沛齊 (PAYX) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Paychex First Quarter Fiscal Year 2021 Earnings Conference Call.

(Operator Instructions)

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's First Quarter Fiscal 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, and you can access the earnings release on our Investor Relations web page, 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'll 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 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 begin 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 refers to market with a PPP loan forgiveness estimator, which now produces a signature-ready application.

Recently, Wolters Kluwer, a leading national provider of Tax & 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 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've 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 increased 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's learning enrollments are up 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 Time Clocks, Pay-on-Demand capabilities and other product functionality will continue to provide -- prove invaluable to our clients whether their employees continue to work remotely or as they prepared 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 onetime 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'm also very proud to note that for the 10th straight year, we have been recognized as the largest provider of 401(k) record-keeping services by the number of plans by plan sponsor magazine.

We have a long-standing 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 safe 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 have been impacted by the pandemic.

Let me remind everyone that today's conference call will contain forward-looking statements.

You know all that stuff, refer to future events et cetera, look at the customary disclosures.

And then I'm going to refer to non-GAAP measures, such as adjusted EBITDA, same things.

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, 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 sent -- 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 that 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 moderating, I mean decline.

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 onetime cost of $31 million that Marty mentioned, we were actually down 4%, driven by lower discretionary spending and cost control measures implemented in Q4.

We're very proud of how we managed expenses through this entire period.

Operating income increased 19% -- decreased, I'm sorry, 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 onetime costs decreased 10% to $315 million, reflected in adjusted operating margin of 33.8%.

Other expense net for the first quarter, that 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 comp payments that occur with divesting 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 includes onetime costs and the tax benefit from stock comp payments.

We pulled it out.

We discussed this all the time.

There's just no way to know in a given quarter whether people are going to exercise or not.

We can give you a guesstimate, but 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, reasons I cited above.

Investments in income.

As you know, our primary goal is to protect principal and optimize liquidity.

We continue to invest in high credit quality securities.

Long-term portfolio currently has an average yield of about 2%, average duration of 3.3% -- or 3.3 years.

Combined portfolios have earned an average rate of return of 1.3% for the quarter, down from 2% last year.

I'll 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 dividend 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 -- or fiscal 2021 guidance for the current year, which ends, as you know, 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 previously guided to a decline in the range of 1% to 4%, and we'll continue to update as each quarter passes.

PEO and Insurance Services 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 of 2% to 4%.

We 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 is expected to be approximately 40%, up from 39% to 40%.

Other expense, net 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 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 onetime costs, are anticipated to be in the range of 34% to 35%.

An early view of the second half of the year.

And I just want to mention something.

When all of this started, many people withdrew guidance.

And we walked in and we told you what we thought.

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.

So we will continue -- we're committed to full transparency and we are committed to updating you on a regular basis.

So investors know exactly what we're thinking when we think it.

This is what we're thinking right now.

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, 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, as I said, all of this is subject to current assumptions, which are subject to change.

We'll 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're dealing with.

I'd say just a couple more things to conclude my comments.

Number one is, I think what you saw in first quarter, and Marty alluded to it is the strength of Digital Solutions, digital and virtual sales were up very, very strong in the quarter.

And when I say very strong, I don't mean 10, and I don't mean 20.

I mean it was very strong.

Obviously, any sale that depended on face-to-face meetings was more challenging, but we've 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-based 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 driving or being incrementally positive as we go through the year.

On 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've seen a sharp recovery also.

And so we're incrementally, again, more positive on PEO.

That solution is important in the market, and we think there will be -- continue to be a good demand.

Now obviously, there's 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 we took a lot of the right steps in 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'll turn it back to Marty.

Okay.

Thank you, Efrain.

And we'll now -- operator, we'll open it up for your questions.

(Operator Instructions)

Our first question comes from the line of Ramsey El-Assal of Barclays.

I wanted to ask, Efrain, about your -- or Marty's well the last comments you had on digital and just get your view in terms of -- 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 that you think will kind of fundamentally change the fabric as we go forward?

Yes.

I'll start, and then I'll let Efrain jump in on anything that I missed or comments 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 environment of work-from-home employees.

And so a lot of things are -- the mobile adoption, the use -- the look for paperless, everything being paperless from recruiting to onboarding, to training, to any change that employee makes is all -- we could see all that coming and had invested in it.

As many had, 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 the office or a similar environment.

And I think that's never going to change.

I think people are just used to it.

The -- also the way they're buying, which is much more virtual, as Efrain commented, the results have been very strong from a, we're a self-service basically where they're going online and doing the search for us, which we've invested in; looking at demos, which we've invested in and then buying themselves online through SurePayroll or Flex have both been very strong, as Efrain mentioned.

And I do think it's because we've invested well in a product that is simple to use 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'd add is it's one thing to say, "Hey, we had great, great digital sales progress in the quarter." And by that, I mean not only SurePayroll where we can, as Marty mentioned, you can search and onboard yourself in payroll without having anyone involved in the process.

That was 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've made a lot of investments on that side.

You heard his comments about the number of employees who are actually utilizing our platform to do -- to connect and update their information.

And so sometimes, we hear this narrative like somehow the only people in the market that can do that are certain competitors.

And it's just -- it's just interesting, let me put it that way.

It isn't truth, but it's interesting.

And we've been making quietly many of the same changes, and you can't compete now in the market.

10 years ago, if you weren't SaaS, you weren't, we're going to be left behind.

And now if you're not pivoting to digital, you're going to be left behind, too.

I think you understand that.

I'm sorry, but 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, 50% of the questions are now being answered by the chatbot, and it's -- the use of that is just incredible.

And it has saved us a lot from a service perspective, from a people perspective, and what they can focus on.

So our team is always available, as I said, only when it's available, 7/24/365 from a personal surface if you need it.

And now those people are freed up more than ever for the more value-added questions.

So we feel like the investments we made there 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 sort of evolving in the context of the pandemic.

Can you speak to kind of the relative importance of cross-selling to existing customers versus signing up new ones in terms of your kind of your growth algorithm now?

Is the model more reliant today on expanding sort of wallet share at existing clients?

Or is it sort of business as usual?

How would you kind of characterize that balance?

I'd say it's fairly business as usual.

