Paychex, Inc.

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Paycheck Fourth Quarter and Year-end Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Martin Moosey, President and Chief Executive Officer. Please go ahead, sir.

Thank you and thank you for joining us for our discussion of the Paychex Fourth Quarter and Fiscal Year 2020 earnings release. Joining me today is Efren Rivera, our Chief Financial Officer. This morning, before the market opened, we released our financial results for the Fourth Quarter and Fiscal Year ended May 31, 2020. You can access our earnings release on our Investor Relations webpage and our Form 10-K will be filed with the SEC before the end of July. This other conference is being broadcast over the Internet and will be archived and available on our website for approximately one month. I will start today's call with an update on some of the key metrics and our response to COVID-19 and then review business highlights for the Fourth Quarter. Efren will review our financial results for both the Fourth Quarter and full year and discuss our guidance for the upcoming Fiscal Year 2021. And then we'll open it up for your questions or comments. In May, we provided you with an update on our business as we were responding to the impacts of COVID-19. At that time, we talked about the positive trends we were seeing in our key metrics, but it was still early. Over the past month, we have continued to experience steady improvements across all of our key metrics we are tracking on a weekly basis. We are seeing a steady increase in paid employees and in the number of work site employees for our HR, outsourcing clients. We have also continued to see an increase in sales leads and sales productivity. One particular bright spot is client retention. We are seeing now more than ever our clients are experiencing their value proposition of paychecks as we help them navigate through this very challenging time. I credit the dedication of our paychecks IT development, product marketing, and service teams who have worked tirelessly to ensure a seamless transition to remote working for us while providing the products and service to support our clients and their CPAs during a time of great concern for their businesses, in fact, many times their business survival. When the Paycheck Protection Program was introduced, we were the first in our industry to release an online payroll report to help simplify the filing of the application for the loan. As a client of paychecks, we pre-populated the payroll information that you had ahead of time. We have processed this report over a half a million times for our clients and their CPAs to assist them. We also partnered with three fintech companies, Biz to Credit, Fundera, and Lendio to provide our clients with direct access to alternative lenders for the PPP loans if they did not want to go through their own banking partner. Over $100 million worth of loans have been processed through these partners by our clients. On June 5th, the Paycheck Protection Program Flexibility Act was signed into law, relaxing the original requirements for businesses using use of the PPP loans while continuing to qualify for loan forgiveness. Shortly after we launched the PPP Loan Forgiveness Estimator, this tool, which I feel is the most comprehensive in our market, simplifies the complicated process for our clients and, again, pre-populates the paychecks client data and provides a very simple way to add non-payroll data to satisfy the new forgiveness requirements. Our service teams have provided excellent responsiveness to our clients 7 by 24, even with much higher call volumes and call complexity, all while maintaining and even improving our client satisfaction and retention performance. In fact, client retention reached a new all-time high. Throughout this uncertain time, we have seen strong performance in multiple areas of the business. Sure, Payroll has continued to grow as more prospects are looking for intuitive, -it-yourself solutions. We have seen similar results in our Flex virtual sales efforts. We are also experiencing increased demand for our outsourced HR services, both PEO and ASO, due to the complex demands of the current environment. Our leading suite of customizable solutions allows us to help any business, large or small, simple or complex, -it-yourself or fully outsourced, with today's challenges. The COVID-19 pandemic has been a challenge to our business. However, this challenge confirmed that the investments we have made in the recent past were the right investments. COVID-19 accelerated many workplace trends, and we have had the right solutions in place to help our clients adapt to their new, unexpected environment. Our five-star rated mobile app provides clients and their employees with access to solutions from anywhere on any type of device. This, along with our broad set of human capital management solutions and our comprehensive self-service capabilities, have allowed our clients to effectively manage a remote workforce and maintain productivity. Maintaining employee engagement has been critical for our clients during this time, especially as communications are rarely -to-face. Whether a client needs to capture and track employee issues and requests, or simply check in with their people, Paychex makes it simple to stay connected and maintain a productive and engaged workforce. This can occur through our HR Conversations tool or HR Connect, a tool that we recently released that allows employees to submit their questions, requests and incidents directly to HR through an -to-use workflow. We have also seen an increase in the use of Paychex Learning, an online learning platform which allows clients to retain employees by providing them with various training and professional development options, even while not in an office environment. Our comprehensive suite of payroll solutions offers flexible payment options to help address employees' needs or time-sensitive situations. We provide clients the ability to pay employees on demand for wages earned prior to payday and make real-time payments in minutes for time-sensitive or emergency situations. We continually enhance our data analytics and library port functionality. Faced with a rapidly changing business environment and market uncertainty, providing clients with access to clear, accurate information is critical for them to make decisions about the future for their businesses. Recent updates to our analytics suite provide additional insights on labor costs and workers' compensation information, workplace illness and injury trends, and other HR details such as employee record updates and performance feedback. Additional new enhancements are geared toward improved organizational collaboration and a streamlining processes through digital solutions, such as allowing for electronic workflow and e-signatures on direct deposit and W-4 forms, simplifying the process of adding new workers. We offer many new self-service capabilities for our clients' employees that have streamlined the process for both the employees and the client. We have been a valuable business partner to our clients through this time, providing them with information to navigate legislation, helping them access federal loans, and managing a remote workforce. Our extensive number of webinars have exceeded all records of participation, with over 100,000 clients and CPAs registering for multiple sessions. While our solutions were invaluable to clients in adapting to the new environment of a remote workforce, they are also key to helping businesses as they begin to reopen and get back to business. By using digital solutions, it helps clients integrate more contactless processes to reduce infection risk at their business. In regards to our Paychex family, we have an ongoing commitment to our employees to ensure their safety. At this time, we still have over 95% of our workforce continuing to work remotely, and it has been going well. Given this success, we are accelerating some of our strategies to leverage a more distributed workforce. We are implementing plans to reduce our physical location footprint, among other expense savings initiatives. These plans have recently been announced to our employees, and we are moving forward with these initiatives. As we begin fiscal 2021, we see several reasons for optimism. Our employees remain engaged and have continued to go above and beyond, reacting in real time to continue to provide excellent service to our clients. Our record retention and high client satisfaction, net promoter scores, and client testimonials highlight the value we provide our clients and their advisors as we help them navigate this challenging time. We continue to return capital to our shareholders, and our leading indicators continue to show signs of steady progress. While much uncertainty remains as businesses or states pause or delay reopening as a result of COVID-19, we are confident that the value of our offerings is more relevant to our clients than it has ever been, and we will continue to provide innovative products and services through online offerings where our well-trained and experienced service providers as we get through this together. I will now turn the call over to Efrain Rivera to review our financial results for the fourth quarter and the fiscal year. Efrain?

