Q4 2023 Paychex Inc Earnings Call

June 29, 2023

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Good day everyone and welcome to today's Paycheck, Fourth Quarter, and Fiscal Year-End 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 register to ask a question at any time by pressing star and one on your touchtone phone. You may withdraw yourself from the queue by pressing star two.

Please note this call may be recorded. I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Mr. John Gibson, President and CEO . Please go ahead.

Thank you, Stephanie. Thank you, everyone, for joining us for our discussion of the Paycheck Fourth Quarter and Fiscal Year 23 Ownings Release.

Joining me today is Stefan Rivera, our Chief Financial Officer.

This morning, before the market opened, we released our financial results for the fourth quarter and full fiscal year. It ended May 31st.

You can access our earnings release on our investor relations website. Our Forbes 10k will be filed with the SEC before the end of July .

This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days.

I'll start with the call today with an update on the business highlights for the fourth quarter and fiscal year after we'll review our financial results for fiscal 23 and our outlook for 24. I'll then open it up for your questions.

We finished fiscal year 23 with solid financial results and momentum heading into fiscal year 2024.

Total revenue grew 9% for the full year and we hit a major milestone for the company with over $5 billion in total revenue. I was personally reflecting on this last night when I joined the company. We were just over $2 billion. It took us six years to go from $2 to $3 billion, three years to go to $3 to $4.

And it took us three years to go to four to five, but I remind everybody that was during the global pandemic. So certainly very proud of those results. In addition to the revenue growth at 9%, adjusted diluted earnings per share grew 13% to $4.27, and operating margins finished at 41%.

as we continue to benefit from our continued investments in technology, our focus on driving digitalization in all aspects of our business, and our long-standing tradition of operating at home.

These results are due to the hard work and dedication of our more than 16,000 employees. I'm very proud of what we've achieved this fiscal year. Our industry leading technology and advisory solutions have made a positive impact on our clients and their employees. And in return, they continue to reward us with additional business and their continued loyalty.

We are well positioned in terms of our staffing levels and rep tenure heading into the new year. Revenue retention finished the year near record levels as we continue to focus on retaining and increasing our share of wallet with our high value customer segments.

Client retention was impacted by higher losses due to out of business, concentrated mainly in newly formed businesses the last two years, and financial distress in the lower revenue small clients.

We continue to see strong demand for our HR outsourcing solutions with worksite employee growth over 10% year over year.

Over the year, we achieve record level work site employee retention due to our strong and unique value proposition of our leading HR technology and advisory capabilities.

Businesses of all sizes continue to navigate the challenges of a very complicated regulatory environment, a competitive labor market, and now tightening credit.

Demand for our solutions remain strong due to the depth and breadth of our integrated offerings including HR technology designed to deliver efficiency for both the employer and the employees, our comprehensive HR outsourcing which leverages the strength of our technology and the experience of a trained HR professional and our outstanding compliance.

organization and the need for businesses to offer quality benefits including retirement to compete for talent.

Our retirement solutions are benefiting from the growing expectations of a retirement plan as a core benefit offering for small and mid-sized businesses. Recent passage of the SECURE Act 2.0 legislation and various state mandates requiring employers to provide retirement services to their employees are making 401Ks a key benefit for small and mid-sized businesses. For more information about the SECURE Act and the finallaughter Act, visit our website. You can always visit our website at www.

With more state mandates expected to take effect in the future, we expect a strong market for retirement to continue for the foreseeable future, and we are well-positioned as a leader to take advantage of this opportunity.

The SMB credit environment has continued to fuel demand for our employee retention tax credit service. Our full service ERTC offerings have helped tens of thousands of businesses obtain tax credits and getting access to funds they need to keep their businesses running and growing.

We continue to communicate this opportunity to existing clients and prospects.

Industry recognition continues to reinforce the competitive strength of our technology solutions.

For the fourth consecutive year, Paycheck Flex earned an HR Tech award for best small and mid-sized business-focused solutions in the core HR category. Our consistency in winning these awards and being placed repeatedly in the leadership quadrant of respected technology analyst rankings.

speaks to our market leadership in HR technology.

I'm not only very proud of these results and the performance of the team, but I'm also equally proud of how we achieved these results.

We have been consistently recognized as one of the world's most admired, most ethical, and most innovative companies. In addition, we've been ranked as one of the best places to work for people in sales, for women, for diversity, and for our outstanding training and investment.

in our employees' development.

These awards are a testament to how our employees not only get the job done, but do it the right way, and we are constantly looking for new ways we can make ourselves and our communities better.

As we move into fiscal year 24, we will continue our focus on developing leading customer experiences that combine our technology, our advisory capabilities, and our partnership to deliver superior value to our customers.

Paychex is uniquely positioned to help small and mid-sized businesses navigate the challenges they face in a complex and ever-changing and evolving world. We remain committed to our purpose and that is to help businesses succeed.

I'd like to remind everyone that today's commentary will contain forward-looking statements referred to the customary disclosures that we make.

I'm going to start by providing a summary of our fourth quarter financial results, talk about full year results, and then finish with a review of our fiscal 2024 outlook.

I just, before I start, I also wanted to add that joining us in the room today this morning is Bob Schrader, VP of Finance at NIR. Many of you have met Bob.

Okay, for the fourth quarter you saw total revenue increase 7% to $1.2 billion. Management solution revenue was up 7% tonight, a little bit over $900 million driven by additional product penetration. Inter ancillary services which currently is mostly ERTC and also price realization.

We continue to see strong attachment of our HR solutions, retirement, and time of attendance.

demand for ERTC service remains strong as John mentioned and it contributed approximately 1 to 2% to total revenue growth for the full year.

demand for this service along with our internal execution have continued to exceed our expectations about ERTC has been a tailwind.

and we expect demand to continue into fiscal year 24, it will become a moderate headwind next year, especially in the back half of the year where it will become more of a headwind.

CEO and insurance solutions revenue increased 5% to $300 million, driven by higher revenue per client and growth in average worksite employees.

The rate of growth was tempered a bit by lower medical plan sales and participant buy-ins along with continued preference.

for ASO in this environment.

or ASO in this environment. We expect these trends will.

start to normalize as we progress through fiscal 2024, though it won't be evident necessarily in Q1. I'll talk about that in a little bit. Interest on funds held for clients increased 69% to $25 million, primarily due to higher average interest rates, partially offset by realized losses taken in Q4.

as we reposition the portfolio heading into the back half of this year.

Total expenses increased 3% to $776 million. Spence growth is largely attributable to higher headcount, wage rates, and general costs to support growth in the business.

Operating income increased 15% to $453 million with an operating margin of just under 37%, a 240 basis point expansion over the prior year period.

diluted earnings per share increased 18% to 97 cents per share and adjusted diluted earnings per share increased 20% for the quarter to again 97 cents per share.

Let me quickly summarize our full year results. Total revenue increased 9% to 5 billion, and total service revenue increased 8% to 4.9 billion. As you are all aware, we raise guidance a number of times during the year. Management solutions increased 8% to 3.7 billion, increasing the Earth Mobility Program.

over the prior year.

The leverage in the model was pretty evident. Other income net increased by over $30 million due to higher average interest rates and average investment balances within the corporate investment portfolio. The looted earnings per share increased 12%.

to $4.30 per share and adjusted diluting earnings per share increased 13% for $4.27 per share.

Our financial position remains rock solid with cash, restricted cash, and total corporate investment of more than $1.6 billion and total borrowing of approximately $808 million as of July 2019.

remains rock solid with cash, restricted cash, and total corporate investment for more than 1.6 billion and total borrowing of approximately $808 million as of May 2023.

