Paychex Inc. (NASDAQ: PAYX) Q1 2021 earnings call dated Oct. 06, 2020
Corporate Participants:
Martin Mucci — President and Chief Executive Officer
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Analysts:
Ramsey El-Assal — Barclays — Analyst
David Togut — Evercore ISI — Analyst
Jason Kupferberg — Bank of America — Analyst
Steven Wald — Morgan Stanley — Analyst
Bryan Keane — Deutsche Bank — Analyst
Andrew Nicholas — William Blair — Analyst
Bryan Bergin — Cowen — Analyst
Kartik Mehta — Northcoast Research — Analyst
Pete Christiansen — Citi — Analyst
Lisa Ellis — MoffettNathanson — Analyst
Jeff Silber — BMO Capital Markets — Analyst
Samad Samana — Jefferies — Analyst
Tien-tsin Huang — JPMorgan — Analyst
Mark Marcon — Baird — Analyst
Kevin McVeigh — Credit Suisse — Analyst
Matthew O’Neill — Goldman Sachs — Analyst
David Grossman — Stifel — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Paychex First Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions]. Thank you.
I will now hand the call over to Martin Mucci, President and Chief Executive Officer to begin. Please go ahead, sir.
Martin Mucci — President and Chief Executive Officer
Great, thank you. And thank you for joining us for our discussion of our Paychex 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. You can access the earnings release on our Investor Relations webpage, and our Form 10-Q will be filed with the SEC, within the next few days. This teleconference is being broadcast over the internet, will be archived and available on our website for approximately 90 days.
I will start today’s call with an update on the business highlights for the first quarter. Efrain will review our first quarter financial results, and provide an update on fiscal ’21, and then we’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 revenues, significantly higher than our expectations. Growth in new payroll sales units was strong year-over-year, reflecting the highest fiscal quarter growth in over five 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 mid-sized businesses 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 worked closely with regulatory agencies, to both remain informed and advocate for our clients. Our compliance and software development teams worked quickly, to interpret and respond to the changing regulations, and design products to assist our clients through one of the most challenging times for the business community.
We have provided real time updates and solutions, compliant with new regulations. We were first to market, with a PPP Loan Forgiveness Estimator, which now produces a signature ready application. Recently, Wolters Kluwer, a leading national provider of tax and accounting expertise, selected our PPP Loan Forgiveness Estimator to be utilized by their CCH AnswerConnect research platform subscribers.
Since launching in early April, we have approximately 300,000 unique visitors to our COVID-19 helpcenter. 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, increase double digits, compared to the prior year period, and the number of active employees on the platform continues to increase. Our clients and their employees have been taking advantage of Flex for self-service, self-service utilization by client employees as a percentage of total utilization is at an all-time high, given the remote working environment for many of our clients. And Paychex Learning Enrollments are 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 request leave to care for a family member or a child attending school virtually. COVID-19 screening, for when employees come back to the physical work environment, and a held-at-the-station solution, that allows employers to collect employee information in a variety of ways. These features, combined with our HR Connect and conversations features, iris scan clocks, Pay-on-Demand capabilities and other product functionality, will continue to provide — prove invaluable to our clients, whether their employees continue to work remotely, or as they prepare for returning their employees to an office environment.
As mentioned in June, we have accelerated certain long-term cost saving initiatives, including reducing our physical office footprint, and during the first quarter, we recognized $31 million in one-time costs, related to these initiatives, and we are progressing better than expected. We anticipate that we will fully realize our projected savings from these initiatives.
We are proud that both the strength of our technology, as well as the care we give our customers, has been recognized by industry experts. Most recently, the Paychex Flex platform was recognized by Lighthouse research and advisory, with an HR Tech Award for the best SMB-focused solution in the core HR Workforce category. The combination of a single device independent application, with Human Resource Services and benchmarking capabilities, sets us apart from others in this category.
