Ladies and gentlemen, thank you for standing by and welcome to the Paychex First Quarter Fiscal Year 2021 Earnings Conference Call. The operator will now provide instructions. Thank you. I will now hand the call over to Martin Mucci, President and Chief Executive Officer to begin. Please go ahead, sir.

Great, thank you, and thank you for joining us for our discussion of our Paychex first quarter of fiscal year 2021 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the first quarter ended August 31, 2020. You can access the earnings release on our Investor Relations webpage and our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet, will be archived and available on our website for approximately 90 days. I will start today’s call with an update on the business highlights for the first quarter. Efrain will review our first quarter financial results and provide an update on fiscal ’21 and then we will open it up for your questions. Fiscal ’21 is off to a good start. Although the impacts of COVID-19 continue to affect our results causing unfavorable year-over-year comparisons, our first quarter results finished better than originally projected as most of our key business metrics recovered at a faster rate than anticipated. Throughout the COVID-19 crisis, our business model has proven resilient. We have seen good sales momentum, excellent client retention and accelerated product development responsive to the needs of our clients. We also rapidly reduced discretionary costs where needed to protect margins and are ahead of schedule on a number of initiatives to reduce long-term costs as well. We are pleased with our sales performance during the first quarter, which reflected new annualized revenue significantly higher than our expectations. Growth in new payroll sales units was strong year-over-year reflecting the highest fiscal quarter growth in over 5 years. Our investments over the past several years in virtual sales, digital marketing and lead generation, and sales support technologies have positioned us well to succeed in this environment. With the challenges small and midsized businesses have faced during this environment, our HR value proposition has never been more clear. We have seen a surge in demand for our various HR offerings since the beginning of COVID, and our Q1 sales results for our HR services division were very strong with a double-digit increase over last year. We are well-positioned to continue to take advantage of this opportunity. Our client retention during the first quarter has remained at record levels. We continue to see payroll clients that have been in non-processing status beginning to pay employees again. Throughout this crisis, we have been very proactive in providing information, tools, and guidance to our clients. We are proud of our response supporting our clients during this crisis. We work closely with regulatory agencies to both remain informed and advocate for our clients. Our compliance and software development teams worked quickly to interpret and respond to the changing regulations and design products to assist our clients through one of the most challenging times for the business community. We have provided real-time updates and solutions compliant with new regulations. We were first to market with a PPP loan forgiveness estimator, which now produces a signature-ready application. Recently, Wolters Kluwer, a leading national provider of tax and accounting expertise, selected our PPP loan forgiveness estimator to be utilized by their CCH AnswerConnect research platform subscribers. Since launching in early April, we have had approximately 300,000 unique visitors to our COVID-19 Help Center. Our COVID-related training has seen strong participation with some webinars attracting over 10,000 attendees. Along with the investments we have made in our platforms that have allowed us to adapt and maintain high levels of service delivery, our thought leadership has helped in achieving our record client satisfaction. Investments in technology combined with personalized client service that Paychex is known for, available 7/24/365, has served us well in the current environment due to the adaptability and speed of delivery. We have seen sessions during the quarter utilizing our mobile platform increase double digits compared to the prior-year period and the number of active employees on the platform continues to increase. Our clients and their employees have been taking advantage of Flex for self service. Self-service utilization by client employees as a percentage of total utilization is at an all-time high given the remote working environment for many of our clients, and Paychex Learning enrollments are also significantly benefiting from virtual training offerings that users can participate in from any location. We recently introduced new employee health and safety in the workplace features in Paychex Flex. These features include COVID-19 leave of absence tracking through HR Connect for employees who request leave to care for a family member or child attending school virtually, COVID-19 screening for when employees come back to the physical work environment, and a health attestation solution that allows employers to collect employee information in a variety of ways. These features combined with our HR Connect and conversations features, Iris scan clocks, pay-on-demand capabilities, and other product functionality will continue to prove invaluable to our clients, whether their employees continue to work remotely or as they prepare for returning their employees to an office environment. As mentioned in June, we have accelerated certain long-term cost saving initiatives, including reducing our physical office footprint, and during the first quarter, we recognized $31 million in one-time costs related to these initiatives, and we are progressing better than expected. We anticipate that we will fully realize our projected savings from these initiatives. We are proud that both the strength of our technology as well as the care we give our customers has been recognized by industry experts. Most recently, the Paychex Flex platform was recognized by Lighthouse Research and Advisory with an HR Tech Award for the Best SMB-focused solution in the Core HR/Workforce category. The combination of a single device-independent application with human resource services and benchmarking capabilities sets us apart from others in this category. We have also been recognized with a 2020 Tech Cares Award presented by TrustRadius, which celebrates companies that have gone above and beyond to provide their communities and clients with support during the COVID-19 pandemic. I am also very proud to note that for the tenth straight year, we have been recognized as the largest provider of 401(k) record-keeping services by the number of plans by Plansponsor Magazine. We have a longstanding commitment to leveraging innovative technology solutions like Paychex Flex and best-in-class service to simplify the often complex task of saving for retirement and are proud to continue to help business owners and employees save for retirement during these challenging times. Irrespective of the pace and speed of recovery, our resilient business model, strong liquidity position, and dedicated employees will allow us to come through this stronger, while continuing to provide industry-leading technology solutions and outstanding service to our clients. I will now turn the call over to Efrain to review our financial results for the first quarter. Efrain?