Thank you, Marty, and good morning to everyone. I'll remind you that today's conference contains the customary forward-looking statements that refer to future events as such involve risks. Please refer to the earnings release for more disclosure on these statements and related factors. In addition, I'll periodically refer to some non-GAAP measures such as EBITDA, adjusted net income, adjusted diluted earnings per share, etc. Please refer to the press release and investor presentation for a discussion of these measures and a reconciliation of the fourth quarter and fiscal year 2020 to their related GAAP measures. Let me start by providing some of the key points for the quarter. Our fourth quarter results reflected the impact of conditions resulting from COVID-19. I'll provide a summary of our results and then discuss our full year fiscal 2020 results. For the fourth quarter, let's start there. Total revenue, as you saw, decreased 7% to $915 million, largely due to volume declines impacting revenue across our HCM solutions. Total service revenue decreased 7% for the fourth quarter to $890 million. Within service revenue management solutions, revenue declined 6% to $662 million. In PEO and insurance solutions, revenue declined 11% to $228 million. Interest on funds held for clients increased 14% for the fourth quarter to $25 million. Higher realized gains more than offset lower average investment balances and lower average interest rates earned. This was part of the portfolio repositioning we discussed on an earlier call. Average balances for interest on funds held for clients declined 8% during the fourth quarter, primarily due to the impact of lower checks for clients resulting from COVID. Expenses decreased 8% to $615 million. The decline was largely impacted by reductions in discretionary spending as a result of company-wide expense controls. Off-income decreased 5% to $300 million and reflected an operating margin of 32.7%. EBITDA decreased 5% to $351 million with an EBITDA margin of 38.4%. Other expense net for the fourth quarter includes interest on our long-term borrowings, partially offset by corporate investment income, which was impacted, as you all know, by lower interest rates. Our effective income tax rate was .3% for the fourth quarter compared to .8% for the same period last year. Net income decreased 4% to $221 million and adjusted. Net income decreased 3% to $221 million for the fourth quarter. Deluded earnings per share decreased 5% to $0.61 for the fourth quarter and adjusted diluted earnings per share decreased 3% again at $0.61. Let's talk about -to-date results. Through the first nine months, results were solid. Our full year growth, though, was tempered as a result of COVID in Q4, but the year still reflected solid progress. Let's look at the results of the first nine months. Total revenue increased 7% to $4 billion. Service revenue increased 7% again to $4 billion, with management solutions growth of 3% to $3 billion and PEO and insurance solutions growth of 22% to $991 million. Management solutions benefited from higher revenue per client. PEO and insurance solutions benefited from higher revenue per client. I'm sorry, from the full year of OASIS results, while insurance services remained challenged by lower workers' comp premiums. Interest on funds held for clients increased 8% to $87 million, driven by higher realized gains, partially offset by lower average investment balances and lower average interest rates. Up income increased 7% to $1.5 billion. Operating margin was at 36.1%, comparable to the prior year. Net income and diluted earnings per share each increased 6% to $1.1 billion and $3.04 per share respectively. Adjusted net income increased 5% to $1.1 billion, and adjusted diluted earnings per share increased 6% again to $3 per share. Let's talk about investments and income. Our goal, as you know, is to protect principle and optimize liquidity. We continue to invest in high credit quality securities. Our long-term portfolio has an average yield of 2.1%. Average duration is currently 2.9 years. So we're a little bit shorter on the curve. Our combined portfolios have earned an average rate of return of .5% and .8% for the fourth quarter and fiscal year respectively. These are down from .1% and .9% for the respective periods last year, as you realize the Fed has cut interest rates a number of times this year. Let's talk about our financial position, which we're particularly proud of. It remains strong with cash, restricted cash, and total corporate investments of over $1 billion as of May 31, 2020. And it really is, highlights the strength of the company that we achieved that result during a very challenging time in economic time for both us and our clients. Funds held for clients as of May 31 were $3.4 billion compared to $3.8 billion as of May 31, 2019. Funds held for clients vary widely on a -to-day basis, an average $3.8 billion for the fourth quarter and $3.9 billion for the fiscal year. Our total available for sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $100 million as of the end of May 31, 2020. Today this compares with $20 million as of May 31, 2019. The increase in net gain position obviously resulted from declines in interest rates. Total stockholders' equity was $2.8 billion as of the end of May 31, 2020, reflecting $889 million in dividends paid and $172 million of shares repurchased during fiscal 2020. Our return on equity for the past 12 years remained strong at 41%. Cash flows from operations were also strong. We reached $1.4 billion for the fiscal year. That's an increase of 13% from the same period last year. The increase was driven by higher net income, amortization of intangible assets and fluctuations in networking capital. So we ended the quarter in a very, very strong operating position, cash and cash flow. Let's talk about 2021. The outlook that I'm about to present reflects our current thinking regarding the speed and timing of the economic recovery. I don't need to remind you of how volatile the situation is. And we'll talk about this in terms of really the first half and the second half of the year. We expect the impacts on the first half of the year will be significant, and then there will be improving sequential. We will start improving sequentially. And recovery is going to occur in the second half of the year, primarily in the fourth quarter. This outlook also includes various expense control measures we have implemented, which I'll discuss shortly, including a one-time charge that we're going to take in the first half of the year. I'll come to that and discuss that more fully in a second. Our outlook is as follows. Management Solutions revenue is anticipated to decline in the range of 1 to 4%. PEO and Insurance Services revenue is anticipated currently to decline in a range of 2 to 7%. Interest on funds held for clients is anticipated to be between 55 and $65 million. Total revenue is anticipated to decline in the range of 2 to 5%. Adjusted operating income as a percentage of total revenue is anticipated to be between 34 and 35%, which excludes, as I mentioned earlier, the impact of one-time costs, which I will discuss in a moment. Adjusted EBITDA margin for the full year 2021 is expected to be between 39 and 40%. Other expense net is anticipated to be in the range of 30 to 35 million. And the effective income tax rate for fiscal 2021 is expected to be in the range of 24.5 to 25%. I'll just remind you, too, that we don't include in any of these projections what we expect benefit from stock comp expense. We adjust that out. So that could change depending on what benefit we get during the year. Adjusted diluted earnings per share is expected to decline in the range of 6 to 10%. Now, as Marty mentioned earlier, given what we've experienced over the last several months, we are accelerating a range of cost savings initiatives. These include headcount optimization in addition to reduced discretionary spend. In addition, we're planning an acceleration of our long-term plan to reduce our geographic footprint, and this is the majority of the charge that I'm about to describe. We anticipate recognizing one-time costs in the neighborhood of $40 million, most of which will be incurred during the first quarter. Our guidance for adjusted operating margins, adjusted EBITDA margin, and adjusted diluted EPS, which I'll remind you again are non-GAAP measures, excludes these one-time costs. Again, $40 million we expect it to be primarily in the first quarter, and it is primarily directed at geographic optimization, a plan that we had in place and that we've decided to accelerate given current conditions. Now, I've given you full year. Let me give you some color on the gating. One of the things that I would say is we will post on the website our presentation. You can take a look at it. It'll provide some detail on this also, so hopefully that will be clear once you've read it. But now let me just describe what we're anticipating. We currently expect revenue to be the most impacted during the first quarter of fiscal 21 with each quarter improving sequentially. We view fiscal 2021 in terms of first half and second half of the year. So let me talk about the first half. We anticipate that in the first half, management solutions revenue will be down mid to upper single digits, and PEO and insurance solutions revenue will be down in the high single digits to low double digits. Adjusted operating margins, excluding the one-time cost that I just mentioned, are anticipated to be approximately 32%. Now, specifically Q1, I would say this. The greatest impact is going to be felt in that quarter, and total revenue is anticipated to be down high single to low double digits range in Q1, and operating margin is anticipated to be approximately 30%. So be sure to bake that into the model. In the back half of the year, we anticipate greater improvement with much of the recovery occurring in the fourth quarter. So we see it accelerating into the fourth quarter, and in the fourth quarter it'll look much more like a normal quarter pre-COVID. Management solutions and PEO and insurance solutions revenues are expected to grow in the low single digits. And when I say low single digits, I mean low. So the combination of Q3 and Q4, because Q3 is a big revenue quarter, and we still don't anticipate full recovery in Q3 with more of it occurring in Q4, combines to create low single digit revenue growth. Adjusted operating margins are anticipated to be approximately 37%, reflecting both higher seasonal margins in the third quarter and the improvement that we expect to see in revenue. So I'm talking now about the second half of the year, where we typically see higher margins. Adjusted earnings per share, again, in the second half are expected to be flat to down low single digits. So let me refer you back to the investor slide so you can think through all that gating. And with that, I will turn it back over to Marty.

Thank

you, Efren. And Lisa will now open up for questions, please.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause you just a moment to compile the Q&A roster. Your first question comes from the line of Ramsey Ellafra with Barclays.

Hi. Good morning, gentlemen. This is Damien Afaranzi. So good to see some of the improvement in trends here sequentially. I guess, you know, the big question here for me is on 2021, just how you characterize the conservatism and your guidance. You know, in other words, are you, you know, are you assuming it's some sort of improvement in the key metrics throughout the year, or to what extent is it sort of a bottoming out of trends and then you're growing over them? Just in color there, I think would be really helpful.

Yeah. So that's a fair question. Q1, obviously, as I just mentioned, we see the most impact. But if I think about where we have been over the last seven or eight years, we've seen sequential improvement. I'm sorry, several years, several weeks. It's felt like years sometimes. We have seen sequential improvement week by week. That rate of acceleration is what's a little bit tough to call, but certainly the bottom is in Q1 and then we expect it to be better. And we expect that to continue through the remainder of the year. I would say relative to what we expected to see three, four weeks ago, as we started the year, we're doing better. So there's lots of, there are a lot of signs at that point that we're seeing a recovery occurring. Now how sustained and how quickly that will occur, we'll see as we go through the quarter. So that's the commentary. We certainly think in the back half of the year, you're going to see substantial recovery.