I mean we're selling into the base well.

I think the clients -- the more satisfied the clients are with the existing services they have, obviously, the more open they are to talking to us.

We've expanded our product set quite dramatically.

And we have new technology advancements that are coming out all the time.

We have quite a package of services that will help in the pandemic.

I think one of the things during this pandemic is that COVID Help Center has really driven a lot of clients in to see how valuable.

When clients need you most is when they see the greatest value, and they've really seen great value in what we've offered and what they've been able to access from information.

When you think about the payroll report that we produced, the same-day that it was -- that the loans were available, we were the first to put out the payroll report.

That's been accessed and downloaded over 0.5 million times now.

And now the loan forgiveness estimator, no one has got a better estimator and now Signature Ready application to be able to get your loan forgiven.

Those kind of things have added a lot of value to clients.

And therefore, our client retention has never been stronger.

No one's leaving to go to any competitor that are using those kind of tools because they found them so valuable.

So I think the process of selling additional features are being helped by that.

And I think certain things, we even saw a big drop in the fourth quarter of last year in retirement sales because people weren't focused on retirement, that has come back strong in the first quarter.

So people who were payroll clients or a payroll in HR are now look for retirement and retirement actually increased year-over-year from a sales and revenue perspective.

So I think the ability to sell other services has really improved in -- through the pandemic because of the value we've offered.

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

I appreciate you are giving guidance in environment where many companies are not.

I'm 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 a lot of the metrics that you've called out in terms of record 5-year growth in new payroll sales, double-digit growth in HR sales, highest client retention ever, might actually point to a stronger result for FY '21?

Are there -- are you just uncertain if we get another wave of fiscal stimulus, or maybe a little more detail around how you're thinking about outcomes for FY '21?

And maybe why not a little stronger given all the leading indicators are really off the charts.

Yes.

That's quite off the chart.

That would be good.

But -- yes.

So David, I think just a few things on that.

One is, we feel pretty good that first half is going to be better than what we expected, it was a bit.

So you don't win a game in the first half, but it certainly is good to be up several touchdowns before the half end.

So we think first half is going to be strong.

Having said that, a lot of it depends as you suggest on the back half of the year.

And fourth quarter is going to be very important.

Through Q3, we see results being still muted just because that's a big quarter, and we're comparing against a quarter before all of the pandemic effects occurred.

So there's a note of caution in what we have.

If we could -- if we projected the lines we see now, we'd have different guidance, but we don't do that because it's not an accurate or -- it's not a forecast, we would be very comfortable providing.

But we think a lot of the metrics are pointing in the right direction and certainly from where we were in the June time frame, things look better.

We're not anticipating another stimulus.

If it comes, that would be great.

We think that Marty said in other interviews, we think the stimulus did help.

It provided a cushion for the blow for a lot of small and medium-sized businesses, but we're not assuming that it's better.

And we don't assume that there's going to be a dramatic improvement in unemployment over the next several quarters.

So that dictates some caution in terms of what we provide.

But the environment is better than -- or we started the year better than we anticipated with recovery in a number of areas coming faster than we thought.

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?

I mean what's the time line to implement the strong new book of business?

Well, I think, look, selling season will be -- it's coming up, actually starting in the mid-market this month.

I think probably the only thing that's going to be the most challenging is getting to clients.

Some clients are still delaying decisions, particularly in that mid-market to be a little bit careful.

We're making sales.

We're getting out now to meet with clients that they want to meet.

This has all been done really remotely for the last 2 quarters.

And so to have the sales that we have, even in a remote selling environment has been pretty impressive.

And I think we've honed kind of new skills on being able to do that.

So I think probably the biggest challenge to hitting results would be continuing those results would just be getting access to the client and the client being comfortable to make a decision based on their business and whether they're ready.

But right now, we feel good and in the small business, in particular, in the small business market, I think that's continuing to expand.

So not only do I think we've taken a little share, but we've also seen the pie get larger because more businesses, small businesses, in particular, that have not outsourced before, we're seeing them outsource payroll, for the payroll at least, if not payroll and HR, for the first time.

And so that market, I think, is growing as well, given kind of the complexities of the environment and so forth.

And they're seeing the value of being with a payroll provider, for example, to help them get the loans, to help them get the loans forgiven, to work through all of the complicated regulations that are changing and so forth.

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

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 total revs?

Yes, flat to up very low single digits.

Okay.

Okay.

Now last quarter, were we talking up low single?

I know it's not much of a difference, but I just wanted to see if I have that set nuance right?

And is this just kind of a timing thing where the recovery happened a little sooner.

So the year is a little bit more balanced than you might have thought otherwise?

When you say last quarter, Jason, what are you referring to?

Sequentially for the previous quarter or?

No.

Last quarter when you gave us guidance and you broke down the first half in the second half, I thought at that point in time, the second half was expected to be up low single digits?

No.

I didn't say low single digits for second half.

That wouldn't have been.

So -- I'd have to kind of looked at what I said, but no, no, we said that.

No.

No.

And Jason, just to provide some clarification.

We still expect at this point, third quarter is going to be down versus the prior quarter with growth and then growth -- more significant growth in fourth quarter.

No, I don't think -- we might have said I won't speculate on what we said.

The transcript will say what we said, but if we said something that indicated we were going to be positive in the back half that -- or second half, that wouldn't have been correct.

Okay.

Okay.

Fair enough.

And just a question on the margin front.

How should we think about the long-term implications for your cost structure, real estate, salesforce, customer support, et cetera.

I mean is there any way to quantify that at this point or at some point in the not-too-distant future, perhaps?

Probably in the not-too-distant future, not the second, but I think the question you're asking, if I can ask a question or answer a question you're not asking.

Look, there's a range of initiatives that Marty was mentioning the speed with which we did the footprint rationalization.

It doesn't take too much to -- too many assumptions to think that we can't continue to evolve that model so that you need less space than you currently do.

And address costs in that way.

So we'll look at that.

We're not ready to commit to what that number looks like at this point, but we've had good experience thus far.

And I think the acceleration of our other digital efforts suggests that we can, at least control costs in that area and maybe get more efficient as we go along.

But we'll talk more about that in future calls.