Thanks, Marty and good morning everyone. I want to start by saying I hope that everyone is safe and your families are doing well and our best wishes go out to those who have been impacted by the pandemic. Let me remind everyone that today’s conference call will contain forward-looking statements that refer to future events; please review the customary disclosures, and I am going to refer to non-GAAP measures such as adjusted operating income and adjusted EBITDA. Please refer to the press release for the reconciliation of GAAP to non-GAAP measures. Let me start by providing some of the key points for the quarter and then follow up with greater detail in certain areas and then wrap with our fiscal 2021 outlook. First quarter results reflect the impact of economic conditions resulting from COVID-19. As Marty mentioned, for the first quarter, total revenue declined 6% to $932 million largely due to lower volume impacting revenue across our HCM solutions. During our June earnings call, I had noted the first quarter revenue was anticipated to be down high single-digits to low double-digits. Obviously, looking at this, our results exceeded those expectations. Total service revenue moderated 6% to $917 million. Within service revenue, Management Solutions revenue declined 5% to $687 million and PEO and Insurance Solutions revenue decreased 7% to $230 million. When I say total service revenue moderated, I mean declined. Interest on funds held for clients decreased 28% for the quarter to $15 million due to lower average investment balances and lower average interest rates earned. Average balances for interest on funds held for clients declined 6% during the quarter primarily due to the impact of lower checks per client due to COVID. Expenses were up 1% to $650 million, but when you exclude the one-time costs of $31 million that Marty mentioned, we were actually down 4% driven by lower discretionary spending and cost control measures implemented in Q4. We are very proud of how we managed expenses through this entire period. Operating income decreased 19% to $284 million and reflected an operating margin of 30.5%. Again, that was ahead of expectations. Adjusted operating income excluding the impact of one-time costs decreased 10% to $315 million and reflected an adjusted operating margin of 33.8%. Other expense, net for the first quarter includes interest on long-term borrowings partially offset by corporate investment income, which, as you know, is quite low and was impacted by lower rates. Our effective income tax rate was 23.4% for the first quarter compared to 23.3% for the same period last year. Both periods reflect tax benefits for stock-based compensation payments that occur with the vesting of various annual stock rewards. Net income decreased 20% to $212 million, but adjusted net income decreased 11% to $228 million. For the quarter, adjusted net income excludes the one-time costs and includes the tax benefit from stock compensation payments. We have pulled that out; there is just no way to know in a given quarter whether people are going to exercise or not. We can give you guesstimates, but we don’t know. It ended up providing some benefits in the quarter. Diluted earnings per share declined 19% to $0.59 for the quarter, but adjusted diluted earnings per share decreased 11% to $0.63, for the reasons I cited above. Investments and income: as you know, our primary goal is to protect principal and optimize liquidity. We continue to invest in high credit quality securities. Our long-term portfolio currently has an average yield of about 2% and an average duration of 3.3 years. Combined portfolios have earned an average rate of return of 1.3% for the quarter, down from 2% last year. I will now walk through highlights of our financial position. It remains strong with cash, restricted cash and total corporate investments of $952 million. Funds held for clients as of August 31, 2020 were $3.3 billion compared to $3.4 billion. Funds held for clients vary widely on a day-to-day basis and averaged $3.5 billion for the first quarter. Total available-for-sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $117 million as of August 31, 2020 compared with $100 million as of May 31, 2020. The increase in net gain position, as you can surmise, resulted from declines in interest rates. Total stockholders’ equity was $2.8 billion, reflecting $223 million in dividends paid and $29 million of shares repurchased during the quarter. Our return on equity for the past 12 months remains robust at 39%. Cash flows from operations were $215 million for the first quarter, a decrease of over 20% from the same period last year. The decrease was driven by lower net income and fluctuations in working capital. Now, let me turn to fiscal guidance for fiscal 2021, which ends on May 31, 2021. The outlook reflects our current thinking regarding the speed and timing of the economic recovery. First quarter results as you can see exceeded expectation. There is uncertainty about the trajectory of recovery over the next several quarters. Our guidance assumes a steady, but gradual improvement through the rest of the fiscal year. We have provided the following updates to the guidance after seeing first quarter results. Management Solutions revenue is now expected to decline in the range of 1% to 3%. We have previously guided to a decline in the range of 1% to 4% and we will continue to update as each quarter passes. PEO and Insurance Solutions revenue is expected to decline in the range of 2% to 5%. Our previous guidance was a decline in the range of 2% to 7%. Interest on funds held for clients is expected to be between $55 million and $65 million. Total revenue is expected to decline in the range of 2% to 4%. We have previously guided to a decline in the range of 2% to 5%. Adjusted operating income, as a percent of total revenue, is now anticipated to be approximately 35%, up from previous guidance of 34% to 35%. Adjusted EBITDA margins for the full year fiscal 2021 are expected to be approximately 40%, up from prior guidance of 39% to 40%. Other expense, net is anticipated to be in the range of $30 million to $35 million. The effective income tax rate for fiscal 2021 is expected to be in the range of 24% to 25%. Adjusted diluted earnings per share is expected to decline in the range of 6% to 8%. We have previously guided to a decline in the range of 6% to 10%. Turning to the second quarter, we currently anticipate Management Solutions revenue will decline in the range of 2% to 3% and PEO and Insurance Solutions revenue will decline 4% to 6%. Adjusted operating margins, excluding one-time costs, are anticipated to be in the range of 34% to 35%. An early view of the second half of the year: when all of this started, many companies withdrew guidance, and we provided our best view. We didn’t get it completely right at first, but we communicated and updated you in the middle of the quarter to tell you where things were changing. We will continue to be committed to full transparency and to updating you on a regular basis so investors know what we are thinking when we think it. Of course, things can change as we go through the year. But at this point, the early view of the second half of the year is that we anticipate total revenue will be in the range of flat to very low single-digits. Operating margins we anticipate to be approximately 37%. Of course, all of this is subject to current assumptions, which are subject to change. We will update you again on our second quarter call. So, we are more positive than we were at the June call. Obviously, everyone knows the uncertainty you are dealing with. Just a couple of more things to conclude my comments. Number one, I think what you saw in first quarter and Marty alluded to, is the strength of digital solutions. Digital and virtual sales were up very, very strong in the quarter. When I say very strong, I don’t mean 10 or 20 percent; it was very strong. Obviously, any sale that depended on face-to-face meetings was more challenging, but we have been gaining momentum there. That’s number one. Number two, HR solutions was up very strong from a sales standpoint and revenue recovery has been strong in the quarter, stronger than we anticipated. So, when you look at digital marketing and sales, we had a really good quarter. When you look at HR solutions, we had a very good quarter and that is part of what’s incrementally positive as we go through the year. And PEO, I would say this: one of the things that we have learned as the year has gone on is that while PEO had a sharp downturn initially, we have seen a sharp recovery also. So we are incrementally more positive on PEO. That solution is important in the market, and we think there will continue to be good demand. Now, obviously, there is still a lot of uncertainty in the environment. But as I said, on the second half, we think we are in a position to manage through it and have taken all of the right steps in the short-term and the long-term to direct investments to where we were; had we not done that, we would be in a different position. This is not your father’s Paychex. With that, I will turn it back to Marty.

