Paychex, Inc.

Q4 2021 Earnings Conference Call

6/25/2021

spk12: 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.
spk16: 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.
spk13: 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.
spk16: Operator, we'll now open it up for questions, comments.
spk12: At this time, if you would like to ask an audio question... please press star 1 on your touchtone phones. Once again, that is star 1 to ask an audio question. Your first question comes from the line of David Tagut with Evercore.
spk15: Thank you. Good morning. Did you change your name, David? What's that?
spk13: Did you change your name? She announced you as David Tagut. So I just want to make sure we get it right.
spk15: Yeah, same person. Thanks. In your fiscal 22 guidance for 7% management solutions revenue growth, what are you forecasting for client retention and payroll client-based growth?
spk13: Yeah. So with respect to payroll client-based growth, David, we expect it to be in the normal range of 1% to 3%. Hopefully we do better than that. We certainly did better than that this year. Because retention was so strong this year, we expect that it will not reach the level that Marty mentioned. So we ended the year at 85%. If you look at flex revenue retention, we were almost 90%. Those are really extraordinary numbers. We expect some loosening of those numbers, but not significant. So we expect it to be down a little bit.
spk15: Understood. Just as a follow-up, accounts receivable growth remains elevated at 51% versus the May 2020 balance sheet. Can you dig into the purchased accounts receivable detail that you signaled in your comments? And is there a collectability issue here?
spk13: No, none, zero. Hey, David, I mean, I think many people on the call would know that one of our businesses is One of our businesses is funding staffing firms. We don't do staffing, but we fund staffing. So it was an anomaly in the fourth quarter of last year. Staffing was down 20%. Those of you who cover staffing firms know that. When staffing declines at that level, then there's simply nothing to fund. There's no receivables to fund. And so if you look at last year, our cash flow was $1.44 billion. That was much higher than even I expected, but that's because we didn't put out any money to fund staffing. This year we had a really sharp rebound in the back half of the year. and in the fourth quarter. And that was a very good performer for us. But that means that we purchase more receivables. We get obviously some benefit from doing that. The way it's reflected in the statement of cash flows is that that shows a growth in receivables. So I would say those numbers are now more normalized versus a year last year that was artificially depressed.
spk15: So in the August quarter, should we expect receivable growth to track revenue growth?
spk13: It still will probably not track it completely because the recovery on staffing really is more of a second-half phenomenon this year. Staffing was still weak into the first quarter of last year.
spk15: Understood. Thank you very much. Okay. Thanks.
spk12: Your next question comes from the line of Ramsey Alisal with Barclays.
spk01: Hi, gentlemen. Thanks for taking my question today. I wanted to ask about the fiscal 22 margin guidance, which came in really nicely above our model effort. I know you mentioned that it was due to some initiatives that you guys had laid in, and it was kind of a group effort, but could you give us a little more color on what those initiatives might be? What are the primary drivers of that outperformance?
spk13: Yeah, so I'd say the first thing, Ramsey, is that when we took the charge last year, we knew that it would produce, or we believed and modeled that it would produce a certain return, and it produced that return and probably a little bit more. So kudos to the team that did that. I think that we continue to evaluate what the right footprint is. There's no additional charges contemplated, but as we examine that, that footprint, we're looking for ways to become more efficient. That's number one. Number two, one of the things that a pandemic produces is it produces a keen focus on every single line of expense in the P&L. And I would say that for a company like ours that is built on the idea that we have to operate very efficiently, We looked at it and said not every single dollar of cost that was in the model pre-pandemic needs to be in the model post-pandemic. And so we thought we could comfortably manage with a slightly different level of expenses. And so the expense growth did not match the revenue growth. So the third thing is a sharp rebound in revenue then produces the ability to leverage further than you would if those costs came in or you didn't have that level of revenue growth. I would say this, I get the question many, many times, what's the theoretical max for how our margins can grow? The short answer is that we don't have an answer on that, but obviously there is a theoretical max. But the point is that increasingly we look for more and more operating efficiencies as our systems get better and better, and they have gotten better and better, and our operating model has gotten more and more efficient. So it's really a combination of all of those. It's sustainable, and all of those things are influencing that number.
spk01: Okay. That's terrific and interesting. Also, I wanted to follow up on David's prior question on revenue retention. It's been impressive this year, obviously impressive in the quarter. And I think you also mentioned there was a bunch of drivers there, whether it's product, service levels, blocking and tackling, et cetera. But can you also call out a couple of things there that have really made the difference? And then maybe also just tack on there, has the PPP, your servicing in terms of the PPP loans made a difference there? Are your clients sort of locked in a little more now because they have to unwind all that process? Or is that big enough to move the needle in your business?
spk16: I think, Ramza, I think it has definitely helped. I think, you know, clients learned that there was a great value, more value than they maybe have thought in having us and the expertise that we have with compliance and so forth. The ability to be able to provide them access to those PPP loans the day they were available and giving them a pre-populated opportunity. kind of an application that they could file for the loan, a pre-populated application that was signature-ready for the forgiveness, the ability that we linked with three FinTech providers to help them facilitate loans when they couldn't get the interest from the banks. You know, was really very helpful, and I think that has contributed a lot. You know, they're at a stage now where they're still finding that with the employee retention tax credit, we're doing a tremendous service to them by helping them understand that there even is an employee retention tax credit. and how big that can be to support them from a cash flow perspective. So I think all of those things, in addition to the strength of the product and the service already, has really contributed to people saying, hey, I'm not going to leave to save 10% or a free month of service when I see the benefits that the paychecks and the team have provided me.
