Earnings Call Transcript
PAYCHEX INC (PAYX)
Earnings Call Transcript - PAYX Q3 2022
Operator, Operator
Good day, everyone, and welcome to today's Paychex Third Quarter Fiscal 2022 earnings. At this time, all participants are in a listen-only mode. Later, you’ll have an opportunity to ask questions during the question-answer session. Please note, this call may be recorded. It is now my pleasure to turn the conference over to Mr. Martin Mucci, Chairman and Chief Executive Officer of Paychex.
Martin Mucci, CEO
Thank you, Katie, and thank you for joining us for our discussion of the Paychex third quarter fiscal year 2022 earnings release. Joining me today, of course, is Efrain Rivera, our Chief Financial Officer. This morning, before the market opens, we released financial results for the third quarter ended February 28, 2022. You can access our earnings release on our Investor Relations website. 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 about 90 days. I will start today's call with an update on our business highlights for the third quarter, and Efrain will review our financial results for the quarter and provide an update on fiscal 2022. Strong results for the first half of the year continued in the third quarter as both management solutions and PEO and Insurance Solutions revenues increased by double-digit percentages year-over-year and adjusted diluted earnings per share increased 20%. We continue to see positive trends in our key indicators and strong momentum across all our lines of business, driven by a combination of solid internal execution and a market-leading suite of innovative solutions uniquely designed to address today's HR challenges. This momentum carried through calendar year-end and selling season, resulting in record sales performance and near-record level retention. Our value proposition continues to resonate in the market, particularly in this challenging environment, and our sales results were broad-based with double-digit growth in new annualized revenue across all lines of business: HR outsourcing, retirement, payroll, and insurance. We continue to improve our traction in the mid-market space, which has benefited from the investments we've made in our technology and product suite. Our client retention continues to surpass our expectations and remains near our record levels of the prior year, well ahead of the pre-pandemic levels. Our revenue retention remains at record levels for the year as we continue to bring in even more focus on our higher-value clients. Demand for our comprehensive set of solutions, including our integrated Paychex Flex human capital management technology and our comprehensive ASO and PEO HR offerings, remains high. Businesses of all sizes are facing continued pressure from supply chain and labor shortages, the rising cost of doing business, and ongoing challenges with COVID-19. As staffing challenges persist, businesses are looking for integrated technology to deliver increased productivity, operating efficiencies, and access to experienced HR professionals to help them navigate a complex regulatory environment and complicated distributed workforce dynamics. We continue to invest in our product set to differentiate us in the market and deliver solutions designed to meet the growing challenges of running a business. Our most recent product launch introduced a series of enhancements designed to support both an on-site and distributed workforce, including an enhanced iris scanning time clock, which delivers a hands-free punch experience with industry-best security, including both iris and facial scanning. A new secure document management solution allows clients to safely and confidentially store documents like employee vaccination status within the Flex platform, and a compensation summary provides employees a full view of their compensation to promote retention, as well as enhancements to our financial wellness offering to help client employees more effectively budget, manage debt, and save for retirement. Each of these enhancements builds on our award-winning Paychex Flex technology. Several industry awards provide the latest validation of the benefits of our innovative technology. We were recently recognized with two awards for our Paychex Pre-Check solution: the 2022 BIG Innovation Award presented by the Business Intelligence Group and a 2022 Stevie Award for innovation in customer service. Paychex Pre-Check combines payroll, HR, time and attendance, and employee self-service into a complete system of checks and balances, ensuring that work hours are never missed, pay rates are properly applied, paid time off is not overlooked, and pay is always calculated correctly. We have seen a strong response in terms of both client adoption and client results with Paychex Pre-Check. Our focus on helping clients maximize available government stimulus was recognized by Accounting Today as we were awarded a top new product award for our employee retention tax credit service. We recently surpassed $7 billion in total credits processed for our clients. I'm very proud of the agility demonstrated by our IT and service teams to proactively assist our clients with these government subsidies to help them sustain and