Paychex, Inc.

Good day, everyone, and welcome to today's Paycheck's first quarter fiscal 22 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. Please note this call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to President and Chief Executive Officer Martin Mucey. Please go ahead.

Thank you. And thank you for joining us for our discussion of the Paychex first quarter fiscal year 2022 earnings release. Joining me today is Efren Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the first quarter ended August 31, 2021. You can access our earnings release on our investor relations website, and our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days. I will start today's call with an update on the business highlights for the first quarter, and Efren will review the financial results for the quarter and provide an update on fiscal 22 guidance. We will then open it up for questions. Fiscal 22 is off to a very strong start with Q1 results above our expectations. Total revenue increased 16% with double-digit growth in both management solutions and PEO and insurance solutions, while total expenses declined by 1%. Adjusted diluted earnings per share increased 41%. While results benefited from the compare to a pandemic-impacted first quarter last year in improvements in the economy, Our internal execution has been strong with continued momentum in sales, marketing, and client retention. During the first quarter, positive macroeconomic trends continued. This was evident in the growth in checks per payroll and net increase in worksite employees within our existing base of HR outsourcing clients, particularly with our ASO offering. Our client retention remains near record levels, reflective of both the resilience of small businesses and and the value provided by our unique blend of software solutions and HR expertise. Our sales momentum continued with strong first quarter sales performance as measured by new annualized revenue reflecting solid performance in digital sales, our mid-market sales, and our HR outsourcing divisions. Our unique value proposition of combining the most comprehensive human capital management software platform with our deep HR expertise, continues to resonate with prospective clients. We continue to invest in our sales force and support them through increased digital marketing and lead generation initiatives. We are well positioned for the upcoming selling season. We continue to leverage our investments in research and development to expand the capabilities of our industry-leading software, Paychex Flex. Our investments in self-service, artificial intelligence, and machine learning, and analytics payments, wearables, and voice recognition allow us to offer cutting-edge technology specifically designed to deliver automation and efficiency to both administrators and their employees. Our recent Pulse of HR survey identified hiring, retention, and software automation to gain efficiencies as the top industry trends facing businesses of all sizes. Our fall release introduces a series of software enhancements to further strengthen the power of Paychex Flex. We currently offer two options for clients in their search for talent, a fully integrated connection, API connection with Indeed, the world's largest job board for clients who are looking for a pool of applicants, and a comprehensive recruiting and applicant tracking offering called Flex Hiring for businesses looking for integrated technology to manage the entire recruiting process. We made enhancements to both to provide clients with tools they need to post jobs, attract candidates, and allow new hires to digitally self-onboard via our Flex mobile application. With employee retention being a significant issue in this challenging environment, we've introduced several enhancements to provide our clients with insights and offerings designed to help them and make informed decisions and retain their workforce. The introduction of retention insights, our first client-facing predictive analytic, was designed to identify employees who may be at risk of leaving, for example. Second is pay benchmarking, which allows employers to compare performance ratings and compensation details by position to ensure top performers are paid equitably. With our advanced technology, employers can easily compare individual employee compensation against national averages provided by the Bureau of Labor Statistics to confirm the impact of compensation on retention. We're excited also to announce a new offering called Paychecks Pre-Check to further automate the payroll process for employers and provide their employees an opportunity to review their gross-to-net calculation before payroll is officially processed. With Paychecks Pre-Check, employees are notified through their channel of choice, their phone, their tablet, their smartwatch, or their smart speakers that they have a pending pay period to review. The employee leverages Paychecks Flex to either confirm the amount of their check or report an issue. Issues are routed electronically to allow clients to focus on exceptions and proactively address issues prior to payday. Paychex PreCheck leverages our industry-leading flex payroll and time and attendance offerings, HR