Okay.

And maybe just one last one.

On the back of the strong sales performance you just saw.

Can you just talk about the trends you're seeing in terms of new business creation and your overall win rates?

Yes.

Sure.

I mean we're certainly seeing, as I think, just generally in the economy, new business start-ups are up 20% year-over-year.

It's pretty incredible.

And I think what we're seeing -- what you see, and we see it on new businesses as people are shifting.

So people are getting out of some businesses, shifting to others or evolving their business and others are seeing opportunities in this environment that they didn't see before.

So new business start-ups are really growing, and I think we're getting a good share of those.

Because of the investments we've made, where it's easy to sign up, it's a very full-featured product, whether you go to Sure or whether you need Flex.

And so I think new business start-ups from that is -- are helping.

And then I think existing businesses, as I mentioned, that are now outsourcing that we're doing payroll and HR themselves have found that it's time to outsource to someone like Paychex that can deliver great value to them and really protect them, help protect them in an environment that is changing so rapidly with all of the regulations and the benefits and what employees are looking for from them as well.

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

Thanks for providing all the continuing guidance through all this.

We do appreciate it.

I was hoping to start off just sharpening the pencils on a few items that you guys have been talking around specifically.

I think -- I don't think I missed it, but an actual retention number for the quarter.

I think it stood at 83% last quarter, but it included an adjustment for businesses that were suspended?

And then if you could maybe walk us through how you're thinking about year-end -- fiscal year-end unemployment rate assumptions and business failure rates from here?

Yes.

I would say on the client retention, we really give it once a year, but we're still at the highest levels of retention we had.

So even -- and I would say that of those, Steven, the numbers that we said that were suspended, were probably down 3 quarters of those from the peak.

So we still have some that have suspended their service, but it's getting down to a very low number.

Now may more of those go lost after year-end, we're watching that.

But we've seen really a pretty dramatic decrease from the peak down to probably 1/4 of what we saw.

So yes, it could still impact client retention, but it's a much smaller number than what it was.

And we'll have to see as we get through calendar year-end, whether they're kind of hanging on for either more stimulus or to be able to get through year-end.

But at this point, we've seen a real improvement in that.

And I'm sorry, what was your other question?

The questions on unemployment.

Unemployment, it's hard to say, really, that's just a prediction as to where we are.

We've seen what half the jobs come back that were lost.

We definitely see the progress slowing as you see employees come back and being paid.

So we are seeing -- we saw a much better improvement in the first quarter than we had expected as we've talked about.

And that is slowing, it's still progressing and positive.

But the number, it'd be hard to predict kind of where we think that's going to be.

I think it's going to continue to improve but at a slower rate than we had.

And then I think the hardest prediction is really kind of after the election, what does that do to things?

And I think that's why we're a little more cautious in the second half of the year is just saying, "Hey, we have a pretty good sense of, obviously, of second quarter.

But when you see third and fourth, it's a little bit harder to predict."

Yes.

We're not pegging our forecast to 7% or 6% or 5% or 4.5% unemployment by Q4.

Part of the reason for that is the business is more complex than simply what's happening with worksite employees or with checks per client.

We obviously, as Marty said, expect it to be -- to improve.

And frankly, the unemployment numbers have been better than we were anticipating originally when we put our plan together.

What's it need to be in Q4 to hit the numbers?

I don't think that's really -- we're not pegging our forecast in that way.

So we're looking at a lot of other factors that really have to do with not only what's happening on HCM sales, but what's happening in the rest of the base, which is more than 50% of our revenue.

Yes.

The other thing that's important to note is we're very diversified in our client base.

So even as this happened, we didn't -- even though leisure and hospitality, in particular, took a huge hit as restaurants closed and then reopened partially and so forth.

We certainly have plenty of clients in that leisure and hospitality kind of sector, but we're also very spread around into other sectors.

And construction and everything around construction has continued to perform quite well from a job's perspective, particularly in the south and so forth.

So we're quite spread out.

And so we don't see -- if there's any one industry that's really taking a hit, that doesn't necessarily reflect in our results.

Completely understood, and I appreciate the color on all that.

Maybe just one quick follow-up.

As you were talking about sort of the diversification, I believe, the one area where there was maybe like any concentration among your client base was in the PEO space, where it's more concentrated to, I think, mentioned previously in discussions, Florida, Texas, California.

Just curious what you're seeing on the ground there relative to how you think about the national footprint and whether that sort of just nets out in the wash on the PEO side?

Or if there's any particular areas of strength from, obviously, there are a lot of headlines about migration of investment dollars towards low tax states or any of those things?

Just thoughts on conditions on the ground in those areas?

Yes.

What we've seen, if you look at it from a worksite employee standpoint in those states is we've seen a pretty sharp recovery certainly in several of those states.

I would say California is more volatile of the larger PEO states just as they battle flare-ups with COVID.

But we've seen a pretty significant rebound in a lot of those states, not to where they were before pre-COVID, but certainly, starting to get up towards those levels.

And I think the PEO itself, both if you look at it from a revenue standpoint and the amount of works on employees that we're processing.

And also on a sales standpoint, we're seeing good results on both ends of that equation, which suggests to us that the environment is normalizing.

Yes.

Florida -- as Efrain said, everybody is still down, but Florida is the strongest on our small business index that we track on a monthly basis.

Florida has been number one.

South has been strong, again, construction, both residential and commercial has continued to be strong there.

So we're -- we certainly had more concentration in those states.

They have been stronger states.

And insurance rates on top of that have been good.

So the increases in insurance have been pretty low.

So I think they'll continue to have -- we should have continued to have good retention as we go through open enrollment for insurance plans and everything this quarter.

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

I wanted to ask about the change to virtual and e-com.

How does that change the revenue per client first?

And then secondly, how does that change the margin structure?

Is there a higher-margin inherent in that?

Interesting.

So I think, Bryan, it's a function of size of clients.

So the smaller the client, obviously, the lower the revenue.

So if you're driving a lot of smaller clients tend to be the ones that are -- that use a lot of the e-commerce solutions.

So you get less revenue in that standpoint.

On the other hand, from a margin standpoint, sometimes it's better because there's lower cost to serve.

So there's a little bit of a wash.