Yeah, that makes sense. And maybe if I were to just zoom out here then, and maybe this is a question for Marty, but can you maybe just give some updated thoughts about the long-term composition of the company's business lines here? Obviously the pandemic has changed a lot for a lot of people, but are you looking more seriously to move into adjacent areas or businesses? In five years, does the paychecks model look similar to how it is today, or do you think it changes a little bit?

Well, I think definitely we've continued to move more toward being an HR company, and you know, HR, I think many times people still think of us as small business payroll, but as you could see, you know, the way the revenues have grown, we've become more and more of an HR services company for small and mid-sized businesses, and I think that will continue. You know, I think when you see, we will evolve as, and we have continued to evolve, in the way that that is needed. So HR used to be about, you know, kind of HR administration. Then it broadened to become more about, you know, kind of pushing to the front end of recruiting and staffing of your firm, and now it'll become, I think even it may become, at least in the short term, for how do you bring people back to a physical location. It certainly has become more about how do you handle remote. I think the investments we've made in online, in our SaaS products, and mobility in all of our designs has been very helpful, because as I mentioned, you know, you'll still see us as, I think, as an HR company, but I guess what I'm saying is it becomes much more all-encompassing, and that definition of HR gets broader and broader, and I think we've been able to capture on that. We've seen everything from staffing and recruiting to paperless administration from start to finish, of course retirement and insurances, health and workers comp, and then you'll also see the analytics now playing a bigger role in HR as well, in helping people make decisions, businesses who can't afford that kind of stuff can come with us to get the data analytics to help them make decisions and so forth, and I think an awful lot of it is, and also has turned about training and development of employees, and now with our learning management system that we offer, you know, that was perfect timing to be able to train new employees and develop employees from a remote location, which has been really a critical need for our clients. So I think, you know, in five years, Paychex should be known very much as an HR company that delivers HR support, includes everything from staffing, recruiting, to payroll, to retirement, insurances, you know, you name it, but it's constantly evolving what that is defined as, and I think our technology has positioned us extremely well now and toward the future.

That's great. Thanks, guys, and hope you stay safe and healthy.

Thank you. You too.

Your next question comes from a line of David Tugge with Evercore ISI.

Thank you. Good morning. Could you expand upon the performance of the key performance indicators in the fourth quarter? I think, you know, Marty, you talked on the business update call about a number of businesses being on hiatus, suspending their processing. I think as of May 19th, checks per payroll were down double digits. What are you seeing in particular on this KPI? And then my follow-up really relates to new bookings trends, you know, in the fourth quarter and how the sales force is operating, still mostly remote, some in-person meetings, so forth.

Sure. David, I'll start with on the key metrics. Yeah, basically what we refer to as suspended businesses, so they had not gone out of business, but they had suspended processing, and that is down less than half of where we were at the peak and continues to come down, has continued to come down each, really each week. So we're seeing businesses come back. Now, I will say that they're not always coming back with full employment that they had before. So if they had 20 or 30 employees, they might have 15 or 20 now. And you can expect, obviously, that would happen as businesses are at 50 percent capacity, you know, restaurants and places like that. But we are seeing we've seen more than half of the suspended businesses come back, which we think is very good, actually, relatively quickly. And we're seeing, you know, the checks improve and the worksite employees improve as well in the PEO and ASO offerings. So that change in base basically has happened quite quickly as well. So they're bringing back employees faster than we had expected. And hopefully that will continue. But the trend has certainly been continuous improvement. On the sales side, we are still remote for the most part. We are starting to visit clients if they want to be visited and the rep is comfortable visiting. We've taken all the necessary safety protocols. But we are finding that, you know, some clients want to meet in person. But frankly, most clients, the majority of our sales are coming, you know, from a remote, you know, online and in discussion over the phone. And that is working very well. I'm actually amazed at the number of final sales we ended up with in the fourth quarter, given the remote workforce that we have. We also permanently shifted a number of our double-digit percentage of our SMB, our small business sales reps, to inside sales because it was going so well. Of course, we've been doing virtual telephonic sales for many years. But we're increasing that number because of the success of it and the productivity of that and the tools that we had in place already for virtual have continued to work well. So sales productivity coming up, checks per client coming up, and suspended clients who are suspended processing have been going down quite dramatically. Efron, anything you want to add

to that? I think in addition to all of those metrics, David, we track a number of other metrics, including everything from hours punched to time recorded to funds flow through the systems. And they're all showing a pretty significant recovery from the depths of where we were four or five weeks ago.

Understood. Thank you. Stay safe and healthy.

Okay. Thanks, David.

The next question comes from the line of Stephen Wall with Morgan Stanley.

Great. Thanks for taking my question, Marty and Efron. Hope you guys are staying safe and well. Thanks. Maybe just following up on David's sort of question around the KPIs, moving forward towards what you're seeing now. And I believe, Marty, your comment about client retention being up the highest it's ever been. First, can we get that specific number? I think the last we had seen a number there was 82 or just hovering above 82 percent. And separately, as we think about the revenue dynamics, given client retention is typically a bigger piece for sensitivity on the revenue front. But the revenue guide seems to have stayed roughly the same. The down two to five sounds like the low to mid single digit decline you gave in mid-May. Would it be fair to say that the bookings activity, although holding up relatively better than what you expected, has gotten slightly worse if the retention has gotten maybe better? Or were you already assuming that retention would have gone up?

No, I think we assume that the retention is around 83 percent, so an all-time high for us. Now, you know, we're conservative, so when you look at that and we still have the suspended clients, even though they're less than half of where they were at the peak, this is still rapidly changing. So we're trying to make sure we understand how many clients are suspended and how many may permanently go out of business. Our retention is the best it's been, but we'd like to give it another month to kind of see if all those clients come back or how many are lost and that kind of thing. Bookings, no, I mean really sales have continued to be pretty steady, so we haven't seen any degradation in that in sales. Look, they're not where they were pre-COVID yet, but they are definitely improving. And so I think, you know, it's just all in those ranges. I wouldn't say anything. Sales has been improving and losses and retention, I guess I'd say, is definitely at an all-time high. But we're waiting to kind of make sure over the next 30 to 60 days that, you know, all those clients that we retained, you know, have really been retained and are not just in a suspended state that then go out of business. Our losses to competitors have been remarkably improved. So I don't think it also we found a time where people were not moving. So they're not moving to competitors, you know, to maybe pick up an extra discount or something like that at a time when, you know, they need our help in particular with the loans and the forgiveness calculators that we've gotten a lot of client testimonials on. So we've held more clients. We definitely have done better in not losing clients for price or for the competition. And then I think the conservative nature, Stephen, is just, you know, kind of watching what happens here in the next 30 to 60 days.

Okay, great. That's a lot of commentary. I appreciate the comments there. But if I could just quickly follow up on how you guys are thinking about the underlying assumptions, Efron, I really appreciate the granular look at fiscal 21, the first half, even the first quarter versus the second half. Could you talk to how you're thinking about the underlying employment rate? I mean, I don't know if you're able to put a specific number on it, but maybe a range of where we'll be sort of as we get to mid-year, maybe the end of the fiscal year, what you're thinking of the exit rate and also how you're thinking about the disparity between employment in different regions and states driving that because clearly we're seeing very different experiences across states with either, you know, I don't know whether you want to call it a second wave rising or a continuation of the first wave or something like that. I'm just wondering if some states are really moving towards reopening versus those that are now closing up. Just wondering how you guys are thinking about the underlying assumptions broadly.

