Q2 2020 Earnings Call
At this time, all participants are in listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question during this session Milani to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to your Speaker today Martin you see please go ahead.
Thank you and thank you for joining us for discussion of the paycheck second quarter fiscal 2020 <unk> earnings release, joining me today is definitely there are chief financial Officer. This morning before the market open we released our financial results for the second quarter ended November Thirtyth 2019, you can access our earnings release on our Investor Relations Web.
Page or Form 10-Q will be filed with the FCC within the next few days. This teleconference is being broadcast over the internet will be archived in available on our website for about one month.
Today's call I will review the business highlights for the second quarter effort will review, our second quarter financial results will discuss our guidance for fiscal 2020, and then we'll open it up for your questions financial results for the second quarter fiscal 2020 reflect good progress on our key initiatives total revenue growth was 15% for the quarter management solutions revenue.
Grew 6% and P. on insurance services revenues grew 57%, including the results from the away since acquisition.
We've been investing significantly in the area of sales marketing service and technology. These investments are paying dividends as we've seen continued momentum in new sales efficiencies.
Excuse me in operations and the introduction of new and enhanced products matrix is being known much more as a provider of innovative HR technology solutions than ever before our investments in demand generation in sales are contributing to solid growth in new sales revenue and in particular, we're pleased with a strong performance of the Midmarket space.
Aided by greater attachment of our broad suite of H.C.M. SAS based software solutions, such as our time and attendance and HR administration products.
We are now in the main selling season, we believe we're well positioned for continued momentum.
We're also continuing to experience improved efficiencies in our operations through the use of self service functionalities in our robotic process automation efforts by automating more routine process season, we're reducing operating costs and providing more time for more high value client service interactions with our team.
The evidence of high quality service by our teams as demonstrated by our client retention and satisfaction scores, which remain consistent with record high levels.
We have seen continued increases in net promoter scores most notably in the Midmarket space, Let me touch briefly on what we're seeing in the small business environment.
Paychex Hs market small business employment watch showed I really earnings growth at its highest level since 2011, well job growth has been holding steady wage increases are beginning to reflect the tight labor market for small businesses.
The constant battle for talent highlights the importance of having a partner like paychex, who can provide solutions to simplify HR recruiting and onboarding and a competitive benefits package to attract and retain top talent.
We are currently operating in an unpredictable regulatory environment.
Appliance with the rapidly evolving regulatory landscape is one of the many reasons employers choose paychex for their HR needs. We're proud of our leadership role within the industry partnering with regulatory agencies, keeping our clients informed and quickly updating our systems to be in compliance and support changes as they become affects it just this month the IRS released the final.
Version of the new form W. for to be used by all new employees and for all adjustments effective January one 2020 by remaining actively engaged with the IRS and providing feedback throughout their process. We were able to have the new forms unrelated calculations integrated into our systems within minutes of the issuance by the IRS.
The workplace continues to evolve both in technology and the way people work and we're very proud that paychex has been included on the Fortune magazine's future 50 list of companies that are best positioned for long term growth. In addition to solid financial results Paychex was recognized for its commitment to innovative technology offerings designed to meet the.
Needs of the evolving workplace, we continue to focus on enhancing our product offerings and the use of technology to remain a leader in this industry.
Last quarter. It HR Tech, we discuss some of the newest products being introduced this month, we launched one of those products pay on demand, which enables workers to access wages. They have already earned before pay day. This pay option is a great to have recruitment and retention of talent as it allows employees to be paid when they want allowing flexibility more flexibility.
And the traditional weekly bi weekly or monthly pay schedule other companies in the industry offer similar services on a smaller scale, but our solution is unique in that it provides our clients with flexible payment options, including direct deposit pay card and digital payment into Amazon or pay Pal accounts. However, the client employee wants it.
The other exciting products, we demonstrated HR tech are progressing on track and we'll be launching in the coming months, we continue to focus our investments in emerging technologies, such as Wearables real time payments product integrations data analytics.
Artificial intelligence.
We are proud that paychexs commitment to tech innovation has been recognized by industry experts. We were very proud to early awesome New technologies for HR Award at the HR Technology Conference in Expo in October this recognizes the enhancements and increased flexibility of our paychex Flex service product.
We were also named to the HR Examiner 2020 watch list for artificial intelligence and HR this recognized or innovation using AI tools and machine learning to strengthen existing operations, our flex assistant chat, but currently answers over 200, commonly asked questions spanning the flex suite of products in seamlessly integrates with real time lives.
We had capability with a paycheck service agent seven by 24 by 365 days a year. In addition, we have intelligent tools within flex architecture that deliver a more personalized user experience through learning individual user preferences overtime that can be listening out how to do something or even watching now short videos.
To to learn how to use the flex product.
Your next flex also want to Gold award for Excellence and Technology from Brandon Hall group in the category of best in advance and HR or workforce management technology for small and midsize businesses. This is the fourth straight year that paychex flex has been added with the Tech technology. Its Excellence award, which relates our tech vision investment in that vision in the value.
Tech brings to our clients, we're proud of the experience our flex platform provides to our clients and their employees enhanced through automation, we have built into the application based on individual patterns and preferences.
We also continue to see increase utilization of our industry, leading five star rated mobile app during the quarter, we experienced an increase of over 50% in the number of mobile sessions and a 35% increase in the number of mobile only users. This increase mobile usage by clients and their employees has led to efficiencies internally in higher net promoter score.
Wars, we are serving clients and their employees the way they want to be served.
Shifting to our video business the acquisition of Oasis was the largest acquisition in our history and doubled the number of Worksite employees, we serve in our PEO as with any significant acquisition. The integration efforts can cause some initial disruption in sales cadence.
And some operating inefficiencies as we realize the expected synergies as we discussed last quarter, we realize some of this in the first part of this fiscal year as we went through that process that has led to slower than anticipated revenue growth for the year. However, we believe we are in a good position now as we progress with full sales rep headcount in our operations teams continued to fall.
Focus on what's most important that is serving our clients and providing them the right combinations of solutions to help them succeed. We are excited about the continued strong demand for PEO services in the markets that we serve in summary, we continue to focus on growing our business by making things simple for our clients our innovative technology allows us to service.
Our clients in a way that they want when they want and where they want.
We're focused on continuing to introduce innovations to our technology enabled service to improve business sufficiency and drive even more value for our clients. Our full suite of HR solutions has been the recipe for growth and positions us for continued growth going forward the efforts of our employees and their commitment to our clients are definitely making.
Difference I will now turn the call over to Efrain Rivera, our Chief Financial Officer to review, our financial results for the second quarter effort.
Thanks, Marty and thanks to everyone on the call I'd like to our men remind you that today's conference call contain forward looking statements refer to the customary.
Disclosures. In addition, our periodically refer to non-GAAP measures, such as EBITDA et cetera, again refer to our Investor presentation press release for reconciliation.
Second quarter two related GAAP measures.
