Q1 2023 Paychex Inc Earnings Call
[music].
Good day, everyone and welcome to the Paychex first quarter FY 'twenty three earnings 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 and answer session.
I registered to ask a question by pressing star one on your Touchtone phone. Please note. This call may be recorded it is now my pleasure to turn today's program over to Martin Mucci, Chairman and Chief Executive Officer of Paychex. Please go ahead.
Thank you Gretchen and thank you for joining us for a discussion of the Paychex first quarter fiscal 'twenty three earnings release, joining me today are John Gibson, Our President and Chief operating Officer, and Efrain Rivera, Our Chief Financial Officer, I do want to start out by saying that all of US are thinking of everyone in the path of hurricane.
Ian that is approaching Florida at this time, certainly our employees our clients and everyone else in those areas. We hope are safe.
This morning before the market opened we released our financial results for the first quarter ended August 31, 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 and this teleconference is of course being broadcast over the internet and will be archived and available for approximately nine.
Days.
We will start today's call with an update on the business highlights for the first quarter Efrain will then review our financial results and outlook for fiscal 2023, and then we'll open it up for your questions I will start off by acknowledging that this will be my last earnings call as in my role as CEO of Paychex on August 24th we announced I am retiring as CEO .
Effective October 14th that's after our 2022.
Fiscal 2022 annual meeting of stockholders. However, I will remain in my role as chairman of the Board John Gibson on the call today are current President and Chief operating officer will assume the role of President and CEO . John has been a member of the executive leadership team since 2013 and has been instrumental in the success of Paychex.
During his tenure, we have executed on our long term succession plan and I'm confident that John is the right person to lead paychex into its next phase of growth really many best days ahead of us I want to thank all of you also you directly for your interest and coverage of Paychex. Some of you for more than two decades.
For your good questions and feedback over my 12 years as Chief Executive Officer.
I also want to publicly thank effort.
Everyone knows he is one of the best CFO in the business and we've done over 40 quarterly calls together and more than any more than a CFO effort has really been a leader on our executive team and who provides not only great counsel, but is known for his intelligence. His integrity and also music trivia you can try that out some time.
Fiscal 2023 is off to a great start with a double digit growth in both revenue and earnings compared to the same quarter last year, we have a record level of first quarter sales with strong trends continuing in the mid market retirement and HR outsourcing in particular, we have had continued success in the selling of our suite of innovative.
Products from HCM technology to HR solutions that help businesses become more efficient and address complex HR issues in a challenging time for many businesses. We continue to regularly monitor are key leading indicators for signs of changes to the macroeconomic trends and while we've seen some moderation in key issues.
We have not yet seen any significant changes.
As an example, the latest paychex IHS small business employment watch showed that workers of U S. Small businesses continue to benefit from higher wages, new jobs continue to grow but at a more moderated pace and job growth at U S. Small businesses remains resilient, even in the face of a tight labor market and inflation pressures.
Employment levels at our existing clients have continued to increase as they are finding more people to fill those positions consistent with these findings of our HR of our small business index I will now turn the call over to John <unk>.
We'll provide you with some highlights surrounding our technology and product suite and results jet. Okay. Thank you Marty and good morning, everyone. It's a pleasure to be with you.
Based upon our recently released pulse of HR survey, it's obvious the businesses of all sizes continue to be challenged with attracting and retaining talent improving their operational efficiency and working to increase their finance financial flexibility. Our continued investments in innovative HR technology combined with our unmatched.
<unk> expertise truly and uniquely positions us to help small businesses and midsize businesses navigate a very dynamic and challenging environment.
Earlier. This month, we attended the annual HR Technology conference in Las Vegas, where once again paychex demonstrated the latest of our innovations we showcase significant enhancements to the paychex flex recruiting an applicant tracking experience, which is designed to digitally deliver candidates to clients faster and <unk>.
All of them to leverage mobile technology to recruit screen, and then onboard candidates and a unified and simple to use experience already our digital Onboarding experience was utilized by over one 7 million new hires in the last year alone.
We also introduced our latest innovation Paychex voice assist and really this is a natural extension of the expansive and ever growing and utilized self service capabilities that.
We havent paychex and coupled with our award winning paychex pre check offering which allows employees to further participate in the payroll process by reviewing their gross to net payroll calculations prior to payroll processing Paychex voice assist now enables HR and payroll administrators and small business owners to manage their payer.
Joel and HR task, while on the go through any Google assistant capable device. This provides a hands free experience that includes voice recognition and verification security.
I am proud that paychex as the first HCM solutions provider to offer voice activated capabilities such as these.
Our technology offerings continued to garner national recognition Paychex is proud to be recognized for the six I repeat the sixth consecutive year by Nelson Hall, a global analysts and research firm and they positioned us as a leader in its 2002 neat report for service providers Paychex Flex was recognized.
Where its comprehensive technology as one of the most advanced HR platforms that brings the power of benchmarking data analytics as well as digital service enablement to drive operational efficiency and improve the employee experience I also want to mention that we have once again for the 12th consecutive year.
Been recognized as the nation's largest 401K record keeper by total number of plans by plan sponsor magazine.
We were also recognized by them as an industry leader and the number of new plans that we added in 2021, it's obvious that our retirement business continues to be an area of strength for us as many business owners and our employees are focused on financial wellness is a key benefit in issue.
In addition, our pooled employer plan offering continues to gain traction in the marketplace with approximately 4000, new plans on boarded during the first quarter alone.
We've continued to see strong demand for our employee retention tax credit service. This helps clients maximize their outage eligible tax credits and thus provide them more financial flexibility to date, we have helped over 45000 clients secured over 186.
That's eight $6 billion and combined and combined <unk> and paid leave tax credits. We continue to have the opportunity to educate more of our existing clients on the benefit of this service as well as leverage that service to attract new clients.
We have started off this fiscal year 'twenty three strong and while there is uncertainty in the macro environment, our solutions and business model have in the past and continue today to prove their resilience, we help our clients to succeed under any macro economic conditions, we continue to focus our product roadmap on the needs of our <unk>.
Lyons and anticipate releasing further enhancements this fiscal year designed to continue to provide them a positive digital user experience and help them utilized HR technology to simplify their processes.
Now before I turn the call over to ever ever and I'd like to take a moment to say, thank you and yes, more youre going to continue to hear this over and over again over the next couple of weeks, but I wanted to say, thank you to Marty for his tireless dedication and strong leadership of the company over the years and for me personally for his mentorship and his friendship.
For the nearly decade that Eni has been working together.
Under <unk> tenure as CEO paychex has more than doubled its revenue and transformed into a leading HCM technology solutions company today Paycheck is a tech company.
And it's a tech company because of Marty's vision and his leadership.
Marty it's been a pleasure to work alongside you the leadership team and the nearly 17000 now employees of Paychex and I look forward to continuing our relationship and our new rules.
As I've said, many times and to many people where the same great company. It's the same great leadership team. It's the same great employees. We're just each playing a little different rules as we move forward I know that our collective focus on our purpose.
Which is to help small small and mid sized businesses succeed will continue to drive us in the future as it has in the past I will now turn the call over to effort to discuss our first quarter financials.
