Q1 2022 Paychex Inc Earnings Call

September 30, 2021

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Good day, everyone and welcome to today's Paychex first quarter fiscal 'twenty two earnings conference call. At this time, all participants are in a listen only mode.

You will have the opportunity to ask questions. During the question and answer session. He May Register to ask a question at any time by pressing the star and one on your Touchtone phone. Please note. This call maybe recorded and I will be saying by should you need any assistance. It is now my pleasure to turn today's call over to President and Chief Executive Officer, Martin you see please.

Go ahead.

And thank you for joining us for our discussion of the Paychex first quarter fiscal year 2022 earnings release, joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened we released our financial results for the first quarter ended August 31, 2021, you can access our earnings release on our Investor Relations.

<unk> 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 and will be archived and available on our website for approximately 90 days I will start today's call with an update on the business highlights for the first quarter and Efrain will review the financial results for the quarter and provide an up.

Date on fiscal 'twenty two guidance, we will then open it up for questions.

Fiscal 'twenty two is off to a very strong start with Q1 results above our expectations.

Total revenue increased 16% with double digit growth in both management solutions, and PEO and insurance solutions, while total expenses declined by 1% adjusted diluted earnings per share increased 41% while results benefited from the compare to a pandemic impacted first quarter last year and improvements in the economy.

Our internal execution has been strong with continued momentum in sales marketing and client retention during the first quarter positive macroeconomic trends continued this was evident in the growth in checks per payroll and net increase in worksite employees within our existing base of HR outsourcing clients, particularly with our ASO.

Offering our client retention remains near record levels reflective of both the resilience of small businesses and the value provided by our unique blend of software solutions and HR expertise.

Our sales momentum continued with strong first quarter sales performance as measured by new annualized revenue, reflecting solid performance in digital sales, our mid market sales and our HR outsourcing divisions, our unique value proposition of combining the most comprehensive human capital management software platform with our deep.

HR expertise continues to resonate with prospective clients, we continue to invest in our salesforce and support them through increased digital marketing and lead generation initiatives, we are well positioned for the upcoming selling season.

We continue to leverage our investments in research and development to expand the capabilities of our industry leading software.

Checks flex our investments in self service artificial intelligence and machine learning and analytics payments Wearables and voice recognition allow us to offer cutting edge technology, specifically designed to deliver automation and efficiency to both administrators and their employees.

Our recent pulse of HR reported survey reported identified a hiring retention and software automation to gain efficiencies as the top industry trends facing businesses of all sizes. Our fall release introduces a series of software enhancements to further strengthen the power of Paychex flex.

We currently offer two options for clients in their search for talent with fully integrated connection API connection with and indeed, the world's largest job board for clients, who are looking for a pool of applicants.

<unk> comprehensive recruiting an applicant tracking offering called flex hiring for businesses looking for integrated technology to manage the entire recruiting process. We made enhancements to both both to provide clients with tools they need to post jobs attract candidates and allow new hires to digitally self onboard via our <unk>.

<unk> mobile application.

With employee retention being a significant issue in this challenging environment. We've introduced several enhancements to provide our clients with insights and offerings designed to help them and make informed decisions and retain their workforce the.

The introduction of retention insights our first client facing predictive analytics was designed to identify employees, who may be at risk of leaving for example, second is pay benchmarking, which allows employers to compare performance ratings and compensation details by position to ensure top performers are paid equitably.

With our advanced technology employers can easily compare individual employee compensation against national averages provided by the Bureau of labor statistics to confirm the impact of compensation and retention.

We're excited also to announce a new offering called paychex pre check to fully to further automate the payroll process for employers and provide their employees an opportunity to review their gross to net calculation.

For payrolls officially processed with paycheck pre check paychex pre check employees are notified through their channel of choice their phone or tablet their smartwatch or their smart speakers that they have a pending pay period to review.

The employee Leverages paychex flex to either confirm the amount of their check or report an issue issues are rooted electronically to allow clients to focus on exceptions and proactively address issues prior to pay day.

Paychex pre check leverages, our industry, leading flex payroll and time and attendance offerings HR connect offering our digital employee case management tool our advanced analytics module, our five star rated mobile App and expands our conversational UI capabilities, including our integration with Amazon Alexa Google Assistant.

And Siri shortcuts with these additions paychex flex is the first HCM application to offer integration with three of the major voice assistant platforms.

<unk> pre check was recently recognized by HR Executive magazine in the HR Tech Conference and Exposition with the top HR product of the year Award an award that spotlights innovation driving the HR technology market. This is a three peat for us Mark the third consecutive year that paychex has been recognized as a top <unk>.

A product innovator by HR Tech.

In addition to our innovative technology, the expertise and advice, we're able to provide clients on HR matters really sets us apart our HR professionals have been very important in helping <unk> ASO and PEO clients to navigate through the pandemic and in handling the current uncertainty around COVID-19 with the recent uptick in transmission rates return to office plan.

<unk> and potential vaccine mandates we are very proud of the work our HR professionals do and we're honored to be recognized by winning a gold human capital Management Excellence Award from the Brandon Hall group in the category of best use of a blended learning program for our HR Services Excellence Academy training program. This training.

Program prepares our new HR professionals to provide exemplary consulting services to the company's HR outsourcing clients and was recognized for combining an instructor led training with technology based activities.

The expertise we offer our clients also expands to providing resources to assist clients, where there are many compliance obligations. Our Covid response continues near real time updates to our COVID-19 Health Center, where businesses can access key information regarding changing regulations, including the recent by the administration.

Proposal and vaccine mandates we.

We assisted our clients and receiving over $65 billion and paycheck protection loans, that's 9% of the total PPP loans provided and our industry, leading PPP forgiveness tools and reports have been accessed over 500000 times since its release with over 90% of businesses now reporting.

Their initial loan has been forgiven. We have also been instrumental in helping clients secure over $4 billion in stimulus funds available through the employee retention and paid leave credits.

We recently launched an enhanced offering the paychex employee retention tax credit service to help businesses retroactively identified tax credit eligibility based on wages already paid and file amended returns to claim the credit.

On average paychex clients are claiming over $150000 in tax credits a substantial amount for a smaller mid sized business that is helping them survive and thrive in this pandemic.

Pandemic is only exacerbated the retirement crisis in America in response to a growing number of states have introduced state mandated retirement programs and our pooled employer plan or pep offering as well as traditional plans have helped our clients handle new state mandates in ways that make financial sense for the employer and employees for the <unk>.

Seventh consecutive year Paychex has earned the distinction as the largest four one K record keeper by total number of 401K plans serving more than 96000 plans. We have seen continued success in helping clients find retirement plans that suit their employees needs and help them to attract and retain clients.

We are very proud of our performance during the first quarter, but remain vigilant about the rest of the fiscal year, given the uncertainty around the macroeconomic environment and the COVID-19 variance our very strong start in sales continued client base growth best in class operating margin and increased investment in marketing lead generation and product development.

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Have us well positioned for continued financial and operating success during the remainder of fiscal year 'twenty two and beyond.

I'd like to close my comments by recognizing again, the companys 50th anniversary from our founder start with $3000 in a few clients. We are transformed into a comprehensive technology driven human capital management software company with over 710000 clients across the U S and Europe in addition to paying.

One in every 12 American private sector employees, we are the country's largest four one K record keeper of top 30 U S insurance agency and among the largest providers of HR outsourcing in the U S supporting over $8.0 million Worksite employees, while the size and the breadth of the company has changed we remain true to our original <unk>.

Mission of serving the unique needs of small and midsized businesses that mission was all the more important during the challenges faced over the past 18 months I'd like to thank and commend our employees for their tireless dedication to innovation and commitment to serving our clients. They have driven our growth over these 50 years and our shareholders.

<unk>, we thank them for their investment with us along the way.

I will now turn the call over to Efrain Rivera to review our financial results for the first quarter effort, Thanks, Marty and good morning to everyone.

To remind you to start that todays conference call contains forward looking statements refer to the customary disclosures I'll move through my comments relatively quickly. So we can get to your questions.

Ah periodically refer to non-GAAP measures such as adjusted operating income EBITDA et cetera. Please refer to our press release investor presentation for more information on these measures, especially on the Investor presentation too if you want to have.

Clear roadmap in terms of what's included and what's not.

The adjustments we make.

I'll start by providing some of the key points for the quarter, then follow with greater detail on some areas I'll finish with a review of our fiscal 2020 outlook, which as you saw with revised upwards first quarter reflected strong internal execution improved economic environment favorable compares against the prior period.

Both service revenue and total revenue increased 16% to $2.0 billion as we benefited from improved employment levels higher client counts.

Cross all of our solutions growth rates were bolstered by a more easy compare to the prior year first quarter that was impacted by the pandemic, but as Marty said, we also had very strong execution in the quarter within service revenue management solutions increased 17% to $805 million.

And insurance revenue increased 14% to 263 million interest on funds held for clients decreased 3% for the quarter as lower average interest rates and realized gains were partially offset by higher average investment balances, we will see what happens in the balance of the year as interest rates have started to move higher.

Total expenses decreased 1% to $640 million, excluding one time cost of 31 million that occurred during the first quarter fiscal 2021 expenses increased a modest 4% the growth in expenses was impacted by higher PEO direct insurance costs increase.

Increases in fringe benefits and continued investment and investment in product development and information technology.

One thing I'd like to point out here. That's important is if you go back to the first quarter of 2020, our performance was strong even when we measure against that quarter. So not only did we have strong.

Compares against that Covid impacted quarter, but go back to 2020 and you'll see this was a strong quarter overall.

I think it's fundamentally something important about hugging company has transformed over the last two years.

Op income for this quarter increased 56% of $443 million with an operating margin of 41% adjusted operating margin was also 40%, 41% during the first quarter compared with 33, 8% for the prior year, an expansion of more than 700 basis points effective income tax was 24 nine.

Compared to $23 for the first quarter was impacted by an increase in state tax provisions both periods reflect net discrete tax benefits related to stock based compensation benefits as you know we.

We exclude those for purposes of our adjusted.

Calculation adjusted net income increased 42% adjusted diluted earnings per share increased 41, 42, I'm sorry, but just the net income increased 42, and adjusted diluted earnings per share increased 41% for the quarter to $323 million and 89 per share respectively.

Investments and income our primary goal as you know is to protect principal and optimize liquidity. We continue to invest in high credit quality securities. The long term portfolio has an average yield of one 8% average duration of three four years.

Our combined portfolios have earned an average rate of return of one 1% for the quarter down from one 3% in the prior year.

Now, let's look at our financial position.

In a nutshell pretty strong.

Remains strong with restricted cash and total corporate investments of over $3.0 billion, our borrowings were $805 million as of August 31.

Cash flow from operations was $386 million during the first quarter, a robust increase of 79% from the same period last year free cash flow generated was $354 million up 83% year over year the increases were driven.