We have also been recognized with a 2020 Tech Cares Award presented by TrustRadius, which celebrates companies that have gone above and beyond to provide their communities and clients with support during the COVID-19 pandemic. I’m also very proud to note that for the 10th straight year, we have been recognized as the largest provider of 401(k) recordkeeping services by the number of plans, by PLANSPONSOR magazine. We have a longstanding commitment to leveraging innovative technology solutions like Paychex Flex, and best-in-class service to simplify the often complex task of saving for retirement, and are proud to continue to help business owners and employees save for retirement during these challenging times.
Irrespective of the pace and speed of recovery, our resilient business model, strong liquidity position, and dedicated employees will allow us to come through this stronger, while continuing to provide industry-leading technology solutions and outstanding service to our clients.
I will now turn the call over to Efrain to review our financial results for the first quarter. Efrain?
Also read: Paychex Q1 2021 Earnings Highlights
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Thanks, Marty and good morning everyone. I want to start by saying I hope that everyone is safe and your families are doing well, and our best wishes go out to those who have been impacted by pandemic. Let me remind everyone that today’s conference call will contain forward-looking statements. You know all that stuff, refer to future events, etc. 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 in certain areas, and then wrap with our fiscal 2021 outlook. First quarter results reflect the impact of economic conditions resulting from COVID-19, as Marty mentioned. For the first quarter, total revenue declined 6% to $932 million, largely due to lower volume impacting revenue across our HCM solutions. During our June earnings call, I had noted 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 declined.
Interest on funds held for clients decreased 28% for the quarter to $15 million, due to lower average investment balances, and lower average interest rates earned. Average balances for interest on funds held for clients declined 6% during the quarter, primarily due to the impact of lower checks per client, due to COVID. Expenses were up 1% to $650 million, but when you exclude the one-time costs of $31 million that Marty mentioned, we were actually down 4%, driven by lower discretionary spending in cost control measures implemented in Q4. We’re very proud of how we managed expenses through this entire period.
Operating income decrease 19% to $284 million and reflected an operating margin of 30.5%, again that was ahead of expectations. Adjusted operating income, excluding the impact of one-time costs, decreased 10% to $315 million, 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 one-time 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 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, for reasons I cited above, divestments and 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 years. Combined portfolios have earned an average rate of return of 1.3% for the quarter, down from 2% last year.
I will now walk through highlights of our financial position, and 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 average $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 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 expected to be between $55 million and $65 million. Total revenue is expected to decline in the range 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 $35 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 declined 4% to 6%. Adjusted operating margins, excluding one-time costs, are anticipated to be in the range of 34% to 35%.
An early view of the second half of the year, 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 are 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 we are dealing with.
I’d say just a couple of more things to conclude my comments. Number one is, I think what you saw in the first quarter, 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 our — being incrementally positive, as we go through the year. And PEO I would say this, one of the things that we have learned as the year has gone on, is that while PEO had a sharp downturn initially, we’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 is still a lot of uncertainty in the environment. But as I said on the second half, we think we are in a position to manage through it and have taken all of the right steps in the short term, and 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,
Martin Mucci — President and Chief Executive Officer
Okay. Thank you, Efrain. And we’ll now — operator, we’ll open it up for your questions.
Questions and Answers:
Operator
[Operator Instructions]. Our first question comes from the line of Ramsey El-Assal of Barclays.
Ramsey El-Assal — Barclays — Analyst
Hi guys, thanks for taking my question. I wanted to ask Efrain about your — or Marty as well, the last comments you had on digital, and just get your view in terms of — how you mentioned it’s not your father’s Paychex. How permanent do you think some of the shifts are in your business, when it comes to things like digital versus analog from, I guess, a product standpoint as well as the sales technology standpoint. Is this more of a blip or is this something that you think will kind of fundamentally change that the fabric as we go forward?
