Q2 2023 Paychex Inc Earnings Call
Please stand by your program is about to begin if you need assistance. During your conference today. Please press Star zero.
Good day, everyone and welcome to the Paychex second quarter earnings Conference call.
At this time all participants are in a listen only mode.
Later, you will have the opportunity to ask questions. During the question and answer session.
You may registered 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 star two.
Please note this call will be recorded and I will be standing by if you should need any assistance.
It's now my pleasure to turn the conference over to Mr. John Gibson, President and CEO . Please go ahead, Sir Thanks Pat.
Good morning, everyone. Thank you for joining us for our discussion of the Paychex second quarter fiscal year 'twenty three earnings release, joining me today is Efrain Rivera, our Chief Financial Officer.
This morning before the market opened we released our financial results for the second quarter ended November 30th.
Can access our earnings release on our Investor Relations website, our Form 10-Q will be filed with the SEC within the next day.
This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days we'll.
We will start the call with an update on the business for the second quarter, and then Efrain will review, our financial results and outlook for fiscal year 'twenty. Three we will then open it up to your questions.
We delivered solid financial results for the second quarter with total revenue up 7% and adjusted diluted earnings per share growth of nine.
Demand for our comprehensive solution suite remains strong and we are well positioned to help our clients succeed our unique combination of leading HR technology HR expertise and the wide breadth of solutions, we have to address the many needs in the marketplace continue to help small and midsized businesses.
That's very dynamic and challenging environment.
We continue to closely monitor the macroeconomic environment and our internal leading indicators the latest findings from our paychex IHS small business employment watch rebuild moderating growth in jobs and steady growth in wages.
Our clients continue to be challenged by the continuing impacts of the pandemic inflationary pressures and the challenges of this labor market. However, small and mid sized businesses continue to show their resilience. Our revenue retention remained solid as we focus on retaining clients and driving increased value in.
<unk> of our HR outsourcing.
<unk> software and retirement solutions or.
Our overall HR outsourcing business continues to perform well with strong growth in worksite employees and record record revenue retention, we achieved a major milestone this quarter.
We now serve over 2 million worksite employees across our ASO and PEO business, clearly, establishing us as a HR leader our industry, leading HR advisory services sets us apart and are certified HR professionals are truly unique asset as they're advising our clients.
On HR issues as well as leveraging our HR technology and the analytics from our vast SMB dataset to help our clients achieve greater operational efficiency increase employee engagement and reduce turnover.
While demand for our technology and HR outsourcing solutions remained strong we continued to see shifts in what offerings clients find the best fit for their current situation.
Both early and during the pandemic, we saw lower demand for adding employer health benefits. We continue to see this trend and also a high demand for our <unk> solutions driven by businesses seeking immediate assistance with HR issues and filing for tax credits, but delaying decisions on adding or changing their insurance offerings.
To their employees.
In addition, the lower medical plan sales and participant volumes in our health and benefits area of our insurance agency that we discussed last quarter continued in the second quarter and we saw some similar trends in our Florida at risk insurance program in the PEO impacting revenue growth in that area of the <unk>.
Business.
Wariness in demand of our employee retention tax credit or E. RTC service, which helps clients maximize eligible tax credits continues to grow to date, we've helped more than 50000 clients secure billions and ERP see a recent survey actually showed just 63% of business.
At 63% of business owners didn't even know that they were eligible for these credits we continue to educate existing clients of the benefits as well as leverage this service to attract new clients.
We continue to invest and enhance our product suite and customer experiences in November we released our enhancements to paychex flex focused on further streamlining the recruiting on boarding time and attendance and benefits administration experiences through our HR technology three out of four.
Checks client surveyed have shortened the time required from recruiting screening tracking and Onboarding new employees those clients reported an average.
Time savings of 26%, indicating that the typical two month recruiting cycle has now been reduced to just six.
I am very excited about our retention insights at all.
Offering which continues to deliver strong results for our clients at a time when businesses remain committed to retaining their existing staff.
This feature uses predictive analytics, coupled with our vast data sets to provide insights on potential employee flight risk clients leveraging the retention insights offering are showing a 15% reduction in turnover when compared against their industry peers. We're very pleased.
First we received the bronze Brandon Hall Group Excellence Award for Best advance in HR predictive analytics technology for this solution. This is the 10th consecutive year they've recognized us.
During the quarter, we also.
Were recognized with the ITC 2022, SaaS customer service satisfaction award for core HR. We are honored to have received this award is another confirmation of the power of our HR technology and the quality of our advisory services. These awards continue to validate that paychex has a technology.
Leader and that our focus on HR is delivering real impact for our clients and their employees.
At this time, we are heading into a critical year in season.
We're fully staffed in both sales and service and we have good momentum I want to thank all the employees in advance for all their hard work and dedication in making this the best year end ever now I'll turn it over to effort, who will take you through our financial results for the second quarter effort. Thanks, John and good morning, I'd like to remind everyone that todays <unk>.
Commentary will contain forward looking statements that refer to future events you know the customary.
Comments take a look on.
In our press release.
If you have any questions on that.
Let me start by providing some of the key points for the quarter.
And then I'll finish with a review of our fiscal 2023 outlook.
Both service revenue and total revenue increased 7% to $1 2 billion management solutions revenue increased 8% to.
$895 million, driven by higher client employment levels and revenue per client.
Revenue per client was positively impacted by additional product penetration.
HR ancillary services, largely RTC and price realization.
We continued to see strong attachment of our HR solutions retirement, and time and attendance solutions.
I would note that revenue from our <unk> service benefited second quarter revenue growth by approximately 1%.
We anticipated the RTC revenue would moderate in fiscal 2023, but strong demand and execution have led to better than expected results.
<unk> was a tailwind to management solutions growth the first half.
Become a moderate headwind in the second half.