enhance our clients' financial position. Our mobile and self-service technology solutions deliver efficiency for our clients and their employees, and we have seen significant increases in Flex sessions both through desktop and mobile devices, with an increasingly rising proportion of the sessions done by the mobile app. Contributing to this growth is the traction we are gaining with wearable devices. The use of the Apple Watch has increased mobile usage for our time and attendance solution. This provides another safer method for employees to punch in and out and avoid exposure to COVID and other illnesses. I am particularly proud of two awards that Paychex has recently been honored with for our commitment to business integrity through our best-in-class ethics, compliance, and government practices. For the 14th time, Ethisphere named us one of the world's most ethical companies. We are also on Fortune's list of the world's most admired companies. These awards acknowledge our ethical business practices, values-based culture, innovation, social responsibility, and leadership. We believe doing business the right way leads to greater success. Ethisphere agrees, noting that their 2022 Ethics Index, a collection of publicly traded companies recognized as recipients of this year's world's most ethical companies designation, outperformed the comparable index of large-cap companies by almost 25% over the past five years. I credit the innovation, integrity, and hard work of our employees who live our Paychex values each and every day. In summary, we are very proud of our performance during the third quarter and year-to-date, and I thank our employees for their tireless dedication during our busiest time of the year. Our set of innovative technology and service solutions provides industry-leading value to our clients and leaves us well positioned for a strong finish for fiscal 2022 and continued growth into fiscal 2023. I'll now turn the call over to Efrain to review our financial results for the third quarter.
Efrain Rivera, CFO
Thanks, Marty. Good morning. Thanks for being on the call. I'd like to remind everyone that today's conference call will contain forward-looking statements; please refer to the customary disclosures. Let me start by providing some of the key points for the quarter. I'll finish with a review of fiscal '22 outlook and some very preliminary thoughts on fiscal 2023. Our third quarter results reflect strong internal execution, as Marty mentioned, and continued improvement in key indicators. Service revenue and total revenue increased 15% to $1.3 billion. Within service revenue, Management Solutions revenue increased 13% to $960 million, driven by higher client bases across our HCM suite, check volumes, revenue per check, payroll funding, and outsourced service for temporary staffing clients and ancillary HR services resulting from ERTC, which Marty just mentioned. Although the revenue associated with ERTC is substantially nonrecurring, the ERTC has afforded Paychex the opportunity to continue to deepen its relationship with clients, increase revenue with clients, and showcase its industry-leading suite of solutions for small and medium-sized businesses. A significant opportunity remains both inside and outside our base. And one thing I'd like to point out here is that there are a number of HCM platforms in the market, but there are only a select few partners. In order to access the opportunities arising from an HCM suite with bundled ancillary services, you have to be a partner, not simply a platform provider. Our results demonstrate the power of being one; we are one of the leading ones, and our results are not surprising to us. Our clients want to know the difference between a MEP, a SEP, and a PEP. They want to know what the implication of the ERTC is for their business, and they want to know how legislation like the Secure Act will impact their business. We know that; we're experts, and we're the partner that our clients look to for solutions to those issues. Our results demonstrate that this quarter. Now client base growth in the quarter resulted from both strong sales performance and high levels of client retention. In particular, the HR Solutions business continues to benefit from strong demand as businesses seek more HR support. PEO and Insurance Solutions revenue increased 21% to $302 million. Our PEO business benefited from higher average worksite employees, state unemployment insurance revenue, and the health insurance attachment. Interest on funds held for clients decreased 5% for the quarter to $14 million as the impact of lower average interest rates was partially offset by an increase of 13% in average investment balances. Total expenses increased 11% to $713 million. The growth in expenses resulted from higher PEO direct insurance costs, headcount to support our growing client base, and continued investment in our product, technology, sales, and marketing. Operating income increased 20% to $563 million, with an operating margin of 44.1%, an expansion of almost 200 basis points. Our effective income tax rate was 22.3% compared to 24.2% for the same period last year. Both periods reflect net discrete tax benefits related to stock-based