Thanks, John and good morning, I'd like to remind everyone that today's commentary contains forward looking statements that refer to future events and therefore involve risks.
Refer to the customary disclosures let.
Let me start by providing key points for the quarter and finish with a review of fiscal 2023 outlook.
Marty as John already mentioned.
Q1 was strong our financial results for the first quarter included service revenue and total revenue increased 11% to $1 2 billion.
Management solutions revenue increased 12% to $906 million driven by higher client employee levels.
And revenue per client revenue per client was positively impacted by additional product penetration HR ancillary services largely or your Tc.
Product and price realization.
Did you do see strong attachment of our HR solutions retirement, and time and attendance solutions.
I'll note that the revenue from our <unk> service benefited our first quarter revenue.
By about 1% to 2%.
While we had anticipated <unk> revenue would continue in fiscal 2023.
Strong execution, both in sales and service allowed us to realize some of the revenue a bit earlier in the year.
While <unk> was a tailwind to growth for the first quarter, it's benefit will decline as the year progresses for the full year the impact will be marginal to growth.
Beyond insurance solutions revenue increased 8% to $283 million driven by growth in average worksite employees, and PEO and insurance revenue.
The rate of growth was tempered by a lower rate of health insurance enrollment in both the PEO and insurance agencies together with continued softness in workers' compensation rates. So that really is a little bit more focused.
The insurance agency.
More of an impact on the revenue there.
Interest on funds held for clients increased 24% for the quarter to $18 million, primarily due to higher average interest rates, along with growth and investment balances.
Total expenses increased 11% to $711 million expense growth was largely attributable to higher head count.
Wage rates in general course costs to support growth in our business.
In addition, PEO direct costs.
Increased due to higher medical plan enrollments compared to the same period last year.
Op income increased 12% to $496 million with an operating margin of 41, 1% an expansion of 20 basis points over the prior year, a bit above where we anticipated it being in the first quarter.
Our effective tax rate for the quarter was 22, 9% compared to 24, 9% in the prior year period.
Both periods reflect discrete tax benefits related to employee stock based comp payments. However, the prior year also reflected an increase in state taxes.
Net income and diluted earnings per share, both increased 14% to $379 million and $1 five per share respectively.
Adjusted net income increased 15% and adjusted diluted earnings per share increased 16% for the quarter to $372 million and $1 three per share respectively.
Our financial position remains strong with cash restricted cash and total corporate investments.
$3 billion and our borrowings are at approximately $100 million.
End of the quarter cash flow from operations was $364 million during the first quarter, a small decrease from the prior driven by fluctuations in working capital, partially offset by higher net income.
And we paid a quarterly dividend at.
At <unk> 79 per share for total of $285 million in the first quarter.
Our 12 month Rolling return on equity was a stellar 46%.
Now.
I will turn to our guidance for the current fiscal year ending May 31 2023.
Our current outlook incorporates our first quarter results and our view of the evolving macroeconomic landscape.
One thing I want to emphasize as I.
As I walk through the guidance, we don't provide quarter to quarter guidance. What we try to do is give you a sense of where we anticipate the quarters will fall. So I'd ask that you keep that in mind.
The majority of our guidance.
It remains unchanged from that provided in June with the exception of an increase in our expected growth for adjusted earnings per share.
Let me provide some color in certain areas.
As follows.
Management solutions revenue is expected to grow in the range of 5% to 7%, but now we anticipate it to be towards the upper end of the range.
PEO and insurance solutions still expected to grow in the range of 8% to 10%, but we now anticipated to be towards the lower end of the range.
Interest on funds held for clients is expected to be in the range of $85 million to $95 million, but is now again anticipated to be towards the upper end of the range.
Total revenue is expected to grow in the range of 7% to 8%, but again based on what I. Just said is anticipated to be towards the upper end of that range and adjusted.
Diluted earnings per share is now expected to grow in the range of 11%, 12% <unk>.
The increase from the previous guidance of 9% to 10% just want everyone to remember I'm talking about adjusted diluted earnings per share.
So turning to the second quarter, our current thought.
<unk> are that we anticipate revenue growth will be approximately 7%.
And we expect operating margins to be approximately 38%.
Of course, all of this is subject to current assumptions, which could change if there are significant changes to the macro environment.
And we'll update you again on the second quarter call.
And I refer you to our investor slides on our website for more information.
I'd also like to take a moment to thank you.
To say, thank you to Marty for his years of service to the company. It's been an incredible pleasure working alongside you and I wish you the best of luck.
In your future endeavors, I can say that for all of the shareholders on the call. There was never a moment never a conversation we're putting the interest of shareholders didn't come first and so I know that that will continue under John's leadership. So.
The other thing I'd like to say is that the company that we're reporting on today simply would not be where it is today without marty's efforts, Hey, one other thing that I want to add too.
For the investors on the call.
We filed a supplemental proxy statement.
This week really.
Waiting to our say on pay proposal, we would ask that.
Investors, who own a position paychex take a look read that read that closely.
Im always available the management team is always available for any calls that you'd like to schedule to discuss that so with that let me turn it back over to Marty.
Thanks, John and thank you very much for the comments and for your updates and also of course, we wouldn't be here, where we are today, if the company without our over 16000 employees.
I've worked so tirelessly for our clients and for our shareholders. We will now open it up for your questions and comments Gretchen. Please open the open it up please.
Yes.
At this time, if you'd like to ask a question. Please press star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing star Q. Once again that is star one to ask a question. We will take our first question from Bryan Bergin from Cowen.
And Brian you like that.
Sure.
Hi, Good morning, Thank you Marty John Congrats.
I wanted to start here. If we can talk about are really that they're getting a little bit more around the moderation comment you mentioned on some of the Kpis and any changed view on macro assumptions in that fiscal 'twenty three guide, particularly on client employee levels and retention.
Yes, I don't think so I'll, let John comment too, but I think what we're seeing in the moderation is.
On retention I think that we're kind of heading back toward we're still above from a revenue retention standpoint, we're still above pre pandemic levels on our client retention, we're kind of normalizing back to our pre pandemic, we kind of expected that there was a lot of new business growth new startup business growth over the last couple of years during the pandemic.
And so youre seeing a few more of those.
Go out of business and Youre seeing a few more bankruptcies that way.
And the other thing that we're seeing in the small business index is while wages are going up there is starting to slow down and moderate so.
So while job growth is still growing and moderating some for small businesses wage growth is starting to moderate slightly so that's maybe a good sign that some of the actions being taken by the fed are working and maybe that will continue to improve but other than net sales continue to be very strong. So when you look at that side of it.
We're at record levels of sales, we had a great first quarter in sales.
And clients are adding employees so the.
The moderation is probably more on the retention side normalizing and but the number of employees being added in that sales are still very strong Jeff anything you want to add.
I don't think Theres anything we're seeing at this point that we'd see a sign of a recession, it's Marty pointed out there.
There was moderation that we expected going into this year on.
<unk> because of the business charge, but when I look at it and point out levels continue to be an increase we see that in our checks we see that in worksite employees.
Customer of the labor market continues to be tight.
Business watch.
Certainly showed that information.
I would also.
