Q3 2022 Paychex Inc Earnings Call
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Good day, everyone and welcome todays Paychex third quarter fiscal 2022 earnings at this time all participants are in a listen only mode. Later, you'll have the opportunity to ask questions. During the question and answer session. You May Register to ask a question.
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Gaining by if you need any assistance. It is now my pleasure to turn the conference over to Mr. Martin <unk>, Chairman and Chief Executive Officer of Paychex.
Thank you Carrie and thank you for joining us for our discussion of the Paychex third quarter fiscal year 2022 earnings release, joining me today of course is Efrain Rivera, our Chief Financial Officer. This morning before the market opened.
Financial results for the third quarter ended February 28, 2022, you can access our earnings release on our Investor Relations website, our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the internet and will be archived and available on our website for about 90 days.
I will start today's call with an update on our business highlights for the third quarter and Efrain will review our financial results for the quarter and provide an update on fiscal 'twenty two.
Fiscal 2022, and then we'll open it up for your questions or comments.
Our strong results for the first half of the year continued in the third quarter as both management solutions and PEO and insurance solutions revenues increased by double digit percentages year over year and adjusted diluted earnings per share increased 20%. We continue to see positive trends in our key indicators and strong momentum across all our lines of <unk>.
Is this driven by a combination of solid internal execution and our market leading suite of innovative solutions uniquely designed to address today's HR challenges. This momentum carried through calendar year end and selling season, resulting in a record sales performance and near record level retention our value proposition continues.
News to resonate resignee resonate in the market, particularly in this challenging environment and our sales results were broad based with double digit growth in new annualized revenue across all lines of business HR outsourcing retirement payroll and insurance, we continue to improve our traction in the mid market space, which is benefit.
From the investments we've made in our technology and product suite.
Our client retention continues to surpass our expectations and remains near our record levels of the prior year well ahead of the pre pandemic levels. Our revenue retention remains at record levels for the year as we continue to bring in even more focus on our higher value clients.
Demand for our comprehensive set of solutions, including our integrated Paychex Flex human capital management technology, and our comprehensive ASO and PEO HR offerings remains high businesses of all sizes are facing continued pressure from supply chain and labor shortages, the rising cost of doing business.
And ongoing challenges with COVID-19.
As staffing challenges persist businesses are looking for integrated technology to deliver increased productivity operating efficiencies and access to experienced HR professionals to help them navigate a complex regulatory environment and complicated distributed workforce dynamics.
We continue to invest in our product set to differentiate us in the market and deliver solutions designed to meet the growing challenges of running a business. Our most recent product launch introduced a series of enhancements designed to support both an onsite and distributed workforce, including an enhanced iris.
Scanning time clock, which delivers a hands free punch experience with industry best security.
Including both the Iris and facial scanning.
A new secured document management solution, which allows clients to safely and confidentially stored documents like employee vaccination status within the flex platform in.
And the compensation summary, which allows clients to provide employees a full view of their compensation to promote retention.
And enhancements to our financial wellness offering to help client employees more effectively budget manage debt and save for retirement.
Each of these enhancements builds on our award winning Paychex Flex technology.
Several industry awards provide the latest validation of the benefits of our innovative technology. We were recently recognized with two awards for our paycheck pre check solution. The 2022 <unk> Innovation award presented by the business Intelligence Group and a 2022 Stevie award for innovation and customer <unk>.
Service pay.
Paychex pre check combines payroll HR time, and attendance and employee self service into a complete system of checks and balances ensuring that work hours are never missed pay rates are properly applied paid time off is not overlooked and then pay is always calculated correctly, we have seen a strong response.
In terms of both client adoption and client results.
Paychex preaching.
Our focus on helping clients maximize available government stimulus was recognized by accounting today as we were awarded with the top New product award for our employee retention tax credit service. We recently surpassed $7 billion in total credits process for our clients I'm very proud of the agility demonstrate.
By our I T and.
And service teams to proactively assist our clients with these government subsidies to help them sustain and enhance our clients' financial position or.
Our mobile and self service technology solutions deliver efficiency for our clients and their employees and we are seeing significant increases in flex sessions, both through the desktop and mobile devices with an increasingly increasing proportion of the sessions of course done by the mobile App <unk>.
Contributing to this growth as traction, we're gaining with wearable devices. They use of the Apple watch has increased mobile usage for our time and attendance solution.
Obviously this provides another safer method for employees to punch in and out and avoid exposure to COVID-19 and other illnesses.
I am, particularly proud of two awards that Paychex has been recently been honored with further our commitment to business integrity through our best in class.
<unk> compliance and government practices for the 14th time Ethisphere named US one of the world's most ethical companies. We are also unfortunate list of the world's most admired companies.
These awards acknowledge our ethical business practices, our values based culture innovation, social responsibility and leadership, we believe doing business. The right way leads to greater success atmosphere agrees, noting that there are 2022 ethics index a collection of publicly traded companies recognized as <unk>.
Repeats of this year's world's most ethical companies designation outperformed the comparable index of large cap companies by almost 25% over the past five years I give credit to the innovation integrity and hard work of our employees, who live our paychex values each and every day.
In summary, we are very proud of our performance during the third quarter and year to date and I. Thank our employees for their tireless dedication during our busiest time of the year are.
Our set of innovative technology and service solutions provides industry, leading value to our clients and leaves us well positioned for a strong finish for fiscal 2022 and continued growth into fiscal 2023, I'll now turn the call over to effort to review our financial results for the third quarter Efrain. Thanks.