compensation payments. In addition, the current quarter includes tax benefits related to prior-year research and development expenses incurred in the production of customer-facing software. Net income and diluted earnings per share both increased 23% for the quarter to $431 million and $1.19 per share, respectively. Adjusted net income and adjusted diluted earnings per share increased 20% for the quarter to $419 million and $1.15 per share, respectively. Our highlights for the nine-month period ending February 28 show that both revenue and earnings have grown by double digits for each of the past three quarters. Total service revenue and total revenue growth of 15% each to $3.4 billion and $3.5 billion, respectively. Expenses, excluding one-time costs incurred during the prior year, increased 7%. Operating income and adjusted operating income were $1.4 billion, increases of 31% and 27%, respectively. Diluted earnings per share increased 31% to $3.02 per share; adjusted diluted earnings per share increased 27% to $2.95 a share. Now I will turn to our guidance for the current fiscal year ending May 31, 2022. The outlook reflects the current macro environment, which saw improvement in the quarter despite some disruption from Omicron. We've tempered our outlook given the changing macroeconomic environment and provided the following updated fiscal 2022 guidance. Management Solutions revenue is now expected to grow in the range of 12% to 13%. PEO and Insurance Solutions is expected to grow in the range of 13% to 14%. Total revenue is expected to grow in the range of 12% to 13%. Adjusted operating income margin is expected to be approximately 40%, up from previous guidance of 39% to 40%. Adjusted EBITDA margin is expected to be in the range of 44% to 45%, up from previous guidance of approximately 44%. Effective income tax rate is expected to be approximately 24%, down from the previous guidance of 24% to 25%. Adjusted diluted earnings per share is expected to grow in the range of 22.5% to 23%. This guidance reflects our intention to continue to invest in our businesses to help drive future growth. In the fourth quarter, we intend to take some additional actions regarding our investment in the business. So that will temper the margin as we head into 2023. Now comments on 2023: we're currently in the process of preparing our annual plan. We'll provide guidance, final guidance for fiscal 2023 during our fiscal 2022 fourth quarter in June. On a preliminary basis, we believe the total revenue growth will be in the upper single digits. I would caution that there is a lot of work to be done to fully digest the Fed's position and how we position the portfolio. The other thing we would say right now – with respect to operating margins, is that we expect an improvement of about 50 basis points. Other expense net is expected to be in the range of $25 million to $30 million next year due to the absence of equity gains. The effective tax rate will be in the range of 24% to 25%. All of this is very preliminary, subject to revision and based on assumptions that could change given the uncertain macro environment. We’ll update you again on the fourth quarter call.
Martin Mucci, CEO
Thank you, Efrain. We'll now open the call to questions. Katie?
Operator, Operator
Thank you. Our first question will come from Bryan Bergin with Cowen.
Bryan Bergin, Analyst
Good morning, guys. I appreciate you giving us an early fiscal 2023 view here. Understanding you've got some outsized double-digit growth comps materializing this year. That's good to hear for next year's number. I guess, more importantly though, a question we're often getting is how to think about a sustainable level of growth in your business – you've had some peers speak to medium-term targets in the model. Anything you could share as a framework for how you're thinking about maybe longer-term growth based on what you're seeing in the market and what you've done here to drive that stronger sales execution.
Efrain Rivera, CFO
Yes. Hey, Bryan, first of all, thanks, really, for the comments. I think that we start with, I guess, two things and then one further building block. With respect to management solutions, many of you heard me say this: we start with the premise that we're going to be at least mid, and we would hope over that time frame to get above mid- to upper single digits in management solutions. When we get to Q4, we'll call that out a little more. And then, on the PEO and insurance side, we expect to be around double digits. So we start with that premise that yields a certain revenue growth that we think is going to be upper single digits. Our expectation is that we will leverage. In typical years, we average at least 50 basis points; some years, we won't do that. Some years, we'll do 200. So a year like this year doesn’t come around that often. So I don’t suspect there will be too many 200 basis point leverage years for us. But we expect to continue to leverage going forward, certainly over the intermediate term. This isn't simply an arithmetic exercise. It's a result of all of the efficiencies we're building in the background. Our significant operating margin improvement commits us to leveraging the business.