spk13: The other thing, just to build on that, just kind of add some numbers to that. Marty mentioned it earlier in his comments. Look, doing things on a one-year or half-year basis is one thing. Doing it on a sustainable basis is another thing. I would say one other thing that we're very, very proud of is that through the pandemic, when there was an unprecedented level of demand on our service providers, We met that need, and our net promoter scores hit their highest levels ever in the company. So when you look at all of those things, that really plays into the retention number. Of course, the economy has something to do with it. But I think the combination of that leads us to believe that this is a sustainable trend going forward.
spk01: Great. Thank you so much.
spk13: Okay.
spk12: Your next question comes from the line of Jason Kupferberger with Bank of America.
spk18: Hey, guys. Good morning. Thanks for taking the questions here. I wanted to ask a follow-up just in terms of some underlying assumptions in that FY22 guide, specifically on pricing as well as checks per client. And sort of as part of that, what are you kind of assuming in your base case for where the US unemployment rate goes during the course of your fiscal year?
spk13: Yeah. So pricing, I think we assume that we return to a more normal pricing environment. Jason, we delayed price increases at the beginning of last year. We thought that was the right thing to do. It impacted us, but we thought it was the right thing to do for clients, but we resumed a more normal cadence of pricing increases. Maybe a little bit, just slightly off from what we would do in a typical year, but pretty close. I think that the way we have pegged our plans is that, again, we expect in the second half of the year a return to more normal unemployment rates. The first half will still continue to be impacted by what we see, which many of you know is difficulty in hiring, SMBs struggling to fill positions. I would say that this forecast that we have does not assume even that we're at the same level of checks per payroll or pays per control that we were pre-pandemic through all of next year. If we get to that point, that would be upside to this model, but that's not where we're expecting. We obviously believe it will Although, I would say if you looked at the underlying data that forms a plan, it's pretty modest improvement at this point. Those are some of the key assumptions underlying the forecast or the plan.
spk18: That's helpful. I know you've also been talking the past couple of quarters about a healthier backdrop for new business creation. Wanted to get the latest there. Has that continued in recent months? Any type of quantification you might be able to provide, for example, the percent of your new wins coming from newly formed businesses or your win rates and competing for these new businesses?
spk16: Yeah, we're still seeing new business formation, as you would see from the economic numbers, are still up very strong. I think they're up 70% year-to-date over last year, brand-new business startups. And I think that we've done a very good job of capturing those through the products that we have, both Flex and SurePayroll. Sure Payroll has had a very strong year as well, and especially at the beginning of the year where they picked up a lot of work-at-home kind of nanny payrolls and things like that. Flex also picked up a lot of new startup businesses of various sizes, and I think that We expect that to continue. I think a lot of it has been the self-service, the marketing we've done to get the web leads and then be able to respond to them very quickly, even virtually, from home and from our virtual sales forces, and then the amount of self-service that clients can do that they're looking forward to now in a brand-new business. So it has definitely continued. We expect it to continue, and I think we've performed very well from a close rate perspective.
spk18: Okay. Well, thanks for the comments. I appreciate it.
spk16: All right. Thanks.
spk12: Your next question comes from the line of Brian Bergen with Cowen.
spk04: Hey, guys. Good morning. Thank you. Wanted to ask on the record new sales in the quarter. Can you just talk about where you saw that as it relates to client size? Any areas in the market you saw more strength? I just heard the comments you made on the smaller end, but just more broadly on client size. size and demand there. And then what solutions are you seeing the strongest demand in?
spk16: Yeah, I think from a size perspective, it was definitely a lot of the new business, you know, startups, so it was on the smaller size. The mid-market did okay, but it was a little bit more difficult. There were the decisions where they were making no decisions kind of thing or delaying decisions. We're starting to see that pick up now as we transition into the new fiscal year. I think they're seeing more need for some of the products and services as they try to hire back and build their teams back up. And so we're definitely, I think, saw it there. Retirement and HR was very strong. You know, retirement was very weak in the first quarter, as you'd expect going through the beginning of the pandemic. People weren't talking about retirement. We shifted some of those resources toward HR outsourcing. They did a great job. Then as we saw more interest in retirement, they shifted back. We introduced the pooled employer plan in January. As I mentioned, that took off, and there's been a very strong need for the pooled employer plan now. that has really helped support retirement. But retirement, ASO, in particular, HR outsourcing under the ASO model, PEO has been good. It hasn't been as strong as the insurance needs and changes I think will come along now as people are looking for comprehensive benefit packages to retain and attract employees. But HR outsourcing, retirement, certainly sure payroll, you know, all were very, you know, very strong.
spk04: Okay. And then just PEO versus insurance performance. Can you kind of break down how each of those businesses performed in 4Q and then how you're building those into your fiscal 22 outlook?