P O and insurance solutions revenue increased 4% to $273 million driven by growth in average worksite employees and revenue per client.
The rate of growth was tempered by.
By the impact of factors, John previously discussed, including lower medical plan attachment.
Participant volumes, along with the mix shift so and I would just note on PEO and insurance solutions insurance solutions was significantly below the growth rate of PEO.
Interest on funds held for clients increased 54% for the quarter to $22 million, primarily due to higher average interest rates along with growth in investment balances.
Total expenses increased 7% to $718 million.
Expense growth was largely attributable to higher head count and wage rates and general cost to support the growth of our business.
Operating income increased 7% to $472 million with an operating margin of 39, 7% in line with the prior year period.
Our effective tax rate for the quarter was 24, 2% compared to 24, 1% in the prior year period.
Net income increased 8% to $360 million and diluted earnings per share increased 9% to 99 per share.
Adjusted net income and adjusted diluted earnings per share both increased 9% from the quarter to $359 million and 99 per share respectively.
Quick summary of year to date financial results total service.
Revenue and total revenue both increased 9% to $2 4 billion.
Management solutions increased 10% to $1 8 billion.
And insurance solutions increased 6% to 556 million op income increased 10% with a margin of 44% with modest expansion year over year and adjusted net income and adjusted diluted earnings per share both increased 12% to 731 million.
And $2 <unk> per share.
Let's look at our financial position is strong with cash restricted cash and total corporate investments of more than $1 3 billion and total borrowings of approximately $808 million as of November 32022.
Cash flow from operations increased to $686 million for the first half of fiscal 2023.
This was driven by higher net income.
Changes in working capital, we pay out quarterly dividends at 79 per share for a total of $569 million. During the first half of 2023, our 12 month Rolling return on equity was a apps.
Absolutely stellar 46%.
Now.
I'll turn to the guidance for the current fiscal year ending.
May 31, 2023, our current outlook incorporates our first half results, obviously in our view of the evolving macroeconomic environment.
We have raised guidance in many areas, but moderated the range for PEO and insurance solutions based on factors previously discuss updated guidance as follows management solutions revenue expected to grow in the range of 7% to 8%.
And insurance solutions expected to grow in the range of 5% to 7%.
Interest on funds held for clients is expected to be in the range of $100 million to $110 million.
Total revenue is expected to grow approximately 8%.
<unk> income slash expense net.
And I'd, just remind you that the net of our debt service plus.
Earnings on our corporate portfolios that number is now expected to be income of $5 million to $10 million adjusted diluted earnings per share is now expected to grow in the range of 12% to 14%.
Guidance for margins and effective tax rate are unchanged, although we do anticipate.
Turning towards the upper end of the range on operating margin and the lower end of the range on effective tax rate.
Turning to the third quarter. We currently anticipate that total revenue growth will be approximately 6%.
And that operating margin in the third quarter will be in the range of 43% to 44%.
Of course.
All of this is subject to our current assumptions, which could change.
If there are changes in the macro environment.
We will update you again in the third quarter call.
And I will refer you to our investor slides on the website for more information.
I'll now turn the call back over to John .
Thank you effort Todd we will now open the call for questions.
Thank you Sir at this time, if you would like to ask a question. Please press the star and one on you touched on phone.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question.
We'll take our first question from Ramsey El <unk> with Barclays.
Hi, Ramsey Hey, Thanks for taking hi, there. Thanks for taking my question this morning, and happy holidays to you.
I had a I had a question on the insurance business I'm. Just curious you mentioned lower medical plan attachment and the mix shift. So what do you think is the underlying driver there is there any other.
Color or insight that you have in terms of why that that sort of those dynamics are kind of kicking in right now.
Yeah look I think I'll step back a little bit and then I'll zero in on your question I think our HR solutions. When you look at the combination of <unk> continues to grow at double digit rates, we're very happy with the progress there as.
As we said we surpassed the 2 million employee served and if you go if you go back and think about that 90 in fiscal year 19, we were at $1 2 million disclosed so that's a 72% increase.
And then you think about that we had one year of Covid, where I think is probably like 3%. So very solid growth in both of those products I think when you look inside the agency has struggled.
When you look under Theres, a lot of economic pressure I think on employers and employees.
Most of our insurance agency tends to attract first time.
Employers, who are offering insurance for the first time, a lot of new business start type of driven activity and I think in this environment I think even though they would want to offer insurance to their clients I think they are finding that it's economically difficult for them to think about adding that product and then when we look at the participation rate the other.
<unk>. There is you need two things one you needed to employer to buy it and then you need to employees to contribute their fair share. We've also seen some decreases and employees who are electing not to participate in their employer plans. So you have those those two dynamics I can't connect the two directly but certainly when I look at the.
Hours work when I looked at inflationary pressure.
Wages I wouldn't be surprised if that some of the economic decision that's being made there.
Got it okay. Thank you Super helpful. One follow up for me.
You also talked about management solutions higher product attachment cross sell can you kind of update us on your strategy. There what levers you are using to execute on cross selling what inning, we're in in terms of that broader opportunity.
Yeah.
What we've seen across the board our digital offerings, our online solutions continued to attract their driving efficiency inside companies that things that are looking for or do you think about our time and attendance solutions. They're also dealing with more dispersed workforces. So that's driving demand.
Onboarding recruiting and Onboarding. So we still have a very tight labor market for small and medium sized businesses. So our ricky.
Recruiting and Onboarding experience has really driven demand it's been partnership with indeed as a matter of fact I think the last time, we reported we were somewhere around 1.8 million employees hired to this new onboarding hiring and Onboarding experience and we are approaching the 3 million Mark in just six months since we.
<unk> reported that number so that's been very attractive as people are trying to attract and retain and then our retention inside so we go out we have our HR professionals talking to our clients. It's interesting on the retention insights, we're actually doing behind the behind the scenes insights to a data analytics team and they were actually lagging.
