Q3 2024 Paychex Inc Earnings Call

April 2, 2024

Yeah.

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Note. This call is being recorded and it is now my pleasure to turn today's call over to President and Chief Executive Officer, John Gibson. Please go ahead.

Thank you Mike.

Thank you everyone for joining our discussion today on the Paychex third quarter fiscal year 2024 earnings release, joining me today is Bob Schaffer.

<unk>, our chief Financial Officer.

This morning before the market opened we released our financial results for the third quarter you can access our earnings release on our Investor Relations website, our Form 10-Q will be filed with the SEC within the next day.

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

I'm going to start the call today with an update on the business highlights for the third quarter, and then turn it over to Bob for a financial update and then of course, we'll be happy to take your questions.

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We delivered solid results in the third quarter and the first nine months of the current fiscal year total revenue growth of 4% in the third quarter reflected a lower contribution for our employee retention tax credit or E. R. A T C service as compared with the prior year period. This is.

[music].

None: Good day, everyone and welcome to today's Paychex third quarter earnings Conference call.

None: At this time all participants are in a listen only mode.

None: Later, you will have an opportunity to ask questions. During the question and answer session.

None: You May register to ask a question at any time by pressing star one on your telephone keypad. Please.

Consistent with our previously communicated expectations that E. R. T C revenue would become a headwind in the second half of the current fiscal year. Excluding this impact our total revenue growth accelerated to 7% in the quarter.

None: Please note. This call is being recorded and it is now my pleasure to turn today's call over to President and Chief Executive Officer, John Gibson. Please go ahead.

John B. Gibson: Thank you Mike.

John B. Gibson: You everyone for joining our discussion today on the Paychex third quarter fiscal year 2024 earnings release, joining me today is Bob Schaffer Schrader, our Chief Financial Officer.

While our new client volumes remain solid and in line and both client and revenue Retentions were in line with our expectations several factors, including our decision to wind down.

John B. Gibson: This morning before the market opened we released our financial results for third quarter, you can access our earnings release on our Investor Relations website, our Form 10-Q will be filed with the SEC within the next day.

E. R. T C program based upon the recent legislative developments on Capitol Hill continued moderation of employment growth within our client bases.

And slightly lower realized rates all combine to create headwind.

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

Headwind than what we had anticipated in the quarter.

With the end of the E. R. A T. C program. We are now officially in the post pandemic era have paychecks.

None: I'm going to start the call today with an update on the business highlights for the third quarter, and then turn it over to Bob for a financial update and then of course, we'll be happy to take your questions.

And I will tell you I am very pleased with how our teams have performed during these past several years, we put nearly $90 billion of financial aid into the hands of our clients.

None: We delivered solid results in the third quarter and the first nine months of the current fiscal year total revenue growth of 4% in the third quarter reflected a lower contribution for our employee retention tax credit or <unk> service as compared with the prior year period.

And based upon an analysis by M. I T. We estimate that we saved over 300000 small business jobs.

While these pandemic there are programs are not part of our normal reoccurring revenue product strategy or our business model at Paychex. They were certainly consistent with our purpose and that's simply to help businesses succeed and I believe that we are a better company today than when we entered the pandemic before years ago.

None: Consistent with our previously communicated expectations that <unk> revenue would become a headwind in the second half of the current fiscal year. Excluding this impact our total revenue growth accelerated to 7% in the quarter.

None: While our new client volumes remain solid and in line and both client and revenue Retentions were in line with our expectations.

We are winning in the marketplace and our long proven our recurring revenue growth Formula still holds true in this post pandemic and digitally driven era for the company.

None: Factors, including our decision to wind down.

None: The RTC program based upon the recent legislative developments on Capitol Hill continued moderation of employment growth within our client basis, and slightly lower realized rates all combined to create headwind.

Focus client growth value based price realization increased product penetration and opportunistic acquisitions are still the key pillars of the paychex growth strategy.

We are exiting the pandemic era with an even greater focus on our purpose more opportunities to impact our clients and their employees and with an even stronger reputation as a trusted adviser to small and mid sized business owners.

None: Larger headwind than what we had anticipated in the quarter.

None: With the end of the <unk> program. We are now officially in the post pandemic era at Paychex.

None: And I will tell you I am very pleased with how our teams have performed during these past several years.

Despite the headwinds in the quarter, we delivered 7% growth in diluted earnings per share and expanded operating margins due to our long standing tradition of expense discipline.

None: We put nearly $90 billion of financial aid into the hands of our clients.

None: And based upon an analysis by <unk>.

One of the best operators in the business, we continued to demonstrate our ability to deliver on earnings and uncertain times.

None: We estimate that we saved over 300000 small business jobs.

None: While these pandemic air programs are not part of our normal reoccurring revenue product strategy or our business model at Paychex. They were certainly consistent with our purpose.

And still make the necessary strategic investments to drive long term profitable growth.

Our culture of expense management, along with investments we've made the past several years and Digitization and enhanced sales and operational excellence capabilities have positioned us well for future profitable growth as well.

None: And that's simply to help businesses succeed.

None: I believe that we are a better company today.

When we entered the pandemic four years ago.

None: We are winning in the marketplace and our long proven.

The macroeconomic and labor market remains challenging for small and midsized businesses.

None: Revenue growth Formula still holds true in this post pandemic and digitally driven Eric for the company.

Job market for qualified workers reduced access to affordable growth capital and inflationary pressures continue to be headwinds for small businesses are.

None: Focused client growth value based price realization increased product penetration and opportunistic acquisitions are still the key pillars of the paychex growth strategy.

Our small business employment watch continues to show moderation.

Both job growth and wage inflation.

But however, a relatively stable macro environment.

None: We are exiting the pandemic era with an even greater focus on our purpose more opportunities to impact our clients and their employees and with an even stronger reputation as a trusted advisor to small and mid sized business cylinders does.

The softening in hiring we started to see in the second quarter continued in the third quarter. There is more choppiness in hiring across all customer segments and industries now.

Our clients tell us they still can't find qualified employees and are not willing to hire just anyone at higher wage rates, especially in areas with Richard recent minimum wage increases and aggressive legislation legislative changes.

None: Despite the headwinds in the quarter, we delivered 7% growth in diluted earnings per share and expanded operating margins due to our long standing tradition of expense discipline as one of the best operators in the business. We continue to demonstrate our ability to deliver on earnings and uncertain times and still make.

The demand for our HR technology, and advisory solutions remains robust and the volumes of new clients added in the quarter were strong we continue to deliver value for our customers as seen in our revenue retention results, which remain above pre pandemic levels.

None: The necessary strategic investments to drive long term profitable growth.

None: Our culture of expense management, along with investments we've made the past several years and digitization and enhanced sales and operational excellence capabilities.

And retention from the third quarter was also in line with pre pandemic levels in both revenue and HR outsourcing Worksite employee retention remains at record levels as we continue to focus our resources on acquiring and retaining high value clients.

None: Positioned us well for future profitable growth as well.

None: The macroeconomic and labor market remains challenging for small and midsized businesses are.

None: A tight job market for qualified workers reduced access to affordable growth capital and inflationary pressures continue to be headwinds for small businesses.

Our sustained high revenue retention demonstrates that our value proposition and our market leadership remain intact. The fundamentals of paychex are sound.

None: Our small business employment watch continues to show moderation.

None: Job growth and wage inflation.

I'd like to highlight the success in our PEO business, specifically, which has continued to gain momentum with strong results. During the first nine months of the fiscal year. We finished the quarter with strong results in sales attention.

None: But however, a relatively stable macro environment.

None: The softening in hiring we started to see in the second quarter continued in the third quarter. There is more choppiness in hiring across all customer segments and industries now are.

And insurance enrollment we.

None: Our clients tell us they still can't find qualified employees and are not willing to hire just anyone at higher wage rates, especially in areas with recent minimum wage increases and aggressive legislation legislative changes.

We have continued to see a shift back towards the P O offering both outside and inside our client base. This shift mix has a long term positive impact on the customer lifetime value on our model, particularly as clients attach insurance benefit.

AI and related technology investments are also key areas of focus in our industry and something that as many of you know we've been focused on for many years. We are proud to announce that we successfully implemented in the quarter. Several additional innovative AI models that significantly improved results for PE.

None: The demand for our HR technology number three solutions remains robust and the volumes of new clients added in the quarter were strong we continue to deliver value for our customers as seen in our revenue retention results, which remain above pre pandemic levels client retention for the third quarter was also in line with prepay.

Checks at our clients.

None: Levels in both revenue and HR outsourcing Worksite employee retention remains at record levels as we continue to focus our resources on acquiring and retaining high value clients.

Virginia innovative technology and advanced analytics has allowed us gain deeper insights into prospects.

And client behavior their preferences and their growing needs.

Last month, we announced the Beaumont Vance has joined the company as our senior Vice President of data analytics and AI in this newly created role he will be responsible for refining and executing the company's data strategy, including the use of business intelligence advanced analytics, and AI driven automation to drive both.

None: Our sustained high revenue retention demonstrates that our value proposition and our market leadership remain intact, the fundamentals of paychex our Sam.

None: I'd like to highlight the success in our <unk> business, specifically, which has continued to gain momentum with strong results. During the first nine months of the fiscal year. We finished the quarter with strong results in sales retention.

<unk> business performance and enhanced customer value. We are excited to have Beaumont onboard to help us capture the full value of our vast data assets.

None: Insurance enrollment.

None: We have continued to see a shift back towards the P O offering both outside and inside our client base.

I wanted to say.

Thanks to the hard work of our more than 16000 employees and their focus on our company's values Paychex continues to be recognized for both what we do and more importantly in my opinion, how we do it we are proud to be recognized for the 16th time by Ethisphere as one of the worlds.

None: This shift mix has a long term positive impact on the customer lifetime value on our model, particularly as clients attach insurance benefits.

None: AI and related technology investments are also key areas of focus in our industry and something that as many of you know we've been focused on for many years.

F ethical companies in their recent annual west pay.

None: We're proud to announce that we successfully implemented in the quarter. Several additional innovative AI models that significantly improved results for paychex and our clients.

Paychex was also recently recognized by Fortune magazine as one of the most innovative company for the second consecutive year. These.

None: Leveraging innovative technology and advanced analytics has allowed us to gain deeper insights into prospects.

These recognitions in the many product and service awards that we've received in the past year and over the decades is a testament to the strength of our business model culture, and the commitment to invest in our business and our employees to deliver long term value for our customers and investors.

None: And client behavior their preferences and their growing needs.

None: Last month, we announced that Beaumont Vance has joined the company as our senior Vice President of data analytics and AI.

I'm very proud of how our employees have delivered for our customers for each other for our communities and for our shareholders throughout the pandemic area. We exit the period at this period and Paychex history, more focused and determined to be the digital.