By higher net income and changes in working capital, we paid quarterly dividends of <unk> 66.

66, <unk> per share for a total of $238 million during the first quarter. Our 12 month Rolling return on equity was a stellar 42% now.

No.

Let me turn to guidance for the current fiscal year ending May 31, 2022. This outlook reflects the current macro environment, which saw improvement in the quarter, especially in June and July.

First quarter results exceeded expectations. Nevertheless, as all of you know there is uncertainty about the trajectory of the remainder of the next several quarters. So we've incorporated this into our expectations for the remainder of the year.

Our crystal ball is clear the Nir, we are in a little bit less clear as we go out and now we're into the spring of next year, So with all that said.

Management solutions, we expect it to grow approximately 8% that's guided upward from 7% approximately 7% PEO and insurance solutions is expected to grow in the range of 8% to 10%. That's similar to what we said previously interest on funds held for clients.

Still expected to be flat year over year total revenue is expected to grow approximately 8% again guided upward from 7% adjusted operating income is expected to be in the range of 38%, 39% up from previous guidance of approximately 38% and if theres a point I would make simply is this that we went through.

Endemic.

We've made a lot of adjusted adjustments and the operating margin.

Our returns are really really strong.

Adjusted EBITDA margin now is expected to be approximately 43% up from previous guidance of approximately 42%.

Other income and expense net is expected to be in the range of $23 million to $26 million, our previous guidance in the range of 33% to $37 million. The changes due to certain nonoperating income received during the first quarter and specifically before I get the question Amit Let me just say that we embed.

Have.

<unk> invested in.

A technology fund, we received a mark that.

That ended up in us recognizing income on that technology funds, which invest in early stage technology companies.

Our effective income tax is expected to be in the range of 24% to 25% and adjusted diluted earnings per share.

Is expected to grow in the range of 12% to 14%, we previously guided to growth of 10% to 12% turning to the second quarter.

We currently anticipate total revenue growth will be in the range of 7% to 8% and adjusted remember its adjusted operating margin is expected to be in the range of 36% to 37%.

Before I get the call I will just say on everything there is an element of conservatism in what we say in part because of the macro environment does impact.

We don't obviously.

Our crystal ball on what happened in the second quarter and beyond and we're trying to create a all weather forecast.

Now of course, all of what I, just said, it's subject to current assumptions, which can change given the current environment.

We'll update you again on the second quarter call I'll refer you to our investor slides on the website for more information and now with all of that I will turn it over to Marty. Thank you Efrain Ashley we will now open the call for questions. Please.

Certainly and at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may recall your question at any time by pressing the bounty once again Thats star one and we will take our first question from David <unk> with Evercore ISI. Please go ahead.

Thank you good morning, very nice results.

Thank you.

Duly noted on the conservatism for the rest of the year.

But the first quarter revenue and earnings outperformance actually exceeds the increase in the annual guidance by about $18 million in revenue and adjusted EPS by <unk> <unk>.

So can you flesh out your thinking.

The remaining three quarters of the year.

Talking about your outlook for employment.

Bookings than any other factor.

Beside conservatism that might be keeping the next three quarters.

Lets say below where they might have been given the first quarter outperformance.

Yes, let me, let me handle that David I think that there.

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Two pieces to the way we look at the year.

See in the first half and what we see in.

In the back half.

So I would say with respect to the EPS, we factored into our <unk>.

Our assumptions.

Additional hiring as the year progresses, which will which will add a bit to expenses. So I think thats. The first part of the equation. The second part is that we do not at this point in our in our in.

And our guidance contemplate that the unemployment picture is going to change significantly so to the extent that it does that.

Is significantly improved from where we are that would be upside to.

Our case, we simply are at a point, where we had in the first quarter a nice rebound in terms of the number of employees.

Payroll that obviously helps from a revenue standpoint, what happens going forward, we simply have to try to.

Estimate what we think what we think is a reasonable as I said all weather scenario. Those are really kind of the two things that are driving it and I would say this on the back half of the year, because I'll get questions on that the back half of the year, we will see where we come out of Q2, and then get a better better feel for it understood.

And we were very strong in the first quarter. There is conservatism in what we what we've guided to and we could do better but.

As everyone on the call knows.

There is uncertainty about a number of things in the macro environment that we want to make sure that investors have completely.

Completely taken into account.

And to assure investors that we'd pick and then completely into account so all of that mouthful within in the forecast.

Okay. Thanks for that just as a quick follow up.

Efrain you called out strength in.

Mid market bookings in the quarter.

Is that an industry phenomenon, where mid market generally with stronger than expected in Q2 or is that a function of market share gains.

Well I think.

Marty I think it's really been.

We were going fairly slower than we expected in the second half of last year, and we really had a nice pickup in the first quarter I think its really I don't think its necessarily.

The environment I think this was really much more success in sales we had done a number of things and training of course, the product adds that we have been doing.

Technology standpoint to the software. So I think it was really more performance, we're really pleased with the pickup in mid market and we think we're really well prepared for selling season as well.

Understood. Thank you very much okay.

We will take our next question from Ramsey El <unk> with Barclays. Please go ahead. Your line is open hi.

Gentlemen, thanks for taking my question this morning.

I wanted to ask about.

What you see as the biggest drivers of this nice margin beat in the quarter. I know you mentioned you made some pandemic related expense adjustments I'm, just trying to understand the degree to which which of those adjustments you made will prove to be the most sort of impactful and lasting.

Yes, so so ramzi let me.

Made a comment which during my my.

My prepared comments.

About the compare to.

2020, and I think that's important you can go back these are matters.

Public disclosure.

If you look at what happened with expenses our expenses are pretty flat against 2020, there's two things one of which is likely nonrecurring, but one of which is very recurring and it's part of our strategy. So I keep.

Harping on the idea that that we've been on this journey of transformation transformation.

As a technology enabled services provider and look I can say, whatever I want to and Marty can say whatever he wants to but if it's not evident in the P&L.

So that speaks for itself. If you look at our expenses there are essentially flat with 2020 quarter. One now why is that.

Obviously, they should be somewhat up so theres an element of this that really has to do with.

Delayed or deferred hiring.

The labor market is tight it's not necessarily easy to get all of the people that you want in place we are adequately hired but we're a little bit behind where we would've expected to be hired at this point part of the question that David asked earlier.

Why wouldn't you see even more flow through the short answer is that we expect to hire as we go through the year, perhaps not at the rate that we would have previously.

Previously, but certainly at at a rate that is higher than the first quarter, but leave that aside.

The reality is that when we took a when we took a restructuring charge in the first quarter. It yielded benefits I'm sorry, the first quarter of last year yielded benefits this quarter when we when we looked at our head count and looked at those metrics of efficiency. We are more efficient as a company today than we were in 2020.

And that is what's driving a lot of what youre seeing more investment in technology less investment on in other areas of the business that are not needed frankly at this point is driving is driving the.

Efficiency that you're seeing in the results that we've delivered.

I see okay.

One follow up for me.

A slide presentation I think under management solutions you mentioned.

Pricing realization.

I'm curious have you seen any changes on that sort of positive or negative side to the pricing environment as we emerge from the pandemic I guess.

<unk> way of asking about the competitive environment and whether there is whether theres more opportunity or less opportunity at the same amount of opportunities before too.

To modify prices.

I think we still have very good pricing power.

Based on that I think we've seen we've seen our revenue per client go up and we've sold them more products as well. So we've really seen that I think from a competitive standpoint. When you just get right to that point I don't think we've seen a lot of changes what we have seen though is that the work we were able to do for our clients during COVID-19 the support.

We are that we are able to provide them excuse me and the products that we are able to provide them to help them get loans now to help them in a really a great automated fashion get an employee retention tax credit. For example, this makes a huge difference from a competitive standpoint of our retention and even from a prospect perspective.

As to whether they are aware if from a prospect perspective, it's hey, where are you even aware that you could get this retention tax credit and you know how much. This can bring you to help you with hiring new employees or retaining your current employees for our current clients. The level of support we were able to show them and demonstrate to them during a very difficult time.

It really has made the difference so I think it's I think the competitive environment is just as strong, but I think we've been able to have an opportunity and then have shown what we can do and that's given us an even stronger position than we would've had beforehand.

Interesting alright, thanks, so much okay.

Thanks Ramsey.

And we'll take our next question from Bryan Bergin with Cowen.

Colin. Please go ahead your line is open.

Hi, Brian Hi, Good morning, Thank you and good morning.

Can you comment on how demand trended within the quarter Sysco results and commentary certain positive here, but taking into account the conservative view.

If you actually did see any deterioration as you exited August or even in September relative to may be June and July.

Yes.

Yes, Brian not really M&A San from a sales side, we have not.

We think we are well prepared as to kind of our selling season that picks up here over the next month or so and towards the end of the year, but we think we're very well prepared we said we haven't really seen anything it's been pretty consistent through the quarter.

We really again I'll mentioned mid market was strong.

Digital any digital sales were strong and we also have.

Seeing very good results on our HR outsourcing, both PEO and ASO. So it's not like it started strong in.

Squeezing me in the beginning of the summer went down it actually has been pretty consistent and we actually think theres some opportunity from a sales perspective this month and over the next few months.

Across the board, including retirement and retirement has been very strong as well and Brian I think you are.

I don't want to anticipate what your base question was but but but I would say if we looked at the macro indicators that we were seeing in June and July were really strong and not these arent micro I want to make that clear June and July were strong in August was softer so.

We will see when we come out of September but at this stage to marty's point its not impacting that.

The business.

Okay, Okay understood.

And then on the management solutions growth can you give us a sense of the mix of the drivers at 17% and that outperformance is how should we think about check volume recovery versus new units cross sell versus pricing any of any of these stand out more than others.

Yes, good question and fair point. So the first thing I'd say is that sort of step take a step back as management solutions is not entirely a payroll game its really kind of.

An important respects.

Three three pieces so.

The HCM part retirement services.

HR outsourcing so those are the three big buckets, if you will and management solutions.

I would say.

Couldn't see anything on the PEO that was a major revenue line that wasn't up double digits. So.

On the HCM side, we benefited from upper single digit pace per control. So that was helpful. Known that's not surprising we had a pretty big decline in the first quarter.

But in addition to that there was pricing and also client based growth. So all of those were driving that that result on the.

On the HRS.

<unk> outsourcing side, we simply had a great year last year had more worksite employees served and that drove that result, and then retirement services Marty talked about that retirement services.

Gaining steam across the country and we are certainly benefiting it benefiting from it with mandates and multiple multiple states now our pet product. We feel we are and I don't feel that we believe it and see it that we are well positioned so when you look at all of those three it took off.

All of those three to drive that result wasn't it wasn't solely in HCM story and I think it plays to the fact that we sell in an integrated way and we've benefited from that in in terms of.

