Paychex, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the PayTax First Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and later the floor will be open for your questions. To ask a question at that time, simply press star then the number one on your telephone keypad. To withdraw your question, press the pound key. Lastly, if you need operator assistance, please press star zero. Thank you. I will now hand the call over to Martin Mucey, President and Chief Executive Officer, to begin. Please go ahead, sir.

Great. Thank you. And thank you for joining us for our discussion of a Paychex first quarter fiscal 2021 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 first quarter, ended August 31, 2021. You can access the earnings release on our investor relations webpage, and our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet, will be archived and available on our website for approximately 90 days. I will start today's call with an update on the business highlights for the first quarter. Efren will review our first quarter financial results and provide an update on Fiscal 21, and then we'll open it up for your questions. Fiscal 21 is off to a good start. Although the impacts of COVID-19 continue to affect our results, causing unfavorable year-over-year comparisons, our first quarter results finished better than originally projected as most of our key business metrics recovered at a faster rate than anticipated. Throughout the COVID-19 crisis, our business model has proven resilient. We have seen good sales momentum, excellent client retention, and accelerated product development responsive to the needs of our clients. We also rapidly reduced discretionary costs We're needed to protect margins and are ahead of schedule on a number of initiatives to reduce long-term costs as well. We are pleased with our sales performance during the first quarter, which reflected new annualized revenue significantly higher than our expectations. Growth in new payroll sales units was strong year over year, reflecting the highest fiscal quarter growth in over five years. Our investments over the past several years in virtual sales, digital marketing, and lead generation are and sales support technologies have positioned us well to succeed in this environment. With the challenges small and mid-sized businesses have faced during this environment, our HR value proposition has never been more clear. We have seen a surge in demand for our various HR offerings since the beginning of COVID, and our Q1 sales results for our HR services division were very strong with double digit increase over last year. We are well positioned to continue to take advantage of this opportunity. Our retention during the first quarter has remained at record levels. We continue to see payroll clients that have been in non-processing status begin to pay employees again. Throughout this crisis, we have been very proactive in providing information, tools, and guidance to our clients. We are proud of our response supporting our clients during this crisis. We work closely with regulatory agencies to both remain informed and advocate for our clients. Our compliance and software development teams worked quickly to interpret and respond to the changing regulations and design products to assist our clients through one of the most challenging times for the business community. We have provided real-time updates and solutions compliant with new regulations. We were first to market with a PPP loan forgiveness estimator, which now produces a signature-ready application. Recently, Walter Skloer, a leading national provider of tax and accounting expertise, selected our PPP Loan Forgiveness Estimator to be utilized by their CCH AnswerConnect Research Platform subscribers. Since launching in early April, we have approximately 300,000 unique visitors to our COVID-19 Help Center. Our COVID-related training has seen strong participation, with some webinars attracting over 10,000 attendees. Along with the investments we've made in our platforms, that have allowed us to adapt and maintain high levels of service delivery, our thought leadership has helped in achieving our record client satisfaction. Investments in technology combined with personalized client service that Paychex is known for, available 7 by 24 by 365, has served us well in the current environment due to the adaptability and speed of delivery. We have seen sessions during the quarter utilizing our mobile platform increase double digits compared to the prior year period, and the number of active employees on the platform continues to increase. Our clients and their employees have been taking advantage of Flex for self-service. Self-service utilization by client employees as a percentage of total utilization is at an all-time high, given the remote working environment for many of our clients. And Paychex Learning enrollments are up also significantly, benefiting from virtual training offerings that users can participate in from any location. We recently introduced new employee health and safety in the workplace features in Paychex Flex. These features include COVID-19 leave of absence tracking through HR Connect for employees who request leave to care for a family member or child attending school virtually, COVID-19 screening for when employees come back to the physical work environment, and a health attestation solution that allows employers to collect employee information in a variety of ways. These features, combined with our HR Connect and Conversations features, iOS scan clocks, pay-on-demand capabilities, and other product functionality will continue to prove invaluable to our clients, whether their employees continue to work remotely or as they prepare for returning their employees to an office environment. As mentioned in June, we have accelerated certain long-term cost-saving initiatives, including reducing our physical office footprint, And during the first quarter, we recognized $31 million in one-time costs related to these initiatives. And we are progressing better than expected. We anticipate that we will fully realize our projected savings from these initiatives. We are proud that both the strength of our technology as well as the care we give our customers has been recognized by industry experts. Most recently, the Paychex Flex platform was recognized by Lighthouse Research and Advisory with an HR Tech Award for the best SMB-focused solution in the core HR workforce category. The combination of a single device-independent application with human resource services and benchmarking capabilities sets us apart from others in this category. We have also been recognized with a 2020 Tech Cares Award presented by Trust Radius, which celebrates companies that have gone above and beyond to provide their communities and clients with support during the COVID-19 pandemic. I'm also very proud to note that for the 10th straight year, we have been recognized as the largest provider of 401 record-keeping services by the number of plans by Plan Sponsor Magazine. We have a long-standing commitment to leveraging innovative technology solutions like Paychex Flex and best-in-class service to simplify the often complex task of saving for retirement and are proud to continue to help business owners and employees save for retirement during these challenging times. Irrespective of the pace and speed of recovery, our resilient business model, strong liquidity position, and dedicated employees will allow us to come through this stronger while continuing to provide industry-leading technology solutions and outstanding service to our clients. I will now turn the call over to Efren to review our financial results for the first quarter.