Martin Mucci, CEO
To add to that, on the sales execution, we feel very strong this year. We've had great sales execution. Selling season was very strong, and we are really pleased with the marketing and brand work we've done and the product development innovations. This has really hit the marketplace at a time when HR support is crucial for businesses and prospects. As Efrain said, this just doesn’t happen by chance. Our focus on employee retention tax credit has been successful, allowing us to help current clients and prospects obtain substantial government subsidies. Those tax credits, on average, have been about $180,000 per client, which adds significant value and strengthens retention.
Bryan Bergin, Analyst
Okay. Makes sense. And just a follow-up on retention. Can you just share where unit retention landed here in 3Q? It doesn't sound like you have any change in your holding at higher post-pandemic levels, but correct me if I’m wrong there. And just one thing, are you seeing any change in the gap between unit and revenue retention, as your mid-market and larger client push materializes?
Efrain Rivera, CFO
It's a good question. I think revenue retention is a little higher. We are seeing a gap there, as you'd expect just based on the size of the clients and that we're gaining more mid-market success in both sales and retention. The overall retention number is better than pre-pandemic, but not quite at the record levels. Given that many clients held on through the pandemic and are now figuring things out, we’re cautiously optimistic. We’re still under pressure from supply chain and inflation, but we don’t see that impacting retention much at this time.
Bryan Bergin, Analyst
Okay. Thank you.
Efrain Rivera, CFO
All right, Bryan. Thanks.
Operator, Operator
Thank you. Our next question comes from Andrew Nicholas with William Blair.
Andrew Nicholas, Analyst
Hi, good morning. Thank you for taking my questions. First one I had was just on the pricing environment in the PEO business, specifically. Are you seeing any noticeable change in the aggressiveness of your competitors when it comes to price? If so, is that something that's had any impact on new business generation or competitive win rates to this point?
Martin Mucci, CEO
No, we have not seen any real changes in the pricing environment. We've been able to maintain good pricing on our sales and have not needed to discount further, which has been very pleasing.
Efrain Rivera, CFO
Andrew, the other thing I'd add is that if you get aggressive on price in the wrong way in the PEO business, then you encounter significant problems down the road related to health care insurance pricing, and we monitor that closely to mitigate any risks. What we find is that our value proposition in PEO remains compelling and is driving ongoing growth.
Andrew Nicholas, Analyst
No, that's helpful. And part of why I ask is because some of the conversations we've had indicate maybe there are some other players that are being aggressive on that front. So not specific to Paychex. In terms of my follow-up, Efrain, I think you mentioned in your prepared remarks at the end that you intend to take some additional investment actions in the fourth quarter. Could you spend a little bit more time talking about areas of interest there? Just to give us a little bit more insight on what to look out for going forward.
Efrain Rivera, CFO
Yes, Andrew, I can take some of that, too. I would say from an employee retention standpoint, there are actions we want to take in that regard. There's also further marketing investment, as we've seen good response to our SEM and SEO efforts for sales over the last three quarters. Some of our IT investments are being accelerated to roll out products faster. So, it's really across the board. We have been hiring to strengthen service capabilities as we address turnover issues earlier in the year, and we have made progress in that area.
Andrew Nicholas, Analyst
Makes sense. Thank you very much.
Efrain Rivera, CFO
Okay. Thank you.
Operator, Operator
Thank you. Our next question comes from Kevin McVeigh with Credit Suisse.