I'll begin by providing some of the key highlights for the quarter.
And then I'll follow up some greater detail in certain areas of BREP with a review of the fiscal 2020 outlook.
As you saw total revenue growth was 15% second quarter waste has contributed approximately a little bit less than 9% to this growth.
Expenses increased 18%.
For the second quarter to 649 million similar to last quarter increases in compensation related costs.
Direct insurance costs amortization of intangible assets contributed a total expense growth total expense growth was primarily driven by the acquisition of always.
Operating income increased 11% to 342 million operating margin was 34.5% for the second quarter EBITDA increased 16%.
EBITDA margin was Ford was approximately 40% for the quarter of EBITDA margin increased slightly compared to a year ago.
Operating margin declined due to the amortization of intangibles associated with you with this acquisition as you all know.
Other expense net for the second quarter 5 million includes interest expense of approximately 8 million related to long term borrowings as you as a reminder, we borrowed $800 million bonds to fund a portion of it always is purchase price.
The effective tax rate was 23.2 present for the second quarter compared to 23.8% for the same period last year.
Net income increased 10% to 259 million adjusted net income increased 8% to 254 million.
Diluted earnings per share were up 11% to 72 cents for the second quarter in adjusted diluted earnings per share increased 8% to 70 cents.
We received a little over one cents benefit from stock based comp payments during the second quarter, which is included forget but we excluded for adjusted diluted bps.
Let me provide some additional color in certain areas total service revenue.
Was up as I said $9 million to $971 million, 15% within service revenue.
Management solutions revenue increased 6% 727 million in PEO in insurance services increased 57% to 244 management solutions revenue growth of 6%.
Which actually exceeded our expectations included a contribution from oasis of slightly less than 1% the remaining growth.
It was primarily driven by increases in our client.
Bases across many of our services along with growth in revenue per client.
Revenue per client improved as result of higher price realization and increased penetration of our suite of solutions.
Currently time and attendance retirement services in HR outsourcing and that's been a focus.
Of our efforts over the last several years in a few chart.
Our growth.
Revenue per client you've seen a pretty steady increase retirement services revenue also benefited from an increase in SMB revenue earned on the asset value participant funds.
Few on insurance services revenue growth of 57% was largely due to the acquisition of Oasis, which contributed.
47% to this growth. In addition, the increase reflects growth in clients and client worksite employees across our existing PEO business.
Insurance services revenue benefited from an increased number of health and benefit applications, partially offset by the impact of softness in workers' compensation premiums as we've been discussing all year.
Interest on funds held for clients increased 9% for the second quarter to 20 million, primarily as result of higher realized gain.
Average investment balances and interest rates funds held for clients.
Average investment balances were impact by wage inflation increases within our base offset by changes in client base mix and timing of collections remittances.
Turning to our investment portfolio, we continue to invest in the high credit quality securities or long term portfolio has an average yield mount 2.1%.
Average duration of 3.1 years.
Our combined portfolios earned an average rate of return of 2% for the second quarter up from 1.9% last year.
Quickly looking at year to date results total revenues up 15% to 2 billion service revenue up 50% to 1.9 billion with management solutions, reflecting growth of 6% to 1.5 billion PEO and insurance is reflecting growth of 57% to 491 million.
Interest on funds.
As growing 14% 40 million operating income.
Person to 691 million, a net income and diluted earnings per share each increased 9% departments 23 million and $1.45 per share respectively. Adjusted net income increased 7% to 511 million and adjusted diluted earnings per share increased 8% thought were 42 per share.
Let me walk through the highlights of our financial position. It remains strong with cash restricted cash total corporate investments of 708 million as of the ended the quarter funds held for clients were 3.7 billion compared to 3.8 billion as of the end of last year May 31, 2019 funds held for Cline.
As you know very widely on a day to day basis and averaged $3.7 billion for the second quarter.
Total available for sale investments, including corporate investments in funds held for clients reflected net unrealized gains of $39 million as of the ended the quarter compared with 20 million as of the end of.
Last year May 31, 2019.
Total stockholders' equity was 2.6 billion as of November 32019, reflecting four reflecting $444 million and dividends paid $172 million of shares repurchase during the first six months return on equity for the past 12 month.
Has been a stellar 42%.
Cash flows from operations were 565 million for the first six months.
A robust increase of 14% from the same period last year. So strong performance on cash flow. The increase was primarily driven by higher net income and non cash adjustments increased than men noncash adjustments was primarily primarily due to higher amortization expense largely driven.
By intangible assets acquired through the acquisition of Oasis.
Let me talk about 2020 guidance.
I remind you that our outlook is based on our current view of economic conditions, continuing with no significant changes.
Though we have reflected the impact of the three interest rate cuts that have already occurred this fiscal year I'll provide our current outlook in some color on a couple areas. We provided updates to the guidance as you saw.
It's been solutions revenue has been trending positively and now we anticipated to grow in the range of five to five in that sense has raised from the previous guidance of approximately 5% growth and we're doing well.
In almost all of the buckets that comprise that.
That revenue stream.
And insurance services now anticipated to grow in the range of 25% to 30% as Marty previously mentioned Weve got off to a slow start with the ways voices slower than we anticipated.
We still maintain a strong long term outlook and continue to execute on our plans integrate our business.
Interest on funds held for clients is now expected to grow approximately 4% modified from a range of 4% to 8% started the year and this simply reflects the most recent federal funds rate cuts.
And.
Diluted earnings per share growth has been increased to a range of 9% to 10% growth rates from our guidance of approximately 9% growth. Other guidance remains unchanged as followed total revenue, 10% to 11% operating income as a percent of total revenue approximately 36 EBITDA margin for the full year expected to be up.
Approximately 41 effective income tax rate expected to be in the range of 24 to 24 and a half net income adjusted net income and it just diluting earnings per diluted earnings per share all expected to grow at approximately 9%.
Fiscal 2020, now let me provide a little color on the back half of your as I indicated PEO and insurance revenues are now anticipated to grow in the range of 25% to 30%.
Well the second quarter results were within the range provided 56% to 60% we have taken a more conservative approach for the back half of the year given our current trends in particular, we've continued to experience lower compensation lower workers compensation insurance rate at a moderate or insurance moderated our insurance services.
Yup.
We anticipate that this trend will likely ease as we enter the next fiscal year.
We're also seeing modestly lower at risk insurance attachment and the PEO.
In addition, this change reflects impacts from the slower start from the four weeks. This acquisition, we now anticipate that growth for the third quarter, Vito and insurance will be approximately 10%.
Management solutions guidance was increased to a range of five 5.5% growth from our previous guidance of approximately 5% due to favorable trends that we've seen in the first half of fiscal 2020.
This incorporates the higher than anticipated growth achieved in the second quarter and assumes that third quarter would come in.
The full year range I refer you to slide 16 in our Investor presentation, which shows the impact of the re class in the fourth quarter fiscal 2019 of an immaterial amount of Oasis revenue.
