Paychex [PAYX] Conference call transcript for 2022 q3
2022-09-28 15:44:01
Fiscal: 2023 q1
Operator: Good day everyone and welcome to the Paychex first quarter FY23 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question by pressing star and one on your touchtone phone. Please note this call may be recorded. It is now my pleasure to turn todayâs program over to Martin Mucci, Chairman and Chief Executive Officer of Paychex. Please go ahead.
Martin Mucci: Thank you Gretchen, and thank you for joining us for our discussion of the Paychex first quarter fiscal 2023 earnings release. Joining me today are John Gibson, our President and Chief Operating Officer, and Efrain Rivera, our Chief Financial Officer. I do want to start off by saying that all of us are thinking of everyone in the path of Hurricane Ian that is approaching Florida at this time. Certainly our employees, our clients, and everyone else in those areas, we hope are safe. This morning before the market opened, we released our financial results for the first quarter ended August 31, 2022. You can access our earnings release on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next few days, and this teleconference is of course being broadcast over the internet and will be archived and available for approximately 90 days. Weâll start todayâs call with an update on business highlights for the first quarter, Efrain will then review our financial results and outlook for fiscal 2023, and then weâll open it up for your questions. I will start out by acknowledging that this will be my last earnings call in my role as CEO of Paychex. On August 24, we announced I am retiring of CEO effective October 14 - thatâs after our fiscal 2022 annual meeting of stockholders; however, I will remain my role as Chairman of the Board. John Gibson on the call today, our current President and Chief Operating Officer, will assume the role of President and CEO. John has been a member of the executive leadership team since 2013 and has been instrumental in the success of Paychex during this tenure. We have executed on a long term succession plan and Iâm confident that John is the right person to lead Paychex into its next phase of growth. Really, many best days ahead of us. I want to thank all of you also, you directly for your interest and coverage of Paychex, some of you for more than two decades, and for your good questions and feedback over my 12 years as Chief Executive Officer. I also want to publicly thank Efrain. You know, everyone knows heâs one of the best CFOs in the business and weâve done over 40 quarterly calls together, and more than a CFO, Efrain has really been a leader on our executive team who provides not only great counsel but is known for his intelligence, his integrity, and also music trivia - you can try that out sometime. Fiscal 2023 is off to a great start with double digit growth in both revenue and earnings compared to the same quarter last year. We had a record level of first quarter sales with strong trends continuing in the mid market, retirement and HR outsourcing in particular. We have had continued success in the selling of our suite of innovative products from HCM technology to HR solutions that help businesses become more efficient and address complex HR issues in a challenging time for many businesses. We continue to regularly monitor our key leading indicators for signs of changes to the macroeconomic trends, and while we have seen some moderation in key issues, we have not yet seen any significant changes. As an example, the latest Paychex IHS Small Business Employment Watch showed that workers of U.S. small businesses continue to benefit from higher wages. New jobs continue to grow but at a more moderated pace and job growth at U.S. small businesses remains resilient even in the face of a tight labor market and inflation pressures. Employment levels at our existing clients have continued to increase as theyâre finding more people to fill those positions, consistent with these findings of our small business index. I will now turn the call over to John and he will provide you with some highlights surrounding our technology and product suite and results. John?