Yeah. So, yeah, let me talk to that, Stephen. So, you know, when you have a shock like this, the impact is felt obviously, you felt that in April and May and we knew it would continue into June, July and August, which is our first quarter. And I suspect others will report similar impacts or at least in that same range. Our assumption is that as we get through the first quarter, we start to see improvement, but we are not assuming that we see improvement to pre-COVID levels in Q2. As a matter of fact, we don't see that occurring really until the tail end of Q3 in the forecast. By the time we get to Q4, I would say that we are now looking at an environment that's much closer to where we were, say, in Q3 of this year than where we will have been in the first three quarters of the year. And I would say that part of the reason for that is that we will understand what the recovery of our clients is, what's been happening with checks, where bookings growth is anticipated to be. I think we've done a lot of simulation and modeling to get that reasonably correct. And so I would say this forecast assumes very modest gradual improvement through the first three quarters of the year. And then in the fourth quarter, obviously you have an easier compare. So we expect to see results much better than certainly the first quarter. And we're going to monitor it. I think that to your point, we can tell by vertical who's impacted. We can tell by state. I would say the fact that New York and California are struggling a bit in terms of reopening doesn't help the outlook. But it's baked into our thinking. And also we assume some recovery or in certain states based on verticals that are in that state, for example, Florida and hospitality, we assume that that's going to take a while to recover. And that we'll start to see that as we head into next year because it makes sense to us that that's what will occur. But I would say in the first three quarters, we are we are cautious about how quickly that's going to occur.

That's much appreciated on all the commentary. Stay safe,

guys.

Your next question comes from online. It's Jason Kupferberg with Bank of America.

Hey, good morning, guys. Maybe just to pick up on that. Hi, Efren. Maybe just to pick up on that discussion thread a little bit. I was curious on some of those states that you mentioned, you know, that have gone through these partial reclosings, if you will, Florida, Texas, Arizona. Have you seen any increase in clients that have had to go dormant for a second time because of reclosings?

You know, just let me take the front of that, the first part of that. I think, you know, we've seen some, but not too much yet at this point. It's been relatively recent, of course, in this month. So we haven't seen too much of that yet. And the funny thing is some of the southern states still are performing the best when you look at our small business index and when you break it down by region, the south, you know, particularly with construction. Now, leisure and hospitality, you know, gets hurt and that'll be hurt by some of these closings kind of coming back, some of the bars and some of the restaurants. But construction is still doing pretty well. And we have a number of clients in that construction business and that support kind of around construction. So, you know, home sales are up, new home sales are up, double digit still. And a lot of that is the south. And then some of the commercial construction is still up in the south and particularly Florida. So I think that won't hurt us quite as much. Obviously, the leisure and hospitality will bounce around a bit. But we haven't seen, you know, like we haven't seen at least at this point in our indicators when we look weekly any major drop in those states that have, you know, seen some higher recurrence, reoccurrence, I guess, or a continuation of recurrence and closures.

Okay, that's helpful. And I wanted to just ask for a little bit more color on the comment about the client retention hitting the all time high, the 83%. Is that for the fiscal Q4? Was that a full year fiscal 20 comment? And maybe as part of that, can you sort of break apart the moving pieces of retention? I know you mentioned takeaways are down because we've got a lot of switching going on. So I just wanted to understand, you know, in the turn that you are seeing, what the kind of mix of out of business versus, you know, house versus third party takeaways, what that's looking like right now and what you're assuming for the retention number in 21.

Yeah, I think, you know, the hard part right now, as I mentioned, was that these suspended accounts and so it is our best retention and it has been because there were fewer takeaways, as we said, and less leaving for price. Out of business was up slightly, but overall, you know, I think that was probably pretty consistent, maybe up slightly. The improvement, it would come from competitive takeaways or price and that's the scheme of things. Right now, we'd expect that, you know, given the really high, we also are hitting great net promoter scores and client satisfaction. We have got great client testimonials. I really think clients have, you know, felt like between the payroll report that helped them make it easy for them to file for the PPP loan and then the loan forgiveness estimator that is so comprehensive, we've gotten a lot of great feedback and I do think that's helped drive the value to our clients even more, you know, kind of in a crisis when they really needed us. They found that we were there and very helpful to them and important. So I think that's helped. The only thing that I said is we played a little conservative is we'd like to see how the next, you know, month or two fall out for the other suspended accounts. Again, they've fallen more than in half of the peak, but we just want to get a sense of, you know, do we hold at that level of retention or, you know, are worthy some accounts that were suspended, but, you know, they're still in business, but they might not make it longer term. Right now, you know, by now I would have thought that many of those would have declared they're out of business. I don't think there could be an impact from the reclosings. You know, if you were a bar or a restaurant and you were closed, then you opened back up at 50%, but now you've been closed again. You know, does that have an impact or not? We're not sure yet, but right now we're very positive based on all the facts that we're seeing. Okay. And

just to clarify, the 83% number was for Q4 or that was full year? I'm sorry, full year.

Full year. I'm sorry.

Full year. Okay. Where did you exit the year on that metric?

Well, 83% is it. That's the year, the end of the year.

I got the end of the year. Okay. Thank you, guys. Okay. You're welcome.

Your next question, caution the line of Kevin McVeigh with credits, please.

Great. Thank you. Hey, I wonder, I guess, what drove the decision, hey, Anthony, hey, Marty, the $40 million charge, I know you were kind of in the process of doing that. It sounds like a lot of it's occupancy. During the way that frames its specific geographies and is it just kind of the success that you saw, you know, having forced to do it remotely that kind of drove that decision, I guess, just any additional thoughts around that and then what the margin impact can be long term from those actions.

Sure. I'll start with that. We've been, we had a plan in place that as, you know, we had a number of offices across the country. That was our model. And what we were finding is, you know, as we consolidated, as offices got smaller and we were consolidating through regional service centers, we could put better technology in place and so forth. And we had a number of people working from home already. And in fact, when we would close kind of a remote office, we would let the experienced people, many of them, work from home from a service perspective because we had all the tools in place. When we saw that 95% of our employees were working from home and that our client satisfaction even went up and our retention was even stronger, we looked, had to look at is this a way to reduce costs a little bit faster? And we decided to accelerate closing a number of physical locations, allowing people to work from home even in those local areas and from a service perspective and that we could save a tremendous amount of lease expense and rental expense on the physical location. So that's why we decided to accelerate it. That's already been announced to our employees and we're already moving forward and taking those steps. And that was the majority of the 40 million. There was also, as Efren mentioned, there was also some reduction in force, but it was quite small, less than 2% of our employees. Still painful to do. But as we worked through the closing of certain offices and so forth and some other reorganizations, we also took those actions as well.

And on your second question, Kevin, you know, if you take the 40, you tax-effect the 40, you can figure out what the EPS impact will be. We anticipate that that will be, that will come out of the cost structure going forward.

That's helpful. Just one quick follow-up. The guidance, it assumes kind of no incremental federal stimulus. I guess just, you know, that obviously brings some concern that, you know, if some of the states don't get incremental funding, there could be some layoffs, things like that. Is that embedded in the guidance as well or would that be something that would be another thing, if you can see the impacts?

Yeah, I don't think we're at that level right now, Kevin. I mean, literally, I would say if you were in our management meetings every week, we're looking at different scenarios in terms of both what ideas that are coming out of the Congress, extension of PPT, what the impact of all of that is. But we're not at a granular level where we're saying, hey, if that happens, it's going to result in a bump of X percent. We're still early to do that.

Thank you very much.

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

Hi, good morning. I was just hoping you could compare the resiliency of the CGO business to the payroll business in terms of the health of your own client. Is there any major difference in the way the two client bases have reacted to the current environment and how is that impacting your outlook for each business?

Well, I think I'll start and then ask Efron if he wants to add something to that. I think we saw, you know, a drop in both, you know, obviously with layoffs, with furloughs and things like that. What you saw in the small business on the payroll side, you know, businesses actually shut down or were closed. So you had no employees there. On the PEO side, usually, you know, a little bit larger client base, a little bit larger average client, and they reduced their employees, the worksite employees. But both have come back pretty well. And the worksite employees, basically what we refer to as change in base, so change of existing employees being paid within the worksite employees, you know, has bounced back, I think, a little bit better than we expected on the PEO side. There's a great demand for both PEO and ASO. I think this has helped clients who, I would say, on the PEO and ASO side, more people have moved toward that HR outsourcing because this is just too difficult for them to handle if they have, you know, 25 to 35, 40 employees, which is kind of our average size on the PEO client. You know, I think more have moved that way because of the need and the complexity of the regulations. And how do you bring people back? How do you furlough? When do you bring them back? What, how do you handle all of the changes that have been put in place? And for insurances and so forth. And on the small business side, I think we've also seen, you know, that come back. But that one's been a little bit more about either being open or closed kind of thing, where the PEO has been kind of stayed open but reduced their employee set. Both are showing improvements, though, and a little bit better than we expected. So we certainly hope that that continues.

