Q2 2022 Paychex Inc Earnings Call

December 22, 2021

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You all say its on hold we appreciate your patience chassis piece continue to standby.

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Good day, everyone and welcome to Paychex Q2, FY 2022 earnings conference call.

This time all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question answer session. You May Register to ask a question at any time, but a question to start and one and you touched on phone I will be so anybody should you need any assistance. Please note. This call maybe recorded it's now my pleasure to your taste program over to Martin.

You see he chairman and Chief Executive Officer of Paychex.

Thank you Amy and thank you for joining us for our discussion of the Paychex second quarter fiscal year 2022 earnings release, joining me today is Efrain Rivera, our Chief Financial Officer, and this morning before the market opened we released our financial results for the second quarter ended November 32021, you can access our earnings release on our Investor.

Relations website, and our Form 10-Q will be filed with the SEC within the next day. This teleconference is being broadcast over the internet will be archived and available on our website for approximately 90 days I will start today.

With an update on the business highlights for the second quarter that Efrain will review our financial results for the quarter and provide an update on fiscal 'twenty two.

We will then open it up for your questions today, we reported strong financial results for the second quarter of fiscal 2022, as both management solutions and PEO and insurance revenues increased double digits year over year and adjusted diluted earnings per share increased 25%. We continued to have strong momentum.

For the from the first quarter with positive trends across the entire business.

Client bases across all major solutions have continued to grow sales performance for the second quarter was strong across the board, resulting in our highest year over year growth in new annualized revenue and over five years and in fact, a record high level of annualized revenue sold for the second quarter and the first half of the year.

The investments we've made in our technology product sales in digital marketing have positioned us well for success in today's environment.

Our client retention remains near record levels. This is reflective of both the resilience of small businesses in the U S and the value provided by our unique blend of software solutions and HR expertise.

Micro macroeconomic tailwind persisted and resulting in strong growth in checks per payroll and increases in worksite employees in our HR outsourcing clients the tight labor market in war for talent has been very challenging for all businesses and response paychex ourselves, we've taken proactive steps implementing incentives and programs to compete for talent.

And we've made significant progress in hiring over the past quarter, and we're well prepared heading into the calendar yearend and selling season.

COVID-19, and its variants continue to pressure businesses of all sizes, and we constantly enhance our robo robo.

Robust set of COVID-19 related solutions. Most recently within 10 days of the legislation surrounding COVID-19, vaccination and testing we introduced a digital solution that businesses can leverage to confidentially capture and store employee vaccination status and request testing results for the end vaccinated.

To help our clients stay up to date on all federal and state regulatory changes, we continue to introduce new methods of communication to proactively keep them informed and educated through white papers Webinars videos and our podcast series on the Mark we closely monitor topics that may have a significant impact on our clients such as vaccine.

Management updated guidance on employee retention tax credit or <unk> and the return of masked mandates in specific states.

We remain a trusted resource to support small and mid sized businesses.

The trends we saw accelerate during the pandemic continue including the need for HR advice, the need to upgrade employee benefits and retirement solutions to attract and retain talent and the acceleration of digital technology solutions to support a distributed workforce.

And tools to help businesses maximize our value available stimulus from the government.

We've seen the benefit we've seen the benefits of these trends and strong demand for our HR solutions. Another business that is benefiting from strong demand is our retirement business, where we have reached the 100000 client milestone as a leader in this space. We are uniquely positioned to help businesses meet the growing number of state mandates for retirement.

<unk> plans and provide a critical benefit offering to drive employee retention and satisfaction.

In fact in January we were one of the first to release a Pep plan are pooled employer plan and 11 months later not even a year later, we now have over 10000 Pep clients.

The access the stimulus funding has been a powerful retention tool for paychex, we're proud that we've been able to help clients obtain billions in paycheck protection program loans and approximately 90% of our clients have leveraged our award winning PPP forgiveness tool to gain some or all level of forgiveness for those loans effectively transitioning the PPP.

Loan into a grant.

We've also help businesses gained access to over $6 billion and employee retention and paid leave tax credits returns for clients leveraging our <unk> service represent a significant amount for any business.

Two of our most recent technology innovation focus on employee retention, our retention insights offering use our retention insights offering uses predictive analytics based on a few dozen unique data elements to help employers identify employees, who may be more likely to consider leaving the organization.

This is paychex first client facing predictive analytic and couldnt have come at a better time, given today's competitive labor market. We also introduced a completely enhanced total compensation some rates that can be used by employers to communicate the impact of their total pay and benefits packages for employees. These are just two examples of the powerful technology.

And use of information, we're providing to help employers compete and retain talent.

We continue to enhance our technology solutions to deliver efficiency for our clients their employees and paychex through self service and chat bots use of our cloud based applications continues to grow with double digit increases in both desktop and mobile devices. During our recent open enrollment period for our PEO clients for example, nine.

9% of our PEO Worksite employees completed their open enrollment digitally resulting in a 26% reduction in call volume.

Our continued emphasis on expanding the digital capabilities of Paychex Flex was validated by several recent awards.

We were named by Nelson Hall, a leading global analyst research firm as a leader in their annual neat vendor evaluation report for human capital management Paychex placed in the leader quadrant of the next generation HCM Technology report. This designation was based on our ability to deliver immediate client benefits and meet clients.

Future requirements.

In addition, Brandon Hall Group was just has just recognized paychex flex with two excellence in Technology Awards or <unk> service was recognized in the category of best advance in HR in workforce management technology for small and midsized businesses.

And paychex pre check was recognized in the category of business strategy and technology innovation.

This is our ninth consecutive year, we've been recognized for our technology and this award program the largest and longest running award program in the HCM space.

Before closing I'd like to take a moment to discuss the recent change in executive leadership roles that took effect on December 1st I have assumed the role of chairman of the board and will continue to serve as Chief Executive Officer, Tom Golisano, our founder and prior Chairman will remain a board member and we will continue to play a role in the governance and oversight of the company John Gibson, Our senior Vice.

<unk> of service since 2013 has been promoted to the role of President and Chief Operating Officer, John has been an integral part of our executive team and has led the service and operations of all paychex businesses divisions, including HR outsourcing payroll retirement and insurance there remains continuity in leadership to drive paychecks are the future.

And I'd like to thank Tom for his leadership and for his continued support as we move forward and wish John well in our future growth in summary, we are proud of our performance during the second quarter, we are well positioned with our set of innovative technology and service solutions for the selling season and to continue providing industry leading value to our clients.

I will now turn the call over to effort to review our financial results for the second quarter efforts. Thanks Marty.

And good morning, everyone I'd like to remind you that today's conference call will contain forward looking statements that refer to future events and therefore.

Some risks.

In addition, I will periodically refer to some non-GAAP measures.

[noise] referred to the customary disclosures.

Let me start by providing key points for the quarter followup with greater detail in certain areas and then I'll finish with a review of our fiscal 2022 outlook.

Our second quarter results reflected strong internal execution and continued economic recovery.

Service revenue and total revenue increased 13% to $1 1 billion.

Within service revenue management solutions revenue increased 14% to $832 million driven primarily by growth in client bases across our portfolio of solutions.

Higher revenue per client and improvement.

Payment levels client based growth resulted from both strong sales performance and high levels of client retention.

In particular, our HR solutions business continues to benefit from strong demand as businesses look.

For HR support.

PEO and insurance solutions revenue increased 11% to $262 million, our PEO has benefited from higher average worksite employees.

State unemployment insurance revenue and help insurance attachment.

On funds held for clients decreased 5% for the quarter to $14 million is the impact of lower average interest rates and realized gains was partially offset.

By a 9% increase in average investment balances.

Total expenses were up 6% to $668 million the growth in expenses resulted from higher PEO direct insurance costs and.

An increase in benefit costs to our employees and continued investment in our products technology sales and marketing.

Op income increased 24% to $440 million with an operating margin of 39, 7% adjust.

Adjusted operating margin was also up 39, 7% in the second quarter compared with 36, 1% for the prior year period, an expansion of 360 basis points.

Our effective income tax rate.

Was 24% compared to 22, 1% for the same period last year.

Both periods reflect net discrete tax benefits related to stock based compensation payments.

Adjusted net income and adjusted diluted earnings per share increased 25% for the quarter to $330 million 91 per share respectively.

Year to date results.

Touch on the highlights briefly here.

For the six month period, obviously I think November 30th.

Total service revenue and total revenue increased 50% and 14% respectively to $2 2 billion expenses, excluding onetime costs incurred during the prior year increased 5% op income and adjusted Op income were $883 million.

Increases of 38%, 32% respectively.

Diluted earnings per share increased 37.

<unk> to $1 83 per share adjusted diluted earnings per share increased 32% to $1 80.

Per share.

Let's talk about financial position.

It remains strong with cash restricted cash and total corporate investments over $1 1 billion and total borrowings of approximately $800 million as of November 30th.

Cash flows from operations were $555 million during the first six months, an increase of 29% from the same period last year.

Free cash flow generated was $459 million up 21% year over year. The increases were driven by higher net income partially offset by fluctuations in working capital.

We've had paid out quarterly dividends.

At <unk> 66 per share for a total of $476 million during the first six months or 12 months Rolling return on equity was 43%.

Now I'll turn to guidance for the current fiscal year, ending May 31, 2020 to be outlook reflects the current macro environment.

Improvement in the quarter, we've taken that into account in the second quarter results.

And our second quarter results actually exceeded expectations, we have some conservatism given the macro economic uncertainty.

That proof.

Sales during the remainder of the year.

We provided the following updated guidance as you saw.

Management solutions revenue is now expected to grow in the range of 10% to 11%, we previously guided to a growth of approximately 8%.

And insurance solutions is expected to grow in the range of 10% to 12%. We previously guided to grow in the range of eight to 10 interest on funds held for clients is expected to be flat year over year total revenue expected to grow in the range of 10% to 11%. We previously guided to growth of approximately 8% adjusted op income.

As expected to be in the range of 39% to 40% up from the previous guidance of 38% to 39% adjusted.

Adjusted EBITDA margin is expected to be approximately 44% up from the previous guidance of approximately 43%.

Other expense net is expected to be in the range of $15 million to $18 million of our previous guidance was in the range of 23% to $26 million.

With the change due to certain nonoperating income received during the second quarter.

Our effective income tax is still expected to be in the range of 24% to 25% and.

Adjusted diluted earnings per share is expected now to grow in the range of 18% to 20%. We previously guided the growth of 12% to 14%.

Turning to the third quarter. We currently anticipate total revenue growth to be approximately 9%.

And we are expecting an adjusted operating margin of approximately 42%. So note that in your models.

PEO and insurance solutions revenues for the third and fourth quarter of fiscal 2021.

We're impacted by timing of notification of changes in state unemployment insurance rates.

This creates comparability issues for the third and fourth quarters of fiscal 2022 doesn't affect the whole year.

