Q2 2025 Paychex Inc Earnings Call
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Speaker Change: Good morning, and welcome to the second quarter fiscal 2025 Paycheck earnings conference call participating on the call today are John Gibson and Bob Schrader. After the Speakers' opening remarks, there'll be a question and answer period.
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Speaker Change: I would now like to turn the call over to Bob Schrader, Chief Financial Officer. Please go ahead.
Bob Schrader: Thank you for joining us for our review of the Paychex second quarter 2025 financial results. Joining me today is John Gibson, Our Chief Executive Officer.
Bob Schrader: This morning before the market opened we released our financial results for the quarter ended November 32024, you can access our earnings release and Investor presentation on the Sec's website as well as on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next couple of days. This teleconference is being broadcast over the internet and will be archived.
Bob Schrader: And available on our website for approximately 90 days.
Bob Schrader: Today's call will contain forward looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also will reference some non-GAAP financial measures a description of these items along with a reconciliation.
Bob Schrader: Of the non-GAAP measures can be found in our earnings release.
Bob Schrader: I'll now turn the call over to John.
John Gibson: Thanks, Bob.
Start todays call with an update on the business highlights for the second quarter, and then I'll turn it back to Bob for a financial update and then of course, we will open it up for your questions.
John Gibson: We delivered solid results in the second quarter and the first half of the fiscal year, excluding the impact of the exploration of the RTC program revenue growth was 7% in the second quarter as we continue to deliver a comprehensive suite of HCM solutions that help businesses solve real problems.
John Gibson: Diluted earnings per share growth was 6% as we continually find ways to operate the company more efficiently while also enhancing the value proposition that we offer our customers.
John Gibson: The demand for our HR technology and advisory solutions remains healthy as we head into the key selling season <unk>.
John Gibson: A challenging labor market and rising healthcare and benefits costs are forcing many small businesses to reevaluate their HR strategies and technology needs and they can rely on paychecks to help them succeed.
John Gibson: Our sales activities and pipelines are strong most notably in our PEO and middle market HCM businesses.
John Gibson: Where we have invested as you know to take advantage of the growth opportunities. We see in these attractive markets and where we believe our breadth of solutions provide us with a competitive advantage. We are fully staffed across our sales and service teams for this critical time of year. We are also investing in advertising to dry.
John Gibson: <unk> improved awareness and adoption of our expanded product offerings.
John Gibson: <unk> business continues to perform exceptionally well driven by our robust value proposition as evidenced by solid worksite employee growth due to strong sales performance record levels of retention.
John Gibson: And higher overall insurance enrollment.
John Gibson: While the underlying business is strong and our attachment and participation levels in our health plans across the country increased mid single digits.
John Gibson: Enrollment in our Florida at risk Medical plan was flat year over year.
John Gibson: We also saw more employees opting for lower cost health plans in light of rising health care costs.
John Gibson: These factors create a headwind to our pass through revenue, but had no impact to our earnings or the strength of our value proposition.
John Gibson: Our revenue retention improved during the past year and remains above pre pandemic levels as we continue to remain disciplined on acquiring and retaining high value clients.
John Gibson: Client retention has improved since last year and retention in our HR outsourcing solutions remain near record levels client losses are down over the past year with improvements across all our employee size segments are continued strong retention in a highly competitive marketplace speaks to that.
Hard work and execution of our service teams and the strength of our value proposition.
John Gibson: The pace of U S job growth has moderated over the past year.
John Gibson: And overall customer employment levels have remained consistent with our expectations.
John Gibson: Small and mid sized businesses remain resilient and are generally optimistic as we head into a new year with hiring intentions in November rebounding to the highest level since last November.
John Gibson: We continue to make investments in our product suite to help our customers solve their biggest problems in October we announced the paychex recruiting co pilot.
John Gibson: Digitally AI powered solution designed to help clients proactively find talent in a challenging labor market.
John Gibson: Though it is still early we are seeing momentum building for the product as we head into the busiest time of year for hiring.
John Gibson: According to a recent NFIB survey, 55% of small businesses reported hiring or trying to hire in November and 48% reported few or no qualified applicants for the positions that they're trying to fill.
John Gibson: This is something we are actively trying to address.
John Gibson: We recently expanded our HR analytics offerings to provide our customers with deeper and more meaningful insights with the addition of the premium plus offering that we announced last month businesses of all sizes now have access to real current market data for compensation benchmarks to any.
John Gibson: <unk> them to more effectively recruit manage talent and develop growth strategies.
John Gibson: Premium plus also has a generative AI assistant and a chat interface.
John Gibson: We're pleased to report strong early adoption of our HR analytics solution, which we are planning to launch broadly to our PEO clients. This month.
John Gibson: Through AI AI insights, we are using generative AI to provide our customers with access to robust data a meaningful insights through simple easy to use interactions since launching the product in September we've seen a significant increase in customer engagement.
John Gibson: Over 80% of the early adopters have actively engaged with the platform and we've seen AI focused you should usage increased significantly in the past three months.
John Gibson: As a reminder, paychex has used AI technology for many years and we believe Gen. AI offers a new set of opportunities for value creation.
John Gibson: Especially when paired with it.
John Gibson: Large and high quality dataset pay.
John Gibson: Paychex captures 14 billion data elements last year, and we pay one in 12 private sector workers in the U S, giving us one of the largest workforce datasets and the industry are.
John Gibson: Our vast and growing data set provides us with the ability to deliver actionable insights to customers and strengthens our competitive mode.
John Gibson: Our clients can now leverage paychex flex perks to complete compete for scarce talent more effectively.
John Gibson: <unk> is an award winning digital marketplace that offers our clients employees access to affordable benefits and discounted products and services from third party providers.
John Gibson: Hertz is available at no cost to employers and payments are processed automatically through payroll deductions.
John Gibson: We launched the product in September over 100000 client employees have purchased at least one product offer in the marketplace.
The value proposition of our new product innovation is resonating with our customers and also with industry experts.
John Gibson: The Paychex Flex perks was awarded the top HR product of the year Award by HR Executive and also recently received a Brandon Hall excellence in HR Technology Silver Award.
John Gibson: Paychex was also recently named a leader in payroll services by Nelson Hall for the eighth consecutive year.
John Gibson: We were evaluated and placed in the leader quarter for our ability to deliver immediate client benefit and meet future client requirements.
John Gibson: To sum it up we remain focused on our north star and that simply is helping small and midsized businesses succeed by offering the most comprehensive suite of HCM solutions best in class Advisory support and actionable insights gleaned from our large proprietary data based upon our <unk>.
Bob Schrader: A long history of helping businesses I will now turn it over to Bob to give US a brief update on our financial results for the second quarter, Bob Yeah. Thanks, John and good morning, I'll start with a summary of our second quarter financial results and then provide an update on our outlook for fiscal 2025.
Bob Schrader: Total revenue for the quarter increased 5% to $1 3 billion. This includes the headwind from the expiration of the RTC program of approximately 200 basis points, which is consistent with the expectation we shared with you last quarter. Excluding this headwind as John mentioned total revenue grew 7% in the quarter.
Bob Schrader: Management solutions revenue increased 3% to $963 million. This was primarily driven by growth in the number of clients served across our suite of HCM solutions as well as client Worksite employees for HR solutions and higher product penetration, partially offset by lower <unk> revenues.
Bob Schrader: Oh and insurance solutions revenue increased 7% to $318 million driven primarily by higher average higher average worksite employees and an increase in PEO and insurance revenues.
Bob Schrader: Interest on funds held for clients increased 15% to $36 million, primarily due to higher average interest rates and invested balances.
Bob Schrader: Total expenses increased 4% to $779 million. This was due to higher PEO direct insurance costs related to growth in our average worksite employees and PEO insurance revenues as well as continued investments in product innovation data and AI and our go to market initiatives.
Bob Schrader: Operating income grew 6% to $538 million with an operating margin of 49%, which was up year over year, approximately 60 basis points and as a reminder, operating income.
Bob Schrader: Is also impacted by the expiration of the RTC program, excluding that impact operating margins would've expanded 180 basis points in the quarter compared to the prior year period.
Bob Schrader: Diluted earnings per share and adjusted diluting earnings per share both increased 6% to $1 14 in the second quarter.
Bob Schrader: Now, let me quickly touch on the results for the first six months of the year.
Total revenue grew 4% to $2 6 billion, which includes approximately 300 basis points of headwinds from <unk> as well as having one fewer processing day in the first quarter. Excluding these headwinds total revenue grew 7% in the first half of the fiscal year.
Bob Schrader: Management solutions revenue increased 2% to $1 9 billion PEO and insurance solutions increased 7% to $637 million and interest on funds held for clients increased 15% to $74 million.
Bob Schrader: Total expense growth for the first six months of the year was 3% to $1 6 billion and operating margins expanded approximately 20 basis points to 41, 2% and again. This is despite the <unk> headwind that we had in the first half of the year.
Bob Schrader: Diluted earnings per share increased 4% to $2 32 and.
Bob Schrader: And adjusted diluted earnings per share increased 3% to $2 30 a share.
Bob Schrader: Our financial position remains strong with cash restricted cash and total corporate investments of $1 3 billion and total borrowings of approximately $817 million as of November 32024.
Bob Schrader: Cash flow from operations was $841 million for the first half of the year driven by net income and reflects changes in working capital influenced by the timing of our quarter end.
Bob Schrader: Through the first six months of the year, we returned a total of $810 million to our shareholders through cash dividends and share repurchases and our 12 month Rolling return on equity remains robust at 46%.
Speaker Change: I'll now turn to our guidance for the fiscal year.
Speaker Change: Outlook assumes the continuation of the current macro environment and I assume most of you have seen in the press release, we are not making any changes to the guidance I will however provide color on the guidance ranges for two of the two of the line items.
Speaker Change: Total revenue is still expected to grow in the range of four to five 5% and as a reminder, this includes approximately 200 basis points of headwind from the expiration of the RTC.
Speaker Change: Management solutions is still expected to grow in the range of 3% to 4%.
Speaker Change: PEO and insurance solutions.
<unk> to grow in the range of 7% to 9% due to some of the factors that John discussed earlier as it relates to our MPP enrollment in the state of Florida, We would now expect growth to be at the lower end of that range.
Speaker Change: Interest on funds held for clients is expected to be in the range of $145 million to $155 million and other income net is expected to be income in the range of $30 million to $35 million.
Speaker Change: Operating income margin is expected to be in the range of 42% to 43%. However, we would now expect that to be at the higher end of the range and our effective tax rate is expected to be in the range of 24% to 25% and earnings adjusted diluted earnings per share is still expected to grow in the range of five to seven.
Speaker Change: <unk>.
Speaker Change: Turning to the third quarter, we would anticipate total revenue growth to be in the range of four 5% to 5%. This includes approximately 150 basis points of headwinds from the exploration of the RTC program. This will be the last quarter of headwind as it relates to <unk>. So I'm looking very much forward.
Speaker Change: To anniversarying that as we get through the end of Q3.
Speaker Change: We would also expect our operating margin to be between 46, and 47% I think as most of you know Q3 is our largest operating margin quarter due to the fact that that's when we have we benefit from our annual form filings and of course all of this is based on our current assumptions, which are subject to change and we'll update you again on the third quarter call.
Speaker Change: And I'd also refer you to our Investor Relations website for more information in our investor slides and with that I will turn the call back over to John.
Speaker Change: Thank you Bob we will now open the call to questions.
Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad, you may remove yourself from the queue at any time by pressing star two.
Speaker Change: Please limit yourself to one question and one follow up.
Speaker Change: Once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
Speaker Change: And we'll take our first question from Mark Massaro with Baird. Your line is open.
Speaker Change: Hey, good morning, and happy holidays, John and Bob.
Speaker Change: Wondering thanks Marty.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: Wondering what youre seeing with regards to any sort of change in terms of business sentiment.
Speaker Change: Post election.
Speaker Change: We did see the NFIB confidence index really jump up fairly materially and I'm wondering if that's actually translating.
Two two events in the field.
Speaker Change: In terms of the pipeline builds any commentary there would be really helpful.
Speaker Change: Yeah, Mark this is John happy holidays listen, we I think we continue to see really moderate growth and small businesses and you look at our.
Speaker Change: The index Thats kind of the story of the of the year.
Speaker Change: The year that escaped the recession that never happened.
Speaker Change: I would say continuing to see downward pressure on wages and small businesses, where ultimately we don't see any signs.
Speaker Change: The recession I think you point out.
Speaker Change: There was a degree of uncertainty with the election Thats behind us certainly the optimism.
Speaker Change: Indexes it seemed to improve.
I'd say, we have not seen that at this time turn into.
Speaker Change: Positive momentum however, what I would tell you is in results, but what I would tell you is certainly job openings. We've seen increase we know that the desire of our clients to want to add employees. It's still very strong that's one of the biggest problems, particularly in the small market still.
Speaker Change: Still challenging to find qualified people, which is why we've been doing some of the solutions that we've had so so right now I would say more optimism, but we've not seen that at this point translate into any significant change in the moderate growth that we've been seeing through this year.
Speaker Change: Thank you for that and then.
Speaker Change: My follow up question relates to the PEO business.
It actually looks like relative to you know all the public data that we see it looks like you're actually growing the PEO business faster.
Speaker Change: You know then some of the competitors that are out there and what I'm wondering is what are you attributing that to to what degree.
Speaker Change: Are some of the new.
Speaker Change: I fueled.
Solutions that you're offering helping what are you doing on the insurance side, that's really addressing some of the needs that you outlined.
Speaker Change: Yes, Mark I would tell you that <unk> is gaining share.
Speaker Change: There's no question about it I mean the.
Speaker Change: The demand that we see I mean, our contracted revenue in the PEO was up high double digits. I mean, it would seem you want that the contracted new contracted revenue that we got him.
Speaker Change: In the quarter.
Speaker Change: Client adds were up high double digits.
Speaker Change: That's the second year in a row.