Marty good morning, Thanks for being on the call I'd like to remind everyone that today's conference call will contain forward looking statements.
<unk> to the customary disclosures.
Now, let me start by providing some key points for the quarter I'll follow up with greater detail in certain areas I'll finish with a review of fiscal 'twenty two outlook and some very very very preliminary thoughts on fiscal 2023.
Our third quarter results reflect strong internal execution as Marty mentioned that continued improvement in key indicators service revenue and total revenue increased 15% to $1 3 billion.
Within service revenue management solutions revenue increased 13% to $960 million driven by higher client bases across our HCM suite check volumes revenues per check by revenue per client payroll funding and outsource service for temporary staffing clients in ancillary.
HR services, resulting from EUR, Tc, which Marty just mentioned.
Although the revenue associated with <unk> substantially nonrecurring.
<unk> as reported paychex the opportunity to continue to deepen its relationship with clients.
Increased revenue with clients and showcase its industry, leading suite of solutions for small and medium sized businesses.
A significant opportunity remains both inside and outside our base and one thing I'd like to point out here is.
There are a number of HCM platforms in the market you all know that but there are only a select few partners in order for you to be able to access the opportunities that arise.
From having an HCM suite with bundled ancillary services you have to be a partner not simply a platform provider. There's only a few of those in the market our results demonstrate the power of being one and.
And we are one of the leading one so our results are not surprising to us our clients want to know the difference between a map of SAP in our Pep they want to know what the implication of the EUR Tc is for their business and they want to know what the implications of legislation like the secure act.
Is going how its going to impact their business. We know that we are experts and where the partner that our clients look to for solutions to those issues. Our results demonstrate that this quarter now.
Client base growth in the quarter resulted from both strong sales performance and high levels of client retention in.
In particular HR solutions business continues to benefit from strong demand as businesses look for more HR support.
And insurance solutions revenue increased 21% to $302 million, our PEO business benefited from higher average Worksite employees state unemployment insurance revenue in health insurance attachment intra.
Interest income funds held for clients decreased 5% for the quarter to $14 million as the impact of lower average interest rates.
It was partially offset by an increase of 13% in average investment balances and obviously this is one of the things thats going to change as we go through both the remainder of the year and into the next year, we haven't seen the impact of rising rates, yet we will.
Total expenses increased 11% to $713 million the growth in expenses resulted from higher PEO direct insurance costs head count to support our growing client base and continued investment in our product technology sales and marketing.
Op income increased 20% to $563 million with an operating margin of 44, 1% an expansion of almost 200 basis points.
Our effective income tax rate was 23, 3% compared to 24, 2% for the same period last year, both periods reflect net discrete tax benefits related to both to stock based compensation benefits.
In our payments I'm sorry. In addition, the current quarter includes tax benefits related to prior year research and development expenses incurred in the production of customer facing software. So we had an adjustment there and that's part of our lower tax rate.
Net income and diluted earnings per share both increased 23% for the quarter to $431 million and $1 19 per share respectively. Adjusted net income and adjusted diluted earnings per share increased 20% for the quarter to $419 million and $1 15 per share respectively.
I'll quickly highlight our results for the nine month period ending February 28.
Both revenue and earnings have grown by double digits for the each of the past three quarters total service revenue and total revenue growth of 15% each to $3 4 billion and $3 5 billion respectively.
Expenses, excluding onetime costs incurred during the prior year increased 7%. So we've gotten very good leverage operating income and adjusted.
Operating income were $1 4 billion increases of 31% and 27% respectively diluted earnings per share increased 31% to $3 <unk> per share adjusted diluted earnings per share increased 27% to $2, 95% sure.
Let me walk through the highlights of our financial position as you all can see it has very strong cash restricted cash and total corporate investments now total over $1 4 billion and our total borrowings of approximately $806 million.
Is where it stood at February 28, 2022 cash flow from operations was robust in the quarter.
It was at $1 2 billion, an increase of 34% from the same period last year free cash flow generated for the nine months was $1 billion up 36% over last year. The increases were driven by higher net income and fluctuations in working capital we pay out quarterly dividends at <unk> 66, a share for a total of seven <unk>.
$15 million during the first nine months or 12 months Rolling return on equity was 44% those are strong numbers.
Now I will turn to our guidance for the current fiscal year ending May 31, 2022. The outlook reflects the current macro environment, which saw improvement in the quarter. Despite some disruption from <unk>.
We've taken that into account.
We've taken into account affected third quarter results exceeded expectations, but have tempered our outlook given changing macroeconomic.
Changing macroeconomic environment and we provided the following updated fiscal 'twenty two.
<unk>.
As you saw our management solutions revenue is now expected to grow in the range of 12%, 13%. We previously guided to growth in the range of 10% to 11%.
And insurance solutions is expected to grow in the range of 13% to 14%. We previously guided to growth in the range of 10 to 12 interest on funds held for clients is expected to be relatively flat year over year, we won't see the impact yet significantly.
Fed raises.
Total revenue is expected to grow in the range of 12% to 13%. We previously guided to growth in the range of 10 to 11 adjusted operating income margin is expected to be approximately 40% up from previous guidance of 39% to 40% adjusted.
Adjusted EBITDA margin is expected to be in the range of 44% to 45% up from previous guidance of.