Please note that the as adjusted numbers on this slide represent the base on which we apply the growth rates, we are guiding two and management solutions and PEO and insurance revenues and the reason I called that out as when I look at your models two thirds of you do it that way and one third have split between third and fourth quarter. Please look at that.
Number so that you can adjust your models correctly.
Operating margins, which for the full year anticipated.
For the full year are anticipated to be approximately 36% do very core quarterly.
Margins for the second quarter exceeded the guidance, we provided in the last call, which was a range of 30, 334% peppy was impacted by delays inherent related to the tight labor market with we still anticipate margins of approximately 30% for the back half of year, we expect to continue to invest significantly in sales and market.
During the back half of the year, while still achieving our target of a full year operating margin of approximately 36%.
And with all that I'll turn the call back over to Martin. Thank you referenced we'll now open the question the call to questions. Please.
Ladies and gentlemen, as a reminder, if you'd like to ask an audio question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Ramsey El Assal from Barclays.
Hi, Thanks for taking my question I appreciate it.
I wanted to ask about the trend and the.
Lower workers comp insurance rates and I, just was trying to get an idea of your visibility how those rates trend. How do you. What gives you confidence about he does rates over time going into next year. I think you indicated sort of becoming more favorable what type of read you gain on that on that.
On that rate.
Well I'd say a couple of things one is that.
Because we have a insurance agency and or.
Our pricing policies.
Actually daily basis, we get a sense, a pretty clear sense of where that pricing is trending. That's one part. The second is influenced by what state Workers' compensation Board, where they're setting pricing and we know we have a pretty good sense.
Of what states or contemplating were have contemplated changes in workers' compensation insurance. So I think the combination of those and then the final thing is we're we're looking at the mix of revenue quarter by quarter, and we know that.
We started the year compare and it starts to ease as we get into the back half of the year old.
Got it Okay, and then could you talk about your retention trends and the degree to which those trends or I would imagine moving in the right direction, giving you confidence in terms of raising the managed to management solutions segment guidance for the year.
Yeah, we're continuing to see pretty much near record levels on retention across.
Both small and midsized clients were seeing very good retention numbers and.
So there they've been very solid and you know how conservative we are as we look forward, we still think theyre going to we're going to maintain that.
Going forward, so we feel that the value of the products, obviously and.
Along with the needs of the clients. During this particularly this kind of tight labor market I think are really keeping the retention and we're not seeing.
Out of businesses really increase either so all both from an environment and from our performance I think are both keeping our both keeping our retention numbers at record levels.
Thats terrific. Thanks for taking my questions. Thank you for sure.
Your next question comes from the line of Kevin Mcveigh with Credit Suisse.
Great. Thanks, Hey seems like the organic growth, particularly in.
Managed services is settling in at higher levels, despite much tougher comps.
Can you just frame out like how much of that is retention because.
Good morning, I know you mentioned kind of maintaining those levels is it possible E con to set a new level based on you know more the SaaS offering as opposed to the traditional service. So maybe just a sensitivity on SaaS for service and what that can do to the retention over the course of talent.
Yes, I think I think it certainly does I think we're appealing to to the clients. The way they want to be served as I mentioned earlier and their employees employees are playing.
A pretty strong roll these days more than I think ever in the past as you see the mobile app, 70% of the usage of the mobile App is the employee of the client and so they're having a bigger impact on retention and we started talking about that a couple of years ago. So I think that that does have an opportunity. The issue, though is still when you see improvement pretty.
Currently on the small client bases. There are so many businesses. The go out of business every year and we've been in this a long time and it hasn't changed that dramatically. So what I think where you do have room for improvement is certainly from a service value standpoint I.
I think the need for clients small businesses mid sized businesses to have.
Software as a service to have mobile apps to have self service available to their employees all those things are making them more.
More valuable and stickier I would say two appliance. So we certainly see some were optimistic but we still also know that so many businesses start up and go out of business on the small and.
And just to follow up on MRT real quick if it's.
If you're bumping up at that 82% level any sense of how much of that is failures versus.
Maybe other parts of new driving the attrition.
I think if you if you put all together kind of know employees out of business.
Bought a required it's typically been 50% plus a little bit so that accounts for about half of it and are little bit more even sometimes and then the other pieces or price and it's still just as competitive as it's always been hasn't really increase but that number has been pretty consistent and and then service.
Value kind of stuff, so I'd say, 50% to 60% of your rolled all those things together are kind of out of control type of thing.
Thank you.
Okay. Thanks Kim.
Your next question comes from the line of James Berkley with Wolfe Research.
Hi, guys. Thanks, a lot from time to.
Hey, I just quick question on the PEO side would be possible just a breakout in more detail just kind of that segment.
PEO and insurance separately, how bookings have been trending on the PEO side and maybe how much of the guidance drop was attributable to leases, which you expect to turnaround.
Well, let me start now have efron jump in I think.
What we've seen there is one we have our we think the market is still very strong for PEO in particular, so the demand continues to be strong.
But you're still seeing a very tight labor market. So they're looking for help in recruiting and retaining employees, they're looking for benefit packages that will retain employees and HR kind of mobile app and strength to not only recruit but retain in that mid market small and mid market. The other thing is that the.
Great one of a waste is certainly has impacted this somewhat we got off to a slower start we mentioned it in the first quarter last year, we really began the active in integration around June so about six months ago.
And once we started aligning underwriting procedures sales comp models service processes and those things it kind of slowed our sales cadence down at a wages.
And it was definitely impacted by underwriting we've always been very tight on the underwriting side. We wanted the processes to be very tight and in so that gave us slower ramp up to the sales.
The sales and then we had to ramp up the sales head count and that was a little slower than we expected now we're at that full near that full rate full ramp up of the sales head count and also we got through a couple of insurance renewals you know, it's always important to kind of see where we're coming out for the first time with a major integration like that with insurance renew.
Rules and we came through fine, but that in the underwriting I think certainly impacted some existing clients now that all or that we're through that we have a much better sense of the first year of away system, where we're going to come out for this first fiscal year. The remainder of the first fiscal year. We think the market is very strong our organic PEO business.
This non acquisition was very strong year to date and so we feel still very strong about it we just got off to a slower start than we thought and that's going to impact the full years.
For years performance.
I guess has asked another way if it's okay would.
You didn't do deal or Oasis acquisition would have organic PEO growth than in lot of expectations like what that had been unchanged.
I think it would have been pretty much unchanged I mean, when you look because we feel very we're actually performing sales have been stronger.
Than we expected in our organic PEO business and so yes, I think it I think it would've been stronger I mean this is we really feel like this is kind of around the first part of the integration and although we've had the company. We purchased a company in December we kind of let the fiscal year play out we had a number of things we we're organizing around running some synergies.
Then in our beginning of our fiscal year, we kind of put new processes in place and frankly, it had a little bit stronger impact than we thought in slowing things down from a sales and and even retention perspective now we've kind of got that turned around and we just wanted to make sure. We're conservative kind of on the rest of the year and how that will come out, but we feel.