spk13: Yeah, the growth performance in the quarter was pretty comparable, Brian, in fourth quarter. At this stage, we think that going into next year, that PEO is going to grow a little bit faster than insurance performance. I think that I'd love to say finally, after about four years, that workers' comp drag is behind us. It's probably behind us as a drag, but it's not behind us in terms of growth that isn't really strong. I would say one thing that was quite interesting about the quarter was that health and benefits, which we still do a fair amount of sales on, in the under 50 space had a strong quarter. So there's interesting pockets of demand in the economy, above and below 50, and there seems to be a pretty strong demand still for insurance, health and benefits insurance, for in the under 50 space, in addition, obviously, PEO. This is, now I'm talking more standalone health and benefits. So, in summary, going into next year we think PEO is going to grow a bit faster than the insurance part.
spk16: I think, Brian, the only one I left out was time and attendance. You know, we've had tremendous consistent growth in time and attendance, and I think you know, the ability for the technology that we've continued to innovate there from regular time clocks, the retina scan time clocks, to punching in on your mobile phone or your watch has really driven a lot of support there. Time and attendance has got a lot of demand that continues to grow at a double-digit space penetration into our base and new clients. I think a lot of it being that there's going to be a lot more part-time employees. You've got Flexible work schedules, time and attendance is really critical, so we're seeing a lot of strength there as well.
spk04: Okay, understood. Thank you for all, Carl.
spk12: Thank you. Your next question comes from the line of Brian Keene with Deutsche Bank.
spk17: Hi, guys. Good morning. I wanted to ask about digital sales. Do you think the market's changed more permanently now? and the go-to-market strategy changes for everybody now that people realize some of the efficiencies there, and just thinking about the cost structure for you guys as a result of that.
spk16: Yeah, I think it has. I mean, I just think it's one of those things that people have gotten, you know, clients, prospects have gotten more used to. We were already in, you know, virtual sales and lead generation and nurturing programs, particularly over the last few years, and that has continued to grow for us as well as Flex and SurePayroll. And there's a lot more self-service now capabilities that we've introduced as well. So not only can you research, demo, and decide to buy the product, you can do a lot more of it self-service, not only through buying the product, depending on your size, but then a salesperson can jump in and help you anywhere along the way, and people want to do things more themselves. Then, as I think I've mentioned previously, in my earlier comments, that we're introducing more self-service to where once you onboard a new employee, they can do their own self-service setup and everything. And this is helping a lot of clients. They're used to doing things online. They're used to doing it on a mobile phone. And, of course, we've been developing all of our products mobile-first design so that it's built for the mobile phone years ago, and that has continued to pay off. A lot of the investments we made in self-service and in technology over the last few years really paid off during the pandemic from a standpoint of clients being able to go online and buy and self-serve and set up, and our self-service has picked up dramatically. For existing clients, for example, an employee changing their own direct deposit bank account, changing their address, Over 80% of those last year were done by the client or the employee, now self-service, most of them on our mobile app. So things have changed, you know, and they sped up during the pandemic, and I think they'll continue to do that.
spk13: Yeah, Brian, the other thing I'd add is, you know, our marketing group has really done a great job in terms of identifying sources of leads and optimizing our models so that our dollars are really efficiently spent. spent on the web, but the point you make is a very good one. I think that we've evolved into a world where there is much more digital sales, digital capability, and when you're in front of the client, it frequently is going to be in a hybrid model. It was interesting to hear some of our top salespeople basically, some of the really high dollar producers talk about how they were able to pivot in a hybrid fashion to sell when they hadn't done it before. And I think that it's the wave of the future. The positive on that, I would say, is that obviously we can get more efficient in terms of our dollars spent. But there's an offset to that because you have to spend more on digital marketing. There's no way to avoid it. One of the things that we're very, very proud of this year is if you look at us, look at what we did from the beginning of the pandemic. We did our first TV advertising. We increased our marketing spend. We didn't decrease it this year. But that's going to be more of a permanent feature of the way the business operates.
spk17: Got it. That's really helpful. And just as a quick follow-up, Efren, when I think about the cadence of service revenue, you talked about the high watermark being in the first quarter. Just trying to think about the model. So the second and third quarter look more equal, and then the tougher comp in Q4, that'll be probably the lowest growth rate. I just want to make sure we get the models right.
spk13: I would say directionally, you're correct. Now, I just want to caution one thing, which is 22 will be another year where, at every quarter, we'll call out what we're seeing. I mentioned earlier, and it's not a throwaway statement, and I think Jason asked earlier, what are your assumptions about unemployment? That's going to play into what happens. We still have, we still, from a pays-per-control perspective, are down from where we were pre-pandemic. And we're not expecting a complete recovery. The question is how quickly that occurs as we go through the year. That'll be something we need to see. But I'd say directionally, you're correct.
spk17: Great. Thanks for taking the questions.
spk13: Okay.
spk12: Your next question comes from the line of Eugene Simuni with Moffitt-Napeson.
spk13: Hi, Eugene.
spk05: Good morning. Good morning. Thank you for taking my question. So first, I wanted to come back for a second to PO Outlook Zero on that quickly. So great bounce back this quarter, 13% growth. It would sound like going forward, there's significant tailwinds continuing from T&E recovery, which I know PO is very exposed to, general secular demand, which you keep highlighting for the outsourced products, and frankly, general strength in PO, we think. your outlook is for 8% to 10% growth, so a bit of a deceleration from 13%. Can you maybe talk through some of the puts and takes that went into that outlook and kind of what makes you perhaps a bit conservative?