Of approximately 44%.
Other expense net is expected to be approximately $15 million our previous guidance range was in the range of 15 to 18 effective income tax rate is expected to be approximately 24%. We previously guided in the range of 24% to 25% adjusted diluted earnings per share is expected to grow in there.
Range of 22.5% to 23% previously guided growth range of 18 to 20.
This guidance reflects our intention to continue to invest in our businesses to help drive future growth and I would just comment that in the fourth quarter, we intend to take some additional actions with respect to investment in the business. So.
That will temper the margin a little bit as we head into 'twenty three.
Now comments on 'twenty three.
We're currently in the process preparing our annual plan.
We will provide guidance final guidance for fiscal 2023 during our fiscal 2022 fourth quarter in June , but I want to provide a preliminary thought process around fiscal 'twenty three as we entered the planning cycle on a preliminary basis. We believe the total revenue growth will be in the upper single digits.
At this stage I'd call that somewhere around 7%.
I would caution that there is a lot of work to be done to digest completely where the fed is going to end up and how we position the portfolio. So theres still.
So some moving pieces there the other thing we would say right now with respect to operating margins. We expect an improvement of about 50 basis points. You know that typically that's what we're aiming for we've had very very significant operating margin improvement, but we're still committed to two.
Leveraging the business. So that's where we're at right now I want to call out one thing Thats important other expense net is going to be in the range of $25 million to $30 million next year due to the absence of equity gains that we got this year. So we have.
A portfolio that we invest in.
Equity gains during the year those will not be in.
Next year at least we don't can't plan on minimum or anticipate there will be there and then the effective tax rate will be in the range of 24% to 25% of course.
All of this is very preliminary it's subject to revision and is based on assumptions that could change given the uncertain macro environment, especially as we gain additional insight into what the fed actually will do.
We'll update you again on the fourth quarter call. So with all of that I'll turn it back over to Martin. Thank you Efrain will now open the call to questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key.
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Thank you our first question will come from Bryan Bergin with Cowen.
Hi, Good morning, guys I appreciate you've given us.
In early fiscal 'twenty three view here so.
My understanding you've got some outsized double digit growth comps materializing this year.
Good to hear for next year's number I guess more importantly, though our question. We're often getting is how to think about a sustainable level of growth in your business you've had some peers speak to the medium term targets in the model anything you could share as a framework for how youre thinking about maybe longer term growth based on what youre seeing in the market and what you've done here to drive that stronger sales execution.
Yes.
First of all thanks.
The comments.
Think that.
We start with I guess, two things and then.
Further building block.
With respect to management solution. Many of you've heard me say this we start with the premise that we're going to be up at least mid and we would hope over that timeframe.
Get above mid to upper single digits and management solutions, when we get to Q4, we'll call that out a little bit more and then on the PEO and insurance side, we expect to be around double digits. So we start with that premise that yields a certain.
Certain revenue growth that that.
We think is going to be upper single digits.
And then the other thing is that our expectation is that we will leverage in typical years, we average.
At least 50 basis points some years, we won't do that some years, we'll do.
So.
A year like this year from a leverage perspective doesn't come around that long. So I don't suspect it will be too many 200 basis points.
Leverage.
Years in us, but we do expect to continue to leverage going forward certainly over the intermediate term and just one other other point on that.
That's not simply an arithmetic exercise, it's a function of all of the work that's being done in the background around automating and making the business more efficient I said earlier in.
In the comments that.
We we have a we are a leading HCM suite provider, but what makes us so unique as we do that.
At margins that are industry, leading and so we work very hard on that as we go into a planned process here that will be a mantra that's repeated over and over.
<unk>.
We expect to be able to deliver on those commitments over the intermediate term and I think just to add to that.
On the sales execution.
We feel very strong this year, we've had great sales execution selling season was very strong record third quarter sales performance and as we've gone through it really across the board. So we're really pleased that.
Not only the marketing and brand work, we've done but the product development that we've done in innovation there has.
He has really.
<unk> hit the marketplace very well at a time and we really timed it very well to hit the market with the HR support that businesses and prospects current clients and prospects needed from a attracting and hiring and retaining talent.
We really hit the right timing on that and then in addition to it as Efrain said. This this doesn't happen the thought that went into the employee retention tax credit, which has been very successful for us.
We've been able to go to current clients and prospects and talk about how we can get this government subsidy for you and those tax credits have averaged around $180000 per client.
And when you think of our average client size. It's a significant dollar amount that adds as Efrain mentioned earlier a lot of value and then to say hey, not only are we helping you with that here's how we can help you continue to sustain your growth in your business. That's been very successful and we don't that's how we play the game. So we feel will continue to be able to do.
That.
Okay makes sense and.
Just follow up on retention so.
Can you just share where unit retention landed here on <unk>. It doesn't sound like you have any change of your.
Holding higher post pandemic levels, but correct me if I'm wrong, there and just one thing are you seeing any change in the gap between unit and revenue retention as your mid market and larger client push materializes.
It's a good question I think revenue retention is a little higher and so we are seeing a little bit of a gap. There as you would expect just based on the size of the clients and that were getting more mid market success in both sales and retention. The overall retention number is going to be better than pre.
Pandemic at least that his experience to be right now it's better than pre pandemic, we think that will stay through the rest of the fiscal year end.
And but not quite at the record levels, but it doesn't surprise us I think a lot of people held on.