Okay, thank you, Efrain. And we will now—operator, we will open it up for your questions.

Thank you. The floor is now open for questions. Our first question comes from the line of Ramsey El-Assal of Barclays.

Hi, guys. Thanks for taking my question. I wanted to ask Efrain about your—or Marty as well—the last comments you had on digital and just get your view in terms of how you mentioned, it’s not your father’s Paychex. How permanent do you think some of the shifts are in your business when it comes to things like digital versus analog from, I guess, a product standpoint as well as a sales technology standpoint? Is this more of a blip or is this something you think will fundamentally change the fabric as we go forward?

Yes, I will start and then I will let Efrain jump in on anything that I miss or comment that he has. Look, I think it’s permanent. I also think, as I think everyone has seen, things have accelerated quite dramatically with the work-from-home environment, and so a lot of things such as mobile adoption and the move to paperless—from recruiting, to onboarding, to training, to any change an employee makes—have accelerated. We could see this coming and had invested in it, but it has really accelerated with the remote workforces and I think it’s definitely permanent even if employees come back to the office, many will return to a similar environment and I think that’s never going to change. I think people are just used to it. Also the way they are buying is much more virtual. As Efrain commented, the results have been very strong from a virtual sales and digital marketing standpoint. We are a self-service company basically, where clients are going online and doing the search for us, which we have invested in, looking at demos, which we have invested in, and then buying themselves online through SurePayroll or Flex has both been very strong as Efrain mentioned. And I do think it’s because we have invested well in a product that is simple to use and easy to sign up for, and that’s working very well. So, I think it’s very permanent, all the way through from paperless, to remote, to the mobility app, and everything else in between. So, we feel very well-positioned from a permanent going-forward standpoint.

