Q1 2024 Paychex Inc Earnings Call
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Good day, everyone and welcome to today's Paychex first 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 to.
Star and one on your telephone keypad, you may withdraw yourself from the queue by pressing star and two. Please note. This call is being recorded and I will be standing by if you should need any assistance and it's now my pleasure to turn the conference over to John Gibson.
Thank you Shelby and thank.
Thank you everyone for joining us for our discussion of the Paychex first quarter fiscal year 24 earnings release.
Joining me today is Efrain Rivera, our Chief Financial Officer, and Bob Schrader, Vice President Finance and Investor Relations. This morning before the market opened we released our financial results for the first quarter you can access our earnings release on our Investor Relations website, our Form 10-Q will be filed with the with the S. E C.
Within the next day, the teleconference is being broadcast online and will be archived and available on our website for approximately 90 days.
I will start the call with an update on the business highlights for the first quarter. I'll, then turn it over to afternoon, Bob for a financial update and then we'll open it up for your questions.
But before getting into the discussion of our earnings results I want to take a brief moment here to make a few brief comments to acknowledged yesterday Rivera.
Who announced his intention to retire as CFO effective October 12 2023.
He will remain as a senior adviser at least through the end of the calendar year.
Everyone has been a valuable member of the senior leadership team at Paychex for the past 12 years.
He has provided strong financial steward.
Stewardship, but more importantly, great strategic leadership as well.
During his time with Paychex the company has transformed into a technology enabled services company and we significantly expanded our HR solutions and capabilities.
One has been a key strategic adviser and a catalyst for this transformation.
After I think you know how truly I appreciate.
Your intellect your wisdom.
Your integrity the guidance, you've given me personally over my decade here.
And to the company and we're all in great gratitude for what you've done for each one of us personally and for the company our customers our employees and our shareholders are better off because you were here. So thank you.
Joining us today is Bob Schrader, who will succeed that furnace CFO , Bob joined Paychex back in 2014 and is taking on progressive leadership roles over the past nine years, including over the last year and a half since I was named President and subsequent CEO I'm being the co head of many of our strategic review efforts and strategic.
Initiatives.
<unk> promotion as a part of a strategic succession plan to bring an innovative leader who will continue to guide the company going forward I want to congratulate Bob and Bob I look forward to continuing to work.
With you as I have the last 10 years.
We continue to continue our track record of delivering strong financial results and continuing to position paychex as a leader and innovator in a company that you can count on to predictable and sustainable results.
Now moving on to the first quarter results speaking up predictability and sustainability.
We have begun to fiscal year 'twenty, four with solid growth of 7% and total revenue and 11% and adjusted diluted earnings per share. We've seen operating margin expansion of approximately 60 basis points year over year, while still investing in our business to drive future growth.
Our first quarter reflected solid execution by our sales service and all of our teams across paychex.
The demand for our HR technology and advisory solutions continued.
Zelda and strong quarter, new sales revenue growth, we saw positive trends in client revenue and HR outsourcing worksite employee retention during the quarter and we continue to focus our resources on acquiring and retaining high value clients.
We are starting to see improvements in some of our T. P O and insurance metrics during the quarter with good results across sales activity insurance attachment and retention.
We will know more after our open enrollment season is completed which prime way runs from October through January but at this time, we believe that the actions we have taken in response to the headwinds we faced in 2023 are beginning to gain traction.
Employment levels within our client base have remained stable small businesses, which are central to the U S economy continues to show the resiliency.
Our small business employment watch has shown that small businesses continue to add workers at sustained but modest rates.
So the trend in wages had shown some cooling in wage growth consistent with overall inflation.
Our data indicate a continued stable macro environment for small and midsized businesses.
We continue to monitor our leading indicators and are prepared to take appropriate actions to navigate any changes, but again at this time, we don't see any material changes in the macro environment.
Small businesses have faced challenges getting access to capital and managing cash flows in this environment. This has continued to drive demand for our full service employee retention tax credit service.
I know there's been some recent news of the IRS pause in E. R. T C processing in order for them to perform increased audits.
This is not expected to have an impact on our ability to provide this service, though it may take longer for our clients to receive their funds. We continue to communicate this opportunity to existing clients and prospects and we continue to file amended research returns with the IRS on their behalf.
We intend anticipate that E. R. T C revenue will be a slight tailwind for the first half of the fiscal year, and then turned to a headwind in the back half as the program ends.
We are seeing greater adoption of HR software as businesses look to digitize their HR efforts to support the complexities of managing today's workforce and a more efficient manner.
We also continue to see strong demand for our HR advisory solutions businesses deal with the continued challenges of being an employer in today's challenging employment world.
Paychex is uniquely positioned to offer a continuum of HR products technology and services from do it yourself payroll all the way to a full service P O HR outsourcing.
All of these products deliver a strong return on investment for our clients.
For the 13th year in a row, we were named the leading retirement record keeper by number of plans by plan sponsor magazine.
Our leadership position in retirement makes us an excellent resource for small businesses and we continue to exit educate and execute on this opportunity.
There have there is there has.
It's certainly been a lot of excitement about AI and related technology and advancement.
Dan Smith around the monetization of large datasets.
At Paychex.
We've talked on prior calls this isn't anything new where it's not a fad.
We have been using artificial intelligence to transform our business for over a decade, we have over 200 AI models that are actively working on our business today designed to provide valuable insights fueled by our vast data assets. Our award winning retention inside tool uses AI based predictive analytics to.
<unk> HR leaders with early insights into potential employee retention issues or.
Our flex intelligence engine is an embedded a I chat.
Capability within our flex platform.
Allow the customer to get quick quick answers to over 900 is the most common questions and access over 1200 instructional resources.
Companies like Paychex with large amounts of data is data will clearly be the winter with AI and we will continue to harness the power of AI and leverage our extensive data to drive internal efficiencies and provide actionable insights and solutions to our clients.