Speaker Change: Record retention in that group proposed proposals were up high double digits. So theres a lot of activity in the market I think it's fair to say that health inflation is an issue and that's causing a lot of people to go out and shop and I think that's going to be an annual event. I think people are always going to be looking at am I getting the best option.
Speaker Change: You raised a good question why why are we differentiating ourselves I do think we have a broad set of products and services. So I think one of the things the client or a prospect knows that they come with us.
Speaker Change: They don't have the wheat paycheck that they need change.
Speaker Change: And so they can build a solid reputation yeah. As you know we have a pretty solid ASO business with great HCM business. So theres a lot of Optionality here, we also.
Speaker Change: Average our insurance agency embedded in the P. O. So really would gives us maximum flexibility.
Speaker Change: <unk> meet the clients' needs from a price perspective, you are health plans, we provide a lot of options, but it's not every option you can only manage so many options and being so much risk. So if they're looking for a little higher deductible plan than we have than we can go into the open market and do that what's great is both from the client perspective, and the employee perspective.
Speaker Change: The open enrollment.
Speaker Change: All aspects of it really doesn't matter, whether or not your PEO client on our agency or Youre on one of our master plans within the PEO youre going to have the same experience that we can move that during the enrollment period without without any problems. So I do think that differentiates US is the fact that we do have a broad suite of opera.
Speaker Change: Earnings a client can come to paychex, they can call at home for the lifetime of their of their business and know that as their needs change, we can evolve and change with them.
Speaker Change: That's great. Thank you so much and again happy holidays.
Speaker Change: Got it.
Speaker Change: Thank you we'll take our next question from Bryan Bergin with PD Cowen Your line is open.
Speaker Change: Hey, guys, good morning, and happy holidays from me as well.
I wanted to start on management solutions growth here. So I guess in total I know you maintained all the growth ranges and we appreciate the color on the PEO do you have an offset in the management solutions business that will offset that and help you maybe land favorably within the total range just curious where you feel most comfortable in the non interest.
Speaker Change: Ocean Ranch.
Speaker Change: Yeah, I mean, I think Brian we gave you the guide.
Speaker Change: Change to the management solutions Guide I think we're comfortable with the range there and yes P always strong, but <unk> always been strong as well so we've been able to grow both of those businesses I think when we look at a.
Speaker Change: New bookings Worksite employee growth for both of those businesses. The upper single digits. I think we had flagged that in the investor presentation retention strong in both businesses. So we don't really see a trade off where we've seen that in the past maybe a tradeoff between ASO and PEO, we did not see that.
Speaker Change: That this quarter both businesses.
Speaker Change: We had strong growth and then within management solutions again, we continue to see strong.
Speaker Change: Product penetration, we have several businesses in that category that grew double digits in the quarter retirement solutions, our funding solutions business. So we feel good about the performance of both of those business businesses, both for the quarter and then with the updated guidance ranges that we provided.
Speaker Change: Okay. That's clear and then just on <unk> I know you were reserving revenue for this year given some proposed legislation.
Speaker Change: Was there any reserve release in the quarter here and if not how are you thinking about that going forward is that proposed retroactive legislation on <unk>.
Speaker Change: Our Tc seems less likely.
Speaker Change: Yeah. So I think what you are referencing Brian is the reserve that we did I believe it was in Q3 of last year for the amount of <unk> that we sold in the month of February.
Speaker Change: When that proposed legislation came out and put that at risk because it was going to be you know we're going to end the program retro too.
Speaker Change: End of January So we were conservative we reserve data it was not a big dollar amount.
Speaker Change: We did have that in our plan this year to release it we carried it for a couple of quarters, but we no longer have that reserve and that was assumed in the in the guide for Q2 and really the guide for the year. So we couldn't justify holding it any more or theres been no movement, there and so that that reserve is no longer on the books.
Speaker Change: It was a small immaterial dollar amount.
Speaker Change: In the Grand scheme of things.
Got it okay I'll be honest.
Speaker Change: Yes. It came to you. Thank you.
Speaker Change: Thank you well take our next question from Ramsey El <unk> with Barclays. Your line is open.
Speaker Change: Alright, Thank you very much for taking my question.
Speaker Change: And I think last quarter, you were contemplating something like 125 basis points worth of fed cuts into guidance you maintain that range. Despite the solid beat this quarter I'm just curious about how we should think about that given you know.
Speaker Change: With the fed sort of announced yesterday do you see this range being a little more conservative perhaps.
Speaker Change: Yeah, I mean, you know the.
Speaker Change: We obviously didn't get a chance to update our forecast based on yesterday's news.
Speaker Change: But the forecast.
Speaker Change: Our prior forecast as well as the current forecast.
Speaker Change: <unk> completed 125 basis points of cuts this year Ramsey you know hundred have already happened.
Speaker Change: 50 in September and then November and yesterday's cut so we have one more.
Speaker Change: In in the back half of this year based on the update that was provided yesterday.
Speaker Change: That may or may not happen. So there there could be a little bit of upside there, but it's not going to have a material impact whether it happens or not just given the timing of the of the year. So.
Speaker Change: That's kind of what the forecast is based on.
Speaker Change: Got it Okay, and then you called out higher product penetration of the HCM products and management solutions, which is obviously an ongoing trend.
Speaker Change: Can you kind of give us an update on your growth algorithm, how much does HCM in totality contribute versus the core business, how does that sort of evolved over time I'm just trying to put my finger on the pulse of the the way that core key drivers of your growth of changeover overtime.
Speaker Change: Yes, I mean to be honest I havent it hasnt changed significantly in it you know we talk about it in terms of the of the total business but.
Speaker Change: We've driven a lot of growth.
Speaker Change: Historically out of out of our ability to get increased penetration larger share of wallet and really monetizing our existing client base.
Speaker Change: Driven at least half of our growth. We I think we talk about it being typically in the 3% to 4% range in when we kind of take a step back and we look at the penetration rates within our existing client base, there's there's still relatively.
Speaker Change: Low penetration rates around some of those key solutions, particularly in the PEO. So we still see lots of room as it relates to that.
Speaker Change: Formula and our ability to drive growth.
Speaker Change: Through product penetration as we move forward.
I think the thing that is a trend that continues.
Speaker Change: In this quarter, it's continued for nearly a decade.
Speaker Change: Sure payroll is becoming less than 50% of what really is driving our business. It's really a an HR story and a technology story and we can get on with it we're very pleased with the product attachment that we're seeing.
Speaker Change: In the products are really excited about the new markets that we've opened up for ourselves, which is to monetize our clients' employees.
Speaker Change: Through our Paychex flex.
Speaker Change: Our purchase product.
Speaker Change: We've been investing.
Speaker Change: A lot of the RTC.
Speaker Change: Money into this technology plan, that's basically a rewiring of our technology to be able to really position the client's employee as a customer of paychex, we kind of do that before now we can do that we built this marketplace.
Speaker Change: When you think about starting the first initial launch a wave launch.
Speaker Change: In September.
Speaker Change: And since that launch we get a small trial I think we opened it up to about 100000 potential client employees and now we started to open it up to the broader base that's on our flex platform in.
Speaker Change: Relatively short period of time six weeks SAB 100000 customers.
Speaker Change: It's a small dollar amount, but it's a it's a pretty impressive start to something that we think has a lot of legs.
Speaker Change: That is impressive thanks, so much.
Thank you.
Speaker Change: We'll take our next question from Andrew Nicholas with William Blair. Your line is open.
Speaker Change: Hi, Thank you and good morning, I wanted to ask about the upper single digit growth in outsourced or HR outsourcing Worksite employees is there any way for us to think about how much of that comes from upsell from <unk>.
Speaker Change: Clients with an existing payroll relationship versus.
Speaker Change: They're new to paychex entirely.
Yeah.
Speaker Change: I'll add onto that.
Speaker Change: Mark made relative to the use of AI and how we're using AI.
Speaker Change: Certainly in the second quarter, we had a lot of.
Speaker Change: Increased inside the base at the time, when we have insurance renewals. So we're actually able to look across our client base and do analytics and AI about.
What they are paying for health insurance, both in our agency and others and then really target that with.
Some sales place to say Hey, we may have a good value proposition with this client. So I think it ebbs and flows we have a very solid both inside and outside the base capability in the PEO specifically.
Almost all of our <unk> businesses inside debates upsell, but in the we had a good balance of performance I would say both outside the base.
Speaker Change: As well as inside the base killed it a little bit more inside the base I would say in the last quarter, but again I would imagine that will rebalance itself out as we go through the second half of the year again, it's during that enrollment period.
Speaker Change: That that we really do.
Speaker Change: The AI models to be able to look across our client base and figure out whether or not what's the best value proposition to target and offer them.
Speaker Change: Makes sense. Thank you and then for my follow up.
Speaker Change: Just on on the enrollment dynamic in Florida could you speak a little bit more if you have any insight in terms of what's driving that and also if theres any way to kind of refresh us on that.
Speaker Change: The PEO business has exposure to Florida, obviously quite a bit of that came from oasis over half a decade ago now, but just trying to get an understanding of how much of the business that represents at this point. Thank you.
Speaker Change: Yeah.
Speaker Change: I'll start off and then Bob can add.
Speaker Change: Add on if he wants what what's driving that performance is up.
Speaker Change: And quite frankly, I would say it this way.
Speaker Change: The P O results I think including the flat.
Speaker Change: At risk of MTT insurance revenue growth in Florida, I think should be viewed as a positive.
Speaker Change: For investors and for our clients quite frankly, I mean first of all the pass through revenue doesn't really impact earnings at all and I think when you look at the business, we actually expanded insurance penetration.
Expanded the percentage of our clients that have insurance attached we expanded the number of employees within the PEO that hasnt insurance attached and bought it and insurance paths, but we did it in less risky ways. So we made the decision to underwrite more conservatively given some of the cost.
Speaker Change: Increases that we're seeing in some of the volatility and health cost. So we have more options than just the MPP plan in Florida, We have the agency and so when you look overall, our actual insurance inside the T. O was up mid single digits. It was flat in this one program and some of that was a conscious decision. So one of the great things.
Speaker Change: Our model is we have options and we're leveraging those so we have a client that is looking for specific plan. We don't have in the 40 M. P. P them, we'll give them something on the agency and if we're looking at a prospect or we find a competitor that may be doing pricing more aggressively when we feel comfortable with we're not going to put that risk.
Speaker Change: On the on the business. So what I I think health of inflation is real in the business, particularly if you are at risk we have to manage that well.
Speaker Change: We're going to be disciplined growers of the business and so I think.
Speaker Change: I'm very pleased and matter of fact, I'm very pleased with the management team I think they made the right calls in terms of balancing growth with risk and we got both I think we've got good growth and I think we got better manage risks and they actually increased insurance penetration across the base of that digital winners for maintenance and the way the economics works out because all you have to recognize.
Speaker Change: <unk> revenue and I'll leave that to Bob explained why the accounting.
Speaker Change: Yeah, I'd just add I mean, we have a little bit of a unique model compared to others. I mean, we made the decision that insurance is a scale game and we have scale in Florida. So we made a decision a number of years ago strategically that we would be at risk on our medical plans in Florida. That's the only state where we are at risk. So you know you get if you get mixed.
Issues, if youre growing outside of Florida versus inside of Florida, you know that could have an impact on on the revenue I think overall, we feel very pleased with the continued strength of our PEO business I mean someone mentioned earlier relative to the I think it was mark relative to the competition.
Speaker Change: Sales performance in the quarter was strong retention was strong worksite employee growth is strong it is.
Speaker Change: The MPP enrollment was not where we thought it was going to be coming into the year in Florida, but when we take a step back that just illustrate the point that John is making when we look at the PEO clients that are on our agency medical plans in Florida that was that was up upper single digits and again those are risk based decisions that we're making for the business.
Speaker Change: We're not gonna make bad decisions just to chase a revenue number because that's not the right thing to do for the company and if you were to look at this from a net service revenue standpoint, or an earning standpoint to John's point. It would really have no impact. So we feel pretty good about where we're at with the continued strength of the of our PEO business. Yeah. I think the other thing I would add ons.
Speaker Change: To that because we saw this across not.
Speaker Change: Not just the <unk>, but also the insurance business as well.
Speaker Change: Employees when given the choices we're downgrading their plans we saw downgrades double the percentage.
Speaker Change: It was in double digit typically that's a single digit issue most of the time an employee once they get onto the plan. They stay with the plan they don't want to change the plan.
Speaker Change: And actually in the mid <unk>.
Speaker Change: Mid to high single digits, each year, you'll see some people selecting to downgrade their plan.
Speaker Change: We saw that across the board. So I think the self installation is.
Speaker Change: <unk> is a real story and again I just get back to it.
Speaker Change: Just going to say this again on the SMTP revenue number.
We have a lot of control over that I mean, you you can hit that number.
And you could maybe hit that number for a quarter and you maybe hit that number for what do you want that number to be and we can probably hit it but where are we going to do it for a quarter or two quarters, and then youre going to have a risk problem and we've seen that movie play out in the industry before and like I said, that's not that's not the game that we play we're disciplined we have options we.
Speaker Change: Avail ourselves of the options that we're going to constantly be disciplined growers.
Speaker Change: Revenue in the business.
Speaker Change: Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question from Michael <unk> with Morgan Stanley. Your line is open.
Hi, everyone. Thanks for thanks for taking our question I just wanted to start on that partnership channel more broadly if I think about one of your competitors striking in SMB partnership to embed some of their payroll capabilities alongside of some of their BTB payments.
Speaker Change: Capabilities and I'm, just curious how you think about the partnership channel and whether or not that's a source of incremental investment for you. Thanks.
Speaker Change: Yeah look we have a lot of partners.
Speaker Change: Long standing partners.
Speaker Change: Including those in the payment space, some of which you're probably referring to.
Speaker Change: So we partner with them when we partnered with many others and certainly.