spk13: That's a good question, Yigit. I'm chuckling a little bit. Yeah, look, the... anyone who goes to a restaurant these days or goes to any hospitality provider knows that the challenges that the industry still faces in terms of completely reopening. We just don't see that starting to charge ahead until sometime in the fall. So that will be, of course, the compare will be easier as we start the year, but There's still a lot of work to be done in hospitality and accommodations and in the state of Florida where a lot of our businesses, we're playing that a little bit more cautiously in terms of that part of the business. So to the extent that that turns very quickly and they can find the workers, maybe we get more positive as we go through the year. But at this point, we think that that's what makes sense.
spk05: Got it. Understood. Thank you. And then for my follow-up, very interested in the opportunity you guys have in growing revenues through getting greater share of wallet with existing customers. You guys highlighted it quite a bit with time and attendance, retirement, other products. So can you just elaborate on that a little bit more? What are the other, maybe in addition to these two, what are the other areas, services, products where you're seeing a lot of opportunity perhaps over the medium term, next couple of years, where you can just grab a larger share of the HR budget, which, you know, we think there is a big white space there.
spk16: Yeah, I think, you know, the biggest one that is, of course, the HR outsourcing, you know, that's had double digit growth from the ASO model. I think clients realized you know, in a year, particularly with the pandemic, that they had so many questions on how to handle remote workforces, how do you handle vaccine policy, how do you handle, you know, how you're going to, you know, flexible work schedules. Things that they've never addressed before, we saw a great demand for HR at all sizes of clients and how to handle federal and state regulations. So I think we opened up a whole number of clients who hadn't thought that they needed it, maybe, to realize that there's a lot of ongoing support that they could gain from HR services. Now, we have over 600 HR specialists across the country now. that provided some great expertise, even remotely, to these clients and a huge compliance team behind them in legal and marketing that would take the rules and regulations coming out of the Fed and the state governments boil those down, make them understandable, and train our HRGs who then train those clients on how to handle it. And I think that's not going to go backwards. I think especially even for the next year, now the issue is how do I hire someone? How do I retain them? How do I keep them in my company with career pathing and development? And how do I use our products like data analytics that would show you this is what the pay might – you might want to pay someone. This is how you might want to handle their development. and do it all, by the way, remotely through our Flex app and paperless onboarding and so forth, I think that's going to be the biggest demand and growth besides retirement and time and attendance and, of course, insurances. And even beyond that, of course, there's merchant services that we sell through partnerships. There's going to be pay-on-demand options that we already offer that will continue to grow, all of those things. Once they see the value that we can provide them, I think there's tremendous upside in the penetration.
spk13: Yeah, just to build on that, Marty mentioned it in his comments, but I want to make sure people did not overlook it. You know, we talked about three really important metrics that make us very constructive on our results going forward. One was client retention was at 85%. I mentioned revenue retention ran about 400 basis points ahead of that. The client base grew 4%, which was in recent years one of the highest we had. And that, by the way, as people pivoted to selling virtually in the first half of the year. But the third one, which Marty mentioned, which is important, is we had 18% growth in worksite employees in HR-related services, and we now are at, 1.7 million worksite employees served. We dwarf anyone else in the industry. And we think we're still only scratching the surface. And the revenue opportunity is multiples of payroll, as I've mentioned to all of you before. We think we still have a lot of opportunity. So just to bolster, in addition to everything else Marty said, the HR part of that equation, that's important.
spk05: Great. Thank you very much. Okay.
spk12: Thanks. Your next question comes from the line of Kurtik Mehta with North Coast Research.
spk10: Hey, good morning, Marty and Efren. Hey, Efren, you talked a little about what you're expecting from a pricing standpoint, maybe a little bit less than normal for FY22. I'm just wondering, you know, today, has the pricing competition changed at all? Are you seeing aggressive pricing anywhere, or has it been fairly normal?
spk16: I think, Cardick, I'll take the start of that one. I think it's been fairly normal. You know, I think we really haven't seen, as I mentioned earlier, I think value and focus for our clients have been so much on the pandemic and the value that they're getting from our support during the pandemic, and it's been so critical to them. We have not seen, you know, we've certainly seen a much better retention from going to competitors. So we're not seeing people leave to go to competitors. And so I think even as the pricing has gotten, for a little while there seemed to be a little bit of a step up in, you know, number of free months and stuff like that. But, again, that's quieted back down and really don't see much change in the competitive environment.
spk13: Yeah, Cardick, and if you look over a multi-year period and certainly look at where the trends landed, and we look at retention by reason codes, we call it, price value losses, we would call that. It's not just price, but what value is the client getting? They're significantly down. So irrespective of what the environment is in pricing, the value that we're delivering, and certainly we know that anecdotally, in our tech services model has been well received by clients, and they seem to be voting to stay.
spk10: And then, Efren, just on the float portfolio, I think you said, you know, kind of expect flat interest on Poncello for clients. Are you anticipating any growth in the float portfolio as we have wage inflation and maybe a pace for control improve a little bit? And is this just a reflection on the yield, or are you anticipating the float portfolio growth to be flat or down?