This quarter, we continue to be recognized for our innovation service and the positive impact we're having on our customers our industry and the world for the third time Paychex has been recognized by trust radius with a 2023 Tech cares award for the company's corporate social responsibility.
Building programs.
And our community impact.
We also received an award from selling power for our commitment to fostering a diverse and inclusive workforce and from Forbes as one of the bathroom, whereas for women in 2023.
On the product and service side Nelson Hall, once again identified paychex as the leader in its 2023 next generation HCM technology market report.
We also learned that silver Brandon Hall Group 2023, HR Excellence award for breadth and depth of training that we provide our HR advisers to keep them up to speed on the ever changing complexities of the employer employee relationship.
Paychex was also named the 2023 constellation research on their shortlist for best payroll for North American small and midsized businesses the.
The depth and breadth of our product suite provides American businesses, the freedom to succeed with the technology and advice that they desperately need to remain competitive in a very complicated world.
I want to thank our over 16000 global employees, who consistently deliver for our clients and our shareholders is because of them that were off to such a good start this fiscal year I'll now turn it over to Bob Schrader to give you a brief update on our financial results for the first quarter, Bob Yeah. Thanks, John and good morning, it's good to be here with you. This <unk>.
And I certainly look forward to working with each of you as we move forward.
To remind everyone that today's commentary will contain forward looking statements. Obviously those involve risks and we will refer to some non-GAAP measures I'll refer you to our customary disclosures in our press release.
Our investor presentation that will be posted later today I'll start providing a summary of our first quarter results and then I'm going to turn it over to Efrain and he'll give an update on our financial position and updated guidance for the year.
Total revenue for the quarter increased 7% to $1 $3 billion management solutions revenue increased 6% to $956 million, primarily driven by higher clients and client employees product penetration price realization and HR ancillary services. We continued to see increased attachment demand for HR solutions.
Time, and time and attendance solutions.
Oh and insurance solutions revenue increased 5% to $298 million, driven primarily by higher revenue per client and higher average worksite employees as John mentioned, we definitely saw some positive momentum in the PEO in the first quarter as it relates to both sales activity and medical plan participation in attachment those were obviously headwinds.
Last year end and we're definitely seeing some positive signs as we moved through the first quarter here interest on funds held for clients increased 83% to $33 million, primarily due to higher average interest rates total expenses increased 5% to $750 million expense growth was largely attributable to higher compensation costs.
PEO direct insurance costs and investments that we've made into the business.
Operating income increased 8% at $536 million with an operating margin of 41, 7%. That's a 60 basis point improvement versus the prior year period and diluted earnings per share increased 10% to $1 16 per share and adjusted diluted earnings per share increased 11% for the quarter to one.
Dollars 14 per share I'll.
Now I'll turn it over to Akron to take you through our financial position and our updated guidance for the year.
Thanks, Bob and good morning to everyone on the call.
Before I start just wanted to.
So thank you John for the generous words Hum.
Absolute professional privilege privilege and honor to have been weak.
Paycheck stream all of his time.
As you all know we maintain a strong financial position with high quality cash and earnings or balance for cash restricted cash and term.
Corporate investments was more than $1 7 billion.
Borrowings were approximately 812 million.
August 21 2023.
Cash flows from operations were 656 million for the first quarter was driven by net income and changes in working capital. There was some influence of timing there wasn't quite as strong as the percentages would indicate but nonetheless, it was a very solid quarter as you know our honor.
Earnings quality, which maybe some of you have pointed out is among the best.
Candidly.
And the entirety of the S&P 500.
In the first quarter, we acquired a small company that purchases outstanding accounts receivable of their customers under non recourse arrangements.
This acquisition is a good strategic fit with another business that we have called Patrix had fans.
And that business purchases accounts receivable for temporary staffing clients.
This acquisition will provide an opportunity for our small business clients to manage working capital challenges as John alluded to earlier, we've seen over the last several years that access to financing is very important for small and medium sized businesses. We think this play as well.
Or are you know our portfolio of businesses that we have I'm very excited to have it.
Acquisition at this stage is not.
He is not anticipated to have a material impact on our financial results. This year.
We paid a total of 322 million in dividends during the first quarter. Our 12 month Rolling return on equity was stellar Super Amazing 47%.
Now, let me turn to guidance for the fiscal year, ending May 31, 2024, I'm going to give you.
Color on not only the full year, the first half second half and we typically do that at this stage.
As you noted we have raised guidance for interest on funds held for clients and for adjusted EPS, but I want to go through a little bit of color as we go as we go through to give you a sense of what our thinking is.
Our current outlook is as follows you saw that management solutions.
Still expected to grow in the range of 5% to 6%.
You know and insurance solutions expected to grow in the range of 6% to 9%.
Interest on funds held for clients now and so I just mentioned are expected to be in the range of 140 to 150 million raised from our previous guide of $1 35 to $1 45 and before I.
Good question now we anticipated that range are we anticipating a range of additional increases no. We're we're poised and looking at what the fed is is doing just like everyone else's, but this is our best estimate of at least some additional activity by the.
But not likely not contemplating all of it.
To the extent that the fed does something now we'll have a conversation later in the year, maybe the fed will decide but they actually do want them clubs, but but at this point, that's where we anticipate being.
Total revenue is expected to grow in the range of 6% to 7%, but now we think this is likely towards.
High end of the range so.
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 million to $35 million.
The effective income tax to be in the range of 24 to 25 adjusted diluted earnings per share is expected to grow in the range of 9% to 11% and this is where it is from our previous guide of 9% to 10%.
This full year outlook assumes current macroeconomic conditions, which have some uncertainty surrounding future interest rate changes and their impact on the economy and I would just say it's been almost I would say at least six quarters, where we keep saying.
Hey, we don't know what's going to happen in the back half of the year and it could change our outlook I think John .
John summarized it very well at this point things look pretty stable, so where we're feeling.
Directionally more and more confident in the back half.
Projecting the second half of the year, we anticipate total revenue growth of approximately 7%.
