Paychex, Inc.

Good day, everyone, and welcome to Paychex Q2 FY 2022 Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, you will have an opportunity to ask questions during the question-answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. I will be standing by should you need any assistance. Please note, this call may be recorded. It is now my pleasure to introduce program over to Martin Mucey, Chairman and Chief Executive Officer of Paychex.

Thank you, Emmett, and thank you for joining us for our discussion of the Paycheck's second quarter fiscal year 2022 earnings release. Joining me today is Efren Rivera, our Chief Financial Officer. And this morning before the market opened, we released our financial results for the second quarter ended November 30th, 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 day. This teleconference is being broadcast over the internet, will be archived and available on our website for approximately 90 days. I will start today with an update on the business highlights for the second quarter. Then Efren will review our financial results for the quarter and provide an update on fiscal 22. We will then open it up for your questions. Today we reported strong financial results for the second quarter of fiscal 2022 as both management solutions and PEO and insurance revenues increased double digits year over year and adjusted diluted earnings per share increased 25%. We continued to have strong momentum from the first quarter with positive trends across the entire business. Client bases across all major solutions have continued to grow. Sales performance for the second quarter was strong across the board, resulting in our highest year-over-year growth in new annualized revenue in over five years and, in fact, a record high level of annualized revenue sold for the second quarter and the first half of the year. The investments we've made in our technology, product, sales, and digital marketing have positioned us well for success in today's environment. Our client retention remains near record levels. This is reflective of both the resilience of small businesses in the U.S. and the value provided by our unique blend of software solutions and HR expertise. Macroeconomic tailwinds persisted and resulting in strong growth in checks per payroll and increases in worksite employees in our HR outsourcing clients. The tight labor market and war for talent has been very challenging for all businesses. In response, Paychex ourselves, we've taken proactive steps, implementing incentives and programs to compete for talent, and we've made significant progress in hiring over the past quarter, and we're well prepared heading into the calendar year-end and selling season. COVID-19 and its variants continue to pressure businesses of all sizes, and we constantly enhance our robust set of COVID-19-related solutions. Most recently, within 10 days of the legislation surrounding COVID-19 vaccination and testing, we introduced a digital solution that businesses can leverage to confidentially capture and store employee vaccination status and request testing results for the unvaccinated. To help our clients stay up to date on all federal and state regulatory changes, we continue to introduce new methods of communication to proactively keep them informed and educated through white papers, webinars, videos, and our podcast series, On the Mark. We closely monitor topics that may have a significant impact on our clients, such as vaccine management, updated guidance on employee retention tax credit, or ERTC, and the return of mask mandates in specific states. we remain a trusted resource to support small and mid-sized businesses. The trends we saw accelerate during the pandemic continue, including the need for HR advice, the need to upgrade employee benefits and retirement solutions to attract and retain talent, and the acceleration of digital technology solutions to support a distributed workforce and tools to help businesses maximize available stimulus from the government. We've seen the benefits of these trends in strong demand for our HR solutions. Another business that is benefiting from strong demand is our retirement business, where we have reached the 100,000 client milestone. As a leader in this space, we are uniquely positioned to help businesses meet the growing number of state mandates for retirement plans and provide a critical benefit offering to drive employee retention and satisfaction. In fact, in January, we were one of the first to release a PEP plan or pooled employer plan. And 11 months later, not even a year later, we now have over 10,000 PEP clients. The access to stimulus funding has been a powerful retention tool for paychecks. We're proud that we've been able to help clients obtain billions in Paycheck Protection Program loans, and approximately 90% of our clients have leveraged our award-winning PPP forgiveness tool to gain some or all level of forgiveness for those loans, effectively transitioning the PPP loan into a grant. We've also helped businesses gain access to over $6 billion in employee retention and paid leave tax credits. Returns for clients leveraging our ERTC service represent a significant amount for any business. Two of our most recent technology innovations focus on employee retention. Our retention insights offering uses predictive analytics based on a few dozen unique data elements to help employers identify employees who may be more likely to consider leaving their organizations. This is Paycheck's first client-facing predictive analytic and could not come at a better time given today's competitive labor market. We also introduced a completely enhanced total compensation summary that can be used by employers to communicate the impact of their total pay and benefits packages for employees. These are just two examples of the powerful technology and use of information we're providing to help employers compete and retain talent. We continue to enhance our technology solutions to deliver efficiency for our clients, their employees, and paychecks through self-service and chatbots. Use of our cloud-based applications continues to grow with double-digit increases in both desktop and mobile devices. During our recent open enrollment period for our PEO clients, for example, 99% of our PEO worksite employees completed their open enrollment digitally, resulting in a 26% reduction in call volume. Our continued emphasis on expanding the digital capabilities of Paychex Flex was validated by several recent awards. We were named by Nelson Hall, a leading global analyst research firm, as a leader in their annual NEET vendor evaluation report for human capital management. Paychex placed in the leader quadrant of the next generation HCM technology report. This designation was based on our ability to deliver immediate client benefits and meet clients' future requirements. In addition, Brandon Hall Group has just recognized Paychex Flex with two Excellence in Technology awards. Our ERTC service was recognized in the category of Best Advance in HR and Workforce Management Technology for Small and Midsize Businesses. And Paychex PreCheck was recognized in the category of Business Strategy and Technology Innovation. This is our ninth consecutive year we've been recognized for our technology. in this award program, the largest and longest running award program in the HCM space. Before closing, I'd like to take a moment to discuss the recent change in executive leadership roles that took effect on December 1st. I have assumed the role of chairman of the board and will continue to serve as chief executive officer. Tom Golisano, our founder and prior chairman, will remain a board member and will continue to play a role in the governance and oversight of the company. John Gibson, our senior vice president of service since 2013, has been promoted to the role of president and chief operating officer. John has been an integral part of our executive team and has led the service and operations of all paychecks business divisions, including HR outsourcing, payroll, retirement, and insurance. There remains continuity and leadership to drive paychecks of the future, and I'd like to thank Tom for his leadership and for his continued support as we move forward and wish John well in our future growth. In summary, we are proud of our performance during the second quarter. We are well positioned with our set of innovative technology and service solutions for this selling season and to continue providing industry-leading value to our clients. I will now turn the call over to Efren to review our financial results for the second quarter. Efren?