Cash flow from operations was $1.7 billion for the fiscal year, an increase of 13% from the prior year, driven by higher net income and changes in working capital. Free cash flow generated for the year was $1.5 billion, a 15% year-over-year. And while it's easy to gloss over those numbers...

I think it's really important to note that when we report numbers, the quality of our earnings and the quality of our cash is very, very strong as noted by some of you. Not only do we deliver on the top line, but we deliver in a quality way on the bottom line and we intend to continue to do that.

We paid out a total of $1.2 billion in dividends during fiscal 2023, or 70% of our net income. A 12 month rolling return on equity was a stellar 48% with an arrow pointing up.

1.2 billion in dividends during fiscal 2023 or 70% of our net income, our 12-month rolling return on equity was a stellar 48% with an arrow pointing up.

Let me turn to guidance for the upcoming fiscal year ending May 2024. Our current outlook, as you saw, is as follows. Management Solutions expected to grow on the range of 5 to 6 percent.

The insurance solution is expected to grow in the range of 6 to 9 percent. We widen that a bit just to accommodate the fact that sometimes attachment on insurance can vary from quarter to quarter and from year to year as we saw last year.

Interest on funds held for clients is expected to be in the range of $135 to $145 million. Total revenue is expected to grow in the range of 6 to 7%. Operating income margin is expected to be in the range of 41 to 42%.

Other income net is expected to be income in the range of 30 to 35 million.

And then our effective income tax rate is expected to be in the range of 24 to 25%. Adjusted diluted earnings per share expected to grow in the range of 9 to 10%.

This outlook assumes current macroeconomic environment, which as you know, has some uncertainty surrounding future interest rate changes in the economy.

We have better visibility in the first half fiscal 2024 as each quarter progresses. We have a little better visibility into the remaining quarters in the year.

For the first half of fiscal 2024 and the first quarter, we expect total revenue growth to be approximately 6%.

That's the first half and first quarter. We anticipate operating margins for the first quarter to be approximately 41 percent. That will help do a little bit on your modeling.

And we expect PEO and insurance solutions revenue to be below the low end of the range for the first quarter. Then it will be solidly in the range. That's our expectation at this point.

before you ask me the question, I'll answer the first quarter was actually the strongest quarter of the year on PEO last year and As consequence the compare will be a little bit tougher and we expect this bill doesn't go through the year

The first quarter was actually the strongest quarter of the year on PEO last year, and as a consequence the compare will be a little bit tougher and we expect that this bill doesn't go through the year. Of course.

All of this is subject to our current assumptions, and they can change. We'll update you again on the first quarter call. There's a number of questions because it's, of course, the time when we give being of guidance. So if I could just ask for your forbearance on something, which is to say, ask a question.

and limit yourself to one follow-up now, I will say I understand some of those questions will be compound questions, but if it's a five-part compound question, that violates the rules. But just so we can get through the call without going excessively long.

With all of that, I will refer you to our investor slides on our website for additional information.

And I'll turn the call back over to John . Okay. And now with all these conditions and restrictions that Ephron has laid out for you, we'll now open the call for questions.

Thank you. At this time, if you'd like to ask a question, please press star and one on your touch tone phone. You may remove yourself from the queue at any time by pressing star two.

Again, that is star one to ask a question. Our first question will come from Ramsey LSE with Barclays.

Hi, thanks so much for taking my question this morning. Can you comment on the pricing environment? You called it out a little bit in the press release. And I guess the question is, are you seeing sort of a window right now for more aggressive pricing adjustments just given the inflationary environment? Or is this sort of, are you feeling now that you're in sort of a steady state kind of continual trajectory when it comes to...

We believe we have a pricing of power inside the base, and we'll continue to avail ourselves of that. And then in terms of new clients and prospects in the competitive environment, hey, we've always been in a competitive market, and I see stable pricing. And I think as we go through this year, we'll continue to do what we need to do to be competitive in the marketplace. So I don't see any major...

shifts of change on either side of the pricing equation. Okay, and I wanted to ask also about retention. Obviously, retention is at healthy record levels. At the same time, you called out a little bit of, where you were seeing a little bit of headwind, I think it was from out of business.

from newly formed businesses and I think there was some other color that Ephraim provided. If you could just elaborate on that a little bit, I'd appreciate it.

Yeah, yeah, Ramsey, I think this has been pretty consistent, and I think on all the prior calls I said probably as we expected. So we continue to really focus our efforts on the high-end part of our valuable clients, particularly the HR outsourcing there. We continue to maintain both in the PO and ASO record retention from a revenue and client perspective there.ul

where we did see, and we had near record retention overall across the business, again because of that focus that we're having and the things we're doing from driving value and our high value customer segments. As we expected, we did see some out of business. And when I pull that back, what you're seeing is exactly what I thought we'd see. We had a very high number of new business starts.

But again, even if you look at the client retention side, we're back to where we were pre-pandemic level.

So nothing dramatic there. So I'd say that's more stabilizing and we kind of expect that kind of more typical stable kind of client attrition to occur as we're going into 24.

So nothing dramatic there. So I'd say that's more stabilizing, and we kind of expect that kind of more typical stable kind of client attrition to occur as we're going into 24. Got it. Thanks so much.

Thank you. Our next question will come from Jason with Bank of America. Hi, this is Eric. Thanks for taking the question. I had a question just kind of high level. We have seen small businesses be really resilient. It seems like the macro may avoid a hard landing.

But curious about kind of trends you're seeing among different client groups. You know, anything to call out, maybe blue collar versus white collar, any color you can add there? Yeah, look, I think again, not seeing anything, Eric, that's out of the norm. I think generally we've continued to see the hospitality when you go back and look at our jobs index.

Hospitality has probably been the laggard, leisure and hospitality has been the laggard through the course of the recession. What we've seen there is they've really made a good, strong comeback, I would say, in the back half of this fiscal year for us and are getting back to what I've become kind of.

employment levels of the other segments, not really seeing anything specifically out of the ordinary. Certainly in the low end of the market you're seeing a lot more of the small companies, going back to what we said on the retention side, newer startups, smaller companies, finding more pressure relative to inability to pass price. So they're being scores by inflation, and then also the credit.

credit situation. Okay, great thanks. And then on the, this one's for Ephron, on the float guidance, kind of two parts. What are you thinking about for interest rates? And then, you know, what are your thoughts on kind of managing duration? I know this question comes up every call, but thought I'd ask. Thanks.

So what we're thinking and then how we're managing, I'll break those two in. I mentioned in the previous quote that I was really concerned about a

sharp decline in rates in the first half of the 24 and the end of this year calendar year. I don't think that's likely to happen.

So at this point our thinking is that there'll be a couple of

point our thinking is that there'll be a couple of rate increases.

as we go through the first half of the year and likely to see some rate decreases as we enter next year. Certainly, it's either the repeat tests, whether or not we have one.

Jerome Powell's comments recently, we seem to indicate that's where we're going. But I think, we think, our assumption is that in the first half of calendar year 24, our second half, you're gonna see rate decreases, so.

Net, net, that's what's incorporated in our guidance. So while we could adjust and play games in terms of where we are with futures, that's what our thinking is. And as we get through the year.

in the back half of the year, we'll update kind of where we're at.

As to positioning the portfolio, my bias is to go long as we go through the year to mitigate what in 24 is likely to be a set of rate decreases. I can't call it any closer than that.