Operating margin in the range of <unk> 42 to <unk> 43 per cent hurt some comments. After first when we released guidance that we have a ramp in the back half of the year, but I wouldn't describe our current guidance.
Significant ramp in the back half of the year. Obviously, there are differences in the back half of the year that we'll navigate through and.
Talk to you, but the difference between first half and second half it's not dramatic.
Of course, all of these comments are subject to our current assumptions, which are subject to change.
We will update you again on the second quarter call.
So let me just repeat a couple of things to make sure first half 2024 total revenue growth.
Growth in the range of 6% to 7% operating margin in the range of 40 to 41 and then in the second half at this point, we anticipate total revenue growth to be approximately 7% operating margin in the range of 42 to 43 I refer you to our investor slides on the website.
Additional tonnage before handing things back over to John I would just like to say that.
Appreciate the relationship I built with each of you during my time here at Paychex.
We've had a long time together and.
One of them to hand, the reins over to someone someone else, who I think will do an even better job than than I have.
One of the things that strikes me during that entire time and many of you have been doing <unk> been here for the entire ride I got a call when someone or I got a note in someone's the effort, you're making me old because I've retired two two cfos to paychex. So.
I think that's unfortunately true, we're all getting a little bit older but one of the things that always strikes me is that that we are covered by the best group of many animals in the business.
I say that even though I have disagreed with some of you over the years and I still think you have us rated through low but be that as it may I can't I can't argue with some of the things that you're right. So.
And then a separate note I just wanted to say this I've worked with Bob Schrader for many years, both here and prior to Paychex I know that I'm, leaving you in very capable hands.
And I'm sure that Bob will do an even better job than the one that I do.
With that let me turn it back to John .
Thank you Ofer and.
Before I open the call for questions, probably two things one we have a lot of people here and you know last time effort did a great job of providing rules on questions, particularly around compound questions and multiple follow up. So we can just follow the effort rule in honor of efforts retirement I know he would greatly appreciate that and maybe.
We can create a new tradition here, but no firm feel free to answering your questions, but I would like to also add make everyone aware. There's many ways you can learn more about paychecks.
And they really the amazing success stories and the impact that we're having on the world. We've recently yet.
Launched a series of reports that you can find it on our Investor page both our annual report our ESG report and a new client impact report and very shortly you'll be seeing a new.
Investor Relations 101 presentation that will be launched on the website prior to our annual meeting.
The coming weeks and again I think these documents provide a lot more color and really a lot more insight and just how significant how broad our products are how big impact, we're having on our customers how big of impact we're having on our employees on how and why pay checks is known as one of the most admired.
Most ethical and most innovative companies in the world and I encourage you to check.
Check that out so with that advertisement of our Investor website. Shelby you can now turn it over for questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star to you. Once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
And we'll take our first question from Ramsey El <unk> with Barclays. Your line is open.
Hi, Thank you for taking my question and congratulations to you referenced.
It will Ah well Miss hearing your voice on these calls I certainly am.
I was wondering if you could comment on the interest from corporate investments was relatively high in the first quarter and it doesn't necessarily feel like that's going to for three or four at the full year guide in terms of maybe recurring each quarter. So maybe if you could talk about that contribution to other income and just how you might see it trending the rest of the year.
Yeah, So Ramsey and Theres a couple of things that go into that line beyond just so so for everyone.
For everyone who.
Isn't focusing on that line that much. So that's a combination of our interest expense our interest income from corporate portfolios, primarily and also some gains and losses on our investments that we have and and a small investment funds that we have.
Those things can swing a bit during the year and are subject to whatever we think the balance is going to be on on corporate funds. During the year. We made an acquisition. So we expect that.
During the year, our average corporate balances will be lower so that will generate lower interest income and then the other the other part of that Ramsey is our gains and losses on that other investments as we mark to market can change from quarter to quarter. So there could be a little bit of lumpiness in that number but but.
It might be a little bit different I would say one other thing just by way of color on that line. We ended up with a fairly high cash balance that was influenced by the timing I think I called that out word if I didn't call. It out now it just really has to do with the day on which we close.
Closed the quarter. So our cash balances were higher they are likely to be a bit lower not a bit lower but lower as we progress through the year. So you might see that number change a bit.
Okay Fantastic and a quick follow up if you could talk about secure act to point out how you see that evolving and how you see that potentially presumably benefiting the business over time.
Yeah look at secure act to that though I think is a great great.
Great action and great step that the government has taken an encouraging and helping small and midsized businesses I'll provide for their retirement.
Yes.
We're certainly out there educating the market on on the opportunity that really provides an opportunity for them too.
At a four one K plan I'll get it tax credit back for the implementation fees sort of setup fees of the plan and then allows them to actually do a match for their employees and get that back end into a tax credit as well.
We're very happy our form K businesses is it's continued to have very very strong growth that has continued the thing I continue to remind people we have some experience in this and other state mandates.
And what we realized is that Theres a lot of education that has to go on to get the market educated about the cost of a 401K plan the benefits of a four one K plan and certainly well.
Al actively in the market educating the market educating our strategic partners on that and we believe that that secure act to that there was going to allow us to continue to sustain the double digit growth rates that we've seen.
Climate business.
Several years.
Fantastic. Thank you very much.
Yeah.
And we'll take our next question from Andrew Nicholas with William Blair. Your line is open.
Hi, Good morning, guys and you'll Maxwell on for Andrew today.
To start off I was hoping you could dig in a little on any changes to the dynamic between a S. So N P O N.
Weather over the past couple of months, you've seen any preferences shift on that you called out the last couple of quarters. So I was wondering if anything changed.
Yeah, Yeah. So I would say this we continue to see strong demand for our HR outsourcing solutions across the board.
And I would say that the balance.
It's probably more back to prior to 'twenty, three where we saw a little shift to.
So we've seen more of what I, that's more traditional balance of ASO to P. O. As we mentioned on our last call. We made some changes I think too.
Product portfolio in the P. O that I think is balanced that out a little bit the other thing that I would point to.