Clients that we think have an issue and then we're proactively going out to them and having our HR consultants engage them in a conversation.
Okay.
Fantastic. Thanks, so much I appreciate your comments thanks, Bryan Thank you.
Okay.
Thank you. Our next question comes from Bryan Bergin with Cowen.
Hi, Brian Hi, Bryan.
Hey, guys good morning happy holidays.
One one of the thing in here just on some of the leading indicators and the demand environment. So just since you reported last and then over the last few weeks can you just talk about what youre seeing in that in that new demand across employer size as well and offering.
Yes, yes, again, what I would tell you is.
Even though it's a challenging and kind of a mixed macro environment everything you read.
Read about the resiliency that we're seeing in the small and mid sized businesses continues to be strong. So when you look at the leading indicators that we would be looking at kind of the first signs of a downturn, we're simply not seeing those in our indicators at this time and that's clearly what we've reported here.
I think there's certainly been a roller coaster effected from the Covid perspective.
When you look under the covers I think our mid market customers.
And larger customers seem to be doing better than our small customers and small customers seem to be doing better than the micro customers in terms of dealing with inflation and the recruiting scene, but when you look at the overall macro perspective, we're not seeing anything at this time and are indicators that would indicate any kind of downturn for small businesses.
Okay. Okay, that's good to hear.
Just to follow up on that.
About the <unk>.
Macro assumptions underlying our second half outlook can you just talk about what youre thinking about for client employment levels out a business client losses things like that.
I think I think <unk> at this point.
I think we're assuming an environment that's similar to what we saw in the first half.
This caveat Bryan.
As we've looked at quarter over quarter, you continue to see a pace that is moderating versus the previous quarter.
Quarter, I think thats the trend, we think continues into through the end of the fiscal so while it doesn't represent a sharp departure, we still see continuing signs of moderation as we go through the year now that assumes that.
The impact of the fed.
Right raising.
<unk> continues to have the same incremental impact it's had.
In the first couple of quarters.
By that I mean, right now what we see is having the effect of.
Starring Tam.
<unk> pressures its not having a dramatic impact on <unk>.
Hiring.
Especially in SME.
In the SMB firms that we serve.
If if.
That started to change it would change our assumptions right now, we don't see that occurring but.
Right now were not at 5% short term rates were going to have to monitor that and there is just a note of caution that we have as you approach what they would consider their peak.
Peak short term interests, so no dramatic departure.
From the first half.
Okay understood. Thank you.
Thank you. Our next question comes from Jason Kupferberg with Bank of America.
Thank you good morning again.
Hi.
Got it.
Thanks.
I wanted to start just on management solutions with the raise of the revenue guidance, there, which are the key operating metrics are you know bullish on I mean is it pricing retention bookings checks per client.
Yes.
[laughter] yeah.
Driving that Jason is.
<unk>.
Sure.
Let me pick a couple of those out and say, we're where we're stronger we're.
Sure.
Not as strong.
So obviously, we expect client retention and revenue retention to remain strong it's strong and we expect that.
Occurred during the during the balance of the year, we're seeing a little bit more.
Increase in the unit.
And unit churn on the low end and that's to be expected given the mix of the client base over the last couple of years, but it's coupled with very strong client retention through higher value clients.
We're retaining which is what we want to do.
On the checks question, that's a good one because.
In the first half we saw good.
Good checks per.
Payroll or.
Pays per control growth in the first half we don't expect it to be that strong in the back half of the year. So we expect it moderates as we get into the second half of the year, partly compares partly simply because of the the amount of growth that we saw.
So last year, so some of that but it's still it's still will be a positive contributor we think that <unk> will still be a factor in the back half of a year ago I called it out management solutions is moderating it just won't moderate quite as much as as we proceed.
To be and then.
We could we consider the demand environment to still be positive.
Obviously, we think that that sales will.
We will remain positive we go through the year.
It's a little bit more color on each of those yes, and Jason I would I would probably add to that I mean, we continue to see the demand for our HR solutions, both ASI and Poe.
The demand what we are seeing an increase in worksite employees and the retention in those has been very I mean historic record high when you look at our HR outsourcing businesses both of them at record highs. So we've had solid revenue retention.
Crossed over at.
The macro level and then when you look at what's going on in the in the HR area very very positive results from that certainly.
Helping us as well.
Okay understood.
My next question is just on the coming back to the insurance side of things and when you talk about you talked about some macro economic effects that you think are.
Using that business to be a little softer than you would have anticipated but are there any execution issues. You feel you need to take a look at or anything that could border on structural challenge vis vis cyclical just wanted to see if we can unpack that a little more yes, Jason let's talk a little bit because we've talked about.
The agency a little bit I mean, PNC has has been our continued product where again remember most of our P&C business is workers' comp the vast majority of it to new startup businesses and that's been a very very soft market for a period of time so.
Certainly that has continued to be a drag and that has not not turned around I think when you look at the <unk> <unk> side, which has been a little bit more impacted up and down.
As we went through this what you went through this pandemic.
It's what I kind of say you have a little slower new business starts with people.
Less and less people, we're talking to and then you have the economic pressure of adding a benefit at that cost both from an employer and employee side. So I don't think there's.
Anything terribly structurally now one of the things. We're certainly doing is we're trying to make adjustments to our approach.
Both in terms of driving more digital.
The engagement on the P&C side.
We're also doing a lot more going back to current clients on the <unk> side, where we think we may have more success in converting them from existing benefit programs and we're going to continue to look at expanding our insurance product portfolio to meet meet.
Meet the demands of the marketplace with some things that may be more economical, but I don't think theres anything major we have those but but again. This is really continued slug sluggishness with PNC and then this kind of.
Lack of attachment and lack of participation in <unk>.
Okay that color is helpful. Thanks again guys.
Thank you.
Thank you we'll take our next question from Kevin Mcveigh with credit Suisse.
