Paychex, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Paychex Q4 Fiscal Year 21 Earnings 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 at that time, please press star 1 on your touchtone phone. I will now turn the call over to Mr. Martin G. UC president and CEO, please go ahead.

Thank you. And thank you for joining us for our discussion of the paychecks fourth quarter and fiscal 21 earnings release. Joining me today is Efren Rivera, our chief financial officer. Hey, this morning before the market opened, we released our financial results for the fourth quarter and full year ended March 31, 2021. You can access our earnings release on our investor relations website at And our Form 10-K will be filed with the SEC before the end of July. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days. I will start today's call with an update on our business highlights for the fourth quarter. Efren will review our financial results for both the fourth quarter and the full year and discuss our guidance for the upcoming fiscal 2022. And then we'll open it up for your questions. Before I comment on our results, I just want to take a moment to note that Paychex is celebrating its 50th anniversary this year. We are proud of our 50 years of innovation in support of small and medium-sized businesses, from the payroll services provided to our first client in 1971 to the critical care we gave our clients through the unprecedented pandemic environment over the last 15 months. We are excited to continue to build on this legacy of technology-enabled service that keeps it simple for our clients and gives them the freedom to succeed in their businesses. Fiscal 2021 presented one of the most challenging periods in our history, yet our commitment to servicing our clients with innovative products made it a very successful year. We finished the year reporting positive growth of 1% for both service revenue and adjusted diluted earnings per share in the midst of a pandemic. with almost 15,000 employees working remotely. The results of the past year are a testament to our resilient business model and the hard work and dedication of all of our employees who made sure that our clients were well-informed and had the technology, products, and resources needed during this challenging time, many times for the actual survival of our clients' businesses. We achieved record fourth-quarter revenue and earnings, And we began to see positive, as we began to see positive, macroeconomic impacts from the economic stimulus and an increase in vaccinations that have allowed businesses to reopen and begin adding employees. This was evident in our check volume trends, our increase in time and attendance activity, and strong sequential growth in both PEO and ASO worksite employees. We ended the year with 4% growth in our payroll client base, the highest organic growth rate we have seen in a number of years. This was driven by both solid sales performance and a record level of client retention of approximately 85% of our beginning client base. We also grew total worksite employees 18% to 1.7 million. We achieved growth in total sales revenue for the year, quite an accomplishment given the impact of the pandemic on the business environment and with all of our sales teams selling virtually. Throughout fiscal 2021, we have seen strength in our virtual sales, retirement services, and HR solutions, all of which experienced double-digit growth for the year. This growth was fueled by a record high fourth quarter in new sales revenue. These positive results coupled with signs of continuing momentum in sales lead generation and nurturing campaigns leaves us well positioned for a strong sales year in fiscal 22. Our unique combination of innovative products and service are designed to meet the evolving needs of employers and their employees. The strength of our technology backed by our HR and compliance expertise and personalized service continues to be recognized by industry experts. The Sapient Insights Group annual HR survey ranked Paychex Plex number one among all solution providers as rated by their voice of the customer report in both user experience and client satisfaction scores. In addition, Lighthouse Research and Advisory announced Paychex Plex won its second annual HR Tech Award for the best small and medium business focused solution in the core HR workforce category. We were recognized for the strength of our technology and service in providing support to our clients during the pandemic. In particular, our ongoing federal stimulus support, HR services team, and digital communication solutions have proven valuable during this challenging time. Looking ahead, there will be continued challenges for employers as Americans continue to get vaccinated, state restrictions relax, and businesses fully reopen. The war for talent has intensified. and we are well positioned with our fully integrated flex recruiting and applicant tracking module and our partnership and integration with Indeed, the world's largest job board to help businesses find, hire, engage, and retain employees quickly and easily. Recently, we released additional self-service capabilities which accelerate the speed to hire and lessen the administrative burden on businesses. This tool simplifies the experience and includes the ability to invite the new hire to onboard and complete documentation digitally. We are in the early days, but reception of this tool has been very positive. Since its release, 80% of the transactions in this new solution have been completed using a mobile device, reflecting on the strength of our mobile and self-service capabilities. Retaining talent in today's environment requires a comprehensive benefits package. The latest innovation in our retirement services offering, our pooled employer plan, has quickly surpassed 4,000 clients since our January release just a few months ago with strong activity in the pipeline. Managing cash flow and labor expenses continues to be important as the economy ramps up. The new Paychex Flex labor cost hub gives clients a holistic, real-time view of total job costing