That we mentioned on the prior call is that when we over index with a ASO in the prior year, we always look at that as a great opportunity for us to go back to those customers and then upgrade them our select them into our P. O arm product and when we started doing that we actually that's a good example of AI.
We're actually using AI tools to be able to go into the ASO base and find clients that we believe theres going to be a valuable value proposition to be an appeal relationship for.
Multitude of different reasons and that program actually has has shown results in the first quarter.
It's early in the process, but I.
I would tell you that our transition of ASO to Apio customers.
The number of customers that we transition this first quarter versus last first quarter was nearly two ex the <unk>.
Number of clients so exactly what we thought could happen, which was we over index when a ASO in the prior fiscal year, we continue to sell outside to new logos and that was also double digit strong and appeal in the first quarter. So we had both benefits we had strong outside the base growth in T O in the first quarter.
And we have good migration of our upgrades are ASO to P O, which was a good good start to the first quarter, we still got three quarters to go in the middle of.
Our open enrollment, which is critical there, but good early signs we had we had good signs in the appeal in the fourth quarter that we talked about that on the last call and that just accelerated in the first quarter and so now we've just got to see if that can that can continue into the core selling season.
Great good to hear.
And then for my follow up any detail you can give on the the increase to our direct insurance costs from workers' comp.
Any color or any reminder of your exposure to any volatility in that area.
Yeah. This is Bob Yeah, we I mean, we obviously take risk in the PEO business on Workers' comp. Obviously, we are very prudent in managing that risk and in which in picky on which risk we're willing to take I'd say you know there is growth in the quarter, primarily driven by you know we have growth in Worksite employees that's gonna.
Drive higher workers compensation cost, we go through every quarter and do true ups of our reserves and so forth, but nothing nothing specific to call out other than you know growth in the business that would drive growth in direct costs. Yeah. There's been no change to our underwriting standards, there's no change to our programs in terms of caps and limits.
And no real no.
A real change in the overall program performance, though.
Alright, Thanks, a lot guys and congrats again on your retirement, Bob on your promotion and thank you.
And we'll take our next question from Bryan Bergin with Cowen Your line is open.
Hi, Good morning, guys. Thank you afternoon, Bob Let me Echo my congrats as well I've run it's been nice working with you here enjoy your retirement.
Well I've got to ask the question because we've gotten a lot of questions just as it relates to E. R. T. C. So it doesn't sound like you have any change in your fiscal 'twenty four revenue expectation there surrounding.
D C. After this recent IRS announcement, but can you just dig in there a little bit more since there has been a lot of questions is there any evidence of any clients wanting to potentially delay submitting new claims there any dynamic there to be mindful of.
Listen Brian appreciate the question look I E. R. T. C was in line with our expectation expectations in the first quarter, we continue to submit.
No one's wanting to delay the program is going to end the night I again.
S announcement is not stopping any ones efforts in our efforts and approaching clients, who are assisting them in filing the tax credits and in fact, the IRS specifically commented to clients and small business owners that they should seek trusted partners to complete their filings the IRS.
The pause in processing and accepting so they're accepting filings it's really due to some just really bad actors out there that are providing bad advice for small businesses and putting them at risk I talked about this probably a year ago. When they started at least little pop up company started to show up.
And again I think that the IRS is trying to do a prudent thing to tamp down on fraud and also to make sure. This small businesses are.
We're not getting bad advice from from these pop up for them. So.
We actually are continuing to accept and encouraging our clients and prospects are to file and we provide a service where we're confident that the advice, we're giving them is adequate and it will continue to try to get the processing done before.
Filing deadline.
Early next calendar year, yeah, the delay the delay impacts where the client is really going to be in the processing, which is really going to be when they get the refund.
Okay very good that's clear and then my follow up just on the target here can you share as it relates to the M&A that the financial profile of this target just any revenue attribution to call out now included in the in the current year outlook I did hear you mentioned I believe the upper end of your growth range, but just wanted to confirm there were no organic offsets.
Off that.
Organic offsets.
As far as anything in the organic side being offset by now any incremental inorganic and they are not.
Not really Bryan I mean that it will contribute a modest amount of revenue we'll call. It out as we as we go through the year, but it's not it's not masking something more or additive.
In that respect I think there's a number of different vectors of growth around the companies that are that are working pretty well so no.
No no not really.
Alright, thank you.
You're welcome.
And we'll take our next question from Ashish.
With RBC capital markets. Your line is open.
Hello, Thanks for taking my question and Bob and congrats to both of you.
That's all my question I wanted to better understand the meaning of the guidance and confidence in the back half.
Is that both on management solution as well as any color on that.
Yeah. So so one is as a kind of I'd say process and structural and then the second is.
The substance of what we saw in the first time. So so the processes the substance is simply that.
At a point in time, we were taking a snapshot and saying okay.
When we issued the guidance back four months or so ago, we had a certain set of macro conditions, we didnt know that whether they would hold but at that point.
On the macro conditions as John said earlier haven't changed significantly so we fast forward four months and now we have.
More more certainty as to what environment, we're looking at at least can be in there.
The medium term medium term being three to six months.
So that's one of the the second part as we look at the trends of the business, where we close where are we correct in terms of the trends that we saw you heard some of the some of the comments that John said on the PEO. So much of that was what we expected from execution standpoint.
But one thing that's expected it's another thing to deliver it and thus far we've started on a good note. So those are those are two parts of it. So by the time, we get to September end of or into October now, we know we know with reasonable degree of certainty what Q2 looks now we.
We project forward into the back half of the year and do we feel reasonably confident based on the.
A combination of all of the factors that we're seeing that the back half expectations will be as we expect as we sit here the answer is yes. So.
As you look at the guidance it anticipates that PEO.
We will strengthen in the back half of the year and at this point, we're seeing indications can we say that certainty you can never say anything certainly, but but yes. We based on all of that combination of factors, but we feel pretty pretty positive about where where things are currently.
I just said just to add on to that I think.