Kevin McVeigh, Analyst
Thanks so much. Hey Efrain, hey Marty, nice job. Thanks so much for the preliminary results in terms of outlook for '23. Is there any way to frame what type of Fed funds is in that 7%? I know it’s fluid, but is there any way to think about just initial thoughts on that?
Efrain Rivera, CFO
We have some preliminary thoughts, Kevin. We want to clarify where the Fed's rate hikes could land. A moderate scenario that's not overly aggressive provides room for growth. Much of the growth is driven by improvements in operating performance, which plays a factor in avoiding recession risk.
Kevin McVeigh, Analyst
That's super helpful. And then my other question is more longer-term or whether it's for you or Marty. Can you help us understand the addressable market of Paychex today versus last cycle? Because obviously, you've done a ton of investment it seems like what you're able to offer your clients is much more robust today. Is there any way to think about kind of whether it's a dollar amount or just how you're thinking about the addressable market today versus maybe what it was coming out of the last cycle?
Martin Mucci, CEO
Yes. I think definitely from the product set that we offer and the integration with Flex in the digital approach, we have a much larger addressable market now. Our success in mid-market sales and retention over the last three quarters indicates that we're hitting the mark. We've positioned our solutions to specifically address the challenges of recovery from COVID, including distributed workforces. This changed landscape has opened up a wider array of service opportunities.
Efrain Rivera, CFO
What we’ve seen in this quarter is that our services expand around the HCM suite, illustrating the opportunity we have going forward. The revenue streams that were previously not monetized are becoming increasingly relevant, and the breadth of our product suite allows us to respond effectively to evolving client needs.
Martin Mucci, CEO
Excitement about the use of data has been significant. Past initiatives, like the Paycheck Protection loan, are examples. Our IT teams devised ways to utilize data to inform clients about government loan opportunities, leading to nearly 95% approvals. Initiatives like the employee retention tax credit have highlighted our capability to capitalize on data to inform and guide clients effectively.
Kevin McVeigh, Analyst
Makes a lot of sense. Thank you.
Martin Mucci, CEO
Okay.
Operator, Operator
Thank you. Our next question comes from Jason Kupferberg with Bank of America.
Jason Kupferberg, Analyst
Thanks, guys. Good morning. Efrain, I just wanted to start by probing some of your comments in the prepared remarks around macro. I think you said something to the effect of tempering your outlook. But obviously, you raised the outlook, at least for revenue for the year by more than what you just beat the quarter by. So I just wanted to try and reconcile that. Is that really reflected in the initial outlook for 2023?
Efrain Rivera, CFO
Yeah, most of that caution comes from Q4. We're feeling good about business and cash flow but the macro landscape overall remains uncertain. This wasn’t a sudden shift; it’s just a recognition that we want to be cautious amidst volatility.
Jason Kupferberg, Analyst
Yeah. It was. Okay. Totally understand. I know I think the past couple of quarters, you've been calling out some tailwinds from temp staffing clients, and I was just curious if you can quantify maybe how much of a lift that is provided to management solutions and your thoughts on sustainability of the tailwind?
Efrain Rivera, CFO
It's modest, Jason. Just to clarify, we provide funding for staffing companies but not necessarily staff them ourselves. The staffing business has been robust over the last six months, benefiting our funding services, though overall it remains modest. While profitable, it is part of a broader success that we've seen this year.
Jason Kupferberg, Analyst
Okay. Yeah. Appreciate the color. Thank you.
Efrain Rivera, CFO
Yep. Okay.
Operator, Operator
Thank you. Our next question comes from Kartik Mehta with Northcoast Research.
Kartik Mehta, Analyst
Hey, good morning, Marty and Efrain. Efrain, I know one of the areas we always talk about is pays per control, and you've talked about how in this environment that's been difficult. I'm wondering what the trend's been? And what you expect it to be over the next six months or so?