You'll look at our.

The investor presentation, when we post it in a little bit.

And we provided additional details so you can get the split of the quarters.

Correct.

Of course, everything that I, just said is subject to our current assumptions, which could change given the current environment.

We will update you again on the third quarter call.

And with that.

During the call back over to Marty. Thank you Efrain and I will now open the call for questions or comments. Please.

Thank you I'd like to ask a question. Please press star one on your Touchtone phone.

You may remove yourself anytime my question.

Once again that is star one to ask a question we will take our first question from Kevin Mcveigh with credit Suisse.

Great. Thanks, so much and congratulations on the results.

Hey, Marty.

Looks like you delivered a 44, 7% margin in the quarter I think that's the highest on record and then even going back to <unk> 71, and then the float income was half of what it was today.

Can you maybe talk to just some of the structural changes Marty you talked to the chat box things like that.

Maybe just.

You help us frame is there a new range of margins.

Any thoughts as to just the leverage in the model obviously.

You're seeing outsized margin expansion.

Still some headwinds around floating from things like that so just wanted to start there.

Sure.

Efrain can jump.

Jumping into it I think I think there's really two parts to it one is we've been down some head count temporary is challenging.

Challenging hiring, but we really picked up a lot of hires in the second quarter due to some creative things, we did but I would say overall the bigger impact is that we have.

Automated a lot of the service models when you look at it and you think about chat bots. When you when someone comes on the web now to ask a question over 60% of the questions are being answered in an automated fashion with a chatbot before they go to anyone live I also as I mentioned in my comments. If you just think about the things we've done with.

Flex and our PEO offering 99, almost 100% of PEO employees Worksite employees.

Handled open enrollment online digitally now and that reduce calling in for questions and issues by over 25%. So a lot of the things we're doing not only with the product, but with the service models themselves have reduced the number of calls that are coming in not only are the clients happier.

We're getting a faster answer and it's being done the way they want to receive it which is either automatically or through chat et cetera.

But also we're saving expense and time and allowing our specialists to handle more value added calls for the client so.

Is there a wider range I think theres always a little bit wider range and you know thats. Our our DNA is that kind of drive margin as best we can I would say a little is temporary but but most of it is the things that we've been doing year after year.

Yes, there's no default.

There Kevin just.

Say that.

You know this very well and I think any of that.

Analysts that cover us.

We have evolved significantly from a technology standpoint, we have evolved significantly in terms of our digital capabilities.

And the model shows that the margin show that we will put up our margins against anyone in the business because to marty's point.

Durable and sustainable and it's technology based.

No.

And just.

A follow up on that and then I'll get back in the kitchen and understand the circumstances.

Is that the same level of success on the front end to in terms of the implementation is there any way to think about when.

When you're implementing clients for the first time, how much of that is.

Fully digitized as opposed to.

More as the human component to it as that.

I know.

What youre, saying is exactly where we are heading there as more and more clients that.

Can self onboard themselves I'd say, we're still more.

Newer into that process, but that is happening not only because it's good for our expenses. It's really good for the clients. The clients want to self onboard share payroll division has been doing this for some time and flex is continuing to grow into that so if it's particularly a smaller clients. They want to start on boarding themselves here's a couple of benefits.

Not only does it reduces cost it allows the client to onboard themselves at their pace.

It is.

It also really creates a lot fewer errors and interactions with the service team because the clients doing it at their own pace and when they want to do it and how they want to do it.

And the last thing is that had frankly, many times is a better sale. If you are buying online digitally and then you start self onboarding yourself and you might need help but if you don't you complete that it's better than multiple salespeople and service people talking to you to implement <unk>. So we're definitely headed we're definitely down that path.

More on this year payroll side, but flex is increasing as well.

Thank you and again congrats on the promotion.

Thanks, Kevin Thank you.

We'll go next to Bryan Bergin with Cowen.

Hi, good morning, and happy holidays. Thank you wanted to.

I wanted to start with retention can you just talk about what youre seeing there it sounds like it's still record but.

You did expect some moderation in the year, so any change on that front and can you talk about some of the underlying factors you would typically see that drive retention as it relates to out of business closures or normal client switching behavior and just also beyond <unk>. If you can help us a little bit into the December month as well.

Yes, I think so far in Q2 was still near record levels. It wasn't quite as high as the record and that we saw in Q1, but it's very close to that I really still think as I said last quarter that we will kind of even out at someplace better than we were pre pandemic and I think a number of things that are helping that there is few.

We're out of business.

But there is also just the value of the product what were seeing is the value we're not seeing as many leaving for price value kind of category, because they're seeing the value of the product, especially at a time of COVID-19 with all of the value, we're bringing them from the product side from the technology handling a distributed workforce with all.

The mobile apps that we have an ability and now the retention tools that we're giving them in the paycheck pre check where we're allowing the employees to review and approve kind of their own pay before it even gets processed all of these things we're getting back from clients are adding value and that is doing exactly what we hoped which is not only adding VAT.

Due to the client, but improving retention. So we're near record levels in Q2 don't see anything changing at this point in December of course.

December January is really where we will see.

The number for year end and but at this point, we expect things to even out certainly better than pre pandemic levels.

Okay. Okay. That's good to hear and then.

I understand the conservatism in the outlook given everything that's going on with Amazon any have you seen an actual impact in any sales activity or pipeline, yet or is it or is it just conservatism, making sure you may see some actual impact I think we're always trying to be conservative, especially in an environment like this like you said, but.

Right now record levels of par annualized revenue, we're seeing in growth in the first half of the year and in the second quarter. It still seems strong but selling season is really when we know.

How that'll be but right now really all areas.

Retirement HR solutions mid.

Mid sized business.

Our mid market business in virtual sales digital sales all going strong.

Okay.

Okay. Thanks Bryan.

Our next question comes from Andrew Nicholas with William Blair.

Hi, Good morning, I appreciate you taking my questions.

I guess my first one is kind of sticking with the technology theme.

From the responses to the first couple of questions just as it relates to kind of paying for that kind of talent.

Is that.

Engineering software building talent is getting more and more expensive has for some time just wondering how you think about that both from an expense perspective, but also <unk>.

Labor supply.

Perspective, as you move forward here through the rest of the year and beyond.

Yes, I think one thing we've got a very tenured team and <unk>.

And my Joy and the team have done just a great job Mike spent in charge of that for over 10 years now and.

And it has just done a great job of that team.

One of the things, yes, the costs go up and you have to compete in this market and and I think we've done that very effectively we also make it a great place for them to work. They can all theyre all can work from home yet.

Yet they also have great office space, that's available to them to come in and they meet regularly but they are all working from home. They're also working on some of the latest technology and digital services and that adds a lot of retention as well.

Years ago.

I'd say 10, plus 15 years ago, where there was always an issue are we working with the latest technology well, we blown well past that we're a leader from an innovative.

Product development not only in the products that we have but the way we develop them and the date the infrastructure and architecture that we use and so I think that is very attractive to candidates and attractive to the employees to stay here. So we're very proud of the tenure, we have and I think we pay very competitively and that's why we've had good return.

<unk>.

That's helpful. Thank you and then just for my follow up different topic, just on on the PEO insurance business could you maybe break down the <unk>.

<unk> performance versus insurance performance in the quarter I think your expectation last time, we spoke was that insurance is going to be a bit slower. This year. Just wondering if that played itself out at this point.

Second quarter helps it helps speak to that any further thank you.

Thanks, Andrew Fair question. So when you look at look at the PEO.

<unk> versus the insurance business the insurance business.

Moderator.

Overall growth of PEO and insurance PEO was solid double digits growing nicely good client adds good client wins.

Insurance is a tale of two cities.

The health and benefits side grew upper single digits.

But work comp still remains are really are.

Really tough tough.

Tough compare because that market is continues to be soft.

I, probably am going on four or five years of talking about softness in workers' comp.

It is good to say.

It at least has.

Moderated to the point, where you were flat year over year, but but.

Increasingly it's a small.

Waller and smaller part of the business, but.

It hasn't it hasn't bounce back yet so we're.

So doing very well, let's say health benefits on the insurance side doing well.

Workers comp kind of.

Creating situations that moderates the overall amount hopefully as we get into next year.

That will start to turnaround, but I've said that before and been wrong before so.

Take it to the bank.

<unk>.

Alright, Thank you happy holidays et cetera Youtube.

We'll go next to Eugene <unk> with Morgan Nathan.

Thank you very much.

Morning.

Wanted to ask first about management solution.

Very impressive performance this quarter.

Following that everybody's expectation.

Expectations, you listed out a number of drivers that are.

Behind that outperformance can you give us a little bit of Apollo, which of the drivers that more one time kind of temporary in nature, which can be sustained as we're moving forward.

Let me start and then maybe maybe Marty can can.

Some further color.

So if you look at management solutions, and you kind of apply.

Kind of a broad umbrella of what's in that in that in that revenue stream.

You really have three important components as many of you know you've got HCM solutions.

That are.

Roughly.

A little bit under half of that of that revenue stream, but then I would say there's two other parts that we don't talk about as much but increasingly have become very very important and which are the combination of retirement services and also what we would call.

DSO or HR outsourcing not PEO.

So if you look at that those two in comparison to HCM. There now almost 50% of what HCM is and they are growing at rates that are faster than HCM HCM had a very strong quarter. It's not that it did it is just the retirement services.

And HR outsourcing had even stronger.

Even stronger quarters now.

Those are not one time things there is demand in the environment for both retirement services I think Marty mentioned Pep plans et cetera.

And our success there.

It's pretty clear, we're leading the market in terms of selling of that product.

If you look at trace that back we didn't release it but you trace that back to our sales sales have been very strong.

And on the HR outsourcing.

<unk>.

Solution side, that's been very strong too.

Both of those are are driven by unique factors in the market HR because of the uncertainty of the environment. The demand is the value proposition has never been higher and as a consequence demand is very strong and on the retirement side. There are increasing amounts of states that are mandating.

Retirement plans for employees that have benefited.

Our business and that continues to grow strongly so what am I whatever I, just said I've said that a lot of the demand.

Forces within management solutions, obviously have benefited from a pandemic rebound, but if I isolate HR outsourcing in retirement services those are responding to other forces in the in the.

Economy that we think are pretty durable. So long story short there isn't a lot of one time and there are some things to rebound certainly is part of it but there are also structural demands are structural factors that are driving demand higher.

Yes, I think thats very true.

As ever went through there is every product is strong we didn't necessarily expect retirement to be as strong as it is and as I mentioned, our pet product. We were one of the first to come out with a pet product the pool employer plan back in January of this year, so not even a year later, we're at 10000 clients.

We have sold that extremely well and and when you look across the board have Ron mentioned between time and attendance, but HR solutions in a COVID-19 environment is so critically important and the technology that we've introduced on the mobile app. So the ability to really handle distributed workforces to be able to track vaccinations.