Again every business hasn't we haven't risen and in the third quarter is a critical that's our selling season and so what the macro environment will be in the third quarter fourth quarter. Those are always the things, where we're trying to guess I think what I would.
Right at this point in time is.
When we left the fourth quarter I talked about the second half of our last fiscal year, we actually saw new sales bookings, both in management solutions and the PEO and insurance.
Accelerating.
We continue to see that double digit momentum in the first quarter HR outsourcing a S. L. P. L strong mid market in the quarter retirement strong digital payroll strong. So when we look at the demand environment. Then we look at the employment environment with our index and what we're seeing the firm.
First quarter set up to be kind of a repeat in continuation of what we saw.
In the second half and particularly the fourth quarter now as it relates to the PEO business as we talked about the insurance as a portion of that insurance attachment as part of the reason why we have a little bit wider range why do you.
You have to determine there is how many companies continue to offer benefits to their employees. That's the first choice.
Second choices, how many of those employees sign up for our health.
Health insurance.
And what plans do they sign up for now we are only a quarter away through that decision process, which really is already started about 25% of way through what I would say at this point 25% of weight.
We're running a little bit on par, where we expected.
As that continues I think that that's what gives us confidence in the back half, but again I still got three quarters of that process left and again I want to be predictable.
Relative to what you should expect and so we're being we're being I think prudently cautious in and making sure that we're executing both management solution. We're taking advantage of the opportunities in the marketplace and then in the PEO and insurance, making sure we need we're doing what we need to do to make sure we have a successful open.
Enrollment and drive our insurance attachment.
That's great color and maybe if I can just ask a quick follow up question on the commentary on the PEO side on the improved our insurance attach rate. Obviously last quarter. You also talked about lean up product and I was wondering if that's driving better adoption or you are seeing just better at it all day.
Stronger demand for insurance products.
Yeah. It is.
So I would say that there's a multitude of things that we probably probably tweaked every aspect of how we approach the insurance both in terms of analytics of what we're doing relative to targeting customers that we think can drive we can drive the value proposition there have we changed the technology, we've changed our advisory.
Approach and we've expanded the product choices.
That both employers and employees can have we've improved our educational tools in that process, we got a lot more engagement with our HR advisors.
Clients around that so I would say you know across the board after while we experienced a year ago into first quarter. We've looked at every aspect of it and the team has really done a great job there and just re imagining how we need to approach this and again.
We're only 25% of the way through but we're seeing we're seeing results from from those activities and I and I do think demand for insurance.
It's gonna be interesting, we were very pleased with our renewals.
You've read it in the General press right now you will see that there is a degree of health inflation and when that occurs we do typically see more customers shopping for alternatives that we think we have a good value proposition there.
That's great color. Thank you.
And we'll take our next question from Scott Wurtzel with Wolfe Research. Your line is open.
Great. Good morning, guys and thanks for taking my question, maybe just going back to the acquisition I'm. Just wondering if you can maybe give a little bit more color on.
The strategic rationale behind it and sort of said another way like why now with this deal and maybe relative to some of the other targets you were looking at.
Well.
Oh bracketed three ways.
First thing is that.
Is John .
Dilutive to or said earlier.
The ability for small businesses.
To access funding and small and medium size I should say access funding is important so a week, we had our eyes on looking to build our capability in that area.
The second thing is acquisitions or as you would know.
They don't always present themselves and exactly the timing switch.
Which you expect them to and when an opportunity arises.
So you do what you need to do to take advantage of it we saw an opportunity for a high quality, yes. It.
Decided that it was the right time and I would say that the third is that.
It's an interesting environment for small businesses, so where access to funding opportunities.
Opportunities is becoming more tricky given what's happened with banks and with rising interest rates. So we think the timing seemed to fit pretty well.
Again.
I don't want to spend too much time, it's a relatively modest acquisition based on our revenue side, but we think we've had a lot of success with our paychex advance acquisition.
And it's a very profitable corner of the market and we think we can we can do the same thing with the company that we bought called alternative iron ore.
Yeah, and I I would just add that neither one of these things are new to us.
We we kind of got dragged into this when Covid hit if you remember the PPP program and the banks were struggling to figure out how to access it and we put a program together and that started a partnership with several centex and we did those technology integrations et cetera, and that led to.
A more of a partnership approach and then we have several partners that if we have clients that meet our risk profile and are wanting to you know maybe need debt and fund a payroll or something like that we've got partners that we can introduce them to so we got we got kind of introduced this concept and it has certainly been the macro environment will play out from just that day.
<unk> raising interest rate rising interest rates and we just know we have a lot of great customers out there small and midsized customers very strong businesses that just really struggled to get access to capital at affordable rates and so that's starting to just do a partnership piece and then we had the advanced business, which was kind of.
Doing this for staffing companies and we've been in that has been a great business for us a great acquisition business force introduces our payroll customers. It does not have a lot of positives there and these are adjacent and so literally its one of those classic you're at a conference and you know people, who know people and in the tiny seemed right and just based upon.
They need we saw and the fact that we thought there were opportunities for us to potentially help our strong customers continue to grow their business.
You've already been introducing them to partners why not introduce them to ourselves and get a piece of that action. So that was kind of the strategic rationale and it's a small small small like you said very small at this point in time.
Got it that's super helpful. Thank you and then just as a follow up I mean, just one quickly on the float portfolio.
When you think about the recent fed commentary and dot plot, showing you know maybe a sustained higher rate trajectory then.
A few months ago I'm afraid I know you've talked about in the past wanted to position the portfolio more of longer duration Securities. I was just wondering if this the recent fed commentary sort of gives you even more towards sort of a longer duration securities in the portfolio rather than shorter duration.
Yeah, you know, where we were you're reviewing your monthly to figure out based on and looking at the same top box you are to see what happens. So I would just go back to something I've said it from the point that the fed started raising rates. The problem is and taking advantage of the rates going up the problem is.
What happens when you come down and so we're where we're positioning the portfolio.
We'll position the portfolio.
And I'm sure Bob will do the same.