Speaker Change: We have a capability to partner in a what I would say you can call it embedded I call it wholesale or white label type of way is well within our business and we're certainly open to that and I would say in the CPA micro area. That's that's a healthy business and it has been it has been growing so more to come on that.
Speaker Change: In terms of how we approach broader partnerships I think what we've tried to look for are ways in which.
Speaker Change: We can bring something to the partner and they can bring something to us.
Speaker Change: And.
Speaker Change: And like I said, we continue to expand their partnerships and continue to look at ways to expand that going forward.
Speaker Change: Okay.
Speaker Change: That's helpful. Maybe just on the retention front you obviously spoke to the fact that you're sort of tracking above historical ranges is that both on a revenue and a logo basis and how would you sort of compare those two buckets relative to historical levels. Thanks.
Speaker Change: Yeah.
Retention was solid.
Speaker Change: Revenue retention was solid continuing near record levels.
Speaker Change: I think really demonstrating the value proposition of the hard work of the team, but also the value proposition. There is a lot of alternatives out there and client losses are improved over last year. So even on a logo basis, we saw improvement year over year. So very pleased and it was across all the all the segments as well.
Speaker Change: Which is also a pause as typically we have one one segment or one business. That's you know it's kind of.
Speaker Change: We're not doing as well as the others and this is this is one of those quarters, where in one of the really first half of the years, where we tend to see pretty consistent improvements so hats off to the team there.
John Gibson: Thanks, John.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: We'll take our next question from Bryan Keane with Deutsche Bank. Your line is open.
Speaker Change: Hey, guys happy holidays, any pick up yet or any signs of growth.
Speaker Change: Youll see for kind of new business starts or the development of new business starts.
Speaker Change: Yeah.
Speaker Change: Yeah, Brian This is business starts.
Speaker Change: Down.
Kind of year over year, what I would tell you, they're still above pre pandemic levels.
Speaker Change: We had this odd anomaly doing during COVID-19, where they really spiked up a lot of people going off on their own and.
Speaker Change: Doing that they've continued to kind of what I call moderate again, we're still above I still think that there's a higher degree of entrepreneurship.
Speaker Change: In the general economy.
Speaker Change: But again <unk> not seen that has not gone the other direction Thats continued to moderate this year.
Speaker Change: Is that something that cyclically comes back if the economy starts to improve I'm, just trying to think about timing on when that might that balance.
Speaker Change: Well the underlying premise of your question.
Speaker Change: These are in great shape, and I think our assessment would be that it's in it's in really good shape I think solid shape at the small business again, if you look at our small business index. We continue to see moderate growth. We think optimism is there we find our clients wanting to grow their business.
And I think the challenges they face as well as access to capital is one and then the other point if I'm going to open up another restaurant and we're going to open up another location, even if I can find the money and I can afford the cost of capital in.
Speaker Change: In the market at market today can I fill that building with people that are qualified to do the work that needs to get done to satisfy my customers and I think those two those two are the two things I see right now our main street.
Speaker Change: That's what we deal with every day, we don't deal with Wall Street.
Speaker Change: Chips are bitcoins, we deal with people that are cutting hair and doing things like that.
Speaker Change: There's no real two constraints right now.
Speaker Change: On the economy.
Speaker Change: Got it and just as a follow up you called out kind of the Midmarket HCM business.
Speaker Change: With strong sales activity anything in particular are causing that is that a competitive dynamic or is that a new products that seem to be resonating better.
Speaker Change: Well I think it's a combination I think it's a combination of things I think that certainly we've continued to invest in the product.
Speaker Change: Our paychex flex engage product, which is an AI based engagement tool that allows our businesses to manage both performance and rewards and engagement with their employees and compensation more effectively.
Speaker Change: That's been the big winner in the mid market. So I think on par or technology has always been on par. We continue to have a very strong technology capability in the mid market I do think that the HR outsourcing value proposition is resonating in the marketplace I think the our value proposition to be able to say you can come in.
The paychex and Azure business changing in each change you can stay in one place you don't have to move you can you can go back and forth I think that's resonating and I think there's been some disruption.
Speaker Change: There's been some disruption in the mid market that has provided an opportunity.
Speaker Change: For us to position ourselves at the bitter stable quite frankly, and so I think again that market has changed a little bit I think theres, a little bit more rationality.
Speaker Change: We're actually talking about profitability.
Speaker Change: As well as growth and we've been talking about that for some time, so I think theres more rationality in that market and I think our customers are coming around.
Speaker Change: Check.
Speaker Change: Got it got it okay. Congrats on the results.
Speaker Change: Right.
Speaker Change: Thank you we'll take our next question from Kevin Mcveigh with UBS. Your line is open.
Speaker Change: Great. Thanks, so much.
Speaker Change: Hey.
Speaker Change: You had mentioned I think that youre, capturing some share an appeal, which is good news to see.
That's coming from wanted to kind of start there because I thought there was an interesting data point.
Speaker Change: Yeah, Kevin I would tell you that we're introducing people to the PEO concept, that's still predominantly what we do.
Speaker Change: We we tend not to do a lot of head to head what I called T O to P O movement.
Speaker Change: Frankly, now when we go head to head in the <unk> in the marketplace.
Speaker Change: When a client is deciding that they want to select P O.
Speaker Change: But I would not say if you're thinking about it am I going to is there a particular T. OS that we're taking a lot of business from that's generally not our sales motion. There's a risk involved in that there's a lot of other issues.
Speaker Change: We stay away from that our general sales plays are introducing our HCM clients see the value proposition.
Speaker Change: Or it's going head to head in the market for clients that are moving towards the value.
Speaker Change: Our value proposition in those cases, we are going head to head with.
With other peers in the marketplace and again I think it's the strength of our value proposition is the strength of our technology is the strength of our advisory.
Speaker Change: Our capability, our HR Gs are the best and best in the business in terms of the advice that they provide these clients I think it's our use of AI and data analytics, which we're really driving in the Po and then I think it's the fact, what I said earlier, which is we have the <unk>.
Speaker Change: <unk> set of capabilities. So you you're going to start with us as a P O and if things change we have a non PEO HR outsourcing options for you and if something else changed we gotta HCM only and I think I think again customers.
Speaker Change: Read some notes and I, you know I don't I don't.
Speaker Change: Don't know if I would say, it's totally true, but I do see clients not wanting to have to deal with a lot of vendors and so I do think this comes out consolidation of vendors and as you get each of the competitors kind of gaining even par in terms of capabilities across the HCM suite I think if clients can say looks like.
Speaker Change: Go to a partner, they're gonna be reliable, they're gonna be predictable and I can stay there and build a long term relationship that makes more sense than trying to spend my time, managing multiple vendors and switching every year.
Speaker Change: No that makes a lot of sense and then just I had been in and out I apologize.
Speaker Change: I think you gave some commentary on the Q3 revenue can you just remind us what that is and then the pacing in Q4 as well and you know what what does it take to kind of get to the high end of the guidance range as opposed to the low end. It gets more from a revenue perspective, just it's just trying to kind of help understand that in the back half of the year.
Speaker Change: Yeah, I think the color that we gave on Q3.
Speaker Change: Kevin was that we would be between four four and a half and 5% and that still includes about 150 basis points.
Speaker Change: Headwind.
Speaker Change: From from ER T. C. So this is the last quarter of <unk>. So that's the color that we provided for the quarter, obviously, the headline numbers with the RTC headwind going away youre going to see an acceleration in revenue growth in the back half of the year.
Speaker Change: Due to that.
Speaker Change: We mentioned the guide on.
And so I would say the PEO in the back half of the year is probably going to be a bit lighter than.
Speaker Change: Then we saw in the in the front half of the year and that's really driven by the at risk enrollment that we talked about on the pass through revenues in Florida again, no impact to net revenue, earning so when we kind of take a step back and look at front half versus back half I <unk> I think you'll see fairly similar growth rates in the back half of the year than what you saw in the front half of the year and again.
Speaker Change: I think we mentioned this <unk> T C for the quarter were up 7% and that's.
Speaker Change: Going back to the second half of last year, when we turned the corner last year, we started to see a pickup in the organic growth of the business I think the front half of last year. We drove grew 5% actually RTC and then when we turned the corner. This is the fourth quarter in a row that we've seen strong upper single digit call it 7%.
Speaker Change: <unk>.
Speaker Change: Growth actually our T. C. Now interest rates has continued to help there certainly helped in the back half of last year helped in the first half of this year up 15% you know that that will turn into a headwind as we move forward in the back half of the year, but you know all in all the performance of the business in the back half.
Actually he RTC and interest rates, we would expect to be similar to that to the front half.
Speaker Change: I just realized we're gonna have to shorten the calls in the future.
Speaker Change: [laughter].
Speaker Change: Thank you.
Speaker Change: And we'll take our next question from Tien Tsin Huang with Jpmorgan. Your line is open.
Speaker Change: Thanks, So much good morning, John and Bob just wanted to dig in really quickly just on the Florida comments always education on what you guys talk about there does that.
Given the test that's asked for at risk given that say it only does that inform your thinking on SMB employee health and demand in general assuming you get more data there I'm thinking more about the downgrading of planned comments specifically thanks.
Speaker Change: No I don't I don't view that at all I I view this more as a.
Speaker Change: As it as a cost control mechanism both at the people managing their personalized and employers managing their employee cost.
Speaker Change: Again, we saw increases in the percentage of clients and increases in the percentage of employees in our PEO attaching insurance.
Speaker Change: They didn't agree actually more of them are offering insurance now when you get under what did I order offer last year or what did I buy last year I offered a Cadillac plan and people bought a Cadillac plan and now I really only want the I guess I'll use old terms for myself and gave myself or the Chevy.
Speaker Change: Right and then people are downgrading to the to the sugar plant I think that's what you see going on is more people looking at ways. They can manage the cost and then to be fair you know health inflation is an issue.
And you'd see health inflation at the for US we've been managing it successfully for our clients over a decade with really what I would call mid to high mid.
Speaker Change: Hot mill.
Speaker Change: Mid to high single digit increases over the last decade in that program and that's beating the market from a medical inflation perspective, and that's the commitment we want to make to our clients is we're going to try to manage.
Speaker Change: Those opportunities so that they can have predictable inflation, but again you you could talk about a 9% increase for somebody who is already being disclosed at the shot to food market and go into the gas pump and et cetera, et cetera, they're looking for ways. They can trim back and theyre looking at and saying look I have this really nice plan I like last year.
But this other plan is is less money than what I was paying last year. That's what we're seeing people, they're not dropping it they're just making different choices in terms of deductibles and plans in that the only thing I would add to that is we're somewhat indifferent to that choice I mean, obviously it would be great. If they pick the higher plan from a revenue standpoint, but at the end of the day, we want them.
Speaker Change: To attach out because what we found when in our model is when we get that helped attachment that really drives retention stickiness in lifetime value in the difference in the in those plants. You know there may be a little bit of an impact to the top line, there's no impact to the bottom line and so we want to give them choice and help them find a plan that.
Speaker Change: That meets their needs, but provide them that plan, because that really drives retention and lifetime value for us.
Speaker Change: Got it no that's correct no the attach being strong is this great I'm just trying to learn around the.
Speaker Change: But the plan selection there it sounds like it's mostly health care inflation and smbs attacking that.
Speaker Change: This is not.
Speaker Change: Not intended to be related but just thinking about that.
Speaker Change: Broader HCM pricing and discounting for you.
Speaker Change: In terms of what you're seeing or maybe thinking.
Speaker Change: Any new considerations there.
Speaker Change: So not a not a PEO or health specific question, but just broader.
Speaker Change: And around pricing and discounting as you're trying to retain and pursue new new.
Speaker Change: The growth.
Speaker Change: Yeah, No I would say across across all of the market segments and across all of the business segments.
Speaker Change: We've not seen we've not seen anything out of the ordinary.
Speaker Change: The competitive market.
Speaker Change: We continue to drive and get a price value premium in the market.
Speaker Change: Again, there's a lower cost options out there, but I think people recognize value when they when they see it. So so we're not seeing anything out of the ordinary we had planned it on a little more price competitiveness and we've seen that but not seeing anything radical across the in any of the groups against what I will say this we're going to continue to be.
Speaker Change: Disappointed.
Growers.
Speaker Change: I think that's important to understand.
Speaker Change: When it comes across Youre going after the client, whether that's health insurance risk.
Speaker Change: We're gonna be disciplined we're not going to do that just to get the revenue you look at increasingly clients.
Speaker Change: How much I paid Google to get seen by somebody.
Speaker Change: Got paid Google is double what the lifetime value of that client is going to be I'll, let somebody else pay that freight.
Speaker Change: And so.
We're going to continue to be disciplined we're not going to do anything that's crazy.
That's going to jeopardize.
Speaker Change: Our long standing position.
Speaker Change: Position as being predictable and consistent and what we believe is that clients are going to appreciate that over a long time. It is a day.
Speaker Change: You've got to make money as a business and if you're spending more to get a client or taking more risk than than you can absorb on your balance sheet. That's not good business. So we're going to continue to be disciplined, but we're not seeing as I said I think I said it on the last call.
Speaker Change: Since there is a little bit more rationality coming in to our markets were.
Speaker Change: Both down market.
Speaker Change: In the mid market.
People are beginning to realize this thing called profitability and that will drive that will drive more rational pricing.
Speaker Change: Yeah. So the discipline is clear thank you for your thoughts.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: We'll take our next question from Ashish <unk>.
Speaker Change: RBC capital markets. Your line is open.
Hi, Thanks for taking my question, although it doesn't have to do an increase in PEO direct insurance costs. I was just wondering if you could comment on how that's trending on a full year.
Speaker Change: It looks like employee basis, just given that they have to get information and then as we think about going forward are there any changes to the plan in order to manage this insurance costs. Thank you.
Speaker Change: Yeah, I mean, our direct costs are up Ashish I don't have the numbers in front of me, but there certainly.
Speaker Change: It's not just those costs arent just out there also workers' comp and we're largely going to be driven.
Speaker Change: By growth in Worksite employees, which I had mentioned was upper single digits. So no significant.