I think that our numbers kind of support that kind of scenario. Stephanie? Thank you. Our next question will come from Reina Kumar with UBS.

Good morning. Thanks for taking my question. Can you talk about what bookings was? Hello. Can you talk a little bit about bookings in the quarter? Anything to pull out on different customer sizes and products where you're seeing strengths or weaknesses?

Yes, so look, we actually saw strong demand continuing, you know, I would say actually the, we actually saw some acceleration in the fourth quarter when you look at it. And the back half of the fiscal year was actually stronger than the first half, which was a lot of the thing, HR services.

Our HR solutions continue to resonate in retirement. We even saw a pickup in the rolling digital end of our business in the fourth quarter, which was nice to see. And in fact, I would say the PO had improvement in Q4 as well, which was an encouraging sign that some of the changes in our approach that we've been working on.

strong demand in this environment across all the market segments.

That is very helpful. And then just a quick, really quick follow up to stay within a friend's guidelines here. Could you call up the ERTC contribution just for the fourth quarter? Yes.

No, we didn't. I think right now we're going to stick with it's 1 to 2% on growth for the full year. And then that converts from a tailwind into a headwind next year. That's as far as we'll go.

Got it. Okay, thank you.

Yes, you're welcome. Thank you. Our next question will come from Andrew Nicholas with William Blair.

Hi, good morning. Thanks for taking my questions. I was going to ask first on kind of M&A within paychecks. If you could just kind of give us an update on your ambitions both in the near term and medium term.

This is definitely a compound question, but a preference between HCM and PEO and anything you could say on valuation.

Thanks for the question. Our ambitions remain the same. We're trying to find opportunities to meet our strategic objectives and at the same time make sense financially. The latter has been more challenging in the environment I would say over the past few years. I think we certainly began to see...

some change in the market dynamics and our pipeline beginning to expand with opportunities that I think are more realistic for us to consider. I don't think our focus has really changed. We are going to continue to look for tuck-ins that help us kind of add scale in new markets or expand our product suite. We are looking for capability enhancements particularly in the digital areas, digital capabilities.

data analytics, HR analytics. And again, we're constantly looking at numerous adjacencies as the market continues to evolve and looking for new growth platforms that are adjacent to our current suite of solutions and really help us continue to deliver that.

value proposition of small and medium sized businesses to help them succeed. So again, small tuck-ins, capability enhancements, and new growth platforms, that's our area of focus and we're going to continue to be mindful of making sure we're getting good deals and not other things.

That's helpful. Thank you. And then for my follow up, I just wanted to ask on the margin guide for next year, I think last quarter you spoke to a preliminary target of 25 to 50 basis points. I think the 41 to 42% range you put out this morning is a decent bit higher at the midpoint. So it.

If you could just kind of unpack that a little bit, what's changed in terms of your outlook, if anything, or if it's just a matter of rounded numbers, then that's totally fine as well. Just trying to get a little bit more insight there. Thank you.

Yeah, I guess I'd answer that in a couple of ways. Look, March is preliminary. I mean, we haven't gone through a plan.

I think that John continued a tradition that we've had in the company, which is to say...

where can we find sources of leverage in the P&L. So obviously mix has an impact on that, Andrew, as you're aware. If you have more PEO, you have less opportunity, you have more management solutions, that gives you more opportunity. But I would say we went through a pretty disciplined process in the planning process to see where there are opportunities to leverage, uncover them, and...

And that's what you're seeing in the guns. I'd say one other thing that's really important.

and that's what you're seeing in the guns. So that's one other thing that's really important.

The process of planning a year is a 365 day activity. If we get through the first quarter, as we go through, we see opportunities both on the investment side and also on the cost side. We go for it and we challenge ourselves.

to find those opportunities. So I think that in addition to the fact that that was a byproduct, not byproduct, but a team of planning processes.

we think in those terms and so because you'd have to go into the year with multiple levers to find leverage if you need it. So we're as we speak thinking about okay how can we even do better or offset any potential issues that might come up in the year so it's that there's a little bit around me

You talked a little bit about, I think, kind of revenue retention versus client retention and revenue retention being at all-time high despite…

Kind of, I think, a little shift in client. Can you help us frame what the Delta is there? Kind of what it is today and kind of where that's been historically and I'd imagine it's probably narrowed over time, but is there any way to frame that a little bit more? Yeah, yeah. So, you know, look, when it was approaching the mid-80s during the pandemic, but that's...

really is in some ways kind of an outlier. When we reported last year, which is kind of like one year post the mid point of the pandemic, sorry, the mid point of the pandemic, we were between 83 and 84, and this year we're between 82 and 83. So as John mentioned, we saw some...

larger losses on the low end of the market.

I'll frame that in one second. That 82-83 is consistent with where we've been in prior years. There's nothing unusual about that. What was unusual during the pandemic was that the number of bankruptcies, what we call involuntary losses, was much lower than it normally has been.

And there's obvious reasons, I don't need to tell everyone on the call about PPT. So a lot of those clients kind of got through the client phase to John's point. What was going on was that you had a pent up group of very small clients that were being propped up a bit by funding.

in some ways the losses were higher because of that, and I think we're now back to a more normalized environment in terms of losses. But I want to make an important point.

And John referenced it. We put a lot of emphasis on revenue retention, especially among high-value clients, on what's not different or what is different from the pandemic.

is that our revenue retention is higher than it was pre-pandemic. So we're at record retention levels from revenue. That's where we put our, that's where we put a lot of our focus on, and I can, you know, I won't do it, but we could cite many, many efforts that go into retaining our highest clients so we can deliver.

you know, approximately 88% revenue retention. That's important. That's an important number for us. And so while in the past we talk a lot about unit retention, nothing wrong with that. You want that. The reality is that what's becoming much more important is that you save and you retain your highest value clients. And so...

while our unit retention is in line with what it was before the pandemic or rather retention.

with higher and the hence remain higher and will be an area focused on both. Yeah, Kevin, the thing I would add to that, I would remind everybody to, you know, I go back and we go back and look at this over the last four to five years. When we say pre-pandemic levels, you go back to 19.

If you read our transcript, what you would also hear in 19 is that on a client retention, we actually had historical high client retention back in 19 as well. So we are returning on the client side to levels that historically for paychecks would have been historical high in terms of client retention. And then, as Efren pointed out, we are now returning on the client side to levels that historically for paychecks would have been historical high in terms of client retention.

We've had a lot of focus on what we need to do to drive better retention in our high value segments. And we've been very successful to do that. And I think coming out of the pandemic, the value that we've demonstrated to those clients in terms of both our technology enhancements as well as the advisory support that we've given them.

to very challenging times. I think they rewarded us. They rewarded us by buying more from us. They rewarded us by giving us the opportunity to have a better pricing for those products and services because they see the value and they reward this with their loyalty.

Very helpful. Thank you. Thank you. Our next question will come from Brian Bergen with TD Cowen.

Hey guys, good morning. Thank you. Wanted to dig into management solutions here a bit more and maybe some of the underlying growth driver assumptions for 24. When we look here, you know, just this year, in 23, is the total company client growth of like a point and a half in 23, and you're citing increased product penetration price realization. Can you kind of roll that forward for us here? Can you give us a sense on how you're thinking

range we expect to be middle or higher next year so that's

Part of the equation on the pricing side were typically in the two to 4% range, although in recent years higher than that. We're on the mid to maybe perhaps a little bit higher than mid level on the pricing side. Those are sort of the basic elements, and then you got mix and additional product penetration driving.

driving the remainder of that. Now, if you start reconciling me, I gotta take the negatives too. And the negative is, I'm gonna get some headwind from the RTC, which you will see on the management solution side. So that's when you triangulate all those pieces, that's where you get to our 5 to 6% growth.