Yes. What I would add is it’s one thing to say we had great digital sales progress in the quarter. By that I mean not only SurePayroll where, as Marty mentioned, you can search and onboard yourself in payroll without having anyone involved in the process—something we did several years ago—but also our virtual selling efforts that are powered by our digital marketing efforts have been really, really strong too. But all of that needs to be tied together with a digital service model, and I think as Marty was mentioning, we have made a lot of investments on that side. You heard his comments about the number of employees who are actually utilizing our platform to connect and update their information. Sometimes we hear this narrative that somehow only certain competitors can do that, and it’s not true. We have been quietly making many of the same changes and you can’t compete now in the market if you are not pivoting to digital. We understand that.

I am sorry, Efrain, I wanted to say the other stat that’s been so interesting is we’ve talked about our Flex Assistant, which is basically a chatbot that answers questions coming in from clients. Fifty percent of the questions are now being answered by the chatbot, and the use of that is just incredible. It has saved us a lot from a service perspective and allowed our people to focus on higher-value tasks. So, our team is always available, the personal service is available 7/24/365 if you need it, and now those people are freed up more than ever for the more value-added questions. We feel like the investments we have made are really paying off and it’s accelerated and will be permanent as a result of this pandemic environment.

Great. That’s terrific. One more for me: I wanted to ask another question about how the business is evolving in the context of the pandemic. Can you speak to the relative importance of cross-selling to existing customers versus signing up new ones in terms of your growth algorithm now? Is the model more reliant today on expanding wallet share of existing clients, or is it business as usual? How would you characterize that balance?

I would say it’s fairly business as usual. We are selling into the base well. The more satisfied clients are with the existing services they have, the more open they are to talking to us. We have expanded our product set quite dramatically and we have new technology advancements that are coming out all the time, and we have quite a package of services that will help in the pandemic. One of the things during this pandemic is that the COVID Help Center has really driven a lot of clients in to see how valuable we are. When clients need you most is when they see the greatest value, and they have really seen great value in what we have offered and what they have been able to access. For example, when the loans were available, we were first to put out the payroll report that has been accessed and downloaded over 0.5 million times, and the loan forgiveness estimator provides signature-ready applications to help clients get forgiveness. Those kinds of things have added a lot of value to clients and therefore our client retention has never been stronger. No one is leaving to go to competitors that do not offer these tools, because clients find them so valuable. So, the process of selling additional features is being helped by that, and certain things that had dropped, like retirement sales last year, have come back strong in the first quarter. People who were payroll or payroll and HR clients are now looking for retirement services, and retirement actually increased year-over-year from a sales and revenue perspective. So, the ability to sell other services has really improved through the pandemic because of the value we have offered.

That’s terrific. I appreciate your answers. Thanks so much for taking the question.

Alright. Thanks.

Our next question comes from the line of David Togut of Evercore ISI.

Thank you. Good morning, Marty and Efrain. I appreciate you giving guidance in an environment where many companies are not. I am wondering if you could flesh out your thinking a little bit more, Efrain, on FY ’21. You are pointing to the top half of your previous guidance ranges, but it seems like many of the metrics you have called out—record 5-year growth and new payroll sales, double-digit growth in HR sales, highest client retention ever—might actually point to a stronger result for FY ’21. Are you just uncertain if we get another wave of fiscal stimulus, or can you give a little more detail around how you are thinking about outcomes for FY ’21? And then maybe why not a little stronger given all the leading indicators look very strong?

Hi. Not quite off the charts, that would be nice, but yes. David, a few things on that. We feel pretty good that the first half is going to be better than what we expected; it was strong. You don’t win a game in the first half, but it certainly is good to be up several touchdowns before halftime. So, we think the first half is going to be strong. Having said that, a lot of it depends on the back half of the year and fourth quarter will be very important. Through Q3, we see results being still muted because that’s a big quarter and we are comparing against a quarter before all of the pandemic effects occurred. So there is a note of caution. If we projected the lines we see now, we would have different guidance, but we don’t do that because it wouldn’t be an accurate forecast we would be comfortable providing. But a lot of the metrics are pointing in the right direction. From where we were in June, things look better. We are not anticipating another stimulus; if it comes that would be great. We think that the initial stimulus helped provide a cushion for many small and medium-sized businesses, but we are not assuming more. We don’t assume a dramatic improvement in unemployment over the next several quarters. That dictates some caution in terms of what we provide, but the environment is better than we anticipated when we set the plan.

Got it. Just as a quick follow-up, are there any constraints on your ability to implement these record new sales in the payroll services business? What’s the timeline to implement the strong new book of business?

I think the selling season will be coming up actually starting in the mid-market this month. Probably the one thing that’s most challenging is that some clients are still delaying decisions, particularly in the mid-market, to be a bit more careful. We are making sales and we can meet with clients remotely if they want to meet. This has been done remotely for the last two quarters, and to have the sales we have had in a remote selling environment has been pretty impressive. We have honed new skills in being able to do that. The biggest challenge to hitting results would be continuing access to the client and clients being comfortable to make a decision based on their business and whether they are ready, but right now we feel good in the small business market. I think that’s continuing to expand. Not only do I think we have taken a little share, but we have also seen the pie get larger because more small businesses that have not outsourced before are now outsourcing payroll, if not payroll and HR, for the first time. That market is growing given the complexities of the environment, and they see the value of being with a payroll provider to help them get loans, the loans forgiven, and to work through complicated regulations that are changing.