Through the pandemic and we're trying to figure out where they were but again things like the employee retention tax credit those things have helped our retention and we're trying to see if businesses even under the pressure that they're under can still sustain their business in and keep themselves going there's a lot of challenges out there as you know with supply chain and just inflation.
And so forth and so we're a little cautious but right now we don't see that impacting them very much.
Okay. Thank you alright, Brian Thanks.
Thank you. Our next question comes from Andrew Nicholas with William Blair.
Hi, Good morning, Thank you for taking my questions.
First one I had was just on the pricing environment in the PEO business. Specifically are you seeing any noticeable change in the aggressiveness of your competitors when it comes to price and if so is that something thats had any impact on new business generation or our competitive win rates to this point.
Yes, no we have not.
I don't see any real changes in that environment, we've been able to.
<unk> take good price get good price.
On our sales and have not seen any increase in the need to discount further or anything like that so we've been very pleased with not only has sales at a record level, but we've been able to hold price as well.
Andrew.
The other thing I'd add is first of all.
Nice report on the PEO industry by the way.
Sure.
The other part is if you get aggressive on price in the wrong way in the <unk> you.
Pay a ferocious price, but you don't get you don't pay the price in the next six to 12 months.
If you discount your health care insurance, and then don't price it appropriate to market and of course, you know this better than I do.
Do you pay a price down the road. So we are really really careful on that point I would say, it's one of the five things. We're probably most careful about is pricing all of the ancillary well all of the.
<unk> insurance direct insurance in a way that that's appropriate to the risk and we haven't had any blow ups. We monitor monitor very closely. So we think there's a really compelling value prop and PEO thats going to continue to grow but it won't be on the basis of selling cheap insurance, we're very cautious about that.
No that's helpful and part of why I ask is because some of the conversations we've had indicate maybe maybe there is some other players that are being aggressive on that front, so not specific to paychex.
In terms of my follow up front I think you mentioned in your prepared remarks towards the end that you intend to take some additional investment actions in the fourth quarter can you spend a little bit more time talking about.
Areas of interest there.
Just to give us a little bit more insight on what to look out for going forward. Thank you.
Andrew I can take some of that too I would say there is certainly as you can expect from an employee retention standpoint, theres. Some actions, we want to take and kind of move some of that up.
In the process. There's also more marketing we're finding good response to our SCM and SCO investments.
Unbranded and and also the products that worked well with us for sales in the last three quarters. So we decided to continue to spend there and then some of the investment in it that we would have planned typically to start into the first quarter. We can move some of that up we feel an accelerated to get the products out even a little faster there.
We're coming up so it's really kind of across the board.
The other thing is we.
We have been hiring so we've got we got a little low in the first part of the year, particularly in service and with turnover and so forth. We have now accelerated that hiring and done well in the third quarter and that will pick up some additional cost in in the fourth quarter.
Makes sense. Thank you very much okay. Thank you.
Thank you. Our next question comes from Kevin Mcveigh with Credit Suisse.
Okay, great. Thanks, so much.
Hey, Ashwin, Hey, Marty maybe Catherine.
Yeah, Frank Thanks, so much for the preliminary results.
Outlook for 'twenty three is there any way to frame what type of fed funds is in that 7%.
I didn't get that I know, it's fluid, but is there any way to think about just initial thoughts on that.
Yes.
We have some we don't have all of it in at this point.
In the.
The preliminary outlook Kevin.
We want to get a sense of.
Whether six is real for us real nine Israel, Israel and I think we're all trying to read the tea leaves is it 50 is it 25.
We have what we would.
Characterizes a moderate scenario certainly not the most aggressive.
A lot of that growth is really more being driven by by.
Improvements in operating performance and.
Fed gets very constructive.
We avoid a recession.
That's part of what we will have a better or clearer answer to when we get to June .
Okay. That's super helpful. And then my other question is more.
I don't know if its a longer term or whether it for you Marty but can you help us understand the addressable market of paychex today versus last cycle, because obviously, you've done a ton of investment it seems like.
What youre able to off your client is much more robust today.
Way to think about kind of whether it's a dollar amount or just how youre thinking about the addressable market today versus maybe what it was coming out of the last cycle.
Yes, I think I think definitely from the product set that we offer and the integration with flex in.
The digital approach to everything we've done.
I think it is definitely larger I don't know if I can put a dollar amount on it but I think our success in the mid market sales in particular in the retention there.
Over the last three quarters has really shown that we're hitting the mark as I mentioned earlier, we really focused on.
The what would be the impact of coming out of Covid kind of the heavy COVID-19 period, which is that distributed workforce. How do you allow the hiring.
On boarding the retaining of employees, who are disturbed may be distributed or may be in the office.
Do you handle all of that I think those products have really positioned us well to a larger mid market base, it's not necessarily larger clients, but I think maybe a broader set of solutions that will hit a lot of different.
Areas for clients and I think at the same time I think we've positioned ourselves well from what the client is really feeling coming out of Covid. It opened up an opportunity like distributed Workforces to say, let me tell you how powerful mobile.
Mobile Apple Flex is look at how just take an example that our head of product management did for our team. The other day on investment team are looking at products.
Just the mobile App up time, and attendance and how that works and how you can of course punch in and out but how you can ship swap remotely alert someone that you need don't need this shift or you don't need that ship and open it up and take it and all of that is done on a mobile app for across employees very powerful not to mentioned retention analytics.