John Gibson: Okay, thank you Marty, and good morning everyone. Itâs a pleasure to be with you. Based on our recently released Pulse of HR survey, itâs obvious that businesses of all sizes continue to be challenged with attracting and retaining talent, improving their operational efficiency, and working to increase their financial flexibility. Our continued investments in innovative HR technology combined with our unmatched HR expertise truly and uniquely positions us to help small businesses and midsized businesses navigate a very dynamic and challenging environment. Earlier this month, we attended the annual HR Technology Conference in Las Vegas, where once again Paychex demonstrated the latest of our innovations. We showcased significant enhancements to the Paychex Flex recruiting and applicant tracking experience, which is designed to digitally deliver candidates to clients faster and allow them to leverage mobile technology to recruit, screen and then on-board candidates in a unified and simple to use experience. Already, our digital on-boarding experience was utilized by over 1.7 million new hires in the last year alone. We also introduced our latest innovation, Paychex Voice Assist, and really this is a natural extension of the expansive and ever-growing and utilized self-service capabilities that we have at Paychex, and coupled with our award-winning Paychex pre-check offering which allows employees to further participate in the payroll process by reviewing their gross to net payroll calculations prior to payroll processing, Paychex Voice Assist now enables HR and payroll administrators and small business owners to manage their payroll and HR tasks while on the go through any Google Assistant-capable device. This provides a hands-free experience that includes voice recognition and verification security. Iâm proud that Paychex is the first HMC solutions provider to offer voice activated capabilities such as these. Our technology offerings continue to garner national recognition. Paychex is proud to be recognized for the sixth - I repeat, the sixth consecutive year by NelsonHall, a global analyst and research firm, and they positioned us as a leader in its 2022 NEAT report for service providers. Paychex Flex was recognized for its comprehensive technology as one of the most advanced HR platforms that brings the power of benchmarking, data analytics, as well as digital service enablement to drive operational efficiency and improve the employee experience. I also want to mention that we have once again, for the 12th consecutive year, been recognized as the nationâs largest 401K record keeper by total number of plans by Plan Sponsor Magazine. We were also recognized by them as an industry leader in the number of new plans that we added in 2021. Itâs obvious that our retirement business continues to be an area of strength for us as many business owners and their employees are focused on financial wellness as a key benefit and issue. In addition, our pooled employer plan offering continues to gain traction in the marketplace with approximately 4,000 new plans on-boarded during the first quarter alone. We continue to see strong demand for our employee retention tax credit service. This helps clients to maximize their eligible tax credits and thus provide them more financial flexibility. To date, we have helped over 45,000 clients secure over $8.6 billion in combined ERTC and paid leave tax credits. We continue to have the opportunity to educate more of our existing clients on the benefit of this service as well as leverage the service to attract new clients. We have started off the fiscal year â23 strong, and while there is uncertainty in the macro environment, our solutions and business model have in the past and continue today to prove their resilience. We help our clients to succeed under any macroeconomic conditions. We continue to focus our product road map on the needs of our clients and anticipate releasing further enhancements this fiscal year designed to continue to provide them a positive digital user experience and help them utilize HR technology to simplify their processes. Now before I turn the call over to Efrain, Iâd like to take a moment to say thank you - and yes, Marty, youâre going to continue to hear this over and over again over the next couple weeks, but I want to say thank you to Marty for his tireless dedication and strong leadership of the company over the years, and for me personally for his mentorship and his friendship for the nearly decade that he and I have been working together. You know, under Martyâs tenure as CEO, Paychex has more than doubled its revenue and transformed into a leading HCM technology solutions company. Today, Paychex is a tech company and itâs a tech company because of Martyâs vision and his leadership. Marty, itâs been a pleasure to work alongside you, the leadership team, and the nearly 17,000 now employees at Paychex, and I look forward to continuing our relationship in our new roles. As Iâve said many times and to many people, weâre the same great company, itâs the same great leadership team, itâs the same great employees, weâre just each playing a little different roles as we move forward. I know that our collective focus on our purpose, which is to help small and midsized businesses succeed, will continue to drive us in the future as it has in the past. Iâll now turn the call over to Efrain to discuss our first quarter financials.