Speaker Change: It began changes planned from a plan design standpoint, I think.
Speaker Change: Our books are performing well, both across medical and workers' comp and that's really going to be a factor of two things both growth in the business from a worksite employee standpoint, and then how we're doing from from attachment.
Speaker Change: Getting not just medical but across the board with workers comp as well.
Speaker Change: And then I would just say I talked about this for.
Speaker Change: Yeah, I think we've talked about this as well we continue to look for innovative ways. We're constantly evaluating the plans we offer we're constantly looking at the mix of.
Speaker Change: Of health products, so that we can meet the broadest set of customer needs.
And we'll continue to do that but again health inflation across the board.
It is a public policy issue.
Speaker Change: We'll issue and I think we're still seeing the after we've not we're still seeing the effects of COVID-19 and they.
Speaker Change: Health inflation that occurred during COVID-19.
Speaker Change: Working through the working team to help the pricing system right now.
Speaker Change: Very very helpful color and just for my follow up.
Speaker Change: A quick clarification, saying Q of last year that was impacted by slower seasonal Heidi I was wondering if you have seen any change on the seasonal higher incentives.
Speaker Change: No I mean I hiring has been in line with our expectations I think we've talked about this earlier in the year what was assumed in our guide which was pretty much not not a lot of hiring assumed in the client base, that's pretty much how the year has been played out so both both Q1 and Q2 I would say employment levels within our existing client.
Speaker Change: Is it pretty much lined up with what our expectations were.
Speaker Change: Very helpful. Thank you. Thanks.
Speaker Change: Thank you.
Speaker Change: We'll take our next question from Keith Mehta with Northcoast Research. Your line is open.
Speaker Change: Good morning, John and Bob just on just a hey.
Speaker Change: John maybe just on the pricing commentary, obviously inflation, probably a little bit higher than everybody expected and I know Oh.
Speaker Change: Last year, maybe the year before you got some better pricing than in the past so I'm wondering.
How that's playing out.
Speaker Change: This year, you'll have some ancillary products and stuff is there an opportunity to get some of that pricing back.
Speaker Change: Or do you anticipate pricing will be maybe on.
Speaker Change: On the lower end than it was a couple of years ago.
Speaker Change: Okay.
Speaker Change: Yeah, Kartik I would say this I would say that our all our price value proposition.
Speaker Change: <unk> strong with our existing clients and I think that once the client gets onboard with paychex they see the value of what we're doing.
Speaker Change: And I think that we've continued to maintain what has been our historical growth formula in that area.
Speaker Change: I think both in terms of that part of our growth formula.
Speaker Change: As well as our product penetration of our ability to add new products and services to add more value, which then adds more price to those clients I think those things have been very sound.
Speaker Change: I think that prospects and clients are more price sensitive than they were pre COVID-19 I don't think that's surprising during COVID-19 people were running meeting to get digital HR systems to be able to manage dispersed workforces.
Speaker Change: There was a lot of compliance issues that they were trying to battle.
Speaker Change: So I think Thats certainly true I think they were in the market place today when I look at our our proposal volumes I look at our call volumes I mean, there's a lot of activity out there.
Speaker Change: And that indicates to me we are back to a market where there is a percentage of that.
Speaker Change: Of the market that are what I call shoppers, they're trying to see they're trying to check the price there trying to make sure we're getting the right deal.
Speaker Change: And.
Speaker Change: But again I don't see that any different than what I saw prior to Covid and what has been my 20, some years of history in the industry. So.
Speaker Change: My point would be is we still are a valued provider I think we're still a premium price provider in the marketplace across the segments and I think clients are continuing to.
That value as you see in both our revenue retention our client retention.
And our continued growth.
Speaker Change: And in each of the segments.
Speaker Change: And then just Bob on the float I know you've talked about maybe at the beginning of the year anticipated more rate.
Speaker Change: Great cuts that are going to happen, but I'm wondering any change and maybe how you're managing the Florida, Ohio manage afloat because of this changing environment.
Speaker Change: No not anything specific kartik I mean, we did some repositioning a while ago in anticipation that rates were going to come down. So I don't think theres a whole lot for us to do there.
Speaker Change: Right now you'll probably over the most recent past when we've been reinvesting in the long portfolio, it's probably been more on the shorter end of the curve just kind of given where the race car it was little bit inverted there.
Speaker Change: As things roll off we'll continue to look at the shape of the curve and.
Speaker Change: You've got to spread it out so you don't want to get too much in any one year. Because then you have reinvestment risk, but we'll look at the shape of the curve and look to place our investments to optimize the portfolio. We have a strong team and our Treasury Department. That's looking at this every day, but I would say no significant changes to our approach or philosophy, just you know look.
Speaker Change: To optimize based on where the curve is that at any given point in time.
Speaker Change: Perfect. Thank you both very much I really appreciate it.
Yep Yep. Thanks Kartik.
Thank you we'll take our next question from Scott <unk> with Wolfe Research. Your line is open.
Speaker Change: Hey, good morning, guys. Thanks for taking my questions just wanted to ask on the margin side I mean, the outperformance has been pretty constructive interview also pointing towards the higher end of the guide for this year and I know there's been some investments around the sort of advertising front. So I'm wondering if you could just remind us where you are kind of finding some of those efficiencies to drive.
Speaker Change: Some of the better margin performance that we've seen.
Speaker Change: Yes, Scott.
Speaker Change: Start off with number one is we always talk about it built into the basic DNA of the company is to continue to just ask ourselves how can we do this better than we're doing it.
Speaker Change: Yesterday, and so I think across the board all aspects of the business every part of the company. We're constantly doing that I think that the real tailwind that we have right now is digital adoption and the way that we're leveraging AI in the datasets that we have far more effectively across all the areas.
Speaker Change: To be able to drive drive productivity and so I think that's been a big boost to US we continue to see our clients. We continue to see our employee their employees.
Speaker Change: Adopt digital means to get work done.
Speaker Change: And that helps us provide better customer experiences and I continue to see our employees come up with very creative ways to reengineer work into digitize it and to leverage the insights and data that we have to make better decisions that make us more effective whether that's increasing close rates, where does that you are saving our client or getting in front of a client.
Speaker Change: Before they're about ready to call us and say, Hey, I got a better offer.
Speaker Change: Go into the detail for anti competitive reasons, but we're getting in front of that and that reduces the cost to save our clients right. We don't have to send them to the same desk and I don't have to pay a commission for that same client. So so the fact of matter is the fact, we're getting in front of that I think across the board continues to add to that to the margins.
Speaker Change: Got it that's helpful. And then just as a follow up just on the go to market. So I'm wondering if you're kind of seeing in your environment with your clients.
Speaker Change: Are you seeing clients sort of maybe adopt more on the initial sale instead of maybe you know selling sort of the initial product and then going in more for sort of a cross sell upsell dynamics.
Speaker Change: I would say I have not seen a major difference in that I would say that we've done a better job from a sales execution and kind of what we call integrated selling and making sure that we're offering the full value proposition.
Paychex upfront and the initial dialogue versus waiting for them to become a payroll client and then 30 days later upgrading them to a ASO or upgrading them to P. So you know that that if you look back in our old model I can say that was a little more how how we would operate and so you saw a lot more upsell it let's get them in I would say.
Speaker Change: Today that still happens.
Speaker Change: Probably is still the majority of what we do but I do think we're doing a better job upfront, but if we think we can add a higher value product package I would stay in the upper market HCM area. That's the area, where I do see clients wanting the foot wanting that go with more of the full suite and a lot of times, that's really they're dropping points.
Speaker Change: Solutions.
Speaker Change: Point solutions that they have kind of cobbled together and therefore, they're looking for account management.
We have account management suite, if they're using it was.
Speaker Change: Ancillary and then with that integrated in so I'm seeing that a little bit more than I can say more the upper end of the mid market and where we are in the enterprise.
Speaker Change: Got it thanks, guys happy holidays.
Speaker Change: Got it.
Speaker Change: Thank you we'll take our next question from Jason Kupferberg with Bank of America. Your line is open.
Speaker Change: Thanks, guys. Good morning, I was just wondering as you enter the selling season is there anything different you are preparing for in the environment versus last years selling season, whether that.
Speaker Change: Regulatory backdrop for a competitive environment or other factors.
Speaker Change: Okay.
Speaker Change: I I would say that we're not preparing for anything different from a competitive perspective, I think what youre going to see is we'll be kicking off some advertising and I think you'll really see us leaning into.
Speaker Change: The award winning product suite that we've introduced.
Speaker Change: This year.
Speaker Change: I think when you look at what we've done in enhancing our HR analytics.
With our premium plus product, which is now G&A I insights, we now have 20 million employee records.
Speaker Change: And that it's going to allow you to be able to figure out what you should be paying from a compensation benchmarking perspective. If you can provide advanced workforce analytics. The fact that you can actually ask the chatbot is simple question ill come back and bring you an analytical report and compare you against these benchmark I think we're going to continue to read into that.
Speaker Change: We are doing with our paychex recruiting co pilot, which is another AI assisted cowen.
Speaker Change: Talent acquisition solutions, what's great about that is you only have to be at paychex, our paychex flex clients could get that you can buy that as a standalone product I think you'll hear us talk about more of that and then I think the the.
Speaker Change: The purchase product that we talked about it for a lot of small businesses. They can't offer any benefit to their employees.
Speaker Change: And so there is a significant competitive disadvantage.
Speaker Change: Because they don't have benefits and I've got a choice. They can go over here to midsized company that has benefits or go to the small company that does it and what this really allows you to do is is to sell a value proposition to their employees that if you've come on board you have a set of benefits that you can get access to it at no cost to the employer and as I said.
Speaker Change: That's been a.
Speaker Change: Really been interesting to see the.
Clients adoptions of excited that they can offer their employees something and then they see their employees go through the open enrollment process and to see the attach rates on that so I think you're going to see us lean more into our value proposition. What we can do that no one else can do.
Speaker Change: And I'm not expecting again, I'm expecting the market to be rational.
Speaker Change: Cross the various segments and what I can assure you is that if the market is not rational.
Speaker Change: We will be we're going to continue to be disciplined growers.
Speaker Change: Understood understood and just as a follow up can you give us an update on your M&A pipeline, what you're seeing out there and just remind us whether or not there is any inorganic contribution in the fiscal 'twenty five guidance.
Speaker Change: No. There is no M&A, we don't plan on M&A. Because then you know what that does that cause you to do stuff that's not smart.
Speaker Change: So so to me that's got to be the icing on the cake that can't be the cake.
Speaker Change: What I would tell you. This the pipeline is good and strong probably the largest pipeline I've seen.
Speaker Change: Across the various areas.
Speaker Change: Since I've, probably been in the business since I've been at Paychex for sure it.
Speaker Change: It seems like people are coming back to more rational.
Speaker Change: Realizations about value.
Speaker Change: It seems like more people want to try to do deals and transact deals across the various areas. So again, we continue to be focused on opportunity that's gonna add scale, either a new or existing markets that we're currently in areas, where we can go and drive our full breadth of our advisory solutions and outsourcing and really leverage our best operate.
Speaker Change: <unk>.
Capabilities to drive synergies from those targets, we're going to continue to look at opportunities to drive and expand our product suite I think theres a lot of good opportunities. There that we're looking at we're really working on completing and building our capabilities in digital HR and data analytics that will continue to focus there and we have a good.
Pipeline there and then we're looking for new growth platforms that are adjacent.
Speaker Change: And so continuing to talk to that like I said, it's been interesting how many individuals how many how many.
Speaker Change: Targets have come to us and see synergy and joining our ecosystem and so pretty pleased with that but I you know I go back to what I said.
Speaker Change: We're gonna be disciplined around around the growth in not only in organic growth, but I would say inorganic growth.
Speaker Change: As well so.
Speaker Change: We're going to make sure that we're.
Speaker Change: Finding targets, where we're getting a fair value for our shareholders and where we think we can drive synergies too you.
Speaker Change: You have to have a multiplier.
It's got to be one plus one equals three and that's what we're going to continue to do.
Speaker Change #100: Okay, well I appreciate the thoughts I hope you have a great holiday.
Speaker Change #101: Thank you.
Speaker Change #102: Thank you and it appears that we have no further questions at this time.
Speaker Change #103: Okay, well it must be the holiday mood short short short on questions here. So great you know what.
Speaker Change #103: At this point, we're going to close the call if you're interested in a replay the webcast of this conference call will be archived for approximately 90 days.
Speaker Change #103: I look I would like to wish each and every one of you and your families a safe and happy holiday season.
Speaker Change #103: We look forward to talking to you in the new year and so we wish all of you a happy new year as well. So thank you for your interest in Paychex and have a great day.
Speaker Change #104: That concludes today's teleconference. Thank you for your participation you may now disconnect.
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Speaker Change #105: Good morning, and welcome to the second quarter fiscal 2025 Paycheck earnings conference call participating on the call today are John Gibson and Bob Schrader. After the Speakers' opening remarks, there will be a question and answer period.
Speaker Change #106: I would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press star two on your telephone keypad as.
Speaker Change #106: As a reminder, this conference is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms. Please disconnect at this time.
Speaker Change #107: I would now like to turn the call over to Bob Schrader, Chief Financial Officer. Please go ahead.
For joining us for our review of the Paychex second quarter 2025 financial results. Joining me today is John Gibson, Our Chief Executive Officer. This morning before the market opened we released our financial results for the quarter ended November 32024, you can access our earnings release and Investor presentation on the Sec's website as well as on our Investor.
Speaker Change #107: <unk> website, our Form 10-Q will be filed with the SEC within the next couple of days.
Speaker Change #107: This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days.
Speaker Change #107: Today's call will contain forward looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference some non-GAAP financial measures a description of these items along with a reconciliation.
Speaker Change #107: The non-GAAP measures can be found in our earnings release.
Speaker Change #107: I'll now turn the call over to John.