And those who are on vaccinated all of these things are part of a digital experience that clients are really seeing so I think I think most of it is sustainable growth that we're seeing even the macro that you're seeing more checks and so forth should be sustainable unless there's a drop off because of the variant in the next year, but we don't see that and still there is room.

To grow a lot of people that are still not employed and we expect that could pick up next in the first part of the App of the next calendar year.

Got it got it. Thank you and then for my follow up I wanted to quickly ask about inflation and deflation being somewhat of a day can you just remind us quickly up the kind of puts and takes of the high inflation for your business.

So.

Inflation in general is a net positive.

Hard to say it that way, but.

What it does is because of this segment of the market that we're in we have relatively more pricing power than if you were in the enterprise space, Although I suspect they'll have more and more pricing power.

So it gives us.

In terms of our model.

A measure of ability to price that maybe a little bit higher than we have experienced in.

Previous years too.

To the extent that inflation also drives interest rates higher that also has a benefit.

On to the business so obviously.

There is a balance there in terms of.

If interest rates.

And inflation search to pie could have a dampening effect on.

Economic growth, but assuming it's.

It's it's under some reasonable level.

It's going to be a net positive for the business.

Got it. Thank you happy holidays guys. Thank you thanks same to you.

We'll go next to Bryan Deutsche Bank.

Hi, guys congrats on the quarter here.

I wanted to break down kind of my favorite topic looking at the revenue per client I know thats been going higher just thinking about.

The drivers specifically on that and then price realization I know thats almost a separate thing what you guys are doing on that front.

Bryan I'll start and then let upfront jump in I think one yes, I think we're just selling Bryan more services. The revenue per client is is really.

Helpful. When you think about things like we've talked about time and attendance and some of the other RTC.

Things that are driving.

The revenue.

And even really.

Doing much stronger even though the client growth is solid as well, we're really seeing more revenue because of more adoption.

Adoption of different services that the client is taking from a price standpoint, I think we're feeling like we still have good price realization.

And I don't think there is some pressure on it but as Efrain mentioned in this inflationary kind of timeframe.

I think it's.

One probably is difficult to get it as it was and also while it's still very competitive in the market, but also the value that we're bringing I think well, it's just not challenged as much given how much we've been able to do if you just take something like employee retention tax credit.

We're bringing so much to our client at a relatively low cost that they are benefiting a lot I think at that point theyre start they see more and more value that we bring through Covid that has helped us get even better price realization.

Yeah, So Bryan to your point I think that we've had very very good.

Average.

Revenue price.

Per client, especially on.

On our HCM clients.

It's been very positive.

Our price realization in this environment when you when you triangulate to retention.

Plus.

The extra the additional value added in terms of services sold.

We've been able to do very very well one thing, we haven't talked about which I don't want to.

I don't want to.

Forget in this process.

One of the strengths of our model.

Is that.

We are really very very quick and Marty Marty mentioned this we're very very agile in terms of responding to two new opportunities that come up as a result of changes in legislation. So we mentioned that there is this this this service we call employee retention tax.

<unk>.

We have I think throughout the pandemic shown agility in terms of responding very quickly and creating value added products and services for our clients that help both.

To raise our average revenue per client also helped us to get.

To justify the price realization that we've done Marty said, we have been losing very few clients to.

Because of the dissatisfaction with value and price and it's part because we keep raising the value of what we're providing to clients and they've responded very well.

Got it and then the success you guys are having in the mid market is there something driving that difference or is there a competitive thing going on there.

I think Bryan it's really we've got a very much more tenured salesforce now great leadership, that's been driving that now for a few years I think the last year or so we ran into a great presentations, but people not making decisions and I think we're now going back at those and we're winning a lot of these deals against competitor.

<unk>.

Just want a big one yesterday and really doing well against the competitors that are out there I think because of the product work that's been done.

And the technology that is really fitting exactly what they need at the moment as Efrain said, the agility to be able to turnaround things like employee retention insights.

The fact that we can give them new compensation summaries for their clients or for their employees whatever they needed. We're we're feeling like we're kind of a step ahead and in the mid market in particular.

They are really feeling the pinch and retention and attraction of new employees, and we're able to do that and remember we've talked about it on other calls. This partnership we have with indeed, where you are connected digitally through paychex flex to indeed, the world's largest job posting site, you'll get a credit on indeed, indeed, you can post the job.

Electronically digitally than if they respond to the post it goes right into the system. If you hire them everything is paperless. These are all things that mid market clients in particular, right now need and we've been ahead of it and really hats off to the product management and development teams. I mean, we have just been a step ahead of everything they need so.

That is the power of the sales team really has come through.

The other thing I'd add Bryan is that.

Four in previous years, we've talked a lot about client sizes trending down in terms of clients. So.

And the last year, what we've seen is the client sizes, especially in our mid market business are trending up not not knocked down and I think that part of it is there.

In this environment the ability to bundle the right level of value added services to a midmarket client is valued very highly and not all of the competition can do that because not all of the competition has been integrated platform plus World class service.

Think that that's a winning proposition in the marketplace right now.

Got it alright, guys have a great and safe holiday. Thanks, Bryan you too.

We'll go next to Jason Kupferberg with Bank of America.

Hey, Yeah, Thanks, guys happy holidays. Thank.

Thank you.

Thank you. Thank you.

So as we entered fiscal 'twenty two I think the expectation you guys had with net client base growth to return to kind of a more normalized historical levels of 1% to 3%, but based on how things have gone through the first half of the year do you think that figure could come in higher and to the extent that it does what you would attribute it more.

More to the gross client adds or to the retention outperformance.

So yes, I think we're certainly trending at the high end of that range, we will see whether we actually beat the high end Jason.

The second part of that is that.

It's really balanced performance.

I'd say last year.

When I reflect back.

In this quarter last year, I think management solutions was up one and PEO and insurance was up about three or four.

We were we were pleasantly surprised that that actually we had.

<unk> started to see a return a quick return to revenue growth, but it really was fueled an important measure by retention, which as Marty mentioned earlier was at record levels.

We still continue to have very good retention.

That's been great, but but our sales performance has been really strong. This year. So a combination of both of those is really what's driving I would say it took us a little bit more towards the sales side, rather than the the retention side, but both have been strong.

Absolutely.

Okay and.

Maybe just picking up on the topic of sales since you are kind of entering the key selling season here.

Just in light of the new variant is that having any bearing on your sales strategy here virtual versus in person over the next couple of months.

Really Jason it's not I mean, we've been very successful selling.

From virtually and.

I think that will continue they have the option if the client and the rep agree to get together more of them are doing that and I think even with the variant I think theres still they're still doing that but so many of the presentations now, particularly in the mid market even can be done virtually and really I think we've really fine.

Tune that through this time.

And the sales engineering team and so far they've just done a great job in kind of building out sand boxes and different examples for our client that are very personalized to the client to say this is what youre going to get this is how you work through it and frankly, it's probably easier to do it virtually.

And digitally than it is in front of the client.

They can all see it right in front of them and they can they can take them through it so.

I think it will affect us.

We're well staffed were great products everything is really moving very well. So it feels very strong right now, but we will know at the end of the selling season, but we feel pretty good right now with the momentum.

Okay, well I appreciate the comments guys. Thanks again.

Yes.

We'll go next to James Faucette with Morgan Stanley.

Thank you very much I wanted to follow up quickly on retention and side you mentioned that is.

As a key tool for for you and your customers.

The retention of stability, partly a function of retention.

Integration right now and to the flex platform generally in and can you give.

Some idea on on client adoption of.

That product to date.

Yes, it's pretty early but we're getting a lot of great feedback from clients because everyone's looking for that kind of information.

We certainly use the same kind of thing and have for some time internally and now it's much more bill.

Built for mid market and small clients to be able to use its using a number of factors just to look at.

What which employees do you think are most likely to leave that gives them some insight into that and it can help them with the retention. So it's pretty early in the adoption.

I guess early innings of this thing I would say, but it's really.

Ben.

Very well accepted and and I think they feel like it's an easy way to use flex to get that insight. So.

I'd say, it's still early but great feedback with what we're doing from a predictive analytic basis.

Great and then just a quick macro question from for me.

One of the big one of the big lingering.

Uncertainties in the economy overall right now is just labor force participation and being able to fulfill and fill openings.

Can you give a little view into what you are seeing from that perspective are you seeing.

People come back to the Labor force are there any particular areas or industries that are risk.

Bonnie better than others or are there are industries that arent responding just some macro on site there as we try to get a grasp on kind of what's happening generally.

Sure, we obviously from our small business index and that really looks at the clients of ours that are under 50 employees.

We're seeing continued growth job growth.

For six months in a row now so the job growth is good now we are still as you know what at around 61% participation rate I think which is down a couple percentage points prepayments from pre pandemic, we're still short around 4 million jobs from pre pandemic a million and half of those are leisure and hospitality. So I would say the ones that are still struggling the most or the.

Restaurants, and you probably know everyone's kind of sees that anecdotally from cut back hours or even closed a few more days than they normally would I think that's where still the biggest struggle has been.

And it's a combination of.

The pay which has gone up dramatically, we're seeing average part time.

Pay for our client base part time pay per hour is $19.62 last month, it's an amazing thing. When you think two years ago, everybody was arguing about getting to 15. So it is more costly the supplies or more costly as well, but I think from an employment perspective.

Probably the one that's suffering the most but I do think that as things change now in some of the stimulus money dries up the unemployment has changed of course back to more normal levels.

The child tax credit may end up going away as well thats been the arguments.

<unk> got to pay your tuition payments now they've been deferred many of them rent I think youre going to see more people come back in the first and second quarter would be our guess based on what we're hearing from clients. So they've seen growth, but theres still a lot of people that are still sitting on the sidelines, but I think.

As.

Depending on what the market does and of course, just kind of overall cash balances as things all come together, we expect more people to be hired in the next six months as that continues to pick up.

That's great color. Thanks, a lot Marty thanks, Tom.

Sure James.

We'll go next to Kartik Mehta with Northcoast research.

Hey, good morning, Marty and Efrain, Yes, I wanted to go back to a little bit of a comment you made when you were answering the question on inflation and just pricing I know usually you change pricing around may and I'm wondering with the current environment will you stay with the same strategy or is there an opportunity.

To change your timing and maybe get two price increases.

Two smaller ones that add up to a larger price increase.

Yes, that's a good question so.

I'd say two things one is make.

Make a statement of philosophy about what the company does.

Answer the question.

The first thing is that debt.

I think youre right Kartik typically in the late spring, we actually used to used to broadcast that which I was not a big fan of but.

But we typically would look at it in late spring and raise it I would say in the pandemic, we really have adopted a little bit more flexible timing. So we don't necessarily say, we're going to do it in April.