Very good about the market and yes, it would've been stronger can just looked at without the integration. We certainly would have been above I think our expectations on PEO only side, that's great to hear and obviously doing really well and merchant coming on the on the management solution side as well. So just last question on that point on.
Just given the tight labor market.
Any thoughts incremental thoughts and kind of where we are in the economic cycle. How you think about things like labor participation rate how much slack there might be left in that and room for you guys to ride in the small business side.
Yes, I think we're still feeling pretty strongly about how the market is how the market outlook is the optimism still it bounces around a little bit business optimism, but what we're seeing is the wage increases are the highest as I said since 2011 from small businesses under 50 employees. This is what's in that watch and the hours work.
Our up also for the highest in like three years. So were we look at that as demand for the employees. So the business is this the toughest thing for small in particular small, but mid sized businesses right now as I can't find the people to finish that to get the work done for the demand I have that to me points to a pretty strong account.
Let me still and and that's how it feels to US when hours worked are up and the wages are up it's because hey, I've got the.
I've got the the demand and from client from customers that want that so I think thats very good the tariffs in the trade issues, we've seen impact roughly a third maybe 25% to a third of small businesses. Most of those are more much more reason our regional.
So theyre not going to be impacted by that to the third 25% or third that are impacted by tariffs and so forth.
Have a harder time, but but most small businesses are not impacted by then.
That makes a lot of sense. Thank you.
Your next question comes from the line of David Togut with Evercore ISI.
Thank you good to see the strength and.
Bookings in the quarter could you, perhaps dimension the rate of growth that you've seen Marty both in the small business managed solutions market and also Midmarket and then.
Although strength.
From a macro standpoint.
Additional color about which solutions are getting the most traction where you think you might be gaining market share.
Yes, I think one retirement continues to be very strong and I think you know the secure act.
Mostly probably know got through the house.
Yesterday and is headed for the Senate if that gets approved.
Thats, giving tax credits for new retirement plans and and I think that would continue to be a boost for small businesses starting retirement plans and we continue to be just very solid on retirement services. Both what we would call large market and small market generally are doing very well time and attendance when you think about.
At the overtime changes that have been recently made in providing overtime to more it's hitting more employees of our clients time and attendance continues to be very strong double digit growth as well.
And we're we try to of state we've really state I think ahead of even the market from a technology standpoint. So it's not just the old punch cards. It's you know its finger scan, which is now going to ice scan, which has gone to face scan and now wearables, we'll be introducing very soon that you can punch in and punch out on year on year of why.
And in these are all things that are being demanded by clients. So I think time and attendance retirement, certainly HR overall and the technology that goes with that meaning I want to see data analytics that help me as a small and midsize business compared to other businesses. We have that database that other clients are.
Other businesses don't have we can use data from 600000, plus clients that say hey.
Here's what your turnover looks like comparative others here is what you're wages look like so I think data analytics and HR and all of those things all or are pretty strong and so overall, we see pretty good growth our heading into this were in selling season. So it's too early we really need third quarter to kind of give us that look on on sales, but so far.
Year to date sales have been good and particularly in the mid market, we feel very strong about the pickup that the products of have done in the marketplace.
Thank you appreciate all the insights okay to thank you David.
Your next question comes from the line of Stephen Walt with Morgan Stanley .
Hey, good morning.
Just maybe going through the pieces. The revenue guide I know you guys didn't change the overall revenue guidance when I look at your adjusted numbers I believe that for me talking about this after last quarter. The two different adjustments made there and.
So to map out the pieces of your segment guidance sort of getting to 9% to 11% range at the bottom end top end of those pieces added together is that generally how should we thinking about it sort of seems like at the midpoint you'd be at the low end of your prior 10% to 11% guidance Thats not no stick your far off Steven.
Pick that.
That's fair.
Okay collectively make sure I understood that and then.
And then is causing question last quarter the Oasis.
Hone ends and other you reclassified a piece of the last quarter as to how to think about it but I think it in the press release, you said it added about 1% to the management solution. So should we think about it as leases minus 70 million is all in the PEO and the rest goes into management solutions.
Yes, I'd have to him doing mental math really quickly I think it's a little bit lower maybe 67, but but.
Im not looking at the detail about that Thats far off.
Okay I just wanted to make sure I was clear on those things Okay. All right. Thanks.
Your next question comes from the line of Andrew Nicholas with William Blair.
Hi, good morning.
Just wanted to talk little bit about technology in the PEO business.
I'm wondering if you could talk maybe about your plans for Oasis and maybe even HR Nikolai from a tax perspective.
Our both businesses so running on a third party software or are there plans to transition to an internal.
Briatore software in the near to medium term.
And then maybe related Lee as just wondering if you could maybe speak to the tech capabilities of your PEO business relative to the competition.
Yes, I think.
Capabilities.
First of all yes, they're both on third party added.
License software and so far that seems to be going very well. So we're watching that closely but we're not looking to necessarily moved any quick integration.
Or client conversion.
To disrupt the base or anything like that so we think that the third party software is doing fine and in fact gets upgraded pretty.
Consistently and so we feel good about that the integration, we're tying it in as much as possible to our products as well. So I think that technology that we're focused on with the HR ROI and.
Places is how to tied into our for our retirement information our retirement integration excuse me into our retirement time and attendance and so forth. So that they can benefit most from those products and that's going well.
And so we'll determine overtime, whether it makes sense to get them to.
Our PEO.
The house product.
Our or not I think.
You never want to necessarily move clients through a conversion if you don't have too and if thats taking curve, but we're still continuing to watch that's not a focus right now our technology and on the PEO is that we feel is very competitive we can see as I said that the demand is good in the street and we're selling well, particularly on.
The organic side, if you look kind of non acquisition and integration.
We are doing very well on the organic PEO and are fact are ahead of sales. So I think our product is performing very well competitively in the marketplace, just just add a little bit more color there Andrew so so.
Our.
We run on both the flux platform for our.
Or.
Business.
And we also run on.
A third party software, which many of you know what it is.
But.
It's a customized instance software so so there have been a lot of.
Upgrades and adjustments.
Enhancements made to that system and I think the challenge as Marty mentioned is.
With those customization.
Enhancements.
Over time, we want to figure out what the right right decision is in terms of bringing all on one.
On our internal platform.
We'll take a little time to sort out.
Makes sense, that's very helpful. Thank you and then maybe sticking with the PEO space. Just wondering if you could update us on your appetite for M&A there.
And maybe more broadly how you would characterize pricing in this space.
And last thing there would be does some of the slower than expected start with oasis tied to kind of integration issues.
Change that appetite at all thanks, Yes, let me let me start at the at the end and go back I think yes, any integration when you update and they and remember Oasis. It had a number of companies as well and so we had to go across the number of companies that they had acquired as well we wanted to be sure that we felt comfortable all the underwriting.