None: Its newly created role he will be responsible for refining and executing the company's data strategy, including the use of business intelligence.

None: Analytics, and AI, driven automation to drive both improved business performance and enhanced customer value.

We are excited to have onboard to help us capture the full value of our vast data assets.

Digitally driven HR leader in our industry and we are even better positioned to capture the opportunities in the markets we serve.

None: I wanted to say.

I'll now turn it over to Bob to give you a brief update on our financial results for the quarter.

None: Thanks to the hard work of our more than 16000 employees and their focus on our company's values Paychex continues to be recognized for both what we do.

Thanks, John and good morning, everyone I'd like to start by reminding everyone that today's commentary will contain certain forward looking statements that refer to future events and therefore involves some risk. In addition, I will periodically refer to some non-GAAP measures like adjusted diluted earnings per share I'd refer you to our press release for our customary disclosures around those metrics.

None: And more importantly in my opinion, how we do it we are proud to be recognized for the 16th time by Ethisphere as one of the world's most ethical companies in their recent annual West <unk>.

I'll start with a summary of our third quarter and year to date financial results and then provide an update on our fiscal 'twenty for outlook and as promised to many of you on the phone I will share some preliminary thoughts around fiscal 'twenty five.

None: Paychex was also recently recognized by Fortune magazine as one of the most innovative company for the second consecutive year. These.

None: These recognitions in the many product and service awards, we have received in the past year and over the decades is a testament to the strength of our business model culture, and the commitment to invest in our business and our employees to deliver long term value for our customers and investors.

Total revenue for the quarter increased 4% to $1 $4 billion, which reflects a lower contribution from our E. R. A T C as compared to the prior year quarter.

Management solutions revenue increased 2% to $1 billion. This was primarily driven by growth in the number of clients served across our suite of HCM solutions and increased product penetration and that was offset by the decline in our E. R. T C revenue and as we disclosed in the press release that was impacted impacted growth by about 300 basis point.

None: I'm very proud of how our employees have delivered for our customers for each other for our communities and for our shareholders throughout the pandemic area. We exit the period at this period in Paychex history, more focused and determined to be the digital.

P O and insurance solutions revenue increased 8% to $346 million that was driven by higher average worksite employees and an increase in our PEO insurance revenues are P. O saw continued momentum in Worksite employee growth and medical plan participant volumes during the third quarter.

None: Digitally driven HR leader in our industry and we are even better positioned to capture the opportunities in the markets we serve.

I'll now turn it over to Bob to give you a brief update on our financial results for the quarter.

Robert L. Schrader: Thanks, John and good morning, everyone I'd like to start by reminding everyone that today's commentary will contain certain forward looking.

Interest on funds held for clients increased 25% to $44 million, primarily due to higher average interest rates total expenses increased 3% to $790 million expense growth was attributable to higher compensation costs and PEO direct insurance costs related to the higher average worksite employees as well as the higher insurance revenues.

Robert L. Schrader: They refer to future events and therefore involve some risk. In addition, I will periodically refer to some non-GAAP measures like adjusted diluted earnings per share I'd refer you to our press release for our customary disclosures around those metrics I'll start with a summary of our third quarter and year to date financial results and then provide an update on our fiscal 'twenty for outlook and ads promise.

In the quarter.

Operating income increased 6% to $650 million with an operating margin for the quarter of 45, 1% that represents about 80 basis points of margin expansion over the prior year period I would like to highlight that is just that margin expansion is despite the E. R. A T C headwind there that we just called out we were still.

Robert L. Schrader: To many of you on the phone I will share some preliminary thoughts around fiscal 'twenty five.

Robert L. Schrader: Total revenue for the quarter increased 4% to $1 4 billion, which reflects a lower contribution from our <unk> as compared to the prior year quarter.

Robert L. Schrader: Management solutions revenue increased 2% to $1 billion. This was primarily driven by growth in the number of clients served across our suite of HCM solutions and increased product penetration and that was offset by the decline in our <unk> revenue and as we disclosed in the press release that was impacted impacted growth by about 300.

Able to deliver really strong a margin expansion in the quarter and I think as many of you know E. R. T C. It's pretty much like interest rates, it's pretty much all margin.

Both diluted earnings per share and adjusted diluted earnings per share increased 7% to $1 38, I'll quickly summarize our results for the year to date period total revenue grew 5% to $4 billion.

Robert L. Schrader: At this point.

Robert L. Schrader: And insurance solutions revenue increased 8% to $346 million that was driven by higher average worksite employees and an increase in our PEO insurance revenues are saw continued momentum in worksite employee growth and medical plan participant volumes during third quarter.

Management solutions revenue increased 4% to $2 9 billion.

Oh and assurance solutions increased 7% to 939 million and interest on funds held for clients increased 44% to $108 million.

Total expenses for the first nine months grew 4% to $2 3 billion and our operating margins for the first nine months of the year were 42, 5% net 70 basis points expansion over the prior year period Duluth.

Robert L. Schrader: Interest on funds held for clients increased 25% to $44 million, primarily due to higher average interest rates total expenses increased 3% to $790 million expense growth was attributable to higher compensation costs and PEO direct insurance costs related to the higher average worksite employees as well as the higher insurance revenues.

Diluted earnings per share and adjusted diluting earnings per share both increased 9% year over year to $3 62 and.

And $3 60, respectively.

Robert L. Schrader: In the quarter.

Robert L. Schrader: Operating income increased 6% to $650 million with an operating margin for the quarter of 45, 1% that represents about 80 basis points of margin expansion over the prior year period I would like to highlight that is just.

I'll now I'll give you a quick overview of our financial position as many of you know we maintain a strong financial position with high quality cash flows and earnings generation, our balance for cash restricted cash and total corporate investments was $1 $8 billion and our total borrowings were approximately $817 million as of the end of the quarter.

Robert L. Schrader: That margin expansion is despite the <unk> headwind that we just called out we were still able to deliver really strong margin expansion in the quarter and I think as many of you know <unk> is pretty much like interest rates, it's pretty much all margin.

Cash flow from operations for the first nine months was $1 7 billion, that's up 30% compared to the same period last year.

Was driven primarily by higher net income and fluctuations in working capital and we returned a total of $1 $1 billion to shareholders through the first nine months of the year that included $963 million in dividends and $169 million of share repurchases and our 12 month rolling return on equity.

Robert L. Schrader: Both diluted earnings per share and adjusted diluted earnings per share increased 7% to $1 38, I'll quickly summarize our results for the year to date period total revenue grew 5% to $4 billion.

Robert L. Schrader: Management solutions revenue increased 4% to $2 9 billion.

So in insurance.

Robert L. Schrader: That 5% to $939 million in interest on.

Remains robust.

47%.

Robert L. Schrader: Pretty much $108 million.

I'll now turn to our updated guidance for the current fiscal year.

Robert L. Schrader: Total expenses for the first nine months grew 4% to $2 3 billion and our operating margins for the first nine months of the year were 42, 5% necessary basis points expansion over the prior year period.

Outlook assumes the current macro environment, which obviously had some level of uncertainty we have revised our guidance on certain measures based on performance. This quarter and this also reflects the impact of our decision to wind down our E. R. A T. C service based on recently proposed legislation I just wanted to pause there for my prepared remarks to provide a little bit more color.

Robert L. Schrader: Rooted earnings per share and adjusted diluting earnings per share both increased 9% year over year to $3 62.

Robert L. Schrader: And $3 60, respectively.

On the RTC I think many of you guys are aware that there is bipartisan legislation out there that would and the E. R. T C program.

None: I'll now give you a quick overview of our financial position as many of you know we maintain a strong financial position with high quality cash flows and earnings generation, our balance for cash restricted cash and total corporate investments was $1 $8 billion and our total borrowings were approximately $817 million as of the end of the quarter.

Retro to January 31st of this year I think it's passed the house it hasn't yet passed the Senate, but that does create a level of uncertainty around E. R. T. C. We continued to sell it in the month of February we made a decision based on that level of uncertainty to stop recognizing the revenue on E. R. T C.

None: Cash flow from operations for the first nine months was $1 7 billion, that's up 30% compared to the same period last year.

Subject to or subsequent to January 31st and we essentially removed it from the forecast in Q4, and so that's part of what you see as it relates to the impact of the quarter and also impacts the guidance set at the updated guidance that I'm about to give you a for the year.

Management solutions is now expected to grow in the range of 3.5% to 4%. We previously had guided to the lower end of the 5% to 6% range.

Remains robust at 47%.

None: I'll now turn to our updated guidance for the current fiscal year.

Oh and insurance is still expected to grow in the range of 7% to 9%. Although we now expect that it will be more towards the lower end of that range interest on funds held for clients is still expect expected to be in the range of $140 million to $150 million.

None: Outlook assumes the current macro environment, which obviously had some level of uncertainty we have provided our guidance on certain measures based on performance. This quarter and this also reflects the impact of our decision to wind down our E. RTC service based on recently proposed legislation I just wanted to pause there for my prepared remarks that provide a little bit more color.

Total revenue is now expected to grow in the range of 5% to 6% our prior guidance was with six to seven.

On <unk> I think many of you guys are aware that there is bipartisan legislation out there that would and the RTC program.

Other income net is expected to be income in the range of $40 million to $45 million and this is raised from the previous guidance of $35 million to $40 million our guidance for operating margins and effective tax rate are unchanged. Although we still do anticipate being at the high end of the operating margin guidance range, which was.

None: Retro to January 31st of this year I think it passed the house it hasn't yet passed the Senate, but that does create a level of uncertainty around E. RTC. We continued to sell it in the month of February we made a decision based on that level of uncertainty to stop recognizing the revenue on E. R. T C.

Was <unk>, 41% to 42% and adjusted diluted earnings per share is still expected to grow in the range of 10% to 11%.

None: Subject to or subsequent to January 31, and we essentially removed it from the forecast in Q4, and so that's part of what you see as it relates to the impact of the quarter.

Now, let me just provide a little bit of color on the fourth quarter. We are currently anticipating total revenue growth to be approximately 5% in Q4, we expect that <unk> <unk> headwind to management solutions growth in the fourth quarter to be similar to what it was in the third quarter and we would also expect operating margins to be around 40%.

None: It also impacts the guidance set at the updated guidance that I'm about to give you for the year.

None: Management solutions is now expected to grow in the range of 3.5% to 4%. We previously had guided to the lower end of the 5% to 6% range.

In the quarter.

We are currently in the middle of our annual budget process and working on our expectations for the next fiscal year. We obviously will provide formal guidance like we normally do it at the end of the Q4, when we get to that call. However, I will share some preliminary thoughts and I will emphasize the word preliminary around what we're expecting for fiscal <unk>.