Two our revenue retention is remaining at record levels, we've seen before so again, we continue to see the fact that retention and the use of our products. When I look at the underlying pieces clients are taking high value services from us those things are creating more stickiness for those customers that are our price.
Value losses continue to remain significantly below even the pre pandemic level. So so again.
The moderation that we're seeing I view as more of a normal normalization of what we kind of solid anomaly going on during the during the pandemic.
Okay. Okay. Okay. Thank you and then just effort for the QQ rough targets that you provided here can you just talk a little bit more of that in the dynamics first on growth as.
As we think about moving from <unk> to <unk> and then just on margin to yet outperformance on margin and <unk>.
Are there added investments that come back into the model over the course of the year, particularly in ticket.
Yeah, a little bit so let me just.
Because obviously the growth rate in Q2, just a little bit different this year was always a little odd because the two highest.
Growth quarters were the first in the west and in the middle for different reasons, a little bit idiosyncratic to the processing.
Yes.
For a planned process ended up a little bit lower.
In Q2.
I'd call out three things Brian that are important we don't anticipate that the level of <unk> called that out in the quarter will the amount of growth contributed by <unk> will continue in the second quarter, having said that I don't know because I didn't think that was going to happen in the first quarter. So we could be a little.
A bit more but I'm being a little bit cautious about what we think we will get so you won't quite get you won't get that level of.
The uptick in growth in Q2.
And these comments are about Q2 by the way we will talk about the back half of the year, when we get a little bit closer to the back half of the year.
The second part is that we had to the point so although there's been discussion about moderation what was really interesting in the first quarters that.
We had.
Higher growth in.
What we would call.
Check volume and.
And pays per control others call than we anticipated in our plan in the first quarter was actually fairly robust.
Out of an abundance of caution reading the same info you you are reading, we think we're still going to get some benefit in Q2, but it won't be as pronounced as it was in the in the first quarter, so that will cause.
A little bit of a step down and then with respect to PEO, we called out some some trends that are persisting with around insurance.
Insurance around healthcare attachment that we think will continue into second quarter, that's going to drive growth a bit small are a bit lower than we were really consistent in some ways a little bit above with what I said.
We were in the fourth quarter call, that's really what's driving it it really is more of a Q2.
Investment side.
The challenge for this year was we entered the year.
We were in the first half of the year last year, we were really.
At much lower employment levels than we are currently and so as you have a little bit of a step down in revenue.
In Q2 words, you have a step down in revenue in Q2, you still have relatively higher expense level, but normalized as we get into the back half of the year and then we're making investments in marketing product development. The normal things that you would you would make in a quarter and that combines to kind of create a little bit of a lumpy Q2.
So those are the.
Key factors in terms of underlying dynamics.
No change and it's pretty much in line with what we anticipated.
Okay. Thank you very much.
Next question comes from Jason Kupferberg from Bank of America.
Jason Your line is open.
Sorry apologize I was on mute.
First of all congrats to Marty and John I did want to start with a question for <unk> just on the EPS guidance raise upfront is this just because you know think revenue and margin will both be at the higher end of your full year expectations I know everything else is kind of.
<unk>. So just wanted to make sure we have the pieces there for EPS.
Yes, I think for the whole for the full year will be a little bit ahead, I'd say I think it's more more driven.
Jason Bye.
By more mix. So there is some there is some revenue component to it and there's a mix component to it that's driving driving the EPS number.
Okay. Okay.
Got it.
Just the float income guidance for fiscal 'twenty, three I know, it's unchanged youre talking about being at the higher end I guess, maybe just given the magnitude and the speed of the fed rate hikes can you walk through some of the pieces there some people.
Think might've thought that that number would be moving a bit higher, but obviously theres portfolio duration and other variables to consider.
Yes, that'd be helpful. Jason.
Thank you.
That.
So look I'm, a little bit cautious and I think.
I think we could be accused of some conservatism there.
But you're absolutely right.
Just to get one level deeper and get a little bit more into the question that you're raising I think.
Issue for us.
At what point do you do you see the fed raising menu locked long based on duration I don't have the great answer to that I will say, we're meeting basically every other week to decide what our outlook is on that that could impact that number im looking not only at 23 and 'twenty four.
You were here long enough to know when we wrote that that cycle up and then it had a bumpy cycle on the way down and so I want to avoid that even at the expense of maybe a little bit of upside. This year. So we're we're trying to figure all that out and then.
You are reading the same thing actually get better than I do one second it looks like short term interests are going to go to X. In the next second someone says hey, I'm a little bit concerned about the effect caused the recession, so balancing all of that with the appropriate level of.
Conservatism.
So that we can hit what we we said we feel good about the forecast at this stage based on what we know.
Is it a little bit trickier, we're certainly at the high end of that range and we'll update.
Update.
Next quarter.
Okay. Just one last quick one just in that picking up on that theme of potential conservatism. I mean, just looking at management solutions, obviously, youre sticking with 5% to 7% for the year. You started at 12, you had some of the RTC benefit but.
Just.
Seems like a lot of decile kind of.
So maybe you want to talk through that a little bit I know you are talking about higher end, but so yes.
I would say this I think.
And we will talk more as we get to kind of mid year I think one of the things that that ends up happening with <unk> in the back half of the year it becomes a headwind to growth because.
It doesn't recur in the same way.
Our revenues do so we baked that.
That and that's one we're against tough comps in the back half of the year. So that's another issue and then employment is really the other part that we're wondering about right now we're not assuming that there is there's a lot of employee gets in the back half of the year.
Could we see some.
Some.
Something.
Thats different than that I don't know both ways at this point I can't call it close enough. So.
Sticking with where we thought we were going to be at the beginning of the year.
And then we'll update as we go through the year.
Fair enough. Thank you okay. Thank you.
Our next question comes from Andrew Nicholas from William Blair.
Hi, good morning, Thanks for taking my question.
Wanted to start on the PEO and insurances.
<unk> services segment, obviously growth came in on the bottom end of the full year range. You are now guiding to kind of lower end of the range. The full year I know you mentioned some weakness in the insurance business. This quarter is there anything else to call out within that business that that surprised you whether it was to the upside or the downside sounds like existing clients hiring activities.
There are still quite strong sales are good.
So just want to make sure I understand all the dynamics there as well, let me frame it and then I'll, let John talk to it.
Yes.
Obviously.
Well versed in what's going on but in terms of the dynamics of the business in terms of the <unk>.
And the forecast.
And our guidance.
We started out the year, a little bit lower on the insurance side than we had anticipated.
That's primarily an issue around and.
We called it out.
Enrollments.
We think that trend will persist into the second quarter, and then and then it will it will start to.
Improve as we get into the back half of the year. So we have a little bit lower first half.
We anticipated and in the back half as we expected. So that's what's really kind of moving the.
PEO.
Numbers down in terms of our outlook look.
Better than most.
Differences in attachment can change revenues really really quickly and so we.
We will see where we where we where we ended up on that on that front as we go through the year is driving it.
It's driving our results largely doesn't have a significant impact on margin again as you know because those are relatively low margin revenues, but out of a sense of.
Uh huh.
Okay.
And a sense of where we ended up in the first quarter and where we're anticipating second quarter to be.
Now.
I'll, let John talk about the fundamentals of the business because I think they actually are pretty strong.