A lot of the analytics work that we've given clients. So I think that I think long answer I think we've opened up a lot more opportunities for us at a very perfect time to do that the other thing I would add Kevin is in this quarter really is a demonstration of that when Covid started we were doing a lot of.
Consulting with our clients and not we werent charging.
It wasn't monetized.
I will say that in the midst of the pandemic some of our competitors referred.
Their clients to our website in terms of information I think as we progressed through Covid. What we learned was that there is a tremendous amount of opportunity in the services that attach around the HCM suite.
<unk> is a great example of that that situation of retirement services promises to be another important.
<unk> going forward and there will be others, which we don't know a lot about right now because they haven't been they haven't been.
Surface.
We are finding is that debt.
In addition to the technology that Marty highlighted that technology opens another door for the opportunity to provide a set of solutions that clients are interested in once we.
Inform them about it or once we partner with them and I would say our marketing our product our it teams and our compliance teams also are all working very hard and including I've put in our legal team to to uncover those kinds of opportunities that we can we can monetize so they're within the product.
There's one set of Av.
Of opportunities and I think there's this growing amount of services that we can provide our clients a play off our technology and that part.
We'll be looking to dimension as we go forward.
But it is becoming increasingly important.
It got us excited to talk about this now adding to what <unk>. Just said, it's the use of the data we really have maximized the use of our client data now and.
Like when when the paycheck protection loans started.
The teams here figured out hey look we use the data to immediately.
The clients that they could file for the loans and we could basically pre populate the entire application other than they have to sign it.
When it became yet and you could add other expenses in there. Okay. Just add the other expenses, but we pre populated if you are a client of ours all of the data that we have in our system and then.
And so 94% 95% of those loans now have all been by the way turned into grants. So they've all been approved is complete grant. So it's also using the power of our data and as Efrain said the employee retention tax credit was we use the data to now go to our clients and say Hey look based on what we have in our data we think you can.
Apply for this and you fill out of you sign a couple of things electronically and we will help you file and we will amend the returns and youre going to have $180000 on average.
It's a big deal so that added a lot of value.
Two of the clients that said Wow I didn't realize that paychex can do all of this for me and it added a lot I think to the retention and the brand value of what we could do for them.
There's a lot of sense. Thank you.
Okay.
Thank you. Our next question comes from Jason Kupferberg with Bank of America.
Thanks, guys. Good morning, I, just wanted to start by by probing some of your comments in the prepared remarks around.
Macro I think you said something to the effective tempering your outlook, but obviously you raised the outlook at least for revenue for the year by more than what you just beat the quarter by so just wanted to try and reconcile that as that really reflected in the initial outlook for 'twenty three yes, yes.
That was mostly for people like us Jason.
Yeah.
It would be on why aren't you more constructive on Q4 as a number of you who know me and who I've known you for now a number of years, we're going to point out about.
About how we look we're looking at Q4.
There is an element of caution in Q4, and if you look at where Factset is Q4, you can derive an imputed number for Q4.
The point I was simply making there is that as Marty highlighted earlier.
Given the year, we decided that it was important to continue to spend into Q4. So.
That was one element of it so tempered a little bit from an expense standpoint.
R. R flowed through with what we think could be revenue in the quarter Thats, one and then second.
When we were putting all the data together.
I think the macro environment look it was looking a little bit more uncertain than maybe it is right now.
And I don't mean that.
Something suddenly changed in the last week, but.
The environment is kind of volatile and I just wanted to highlight that we're sitting here feeling okay.
From a macro perspective business wise, we feel very okay, but but.
Things could change in the next.
And over the next month and so I just wanted to inject a small note of caution to what was a really strong quarter for us yes.
Yes, yes.
Okay totally understand I know I think the past couple of quarters, you've been calling out some tailwind from temp staffing clients and I was just curious if you can quantify maybe how much of a lift that is provided to management solutions and your thoughts on sustainability of the tailwind.
We.
It's modest.
Jason.
So many of you know that we provide funding for staffing companies.
To make sure everyone's clear we don't we're not in the staffing business, where in the funding of the staffing business.
The staffing business has been on fire over the last six months and so our our funding business has done very very well. This year. So it's still it's still modest.
It's a highly profitable business for us but.
It contributed in the mix of things that have gone well and it's a long list of things that have gone well. This year. It's one of the businesses that had a pretty robust recovery.
Okay.
<unk> the color.
Thank you.
Hey.
Thank you. Our next question comes from Kartik Mehta with Northcoast research.
Hey, good morning, Marty and Efrain.
I know one of the areas. We always talk about is pays per control and you've talked about how in this environment that's been difficult I'm wondering.
What the trends been.
You can expect that trend to be over the next.
Six months or so.
Yes, Kartik I mean, you know.
Better than.
Than most.
Goodbye.
At this point that unemployment was at three 8%.
Think that most people would have thought.
And that we were going to base a plan on that that idea.
At three 8%.
Look it's been more robust than we thought.
I'll, let Marty comment because he just.
We just I should say release employment index, and so we've got a little bit more.
He's got a lot more color on that and I do but I would say.
You are getting to the point, where it's going to get difficult for that number to run its been running positive and it's been running ahead of what we thought.
But.
Youre getting to a point, where it is going to be difficult to continue to run quite as hard it.
As it's been so ill, let Marty talk a little bit yes, I think we've seen correct.
Index this is really.
Clients under 50.