To be able to manage it in an orderly way on the way down. So we're looking at Oh. This is the time when you want to go longer if you can even or perhaps are there there are opportunities on the short end of the curve because at some point will come.
It will come down and that's what you got to figure out how best to manage and that's what we're working on.
Great. Thank you and congrats on great.
Thank you.
And we'll take our next question from Tien Tsin Huang with Jpmorgan. Your line is open.
The Tianjin.
Hey, good morning. Thanks, I just wanted to follow up on the acquisition the $200 million acquisition here and the strategic fit.
Fit with Paychex advance I remember when that deal was announced and it was a lot about payroll funding and yep.
And factoring and whatnot is this now more about early ways to access and some of the more modern.
Funding opportunities for employees I, just want to make sure I understand what you're adding specifically yeah. Yeah. The short answer is no.
That's a separate that's a separate.
A separate initiative at some point, we'll talk about when it becomes more significant attention. This what they do is more focused on on receivable okay.
So yeah, obviously, we we dipped our toe in the water with staffing firms.
Firms, but we saw an opportunity that was broader than that because our all of our clients have to one degree or another receivables and it can become a source of financing and we've got the data to make it work.
Okay very clear so this isn't a R.
Understood Okay.
No no follow up for me I, just want to wish you even all the best of course for the next chapter and I've said it before you spend real helpful for us for for a long time. So thanks for that that's gonna Miss talking to you.
Thank you.
And we'll take our next question from Peter Christiansen with Citigroup. Your line is open.
Good morning.
Welcome and congrats to Bob and certainly.
Congrats and thank you to a friend.
John I wanted to dig a little bit into your thoughts on SMB lending in general.
Obviously, there's a big money Center bank is.
Getting into the payroll business a bit more in SMB lending is often thought of as a nice adjacency here.
Should we should should we.
Considering the possibility possibility that paychex may need further delve into SMB lending, whether it be merchant cash advances or other types of working capital solutions. These do you see that in paychecks and its future.
Well look I think what we're trying to do is make sure that we're focused on what do we need to do to help our clients succeed and as I said, whether that's through partnership or if theres opportunities for us to participate in that process integrating that with our technology those are the.
Those are really the things that we're interested in and when.
You know when we hear our clients and we're engaging those clients our advisers on a constant basis.
Say this is an issue for them. We go in search for answers and partnerships are a part of that and as I said, we have several partnerships with fintech that we're doing in relationships with large banks.
I can go deeper on that if you want to know about banking and banks in payroll we have businesses that do that but I think in general you should not read anything more into this.
And then the fact, there is a need out there.
We had an adjacent business that has been very successfully managed and has been a good return for our shareholders and there was a natural relationship and opportunity that we thought by us coming in with our balance sheet with our expertise with our client base that we could we could potentially make something of this and so.
Thank you shouldn't read anything more into it to the opportunistic acquisition that matches a need that we're seeing today from our customers and one that based upon the macro environment. We think we're going to grow and I don't think this is a competition with any of the major banks. Most of these clients are just not getting access.
Two two to the phones. It's just it's just not available and if theres more tightening at the regional bank, which is generally the go to place for a lot of these small and medium sized businesses you know that.
That's not that's not good for small business owners and so we're going to try to figure out how we can build partnerships to do that.
Well, thank you that that's super helpful.
And then just as a follow up just wondering if you could call out any trends down to trade wise are there areas, where you see paychex has an opportunity to improve competitive dynamics or vice versa. You know some areas.
You know, where where you're a bit more on defense versus offense, just just any sense on on balance of trade versus some of your competitors.
Maybe some of the regionals as well.
Well, let me I I would just say this we've talked about our sales momentum continues in the first quarter that we saw in the second quarter on a macro side when I'm looking at it I'm not seeing major shifts at all relative to balance of trade and the competitive environment I commented on the fourth quarter.
I do look under it again these things go back and forth I would say, it's leaning a little more in our favor on the competitive front in several key areas that we monitor we had a good.
First quarter in the mid market.
That was that there were several good signs there as well, but it's not it's not monumental Peter it's it it's the same market.
Very stable competitive environment same set of competitors well in mid high N. P. O. It. It's the same cast of characters same kind of pricing environment competitive environment. It's a competitive marketplace. We will leave it at that and I think we're winning more than our fair share.
Oh for sure.
Thanks, again and congrats my friend good luck. Thank you.
<unk>.
Yeah.
And we'll take our next question from Bryan Keane with Deutsche Bank. Your line is open.
Hi, Brian Hi, good morning.
Wanted to ask about the free cash flow increase year over year in the first quarter was it a substantial I think it was up over 23% how much of that was once at one time and working capital and how much should that carry through the fiscal year or should we see a decrease in kind of growth rate in free cash flow to equal out to the same growth.
Of the 9% to 11% earnings growth by the time, we get to the end of the fiscal year.
Yeah, Brian This is Bob I mean, I think that's a fair way to think about it I think as you guys know, we typically don't have big swings in our working capital.
And as I mentioned, we had a little bit of a timing there at the end of the quarter. The core it ended on a big collection day, we had a big influx of cash that would go would go out. The next day. So the way to really think about our operating cash flows and then obviously free cash flow is gets gets impacted by M&A. So there was a little bit of an impact there in Q1 and free cash flows but typically.
Our operating cash flows growth is going to trend in line with with our net income growth and so you'll see that moderate as we move through the year and that's what you should expect from a growth standpoint.
Got it got it and then just a follow up I was hoping to get an update on what you guys are seeing for for SMB bankruptcy rates I know they've been a little bit elevated in the recent past here and just curious if that's a.
Still elevated levels or has it become more normalized.
Yeah, no. So what when we say elevated I think that there are elevated over what we saw during the Covid period.
Two and a half two.
Years.
Actually bankruptcies are still slightly below where they were pre pandemic and kind of trending to or a normalized rate. We have we have seen that I would say, particularly in that startup businesses. When we had the big startup, though we've seen a lot more out of businesses on the very small and we I think we called that out at all.