Yeah look I feel particularly on the PEO side, we'll talk about that first.
We are well positioned coming out of the first quarter remember, we're just now really entering the key selling season. We're also an open enrollment season within our PEO is and those are two critical periods.
Periods of time, when I look at where we are going into this.
Client retention is extremely strong.
Really we had set some pretty aggressive targets and we're actually beating those targets in the <unk> in the first quarter to the value proposition is resonating. So retention was very strong sales were strong.
For the first quarter.
Look at where we are from a sales head count we actually accelerated if you remember in the fourth quarter. We made said we've made some investments in the first quarter. Some of that was actually adding because we saw the demand. There are 10 years, great. We have the best sales retention of any of our divisions.
In the PEO, so our tenure of our team going into the selling season.
Is really strong we just completed our renewals with our health insurance carriers I feel good about where we are on those I think we got a good part of that to <unk> point.
The attachment of insurance and then once we attach insurance to a client how many employees are signing up for that again, particularly as maybe an affordability issue.
May be seeing some of the things. We've done is we've actually expanded low cost planned in this next enrollment we've expanded our enrollment consultants, who will go out and engage clients. So we're working against what we've kind of seen some trends in the first quarter, but obviously some of the drag in revenue as Efrain said is we had a little lower.
<unk> historically seen relative to attachment of insurance in the PEO and a little lower participation.
And then we've typically seen as well and again we.
We've taken steps in terms of both plan design and in our sales execution.
Move forward the agent the insurance agency some of the things we saw relative to attachment and participation in our <unk> area similar to Po common theme there that we saw in the first quarter and then as we've talked about I think repeatedly.
The market is just the market is continually soften in P&C and continues to be a headwind.
Great. Thanks, Jon Thanks, Geoff on those.
Comments were Super helpful. For my follow up I, just wanted to ask a bigger picture question you mentioned the HR Tech conference in your press release, and I think again in the prepared remarks.
I personally I was impressed by the number of vendors at the conference and the level of innovation.
Really across the sector, so with that in mind.
Given the number of new products the amount of money that's come into the space over the past.
Several years I'm just wondering if it's changed how you kind of think about the build versus buy equation does M&A make more sense today, given the rate of change in the market and how rapidly new products are being built and getting adoption.
Essentially I just wanted to get your thoughts on build versus buy appetite for M&A given all that's going on right now thank you.
This is Marty I'll start it out interesting question I think I think the appetite is still there I think valuations are still high but we'll see if they catch up.
And come down some and get more realistic.
We've always been able to use M&A not only for growth from kind of from a product perspective, but actually adding to the technology. So time and attendance started with M&A.
Back many years ago, now 10 11 years ago.
And probably <unk> 12 for the first time and attendance product, which would then we built into our product and and now is one of the fastest growing products, we have from that perspective. So.
I don't think so I think we really look at that very closely whether we can build we have a very successful development team here product management and development that kind of decide what do we have to do from a tech standpoint, we like it being bundled into the flex product suite and so we're careful to do an M&A from a product add ons stand.
Point, and we don't really see I don't really see and John can comment on as to a product that we are missing right now in the suite that I would have to go out and that we would go out and look at from an M&A perspective.
It's more adding to what we have the technology, we feel everything as Jan mentioned earlier the HR. The HCM technology that we have the combination with being able to do so much on the mobile we have such a large use now of the mobile App. We're also tying much more to the employees and self service.
And so if you didn't pick up on some of that at HR Tech self service has become a big part of our model that gets the employees of our clients more involved and right from just making their own changes self onboarding. Many aspects of when they sign up to preach to paychex pre checks, which allows them to view as you know.
View their payroll before it before its process has really been important to bring the client employees into the picture, which builds better retention and better level of the paychex mobile App, which still does a four eight out of five stars and so I don't think Theres a lot of M&A from a product need that we have to add too but.
There is still a good appetite for M&A and we are constantly evaluating opportunities yes, yes.
Probably give you.
A good example that I actually talked about here on the call and one that's.
Had previously announced and is in the works to go live I think we're constantly looking for the right combination of partnerships technology, we can build and acquisitions that we can bolt on to kind of put a unified experience together that resonates with our customers and dresses probably talked about the re recruiting an applicant tracking.
Onboarding experience that we launched reintegrated Thats way combination of build we've got a partnership with indeed, which we've talked about numerous times to help get candidates faster.
And then it was also an acquisition that we made some time ago of a company on the Onboarding and kind of applicant tracking side and the unification of that into flax and using the talent that we had thought and that's taken off tremendously. So it's a better experience as Marty mentioned already $1 7 million new hires have went through that process. So that's an example, another.
Example, that we're currently in the process of and it's goes back probably to your question on the insurance agency and about US working to really get more employees participating in all of our insurance products and that was an acquisition that we made just a little bit ago with a benefits administration and enrollment technology sounded great small little company.
<unk> could add both the talent on how to design that from a user experience perspective, we are in the final stages of deploying that and actually that will be deployed in our agency and our PEO as in electronic mobile enabled a way for employees to enroll in benefits and it's also going to really highlight the ancillary benefits.
Again. This is then showing them the right plan getting them to participate in getting them to really see the full suite of insurance, we've got electronically and a unified experience. So that's that's that's in early stages of being launched as we speak right. Now. So there's a couple of examples of where I think we're going to continue to look for <unk>.
Experiences, we're trying to build for our clients and their employees what capabilities do we have built into flex today, and where can we either find partners or fine Tec Tech bolt ons that will help us improve that experience.
Great. Thanks again, okay.
Our next question comes from Ramsey El <unk> from Barclays.
Hi, Thank you for taking my question this morning.
I wanted to ask about the pricing environment and the degree to which you've been able to kind of pass through potentially larger price increases given the inflationary backdrop should we expect a bigger contribution from from pricing in this environment. This year than we normally would.
Yes in terms of pricing Ramsey I think that.
<unk>.
I think Marty mentioned.
Last quarter's call that we were.
Were towards the higher end of the range of what we typically price.
And I think Thats, where were at right now.
Sure.
That's what's holding.
Look I think I think we are constantly trying to strive for getting the balance.
Price and value correct.
<unk>.
And I think that we're striking at this point.
The right balance.
On that issue, yes, the price realization feels very good right now and as John mentioned I think it was a combination of a lot of things China's saying so when you when you have that a big need for recruiting hiring and onboarding employees, and we're able to solve that particularly with technology youre saving we're hearing more and more from the <unk>.
Clients that they are saving operationally they are being more effective therefore.
A little bit higher on the price range is working and it's it's sticking so discounting is has really been not.
Not an issue at all.
Okay quite helpful. A follow up from me I wanted to ask a question on the.
Sort of the relative resiliency of the two parts of your business I'm. Just curious if there are drivers or factors that make management solutions and our PEO sort of more cyclically sensitive.
Relative to each other I kind of feel like investors have a better handle on management solutions is it sort of the longer dated.
Segment, but I'm just curious if you feel that <unk> also has the sort of resiliency that you'd expect from the overall business.
I can start and John can jump in I think Ramsey definitely PEO does right now all the things that John just talked about I, just mentioned recruiting hiring having insurance plans that is a smaller mid sized business you might not be able to have on your own. The PEO has continued to be.