April may or we're going to do it in June July.

And we look at what the circumstances are and then decide when when it's right to plug in.

Great.

First part.

I think that from our perspective, we think it's.

To be fair to customers I think we are guided by that thought.

In fact that we can take two or even more price increases does not.

Determine whether we will because in the end we value our relationship with clients.

Our job is to create value that supports a price increase.

Much of what Marty has been saying during this call.

<unk> is an indication of that and so we'll we'll take a look at the spring figure out what makes sense, we certainly don't want to create a situation where clients.

Perceive that they're not getting the value for what we're charging on the other hand.

We task ourselves with creating greater and greater value for clients. So that when we do pass the increase along.

Don't complain about it and generally that's what occurs.

And then Marty I think.

It's a difficult question, but maybe you have some insight you talked a little bit about employees coming back to the workforce in the next six months. If you look at your client base is there a way to tell maybe how many openings. They are really are and if people do come back what that could mean to your kind of pays per check.

Interesting I think we could tell with some of them because of course, they use our products for posting jobs and so forth then and we can see and we actually give them.

Kind of.

Hi.

I noticed that says if you've just let someone if you've just reduced an employee would you like to post. This would you like to do something with it I don't have that number right in front of me Kartik, but.

I think we continue to try to watch that to see and we know the average employees I think that definitely we have some sense that it would obviously continue to benefit us from where it is we're seeing.

The tailwind of the economy and that our employees that our clients are hiring and as Efrain said.

That would that we've seen the average size of the clients grow as well. So we still think theres some room to grow there and that would obviously give us continued tailwind.

I would say Kartik, we obviously put our plan together as we get into the spring of next year.

Create a.

A more detailed estimate of what we think it will be really important to see where we end up.

January and February timeframe.

Last year.

It seems like.

Many many years ago. There was an outbreak there was the post Thanksgiving.

Winter outbreak like we're having now in New York.

<unk>.

It did have a little bit of impact we're not seeing that right now, but we'll have to get through the next month month and a half to get a better sense of where were yes. The other thing that is even if we knew because we have some sense of how many openings there or you don't know if that that restaurant or that business is going to backfill them or that they may have get become more efficient. We certainly have seen are.

Our clients become more efficient during this period and realize that they could do without this employer that one and that higher back after an extended period of time to not being able to get somebody so it's a little hard to predict but we still think theres certainly room for that to grow.

Well. Thank you both of you really appreciate it okay kartik. Thanks.

Well go next to Mark Marcon with Baird.

Hey, good morning, and happy holidays, Marty Marty and John Congratulations on the promotions had several questions.

On the Paychex pre Chet.

What sort of adoption are you getting and how much is that actually helping in terms of <unk>.

Of the payrolls.

It's early innings for pre check, but we're getting very good feedback that it's very easy for them to check that the accuracy that from a client perspective. They feel the accuracy is is.

Is helping them.

From the standpoint that their employees are going to complain that something they got something that they didn't expect in the paycheck that they got a chance to see their hours that they got a chance to approve those or or be able to say from a digital standpoint.

Disagree with us and I have a question that the employer can take care of so it's early Mark I'd give you a better sense, probably in a quarter or two but really good feedback on the on the early clients that we've seen from that standpoint.

Great and then what are you seeing in terms of on demand payroll into demand for that small land.

Yes.

<unk> steady, but still I would say pretty light.

Certain clients.

More of the hourly and restaurants things like that and there is still a little bit slow to adopt it I think I think we can we still got a lot of opportunity.

Really to advance that as more people get used to it and there's more demand for it I think clients are a little concerned sometimes about offering it because they're not sure if thats going to have a cash flow impact, which it doesn't.

And then the employees are not aware of it and so they don't ask for it I think youre going to see over the next it will take I think the next couple of years, but I think there'll be a very big demand for that as.

Employees, just say, hey, look I want to get paid today and I think youll see a resurgence of tomorrow gig economy kind of thing where I'm working two or three jobs.

And but they are all I want the money now because it's eight hours here in eight hours there so.

I'd say its still pretty light.

Success for those who do it they like it.

We're trying to find new ways to build that out and grow that business. Because we think it's really going to be a big demand in the future.

Great and then in terms of the gross sales you mentioned how strong things are obviously you are in the middle of.

The key selling season, but I'm wondering in terms of what you've seen thus far this season.

How would you how would you describe it between the micro versus the small versus your more medium sized clients and what are you seeing in terms of the differences between established versus brand new business formations.

I mean really strong at all sizes I would say right from share payroll size very strong growth from sure strong growth on the flex side from small to.

To midsize and mid the mid market really we're doing very well I. Just wanted best years, we've had in years and I talked a little bit about that some of that is clients that got presented to last year that it really we're ready to decide but I just think the overall package as Efrain said, we're really the only.

One of the only maybe of two major competitors of the bunch that can offer everything in an integrated fashion with the latest technology. So you can buy parts from other competitors, but youre going to have to connect to third parties. We can do that too, but if you want it all in one place and the HR expertise to back it up with over 650.

The HR experts, which people really like to have as a backup now thats what they are seeing and this is.

Is very strong so we're seeing it across the board sorry.

Sorry, what was the second part of that it was all of the different.

The established versus the brand new businesses, but.

I mean, what you were just saying in terms of like being the only one of two that can offer everything are you seeing an increased level of wins with companies coming back to you from.

Some of the newer competitors that are out there.

We're seeing some yes in the mid market and we're winning more on the upfront I would say, it's stronger on the upfront like going head to head today.

Then necessarily winning them back, but we're getting some of those as well.

And I think we're still seeing a strong growth and as you know new business starts it's still I think its up year to date maybe.

30% to 40%.

So we're still getting a very small on the low end there is more typically on the very low end as you know, but we're still seeing a lot of startup businesses and I think it's just part of the economy right now.

That's great. Thank you congrats okay. Thanks.

Well go next to Vincent hung with J P. Morgan.

Hi, guys, it's Andrew on for Tien Tsin I just wanted to ask a question.

Hello.

I wanted to ask a question I know about a year ago in the earlier part of this calendar year.

Talking about selling.

Selling the PEO and I know last quarter, we talked about PEO coming back strong and into this quarter. So I just wanted to ask how that Hilton today, and just more of a high level, how the margins differ across those two solutions.

Yes, first I'd say that the sales in Europe evened out pretty good I mean, we're having strong ASO and PEO sales I think.

<unk> has come on very strong, particularly in those the great markets that we're in.

Hats off to the sales and service teams there were having not only good growth there, but also ASO. So here's really were having good strong growth in both in both markets and I think just shows the demand for HR solutions that not only from a digital solution, but also with the HR expertise that we can bring from both sides.

Right and the need for full benefits one of the things that we just did a survey and it comes out very strong as the need if you're going to attract and retain employees you got to really look out for their well being and that's from a financial standpoint. That's from benefits retirement included Theyre really looking for that overall perspective, I'll, let effort if you want to.

Hey.

With respect to the question on margins.

The the margins.

On PEO, we're going to be lower not because the.

The core offering.

Lower margins, but because of the absence or I'm sorry, the inclusion of pass through revenues on insurance so to Marty's point when you sell a full benefit you've got insurance as attach those carry lower lower costs because a portion of them are pass through so that the margin is lower on the PEO.

The revenue can be higher.

Okay.

Got it thank you and I just had one follow up I mean, we've talked a lot about the retention tools you guys are offering to customers, but just on the hiring side.

What are some of the ways that paychex can help.

<unk> actual hiring I recall last quarter, you talked about the partnership with indeed I was just curious also if we could hear how that's trending.

Continuing to trend very well.

It's a hot market as everyone knows to hire it is very difficult.

And I think that that partnership of being able to do it to partner with indeed, who as I said is so many job postings that are the largest in the world I think right now from a job posting site to have that digitally connect to also have a deal with them where they get some credits.

With indeed to be able to post is all very strong.

And then I think that that also attracts people then the full benefit the full HR solution that I, just said the benefits of retirement and.

All of the other benefits insurance benefits. This is really attracting more people and retaining the clients. So that is all things that we can offer not only from a full solution set but from a technology standpoint that really attracts.

Generation that is out there deciding where they want to work today they won things on their mobile apps.

Paychex Flex mobile App is full featured you can have your retirement or insurance.

Based on what you have now pre checks.

Working for somebody who you feel like not only is full benefits, but they're a leader in technology. When you use our products. So that's how we're helping our clients, particularly I guess I'd say in the mid market to succeed and that drives a lot of value for them and for us.

Great. Thank you and have a happy holiday and new year's Eve, So Greg. Thank you Andrew.

<unk>.

Well go next to Peter Christiansen with Citi.

Good morning, Marty and Efrain happy holidays.

<unk> results.

Yeah.

Couple of questions here.

Right.

Anthony You did mentioned new business formation continues to be strong.

It's certainly been Jeremy that from the charts and it's been what 50% typically of new sales.

I was just wondering if you could talk about the opportunity or maybe the trends that youre seeing from.

The self file or maybe from some of the regional.

Perhaps less sophisticated players out there.

How are some of the trends they're behaving.

As regards to new sales and then.

My follow up would be tough for a number of quarters since the pandemic and so <unk> has been gaining and it's been really strong.

That mix shift.

Help them to what degree is that mix shift help is helping the margin I guess as my follow up thank you.

I'll start it out with some of the regional players where net certainly net adding from a regional player perspective, meaning selling versus losing I think many of their regional players are struggling in this environment to provide as many as much value through COVID-19.

The speed at which regulations are changing and demands on small and midsized businesses for vaccination policy the mandate whats the latest.

Get that from someone like us and in fact, many smaller players try to copy our stuff off the web we have a very comprehensive.

Website from marketing that puts all of the information out by state telling you. What you have to do where you have to do it and then here's the products that will that will help you with that from a technology and a service standpoint so.

It's really been more difficult on the regional players today that just don't have the breadth.

Service knowledge, our compliance people to be able to keep up with as you know we have over 200 compliance experts that follow every single thing that's happening and that may happen. So that we can be as agile as efrain mentioned earlier and creating these products almost as soon as the issues come out so very strong from a regional competitor standpoint on the net.

On the net adds that we've seen year to date, you want to take the yes on the margin part.

One of the things that.

I think you've seen in the model certainly over the last three or four.

Quarters, so is that.

When when you have growth in.

In revenue.

You don't have.

Attendant costs associated with it typically.

And so you scaled nicely and drop a lot to the bottom line I think that's particularly true of management solutions, where.

That's a higher margin.

The higher margin portion of the revenue and so when <unk> ASO is growing at the rates that it's growing.

Because of the way that are that are.

Our business model works.

A lot of that ends up dropping to the bottom line. So it.

All of the mix shift in terms of the way the business has been growing as has been helpful to margins.