spk13: No, the portfolio itself, we expect modest growth. And because of what you said, Kardec, we expect the pace per control are going to grow. We would say it's modest growth. And then the other components, they at least stay at current levels. I think we're a little bit cautious just on the interest rate environment. At one point, you know, sometimes we see the 10-year going up to 16, 17, then it bounces back down to 14. So I think we're a little bit cautious about getting more aggressive either on positioning or on calling out a higher increase in the flow portfolio. But we expect increases in the underlying funds and modest improvement from where we are, but we're not we're not ready to get aggressive in terms of positioning the portfolio or our assumptions on interest rates.
spk10: Perfect. Thank you both. Appreciate it.
spk12: Your next question comes from the line of Samad Samana with Jeffries.
spk02: Hi. Good morning. Thanks for taking my question. Good to see the strong close to the fiscal year. Maybe, Efren, if I could ask, I know we've asked a lot of questions about the pace for control assumptions and strong bookings, but how about the company's own hiring in what seems to be just a tight labor market? How should we think about where paychecks is in terms of direct sales capacity, and how's your ability to hire and retain in sales right now?
spk16: Yeah, Simone, I'll take that one to start anyway. It's been good. I mean, it's We certainly have had some challenge, I think, on the front end from a service perspective in some locations, but generally we've really picked up in the last. We've done a couple of things that have really picked up our hiring and filling those spots. We think we're in good shape. From a sales perspective, we're in very good shape from starting the year at full capacity with everybody in the seats, well-trained on the products that we're offering, and I think we feel good about that. We are seeing it as a very big challenge for our clients, and that's providing some opportunities through, again, the employee retention tax credit and telling them how we can help them get dollars there that will help not only retain their employees, but they could use some of those dollars for hiring, too. You're seeing a lot of upfront bonuses and things like that that clients have never even considered before that we're helping advise them might be a good trend to start.
spk02: Great. And then maybe on the strong new bookings, I know it was asked, but maybe if we could double-click, how should we think about it maybe stratifying by customer size? If we think about maybe kind of sub-20 where you've seen strong business formation, sub-20 employees versus kind of more in that upper end of your SMB focus, so maybe like that 50 to 100 employee and 100 employee plus segment.
spk16: Yeah, that under 20 has been strong, just like you said, because of new formation of businesses, and we've picked up very well there. I think on the mid-market, the fourth quarter saw a good increase, and we looked at it over even 19 because it was a tough compare, you know, or an easy compare, I guess I'd say, you know, last year because there wasn't as much activity. in the fourth quarter. We looked at it over 19, and we're up in the mid-market over pre-pandemic levels. And in total, our par number hit a five-year high on the overall par that we sold. So we feel good really kind of across the board, mid-market, more coming in the last quarter and as we start this year. But, you know, fully staffed and ready to go and really seeing, you know, now they're really trained. on how to sell from home. And now, of course, the visits are opening back up. We're getting back out to the referral channels, the CPAs, and current clients. We've also introduced some technology last year on the client side that helped us, mostly on the sub-20 or on the under-20, I guess I'd say, an automated referral network that we introduced through the marketing team and the sales team, which tells clients, hey, here's how far you are from free payroll or from other things that you can get by turning in one more referral, and it's very easy to do. So we've used some technology to pick up on the referrals as well and give better leads. in addition to the normal methods.
spk13: PAR, by the way, refers to our internal acronym for bookings.
spk16: Oh, sorry. Yeah.
spk13: Okay. I get that question.
spk16: Annualized revenue. Yeah.
spk02: Great. Thanks again for taking my questions, and good to see the strong execution.
spk16: Yeah. Great. Thank you so much.
spk12: Your next question comes from the line of Andrew Nicholas with William Blair.
spk07: Hi. Good morning. Thanks for taking my question. I guess the first one I wanted to ask was just a numbers one. Efren, you noted 1.7 million worksite employees. We've talked about kind of 18% year-over-year growth in that metric in the fourth quarter. I'm just wondering if we could drill into kind of those same metrics on PEO specifically. Do you have? Yeah. kind of a ballpark WSC number there and maybe the magnitude of growth on that metric year over year in the fourth quarter?
spk13: Yeah, so we combine both. And the reason we did, we're not splitting it out, Andrew, is that from our perspective, when we go in front of a client, if they want to pivot to an ASO model, ASO, that gives us comparable revenue, not quite as much as PEO, depending on whether they take insurance, as you know, or they don't. So the 18% is where we grew year over year. It wasn't a Q4 number. And the combination of both were very strong in the year.
spk07: Okay. And maybe as a follow-up to that, have you noticed any kind of material change in clients' preference between ASO and PEO over the past couple of months? I think they've generally leaned towards ASO since the pandemic started, but just wondering if there's any evolution of that demand balance here since we last spoke.
spk16: Yeah, Andrew, I think the PEO side we saw coming on stronger toward the end of the year. I think, again, the big challenge out there now for businesses is hiring and retaining employees. And a benefits package and a very solid benefits package and easy to enroll is going to become part of all of that package that you're trying to get to attract employees and keep them. So we do see insurance picking up some. Now we can provide insurance through the agency directly or through the PEO. And you're also seeing Texas and Florida picking up speed as well as you'd expect since they've been pretty open. But again, it's a challenge to find people, although it's a little easier to find them there in those two states, frankly, than in other areas of the state. So I think PEO will pick up some. It's just been slower to pick up because the focus has been more on the HR need. Now the HR need being... How do I handle things like I mentioned, like vaccination policy, people working from home, new flexible schedules? Now it's shifting to not only that, but also how do I hire and retain in a really tough market to find people? And I think one of those things is going to be benefits and insurance.