The point that Marty made earlier, which is we're getting better revenue per client.

Okay very good thank you.

Okay.

And we'll take our next question from Kevin Mcveigh with Credit Suisse. Please go ahead. Your line is open.

Great. Thanks, so much hi, Kevin.

Hey, Marty.

Hey.

Kind of you made a comment on the call.

The company has fundamentally transformed and I firmly believe that's the case.

I Wonder if you could help us frame, where you think youre going to see that I mean, it sounds like the retention continues to bump at record highs is there a new range for that I mean clearly it.

I'm just going to ask one question, but just maybe within the client growth rate I mean, you picked up 75000 clients had 11% growth.

I don't think you've ever done that so I mean, it seems like the business is poised for structurally higher growth I don't want to get too far ahead of myself here, but can you help us understand.

Where that sits particularly given the leverage on the margin side as well.

Yes so.

Kevin I would say the 75% is probably over a period of years, we disclosed that we were up above 710, and we had been we had been in the high 600, the year before but to your point Directionally.

Directionally.

Our client growth has been strong over the past several years in part impacted by this move to digital but Marty talk about so that's one part.

The second part is that the move to digital brings with it.

The ability to operate at a higher levels of efficiency, which is what you see in the P&L. So that's a big emphasis within the company and I would say.

Shut out to all of my colleagues in operations have done a phenomenal job and to the ITM product group, who will also make that happen can happen.

Any other way so I'd say, that's that's the second point and then the third point Kevin to your point last year, we ended at as I mentioned.

On the call we were in the high <unk> in terms of revenue retention there is a natural.

There is a natural ceiling on the amount of revenue growth I'm, sorry revenue retention, we can have because of some of the markets that we operate in meeting the smaller clients.

Two a trip more rapidly than larger clients, but all of that move up.

Previous to the pandemic final point, we were in the 83 to 84 range.

I would say thats, the new Mendoza line for.

Retention and <unk>.

Last year, we beat that we hope to beat that and built off of that and all of my colleagues in operations share that coal.

<unk> also Kevin when you're talking about transformation, having the chance to.

To think about our 50 years in business and how it's changed so dramatically the software enhancements that we're making.

Consistently at in front of our clients. It is providing them. So much information in the artificial intelligence and the data analytics that we're providing and just talked about today with paychex pre check really allowing employees to be alerted that theyre here is there.

They're pay for this pay period, they can answer that they hear about that on their mobile phone. They can hear about it from their smart speaker.

So meaning that we're tied in now we're the only company tied into all three of the major voice assistant platform. So it saying Youre Paste-up is ready you would like to check it.

You can respond that you have check to think of the efficiency that it brings the employer and the administrator of the employer of the client and the employee as well now is this is this is really helping continue our retention at the levels that effort is talking about even though theres business failures in small business that keeps us at some point at some level. This is really <unk>.

Taking it to the highest level and that on top of the Covid work that we did and the ability to update them.

And really provide support and dollars through like employee retention tax credit.

He is making a big difference and it's really a very different company as a software driven company that is using artificial.

Efficient intelligence and data analytics to give a tremendous amount of efficiency to our clients.

Congratulations again.

Thanks, Kevin.

And we will take our next question from Jason Kupferberg with Bank of America. Please go ahead.

Hi, Good morning. This is on for Jason.

Thank you for taking my questions I wanted to ask maybe just.

And then staying on the similar topic in terms of.

Just.

Yes.

What youre seeing in the market right now you've been talking we've talked a little bit about new business creation being pretty healthy recently has that continued in recent months and then is there any type of quantification you can provide just for example in terms of the.

The percent of your wins coming from newly formed businesses, you'll win rates as you compete for these new businesses.

Yes, I would say new business formations are down a little bit from last year now, but they're up from 'twenty. They are still up very strong from pre pandemic levels up 20% to 30% over pre pandemic levels. Now there was a big jump last first quarter and frankly, the first half of our fiscal year as we think about it and new business formations they were up.

<unk>.

40%, 50%, neither up really 20 to 30 over the previous pandemic years, and we do very well with brand new businesses, we certainly do well as I mentioned it picked up some real positive performance in the mid market, but we're also doing very well with brand new clients that are starting up obviously, we still have great.

Relationships with Cpas and.

As well as banks and getting referrals. We're also able to do a lot of these sales digitally is we've really improved the ability for our clients to go online and look at our product demo the product even on their mobile phone or online.

As well as then go right through to actually starting to set up an onboard themselves all audit all digitally without talking to anyone we certainly have a lot of pride in our field Salesforce and our digital sales for our voice or telephonic salesforce, but the digital sales is becoming a bigger part of brand new businesses obviously.

And we're very proud of that.

Thank you and then just if I could ask about <unk>.

Margin increase in the guidance is that being driven by the topline growth and some efficiencies of scale just from the topline goods flowing through.

They also been any changes to your underlying investment by expense plans.

Yes, let me just answer that I think I think there always is some element of both but I think it's driven more so by.

By improvements on topline revenue and I would say that because we have we have been.

<unk> been able to do the things that we have done or the actions. We've taken on the expense side now when a dollar flows through you get even more benefit that you would've otherwise although.

As everyone knows we have industry, leading margins to begin with.

Thank you.

Alright. Thanks.

And we will take our next question from Andrew Nicholas with William Blair. Please go ahead. Your line is open.

Great. Thank you good morning.

Can you touch on the PEO performance versus insurance performance in the quarter and I know you're maintaining your guide on that.

Revenue line in the aggregate, but is there any change to your expectation that that underlying level in terms of growth through the remainder of the year.

So I would say both are actually growing quite well HR outsourcing in total is growing well and we.

I think we've positioned ourselves very well on the PEO side as well as ASO I would say.

The PEO side has picked back up more recently I think we talked about it last year, maybe the last couple of quarters that.

Insurance wasn't as.

In demand at that time because of getting through the pandemic that is starting to come back now more because of our sense of retention of your employees and hiring your employees.

It's a very as you know, it's a very competitive market out there and so now the insurance plans your health insurance et cetera. Your dental your voluntary insurance as they are becoming very much a competitive offering to attract the employees in a tough market and retain those that you have so the interest and insurance has picked back up so both.

Our ASO and PEO, frankly, our double digit growers and and have done very well in the in the first quarter, Andrew when you do the arithmetic so.

Part of your question also is what why not increase the guide.

The short answer is that PEO continues to do pretty well and the reason why you're at 8% to 10 versus double digit and above is that insurance is simply growing slower still where we expected it to be.

But we anticipate it growing slower.

Then PEO for the year, we had a good first quarter that could prove to be incorrect and then the other point that I would make is that everyone's going to struggle with us which has had a cough Q4, everyone had a very strong Q4 that compares against Q4 or are the ones that are a little bit tough at this point to gauge.

Lately, both on the top and the bottom line.

We have a we have.

My view of it, but we'll need to refine that as we go through the year.

Okay.

No. That's really helpful. Thank you and then maybe a longer term strategic question.

<unk> talked a lot about.

Digital sales is that something that you can apply your learnings and capabilities.

From to the PEO market or is that too involved in the sale or is there some.

Middle ground that youre approaching your hoping to target longer term that could make that a more efficient process. Just wondering how that could be part of the strategy and maybe the puts and takes to consider on the PEO front. Thank you.

No sure we're actually already involved in it it's basically what Youre doing is also automating and digitizing a lot of the underwriting process and the.

The information that you have to get onboarding of clients, including in the PEO, We're looking more and more to go to employees to help them self onboard and makes it easier and the client on the prospect itself as they are on boarding and so is sending a linked to employees to say Hey give me inner information load your own information in and get started.

That will be transformed I think over to the PEO side, and certainly automation in the underwriting side, which makes that will make the whole process faster. So oh, yes, the digital.

There is going to be no limit to the selling from a digital standpoint people are going to want to continue to find ways to have everything automated for them to be able to go in online set themselves up look at the product and by you may still have some certainly sales rep involvement on the complication of <unk>.

Insurance plans and so forth, but we're always looking to make that easier and anything that a client can do for themselves or allow their employees to do for themselves is exactly where we're going strategically and we've already made a number of steps that way.

Okay. Thanks again.

And we'll take our next question from.

Jake <unk> with Northcoast Research. Please go ahead your line is open.

Hey, good morning, Marty and Efrain.

Alright.

Marty I wanted to ask a little bit about sales distribution I know this might be a little dated but at one point accountants are counted for a third I think direct sales accounted for a third and that.

Kind of others, and you've talked a lot about digital sales improving and being a bigger part I'm wondering is it sales distribution or how paychex acquired clients changed at all as a result of.

While the changes.

Yes kartik.

It definitely has account.

Accounts and banks are still important to us accounts in particular, great relationship with them for many many years and the assistance that we give them and support we give them for their clients as well, but that has definitely come down and as a percentage in digital has gone up as a percentage I would say, it's been a pretty steady change and I expect that will probably.

And accelerate.

So much more of our lead generation comes now from the marketing investments that we make in marketing has become a very important part of the sales function and how sales gets third leads and then frankly, our clients view US and then come in online and just decided to buy as I mentioned many clients now are certainly.

Under 10 employees at least can come in.

Come into our website, because they've seen us advertise somewhere or online through SCM and SCO and know that we're an expert in this field commend demo the product compare the product and even buy the product and start to set themselves up so yes, it's becoming a bigger certainly a bigger part of it and of course that leads to efficiencies that <unk> been talking about.

And the effort on the float.

We've seen obviously rates move up a little bit over the last couple of weeks.

Imagine youll benefit from any kind of wage inflation on the float portfolio any changes to how you might manage that over the next six to 12 months.

Are you anticipating wage inflation to help the float portfolio.

Yes, no, we do and I think that.

But clearly in the first quarter to help offset some of the drag.

The short answer is.

Sure.

It's interesting.

So the market kind of moves in some ways based on.

<unk>.

Concerns about inflation and stagflation.

But in our case that expectation is largely a positive when you look at it from a float and from a pricing perspective, so those arent necessarily negative to us where I would say we're in a.

Heightened state of scrutiny on how to position the portfolio based on what we're seeing.

And credit markets.

<unk>.

On the on the investment side.

Perfect. Thank you very much okay. Thanks, Thank you Kurt.

We will take our next question from Jeff Silber with BMO capital markets. Please go ahead. Your line is open.

Thanks, so much.

How are you doing.

Earlier, you talked about.

Some of the labor tightness impacting your own ability to hire a bit I know, we talk a little bit about last quarter about potentially that easing up a little bit in September when folks go back to school or childcare easier and maybe when the unemployment subsidy kind of.

Rob did.

Did you see any impact or hadn't seen any impact in recent weeks I think getting a bit easier.

From a from a macro standpoint, I would say, it's not showing up yet.