Yeah, Andrew, what I would add is that, you know, the nature of our PEO business is a little different than the nature of our SMB business in terms of its geographic scope. And so our PEO has more concentration in the state of Florida as we've discussed before. And as a consequence, if you just isolate that factor, we would have more exposure to hospitality in some of the industries that have been hard hit. When we looked at the data, it was pretty clear that they were, there was almost a hair trigger reaction in terms of reducing employees. But to Marty's point, we started to see them come back. I would say we overindex a bit in some parts of the business on hospitality. So we probably have been hit a little harder than perhaps other people, other companies may be. But we're also now starting to see pretty rapid recovery in terms of works on employees. I think the state of how your PEO reacts in this environment is going to really depend on where your concentration is. If you're in a concentration in a state or you have a heavy concentration in a state that's been shut down,

you're going to

end up with one result. If you have one where a lot of your works on employees were in a state that remained relatively open, you have a different point. But just to reiterate what Marty said, so we didn't see clients necessarily stopping their processing. What we saw was clients reducing significantly their processing and now adding employees back.

Great. Great. That's very helpful. Thank you. And then sticking with PEO, just wondering if there's any update to how you're viewing the M&A opportunities set there. I mean, how much are you kind of considering the volatility or the variability in the economic backdrop and considering future deals? Are you at a point even now where you might be comfortable moving forward with something like that? Thank you.

Sure. Yeah, we're still very interested. Obviously, we think the PEO business, it's a growing part of our business. And we do think that there's M&A opportunities out there. We're staying in touch in this environment. It's a little bit difficult, obviously, one from a remote working, just the due diligence and so forth. But we're staying in touch with certain opportunities and we're continuing to watch those. It does make it a little bit more difficult, not only the remote piece of diligence, but to understand where they dropped employees or dropped clients. You know, what's the take now? What's the valuation? And many of the possibilities of acquisitions are also a little bit nervous about, you know, selling at this point unless we're willing as a buyer or any buyer is willing to kind of overvalue expecting how it's going to bounce back. So it's a little bit of a tenuous time to buy, but we're staying very close to that market and very interested for the right opportunity.

Great. Thank you. All right.

Your next question comes from the line of Brian King with Deutsche Bank. Hi, Brian.

Hey, guys. Thanks for taking my questions. Just following up on the discussion, thinking about the suspended clients, you know, what percentage of those fall in that bucket still or remain dormant? Is it 10% of the base, 20% of the base? I just don't have a good sense of that.

Oh, much smaller, Brian, much smaller. I don't think we've given out the number, but one, it's dropped in half. Even at its peak, it wasn't anywhere near 10%. So it's, yeah, that's a good question, actually, so that people don't feel like it's too large. It's not that large. We haven't given the number, but it's not even 10%. Well, it's probably, you know, frankly, when you put it all together, where we are now might be 1% to 2%. So we probably over discussed that for the number that are out there.

Wow, OK. So it's only 1% to 2% that look like they could close down or, you know, or fail, I guess, at this point.

Yeah, that are still suspended and suspended as a result of COVID, you know, because we always have some suspended, but that are seasonal and things like that. But we can break out the best we can what are really COVID related in that timing. It's definitely under 2%, probably that 1 to 2 range.

And does that include businesses that you've already kind of realized that have failed or turned off?

No, what does? Meaning are there

another percentage group already that are closed that, you know, are basically turned off?

Well, yeah, that would be in our lost numbers. So we've already taken those as lost clients and they're not in the retention numbers. The only thing that's in our client base right now, there is a, you know, 1 to 2% that are suspended because of COVID. And we're still kind of waiting to see how those kind of end up, if that helps. Anything that went lost already is out of the client base.

Yeah, and so that lost percentage, is that, was that, you know, how does that compare to a normal recession, you know, just trying to get a sense of how big that percentage was?

Yeah, you know, really at this point, you know, the last recession, this was so much deeper, but we didn't really, we at this point, we haven't lost, I would say anything like the last recession. Now that went longer. And so you lost them over a period of time, probably 18 months. This one was, you know, we went much deeper and I think we handled it very well from a payroll specialist and the relationships that we had. We kind of talked to them about being suspended. So where they may have said, hey, I'm going to go lost and if I need to, if I'm going to start back up, I'll call you again. We kept it from going lost, having to sell it again in competition. And it made it much easier for our clients and easier for us. So it's really been, frankly, a lot better than I would say the last recession 10 years ago, which really those losses were larger and came over a longer period of time.

Got it. Helpful. And then just last question I had, Efren, just thinking about the 4Q guidance, you know, you said it comes back to more looking like more normal growth. And I guess that's the jump off period as we go into fiscal year 22. Just think about the puts and takes there, you know, with the weaker numbers versus, you know, the easier comp piece of that versus, you know, does business start to bounce back with new sales, that kind of thing? How do we think about that trajectory as we head into 4Q and then head into fiscal year 22?

Well, I guess it looks like a more normalized quarter, Brian, is what I'd, the best I can say right now. You know, I would say this about the second half. Obviously compared to a normal year, we have less visibility in the second half compared to where we would be otherwise. But I would say by the time we get around the Q4, there's a number of things that we think will be occurring that are going to create a situation where that quarter looks a lot more normalized than certainly the first three quarters. So at this point, I'll just hold talking in more specifically about Q4 until we start getting our sea legs under us in this year. But I think that we've got a reasonably good basis for thinking that that's the way the quarter will look.

No, that's helpful. And as we get into fiscal year 22, it just there's no reason why it, you know, shouldn't be more normalized as well as we jump off that point. Brian,

yeah. So, you know, we've been talking about non-processing clients, works that employees being down, checks for payroll, all of that stuff is going to normalize out as we go through. And I think that the point I want to make, reiterate that Marty's been making in this call is this. We have the right kind of model for the situation we are in. What I mean by that is a tech services model in an uncertain environment is the kind of environment, is the kind of business that you want to have. Now, it's great that I say that. It really is irrelevant that I say it. What's more important is the feedback we're getting from clients. We have not never gotten as much positive reinforcement for the role we have played over the last several months. So we think not only do we recover, but we have in the balance of the year the ability to gain share in the market because we have the right model in an environment that's very uncertain for the kind of clients that we serve. So we are bullish as we go through the year that as we exit the year, we're going to be not only recovered compared to where we are now, but actually going to the strength of our model is going to show. And we could very well end up being in a better place than we were when we entered the COVID era.

Got it. Super helpful. Stay safe.

Your next question comes from the line of Brian Bergen with Cowan.

Hi. Good morning. Thank you. I wanted to ask on the outlook, how would you characterize the projected sequential improvement in management solutions as far as it being driven predominantly from the improving check volumes versus some of the increased penetration of retirement and some of the other services you referenced? And then the high teams check volume decline that you called out on the update call. Did you say you did better than that here in 4Q? Curious how you see that playing out in 21?

We did, I would say, a little bit better, Brian, in 4Q. And we're seeing improvement as we go through Q1. Still early, but that's where we expect. So, you know, to the point, the question that you're asking, yes, we expect that we'll get through Q1. We'll understand what clients didn't make it. And then the clients that remain have an opportunity to grow and to build and build up their workforce and the combination of a better sales environment and better sales combined with recovery from our clients that drives better revenue as we go through the year.

Okay, that's helpful. And then on pay offerings. So, can you just comment on what you're seeing in the adoption of the real-time pay solution versus the pay on demand offering? And then just as we think about an acceleration of digital payment methods from traditional paper checks, is there a margin story to be had for you, potentially through less service or other means?