Efren. Thanks, Marty. And good morning, everyone. I want to start by saying I hope that everyone is well. Safe and your families are doing well and our best wishes go out to Those have been impacted by the by the pandemic Let me remind everyone that today's conference call will contain forward-looking statements, you know all that stuff refer to future events, etc look at the customary disclosures and And then I'm going to refer to non-GAAP measures such as adjusted EBITDA. Same thing. Please refer to the press release for the reconciliation of GAAP to non-GAAP measures. Let me start by providing some of the key points for the quarter and then follow up with greater detail on certain areas and then wrap with our fiscal 2021 outlook. First quarter results reflect the impact of economic conditions resulting from COVID-19, as Marnie mentioned. For the first quarter, total revenue declined 6% to $932 million, largely due to lower volume impacting revenue across our HCM solutions. During our June earnings call, I had noted that first quarter revenue was anticipated to be down high single digits to low double digits. Obviously, looking at this, our results exceeded those expectations. Total service revenue moderated 6% to $917 million, Within service revenue, management solutions revenue declined 5% to $687 million. And PEO and insurance solutions revenue decreased 7% to 230. When I say total service revenue moderating, I mean decline. Interest on funds held for clients decreased 28% for the quarter to $15 million due to lower average investment balances and lower average interest rates earned. Average balances for interest on funds held for clients declined 6% during the quarter, primarily due to the impact of lower checks per client due to COVID. Expenses were up 1% to $650 million, but when you exclude the one-time cost of $31 million that Marty mentioned, we were actually down 4%, driven by lower discretionary spending and cost control measures implemented in Q4. We're very proud of how we managed expenses through this entire period. Operating income decreased 19% to $284 million and reflected an operating margin of 30.5%. Again, that was ahead of expectations. Adjusted operating income, excluding the impact of one-time costs, decreased 10% to $315 million, reflected an adjusted operating margin of 33.8%. Other expense net for the first quarter, that includes interest on long-term borrowings partially offset by corporate investment income, which, as you know, is quite low and was impacted by lower rates. Our effective income tax rate was 23.4% for the first quarter compared to 23.3% for the same period last year. Both periods reflect tax benefits for stock-based comp payments that occur with the vesting of various annual stock rewards. Net income decreased 20% to $212 million, but adjusted net income decreased 11% to $228 million for the quarter. Adjusted net income includes one-time costs and the tax benefit from stock comp payments. We pull that out. We discuss this all the time. There's just no way to know in a given quarter whether people are going to exercise or not. We can give you a guesstimate, but don't know. It ended up providing some benefits in the quarter. Diluted earnings per share declined 19% to 59 cents for the quarter, but adjusted diluted earnings per share decreased 11% to 63 cents, reasons I cited above. Investments and income. As you know, our primary goal is to protect principal and optimize liquidity. We continue to invest in high credit quality securities. Long-term portfolio currently has an average yield of about 2%, average duration of 3.3% or 3.3 years. Combined portfolios have earned an average rate of return of 1.3% for the quarter down from 2% last year. I'll now walk through highlights of of our financial position. It remains strong with cash, restricted cash, and total corporate investments of $952 million. Funds held for clients as of August 31, 2020 were $3.3 billion compared to $3.4 billion. Funds held for clients vary widely on a day-to-day basis, an average $3.5 billion for the first quarter. Total available for sale investments including corporate investments and funds held for clients, reflected net unrealized gains of $117 million as of August 31, 2020, compared with $100 million as of May 31, 2020, the increase in net gain position, as you can surmise, resulted from declines in interest rates. Total stockholders' equity was $2.8 billion, reflecting $223 million in dividends paid and $29 billion $29 million of shares repurchased during the quarter. Our return on equity for the past 12 months remains robust at 39%. Cash flows from operations were $215 million for the first quarter, a decrease of over 20%. From the same period last