What it demonstrated to us and I started to see this through some of the data analytics work that our teams are doing here.

From our small business index is that it wasn't it's not just the unemployment because we you could see some of the states had cut that the extra unemployment benefit out and it really was not making a big difference in the who was going back to work. So I think what you're finding is it's going to take a little bit longer.

In the market, it's definitely still a tough hiring market.

And I think that the cash balances everyone. You can see this data cash balances are high checking accounts or at a high because people haven't either spent or they also have got in other.

Stimulus money, whether it's child care at kind of our child tax.

Our child benefits that Theyre getting right now people are at a pretty good stage and I think they're still trying to test it out plus I think there is just still healthcare worries about their businesses that they are going back to do they have to wear masks is there a mandate or not and I think it's going to take a couple more months to shake out.

It certainly the hiring has gotten better our hiring growth is the hiring growth in our small business index is gotten much stronger in the last couple of months, especially in leisure and hospitality sectors and other services sectors.

But there is still a challenge out there in the hiring so we expect it to pick up but it's going to be a little bit longer than just it's not just the unemployment benefits that made the difference.

Okay.

Okay. Okay.

Okay.

We'll take our next question from Kumar <unk> with Jefferies. Please go ahead.

Hey, good morning, Marty and Efrain.

Congrats on the good results I wanted to maybe ask the question on your own hiring I know you guys talked about being a little bit behind but can you tell us maybe what which part of the organization is it broadly or is it inside the quota carrying sales rep side or is that on the R&D side, just how should we think about where you're playing catch up on hiring.

Yes, I think it's more on the service side and frontline service. There is some in sales, but it's kind of spread and it's not an overall larger number in any sales division. So we feel good about that.

Also and Thats, probably the hardest on the frontline service providers.

Gibson, who runs all of the services you have done a great job with our HR team defined very creative ways, though the hiring is really picked back up.

<unk> shifted to some different ways to encourage new employees to commend different work schedules different ability certainly work from home.

And a number of other benefits that they can get in the tools and support that they have so it's picking back up now, particularly just in the last 30 days, but as Efrain said, it's a tough market out there to hire particularly frontline service people.

But as we said we still are seeing very strong client retention, we're getting the job done and we're certainly driving.

More calls to the website, which our chatbot or automated response to service questions and other questions are being answered 60% of the time by by the automated response, you can always reach someone live at Paychex 24 hours by seven days a week 365 days.

Days, a year and but we are certainly looking for efficiencies and we're hiring very creatively and it's starting to pick back up again.

Helpful. And then Efrain I know, we've talked kind of a lot about the expense controls and how that's benefited the margin structurally but gross margins are also continuing to melt up nicely, even with call it headwinds to some of that high margin.

<unk> revenue just how should I think about maybe the tech stack on the on flex and.

That's driving gains on the gross margin side and maybe how much more room is there on the software stack to drive gross margin gains.

Great question Simona.

So let me answer it in two.

Two ways.

The first I'd say is when you look at our gross margins and compare ignore for a second.

Our operating margins, but if you look at our gross margins and compare against industry. We still are right at the top and Thats against the people who are air quotes pure software players. So look at the data that's what I would say.

Okay.

We're proud of that we understand that we manage to that to your point.

When I look at the data and I mentioned I think in response to an earlier question. It might've been ramsey's question.

About the strength of management solutions, what was really notable about that was that it was widespread across the three major buckets of management solutions retirement, HRC and <unk>.

<unk> HCM and what we're seeing is that our sales team has done a really good job of selling the entire we called value proposition.

The company through what we call the power of 3000.

And the idea is that when we get in front of a client we want it.

Want to sell them the entirety of that.

That value proposition just one small digression on that point you can only do that if you've got an integrated system not just HCM, but integrating ancillary so when you sell that proposition and now you've upgraded to a module, there's essentially very very low.

Variable cost associated with that and that's really what's helping to drive what we see we are we have been selling a bit higher in terms of client size, but more importantly, we have been selling more modules.

Especially on high value ancillary as like HRS, So youre right.

All of that is driving the improved.

Margin performance that Youre seeing.

Great very helpful. Thanks, everyone.

Okay.

Yeah.

And we'll take our next question from Bryan Keane with Deutsche Bank. Please go ahead.

Hi, guys. Good morning, just wanted to ask on managed solutions for maybe a slightly different angle. If you look at the revenue growth I think it was up 500 basis points first street estimate and it was better than your expectations. So I'm just trying to figure out what exactly was it was the surprising strength.

In the quarter for you guys and just trying to figure out why that wouldn't repeat itself maybe in the next few quarters.

Well I'd say this Brian the first thing is that.

<unk> pays per control were solid.

They were up as I said upper single digits, you won't see that we don't think youll see that in future quarters. So that's going to present, a little bit of a.

Compare issue.

We did have better pricing in the quarter than we had.

Versus the <unk>.

Endemic impacted quarter.

Last year so what.

What happened is we did take steps in the first quarter of last year to hold off on price increases until we had had a chance to let our customers take a breather that was unique to the quarter.

As we anniversary that.

That helps and then the third thing is that.

Clients.

Clients were.

On account was up significantly versus where we started the year.

Last year all of those things made Q1, the confluence of those things were.

Really important and then finally HR really took off in the first quarter of last year, we saw the strength through the remainder of the year, but but but when you got to first quarter. Now you saw the full the full annualized impact of that strength in HR.

Hey, Brian there is an element of conservatism in our numbers, we will see where we end up but it won't.

We're not going to have the same same.

Same revenue growth in the second quarter and Thats why.

In addition to everything else, we know that Q1.

Q1 had certain factors in it that don't repeat in other quarters, but.

There are some underlying factors that we've talked about through the balance of this call that will repeat as we go through and we're a little bit conservative on the rest of the year.

Got it no that's helpful for the going forward, but how about the quarter itself. When you guided originally I don't think you expected it to be that strong in some of those factors. You. Just outlined you would have known about that would have been on a comparative basis. So just trying to figure out the surprise in the quarter, what could possibly surprised that much yes.

The short answer is you are pressing me down is that it was better than almost all of those categories. So that's the short of it.

Got it got it.

The only other question I had is just looking at some of your metrics compared to some of the global.

Employment metrics and the factors you see as your metrics seem to be stronger.

Then kind of what we're seeing in the overall I'm just trying to figure out if there's any.

Thoughts of reasons, why your data might be a little bit showing more strength in what we're seeing on a more macro.

Basis, Frank which ones like employment growth type of thing, yes, yes in particular employment.

Well I do think that the.

The growth in small business and small to mid size from our small business index that piece of it is focused on clients under 50 employees and I think there has been a nice recovery in leisure and hospitality in particular, youre getting some back even though many restaurants and hospitality.

Service places are still struggling to find enough people the growth in the in the recovery over the summer has been very strong and so people have been getting back to work and the demand has been there certainly so I think we might be seeing a little bit and they fell harder remember as well so they fell a lot harder than larger businesses.

<unk>.

Our study is focused more on 50 and below they took a really hard hit many of them closed when you compare to.

The last year and now they are recovering faster because they had a bigger hit last year.

I would say in general so.

No. That's helpful makes sense congrats on the success.

Great.

We will take our next question from.

In Sydney with Moffett. Please go ahead your line is open.

Hi, Eugene.

Hi, Hi, guys. Thank you very much.

Wanted to come back quickly to retention level.

Yes.

And I think that pretty broad based expectation that retention levels might start to come down across the industry really as the economy opens up if activity picks up it sounds like in the first quarter you guys scale, achieving very high levels of retention are you seeing any indication.

And the high churn as activity picks up and as you're looking out into the rest of the year are you still expecting some deterioration in retention as that may be part of the conservatism.

Yes, I mean I think we.

It may happen and we were we've been very happy with the retention, obviously hitting record levels last year and I do think what we're continuing to find from clients. As we have really gained a lot as I said earlier from the Covid work that we did the ability to help them.

Turn in their paperwork for their loans in the last 18 months than we have 90% of our clients have been able to have their loans for given a lot of that is we made it easy for them. We hear this time and time again that.

They were at a very dire point of going out of business, yet we help them get the loans. We've partnered with three fintech companies to provide them. Another source for loans, we help them with the forgiveness and now we're coming back to them, saying, Hey, you can have an employee retention tax credit and you can get the cash right away, it's not like waiting and here's how you do it.

And we can do it all for you in a very automated fashion and you can have.

On average $150000 worth of cash in your pocket that you don't have to repay the government. It's a huge stimulus to them. So it really has helped our retention it gave us an opportunity to kind of full show the full power of Paychex and and then on top of that as Efrain said I think more and more of those clients then saw the HR support as well.

<unk> not just on the payroll side, but also in the HR support and now Theres still need us to really help them through vaccine mandates what do I do with work from home policies, how do I bring people back to work how do I handle hybrid in Ottawa coach employees.

All of the technology that we're showing them is really come to us for them. Even some of the things that are so out there from a digital standpoint that their employees can do from their mobile phone. It really has given us a chance to show them Hey, Here's all the things you can do to retain higher and grow your business and give you some cash.

In your pocket and that has really helped retention a great deal I mean to your point too.

We had a great year and retention, we don't anticipate that we will be at that level, you will see the impact of that.

Retention over the course of the year. So that has some impact on on where we get to.

Where we end up.

Well, we'll have a better sense of that when we get through Q2, we are not anticipating nor are we planning on the idea that we're going to be at the same level of retention that for last year would love to do it but probably not a realistic planning assumption.

Got it got it.

Okay. Thanks.

And then secondly wanted to quickly ask about the <unk>.

Your potential up sell opportunity you mentioned it.

In the past couple of quarters that with them.

Record strength.

Sure.

Gross.

It'd be kind of opportunity.

Nowadays so clients to be all clients know that.

Folks I'm more interested all open to us switching insurance providers are you.

Pursuing that initiative yielding results.

Is there more opportunity there.

Two great growth.

Sure. There is one we've had a lot of success and as we said in double digit growth in both ASO and PEO and we've been able to go into the client base and get them to an HR outsourcing product first but as I mentioned and as you know just noted the insurance is coming back we had a good quarter on insurance and Youre seeing that in the PEO side in that.

It really is a environment, where the number one issue number one or two issue with clients is how do I hire and retain people and then how do I get more efficient the hire and retain has become not just about comp, meaning pay but it has become about benefits as well and.

So it's been very important from that standpoint. So we are having some success certainly in continuing to upgrade our current clients and sell brand new clients as well on both PEO and ASO solutions.

Got it thank you very much alrighty.

And we'll take our next question from Mark Marcon with Baird. Please go ahead.

Good morning, Marty and Efrain.

Congrats on the congrats on the quarter. Thank you.

Going to one of the conservatism questions.

In some states such as Florida, where they did see a spike in Delta did you see any sort of negative impact with regards to.