Martin Mucci — President and Chief Executive Officer
Yeah, I’ll start and then I’ll let Efrain jump in on anything that I miss 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 on-boarding 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 our 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. 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.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yeah, what I would add is, is it’s one thing to say, hey, we had great digital sale progress in the quarter. And by that I mean not only not only SurePayroll, where we can, as Marty mentioned, you can search and on board 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 the 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 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 ain’t truth, but it’s interesting, and we’ve been making quietly many of the same changes and you can compete now in the market. 10 years ago, if you weren’t SaaS, you weren’t — were going to be left behind. And now if you’re not pivoting to digital, you’re going to be left behind too. And I understand that.
Martin Mucci — President and Chief Executive Officer
I’m sorry. And I would say the other stat that has 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, the only one that’s available 7/24/365 from a personal service, 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 are really paying off, and it has accelerated and will be permanent as a result of this pandemic environment.
Ramsey El-Assal — Barclays — Analyst
Great. That’s terrific. One more for me, I wanted to ask another question about how the business is sort of involving 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 kind of your growth algorithm now? Is the model more reliant today on expanding to the wallet share of existing clients, or is it sort of business as usual? How would you kind of characterize that balance?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 the industry [Phonetic], 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 the loans were available, we were the first to put out the payroll report, that has 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 are payroll and HR, 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 through the pandemic, because of the value we’ve offered.
Ramsey El-Assal — Barclays — Analyst
That’s terrific. I appreciate your answers. Thanks so much for taking the question.
Operator
Our next question comes from the line of David Togut of Evercore ISI.
David Togut — Evercore ISI — Analyst
Thank you. Good morning Marty and Efrain. I appreciate you are giving guidance in an environment, where many companies are not. I’m wondering if you could flush 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 five 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 you just uncertain if we get another way of the fiscal stimulus, or may be 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yeah, hi, quite off the chart that will be good, but — yeah. 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 going to be. So you don’t win a game in the first half, but it certainly is good to be up several touchdowns, before the half ends. 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 is a note of caution in what we have. If we projected the lines we see now, we’d have different guidance, but we don’t do that, because it’s not 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 timeframe, things look better. We are 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 is 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.
David Togut — Evercore ISI — Analyst
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 timeline to implement this strong new book of business?
Martin Mucci — President and Chief Executive Officer
Well, I think what selling season will be is coming up, actually starting in the mid-market of this month. I think probably the only thing that is 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 are getting out now to meet with clients that they want to meet. This has all been done really remotely for the last two 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 are seeing them outsource payroll for the — payroll at least, if not payroll in 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 you’re seeing 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.
David Togut — Evercore ISI — Analyst
Understood. Thank you very much.
Operator
Our next question comes from the line of Jason Kupferberg of Bank of America.
Jason Kupferberg — Bank of America — Analyst
Hey, thanks guys, good morning. I just wanted to start with a clarification, Efrain, just on the second half outlook. Did you say that revenue should be flat to up, total revs?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yeah, flat to up, low single digits.
Jason Kupferberg — Bank of America — Analyst
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 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
When you say last quarter Jason, what are you referring to? Sequentially or the previous quarter?
Jason Kupferberg — Bank of America — Analyst
No. Last quarter when you gave us guidance and you broke down the first half and the second half, I thought at that point in time, the second half was expected to be up low-single digits?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
No, I didn’t say low single digits for the second half. That wouldn’t have been correct. So I’d have kind of look at what I said, but no, we didn’t say. 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, but 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 — our second half, that wouldn’t have been correct.
Jason Kupferberg — Bank of America — Analyst
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, sales force, customer support, etc. I mean is there any way to quantify that at this point, or at some point in the not too distant future perhaps?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Probably in the not too distant future, not this second. But I think the question you’re asking or if I can ask a question or answer a question you are not asking. Look, there is a range of initiatives that Marty was mentioning, the speed with which we did the footprint rationalization. It doesn’t take too much, too many assumptions to think that, we can 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.
Jason Kupferberg — Bank of America — Analyst
Okay. And maybe just one last one on the back of a 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?