Okay, how about client employment there? So and I guess specifically in 4Q how did it occur in 3Q and then for 24 as well? Sorry, I started talking over your power. You were saying 3Q and then Q4. What were you saying there?

Yeah, so when you think about client employment, I'm curious about how you're factoring that for 24, but also I think you guys were assuming 4Q was going to be relatively flattish from 3Q. Was that a bad layout or was that different too?

Yeah, yeah that played out and going into next year we expect to be fly.

I will say that you always have to have an element of caution.

The tier levels there, that would cause me to get a little bit more concern than I am right now. So we'll have to play that out. And that definitely would have an impact on worksite employee growth. I think it's manageable and we've taken that into account in our plan, but at this point we're not expecting that it's going to change.

Sorry, yeah. I just wanted to follow up on the client growth question. It sounds like you expect it to go up a little bit, you know, higher than it was. It was on the low end of the range and then it'll go up. Is that a function of what you're seeing in the sales channel or is that a little bit of retention just given that maybe some of the smaller clients that churned off during the pandemic, you won't have that same issue as you...

really more of a retention-driven issue based on the factors that we talked about earlier in the call, i.e., the

just to go one level deeper. We all remember that one of the anomalies in the pandemic was that the business starts really, really accelerated. And I think to this day, a few people can completely explain it. And so we benefited from that unit growth, but as John said, we know a number of people have been working on this for a long time.

once that stimulus is gone. So that's primarily driver, somewhat of an anomalous situation. I think that we'll return to more traditional patterns as we get into next year. That's our expectation. Got it. The guidance looks pretty consistent.

You know as you look at the revenue and the margins that you're not you're not wildly off from the first half of the second Half and sometimes there's there's bigger changes there any any kind of key macro Factors that you watch that we should be watching that could move it up or down That that could change at least maybe as we get into the second half as we think about the macro Yeah To but but you know what I'd say Brian

the factor that, or the environment that we're seeing now, which we're not seeing dramatic changes in the environment, and we would start to see them and exercise the appropriate level of caution as we did.

So we're going to look at what's the impact of these interest rates at this point. Small businesses seem to be absorbing them. They seem to be getting what they need to be able to fund their businesses. We don't think that will last forever. There are rates at which...

it's going to prove to be difficult. I would say what's happening on the macro is really important. The internal stuff, we can manage that. We will manage that. And I've said to many people that look, if we have to pivot inside the base, there's a lot of opportunity inside the base. We'll pivot inside the base that the external environment doesn't give us.

opportunities for growth. Yeah, no, I think the other thing that I think to keep in mind a little bit about the macro one again We'll go back to the macro side. I look at our small business index. I look at the start of this calendar year We went the first three months the index actually went up every every month All right, so went up for three consecutive months, and then it sort of stabilized

So we continue to see that. As Efren said, we probably expected in the fourth quarter we're always kind of sitting there waiting for employment to go down and it didn't. So actually I would say I was actually a little pleasantly surprised at where we were on checks and where we were on work site employee growth inside the base of clients that we had.

continuing to see that hiring is also an issue and staffing continues to be an issue of our HR concerns so we look at what are the questions and issues that are coming into our HR consultants we continue to see that to be an issue and I do think you're going to see something interesting here that we probably not seen

Small and mid-sized business owners are scarred by their experience of employment over the last several years. And they fought to get back to staffing levels. And I think what's going to be interesting is they are going to be very hesitant to let go because I think they remember what it was like trying to find talent. And they are just simply...

not enough labor supply here. So I think it would be very interesting to kind of win this tug of war back and forth relative to employment. The other thing that we see is we're seeing a lot of non-traditional labor being tapped by businesses, gig workers, contract workers, maybe a little bit more part-time. What I'm curious about to see...

Will those be the first things to go? Would that before a small business owner is going to let go of permanent staffing that they've got that they are paying every week, are they going to try to write it out by tightening in other areas such as this non-traditional gig employment that has kind of sprung up? So the labor market is a very, very interesting thing I think for us to look at and study right now. And I don't think it sets up

Scott Wurtzel with Wolf Research.

Hey, good morning guys and thanks for taking my questions. Just on the expense side, wanted to see if you guys can just go over maybe what some of your top investment priorities are over the next 12 months and sort of folding into that, you know, how you're thinking about maybe incorporating generative AI into your business.

business as well. Yeah, so investments are in growth, in growth. Those are probably the top two. And then you mentioned digital. I mean, we've been making a lot of investments.

in the digital area, both in terms of our sales and what we are doing from a go-to-market perspective which we are very happy with, and how we are leveraging technology, AI in the back office. And I'm very pleased with several things that we've got going on. So we've been actively leveraging AI.

for several years across every area of the business, driving efficiency, delivering a lot of our large clients. One of the things I keep telling people is we are one of the few players in this industry that has the size of data set that we have. And I do think in these types of, in AI you've got to have a large data set.

We're using it in customer service. We're using it in risk. We're using it in finance. We're using it in our HR outsourcing advisory capacity. We're building it into our products, in our retention insights products. So there's a lot of investment that we're making and a lot of learnings that we have in terms of how we can digitize the front office and the...

the front of house and kind of the back office of our business. And so that's going to be an area that we continue to invest and continue to explore. Got it. It's very helpful. And then Efren, just a quick clarification on the float income side with the guidance. I'm wondering if you could maybe help us out with how you're thinking about client balance growth for the year.

client balance growth, roughly in line with wage inflation, which is to say, most of the business.

client balance growth, roughly in line with wage inflation, which is to say low, low-sum of business. All right. Thanks, guys.

Thank you. Our next question will come from Kartik Mehta with North Coast Research. Hey, good morning. Are you battling the smoke there in Cleveland? You know yesterday was a lot worse than it is today. So it's a little bit better today. But thank you for asking, Ephraim. Go away, Kartik.

We'll do so. I'm wondering, just on page per control, Efren, I know they've come down obviously from pretty high levels and I'm wondering if what your expectations are for FY24 not only for the payroll business but also the PEO and if you're seeing anything different.

Yeah, two good questions. So, FLASH, I guess, is the short answer to what we expect for 24. Don't expect too much.

in terms of in-client based growth. And that's a mix. I think our larger clients are doing fine. And in some cases adding employees, we look at it. Smaller clients, let's go and then you gotta factor in.

what your anticipated losses are. So you always tend to move a little bit higher than what you gain in the given year, and then you expect your in-clients, your clients in the base to grow the works I employ. But this is an environment where I don't think it's gonna be robust in terms of hiring in part because of what John said earlier, which is that so that.

Many businesses would like to hire the distance they are for people who were there, who were available, and also they figured out how to do it without people. But they probably won't be as John mentioned.

less inclined to perhaps get rid of them. On the PEO, and I'd say also the ASOS side, our worksite employee, we have worksite employee growth this year, we expect that to continue into next year. You could see.

solid worksite employee growth as the year rebounds going into next year. But overall, and I think that Brian asked this question, it's not going to be a significant driver of revenue growth.