The weekly revenue trends when the spike occurred.

I would say actually the <unk>.

Best job growth has been in the south so even while they picked up.

Some more they obviously have more cases youre seeing the best job growth from a macro standpoint and from our some of our sales in Florida, and Georgia, and Texas, where there is but that is also a function of great demand rate thats going there and there's more people there.

At migrating there as everyone knows and so youre seeing more businesses open up there you are seeing more people available to fill jobs that is helping more demand thats increasing checks per payroll that kind of thing. So I would say no I'm sure that has had some impact but overall.

<unk> like Florida have actually been quite positive market has just been dwarfed by the recovery there probably if we were in a steady state you would see more of that but in the data as Marty said the recovery in hospitality and leisure has been a big plus in Florida.

Okay, and so even during the weeks when.

Things started heating up for them from a case load perspective, it didn't have it done.

No we didn't say no.

Okay.

And then with regards to.

Your recent products and technology launches I mean, this has probably been one of the most active periods for you as it relates to it I'm wondering when we go through the list whether it's paycheck.

Pre check the retention insights benchmarking talent dashboard, so on and so forth.

Which ones are you the most excited about which ones you are seeing.

Highest attach rates and and which ones are leidy are yielding the most incremental revenue.

Yes, I think.

Paychex Paychex pre check will and now it's just a staggered approach as it's going out now, but I think something like that will have big efficiency gains for clients, which will help a lot on retention. We're not looking we're not charging additional cost for that revenue for that Thats part of the service that a client opts in for but when you hear that class.

Or trying to be more efficient it's things like that.

That are really going to help on the retention and I think the revenue per client, so what kind of price and the ability we get from that so we're very excited about about that one also that it is tied to the technology. It's tied to smart speakers. We're the only company tied to all three major voice assistant platforms. This is just a.

A whole new way for clients to be able to handle things with their employees to say hey, your paycheck is ready would you like to check it youre paste-up or from an employer standpoint that you get a you get at Alexa That's telling you Hey, you have three things to do today as an employer I mean these kinds of things are really tying much better retention than anything in the REIT.

Pension insights for example, really just uses the artificial intelligence through a great deal.

You can check not only pay but you can look at we look at like 15.20 different indicators that are in the payroll in the system in the software that will say here's your performance rating of this person here's their pay is below the national average based on BLS and <unk> and their pay is below the rest.

Are the team that have this job category.

One company a watch out on the dashboard. This person may be likely to leave you when clients start seeing that it's not as much about the revenue directly from that software. It's from the retention of saying I cant live without this just like the mobile App has been like that for us to have a five star mobile app that employees don't want to leave because it's easy to use.

And they can do so many things themselves is great from a retention standpoint. So we're really excited about the level of speed that we're putting out software enhancements and the strength of being much more of a technology company and software company and that that's leading to retention.

Great.

Given the recent introduction.

Could it possibly offset some of the headwinds you noted in terms of the fall when you're thinking about retention.

Yes.

It certainly is going to help keep it up there I think as Efrain mentioned earlier, where again you know so well there is always that there is a natural level of just turnover of businesses. They are in the smaller to mid size. So it's not going to get up there, but we're very proud of hitting a record level of retention last year, and we expected that to come down some this year, but but.

As Efrain said, we have a Mendoza line that we're kind of saying Hey, this is where we ought to be able to to hold it.

Great and then one last one just on the mid market it sounds like Youre doing.

Much better there.

Who are you sensing that youre doing better against would it be.

The big competitor that we all know about is it regionals is it some of the more recently public companies, where you're seeing some of the greatest takeaways, yes, we're seeing it kind of across the board. So I think we're doing very well competitively and we are also still in house as well doing well against but it is the major competitor and <unk>.

Some of the other.

That you know so well I think we're doing very well against them with the technology enhancements. The software enhancements that we've just mentioned and the ability to be able to show all of that.

I think sometimes people still think of us as a more of a service company Great service company, but not the technology when we're able to show the technology enhancements that we've introduced in the last few years.

<unk>.

Come up against other competitors and we perform extremely well and as Efrain mentioned you know we are fully integrated so we can provide everything on one solution.

Flex right from retirement to insurance to to HR and payroll. So it's not necessarily where you might go to a competitor that says hey.

I'm going to pass you to somebody else to do the retirement or pass you to somebody else to do this not to mentioned over 650, HR specialists, who are really have been there in the last couple of years nobody else has a team like that in my opinion so.

Perfect. Congratulations again, thanks Mark.

And we will take our final question from James Faucette with Morgan Stanley. Please go ahead.

Hey, Thank you very much Marty.

Im doing well thanks.

Thanks for thanks for all the time.

And most of my questions have been answered I. The one thing I wanted to ask though is when we look at.

Of.

The hiring environment and you've emphasized like your own efforts there as well as the struggles of your customers.

Are there things that.

Hey tests can be doing incrementally to help with the hiring beyond clearly there are a lot of tools that you're already and you've highlighted but are there things that you can be or should be doing to help your customers even more in the area.

Just would love to get your thoughts on that as a strategic opportunity absolutely.

Absolutely absolutely I mean, I think many of the things that we've talked about.

It really helped clients.

You can go right from a financial perspective, which is the employee retention tax credits, giving them dollars in their pocket to pay more for existing employees or PE.

To attract employees. So we go right at them to help them with their own financial situation than when you look at from.

From the product standpoint from the product standpoint, you have all of these things benefit plans retirement plans.

Our guidance and support many companies you know $55.0 employees still don't really have the great HR support knowledge that they need to be able to how do I attract and one that I haven't even mentioned today, which is really important as we've had this partnership with indeed.

We have a very fully integrated partnership with indeed, which is the largest the world's largest job posting system in.

We actually can.

Client can go out and post on indeed, they actually get a credit because they are with paychex with indeed for the first couple of postings. They can go out on that job board post that if someone applies for that job.

Give their demographic demographic information obviously in the application if thats accepted that comes over with no need to then put that into our system again it transfers over through API. So we also think we've helped them by getting them in front of the biggest job posting system and making it easy for them to post a job through flex.

Place it on indeed somebody applies it comes back from indeed self populates really if that if the person is hired into the payroll system and the HR system and everything set so we've made it easy as much as we can for clients to hire and then retain by giving them the benefits and so forth to keep that in place. So we're very proud of the indeed partnership.

And what that does not only gives them a little financial incentives in some discounts.

On their postings, but it really makes it easy for them to post and these are companies even <unk>.

<unk> employees to 50, that's still struggle, sometimes with where to post for a job.

That's great that's great color. Thank you very much.

Okay.

Ashley if theyre going to work.

It does have a statement that he wants to make before we close out our.

Are there no more questions.

There are no further questions at this time.

Okay, Hey, Thanks final point to the shareholders on the call.

Wanted to mention that we recently filed supplemental proxy materials relating to our proposal on say on pay.

Glass Lewis has recommended a for vote on the proposal and we would appreciate your support.

Should you be interested in engaging with us on the issue. Please feel free to reach out prior to the shareholder meeting or after happy to chat with you about it so with that I will turn it back to Marty great. At this point, we will close the call if you're interested in replaying. The webcast of this conference call will be archived for approximately 90 days.

Thank you for your taking the time to participate in our first quarter Press Conference Press release conference call and for your interest in Paychex.

Have a great rest of the week.

Sure.

Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.

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Good day, everyone and welcome to today's Paychex first quarter fiscal 'twenty two earnings conference call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing the star one on your desk.

Please note this call may be recorded and will be seen by should you need any assistance. It is.

Is now my pleasure to turn today's call over to President and Chief Executive Officer, Mark <unk>. Please go ahead.

Thank you and thank you for joining us for our discussion of the Paychex first quarter fiscal year 2022 earnings release, joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened we released our financial results for the first quarter ended August 31, 2021, you can access our earnings release on our Investor.

Our 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 and will be archived and available on our website for approximately 90 days I will start today's call with an update on the business highlights for the first quarter and Efrain will review the financial results for the quarter and.

An update on fiscal 'twenty two guidance, we will then open it up for questions.

Fiscal 'twenty two is off to a very strong start with Q1 results above our expectations.

<unk>.

Our client retention remains near record levels reflective of both the resilience of small businesses and the value provided by our unique blend of software solutions and HR expertise.

<unk> expertise continues to resonate with prospective clients, we continue to invest in our salesforce and support them through increased digital marketing and lead generation initiatives, we are well positioned for the upcoming selling season.

We continue to leverage our investments in research and development to expand the capabilities of our industry, leading software paychex flex our investments in self service artificial intelligence and machine learning and analytics payments Wearables and voice recognition allow us to offer cutting edge technology, specifically designed to deliver automation.

Inefficiency to both administrators and their employees.

Our recent pulse of HR reported survey reported identified.

Hearing retention and software automation to gain efficiencies as the top industry trends facing businesses of all sizes. Our fall release introduces a series of software enhancements to further strengthen the power of Paychex flex.

We currently offer two options for clients in their search for talent with fully integrated connection API connection with it indeed, the world's largest job board for clients, who are looking for a pool of applicants and comprehensive recruiting an applicant tracking offering called flex hiring for businesses looking for integrated technology to manage the entire.

We're recruiting process, we made enhancements to both both to provide clients with tools they need to post jobs attract candidates and allow new hires to digitally self onboard via our flex mobile application.

The introduction of retention insights our first client facing predictive analytic was designed to identify employees, who may be at risk of leaving for example.

Second as pay benchmarking, which allows employers to compare performance ratings and compensation details by position to ensure top performers are paid equitably.

And Siri shortcuts with these additions paychex flex is the first HCM application to offer integration with three of the major voice assistant platforms.

<unk> pre check was recently recognized by HR Executive magazine in the HR Tech Conference and Exposition with the top HR product of the year Award an award that spotlights innovation driving the HR technology market. This is a three peat for US marks the third consecutive year that paychex has been recognized as a top.

A product innovator by HR Tech.

Program prepares our new HR professionals to provide exemplary consulting services to the company's HR outsourcing clients and was recognized for combining instructor led training with technology based activities.

Proposal and vaccine mandates we.

Their initial loan has been forgiven. We have also been instrumental in helping clients secure over $4 billion in stimulus funds available through the employee retention and paid leave credits.

We recently launched an enhanced offering that paychex employee retention tax credit service to help businesses retroactively identified tax credit eligibility based on wages already paid and file amended returns to claim the credit.

On average paychex clients are claiming over $150000 in tax credits a substantial amount for a smaller mid sized business that is helping them survive and thrive in this pandemic.

Pandemic is only exacerbated the retirement crisis in America in response to a growing number of states have introduced state mandated retirement programs and our pooled employer plan or Pip offering as well as traditional plans have helped our clients handle new state mandates in ways that make financial sense for the employer and employees for the <unk>.