Thanks, Marty, and good morning to everyone. I'd like to remind you that today's conference call will contain forward-looking statements that refer to future events and therefore involve some risks. In addition, I will periodically refer to some non-GAAP measures, refer to the customary disclosures. So, let me start by providing key points for the quarter, follow up with greater detail in certain areas, and then I'll finish with the review of our fiscal 2022 outlook. Our second quarter results reflected strong internal execution and continued economic recovery. Revenue and total revenue increased 13% to $1.1 billion. Within service revenue, management solutions revenue increased 14% to $832 million, driven primarily by growth in client bases across our portfolio of solutions, higher revenue per client, and improved employment levels. Client-based growth resulted from both strong sales performance and high levels of client retention. In particular, our HR solutions business continues to benefit from strong demand as businesses look for more HR support. PEO and insurance solutions revenue increased 11% to $262 million. Our PEO has benefited from higher average worksite employees, state unemployment insurance revenue, and health insurance attachment. Interest on funds held for clients decreased 5% for the quarter to $14 million. The impact of lower average interest rates and realized gains was partially offset by a 9% increase in average investment balances. Total expenses were up 6% to $668 million. The growth in expenses resulted from higher PEO direct insurance costs, an increase in benefit costs to our employees, and continued investment in our products, technology, sales, and marketing. Op income increased 24% to $440 million, with an operating margin of 39.7%. Adjusted operating margin was also 39.7% in the second quarter, compared with 36.1% for the prior year period, an expansion of 360 basis points. Our effective income tax rate was 24% compared to 22.1% for the same period last year. Both periods reflect net discrete tax benefits related to stock-based compensation payments. Adjusted net income and adjusted diluted earnings per share increased 25% for the quarter to $330 million and $0.91 per share, respectively. Year-to-date results. I'll touch on the highlights briefly here. This is for the six-month period, obviously, ending November 30th. Total service revenue and total revenue increased 15% and 14% respectively to $2.2 billion. Expenses excluding one-time costs incurred during the prior year increased 5%. Off-income and adjusted off-income were $883 million. Increases of 38% and 32% respectively. Diluted earnings per share increased 37%. to $1.83 per share. Adjusted diluted earnings per share increased 32% to $1.80 per share. Let's talk about financial position. It remains strong with cash, restricted cash, and total corporate investments over $1.1 billion and total borrowings of approximately $800 million as of November 30th. Cash flows from operations were 555 million during the first six months, an increase of 29% from the same period last year. Free cash flow generated was 459 million, up 21% year over year. The increases were driven by higher net income, partially offset by fluctuations in working capital. We paid out quarterly dividends, at 66 cents per share for a total of 476 million during the first six months. Our 12 month rolling return on equity was 43%. Now I'll turn to guidance for the current fiscal year ending May 31, 2022. The outlook reflects the current macro environment which saw improvement in the quarter. We've taken that into account in the second quarter results and our second quarter results actually exceeded expectations We have some conservatism given the macroeconomic uncertainty that prevails during the remainder of the year. We provided the following updated guidance as you saw. Management Solutions revenue is now expected to grow in the range of 10 to 11%. We previously guided to a growth of approximately 8%. PO and Insurance Solutions is expected to grow in the range of 10 to 12%. We previously guided to grow in the range of 8 to 10. Interest on funds held for clients is expected to be flat year over year. Total revenue expected to grow in the range of 10 to 11% with previously guided to growth of approximately 8%. Adjusted op income is expected to be in the range of 39 to 40% up from the previous guidance of 38 to 39%. Adjusted EBITDA margin is expected to be approximately 44% up from the previous guidance of approximately 43%. Other expense net is expected to be in the range of 15 to 18 million. Our previous guidance was in the range of 23 to 26 million with the change due to certain non-operating income received during the second quarter. Our effective income tax is still expected to be in the range of 24 to 25 percent and Adjusted diluted earnings per share is expected now to grow on the range of 18% to 20%. We previously guided the growth of 12% to 14%. Turning to the third quarter, we currently anticipate total revenue growth to be approximately 9%. And we are expecting an adjusted operating margin of approximately 42%. So note that in your models. PEO and insurance solutions revenues for the third and fourth quarter of fiscal 2021 were impacted by timing of notification of changes in state unemployment insurance rates. This creates comparability issues for the third and fourth quarters of fiscal 2022, doesn't affect the whole year. You'll look at our investor presentation when we post it in a little bit, and we provided additional details so you can get the split of the quarters correct. Of course, everything that I just said is subject to our current assumptions, which could change given the current environment. We'll update you again on the third quarter call. And with that, I'll turn the call back over to Marty.