You got to overcome a bit of the sales -- the revenue impact.

But longer term, it's still a pretty positive development.

I didn't catch the second part of that question.

And then margin, I just mentioned it.

Margin can be as good or sometimes even better.

No, that's helpful.

That's what I would have figured, but I wanted to confirm.

And then, Marty, on your comment, sales performance is accelerating with year-over-year growth and number of clients sold.

And I think you talked about a record number of units sold, maybe the highest in 5 years.

I was just trying to get a sense of where that was in the trough.

How much was client growth down, maybe in the trough?

And then how much is it growing now on a year-over-year basis?

Just hoping to quantify that impact?

I just wanted to want to clarify something, Bryan.

When Marty said that unit growth was the highest it's been in 5 years.

He's not comparing it in terms of sequential improvement.

If it was a sequential improvement, the number would be even more amazing.

But what we're comparing is against the same quarter last year, pre-COVID.

What we're saying is that our unit growth in the quarter was very high.

So that -- I'll let Marty answer the rest of it.

Yes.

Because when you're top of the trough, then I think that's where Efrain picked up what you're talking about last quarter.

We're comparing year-over-year.

So year-over-year first quarter, it's been the best sales unit growth that we've seen in probably 5 years or maybe even a little bit more.

So if that's what you were asking.

So it's not compared to how low it got in the fourth quarter, it's compared to last year first quarter.

So we've seen a real pickup in demand, as I said, Bryan, from those who didn't outsource before, new business starts.

And I think, taking some share as well and then the client retention being so strong is overall has really helped.

We don't talk about net client growth, except once a year, but it's needless to say, when you put that together, you got nice growth.

I would say, just our digital marketing efforts over the last couple of years have really, really picked up and really been terrific.

And I think it's really fueling a lot of those results.

And going forward, do you think, Efrain, that it's -- is it still the 1% to 3% client growth?

Or maybe does this model change a little bit with these kind of new business starts in this e-com model?

Yes.

It's still early.

I want to -- while part of me wants to be draw a line with several points and then kind of extrapolate out.

Yes, I want to be cautious about that.

There is an element here that we're in an environment where that favors digital solutions.

I mean that's not a surprise.

And Marty answered earlier when he was asked that question, how permanent or durable is it?

Certainly, you got to think that there's a portion of this that's durable and will continue and that you've got to bake that into your model and that there's demand there, which is what Marty was saying.

I mean one of the things that we have seen is that we have seen some indicators that some of that demand is coming from companies that didn't outsource.

We also happen to be in an environment which is counterintuitive where business formation is better than anyone expected.

So very different in some ways from '07, '08.

So we'll have to get a couple more quarters under our belt to get a sense of whether this starts to change that equation a bit.

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

I was just hoping you could speak to trends on the workers' comp side of late.

Have you seen any stabilization rates there or will that continue to be a headwind throughout the rest of the year?

I think it will be a bit of a headwind from a revenue standpoint, Andrew, but rates seem to be stabilizing.

And actually, we've seen, in some cases, been ticking up slightly.

So we think we may have -- we may be getting towards the bottom of the trough, so to speak.

That has some impacts, obviously, on PEO in addition to our insurance brokered workers' comp sales.

It seems like we're getting closer to the bottom.

Got it.

Good to hear.

Good to hear.

And then just a follow-up.

I was hoping you could speak a little bit to the M&A opportunity right now.

Are you still open to doing deals?

I would assume so.

And where you expect to find those opportunities?

And then relatedly, if you have any commentary on kind of what pricing is looking like in those areas, that would be helpful.

Yes.

We're still very open to that and have continued to stay in contact with opportunities and with the banker community and so forth as to what's available.

Very interested, of course, in all the lines of our current business, in particular, so PEO businesses and payroll, of course, and others.

I think it's opening up a little bit.

I'd say valuations are still right up there.

I wouldn't say there was any discounting going in because of COVID.

I think it's difficult -- it's a little bit still difficult to do due diligence and things like that, given limited travel and access.

But I think we'd be able to work through those if we found the right business.

So yes, we're very open to M&A.

Obviously, we were very liquid and have a good, solid cash position.

And if we find a good acquisition, we're certainly ready and able to execute on that.

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

I wanted to ask on Management Solutions.

I want to understand the mix of your better-than-expected performance here in 1Q related to the changes in check volume contribution versus some of the new addition momentum you're talking about.

Versus the increased retirement and other services.

So can you just help us understand the mix of the factors that contributed here in 1Q?

Yes.

I would say probably the largest change, Bryan, was really a function of where we started, where we ended up in terms of average client base in the quarter.

So if you think about businesses like ours that are more established, you've got a number of different factors that are weighing on the revenue.

What's your rate of retention?

We said that, that was high, actually probably higher than we anticipated or a plan.

So that was a positive.

You had sales -- while sales revenue was better than we planned, it still wasn't quite what it was overall pre-COVID.

So that had some better impact, but that wasn't a big driver.

The bigger driver is what was happening within the client base in terms of the number of clients.

So we break that down, it's just -- not just number of clients, but the employees those clients had.

So the employees that the client had, we're roughly about what we expected.

We just had more clients in the base than we had, on average, than we had anticipated, who were processing.

So remember, we're putting plans back together in May, June, we're trying to anticipate it in an environment where states like California and New York, which are important revenue state were largely starting to -- or we're in the process of being -- continuing to be shut down, it turns out that those factors have moderated.

So what we're seeing when you look at a panorama across the country, is moderate improving statistics in most geographies where we're looking at and across most industries, as Marty mentioned earlier.

When you put that together, we start, if you will, from a little bit higher step on the run over the ladder than we anticipated when the plan was put together.

And another way to think about it.

If you flip that analogy over or you changing LNG.

It was definitely less worse than we anticipated as we started the year.

We -- the impact of COVID, which was very severe in April had us all thinking what does this end up looking like?

Well, those pundits who thought that the recovery would be sharp we're actually more in the right than wrong.

And now the recovery from here, we've signaled that it's gradual, we're still seeing signs of a gradual recovery.

Nothing is changing our mind at this point.

To say that we don't continue to progress from where we are.