Understood. Thank you very much.

Okay, David.

Our next question comes from the line of Jason Kupferberg of Bank of America.

Hey, thanks, guys. Good morning. I just wanted to start with a clarification. Efrain, just on the second half outlook, did you say that revenue should be flat to up very low single-digits?

Yes, flat to up very low single-digits.

Okay. Last quarter, I thought the second half was expected to be up low single-digits. Is this just timing where the recovery happened a little sooner so the year is a little more balanced?

When you say last quarter, Jason, do you mean sequentially or the previous quarter’s guidance? I don’t recall saying low single-digits for the second half; if I did, that wouldn’t have been correct. To clarify, we still expect at this point that the third quarter will be down versus the prior quarter with growth returning more significantly in the fourth quarter. The transcript will reflect what was said previously, but at this point we are not signaling a positive second half beyond what I just characterized.

Okay, fair enough. And on the margin front, how should we think about the long-term implications for your cost structure—real estate, sales force, customer support, etc.? Is there any way to quantify that yet or will that come in the not-too-distant future?

Probably in the not-too-distant future, not this second. There is a range of initiatives including the footprint rationalization. It doesn’t take too many assumptions to see we can continue to evolve that model so that we need less space and reduce costs that way. We are not ready to commit to what that number looks like at this point, but we have had good experience thus far. The acceleration of our digital efforts suggests we can control costs in that area and maybe get more efficient as we go along. We will talk more about that in future calls.

One last on the strong sales performance: can you talk about trends in new business creation and your overall win rates?

We are certainly seeing new business startups are up roughly 20% year-over-year. People are shifting businesses, seeing opportunities, and startups are growing, which helps us because our products make it easy to sign up. New business startups are contributing and we are getting a good share. Existing businesses are also outsourcing more than before; they are recognizing the value a payroll provider gives in this complex environment. So new business startups and conversions from self-processing are both contributing to the sales strength.

Alright. Thanks for the comments, guys.

Okay, thank you.

Our next question comes from the line of Steven Wald of Morgan Stanley.

Hey, good morning. Thanks for providing guidance through all this; we appreciate it. I was hoping to start off just by sharpening the pencils on a few items. Specifically, I don’t think I missed it, but an actual retention number for the quarter: I think you said 83% last quarter but it included an adjustment for businesses that were suspended. Could you clarify? And then how are you thinking about fiscal year-end unemployment rate assumptions and business failure rates from here?

We really give client retention once a year, but we remain at the highest levels of retention we have. The number of suspended clients is down to about a quarter of the peak—we have seen a dramatic decrease from the peak. We still have some that are suspended, but it’s a much smaller number than it was. More of those could be lost after year-end; we are watching that. We have seen a real improvement. As for unemployment, it’s hard to predict precisely. Half the jobs lost have come back, and progress is slowing. We saw much better improvement in the first quarter than we had expected and that is slowing. It’s continuing to improve but at a slower rate. The hardest prediction right now is the effect of the election and what that does to things, which is why we are a little more cautious for the second half of the year.

We are not pegging our forecast to a specific unemployment number, such as 7% or 5%, for Q4. The business is more complex than simply what’s happening with worksite employees or checks per client. We expect improvement and unemployment numbers have been better than we anticipated when we put our plan together. The forecast is based on a range of factors beyond unemployment, including what’s happening in the rest of the base, which is more than 50% of our revenue.

Completely understood and appreciate the color. A quick follow-up: you had concentration in PEO in certain states like Florida, Texas, California. What are you seeing on the ground there relative to how you think about the national footprint? Any particular areas of strength or migration trends that matter?

If you look at worksite employees in those states, we have seen a pretty sharp recovery in many of them. California is more volatile among the larger PEO states as it battled flare-ups of COVID. We have seen a significant rebound in a lot of those states—not necessarily back to pre-COVID levels, but starting to get toward those levels. PEO itself, both from a revenue standpoint and the amount of worksite employees, and on the sales side, we are seeing good results on both ends, which suggests environment normalization.

Florida has been the strongest on our small business index and the South has been strong. Construction, both residential and commercial, has been strong. Where we had more concentration, those states have been stronger and insurance rates have been relatively low increases. This should bode well for retention as we go through open enrollment for insurance plans.

Great. Thanks for taking my questions.

Our next question comes from the line of Bryan Keane of Deutsche Bank.

Hi, guys. Good morning. Wanted to ask about the change to virtual and e-commerce. How does it change revenue per client? Secondly, how does it change the margin structure— is there a higher margin inherent in that?