Seventh consecutive year Paychex has earned the distinction as the largest four one K record keeper by total number of four one K plans serving more than 96000 plans. We have seen continued success in helping clients find retirement plans that suit their employees' needs and help them to attract and retain clients.

<unk>.

Have us well positioned for continued financial and operating success during the remainder of fiscal year 'twenty two and beyond.

I'd like to close my comments by recognizing again, the companys 50th anniversary from our founder start with $3000 in a few clients we have transformed into a comprehensive technology driven human capital management software company with over 710000 clients across the U S and Europe in addition to paying.

<unk> of serving the unique needs of small and midsized businesses that mission was all the more important during the challenges faced over the past 18 months I'd like to thank and commend our employees for their tireless dedication to innovation and commitment to serving our clients. They have driven our growth over these 50 years and our shareholders.

We thank them for their investment with us along the way.

I will now turn the call over to Efrain Rivera to review our financial results for the first quarter effort, Thanks, Marty and good morning to everyone.

The adjustments we make.

I'll start by providing some of the key points for the quarter and then forward with greater detail on some areas I'll finish with a review of our fiscal 2022 outlook, which as you saw was revised upwards first quarter reflected strong internal execution improved economic environment favorable compares against the prior period.

Both service revenue and total revenue increased 16% to $2.0 billion as we benefited from improved employment levels higher client counts across all of our solutions growth rates were bolstered by a more easy compare to the prior year first quarter that was impacted by the pandemic, but as Marty said we.

Also had very strong execution in the quarter within service revenue management solutions increased 17% to $805 million in PEO and insurance revenue increased 14% to 263 million interest on funds held for clients decreased 3% for the quarter as lower average interest rates and realized.

Gains were partially offset by higher average investment balances, we'll see what happens in the balance of the year as interest rates have started to move higher.

Total expenses decreased 1% to $640 million, excluding onetime costs of $31 million that occurred during the first quarter fiscal 2021 expenses increased a modest 4% the growth in expenses was impacted by higher PEO direct insurance costs increases in fringe benefits and continued.

<unk> investment in product development and information technology.

Compares against the Covid impacted quarter, but go back to 2020 and Youll see this was a strong quarter overall.

I think it says <unk>.

Fundamentally something important about how the company has transformed over the last two years.

Up income for this quarter increased 56% to $443 million with an operating margin of 41% adjusted operating margin was also 40%, 41% during the first quarter compared with 33, 8% for the prior year, an expansion of more than 700 basis points.

Income tax was $24 nine compared to $23 for the first quarter was impacted by an increase in state tax provisions both periods reflect net discrete tax benefits related to stock based compensation benefits as you know we.

We exclude those for purposes.

Our adjusted.

<unk> <unk>.

Adjusted net income increased 42% and adjusted diluted earnings per share increased 41, 42, I'm sorry, but just the net income increased 42% and adjusted diluted earnings per share increased 41% for the quarter to $323 million and 89 per share respectively.

Our combined portfolios have earned an average rate of return of one 1% per quarter down from one 3% in the prior year.

Now, let's look at our financial position.

In a nutshell pretty strong.

<unk> strong with restricted cash and total corporate investments over $3.0 billion, our borrowings were $805 million as of August 31.

By higher net income and changes in working capital, we paid quarterly dividends of <unk> 66 <unk>.

66, <unk> per share for totaled $238 million during the first quarter. Our 12 month Rolling return on equity was a stellar 42% now.

No.

Let me turn to guidance for the current fiscal year ending May 31, 2022. This outlook reflects the current macro environment, which saw improvement in the quarter, especially in June and July.

Our crystal ball is clear the Nir, we are in a little bit less clear as we go out and now we're into the spring of next year, So with all that said.

Management solutions, we expect it to grow now approximately 8% that's guided upward from 7% approximately 7% PEO and insurance solutions is expected to grow in the range of 8% to 10%. That's similar to what we said previously interest on funds held for clients.

Endemic.

We made a lot of adjusted adjustments and the operating margin.

Our returns are really really strong.

Adjusted EBITDA margin is expected to be approximately 43% up from previous guidance of approximately 42%.

Other income and expense net is expected to be in the range of $23 million to $26 million, our previous guidance in the range of 33% to $37 million. The changes due to certain nonoperating income received during the first quarter and then specifically before I get the question on that let me just say that we embed.

Have.

<unk> invested in.

A technology fund we received a mark.

That ended up in us recognizing income on that technology funds, which invest in early stage technology companies.

Our effective income tax is expected to be in the range of 24% to 25% and adjusted diluted earnings per share.

As expected to grow in the range of 12% to 14%, we previously guided to growth of 10% to 12% turning to the second quarter.

We currently anticipate total revenue growth will be in the range of 7% to 8% and adjusted remember its adjusted operating margin is expected to be in the range of 36% to 37%.

Before I get the call I will just say on everything there is an element of conservatism in what we say in part because of the macro environment does impact.

We don't obviously have.

Our crystal ball on what happened in the second quarter and beyond and we're trying to create a weather forecast.

Now of course, all look what I, just said, it's subject to current assumptions, which can change given the current environment.

We'll update you again on the second quarter call I'll refer you to our investor slides on the website for more information and now with that I'll turn it over to Marty. Thank you Efrain actually we will now open the call for questions. Please.

Certainly and at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may recall your question at any time by pressing the pound key once again Thats star one and we will take our first question from David <unk> with Evercore ISI. Please go ahead.

Thank you good morning, very nice results.

Okay.

Duly noted on the conservatism for the rest of the year.

But the first quarter revenue and earnings outperformance actually exceeds the increase in the annual guidance by about $18 million in revenue and adjusted EPS by <unk> <unk>.

So can you flesh out your thinking.

On the remaining three quarters of the year.

Talking about your outlook for employment.

Bookings and any other factors besides conservatism that might be keeping.

Next three quarters.

Let's say below where they might have been given the first quarter outperformance.

Yes, let me, let me handle that David I think.

There's two pieces to the way we look at the year.

See in the first half and what we see.

In the back half.

So I would say with respect to the EPS, we factored into our.

Our assumptions.

And our guidance contemplates that the unemployment picture is going to change significantly so to the extent that it does that.

Is significantly improved from where we are that would be upside to.

Our case, we simply are at a point, where we had in the first quarter a nice rebound in terms of the number of employees.

Payrolls that obviously helps from a revenue standpoint, what happens going forward, we simply have to try to.

Questions on that the back half of the year, we will see where we come out of Q2, and then get a better better feel for it understand we were very strong in the first quarter. There is conservatism in what we've what we've guided to and we could do better but.

As everyone on the call knows.

There is uncertainty about a number of things in the macro environment that we want to make sure that investors have.

Lately.

Lately taken into account.

And to assure investors that we pick a minute completely into account. So all of that mouthful was and in the forecast.

Okay. Thanks for that just as a quick follow up.

Efrain you called out strength in.

Mid market bookings in the quarter.

Is that an industry phenomenon, where mid market generally with stronger than expected in Q2 or is that a function of market share gains.

Well I think.

Marty I think it's really been.

We were going fairly slower than we expected in the second half of last year, and we really had a nice pickup in the first quarter I think its really I don't think its necessarily.

The environment I think this was really much more success in sales we have done a number of things and training of course, the product adds that we have been doing.

Understood. Thank you very much okay. Thanks.

We will take our next question from Brian <unk> with Barclays. Please go ahead. Your line is open hi.

Gentlemen, thanks for taking my question this morning.

I wanted to ask about.

Yes, so so ramzi let me.

Made a comment which during my my.

My prepared comments.

About the compare to 2020 and I think that's important you can go back these are matters.

Public disclosure.

If you look at what happened with expenses our expenses are pretty flat against 2020, there's two things one of which is likely non recurring but one of which is very recurring and it's part of our strategy. So I keep.

Harping on the idea that that we've been on this journey of transformation transformation.

As a technology enabled services provider and look I can say, whatever I want to and Marty can say whatever he wants to but if it's not evident in the P&L.

So that speaks for itself. If you look at our expenses there are essentially flat with 2020 quarter. One now why is that.

Obviously, they should be somewhat up so there is an element of this that really has to do with.

Delayed or deferred hiring.

We expect to hire as we go through the year, perhaps not at the rate that we would have pre.

Previously, but certainly at a rate that is higher than the first quarter, but leave that aside.

The reality is that when we took a when we took a restructuring charge in the first quarter. It yielded benefits I am sorry, the first quarter of last year yielded benefits this quarter when we when we looked at our head count and looked at those metrics of efficiency. We are more efficient as a company today than we were in 2020.

Efficiency that you're seeing in the results that we've delivered.

I see okay.

One follow up for me.

A slide presentation I think under management solutions you mentioned.

Pricing realization and I just I'm curious have you seen any changes positive or negative side to the pricing environment as we emerge from the pandemic I guess at the ABA.

Back to our way of asking about the competitive environment and whether there is whether theres more opportunity or less opportunity at the same amount of opportunities before us.

To modify prices.

I think we still have very good pricing power.

We.

We were able to provide them excuse me and the products that we are able to provide them to help them get loans now to help them.

Really a great automated fashion get an employee retention tax credit for example, this makes a huge difference from a competitive standpoint of our retention and even from a prospect perspective as to whether they are aware of from a prospect perspective, It's hey, where you even aware that you could get this retention tax credit and you know how much this can bring you.

To help you with hiring new employees or retaining your current employees for our current clients. The level of support we were able to show them and demonstrate to them during a very difficult time.

It really has made the difference so I think it's I think the competitive environment is just as strong, but I think we've been able to have an opportunity and then have shown what we can do and thats given us an even stronger position than we would've had beforehand.

Interesting alright, thanks, so much okay.

Okay. Thanks Ramsey.

And we'll take our next question from.

Bryan Bergin with Cowen Cowen.

Colin. Please go ahead your line is open.

Hi, Brian Hi, Good morning, Thank you and good morning.

Can you comment on how demand trended within the quarter Sysco results and commentary is certainly positive, but taking into account the conservative view I'm curious if you actually did see any deterioration as you exited August or even in September relative to may be June and July.

Yes, Brian that really on the sand from a sales side, we have not.

We think we're well prepared as to kind of our selling season that picks up here over the next month or so and towards the end of the year, but we think we're very well prepared we said we haven't really seen anything it's been pretty consistent through the quarter we.

We really again I'll mentioned mid market was strong.

Digital any digital sales were strong and we also.

<unk> seen very good results on our HR outsourcing, both PEO and ASO. So it's not like it started strong in.

Excuse me in the beginning of the summer went down it actually has been pretty consistent and we actually think theres some opportunity from a sales perspective this month and over the next few months across the board, including retirement and retirement has been very strong as well and Brian I think you are.

I don't want to anticipate what your base question was but but but.