Martin Mucci — President and Chief Executive Officer
Yeah, sure. I mean, we’re certainly seeing, as I think just generally in the economy, new business startups are up 20% year-over-year. It’s pretty incredible and I think what we’re seeing — what you see, and we see it, our new businesses, is 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 startups 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 startups, and that is our 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 the regulations and the benefits and what employees are looking for, from them as well.
Jason Kupferberg — Bank of America — Analyst
All right. Well, thanks for the comments, guys.
Martin Mucci — President and Chief Executive Officer
Okay, thank you.
Operator
Our next question comes from the line of Steven Wald of Morgan Stanley.
Steven Wald — Morgan Stanley — Analyst
Hey, good morning, thanks for providing all the continued guidance through all this. We do appreciate it. I was hoping to start off just by sharpening the pencils on a few items that you guys have been talking around, specifically, I think — I don’t think I missed a bit an actual retention number for the quarter. I think you said 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?
Martin Mucci — President and Chief Executive Officer
Yeah, 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 three 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 more of those go lost after year-end, we’re watching that. What we’ve seen — really a pretty dramatic decrease from the peak, down to probably a quarter 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
The other question is on unemployment.
Martin Mucci — President and Chief Executive Officer
Oh, unemployment. It’s hard to say, you know, really that’s just a prediction as to where we are. We’ve seen what half the jobs come back that that were lost. We definitely see the progress slowing, as you see employees come back and being paid. So we are seeing — we saw 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 would 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. 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.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yeah, we’re not pegging our forecast to 7% or 6% or 5% or 4.5% unemployment by Q4. Part the reason for that is, the business is more complex than — excuse me, 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 for originally, when we put our plan together, what it needs 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.
Martin Mucci — President and Chief Executive Officer
Yeah. The other thing that’s important to note is, we’re very diversified in our client base. So you know, even as this happened, we didn’t — even the 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 are also very spread around into other sectors, and construction and everything around construction has continued to perform quite well from a jobs 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 taken a hit, it doesn’t necessarily reflect in our results.
Steven Wald — Morgan Stanley — Analyst
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 you 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 is any particular areas of strength from — obviously, there will be 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yeah, what we’ve seen — if you look at it from a worksite employee standpoint in those states, we’ve seen a pretty sharp recovery, certainly in in several of those states. I would say, California is more volatile of the larger PEO states, just as they battled 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 that PEO itself, both — if you look at it from a revenue standpoint and the amount of worksite 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.
Martin Mucci — President and Chief Executive Officer
Yeah 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 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 continue to have good retention, as we go through open enrollment for insurance plans and everything this quarter.
Steven Wald — Morgan Stanley — Analyst
Great. Thanks for taking my questions.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
You’re welcome.
Operator
Our next question comes from the line of Bryan Keane of Deutsche Bank.
Bryan Keane — Deutsche Bank — Analyst
Hi guys, good morning. Wanted to ask about the change to virtual and ecomm? How does that change the revenue per client first, and then secondly, how does it change the margin structure? Is there a higher margin inherent in that?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 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 a lower cost to serve. So there is 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.
Bryan Keane — Deutsche Bank — Analyst
That’s helpful. That’s what I would have figured, but 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 five 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
I just want to clarify something Bryan. When Marty said that unit growth was the highest it has been in five years, he is not comparing it in terms of sequential improvement. If it was 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 with that, I’ll let Marty answer the rest of it.
Martin Mucci — President and Chief Executive Officer
Yeah, because when you’re top of the trough tonight, I think that’s where Efrain picked up, where you are talking about last quarter. We’re comparing year-over-year. So, year-over-year first quarter, it has been the best sales unit growth that we’ve seen in probably five 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, overall, has really helped. We don’t talk about net client growth except once a year, but — needless to say, when you put that together, you got nice growth.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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.