That's very helpful gentlemen, happy holidays. Thank you same to you take care.

Okay.

Have any other questions.

Yeah.

Well take our final question from Scott <unk> with Wolfe Research. Your line is open okay. Thank you.

Thanks, Hey, guys. This is Scott on for Darrin, just first one within management solutions, you guys called out one of the drivers being improved market conditions for retirement services. I was just wondering if you could give a little more color on that.

Yes, I think what's happening there is there is a lot of mandates now that are coming out by state, we still haven't seen necessarily the federal mandate, but thats been discussed a lot, but a lot of states, California in particular, New York, some others are coming out saying that businesses have some in some cases all sizes have to offer a retirement plan.

Some sort to their employees, so there's going to be some theres. Some mandates there that will have penalties that are starting to be enacted.

Number in place already in California, I think coming up in June so theres a lot of attraction there to people not only looking at it from that standpoint, but also just from a hiring standpoint, and a full benefits. There's a lot of interest as I've mentioned in having a full suite of benefits for the well being of the employees, that's helping retain them.

And attract them in a difficult market. So its retirement it's insurance.

It's what's your work from home policy your hybrid policy of working in office and home. It's all those things kind of combined it's not just compensation. So that's really picked up and we've had continue to have a very strong retirement sales and the fact that we offer a multitude of products and we just went over 100000 clients I mentioned earlier.

It's a great milestone we're still number one in new 401, K plans that are offered and I think between our Pep plan in our regular 401, K plans and Iras very strong very strong conditions in the market and great success from our selling teams selling them and servicing them.

Maybe as we hopefully approach more of a normalized environment could you give a little more color on where you may be employing some investment dollars going forward.

Yes sure. It will continue certainly on the marketing side as well to get the leads are coming in from a digital standpoint, we've been very successful on the work that our marketing team and leadership have done we expect that to continue that is accelerated through COVID-19 on how people are buying.

Also youll continue to see it in the way, we sell from a digital standpoint, and the way we onboard.

As well youre going to see that the self service, we talked about that's going to be continued because this is the way clients. They want to go as no surprise. They want to go online they want to see your product test your product price your product and even start implementing it themselves and be able to do that with a world class innovative product and mobile experience and Thats what <unk>.

Got so youll see our digital investments continue in that standpoint, we've seen a lot of success from the investment we've put out so far and that's going to continue.

Great. Thanks, guys happy holidays. Thank you same to you.

Okay.

There are no further questions in queue at this time I would like to turn the call back over to our speakers for any additional or closing remarks alright. Thank you at this point, we will close the call if you're interested in replaying. The webcast will be archived for about 90 days. Thank you for the time Youre taking to participate in this second quarter earnings release call and for your interest in Paychex.

We wish you and your families a very happy and safe holiday season. Thank you all.

Okay.

This does conclude today's program. Thank you for your participation you may disconnect at any time.

Okay.

Yes.

Uh huh.

Okay.

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Good day, everyone and welcome to Paychex Q2, FY 2022.

This conference call.

At this time all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question answer session. You May Register to ask a question at any time by pressing the star and one on your Touchtone phone I've always to anybody should you need any assistance. Please note. This call maybe recorded it's now my pleasure to their taste program over to Mark.

And you see chairman and Chief Executive Officer of Paychex.

Thank you Amit and thank you for joining us for our discussion of the Paychex second quarter fiscal year 2022 earnings release, joining me today is Efrain Rivera, our Chief Financial Officer, and this morning before the market opened we released our financial results for the second quarter ended November 32021, you can access our earnings release on our <unk>.

<unk> relations website, and our Form 10-Q will be filed with the SEC within the next day. This teleconference is being broadcast over the internet will be archived and available on our website for approximately 90 days I will start today.

With an update on the business highlights for the second quarter, then Efrain will review our financial results for the quarter and provide an update on fiscal 'twenty two.

We'll then open it up for your questions today, we reported strong financial results for the second quarter of fiscal 2022, as both management solutions and PEO and insurance revenues increased double digits year over year and adjusted diluted earnings per share increased 25%.

We continued to have strong momentum for the from the first quarter with positive trends across the entire business.

The investments we've made in our technology product sales in digital marketing have positioned us well for success in today's environment. Our client retention remains near record levels. This is reflective of both the resilience of small businesses in the U S and the value provided by our unique blend of software solutions and extra HR.

Expertise.

Micro macroeconomic tailwind persisted and resulting in strong growth in checks per payroll and increases in worksite employees in our HR outsourcing clients.

Right Labor market in war for talent has been very challenging for all businesses and response paychex ourselves, we've taken proactive steps implementing incentives and programs to compete for talent and we've made significant progress in hiring over the past quarter, and we're well prepared heading into the calendar year end and selling season.

COVID-19, and its variants continue to pressure businesses of all sizes, and we constantly enhance our robust.

Bust set of COVID-19 related solutions. Most recently within 10 days of the legislation surrounding COVID-19, vaccination and testing we introduced a digital solution that businesses can leverage to confidentially capture and store employee vaccination status and request testing results for the end vaccinated to.

Help our clients stay up to date on all federal and state regulatory changes, we continue to introduce new methods of communication to proactively keep them informed and educated through white papers Webinars videos and our podcast series on the Mark.

We closely monitor topics that may have a significant impact on our clients such as vaccine management updated guidance on employee retention tax credit or <unk> and the return of mask mandates in specific states, we remain a trusted resource to support small and mid sized businesses.

From the government.

<unk> plans and provide a critical benefit offering to drive employee retention and satisfaction.

In fact in January we were one of the first to release a Pep plan are pooled employer plan and 11 months later not even a year later, we now have over 10000 Pep clients.

Loan into a grant.

Two of our most recent technology innovation focused on employee retention, our retention insights offering use our retention insights offering uses predictive analytics based on a few dozen unique data elements to help employers identify employees, who may be more likely to consider leaving the organization.

And use of information, we are providing to help employers compete and retain talent.

9% of our PEO Worksite employees completed their open enrollment digitally resulting in a 26% reduction in call volume.

Our continued emphasis on expanding the digital capabilities of Paychex Flex was validated by several recent awards.

Future requirements.

In addition, Brandon Hall Group was just has just recognized paychex flex with two excellent and Technology Awards.

Our <unk> service was recognized in the category of best advance in HR in workforce management technology for small and mid sized businesses.

And paychex pre check was recognized in the category of business strategy and technology innovation.

This is our ninth consecutive year, we've been recognized for our technology and this award program the largest and longest running award program in the HCM space.

Before closing I'd like to take a moment to discuss the recent change in executive leadership roles that took effect on December 1st I have assumed the role of chairman of the board and will continue to serve as Chief Executive Officer, Tom Golisano, Our founder and prior Chairman will remain a board member and will continue to play a role in the governance and oversight of the company John Gibson, Our senior Vice.

<unk> of service since 2013 has been promoted to the role of President and Chief Operating Officer, John has been an integral part of our executive team and has led the service and operations of all paychex businesses divisions, including HR outsourcing payroll retirement and insurance that remains continuity in leadership to drive paychex of the future.

And I'd like to thank Tom for his leadership and for his continued support as we move forward and wish John well and our future growth in summary, we are proud of our performance during the second quarter, we are well positioned with our set of innovative technology and service solutions for this selling season and to continue providing industry leading value to our clients.

I will now turn the call over to effort to review our financial results for the second quarter efforts. Thanks Marty.

And good morning to everyone I'd like to remind you that today's conference call will contain forward looking statements that refer to future events and therefore.

Some risks.

In addition, I will periodically refer to some non-GAAP measures.

Referred to the customary disclosures.

Let me start by providing key points for the quarter follow up with greater detail in certain areas and then I'll finish with a review of our fiscal 2022 outlook.

Our second quarter results reflected strong internal execution and continued economic recovery.

Service revenue and total revenue increased 13% to $1 1 billion.

Within service revenue management solutions revenue increased 14% to $832 million driven primarily by growth in client bases across our portfolio of solutions.

Higher revenue per client and improvement.

<unk> levels client based growth resulted from both strong sales performance and high levels of client retention.

In particular, our HR solutions business continues to benefit from strong demand.

Businesses look for more HR support.

PEO and insurance solutions revenue increased 11% to $262 million, our PEO has benefited from higher.

Average worksite employees state unemployment insurance revenue and health insurance attachment.

Interest on funds held for clients decreased 5% for the quarter to $14 million is the impact of lower average interest rates and realized gains was partially offset.

By a 9% increase in average investment balances.

Total expenses were up 6% to $668 million of growth in expenses resulted from higher PEO direct insurance costs and.

An increase in benefit costs to our employees and continued investment in our products technology sales and marketing.

Op income increased 24% to $440 million with an operating margin of 39, 7% adjust.

Adjusted operating margin was also up 39, 7% in the second quarter compared with 36, 1% for the <unk>.

Prior year period, an expansion of 360 basis points.

Our effective income tax rate.

Was 24% compared to 22, 1% for the same period last year.

Both periods reflect net discrete tax benefits related to stock based compensation payments.

Adjusted net income and adjusted diluted earnings per share increased 25% for the quarter to $330 million 91 per share respectively.

Year to date results.

Touch on the highlights briefly here.

For the six month period, obviously ending November 30th.

Total service revenue and total revenue increased 15% and 14% respectively. The $2 2 billion expenses, excluding onetime costs incurred during the prior year increased 5% op income and adjusted Op income were $883 million.

Increases of 38%, 32% respectively.

Diluted earnings per share increased 37% to $1 83 per share adjusted diluted earnings per share increased 32% to $1 80.

Per share.

Let's talk about financial position.

It remains strong with cash restricted cash and total corporate investments over $1 1 billion and total borrowings of approximately $800 million as of November 30.

Cash flows from operations were $555 million during the first six months, an increase of 29% from the same period last year.

Free cash flow generated was $459 million up 21% year over year. The increases were driven by higher net income partially offset by fluctuations in working capital.

We've had paid out quarterly dividends.

At <unk> 66 per share for a total of $476 million during the first six months or 12 months Rolling return on equity was 43%.

Now I'll turn to guidance for the current fiscal year, ending May 31, 2020 to be outlook reflects the current macro environment, which saw.

Improvement in the quarter, we've taken that into account in the second quarter results.

And in our second quarter results actually exceeded expectations, we have some conservatism given the macro economic uncertainty.

Prevails during the remainder of the year.

We provided the following updated guidance as you saw.

Management solutions revenue is now expected to grow in the range of 10% to 11%, we previously guided to a growth of approximately 8%.

To be in the range of 39% to 40% up from the previous guidance of 38% to 39%.

Adjusted EBITDA margin is expected to be approximately 44% up from the previous guidance of approximately 43%.

Other expense net is expected to be in the range of $15 million to $18 million in our previous guidance was in the range of 23% to $26 million.