That index, but we've continued to see strong job growth and it has it has moderated the last two months.
But its still strong growth over last year and.
And I think as we've sold more into the mid market as well we're seeing.
Probably a little bit better growth there from the number of employees because we're into a larger client size and and I think what we're trying to measure is.
With the things that are going on now in the macro environment, what is that going to mean going forward like they haven't there is a number of government subsidies, but are we getting to the end of those now we still think by the way the employee retention tax credit will help us in next year as well and help our clients because theres still a lot we can file for.
As we go back through the process, but but I think it's just how much are they going to grow going forward right now there's a bit of.
Bit of pessimism and small clients as two between inflation supply chain et cetera should we be a little bit careful but they have but they have demand, especially restaurants and so forth. So when you look at leisure and hospitality job growth is up 20% 21%.
The fastest of all of them, but how will that continue given inflation concerns.
Supply chain stuff that continues so I will say I think it's still positive we're still seeing growth, but it's moderating.
And then Marty just on pricing in every business has taken have taken the opportunity to raise prices just because of the environment. We're in in everybody's face inflationary pressures just like you are now I'm wondering maybe what the strategy is for paychex from a price standpoint.
As you move forward or at least for this year.
I think what we're seeing is the opportunity to be at the high end of our range.
The range would still be in that same but I think we'll be at the high end of that range.
Some costs are up obviously for us, but I think that the value of the products to our clients have increased as the all the things we've talked about before with the help that we're giving them through government subsidies with all of them the value, we're giving them an HR then all the product investments. We've made so I think that that will tolerate that.
Well actually because we are just going to be towards the high end of the range that we normally would have.
Alright. Thank you both very much I appreciate it.
Thank you. Our next question will come from Eugene <unk> with Moffett Nathan.
Okay. Good.
Good morning, Marty and Efrain.
Two quick.
Paul.
One just on retention I just wanted to clarify.
Separating between out of business churn and competitive losses.
Maybe elaborate a little bit on how those two things are trending in relation to you.
The record high retention levels overall.
Both of those metrics one of them now.
Congress.
Yes out of businesses.
Pretty solid and so is the competitive has not changed all that much really and in fact, if you look at what our largest competitor. If you. We always look at how much have we sold to their clients and sold them away from the competitor and how much have we lost were a net gain at this point. So we're not losing any more really to compare.
Some some.
But for here and there, but really we're pretty solid on the retention kind of across the board as to how we're doing obviously if were.
Near record levels, we're continuing to be pretty steady and where we are in retention.
Yes, and yes elaborate sort of out of business in terms of like bankruptcy is that as we maybe mobile way from government.
<unk> seen that pressure yet.
Yes.
Okay hope that yet.
Great and then.
Great and then another quick one on the just wanted to see if you can provide some.
Some color on what drove the 21% growth in revenue.
The major drivers that you call out which is that worksite employees.
Regional reinsurance strategy.
Yeah I'll start on Efrain can jump in I think one we've had very solid sales very strong sales results and and then with those sales results. We've seen great attachment to insurance, so better <unk> for insurance products, I think thats very reflective of the need to provide insurance and the good benefit plans and <unk>.
Tony that the PEO provides clients and prospects and and then lastly, we've seen obviously an increase in worksite employees from the clients that we have so they've been adding back employees. So it really kind of got it across the board you got good good sales good solid retention, you got better attachment to insurance.
And growing worksite employees of the existing base.
The other the only other two to round that out is increasing wages.
Sundar.
So you got really I don't know if theres notes not more than a trifecta, but a lot of good things going on we had a really strong quarter I mean, obviously the results speak for themselves but.
But it was a good quarter in the PEO.
Yeah got it got it.
<unk> growth was that.
How was it relative maybe quite honestly not bright spot was lower.
Other factors, but can you give us that yes.
We had one.
Can you give us some thought worksite employee growth.
We'll update that.
Janet.
At year end.
We don't separate out.
So disappointed.
But we it's included in our overall Worksite employees served.
In our HR outsourcing businesses, but but the numbers.
Both have been pretty robust growth.
Got it got it okay. Thank you.
Thank you. Our next question comes from James Faucette with Morgan Stanley .
Hey, good morning, everybody and thanks, a lot for all the color I wanted to follow up on previous question and some of your commentary first on on your own customer retention.
Obviously, great work, there and you continue to operate at record levels and not really seeing the softening that you had anticipated.
We anticipated maybe a couple of quarters ago, but I'm wondering like how are you adjusting your planning for that long term retention level.
And what is.
What should we think that that could baseline at down the road.
I think right now as I.
I've said, it's a little dicey given okay. We had some government stimulus that they were able to some clients were able to take advantage of.
At the same time, you've got a raising or rising inflation and and then supply chain hopefully getting better. So you've got a lot of macro things going on at the same time right now we would expect that it's still going to be strong.
Based on how we are year to date, we've said, we're not at record levels that we had last year, but were better than pre pandemic. We would expect that we continue to be at better than pre pandemic levels that we have added a lot of value to our clients and.
That it will continue to be strong I think that's how we feel but theres a lot of macro stuff that could go on there with again with bankruptcies and things like that that right now we haven't seen so our expectation going forward is that we're at a pretty similar level to where we are right now.
Got it no that's.
That's actually really helpful context, and then as far as your investment that you've called out multiple times here and what you want to do at least in the.
<unk>.