Great. Thanks, so much that would be eligible to John congratulations on the first call here.
Youll recall.
Hey.
I wanted to go into the puts and takes on the guidance a little bit I mean, theres been a pretty sizable step up in flow, which is pretty profitable.
And then the swing factor on the other income pretty profitable too.
But we're kind of holding to EBITDA.
The other income below the line, but the floats above.
Is there anything offsetting that or is that a little conservatism.
Just because it seems like you are over performing in some of the more profitable parts of it.
The business as opposed to not.
Does it seem like that flow through is there anything I'm missing there just not thinking about that right.
No no not really Kevin I mean, I think when you do the arithmetic.
What what you end up in the color that I gave you was that.
We we source of more towards the top of the range. So there is flow through on.
On that.
On that revenue.
In the back half of the year.
We don't assume that 100% floats through.
We look at the year position ourselves also to anticipate potential spending going into 'twenty four.
We may end up.
Outperforming that number but at this point, we do always approach with an element of caution.
And conservatism as we go through the year.
That makes a lot of sense and then can you remind us what fed funds is in that 100 $100 million of 110 in terms of.
From the fed.
We assume we're going to end up close to where the.
It is around a 5% terminal rate as we get into the spring.
I would just caution that you can't simply take the portfolio and.
And.
And put that right and because it will depend on what the balance between short term and long term is and I've been saying throughout the year.
Wanted to do is.
Positioning the portfolio. So we don't so if we're in a situation.
Sure the fed decides to raise and then suddenly sharply cut we're a little bit more protected than we were during the last cycle. When the same thing occurred so.
But obviously, we're flowing we're flowing back.
Through the P&L.
Great. Thank you.
Thank you. Our next question comes from some odd Samana with Jefferies.
Hi, good morning, and thanks for taking my questions Hey, how are you.
Maybe just under on the record sales performance I guess can you comment on booking.
Bookings activity.
In aggregate and then maybe the linearity to the quarter and what Youre seeing as we get closer towards the end of the year and as your clients, suggesting maybe the changing macro environment.
Environment.
Yes.
Look we continue to see there.
Very strong demand for our products and services as I said continue on the HR side continue to see strength there.
All of our digital private products, we're not seeing those either change in the competitive landscape.
At this point at all again, we continue to find our clients are really struggling with dealing with inflation.
And certainly our our technology solutions are making them more efficient. So we've got a definitely efficient efficiency play there.
We're also helping them with the RTC again.
Remember.
I think our averages over $150000 per client that we're helping them we've helped.
<unk> thousand clients and that's become a big economic helped to them that's helping us.
We continue to see strength in the 401K business as well.
As an attachment of critical benefit that people want to have their state mandates.
And thats, becoming a very popular as well I mentioned time and attendance and all of our online services. This comprehensive group of online digital experiences that we're rolling out from recruiting up all of those are really.
Resonating with the problems that small businesses that are happening.
Six months so to your question by the way. Thank you.
It had been.
For a second as to the linearity of it.
My answer to that you can talk to you.
<unk> it correctly.
So if I look at it.
First half.
Sales bookings growth.
It was it was certainly solid strong.
You have to go back to.
How are we comparing now.
And the two year stack pre pandemic and we compare favorably.
Certainly the that period of time.
But the question for the businesses as everyone on the call knows Q3 is a really important quarter in most important quarters. So.
Generally when we line up.
Strong in the first half and a stronger second half.
We start to wobble, a little bit in the first half.
Tougher in the second half.
I think to John's point, we're well positioned for the selling season.
The caveat I would have is that we have to get through the selling season and see how we come out to really kind of get a sense of where the year was by the third quarter has rolled through we were.
Pretty much.
We pretty much know where.
You are for the year, so I think we're lined up well.
The numbers would suggest that.
And we're in the middle of it wont report put out a morning third quarter.
That's the color I was looking for ethane and then maybe just a.
Yes, a follow up on your own I think that's about what your customers Youre getting and you said that you're at the expected staffing levels. How are you thinking about your own maybe hiring going forward.
In the sales and marketing organization. How are you guys planning for based on the assumptions you've made in your own guidance as well.
As we said we're fully staff both in sales and service going in to.
To the selling season, which is exactly where we want to be given the demand that we're seeing.
We're going to continue to monitor that were being very cautious in adding above that at this point in time I would say, we do see some opportunities for investment as Efrain said and we will make those investments.
The selling season, if we see the opportunity to to promote certain products and services that we think are resonating in the market. So we are holding back to be able to do that if we see some sort of change we know what the levers are as we've said we are the best operators in the business, we're going to continue to do that we've got our hands on the levers, but we're not pulling them at this.
This point, because we're just not seeing.
The decrease in the demand that would merit that.
Great wishing you and your families a great holiday season.
Same to you and I appreciate it.
Okay.
Thank you. Our next question comes from Kartik Mehta with Northcoast research.
Hey, good morning.
Hey, good morning.
Afternoon, John just thoughts on pricing, how it's taking I know John you said the competitive environment has been changing so I'm wondering how your customers have reacted to the most recent price increases that you had to put in.
Well Kartik I would say our average revenue per client is that double digits above even any of the pricing levels and that's really driven by the value we're providing.
We've already talked about at the attachment the upgrading we're doing from the HCM to the HR solutions. The attachment we're seeing from our digital experiences that we're adding so from a revenue per customer as well as the revenue per new sole customer.
We've actually are doing very very well there. So I think it demonstrates the value and I think it demonstrates the pricing power that we have.
And then just looking at the balance sheet, obviously, the balance sheets in great shape.
If the economy slows and maybe valuations come down you just your thoughts on maybe buying back stock versus M&A opportunities.
What makes more sense for paychex.
I don't think anything's changed Kartik in this sense.
If the right opportunities for M&A came along we would obviously be constructive.