Processes, the sales comp models getting tighter process on service when we pull all that stuff together you have some consternation that goes on and some slower ramp up of hiring of the sales folks et cetera, and we really think that was tied to just getting things all aligned and we really didn't push those things until about June into that.
Summer in so that put us a little bit behind this year as first starting out. So think it was really geared around that M&A was still very interested certainly always looking.
And what opportunities are there from a when you talk about pricing if its pricing of the M&A. The valuations are still I think pretty high but it all depends there's so many peos, it's such a fragmented.
Environment, but theres a lot of opportunity I think out there and we're just trying to make sure that we get the right valuations from a pricing from the market standpoint, I think we're extremely competitive I don't think the competition in that market is changed very much and I think we're very competitive and we're seeing that by being above sales.
Our sales forecast in the first part of the year with our organic PEO. So.
Where theres no distractions or anything at the beginning of the first half of the year, we've seen very good sales.
Probably very good sales results from from our organic PEO.
Great. Thank you.
All right.
Your next question comes from the line of Jason.
For Berg with Beal Bank of America.
Hey, Thanks, Good morning, guys happy holidays.
Same view.
I wanted to ask a follow up just on Oasis.
Should we have the numbers right I think of regionally the expectation was for leases to generate 335 to 375 million in revenue. This year can you just help us get a sense of what the new range would look like obviously just given.
The integration challenges that you talked about.
I think Jason we're still in that range.
But we're certainly towards the lower into that range.
Okay. Okay got it got it and then just on the Salesforce side of always has some and I guess as you went through the integration process was there any unexpected uptick in voluntary turnover among oasis salespeople.
Yes, I think you we lost a few it was a very we started making changes to underwriting process and sales comp and things like that at the beginning is pretty minor number.
But we lost a few because of the same time you had some PE firms buying up a couple of other small.
Companies that were that we're trying to attract sales rep. So I think we lost a few I wouldn't say it was it it was not a big number.
And then that put us little behind ramping up the Salesforce those number that we wanted which were back at now so.
Thats a bit of what we encountered at the beginning so okay and then just a final clarification efrain just on the on the EPS side I know because there's a couple of s's out there. So diluted EPS you did uptick but your adjusted EPS growth expectations are unchanged correct and I think the number you correct.
Okay. That's that's reflecting what we focus on both Jason, but but okay, but thats, reflecting taxes I mean look yes, I get the the question frequently why do you guys called that out I think in the in an effort to be transparent about what we think is underlying operating performance and whats underlying financial perform.
Yes.
Underlying operating performance.
We exclude the impact stock comp.
That everyone does we do and then financial performance is what it is so so.
That's what we're trying to be clear on.
Yep Yep, Okay very helpful. Thanks, guys.
Yeah.
Your next question comes from the line of 10 thing Wang with JP Morgan.
The until Reis services can you give us an update on.
Penetration for some of the services like time attendance and.
In retirement services, how much more room is there to go.
Hey, it's engine sorry for that Miss pronunciation, but for some reason at the beginning of the of the question. We Didnt you Didnt come in you cut out yet so we didnt hear the full question. So to answer it. If you could you repeat would you mind repeating it yes happy to help US is little better just the penetration rate of some of the ancillary services like time and attendance retirement.
It services I think both were called out as being positive.
Are you in that.
Yes, we're definitely picking up we don't give.
Detailed penetration rates on those but we definitely are picking up penetration across the base on time and attendance retirement continues to go up the other thing on retirement that has been very helpful to us as in the mobile App you know we've not we've released probably six months ago.
Where you could sign up on the mobile App I think I've talked about it before as opposed to all of the paper that employees of our clients would go through so the participation rate is up and Thats now retaining more for one k. clients that otherwise would have dropped out because they didnt have the correct participation of their employee base. So we're not only are the sales stronger.
But the part the retention of four one k. retirement is stronger as well.
Health and benefit insurance up ticking up a bit as well.
Of course, we're still strong on the insurance side and we've linked the PEO to our agency being a top 20 agency. We have if you don't qualify for underwriting and the PEO. We think you over to the insurance agency to right should we have a very unique.
Offering at that point.
By the ability to do that so I think all it picked up pretty strongly those are certainly the best that I can think of right off hand right now.
Yes, so to engine, we only update those at year end, but I think just underscore what Marty said.
We're trending above where we where we ended last year and if you look at it from a revenue standpoint on breakout revenue on each of those.
Each of those areas that were called out time and attendance.
HR.
And.
And.
Retirement services those are trending above were.
Were management solutions as a whole is growing so we're experiencing good result, and by the way just want to make sure that is clear.
That is our strategy our strategy is to approach a client and sell them on the full bundle, which is why we present the revenue in the way we do.
Right, Yes, no. It's been clear you want to travel revenue per so.
I get that so just as a quick follow up then and I know you mentioned.
I remember last we talked about improving enrollment on four okay. What have you so.
Sensitivity to you and asset value given some of the move up your I'm curious is there an update or any rule of thumb. We can use gives the equity market has been strong it sounds like thats, helping you quite a bit here maybe yes. That's a good question. So it's really assets under administration to engine.
Well have to come back it's not a huge numbers. So we wouldn't anticipate a significant.
A significant change, but in the back half of the year.
Get into into.
Taking a little bit about next year, we'll talk about it right now I don't think it would be a significant.
Something dramatic in the market, we wouldn't be significant in the order of.
Pennies.
In terms of EPS, but we'll update as we go through the year.
Okay, well suited for that have a safe holiday guys.
Thanks, you too.
Your next question comes from the line of Brian King with.
Deutsche Bank.
Yes, good morning, guys.
To me it sounds like the Oasis.
A little bit of an integration challenge is more onetime in nature. So I'm trying to think about what the normalized organic growth rate for racists might be post one year out.
So when we bought them people asked you. This they were growing kind of mid to upper single digits organically, that's where they were.
They we expect that we will be able to.
To bump that growth rate with additional salespeople, obviously as Martin mentioned, we're off to a slow start there but.
Our expectation as we can get it.
Got it growing.
Above those rates in the future, we're going to get through this year get through the disruption of this year.
Yes, guessing that the growth rate this year will be a little bit below their historical average as a result.
Hello.
Yep.
Then one follow up I had on on the revenue per client increase it also sounds like you're getting a little bit a higher price realization just trying to figure is that is at normal.
Higher prices or is that something that you're seeing a little bit different a little bit more pricing power than usual.
I think we've had a little bit more pricing power this year than that.
In other years I think that.
We do a lot of work on the analytics side to understand how to price each client I think we've done a good job.
On the pricing side to do that so.
You Hope every year, there's there's opportunities to do it.
Obviously, we hope to hold hold that that kind of.
Pricing power, but every year brings another set of challenges. It also depends on competition. So.
Well I think the level of competitive intensity remains high certainly.
Dramatically increased and one thing we haven't talked about Brian , which I think is important.
We are having a really good year to begin the year in our Midmarket business, which also helps management solution. So a continuation of those trends.