Bryan Keane — Deutsche Bank — Analyst
And going forward, do you think Efrain that — 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 ecomm model?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yeah, it’s still early. I’d want to — well, part of me wants to be draw a line with several points and then kind of extrapolate out. 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 — 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 is a portion of this that’s durable, and will continue, and that you’ve got to bake that into your model, and that there is 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 a business formation is better than anyone expected. So very different in some ways from ’07, ’08.
So we’ll have to get a couple of more quarters under our belt to get a sense of whether this starts to change that equation a bit.
Bryan Keane — Deutsche Bank — Analyst
Great, thanks for taking the questions.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Okay Bryan, thanks.
Operator
Our next question comes from one of Andrew Nicholas of William Blair.
Andrew Nicholas — William Blair — Analyst
Hi, good morning. 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 broker workers’ comp sales. It seems like we’re getting closer to the bottom there.
Andrew Nicholas — William Blair — Analyst
Got it. Good to hear. Good to hear. And then just a follow-up. Just 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 do 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’d be helpful.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yeah. We’re still very open to that and they 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 on 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’re 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.
Andrew Nicholas — William Blair — Analyst
Great, thank you.
Martin Mucci — President and Chief Executive Officer
Okay.
Operator
Our next question comes from the line of Bryan Bergin of Cowen.
Bryan Bergin — Cowen — Analyst
Hi, good morning. Thank you. 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 planned. 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 drivers — what was happening within the client base in terms of the number of clients, so we break that down. It’s not just number of clients, but the employees those clients had. So, the employees that the clients that were 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 in an environment where states like California and New York, which are important revenue states, were largely starting to, or were 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 in across most industries, as Marty mentioned earlier, when you put that together, we start — if you will, from a little bit higher — a higher step on the rung or 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 change the analogy, 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, were actually more in the right than wrong. And now the recovery from here, we 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.
Bryan Bergin — Cowen — Analyst
Okay, that’s helpful. And then I wanted to ask a question on the sales force. So, can you just give us a sense of the mix of the sales force that has returned here too in-person meetings, really I guess currently versus in 1Q, really feet on the street model versus the virtual sales force? And then how should we think about this mix longer term as things normalize?
Martin Mucci — President and Chief Executive Officer
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 is 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 decision.
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, that the client 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 sized clients, much more is being done without ever talking to a Rep at all because of the investments we’ve made at both Sure and SurePayroll’s products and Flex’s 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 needed.
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.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 sales people you have and where are they. That’s only one factor in the equation. If you have end-to-end eCommerce, the ability to sell without any salespeople, which was a something we invested 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.
Bryan Bergin — Cowen — Analyst
Just a follow-up there. What’s the top end of employer size that you’re seeing do it by themselves to that e-commerce model?
Martin Mucci — President and Chief Executive Officer
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, it could be up into the 20 — 20 employees. But typically, I’d say it’s under 10, Bryan. But it’s — if it’s a straightforward business, it could be more employees than that. But it’s — I think it’s typically under 10 employees.
Bryan Bergin — Cowen — Analyst
Thanks, guys.
Martin Mucci — President and Chief Executive Officer
Okay.
Operator
Our next question comes from the line of Kartik Mehta of Northcoast Research.
Kartik Mehta — Northcoast Research — Analyst
Hey, good morning, Marty and Efrain. 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 or last fiscal year you decided against it because of the situation we’re in. I’m just wondering for fiscal ’21 what you anticipate?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 record highs. But our NPS scores at this point through the pandemic are at record high, 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 is 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 that we’re facing. We think that many, 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. And we think that many of our clients will be okay with modest price increase. So, we will do that as we go through the year.
Kartik Mehta — Northcoast Research — Analyst
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?
Martin Mucci — President and Chief Executive Officer
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 crossed. 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 rates, 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.
Kartik Mehta — Northcoast Research — Analyst
Hey, thank you very much. Appreciate it.
Martin Mucci — President and Chief Executive Officer
Okay, Kartik. Thanks.
Operator
Our next question comes from the line of Pete Christiansen of Citi.