John Gibson: Thanks, Bob I will start today's call with an update on the business highlights for the second quarter, and then I'll turn it back to Bob for a financial update and then of course, we will open it up for your questions.
John Gibson: We delivered solid results in the second quarter and the first half of the fiscal year, excluding the impact of the expiration of the RTC program revenue growth was 7% in the second quarter as we continued to deliver a comprehensive suite of HCM solutions that help businesses solve real problems.
Diluted earnings per share growth was 6% as we continually find ways to operate the company more efficiently while also enhancing the value proposition that we offer our customers the.
John Gibson: The demand for our HR technology and advisory solutions remains healthy as we head into the key selling season, a challenging labor market and rising health care and benefits costs are forcing many small businesses to reevaluate their HR strategies and technology needs and they can rely on pay.
Checks to help them succeed.
John Gibson: Our sales activities and pipelines are strong most notably in our Po and middle market HCM businesses, where we have invested as you know to take advantage of the growth opportunities. We see in these attractive markets and where we believe our breadth of solutions provide us with a competitive advantage we are.
John Gibson: Fully staffed across our sales and service teams for this critical time of year. We are also investing in advertising to drive improved awareness and adoption of our expanded product offerings.
<unk> business continues to perform exceptionally well driven by our robust value proposition as evidenced by solid worksite employee growth due to strong sales performance.
John Gibson: Record levels of retention and higher overall insurance enrollment.
John Gibson: While the underlying business is strong and our attachment and participation levels in our health plans across the country increased mid single digits.
Enrollment in our Florida at risk Medical plan was flat year over year.
John Gibson: We also saw more employees opting for lower cost health plans in light of rising health care costs.
John Gibson: These factors create a headwind to our pass through revenue, but had no impact to our earnings or the strength of our value proposition.
John Gibson: Our revenue retention improved during the past year and remains above pre pandemic levels as we continue to remain disciplined on acquiring and retaining high value clients.
John Gibson: Client retention has improved since last year and retention in our HR outsourcing solutions remain near record levels client losses are down over the past year with improvements across all our employee size segments are continued strong retention and a highly competitive marketplace speaks to that.
John Gibson: Hard work and execution of our service teams and the strength of our value proposition.
The pace of U S job growth has moderated over the past year.
John Gibson: Overall customer employment levels have remained consistent with our expectations.
John Gibson: <unk> and mid sized businesses remained resilient and are generally optimistic as we head into a new year with hiring intentions in November rebounding to the highest level since last November.
John Gibson: We continue to make investments in our product suite to help our customers solve their biggest problems in October we announced the paychex recruiting co pilot a digitally AI powered solution designed to help clients proactively find talent in a challenging labor market.
John Gibson: Although it's still early we are seeing momentum building for the product as we head into the busiest time of year for hiring.
John Gibson: According to a recent NFIB survey, 55% of small businesses reported hiring or trying to hire in November and 48% reported few or no qualified applicants.
John Gibson: The positions that they're trying to fill.
John Gibson: This is something we are actively trying to address.
We recently expanded our HR analytics offering to provide our customers with deeper and more meaningful insights with the addition of the premium plus offering that we announced last month businesses of all sizes now have access to real current market data for compensation benchmarks to enable.
John Gibson: Them to more effectively recruit.
John Gibson: Managed talent and develop growth strategies.
John Gibson: Premium plus also has a generative AI assistant and a chat interface.
John Gibson: We're pleased to report strong early adoption of our HR analytics solution, which we are planning to launch broadly to our PEO clients. This month.
Through AI AI insights, we are using generative AI to provide our customers with access to robust data and meaningful insights through simple easy to use interactions since launching the product in September we've seen a significant increase in customer engagement.
John Gibson: Over 80% of the early adopters have actively engaged with the platform and we've seen AI focused you should usage increased significantly in the past three months.
John Gibson: As a reminder, paychex has used AI technology for many years and we believe Gen. AI offers a new set of opportunities for value creation.
Especially when paired with a large and high quality dataset.
John Gibson: <unk> captures 14 billion data elements last year, and we pay one in 12 private sector workers in the U S, giving us one of the largest workforce data sets in the industry.
John Gibson: Our vast and growing data set provides us with the ability to deliver actionable insights to customers and strengthens our competitive moat.
John Gibson: Our clients can now leverage paychex flex perks to complete compete for scarce talent more effectively.
John Gibson: <unk> is an award winning digital marketplace that offers our clients employees access to affordable benefits and discounted products and services from third party providers.
John Gibson: Hertz is available at no cost to employers and payments are processed automatically through payroll deductions.
Since we launched the product in September over 100000 client employees have purchased at least one product offer in the marketplace.
The value proposition of our new product innovation is resonating with our customers and also with industry experts.
John Gibson: The Paychex Flex perks was awarded the top HR product of the year Award by HR Executive and also recently received a Brandon Hall excellence in HR Technology Silver Award.
John Gibson: Paychex was also recently named a leader in payroll services by Nelson Hall for the eighth consecutive year.
John Gibson: We were evaluated and placed in the reader quarter for our ability to deliver immediate client benefit and meet future client requirements.
John Gibson: To sum it up we remain focused on our north star and that simply is helping small and midsized businesses succeed by offering the most comprehensive suite of HCM solutions best in class Advisory support and actionable insights gleaned from our large proprietary data based upon our.
Bob Schrader: A long history of helping businesses I will now turn it over to Bob to give US a brief update on our financial results for the second quarter. Yeah. Thanks, John and good morning, I'll start with a summary of our second quarter financial results and then provide an update on our outlook for fiscal 2025.
Bob Schrader: Total revenue for the quarter increased 5% to $1 3 billion. This includes the headwind from the expiration of the RTC program of approximately 200 basis points, which is consistent with the expectation we shared with you last quarter. Excluding this headwind as John mentioned total revenue grew 7% in the quarter.
Bob Schrader: Management solutions revenue increased 3% to $963 million. This was primarily driven by growth in the number of clients served across our suite of HCM solutions as well as client Worksite employees for HR solutions and higher product penetration, partially offset by lower <unk> revenues.
Bob Schrader: Oh and insurance solutions revenue increased 7% to $318 million driven primarily by higher average higher average worksite employees and an increase in PEO and insurance revenues.
Bob Schrader: Interest on funds held for clients increased 15% to $36 million, primarily due to higher average interest rates and invested balances.
Bob Schrader: Total expenses increased 4% to $779 million. This was due to higher PEO direct insurance costs related to growth in our average worksite employees.
Bob Schrader: Insurance revenues as well as continued investments in product innovation data and AI and our go to market initiatives.
Bob Schrader: Operating income grew 6% to $538 million with an operating margin of 49%, which was up year over year, approximately 60 basis points and as a reminder, operating income.
Bob Schrader: Is also impacted by the expiration of the RTC program, excluding that impact operating margins would've expanded 180 basis points in the quarter compared to the prior year period.
Diluted earnings per share and adjusted diluting earnings per share both increased 6% to $1 14 in the second quarter.
Bob Schrader: Now, let me quickly touch on the results for the first six months of the year.
Bob Schrader: Total revenue grew 4% to $2 6 billion, which includes approximately 300 basis points of headwinds from <unk> as well as having one fewer processing day in the first quarter. Excluding these headwinds total revenue grew 7% in the first half of the fiscal year.
Bob Schrader: Management solutions revenue increased 2% to $1 9 billion PEO and insurance solutions increased 7% to $637 million and interest on funds held for clients increased 15% to $74 million.
Bob Schrader: Total expense growth for the first six months of the year was 3% to $1 6 billion and operating margins expanded approximately 20 basis points to 41, 2% and again. This is despite the <unk> headwind that we had in the first half of the year.
Bob Schrader: Diluted earnings per share increased 4% to $2 32 and.
Bob Schrader: And adjusted diluted earnings per share increased 3% to $2 30 a share.
Bob Schrader: Our financial position remains strong with cash restricted cash and total corporate investments of $1 3 billion and total borrowings of approximately $817 million as of November 32024.
Bob Schrader: Cash flow from operations was $841 million for the first half of the year driven by net income and reflects changes in working capital influenced by the timing of our quarter end.
Bob Schrader: Through the first six months of the year, we returned a total of $810 million to our shareholders through cash dividends and share repurchases and our 12 month Rolling return on equity remains robust at 46%.
I'll now turn to our guidance for the fiscal year.
Bob Schrader: Outlook assumes the continuation of the current macro environment and I assume most of you have seen in the press release, we are not making any changes to the guidance I will however provide color on the guidance ranges for two of the two of the line items.
Bob Schrader: Total revenue is still expected to grow in the range of 4% to five 5% and as a reminder, this includes approximately 200 basis points of headwind from the expiration of the RTC.
Bob Schrader: Management solutions is still expected to grow in the range of 3% to 4%.
Bob Schrader: PEO and insurance solutions.
<unk> to grow in the range of seven 9% due to some of the factors that John discussed earlier as it relates to our MPP enrollment in the state of Florida, We would now expect growth to be at the lower end of that range.
Bob Schrader: Interest on funds held for clients is expected to be in the range of $145 million to $155 million and other income net is expected to be income in the range of $30 million to $35 million.
Bob Schrader: Operating income margin is expected to be in the range of 42% to 43%. However, we would now expect that to be at the higher end of the range and our effective tax rate is expected to be in the range of 24% to 25%.
Bob Schrader: And earnings adjusted diluted earnings per share is still expected to grow in the range of 5% to 7%.
Bob Schrader: Turning to the third quarter, we would anticipate total revenue growth to be in the range of four 5% to 5%. This includes approximately 150 basis points of headwinds from the expiration of the RTC program. This will be the last quarter of headwind as it relates to <unk>. So I'm looking very much forward to.
Bob Schrader: Anniversarying that as we get through the end of Q3.
Bob Schrader: We would also expect our operating margin to be between 46, and 47% I think as most of you know Q3 is our largest operating margin quarter due to the fact that that's when we have we benefit from our annual form filings.
Speaker Change #108: Of course, all of this is based on our current assumptions, which are subject to change and we'll update you again on the third quarter call. I'd also refer you to our Investor Relations website for more information in our investor slides and with that I will turn the call back over to John.
John Gibson: Thank you Bob we will now open the call to questions.
Speaker Change #109: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad.
Speaker Change #109: Remove yourself from the queue at any time by pressing star two.
Speaker Change #109: Please limit yourself to one question and one follow up once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
Speaker Change #110: And we'll take our first question from Mark Massaro with Baird. Your line is open.
Mark Massaro: Hey, good morning, and happy holidays, John and Bob.
Mark Massaro: Wondering thanks Marty.
Speaker Change #112: Thank you.
Speaker Change #113: Wondering what youre seeing with regards to you know any sort of change in terms of business sentiment.
Speaker Change #113: Post election.
Speaker Change #115: We did see the NFIB confidence index really jump up fairly materially and I'm wondering if that's actually translating.
Speaker Change #115: Two two events in the field.
Speaker Change #115: Just in terms of the pipeline builds any commentary there would be really helpful.
Speaker Change #115: Okay.
John Gibson: Yeah, Mark this is John happy holidays listen I think we continue to see really moderate growth and small businesses and you look at our.
John Gibson: The index Thats kind of the story of the of the year.
John Gibson: The year that escaped the recession that never happened.
John Gibson: I would say continuing to see downward pressure on wages and small businesses, where ultimately we don't see any signs of a recession I think you point out.
John Gibson: There was a degree of uncertainty with the election, that's behind that certainly the optimism.
John Gibson: Indexes seem to improve.
John Gibson: I would say we've not seen that at this time turn into.
John Gibson: Positive momentum however, what I would tell you is in results, but what I would tell you is certainly job openings. We've seen an increase we know that the desire of our clients to want to add employees is still very strong. That's one of the biggest problems, particularly in the small market still.
John Gibson: Still challenging to find qualified people, which is why we've been doing some of the solutions that we've had so so right now I would say more optimism, but we've not seen that at this point translate.
John Gibson: Any significant change in the moderate growth that we've been seeing through this year.
Speaker Change #116: Thank you for that and then.
Speaker Change #117: My follow up question relates to the PEO business.
Speaker Change #117: It actually looks like relative to you know all the public data that we see it looks like you're actually growing the PEO business faster.
Speaker Change #117: And then some of the competitors that are out there and what I'm wondering is what are you attributing that to to what degree are some of the new.
Speaker Change #118: Fueled solutions.
Speaker Change #118: Solutions that you're offering helping what are you doing on the insurance side. That's that's really addressing some of the needs that you outlined.
Yes, Mark I would tell you that <unk> is gaining share.
Speaker Change #119: There's no question about it.
The demand that we see I mean, our contracted revenue in the PEO was up high double digits.
Speaker Change #119: The new ones at the contracted new contracted revenue that we got him.
Speaker Change #119: In the quarter.
Speaker Change #119: <unk> client adds were up high double digits.
Speaker Change #119: That's the second year in a row.
Speaker Change #119: Record retention in that group proposed proposals were up high double digits. So theres a lot of activity in the market I think it's fair to say that health inflation is an issue and that's causing a lot of people to go out and shop and I think that's going to be an annual event. I think people are always going to be looking at am I getting the best option.
Speaker Change #119: You raised a good question why why are we differentiating ourselves I do think we have a broad set of products and services. So I think one of the things the client or a prospect knows that they come with us.
Speaker Change #119: They're going to have to wheat paycheck that they need change.
Speaker Change #119: And so they can build a solid reputation yeah. As you know we have a very solid business with good HCM business. So there's a lot of Optionality here. We also leverage our insurance agency embedded in the P. O. So really would gives us maximum flexibility.
Speaker Change #119: <unk> meet the clients need from a price perspective, you are health plans, we provide a lot of options, but it's not every option you can only manage so many options and being so much risk. So if they're looking for a little higher deductible plan than we have than we can go into the open market and do that what's great is both from the client perspective any employee perspective.
Speaker Change #119: The open enrollment.