None: Oh and insurance is still expected to grow in the range of 7% to 9%. Although we now expect that it will be more towards the lower end of that range interest on funds held for clients is still expect expected to be in the range of $140 million to $150 million.

25 on a preliminary basis, we would expect total revenue growth to be consistent with the fourth core growth rate and as a reminder, as I. Just told you that would be in the 5% range and this does include a headwind from E. R. T C.

None: Total revenue is now expected to grow in the range of 5% to 6% our prior guidance with six to seven.

None: Other income net is expected to be income in the range of $40 million to $45 million and this is raised from the previous guidance of $35 million to $40 million our guidance for operating margins and effective tax rate are unchanged. Although we still do anticipate being at the high end of the operating margin guidance range, which was.

Approximately 2% and E E R. A T C for all intensive purposes is zero going forward I know what that headwind is going to be I know what the dollar amount was this year and it will be approximately a 2% headwind to revenue growth for FY 'twenty five and that is assumed in the 5% range number that I gave you and then despite this headwind.

None: What is 41% to 42% and adjusted diluted earnings per share is still expected to grow in the range of 10% to 11%.

We are committed to delivering operating margin expansion in fiscal 'twenty five we are still going through the annual budget process working through the details will will provide more color as we get to the end ended the year.

None: Now, let me just provide a little bit of color on the fourth quarter. We are currently anticipating total revenue growth to be approximately 5% in Q4, we expect that <unk> <unk> headwind to management solutions growth in the fourth quarter to be similar to what it was in the third quarter and we would also expect operating margins to be around 40%.

Obviously this is based on our current assumptions, which we're still working through.

Those may change, but we will update you again, when we get to the to the fourth quarter I'll refer you to our investor slides on our website for additional information and with that I'll turn it back over to John Okay. Thank you Bob Mike will now open it up for questions.

None: In the quarter.

Absolutely at this time, if you'd like to ask a question. Please press the star and one on your telephone keypad now.

They remove yourself from the queue at any time by pressing star two and once again that is star one if you'd like to ask a question, we'll pause for just a moment to allow questions to queue.

None: 25 on a preliminary basis, we would expect total revenue growth to be consistent with the fourth quarter growth rate and as a reminder, as I. Just told you that would be in the 5% range and this does include a headwind from <unk>.

And we do have our first question from Mark Mark Hahn with Baird.

Good morning, and thanks for taking my questions. So I.

None: Approximately 2% and E. R. T C for all intensive purposes is zero going forward I know what that headwind is going to be I know what the dollar amount was this year and it will be approximately a 2% headwind to revenue growth for FY 'twenty five and that is assumed in the 5% range number that I gave you and then despite this headwind.

E R. A T C. Just one thing just to clarify Bob what when you talk about but you sold it in February but because of the legislation.

You're going to end.

The bipartisan and it's basically going back and retroactively in January 1st so.

None: We are committed to delivering operating margin expansion in fiscal 'twenty five we are still going through the annual budget process working through the details will who will provide more color as we get to the end ended the year.

You've been stopped recognizing the revenue did you.

If any your T see revenue from that you sold from January 1st.

Through February.

Actually included in the third quarter number that you just reported yeah.

None: Obviously this is based on our current assumptions, which we're still working through.

None: Those may change, but we will update you again, when we get to the to the fourth quarter I'll refer you to our investor slides on our website for additional information and with that I'll turn it back over to John Okay. Thank you Bob Mike will now open it up for questions.

Everything that we sold in and filed in the month of January Mark.

Is included in the quarter, but nothing beyond January 31st So we continued to sell it in the month of February I would say the deferred.

The faucet was.

Still running a study.

Mike: Absolutely at this time, if you would like to ask a question. Please press the star and one on your telephone keypad now.

In February I E. R. T C and we made the decision not to recognize revenue around that just because there's so much uncertainty and obviously, we're telling our clients that.

Mike: You may remove yourself from the queue at any time by pressing star two.

Mike: Once again that is star one if you'd like to ask a question, we'll pause for just a moment to allow questions to queue.

Because of that level of uncertainty at that Bill does pass.

We would not we would refund their their their monies for the for the service that we sold in the month of February. So you know we think it's the right decision from an accounting standpoint to stop recognizing revenue on it and then I would just say as we move forward in the month of February that faucet has slowed to a drip on ear Tc obviously, we're not focus.

Mike: And we do have our first question from Mark Mark Hahn with Baird.

Mark Steven Marcon: Good morning, and thanks for taking my questions. So.

E R. A T C. One thing just to clarify Bob what when you talk about but you sold it in February but because of the legislation.

On it and it's you know, there's probably a little bit that they came in in March but that was probably stuff that we already had kind of in the Q that we were still processing. It it's pretty much you know that that program is over.

Mark Steven Marcon: Youre going to end.

Mark Steven Marcon: Basically bipartisan and Theres basically gonna and retroactively in January 1st.

Mark Steven Marcon: So you've been stopped recognizing the revenue did you.

Mark Steven Marcon: If any your TCE revenue from that you sold from January one through.

Yeah go ahead.

I mean, just related to you know the guide that you were fighting I was you know obviously for the third quarter.

Mark Steven Marcon: Through February.

Actually included in the third quarter number that you just reported yeah.

You know we've been management solutions because of the E. R. A T C headwind.

Everything that we told and filed in the month of January Mark.

Things where were tougher and it seems like you actually did see some you know acceleration ex E. R. T. C. On total revenue. So I was just wondering like is.

None: Is included in the quarter, but nothing beyond January 31st So we continued to sell it in the month of February I would say the <unk>.

Is there any way to quantify the impact in terms of not recognizing that.

None: The faucet.

None: Running a study.

That revenue when in February.

None: In February <unk>, and we made the decision not to recognize revenue around that just because there's so much uncertainty and obviously, we're telling our clients that.

Because obviously you were anticipating that coming in.

So any any thoughts there yeah.

Yeah, I mean high level, Mark I mean, you know we.

None: Because of that level of uncertainty at that Bill does pass we would not we would refund their monies for the for the service that we sold and in the month of February. So you know we think it's the right decision from an accounting standpoint to stop recognizing revenue on it and then I would just say as we move forward in the month of February.

We provided guidance.

Guidance for the quarter.

I think we you guys know what the guidance was that we provided for the quarter the the.

Q3 actually came in maybe about 100 basis points in that range lower than than what we had sat in and I would say you know probably a third or a little bit more of that was was related to the decision that we took on an ear T. C. C. You could probably do the math on that and back into it to get to a number that's close to.

None: Pass it had slowed to a drip on the RTC, obviously, we're not focused on it and it's you know, there's probably a little bit that they came in in March but that was probably off that we already had kind of in the Q that we were still processing. It it's pretty much you know that that program is over.

The impact in February.

Okay, Great and then.

With regards to the margin expansion, obviously, that's very encouraging, especially when you're not when you're not getting that kind of effect from <unk>.

None: And then yeah.

None: Yeah go ahead.

None: Just related to you know the guide that you were fighting I was you know obviously for the third quarter.

E R. A T C. What are the key drivers in terms of the is it the AI initiatives.

None: Can management solutions because of the E. R. A T C. When you.

None: You know things were tougher and it seems like you actually did see some you know acceleration ex E. R. A T.

Efficiency on the sales side, what what what's driving that.

The margin expansion and.

None: On total revenue. So I was just wondering like.

How do you think to what extent do you think youre going to be able to continue that strong progress.

None: Is there any way to quantify the impact in terms of not recognizing that.

Yeah, Mark this is John here again as you know, we we pride ourselves in being the best operators.

None: That revenue when in February.

None: Because obviously you were anticipating that coming in.

And in the industry and have the DNA of and we know the levers to pull as we as we see the type of trends that we see so we've certainly done those what I would say typical things, but the deeper question you're asking is the right. One the fact of the matter is over the past three years we've.

None: So any any thoughts there yeah.

None: Yeah, I mean, hi.

None: High level, Mark I mean.

None: We provided guidance.

None: Guidance for the quarter.

I think we you guys know what the guidance was that we provided for the quarter that the.

None: Q3 actually came in maybe about 100 basis points in that range lower than than what we had said and I would say.

We've done a lot of investments as we've had the opportunity with the E. R. T C. A benefit to make a lot of investments in the business, we've really focused that investment around our digitalization and digital adoption.

Probably a third or a little bit more of that was related to the decision that we took on the <unk> you could probably do the math on that and back in to get to a number that's close to.

Abilities, we build global capabilities and our operations footprint and we started to really roll that out and it really test and pilot that over the course of this fiscal year, and particularly doing selling season, a lot of the enhancements both on the client service and retention side as well as the digital.

The impact in February.

None: Okay, Great and then with.

None: With regards to the margin expansion, obviously, that's very encouraging, especially when you're not when you're not getting that kind of effect from.

Onboarding.

E R a T.

Across each of our platforms, we launched a series of products that demonstrated to us at scale that we can drive stronger operational and sales efficiency.

None: The key drivers in terms of is it the AI initiatives.

None: Is it efficiency on the sales side, what we're describing.

None: Margin expansion and.

In our model and so we're going to continue to double down on that and continue to look for opportunities that we can drive digital transformation in our back office drive digital adoption by our prospects and channel partners.

None: How do you think to what extent do you think youre going to be able to continue that.

None: Programs.

Yeah, Mark I I. This is John here again, you know, we we pride ourselves in being the best operators.

And their employees and we believe that's going to continue to drive margin expansion. That's what we've seen in these tests and pilots and now we're really starting to push and roll that out at scale.

John B. Gibson: And in the industry and have the DNA of and we know the levers to pull as we as we see the type of trends that we see so we've certainly done those what I would say typical things, but the deeper question you're asking is the right. One the fact of the matter is over the past three years we've.

Thank you very much.

Yeah.

And we have our next question from Kevin Mcveigh with UBS.

John B. Gibson: We've done a lot of investments as we've had the opportunity with the E. R. T C. A benefit to make a lot of investments in the business, we've really focused that investment around our digitalization and digital adoption.

Hey, Kevin.

On the execution.

Hey.

I guess this would be for you the 25 guidance preliminary pretty helpful. Any sense of what type of macro environment, you're factoring into that I guess from an employment perspective more broadly.

John B. Gibson: Abilities, we build global capabilities in our operations footprint, and we started to really roll that out and it really test and pilot that over the course of this fiscal year, and particularly doing selling season, a lot of the enhancements both on the client service and retention side as well as the digital.

Yeah, Kevin I mean, we're still going through and finalizing all of our assumptions, but I would say at this.

Point in time, we would assume.

A fairly stable a steady macro environment, obviously, there's there's an exit there was an expectation that the fed is going to.

John B. Gibson: Onboarding.