Those opportunities.
We have a range of opportunities in the <unk>.
And the funnel that we're looking at.
And sometimes we.
<unk>.
We see opportunities.
Maybe.
Worth going after more aggressively at this point I think that we haven't been normal set of opportunities that we have in the funnel.
With respect to buying back shares.
I don't think we've changed our outlook in terms of at this point buying.
Buying back.
Hum.
Based on our desire to combat pollution. So I don't think a lot has changed in that sense I do think.
The environment.
John can you also talk to this but the environment looks more productive for doing both.
Both tuck in acquisitions.
A little bit larger scale.
M&A and we're very interested in doing that.
Yes, I think to add onto that Kartik.
Look I think the market is changing for sure. We've always I think had a very similar position. The position has not changed I think the opportunities are changing meaning they're presenting themselves some more reasonable valuations.
Always our I think known to be very conservative and good allocators of capital.
And it's not that we've not been interested in doing M&A or going after some technology bolt ons, but the evaluations have just been unreasonable for us to be able to cross that barrier and at least what we're seeing is we're starting to see.
Some moderation there.
To continue to be as active as we have been in the past and hopefully we can get to a point where the market valuations match, what we think is a reasonable.
Amount to pay for some of these business that we're interested in.
Perfect. Thank you both I really appreciate it.
<unk>.
Thank you. Our next question comes from Bryan Keane with Deutsche Bank.
Hi, guys good morning.
Just thinking about wage and wage inflation or just inflation in general what's the direct effect for paychex is it is it less attachment less spending from the client that you'll end up seeing.
Well, so let's talk about wage inflation first of all I'd I'd, probably tell you that we have wage inflation, but it's been moderating if you look at our.
Our IHS, our Paychex IHS index.
<unk> been steady for the last three months at about 5%.
And that's actually kind of moderated a little bit from the increases we were seeing we were seeing before when you think about when you think about the wages in certain parts of our business and certain pricing models in the PEO in particular.
Some of our pricing is based on a percentage of wage similar to what's in the in the industry. So that can have some.
Some uplift but in general the.
<unk> right does not have a big impact on our revenue.
And it typically doesn't have a big impact on their appetite to buy attachments or spend more with you guys.
Not not really I don't I don't see that I've never seen that analysis that would indicate that the one thing I would probably say look the number of employees Worksite employees is the key driver in our HR businesses checks in the payroll side of the business.
The more people that are.
<unk> the more people that are getting checks the better what are the one of the things that I would tell you that is that we're seeing in terms of the impact of inflation on employees is they're now working more hours. That's one one component that we see a recent survey of the American Association staffing actually found it.
58% of adults are looking at potentially adding a second job. We are beginning to see people getting checks at two different places within the client base as you can imagine that's a check as a check.
So again, if you see that type of where people are going and working more working in more places getting more checks that's positive for our business.
Got it no. That's helpful. And then obviously as you guys talked about the key selling season.
It's happening over the next few months what are your guys' expectations for new client growth as it I always think about 2% to 4% is it high and low end of that as you head into the season.
Well, so sure Bryan I think typically we say 1% to 3%.
We.
We will see where we come out of a range. There we expect it to be a good season I think that's about as much as I can say is we were in the midst of it.
Great Alright, happy holidays Thanksgiving view.
Okay.
Thank you. Our next question comes from Eugene Some Mooney with market.
That makes sense.
Thank you good morning, guys.
Conciliation of your best.
It's not an easy one.
I always appreciate a good try them.
Hi, guys.
I wanted to come back to the EPR insurance, where is that going to keep on mind.
A lot of questions have been answered on the insurance side of things.
But I wanted to just double click on the <unk>, specifically, so putting the agency have died even putting the issues with insurance attachment aside which we've talked about can you just comment explicitly on what you're seeing in the bare bones.
Business literally appeal works that it bleeds.
Youll booking trend or if they are I think that that would be very helpful. Yeah. So I'll, let John talk to sales, but I think thats a great question.
And I just want to take a second to kind of as you said double double click on the PEO and the elements of revenue that effect.
Revenue growth there so.
As everyone on the call knows the first thing that.
The revenue and insurance in the PEO is primarily derived from.
The state of Florida on the healthcare side worker's comp is different but on the healthcare side. So it's a big number, but it's primarily going to be influenced by Florida.
To John's point, we anecdotally saw some interesting things in the first half of the year, where we had people who have insurance state with the PEO decided they didn't want insurance and it was.
Bit of an unusual situation, we didn't call out specific characteristics of.
The state of Florida in the first half of the year, because frankly don't want to don't want to prolong.
That excuse as to what happened there, but art I had an unusual idiosyncratic period in the first half of the year long story short.
The level of attachment.
We expected to see.
That stayed in particular didn't materialize.
As I looked at it and we looked at it we said what makes sense well. We don't expect we expect the second half revenue and per year will be stronger than the first half.
We're a little cautious based on what we're seeing with respect to insurance attachment and so that's why we we out of an abundance of caution.
We lowered the the.
The range for revenue on <unk> in the second half I think it's really important in all of that is the punch line to make this point has no impact on.
On margins or on net income so.
We could easily have.
Five or 6% PEO growth in it and have feet or 9%, depending on the mix of revenue insurance versus admin. It wouldn't have any impact on margin. So that's largely driven by softness.
On that side of the business and I could be reporting and we could be reporting them in fourth quarter, we had a really sharp spike in insurance attachment. That's the reason we manage the business. The way we do we're not expecting to make money out of there obviously, we'd like it to be a bit higher than it is but I think it's really important.
And to remember that we.
We're excited employees, that's an important point.
What we're seeing is we're seeing solid growth in worksite employees in PEO.
In the PEO business, which is one thing that.
Encourages me in terms of the back half of the year. So we're not seeing.
Softness in terms of Worksite employees.