Press release, our revenue retention.
At near record levels, and when you look at our HR outsourcing businesses at record levels and.
So that's what we've kind of seen on the bankruptcy side the other interesting stats related to bankruptcy.
That kind of surprised me in the first quarter as we actually saw an uptick in new business starts.
Again, we had this big elevated area and then we kind of gravitated back down towards kind of normal levels and we actually saw in the first quarter new business starts.
Click up which was interesting.
Got it great and that for and it's been a real pleasure working with you you'll be missed.
I appreciate it.
And we'll take our next question from Samad Samana with Jefferies. Your line is open.
Great. Thank you.
Miss working with you enjoy a well deserved retirement, Sir I appreciate all the help over the years.
Maybe just a quick one for me a lot of my questions have been asked but just how are you guys seeing the top of the funnel in terms of inbound leads the charge at all any change and maybe interest levels registrations for Webinars, just anything that was a leading indicator of bookings and how's that trended maybe first quarter.
Again I'll go back if a if our sales are growing at double digit rates in the first quarter.
Digital is a ever growing portion of that business you can surmise that that's growing.
As as well so we continue to see strong demand environment across the businesses.
Digitally.
Really across the board I wouldn't doubt it.
Great and then maybe just on your own hiring plans with a quarter doing better than expected and maybe some trends are you seeing any change to your own sales hiring flattens or should we expect that the rich and I'll get back with you.
No really no no no change in plans were yeah. We're certainly in that in the second quarter always in the staffing up and making sure. We're fully staffed enable to cover any thought or planned attrition going into the selling season, both on the service side and the sell side. So I you know I think it's fair to say when.
When you have now going on close to three quarters of strong demand when you've been rather relatively is it going to is it going to stay is it gonna stay we start we want to make sure that we're properly staffed to take full advantage of all of the opportunity and our selling season and were fully staffed on the operations and the service side to make sure that we can.
Both the onboard.
Services clients during the year end.
Great I appreciate you taking my questions. Thank you.
Yeah.
And we'll take our next question from Eugene chimney with Moffat Nathanson. Your line is open.
Thank you good morning, guys and congratulations.
Bob.
I think we will certainly miss working with you Bob look forward to working with you.
Have a two quick follow ups, one time together your comments on sales and her in.
Can you comment how it adds together to climb girl its trends. This year. So far last year was a bit below your historical target range I think you've commented that last quarter I bet.
If you are you are you looking for a re acceleration in client guerrilla type off per se.
So can you comment on how it's going so far so Eugene I'll.
I'll start that and then John .
Hum It really if I were to give you a number it would give you some sort of pool.
Since of what reality is it's almost impossible to draw it.
And on that.
You are in first quarter in some ways some.
Some trends.
Some trends are positive.
And you can draw conclusions on.
Project out through the year, but client base is really a tricky one of the reason is just lose so movie and game. So many.
In the selling season.
It's almost a it's.
Almost difficult to predict we expect to be a bit better than we were last year, but it's still early.
Got it okay.
And then and now that fall off.
P O N and the question there is in your P. All customer base.
Textbook control have you seen any trends that are different from your overall base, whether that all worse employment growth yeah.
Yeah, I would say, it's probably consistent we definitely see in it.
<unk> employees in our PEO clients in our PEO business, adding employees I wouldn't say, it's a huge tailwind, but it's positive and probably in line with what we're seeing in other areas of the business.
Got it okay. Thank you very much guys. Thank.
Thank you.
And we'll take our next question from Mark Marcon with Baird. Your line is open.
Hey, good morning.
They are friends, we go back a long ways, it's been an absolute pleasure working with you.
Wanted to thank you for the relationship.
Bob looking forward to working with you but.
I'm afraid it's been an absolute pleasure.
A lot of questions have been on on the short term.
John One one big picture question you know.
A quarter ago, everybody was asking about hey, I, obviously you've been.
Paychex has been doing a lot with AI for a long period of time I'm wondering if you can just talk a little bit about now that.
You know some of these <unk> have been around for a couple of.
<unk>.
You know permeated the consciousness, how how are you thinking about you know further evolution of your journey with AI and what are the longer term implications from a margin perspective or a scope of business perspective.
Wow, that's the Mark that is a big question, so everybody's asking about like water.
No. It's a great one because I I really think this is probably has the potential to be one of the biggest differentiators that's going to help a company like paychex separate ourselves from the rest.
Because as you said the large language models it starts with a large and it is the only way that this works.
You've got to have a large set of data at large sets of data coming through to continually train those models out.
I'll also say relative to.
It's expensive to do and it is getting more expensive.
In terms of finding the people in and buying the technology and I think that's gonna also bought some people out.
But let me just give you some idea I mean, we have multi.
Multiple teams across the organization looking at every aspect of our business front office back office, G&A and evaluating how we could better leverage all of the capabilities of the data that we have so think of it today, we're recording six five.
5 million calls with our clients.
This year, we're transcribing those calls.
We are using analytics to determine whether or not we have a service opportunity or if we have a sales opportunity or an up sell opportunity and the conversations that we're having with our advisors.
We are already doing almost 1 million natural language processing and analysis on our sales conversations with prospects.
Looking for what are the right phrases words.
Market segments.
Where we're winning and then adjusting that overnight and changing our sales play the next morning.
Using some of that in our in our Poe, we've nearly doubled our closure rates.
In the first quarter.
Yeah, I mean, I just I just could go on and on about where we're piloting and testing and using our data to do this and so I think theres tremendous opportunity and then when you begin to product ties us to start thinking about the values that we can provide the retention insights, which we launched I keep bringing this up we don't want just a year and a half a year and a half ago, we want to.
Award for AI, and I think at the time no one even road anything much about it and because I always think people knew what I was.
And quite frankly, it's it's it's I think that's just one example of multiple examples we're going to be able to drive more value to customers and so I think we're gonna be able to go with a value proposition now to be fair. There's other large competitors that probably you are going to make similar claims, but I certainly think it's a differentiator if you run a local payroll company.