Well, yeah, I think so. I mean, I think it's, when we're seeing part of the expense reductions that you're seeing and, you know, is some of that margin, we've become more productive as more clients have gone down line and we've provided a lot of self-service opportunities. So, you know, in the past, when you think about us, we would take the information, the employee would go to their HR person or their owner of the business to change their direct deposit or, you know, change their address and then they would go to us. And now that's all self-service. And so the employee is really able to do all of that themselves. That saves the client and us. And so you're seeing it much more from that standpoint. On the pay on demand, yeah, we're seeing it's still early, but we introduced it around December timeframe. And I think COVID kind of, you know, slowed it down a bit, but we're definitely seeing more and more interest of it. The process, you know, we have to have the client sign up for it and that's been a little bit more challenging the last couple of months, but I think it's going to pick up the pace again. And there certainly is a lot of interest and there was interest during the last few months in restaurants that would bring someone back and even now that brings someone back to do eight hours shift and not do 40 hours, but work eight hours here or eight hours there. And instead of waiting a few weeks for their paycheck that they were able to use the pay on demand. So I think that has a lot of opportunity going forward. Does it have a lot of margin opportunity? I think it has some there, but because it's more of a, there is some self-service involved there and it's less maybe that we have to do. But fundamentally it's going to be a retention piece too. It's going to be something that it's a great product that we have that people want and the clients like and their employees like. And it'll help them retain their employees and us retain the client. On real-time payments, yeah, I mean, we're still, I think, the only business in the industry that's offering it. We've seen a pretty good pickup for just starting it a few months ago and clients really like it. It's able to get them money in really seconds, minutes, and it's been gotten very favorable reviews from our clients, particularly if they have a last-minute change or a mistake that they wanted to correct. They can do that and get it done in minutes instead of waiting for a day to happen or, you know, or an ACH or wire transaction.

Thanks, Gus. Be well.

Okay. Thanks.

Your next question comes from the line of Jeff Silver with BMO Capital Markets.

Thanks so much. On your business update call, you talked a little bit about what was going on on the workers' comp side. I think you've seen lower rates, but it was offset to some extent by lower healthcare expense because of fewer elective procedures. Can we just get an update on how that's been trending?

I think comparable, Jeff. Not a lot of changes. We've seen a continuation of those trends into the beginning of the year.

Okay. And it doesn't matter in terms of geographically in certain states that are opening up fast, they're still pretty steady?

Not thus far. So, you know, we have a lot of healthcare on the PEO side, healthcare exposure in the state of Florida. You know, our results in the state of Florida have been good. So, thus far, thus good. We'll update if we see anything different.

Okay. Great. And just as a follow-up, forgive me if you mentioned this, did you talk about the expected cost savings that you think you're going to be getting from some of the one-time costs that you talked about?

We said it was embedded in the guidance. We said it was $40 million. We said if you tax affect the $40 million, you can figure out what the benefit will be and that will continue going forward.

Yeah, I'm sorry. It's talking about the annualized cost savings from these moves.

Yeah. So, I think if you take the $40 million and you tax affect it, you'll get the benefit that we expect going forward.

Okay. Great. Thanks so much.

Our next question comes from the line of Lisa Ellis with the Moffitt-Nathanson.

Hi. Good morning, guys. Thanks for squeezing the end.

Yeah.

All right. The first one is just a cadence clarification. If I understood the cadence right, it looks like one Q revenues are expected to be a downpick from four Qs. So, high single to low double digits despite a lot of these operating metrics looking. Can you just clarify why that is? Is that because of new sales dipping? Because of the pandemic or what causes that?

Because, Lisa, remember Q4 has one month of pre-COVID results in it. And April and May were the COVID months. So, Q1 has, you're right, a little bit better results, but unfortunately it also has one less pre-COVID month than Q4 did.

Yeah. Okay. Fair enough. And then second one is just a follow-up question about the competitive dynamic and effort in your comments about Paycheck's winning share as you're coming through this. Are you seeing, I mean, I know you compete still with a lot of legacy regional service bureaus and then also some staff players that don't have the service component to their model. Are you seeing a notable shift in the competitive dynamic in your space, meaning are some of these competitors really struggling through the pandemic? Are you seeing an increased win rates against some of them? I'm curious, just a little bit more color on that.

Yeah, I think, Lisa, we're seeing, we're certainly seeing on the retention side fewer leaving to go to a competitor. And so that we see that as positive from a competitive environment. From a win rate on sales, I would say we definitely are seeing an increase in, for example, like share payroll on the low end, on the micro end. And we're still trying to work through whether that's competitive wins, which it looks like is some of it, where we're really seeing an increase in the sales. We're seeing that we're winning a little bit more there on the micro end. And also that we're getting more clients that have been doing, you know, payroll themselves coming out and saying, hey, I'm going to go to someone, an online processor, because share payroll benefited a lot on their website and on their offering from what we did on the federal side with the payroll report that helped them get the loans that also has the loan forgiveness and a lot of the webinars. So I think they felt a lot of strength in the, in the share payroll and flex opportunity. And so I think we're also winning some there. So I don't think overall the competitive environment, I don't think we've seen any major disruption there, I would say at this point, although there has been, you know, we've seen and heard some furloughs and layoffs of some of the competitors. But I do think that that we are winning because of the great tools that we've had for COVID that have supported clients and supported prospects who are looking maybe for the first time to outsource.

Okay. And then last one for me, just non-COVID question on the election, are there are there any things in the policy agendas of the candidates for the upcoming elections that you're watching for that might create either opportunities or challenges for you? Well, I wouldn't really know. Yeah, sure. Well,

I think, you know, always if the if there is a change in the leadership, that change tends to go back to more regulations. Now more regulations in general help us because there's more of a reason to outsource either HR or, you know, or payroll for that matter. So I don't we don't know. Nothing I've seen yet would say exactly what that opportunity would be. But I would typically based on history, there's going to be more complexity, more regulations, and therefore it's going to be more difficult, you know, for businesses. I also think obviously we're watching, you know, corporate taxes, that's more from not so much from a product and service opportunity. But, you know, just from a because being a highly profitable company, we're obviously looking to see what will be that any tax impact that that Biden has already talked about, and so forth. So but from a product standpoint, frankly, typically, typically in a democratic administration, we would have more regulations and therefore, it would be fairly positive from a product standpoint. And I would also think that there's going to be a number of new rules coming out of recovering from COVID. And that will also make it more complicated for businesses to exist and to handle their employees, which will drive more demand for our services. And again, as we've said a number of times, the way the investments we've made to be able to really respond to a remote workforce, which no matter who gets in, I think is a permanent part of our future. We've made, luckily, the right investments here that have really helped clients and will continue to help clients be remote handle remote working. And that I think is going to pay off for us going forward.

Terrific. Thank you. Thanks, guys. All right. Thanks. Your next question comes from the line of Samana with Jeffries.

Hi, great. Thanks, sir. Thanks for my questions. Efra, maybe one on the retention side. I know you guys, the 83% is a, if I remember correctly, a unit retention number. If we thought about it on a net dollar retention basis. Add 4%. You said add 4%?

Yes.

Okay. Revenue. Okay.

Great. To Marty's point, to Marty's point, we also hit a record in terms of, certainly since we, since I've been here, in terms of the level of revenue we've retained. And just to put a bow on that, Samana. That was really pretty extraordinary work by our service providers. And when I say the strength of our model, I think there is a tendency sometimes to think of that as just adding cost in the model. You can't get to those numbers without those people on the front lines doing the work they do every single day. So can you get more efficient? Obviously. We've taken steps to be more efficient. But not in terms of people. We've decided that the infrastructure can be a lot more efficient than it is. We've made that choice. We've decided that the right thing to do in an environment where we expect the business to recover in the back half of the year is not to slash employees. That's not what we decided to do. And we decided to get very efficient in terms of what we're doing. And I think that in this year it really has paid off. Now, having said all of that, I will add a note of caution that Marty said earlier, which is we need to go through the first quarter of the year to see that of the people who remain in let's call it suspended status at this stage, how many of them will come back and continue to process. We're optimistic because if you would have pulled us when we started the process, we would have thought the number was going to be very high and it's turning out to be lower. Meaning there's fewer of our clients that are going long. Also, sorry for the lengthy response to the question, but I do think it's important to highlight that those things work together. And there is a role for tech services here done efficiently. And I think that our margins and our experiences prove that out.