With the change due to certain nonoperating income received during the second quarter.

Our effective income tax is still expected to be in the range of 24% to 25% and.

Adjusted diluted earnings per share is expected now to grow in the range of 18% to 20%, we previously guided to growth of 12% to 14%.

Turning to the third quarter.

We currently anticipate total revenue growth to be approximately 9%.

And we are expecting an adjusted operating margin of approximately 42%. So note that in your models.

PEO and insurance solutions revenues for the third and fourth quarter of fiscal 2021.

We're impacted by timing of notification of changes in state unemployment insurance rates.

This creates comparability issues for the third and fourth quarters of fiscal 2022 doesn't affect the whole year.

You'll look at our.

Investor presentation, we've posted in a little bit.

And we provided additional details so you can get the split over the quarters.

Correct.

Of course, everything that I, just said is subject to our current assumptions, which could change given the current environment.

We will update you again on the third quarter call.

And with that.

During the call back over to Marty. Thank you Efrain and I will now open the call for questions or comments. Please.

Thank you I'd like to ask a question. Please press star one on your Touchtone phone.

You may remove yourself any time for your questions.

Once again Thats star one to ask a question we will take our first question from Kevin Mcveigh with credit Suisse.

Great. Thanks, so much and congratulations on the results.

Hey, Marty.

It looks like you delivered a 44, 7% margin in the quarter I think thats the highest on record and then even though <unk> 71, and then the float income was half of what it was today.

Can you maybe talk to just some of the structural changes Marty talk to the chat box things like that.

Maybe just.

Can you help us frame that is there a new range of margins.

Any thoughts as to just the leverage in the model solvency.

You're seeing outsized margin expansion.

Still some headwinds around floating and things like that so I just wanted to start there.

Sure and I'll, let efrain can jump in too I think I think there's really two parts to it one is we've been down some head count temporary is.

Challenging hiring, but we really picked up a lot of hires in the second quarter due to some creative things, we did but I would say overall the bigger impact is that we have.

<unk> a lot of the service models when you look at it and you think about chat bots when you when someone comes on the web.

Now to ask a question over 60% of the questions are being answered in an automated fashion with a chatbot before they go to anyone live I also as I mentioned in my comments. If you just think about the things we've done with flex and our PEO offering 99, almost 100% of PEO employees Worksite employees.

Handled open enrollment online digitally now and that reduced calling in for questions and issues by over 25%. So a lot of the things we're doing not only with the product, but with the service models themselves have reduced the number of calls that are coming in not only are the clients happier.

They're getting a faster answer and it's being done the way they want to receive it which is either automatically or through chat et cetera.

But also we're saving expense and time and allowing our specialists to handle more value added calls for the client so.

Is there a wider range I think there is always a little bit wider range and you know thats. Our our DNA is to kind of drive margin as best we can I would say a little is temporary but but most of it is the things that we've been doing year after year.

Yes, there's no default.

There Kevin just.

Say that.

You know this very well and I think many of the analysts that cover us.

We have evolved significantly from a technology standpoint, we have evolved significantly in terms of our digital capabilities.

And the model shows that the margins show it we will put up our margins against anyone in the business because to Marty's point.

Durable and sustainable and it's technology based.

No.

And just as a follow up on that and then I'll get back in the queue and understands the consultant.

Is that the same level of success on the front end to in terms of the implementation like is there any way to think about.

When you're implementing a client for the first time, how much of that is.

Fully digitized as opposed to.

More.

The human component to it as that.

No I know.

Yes, what you're saying is exactly where we are heading there as more and more clients that.

Can self onboard themselves I would say we're still more.

Not only does it reduces cost it allows the client to onboard themselves at their pace.

<unk>.

It also really creates a lot fewer errors and interactions with the service team because the clients doing it at their own pace and when they want to do it and how they want to do it and the last thing is that it frankly.

Many times is a better sale. If you are buying online digitally and then you start self onboarding yourself and you might need help but if you don't you complete that it's better than multiple salespeople and service people talking to you to implement <unk>. So we're definitely headed we're definitely down that path more on the sheer payroll side, but flat.

<unk> is increasing as well.

Thank you and again congrats on the promotion.

Thanks, Kevin Thank you.

We'll go next to Bryan Bergin with Cowen.

Hi, good morning, and happy holidays. Thank you wanted to.

I wanted to start with retention can you just talk about what youre seeing there it sounds like it's still record but you.

You did expect some moderation in the year. So so any change on that front and can you talk about some of the underlying factors you would typically see that drive retention as it relates to out of business closures or normal clients switching behavior and also beyond <unk>. If you can help us a little bit into the December month as well.

I think so far in Q2 was still near record levels. It wasn't quite as high as the record and that we saw in Q1, but it's very close to that I really still think as I said last quarter that we will kind of even out at some place better than we were pre pandemic and I think a number of things that are helping that there is few.

We're out of business.

All of the mobile apps that we have an ability and now the retention tools that we're giving them in the paycheck pre check where we're allowing the employees to review and approve kind of their own pay before it even gets processed all of these things we're getting back from clients are adding value and that is doing exactly what we hoped which is not only adding <unk>.

You to the client, but improving retention. So we're near record levels in Q2 don't see anything changing at this point in December of course.

December January is really where we will see the.

The number for year end and but right at this point, we expect things.

To even out certainly better than pre pandemic levels.

Okay. Okay. That's good to hear and then the.

Understand the conservatism in the outlook given everything going on with them across any have you seen an actual impact in any sales activity or pipeline, yet or is it or is it just conservatism, making sure you may see some actual impact I think we're we're always trying to be conservative, especially in an environment like this like you said, but right.

Now record levels of par annualized revenue.

We're seeing in growth in the first half of the year and in the second quarter. It still seems strong but selling season is really when we know.

How that will be but right now really all areas.

Retirement HR solutions mid.

Mid sized business.

Our mid market business in virtual sales digital sales all going strong.

Okay.

Okay. Thanks Bryan.

Our next question comes from Andrew Nicholas with William Blair.

Hi, Good morning, I appreciate you taking my questions.

I guess my first one is kind of sticking with the technology theme.

From the responses to the first couple of questions just as it relates to kind of paying for that kind of talent.

My sense is that.

Engineering software building talent is getting more and more expensive has for some time just wondering how you think about that both from an expense perspective, but also.

Our labor supply.

Perspective, as you move forward here through the rest of the year and beyond Yes, I think one thing we've got a very tenured team and and my Joy and the team have done just a great job Mike's been in charge of that for over 10 years now and and.

And it has just done a great job of that team and I think one of the things yes. The costs go up and you have to compete in this market and and I think we've done that very effectively we also make it a great place for them to work. They can all theyre all can work from home yet.

Yet they also have great office space, that's available to them to command and they meet regularly but they are all working from home. They're also working on some of the latest technology and digital services and that adds a lot of retention as well.

Years ago.

I'd say 10, plus 15 years ago, where there was always an issue are we working with our latest technology well, we blown well past that we're a leader from an innovative.

<unk>.

That's helpful. Thank you and then just for my follow up different topic, just on on the PEO insurance business could you maybe break down the PEO performance versus insurance performance in the quarter I think your expectation last time, we spoke was that insurance is going to be a bit slower. This year. Just wondering if that played itself out to this.

Point.

And if second quarter helps it helps speak to that any further thank you.

Thanks, Andrew Fair question. So when you look at look at the PEO.

Business versus the insurance business.

The insurance business.

Moderated the overall growth of PEO and insurance PEO was solid double digits growing nicely. Good client adds good client wins.

Insurance is a tale of two cities.

The health and benefits side grew upper single digits, and but work comp still remains are really.

Really tough tough.

Tough compare because that market is continues to be soft.

I, probably am going on four or five years of talking about softness in workers' comp.

It is good to say it at least has has moderated to the point, where you were flat year over year, but but.

Increasingly a smaller and smaller part of the business but.

It hasn't it hasn't bounce back yet so.

So doing very well, let's say health and benefits on the insurance side doing well.

Workers comp kind of.

Creating situations that moderates the overall amount hopefully as we get into next year.

That will start to turnaround, but I've said that before and been wrong before so.

Take it to the bank.

<unk>.

Alright, Thank you happy holidays, Thanks, Andrew Youtube.

We'll go next to James <unk> with Morgan Nathan.

Thank you very much.

Morning.

Wanted to ask first about that management solution.

Very impressive performance this quarter.

Performing that everybody's <unk> expectation.

Expectations, you listed out a number of drivers that are.

Behind that outperformance can you give us a little bit of Apollo, which of the drivers that more one time kind of temporary in nature, which can be sustained as we're moving forward.

Let me start and then maybe maybe Marty can can.

Some further color.

So if you look at management solutions, and you kind of apply.

Kind of a broad umbrella of what's in that in that in that revenue stream.

You really have three important components as many of you know <unk> got HCM solutions.

That are rough.

Roughly.

<unk>.

About a little bit under half of that of that revenue stream, but then I would say there's two other parts that we don't talk about as much but increasingly have become very very important and which are the combination of retirement services and also what we would call.

DSO or HR outsourcing this is not PEO.

So if you look at that those two in comparison to HCM. There now almost 50% of what HCM is and theyre growing at rates that are faster than HCM HCM had a very strong quarter. It's not that it did it is just the retirement services and NH routes.

Sourcing had even stronger.

Even stronger quarters now.

Those are not one time things there is demand in the environment for both retirement services I think Marty mentioned Pep plans et cetera.

Our success there.

It's pretty clear, we're leading the market in terms of selling of that product.

If you look at you can trace that back we didn't release it but you trace that back to our sales sales have been very strong.

And on the HR outsourcing.

Area.

Solution side, that's been very strong to both of those are are driven by unique factors in the market fee chart because of the uncertainty of the environment. The demand is the value proposition has never been higher and as a consequence demand is very strong and on the retirement side there are increased.

Seeing amounts of states that are mandating.

Retirement plans for employees that have benefited our.

Our business and that continues to grow strongly so what am I what am I.

Just said I've said that a lot of the demand forces within management solutions, obviously have benefited from a pandemic rebound, but if I isolate HR outsourcing in retirement services those are responding to other forces in the in the.

The economy that we think are pretty durable. So long story short, it's there isn't a lot of one time and there are some things to rebound certainly is part of it but there are also structural demands are structural factors that are driving demand higher.

Yes, I think thats very true.

As ever went through there is every product is strong we didn't necessarily expect retirement to be as strong as it is and as I mentioned, our pet product, where one of the first to come out with the pet product the pool employer plan back in January of this year, so not even a year later, we're at 10000 clients.

We have sold that extremely well and and when you look across the board aforementioned between time and attendance, but HR solutions in a COVID-19 environment is so critically important and the technology that we've introduced on the mobile app. So the ability to really handle distributed workforces to be able to track vaccinations.