Speaker Change #119: In all aspects of it really doesn't matter, whether or not your PEO client on our agency or you're on one of our.
Speaker Change #119: Master plans within the PEO youre going to have the same experience that we can move that during the enrollment period without without any problem. So I do think that differentiates US is the fact that we do have a broad suite of offerings. Our client can come to paychex. They can call at home for the lifetime of their of their business and know that as their needs change.
Speaker Change #119: Can evolve and change with them.
Speaker Change #120: That's great. Thank you so much and again happy holidays.
Speaker Change #121: Got it.
Speaker Change #122: Thank you well take our next question from Bryan Bergin with PD Cowen Your line is open.
Speaker Change #123: Hey, guys, good morning, and happy holidays from me as well.
Speaker Change #124: I wanted to start on management solutions growth here. So I guess in total I know you maintained all the growth ranges and we appreciate the color on the PEO do you have an offset in the management solutions business that will offset that and help you maybe land favorably within the total range just curious where you feel most comfortable in the non interest.
Speaker Change #124: Ocean Ranch.
Speaker Change #126: Yeah, I mean, I think Brian we gave you the guide.
Speaker Change #126: Change to the management solutions Guide I think we're comfortable with the range there and yes P always strong, but <unk> always been strong as well so we've been able to grow both of those businesses I think when we look at a.
New bookings Worksite employee growth for both of those businesses upper single digits. I think we had flagged that in the investor presentation retention strong in both businesses. So we don't really see a trade off where we've seen that in the past maybe a tradeoff between ASO and PEO, we did not see that.
Speaker Change #126: That this quarter both businesses.
Speaker Change #126: We had strong growth and then within management solutions again, we continue to see strong.
Speaker Change #126: Product penetration, we have several businesses in that category that grew double digits in the quarter retirement solutions, our funding solutions business. So we feel good about the performance of both of those business businesses, both for the quarter and then with the updated guidance ranges that we provided.
Speaker Change #127: Okay. That's clear and then just on <unk> I know you were reserving revenue for this year given some proposed legislation.
Speaker Change #128: Was there any reserve release in the quarter here and if not how are you thinking about that going forward is that proposed retroactive legislation on <unk>.
Speaker Change #128: Our Tc seems less likely.
Speaker Change #130: Yeah. So I think what you are referencing Brian is the reserve that we did I believe it was in Q3 of last year for the amount of <unk> that we sold in the month of February.
Speaker Change #130: When that proposed legislation came out and put that at risk because it was going to be we're going to end the program retro too.
Speaker Change #130: End of January So we were conservative we reserve that it was not a big dollar amount.
We did have that in our plan this year to release it we carried it for a couple of quarters, but we no longer have that reserve and that was assumed in the in the guide for Q2 and really the guide for the year. So we couldn't justify holding it any more or theres been no movement, there and so that that reserve is no longer on the books.
Speaker Change #130: It was a small immaterial dollar amount.
Speaker Change #130: In the Grand scheme of things.
Speaker Change #131: Got it okay I'll be honest.
Yes. It came to you. Thank you.
Thank you well take our next question from Ramsey El <unk> with Barclays. Your line is open.
Speaker Change #132: Alright, Thank you very much for taking my question.
Speaker Change #132: Hum.
Speaker Change #133: I think last quarter, you were contemplating something like 125 basis points worth of fed cuts into guidance you maintain that range. Despite the solid beat this quarter I'm just curious about how we should think about that given you know.
Speaker Change #134: With the fed sort of announced yesterday do you see this range being a little more conservative perhaps.
Speaker Change #135: Yeah I mean.
Speaker Change #135: We obviously didn't get a chance to update our forecast based on yesterday's news.
Speaker Change #135: But the forecast.
Speaker Change #135: The prior forecast as well as the current forecast.
Speaker Change #136: <unk> 125 basis points of cuts this year Ramsey 100 have already happened.
Speaker Change #136: <unk> 50 in September and then November and yesterday's cut so we have one more cut.
Speaker Change #136: In in the back half of this year based on the update that was provided yesterday.
Speaker Change #136: That may or may not happen. So there there could be a little bit of upside there, but it's not going to have a material impact whether it happens or not just given the timing of the of the year. So that's kind of what the forecast is based on.
Speaker Change #137: Got it Okay, and then you called out higher product penetration of the HCM products and management solutions, which is obviously an ongoing trend can you kind of give us an update on your growth algorithm, how much does HCM in totality contribute versus the core business, how does that sort of evolved over time I'm just trying to put my.
Speaker Change #138: Finger on the pulse of the the way that core key drivers of your growth of changeover overtime.
Speaker Change #139: Yeah to be honest it hasn't it hasn't changed significantly and it we talk about it in terms of the of the total business but.
Speaker Change #139: We've driven a lot of growth.
Speaker Change #139: Historically out of out of our ability to get increased penetration larger share of wallet and really monetizing our existing client base, that's probably driven at least half of our growth. We I think we talk about it being typically in the 3% to 4% range in when we kind of take a step back.
Speaker Change #139: And we look at the penetration rates within our existing client base, there's there's still relatively.
Speaker Change #139: Low penetration rates around some of those key solutions, particularly in the PEO. So we still see lots of room as it relates to that.
Formula and our ability to drive growth.
Speaker Change #139: Through product penetration as we move forward.
Speaker Change #140: I think the thing that is a trend that continues.
Speaker Change #140: In this quarter, it's continued for nearly a decade.
Speaker Change #140: Sure payrolls, becoming less than 50% of what really is driving our business. It's really a an HR story and a technology story and when you get onto the we're very pleased with the with the product attachment that we're seeing.
Speaker Change #140: In the products are really excited about the new markets that we've opened up for ourselves, which is to monetize our clients' employees.
Speaker Change #140: Through our Paychex flex.
Speaker Change #140: Purchased product.
Speaker Change #140: We've been investing.
Speaker Change #140: A lot of the RTC.
Speaker Change #140: Money into this technology plan, that's basically a rewiring of our technology to be able to really position the client's employee as a customer of paychex, we kind of do that before now we can do that we built this marketplace.
Speaker Change #140: When you think about starting the first initial launch a wave launch.
Speaker Change #140: In September.
Speaker Change #140: And since that launch we get a small little trial I think we opened it up to about 100000 potential client employees and now we started to open it up to the broader base itself like flex platform in.
Speaker Change #140: Relatively short period of time six weeks they have 100000 customers.
Speaker Change #140: It's a small dollar amount, but it's a it's a pretty impressive start to something that we think has a lot of legs.
Speaker Change #141: That is impressive thanks, so much.
Speaker Change #142: Thank you.
Speaker Change #143: We'll take our next question from Andrew Nicholas with William Blair. Your line is open.
Speaker Change #144: I. Thank you and good morning, I wanted to ask about upper.
Speaker Change #144: Upper single digit growth in outsourced or HR outsourcing Worksite employees is there any way for us to think about how much of that comes from upsell from clients with an existing payroll relationship versus clients that are new to paychex entirely.
Speaker Change #144: Yeah.
And maybe I'll add onto that the point that mark made relative to the use of AI and how we're using AI.
Speaker Change #144: It's certainly in the second quarter, we had a lot of <unk>.
Speaker Change #144: Increased inside the base at the time, when we have insurance renewals. So we're actually able to look across our client base.
And can do analytics and AI about.
Speaker Change #144: What they're paying for health insurance, both in our agency and others and then really target that with.
Speaker Change #144: With some sales place to say Hey, we may have a good value proposition with this client. So I think it ebbs and flows we have a very solid both inside and outside the base capability in the P O specifically.
Speaker Change #144: Almost all of our ASO businesses inside debates upsell, but in the we had a good balance of performance I would say both outside the base as well as inside the base killed it a little bit more inside the base.
Speaker Change #144: I'd say in the last quarter, but again I would imagine that will rebalance itself out as we go through the second half of the year again, it's ensuring that enrollment period.
Speaker Change #144: That would really gin up the AI models to be able to look across our client base and figure out whether or not what's the best value proposition to target and offer them.
Speaker Change #145: Makes sense. Thank you and then for my follow up.
Speaker Change #146: Just on the enrollment dynamic in Florida could you speak a little bit more if you have any insight in terms of what's driving that and also if theres any way to kind of refresh us on that.
Speaker Change #147: The PEO business has exposure to Florida, obviously quite a bit of that came from oasis over half a decade ago now, but just trying to get an understanding of how much of the business that represents at this point. Thank you.
Speaker Change #148: Yeah I did.
I'll start off and then Bob can add.
Bob Schrader: Add on if he wants what's what's driving that performance is up.
Bob Schrader: And quite frankly, I would say it this way.
Bob Schrader: The P O results I think including the flat.
Bob Schrader: At risk of MTT insurance revenue growth in Florida, I think should be viewed as a positive.
Bob Schrader: For investors and for our clients quite frankly, I mean first of all the pass through revenue doesn't really impact earnings at all and I think when you look at the business, we actually expanded insurance penetration.
Bob Schrader: Expanded the percentage of our clients that have insurance attached we expanded the number of employees within the PEO that hasnt insurance attached and bought it and insurance pets, but we did it in less risky ways. So we made the decision to underwrite more conservatively given some of the cost.
Bob Schrader: Increases that we're seeing in some of the volatility in health cost. So we have more options than just the MPP plan in Florida, We have the agency and so when you look overall, our actual insurance inside the T. O was up mid single digits. It was flat in this one program and some of that was a conscious decision. So one of the great things.
Bob Schrader: Our model is we have options and we're leveraging those so we have a client that is looking for specific plan. We don't have in the 40 M. P. P them, we'll give them something on the agency and if we're looking at a prospect or we find a competitor that may be doing pricing is more aggressive than we feel comfortable with we're not going to put that risk.
Bob Schrader: On the on the business. So what I I think health inflation is real in the business, particularly if you're at risk we have to manage that well.
Bob Schrader: We're going to be disciplined growers of the business and so I think.
Bob Schrader: I'm very pleased and matter of fact, I'm very pleased with the management team I think they made the right calls in terms of balancing growth with risk and we got both I think we got good growth and I think we've got better manage risks and they actually increased insurance penetration across the base of that digital winners for maintenance and the way the economics works out because all you have to recognize.
Speaker Change #149: <unk> revenue and I'll leave that to Bob explained why the accounting.
Speaker Change #150: I'd just add I mean, we have a little bit of a unique model compared to others. I mean, we made the decision that insurance is a scale game and we have scale in Florida. So we made a decision a number of years ago strategically that we would be at risk on our medical plans in Florida. That's the only state where we are at risk. So you know you get if you get mixed.
Speaker Change #150: Issues, if youre growing outside of Florida versus inside of Florida, you know that can have an impact on on the revenue I think overall, we feel very pleased with the continued strength of our PEO business I mean someone mentioned earlier relative to the I think it was mark relative to the competition.
Speaker Change #150: Sales performance in the quarter was strong retention was strong worksite employee growth is strong it is.
Speaker Change #150: The MPP enrollment was not where we thought it was going to be coming into the year in Florida, but when we take a step back that just illustrate the point that John is making when we look at the PEO clients that are on our agency medical plans in full.
That was what that was up upper single digits and again those are risk based decisions that we're making for the business. We're.
Speaker Change #150: We're not going to make bad decisions just to chase a revenue number because that's not the right thing to do for the company and if you were to look at this from a net service revenue standpoint, or an earnings standpoint to John's point. It would really have no impact. So we feel pretty good about where we're at with the continued strength of the of our PEO business. Yeah. I think the other thing I would add onto that because.
Speaker Change #150: We saw this across not.
Speaker Change #150: Not just the <unk>, but also the insurance business as well.
Speaker Change #150: Employees when given the choices we're downgrading their plans we saw downgrades double the percentage.
Speaker Change #150: It was in double digit typically that's a single digit issue most of the time an employee once they get onto the plan. They stay with the plan they don't want to change the plan.
Speaker Change #150: And that's usually in the mid <unk>.
Speaker Change #150: Mid to high single digits, each year, you'll see some people selecting to downgrade their plan.
Speaker Change #150: We saw that across the board. So I think the self installation is.
Is it real story and again I just get back to it.
Speaker Change #151: Say that again on the <unk> revenue number.
Speaker Change #152: We have a lot of control over that I mean, you you can hit that number.
Speaker Change #153: And you could maybe hit that number for a quarter and you maybe hit that number for what do you want that number to be and we can probably hit it but where are we going to do it for a quarter or two quarters, and then youre going to have a risk problem and we've seen that movie play out in the industry before and like I said, that's not that's not the game that we play we're disciplined we have options.
Speaker Change #153: We avail ourselves of the options that we're going to constantly be disciplined growers.
Speaker Change #153: Revenue in the business.
Speaker Change #154: Thanks, so much.
Speaker Change #154: Thank you.
Speaker Change #155: We'll take our next question from Michael <unk> with Morgan Stanley. Your line is open.
Speaker Change #156: Hi, everyone. Thanks for thanks for taking our question I just wanted to start on the partnership channel more broadly if I think about one of your competitors striking in SMB partnership to embed some of their payroll capabilities alongside of some of their BTB payments came in.
Speaker Change #156: So I'm just curious how you think about the partnership channel and whether or not that's a source of incremental investment for you. Thanks.
Speaker Change #157: Yeah look we have a lot of partners.
Speaker Change #157: Our long standing partners.
Speaker Change #157: Including those in the payment space, some of which you're probably referring to.
Speaker Change #157: So we partner with them when we partnered with many others and certainly.
Speaker Change #157: We have a capability to partner in a what I would say you can call it embedded I call it wholesale or white label type of way is well within our business.
Certainly open to that and I would say in the CPA micro area. That's that's a healthy business and has been has been growing so.
Speaker Change #157: More to come on that in terms of how we approach broader partnerships I think what we've tried to look for are ways in which we.
Speaker Change #157: We can bring something to the partner and they can bring something to us.
Speaker Change #157: And.
Speaker Change #157: And like I said, we continue to expand our partnerships and continue to look at ways to expand that going forward.