John B. Gibson: Each of our platforms.

John B. Gibson: We've launched a series of products that demonstrated to us at scale debt.

Start cutting rates you know later this year, we do have some of that factored in at this point in time, but I would say overall the assumption has a fairly steady state macro.

John B. Gibson: That we can drive stronger operational and sales efficiency.

John B. Gibson: In our model and so we're going to continue to double down on that and continue to look for opportunities that we can drive digital transformation in our back office drive digital adoption by our prospects and channel partners.

Environment with some expectation that there'll be no rate cuts as we move into the into the fiscal year.

Yeah, I think Kevin Kevin I would I would just add on that on the macro side. We are we are adjusting our view and have adjusted our view even more as you've looked at the third quarter. You know based upon some of the hiring dynamics that we're seeing in the client base. Because there is there is somewhat of a disconnect. When you look at an economy that's growing at.

John B. Gibson: <unk> employees.

John B. Gibson: We believe that's going to continue to drive margin expansion. That's what we've seen in these tests and pilots and now we're really starting to push and roll that out at scale.

None: Perfect. Thank you very much.

None: Yeah.

None: And we have our next question from Kevin Mcveigh with UBS.

Three to three 5% you know high twos, even if you go back.

Kevin Damien McVeigh: Thanks, so much Kevin.

And what Youre seeing from a hiring perspective, I would say the state of hiring in small businesses continues to be a challenge I think it's a labor issue, it's not a demand issue.

Kevin Damien McVeigh: On the execution.

Yes, Bob this could be for you the 25 guidance preliminary pretty helpful.

Kevin Damien McVeigh: Sense of what type of macro environment, you're factoring into that I guess from an employment perspective more broadly.

What we continue to see is clients telling us they they were having trouble filling open positions and quite frankly with qualified candidates I think one of the things that are HR professionals that are engaged as you know we have about $2 2 million of our clients' worksite employees under management by our H.

Robert L. Schrader: Yeah, Kevin I mean, we're still going through and finalizing all of our assumptions, but I would say at this point in time, we would assume.

Robert L. Schrader: A fairly stable steady macro environment. Obviously, there is there is an exit there was an expectation that the fed is going to.

Our teams so as we saw some of the trends we saw that were disconnected from our models in a 3% GDP economy why aren't we seeing the hiring that we would've anticipated happening in the base, we add active active structured dialogues with those clients. What we're hearing is that they they have open positions they want to.

Robert L. Schrader: Start cutting rates.

Robert L. Schrader: Later this year, we do have some of that factored in at this point in time, but I would say overall the assumption has a fairly steady state macro.

Robert L. Schrader: Environment with some expectation that there'll be no rate cuts as we move into it into the fiscal year.

Higher they can't find qualified people and I think they had been burnt through the course of the pandemic and in hiring just anyone and so theyre not willing to do that at the current at the current LIBOR rate. So if the macro environment that we see you look at our job index. All continued moderation in hiring continued moderation in wages.

None: Yeah, I think Kevin Kevin I would I would just add on that on the macro side. We are we are adjusting our view and have adjusted our view even more as you've looked at the third quarter base.

None: Based upon some of the hiring dynamics that we're seeing in the client base. Because there is there is somewhat of a disconnect. When you look at an economy, that's growing at three to three 5% high twos, even if you go back and.

Inflation, we saw that January and February I can say this December January and February if you look at our at our releases continued to show moderation and actually January and February with the first two months in our index still over 100 still showing growth, but those were the first two months that we actually saw growth.

None: And what Youre seeing from a hiring perspective, I would say the state of hiring in small businesses continues to be a challenge I think it's a labor issue, it's not a demand issue.

None: What we continue to see is clients telling us they they were having trouble filling open positions and quite frankly with qualified candidates I think one of the things that are HR professionals that are engaged as you know we have about $2 2 million of our clients' worksite employees under management by our HR.

<unk> under a pre pandemic levels and so stay tuned tomorrow, we will release the March one, but what I would tell you is that what we see as a moderating economy we.

We see a stable economy, we don't see signs of a recession, we don't see all the other demand was strong.

None: Our team so as we saw some of the trends we saw that were disconnected from our models in a 3% GDP economy why aren't we seeing the hiring that we would've anticipated happening in the base we.

Our pipeline was strong the other things that you would typically see that would be more of a recessionary. We're not seeing massive layoffs were not seeing layoffs across point, what were seeing is openings vacancies trouble hiring and businesses being cautious and who they're bringing into the workforce.

We are active active structured dialogues with those clients and what we're hearing is that they they have.

None: They want to hire they can't find qualified people.

A lot of sense and then John just to follow up on that point is that is it.

None: Good morning.

None: Okay.

The tight labor, what's driving kind of the re enrollment on the insurance out of the PEO or just anything to call out in terms of what's been driving that.

None: And in hiring just anyone and so they're not willing to do that at the current at the current labor rates. So if the macro environment that we see you look at our job index. All continued moderation in hiring continue.

Oh, I I think on the P O enrollment I want to really give credit to the team there I think as you as you recall.

None: Continued moderation in wage inflation, we saw that January and February I can say this December January and February if you look at our releases.

A year ago, a little over a year ago. This was a challenging area.

None: Releases continued.

For US we were we were seeing things participation rates went as high attachment.

Continued to show moderation and actually January and February with the first two months in our index still over 100 still showing growth, but those were the first two months that we actually saw growth under a pre pandemic levels. So stay tuned tomorrow will release the March one, but what I would tell you is.

Hi, we really looked at all aspects of both our product or our insurance product offerings or our enrollment processes and how we engage employees around that top to bottom and we made some some changes in both the product offerings, we have as well as we approach clients and the employees in our insurance offerings.

None: That's what we see as a moderating economy.

And the P O and I think the team's done a good job there and what we've seen is you know now we're back to at to slightly above attachment rates and our participation rates are back to our historical norm. So I think that one's a little bit more of an execution issue than any macro.

None: We see.

None: A stable economy, we don't see signs of a recession, we don't see all the other demand was strong.

None: Our pipeline was strong the other things that you would typically see that would be more of a recessionary. We're not seeing massive layoffs were not seeing layoffs across what we're seeing is openings vacancies trouble hiring and business is being cautious and who they're bringing into the workforce.

Thank you.

And we have our next question from Tien Tsin Huang with JP Morgan.

Hey, Thanks, Good morning, I wanted to ask on M. P. I know the commentary around the sales retention and attach was quite strong and then you move into the to the low end.

None: A lot of sense and then John just to follow up on that point is that is it just kind of a tight labor, what's driving kind of the re enrollment on the insurance out of the PEO or just anything to call out in terms of what's been driving that.

I'm just curious maybe you can elaborate on that and maybe your initial thinking around P. A momentum going into into next year as well because I know that was.

Oh, I I think on the P O enrollment I want to really give credit to the team there I think as you as you recall.

That was something that we were tracking.

Yeah, I mean, yeah right good so.

I'll, just start and listen and Pfizer No no no.

John B. Gibson: A year ago, a little over a year ago. This was a challenging area.

So I'd say the big driver of maybe guiding more towards the lower end of the range.

John B. Gibson: For US we were we were seeing things participation rates went as high attachment.

The employment headwinds that John called out in the script, we continue to see moderation in.

Unemployment in and that really was across the board for the most part the P. O has been able to outrun it with strong execution.

In sales our retention and we mentioned we continue to see record levels of of Worksite employee retention really strong worksite employee growth in that business, and then really getting our medical insurance attachment in volumes back to where we see it. So it's really a little bit about the macro headwind and the other thing I'll call out on.

And the P O and I think the team has done a good job there and what we've seen is you know now we're back to at to slightly above attachment rates and our participation rates are back to our historical norm. So I think that was a little bit more of an execution issues in any macro items.

On the P. O you know I think the printer is strong at 8%, but as you guys know that that category is PEO and insurance and insurance is typically dilutive to the growth of that overall category. So I would say that the PTO a scan.

Thank you.

Speaker Change: And we have our next question from Tien Tsin Huang with JP Morgan.

Speaker Change: Hey, Thanks, Good morning, I wanted to ask on the comment around the sales retention and attach was it was quite strong and then you move into the to the low end.

Standalone growth is north of that number obviously that that we that we gave you. So really strong performance in the PEO business and you know where were building momentum and we see that carrying into next year I'm not you know not ready to.

I'm just curious maybe you can elaborate on that and maybe your initial thinking around P O momentum going into into next year as well because I know that was.

None: That was something that we were tracking thank you.

<unk> splits on next year, you know between management solutions in the P O, but we certainly would expect the PEO and insurance to grow at a faster overall rate than the total revenue growth.

None: Yeah, I mean, yeah.

None: Good job.

None: Just starting with the NIM by children No no no.

None: So I'd say the big driver of maybe guiding more towards the lower end of the range with which you might be headwinds that John called out in the script, we continue to see moderation in employment and that really was across the board for the most part the PEO has been able to outrun it with.

That I gave you.

Got it okay very clear so it's really been the employment side.

Perfect. So my quick follow up just on the pricing front among the three factors you mentioned pricing was any more color on.

On the pricing or is it more discounting that you're seeing and I'm curious if that informs your your typical price action that you would take in the in May or is this you know the spring timeframe.

None: With strong execution, both in sales and retention and we mentioned we continue to see record levels of.

And if that's baked into your you're looking ahead are preliminary 25 outlook. Thank you.

None: Worksite employee retention really strong worksite employee growth in that business, and then really getting our medical insurance attachment in volumes back to where we see it. So it's really a little bit about the macro headwind and the other thing I'll call out on on the PEO I think the printer is strong at 8%, but as you guys know.

That is a broad question. So if I Miss something you come back and get tempted, but here's what I, here's what I would say, we're still able to go into the market in command of our traditional value based pricing.

The value we provided I think you can see that in the retention.

None: That that category is PEO and insurance and insurance is typically do.

I would tell you is again and I'll be glad when I don't have to use this word again, which I think will probably be 12 months from now actually RTC.

None: Dilutive to the growth of that overall category. So I would say that the PTO scanned.

None: Standalone growth is north of that number obviously that that we that we gave you. So really strong performance in the PEO business and where we're building momentum and we see that carrying into next year I'm not you know not ready to.

You when I look at our actual revenue per client with E. R. T. P was in a lot of the pricing bundles that we that that we would sell when youre looking at the data is we're actually seeing that the pricing that we're getting across the various product groups.

None: Gifts splits on next year between management solutions in the P O, but we certainly would expect the PEO and insurance to grow at a faster overall rate than the total revenue growth.

You know being on par to what we have seen historically.

I'd remind you that you know over the last three years, we have guided and have said, which has been at the high end of our traditional range and I think that our assumption is as we go into the post pandemic era that we're going down like everything else seems to be going back to the mean to frankly higher so when I look at retention again returned.