I would say if we looked at the macro indicators that we were seeing June and July were really strong I mean, not these arent micro want to make that clear June and July were strong in August was softer so.

We will see when we come out of September but at this stage to marty's point its not impacting the business.

Okay, Okay understood.

On the management solutions growth can you give us a sense of the mix of the drivers at 17% and that outperformance is how should we think about check volume recovery versus new units cross sell versus pricing any any of these.

Stand out more than others.

Yes. Good question of Fairpoint. So the first thing I'd say is the sort of step take a step back as management solutions is not entirely a payroll game.

It's really kind of.

An important respects got three three pieces so.

The HCM part.

Retirement services.

HR outsourcing so those are the three big buckets, if you will and management solutions.

I would say.

Couldn't see anything on the PEO that was a major revenue line that wasn't up double digits. So.

On the HCM side, we benefited from upper single digit pace per control. So that was helpful. Now thats not surprising we had a pretty big decline in the first quarter.

In addition to that there was pricing and also <unk>.

Client based growth. So all of those were driving that that result on the on the <unk>.

<unk> outsourcing side, we simply had a great year last year had more worksite employees served and that drove that result, and then on retirement services Marty talked about that retirement services.

Gaining steam across the country and we are certainly benefiting it benefiting from it with mandates and multiple multiple states now our pet product. We feel we are and I don't feel that we believe it and see it that we're well positioned so when you look at all of those three it took off.

All of those three to drive that result wasn't it wasn't solely in HCM story and I think it plays to the fact that we sell in an integrated way and we benefited from that in in terms of.

The point that Marty made earlier, which is we're getting better revenue per client.

Okay very good thank you.

Okay.

And we'll take our next question from Kevin Mcveigh with Credit Suisse. Please go ahead. Your line is open.

Great. Thanks, so much hi, Kevin.

Hey, Marty.

Hey, Efrain.

Kind of you made a comment on the call.

The company has fundamentally transformed and I firmly believe that's the case.

I Wonder if you could help us frame, where you think youre going to see that I mean, it sounds like the retention continues to bump at record highs.

Is there a new range for that I mean, clearly just.

Can I ask one question, but just maybe within the client growth rate I mean, you picked up 75000 clients at 11% growth.

I don't think you've ever done that so I mean, it seems like the business is poised for structurally higher growth I don't want to get too far ahead of myself here, but can you help us understand.

Where that sits particularly given the leverage on the margin side as well.

Yes so.

Kevin I would say the 75% is probably over a period of years, we disclosed that we were up above 7 million ton and we have been we had been in the high six hundreds a year before but to your point directionally.

Directionally.

Our client growth has been strong over the past several years in part impacted by this move to digital but Marty talk about so that's one part.

The second part is that the move to digital brings with it.

The ability to operate at a higher levels of efficiency, which is what youre seeing in the P&L. So that's a big emphasis within the company and I would say.

Shut out to all of my colleagues in operations have done a phenomenal job and to the ITM product group, who will also make that happen can happen.

Any other way so I'd say, that's that's the second point and then the third point Kevin to your point last year. We ended at as Ive mentioned to folks on the call. We were in the high <unk> in terms of revenue retention there is a natural.

There is a natural ceiling on the amount of revenue growth I'm, sorry revenue retention, we can have because of some of the markets that we operate in meeting the smaller clients.

Tend to trip more rapidly than larger clients, but all of that moved up.

Previous to the pandemic final point, we were in the 83 to 84 range.

I would say that's the new Mendoza line for for retention.

Last year, we beat that we hope to beat that and build off of that and all of my colleagues in operation sure that coal I think also Kevin when you're talking about transformation, you're having the chance to.

To think about our 50 years in business and how it's changed so dramatically the software enhancements that we're making.

<unk> in front of our clients. It is providing them so much information in the artificial intelligence and the data analytics that we're providing and just talked about.

Today with paychex pre check really allowing employees to be alerted that they're here as their pace there they're pay for this pay period. They can answer that they hear about that on their mobile phone. They can hear about it from their smart speaker.

So meaning that we're tied in now we're the only company tied into all three of the major voice assisted platform. So it saying Youre paste-up is ready you'd like to check it and you can respond that you have check to think of the efficiency that it brings the employer and the administrator of the employer of the client and the employee as well now as this is.

This is really helping continue our retention at the levels that everyone's talking about even though theres business failures in small business that keeps us at some point at some level. This is really taking it to the highest level and that on top of the Covid work that we did and the ability to update them.

Really provides support and dollars through the like employee retention tax credit.

Is making a big difference and it's really a very different company as a software driven company that is using artificial intelligence and data analytics to give a tremendous amount of efficiency to our clients.

Congratulations again.

Thanks, Kevin.

And we will take our next question from Jason Kupferberg with Bank of America. Please go ahead.

Hi, Good morning. This is mahela answer Jason Thank.

Thank you for taking my questions I wanted to ask maybe just.

And then staying on the similar topic in terms of.

Just.

So what youre seeing in the market right now you've been talking we've talked a little bit about new business creation being pretty healthy recently has that continued in recent months and then is there any type of quantification you can provide just for example in terms of the.

Percent of your wins coming from newly formed businesses, you'll win rates as you compete for these new businesses.

Yes, I would say new business formations are down a little bit from last year now, but they're up from 'twenty. There is still up very strong from pre pandemic levels up 20% to 30% over pre pandemic levels. Now there was a big jump last first quarter and frankly, the first half of our fiscal year as we think about it and new business formations they were up.

<unk>.

Relationships with Cpas and.

As well as then go right through to actually starting to set up an onboard themselves all audit all digitally without talking to anyone we certainly have a lot of pride in our field Salesforce and our digital sales of our voice or telephonic salesforce, but the digital sales is becoming a bigger part of brand new businesses obviously.

And we're very proud of that.

Thank you and then just if I could ask about <unk>.

Margin increase in the guidance is that being driven by the topline growth and some efficiencies of scale just from that top line growth flowing through.

They also have been any changes to your underlying investment by expense plans.

Yes, let me just answer that I think I think there always is some element of both but I think it's driven more so by.

By improvements on topline revenue and I would say that because we have we have been able to do the things that we have done or the actions. We've taken on the expense side now when a dollar flows through you get even more benefit that you would've otherwise although.

As everyone knows we have industry, leading margins to begin with.

Thank you.

Great. Thanks.

And we'll take our next question from Andrew Nicholas with William Blair. Please go ahead. Your line is open.

Great. Thank you good morning.

Can you touch on the PEO performance versus insurance performance in the quarter and I know youre, maintaining your guide on that revenue line in the aggregate, but is there any change to your expectation that that underlying level in terms of growth through the remainder of the year.

So I would say both are actually growing quite well HR outsourcing in total is growing well.

I think we've positioned ourselves very well on the PEO side as well as <unk>.

So I would say.

The PEO side has picked back up more recently I think we talked about it last year, maybe the last couple of quarters.

That insurance wasn't as.

In demand at that time because of getting through the pandemic that is starting to come back now more because of our sense of retention of your employees and hiring your employees.

It's a very as you know, it's a very competitive market out there and so now the insurance plans your health insurance et.

Et cetera, Youre dental Youre voluntary insurance is there are becoming very much a competitive offering to attract employees in a tough market and retain those that you have so the interest and insurance has picked back up so both our ASO and PEO frankly, our double digit growers and have done very well in the in the first quarter.

Andrew when you do the arithmetic so private part of your question also is what why not increase the guide the.

The short answer is that PEO continues to do pretty well and the reason why you're at eight to 10 versus double digit and above is that insurance is simply growing slower is still where we expected it to be.

But we anticipated growing slower.

Then PEO for the year, we had a good first quarter that could prove to be incorrect and then the other point that I would make is that everyone's going to struggle with this which has had a cough Q4, everyone had a very strong Q4 that compares against Q4 or are the ones that are a little bit tough at this point the gauge.

Completely both on the top and the bottom line.

We have a we have.

Our view of it but we'll need to refine that as we go through the year.

No. That's really helpful. Thank you and then maybe a longer term strategic question.

Talked a lot about digital.

Digital sales is that something that you can.

Ply your learnings and capabilities from to the PEO market or is that too involved in the sale or is there. Some some middle ground that youre approaching your hoping to target longer term that could make that a more efficient process. Just wondering how how that can be part of the strategy and maybe the puts and takes to consider.

Thank you.

Sure we're actually already involved in it it's basically what Youre doing is also automating and digitizing a lot of the underwriting process and the <unk>.

Information that you have to get.

Onboarding of clients, including in the PEO, we're looking more and more to go to employees to help them self onboard and makes it easier and the client on the prospect itself as they are on boarding and so is sending a linked to employees to say Hey give me interim information load your own information in and get started that will transform I think over to the <unk>.

Oh side, and certainly automation in the underwriting side, which makes that will make the whole process faster. So oh, yes, the digital.

<unk> of insurance plans, and so forth, but we're always looking to make that easier and anything that a client can do for themselves or allow their employees to do for themselves is exactly where we're going strategically and we've already made a number of steps that way.

Okay. Thanks again.

And we'll take our next question from Kartik Mehta with Northcoast Research. Please go ahead. Your line is open.

Hey, good morning, Marty and Efrain.

Alright, Marty I wanted to ask a little bit about sales distribution I know this might be a little dated but at one point accountants accounted for a third I think direct sales accounted for a third in that.

Kind of others, and you've talked a lot about digital sales improving and being a bigger part I'm wondering is it sales distribution or how paychex acquired clients changed at all as a result of.

While the changes.

Yes, kartik it definitely has.

And accelerate.

So much more of our lead generation comes now from the marketing investments that we make in marketing has become a very important part of the sales function and how sales gets third leads and then frankly, our clients view US and then come in online and just decide to buy as I mentioned many clients now are certainly.

Under 10 employees at least can come in.

And then effort just on the float.

We've seen obviously rates move up a little bit over the last couple of weeks.

I imagine you'll benefit from any kind of wage inflation on the float portfolio any changes to how you might manage that over the next six to 12 months.

Are you anticipating wage inflation to help the float portfolio.

Yes, no, we do and I think that the.

Clearly in the first quarter to help offset some of the drag.

The short answer is.

It's interesting.

Uh huh.

Market kind of moves in some ways based on on <unk>.

Concerns about inflation and stagflation.

But in our case that expectation is largely.

Positive when you look at it from a float and from a pricing perspective, so those arent necessarily negative to us where I would say we're in a.

Heightened state of scrutiny on how to position the portfolio based on what we're seeing.

And.

In credit markets.

And on.

On the investment side.

Perfect. Thank you very much.

Thank you Kurt.

We will take our next question from Jeff Silber with BMO capital markets. Please go ahead. Your line is open.

Thanks, so much.

Doing.

Earlier, you talked about.

Peter out did.

Did you see any impact or havent seen any impact in recent weeks I think getting a bit easier.