However, at a point where we -- the trough wasn't quite as severe as we thought in the first quarter.

Okay.

That's helpful.

And then I wanted to ask a question on the salesforce.

So can you just give us a sense of the mix of the salesforce that has returned here to in person meetings, really, I guess, currently versus in 1Q really feet on the street model versus the virtual salesforce?

And then how should we think about this mix longer term as things normalize?

Yes.

I think we're -- we've picked up more virtual this year.

So it's still probably of the total -- it might be 25% to 30%.

I think that will continue to grow.

Particularly, I think this is, as I mentioned earlier in the call, Bryan, I think that has accelerated.

I think more client prospects, client prospects are able to do things over a Zoom call or over a Webex call.

Feel comfortable going through the demo digitally over -- and online and be able to make their decisions.

So I think that's going to accelerate.

I think it also is -- it's more productive and efficient.

If they can be virtual.

However, we're opening up kind of as we speak across the country with being able to go visit as well.

We're doing it based on kind of state-by-state or city-by-city and whether the local management feels that the rules are there that they can visit the decline is -- the prospect is comfortable and the rep is comfortable, but that's starting to open up much more now.

But I think you'll see more virtual -- more growth in virtual sales, meaning telephonic.

We've been in it for many years, and you also have more self-service as well as both Efrain and I have mentioned that on the low end, the smaller size clients much more is being done without ever talking to a rep at all because of the investments we've made at both SurePayroll's products and Flex' product that you can go online and basically search, find it, demo it and buy it pretty much without talking to anybody, but you can always reach someone if you need it.

So virtual is going to be more of a way of the future, but we're still always going to have furthermore, complex sales.

The experienced reps that are there in person and with the sales engineering team demoing the product and so forth.

Yes.

And I just want to reiterate what Marty said.

While in the past, you would have thought about, okay, sales equates to how many salespeople you have and where are they?

That's only one factor in the equation.

If you have end-to-end e-commerce, the ability to sell without any salespeople involved, which wasn't something we invested in, in the last couple of years, then you're not constrained by the amount of people that you have in the field, and we've seen the benefit of that in this quarter.

Well, just a follow-up there.

What's the top end of employer size that you're seeing do it by themselves through that e-commerce model?

I think -- well, it depends on the -- it's not always employer size.

It could be employee size, it could be complexity.

If you're pretty straightforward, simple, it could be up into the 20 employees.

But typically, I'd say it's under 10, Bryan, but it's -- if you're a real -- if it's a straightforward business, it could be more employees than that.

But it's -- I think it's typically under 10 employees.

Our next question comes from Kartik Mehta of Northcoast Research.

Efrain, I wanted to ask a little bit about the guidance, and I'm wondering if you have factored in any price increases into it.

I know last year, last fiscal year, you decided against it because of the situation we're in.

I'm just wondering for fiscal '21, what you anticipate?

Yes.

So the short answer is yes.

There are price increases selective, I would say, that we are implementing.

One of the reasons why we feel comfortable doing that is in part, customer feedback, in part the fact that our operations people did such a stellar job that our NPS scores are, again, I mean, we could keep going on and on about things that are at record highs.

But our NPS scores at this point through the pandemic are at record highs, and that's the strength of our model.

The strength of our model really plays well for this environment.

And so we think that there's opportunity for selective price increases.

We obviously delayed through the first part of the year because we didn't think it was appropriate.

And we knew there were clients that were just hanging on and just struggling to get through the environment they were facing.

We think that many of our clients have stabilized as evidenced by the increase in -- or the decrease in non-processing clients.

And the level of service we've gotten great feedback on.

We think that many of our clients will be okay with a modest price increase.

So we'll do that as we go through the year.

And then just a second question on health insurance premiums, your expectations going into next year?

And what do you think that will -- how that will impact the PEO business, if at all?

I think, Kartik, as I mentioned, I think it's going to be pretty favorable, generally, I think, a high single-digit kind of increases, depending on the client, of course.

But generally, I think if you looked across and I think that's going to be very favorable for gaining new insurance clients.

I think we performed very well.

Our risk and underwriting team has done very well.

And therefore, I think we're going to benefit from better rate changes.

And I think also the overall environment is certainly helping us as well.

So I think that should bode well for better sales even better sales from an insurance perspective for both PEO and the agency, the insurance agency itself.

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

I had 2 quick questions.

So I was wondering if you could characterize your win rates that you're seeing lately in terms of where are you winning these new accounts.

Are you seeing it from self processors?

Or other competitors?

Any discernible trends there would be helpful to understand and whether or not you believe you're seeing early signs of some share shift?

Yes.

I think -- well, it's a little bit of both.

We've mentioned, I think we're seeing those who have been self processing, doing things themselves and the complexity of the changes and the need for help at a critical time kind of in their business survival or growth, they've looked to outsource for the first time.

So I think, as I said, I think the pie has gotten larger.

I think more are outsourcing and that's been pretty steady in over the years.

And now that feels like that changed.

And we're very happy that we've won, we think, a large number of those because of the product set and our -- not to mention, as Efrain has mentioned many times, our lead generation and digital, the offering and the demo, et cetera, on the mobility app.

And then I think also, we've seen a net gain from some competitors this quarter based -- something we track on our largest competitor, we see some gain there.

I wouldn't say it's huge, but I'd say definitely a net positive gain from what we've sold from a competitor -- or taken in from a competitor versus lost, we saw a net gain.

So we're definitely gaining some market share there, at least as well as probably some of the smaller regional payroll providers, in particular, that just can't keep up with the need to support them.

From a payroll -- a Paid Check Protection loan program, be able to get them the information they need for the loans that I said we had available to them prepopulated and then the loan estimator and for the forgiveness, I mean we have a signature ready application.

All you have to do is go in and fill in rent, utilities or anything else that's nonpayroll.

The payroll data is already prepopulated.

You can either sign electronically or print and just file that to get your loan forgiven.

When you see those kind of technology advancements that we offer as opposed to particularly a regional company and even some of the national ones, it's a very different value proposition.

So in a time of extra need, I think you're seeing a shift toward more outsourcing.

That's helpful.

And then I just had a quick one on -- at least there's been some data that's coming out, at least at the enterprise level, suggesting that companies that haven't been impacted directly by the pandemic are just now beginning to shed some jobs.