In the back half of that you're going into next year than than hands.
A.
So I would say boy.
Thats a little bit too.
The strong, but but a positive effect on management solutions revenue I think the investments are really paying off that we've made in the product in the technology of the HR side of the mobile those things are paying off and as Efrain said.
Midmarket is really coming on strong we've had a couple of years, where was it wasn't as strong as we would have liked but we're feeling this year was certainly we're seeing this year and the first half of the year and now we can tell you more after this quarter, but it feels really solid about the performance there on the sales side and retention side.
Okay, great. Thanks, guys happy holidays.
Right.
Your next question comes from the line of Kartik Mehta with Northcoast research.
Hey, good morning upfront and Marty.
Just to.
Maybe get a little bit more colour on the pricing comments you made for the payroll business I'm wondering from the competition standpoint have you seen to change our or your competitors getting less aggressive or is this strictly.
Hi, Techs issue, where you are able to raise prices and maybe to competition for new business is still the same.
I think I think it's primarily internal I think we we have.
I think our algorithms internally get better and better every year and I think we understand more clients.
Our okay with certain price increases clients or not I think you have to be very with a great a lot of care if you raise prices carelessly.
End of creating shopping behavior I think the other part is that there are.
I think the strength of our model permits us to understand the level of customer intimacy, we have permits us to understand what segments of the client base, we can get better pricing. So I think it's more more internal than it is external but I think it's important.
In that in that equation.
The rest of the market is not acting irrationally from a price.
And then Monty just on the PEO M&A question I know you said.
Obviously valuations are everywhere, but.
Just from a paychex standpoint, you said Oasis you want to get this integration done maybe you didn't go as smoothly in the beginning as you want it is that slowed down maybe M&A would you wait a little while beefing get oasis running to the point you want before you acquire another IPO or do you think you're in a position.
Where if an asset came up to be ready to acquire.
Oh, you know I think Kartik, we are very much in position and we really feel like Oasis is in good shape. Now. It was really is kind of first half of the year that was most of the integration kind of just a lot of changes that we had to make that always calls caused some slowdown, but I think no. We're very much ready and in fact looking at a number of things today.
Hey is that that are out there and available and no I think from a management leadership standpoint, and organization no or very much ready remember how large AG oasis was the largest private PEO in the country. So you knew you are going to have some integration there.
That we had to do more but as far as everything else from major ROI to all the acquisitions. We've done we've had a very solid track record from integrating and then hitting or beating the numbers that we expected from those acquisitions.
Makes sense.
Thank you both I really appreciate it have a really good holiday.
Actually Arctic you too.
Your next question comes from the line of Lisa Ellis with Moffettnathanson.
Hi, Good morning, guys them first one for me is on the rollout of the Pan demand products you called out I think that you just launched one of them in.
In the prepared remarks, but if I recall correctly I think you're launching two right. One that's more targeted toward employers in one targeted at employees.
Can you just give us a little more color on the exact timing and the monetization models for those two products. Thank you, yes. Shortly so the one we rolled out this month.
Weeks ago was the one for employees that was the basically pay on demand and it's as I mentioned, it's an expanded we think options better than most have out there.
This is can you can not only select when you want the money, but not only and not only put it in your bank account, but you can put it on a pay card. If you want you can put it in your Amazon accounts you can put in your Paypal account. We think this has the broadest selection of options and flexibility that we've seen in the marketplace and and we get up per se.
Manage obviously, we're doing that with a third party and we get a third a percentage of that.
Back into the business and we think for the most part though that the monetization of that is really in the retention of the clients and their employees that were adding another thing to get to employees, that's going to want them to stay with paychex stay with the mobile app stay with the pay flexibility et cetera, which is going to be good for the clients.
In a very tight labor market in the real time payments.
Which is really more geared toward the clients as you mentioned that's geared toward the end of the first quarter of the calendar year as it consistently has it's right on track and and we feel that will be one of the first to offer real time payments there will be a charge for that as we've mentioned in the past we're still working through all of that in.
Looking at the marketplace, and so forth, but as we get closer to rolling that out on schedule than what will we can talk about the monetization of it.
Terrific and then second one for me, maybe Marty can you comment on how the new it looks like this and maybe five law impacting kick workers in California is going to go into effect can you comment just on how you see that type of law impacting paychex and eight and what how you handicap.
Your expectation that that.
Spreads across the country. Thank you I think it's funny I. It two years ago that gig economy was very big and an expected to kind of take over employment and and then it really is kind of quieted down to a certain degree I think those laws in similar ones will come up I think it's the flexibility that that we want.
Of give employees I think it'll be picked up by states like you said like California, New York Places like that first I think we'll be ready to handle that and I think frankly, having a mobile app having pay end demand.
Having flexible retirement plans things like that where our we're very well.
We're pretty well geared for that and we're continuing to look at our product set to see how we can do things more even more around an employee E versus an employee or which has obviously been our model for many years. So I'd say, it's still early stages, but it's still pretty early on the gig economy to that seemed to be the.
It was going to be the wherewithal it was going to be everything a few years ago, but is quite a down.
I think we're able to handle some of that now and we're continuing to look at our product set.
With our head to head of product to see what else, we can do to make that easy and to be able to comply with any new employment laws that come out.
Okay, great yet and I guess, just does do you like completely clarify I think this law impacts like.
Workers they'll be classified as like W. Two full time employees versus ones that are classified as contractors, but you currently.
Actually cover or process payroll for both if that was right. I mean does is that yes, yes, so we sort of mutual effect, yet direct neutral effect right now yeah that we yes, I was thinking more of a wider.
Look at that issue of the whole gig economy real opportunity there, but you're right yet we cover both of those now whether theyre contractors to 90 nines or W. Twos either way.
Okay wonderful thanks, guys happy holidays, Thanks, a lot isolation.
Your next question comes from the line of Brian Brian with Cowen.
Hi, guys good morning.
Don't ask on margins and maintain margin guide following good first half year is there a ramp in the investments absorbing this somewhat in the second half and even or is it a function of officiating oasis back on the path you expected or is it more broaden that if you can just gotten some the moving pieces.
I think Brian when you when you look at first half versus back.
I'm, sorry second half versus.
First half.
The key thing that occurs is that in Q4, you have your highest margin quarter. So you have expenses that are that don't ramp anymore.
Because now Youve anniversary.
Anniversary noises.
And so expense growth is more moderate but.
But then revenue is higher particularly in the third quarter were.
Margins.
Typically are going approaching or above 40%. So I think that's what drives that quarter is unique in terms of the amount of revenue that it has and then.
The fourth quarter also has a high revenue and expenses aren't ramping along with the revenue and driving margins higher.
Okay.
Wonderful and also on the on demand pay product can you just talk about some of the early adoption levels on the employee side and how how should we thinking about the funding mechanisms. All these pay products and any potential impacts to the flow portfolio.