Perhaps in the EO, but not on the HVN side. And then just one follow up. John , I'd be interested in your thoughts on kind of job openings. You know, we see all these numbers, jolt numbers, but seems like employers have become cautious. So...

your perspective on what you really think job openings are as you look at your customers versus maybe what we see in the news. Yeah, correct. I go back to what I said before, we continue to have clients that are wanting to fill open positions. And I don't, I'm not.

of our fiscal year here. I do think relative to they're not maybe opening up as many positions, I would also tell you that one of the things that I think did happen is when we were in the great resignation, which was probably 18 months ago. It seems like forever now, but really only 18 months ago..

Pretty much a lot of business owners were thinking every position I have needs to be posted because I've got to assume that I'm going to potentially lose those positions. So I think there was a lot of posting for jobs that people were passively looking for. And I think some of the contraction that we've seen in the postings are more

business owners being a little more disciplined about what am I actually going to hire, and being out in the market and focused on that. I don't know if that makes sense or helps you. David B It does. Thank you both. I really appreciate it. David B I may add that those individuals who are using our onboarding and recruiting experience in Flex are realizing about a 20% improvement in their time to hire. So if there are any customers or prospects on the phone. Thank you. Our next question.

insurance attached, what kind of businesses I think that would be helpful to hear just because there's so much variability around the PO industry in terms of this healthcare insurance rate attached. And it would be helpful to hear specifically in your client base what you're seeing and then related to that.

as we are looking for the re-acceleration in the PO, and as you're kind of guiding to that, what gives you confidence that there will be pivot there over the next 12 months?

Let me start and then John will...

Let me start and then the Chairman will provide additional comments.

With us it's less about verticals, although I'll caveat that in a second. It's really more about where we derive revenue on the healthcare side and that flows through the P&L and that's the state of Florida. For us on the PEO healthcare...

as it relates to revenue, really it's a Florida game primarily. And the anomaly, and when you talk about Florida you know immediately that you are going to over index on leisure and hospitality. So a bit of what's going on is it depends on what new clients coming into the base are and whether customers in leisure and hospitality are really interested in offering.

health care clients. Now a number of them do, and that's not all clients in Florida to be fair. That's probably too much of a generalization. But it was more of a regional issue than it was, I'd say, as it affected revenue than it was something else.

Why do we feel more comfortable? Because we have put a tremendous amount of focus on it. And that's not to say that guarantees success.

But I would say as we saw what was going on, we took a lot of measures to prove that they aren't gonna necessarily, again, be evident in the first quarter, but should be evident beyond that. And there were things in which we talked about in prior calls, I won't repeat, there were some on anomalous that we saw people actually.

in the PEO deciding they didn't want health care insurance, we thought, our hypothesis was that they were feeling some pressure from a wage perspective and perhaps decided that from a total compensation perspective, they were not going to want.

I do think it's important to understand on the insurance component, there was a trend that we saw happen not just in the field but also in our insurance agency in the health and benefits area, which is not just the client. There's two decision points here. One is the client deciding they're going to offer benefits.

And second is an employee deciding they're going to enroll and pay their fair share. And we saw in both cases that clients, particularly clients, less clients were adding in insurance. That's one part of it. You certainly can go and try to get someone to switch from their existing insurance query, but we saw less people adding insurance.

happen in both areas. That caused us to go back and what you can do is you can go back and look at your plan designs, you can look at leaner plans, you can look at different plans, all of those things. We went through an exhaustive review of every one of our core PO markets to look at every one of our plan designs and look at every one of our offerings to make sure we have the broadest sweep. Now, those decisions are made.

We're actively out in the market selling clients on those today. Those will go in in the July timeframe, if you will. And remember, our enrollment for PO begins in that July timeframe and really goes through the January timeframe. So you won't see kind of that pickup of that going on.

We've looked at every aspect of it. We've made some modifications and changes where we think it makes sense. We know that the HR outsourcing value proposition is still strong because it's going at 10%. And we saw a strong demand in the second half of the year. We know that the PO value proposition is strong because of our record retention in the client set.

can't afford it and haven't are doing well. So we have reason to believe there were some early signs, as I said earlier, in the fourth quarter of improvement there. And now we're getting into the heart of it and we'll see that kind of build as we go into the second, third, and fourth quarter.funding

of this coming fiscal year. So again, we feel confident that we have the right plans in place, and now we'll go out and execute that in the marketplace and see how it goes. Got it. Super helpful. And then a quick follow-up on some of the comments you made earlier on retention bookings and climb growth to tie it all together.

So when we're thinking about your guidance for next fiscal year, and Efren, you mentioned that you expect client growth to pick up from the kind of 1.5% level with this year, would that be a result of both improved retention and improved sales, or is it primarily one or the other that will drive the improvement in client growth? No, you got to do both. You got to do both. I mean, we're over relying on one...

Long story short, both sides of that equation have pretty powerful incentives to make sure that they occur. You don't always hit it 100%. Sometimes you hit it more. But you've got to get both sides to work to get the right net client gain number. Yeah, it breaks down.

And I'll add on to that. Again, I would say the second half was stronger than the first half from a sales unit perspective. And if you dig under our retention numbers, first half to second half, you'll see that we have a lot of retention numbers.

are controllable losses improved in the second half? So again, what we can control, and I do believe that there's a degree of what I call flushing out of the bankruptcies from two years ago in terms of us looking at clients that are kind of on the financial edge.

and whether or not we want to continue to feel confident we can continue to do business with them. Those types of things are kind of flushed out of the system. We've been investing a lot in what we can do to control what we can control regardless of the environment. We talked a little bit about AI. We've been deploying a lot of very sophisticated...

AI models inside our service organization, and inside our client base that are giving us very strong indications of where we may have a client at risk. And we are demonstrating success and demonstrating success in the back half of the year of being able to intercept those and turn those situations into positive retention stories. So when I look at the retention story and the sales story, first half, back half of last fiscal year, I feel good about the progress we are making there.

Thank you very much. Thank you. Our next question will come from Peter Christiansen with Citigroup. Thank you. Good morning. That's a great question. How are you doing? Good. I was curious about the portfolio repositioning. I know it wasn't too large. Could we expect future, maybe,

a bigger part of the business model that gives more leeway for competitors to be more aggressive on the pricing side.

Any comment there would be helpful. Thank you. Those are two absolutely fantastic questions. Literally, I mean wow. OK.

So let me take one. You know, part of what you do and part of what you work with the team is to understand what your degrees of freedom and freedom in delivering them are.

When you perform at a certain level, you have more degrees of freedom, not surprising. So to all my colleagues, CFOs out there who struggle sometimes because they don't have the degrees of freedom, I feel you. When you do have the opportunity to reposition because performance gives you that option, you look at it and you figure out.

You know, we're pretty disciplined here. Is the NPV of doing that better than the NPV of not doing that? And so, in the fourth quarter, we thought there was a positive NPV to that approach. Would we do it in the future? I'd have to see. There's other issues that come into play, which is how much, what do you want to…

To your point, this is really kind of the interesting question that we're wrestling with.

We don't know. I can give you a sense of what happens when interest rates get to 6%.

I know because I studied that pretty extensively when I came into the job now 12 years ago. And two things you've got to worry about or be concerned about there. One is that...

You can attempt to be pretty aggressive on pricing in that kind of environment. So if interest rates are high, you can take it as a signal to price high. But what I find at least in our history was when you did that, when you got overly aggressive in pricing in 07-08, you are going to pay a price on retention. It just is, it follows. And

At least that's a conviction that I have. Now maybe you leave some money on the table by not pricing even more aggressively, but I think there is a balancing there for clients because you are trying to create a level of trust in terms of the value that you delivered to them. And there is a tipping point at which that level of trust gets breached. So we need to look at that closely. The second part is as interest rates are now creeping up if they were to go over 60,000, they are going to be able to go up to 60,000.