spk07: Great. Thanks to you both.
spk16: Okay.
spk07: Thank you.
spk12: Your next question comes from the line of Jeff Cyber with BMO Capital Markets.
spk03: That's close enough. It's Jeff Silver. Good morning. No worries. I know it's late. I'll just ask one. Marty, you had talked a little bit about the challenges that you're seeing in terms of your own internal hiring on the service side. And then throughout the comments, we've talked about some of the challenges that your own clients are seeing. I'm just curious. I know there's been a lot of studies as to why folks are seeing those challenges. What are you hearing and what are you seeing? Why are people not taking these jobs?
spk16: Yeah, I think, you know, you've heard certainly the unemployment benefits being high until Labor Day, at least in most areas of the country. I think that's one. I do think there's still a lot of confusion about COVID and there's health concerns, you know, that people are afraid, like, coming back, is everyone vaccinated or not? Do I have to sit near someone? What's the risks? I also think that there's still just a lot of child care issues as well. We hear that from clients. you know, that schools are still kind of in daycares are open or partially open, but there may be going now to summer schedules as well. And I think people are just kind of playing it, kind of careful to come back. And there's, you know, cash account, bank accounts, whether you're in the market or not. If you're in the market, the market's way up and you're feeling pretty confident of your financial position. If you're not in the market but you have stimulus payments, you've still got some of the highest cash accounts, I think, if you look at the stats across the country that we've had in years. So people are feeling like they've got some financial wherewithal, at least temporarily, to probably get through the next couple months. And then I think... Honestly, it's going to open up pretty drastically in the fall would be my take because the unemployment is going to come back down as well as the rules of looking for work. The schools should be back open full, hopefully, and daycares. I think even more will be known, obviously, about COVID and the impacts of vaccinations. Hopefully, vaccinations are up strongly as well. By all those, now you start to get to September, October, I think things are going to open and people are going to be getting back to work as cash accounts start drifting down a little bit.
spk03: Okay, that's really helpful. Thanks so much. All right, sure.
spk12: Your next question comes from the line of Kevin McVey with Credit Suisse.
spk06: Great, thanks. Hey, congrats. Hey, I wonder, you know, from a margin perspective, as opposed to specific 22 effort or more, is there any way to think about like what the cloud transition can mean to the business longer term. And, you know, as you're seeing the mortgage investment, reinvestment rather, some of that also the runoff from some of the corporate tax reform investments you made back in 17. So I guess, you know, is there a way to frame how much the cloud transition and then ultimately some of that runoff from the 17 investments, what that can mean for the mortgages over the next couple of years? Just obviously there's other puts and takes there, but just those two specific variables.
spk13: Yeah, so let me address that. I think that very little of it was runoff from the 17 investment. There are actually a few projects that are still continuing that we started in that time. They were longer-range projects. So very little of it is the runoff. And what I mean by that, Kevin, is that some of that had to be incorporated in the business in order to drive the efficiency that you're seeing. And part of the way some of those investments were structured were that we would accept higher IT spending in exchange for efficiencies in other parts of the organization. I think that what you've seen is on the operations side significant efficiencies, and the team has done a great job of leveraging the investments we've made. I'd say that's wonderful. I think the second part is simply that, I mentioned earlier, is when you go through one of these experiences and do some geographic optimization, that helps, but you also look at what expenses you actually need and you realize you don't need 100 cents on the dollar, maybe you need 99 cents, and I think that where we had that opportunity, we took the opportunity to eliminate some costs out of the model.
spk06: That's helpful. And then just, it seems, if we have a right, as you go more DIY, it's just a smaller average client size. So morning after came to mind, so kind of where the average client size is today. And the reason I'm trying to make that point is obviously all things equal, smaller clients are higher retention or more turnover, but you're getting better retention overall. So maybe help us reconcile those dynamics a little bit.
spk16: Yeah, I'll start with that. It's still in the mid-teens for the average client size. In some areas, it's gone up a little bit, actually, and in others, it's decreased, but I think we're still hanging in that mid-teens time frame or in that mid-teens size. And I think that it hasn't had a big impact on retention. I think what's really had the big impact on retention is the value we've delivered during the pandemic in particular. And, of course, certainly some macroeconomic effects of people just wanting to say, hey, I'm going to focus on kind of batting down the business and not do a lot of change right now. And we're expecting that to continue based on the value we've provided them during the pandemic that they've seen and experienced.
spk12: Thank you.
spk13: Thanks. You're welcome.
spk12: Your next question comes from the line of James Bassetti with Morgan Stanley.
spk14: Hey, thank you very much, Marty, for all the details and color. I'm wondering if, you know, on this point of hiring and recruiting, et cetera, how you're feeling about the current product and services that paychecks can offer, and I I know that that can be a contributor, but I'm just wondering if there's incremental opportunity to expand and improve those or tie them into other services. Just trying to think about kind of this bottleneck that everybody seems to be dealing with right now and how you can help address that.