Pretty strong you do see fluctuations like we mentioned in this first quarter, we would have quite as much enrollment, but we're also heading into the real selling season and the enrollment portion of the PEO. So PEO has continued to be.
Very popular and I think it is very resilient in a time when I'm competing for employees I'm, a business competing for employees and I need better insurance plans I need better helping.
Signing people up for those insurance plans and so yes, I think it has very strong resiliency just like the management solutions offerings anything you want to add.
Look when I look at the clients that are attracted to the value proposition. These are these are clients that are having to navigate very complex HR are complex employment situations multi state.
They are in difficult states, where there is a lot of regulatory compliance.
Other risks facing their business and they view, our HR support our compliance support the way that we assist them in.
EOC type of complaints and issues as a critical part of our business I just got a comment on this from a from a client.
With small clients.
Couldn't live without their HR person, helping them out and I would step back and just again, maybe reiterate macro because maybe not explaining that well.
You look at our employment.
The HR pulse survey.
I look at the what issues are nearly 700 HR consultants are facing for our clients. Our clients are still trying to fill open positions.
Not only did we see checks and Worksite employees.
Increase, but we continue to see them asking for technology solutions support and how can they continue to fill open positions. So.
What we see in the underlying macro site in both the managed solutions and the <unk> is that they are really needing our HR support it's a complex environment and I think theres good resilience good resiliency going forward.
Okay. So similar performance profile through the cycle for both for both segments is what I got from that so I. Appreciate your answer thanks, so much sure.
Our next question comes from MS, Jean Marie Moffett Nathanson.
Thank you.
Yes.
That wasn't true.
Okay.
No problem at all.
So I wanted to come back for a second to macro I'm hearing loud and clear what you guys are saying that youre not seeing any signs of recession slowdown in the employment base still a very tight labor market.
It's clear I wanted to ask about a slightly different sort of metric, which is let's say businesses' willingness to invest in new technology right. So situation you would get will upgrade feature additions or maybe switching from a legacy provider to you guys and things like that.
Curious, if you're seeing any incremental caution across the small business customers on that.
Even if the performance remains strong with people just get more cautious looking ahead and if not.
Then.
In your experience running this company for a long time when time.
Get a little bit more volatile can.
Can we expect that caution to increase and why or why not.
I would say at this point, we're not seeing that yet because in fact in a time like this they are trying to the biggest things when John talked about some of the surveys we've been doing lately, it's about operating efficiency. It's about how do I fill these positions. So the demand is still there for their products and.
At this stage of the macro and so theyre needing people and they're needing technology to save them money in other ways because wages are up.
Do they have to give more benefits. So there are actually I think in this kind of environment and it's been this way as the market has been tight small and midsized businesses need to offer better benefits they need to offer more technology. They need to have a mobile app like ours that you can deal with remote remote workforces.
So actually I don't think that is.
There hasnt they haven't gotten any more skittish I guess I'd say about investing they're actually really needed at this stage of the game and typically in depending on what kind of macro environment, you're in but in this one where it's about hiring and it's about retaining employees, they're very much looking for technology benefit.
All the things, we offer and even if you're a mid sized and might have to go through some reshuffling of people youre looking to one of those 700 HR specialists that John mentioned that we have that would say, okay. How do I do this I don't why attract people how do I retain them how to why maybe lay some off while I hire others.
And the little bit larger companies. So we're actually seeing a great demand for technology in the HCM World.
As well as been able to handle remote workforces, which really are here to stay.
Got it okay. Okay. Thank you and then for my follow up by probably a question for <unk> switch gears to bid and we talked about the margin dynamics over the short term already of beds I understand there is going to come down to the quarters.
But I wanted to touch on the longer term margin dynamics for a second as we are now moving away from the call. It has been damaged and steadily more and maybe the steady state with digital channels has the comp pick apart the digital buying has become a bigger part post pandemic.
Of your of your model.
How you're seeing that really expecting structural margins of the business as we kind of get more experience with that maybe more digitally focused model.
Well I.
And I think we've talked about certainly we've talked with many of you on that.
Paul we have a relentless drive for efficiency in the business and so.
As more of the business goes into either digitally enabled solutions or fully automated solutions. We expect over time, that's going to be a driver of <unk>.
<unk> productivity.
And improved.
Operating margin. So I've said that I always caveat with you also have to balance investment in Brazil.
For sustainable growth.
If we get 50 basis points or 75 or 100.
The improvement in operating margins, we may decide.
Is that in order to create more operating efficiency I'm, sorry more sustainable.
Margins over the long haul we have to invest a part of it but certainly.
There are very few weeks that don't pass where we're not having that conversation I think that John has been a big driver in.
In the last decade around making making that model work and I expect that to continue over the cycle.
Good luck.
I'll jump on that because I think look our business model and our DNA as a company is around being the best operators in the business I think we've proven that over decades, and that's certainly not going to change with me in this position.
And I think what Youre seeing is it goes back to the question. You asked earlier is little clients are demanding technology. Because they are employees are demanding technology I mean, what we're seeing relative to the digital <unk> is really not just us trying to push that on clients. There's a big pull from clients and their employees to expect that theyre going to have the technology.
Experience, whether that's when they're recruiting if they want to recruit people in up in that in the paper.
So if youre doing that youre, probably not going to find many people, particularly the people that are out looking for employment and so whether it's benefits whether it's their finances, they're looking for.
That to drive that and not only that benefit for the for the customer.
That's also a benefit for Paychex Digitization continues.
<unk> usage it continues to accelerate with our clients and our employees.
Up 67% year over year, and we had a pretty big year the year prior to that so I continue to see this as kind of being something.
It's not a nice to have anymore. It's really a must to have if you want to go out and compete in the talent to do that you've got to have an HR technology solution that is easy to use.
And really meets the full needs of what employees are looking for.
Got it okay. Thank you very much excuse me.
Your next question comes from Bryan Keane from Deutsche Bank.
Good morning.
Wanted to ask about kind of the different market segments. I know you guys called out strength in the mid market. So just thinking about the health and the lower end of the market could you just talk a little bit about new business starts retention in that market any.
Softness in spend Youre seeing there.
Well I think as we mentioned at the beginning Brian small business.
New business starts.
Not as strong as they were last year at the last couple of years during.
Covid and the pandemic of course, we had a lot of people leave big business to start businesses and so small business retention from a client perspective, we said were starting to normalize a bit because some small businesses that started during that period have gone out of business.
But the demand for employees through from small businesses is still needed and we're still there's still adding employees. So the I guess the bad news is some are a little bit more out of business.
But the good news is that.
Of our clients even at the small end are adding employees and still have a lot of postings and openings to fill so I think that.
Mid market and I think what we've said about mid market being stronger as I think we've executed much much better and the mid market not only from a product suite and a technology suite.
What we're offering to the client, but the sales team has done really well we hit our stride kind of last year and that has continued right through the first quarter with very good.
Double digit growth there, yes, and I would add that not always the demand is still strong in the mid market double digit first quarter, I think well positioned going forward retention. When you really look at that mid market, which you get into our HR services you get into the PEO you get into the mid market HCM.