You've got to play those two elements off each other in determining what the price and how to help your clients navigate through an environment where interest rates are high. So hopefully that answered your question.

those two elements off each other in determining what the price and how to help your clients navigate through an environment where interest rates are high. So hopefully that answered your question. Yes, it certainly does, the balance.

That's certainly a challenge, I'd imagine. I don't want to end it here, but thanks for the insight. Very helpful. You're welcome. Thank you. Our next question comes from Tim Sin Wing with JP Morgan. Hi, thanks. Good morning, John , Efren, and Bob. Just want to ask on BO, again, I know it's growing in line with peers in the quarter here. Are you looking for some acceleration? You talked through that with Eugene. I think you probably should have shown it to him, just show theCertainly. So Valür and Kal elaborativ. There is a favorite here, the

acceleration again, just to simplify it, is coming from volume versus rate versus mix. Just want to make sure I understand the components. Well, I'll take that, Tingin. I want to kind of clarify something to start, which is that the

We had work-side employee growth in the PBO. It's not as well contracted in that area. We think we're off to a pretty strong start actually in terms of at least our bookings activity. But we expect relative to last year.

for healthcare attachment to be higher than it was, the contribution from healthcare attachment to be higher than it was last year. We just couldn't have hit the numbers that we hit last year if we had also seen simultaneously that the base business admin was going down. This is very difficult, challenging.

So we expect growth in the business, growth in clients. We expect growth in attachment sets. It's really kind of driving the mix.

of clients. We're not trying to go downstream necessarily, but it's really going to come from more clients, better health care catch. We're just really not expecting any type of major pricing increases either on the health side or on the general administrative fee side. I mean, it's going to be well within our normal.

normal course, although I would mention that on the healthcare side, our normal course is in the single digits, which far beeps on a historical basis what healthcare inflation is. So that's a benefit and a retention benefit for our clients. The other thing we haven't talked about that we have a thesis around is that we had very good HR outsourcing growth. And one of the things that...

I look at that now and say, wait a minute, I now have more clients that love our technology, love our HR, and now it's just a matter of finding the right healthcare solution, going back and up-selling them into the field. So we have a pretty concentrated effort on that. Actually, that's another area where we're using AI where we are actually

analyzing the deduction fees from existing payroll and ASO customers so that we can triangulate what we think they are currently paying for healthcare, and then using the demographic data that we have to do AI-based underwriting to give us a computer-based targeted list of clients that we can approach with a really almost prepackaged value proposition that says, hey, we think we can help you save money on your insurance.

if you join our PO, you're already an ASO client of ours. So we've been working on that model for nine months as part of our efforts, and that's an area too that we think there's opportunity inside our base to go back with our new insurance value proposition in the PO and see if we can't move some clients over. Good. And that's the beauty of P and PEO. So I guess as my follow-up, I do that on Pandemic Heritage.

Any change in your appetite on the whole self-insured versus the fully guaranteed PEO model to the extent that you can better maybe control the insurance packages? And I know everyone's probably thinking, I'm trying to trick you guys to answer the consolidation question, but I'll ask it too. So right, appetite to do acquisitions on the PEO side. I know it's been what, five years since you did Oasis, UCEDD, Tuckins, but I know there's been some news in the market around consolidation. I know that probably is a multi-part question, so I'm on the bad guys. Let's get it anyway. Thank you.

Let me answer the first one. I get that question and I think investors are sensitive to the level of balance sheet and the risk. When we originally did this a number of years ago, I said,

I don't want to be reporting quarters where we blew up the balance sheet because we were doing the wrong things on the insurance side. I would – I won't say it's wrong, but it's a very important use of words. What I mean by that is just taking excessive risk. So everyone knows what they get when they invest in the company. We have managed that without any hiccup because two things help us. One is that –

Even though we go at risk, we don't make money. We make very little money on health care insurance and that removes the incentive to necessarily push insurance, cheap insurance, away from selling PDOs. That's a fool's game. We don't play it. We'll never play it. Having said that, as we get to a certain density in markets and security what all we're moving forward with is just increases the ensgue to be able to'' Rhino compliance says. So you can recognize that we need a resolution with thisOOX to get your In this segment of this webinar

Yeah, just to add to that, I don't think that our current approach to insurance in the PO was a driver to what we saw last year. And so I don't think taking more risk is necessarily the solution. I think that our current approach has demonstrated that we can grow at industry rates without moving ourselves to additional risk and so to efforts point, I don't see that as a magic bullet. I don't think you need that to grow the PO value proposition to efforts point to the degree in which we thought it could accelerate growth in some way and the risk could be balanced in something you can serve and not some.

industry. So you know I think what we would be looking for is tuck-ins in markets where that makes sense. If we were going to add a capability right but you know a capability in terms of something different in the PO that's that's interesting but you know again you know what I continue to see is we're involved in.

I promise to do one question. Thanks, guys. Thank you. Our next question comes from James Possett with Morgan Stanley . Hey, good morning. Just a couple of quick follow-ups. Hey, thanks. Just a couple of quick follow-ups for me. On the out of business comment...

elevated still or is it kind of come back more into line with what you would expect to be kind of normal.

It's that, it's back to normal and again I go back to say it's back to normal pre-pandemic 19, which again we're at reasonably historically low levels for us if you went back historically before that. Thank You MIRA peace out.

You know, look, there was a big surge in new business starts right at the start of the pandemic. And we knew in our models whether or not there was recession, whether or not interest rates were 1% or 6%. Those businesses, a fair number of them were not going to survive after two years. And so we didn't know whenever it was going to come, but I think we knew it was going to come. I think we've seen that begin to flush through and we've kind of returned.

back to what I would say are more normal business start levels. And again, business starts are still reasonably solid. We are not seeing a dip in business starts. Again, we are now back to where we were kind of pre-pandemic which again, were very, very solid and conducive numbers for growth in our business before the pandemic. Michael Yes, that makes sense. I appreciate that. And again, just a quick question to make sure that we are thinking about

business sensitivities correctly. If we were to see macro deteriorate further, which of the underlying verticals, whether it be payroll, ACM software, retirement, ASM management solutions, would be hit hardest versus what would be most resilient? I think we have some ideas there, but I just want to make sure we're thinking about that correctly.

Yeah, I'd say, you know, you got two points of comparison, kind of what happened in 2007 and 2008, and then what happened during the pandemic. What we saw during the pandemic was that on the PEO side, PEO, our base at least, PEO clients shed employees more quickly. Thank you.

I was surprised by the speed with which they did it. I think you'd see more of an impact there on the PU if you saw more of a sharp downturn. A garden variety.

Softness, probably not. And then second, James, and we'll see, but it would go back certainly to the pandemic. You saw employers start to shed clients, shed employees I should say.

shed employees. Interestingly enough, what was a little bit anomalous during the pandemic was we didn't see huge client losses, but we did see them drop employees. And so then you see that impact. I'd remind everyone that our model is not a pure people model. Thank you I still have other vegetables that pop in, well that is well on my hands.

plus people. And so we have some insulation in the event that there's a downturn and overall employment levels fall. And finally, last caveat, we do have the ability to pivot in the base, which we did during the pandemic, which helped to mitigate the impact of what was going on in the economy and the economy. We're home.