Pete Christiansen — Citi — Analyst
Good morning. Thank you for the question and nice trends. I had two 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?
Martin Mucci — President and Chief Executive Officer
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 over the years. And now that’s — it 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 — not to mention as Efrain has mentioned many times — our lead generation and digital, the offering in the demo, etc., and 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 taking 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 paycheck protection loan program, be able to give them the information they need for the loans that I said we had available to them pre-populated 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 non-payroll, the payroll data is already pre-populated. 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.
Pete Christiansen — Citi — Analyst
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?
Martin Mucci — President and Chief Executive Officer
I would — I think small business took the biggest hit in Q4 — in what was our Q4, I mean that kind of March-April timeframe. And they’ve now — I think they’re 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, I — there still could be some fallout. But I think small to mid-size business is 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 are 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 come back, progressively continuing to improve.
Pete Christiansen — Citi — Analyst
That’s really helpful commentary, Marty. Thank you so much, gentlemen. Nice trends.
Martin Mucci — President and Chief Executive Officer
All right. You’re welcome. Thanks.
Operator
Our next question comes from the line of Lisa Ellis of Moffett Nathanson.
Lisa Ellis — MoffettNathanson — Analyst
Hi. Good morning, guys. 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yes. Sorry about that, Lisa. Actually, it’s 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 in 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 then they started to come back and started hiring back, but — but that’s what I was referring to, and obviously it also impacted sales and now we’re talking back in the March-April timeframe.
Lisa Ellis — MoffettNathanson — Analyst
Yes, okay. And so, on the sales side, are you finding — like, how are sales doing in the PEO? Are you finding that — I mean I know that’s typically a reasonably complex sale, but I would imagine there is 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 the — even if it’s remote in the current environment?
Martin Mucci — President and Chief Executive Officer
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, they are — we are really strong on the ASO side and coming back on the PEO side as well. I 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 airs 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 for family etc., 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 HRG’s, the HR generalist, 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.
Lisa Ellis — MoffettNathanson — Analyst
Okay. And then I’ll — 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?
Martin Mucci — President and Chief Executive Officer
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 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 — I’m trying to play the middle of the line here, but we do see opportunities on both sides, 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 change, 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 401k in 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.
Lisa Ellis — MoffettNathanson — Analyst
Terrific. Thanks, guys. Good stuff.
Martin Mucci — President and Chief Executive Officer
Okay. Thanks, Lisa.
Operator
Our next question comes from the line of Jeff Silber of BMO Capital.
Jeff Silber — BMO Capital Markets — Analyst
Thanks so much. I know its 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 booked, how is that separated between opex spends and SG&A, and what kind of cost savings should we expect on both those items from these initiatives? Thanks.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Hey, Jeff, rather than get into, I am 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.
Jeff Silber — BMO Capital Markets — Analyst
Okay, great. And in terms of the cost savings, have you quantified what you expect?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 cost that we take out, but let me revisit that to get a better answer.
Jeff Silber — BMO Capital Markets — Analyst
Okay. Appreciate it. Thanks so much.
Martin Mucci — President and Chief Executive Officer
Okay.
Operator
Our next question comes from the line of Samad Samana of Jefferies.
Samad Samana — Jefferies — Analyst
Hi, good morning. Thanks for taking my question. 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 Payroll’s actively. I think you gave that mix last quarter. Just maybe an update on that and how that changed quarter over quarter would be helpful.
Martin Mucci — President and Chief Executive Officer
Yes, [Speech Overlap] Samad, as I mentioned earlier, we didn’t give the absolute number, but we’re down about three quarters 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 three 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 may again maybe hanging on for year-end or to see if they get another stimulus to kind of help them through. But the number — and the number dropped three 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 non-processing. Most of them are back processing now. They are processing with the fewer employees then — because they haven’t brought them all back. But they are processing, and less than — definitely less than 10% of the number went lost. So, it is 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 that will 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.