Efrain Rivera: Okay, thanks John, and good morning. Iâd like to remind everyone that todayâs commentary contains forward-looking statements that refer to future events and therefore involve risks. Refer to the customary disclosures. Let me start by providing key points for the quarter and finish with a review of fiscal 2023 outlook. As Marty and John already mentioned, Q1 was strong and our financial results for the first quarter included service and revenue and total revenue that increased 11% to $1.2 billion. Management solutions revenue increased 12% to $906 million, driven by higher client employment levels and revenue per client. Revenue per client was positively impacted by additional product penetration, HR ancillary services, largely our ERTC product, and price realization. We continue to see strong attachment of our HR solutions, retirement and time and attendance solutions. Iâll note that the revenue from our ERTC service benefited our first quarter revenue by about 1% to 2%. While we had anticipated ERTC revenue would continue in fiscal 2023, strong execution both in sales and service allowed us to realize some of the revenue a bit earlier in the year. While ERTC was a tailwind to growth for the first quarter, its benefit will decline as the year progresses. For the full year, the impact will be marginal to growth. PEO and insurance solutions revenue increased 8% to $283 million, driven by growth in average worksite employees and PEO health insurance revenue. The rate of growth was tempered by a lower rate of health insurance enrollment in both the PEO and the insurance agency, together with continued softness in workersâ compensation rates, so that really is a little bit more focused at the insurance agency, has more of an impact on the revenue there. Interest on funds held for clients increased 24% for the quarter to $18 million, primarily due to higher average interest rates along with growth in investment balances. Total expenses increased 11% to $711 million. Expense growth was largely attributable to higher headcount, wage rates, and general costs to support growth in our business. In addition, PEO direct costs increased due to higher medical plan enrollments compared to the same period last year. Op income increased 12% to $496 million with an operating margin of 41.1%, an expansion of 20 basis points over the prior year, a bit above where we anticipated it being in first quarter. Our effective tax rate for the quarter was 22.9% compared to 24.9% in the prior year period. Both periods reflect discrete tax benefits related to employee stock-based comp payments; however, the prior year also reflected an increase in state taxes. Net income and diluted earnings per share both increased 14% to $379 million and $1.05 per share respectively. Adjusted net income increased 15% and adjusted diluted earnings per share increased 16% for the quarter to $372 million and $1.03 per share respectively. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.3 billion, and our borrowings are at approximately $800 million as of the end of the quarter. Cash flow from operations was $364 million during the first quarter, a small decrease from the prior driven by fluctuations in working capital partially offset by higher net income, and we paid out quarterly dividends at $0.79 per share for a total of $285 million in the first quarter. Our 12-month rolling return on equity was a stellar 46%. Now Iâll turn to our guidance for the current fiscal year ending May 31, 2023. Our current outlook incorporates our first quarter results and our view of the evolving macroeconomic landscape. One thing I want to emphasize as I walk through the guidance, we donât provide quarter-to-quarter guidance. What we try to do is give you a sense of where we anticipate the quarters will fall, so Iâd ask that you keep that in mind. The majority of our guidance remains unchanged from that provided in June, with the exception of an increase in our expected growth for adjusted earnings per share. Let me provide some color in certain areas as follows. Management solutions revenue is expected to grow in the range of 5% to 7%, but now we anticipate it to be towards the upper end of the range. PEO and insurance solutions still expected to grow in the range of 8% to 10%, but we now anticipate it to be towards the lower end of the range. Interest on funds held for clients is expected to be in the range of $85 million to $95 million but is now again anticipated to be towards the upper end of the range. Total revenue is expected to grow in the range of 7% to 8% but, again based on what I just said, is anticipated to be towards the upper end of that range, and adjusted diluted earnings per share is now expected to grow in the range of 11% to 12%, an increase from the previous guidance of 9% to 10%. Just want everyone to remember, Iâm talking about adjusted diluted earnings per share. Turning to the second quarter, our current thoughts are that we anticipate revenue growth will be approximately 7% and we expect operating margins to be approximately 38%. Of course, all of this is subject to current assumptions which could change if there are significant changes to the macro environment, and weâll update you again on the second quarter call. I refer you to our investor slides on our website for more information. Iâd also like to take a moment to say thank you to Marty for his years of service to the company. Itâs been an incredible pleasure working alongside you, and I wish you the best of luck in your future endeavors. I can say that for all of the shareholders on the call, there was never a moment, never a conversation where putting the interests of shareholders didnât come first, and so I know that that will continue under Johnâs leadership. The other thing Iâd like to say is that the company that weâre reporting on today simply would not be where it is today without Martyâs efforts. One other thing that I want to add too for the investors on the call, we filed a supplemental proxy statement this week relating to our say on pay proposal. Weâd ask that investors who own a position in Paychex take a look, read that closely. Iâm always available, the management team is always available for any calls that youâd like to schedule to discuss that. So with that, let me turn it back over to Marty.
Martin Mucci: Thanks John and Efrain. Thank you very much for the comments and for your updates, and also of course we wouldnât be where we are today as a company without our over 16,000 employees who have worked so tirelessly for our clients and for our shareholders. Weâll now open it up for your questions and comments. Gretchen, open it up, please.
Operator: Weâll take our first question from Bryan Bergin from Cowen. Bryan, your line is open.
Bryan Bergin: Hi, good morning. Thank you. Marty, John, congrats.
Martin Mucci: Thanks Bryan.
Bryan Bergin: Wanted to start here, if we could talk about--really thinking a little bit more around the moderation comment you mentioned on some of the KPIs and any changed view on macro assumptions in that fiscal â23 guide, particularly on client employee levels and retention.