None: That I gave you.

None: Got it okay. That's very clear so it's just really the employment side.

None: Perfect. So my quick follow up just on the pricing front among the three factors you mentioned pricing last any more color on on the pricing or is it more discounting that you're seeing and I'm curious if that informs your your typical price action that you would take in the in May or is this you know the spring timeframe.

Back to kind of pre pandemic levels, but slightly better I think that's where you'll see pricing, we still feel good about where.

None: And if that's baked into your you're looking ahead are preliminary 25 outlook. Thank you.

Where we can go in terms of pricing.

I think the competitive environment, it's always been a competitive environment I think there were two dynamics going on that were interesting.

None: That is a broad question. So if I Miss something you will come back, but here's what I, here's what I would say, we're still able to go into the market in command our traditional value based pricing.

To me when I looked at the data and again when I'm looking across.

When I'm looking across our 401k business P O business, our HCM mid market businesses are small business HCM business.

None: The value we provide I think you can see that in the retention.

I would tell you is again and I'll be glad when I don't have to use this word again, which I think will probably be 12 months from now actually RTC.

Our sure payroll business I, just when I go across.

Our insurance business, the broad set of businesses and look at the third quarter, which is one of our largest volume quarters and I see the volume hold up to what I expected, but what was interesting. The average client size was down in almost all of those slightly which which impacts our realized price right. You just have less employees you have less churn.

None: Are you when I look at our actual revenue per client because <unk> was in a lot of the pricing bundles that we that that we would sell when youre looking at the data is we're actually seeing that the pricing that we're getting across the various product groups.

None: Being on par to what we have seen historically.

And what I, what I sense is is that there in the.

None: I'd remind you that you know over the last three years, we have guided and have said what's been at the high end of our traditional range and I think that our assumption is as we go into the post pandemic era that we're going down like everything else seems to be going back to the mean.

If you think of our business boulders rocks and pebbles right I think borders have been harder to move less decision. So as you've heard some others are competitors that are more targeted in the upper ends of the market talk about extended decision timeframes et cetera. So while we got the volume we expected we.

None: To slightly higher so when I look at retention again retention back kind of pre pandemic levels, but slightly better.

Got a little more rocks and pebbles than we expected, which drove a little bit of rate and then it was more competitive environment in terms of both clients from a retention perspective and from a from a purchase perspective.

None: I think that's where you'll see pricing, but we still feel good about where.

None: Where we can go in terms of pricing.

None: I think the competitive environment, it's always been a competitive environment I think there were two dynamics going on that were interesting.

Landing more and I would say being a little more negotiated.

In their approach, which is kind of what you you since in the economy with with high inflation.

None: To me when I looked at the data and again when I'm looking across when I'm looking across our 401k business P O business, our HCM mid market business, our small business HCM business.

Thank you for the complete answers.

Yeah.

And we have our next question from Bryan Bergin with TD Cohen.

None: Our payroll business I, just when I go across.

Yeah.

Hi, guys. Good morning. Thank you I wanted to just dig in a bit more on bookings could you just talk about how the third quarter bookings came in relative to your expectations, how how for two years running so far and if you can give us some added color on the you know across client size.

P S T E overstay ourselves as well.

Yeah, Brian I would just probably reiterate what I've kind of already said.

None: Jackson and what I, what I sense is is that they're in the <unk>.

We had solid demand for our solutions really really across the board volumes.

None: If you think of our business boulders rocks and pebbles right I think borders have been harder to move less decision. So as you've heard some others are competitors that are more targeted in the upper ends of the market talk about extended decision timeframes et cetera. So while we got the volume we expected we got.

Volumes.

We're in line with our expectations.

I said before is across each one of those sectors I would say that the average size of the deal that we landed was smaller than what we anticipated.

Then than typical so and I'm talking small small small amounts of differences but.

None: A little more rocks and pebbles than we expected, which drove a little bit of rate and then it wasn't more competitive environment in terms of both clients from a retention perspective and from a from a purchase perspective.

As you all know.

Business of our scale, a small change going from average you know one or two employees or three or four employees of worksite employees per deal.

None: They're demanding more and I would say being a little more negotiated them kind of in.

It can it can have an impact on the on the revenue you would expect.

None: In their approach, which is kind of what you you since in the economy with with high inflation.

Okay understood and then just on the sales front and sales investment I guess can you give us a sense on how sales head count has trended relative to the start of the year and as you go forward and plan for 25, how are you thinking about adding absolute sales headcount versus trying to lean on more tech investments to drive more productivity.

Thank you for the complete answers.

None: And we have our next question from Bryan Bergin with T D Cohen.

Bryan C. Bergin: Hi, guys. Good morning. Thank you I wanted to just dig in a bit more on bookings could you just talk about how the third quarter bookings came in relative to your expectations. How how <unk> is trending so far and if you can give us some added color on the <unk>.

Yeah, Brian I would say this our.

Our sales our sales head count has been you know at our at our expectations.

Bryan C. Bergin: Client size.

Through the year.

Bryan C. Bergin: He oversaw as well.

When we went into the selling season, we were at head count that's what we reported I think to your point.

None: Yeah, Brian I would just probably reiterate what I've kind of already said.

None: We had solid demand for our solutions really really across the board.

Well it was interesting in the third quarter, when I look holistically across the business.

None: Volumes.

None: We're in line with our expectations.

The amount of business, we drove digitally across each of the platforms was what was impressive and that's that's approaching.

None: I said before is across each one of those sectors I would say that the average size of the deal that we landed was smaller than what we anticipated than than typical so and I'm talking small small small amounts of differences but.

Some of our other channels that have historically been paychex is bedrock of where we've gotten the business and so you know what we're seeing is and what we're what we're doing with digital.

None: As you all know in the.

Business of our scale.

We will continue to be something that we were looking at a lot of different go to market strategies that we think will drive more productivity.

None: A small change going from average.

None: One or two employees are three or four it ease of worksite employees per deal.

Productivity in our in our sales reps and I think what we're trying to do right now is make sure we're doing the proper territory management.

None: It can it can have an impact on the revenues you expect.

So that we can have even more reps more productive so I'm not I'm not prepared we're still working through our final budget planning process. What I can tell you is that we're driving a lot of productivity on a per rep basis, and we're going to make sure that we're covering every nook and cranny of the market. So making sure you know how many sales.

None: Okay understood and then just on the sales front and sales investment I guess can you give us a sense on how you count has trended relative to the start of the year and as you go forward and plan for 25, how are you thinking about adding absolute sales headcount versus trying to lean on more tech investments to drive more productivity.

None: Yeah, Brian I would say this our ourselves.

People do we actually need.

It's been you know at our at our expectations.

To go after the market opportunity, we have in each of the segments and I think getting more specific about segment sizes and product type.

Through the year.

None: When we went into the selling season, we were at head count that we reported.

Is what we're focused on as part of our new go to market strategy going into this post pandemic era.

None: To your point.

What was interesting in the third quarter, when I look holistically across the business.

Okay. That's clear thank you.

Yeah.

And we have our next question from some months motto with Jefferies.

None: The amount of business, we drove digitally.

None: Across each of the platforms was what was impressive and that's that's approaching.

Hi, Good morning, Thanks for taking my question. So maybe first we'd heard about maybe price increases going into effect, let's call. It either towards the end of the year earlier. This year I was just curious if there is a change in the timing of when you when you push through price increases from customers. This year and then I have a follow up question as well.

None: Some of our other channels that have historically been paychex is bedrock of where we've gotten the business and so you know what we're seeing and what we're what we're doing with digital I think will continue to be something that we were looking at a lot of different go to market strategies that we think will drive more productivity.

Yeah, I'll take I'll take the first because he had no no change them out I mean, I think your timing I mean, its not always the exact time every year, but it's in that range typically towards the end of the fiscal year beginning of the next fiscal year is typically when we we have our annual price increases so really really no change the timing there.

None: Productivity in our in our sales reps and I think what we're trying to do right now is make sure we're doing the proper territory management.

None: So that we can have even more reps more productive so I'm not I'm not prepared we're still working through our final budget planning process. What I can tell you is that we're writing a lot of productivity on a per rep basis, and we're going to make sure that we're covering every nook and cranny of the market. So making sure you know how many sales.

Okay, Great and then I guess, just as you think about segmenting by customer size I know, what you said about the average deal size comparing it being smaller but are you seeing any trends would then it would be stratified. It by your smallest customers versus maybe slightly more like mid market and at the same question between management solutions and.

None: People do we actually need.

None: To go after the market opportunity, we have in each of the segments and I think getting more specific about segment sizes and product type.

Are you seeing anything that's different by the type of customer that you're seeing in terms of behavior or deal size or deal closing times.

None: Is what we're focused on as part of our new go to market strategy going into the post pandemic era.

No. It's not I don't I don't really see much change overall, what I, what I would what I can say is in part of this I'm reading what I hear others have said that that play in.

None: Okay. That's clear thank you.

None: And we have our next question from Matsumoto with Jefferies.

Matsumoto: Hi, Good morning, Thanks for taking my question, So maybe first.

Markets and when I look at our by deal size. So we got a mid market team, we got a P O team they're out in the market outside the base.

Matsumoto: We'd heard that maybe price increases going into effect, let's call it either towards the end of the year earlier. This year I was just curious if there isn't changed and the timing of when you when you push through price increases from customers. This year and then I have a follow up question as well.

And theyre going after deals and they're getting an average deal size and we'll get a mix will get this number of clients over a thousand.

Employees as many 500 to 999, you get the drill right.

Matsumoto: Yes.

None: I'll take the first because he had nothing no change them out I mean, I think your timing is it's not always the exact time every year, but it's it's in that range typically towards the end of the fiscal year beginning of the next fiscal year is typically when we have our annual price increases so really really no change the timing there.

On average you just you get a mix and that's the mix that kind of holds in the marketplace kind of historically, what what I. What I think do you see I mean, when I look across that and Bob can comment as well is that on the larger size to larger in the enterprise into that market.

None: Okay, Great and then I guess, just as you think about segmenting by customer size I know what you just said the average deal size comparing it being smaller but are you seeing any trends would then it would be stratified. It by your smallest customers versus maybe slightly more like mid market and at the same question between management solutions and <unk>.

There was less of those deals that came in in the P. O K N in the ASO and came in in the traditional H C M and we made up the volume and more average.

How do we average sized deals.

That we get but then when you add that altogether, because you have less boulders to the mix you have a little less you'll either worksite employees or less checks.

None: And we're seeing anything that's different by the type of customer that you're seeing in terms of behavior or deal size or deal closing times.

Our planned on.

That makes sense I'm in a break.

I'm going to squeeze one more in and out to a normal winter.