Samad Samana — Jefferies — Analyst
Great. I appreciate the clarity and hope you and your families are all doing well. Thanks again.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Thank you, Samad. You too.
Operator
Our next question comes from the line of Tien-tsin Huang of JPMorgan.
Tien-tsin Huang — JPMorgan — Analyst
Thank you so much. Also, encouraging results. I just wanted to hone in on the winning the startups piece. I thought that was really interesting. How much of your success there with start-ups do you think is organic versus doing something different in digital marketing and driving Internet leads? I know, Efrain, you and I’ve talked about this, and I’m curious if there is a different muscle you’re using to generate that?
Martin Mucci — President and Chief Executive Officer
Well, I think it is — I think as Efrain has mentioned, he’s used the word digital probably, I think he’s won the prize for using it. Those investments, Tien-tsni, 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, that people not wanting to necessarily meet with someone just especially if they’re small in 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 then actually encourages them to start the process of self — of 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, in these investments that we’ve done from a digital standpoint in both the lead generation and the self-setup have helped a lot. And at a time when a lot more startups are looking for someone, that has been kind of the perfect marriage of timing there.
Tien-tsin Huang — JPMorgan — Analyst
Yes, thank you for that, Marty. That’s very complete answer. Just a follow-up and I’ll let you guys go. Just on the — there’s a lot of talk about outsourcing and going through the selling season. Can you remind us, because I get 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?
Martin Mucci — President and Chief Executive Officer
Well, the number has always pretty consistently been 30%, 30% to 35% outsource 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%, 70%, meaning outsource and not outsource, and I definitely think that shifted. It probably had a pretty good shift here in the last two quarters.
Tien-tsin Huang — JPMorgan — Analyst
Makes sense. Thanks for your time.
Martin Mucci — President and Chief Executive Officer
Okay.
Operator
Our next question comes from the line of Mark Marcon of Baird.
Mark Marcon — Baird — Analyst
Hey, good morning, Marty and Efrain. 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?
Martin Mucci — President and Chief Executive Officer
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 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 an Excel 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, how do I handle all this? What about parental leave? How do I handle all these rules?” 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 — and my employees are expecting to be — they are now asking for Pay-on-Demand, for example. We haven’t even touched on that in this call. We offer Pay-on-Demand. They’ve started asking that I worked eight hours, because more employees are working shifts and part-time and various shits instead of being more normalized. They’re asking for Pay-on-Demand. They’re asking for access to their checks 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.
Mark Marcon — Baird — Analyst
Since you brought it up, on the Pay-on-Demand, what percentage of the clients are now using that?
Martin Mucci — President and Chief Executive Officer
You know, it’s still pretty small, but it’s growing. I think 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 clients 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 eight hours here.” And that employees says, “If I’m only working eight hours this week or because of children at home, I can only work 16 hours or 20 hours, I’d like the money right now instead of waiting two 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 up, but it’s still pretty small at this point.
Mark Marcon — Baird — Analyst
Appreciate that. And of the new clients that you’re getting that warrants 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?
Martin Mucci — President and Chief Executive Officer
I don’t have that right in front of me. I don’t know Efrain, if you.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
No, I don’t have that detail.
Martin Mucci — President and Chief Executive Officer
I’d have to — we’d have to look and see if we’ve got that. But I would try — I don’t have it right in front of me. 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 at 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.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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.
Martin Mucci — President and Chief Executive Officer
Yes.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
And we think that there is 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.
Mark Marcon — Baird — Analyst
And new units are up. What percentage were they up during this last quarter?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
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 a low single-digits, Mark.
Mark Marcon — Baird — Analyst
More than low single digits. Okay. And how about ACV?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
I’m sorry, how about what?
Martin Mucci — President and Chief Executive Officer
Average client base.
Mark Marcon — Baird — Analyst
ACV.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Average client base? I’m not sure I know what the acronym means or maybe I’m missing —
Mark Marcon — Baird — Analyst
Annul contract value of the bookings that you’re selling. In other words, book of sales —
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Okay, okay. Yes, 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.