No. It's all done through through third parties. So there won't be any impacts on our float we're not taking any of the risk on it or anything else. We're just getting a percentage of the fees that are paid and.
And it's very early.
Brian is very early on the adoption I mean, we've heard certainly the demand for it.
But it just we rolled it out a few weeks ago. So it's really too early to say, but there seems to be a great demand for it and again I think this is the most full featured from our full flexibility from an opportunity. So we're anxious to see how it how it goes I'd be able to give you a better right. After the next quarter.
Okay, that's fair and effort just the last one way said you lap this acquisition of our over I guess part of the third quarter anything to call out in the expected contribution of Oasis in Threeq, you anything seasonal in that mix between the two segments to note here.
Nothing that's not contemplated in the Guy I think yes, nothing significant.
All right. Thanks, guys have helped us okay. Thanks.
Your next question comes from the line of so much Samano with Jefferies.
Hi, good morning, Thanks for taking my questions.
So.
As it companies mentioned mid market strength multiple times in the call. This morning as curious if maybe you can give you what the average number of employees for new deals in the quarter like just to see if it's how it's impacting the mix versus that historical average closer to about 16 employees and then I have one follow up question or.
Secondly is much larger than that so it it would pull that mix up.
We don't normally give that number out smile, but but I mean, it's it's much it's I would say look at somewhere between.
Probably.
50 to 150 give you a wide range, but the averages somewhere.
Under 100 kind of thing on a client I'd perspective so.
Okay, Great monitor is much much larger than that fit the 15 or 16, thats what pulls that up.
Yes, I guess I was wondering more about what the what the overall average than what it band or for that for this quarter just to kind of get a sense of how much it's pulling up the overall average.
It's pretty right now, it's it's pretty consistent so I don't think it's moving it enough I think we I don't know if we really give that out other than annual if that but it has some I think it would have some adjustment, but not much pretty consistent.
Okay, and then maybe just as a follow up as I think about.
The sales headcount investments that you're making.
Is there other products that you guys have rolled out and as I think about the mid market are you also hiring reps that are more geared towards selling to that 50 to 150 employee type of customer and should we see as we think about the ramping investments in the back half should we continue to see that trend in terms of the type of salesperson hiring as well.
Yes, I think we definitely are at were promoting some from within and from a career paths standpoint, and we're always excited about that and by the way that market goes anywhere I don't want to get to the sensor thats only that what that market is that market goes anywhere from 20, frankly 20 or 30 employees. These days till 2000, but I would say, it's primarily in that.
2500 space, but it goes pretty broad.
Yes, we are hiring people with more experienced some from competitors some from.
Other industries, and then promoting some as well from internally and it will continue to invest in that we're pretty much.
Up to up to full employment up to full hires where we are now, but we're always looking for good people and and I think success is helping us from that standpoint recruit as well that always helps.
Great. That's helpful. Thanks for taking my questions and that gets I'm happy holidays, and thanks, you too.
Your next question comes from the line of Jeff Silver with BMO capital markets.
Thanks, so much on other calls and going long has had a quick follow up actually perhaps.
I know you don't give fiscal 2001 guidance, but I'm not in terms of tax rate is the tax rate that we're using or you're guiding for this year. That's something we should use for next year as well.
Yes, Jeff you.
Look I'm going to say right now.
I don't see significant things that would change at the state like state.
Taxes and stock comp expense move it, but it's probably not a bad proxy right now okay fair enough. Thanks, so much.
Okay.
Your next question comes from the line of David Grossman Stifel.
Hey, good morning.
So each of the Peos reported some issue.
The most recent quarter and well each was different there was typically some element of health insurance involved so.
Can you provide some context to in contrast to what you're experiencing and what may or may not be happening industrywide.
Yes, I guess I'd say I don't think well wait when we look at it if you looked at Reed tension in particular and now we're through a couple of renewals.
I would say it was.
Pretty fair I think there is always a combination of underwriting and tightening up where we want our performance to be from all medical loss ratio and were pretty conservative and careful on that and what were and into our underwriting standards and so I think that had some impact on retention, but I don't think we.
Had any necessarily.
Abnormal impact on the rates that we got themselves I think we got pretty fair renewals overall from from the carriers and then we have our.
Our own self insured plan I think we're performing pretty well there and I don't think the carriers gave us anything that was that difficult I think we just we have a little bit tighter underwriting standard that we wanted to put in place or I guess tighter than what it at least what it was.
And in that had some impact on some clients on the other hand, David the nice thing about us as we can take some of them over than to the insurance to the insurance agency and write them through through the carriers as opposed to taking you underwrite or the some of the risk and ourselves so.
So I don't I don't think I think in contrast, I don't think we saw anything I don't feel like we saw really anything that abnormal from the carriers in the renewals themselves, which bodes for to me and for US I think bodes well for the future. There was no abnormal abnormality, there that should continue or anything.
Got it and then.
Just going over to the mid market I know that has come up several times, but.
So just had to isolate one thing that's changed Lois that may have impacted the momentum in that business. What do you think that is and do you think youre gaining share or you just think you're doing a better job.
Retaining your clients and say migrate.
Into that kind of mid market category.
Yes, I think the one thing is definitely the technology investment I mean look we had a solid salesforce and great sales leadership, there and in operational and service performance and but I think the biggest change has been the technology investment over many years now, but it's really come to fruition.
The last few years in particular as everything has come together the mobile App. The HR administration, the data analytics the artificial intelligence work.
Everything that has come together now we have a fully integrated solution for a mid market that is very simple to use and we're I think that is really shown in the sales performance, particularly this year, but yeah, we could start to see it last half of last year than the first half of this year the sales performances.
Better and the retention as well, but I really think it's the technology on top of good good sales and operations leadership in performance.
And just to think I think we are taking some share but you do know as you know that is a growing market for all players and we.
We just haven't gotten as much of our fair share in the last few years in my opinion as we should have and we had to get the technology really to all pull together, we kept introducing good products, but now we pull that together and we also now have moved to say Hey, if you want to product integration. If you want something if you have the best HR time and attendance that you think is better.
Later than ours will will build the product integration for you as well or we have the product integration are ready to repeat.
And and so I think all of that has has really help I think that technology would be the number one biggest thing.
Right and just can you help size, it's for us or just give us some context. So that we can think about how impactful to continue to the overall growth rate.
Where do you mean in terms of revenue.
Yes, yes, yes.
Yes, so so midmarket revenue for look at it.
In terms of total payroll revenue, we give you payrolls I'm not going to new and number you can't figure out it's been running about.
25% or so of our overall payroll revenue.
So you can figure out management solutions.
Percentages.
His management solutions, you can get a sense of that that.
Buckets within management solution. So if it accelerates its helpful and I think that.
Sure It where it is helpful. I think that was the discussion earlier about this.
If you see printers.
You see continued trends and overtime you see average client size go up and Thats positive, but also you have more opportunity to attach ancillaries.
When you when you get those clients.