None: It's not I don't I don't really see much change overall.

Is there any I know you're not guiding by segment for next year, but is there any reason to assume that the trend line that you've guided for for next quarter for management solutions.

What I would what I would say is and part of this I'm reading what I hear others have said that that play in.

None: Markets and when I look at our by deal size. So we've got a mid market team, we got a P O team they're out in the market outside the base and they're going after deals and they're getting an average deal size and we'll get a mix will get this number of clients over a thousand.

E. R. D C N P O like what's implied in the guide that that wouldn't be the time line heading into next year. I guess is there anything that would that would materially get you off of those trend lines.

Yeah, I mean, I wouldn't say significant lease them out I mean, I don't want to get into providing specifics on the two categories yet as we're still going through our annual budget process, but we certainly would expect the P. O insurance category growth next year to be similar to what we've seen this year and in you know.

None: Employees. This many 500 to 999, you get the drill right and on average you just you get a mix and that's the mix that kind of holds in the marketplace kind of historically, what what I. What I think you see when when I look across that and Bob can comment as well is that on the larger size the larger and the <unk>.

Management solutions is where the the big headwind is with with what D. R. T C.

But yeah, I would say similar trend right lines to where we're exiting the year.

None: Price in that market.

None: There was less of those deals that came in in the P. O came in in the ASO and came in in the traditional HCM and we made up the volume and more average.

Great. Thank you so much have a great day.

Hey, it's tomorrow I appreciate that you're recognizing that the three question [laughter] yeah.

None: We averaged some deals.

One of the afternoon.

None: That we get but then when you add that altogether, because you have less boulders to the mix you have a little less you'll either worksite employees or less.

Alright.

Dawn.

Thanks for Indulging me.

[laughter].

None: Checks.

None: Planned on.

And we have our next question from Jason Kupferberg with Bank of America.

None: Does that make sense I'm gonna person.

I'm going to squeeze one more in and that's where normally blurry.

None: Is there any I know youre not guiding by segment for next year, but is there any reason Bob to assume that the trend line that you've guided for for next quarter for management solutions.

Hi, This is Carol I got one for Jason and so in terms of capital deployment heading into 14 and also 2025 can you give an update on the relative attractiveness of buybacks versus M&A and then also could you give an update on like the general health of your M&A pipeline.

E. R. D C N P O like what's implied in the guide that that wouldn't be the time line heading into next year. I guess is there anything that would that would materially get you off with those trend lines.

You know if you want to start with it eliminates yeah, yeah yeah.

Yeah look I I I would say that we continue to be open.

None: Yeah.

None: Didn't see significant lease them out I mean, I don't want to get into providing specifics on the two categories, yet as we're still going through our annual budget process, but.

Two acquisitions that meet the strategic objectives that we've laid out and that make financial sense I would say that I feel like.

None: We certainly would expect the P O insurance category growth next year to be similar to what we've seen this year and and you know management solutions is where the big headwind is with the RTC.

In several areas and industries that we had the interest that the multiples that I've seen are getting in into line that are more reasonable.

None: But yeah, I would say similar trend right lines to where we're exiting the year.

And you know trying to be active in the key thing is just you know.

The timing of that when that when the right time of that so you know, we're certainly open for business active engaging in India, both tuck ins.

None: Great. Thank you so much have a great day makes them a smart I appreciate that you're recognizing the three questions.

None: [laughter], Yeah, I'd remind everyone of the afternoon.

Where we can add capability.

Doing a lot of things we're looking at what we can do from an AI and digital HR.

None: Alright.

None: Dawn.

None: Thanks for Indulging me.

Perspective are constantly looking for adjacencies that are driving really the needs of our customers in terms of what they need to succeed.

None: [laughter].

None: And we have our next question from Jason Kupferberg.

Jason Alan Kupferberg: I think America.

We've talked about your access to capital being able to retain and hire employees.

Carol: Hi, This is carol.

Jason Alan Kupferberg: Jason So in terms of capital deployment heading into <unk> and also 2025 can you give an update on the relative attractiveness of buybacks versus M&A and then also could you give an update on like the general health of your M&A pipeline.

And really getting access to affordable benefits that allow them to attract clients. So all of those things are open and we've got an active active engaged team.

That is talking to a lot of different prospects, but.

None: You know if you want to start with the M&A.

You know more to come we certainly have the capital capability and Andi and the ability to do acquisitions in and we're prepared to pull the trigger if we can come across something that makes financial sense yet.

None: Yeah look I I I would say that we continue to be open to.

Jason Alan Kupferberg: Two acquisitions that meet the strategic objectives that we've laid out and that make financial sense I would say that I feel like in several areas and industries that we have the interest that the multiples that I've seen are getting in into line that are more reasonable.

Caroline I mean, the only thing I would add to that just overall as it relates to capital allocation really no change in our approach there we're going to continue to invest in the business. You know dividends are you know we're going to continue to grow the dividend and that will continue to be our primary use of cash you mentioned share repurchases you know really no change in our philosophy there we do.

And you know trying to be active in the key thing is just.

Jason Alan Kupferberg: The timing of that when that when the right time of that so you know we're certainly are open for business are active engaging in both tuck ins where.

That to offset dilution from executive comp can you just saw recently a month or so ago. We we did do a new share reauthorization. So we can continue to do that the old authorization had expired and then to John's point, we certainly are interested in M&A opportunistically and we'll continue to to use emanated.

Jason Alan Kupferberg: Where we can add capability.

Jason Alan Kupferberg: Doing a lot of things we're looking at what we can do from an AI and digital HR perspective are constantly looking for adjacencies that are driving really the needs of our customers in terms of what they need to succeed and what we've talked about the access to capital being able to retain and hire employees.

To drive growth in the business. So you know that our strategy and philosophy around capital allocation is very consistent with what you are all used to in the past.

Okay awesome. Thanks, So great color I appreciate you guys taking my question.

Jason Alan Kupferberg: And really getting access to affordable.

Okay.

And we have our next question from James Faucette with Morgan Stanley.

Jason Alan Kupferberg: Benefits that allow them to attract clients. So all of those things are open and we've got an active active engaged team.

Thank you so much I wanted to go back on just a quick couple macro point that you were making.

None: That is talking to a lot of different prospects, but.

None: More to come we certainly have the capital capabilities.

If I rewind to back in December you talked a little bit about.

None: N D.

None: Ability to do acquisitions in and we're prepared to pull the trigger if we come across something that makes financial sense.

Some concerns you had about the potential for increases in out of business rates et cetera, and just wondering like how that's evolved and what your current outlook is there and you know it seems like you feel better about it but I just want to make sure I'm interpreting your comments correctly.

None: Carolyn.

None: The only thing I would add to that just overall as it really relates to capital allocation really no change in our approach there we're going to continue to invest in the business.

Carolyn: Dividends are you know, we're going to continue to grow the dividend and that will continue to be our primary use of cash you mentioned share repurchases really no change in our philosophy, there we get to offset dilution from executive comp you saw recently a month or so ago.

Yeah, exactly I would say that out of business rates are not out of the norm that you would expect given the accelerated new business starts that we saw two to three years ago small business starts are down down a little bit from those peaks and high but still above prepaid.

Carolyn: We did do a new share reauthorization. So we can continue to do that.

Mimic levels.

Authorization has expired and then to John's point, we certainly are interested in M&A Opportunistically and we'll continue to use M&A to drive growth in the business. So you know that our strategy and philosophy around capital allocation is very consistent with what you are all used to in the past.

But again it goes back to what I said before we're not seeing signs.

What would typically be seen in a recessionary period, where there was accelerated out of businesses right now what I would say out of businesses is elevated and in particularly the low end, but when you look at that in context of how many new businesses were started over the last three years that is.

None: Okay awesome. Thanks, Great color I appreciate you guys taking question.

None: Okay.

None: Yeah.

None: And do we have our next question from James Faucette with Morgan Stanley.

Not atypical because within two years, 50% are gone within five years, 75% of them are gone. So that's it's not being driven by what I would say economic hardship or our broad based businesses that you would not expect to go out of business don't seem to be going out of business if that makes sense.

James Eugene Faucette: Thank you so much I wanted to go back on just a quick couple macro point that you're making.

James Eugene Faucette: If I rewind to back in December you talked a little bit about.

James Eugene Faucette: Some concerns you have about potential for increases in out of business rates et cetera, and just wondering like how that's evolved and what's your current outlook is there and you know it seems like you feel better about it but I just want to make sure I'm interpreting your comments correctly.

Yeah. It does makes sense I appreciate that and then.

We've talked about kind of labor scarcity.

Consistently for the last few years and I think your your incremental comments in terms of the quality of labor and specifically.

None: Yeah, James I would say that out of business rates are not out of the norm that you would expect given the accelerated new business starts that we saw two to three years ago small business starts are down down a little bit from those peaks and high but still above pre.

Employers being more discerning now it's interesting any specific areas or whether it be industries or geographic regions that that's important to them and I'm asking the question because I'm trying to think about what the path to resolution there is or if this is just something we're perpetually going to be grappling with.

None: Pandemic levels.

None: But again it goes back to what I said before.

None: We're not seeing signs.

Well I you know work what we keep.

What would typically be seen in a recessionary period, where there was.

Well, we keep trying to focus ourselves on is what more can we do to help our clients retain and attract quality employees. It's it's in their interest is certainly in our interest given the way we get paid I think did you know you know we launched two years ago, the AI based retention insights.

None: Accelerated out of business right now what I would say our business is elevated.

None: And in particularly in the low end, but when you look at that in context of how many new businesses were started over the last three years, that's not atypical because within two years, 50% are gone within five years, 75% of them are gone. So that's it's not driven by what I would say hardship or our broad base.

Product.

It gives them insight to where they may have retention risk.

We've got this partnership with with indeed, it's a fully integrated and we're actually elevating their job postings up in the listings for them, it's part of that partnership.

None: Businesses that you would not expect to go out of business don't seem to be going out of business if that makes sense.

None: Yeah. It does makes sense I appreciate that and then you know.

We just did a busier.

Product, which is which is on the way to be launched will give them compensation information to be done we're going to be doing some things.

None: We've talked about kind of labor scarcity now pretty consistently for the last few years and I think your your incremental comments in terms of the quality of both labor and in specifically.

In the next fiscal year around creating.

Benefit bundles for our non insurance HCM clients that will allow their employees to feel like being part of that employee relationship gives them access to catastrophic care. We're trying to do a lot of things to solve this problem for our clients and obviously theres more.

None: Players being more discerning now that's interesting.

None: Any specific areas or whether it be for you.

None: Prime regions, but that's important to them and I'm asking the question because I'm trying to think about what the path to resolution there is or if this is just something we're perpetually going to to be grappling with.