Yeah, and I would probably say we're actually more effective in terms of both our capabilities analytically to be able to target inside the base our capabilities from the sales and marketing and digital perspective inside the base than we were in any of the in the prior downturn. I mean we just have gotten very very

effective in driving product penetration and identifying opportunities within our client base where we can add additional value with a pretty broad set of products and services.

effective in driving product penetration and identifying opportunities within our client base where we can add additional value with a pretty broad set of products and services. That's great, appreciated.

Thank you. Our next question comes from Mark McCone with Baird. Hey Mark, this is Andre Childress on for Mark. Thank you for taking our questions. So I'll just leave it at one. Retirement Solutions continues to see strong growth and clearly has some nice tailwinds. Can you talk about some of the measures you are taking to capitalize on the opportunity provided by both the state and federal agencies?

SECURE Act as well as state mandates? Yes, so as you know, we're a leader in small and mid-sized businesses in terms of the number of plans. We manage more retirement plans than any other company. For the 12th straight year, we actually have prepared and supported businesses.

more businesses than any other provider. So we are actively already educating our existing customers and have a variety of digital marketing programs in the market. I think you'll continue to see more aggressive positioning of paychecks in the 401k.

We're looking at how it can play a bigger role in our bundles, in all of our payroll bundles as well. Because again, what we're finding is given both the state mandate coupled with the secure Act 2.0, we're literally, if you're a company of 20 employees and we're working on trying to make some changes to that legislation.

actually drop it down even lower than that, we can start up a 401K plan and basically at no cost to you. And you can then provide up to $1000 of match to your employees and get that money back as well. So this is like one of those DRTC moments where our value proposition, we can go to a small business owner and say, you can have a valuable benefit that is going to help you retain your employees, help you attract employees and really it's not going to cost you anything.

to get it started. We think there's a powerful value proposition and like I said, we're already the largest. We already know how to do this. We already have the sales and marketing capabilities and the operational capabilities to do this in a very efficient and effective way. So we're going to continue to capitalize on this as we go into the fiscal year. Great, thank you for the color.

Thank you. Our final question will come from Samad Samana with Jefferies. Hi, great. Thanks for – hey, good morning, guys. Thanks for squeezing me in. So, I just wanted to ask on maybe your own sales organization, can you help us think through just between the last couple of years being strong and then us entering, let's say, a slightly different environment, maybe looking forward?

How maybe the sales organization performed versus quota and fiscal 23, and maybe what assumptions around quota you're thinking for fiscal 24 in terms of quota increases for your sales organization? Well, as I said, we were very pleased with the record setting year that we had in sales execution. It really was a stellar year from a sales performance perspective. My hat's off to the entire team. As I said, we were very pleased with the record setting year that we had in sales execution.

The back half was stronger than the front half. And given that momentum we have coming out of there, the investments we made in the fourth quarter in terms of marketing, also a lot of work on what I would say is go-to-market support for our sales teams, the things we are doing relative to sales training and self-effectiveness tools that we invested in the fourth quarter. Given the momentum we see our sales team has readily and happily...

If you have additional questions at this time, we'd like to now turn it back to our presenters for any closing remarks.

Okay, well I'd like to thank everybody for being with us today. I know probably many of you are starting ahead or are headed or about to head to the 4th of July weekend. I hope you have a great time with your family. I want to thank you for your questions and support. I want to reflect again on

this past fiscal year. Certainly a transition year for me, coming into my new position as CEO . An absolutely phenomenal year for the company. The employees did a great job navigating a very complex fiscal year. And for the company to achieve that $5 billion milestone is really a testament to their hard work.

and to do it at the speed we did it during the global pandemic is something to say. I was reflecting last night as I was looking back over the last five-year results across the board, and I go back and anchor myself to fiscal year 19, which is hard to remember. That was before the pandemic. And I looked at our fourth quarter, and I looked at our full year statistics.

And when you go down there and see we had better revenue growth, better profit growth, better retention metrics, better HR outsourcing metrics, better new sales revenue, better new sales unit rates of growth in the fourth quarter of this past fiscal year and the full year than we had in fiscal year 19, we not only weathered the pandemic, but I think we actually came out of the pandemic in a stronger position across the board. And I just want to thank the 15,000.

employees at Paychex for making that happen and hope you all have a very nice 4th of July weekend. Thank you very much. Have a great day. Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect. Thank you.

Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star and one on your touch tone phone. You may withdraw yourself from the queue by pressing star two.

Please note this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. John Gibson, President and CEO . Please go ahead. Thank you, Stephanie. Thank you everyone for joining us for our discussion of the Paycheck Fourth Quarter in Fiscal Year 23 Ownings Release. Joining me today is Stefan Rivera, our Chief Financial Officer.

This morning, before the market opened, we released our financial results for the fourth quarter and full fiscal year, ended May 31st. You can access our earnings release on our investor relations website. Our Forbes 10-K will be filed with the SEC before the end of July .

This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days.

billion, three years to go to three to four. And it took us three years to go to four to five, but I remind everybody that was during the global pandemic. So I'm certainly very proud of those results. In addition to the revenue growth at 9%, adjusted diluted earnings per share grew 13% to $4.27.

operating margins finished at 41% as we continue to benefit from our continued investments in technology, our focus on driving digitalization in all aspects of our business and our long-standing tradition of operating at home.

Momentum in sales has continued with solid growth and new annualized revenue for both the fourth quarter and the full fiscal year. HR solutions and retirement were areas of particular strength with double digit growth. We are well positioned in terms of our staffing levels and rep tenure heading into the new year.

Revenue retention finished the year near record levels as we continue to focus on retaining and increasing our share of wallet with our high value customer segments.

Client retention was impacted by higher losses due to out of business, concentrated mainly in newly formed businesses the last two years, and financial distress in the lower revenue small clients. We continue to see strong demand for our HR outsourcing solutions with worksite employee growth over 10% year over year. Over the year we achieve record level worksite.

integrated offerings including HR technology designed to deliver efficiency for both the employer and the employee, our comprehensive HR outsourcing which leverages the strength of our technology and the experience of a trained HR professional and our outstanding compliance organization, and the need for businesses to offer quality benefits including retirement to compete for talent.

With more state mandates expected to take effect in the future, we expect a strong market for retirement to continue for the foreseeable future, and we are well positioned as a leader to take advantage of this opportunity. The SMB credit environment has continued to fuel demand for our employee retention tax credit service. Our full-service ERTC offering has helped tens of thousands of businesses obtain tax credit.

and getting access to funds they need to keep their businesses running and growing. We continue to communicate this opportunity to existing clients and prospects. Industry recognition continues to reinforce the competitive strength of our technology solutions. For the fourth consecutive year, Paycheck Flex earned an HR Tech Award for Best Small and Midsides Business Focus Solution in the core HR category. Our consistency in winning these awards and being placed repeatedly in the...

Leadership quadrant of respected technology analyst rankings speaks to our market leadership in HR technology.

I'm not only very proud of these results and the performance of the team, but I'm also equally proud of how we achieved these results. We have been consistently recognized as one of the world's most admired, most ethical, and most innovative companies. In addition, we've been ranked as one of the best places to work for people in sales, for women, for diversity.

and for our outstanding training and investment in our employees' development. These awards are a testament to how our employees not only get the job done, but do it the right way, and we are constantly looking for new ways we can make ourselves and our communities better. As we move into fiscal year 24, we will continue our focus on developing leading customer experiences that combine our technology, our advisory capabilities, and our partnership to deliver superior value to our customers.