Youre seeing more checks and so forth should be sustainable unless there's a drop off because of the variant in the next year, but we don't see that and still there is room to grow there's a lot of people that are still not employed and we expect that could pick up next in the first part of the App of the next calendar year.

Got it got it. Thank you and then for my follow up Mike quickly ask about inflation impacts up with inflation being the one day could you just remind us quickly up the kind of puts and takes of the high inflation for your business.

So.

Inflation in general is a net positive.

Hard to say it that way, but.

What it does is because.

Because of this segment of the market that we're in we have relatively more pricing power than if you work in the enterprise space, Although I suspect, though have more pricing power.

So it gives us.

In terms of our model.

A measure of ability to price that maybe a little bit higher than we have experienced.

In previous years to.

To the extent that inflation will also drive interest rates higher that also has a benefit.

To the business so obviously.

There is a balance there in terms of.

If interest rates.

And inflation search <unk> could have a dampening effect on.

Economic growth, but assuming it is.

It's it's under some reasonable level.

It's going to be a net positive for the business.

Got it. Thank you happy holidays guys. Thank you thanks same to you.

We'll go next to Bryan Deutsche Bank.

Hi, guys congrats on the quarter here.

I wanted to break down kind of my favorite topic looking at the revenue per client I know thats been going higher just thinking about.

The drivers specifically on that and then price realization I know thats almost a separate thing what you guys are doing on that front.

Bryan I'll start and then let upfront jump in I think one yes, I think we're just selling brand more services that revenue per client is is really.

Helpful. When you think about things like we've talked about time and attendance and some of the other <unk>.

Things that are driving.

The revenue.

And even really.

Doing much stronger even though the client growth is solid as well, we're really seeing more revenue because of more adoption.

Adoption of different services that the client is taking from a price standpoint, I think we're feeling like we still have good price realization.

And I don't think there is some pressure on it but as Efrain mentioned in this inflationary kind of timeframe I don't think its.

One probably is difficult to get it as it was and also while it's still very competitive in the market, but also the value that we're bringing I think it's just not challenged as much given how much we've been able to do if you just take something like employee retention tax credit.

We're bringing so much to our client at a relatively low cost.

They are benefiting a lot I think at that point theyre start they see more and more value that we bring through Covid that has helped us get even better price realization.

Yeah, So Bryan to your point I think that we've had very very good.

Average.

Revenue price.

Per clients, especially on.

On our HCM clients.

It's been very positive.

Our price realization in this environment when you when you triangulate the retention.

Plus.

The extra the additional value added in terms of services sold.

We've been able to do very very well one thing, we haven't talked about which I don't want to.

I don't want to.

Forget in this process.

One of the strengths of our model.

Is that.

We are really very very quick and Marty Marty mentioned that we're very very agile in terms of responding to two new opportunities that come up as a result of changes in legislation. So we mentioned that there is this this this service we call employee retention tax.

<unk>.

We have I think throughout the pandemic shown agility in terms of responding very quickly and creating value added products and services for our clients that help both.

To raise our average revenue per client also helped us to get.

To justify the price realization that we've done Marty said, we have been losing very few clients to.

Because of the dissatisfaction with value and price and it's part because we keep raising the value of what we're providing to clients and they have responded very well.

Got it and then the success you guys are having in the mid market is there something driving that difference or is there a competitive thing going on there.

<unk>.

Just want a big one yesterday and.

Really doing well against the competitors that are out there I think because of the product work that's been done.

And the technology that is really fitting exactly what they need at the moment as Efrain said, the agility to be able to turnaround things like employee retention insights.

Fact that we can give them new compensation summaries for their clients for their employees whatever they needed. We're we're feeling like we're kind of a step ahead and in the mid market in particular.

They are really feeling the pinch and retention and attraction of new employees, and we're able to do that and remember we talked about it on other calls. This partnership we have with indeed, where you are connected digitally through paychex flex to indeed, the world's largest job postings site youll get a credit on indeed, indeed, you can post the job.

That is the power of the sales team really has come through.

The other thing I'd add Bryan is that.

Four in previous years, we've talked a lot about client sizes trending down in terms of clients.

And the last year, what we've seen is the client sizes, especially in our mid market business are trending up not not knocked down and I think that part of it is.

In this environment the ability to bundle the right level of value added services to our mid market client is valued very highly and not all of the competition can do that because not all of the competition has been integrated platform plus World class service and I think that that's a winning proposition in the March.

Place right now.

Got it alright, guys have a great and safe holiday. Thanks, Bryan you too.

Okay.

We'll go next to Jason Kupferberg with Bank of America.

Hey, Thanks, guys happy holidays. Thank.

Thank you.

Thank you. Thank you.

So as we entered fiscal 'twenty two I think the expectation you guys had was net client base growth to return to kind of a more normalized historical levels of 1% to 3%, but based on how things have gone through the first half of the year do you think that figure could come in higher and to the extent that it does would you would attribute it more.

More to the gross client adds or to the retention outperformance.

So yes, I think we're certainly trending at the high end of that range, we'll see whether we actually beat the high end Jason.

The second part of that is that.

It's really balanced performance.

I'd say last year.

When I reflect back.

In this quarter last year, I think management solutions was up one and PEO and insurance was up about three or four.

We were we were pleasantly surprised that that actually we had.

<unk> started to see a return a quick return to revenue growth, but it really was fueled an important measure by retention, which as Marty mentioned earlier was at record levels.

We still continue to have very good retention.

That's been great, but but our sales performance has been really strong. This year. So a combination of both of those is really what's driving I would say it tilts a little bit more towards the sales side, rather than the the retention side, but both have been strong.

Absolutely.

Okay, and maybe just picking up on the topic of sales since you are kind of entering the key selling season here.

Just in light of the new variant is that having any bearing on your sales strategy here virtual versus in person over the next couple of months.

Really Jason it's not I mean, we've been very successful selling.

<unk>.

Virtually and and I think that will continue they have the option if.

The decline in the Rep agree to get together more of them are doing that and I think even with the variance I think there is still there is still doing that but so many of the presentations now, particularly in the mid market even can be done virtually and really I think we've really fine tune that through this time.

And the sales engineering team and so far they've just done a great job in kind of building out sand boxes and different examples for our client that are very personalized for the client to say this is what youre going to get this is how you work through it and frankly, it's probably easier to do it virtually and digitally than it is in front of the client.

Because they can all see it right in front of them and they can they can take them through it so.

Don't think it will affect us.

Okay, well I appreciate the comments guys. Thanks again.

We'll go next to James <unk> with Morgan Stanley.

Thank you very much I wanted to follow up quickly on on retention and side you mentioned that is.

As a key tool for for you and your customers.

The retention stability, partly a function of retention.

Integration right now into the flex platform generally in and can you give some idea on on client adoption of that product to date.

Yes, it's pretty early but we're getting a lot of great feedback from clients because everyone's looking for that kind of information.

I mean, we certainly use the same kind of thing and have for some time internally and now it's much more bill.

Built for mid market and small clients to be able to use its using a number of factors just to look at.

What which employees do you think are most likely to leave that gives them some insight into that and it can help them with the retention. So it's pretty early in the adoption.

I guess early innings of this thing I would say, but it's really.

Ben.

Very well accepted and and I think they feel like it's an easy way to use flex to get that insight. So.

I'd say, it's still early but great feedback with what we're doing from a predictive analytic basis.

Great and then just a quick macro question from me.

One of the big one of the big lingering.

Uncertainties in the economy overall right now is just labor force participation in and being able to fulfill and fill openings.

Can you give a little view into what you are seeing from that perspective are you seeing.

People come back to the Labor force are there any particular areas or industries that are worse.

Spawning better than others or are there are industries that arent responding just some macro on site there as we try to get a grasp on kind of what's happening generally.

Sure, we obviously from our small business index and that really looks at the clients of ours that are under 50 employees.

We're seeing continued growth job growth.

For six months in a row now so the job growth is good now we are still as you know what that round of 61% participation rate I think which is down a couple percentage points prepayments from pre pandemic, we're still short around 4 million jobs from pre pandemic a million and half of those are leisure and hospitality. So I would say the ones that are still struggling the most or the.

Restaurants, and you'd probably know everyone's kind of sees that anecdotally from cut back hours or even closed a few more days than they normally would I think that's where still the biggest struggle has been.

And it's a combination of.

The pay which has gone up dramatically, we're seeing average part time.

Pay for our client base part time pay per hour is $19 62 last months, it's an amazing thing. When you think two years ago, everybody was arguing about getting to 15. So it is more costly the supplies or more costly as well, but I think from an employment perspective, that's probably the one that's suffering the most but I do.

Think that as things change now in some of the stimulus money dries up the unemployment has changed of course back to more normal levels.

The child tax credit may end up going away as well that's been the arguments.

You got to pay your tuition payments now they've been deferred many of them rent I think youre going to see more people come back in the first and second quarter would be our guests based on what we're hearing from clients. So they've seen growth, but theres still a lot of people that are still sitting on the sidelines, but I think.

As.

Depending on what the market does and of course, we just kind of overall cash balances as things all come together, we expect more people to be higher in the next six months as that continues to pick up.

That's great color. Thanks, a lot Marty thanks, Tom.

Thanks, Eric and James.

We'll go next to Kartik Mehta with Northcoast research.

Hey, good morning, Marty and Efrain.

I wanted to go back to a little bit of a comment you made when you were answering the question on inflation and just pricing I know, usually new change pricing around may and I'm wondering with the current environment will you stay with the same strategy or is there an opportunity.

To change the timing and maybe get two price increases.

The two smaller ones that add up to a larger price increase.

Yes, it's a good question so I.

I'd say two things one is make.

Make a statement of philosophy about what the company does.

Answer the question.

The first thing is that debt.

I think youre right Kartik typically in the late spring, we actually used to used to broadcast that which I was not a big fan of but.

Oral may or we're going to do it in June July.

We look at what the circumstances are and then decide when its right to plug in.

A pricing right. So that's the first part.

I think that.

From our perspective, we think it's important to be fair to customers. I think we are guided by that thought the fact that we can take two or even more price increases does not.

Determined whether we will because in the end.

We value our relationship with clients.

Our job is to create value that supports a price increase and much of what Marty has been saying during this call I think is an indication of that and so we'll we'll take a look at the spring figure out what makes sense, we certainly don't.

Want to create a situation where clients.

Perceive that they're not getting the value for what we're charging on the other hand.

We task ourselves with creating greater and greater value for clients. So that when we do pass the increase along.

Don't complain about it and generally that's what occurs.

And then Marty I think.

This is a difficult question, but maybe you have some insight you talked a little bit about employees coming back to the workforce in the next six months. If you look at your client base is there a way to maybe how many openings. They are really are and if people do come back what that could mean to your kind of pays per check.