Where our clients are getting the full value utilizing technology, we're seeing very good retention levels. As we said our revenue retention is at record levels I've mentioned that called out appeal, particularly just stellar.
<unk> in the first quarter relative to to client retention and we've seen strong retention and.
Our HR businesses Holistically in that mid market is solid as well I also think that our price value equation in that market has held up very very well as well with our average sell in revenue in the first quarter really strong really strong.
Got it that's helpful and just one clarification for upfront on the second quarter margin I heard about the second quarter revenue being lower and you called out some callouts there, but on the margin in particular or is it just a revenue issue plus additional investments that just flow in that.
Cause the drop in the margin I just want to make sure I have all the pieces there for the 38% margin.
Brian you heard exactly what I said so.
Have been partially clear on that so no that's exactly it little lower revenue little higher expenses, it's typically the lowest revenue quarter of the year. So you get a little bit of.
Of that impact.
And it's.
In line with.
With what we anticipated it to be.
Okay. Thanks, guys. Okay. Thanks.
Our next question comes from Brian Sorry, Kevin Mcveigh from Credit Suisse.
Great. Thanks, so much.
And Mike Congratulations.
We share your view on effort to Marty so.
Okay.
The music, it's everytime it was founded.
Yes exactly.
Hey.
Maybe just one I guess higher level I mean, John you are taking the baton and the organization is super Super strong, but no. Two Ceos are the same so any initial thoughts as two areas of focus maybe.
You might dial in a little bit more I mean, obviously youre building.
A great legacy, but just any thoughts as to where your initial areas of focus or whether it's capital allocation or just technology or just any initial thoughts.
Yeah, Kevin Thanks for that and as you know I've been a part of.
The leadership team for nearly a decade now so a lot of the things we've been working on it.
<unk> been involved in and and highly supportive. So look I think you can expect that we're going to continue to really focus on expanding our leadership in technology and HR I mentioned it earlier, it's going to continue to be the best operators in the business and we're going to consistently be a top performer in terms of total shareholder return I mean I think these are three.
Hi.
Traditions, I don't plan to mess with quite frankly, because they are because they are working under what I believe.
Look I think we've got we've got opportunities to expand our offerings.
And continue to innovate and change I would tell you that I think paychex has always done that and Theres. No question Marty's leadership that has accelerated and I think you should expect us to continue to accelerate that.
We're going to continue to look for new ways and growth platforms that we can apply to help our clients grow we're going to continue to invest in improving the experiences I've mentioned that I keep using this word experiences we have a lot of great products, we have about a great service offerings, how we package those things together to address business problems is critical.
I think the other thing that we began to do more of and I think youll see more of US is look we're really beginning to use the large amount of internal data we have to really apply that the retention insights.
Product that we've launched for our customers and being used with our HR professionals with customers to identify.
How they can retain clients. We're also using <unk> as a good example, where we're using our internal datasets to really identify customers that have specific needs and then able to get our sales force into a situation where they can talk to a client who has that need at that moment and that drives productivity I think youre going to continue.
To see us do that and I think.
Continue to see what I said before we are in.
Company.
And we're going to continue to invest like a tech company. So I think relative to capital utilization Youre going to continue to see us look at our capital in areas, where we can improve our technology footprint.
Help our clients.
That's super helpful. And then just one quick follow up I think for you Efrain.
I appreciate what you're saying in terms of.
The outlook on the fed funds things like that but can you tell us like what fed fund rate is in the implied guidance right now and then just remind us if you can kind of what 25 basis points. What the sensitivity is to the revenue for every incremental 25 bps.
Yes, so in the first quarter, we called it out it was between three and four kind of around the midpoint, there where you expect that I think I may have a quote specifically during the quarter.
So right now we're working with something in that range.
Obviously.
Yeah.
Everyone's chief economist has a different number of ranges probably with a four and some probably are five and above.
But I don't want to call out and so by the way a quarter basis point is somewhere in the $4 million to $5 million range.
In terms of net income so it's.
It is potentially important.
It could be important but Kevin the one thing I think Jason pointed out that's really important that I think what makes it a little bit trickier is.
You don't want to you.
You don't want to push your chips to the middle of the table and go all in short term and have a great year in terms of year over year.
In terms of year over year interest income only to give it back in the next year. So what we're really.
Looking at what's the right duration for the portfolio with this.
In this environment and so that's why I can't I.
Wouldn't necessarily and I am cautious about saying, Hey, I got a 100 basis points up.
Versus my forecast and that relates to X.
I'm, a little bit cautious about that because I think we've got to manage manage.
A somewhat volatile interest rate environment here with the fed.
And.
And.
Figure out what the implications for 'twenty four or so I'll just leave it at that so we're looking at it and by the way and it's not like somehow were geniuses here, we got some of the best minds in the business on the fixed income side working for us. So so we'll pick counsel them and have a lot of discussion on that.
Helpful. Thank you.
Thanks.
Our next question comes from Samad Samana from Jefferies.
Okay.
Hi, This is Jordan <unk> on for some odd Martinez and congrats on the strong results.
John also congrats on the new role.
Thank you.
So I think we've touched on a lot already but I wanted to double click on the employee growth that you've spoken about both management solutions and PEO. So obviously with Covid right. The recovery was not completely EBIT by vertical or geographic area I think in the past we called out Florida was saw some trends first.
I'm curious the growth that you saw this past quarter is that broad based or is it coming from a specific vertical or geographic area, maybe locking what we saw.
He started the recovery from the pandemic yes.
Yes.
Let me, let me disaggregate Gibbs.
John add some color commentary so.
The.
The PEO is a little bit different than the management solutions per se. So so what we saw was strength.
And larger clients.
And that's partly.
A result of really good work that we have done over the last four to six quarters had mid market. We've done good work before that but I think you've seen the benefits of that.
Coupled with coupled with that's always important coupled with.
The.
The improvement from last quarter in terms of the overall.
Hiring.
Hiring environment in the first quarter.
Okay.
We expect that that starts to slow.
Slow a bit with respect to PEO, when we look at Worksite employees.
That was pretty widespread so obviously because our business is over index.
Bart.
And certain verticals relative to management solutions.
We saw strength there, but it was pretty widespread.
Little bit different in the sense that our average client is roughly about 30 or so employees. So you're also getting a little bit of a larger let's call. It client effect in terms of the ads.
So.
So thats.
That's a little bit more color Marty effort over to Marty John want to comment.
Well.
I think we've seen it kind of across the board. The most most of the client base has seen an increase in employee. So we've seen them, adding employees and of course, that's going to be in that.
1% to 20 range in particular, but 1% to 50, probably.
We're seeing that.
I think the Florida, the south we've seen that in the small business index and that those have been the strongest growth job growth states for small business, because that's where the people are and so there's still a lot of job openings, particularly in leisure and hospitality and theyre able to fill them in the Texas, Florida.
George even north Carolina kind of areas, there theyre best job growth kind of areas. So so thats, where small businesses are doing the best but overall we've seen.
Our business is able to add.
Add people and obviously, then thats, adding Texas Jan mentioned.
Yes, Jim.
To reiterate I think we've seen across the board and pretty much all segments.