Speaker Change #157: Yeah.
Speaker Change #159: That's helpful. Maybe just on the retention front you obviously spoke to the fact that you're sort of tracking above historical ranges is that both on a revenue and a logo basis and how would you sort of compare those two buckets relative to historical levels. Thanks.
Speaker Change #160: And listen to retention was solid.
Speaker Change #161: Revenue retention was solid continuing near record levels.
Speaker Change #161: I think really demonstrating the value proposition of the hard work of the team, but also the value proposition. There is a lot of alternatives out there and client losses are improved over last year. So even on a logo basis, we saw improvement year over year. So very pleased and it was across all the all the segments as well.
Speaker Change #161: Which is also a pause as typically we have one one segment or one business. That's you know it's kind of.
Speaker Change #161: We're not doing as well as the others and this is this is one of those quarters, where in one of the really first half of the years, where we've kind of seen pretty consistent improvements so hats off to the team there.
John Gibson: Thanks, John.
Speaker Change #161: Yeah.
Speaker Change #161: Yeah.
We'll take our next question from Bryan Keane with Deutsche Bank. Your line is open.
Speaker Change #162: Hey, guys happy holidays, any pick up yet or any signs of growth.
Speaker Change #163: Youll see for kind of new business starts or the development of new business starts.
Speaker Change #163: Yeah.
Yeah, Brian This is business starts.
Down.
Speaker Change #163: Kind of year over year, what I would tell you, they're still above pre pandemic levels.
Speaker Change #163: We had this odd anomaly doing during COVID-19, where they really spiked up a lot of people going off on their own and.
Speaker Change #163: Doing that they've continued to kind of what I call moderate again, we're still above I still think that there's a higher degree of entrepreneurship.
Speaker Change #163: In the general economy.
Speaker Change #163: But again <unk> not seen that has not gone the other direction Thats continued to moderate this year.
Speaker Change #164: And is that something that cyclically comes back if the economy starts to improve I'm, just trying to think about timing on when that might bounce.
Speaker Change #165: Well the underlying premise of your question.
Speaker Change #166: Companies are in great shape, and I think our assessment would be that it's in it's in really good shape I think solid shape of the small business again, if you look at our small business index. We continue to see moderate growth. We think optimism is there we find our clients wanting to grow their business.
Speaker Change #166: And I think the challenges they face as well as access to capital is one and then the other point if I'm going to open up another restaurant and we're going to open up another location, even if I can find the money and I can afford the cost of capital in.
Speaker Change #166: In the market market today can I fill that building with people that are qualified to do the work that needs to get done to satisfy my customers and I think those two those two are the two things I see right now our main street.
Speaker Change #166: That's what we deal with every day, we don't deal with Wall Street.
Speaker Change #166: Chips are bitcoins, we deal with people that are cutting hair and doing things like that.
Speaker Change #166: Those are the real two constraints right now.
Speaker Change #166: On the economy.
Speaker Change #167: Got it and just as a follow up you called out kind of the Midmarket HCM business.
Speaker Change #167: With strong sales activity anything in particular are causing that or is that a competitive dynamic or is that a new products that seem to be resonating better.
Speaker Change #168: Well I think it's a combination I think it's a combination of things I think that certainly we've continued to invest in the product.
Speaker Change #168: The new Nipper Paychex flex engage product, which is an AI based on engagement tool that allows us businesses to manage both performance and rewards and engagement with their employees and compensation more effectively.
Speaker Change #168: That's been the big winner in the mid market. So I think on par or technology has always been on par. We continue to have a very strong technology capability in the mid market I do think that the HR outsourcing value proposition is resonating in the marketplace I think the our value proposition to be able to say you can come in.
Speaker Change #168: The paychex and Azure business changing in each change you can stay in one place you don't have to move you can you can go back and forth I think that's resonating and I think there's been some disruption.
Speaker Change #168: There's been some disruption in the mid market that has provided an opportunity.
Speaker Change #168: For us to position ourselves at the bitter stable quite frankly, and so I think again.
Speaker Change #168: That market has changed a little bit I think theres, a little bit more rationality.
Speaker Change #168: We're actually talking about profitability.
Speaker Change #168: As well as growth and we've been talking about that for some time, so I think theres more rationality in that market and I think.
Speaker Change #168: They are coming around.
Speaker Change #169: Hey, Chad.
Speaker Change #169: Got it got it okay. Congrats on the results.
Speaker Change #170: Thanks, Brad.
Speaker Change #171: Thank you we'll take our next question from Kevin Mcveigh with UBS. Your line is open.
Speaker Change #172: Great. Thanks, so much.
Speaker Change #172: Hey.
Speaker Change #173: You had mentioned I think that youre, capturing some share an appeal, which is good news to see.
Speaker Change #174: That's coming from I wanted to kind of start there because I thought there was an interesting data point.
Speaker Change #174: Yeah, Kevin I would tell you that we're introducing people to the PEO concept, that's still predominantly what we do we.
We tend not to do a lot of head to head what I called T O to P O movement.
Speaker Change #174: Frankly, now we go head to head in the <unk> in the marketplace.
Speaker Change #174: When a client is deciding that they want to select P O.
Speaker Change #174: But I would not say if you're thinking about it am I going to is there a particular T. OS that we're taking a lot of business from that's generally not our sales motion. There's a risk involved in that there's a lot of other issues.
Speaker Change #174: We stay away from that our general sales plays are introducing our HCM clients see the value proposition.
Speaker Change #174: Or it's going head to head in the market for clients that are moving towards the value.
Speaker Change #174: Our value proposition in those cases, we are going head to head with.
Speaker Change #174: With other peers in the marketplace and again I think it's the strength of our value proposition is the strength of our technology is the strength of our advisory.
Speaker Change #174: Our capability, our HR Gs or the best the best in the business in terms of the advice that they provide these clients I think it's our use of AI and data analytics.
Speaker Change #174: Really driving in the Po and then I think it's the fact, what I said earlier, which is we have.
Speaker Change #174: The broadest set of capabilities. So you you're going to start with us as a P O and if things change we have a non PEO HR outsourcing options for you and if something else changed we gotta HCM only and I think I think again customers I've read some notes and I you know I don't I don't know if I would say, it's totally true, but I do see climb.
Speaker Change #174: Since not wanting to have to deal with a lot of vendors.
Speaker Change #174: And so I do think this comes out consolidation of vendors and as you get each of the competitors kind of gaining even par in terms of capabilities across the HCM suite.
Speaker Change #174: If clients can say look I can go to a partner, they're gonna be reliable, they're going to be predictable and I can stay there and build a long term relationship that makes more sense than trying to spend my time, managing multiple vendors and switching every year.
No that makes a lot of sense and then just I had been in and out I apologize.
Speaker Change #175: You gave some commentary on the Q3 revenue can you just remind us what that is and then the pacing in Q4 as well and you know.
Speaker Change #175: What what does it take to kind of get to the high end of the guidance range as opposed to the low end I guess more from a revenue perspective, just im just trying to kind of help understand that in the back half of the year.
Speaker Change #176: Yeah, I think the color that we gave on Q3.
Kevin was that we would be between four four and a half and 5% and that still includes about 150 basis points of headwind.
Speaker Change #176: From from <unk>. So this is the last quarter of <unk>. So that's the color that we provided for the quarter, obviously, the headline numbers with the RTC headwind going away youre going to see an acceleration in revenue growth in the back half of the year.
Speaker Change #176: Due to that.
Speaker Change #176: We mentioned the guide on <unk>.
Speaker Change #176: So I would say the PEO in the back half of the year is probably going to be a bit lighter.
Speaker Change #176: Then we saw in the front half of the year and that's really driven by the at risk enrollment that we talked about on the pass through revenues in Florida again, no impact to net revenue, earning so when we kind of take a step back and look at front half versus back half.
Speaker Change #176: <unk> I think you'll see fairly similar growth rates in the back half of the year than what you saw in the front half of the year and again I think we mentioned this X CRE T C for the quarter were up 7% and Thats going.
Speaker Change #176: Going back to the second half of last year, you know when we turned the corner last year, we started to see a pickup in the organic growth of the business I think the front half of last year, we drove crude 5% actually RTC and then when we turned the corner. This is the fourth quarter in a row that we've seen strong upper single digit call it 7%.
Speaker Change #176: <unk>.
Speaker Change #176: Growth actually RTC now interest rates has continued to help there certainly helped in the back half of last year helped in the first half of this year up 15% you know that that will turn into a headwind as we move forward in the back half of the year, but you know all in all the performance of the business in the back half.
Actually he RTC and interest rates, we would expect to be similar to that to the front half.
Speaker Change #177: I just realized we're gonna have to shorten the calls in the future.
Speaker Change #177: [laughter].
Speaker Change #178: Thank you.
Speaker Change #179: And we'll take our next question from Tien Tsin Huang with Jpmorgan. Your line is open.
Speaker Change #180: Thanks, So much good morning, John and Bob I, just wanted to dig in really quickly just on the Florida comments always education on what you guys talk about there does that.
Speaker Change #180: Given the test that's asked for at risk given that safe only does that inform your thinking on SMB employee health and demand in general assuming you get more data there I'm thinking more about the downgrading of planned comments specifically thanks.
No I don't I don't view that at all I I view this more as a <unk>.
Speaker Change #180: As it as a cost control mechanism both at the people managing their personalized and employers managing their employee cost.
Speaker Change #180: Again, we saw increases in the percentage of clients.
Speaker Change #180: And increases in the percentage of employees in our PEO attaching insurance so.
Speaker Change #180: We didn't agree actually more of them are offering insurance now when you get under what did I order offer last year or what did I buy last year I offered a Cadillac plan and people bought a Cadillac plan and now I really only want to I guess I'll use old terms for myself and gave myself the Chevy play.
Speaker Change #181: Right and that people were downgrading to the to the sugar plant I think that's what you see going on is more people looking at ways. They can manage their costs and to be fair you know health inflation is an issue.
Speaker Change #181: And you'd see health inflation at the for US we've been managing it successfully for our clients over a decade with really what I would call mid to high mid.
Speaker Change #181: Hot mid to high single digit increases over the last decade in that program and that's beating the market from a medical inflation perspective, and that's the commitment we want to make to our clients is we're going to try to manage.
Speaker Change #181: Those opportunities fit that they could have predictable inflation, but again you you could talk about a 9% increase for somebody who's already being squoze at the at the shot to food market and go into the gas pump and et cetera, et cetera, they're looking for ways. They can trim back and youre looking at and saying look I have this really nice plan I like last year.
Speaker Change #181: This other plan is is it's less money than what I was paying last year. That's what we're seeing people do they're not dropping it they're just making different choices in terms of deductibles and plans and that the only thing I would add to that is we're somewhat indifferent to that choice I mean, obviously it would be great. If they pick the higher plan from a revenue standpoint, but at the end of the day, we want them.
To attach out because what we found when in our model is when we get that helped attachment that really drives retention stickiness in lifetime value in the difference in the in those plants. You know there may be a little bit of an impact to the top line, there's no impact to the bottom line and so we want to give them choice and help them find the plan there.
Speaker Change #181: That meets their needs, but provide them that plan, because that really drives retention and lifetime value for us.
Speaker Change #182: Got it no that's correct no the attach being strong is this great I'm just trying to learn around the.
Speaker Change #183: But the plan selection there it sounds like it's mostly health care inflation and smbs attacking that.
Speaker Change #184: This is not.
Speaker Change #184: Not intended to be related but just thinking about that.
Speaker Change #185: Broader HCM pricing and discounting for you in terms of what you're seeing or maybe thinking any new considerations there.
Speaker Change #186: So not a not a PEO or health specific question, but just broader.
Speaker Change #187: Question around pricing and discounting as you're trying to retain and pursue new.
Speaker Change #186: The growth.
Speaker Change #188: Yeah, No I would say across across all of the market segments and across all of the business segments.
Speaker Change #188: We've not seen we've not seen anything out of the ordinary.
Speaker Change #188: Competitive market.
Speaker Change #188: We continue to drive and get a price value premium in the market.
Speaker Change #189: Uh huh.
Again, there's a lower cost options out there, but I think people recognize value when they when they see it. So so we're not seeing anything out of the ordinary we had planned it on a little more price competitiveness and we've seen that but not seeing anything radical across the in any of the groups against what I will say this we're going to continue to be disappointed.
Speaker Change #189: Our growers.
And I think that's important to understand.
Speaker Change #189: When it comes across Youre going after the client whether that's health insurance risk we're.
Speaker Change #189: We're gonna be disciplined we're not going to do that just to get the revenue you look at increasingly clients.
Speaker Change #189: How much I paid Google to get seen by somebody.
Speaker Change #189: And I paid Google is double what the lifetime value of that client is going to be I'll, let somebody else pay that freight.
Speaker Change #189: And so.
Speaker Change #189: We're going to continue to be disciplined we're not going to do anything that's crazy.
Speaker Change #189: That's going to jeopardize.
Speaker Change #189: Our long standing.
Speaker Change #189: Our position as being predictable and consistent and what we believe is that clients are going to appreciate that over a long time. It is a day.
Speaker Change #189: You've got to make money as a business and if you're spending more to get a client or taking more risk than than you can absorb on your balance sheet. That's not good business. So we're going to continue to be disciplined, but we're not seeing as I said I think I said it on the last call.
Speaker Change #189: Since there is a little bit more rationality coming in to our markets were.
Speaker Change #189: Both down market.
Speaker Change #189: In the mid market.
Speaker Change #189: People are beginning to realize this thing called profitability and that will drive that will drive more rational pricing.
No no the discipline is clear thank you for your thoughts.
Yeah.
Speaker Change #190: Thank you.
Speaker Change #190: We'll take our next question from Ashish <unk>.
Speaker Change #191: RBC capital markets. Your line is open.
Thanks for taking my question.
Speaker Change #192: What happens to an increase in PEO direct insurance costs I was just wondering if you could comment on how that's trending on a boy it looks like employee basis.