You're not going to have the same data and the insights that paychex has relative to what's going on in your area and what's going on in the labor market and if we can harness that and use technology to deliver that to our salespeople our service people and our HR advisors I think the trusted advisor position that we've already established ourselves.
For small and medium sized businesses is only going to be further sustained and probably increase.
So I think Bob's, giving me the hooked up to get onto the bandwagon.
Hello.
Yeah.
Okay.
For my follow up just a quick question just in terms of the margin uplift from the first half to the second half aside from normal seasonality and obviously float balances.
You know certain forms processing.
There anything to call out above and beyond that is it just a pace of investments in the first half being a little bit front end loaded.
Yeah, I think that's it mark it's a couple of things one wanted.
If you noticed the pattern you know pretty obvious we had a hindrance to.
Frontload, a little bit more of spending in part due to make sure that we're prepared for.
For selling season of minutes, we'd get into the fourth quarter typically we have eaten up our spending in anticipating in anticipation of starting.
A year or a stronger Q3 as you know because you have the influx of annual processing generally next Q3 margins higher and then and then Q4 got it.
Great.
In prior years when you combine those two you get to a little bit more spending in the first half.
A little bit less in the back half, but more revenue in the back half.
Margin uplift that I mentioned is there's nothing unusual about it it just is the word.
But the revenue and expenses flow through.
Terrific. Thanks again.
Working with you.
Thank you.
And we'll take our last question from James Faucette with Morgan Stanley . Your line is open.
Thank you very much and I want to share my congratulations to Bob on that front just.
Just wanted to quick follow up question here on on PEO.
And you'd mentioned some of your customers and I think you've kind of talked about this and had.
Back on providing ancillary services like insurance, 401k, et cetera, but now you're calling out some growth in those same ancillary services. That's the driver appeal Brooklyn quarter, what are the things that you're watching for to gauge like the durability of that improvement and kind of a response by your car.
Tomorrow and employers.
So James you mean, what are we looking at yeah, yeah like what are the like one of the things in a more macro economy or even in your customer behavior to try to gauge and projected.
Project the durability of.
That improvement.
Well, let me start and then John chunk, and then maybe Bob can weigh in so.
Wanted to make sure that I'm.
Answering your question correctly.
I think I think the key thing and and if he's stepped back on the PEO.
We saw that attachment last year wasn't where we expected it to be.
And also we saw an opportunity to tilt the balance a bit between what was an asset sale versus a sale. So what we're looking at at least historically years' first are we positioned appropriately on the insurance side to be able to take advantage of that and and <unk>.
Create momentum as we go into some key points in the year, which occur in the fall and then at the beginning of the year on insurance attachment.
Things James that's important to point out last year. When we were talking at this point, we were seeing actually something unusual where we're seeing clients dropping insurance and actually a law.
Lowering their attachment I'm, sorry, not the attachment there Roman so.
We haven't seen that start the year, so the absence of a negative.
So I think we're right that's 111 piece and John called out something I think that is that it's important also that the balance between what what what we're seeing on here so that.
That seems to kind of come into a little bit more balanced so I think those things.
Both.
<unk> started the year well.
Yeah, No I should say try understand so so remember we've got you've got existing client behavior, particularly as it relates to attachment and again, it's always difficult because the insurance. It's pass through it doesn't have a huge impact on margin as an oversized impact on the revenue number right because it is.
It works and so you've got two dynamics, one was existing customers that have the product.
Are they continuing to want that attachment and then what are they attaching patching the Cadillac plan or the basic value plan.
That's the first decision in last year, we had something we normally don't see and we have not seen thus far through our enrollment of people at deference that instead of going to a horror plant dropping and not offering.
We're not seeing that behavior, we saw that last year.
We saw less people, just opting to want to add that or seeing value in adding the insurance, but they wanted the HR and they wanted the technology and they wanted our advisory services that they weren't in the a S. O bucket now we're going back to some of them that are now saying, okay wait now I do want to add the insurance and now work.
We're upgrading them to the P O offerings. So what we're seeing is both in terms of new logo demand some new net customers to pay check.
Strong demand in our ASO and PEO market with attachment rates in the P. O similar to what we saw prior to the 23 experience.
And then the third thing that we've got going on is we're going back into this so a group of clients that we were last year, and we're going back and using analytics and using value propositions.
To see if we can go back and have some of those clients upgrade and add insurance as part of their value proposition I hope that answers your question I wasn't clear James.
Got it.
That's actually really helpful and I guess, just as a and so it sounds like for most of your employers in terms of their behavior on particularly some of those those offerings is that they're kind of reverting back to what you would expect to be in a normalized environment and really it was last year that was really atypical.
Yes, that's that's what I would say it again I mean, you just make stuff up but I always try to remember two years ago was the greatest resignation.
Last year. This time, the bottom was going to fall out of the economy and that all is the recession was right around the corner.
If I recall that I mean, it's just it's been a very emotional roller coaster ride for small and medium sized businesses and when they're making a decision.
Hum of this magnitude because you're making a commitment to your employees that you can offer a benefit and the expectation is youre baking that into your business model going forward and so I think there was a lot of hesitancy now does that mean small medium sized businesses are more confident today than they were last year I don't know, but what I can tell you is we're seeing more behavior.
It's similar to what we've seen in historical patterns and last year. It seems seems to be an anomaly again, I'm only 25% through the enrollment, but you know what I'm, saying right now.
We'll know more in the next call, let's leave it at that.
Got it that's really helpful. Thank you guys.
Okay I appreciate it.
Okay, Shelby I think that wraps it up at this point, we will close the call if you're interested in replaying. The webcast of this conference call. It will be archived for approximately 90 days again, that's on the Paychex Investor website, where we also have all these fabulous reports for you Reed.
And again, we want to thank you for your interest in Paychex and hope everyone has a great day.
That concludes today's teleconference. Thank you for your participation you may now disconnect and have a wonderful day.
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