year, the decrease was driven by lower net income and fluctuations in working capital. Now, let me turn to fiscal guidance, or fiscal 2021 guidance. for the current year, which ends, as you know, on May 31, 2021. The outlook reflects our current thinking regarding the speed and timing of the economic recovery. First quarter results, as you can see, exceeded expectation. There is uncertainty about the trajectory of the recovery over the next several quarters. Our guidance assumes a steady but gradual improvement through the rest of the fiscal year. We have provided the following updates to the guidance after seeing first quarter results. Management solutions revenue is now expected to decline in the range of 1% to 3%. We previously guided to a decline in the range of 1% to 4%, and we'll continue to update as each quarter passes. PEO and insurance services revenue is expected to decline in the range of 2% to 5%. Our previous guidance was a decline of the range of 2% to 7%. Interest on funds held for clients expected to be between $55 and $65 million. Total revenues expected to decline in the range of 2% to 4%. We previously guided to a decline in the range of 2% to 5%. Adjusted operating income as a percent of total revenues now anticipated to be approximately 35%, up from previous guidance of 34% to 35%. Adjusted EBITDA margins for the full year fiscal 2021 is expected to be approximately 40%, up from 39 to 40. Other expense net anticipated to be in the range of 30 to 35 million. The effective income tax rate for fiscal 2021 is expected to be in the range of 24 to 25%. Adjusted diluted earnings per share is expected to decline in the range of 6 to 8%, previously guided to a decline in the range of 6 to 10%. Turning to the second quarter, we currently anticipate management solutions revenue will decline in the range of 2% to 3%, and PEO and insurance solutions revenue will decline 4% to 6%. Adjusted operating margins excluding one-time costs are anticipated to be in the range of 34% to 35%. An early view of the second half of the year, and I just want to mention something. You know, when all of this started, many people withdrew guidance, and we walked in and we told you what we thought. We didn't get it completely right at first, but we communicated and updated you in the middle of the quarter to tell you where things were changing. So we will continue. We're committed to full transparency, and we are committed to updating you on a regular basis so investors know exactly what we're thinking when we think it. This is what we're thinking Right now of course things can change as we go through the year But at this point the early view of the second half of the year we anticipate Total revenue will be in the range of flat to very low single digits operating margins we anticipate to be approximately 37% of course as I said all of this is subject to current assumptions which are subject to change and we'll update you again on our second quarter call. So we are more positive than we were at the June call. Obviously, everyone knows the uncertainty you're dealing with. I'd say just a couple more things to conclude my comments. Number one is I think what you saw in first quarter, and Marty alluded to it, is the strength of digital solutions. Digital and virtual sales were up very, very strong in the quarter. And when I say very strong, I don't mean 10 and I don't mean 20. I mean it was very strong. Obviously, any sale that depended on face-to-face meetings was more challenging, but we've been gaining momentum there. That's number one. Number two. HR Solutions was up very strong from a sales standpoint, and revenue recovery has been strong in the quarter, stronger than we anticipated. So when you look at digital-based, digital marketing and sales, we had a really good quarter. When you look at HR Solutions, we had a very good quarter, and that is part of what's driving our being incrementally positive as we go through the year-round. PEO, I would say this. One of the things that we have learned as the year has gone on is that while PEO had a sharp downturn initially, we've seen a sharp recovery also, and so we're incrementally, again, more positive on PEO. That solution is important in the market, and we think there will continue to be a good demand. Now, Obviously, there's still a lot of uncertainty in the environment, but as I said on the second half, we think we are in a position to manage through it and have taken all of the right steps in the short term, and we took a lot of the right steps in the long term to direct investments to where we were. Had we not done that, we would be in a different position. This is not your father's paychecks. With that, I'll turn it back to Marty.