Speaker Change #192: They have to get information and then as you think about going forward are there any changes to the plan in order to manage costs insurance costs. Thank you.
Speaker Change #193: Yeah, I mean, our direct costs are up Ashish I don't have the numbers in front of me, but it certainly.
Speaker Change #193: It's not just those costs arent just out there also workers' comp and we're largely going to be driven.
Speaker Change #193: By growth in Worksite employees, which I had mentioned was upper single digits. So no significant.
Speaker Change #193: It began changes planned from a plan design standpoint, I think.
Our books are performing well, both across medical and workers' comp and that's really going to be a factor of two things both growth in the business from a worksite employee standpoint, and then how we're doing from from attachment.
Speaker Change #193: And not just medical but across the board with workers comp as well.
Speaker Change #193: And then I would just say I talked about this for.
Speaker Change #193: Yeah, I think we've talked about this as well we continue to look for innovative ways. We're constantly evaluating the plans we offer we're constantly looking at the mix of.
Of health products, so that we can meet the broadest set of customer needs.
Speaker Change #193: And we will continue to do that but again health inflation across the board.
Speaker Change #193: <unk> is a public policy issue.
Speaker Change #193: We'll issue and I think we're still seeing the after we've not we're still seeing the effects of COVID-19 and the <unk>.
Speaker Change #193: With inflation that occurred during COVID-19 working through the working through the health pricing system right now.
Speaker Change #194: Very very helpful color and just for my follow up.
Speaker Change #194: Quick clarification, saying Q of last year that was impacted by similar seasonal hiring I was wondering if you have seen any.
Speaker Change #194: And on the seasonal high incentives here. Thanks.
Speaker Change #195: No I mean hiring has been in line with our expectations and I think we've talked about this earlier in the year what was assumed in our guide which was pretty much not not a lot of hiring assumed in the client base, that's pretty much how the year has been played out so both both Q1 and Q2 I would say employment levels within our existing client base.
Speaker Change #195: Is it pretty much lined up with what our expectations were.
Speaker Change #196: Very helpful. Thank you.
Thank you.
Speaker Change #197: We'll take our next question from Kartik Mehta with Northcoast Research Your line is open.
Speaker Change #198: Hey, good morning, John and Bob.
Speaker Change #198: Just on the Hey.
Speaker Change #198: John maybe just on the pricing commentary, obviously inflation, probably a little bit higher than everybody expected and I know.
Speaker Change #198: Last year, maybe the year before you got some better pricing than in the past so I'm wondering.
Speaker Change #199: How that's playing out this.
Speaker Change #199: This year, you'll have some ancillary products and stuff is there an opportunity to get some of that pricing back.
Speaker Change #199: Or do you anticipate pricing will be maybe on.
Speaker Change #199: On the lower end than it was a couple of years ago.
Speaker Change #199: Okay.
Speaker Change #200: Yeah, Kartik I would say this I would say that our our price value proposition.
Speaker Change #200: <unk> strong with our existing clients and I think that once the client gets onboard with paychex they see the value of what we're doing.
Speaker Change #200: And I think that we've continued to maintain what has been our historical growth formula in that area.
Speaker Change #200: I think both in terms of that part of our growth formula.
Speaker Change #200: As well as our product penetration of our ability to add new products and services to add more value, which then adds more price to those clients I think those things have been very sound.
Speaker Change #200: I think that prospects and clients are more price sensitive than they were pre COVID-19 I don't think that's surprising during COVID-19 people were running needing to get digital HR systems to be able to manage dispersed workforces.
Speaker Change #200: There was a lot of compliance issues that they were trying to battle.
Speaker Change #200: So I think that's certainly true I think they were in the market place today when I look at our our proposal volumes I look at our call volumes I mean, there's a lot of activity out there.
Speaker Change #200: That indicates to me we are back to a market where there is a percentage of the hubs.
Speaker Change #200: Of the market that are what I call shoppers that they're trying to see they're trying to check the price there trying to make sure we're getting the right deal.
Speaker Change #200: And.
Speaker Change #200: But again I don't see that any different than what I saw prior to Covid and what has been my 20, some years of history in the industry. So.
Speaker Change #200: My point would be is we still are a valued provider I think we're still a premium price provider in the marketplace across the segments and I think clients are continuing to.
Speaker Change #200: Shake that value as you see in both our revenue retention our client retention.
Speaker Change #200: And our continued growth.
Speaker Change #200: And in each of the segments.
Speaker Change #201: And then just Bob on the float I know you've talked about maybe at the beginning of the year anticipated more rate.
Speaker Change #202: Great cuts that are going to happen, but I'm wondering any change and maybe how you're managing the Florida, Ohio manage a float because of this changing environment.
Speaker Change #203: That's not anything specific kartik I mean, we did some repositioning a while ago in anticipation that rates were going to come down. So I don't think there's a whole lot for us to do there.
Speaker Change #204: Right now you'll probably over the most recent past when we've been reinvesting in the long portfolio.
Speaker Change #204: We have been more on the shorter end of the curve just kind of given where the rate it was little bit inverted there.
Speaker Change #204: You know as things roll off we'll continue to look at the shape of the curve and you.
Speaker Change #204: You've got to spread it out so you don't want to get too much in any one year. Because then you have reinvestment risk, but we'll look at the shape of the curve and look to place our investments to optimize the portfolio. We have a strong team and our Treasury Department. That's looking at this every day, but I would say no significant changes to our approach or philosophy just look.
Speaker Change #204: To optimize based on where the curve is that at any given point in time.
Speaker Change #205: Perfect. Thank you both very much I really appreciate it.
Speaker Change #206: Yep Yep.
Yep. Thanks.
Speaker Change #207: Thank you we'll take our next question from Scott <unk> with Wolfe Research. Your line is open.
Speaker Change #208: Hey, good morning, guys. Thanks for taking my questions just wanted to ask on the margin side I mean, the outperformance has been pretty constructive interview also pointing towards the higher end of the guide for this year and I know there's been some investments around the sort of advertising front. So I'm wondering if you could just remind us where you are kind of finding some of those efficiencies to drive.
Some of the better margin performance that we've seen.
Speaker Change #209: Yes, Scott I would start off with number one is we always talk about it built into the basic DNA of the company is to continue to just ask ourselves how can we do this better than we're doing it.
Speaker Change #209: Yesterday, and so I think across the board all aspects of the business every part of the company. We're constantly doing that I think that the real tailwind do we have right now is digital adoption and the way that we're leveraging AI in the datasets that we have far more effectively across all the areas.
Speaker Change #209: To be able to drive drive productivity and so I think that's been a big boost to US we continue to see our clients. We continue to see our employee their employees adapt.
Speaker Change #209: Adopt digital means to get work done.
And that helps us provide better customer experiences and I continue to see our employees come up with very creative ways to reengineer work into digitize it and to leverage the insights and data that we have to make better decisions that make us more effective whether that's increasing close rates where does that.
Speaker Change #209: Saving our client or getting in front of a client.
Speaker Change #209: Before they're about ready to call us and say, Hey, I got a better offer I won't go into the detail for anti competitive reasons, but we're getting in front of that and that reduces the cost to save our clients right. We don't have to send them to the same desk and I don't have to pay a commission for our same client. So so the fact the matter is the factor.
Speaker Change #209: In front of that I think across the board continues to add to that after the margins.
Speaker Change #210: Got it that's helpful. And then just as a follow up just on the go to market. So I'm wondering if you're kind of seeing in your environment with your clients.
Speaker Change #211: Are you seeing clients sort of maybe adopt more on the initial sale instead of maybe selling sort of the initial product and then going in more for sort of a cross sell up sell dynamics.
Speaker Change #212: I would say I have not seen a major difference in that I would say that we've done a better job from a sales execution and kind of what we call integrated selling and making sure that we're offering the full value proposition.
Speaker Change #212: Paychex upfront and the initial dialogue versus waiting for them to become a payroll client and then 30 days later upgrading them to a ASO or upgrading them to P. So that's that if you look back in our old model I can say that was a little more how how we would operate and so you saw a lot more upsell if it get them in I would think.
Speaker Change #212: Today that still happens.
Speaker Change #212: Probably is still the majority of what we do but I do think we're doing a better job upfront, but if we think we can add a higher value product package I would stay in the upper market HCM area. That's the area, where I do see clients wanting the foot wanting that go with more of the full suite and a lot of times, that's really they're dropping points.
Speaker Change #212: Solutions.
Speaker Change #212: Point solutions that they have kind of cobbled together and therefore, they're looking for a talent management. They already have account management suite that they're using it was.
Ancillary and then with that integrated in so I'm seeing that a little bit more and I'd say more of the upper end of the mid market and where we are in the enterprise.
Speaker Change #213: Got it thanks, guys happy holidays.
Speaker Change #214: Got it.
Thank you we'll take our next question from Jason Kupferberg with Bank of America. Your line is open.
Speaker Change #215: Thanks, guys. Good morning, I was just wondering as you enter the selling season is there anything different you are preparing for in the environment versus last years selling season, whether that.
Speaker Change #215: The regulatory backdrop for a competitive environment or other factors.
Speaker Change #215: Okay.
Speaker Change #215: I I would say that we're not preparing for anything different from a competitive perspective, I think what youre going to see as well.
Speaker Change #215: We'll be kicking off some advertising and I think you'll really see us leaning into.
Speaker Change #215: The award winning product suite that we've introduced.
Speaker Change #215: This year.
Speaker Change #215: I think when you look at what we've done in enhancing our HR analytics.
Speaker Change #215: With our premium plus product, which is now generic.
The insights we now have 20 million employee records.
Speaker Change #215: And that it's going to allow you to be able to figure out what you should be paying from a compensation benchmarking perspective is going to provide advanced workforce analytics. The fact that you can actually ask the chatbot is simple question it'll come back and bring you an analytical report and compare you against these benchmark I think we're going to continue to read into that.
Speaker Change #215: What we're doing with our paychex recruiting co pilot, which is another AI assisted.
Speaker Change #215: Cowen acquisition solution, what's great about that is you don't even have to be at paychex, our paychex flex clients could get that you can buy that as a standalone product I think you'll hear us talk about more of that.
Speaker Change #215: And then I think.
Speaker Change #215: The purchase product that we talked about it for a lot of small businesses. They can't offer any benefit to their employees.
Speaker Change #215: And so there is a significant competitive disadvantage.
Speaker Change #215: Because they don't have benefits that I've got a choice. They can go over here to midsized company that has benefits or go to the small company that doesn't and what this really allows you to do is is to sell a value proposition to their employees that if you've come on board you have a set of benefits that you can get access to its at no cost to the employer and as.
Speaker Change #215: I said that it's been.
Speaker Change #215: Really been interesting to see the.
Speaker Change #215: Clients adoptions of excited that they can offer their employees something and then they see their employees go through the open enrollment process and to see the attach rates on that so I think you're going to see us lean more into our value proposition. What we can do that no one else can do.
Speaker Change #215: And I'm not expecting again, I'm expecting the market to be rational.
Speaker Change #215: Across the various segments and what I can assure you is that if the market is not rational.
Speaker Change #215: We will be we're going to continue to be disciplined growers.
Speaker Change #216: Understood understood and just as a follow up can you give us an update on your M&A pipeline, what you're seeing out there and just remind us whether or not there is any inorganic contribution in the fiscal 'twenty five guidance.
Speaker Change #217: No. There is no M&A, we don't plan on M&A. Because then you know what that does that cause you to do stuff that's not smart.
Speaker Change #217: So so to me that's got to be the icing on the cake that can't be the cake.
Speaker Change #217: What I would tell you this.
Speaker Change #217: <unk> is good and strong probably the largest pipeline I've seen.
Speaker Change #217: Across the various areas.
Speaker Change #217: Since I've, probably been in the business I think I'd go to paychex for sure it.
Speaker Change #217: It seems like people are coming back to more rational.
Speaker Change #217: Realizations about value.
Speaker Change #217: It seems like more people want to try to do deals and transact deals across the various areas. So again, we continue to be focused on opportunity that's gonna add scale, either in new or existing markets that we're currently in areas, where we can go and drive our full breadth of our advisory solutions and outsourcing and really leverage our best operate.
Speaker Change #217: <unk>.
Speaker Change #217: Capabilities to drive synergies from those targets, we're going to continue to look at opportunities to drive and expand our product suite I think theres a lot of good opportunities. There that we're looking at we're really working on completing and building our capabilities in digital HR and data analytics. So we'll continue to focus there and we've got a good.
Speaker Change #217: Pipeline there and then we're looking for new growth platforms that are adjacent.
Speaker Change #217: And so continuing to talk to that like I said, it's been interesting how many individuals how many how many.
Speaker Change #217: Targets have come to us and see synergies and joining our ecosystem and so pretty pleased with that but I'd go back to what I said.
Speaker Change #217: We're gonna be disciplined around around the growth in not only in organic growth, but I would say inorganic growth.
Speaker Change #217: As well so what.
Speaker Change #217: We're going to make sure that we're.
Speaker Change #217: Finding targets, where we're getting a fair value for our shareholders and we think we can drive synergies too.
Speaker Change #217: You have to have a multiplier. So it's got to be one plus one equals three and that's what we're going to continue to do.
Speaker Change #218: Okay, well I appreciate the thoughts I hope you have a great holiday.
Speaker Change #218: Thank you.
Speaker Change #222: Thank you and it appears that we have no further questions at this time.
Speaker Change #220: Okay, well it must be the holiday mood.
Speaker Change #220: Sure short on questions here, so great you know.
Speaker Change #220: Look at this point, we're going to close the call if you're interested in a replay the webcast of this conference call will be archived for approximately 90 days.
I look I would like to wish each and every one of you and your families a safe and happy holiday season, we look forward to talking to you in the new year and so we wish all of you a happy new year as well. So thank you for your interest in Paychex and have a great day.
Speaker Change #221: That concludes today's teleconference. Thank you for your participation you may now disconnect.