It’s a function of client size: smaller clients tend to use e-commerce and generate lower revenue per client. On the other hand, margin can be better because there is lower cost to serve, so there’s a bit of a wash. You have to overcome the revenue impact, but longer term, it’s a positive development. Margins can be as good or sometimes even better with digital channels.

That’s helpful. Marty, you talked about record unit sales—highest in 5 years. I was trying to get a sense of where that was versus the trough. How much was client growth down in the trough and how much is it growing now year-over-year?

Just to clarify, when Marty said unit growth was the highest it’s been in five years, he was comparing year-over-year against the same fiscal quarter last year. He was not comparing it to the trough quarter-to-quarter. So the strong unit growth is versus the prior-year period.

Yes, when I say top of the trough, I mean we are comparing year-over-year. Our unit growth in the first quarter was the best we have seen in probably five years. So that’s vs. the same quarter last year, not versus the trough in Q4. We have seen a real pickup in demand from new outsourcers and startups, and we’ve taken some share, and client retention being strong overall has helped.

Our digital marketing efforts over the last couple of years have really picked up and have been terrific, fueling a lot of these results.

Going forward, do you think that changes the client growth rate? Is the 1% to 3% client growth still a reasonable expectation or does the model change with more new business starts and e-commerce?

It’s still early. There is an element here that favors digital solutions and that demand will persist. We need a couple more quarters to see if this changes the longer-term client growth rate but we are cautious about extrapolating too early.

Great. Thanks for taking the questions.

Okay, Bryan. Thanks.

Our next question comes from the line of Andrew Nicholas of William Blair.

Hi, good morning. Just hoping you could speak to trends on the workers' comp side. Have you seen any stabilization in rates there or will that continue to be a headwind for the rest of the year?

I think it will be a headwind from a revenue standpoint, but rates seem to be stabilizing and in some cases ticking up slightly. We may be getting towards the bottom of the trough, which has impacts on PEO and our insurance broker workers’ comp sales.

Got it. And then a follow-up on M&A: are you still open to doing deals, and where are you looking? Any commentary on pricing right now would be helpful.

Yes, we are still very open. We continue to stay in contact with opportunities and bankers. We are particularly interested in businesses in our current lines—PEO businesses, payroll and others. It’s opening up a bit. Valuations are still relatively high; I wouldn’t say there is widespread discounting because of COVID. Due diligence is a bit more difficult given limited travel and access, but we could work through that if we found the right business. We are liquid and ready to execute if we find a good acquisition.

Great, thank you.

Our next question comes from the line of Bryan Bergin of Cowen.

Hi, good morning. I wanted to ask on Management Solutions: I want to understand the mix of your better-than-expected performance here in 1Q related to changes in check volume contribution versus new addition momentum versus increased retirement and other services. Can you help us understand the mix of factors that contributed in 1Q?

I would say the largest change was really a function of where we started and where we ended up in terms of average client base processing in the quarter. In an established business like ours you have many factors: retention, sales, and the number of employees clients have. Retention was higher than we anticipated, which was positive. Sales revenue was better than planned but not back to pre-COVID levels. The bigger drivers were the number of clients in the base who were processing. Clients who had suspended service earlier in the pandemic started processing again. We put plans together in May and June with the expectation that states like California and New York would be more shut down; those factors moderated more than we expected. Overall, the impact of COVID, which was severe in April, was less bad than we anticipated by the first quarter and recovery has been gradual.

Okay, that's helpful. On the sales force: can you give a sense of the mix of sales activity that has returned to in-person meetings versus remote or virtual selling? And how should we think about this mix longer term as things normalize?

We have increased virtual selling. Of the total, maybe 25% to 30% is virtual today, and that will continue to grow. Many prospects are comfortable doing demos and closing over Zoom or Webex. We are opening up travel and in-person meetings based on local conditions and safety, but virtual is more productive and efficient when possible. Additionally, we have self-service e-commerce for smaller clients that allows them to buy without ever talking to a rep, which reduces our dependency on field sales capacity. For more complex sales, in-person or assisted demos will remain important.

To reiterate, sales is only one factor. If you have end-to-end e-commerce and the ability to sell without salespeople, you’re not constrained by field headcount and we have seen the benefit of that this quarter.

What’s the top end of employer size that can use the e-commerce model by themselves?

It depends on complexity more than size. If it’s straightforward it could be up into the 20-employee range, but typically it’s under 10 employees.

Thanks, guys.

Our next question comes from the line of Kartik Mehta of Northcoast Research.

Hey, good morning, Marty and Efrain. Efrain, I wanted to ask about guidance: have you factored in any price increases into it? I know last fiscal year you decided against it because of the situation. What do you anticipate for fiscal ’21?

Yes. The short answer is yes, there are selective price increases we are implementing. We feel comfortable doing that in part because of customer feedback and because our operations team did a stellar job—our NPS scores are at record highs through the pandemic. We delayed increases earlier because we thought it was inappropriate during the initial shock. Many clients have stabilized and provided positive feedback, so we think modest, selective price increases are appropriate and many clients will accept them. We will do that as we go through the year.