From a from a macro standpoint, I would say, it's not showing up yet.

What it demonstrated to us and I started to see this through some of the data analytics work that our teams are doing here.

In the market, it's definitely still a tough hiring market.

And I think that the cash balances everyone. You can see this data cash balances are high checking accounts or at a high because people haven't either spent or they also have got in other.

Stimulus money, whether it's child care at kind of our child tax.

Our child benefits that Theyre getting right now people are at a pretty good stage and I think they're still trying to test at a plus I think there is just still healthcare worries about their businesses that they are going back to do they have to wear masks is there a mandate or not and I think it's going to take a couple more months to shake out.

It's certainly the hiring has gotten better our hiring growth is the hiring growth in our small business index is gotten much stronger the last couple of months, especially in leisure and hospitality sectors and other services sectors.

But.

There is still a challenge out there in the hiring so we expect it to pick up but it's going to be a little bit longer than just it's not just the unemployment benefits that made the difference.

Okay.

Okay. Okay.

Great.

We'll take our next question from Kunal <unk> with Jefferies. Please go ahead.

Hey, good morning, Marty.

Lynn.

Also and Thats, probably the hardest on the frontline service providers.

Gibson runs all of the services you have done a great job with our HR team defined very creative ways, though the hiring is really picked back up.

<unk> shifted to some different ways to encourage new employees to commend different work schedules different ability certainly work from home.

But as we said we still are seeing very strong client retention, we're getting the job done and we're certainly driving.

Days, a year and but we are certainly looking for efficiencies and we're hiring very creatively and it's starting to pick back up again.

Helpful. And then Efrain I know, we've talked kind of a lot about the expense controls and how that's benefited the margin structurally but yes gross margins have also continued to up.

Nicely, even with call it headwind some of that high margin.

<unk> revenue just how should I think about maybe the tech stack on the on flex and <unk>.

That's driving gains on the gross margin side and maybe how much more room is there on the software stack to drive gross margin gains.

Great question some months.

So let me answer it in two ways.

The first I'd say is when you look at our gross margins and compare ignore for a second.

Proud of that we understand that we manage to that to your point when I look at the data and I mentioned I think in response to an earlier question it might've been.

<unk> question.

The strength of management solutions, what was really notable about that was that it was widespread.

Bread across the three major buckets of management solutions retirement HRC and.

HCM and what we're seeing is that our sales team has done a really good job of selling the entire we called value proposition.

The company through what we call the power of 3000.

The idea is that when we get in front of a client we wanted.

We want to sell them the entirety of that.

That value proposition not just one small digression on that point you can only do that if you've got an integrated system not just HCM, but integrating ancillary so when you sell that proposition and now you've upgraded to a module, there's essentially very very low.

<unk> cost associated with that and that's really what's helping to drive what we see we are we have been selling a bit higher in terms of client size, but more importantly, we have been selling more modules, especially on high value ancillary as like HRS, So youre right.

All of that is driving the improved.

Margin performance that you're seeing.

Great very helpful. Thanks, everyone.

Okay.

And we'll take our next question from Bryan Keane with Deutsche Bank. Please go ahead.

Hi, guys. Good morning, just wanted to ask on managed solutions from maybe a slightly different angle if you will.

Look at the revenue growth I think it was up 500 basis points first street estimate and it was better than your expectations. So I'm just trying to figure out what exactly was it was the surprising strength in the quarter for you guys and just trying to figure out why that wouldn't repeat itself maybe in the next few quarters.

Well I'd say this Brian the first thing is that.

<unk> pays per control were solid.

They were up as I said upper single digits, you won't see that.

We don't think youll see that in future quarters, So that's going to present, a little bit of a.

Fair issue.

We did have better pricing in the quarter than we had.

Versus the.

Endemic impacted quarter.

Last year so.

What happened is we did take steps in the first quarter of last year to hold off on price increases until we had had a chance to let our customers take a breather that was unique to the quarter end.

We anniversary that that helped and then the third thing is that.

Clients.

Clients were.

On account was up significantly versus where we started the year.

Last year all of those things made Q1, the confluence of those things were.

Hey, Brian there is an element of conservatism in our numbers, we will see where we end up but it won't.

We're not going to have the same same.

Same revenue growth in the second quarter and Thats why.

In addition to everything else, we know that Q1.

Q1 had certain factors in it that don't repeat in other quarters, but.

There are some underlying factors that we've talked about through the balance of this call that will repeat as we go through and we're a little bit conservative on the rest of the year.

Got it that's helpful for the going forward, but how about the quarter itself. When you guided originally I don't think you expected it to be that strong in some of those factors. You. Just outlined you would have known about that would've been on a comparative basis. So just trying to figure out the surprise in the quarter, what could possibly surprised that much yes.

The short answer is you are pressing me down is that it was better than almost all of those categories. So that's the short of it.

Got it got it.

The only other question I had is just looking at some of your metrics compared to some of the global.

Employment metrics and factors you see as your metrics seem to be stronger.

Then kind of what we're seeing in the overall I'm just trying to figure out if there's any.

Thoughts of reasons, why your data might be a little bit showing more strength in what we're seeing on a.

More macro.

Basis, Brian Gate, which ones like employment growth type of thing yeah, Yeah in particular employment.

Well I do think that the.

The growth in small business and small to mid size number or a small business index that piece of it is focused on clients under 50 employees and I think there has been a nice recovery in leisure and hospitality in particular, youre getting some back even though many restaurants and hospitality.

<unk>.

Our study is focused more on 50 and below they took a really hard hit many of them closed when you compare to.

The last year and now they are recovering faster because they had a bigger hit last year.

I would say in general so.

No. That's helpful makes sense congrats on the success.

Brian.

We will take our next question from Vijay.

Mooney with Moffett. Please go ahead your line is open.

Hi, Eugene.

Hi, guys. Thank you very much.

Wanted to come back quickly to retention levels.

Yes.

And I think that pretty broad based expectation that retention levels might start to calm down across the industry. It really as the economy opens up if activity picks up.

First quarter, you guys scale, achieving very high levels of retention are you seeing any indication.

And the high churn as activity picks up and as Youre looking out into the rest of the year are you still expecting some deterioration in retention as that may be part of the conservatism.

Yes, I mean I think we.

It may happen and we were surprised we've been very happy with the retention, obviously hitting record levels last year and I do think what we're continuing to find from clients. As we have really gained a lot as I said earlier from the Covid work that we did the ability to help them.

Turn in their paperwork for their loans in the last 18 months than we have 90% of our clients have been able to have their loans forgiven a lot of that is we made it easy for them. We hear this time and time again that.

They were at a very dire point of going out of business, yet we help them get the loans. We've partnered with three fintech companies to provide them. Another source for loans, we help them with a forgiveness and now we're coming back to them, saying, Hey, you can have an employee retention tax credit and you can get the cash right away, it's not like waiting and here's how you do it.

And we can do it all for you in a very automated fashion and you can have.

In your pocket and that has really helped retention a great deal I mean to your point too.

We had a great year and retention, we don't anticipate that we will be at that level, you will see the impact of that.

Retention over the course of the year. So that has some impact on on where we get to.

Where we end up.

Well, we'll have a better sense of that when we get through Q2, we are not anticipating nor are we planning on the idea that we're going to be at the same level of retention that we have for last year would love to do it but probably not a realistic planning assumption.

Got it got it.

Okay. Thanks.

And then secondly wanted to quickly ask about the <unk>.

All potential up sell opportunity you mentioned in the past couple of quarters that with the date.

Record strength.

Sure.

Growth that might be kind of opportunity.

Based on clients to be all clients now that folks are more interested all open to us switching insurance providers.

Yes.

Net initiatives yielding results.

There are more opportunities there too.

Great NPL growth.

Sure. There is one we've had a lot of success and as we said in double digit growth in both ASO and PEO and we've been able to go into the client base in and get them to an HR outsourcing product first but as I mentioned and as you know just noted yes. The insurance is coming back we had a good quarter on insurance and Youre seeing that in the PEO side in that.

It really is a environment, where the number one issue number one or two issue with clients is how.

How do I hire and retain people and then how do I get more efficient the hire and retain it has become not just about comp, meaning pay but it has become about benefits as well and.

Got it thank you very much alright.

And we'll take our next question from Mark Marcon with Baird. Please go ahead.

Hey, good morning, Marty and Efrain bernheimer, congrats on that.

That's on the quarter. Thank you.

Going to one of the conservatism questions.

In some states such as Florida, where they did see a spike in Delta did you see any sort of negative impact with regards to.

The weekly revenue trends when the spike occurred.

I would say actually the best job growth has been in the south so even while they picked up.

<unk> like Florida have actually been quite positive market has just been dwarfed by the recovery probably if we were in a steady state you would see more of that but in the data as Marty said the recovery in hospitality and leisure has been a big plus in Florida.

Okay.

So even during the weeks when.

Things started heating up for them from a case load perspective, it didn't have it done.

No we didn't say no.

Okay, Great and then with regards to.

Your recent product and technology launches I mean, this has probably been one of the most active periods for you as it relates to it I'm wondering when we go through the list whether it's paycheck.

Pre check.

The retention insights benchmarking talent dashboard, so on and so forth.

Which ones are you the most excited about which ones are seeing.

The highest attach rates and and which ones are leidy are yielding the most incremental revenue.

Yes, I think.

Paychex Paychex pre check will it's.

Just a staggered approach as it's going out now, but I think something like that will have big efficiency gains for clients, which will help a lot on retention, we're not looking we're not charging additional cost for that.

<unk> revenue for that Thats part of the service that a client opts in for but when you hear that clients are trying to be more efficient it's things like that.

That are really going to help on the retention and I think the revenue per client so what the kind of price and the ability we get from that so we're very excited about about that one also that it is tied to the technology. It is tied to smart speakers. We're the only company tied to all three major voice assistant platforms. This is just a.

Whole new way for clients to be able to handle things with their employees to say hey, your paycheck is ready would you like to check it youre paste-up or from an employer standpoint that you get a you get at Alexa That's telling you Hey, you have three things to do today as an employer I mean, these kinds of things are really tying much better retention than anything and the return.

<unk> insights for example, really just uses the artificial intelligence to a great deal.

You can check not only pay but you can look at we look at like 15.20 different indicators that are in the payroll in the system and the software that will say here's your performance rating of this person here's their pay is below the national average based on BLS and <unk> and their pay is below the rest.

The team that have this job category.

Company, a watch out on the dashboard. This person may be likely to leave you when clients start seeing that it's not as much about the revenue directly from that software is from the retention of saying I cant live without this just like the mobile App has been like that for us to have a five star mobile app that employees don't want to leave because it's easy to use.

And they can do so many things themselves is great from a retention standpoint so.

Q1 2022 Paychex Inc Earnings Call

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