Got it thanks very much I hope you both have very nice holiday thanks, David into.
Your next question comes from the line of Mark Mark on with Baird.
Hey, Marty and Efrain happy holidays.
Yes, Thank you Wendy.
Hey.
Just a few follow ups first just on the PEO side.
When you talked about the carriers and what you're doing in terms of your own self insurance on the health care cost.
What rate of increase are you typically see as you go into next year.
For for a like for like type plant.
You know I think.
Mark I would say no one's given you the exact exact increase I would say, it's pretty competitive with the market in some cases, a little bit below so.
Part of.
Following up or.
Marty was saying.
As we try to manage the book.
Very conservatively, we ensure that.
That we.
We manage those.
Losses tightly so that we can go up to market with rates that are our competitive in the market.
Okay.
I appreciate that and then.
With.
Not sure if you are hearing that.
Yes, a little bit there Mark go ahead.
With regards to the percentage of the.
The clients that you're so what percentage of your PEO clients actually are ticking.
Your insurance will use self insured for it.
Yes, so I'll flip it around we don't we don't get the exact clients, but if you look at.
If you look at IPO.
Revenue PEO revenue.
Includes.
Risk revenue of 35% to 40% of that revenue and you can you can get to that because we give you a breakout right.
So.
That gives you a sense, we don't break it up by specific clients.
And then with regards to the mid market, you're obviously doing really well there.
Ken.
In terms of the new sales is there any change Marty in terms of the composition of who you're getting those new clients from or how we should think about that with regards to there's still some surprising number of companies out there with really old legacy systems versus some bit of transition to newer systems.
What's the composition look like in terms of the new sales that you're getting.
Yes, I think.
I think it's been a combination of taking some from competitors and I would say.
I think it's probably this year I would guess its run 50 50 on old legacy systems going to moving into a new platform.
Software as a service platform.
Of ours, and and really moving up the technology and then probably the other half is more.
Something they didnt like at it from a competitive standpoint, so I think we're taking some from market share and then some from as the market expands itself and it's probably roughly around half and half I'd say at least this year to date kind of thing because you know that market. It does continue to expand and it's growing across you know it's the market.
Itself is growing of those who just see the need particularly in this tight labor market to have something thats going to help them higher and onboard with all of that doing it paperless. Lee then retaining them with integrated benefits and a mobile app in retirement plans and so they're seeing a need that they have to go up that it's it.
Definitely is more critical to them in a tight labor market to move onto more modern system and I think ours is appealing to a number of those prospects.
We appreciate that and then to longer term questions. One would basically be you started off the whole presentation basically by talking about some of the effectiveness that you're seeing in terms of your sales and marketing efforts coming through and sales. That's generally actually ended up declining as a percentage of revenue.
Despite the strong sales growth from wondering if you can talk a little bit about the longer term implications for the increased efficacy with regards to your sales efforts and what you're seeing there.
That's the first question and then the second question is basically.
How we should think about the the effective yield for next year.
We will flow balance and.
The duration.
Let me take the first one and then they forget.
I think mark the interesting thing is it's it's a sales and marketing kind of combined look and you're seeing as we've talked about I think before you know a shift more towards marketing. Many times state. Most people are buying are making their decision there, 70% or 75% of the way through the decision before they ever talked anyone.
And and they're looking for much more online.
Approach there being marketed to online the way you market to them. The way you get leads the way you nurture leads and then the way you sell and we're Trialing a number of things that will make us even more efficient from that standpoint.
Where you're spending marketing dollars because a lot of the marketing is really the sales now.
We certainly still have a lot of field reps that we count on that are building relationships and getting referrals in the field and talking to clients, but particularly the small smallest clients were starting up businesses are going online and looking to look by demo and buy and even buy online and we're preparing for all.
All of that so I think we're looking for efficiency, but even more so what's the best way to market and sell to a prospect or an existing client that's in business and try to be as efficient as we can but it's really looking at how is that shifting from web to from Liveperson to web telephonic to E Commerce.
And in positioning ourselves well for the future on that I think I think Weve I think we have a pretty good handle on it and we're trialing a number of things now that seem to be successful.
Hey, Mark on the yield question.
I'd say that the yield we go out.
This year. This meeting this fiscal year is probably the yield that we have we will plan for next year given that apparently the fed has decided that he wants to hold.
We do have a little bit of play there in terms of float balances, which had been increasing slowly.
And we do have a little bit of play with duration, so, but but for planning assumptions, that's what I would assume.
Just to clear the yield.
The year Ron is basically the year, it's basically what we should plan on for next year not the returns this year.
I think it's maybe slightly lower but but I'm just saying the back the yield we have in the back half of a year is probably the is the yield we go into next year with so.
Okay, and we have a little bit of play with duration you saw this year. This quarter duration was 3.1, we can extend it further but it'll depend a little bit on or it'll depend on the shape of the yield curve, how far we want to go out.
Perfect. Thanks happy holidays.
Thanks, Sam Nu Mark.
We have time for one final question and that question comes from the line of Matt O'neill with Autonomous research.
Hi, Thanks, guys for excuse me I know its long call. Most things have been asked and answered I was just curious.
Has there been any.
Noticeable evolution in the kind of lead Gen sources, maybe moving.
A little bit all away from the CPH channels and more towards the online channels and sort of as a follow up if that's true is that something that drives kind of more price sensitive customers or not really any change on on that side of it.
No I think I think.
Definitely has moved some I mean, we still rely.
A lot on being out in the field and building those CPA relationships there good partners with us as well as current clients.
But definitely as I said, you know a lot of you know today everybody is doing their research online even if you're given a referral and the old days you just call us and today, you're going on line you are searching our website our investments have been in the website and in being able to demo the product whether it's you can demo it right on your mobile App, if you download the mobile app.
And so it has been about how do you get those leads and Weve put a lot of investment in that from a marketing standpoint as well as how do you then nurture those leads if theyre not ready that's different than it used to be that's a whole nurturing piece that we have put in place for for the last few years now about how to get information to clients and make sure when.
They are ready they come to US and then we're moving to more money even in E Commerce, where you can buy online, particularly with Surepayroll.
Or other options you can buy online that also lower some cost increases marketing costs, but sales cost come down and balance a lot of that out as you're selling either online or through telephonic.
Through telephonic means and you're giving them more tools telephonically to help demos a product to a client and then sell it to them. So.
We're definitely seeing that change and I think that will ship costs from marketing or from sales to marketing they become all kind of one part of cost that you look at to be the most efficient but it really is about how are you best sell to clients and they are definitely searching demoing and even thinking about for buying online and in.
We're into that already and we're looking we might you will find ways to expand that as well.
Thanks for that and again happy holidays defining Smith.
Operator, so I think thats the last question correct.
Yes, that's correct.
At this point, we will close the call 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 second quarter Press release conference call and for your interest in Paychex. We appreciate it we wish you all happy holiday season. Thank you.
This does conclude today's conference call you may now disconnect your lines.