And Thats really the driver of profitability in the business you don't have to work so that you're not going to have it. So so it's a <unk>.
Little bit digging in you asked the right question when you look at it it really it really.
The fundamental belief.
The issue of insurance look solid I'll, let John talk to what's happening on the sales side, yes no.
Our deference point.
This insurance attachment thing is localized to Florida.
Catchment rate.
In the Po for our clients in Texas has no impact on our revenue at all.
And so the fact that it doesn't Florida has as it has it has it has an impact but look I think the value proposition is still strong. It's still very solid you look at evidence of that I look at our revenue retention and our retention of clients. There is at near record levels very strong.
<unk>.
We continue to see strong worksite employee growth.
And so again I feel really good about where we are position we're fully staffed there we're into the selling season.
And very confident that we have the right products and services for that market. So again, if dynamics in the market change I would expect those are going to impact others, just like they impact us.
Got it got it well thank you for the very comprehensive.
Look like a very helpful. And then for my follow up actually I wanted to ask on the.
H M management side of things on a competitive landscape with curious if you can provide your thoughts on any competitive pressure you are seeing.
And for all.
The trend of.
Betting payroll into software solutions, so you'll be seeing obviously, a lot of the payments provider software providers looking to expand their offerings with other modules.
Modules, if you will and payroll is always at the top of the list.
We talk a lot about that I was curious from your guys' side. How successful do you think those athletes are and are you seeing any competitive pressure there.
I would say that I have not seen a dramatic change in any anything and not seeing any type of new entrants that are.
In terms of what I think about about our growth I think.
Probably the other point I would make is that one of the things I think we will it'll be interesting to see as we go into the selling season is some of the upstart competitors, who don't need to necessarily make money, whether or not they will still be able to.
Approach the market in marketing and marketing spend et cetera in the same way they have in the past. So we've already seen I think some of that dialing back so not that I'm seeing in any of the data that I see that I'm seeing them, having an impact.
<unk>.
I'd go back probably three or four years ago, and one of the Fintech providers.
Embedded in payroll and our stock traded down I don't know like 3% in the day and I was getting calls about why it's.
Such and such as an embedded solution on payroll.
I think.
Look.
The surest way.
To stumble as too arrogant.
And we're not arrogant about those folks we've looked at by the way some of the people that you cover.
And.
I think there is an opportunity in the market for for those solutions. They are just not a dramatic impact we've never seen a dramatic impact on us because the other thing you need to think about the other thing to consider there too as well.
Depending on what part of the market you're addressing there.
Especially at the low end there is a benefit to having some level of service attached to.
Attached to payroll not obviously in the enterprise space.
In the upper mid to upper.
And to the market.
And.
That that ability for simple payroll, we've got that pretty pretty much covered which are payroll.
Yep.
Got it. Thank you very much guys happy holidays. Thank you happy holidays.
Okay.
Thank you we'll take our next question from Peter Christiansen with Citi.
Good morning, welcome John and happy holidays to all.
In front of him.
Wanted to ask a question about you called out working capital benefit this quarter wondering if that's indicative of teaching activity yet.
Some of your staffing clients.
If that's a T leave until perhaps what's going on more macro wise and then I just had a quick follow up.
Well great question Pete So so the short answer to that is if you look at the first.
Comparable period last year.
The staffing business really rebound rebounded significantly.
So we had a net use of working capital.
Seasonable balances grew.
The staffing business continues to be pretty strong.
<unk> funding business.
Hum.
Call knows that's our advance partners business.
But we're not we don't have the growth in receivables that we had last year. So as a consequence.
Change in working capital perspective, we didn't have that we didn't have that use that.
Use of funds. So that's really what's driving it just.
Quick editorial on the staffing funding business, it's doing well and we're continuing to see growth in that part of our business.
In the market as a whole.
That's helpful. Thank you and then.
Just wanted to dig a little bit deeper into last question, particularly dealing directly with merchants.
On the merchant side.
How are you guys are you guys pleased or wondering if you just qualify how things are done with channel sales and I know you have a relationship with Clover and given you have some other channel distribution partners.
Just if you could talk about the sales efficiency that you're seeing there that'd be helpful. Thank you.
I would say in our in our business development, you're continuing to add additional channels. It's still I'd say, a small portion still when you look at where we're getting our clients from our CPA partners is from our existing clients, referring us is from digital marketing.
And then we have a cadre of business development, we continue to add to them. So we continue to do that.
I would say I'm pleased but I'm, not saying that I see anything again it goes back to my prior comments I have not seen a major shift which says Oh my goodness. This is a big emerging trend or emerging threat. They are incremental they're helpful. Theres. Obviously, a segment of the market that looks for that type of integrated solution and a different set as their needs get more come.
<unk>, what we tend to find is they migrate into one of our HCM solutions and are getting into our HR products I know I don't know if that makes sense of it if it's simple if you're looking for something very simple in the integrated is important the minute you have one of these modules that sort of an add on and then you get into complexity, that's where this service model kind of break.
Down and they usually tend to see this unbundling start to occur. So there is a portion of the market that I think it makes sense for we're continuing to look at that but again, when we look up at particularly our HR businesses and where we're seeing the need for our.
Digital offerings.
Not so much I think it's less important to those clients.
That's real helpful color. Thank you both.
That'd be holders.
Thank you we'll take our next question from James Faucette of Morgan Stanley .
Great. Thank you very much and just a couple of follow up questions for me.
One on margins it seems like we're pretty near peak levels right now.
How should we think about the durability of these margin levels going forward and particularly a question. We get a lot of you know if we were to see our assertion and revenue growth would've be impacted.
What would how should we anticipate that would impact margins and what levers do you have to get us to the higher end of your margin outlook versus <unk> versus <unk>.
Going back to the lower end.
Let me answer it two ways.
Then I'll turn it over to John .
Look I think.