And I was wondering if you're seeing any trends or any particular areas within the small business community that indicates that, that trend is possibly creeping into small business?

I would -- I think small business took the biggest hit in Q4 and what was our Q4.

I mean that kind of March, April time frame.

And they -- now I think they're still hurting, and they need another stimulus.

We're not counting on it based on what we've seen.

But they certainly could use it.

I think the most recent survey was over 80% of small businesses, in particular, who took the loans, have used them up now, and they're looking for a second stimulus to kind of help them through.

And then we're not sure what the impact is going to be, particularly in the Northeast, as restaurants have to bring more diners inside and then have capacity constraints.

So there still could be some fallout, but I think small to midsized businesses probably hopefully took their biggest hit already, and we're not necessarily seeing more layoffs there.

They were also much more careful about bringing them back.

We haven't seen a total return of the employees that have come back, and they're probably down double digits right now from where they were pre-COVID.

Small businesses, meaning I haven't -- I've started to bring people that I furloughed or laid off back but I haven't brought everybody back yet.

And so I think we already saw that.

I don't think we're seeing necessarily another drop off unless there is no stimulus, and people just say, "Hey, I can't survive anymore.

But most of our data has shown a pretty good comeback progressively continuing to improve.

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

First question is related to the PEO.

I just want to understand a bit better what's going on in the PEO.

I think, Efrain, you mentioned you first saw a sharp downturn and then now a sharp upturn.

Can you just elaborate were you referring to sales or performance of the existing business or both of those?

Yes.

Sorry about that, Lisa.

Actually, it was probably both.

But when I was making that comment, really was a sharp decline in the number of worksite employees.

So even before we saw checks -- check volume and checks and employees decline in the HCM business, we were seeing that in the PEO business where they shed employees more quickly.

And then PEO had a more sharp upturn as conditions started to get better.

Now part of that could be what that, for example, states like Florida, felt the impact in hospitality, accommodations, leisure.

So they were feeling it at first, and they started to come back and started hiring back.

But that's what I was referring to.

And obviously, it also impacted sales.

And now we're talking back in the March, April time frame.

Yes.

Okay.

And so on the sales side, are you finding -- like how are sales doing in the PEO?

Or are you finding that -- I mean, I know that's typically a reasonably complex sale, but I would imagine there's a lot of demand for it in the current environment.

Are you finding that you're able -- that the sales are rebounding and you're able to sell the PEO in -- even if it's remote in the current environment?

Yes, Lisa, they have recovered even stronger.

Our ASO business, our reps sell both PEO and ASO, meaning not the co-employment.

And -- but the need for HR kind of across the board has really taken off.

So there's -- we are really strong on the ASO side and coming back on the PEO side as well.

Think what Efrain said, the strongest strength in the PEO has been the recovery of the worksite employees coming back on the payroll.

On the sales side, PEO has done fine, but the ASO has been even stronger.

Now our reps can sell both so I think whatever the need of the client has.

And if it's not as much of an insurance need or they're not as interested in insurance right now, but the needs errors toward HR, which I think we've seen, then that may lead to an ASO sale, which sometimes is a little bit quicker because you don't have to go through the underwriting and so forth.

So I think PEO has come back, but ASO has been much stronger.

And overall, it's been because it's driven by an HR need, a human resource administration and need to handle all of whether it's furloughs, layoffs, COVID, leaves of absence per family, et cetera, that's where the biggest demand has been is, how do I handle all of this stuff, and we've really seen that.

And of course, we have those strong HRGs, the HR General is 600 of them across the country.

We've been able to sell the value of that HR person that's helping those clients quite dramatically here in the last quarter.

Okay.

And then for my last one, I'll ask the inevitable election question because by the time we talk to you guys next quarter, it will be over.

So what policies or agenda items are you keeping the most close eye on as we get closer to the election?

Well, it's interesting because I think one generally has obviously been better -- it appears better for business when you look at the last few years because of the growth in businesses and so forth.

And the other side could probably bring a lot more regulations and more opportunities with -- depending on the health care and so forth that comes out in the regulation.

So if it's heavier regulations, there's going to be a lot of opportunity there.

If the administration changes, that would give us a great opportunity.

If the administration stays in place with try to be less regulations, but I would say more confusing regulation, that gives us an opportunity as well.

So we really see kind of not trying to play the middle of the line here, but we do see opportunities on both sides of whatever happens with the election.

Probably, it tends to be a little bit more on the regulation side if a democrat gets in there, but -- and it will just be changed, which will make some businesses outsource more because they're worried about the changes.

But either way, I think we see opportunities coming from it.

We're watching the level of insurance and health care regulations, any impacts on 401(k) and retirement.

And what that impact there.

And then on payroll and HR, it really is just the level of regulations and so forth.

Either way, I think there's going to be plenty for us to do and plenty of opportunity, to be frank with you.

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

I know, it's late.

I'll just keep it to one.

You talked about accelerating some of the cost initiatives.

Can you tell us of the $31 million of books?

How is that separated between op expense and SG&A?

And what kind of cost savings should we expect on both those line items from these initiatives?

Jeff, rather than get into it, I'm laughing because I talked to the controller.

And most of it's going to end up in G&A, but we'll just footnote it in the slide so you can update your models.

Okay.

Great.

And in terms of the cost savings, have you quantified what you'd say?

I think I provided some guidance last quarter.

I'd have to go back and update that.

I think it will be comparable to the costs that we take out, but let me revisit that to get a better answer.

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

Similarly, I'll keep it to one.

Just Efrain, did you mention this quarter, how many customers are still Paychex customers but that aren't processing payrolls actively.

I think you gave that mix last quarter.

Just maybe an update on that and how that change quarter-over-quarter would be helpful.

Yes.

Go ahead.

Sorry.

No, go ahead.

Samad, as I mentioned earlier, we didn't give the absolute number, but we're down about 3/4 from the peak.

And even that number was, I think people misunderstood that it was very large, even at its peak.

And -- but we're down to like -- we're down 3 quarters from where it peaked.

We still could take some losses from those clients, but it's not a big number compared to our client base.

And we're watching those clients.