spk16: I think the investments we've made over the last couple of years, really making onboarding of new employees very easy for our clients, have been really important. It's all paperless. It can all be done online. And the partnership with Indeed has really picked up. Well, the fact that Indeed gives credits to our clients for their early postings and so forth and gets them kind of to the top of the list for posting. So, you know, from the standpoint of as soon as you let someone go, we can alert you to the fact that you can post that job now on Indeed, which is integrated with Paychex Flex online. Indeed will post that job. If someone, you know, as candidates apply for that job, you can now see all that through Flex. You can do video interviews. You can onboard that employee and all of their information that, frankly, they can self-set up by themselves. You know, the person that's applying for the job. And all that can be done and then approved and set up and run a payroll and all their other HR products from us, all paperless, without ever anyone touching anything. So I think that is going to help a lot in the hiring process and the integration with Indeed forward. is going to help people get posted out to the biggest job board, frankly, in the world. So we feel very good about the partnerships and then about all of the process being completely paperless and onboarding. And then once they're in, all of the career development, the data analytics that we provide, the ability to communicate remotely through HR conversations where you can text within the app, back and forth or message within the app back and forth, all is very strong for hiring and retaining your employees.
spk14: That's great. Thanks a lot. Good luck. Thank you.
spk12: Your next question comes from the line of Mark McCann with Baird.
spk19: Good morning, Marty and Efren, and congrats on the strong quarter and the positive outlook. I'm wondering if you can talk a little bit about where you feel like you might be, you know, gaining share when we talk about, like, Obviously, the new business formations are helpful, but it sounds like you're probably getting more than your fair share within new business formations. And then, you know, how would you describe the competitive environment in terms of where some of the gains are coming from and where things are still challenging? And then I've got to follow up.
spk16: Okay. I think the gains, obviously, as you mentioned, Mark, are from new business formation, but also we're retaining a number of clients. From that standpoint, we're retaining more clients that would have gone to competition. We have not seen the losses, as Efren mentioned, from price value. That's improved. To go to competitors, that has improved, particularly our largest competitor. I think we've done extremely well there from holding on to clients. The sales have also, I think we're picking up much more from an HR perspective. You know, a couple of years ago, we started selling really not from just a payroll perspective, but from an HR perspective because we saw we were leaving value on the table for what the client really needed. And I think that has helped us a tremendous amount, too, for a client to say, hey, I'm not just looking for payroll. I'm looking for an HR need. And when you sell the HR need, it has time and attendance, which then leads to the payroll increase. And it's a total package. So I think we've seen a nice pickup from the way we sell, the way we market. Our leads are up double digits from last year, from the way we're marketing on social media, through the Thrive Conference, business conference we just had. I mean, we have gotten much more sophisticated in the marketing space. and making the leads that we're getting much more efficient for the sales teams to be able to go out and sell. And then if they're not ready to buy, we have a great nurturing process of that lead that we have started a few years ago that I think has really matured extremely well.
spk19: It sounds like the leads are up and clearly new business formations are up. But I'm wondering, like, within new business formations, once you get the lead, it seems like the win rates are probably going up. And I'm wondering, like, who do you feel like you're winning more against once you're going head-to-head?
spk16: Yeah, I think I would say local. Certainly, as always, it's been local competitors, too, that are not offering the value. You know, it's one of the things, local, regional competitors, smaller payroll companies. But some of our major competition, too, I don't think have done as good a job in – showing both the technology as well as the fact that hey we are available uh 365 seven days a week 24 hours a day if you need something you can do self-service you can do it yourself it's a great from a technology standpoint but we're not trying to push you away from calling us when you need us with a specific question uh any time of the day or night uh And that's been very important as opposed to some that I think are trying to push into total self-service and becoming more of a Microsoft or Apple that it's too difficult to call them if you really need them in a jam. So they can have the full options available to us. So I think we're winning against local competitors. We're also winning against our major competitor through the breadth of products we're offering and the value and the client referrals. have been very strong, particularly in the existing clients that we've helped through some of the pandemic coming in.
spk19: Right. And then that segues into just, you know, what the incremental efforts are going to be like over the course of this coming year. Can you talk a little bit about what you would anticipate in terms of Salesforce additions and also You know, marketing spend, both in traditional as well as digital, seems like all of the competitors, you know, are picking up, you know, their media presence. So I'm just wondering how you're thinking about that, particularly in context of the really nice operating margin expansion guidance that you're giving us.
spk16: Yeah, I think, as Efren said, I think we've done a good job in some of the things we did, particularly in some of the facilities, you know, initiatives and so forth to reduce costs that allowed us to not only gain the margins, but keep the investment in marketing going. Certainly, we've done, as Efren mentioned, some brand work this year, a lot of pickup in the social media from that standpoint. We found, I think, very effective ways to spend our dollars online. in social and in SEM and SEO to be able to get a lot more attention and, again, to get more productive leads that are more efficient for our sales team as opposed to just a widespread, you know, any warm lead that comes in. These are much more efficient from that standpoint. Sales growth, I think, would be pretty normal from a sales team perspective. And the good news is that we're pretty much fully staffed, pretty close to being fully staffed and ready to go as we begin this fiscal year. We're seeing a good start to the year that came right out of the fourth quarter. Great.
spk19: And then last question. Obviously, you've got a really strong balance sheet. You're going to throw off a lot of free cash flow. How should we think about capital allocation? Any areas of interest from an M&A perspective or, you know, return? Obviously, you've got the stellar track record in terms of returning cash to shareholders, but just thinking about the balance between the two and also CapEx.