Period, and what Youre, giving guidance over the next quarter or so and then how we should think about that longer term can you talk a little bit about where you're seeing opportunities for organic investment and.
What's the time to payback on those and what we should be looking for either from a product or service perspective.
As you continue to invest there.
Yes, I think.
Definitely two main things, which would maybe three so sales investments that will be continuing to invest in our sales teams will be growing the sales team.
And in select markets, but.
But we're really across the board see better opportunities for investing in sales to as marketing cost will continue to invest in marketing, it's driving a lot of leads into the business and that's the way people are obviously searching and buying now so we're going to continue to see that investment go up and it's not getting any less expensive to do it.
And I'd say.
Three would be product.
We're going to see new product as you've seen from US we've had new product releases basically every season, we kind of look at them as a season type of thing and in the spring and summer season.
Have continued new products that we've rolled out we just released.
<unk> talked about our winter release now going into the spring release Youre going to just see continued product enhancements to what we have it is going to.
We've continued to do a lot again as I said with our data and from a digital standpoint, and really maximizing the use of that mobile app. So that we can build even more retention strength with the employees of our clients. They're the ones that are using that mobile app and always have even more than our clients. So we're giving trying to give.
Our clients employees everything they possibly can on their mobile app to produce better retention for us and not allow their employer to leave paychecks or wildly paychex just like the diamond attendance, just like punching in and out Swift ship, swapping and and being able to do things like when when we <unk>.
Higher someone everything is digital now everything is paperless.
The time, we post with indeed, we have that automatic integration with indeed will you can post and indeed, the world's largest job site. That's brought that client is or that prospect. Our applicant has brought in without paper when they hire them. It's brought on an on boarding youre going to just see us continue to build out our HR suite, where every.
Thing is around that mobile app to build strength and sustainability for the client.
Hey, Marty offering. Thank you so much as always for your.
Macro et cetera, Okay. I appreciate thank you.
Thank you. Our next question comes from Mark <unk> with Baird.
Hey, good morning, and congratulations on the strong quarter.
Myra.
Wondering a little bit on the new sales it sounds like.
Things are going really well there I'm wondering if you can comment a little bit about are you seeing any sort of change in terms of the source of new sales are you you mentioned your largest competitor and being a net gainer, there, but relative to everybody else that the public companies know about or the public company.
That are out there also.
Local and regionals.
And any sort of up shift in terms of on premise systems. Both as it relates to your core sized clients and then also the progress that youre, making on the midsized clients.
I'd say on the small side.
Market continues to be really online.
Even a little bit less from still pretty strong from CPA referrals and client existing client referrals, but more and more of those we've seen and this is over the last few years.
It may be in the old days, the CPA would refer us and then the call would come right to us.
CPA may now refer us, but someone than it looks and it comes in through the web and to buy so we're definitely seeing an increase from web sales, particularly on the low end and youre going to see even more of those sales come in on a self serve onboarding basis, where the client can sign themselves up.
And committed search so it's going to be.
And then of course, we've learned that with all of virtually all of the salespeople working remotely and virtually that has been very strong for sales to come in and be sold over over the phone or over the web.
I think on the mid market side.
Yes, I think we've done very well against the competitors that you know well and cover and we've taken some back some clients back that have left us and found as Efrain mentioned very.
Very eloquently earlier that we have a total platform you can buy certain pieces of it but we have a total product set not just one platform they have.
Payroll on and then connect everybody else, we have everything if you want it and makes it much more seamless and we also can keep whatever components you want on your own an API into virtually anybody through a marketplace. So so I think we've seen yes, definitely a growth and the opportunity to take back.
Some some share from competitors and we think that's going to certainly continue as we continue to add product.
Great and then can you talk a little bit on the PEO side in terms of the strong growth that you're experiencing here how much of it is coming from up sells as opposed to.
New logos.
Yeah.
I think.
I think you'd see majority probably from upsell.
But theres plenty of new logos now that are coming in new businesses that for the first time, our and especially in those states where were prominent Florida, Georgia the taxes.
They're new to PEO.
They're not necessarily coming from ASO, but I would say a slight majority are still up sales. We're really good at that they know us and Theres a great close right there.
Hey, you're on payroll only or or maybe your ESO, but you want to go to a better benefit opportunities better benefit plans and go into the PEO, where you're kind of in those shared plans and so forth. So I would say a slight majority from from from up sales, but but plenty of new logos we've re.
<unk> been very successful, obviously, if youre growing over 20% in the quarter.
Great and then to two sort of related macro questions.
One just in terms of the preliminary thoughts with regards to 'twenty three.
How are you thinking about float balance growth.
That's one and then two just a clarification with regards to the tempering of expectations.
Actually seeing anything thats actually occurring on the ground or is your comment more related to just the expectation that there would be some.
Our reason for temporary obviously.
Rates end up going up significantly.
I think it's more of the latter mark on that.
Question look hey, it's all fun and games to say that.
We're going to get all the benefit from 678 raises would depending on your perspective, but you've got to be somewhat cautious about what the impact on the economy as a whole, especially on the small end of the market would be we don't have any crystal ball you have a better one than we do but thats an issue that we need to.
To realize because the fed will take and the fed will give.
And we're trying to analyze how all of that looks.
With respect to <unk>.
Balanced growth I would say, it's probably going to be low single digits to mid single digits at this point.
Depending on what's happening with wage inflation and the other factors that go and insurances.