Yeah, and I think I'd like to play upon that point because we haven't really made it that much that Eprin just brought up one thing and take it a step further. The interesting thing with our model is we've gone to an awful lot of automated self-service and automated responses through chatbots. We can answer over 200 questions in an automated fashion now and it's made our service people much more productive. What we saw in the last two months was like a year end for us, which those in the payroll business means your volumes are up like 25% because at year end, typically people have bonuses. They have a lot of questions. That's what happened in the last couple of months, April and May in particular, where we had very much higher volumes and longer calls because people had questions. So when everything's going well, we have the tools in place for you to do it quick and efficient any way you want it. When you can't get the answer and do something on an automated fashion because you don't understand the regulations or how to do something or how to handle a unique situation like COVID, we had 7 by 24 service experienced service providers that were there to answer the questions. And we got a lot of positive feedback about that. A lot of competitors today have gone a lot of automated or have gone out of the country to provide support that is not at the levels that we've been providing the last couple of months. So it's really a shout out to our service providers who when you need them and be 7 by 24 or 365, they're there and it really paid off for us.

That's very helpful. And then maybe just 100 million of loans have been processed by the partners that you mentioned. Is there, is Paychex, how are you monetizing that? Is there a referral fee that Paychex gets? Is there, is it just a service you're providing for your customers? How should we think about the path to monetization for that?

Yeah, it's not large. We get a referral fee based on a loan that is established. And, you know, it's, I'd say a relatively small amount given our revenue and so forth. A very small amount given our revenue and so forth. But it was more of a service to our clients because a number of small businesses don't necessarily have relationships with banks. And what we were hearing from our clients is that, hey, I don't really have a relationship with a bank and I can't get to the front of the line. And so we partnered with those three fintech companies and obviously it was a need that was out there and provided a support to them. So small monetary value but significant client service, I think.

All right, great. Thank you very helpful. Thanks again for taking my questions. Okay.

Your next question comes from the line of Cartic Mezzo with North Coast Research.

Good morning, Marty and Efren. Hey, Marty and Efren, you talked about the second half obviously being better than the first half. And as you look at the business and, Efren, as you're modeling it, is that based on kind of what you're seeing in terms of bookings and kind of what you're seeing in your stats or is that more based on just the experience that you guys have in this business and your expectations for how the business will trend?

I think it's a little bit of both, Cartic. So I think that, you know, obviously when we started this whole journey several months ago, we have an idea of what a recovery looks like. Once you hit bottom, when we got to mid-May, we said, hey, we have hit bottom and now we're looking at how

this

progresses. I would say it's behaved pretty similarly to once we understood the depths of the drop, how we expected it to continue. And now what we're looking at monitoring, as I said before, we have eight to nine weeks of steadily improving metrics. We now are looking for a continuation. I think there have been a number of calls on, or questions on the call. Does the spread of the infection at some closures, is that having an impact on results? We don't see it yet, but of course we're monitoring that very carefully. But if current trends continue, and again, they don't necessarily, it's not necessarily as they will, we think that the way we've laid out the year makes a lot of sense. So that continued improvement both on bookings, which we expect over the next several quarters, record high levels of retention, our positive, an environment where the value of our services provided, our technology and our services provided, has some ability to win in the marketplace. So I think that's all of those things we think are going to build to the outlook that we've got and we're optimistic about the remainder of the year.

Everett, one of the more controversial numbers out there right now is the unemployment rate. And you look at that rate, do you try to compare it to your business? And is there a way to say where the unemployment rate has to be to hit the numbers you think you can in the second half?

Well, I think we certainly expect that there's going to be improvement starting certainly in the fall. So I think we're in an environment where we're seeing the same levels of elevated unemployment in mid-fall. I think that we'll have another conversation about what the impact of that is on this plan. It's too early to call that. And even economists disagree as to where things really are. I would say we look at that, we're informed by that, but really we're informed by our own data. We can tell week by week, frankly daily if we want to, how much people are paying employees. We know what the trend has been. We know what the recovery from the depths of the shock to where we are right now. And those trends are positive. Now, again, there's no guarantee that they'll continue, but we feel that or we believe looking at the data that it looks like we're on a solid

trend. Yeah, I think, if EFRA makes a great point, it's one piece of data. But there's so much noise in that unemployment number, particularly because it's kind of state, with the state by state procedures and the way they pull those numbers together, it's pretty dicey. We have a great sense, I think. Even our Small Business Index, as we got into it, could see, and I think ADPs as well, there's issues with the data and the way you look at it, as we saw last month with some of these numbers, just because of the way that they're done. And nothing was really set up for a shock like this and the way it dropped so quickly. And if, like, if you look at our index, it was pretty flat month to month, the Small Business Index. And then if you looked at paid employees, though, and the way they were measured, they were actually up 4%. It would have been an improvement of 4%. So you try to look at a lot of data, but as Efron said, we have a lot of very good data these days on what's changing and where it's changing and how quickly. So we tend to rely more on our own than something like that.

And then just one last question, Marty. As you entered this environment, how are you managing investing in the business yet maintaining a margin, operating margins where you're satisfied with the results? Well,

you know, Cardick, it's always a challenge, but I think, you know, even when you go back to tax reform and you look at what happened there, you know, some companies took that right to the bottom line. We worked with the board to reinvest a substantial part of that back into some into the employees, but also into the development. And those IT investments, as we look back now, you know, really were the right things to do that positioned us very well for remote workers, more self-service online, things like our products we've rolled out here with HR Connect that allow clients to talk to their employees virtually through the app and be able to do electronic signatures. So we're looking to continue that investment. You know, we made some a small number of reductions here in force, but like I said, it was under 2%. And when you look at IT development, that has continued to grow really overall the development side of IT. And where we've always had savings over the last, frankly, 10 years or 11 years, we've invested them in IT development to be a real tech-generated service company. And that has paid off well. So that will continue. Our capitalized, you know, our capital, our investments look to be the same as last year. We're not looking to cut IT investments in the product that we're making.

Thank you very much. Okay.

Thanks,

Kurt.

Your next question comes from the line of 10, with J.P. Morgan.

Thanks so much for taking all these questions, guys. I know it's a good use of our time. The bookings question, I know a lot of people have asked about it already, but can we just clarify how did bookings or new sales come in for fiscal 20 versus expectations? And then as we look to fiscal 21, how different is that going to be? Because it sounds like we shouldn't assume a lot of new business dollars retention should be higher, less switching. So is there going to be more selling into existing? Just trying to understand, take a picture of what bookings might look like and how they'll differ from last year.

Yeah. I think I'll start on, I think through nine months, I think Efren, you mentioned this, you know, we look pretty good and we were pretty solid in our growth across pretty much all business lines and through the nine months. And then, you know, as March, middle of March and into March hit in April and May, a lot of that was just dried up and we were down. Yet when we look back at the fourth quarter, I was amazed at the number of units that we had continued to sell. And the strength, frankly, was, a lot of the strength was sure payroll, which can be sold, pretty much all that sold online or over the telephone. And they did very well and continued very well in the fourth quarter. I think that was the issue of where not only were they getting a lot of halo effects from the things that we were doing and what was available online, but also more prospects moving to an outsourcer on a small and on a micro basis. The mid-market through the nine months was very strong. The mid-market, the product, all the product changes we've introduced have done very well. They certainly hurt a little in the fourth quarter because more of that is -to-face. But I think they really kind of maneuvered and learned how to sell online and very quickly. And then we've given them a lot of support and they've done well. In the first quarter, we kind of expect the improvements that we're leaving fourth quarter with to kind of continue in the first. So it's not going to be a banner first quarter because everyone is still remote. But we have learned a lot of tricks of selling remotely and how to do better scheduling, how to do better remote, how to meet with a client if they want to be met with. And that is all kind of picking up steam. So I think first quarter will be okay. And then we think it'll continue to pick up from there. But through the first nine months, we had solid bookings and we're pretty excited about those, if that helps.

It does. It does. So as we look forward and spin around to margins, just looking at the guidance, I appreciate the first half, second half dynamics. But it looks like at least initially we'll see margins. I'm proud to march you guys suggest that pretty much all of the decline of revenue is going to flow through here to EBITDA. I know you have the savings or the payback from the GEO shrinkage here. But is there anything else that's impacting margin beyond just the decremental margins of revenue? You followed my question? I don't know if I asked it well.