We need to do because the simple fact is we have a we have a generational change happening in the labor force participation rates remain below pre.

None: Well I you know look at what we keep.

Pre pandemic levels, and it's going to be very difficult given the rate of retirements that were seeing in baby boomers to really see that that that that change and what you see in the prime age workers.

None: Well, we keep trying to focus ourselves on is what more can we do to help our clients retain and attract quality employees. It's in their interest is certainly in our interest given the way we get paid I think did you know you know we launched two years ago, the AI based retention insights.

At record highs the problem is there's not enough prime age people.

To fulfill all the opportunities and then when you look at the productivity gap that you have generationally. It not just in terms of experience I don't want to disparage any generations are in any way.

None: <unk>.

None: That gives them insight to where they may have retention risk.

None: Got this partnership with with indeed, it's a fully integrated and we're actually elevating their job postings up in the listings for them as part of that partnership.

The fact, youre, replacing someone with years of experience with someone that's new rate experienced I I really think this is gonna be ongoing public policy issue, that's going to have to be addressed with a lot of retraining with AI and digital jobs I think more needs to be done I mean, we've got this we got the R&D tax credit thing that's sitting out there.

None: <unk>.

None: We just did the busier.

None: Product, which is which is on the way to be launch, we're giving them compensation information to be done we're going to be doing some things in.

None: In the next fiscal year around creating.

Not to get on political bandwagon here, but we need to do more to allow businesses to invest in productivity and drive productivity enhancements and that's not going to replace workers, that's going to enable them to get the work done with less workers are going to exist in the marketplace. So I think this is a systemic problem I think it's a great opportunity.

None: Benefit bundles for our non insurance HCM clients that will allow their employees to feel like being part of that employee relationship gives them access to catastrophic care. We're trying to do a lot of things to solve this problem for our clients and obviously theres more.

For us because it really goes to the products and services that we offer for small and medium sized business owner herself.

We need to do because the simple fact is we have it we have a generational change happening in the labor force participation rates remain below.

Yeah, that's kind of my personal view on it and it continues to show up in the data that we that we would get.

None: Pre pandemic levels, and there's going to be very difficult given the rate of retirements that were seeing in baby boomers to really see that that that that change in what you're seeing the prime age workers.

Okay, that's great I really appreciate that.

And we have our next question from Ramsey El <unk> with Barclays.

None: At record highs. The problem is there's not enough prime age people to fill all the opportunities and then when you look at the productivity gap that you have generationally and that's just in terms of experience I don't want to disparage any generations anyway, but just the fact youre, replacing someone with years of experience with <unk>.

Hi, Thanks for taking my question.

How much did M&A contribute in the quarter and if you could help us think through whether there's an inorganic contribution when it comes to your preliminary our F. 'twenty five guidance, what that might be as well yeah.

Yeah, Randy I mean, M&A, we didn't do any new M&A. The M&A that we've done this year with the small alternative acquisition that we did it at the end of Q1.

None: That's new right experienced I I really think this is gonna be ongoing.

Public policy issue, that's going to have to be addressed with a lot of retraining with AI and digital jobs I think more needs to be done I mean, we've got the R&D tax credit thing, that's sitting out there and not to get on political bandwagon here, but we need to do more to allow businesses to invest in productivity and drive productivity enhancements and that's not.

Obviously, it contributes something it does it's a small number it doesn't even round to 1%. So it's really not a big contributor at all and in the guide you know we typically don't although we're always active in looking for opportunities, where we're not gonna put anything into our into our forecast until the deal is closed so from that.

None: Replace workers battling and enable them to get the work done with less workers are going to exist in the marketplace. So I think this is a systemic problem I think it's a great opportunity for us because it really goes to the products and services that we offer for small and medium sized business owner. So yeah, that's kind of my personal view on it.

Not assume any you know the preliminary guide does not assume any level of M&A next year.

Got it got it one one quick follow up for me secure act to Porno, what what are you seeing there does that have the potential to emerge as kind of a tailwind that might help offset some of the guarantee she headwind or is it too early to tell maybe give us an update on on what Youre seeing on secure act you point out.

None: And it continues to show up in the data that we've that we look at.

Yeah, I think I think ramzi.

None: Okay, that's great I really appreciate that.

You know, replacing E. R. T. C is a very difficult thing to do both in terms of the revenue nature of it and and the.

None: And do we have our next question from Ramsey El <unk> with Barclays.

Ramsey Clark El: Hi, Thanks for taking my question.

And the in the profitability of it.

Ramsey Clark El: How much did M&A contribute in the quarter and if you could help us think through whether there's an inorganic contribution when it comes to your preliminary F. 'twenty five guidance, what that might be as well.

And and I and I would say that you know, helping end and basically we're doing filing as you know we would do if we were doing tax filings, which is something that is core to our business and and there was a lot of hype around the RTC.

Yeah, Randy I mean, M&A, we didn't do any new M&A the only M&A that we've done this year with the small alternative acquisition that we did it at the end of Q1, obviously it contributes something it does it's a small number it doesn't even round to 1%. So it's really not a big contributor at all and.

So there was a there was a lot of education going on by others that was helping that.

What I see and secure the secure act is I think it's a it's a great thing I mean, our our retirement business had a solid quarter and has had solid year to date and that continues to be strong.

Ramsey Clark El: The guide we typically don't although we're always active in looking for opportunities, where we're not going to put anything into our into our forecast until the deal is closed so that does not assume any you know the preliminary guide does not assume any level of M&A next year.

Growth driver I think you still got to talk to business owners and educate them on it it's still a sales process.

We've had states that have made it mandatory those kind of come and go in.

In the area. The other thing on the secure act two data, which we've been pushing on is is there is a little bit of a loophole that kind of disadvantages.

Ramsey Clark El: Got it got it one one quick follow up for me secure act to Porno, what what are you seeing there does that have the potential to emerge as kind of a tailwind that might help offset some of the year or do you see headwind or is it too early to tell maybe give us an update on on what Youre seeing on secure act you pointed out.

Businesses with under 10 employees I won't get into the nuances of it in there it was pretty bipartisan support in both the house and Senate to try to close that loophole.

None: Yeah, I think I think ramzi.

And we keep pushing for that because I do think that would particularly helped in our micro segment really accelerate some adoption there, but right now that that will pool. So that's still there.

None: Replacing E. R. T. C is a very difficult thing to do both in terms of the revenue nature of it and.

None: And the.

None: And the and the profitability of it.

None: And and I would say that you know, helping and basically we're doing filing as you know we were doing we were doing tax filings, which is something that is core to our business.

Got it alright, thank you so much.

And we have our next question from Ashish <unk> with RBC capital markets.

And there was a lot of hype around the RTC.

Hi, This is David page I'm on for Ashish. Thanks for taking my question I just had a question on your AI initiatives, maybe can you put some of the customer feedback, but what I.

None: There was a there was a lot of education going on by others.

None: That was helping that what what.

None: I see and secure the secure act is I think it's a it's a great thing I mean, our our retirement business.

I guess what parts of your tools.

None: Solid quarter and solid year to date and that continues to be strong.

But they're liking and maybe some of the benefits you're seeing internally in terms of greater sales teams productivity et cetera.

Growth driver I think.

None: Thank you.

None: You still got to talk to business owners and educate them on it it's still a sales process. We've had states that have made it mandatory those kind of come and go in.

Yeah, So David what I would tell you at this point in time, a lot of our AI initiatives and investments have really been focused internally.

None: In the area. The other thing on the secure act two data, which we've been pushing on it.

And both in terms of how we drive efficiency how.

How we drive better sales productivity, how we do better marketing and targeting how do we do better customer service that identify clients or risk, how we do better pricing and discounting here. So that we're not giving too much away, but we're giving enough to get the right type of lifetime value that we want.

None: Is there is a little bit of a loophole that kind of disadvantages.

None: Businesses with under 10 employees I won't get into the nuances of it in there it was pretty bipartisan support in both the house and Senate to try to close that loophole.

None: And we keep pushing for that because I do think that would particularly helped in our micro segment really accelerate some adoption there, but right now that we're post still that's still there.

Really on the client side the tension insights it's been a very popular product with our larger customers in terms of getting insights of what they're doing and we're just in the stages of it.

Got it alright, thank you so much.

Really rolling out or visit your product, which will give them basically at $750 million of data compensation data points.

None: And we have our next question from Ashish <unk> with RBC capital markets.

That will allow our customers in real time to understand how competitive they are if they're making a job offer of what they could potentially do with that that's just in the early stages. What I believe is because of our vast data set.

None: Hi, This is David page I'm on for Ashish. Thanks for taking my question I just had a question on your AI initiatives, maybe can you put some of the customer feedback, but what are I guess what parts are you.

We're gonna be able to provide a degree of insights in in information when coupled with our HR advisors.

David: For your tools.

David: AI models that they're liking and maybe some of the benefits you're seeing internally.

David: In terms of greater sales teams productivity et cetera.

I truly think it's going to set us apart from any of the smaller regional players or local CPA, because we're just going to be able to give them. The best dataset insights that we have and so well as I mentioned, we just hired a new SVP, whose full time job is to do nothing but pool all of the capabilities we have across the.

Yeah, So David what I would tell you at this point in time, a lot of our AI.

<unk> and investments have really been focused internally.

David: And both in terms of how we drive efficiency.

David: How do we drive better sales productivity, how we do better marketing and targeting how do we do better customer service at a unified clients or risk, how we do better pricing and discounting so that we're not giving too much away, but we're giving enough to get the right type of lifetime value that we want.

And develop a robust strategy of how we can drive the most out of AI to drive more value for our customers and drive more operational efficiency and into the into the company.

Okay.

Yeah.

David: Really on the client side the retention insights it's been a very popular product with our larger customers in terms of getting insights of what they're doing and we're just in the stages of really rolling out our visit your product, which will give them basically at $750 million of data compensation data points there.

And we have our next question from Bryan Keane with Deutsche Bank.

Hi, guys. Good morning, I, just had a couple of clarifications.

The Miss on revenue in third quarter versus your guide expectations.

Sounding like a third of that with the E. R. A T did mentioned that swap recognizing the revenues.

David: All of our customers in real time to understand how.

And I am just trying to fill in the gap and the other two thirds of kind of a bunch of your expectations on the bus if I heard that correctly that that's right, but hey, Brian. So it's roughly there's three big drivers. There are three drivers that we've talked about they're all small, but there's three drivers that we've that we've talked about certainly the continued.

If they are if they're making a job offer what they could potentially do in that that's just in the early stages. What I believe is because of our vast data set.

David: We're gonna be able to provide a degree of insights in.

David: Information when coupled with our HR advisors.