Efrain Rivera, CFO
Yes, Kartik. As a context, unemployment is at 3.8%. This is a better trend than expected; however, sustaining rapid growth becomes more challenging over time. We're experiencing positive trends, yet the capacity to sustain those at this level will become more complex as the labor market stabilizes.
Martin Mucci, CEO
We’re witnessing strong growth in the index for clients with fewer than 50 employees. There has been some moderation in job growth over the past two months, but it is still positive year-over-year. We're seeing potentially stronger growth among mid-market clients due to larger client sizes, but there remains uncertainty given inflation and the supply chain challenges impacting small clients. Yet, sectors like leisure and hospitality continue to experience significant growth.
Kartik Mehta, Analyst
And then, Marty, just on pricing. Every business has taken the opportunity to raise prices because of the inflationary pressures that everybody is face. Now, I'm wondering, what the strategy is for Paychex from a price standpoint as we move forward or at least for this year.
Martin Mucci, CEO
I think we’re seeing the opportunity to be at the high end of our pricing range. While some costs are up, the value we provide to clients has increased significantly, leading us to believe they will accept our higher pricing.
Kartik Mehta, Analyst
All right. Thank you, both, very much. Appreciate it.
Operator, Operator
Thank you. Our next question will come from Eugene Simuni with MoffettNathanson.
Eugene Simuni, Analyst
Thank you. Good morning, Marty and Efrain. Two quick follow-ups. One, just on retention. I wanted to clarify separating between out-of-business churn and competitive losses. Can you elaborate a little bit on how those two things are trending in relation to the still near-record high retention levels overall? Is it across both of those metrics, or is it one of them now picking up in terms of churn versus the other.
Martin Mucci, CEO
Yes. Out-of-business churn remains quite solid, and competitive losses have not changed significantly. In fact, by analyzing our figures against our largest competitor, you can note that we are net gainers; we are not losing more clients to competitors, and our retention remains strong.
Eugene Simuni, Analyst
Great, and just to wrap it up, so out-of-business in terms of bankruptcies as we move away from government stimulus, you're not seeing that pressure yet in your business?
Martin Mucci, CEO
No, not yet.
Eugene Simuni, Analyst
Great. And then another quick one on the PEO. Just wanted to see if you can provide some color on what drove the 21% growth in revenue across the major drivers that you call out?
Martin Mucci, CEO
Yes. I’ll start. We've had very solid sales results, and with those sales results, we’ve seen high insurance attachment. Overall, we’re experiencing growth in worksite employees from existing clients, contributing to that 21% growth in revenue.
Efrain Rivera, CFO
In addition to the points Marty made, increasing wages and employee counts also contributed significantly to this growth.
Eugene Simuni, Analyst
Got it. Thank you.
Operator, Operator
Thank you. Our next question comes from James Faucette with Morgan Stanley.
James Faucette, Analyst
Hey, good morning, everybody, and thanks for all the color. I wanted to follow up on previous questions and some of your commentary. First, on your customer retention, obviously great work there. You continue to operate at record levels, and I'm wondering how you’re adjusting long-term planning for that retention level. What should we consider as a baseline going forward?
Efrain Rivera, CFO
Right now, we anticipate sustaining strong retention. It’s difficult given the uncertainties of government subsidies ending, inflation pressures, and potential bankruptcies. However, we believe we can stay above pre-pandemic levels based on value addition to clients.
James Faucette, Analyst
Got it. No, that's really helpful context. And then as far as your investments, you’ve called out multiple times here what you're doing. Can you talk about where you see organic investment opportunities? What should we be looking for from a product or service perspective as you continue to invest there?
Martin Mucci, CEO
Yes. We’re focused on three primary areas: sales, upscaling our teams; marketing, which is generating significant leads; and product development, which is ongoing and enhancing our offerings. Digital improvements and leveraging data will provide clients with valuable, seamless experiences, driving retention and recovery improvements for them.
James Faucette, Analyst
Hey, Marty, Efrain, thank you so much for your time.