James.
We get that question a month.
I think it's.
It's part of the transformation that the company has gone through over the last few years last I would say five years in particular, especially post.
Every one of the investments that we made post tax reform and that we've delivered on.
Our intent was to.
Accelerate the transformation to look much more like a technology company than what we had been before which was certainly a perfectly.
Ah well functioning tech services business, but more technology. So you hear a lot of what we say, but Don I think see the background of it as much we.
We deploy a lot of technology in the background and I say this in many of the calls where today's.
Tech service.
<unk> is tomorrow's technology delivered by.
The set of technology tools on the backend and we feel really passionate about the ability to deliver service, but service delivered through state of the art technology, but what's the point of all of that.
The point of all of that is that if you can do that and if you can do it successfully then you get margin expansion of the type that we have been driving we think theres still a long road to go in terms of our ability to fully optimize.
And digitize everything that we're doing and as a consequence, we challenge yourself every year to look at a range of potential investments that can drive margin improvement balanced by.
Balanced by investments that will also drive revenue growth. So we're trying to play those off and the short answer is yeah. I think if you were five years ago. If you said, we'd hit 40% and then we'd be talking about the potential to expand beyond 40% look.
I wouldn't have known that with precision that we were going to be there, but that's exactly where we're at there may come a day, where we say hey look I don't think for the growth of the business the level of investment we need to make in the business. We can really continue to leverage but we're not at that point at this at this stage.
Turn it over to John for comments too.
I think you've covered ever.
I've said from the start we are.
We are known as the best operators in the in the business and that's something I'm very proud of to have been part of and it's in our DNA and we're going to continue to do that and I do think we have we have some macro opportunities and that is the digital adoption that's happening in the marketplace as a benefit employees.
And employers don't want to talk to us anymore. They want to get on our five star App and they wanted to be able to do it themselves. So whenever they want to do it that adoption helps them and it helps us it provides a better client experience, we're investing in that looking for ways to drive efficiency there. So.
Macro adoption and then what we're doing in digitizing our back office.
Is another opportunity to have some points that I think we're still we still have runway on and we're still continuing to invest in and push it in and continue to move on so I think there is.
Many of opportunity for us to continue to look for ways to not only provide digital solutions to our clients, but also continue to digitize what we're doing in the back office and that's in all areas that business. I mean, you look at our digital sales.
Unbelievable growth in that mode of selling over the last over the last decade and over the last five years as we've invested in that we've launched a digital onboarding capability that will be fully operational for the low end of our market across the business starting in January so.
Looking forward to that test and learn and we have several other test and learn.
Investments coming out of our November strategy session that are all built around driving additional growth and driving driving further digital adoption across the business.
That's helpful. I guess a related question I mean, it sounds like you guys are going into the selling season, well staffed and I know that's been a point of concern earlier, but.
You know just on that topic and more broadly of service levels.
You know.
Yes, or are you seeing that as an indicator of just a little bit of a change in the hiring market generally and then you know on and as we dig into the efficiencies.
The technology investments et cetera, allowing you to increase the typical client count for an existing account manager and how's that been trending.
Wondering about kind of the hiring environment through your own needs as well as points of efficiencies that you're realizing right now.
Yes, I would say the hiring environment for us I think.
Most people reporting has stabilized much different than it was probably a year ago. When we were sitting here a year ago, we were not fully staff to where we would like to be entering the selling the selling season and the.
The year end season, and as we sit here today fully staffed fully trained and prepared to execute going into that so it's a much different hiring environment.
For us as well.
And we are continuing to drive productivity as well.
Got it. Thank you so much. Thank you. Thank you.
Thank you we'll take our next question from Mark <unk> with Baird.
Hey, happy holidays, John indefinitely.
I just wanted to save you a little effort I've got a little.
<unk> just to save you some time on all your callbacks, Okay I'm getting.
This question a lot.
On the left.
Lots of market.
Tears.
Can you just breakout the pea.
And insurance services at $273 3 million can you break it out between the agency component versus the PEO component.
Okay.
So go ahead.
And then and then to break down.
What you ended up seeing in terms of the year over year change.
Within those in.
This is more than double clicking, but it will save you a lot of time.
How much of an impact there was with regards to.
The change in terms of the.
The uptake of the health insurance.
Property and casualty.
Workers comp.
Yeah, So mark I would point all of the great investors, who are asking you for those.
Solid questions to a chart that we included at the beginning of this fiscal year.
Cash and.
And last fiscal year, which broke out.
PEO and insurance by five percentages. So if you go there and look at that you'll see the exact percentages.
And.
And the percentages as of the end of the or really didn't change significantly in the first half of the year. So that's the first the first part.
The second part is roughly half and half is H b.
And have I am sorry, roughly.
Roughly half of the insurance revenue is H b.
The other half is P&C as John said, but largely workers comp insurance and so I will only describe it qualitatively.
Which is to say that we're still seeing growth.
<unk>.
Low single digits.
I'm, sorry, we're still seeing growth in an H b.
And on P&C.
P&C itself workers' comp in the quarter was flat to down so the impact of a really soft.
Insurance market, which was different than it was three or four years ago is weighing on that so in summary that words I would say look at the end of the quarter.
And of the last fiscal year I got a breakout on management and management solutions and also in PEO and insurance, it's there you'll see what it is.
And then you can say that in the insurance roughly.
Half workers' comp and half <unk>, we're still see growth in <unk>.
John's point.
That should that should grow.
<unk>.
Smaller clients become more constructive on buying insurance workers' comp is the one that's.
That's exerting a drag on.
That entire segment.
Got it.
We strip out the insurance component is.
As the PEO business ex the insurance component still growing high single digits low double digits.
I will split it out that way because it's a little bit tough with the with the value proposition Mark what I'd point to is what I said earlier in the call, but we're getting good worksite employee growth and that's kind of where we are we're focusing yet.