Improvement in the employment levels.
And still in all the surveys were seeing again.
Both the survey we did I know there was one.
I think that was just just in a paper recently a couple of days ago that I read that reinforced at small business owners are struggling more than mid sized companies and we've seen that in our data when we look at where the number of checks or where the worksite employees had accelerated more mid market company that offers more benefits.
Is out competing for the talent and so that's why we've really been focused on sort of this recruiting and.
And the partnerships that we've built and the technology, we built to help small business owners haven't.
Haven't seen our advantage I would also say.
<unk> point, another interesting and again, a little dated but we certainly looked at this a lot we are doing the downturn and what we know is customers who were in our HR products, whether that's our ASO product our appeal product.
They decelerated.
It was less than the general market and when it came time for recovery they were able to staff up faster and I do think thats because of our of our HR support. So we certainly in those areas have seen better recovery faster recovery more full appointment I think that has to do with both our technology and our advisory service and helping them.
Advantage there.
Okay.
Awesome that's all.
Helpful color I think along the same lines I wanted to follow up with you.
We've talked about how difficult hiring is at this time and.
Your own business or are you seeing this hiring pull forward, but thats obviously impacting.
The cadence of margins throughout the year. So this past quarter. What are your hiring plans on track ahead of or lagging your initial expectations and was there any change in your ability to hire incremental sales or support staff throughout the quarter. Just curious if there are any changes on that.
Actually we did very well the hiring machine really took off here from a recruiting and hiring perspective and retention is better. So I think youre hearing that in the overall market, particularly for larger businesses now we made some changes to that we improved some of our starting wage rates just like a lot of companies and.
<unk> did some other things as well for some of the existing employees and I think that's paid off yet.
Fully staffed and and we're ready to go actually we're ready at the start of the quarter for sales and everything else. So we've done very well on the hiring front.
Or are ready for the rest of the year.
Great well, thanks for taking my questions again, John Congrats on the new role.
Thank you.
Our next question comes from James Faucette from Morgan Stanley .
Thank you very much.
My congratulations to both Marty and John as well.
I wanted to.
Address a lot of questions, but I wanted to quickly follow up.
Marty can you just talk to really quickly again do you.
Good cadence for PEO during the course of the year and just.
So I understand the expected improvement later is that because of the things John mentioned of adjustments to the PEO plan changes and sales et cetera or is there something else there.
Do you expect to have an impact there.
Hey, James Let me, let me talk to that so I think as I said at the beginning of the call.
We started.
The year in.
In the first half a little bit under what we expected from it.
Attachment perspective, and insurances were a little softer than we.
We anticipated the impact on margins pretty.
Insignificant as we get through the year.
Our expectations are that.
That the PEO growth accelerates in the back half of the Europe part of it is that we had pretty strong worksite employee growth coming out of the first quarter. So if you get that coupled with.
Better healthcare attachment in the back half of the year looking people make decisions are making decisions in this quarter you don't see the revenue this quarter you see it in future quarters, they're making those decisions.
On the assumption that those things materialize, which they should.
Growth accelerates in the back half of the year, that's basically the explanation for whats going on.
Got it got it.
Thanks for the clarification, there and then.
I guess more from a landscape perspective.
John .
And obviously highlighted.
Over time, but also on this call everything that you've done from.
From a technology perspective in terms of paychex has the ability to help it.
Customers and continue to improve but what are you seeing happening in a regional provider space how are they being able to keep up with you. The incumbents are on tech.
Do you expect further consolidation or I guess, the real question is where youre not winning from regionals.
What's the primary reason and how can you address that.
Sure actually we're doing very well against against the Regionals I don't I think it is hard to keep up I. They certainly have been viable competitors, but I think that it's we haven't seen a big change in the competitive environment I think if anything we feel like we've really continued to jumpstart Jan mentioned the.
Voice assist that we just offered no one else has offered that.
Through with Google.
The work we've done.
Two combined for recruiting in it.
And on boarding their clients.
I think the regions there may be some consolidation I think theyre looking for.
Probably some more support from a tech standpoint, because there will continue to be a lot of investment going forward that we're obviously you have a great track record of doing.
But.
I think theres been a lot of demand. So that's kind of kept everybody happy to pie is the overall pie has continued to grow particularly in the mid market. So I think they've all done.
Everybody has done pretty well, we'll have to see how that goes forward as we get to the kind of the back half of this year, but we feel very confident in that.
Any big changes in the competitive environment, and we've performed very well.
Great. Thanks, a lot okay. Thank you.
Our next question comes from Tien Tsin Huang from Jpmorgan.
Okay.
Engine.
Okay.
Drunk.
Richard are you there.
Yes, Thank you guys.
I'm sorry, yes, we can hear you now.
I apologize I had some trouble with my headphones so.
Sorry to keep you guys waiting.
Quick quick thanks to Marty quick thanks to Marty of course always appreciate their conversation through the years. So.
I'm not sure if you'll Miss these calls, but definitely when Mr. Chairman.
Oh definitely.
Okay.
John look forward to working with you more you did in your remarks credit Marty's vision for embracing technology and I think someone asked you about.
Your focus or legacy might be cut.
Caught that I'm, just curious John given your.
Background on services.
And.
Where you were before paychex I'm curious if you see more opportunity to improve services here further for.
For paychex to complement TEG or is it one and the same in terms of tech and services starting to blend a little bit further I'm just I'm just curious how you think about balancing those those two things right between the services and the tech.
The company.
Look at Tencent I think Youre right. It went in the same and that's probably the reason why it's Marty.
Reminiscing about.
My interview here and what really attracted me was marty's vision was very consistent with mine and my experience about where ICL our industry going from my prior experience and my view is I think.
Having the best technology, and having a unified user experience is going to be critical.
Not only for the demand of our customers employees want but also to drive the operational efficiencies that I think customers are going to want that being said customers needed to know how to use that tool and they are facing complex issues outside of items that technology can solve particularly in the <unk>.
HR areas. So I think we have a unique position to be able to reposition our traditional services kind of hey, I put something in our system for you and really position that more as an advisory opportunity and I think about the things we're doing with the mass sets of data that we have the benchmarking data the way we can do.
Analytics. The fact that we can call client up and say, we think youre going to have a retention problem.
Just walk you through your insights.
Thats what service is going to be it's really not even service in a historical sense that you would see a service company talk about and I do believe that that's going to resonate and we see it resonating in this complex environment more and more companies are going to end up having employees in multiple states than ever before to compete for talent in a remote workforce.
That brings regulatory complexities that not just technology can't solve for you you've got to think about how youre going to do this and so I do think that we're uniquely positioned.
And I think Youll continue to see us invest in technology and invest in HR and really positioning ourselves as the digital HR leader in the marketplace.
Got it.
You go into that because I still think about it when I started covering paychex always thought of it as a services company and of course, Texas and digital has taken over everything so.
Just wanted to get back to basics. There. So thanks for that if you don't mind My quick follow up I know the call is getting long here, just just thinking about the the modules and the breadth of services.
Paychex being the largest 401k record keeper.