and labor distribution expenses to drive greater insights to manage their workforce. This is in addition to our suite of data analytics capabilities that provide our clients with advanced features typically reserved for larger companies. And we continue to update our Paycheck Protection Program solutions in near real time and allow clients to easily navigate the complexities of the PPP and employee retention tax credit concurrently. By quickly developing and deploying these updates in Paychex Flex, we have helped our clients secure over $65 billion in payroll protection loans and $2.5 billion in employee retention and paid sick leave credits combined. I'd also like to provide updates on a few other areas where we continue to invest. Near the end of fiscal 2020, we launched our real-time payment solution, and since then, it processed over 50,000 payrolls, funding over $200 million to client employees. This provides clients the ability to process their payroll on check date and fund direct deposit transactions within 15 seconds, a true cash management opportunity for businesses of all sizes. Our Paychex Flex intelligence engine, our AI and machine learning chatbot, is now trained to successfully answer over 340 questions while also providing users access to our help center inventory of 800 instructional and educational materials. This past fiscal year, our automated help solutions have serviced approximately 1.8 million client and employee users, handling over 60% of the questions in an automated fashion. And we have seen double-digit increases in the number of sessions on our five-star Paychex Flex mobile app, and the use of our self-service functionality continues to grow. Just two weeks ago, we hosted thousands of clients at our first-ever exclusive virtual Paychex Business Conference. We brought together experts, insights, resources, and solutions that clients need to build a better workplace, increase productivity, and thrive in 2021 and beyond. It was an important way to thank our clients for their tremendous loyalty as reflected in our historic levels of client retention. The post-pandemic future of work is still evolving. We remain focused on helping our clients adapt. Near term, this includes PPP forgiveness, employee retention tax credits, rebuilding workforces, and managing the return to work environment. While we are very proud of the performance during fiscal 2021, we are even more excited about how well positioned we are for growth in fiscal 22. The combination of our sales momentum, client-based growth and satisfaction, industry-leading operating margin, and increased investment in our marketing lead generation and product development has us well positioned for another year of strong financial performance in fiscal 2022. I will now turn the call over to Efren Rivera to review our financial results for the fourth quarter and fiscal year, as well as our guidance in fiscal 22.

Efren? Thanks, Marty. Thanks to everyone who's on the call. I'd like to remind you that today's conference call will contain forward-looking statements that refer to future events and therefore involve risks. Please refer to our earnings release that has all of the disclosure on these issues. In addition, I'll periodically refer to some non-GAAP measures such as adjusted operating income, adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share. Please again refer to our press release for more information on these measures. Let me start by providing some of the key points for the quarter. I'll then follow up in greater detail on certain areas, and I'll discuss our full year fiscal 2021 results. For the fourth quarter, it was strong. What can you say? Total revenue increased 12% to $1 billion, and service revenue increased 14% to $1 billion, as we benefited from improved employment levels and higher client counts across all of our solutions. Growth rates were bolstered. by an easier compared to the prior year fourth quarter, that was significantly impacted by the pandemic. And remember, last year we had a fairly strong quarter in terms of interest on funds held for clients. We were battling that headwind and delivered the results that you see. Within service revenue, management solutions revenue increased 14% to $756 million, and PEO and insurance solutions revenue increased 13% to $258 million. Interest on funds held, as I just mentioned, decreased 43% as the lower average interest rates and realized gains were partially offset by higher average investment balances. Expenses increased 10% to $675 million. The growth in expenses was driven by higher performance-based comp, which compared to a prior year quarter that reflected a sharp decline due to the pandemic and higher PEO direct insurance costs. Operating income increased 18% to $354 million with an operating margin of 34.4%, 160 basis point improvement from the prior year fourth quarter. Our effective income tax rate was 24% for the fourth quarter compared to 24.3% for the same period last year. Both periods reflect net discrete tax benefits related to stock-based comp payments that occur with the exercise of stock option awards. And we do call those out. Adjusted net income and adjusted diluted earnings per share both increased 18% for the fourth quarter to 261 million and 72 cents per share respectively. Let me touch quickly on full year results. Service revenues, Marty indicated, increased 1% to 4 billion. Management solutions revenue increased 2%. NPO and insurance solutions revenue declined 2%. Interest on funds. declined 32% to $59 million due to lower average interest rates and realized gains, and total revenue was flat year-over-year at $4.1 billion. Operating income was flat year-over-year at $1.5 billion. Adjusted operating income increased 2% to $1.5 billion with a margin of 36.8 and expansion of 70 basis points compared to the prior year. Adjusted operating margin excludes one-time costs of $32 million related to the acceleration of cost savings initiatives, including the long-term strategy to reduce our geographic footprint and headcount optimization, the majority of which was recognized