Some of those, again, maybe hanging on for year-end or to see if they get another stimulus to kind of help them through.

But the number -- the number dropped 3 quarters and very few of them went lost.

So we really feel very good about the ones that came -- that reduced the number that were nonprocessing.

Most of them are back processing now.

They are processing with fewer employees than because they haven't brought them all back, but they are processing in less than -- definitely less than 10% of the number went lost.

So is it really a very positive so far.

And we've got kind of that last quarter that were suspended kind of hanging on either for more stimulus or year-end.

And we'll have a good sense of that, I think, at the end of the next quarter, I can tell you kind of exactly.

My guess is they'll be pretty much off the service by then or there'll be very few left.

But it's not a number now that's really impacting us that much at all.

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

All encouraging results.

I just wanted to hone in on the -- winning the start-ups piece.

I thought that was really interesting.

How much of your success there with startups, do you think is organic versus doing something different in digital marketing and driving Internet leads?

I know, Efrain, you and I have talked about this.

And I'm curious if there's a different muscle you're using to generate that.

Well, I think it is.

I think as Efrain has mentioned, he's used the word digital, probably, I think, has won the prize for using it.

Those investments, Tien-Tsin, have really made a big difference.

As Efrain pointed out, you start back a number of years ago and whether it's SurePayroll or Flex both, we've invested a lot in making that easy to search to then demo online as well as be able to buy online, and that has really paid off, as Efrain mentioned, in this environment, while people are remote and they're going to get -- they're getting more used to not talking to anyone.

I think that was the trend anyway.

All of us would say that, right?

The people not wanting to necessarily meet with someone just, especially if there is small and fairly simple business to be able to go online and figure it out themselves and set themselves up.

Not to mention that one of the biggest challenges of having more leads was then getting a hold of the prospect after you got the lead, this ability allows people to start and it actually encourages them to start the process of self-sign-up and setting themselves up.

And then a sales rep can jump in at any time and realizes if that has slowed down to help them through the process.

But now they've already started to set up.

Before when you had to reach someone, and contact them, a lot of times, we weren't able to contact the prospect or they had already gone somewhere else.

This -- and these investments that we've done from a digital standpoint in both the lead generation and the self-setup of have helped a lot.

And at a time when a lot more start-ups are looking for someone, that has been kind of the perfect marriage of timing there.

Yes.

That's a very complete answer.

Just a quick follow-up, and I'll let you guys go.

Just on the -- there's a lot of talk about outsourcing and going into the selling season.

Can you remind us because I give this question a lot.

I just want to make sure I'm fresh on it.

Just what percent of the SMB market is in-house as you define it versus outsourcing today?

Well, the number has always pretty consistently been 30%, 30% to 35% outsourced and 65% to 70% still do it themselves of the small business market.

And that has not changed for many years.

Now I haven't got the most up-to-date data, but I would definitely feel that has adjusted given the pandemic, and then I think that's a trend that's going to continue as people have -- once they've seen the value of it, that's what's changed.

So it's always been kind of a 30% to 70%, meaning outsource and not outsourced.

And I definitely think that shifted.

It probably had a pretty good shift here in the last 2 quarters.

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

Wondering with regards to the in-house clients that you're picking up, what are they using typically?

Are they using Intuit and QuickBooks?

Or are they using Excel spreadsheets?

Just what's the level of sophistication?

And what are you seeing in terms of the average client that's switching over?

Mark, it's going to be more anecdotal.

We don't track it really close because the client doesn't always say it.

But I think it's a mix of those.

I would say it's probably more do it kind of themselves manually than it is Intuit, but I think Intuit could be -- that could be 25% or 30% of the mix coming in.

But a lot of times, they haven't used anything.

It's more just figuring out themselves on a cell spreadsheet type of thing and that kind of thing.

And then the need for payroll kind of combined with HR has pushed them kind of over the limit to say, "Hey, I need something else.

I just don't need a calculator of payroll.

I need to understand the rules and regs.

And I've got somebody that's now taking a family leave because of COVID or they need to stay home with children or something.

And how do I handle all this?

What about parental leave?

How do I handle all these rules and if by multi-state, in particular, it's really hard to keep up with it.

So I think it's been that combination of not just -- I don't just need a calculator.

I need really helping how to do these things.

And that my employees are asking for more from a mobile standpoint.

So my employees are expecting to be -- they're now asking for Pay-on-Demand.

For example, we haven't even touched on that in this call.

We offer Pay-on-Demand.

They started asking that I worked 8 hours because more employees are working shifts in part-time and various shifts were instead of being more normalized.

They're asking for Pay-on-Demand, they're asking for access to their check stubs on a mobile.

We're now offering Google Search.

So if I say, "Hey, Google, what -- I want to be able to ask Siri or Google, what I got paid and when I got paid, that's now available.

These are things that more younger, I guess, I'd say, employees are asking for that flexibility and those demand, and they can't do that with what they've been using.

Since you brought it up on the Pay-on-Demand, what percentage of the clients are now using that?

It's still pretty small, but it's growing.

I think as more clients are seeing the ability to have it, I don't -- I think the clients feel like, especially with our -- the way we're offering it today, it's no risk to the client themselves.

It's being done that way.

I think more employees that are realizing that it's available, are asking for it and more clients being aware of how simple it is to do it, it will pick up.

It's still very small from a starting standpoint, but it's starting to get attention, particularly, again, with this environment where, "Hey, I just may need somebody to work 8 hours here." And that employee says, if I'm only working 8 hours this week or because of children at home, I can only work 16 hours or 20 hours, you had like the money right now.

Instead of waiting 2 weeks to get my check because I'm not working full-time right now, it's becoming more interest.

So we're trying to get the word out there that it's available, and I think it's starting to catch on, but it's still pretty small at this point.

Appreciate that.

Of the new clients that you're getting that weren't doing self-service, can you break it out just in terms of what percentage of the new clients you're getting were self-service versus your largest competitor versus regionals?

I don't have that right in front of me.

I don't know, Efrain, if you?

No.

Don't have that detail.

I'd have to -- we'd have to look and say if we got that, but I would -- trying to -- I don't have it right in front of me.