Yeah, thanks, Tingen. So yes, it's primarily revenue driven. And the impacts on a specific quarter are very highly dependent on the amount of revenue in that quarter. And in Q1, you have more, as you mentioned, of a flow through of the margin impact. And then revenue starts to build as you go through that. And you see less of it and you also see some of the other cost savings initiatives take hold as we go through the year. So yeah, you're getting, that's primarily what you're getting. And again, I just go back to one thing that I mentioned. One of the things that we were very careful about is we didn't want to come out of the shock in a weaker state because we thought we needed, we were going to be in a position where there was going to be opportunity in the back half of the year and we were going to rebound. So rather than cutting a significant amount of headcount in the first half of the year, what we decided, as Marty said, is to optimize the amount of headcount that we had. So you'll see benefits as we go through the year from the actions that we're taking. But in Q1, you have a significant hit to margins because of the flow through the revenue.

Got it. That makes a lot of sense. Thank you so much.

Okay, thanks. You're welcome. Your next question comes from the line of Mark McComb with Baird.

Good morning, Marty, and good morning. Just wanted to follow on with regards to the bookings. Could you just, obviously, April and May would have been down because of COVID. But by the time we got to June and things started to stabilize, the bookings, how did they compare relative to a year ago? Like, what were they trending at 90% of prior year or 80? How would you characterize the level of improvement?

Well, I think what we would say, you know, and frankly, when you looked at the whole year, we were fairly flat with last year for the whole fiscal year. So I don't want to portray April and May as too negative. They obviously were down substantially. But when you put it all together, you know, we were probably flattish for the year and down slightly for overall par sold. And if you look at June, you see a sequential improvement over April and May. It's just, you know, it's still down, of course, over June of last year when you've got all your sales folks out and you can't, it's hard. The hardest thing is, frankly, reaching prospects and being able to get their, you know, get their attention and so forth. I do think that'll come back as businesses stabilize and get back open and people kind of feel like there's more of a new normal. We'll have, you know, that will continue to pick up. But we're expecting the first quarter will be certainly down from first quarter of last year. You just don't have the same environment yet.

And then for the budgeting for this year, are you anticipating that the sales force will basically stay flat or would it be, would that be part of the optimization as well and potentially, you know, be a little bit more compact?

No, I think it's fairly flat overall numbers. It's just we've shifted a little bit more to inside selling and telephonic selling because it's been working well. And but overall, I would say the headcount numbers are about the same, you know, across the board. Not growth, we didn't necessarily think that we needed to grow the sales force, but I would say it's roughly about the same number. We didn't really go down either.

Yeah, Mark, just a little color to the point that Marty's making. What we found was in making that shift, you actually could get better productivity. And so it didn't it did not equate to the fact that we couldn't drive a higher sales activity, even though headcount was relatively flat year over year because of the really a tremendous amount of work that we've done on the digital marketing side and also on our ability to sell. As Marty said, virtually, we really are just in a different ballgame now than we were two, three years ago. And so you can operate with less field based salespeople and more virtual and drive higher levels of activity.

That's that's great color. And then, Marty, you made a comment early in the in the discussion about how, you know, a lot of people perceive you as a small business payroll company. But you've actually migrated clients up in terms of size and service level. I'm wondering if you could dimensionalize that to a greater extent, like if we think about where Paychex was a couple of years ago, where you are today and where you think, you know, Paychex is going to be a few years from now, just in terms of client size, number of services that the average client takes on. How would you dimensionalize that?

Well, I think, Mark, you know, if you look at it at a high level, the company, the revenues have doubled in the last 10 years now. So we hit four billion. And, you know, that was our goal was to be over four billion. We're not going to exactly hold it, unfortunately, for a few months from here. But we hit four billion up from two billion 10 years ago. So if you now look at the distribution of that revenue, you know, you can see that it has moved. When we were back, had a payroll and HRS before we shifted to management solutions and PEO. Payroll, you know, had fallen below 50 percent for the first time maybe a year or so ago. And if you look at it now, I think the PEO business, you know, is 25. PEO and insurance is 25 percent of the business. It's continually growing and the payroll side is shifting payroll and other things in management solutions. And I think that that just shows that historically we've taken the company from what was predominantly small business payroll. And the mid-market is growing faster now. And, you know, we had a couple of years where that wasn't growing as well. The last couple of years, that has really picked up speed, even with more competition. We've got more products, much more of a technology company and a lot more self-service. And when you look at the size of the offerings from learning management to pay on demand to HR connection and the mobility app being a five-star app, I think it's just, you know, the company is much more technology and mid-market, small and mid-market company. We're not going to leave small, but mid-market is going to become a much faster growing. And the PEO and HR side has certainly been a much faster growing business. So when I think of Paychex as the original question, you know, out of five years, sometimes our brand still obviously, having been in business almost 50 years, you know, the brand is still, oh yeah, they're a small business payroll company. Well, that's really not true. We're much more of a HR company and the PEO, ASO, insurances that we offer is a fast growing piece of the business. It's now, as I said, just in our financials, 25 percent of the revenue. And so I hope that helps. I mean, that's kind of how I see it, the mentioning in HR, the definition of HR has changed quite dramatically and also will change dramatically now with COVID and what that means. And I think we're well positioned to support that changing definition and need for clients of a larger size. I don't think we're going to we're not going to leave the small business. That's still a great opportunity to continue to grow. But that 20 to 100 in particular, you know, has really picked up steam for what they need. And the revenue per client is obviously picked up as well as they bought more products for their to be competitive with each other as clients in their markets.

That's great. And then can I just ask one last small detail question just with regards to the first half guidance and particularly the first quarter guidance as it relates to the PEO side for down high single digits, low double digits. Part of that is just a function of the reduced salaries that the work site employees are getting, correct?

That's correct. That's part of it. Yep. You got it. Yep. That's correct.

And so when we're thinking about it more from a unit perspective, it would be more muted than that.

Yeah, much more muted than that. You're right.

Okay, great. Thank you. Okay.

Our final question comes from the line of Pete Christensen with Citi.

Good morning, gentlemen. Thank you for fitting me in. I have two connected questions. From your multi-location client employers, are you seeing any footprint shrinkage there? And then there was an article last week in the Journal, I think it was speaking more to the enterprise side, that some furloughs are turning more into permanent headcount reductions. The basis of the two questions is really to ask if you are seeing any early signs, secondary impacts from the weaker economy. Are you starting to see that flow through some of your KPIs?

Yeah, with the first one, I don't think, like in multi-state employers, we really have not seen that. I haven't seen anything that stands out so that they are reducing their footprint yet. That is not a majority of our clients, certainly, but we have not seen any trend yet. I wouldn't necessarily be surprised if more are, like we're doing, reducing our physical footprint and having more work from home and so forth. But that certainly wouldn't surprise me, but we haven't seen much of a trend there. And then the second question, Efren, was, can you repeat that second one?

Sure, yeah, it was about furloughs turning more into permanent headcount reductions. Oh

yeah, sorry, haven't really seen that yet, although the checks are down. So, as we've talked about, we're seeing an improvement in checks, we're seeing an improvement from the decrease in checks, but the checks are still down. So, yes, there's fewer checks. Are they furloughed? Employees are permanently out? I think it's a little bit too early to see that yet. Efren, anything? I don't see that yet. No, I would just say that

in what we saw early on was that small businesses and mid-sized businesses tend to take an action on an employee initially and then hire back as opposed to keep them furloughed. I think in the enterprise base you probably see more furlough action than we see in our client base. And the trends, as Marty was saying earlier, the trends we've been seeing are the opposite, which is we've seen people adding back at this point as opposed to reducing. So it's varied in that number, but that number is looking more positive.

That's helpful. Thank you, gentlemen. Okay, thanks a lot.

And there are no further questions at this time.

Okay, thank you. At this point we will close the call. If you're interested in replaying the webcast of this conference call, it will be archived for approximately 30 days. I do thank you. On behalf of Efren and I, thank you for your time to participate on our fourth quarter in year-end press release conference call and for your interest in paychecks. Have a great day and please stay safe.