Mark Marcon — Baird — Analyst
Okay, great.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Okay. That’s a good one. I’ll just put that in the acronym lexicon.
Mark Marcon — Baird — Analyst
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 that comes 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 at the end here? Or — and how we should think about that? Because all the comments are really positive. And it sound — but it also sounds like you’re not expecting the stimulus to come through. So, I’m just trying to put those two together.
Martin Mucci — President and Chief Executive Officer
Yes.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Hey, 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, etc. 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. We understand the challenges.
Martin Mucci — President and Chief Executive Officer
Yeah. 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 the 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 are at the end of the first loan. About 40% or 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 into 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 mid-sized businesses 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.
Mark Marcon — Baird — Analyst
I appreciate that. Great job in terms of all the things you can control.
Martin Mucci — President and Chief Executive Officer
Okay. Thank you.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Thanks, Mark. Appreciate it. It means a lot.
Operator
Our next question comes from —
Martin Mucci — President and Chief Executive Officer
Operator, are there any other questions?
Operator
Our next question comes from the line of Kevin McVeigh Credit Suisse.
Kevin McVeigh — Credit Suisse — Analyst
Great, thanks. Just a follow-up. All right, I’ll keep it tight. Efrain, I’ll keep it tight. Hey, just the record sales, and you’ve talked about this 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 are 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?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yes. I would say, because of where it was coming and because of the channels through which 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.
Kevin McVeigh — Credit Suisse — Analyst
Awesome. I’ll leave it there just in the interest of time. Thank you.
Martin Mucci — President and Chief Executive Officer
Okay, thank you.
Operator
Our next question comes from the line of Matthew O’Neill of Goldman Sachs.
Matthew O’Neill — Goldman Sachs — Analyst
Yes, hi, gentlemen. Can you hear me? I’m sorry.
Martin Mucci — President and Chief Executive Officer
Yes, go ahead, Matt.
Matthew O’Neill — Goldman Sachs — Analyst
Thanks so much for taking my question. I realize we’re way beyond 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 Paycheck 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 may be at this point kind of struggling, is there any kind of quantifiable metrics around that?
Martin Mucci — President and Chief Executive Officer
I don’t — Matt, I don’t have those numbers right in front of me. We do know that — well, we did a number of things. We partnered with three FinTech companies to help — including Vista Credit 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, so [Speech Overlap] we’ll try to follow up with that.
Matthew O’Neill — Goldman Sachs — Analyst
Okay. Thanks so much, guys. I’ll leave it there.
Martin Mucci — President and Chief Executive Officer
Okay. Thanks, Matt.
Matthew O’Neill — Goldman Sachs — Analyst
That sounds great. Thank you.
Martin Mucci — President and Chief Executive Officer
Operator, I think we’re going to — yes. Operator, I think, given the time, we’ll close the call at this point.
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Are there — is there anyone else on the call?
Martin Mucci — President and Chief Executive Officer
Operator?
Operator
We do have a final question from the line of David Grossman of Stifel.
Martin Mucci — President and Chief Executive Officer
Okay, we’ll take that.
David Grossman — Stifel — Analyst
Thanks. Sorry, I didn’t mean to prolong this even longer than it already is going. I’m sorry.
Martin Mucci — President and Chief Executive Officer
For you, we’ll prolong.
David Grossman — Stifel — Analyst
Thank you. 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, you could just share with us what your guide was for the back half, three months ago?
Efrain Rivera — Senior Vice President, Chief Financial Officer, and Treasurer
Yes, I think I just said that we expect the back half of the year to be flat to very low single digits. So, to the extent you 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. [Speech Overlap]
David Grossman — Stifel — Analyst
All right, fair enough. Let’s leave it there. Thanks again.
Martin Mucci — President and Chief Executive Officer
Okay, thanks a lot. Okay, 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.
Operator
[Operator Closing Remarks]