It's hard it's hard to strip it out that way because then you'd have to do a deep dive on what's happening in Florida versus other other parts of the market, but when you look across the markets that we serve and look at Worksite employee growth with.
Certainly in most of the major markets, we're seeing good worksite employee growth.
And what was I'm, sorry, I'm sure you mentioned it before it's in one of the releases, but what was the Worksite employee growth. We did not say that in good good good try though mark we didn't say well report on it at the end of year, what we did what we did say and what John said.
Is that we've had significant worksite employee growth both in the ASO and PEO model and we surpassed 2 million.
2 million employees remember Mark one other thing for everyone.
<unk>.
We don't force a client into either of the PEO or ASO.
Unlike a lot of other other.
Other providers. So we say to a client you can have either depending on what you value in the bundle and so what we're seeing across both of those solutions is strong demand.
Great and then on.
And managed solutions.
So, obviously solid and better than expected better than what we had.
Bottles that are better than what you guided.
One question that I got some some investors is basically why did management solutions.
Low in Q2 relative to Q.
Okay sounds good question I answered that one after first quarter, but but the short answer to the question Mark I would say bucket it three ways.
And the first thing is that significant growth.
In.
In pays per control or checks per payroll in the quarter versus the prior quarter that was one the second part was that <unk> was a significant contributor in the.
It wasn't as great a contributor.
In the.
Second quarter in other words it wasn't as.
Large incremental growth and then third was everything else which was positive.
Got it great and then John .
You mentioned that.
Really cool innovative tools during the last quarterly discussion, particularly.
Particularly the voice activated salute.
<unk> solution I'm wondering if you can give us a sense for like for your most innovative tools what sort of uptake are you currently see.
Well I mean, I mentioned wanted what was where clients are having the issues, which is really on the hiring and onboarding is one. So if you look at that when we last reported I've mentioned that we had launched that product in beta and then announced it.
At that point, we had 1.1 million I think at 1.1 dollars 8 million maybe.
Employees that had actually been hired to that process.
As I sit here today were.
We will approach 3 billion $3 3 million people hired to that platform. So it gives you some idea of the <unk>.
Use of that how frequently that's being used and it's a very popular the retention insights is another one.
We've had very good uptake and utilization of an impact quite frankly, so getting getting good good reviews there.
Yes, I was talking about the digital will drive 41, K time and attendance all of those other online traditional products doing well as well.
I was referring to the Google voice activated.
Yes.
Yes, yes, so we've launched that it's.
Just starting to starting to launch that add more watching to see what how customers adapt to it and utilize it.
Okay great.
Happy holidays.
Thank you Mark you too.
Okay.
Thank you our last question will come from in Sidney Huang with JP Morgan.
Okay no. Thanks for including me. Good morning, just wanted to ask on the retention side and those record retention, it's been doing really well.
I mean, I've been getting a lot of questions around SMB and retention bankruptcy risk here going into possible recession.
If when you've shared this before but can we revisit what it did in past down cycles.
I'd imagine that you would do probably a little bit better I think you always do a little better than people here, but I would think you would do better here given the.
The shifts in the Biopharm divestments intact. So just wanted to revisit that before we close out the year yeah. Yeah. So I mean, if you go back to <unk> nine where the business was rough pigeon do acknowledge this.
It was roughly about 80% payroll of 20%.
<unk>.
I'll keep that about.
Trough Digest.
On which side you are looking at.
At about <unk>.
77% retention on a unit basis, I don't know what the revenue per ton.
But but we were down to about about.
23% attrition.
And there were a lot of reasons why that's certainly a lower lower lower lower back.
Band.
But.
Not to mention the fact, Tien tsin as everyone on the call knows that right now if we just isolate pure what we would've called payroll that's less than half of what we sell so the.
The rest of the stuff when you attack in our model creates and generates better retention. So now you put yourself in a completely different position even in PEO. So.
So I think the factors there.
Dictate that youre going to have a very different outcome than you. Then you would would have back in those seven or 891 other point that.
But I would add to that I mentioned.
During my comments that we did see we are seeing more.
Elevated churn in the micro segment than than perhaps a year ago. There is a mix element to that it's not if you want to understand it call me, it's not worth going into here, but from a storm.
We anticipated that by the way, but from a revenue retention standpoint, we still are very solid and those are the clients that you are less likely to see churn in a downturn. So that's my long winded.
Sure to your your question no.
Thanks for going through that the micro follow up I know theres a lot of margin questions here the over performance in the first half okay.
Any surprises or what would you attribute a rank the big contributors to the biogen over performing here so far.
Yes.
Tien Tsin I hate to use kind of a very generic answer to the question, but it is the generic answer the question.
We had an expense plan and we'd beat it.
So there was there was some mix effect I mean, I don't want to say that that management solutions over performing the way. It did impact. It did so I think thats part of it but also expenses were better than the first got it now look I like the simple answer.
I appreciate that have addressed holiday. Thank you. Thank you. Thank you you too.
Thank you and we have no further questions at this time I will turn it back to Mr. John Gibson for any additional or closing remarks. Thank you Todd will.
Well at this point, we will close the call I would like to thank <unk>. Thank you for your support during my first call.
<unk> as president and CEO .
Look forward to getting to know each and every one of you better in the future and we've got a chance to talk to some of you I'm sure, we'll get a chance to talk to more.
If you're interested in a replay of the webcast of this conference call. It will be archived for approximately 90 days again I want to thank you for your support of Paychex I Hope all of you and your families have a happy holiday and happy new year.
Yeah.
Thank you. This concludes today's call. We appreciate your patience you may disconnect at any time.
Okay.
Okay.
Sure.
No.
[music] attacks.
Okay.
[music] anatomy.
Okay.
[music].
Okay.
[music].
Phenomenal.
Interesting.
Okay.
[music].
Hello.
[music].