Interesting I think we could tell with some of them because of course, they use our products for posting jobs and so forth and we can see and we actually give them.

Kind of.

Hi.

A notice that says if you've just let someone if you've just reduced an employee would you like to post. This would you like to do something with it I don't have that number right in front of me Kartik, but.

The tailwind of the economy and that our employees that our clients are hiring and as Efrain said.

That would that we've seen the average size of the clients grow as well. So we still think theres some room to grow there and that would obviously give us continued tailwind.

I would say Kartik, we obviously put our plan together as we get into the spring of next year.

Create a.

A more detailed estimate of what we think it will be really important to see where we end up.

January and February timeframe.

Last year.

It seems like.

Many many years ago.

And the outbreak there was the post Thanksgiving or winter outbreaks like we're having now in New York.

<unk>.

It did have a little bit of impact we're not seeing that right now, but we'll have to get through the next month month and a half to get a better sense of where were yes. The other thing that is even if we knew because we have some sense of how many openings there or you don't know if that that restaurant or that business is going to backfill them or not they may have to get become more efficient we certainly have seen.

Our clients become more efficient during this period and realize that they could do without this employer that one and not hire back after an extended period of time, and then not being able to get somebody so it's a little hard to predict but we still think theres certainly room for that to grow.

Well. Thank you both of you really appreciate it okay kartik. Thanks.

We'll go next to Mark.

Greg.

Hey, good morning, and happy holidays, Marty and Efrain, and Marty and John Congratulations on the promotions had several questions.

On the Paychex pre Chet.

What sort of adoption are you getting and how much is that actually helping in terms of D accuracy.

Of the payrolls.

Yes, it's early innings for pre check, but we're getting very good feedback that it's very easy for them to check that the accuracy that from a client perspective. They feel the accuracy is is.

Is helping them.

From the standpoint that their employees are going to complain that something they got something that they didn't expect them. The paycheck that they got a chance to see their hours. They got a chance to approve those or or be able to say from a digital standpoint.

And then what are you seeing in terms of on demand payroll into demand for that small land.

Yes.

Been steady, but still I'd say pretty light.

Certain clients.

The hourly and restaurants things like that and there is still a little bit slow to adopt it I think I think we can we still got a lot of opportunity.

Really to advance that as more people get used to it and there is more demand for it I think clients are a little concerned sometimes about offering it because they're not sure if thats going to have a cash flow impact, which it doesn't.

Employees, just say, hey, look I want to get paid today and I think youll see a resurgence of tomorrow gig economy kind of thing where I'm working two or three jobs.

And but they are all I want the money now because it is eight hours here in eight hours there so.

I'd say, it's still pretty light.

Success for those who do it they like it.

And we're trying to find new ways to build that out and grow that business. Because we think it's really going to be a big demand in the future.

Great and then in terms of the gross sales you mentioned how strong things are obviously you are in the middle of.

The key selling season, but I'm wondering in terms of what you've seen thus far this season how.

I mean really strong at all sizes I would say.

From a share payroll size very strong growth on from sure strong growth on the flex side from small to.

To midsize and mid the mid market really we're doing very well I just wanted to best years, we've had in years and I talked a little bit about that some of that is clients that got presented to last year that are really we're ready to decide but I just think the overall package as Efrain said, we're really the only.

One of the only maybe two major competitors of the bunch that can offer everything in an integrated fashion with the latest technology. So you can buy parts from other competitors, but youre going to have to connect to third parties. We can do that too, but if you want it all in one place and the HR expertise to back it up with over 650.

The HR experts, which people really like to have as a backup now that's what they're seeing and this is.

Is very strong so we're we're seeing it across the board sorry, what was the second part of that it was all the different.

The established versus the brand new businesses, but I.

I mean, what you were just saying in terms of like being the only one of two that can offer everything are you seeing an increased level of wins with companies coming back to you from.

Some of the newer competitors that are out there.

We're seeing some yes in the mid market and we're winning more on the upfront I would say, it's stronger on the upfront like going head to head today.

Then necessarily winning them back, but we're getting some of those as well.

And I think we're still seeing a strong growth and as you know new business starts it's still I think its up year to date maybe.

30% to 40%.

That's great. Thank you congrats okay. Thanks.

Well go next to Vincent hung with J P. Morgan.

Hi, guys, it's Andrew on for Tien Tsin.

I just wanted to ask a question.

Hello, I just wanted to ask a question I know about a year ago in the earlier part of this calendar year, we're talking about.

Selling the PEO and I know last quarter, we talked about coming back strong and into this quarter.

I just wanted to ask how that Hilton today, and just more at a high level, how the margins differ across those two solutions.

Yes, first I'd say that the sales Andrew have evened out pretty good I mean, we're having strong ASO and PEO sales I think.

<unk> has come on very strong, particularly in those the great markets that we're in.

<unk> and the need for a full benefits one of the things that we just did a survey and it comes out very strong as the need if you're going to attract and retain employees you got to really look out for their well being and thats from a financial standpoint that is from benefits retirement included Theyre really looking for that overall perspective, I'll, let effort if you want to.

Yes.

With respect to the question on margins.

The the margins.

On <unk>, we're going to be lower not because the.

The core offering.

<unk> of them are pass through so that the margin is lower on the PEO, although the revenue can be higher.

Okay.

Got it thank you and I just had one follow up I mean, we've talked a lot about the retention tools you guys are offering the customers, but just on the hiring side I'm wondering some of the way that paychex can help F&B. So the actual hiring I recall last quarter, you talked about the partnership with indeed I was just curious also if we could hear how that's trending.

Yes, continuing to trend very well.

A hot market as everyone knows to hire it is very difficult.

Indeed to be able to post is all very strong and then I think that that it also attracts people then the full benefit the full HR solution that I, just said the benefits of retirement and.

Generation that is out there deciding where they want to work today, they want things on their mobile apps.

Paychex Flex mobile App is full featured you can have your retirement or insurance.

<unk> you have now pre check.

You are working for somebody who you feel like not only has full benefits, but they're a leader in technology when you use our products. So.

That's how we are helping our clients, particularly I guess I'd say in the mid market to succeed and that drives a lot of value for them and for us.

Great. Thank you.

Happy holiday and New year's Eve, Greg Thank you Andrew.

<unk>.

Well go next to Peter Christiansen with Citi.

Good morning, Marty and Efrain happy holidays.

As a result.

Yes.

Couple of questions here.

Anthony You did mentioned new business formation continues to be strong.

Certainly been observing that from the charts and it's been what 50% typically of new sales.

Just wondering if you could talk about the opportunity or maybe the trends that youre seeing from the.

<unk> file or maybe from some of the regional.

Perhaps less sophisticated players out there.

Hi.

How are some of the trends they're behaving.

As regards to new sales and then.

My follow up would be.

Tough for a number of quarters since the pandemic and so <unk> has been gaining and it's been really strong.

That mix shift.

Help them to what degree is that mix shift help it helping the margin I guess as my follow up thank you.

All started out with some of the regional players where net certainly net adding from a regional player perspective, meaning selling versus losing I think many of the regional players are struggling in this environment to provide as many as much value through COVID-19.

The speed at which regulations are changing and demands on small and mid sized businesses for vaccination policy the mandate.

What's the latest.

To get that from someone like us and in fact, many smaller players try to copy our stuff off the web we have a very comprehensive.

Website from marketing that puts all the information out by state telling you what you have to do where you have to do it and then here's the products that will that will help you with that from a technology and a service standpoint so.

It's really been more difficult on the regional players today that just don't have the breadth.

On the net adds that we've seen year to date, you want to take the yes on the margin part.

One of the things that.

I think you've seen in the model certainly over the last three or four.

Quarters, or so is that.

When when you have growth in.

In revenue.

You don't have.

Attendant costs associated with it typically.

So you scale, mostly and drop a lot to the bottom line I think that's particularly true of management solutions, where.

That's a higher margin.

It's the higher margin portion of the revenue and so when a ASO is growing at the rates that it's growing.

Because of the way that our that R.

Our business model works a lot of that ends up dropping to the bottom line. So it.

All of the mix shift in terms of the way the business has been growing as has been helpful to margins.

That's very helpful gentlemen, happy holidays. Thank you same to you take care.

Okay.

And then any other questions.

And our final question from Scott <unk> with Wolfe Research. Your line is open okay. Thank you.

Thanks, Hey, guys. This is Scott on for Darrin, just first one within our management solutions you guys called out one of the drivers being improved market conditions for retirement services. I was just wondering if you could give a little more color on that.

Yes, I think.

What's happening there is there is a lot of mandates now that are coming out by state, we still haven't seen necessarily the federal mandate, but thats been discussed a lot, but a lot of states, California in particular, New York, some others are coming out saying that businesses.

Some cases, all sizes have to offer a retirement plan of some sort to their employees. So there's going to be some theres. Some mandates there that will have penalties that are starting to be enacted.

Some are in place already in California, I think coming up in June. So there is a lot of attraction there to people not only looking at it from that standpoint, but also just from a hiring standpoint, and a full benefits. There's a lot of interest as I've mentioned in having a full suite of benefits for the well being of the employees that's helping retain.

And attract them in a difficult market. So its retirement it's insurance.

What's your work from home policy your hybrid policy of working in office and home. So all of those things kind of combined it's not just compensation. So that's really picked up and we've had continue to have a very strong retirement.

Sales and the fact that we offer a multitude of products and we just went over 100000 clients I mentioned earlier is a great milestone. We're still number one in new 401, K plans that are offered and I think between our Pep plan in our regular 401k plans and iras very strong very strong conditions in the market and great.

Success from our selling teams selling them and servicing them.

Great and then just one follow up as we think about investments in the business going forward I know over the course of the pandemic do you guys have been investing a lot on the digital and the self service side of things just maybe as we hopefully approach more of a normalized environment could you give a little more color on where you may be employing some investment dollars going forward.

But also you'll continue to see it in the way we sell from a digital standpoint, and the way we onboard.

As well youre going to see that the self service, we talked about that's going to be continued because this is the way clients.

It is no surprise they want to go online they want to see your product test your product price your product and even start implementing it themselves and be able to do that with a world class innovative product and mobile experience and that's what we've got so youll see our digital investments continue in that standpoint, we've seen a lot of success from the investment we've put.

So far and that's going to continue.

Great. Thanks, guys happy holidays. Thank you same to you.

Okay.

There are no further questions in queue at this time I'd like to turn the call back over to our speakers for any additional or closing remarks alright. Thank you at this point, we will close the call if you're interested in replaying. The webcast. It will be archived for about 90 days. Thank you for the time you are taking to participate in this second quarter earnings release call and for your interest in <unk>.

<unk>, we wish you and your families a very happy and safe holiday season. Thank you all.

Okay.

This does conclude today's program. Thank you for your participation you may disconnect at any time.

Q2 2022 Paychex Inc Earnings Call

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