during the first quarter, I should say, as you know. Adjusted diluted earnings per share increased 1% to $3.04. Turning to our investment portfolio, our primary goal, as you know, is to protect principal, optimize liquidity. We continue to invest in high-credit quality securities. The long-term portfolio now has an average yield of 1.9% and an average duration of 3.3 years. Our combined portfolios have earned an average rate of return of 1.1% and 1.2% for the fourth quarter and fiscal year, respectively, down from the 1.5% and 1.8% for the same periods last year. Financial position, I'll walk you through the highlights of our financial position. It obviously remains pretty strong, or I'd say very strong, since we have over $1.1 billion with a total borrowings of $805 million as of May 31, 2021. Funds held for clients were $3.8 billion, an increase from $3.4 billion as of May 31, 2020. As you know, they vary widely on a day-to-day basis. and they averaged $4.2 billion for the fourth quarter and $3.9 billion for the fiscal year. Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $79 million as of May 31, 2021, compared with $100 million as of May 31, 2020. This decrease in net gain position resulted from increases in longer-term yields during the year. Stockholders' equity was $2.9 billion as of May 31, 2021, and reflected $909 million in dividends paid and $156 million of shares repurchased. Our return for equity for the past 12 months was 38%. Cash flows from operations were $1.3 billion for the fiscal year. That actually was a decrease from the same period last year. The decrease, though, was driven by fluctuations in working capital, including an increase in purchased accounts receivables due to the continued recovery from the COVID-19 pandemic. We just simply didn't purchase a lot of receivables last year in the same quarter. And it also was influenced by the growth in the business, offset by an increase in worksite employees and payroll-related liability. Now let me turn to guidance for the upcoming fiscal year ending May 31, 2022. The outlook reflects the current macroeconomic environment, which continues to show gradual recovery. Our outlook will be as follows. Let me just make this comment before we do that. One of the things that we're really proud of is if you go back to what we said in April of last year before we knew everything that we know now, We got some things wrong, but we got a lot of things right, and we also were very, very transparent with the investment community around what we expected to happen. I think if you look at what happened in the year, we were a lot more right than wrong. There were things that we couldn't have pegged, which was the speed of the recovery, the sharpness of it. We got the direction. We got the shape of it correctly. We knew the year hinged on the fourth quarter being better. We looked at the macroeconomic data and thought that what happened in fourth quarter would happen. It was stronger than we expected. But the point I want to make is simply that we communicated along all of those steps, and we did it in very transparent fashion. We didn't say... We didn't know. We told you what we knew. We told you what we didn't know. And this is where we ended. So with that, in the spirit of those comments, here's where we're landing for 22. Management solutions revenue is now expected to grow approximately 7%. PO and insurance solutions is expected to grow in the range of 8% to 10%. Interest on funds held for clients is expected to be even with this year. Total revenue is expected to grow approximately 7%. Adjusted operating income margin is expected to be approximately 38%, an increase of approximately 120 basis points. Let me pause on that. If you look at what happened, just happened, I would say we are among the few companies that not only grew margins in the middle of a pandemic, but then raised them the following year. And that's a result of a lot of hard work here. not only in IT, but also in services and across the entire organization. A lot of the initiatives that we took are paying dividends going into next year, and we have more than we can do. Adjusted EBITDA margin for the full year fiscal 2021 is expected to be, again, approximately 42%. Other expense net is expected to be in the range of $33 to $37 million. The effective income tax rate is expected to be in the range of 24 to 25%. And adjusted diluted earnings per share is expected to grow in the range of 10 to 12%. We will have some benefit from stock comp exercises. We don't know what that is, so we don't bake it into the guidance. Given the shape of the recovery during fiscal 2021, we expect fiscal 2022 to have stronger growth in the first half of the year and then moderate in the second half. The first half of the year is anticipated to have total revenue growth in the high single digits and an adjusted operating margin in the range of 37 to 38%. To give you some more color on expectations for the first quarter, we anticipate strong year-over-year growth as the fiscal 2021 first quarter was significantly impacted by the pandemic. We currently anticipate total revenue growth will be in the low double digits. I'd say it's probably in the 11 to 13% range, but certainly low double digits. Adjusted operating margin is expected to be approximately 38%. Of course, all of this is subject to our current assumptions, which are subject to change, and we'll update you Again, on the first quarter call. And then just a final comment as we wrap up the prepared remarks. I'd just say this, that when the pandemic started, I fielded a lot of calls from investors and analysts about how we would fare in the pandemic. I think this quarter shows how we fared in the pandemic. We are a very, very resilient business. And even during a downturn that no one expected, we did some things that were pretty extraordinary. We take pride in that. That was the work of every single employee in paychecks, from sales to ops to IT, et cetera. And you know what? As Marty said, we think the best is yet to come. So with that, I'll turn it back to Marty. Great. Thank you, Efren.