I know the equity markets have come down a little bit is that having any influence on on your outlook in general and then also just clarifying if you don't mind two questions and one just to health care enrollment piece is the lower attach or enrollment a function of mix of clients or is it the competitiveness of the plan's issue I'm just want to make sure I understand.
If you don't mind us two questions. Thank you well you got two different ones.
Sorry, yes, I am trying to another take up too much time.
Okay.
I'll talk to the first and I'll, let John talk a little bit Marty.
One second.
So in our retirement services.
Business as many of you know we do do have about a third of the revenue. There is derived from a basis point. So it has a modest drag in terms of revenue it's not.
Not really.
Significant.
Just.
Just put it is de Minimis.
The balance of the year.
Healthcare enrollment you're asking for more color on that.
I'll, let John touch on on what's driving a little bit lower health care enrollment.
Yes look I think I.
I wish I had the perfect answer to that looking at all the data. My my experience tells me a lot of that can be mix of clients again. It has to do what's the average wage of a client whats the industries that are in but you also have as I said economic situations, where in a person may be having benefits in deciding I can't afford benefits right now.
Given <unk> situation they dropped the benefits.
We recognize that that's why we're doing a lot and really looking at our plan designs in the PEO in particular rolling out lower cost plans also rolling out non traditional.
Plans, we've actually created an entire wellness.
And a spectrum of products and services to really meet the needs of the economic needs of every type of Worksite employee that we would have there and we're also driving digitalization into our <unk> business I mentioned that earlier that is rolling out in the second quarter. So that we can offer a more full suite of benefit.
Options that can match the price point of both the clients and their employees, regardless of what their economic situation and so we certainly are trying to expand what we're doing we recognized it for.
Some employees in some customers.
Cost of getting some of these benefits is outside of their capabilities right now and so we're really focused on a product development perspective to make sure. We have the broadest suite of offerings in the marketplace.
Got it that's helpful. Thanks, and sorry for extending the call.
Nor does it always always Youre question is always appreciated.
Thanks for the time guys.
Okay.
Our next question comes from Mark Mcmahon from Baird.
Hey, good morning, Marty congratulations on this.
Tremendous accomplishments over the tenure that you've been the CEO John look forward to working with you.
Okay.
Regards to.
The macro environment, you did mentioned small business.
Formations are a little bit lower how are you thinking about.
The sales pipeline for HR management solutions.
And to what extent can you.
Dial the marketing strategy.
I'll highlight some of the tech improvements that was that I was at HR Tech I was really impressed by the voice recognition program with Google and are you are you charging more for those types of solutions.
Yes, we're really I mean, one let's let's take the marketing side of it it's doing exactly that markets being at HR Tech, it's being it's getting the word out there we're doing a lot with in trying to partner with folks like Google.
To be sure that it's known that we have the only we're the only one that can do that.
With their Google Assistant and have you been able to do it totally hands free we're pushing the marketing has been pretty aggressive for years and through webinars through the tech conferences.
Of course, we're all the podcasts and then just all of the online work that we've done and Thats been very important to us to get the message out and we think that that's worked well.
So I think thats been good I think on the.
We think there is still a huge demand in Jan mentioned I think earlier the product product penetration rates continue to go up I think that is the tech word has gotten out there and the need of course as we've talked about a lot on the call.
We've really seen this additional product penetration and even if new business starts are less than what they were they are still up there just not they're not up the big numbers that they were during COVID-19. When everybody. There are many many people ran from large businesses and started small businesses. So there is still up we're still obviously doing very well on the startups, but I think we're doing it.
<unk> been better with the product suite.
To make the additional penetration of the existing client base.
Great.
The way I am taking it sounds like the pipeline in terms of the key selling season for.
For management solutions as well as PEO continues to be.
Robust.
Youre not really seeing much of a change in terms of.
What we're reading about from a macro headlines perspective as it relates to that correct correct.
We still will it should be a good selling season, it's early but we should feel we feel good about it.
Great and then can you talk a little bit about retention and.
How do you think that ends up being impacted us.
RTC kind of winds down does that have any sort of impact.
Hey, Mark so.
<unk>.
We gave a little bit of color on that Marty Marty Cole I think what I'd call out is.
Two things one is it's one thing that John mentioned from a revenue retention standpoint, we're at near record highs. So.
That that makes sense Marty called out.
On the very lower end, we've seen a little bit more churn.
That is to be expected given given where the market is right now.
So.
Those two I think we feel we're pretty well positioned.
Going into the balance of the year.
RTC really should not have a significant impact on oi.
On client retention I think that it is a.
If anything it's positive in the sense that it.
It just demonstrates the value add of paychex, a lot of our competitors are not talking about it because candidly they're model doesn't allow them to get there.
Some are doing it, but but I think that we think about giving our clients that level of consulting and expertise that John was mentioning earlier, so from a from a retention standpoint really should not have a significant significant impact.
Terrific. Thank you okay. Thanks Mark.
The next question comes from James <unk> from Northcoast Research.
Good morning, gentlemen, and congrats on a great quarter.
I just wanted to get some color around your flow portfolio.
As the fed.
Can you use to hike rig.
Do you think there will be any changes or has there been any changes in the management of your portfolio.
Hey, I think.
I answered earlier that.
In the environment every time the fed makes another pronouncement about what they expect to do with huddle and figure out what the implications of the portfolio are and what we're trying to do is adjust the duration based on what we believe is going to happen when when we think we're going to see pick interest rates.
<unk> to position the portfolio not just for <unk> III buffer 24, so we I would say the changes we have become a little bit more dynamic in terms of what the balance between short and long term.
As the year progresses well.
We will continue to make.
Adjustments real time.
To take advantage of what we think is.
Our changes in the landscape.
Alright. Thank you for re answering that question and do you do you have any thoughts on change in your return of capital to shareholder strategy.
There really <unk>.
Short answer is no we.
I think.
John talked a little bit about this which is obviously where.
We're going to continue to pay a pretty strong dividend, we will buy back shares to offset dilution and we will look at deployment of capital in terms of.
M&A if it makes sense if it.
If it.
Builds value in the portfolio, so from that standpoint, and no significant changes.
Thank you so much okay.
And our last question comes from Scott, We're still from Wolfe Research.
Hey, Good morning, guys. Just one question from me just on the revenue retention side of things I know you called out it's still trending above pre pandemic levels and I think John had mentioned youre continuing to see attach rates of high value products. So just wondering if you could just maybe give a little bit more color on what products are exactly resonating most with the client base.
Yes, it's really our HR suite of products.
You continue to see our online products I just mentioned the retention.
The recruiting an applicant tracking really really popular right now 401K retirement.
Very popular right.
And then time and attendance is yet I put that in kind of the online area anything around the automation of the employee employer relationship.
It's a very high demand very high demand right now people are looking for this operational efficiencies their workforces are more dispersed than ever before and they are leveraging technology to keep track of what's going on.
Okay. That's helpful. Thank you guys.
Thank you.
Rich and that's it for calls.
Yes, no further questions well one more thank you to the over 16000 employees of Paychex, who deliver the great results for US all at this point, we will close the call if you're interested in replaying. The webcast of this conference call it'll be archived for approximately 90 days I would like to thank you all for your support you have given me in my role as CEO over the years and I know I'm, leaving.
All in good hands have a great day. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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