spk16: Yeah, sure. We just obviously just increased the dividend, feeling confident here in the last month or so, and increased the dividend on a normal basis. Still got a very strong yield, obviously. And we always continue to look at that M&A from that M&A standpoint. continuing to look at all kinds of product tuck-ins, PEOs, everything that's out there. Valuations are pretty high. We're pretty particular as to what we're looking for, but we certainly feel good that we're in a solid cash position and gives it a lot of flexibility.
spk13: Anything else you want to add? Mark, the only thing I'd add is two things I'd add, not the only thing, but With respect to CapEx, we generally target about 3.5% to 4% of sales as a level of CapEx will be around there this year. And then we're keenly interested in the right technology, so we do not have the attitude – that if it wasn't invented here, we're not interested in it. We're actually interested in anyone's garage idea if it's better than what we got. So we do peer into garages and see what people are doing. Most of it isn't interesting, but some of it is. So we'll look for technology and obviously in addition to the areas that Marty mentioned.
spk19: Great. Look forward to talking to you again a little bit later today, Afrin. Take care. Bye. Thanks, Marty.
spk12: Your next question comes from the line of Matt O'Neill with Goldman Sachs.
spk08: Hi, good morning, gentlemen. Thanks so much for squeezing me in. I know it's late. Just a quick one. This is probably one of the annual guidances that you guys have issued that had a good deal of upside versus consensus. Historically, you guys have been pretty conservative and you know, consistently able to kind of increase guidance throughout the year. So, you know, with the amount of uncertainty that probably still remains, is it, is it safe to assume that the same principles that you guys use when setting annual guidance holds and that, you know, the starting point here remains conservative in your mind?
spk13: I would say this, Matt, well, that's a good question. I like how euphemistically you said that there's an element of conservatism in our guidance. I mean, look, uh, The good thing about having been here 10 years and the bad thing about having been here 10 years is the same thing. Everyone knows my MO. So we'll issue guidance that we hope we can do a bit better than, but we also want to make sure that when an investor makes a decision about whether they want to hold paychecks versus something else, they know what they can expect. And I think over the last decade, that's exactly what we've delivered. Yep.
spk08: Understood. Thanks so much.
spk12: Great. Thanks, Matt. Your next question comes from the line of Dwin Sing Hong with J.P. Morgan.
spk11: Hey, thanks. Real quick, I've got to say congrats on the 50-year anniversary. That's a crazy stat, especially in tech. So if Tom Golosan is listening, congrats. I wanted to quickly add, I know, Efren, you guys covered a ton. I know just on the the payroll client growth of 4% against service revenue being 1%. I know there's a lot of factors that drive the delta there, but just thinking about that incremental 4% and perhaps skewing smaller with smaller revenue per client, is that something you saw coming out of the pandemic? And is short payroll maybe contributing a little bit more to the client growth? And how might that evolve as we look at fiscal 22?
spk13: Yeah, that's a good question. So, yeah, I think it's fair, Tingen, to say that it's skewed a bit smaller. Having said that, you know, our model is we take clients of all levels. And as Marty mentioned, the first half, the mid-market was more challenging because of driving everyone to virtual. And then we had strength as we came out of the year I think we've optimized our model to produce margins that are really pretty impressive, even when the clients are small. I think that, for example, a sure payroll client has a surprisingly high level of lifetime value, in part because they're being onboarded onto a platform that's optimized for that size of client. And so when we look at the portfolio, We're looking at everything from very low-end clients to higher-end clients and trying to get the mix right. We feel comfortable that we've got that right and that next year maybe you'll skew a little bit less to the small and a little bit bigger, so average client size maybe has a chance to tick up. But despite all of that, we had a good year overall from a client growth standpoint.
spk11: Agreed. Thoughtful. Thank you.
spk13: Okay. Thanks.
spk12: Your last question comes from the line of Peter Christensen with Citi.
spk09: Good morning. Thank you for the chance to back clean up today. Also wanted to say great execution in a tough year, certainly. Appreciate it. It was also a strong year on the product development front. You had the PEP program, you acted fast on the PPP program, Clover integration, and a bunch of other things that you mentioned. But from the product development point of view, what are some of the priorities that you're thinking about over the next 12, 18 months? Where are you spending the bulk of your resources in that avenue? That would be helpful. Thank you.
spk16: Yeah, I think... Peter, what you're going to see is a lot more self-service. You know, you're seeing with it was accelerated a lot with the pandemic that people, you know, we always have been moving that way and have done a lot of work, as I've mentioned a number of times on the call about self-service. But I think you'll see even more of that. Clients want the ability to be able to do things and their employees and want their employees to be able to do things on their own. And that's probably no surprise. And you'll see us continue to offer that and to work to continue to make that simple and on our mobile app. You know, the app is still a five-star mobile app. We're very proud of that. We keep things as simple as we can, and as I said, everything is developed mobile first, so we design it for the mobile app, and that has continued to pay off for us. And I think you'll see, you know, things like the fact that employees of our clients are now making all of these changes for their bank accounts and their address changes, you know, that happened relatively quickly over the last year or so that that has gotten over 80% usage by the employees of the client. That helps the client. That helps us to focus our service people on more value-added conversations and so forth.
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