No, it's a pretty good -- as we're saying, I think the uptick from normal sales value that's driving a lot of growth is the more -- the newer outsourcing that we've talked about that are outsourcing for the first time and new business is definitely up, I would say, double digits as well.

Yes, Mark, part of the reason why you're not getting a crisp answer on that is we recognize we're in an unusual environment where new business formation is up, and we think that there's a -- in addition to everything else, we're benefiting from that, and we seem to have the right solutions for the right time at the right place in the market.

And new units are up, what percentage were they up during this last quarter?

Yes.

You were going to ask.

So the answer is good.

We're not going to give you the exact number.

So good means certainly more than low single digits, Mark.

More than low single digits.

Okay.

And how about ACV?

I'm sorry, how about what?

Average client base.

ACV.

The average client base?

I'm not sure I know what that acronym means or maybe I'm missing.

It's not.

Annual contract value of the bookings that you're selling.

What are book to sales...

Yes.

No, no, no.

We'll update that as we go through the year, Mark.

So we're not going to provide that on a quarterly basis.

Okay.

Great.

Okay.

That's a good one.

I'll just put that in the acronym Lexicon.

Okay.

And then finally, Marty, I heard your interview with regards to the discussion in terms of employment growth and the PPP.

How are you thinking about this fall and winter with regards to -- you said you're not expecting the stimulus to come through.

It sounded in your interview like you thought that was really crucial for some clients.

Can you just discuss like how crucial do you think it is?

What percentage of the clients are really kind of kind of at the end here?

Or -- and how we should think about that?

Because all the comments are really positive, and it sounds -- and it also sounds like you're not expecting the stimulus to come through.

So I'm just trying to put those 2 together?

Yes.

Mark, I just want to clarify something.

The comments are positive versus expectations.

I mean we're not sitting here saying that everything is great, et cetera, we understand the environment which we're operating.

Our comments are positive because the results suggest that it's better than we expected, and we are navigating through the environment.

So I just want to make sure we're not painting a rosy macroeconomic picture that everything is great.

We're saying we're navigating effectively through the environment.

That's the idea that we want to convey and we understand the challenges.

Yes.

And that it's better than we expected.

We expected less of a recovery in that first quarter, and it's been much stronger, and we performed very well compared to our expectations.

But you're right, triangulating all my interviews.

This is a problem with doing too many interviews.

You're right, about 80%, what we've seen in general surveys, not just our clients, but in general, about 80% are saying they're at the end of the first loan, about 40% to 45% are saying they need additional stimulus.

We think it's important that they get additional stimulus.

What Efrain was saying that in our forecast, we have not built that in to say that, that's going to be a big impact.

And we have not built in that they're going to get it, and that's going to have a big impact.

So as we look out, the hardest thing is forecasting the second half of the year because, one, we did much better than we thought in the first quarter.

We can kind of see what that's -- what's happening into the second quarter, that's probably fairly predictable.

What's really unpredictable is the second, the third and fourth quarters, fourth quarter, in particular, where we estimated already that there was going to be a positive growth year-over-year.

Now it's a better compare, obviously, to a tough fourth quarter previous year.

But it's hard to predict.

So I think the stimulus is -- another stimulus for small and midsized business is absolutely needed.

It needs to have more flexibility.

It needs to have an easier way to forgive the loans.

Is that going to happen?

I don't know.

It's just that I think Efrain was saying at the beginning, "Hey, we didn't build in like that was going to have a big impact in the second quarter." So if it does happen, that should help us and give us even more tailwind, but we weren't including it at this point.

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

Just a follow-up.

All right, I'll keep it tight.

Efrain, I'll keep it tight.

Just the record sales, and you talked about this in a couple of different ways, but is there a way to frame just what the average client size is?

Or maybe just how much of those sales coming in or DIY as opposed to traditional method?

And did that -- did the mix help contribute to the margin boost in terms of the guidance?

Or was that more just overperformance on expense, just better expense management?

Yes.

I would say, because of where it was coming in and because of the channels through which it came in, it tended to be smaller rather than larger.

That's where you tend to see more of an impact on those kinds of sales.

It doesn't contribute necessarily the change in margin profile going forward.

But obviously, if we continue to see that kind of sustained performance, it's positive for the business.

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

Gentlemen, can you hear me?

I'm sorry.

Yes.

Yes.

Go ahead.

I realize we're way behind time here.

I was just curious, so many things have been asked and answered and really impressive resiliency of the business throughout, obviously, unprecedented time here.

Going back to the Paychex protection, is there any quantifiable dynamics that you guys have kind of internally studied with respect to the percentage of the current base that's been a recipient of that?

Or when you think about those businesses that are maybe at this point, kind of struggling, is there any kind of quantifiable metrics around that?

I don't have those numbers right in front of me.

We do know that we -- when we did a number of things, we partnered with 3 FinTech companies to help, including Biz2Credit and some others to help get loans out there.

We provided those reports, as I said, the first to provide the payroll report, we think our clients have about $28 billion in loans based on what we know out there.

When you think about that across the whole base, that's not a huge number, when you think about distressed businesses in the base, we felt good about the fact that we're able to help them get those loans and secure those loans.

And -- but I think it's not a real large percentage that took the loan or needed it, but I'm sorry, I don't have that.

I know we were trying to track it.

It was tough to be able to track through that data to see how many of our clients actually took the loan.

We do know that we worked through about $28 billion is what we expect of loans outstanding.

Operator, I think we're going to -- operator, I think we'll give in time, we'll close the call at this point.

Are there -- is there anyone else on the call?

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

Okay.

We'll take that.

I really just have a clarification.

And I really just wanted to follow-up the question earlier about growth in the second half of the year.

Like Jason, actually, I had the guidance at low single-digit growth for the previous call in the back half of the year.

And perhaps we all misunderstood what you had said previously.

So perhaps, Efrain, if you could just share with us what your guide was for the back half 3 months ago.

Yes.

I think I just said, Ed, that we expect the back half of the year to be flat to very low single digits.

So to the extent, you'd say, "Hey, Efrain, you're not saying anything different than you said." Let's just say, I say it with a little bit more conviction this time.

If I said that, I could.

At this point, we will close the call.

And if you're 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 press release 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.