And a second question on health insurance premiums: what are your expectations going into next year and how might that impact the PEO business?

I think health insurance increases will be generally favorable; we expect high single-digit changes in certain cases, depending on the client. Our risk and underwriting teams have done well and I think we'll benefit from better rate changes. This should be favorable for insurance sales for both PEO and our agency.

Thanks very much. Appreciate it.

Our next question comes from the line of Pete Christiansen of Citi.

Good morning. I had two quick questions. Can you characterize your win rates lately? Are you winning new accounts from self-processors or competitors? Any discernible trends indicating early signs of share shift?

It’s a bit of both. We are seeing wins from clients who were self-processing and found the complexity and changes have prompted them to outsource. The pie has gotten larger and we are getting a good share because of our product features and lead generation. We also saw a net gain from some competitors this quarter. Regional payroll providers in particular are challenged to support complicated programs like PPP loan processing and forgiveness, and that’s moved customers toward providers with stronger tech. Overall, we are seeing a shift toward more outsourcing.

Thanks. One quick follow-up: some enterprise data suggests companies not directly impacted by the pandemic are now shedding jobs. Are you seeing any trends indicating that is creeping into small business?

Small business took the biggest hit in the March–April timeframe. They have been very hurt and could use more stimulus; many have used up the loans. We are not necessarily seeing another wave of layoffs in small business yet. Small businesses were cautious bringing people back and many are still down double digits from pre-COVID employment levels. Overall, we have seen a progressive recovery. Unless there is no further stimulus and many cannot survive, we are seeing a steady come back so far.

That’s helpful. Thank you.

Our next question comes from the line of Lisa Ellis of MoffettNathanson.

Hi. Good morning. First question is related to the PEO: can you elaborate on what you meant about the sharp downturn and then sharp upturn—were you referring to sales, performance of existing business, or both?

Sorry for the confusion. It was both, but primarily a sharp decline and then a sharp recovery in the number of worksite employees. PEO worksite employees declined quickly and then had a sharper upturn as conditions improved and businesses rehired. That dynamic also impacted sales and we observed this particularly in the March–April timeframe.

On the sales side, are you able to sell PEO remotely now? Is demand strong for PEO given the complexity in the environment?

Yes, sales have recovered. Our ASO business has been particularly strong—ASO sales can be quicker since it doesn’t always require underwriting—and reps sell both ASO and PEO. The need for HR solutions has taken off: clients need help with furloughs, layoffs, leaves of absence, and other complex HR issues. We have 600 HR generalists across the country and that has been a big differentiator in selling value. PEO has come back and ASO has been even stronger, but both have meaningful demand.

Okay, and final one, the inevitable election question: which policies or agenda items are you watching most closely?

We’re watching regulation and healthcare-related items, retirement policy impacts, and payroll/HR regulatory changes. If there is more regulation, that generally creates opportunities for us because businesses need help complying. If the administration changes, certain regulation shifts could increase demand for outsourcing. In any scenario, there will be plenty for us to do and opportunities to help clients navigate changes.

Terrific. Thanks, guys.

Our next question comes from the line of Jeff Silber of BMO Capital.

Thanks. One quick one: of the $31 million booked in one-time costs, how is that separated between OpEx and SG&A, and what kind of cost savings should we expect on those line items from these initiatives?

Rather than get into the exact split on the spot, most of it will end up in G&A; we will footnote it in the slide so you can update models. As for the cost savings, I provided some guidance last quarter and I will revisit that to provide a better answer in a future call.

Okay, appreciate it. Thanks so much.

Our next question comes from the line of Samad Samana of Jefferies.

Hi, good morning. Similarly, I will keep it brief. Efrain, did you mention how many customers are still Paychex clients but not actively processing payroll? I think you gave that mix last quarter. An update quarter-over-quarter would be helpful.

Go ahead, Efrain.

We didn’t give an absolute number this quarter, but the count of non-processing clients is down about three quarters from the peak. That peak number was large, but the number is now much smaller. We are watching those clients; some may be hanging on for year-end or another stimulus, but very few of the suspended clients went lost—definitely less than 10% went lost. Most are back processing, though often with fewer employees. This is not a number that’s materially impacting us at this point and we expect the number of suspended clients to decline further.

Great. I appreciate the clarity and hope you and your families are doing well. Thanks again.

Thank you, Samad. You too.

Our next question comes from the line of Tien-tsin Huang of JPMorgan.

Thank you. Encouraging results. On winning startups: how much of your success there do you think is organic versus driven by digital marketing and internet lead generation? Is there a different muscle you are using to generate that?

It’s clearly helped by the investments in digital marketing and self-service. We invested in making SurePayroll and Flex easy to search, demo, and buy online. This worked particularly well in the remote environment where prospects are comfortable buying without talking to anyone. The combination of lead generation and the self-setup experience has helped convert those leads to customers. It’s the right product at the right time and the digital execution has been a big factor.