Paycheck is uniquely positioned to help small and mid-sized businesses navigate the challenges they face in a complex and ever-changing and evolving world. We remain committed to our purpose, and that is to help businesses succeed, and we'll continually strive to have a positive impact on our clients, our employees, our communities, and our shareholders. Now I'll turn it over to Efren, who will take you through our financial results for the fourth quarter and the fiscal year, as well as our guidance for fiscal year 24. Efren?

Thanks, John , and good morning to all of you. I hope you're indoors on this smoky Thursday. I thought we were past it, but not quite. I'd like to remind everyone that today's commentary will contain forward-looking statements referred to the customary disclosures that we make. I'm going to start by providing a summary of our fourth quarter financial results, talk about full-year results, and then finish with a review of our fiscal 2024 outlook.

Before I start, I also wanted to add that joining us in the room today this morning is Bob Schroeder, VP of Finance at NIR. Many of you have met Bob. Okay, for the fourth quarter you saw total revenue increase 7% to $1.2 billion. Management solutions revenue was up 7%, a little bit over $900 million by additional product penetration.

HR ancillary services, which currently is mostly ERTC, and also price realization. We continue to see strong attachment of our HR solutions, retirement, and time and attendance products. Demand for our ERTC service remains strong, as John mentioned, and it contributed approximately 1-2% to total revenue growth for the full year.

demand for this service along with our internal execution that continues to exceed our expectations while ERTC has been a tailwind.

and we expect demand to continue into fiscal year 24, it will become a moderate headwind next year, especially in the back half of the year where it will become more of a headwind.

CEO and insurance solutions revenue increased 5% to $300 million, driven by higher revenue per client and growth in average worksite employees. The rate of growth was tempered a bit by lower medical plan sales and participant buy-ins along with continued preference for ASO in this environment.

EO and insurance solutions revenue increased 5% to $300 million, driven by higher revenue per client and growth in average worksite employees. The rate of growth was tempered a bit by lower medical plan sales and participant buy-ins along with continued preference for ASO in this environment. We expect these trends will...

start to normalize as we progress through fiscal 2024, though it won't be evident necessarily in Q1. I'll talk about that in a little bit. Interest on funds held for clients increased 69% to 25 million, primarily due to higher average interest rates partially offset by realized losses taken in Q4 as we reposition the portfolio heading into the back half of this year. Total expenses increased 3% to 776 million.

since growth is largely attributed to higher headcount, wage rates, and general costs to support growth in the business. Operating income increased 15% to $453 million with an operating margin of just under 37%, a 240 basis point expansion over the prior year period. Polluted earnings per share increased 18% to $0.97.

per share and adjusted diluted earnings per share increased 20% for the quarter to again, 97 cents per share. Let me quickly summarize our full year results. Total revenue increased 9% to five billion and total service revenue increased 8% to 4.9 billion. As you are all aware, we raise guidance a number of times during the year. Management solutions increased 8% to 3.7 billion.

increased by over 30 million due to higher average interest rates and average investment balances within the corporate investment portfolio. The diluted earnings per share increased 12%.

to $4.30 per share and adjusted diluting earnings per share increased 13% for $4.27 per share. Our financial position remains rock-solid with cash, restricted cash, and total corporate investment for more than $1.6 billion in total borrowing of approximately $808 million as of May 2023.

Cash flow from operations was $1.7 billion for the fiscal year, an increase of 13% from the prior year driven by higher net income and changes in working capital. Free cash flow generated for the year was $1.5 billion, a 15% year over year. And while it's easy to gloss over those numbers, I think it's really important to note that when we report numbers, the quality of our earnings and the quality of our cash is very, very strong as noted by some of you. Not only do we deliver on the top line, but we deliver in a quality way for them.

on the bottom line and we intend to continue to do that. We paid out a total of 1.2 billion in dividends during fiscal 2023 or 70% of our net income. Our 12 month rolling return on equity was a stellar 48% with an arrow pointing up. Now, let me turn to guidance for the upcoming fiscal year ending May 2024. Our current outlook as you saw is as follows. Management Solutions expected to grow in the range of five to 6%. The Yale Insurance Solutions expected to grow in the range of six to 9%. We widened that a bit.

just to accommodate the fact that sometimes attachment on insurance can vary from quarter to quarter and from year to year as we saw last year. Interest on fund sales for clients is expected to be in the range of $135 to $145 million.

Total revenue is expected to grow in the range of 6 to 7%. Operating income margin is expected to be in the range of 41 to 42%. Other income net is expected to be income in the range of 30 to 35 million. And then our effective income tax rate is expected to be in the range of 24 to 25%. Adjusted diluted earnings for share.

expected to grow in the range of 9 to 10%. This outlook assumes current macroeconomic environment, which as you know has some uncertainty surrounding future interest rate changes in the economy. We have better visibility in the first half of fiscal 2024 as each quarter progresses. We have a little better visibility into the remaining quarters in the year. For the first half of fiscal 2024 and the second half of fiscal 2024, we have a little better visibility into the remaining quarters

Solutions revenue to be below the low end of the range for the first quarter, then it'll be Solidly in the range. That's our expectation at this point Before you ask me the question. I'll answer that first quarter was actually the strongest quarter of the year on on pio last year and As consequence the compare will be a little bit tougher and we expect this bill doesn't go through the year

Of course, all of this is subject to our current assumptions and they can change. We'll update you again on the first quarter call. There's a number of questions because it's of course the time when we give being on guidance. So if I could just ask for your forbearance on something which is to say ask a question and limit yourself to one follow up. Now I will say I understand some of those questions will be compound questions, but if it's a five part compound question that's fine, I take the rule.

at any time by pressing star 2. Again, that is star 1 to ask a question. Our first question will come from Ramsey LSE with Barclays. Hi, thanks so much for taking my question this morning. Can you comment on the pricing environment? You called it out a little bit in the press release, and I guess the question is are you seeing sort of a window right now for more aggressive...

pricing adjustments just given the inflationary environment? Or is this sort of, you know, are you feeling now that you're in sort of a steady state kind of continual, you know, trajectory when it comes to pricing? Yeah, Ramsey, thanks for the question. Yeah, I would say we're more in a steady state. I feel good about where we are. I think the value of our products and services, I think what we see when we talk about price inside our customer base, they're rewarding us. They're seeing the value we're getting, and as we did last year, we believe we have

pricing power inside the base and we'll continue to avail ourselves of that. And then in terms in new clients and prospects in the competitive environment, hey, we've always been in a competitive market and I see stable pricing. And I think as we go through this year, we'll continue to do what we need to do to be competitive in the marketplace. So I don't see any major

shifts of change on either side of the pricing equation. Okay, and I wanted to ask also about retention. Obviously, retention at healthy record levels. At the same time, you called out a little bit of where you were seeing a little bit of headwind. I think it was from out of business, from newly formed businesses. And I think there was some other color that Efrem provided. If you could just elaborate on that a little bit, I'd appreciate it.

Yeah, Ramsey, I think this has been pretty consistent. I think on all the prior calls I said probably as we expected. So we continue to really focus our efforts on the high end part of our valuable clients, particularly the HR outsourcing there. We continue to maintain both in the PO and ASO record retention from a revenue and client perspective there. Where we did see, and we had near record retention overall across the business.

And so I'm not surprised when we're saying we kind of expected that to be the case, and that's what we saw on kind of the client retention side. But again, even if you look at the client retention side, we're back to where we were pre-pandemic levels, so nothing dramatic there. So I think that's more

Q4 2023 Paychex Inc Earnings Call

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