Moderation of employment, we definitely saw lower checks per client lower change in base relative to what are our assumptions, where you know that that started in Q2, we updated our forecast in Q2 for some of the trends that we're seeing but I would say employment came in a little bit softer than even our revised.

David: That I truly think it's going to set us apart from any of the smaller regional players or local CPA, because we're just going to be able to give them. The best data set insights that we have and so well as I mentioned, we just hired a new SVP.

David: His full time job is to do nothing but pool all of the capabilities, we have across the company and develop a robust strategy of how we can drive the most out of AI to drive more value for our customers and drive more operational efficiency into the into the company.

Our assumptions in the forecast and then John mentioned.

So a little bit on the rate we saw you know a smaller client sizes.

Maybe a little bit higher discounting than what we assumed I mean, we're still getting really.

Good price realization overall and shrunk you know growth in revenue per client, but I would say it was a little bit softer relative to what our forecast assumptions were and then you know the bigger piece. There was the E. R. T C that I mentioned, so when you look at those three things. They are roughly a third of piece is how I would I would.

David: Okay.

David: And we have our next question from Bryan Keane with Deutsche Bank.

Bryan Connell Keane: Hi, guys. Good morning, I, just had a couple of clarifications.

Bryan Connell Keane: The Miss on revenue in third quarter versus your guide expectations. It sounded like a third of that with the E. R. A T. Just mentioned, it's Bob recognizing the revenues.

Or is it.

No. That's that's helpful and then when I jump from the third quarter revenue growth of 4% to the guided five what accounts for the extra the strange about 100 basis points when I go into the fourth quarter.

Bryan Connell Keane: And I am just trying to fill in the gap and the other two thirds of kind of a bunch since your expectations on the bus if I heard that correctly.

Bryan Connell Keane: Yeah, that's right, but hey, Brian So it's roughly there's three big drivers. There are three drivers that we've talked about they're all small, but there's three drivers that we've that we've talked about certainly the continued moderation of employment, we definitely saw lower checks per client lower change in base relative to what our.

Yeah. So I'd say, there's a few things that call out there Brian one you know the I mentioned, the RTC headwind being similar to Q3 at it it's a little bit less than it was in Q3.

So that that has a little bit of an impact you know you have less of a headwind from air D. C. In Q4.

You'll get and a strong client base price realization product penetration that carries into into Q4, and then I would say on the PEO side, we came out of selling season in a stronger position from a worksite employee standpoint, and medical enrollment and so we're going to get the full quarter benefit of that.

Bryan Connell Keane: Our assumptions were.

Bryan Connell Keane: That started in Q2, we updated our forecast in Q2 for some of the trends that we're seeing but I would say employment came in a little bit softer than even our revised.

Assumptions in the forecast and then John mentioned, you know a little bit on the rate. We saw you know a smaller client sizes.

In Q4.

Bryan Connell Keane: Maybe a little bit higher discounting than what we assumed I mean, we're still getting really.

Relative to where we were in in in Q3. So we got positive momentum I would say heading into Q4 and in both businesses and then we are getting a little bit of a lift.

Bryan Connell Keane: Good price realization overall and strong growth in revenue per client, but I would say it was a little bit softer relative to what our forecast assumptions were and then you know the bigger piece. There was the E. R. T C that I mentioned, so when you look at those three things. They are roughly a third of piece is how I would I would.

Interest on funds in Q4 are you seeing a little bit stronger growth there versus Q Q3. Some of that is the compare we did some repositioning of the portfolio.

We had some.

Realized losses that we took in Q4 to better position the portfolio going forward until you get a little bit.

Bryan Connell Keane: Or is it.

None: No. That's that's helpful and then when I jump from the third quarter revenue growth of 4% to the guided five what accounts for the extra the strange about 100 basis points when I go into the fourth quarter.

A tailwind in growth from that as well and I'd say when you put those together that that's what accounts for a little bit stronger growth in <unk>.

Q4 relative to Q3.

None: Yeah. So I'd say, there's a few things that call out there Brian one you know the I mentioned, the RTC headwind being similar to Q3, it's a little bit less than it was in Q3.

Got it thanks for taking the questions.

Yes.

And we have our last question from Scott <unk> with Wolfe Research.

None: So that that has a little bit of an impact you know you have less of a headwind from <unk> in Q4.

Hey, good morning, guys. Thanks for taking my question just one for me I wanted to go back to the expansion margin side I mean, the outperformance I think it was notable to spike that you see revenue going away and I just wanted to clarify I mean, I know you talked about some of the efficiencies off the investments over the last few years, but were there any specific actions on the expense side that you took during the quarter as.

None: Still getting strong client base.

None: Sure.

None: It carries into into Q4, and then I would say on the PEO side, we came out of selling season in a stronger position from a worksite employee standpoint, and medical enrollment and so we're going to get the full quarter benefit of that.

The E R. A T C.

Revenue sort of wound down.

Yeah, I wouldn't say anything specific to call out Scott I mean, obviously, we're always trying to look at expenses and making sure that we're you know we're not letting new costs into the business and really focusing we we saw the headwind coming so you know I wouldn't say, there's anything specific to call out other than you know good good expense management and some of that.

None: In Q4.

Relative to where we were in Q3. So we got positive momentum I would say heading into Q4 and in both businesses and then we are getting a little bit of a lift in interest on funds. In Q4 are you seeing a little bit stronger growth there versus Q Q3. Some of that is the compare we did some repositioning.

Margin expansion that you saw in the quarter it is being driven by interest rates.

None: <unk> of the portfolio.

But even when you exclude that we saw good margin expansion during the quarter.

None: I think we had some.

None: Some realized losses that we took in Q4 to better position the portfolio going forward and so you get a little bit of a tailwind in growth from that as well and I would say when you put those together that that's what accounts for a little bit stronger growth.

I I don't want to.

I don't want to shortchange, the tremendous job that each and every employee.

Does in the company in terms of managing expenses and and we have built into our DNA. When we say hey, we're seeing signs it's time to go.

None: Q4 relative to Q3.

None: Got it thanks for taking questions.

None: Yes.

None: And do we have our last question from Scott <unk> with Wolfe Research.

No what to do and they do it.

Again, if I point out that some of that some of that insurance revenue is direct revenue pass through so when you look at our margins do you think some of that revenue.

Scott: Hey, good morning, guys. Thanks for taking my question just one for me I wanted to go back to the expansion margin side. I mean, you know the outperformance I think it was notable despite the E. R. T C revenue going away and I just wanted to clarify I mean, I know you talked about some of the efficiencies off the investments over the last few years, but were there any specific actions on the expense side that you took during the quarter.

You know who's in the E. R. T C. I just wanted to come in and how good a job we have done and I think they have done historically.

As part of our DNA is being the best operators and so you.

Scott: The E R T C.

It's every little bit every little thing matters and so there's no one big thing I would say that.

Scott: Revenue sort of wound down.

None: Yeah, I wouldn't say anything specific to call out Scott I mean, obviously, we're always trying to look at expenses and making sure that we're not letting new costs into the business and really focusing we saw the headwind comment so you know I.

The insights that we're gaining and the opportunity for digitalization.

The investment we've made in enabling our clients and their employees to engage our systems and the rate in which they're adopting that opportunity is.

None: Wouldn't say, there's anything specific to call out other than you know good good expense management and some of that margin expansion that you saw in the quarter. It is being driven by interest rates.

It is tremendous and we've invested over the last several years into building out.

None: But even when you exclude that we saw good margin expansion during the quarter.

With our AI.

Robotics capabilities.

None: I don't want to.

Our global footprint and I think all of those investments we've made over the last three years during the pandemic era. When we had the E. R. T. C are going to serve us serve us well as we move forward. So I you know I just looked at it and say as you know as we exit this era.

None: I don't want to shortchange, the tremendous job that each and every employee.

None: Does in the company in terms of managing expenses and and we have built into our DNA. When we say hey, we're seeing signs it's time to go.

None: People know what to do and they do it.

But of the pandemic from a paychex perspective I I.

None: Because again as Bob pointed out.

None: Some of that some of that insurance revenue is direct revenue pass through so when you look at our margins do you think some of that revenue.

I think we're entering a new era.

Just fundamentally a better positioned company I think we're more positioned trusted adviser to small businesses, we're delivering more value to our customers. They're rewarding that was the retention with up with with better pricing in a market, where there's a lot of cheaper alternatives.

None: Using the E. R. T C. I just wanted to come in how good a job we have done and I think I've done historically.

None: Part of our DNA is being the best operators and so.

Out there we're more digitally enabled in all aspects of our business.

It's every little bit every little thing matters and so there's no one big thing I would say that.

Than we've ever been.

And I think we're more agile and focused and also more profitable quite honestly so hats.

The insights that we're gaining and the opportunity for digitalization.

None: The investment we've made in enabling our clients and their employees to engage our systems and the rate in which they're adopting that opportunity.

Hats off to the team for all the things we've done to get get ourselves in a position that when the tide turned we have levers we can pull.

To make sure that we're delivering for our shareholders.

None: It is tremendous.

Great. Thanks, guys.

None: We've invested over the last several years into building out.

Thanks.

Is that it Mike.

None: Both our AI.

And that does conclude our Q&A session for today.

None: Robotics capabilities and.

Okay, well listen everyone. At this point, we'll close the call if you're interested in a replay of the webcast of the conference call will be archived for approximately 90 days and I want to thank you for your interest in Paychex and hope all of you have a great day. Thank you.

None: Our global footprint and I think all of those investments we've made over the last three years during the pandemic era. When we had the E. R. T C.

None: <unk> are going to serve us serve us well as we move forward. So I you know I just looked at it and say as you know as we exit this era.

Yeah.

This does conclude today's program. Thank you for your participation you may now disconnect.

None: But of the pandemic from a paychex perspective, I think we're entering the new era.

None: Just fundamentally a better positioned company I think we're more position trusted adviser to small businesses, we're delivering more value to our customers, they're rewarding that with the retention with with with better pricing in a market, where there's a lot of cheaper alternatives.

None: Out there we're more digitally enabled in all aspects of our business.

None: Than we've ever been.

None: And I think we're more agile and focused and also more profitable quite honestly and so.

None: Hats off to the team for all the things we've done to get get ourselves in a position that when the tide turn.

None: We have levers we could pull.

None: To make sure that we're delivering for our shareholders.

None: Great. Thanks, guys.

None: Thanks.

Is that it Mike.

None: And that does conclude our Q&A session for today.

None: Okay, well listen everyone at this point well close the call if you're interested in a replay of the webcast of the conference call will be archived for approximately 90 days and I want to thank you for your interest in Paychex and hope all of you have a great day. Thank you.

None: This does conclude today's program. Thank you for your participation you may now disconnect.

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Q3 2024 Paychex Inc Earnings Call

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