Thanks, Marty. Quick follow-up: can you remind us roughly what percent of the SMB market outsources payroll versus does it in-house today?

Historically, roughly 30% to 35% of small businesses outsource and 65% to 70% do it themselves. That had been consistent for years; I believe that has shifted with the pandemic and more businesses are moving toward outsourcing.

Makes sense. Thanks for your time.

Our next question comes from the line of Mark Marcon of Baird.

Hey, good morning, Marty and Efrain. Regarding in-house clients that you are picking up, what are they typically using—Intuit/QuickBooks, Excel spreadsheets? What’s the level of sophistication of the average client switching over?

Anecdotally, it’s a mix. Many are doing it manually in spreadsheets rather than sophisticated payroll software. Intuit can be part of the mix—maybe 25% to 30%—but many haven’t used anything formal. The need for payroll plus HR has pushed them to outsource: complexity such as multi-state rules, leave of absence handling, and employee expectations around mobile access and on-demand pay have driven the shift.

Since you mentioned pay-on-demand, what percentage of clients are using that now?

It's still small but growing. Clients see it as low risk given how it’s offered and employees are asking for it, especially with shift and part-time work. We are getting more interest and it’s starting to catch on, though it’s still a small percentage of clients today.

Of the new clients coming in via self-service, what percentage were self-service versus from competitors versus regionals?

I don’t have that split right in front of me. We can look into it, but I don’t have that detail available on the call.

Part of the reason we don’t provide an immediate split is that we are in an unusual environment with increased new business formation, which benefits all channels. We will consider updating the level of detail we provide in future communications.

Are new units up and by how much during the last quarter?

New units were up by more than low single-digits versus the prior year in the quarter. We are not giving an exact percentage on this call, but it was materially higher than low single-digits.

Yes. And remember we are benefiting from increased new business formation and greater demand for digital solutions—early indications are positive but we’ll need a few more quarters to determine the sustainable trend.

Okay. And on the larger question of stimulus: you said you don’t expect additional stimulus in your base case, but many clients used their PPP funds. How crucial do you think additional stimulus is for these clients overall, and how should we think about downside risk if it doesn’t happen?

I want to clarify that our comments are positive relative to our previous expectations. We are navigating effectively through the environment, but we understand the challenges. We didn’t paint a rosy macro picture. We are saying results are better than we planned.

Yes. About 80% of small businesses that took PPP said they have used up those funds, and 40% to 45% say they need additional stimulus. We think additional stimulus would help, but we did not build it into our guidance. If it does occur, it would provide additional tailwind. We believe much of the worst impact already happened in early quarters, and the recovery has been better than expected, but the back half remains uncertain without further policy action.

I appreciate that. Great job on controllables.

Okay, thank you.

Thanks Mark. Appreciate it.

Our next question comes from the line of Kevin McVeigh of Credit Suisse.

Thanks. Just a follow-up: on the record sales, can you frame what the average client size is or how much of those sales are DIY versus traditional channels? Did the mix help contribute to the margin boost in guidance, or was that primarily better expense management?

Because of the channels through which these sales came in, they tended to be smaller rather than larger clients. That didn’t drive the change in margin profile by itself. The margin improvement in guidance was more the result of expense management and the benefits of our cost-control measures and selective savings initiatives. If we continue to see sustained digital performance, that is positive for the business longer term.

Awesome. Thanks.

Our next question comes from the line of Matthew O'Neill of Goldman Sachs.

Hi, gentlemen. Thanks for taking my question. Going back to PPP, are there any quantifiable dynamics you’ve studied with respect to the percentage of the current base that received PPP? And among those clients that are struggling now, any metrics around how many of them received PPP?

I don’t have precise percentages on the call. We worked with several fintech partners to help clients get loans. Based on what we know publicly and through our efforts, the loans we helped process amount to about $28 billion outstanding across clients we served in this effort. That gives an indication of scale, though it isn’t a precise percentage of our entire client base. It was a meaningful program and we helped many clients, but I don’t have the exact share of clients that received PPP on the call.

Okay, thanks very much. I’ll leave it there.

Okay, Matt. Thank you.

We do have a final question from the line of David Grossman of Stifel.

Thanks. I just want a clarification on the back half guidance. Can you share what you said three months ago for the back half so we can compare?

Three months ago I said we expected the back half to be flat to very low single-digits. Today I am saying the same guidance but with a bit more conviction based on first-quarter performance and visibility into the near term.

Alright, fair enough. Thanks again.

Okay, at this point we will close the call. If you are interested in replaying the webcast of this conference call, it will be archived for approximately 30 days. Thank you for taking the time to participate in our first quarter earnings conference call and for your interest in Paychex. Hope everyone stays safe and thank you for calling in.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.