At this point, that's what our thought process is we've had a pretty robust growth. This year, obviously with recovery in wages.
Clients, it's helped a lot so it'll moderate a bit next year.
Great. Thank you.
Thanks Mark.
Thank you. Our next question comes from Tien Tsin Huang with Jpmorgan.
Okay.
Hey, good morning, great results and profitability.
Quickly if you don't mind, just one question ask about existing versus new.
Revenue growth and Jim just thinking about what you said I think you said it.
Or maybe it's Marty double digit annualized contract value.
It sounded like it was broad based so just trying to disaggregate that comment with the growth outlook thinking about it between new.
Clients versus existing clients, if that makes sense just because it seems like your first look at 'twenty three is pretty consistent with what we typically would observe I just want to make sure the composition is different.
Yes, So let me take that Tien tsin.
So.
I think it is pretty consistent what we observe we typically are going to generate about half of our new logos. If you will from <unk>.
<unk> businesses, we expect that to continue going into next year, and then with the <unk>.
Normal amount of upsell and cross sell.
Growth in revenue per client.
We ended up getting so obviously.
Net adds were comp half of it.
Will come from newly formed business as our new sales will come from newly formed businesses and then.
There was one thing that I highlighted that's important and I.
I think it was in response to Kevin's question.
We're seeing more opportunity to add revenue per client as we see more opportunity for the kinds of services.
Example, ER.
<unk>.
Okay.
It's easy to overlook that but it's part of the way.
As Marty.
It's part of who we are.
Perfect, that's what I needed because it looks like your yes.
Despite the tough comp can sort of write back on what we usually want to expect from paycheck. So thank you. Thank you guys. Thanks attention.
Thank you our next question and our final question for today is from Peter Christiansen with Citi.
Good morning, Thanks for the question Great job guys.
I appreciate it.
To the degree that you can tell.
Are you winning new business from previous like self filers still is that still a reasonable pool to draw from on the new sales front.
Oh, It is definitely I mean, theres still plenty of small businesses on the small side that are have tried to continue to do things themselves and I do think over the last two years, that's become even more difficult and they're losing a lot of opportunity.
By not going with someone I thought, yes, that's still a great opportunity its still a big piece of the pie that's available out there that and youre, making it easier for them to sign up and do everything themselves, but do it in an automated fashion with someone who has over 200 compliance experts to make sure. They are doing it right. So yes, that's still a good opportunity for us.
And that's why as Efrain said half of our sales are coming from new businesses and many of those new businesses may be new but they might have even tried to do something themselves for a few months or a year before they before they went to someone like us.
That's interesting and then.
Any thoughts on <unk>.
Industry consolidation at this point, particularly from <unk>.
I guess the more private regional players.
D C D C any any trends evolving there and then maybe juxtapose that with how youre thinking about the M&A landscape for paychex.
Yes, I think we've seen.
Some of the smallest ones consol.
Consolidate it's just too difficult today.
For many of them to provide the product suite to that people are demanding and the online presence the mobile app.
The constant increase in product development. They are just not able to keep up and all the compliance and the government is not getting any easier to deal with they want to particularly the IRS theyre under budgeted Theyre understaffed.
So it's difficult for smaller payroll in particular companies to keep up with someone like us that has the the powerful team behind the products. So I think there is some consolidation there I wouldn't say any on the larger ones just yet, but I wouldn't be surprised if at some point it just becomes too difficult to keep up.
With the investment.
From an M&A standpoint, there's still plenty of things that we're looking at.
And PEO payroll everything.
Lot of other opportunities, we're finding opportunities that are not always panning out we're very selective obviously, we've had a great success rate over particularly over the last 10 years on acquisitions and we're very careful about what we add and that valuation makes sense and right now the valuations are still a little a little lofty I'd say.
Great well, thanks for the color really okay. Thank you alright, okay.
There are no further questions at this time I will now turn it back to our presenters for any additional or closing remarks. Thank you at this point, we will close the call if you're interested in replaying. The webcast will be archived for approximately 90 days. Thank you for taking the time to participate in our third quarter earnings release conference call and for your interest.
In paychecks I hope you all continue to remain safe and healthy. Thank you.
Thank you ladies and gentlemen. This concludes today's event you may now disconnect.
Okay.
Yes.
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Good day, everyone and welcome todays Paychex third quarter fiscal 2022 earnings at this time all participants are in a listen only mode. Later, you'll have the opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing the star and one on your Touchtone phone.
You may withdraw yourself from the queue by pressing the pound Keith.
Please note. This call may be recorded I will be standing by if you need any assistance. It is now my pleasure to turn the conference over to Mr. Martin Musee, Chairman and Chief Executive Officer of Paychex.
Thank you Carrie and thank you for joining us for our discussion of the Paychex third quarter fiscal year 2022 earnings release, joining me today of course is Efrain Rivera, our Chief Financial Officer, and this morning before the market opened.
Financial results for the third quarter ended February 28, 2022, you can access our earnings release on our Investor Relations website, our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the internet and will be archived and available on our website for about 90 days.
I will start today's call with an update on our business highlights for the third quarter and Efrain will review our financial results for the quarter and provide an update on fiscal 'twenty two.
In fiscal 2022, and then we'll open it up for your questions or comments.
Our strong results for the first half of the year continued in the third quarter as both management solutions and PEO and insurance solutions revenues increased by double digit percentages year over year and adjusted diluted earnings.