Martin Mucci, CEO
Great. Thank you.
Operator, Operator
Thank you. Our next question comes from Mark Marcon with Baird.
Mark Marcon, Analyst
Hey good morning and congratulations on the strong quarter.
Martin Mucci, CEO
Thanks Mark.
Mark Marcon, Analyst
I'm wondering a little bit on the new sales. It sounds like things are going really well there. If you can comment on the change in the source of new sales, are you seeing an increase from your largest competitor?
Martin Mucci, CEO
The small business market remains robust, with strong sales online, CPA referrals, and existing client referrals. We're also seeing an increase in self-service onboarding among clients, which is significant for our lower-end services in the small business segment. For the mid-market, yes, we have gained ground against competitors and have regained some clients, demonstrating our advantage in offering a comprehensive suite of services.
Mark Marcon, Analyst
Great. And can you talk a little about the PEO side in terms of upsells versus new logos?
Martin Mucci, CEO
I’d say a slight majority of our growth is from upsells but we’re also securing new logos, particularly in states where we have a strong presence. Overall, our growth stems from both opportunities.
Mark Marcon, Analyst
Great. And then two sort of related macro questions. One, just in terms of the preliminary thoughts with regards to 2023, how are you thinking about float balance growth?
Efrain Rivera, CFO
I would say it's probably going to be low single digits to mid-single digits at this point in the current economy condition.
Mark Marcon, Analyst
Great. Thank you.
Efrain Rivera, CFO
Okay. Thanks, Mark.
Operator, Operator
Thank you. Our next question comes from Tien-Tsin Huang with JPMorgan.
Tien-Tsin Huang, Analyst
Hey, good morning, great results and profitability.
Efrain Rivera, CFO
Thanks.
Tien-Tsin Huang, Analyst
I wanted to quickly ask about existing versus new client revenue growth. I'm trying to understand the double-digit annualized contract value growth broadly.
Efrain Rivera, CFO
Overall, we've seen consistent revenue growth from both new and existing clients. The expectation is that approximately half of our new sales will come from newly formed businesses alongside our traditional growth from upsells and recurring revenue.
Tien-Tsin Huang, Analyst
Perfect. That's what I needed. Thank you.
Efrain Rivera, CFO
Thanks, Tien-Tsin.
Operator, Operator
Thank you. Our final question is from Peter Christiansen with Citi.
Peter Christiansen, Analyst
Good morning. Thanks for the question. Great job, guys. To the degree that you can tell, are you winning new business from previous self-filers still? Is that still a reasonable pool to draw from on the new sales front?
Martin Mucci, CEO
Yes, definitely. Many small businesses try to handle payroll themselves, and as things have become more complex, there's a considerable opportunity to convert them to our solutions. It remains a viable segment for us as we facilitate a smoother onboarding experience.
Peter Christiansen, Analyst
That's interesting. Any thoughts on industry consolidation at this point, particularly from the more private regional players? Do you see any trends evolving there? And then, maybe juxtapose that with your M&A landscape.
Martin Mucci, CEO
We've noticed some consolidation among the smaller firms as they struggle with the pace of necessary investments. It's a challenge for them to keep up with technology advancements and compliance, so some may have to consolidate. As for our M&A landscape, we’re remaining cautious but are exploring opportunities in payroll and the PEO space, while being careful about valuations.
Peter Christiansen, Analyst
Great. Thanks for the color. Really great work.
Martin Mucci, CEO
Thank you.
Efrain Rivera, CFO
Okay. All right.
Operator, Operator
There are no further questions at this time. I'll now turn it back to our presenters for any additional and closing remarks.
Martin Mucci, CEO
Thank you. At this point, we'll close the call. If you're interested in replaying the webcast, it will be archived for approximately 90 days. Thank you for taking the time to participate in our third quarter earnings release conference call and for your interest in Paychex. I hope you all continue to remain safe and healthy. Thank you.
Operator, Operator
Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.