Connect offering, our digital employee case management tool, our advanced analytics module, our five-star rated mobile app, and expands our conversational UI capabilities, including our integration with Amazon Alexa, Google Assistant, and Siri shortcuts. With these additions, Paychex Flex is the first HCM application to offer integration with three of the major voice assistant platforms. Paychex PreCheck was recently recognized by HR Executive Magazine and the HR Tech Conference and Exposition with the Top HR Product of the Year Award, an award that spotlights innovation driving the HR technology market. This is a three-peat for us, marks the third consecutive year that Paychex has been recognized as a top HR product innovator by HR Tech. In addition to our innovative technology, the expertise and advice we're able to provide clients on HR matters really sets us apart. Our HR professionals have been very important in helping ASO and PEO clients to navigate through the pandemic, and in handling the current uncertainty around COVID with the recent uptick in transmission rates, return to office plans, and potential vaccine mandates. We are very proud of the work our HR professionals do, and we're honored to be recognized by winning a Gold Human Capital Management Excellence Award from the Brandon Hall Group in the category of Best Use of a Blended Learning Program for our HR Services Excellence Academy Training Program. This training program prepares our new HR professionals to provide exemplary consulting services to the company's HR outsourcing clients and was recognized for combining instructor-led training with technology-based activities. The expertise we offer our clients also expands to providing resources to assist clients with their many compliance obligations. Our COVID response continues near real-time updates. to our COVID-19 help center where businesses can access key information regarding changing regulations, including the recent Biden administration proposal on vaccine mandates. We assisted our clients in receiving over $65 billion in paycheck protection loans. That's 9% of the total PPP loans provided. And our industry-leading PPP forgiveness tools and reports have been accessed Over 500,000 times since its release, with over 90% of businesses now reporting their initial loan has been forgiven. We have also been instrumental in helping clients secure over $4 billion in stimulus funds available through the employee retention and paid leave credits. We recently launched an enhanced offering to Paycheck's Employee Retention Tax Credit Service to help businesses retroactively identify tax credit eligibility based on wages already paid and file amended returns to claim the credit. On average, paychecks clients are claiming over $150,000 in tax credits, a substantial amount for a smaller midsize business that is helping them survive and thrive in this pandemic. The pandemic has only exacerbated the retirement crisis in America. In response, a growing number of states have introduced state-mandated retirement programs, and our pooled employer plan or PEP offering, as well as traditional plans, have helped our clients handle new state mandates in ways that make financial sense for the employer and employees. For the 11th consecutive year, Paychex has earned the distinction as the largest 401k record keeper by total number of 401k plans, serving more than 96,000 plans. We have seen continued success in helping clients find retirement plans that suit their employees' needs and help them to attract and retain clients. We are very proud of our performance during the first quarter, but remain vigilant about the rest of the fiscal year given the uncertainty around the macroeconomic environment and the COVID-19 variants. Our very strong start in sales, continued client-based growth, best-in-class operating margin, and increased investment in marketing, lead generation, and product development have us well positioned for continued financial and operating success during the remainder of fiscal year 22 and beyond. I'd like to close my comments by recognizing, again, the company's 50th anniversary. From our founder's start with $3,000 and a few clients, we have transformed into a comprehensive, technology-driven human capital management software company with over 710,000 clients across the U.S. and Europe. In addition to paying one in every 12 American private sector employees, we are the country's largest 401k record keeper, a top 30 U.S. insurance agency, and among the largest providers of HR outsourcing in the U.S., supporting over 1.7 million worksite employees. While the size and the breadth of the company has changed, We remain true to our original mission of serving the unique needs of small and mid-sized businesses. That mission was all the more important during the challenges faced over the past 18 months. I'd like to thank and commend our employees for their tireless dedication to innovation and commitment to serving our clients. They have driven our growth over these 50 years, and our shareholders, we thank them for their investment with us along the way. I will now turn the call over to Efren Rivera to review our financial results for the first quarter.

Efren? Thanks, Marty, and good morning to everyone. I'd like to remind you to start that today's conference call contains forward-looking statements referred to the customary disclosures. I'll move through my comments relatively quickly so we can get to your questions. I'll periodically refer to non-GAAP measures such as adjusted operating income, EBITDA, et cetera. Please refer to our press release investor presentation for more information on these measures, especially on the investor presentation, too, if you want to have a clear roadmap in terms of what's included and what's not on the adjustments we make. I'll start by providing some of the key points for the quarter and then follow it with greater detail in some areas. I'll finish with a review of our fiscal 2022 outlook, which, as you saw, was revised upwards. First quarter reflected strong internal execution, improved economic environment, and favorable compares against the prior period. Both service revenue and total revenue increased 16% to $1.1 billion as we benefited from improved employment levels, higher client counts across all of our solutions. Growth rates were bolstered by a more easy compared to the prior year first quarter that was impacted by the pandemic. But as Marty said, we also had very strong execution in the quarter within service revenue management solutions increased 17% to 805 million and PO and insurance revenue increased 14% to 263 million interest on funds held for clients decreased 3% for the quarter. As lower average interest rates and realized gains were partially offset by higher average investment balances, we'll see what happens in the balance of the year as interest rates have started to move higher. Total expenses decreased 1% to $640 million, excluding one-time costs of $31 million that occurred during the first quarter. Fiscal 2021 expenses increased to minus 4%. The growth in expenses was impacted by higher PEO direct insurance costs, increases in fringe benefits, and continued investment in product development and information technology. One thing I'd like to point out here that's important is if you go back to the first quarter of 2020, our performance was strong even when we measure against that quarter. So not only did we have strong compares against the COVID impacted quarter, but go back to 2020 and you'll see this was a strong quarter overall. I think it says fundamentally something important about how the company has transformed over the last two years. Op income for this quarter increased 56% to $443 million with an operating margin of 41%. Adjusted operating margin was also 41% during the first quarter compared with 33.8% for the prior year and expansion of more than 700 basis points. Effective income tax was 24.9 compared to 23.4. The first quarter was impacted by an increase in state tax provisions. Both periods reflect net discrete tax benefits related to stock-based compensation benefits. As you know, we exclude those for purposes of our adjusted calculations. Adjusted net income increased 42%. Adjusted diluted earnings per share increased 41%. adjusted net income increased 42 and adjusted diluted earnings per share increased 41% for the quarter to 323 million and 89 cents per share respectively. Investments and income, our primary goal as you know is to protect principle and optimize liquidity. We continue to invest in high credit quality securities. The long term portfolio has an average yield of 1.8%, an average duration of 3.4 years. Our combined portfolios have earned an average rate of return of 1.1% for the quarter, down from 1.3% in the prior year. Now let's look at our financial position. It's, in a nutshell, pretty strong. It remains strong with restricted cash and total corporate investments over 1.2 billion. Our borrowings were 805 million as of August 31. Cash flow from operations was 386 million during the first quarter. a robust increase of 79% from the same period last year. Free cash flow generated was $354 million, up 83% year-over-year. The increases were driven by higher net income and changes in working capital. We paid quarterly dividends of 66 cents per share for a total of $238 million during the first quarter. Our 12-month rolling return on equity was a stellar 42%. Let me turn to guidance for the current fiscal year ending May 31, 2022. This outlook reflects the current macro environment, which saw improvement in the quarter, especially in June and July. First quarter results exceeded expectations. Nevertheless, as all of you know, there's uncertainty about the trajectory of the remainder of the next several quarters, so we've incorporated this into our expectations for the remainder of the year. Our crystal ball is clearer the nearer we are and a little bit less clear as we go out and now are into the spring of next year. So with all that said, management solutions, we expect it to grow now approximately 8%. That's guided upward from 7%, approximately 7%. PEO and insurance solutions is expected to grow in the range of 8% to 10%. That's similar to what we said previously, interest on funds held for clients. still expected to be flat year over year. Total revenue is expected to grow approximately 8%, again, guided upward from 7%. Adjusted operating income is expected to be in the range of 38 to 39%, up from previous guidance of approximately 38%. And if there's a point I would make simply is this, that we went through a pandemic. We made a lot of adjustments in the operating margin and our returns are really, really strong. Adjusted EBITDA margin now is expected to be approximately 43%, up from previous guidance of approximately 42%. Other income and expense net is expected to be in the range of $23 to $26 million. Our previous guidance was in the range of $33 to $37 million. The change is due to certain non-operating income received during the first quarter, and specifically, before I get the question on that, let me just say that we have invested in technology fund we received a mark that that ended up in us recognizing income on that technology fund which invest in early stage technology companies our effective income tax is expected to be in the range of 24 to 25 percent and adjusted diluted earnings per share is expected to grow in the range of 12 to 14 percent we previously guided to growth of 10 to 12 percent turning to the second quarter We currently anticipate total revenue growth will be in the range of seven to eight percent and adjusted remember it's adjusted operating margin is expected to be in the range of 36 to 37 percent Before I get the call I will just say on everything there's an element of conservatism and what we say in part because the macro environment does impact We don't obviously have a crystal ball on what's going to happen in the second quarter and beyond, and we're trying to create an all-weather forecast. Now, of course, all of what I just said is subject to current assumptions, which can change given the current environment. We'll update you again on the second quarter call. I'll refer you to our investor slides on the website for more information. And now, with all of that, I'll turn it over to Marty.