Martin Mucci: Yes, I donât think so. Iâll let John comment too, but I think what weâre seeing in the moderation is, like on retention, I think that weâre kind of heading back towards--weâre still above from a revenue retention standpoint, weâre still above pre-pandemic levels. On client retention, weâre kind of normalizing back to a pre-pandemic. We kind of expected that - you know, there was a lot of new business growth, new start-up business growth over the last couple of years during the pandemic, and so youâre seeing a few more of those go out of business and youâre seeing a few more bankruptcies that way. The other thing that weâre seeing in the small business index is while wages are going up, theyâre starting to slow down and moderate, so while job growth is still growing and moderating some for small businesses, wage growth is starting to moderate slightly, so thatâs maybe a good sign that some of the actions being taken by the Fed are working and maybe that will continue to improve. But other than that, sales continue to be very strong, so when you look at that side of it, weâre at record levels of sales. We had a great first quarter in sales and clients are adding employees, so the moderation is probably more on the retention side normalizing but the number of employees being added and the sales are still very strong. John, anything you want to add to that?
John Gibson: No, I would say I donât think there is anything weâre seeing at this point that weâd see as a sign of a recession. As Marty pointed out, there was moderation that we expected going into this year on retention because of the business charge, but when I look at it, employment levels continue to increase, we see that in our checks, we see that in worksite employees per customer. The labor market continues to be tight. Our business watch certainly showed that information. I would also point to our revenue retention is remaining at the record levels weâve seen before, so again we continue to see the fact that retention and the use of our products, when I look at the underlying pieces, clients are taking high value services from us, those things are creating more stickiness for those customers. Our price value losses continue to remain significantly below even the pre-pandemic levels, so again any moderation that weâre seeing, I view as more of a normalization of what we saw anomaly going on during the pandemic.
Bryan Bergin: Okay, thank you. Then just Efrain, for the 2Q rough targets that you provided here, can you just dig in a little bit more on the dynamics, first on growth as we think about moving from 1Q to 2Q, and then just on margin, the outperformance on margin in 1Q, are there added investments that come back into the model over the course of the year, particularly in 2Q?
Efrain Rivera: Yes, a little bit. Let me just talk to that, because obviously the growth rate in 2Q is a little bit different. This year was always a little odd because the two highest growth quarters were the first and the last and the middle for different reasons, a little bit idiosyncratic to the processing--for a planned process ended up a little bit lower. In Q2, Iâd call out three things, Bryan, that are important. We donât anticipate that the level of ERTC I called out in the quarter will--the amount of growth contributed by ERTC will continue in the second quarter. Having said that, I donât know because I didnât think that was going to happen in the first quarter, so we could be a little bit more, but Iâm being a little bit cautious about what we think we will get, so you wonât quite get--you wonât get that level of uptick in growth in Q2. These comments are about Q2, by the way. Weâll talk about the back half of the year when we get a little bit closer to the back half of the year. The second part is that we had, to the point--although thereâs been discussion about moderation, what was really interesting in the first quarter is that we had higher growth in what weâd call check volume - pays per control, others call - than we anticipated in our plans. First quarter was actually fairly robust. Out of an abundance of caution, reading the same info you are reading, we think weâre still going to get some benefit in Q2 but it wonât be as pronounced as it was in the first quarter, so that will cause a little bit of a step-down. Then with respect to PEO, we called out some trends that are persisting around--PEO and insurance, around healthcare attachment that we think will continue into second quarter, thatâs going to drive growth a bit lower than we were. Weâre really consistent and some ways a little bit above what I said when we were in the fourth quarter call. Thatâs really whatâs driving it - it really is more of a Q2 phenomenon on the investment side. The challenge for this year was we entered the year--in the first half of the year last year, we were really at much lower employment levels than we are currently, and so as you have a little bit of a step-down in revenue in Q2, or as you have a step-down in revenue in Q2, you still have relatively higher expense levels that normalize as we get into the back half of the year, and then weâre making investments in marketing, product development, the normal things that you would make in a quarter, and that combines to kind of create a little bit of a lumpy Q2. Those are the key factors in terms of underlying dynamics - no change, and itâs pretty much in line with what we anticipated.
Bryan Bergin: Okay, thank you very much.
Operator: Our next question comes from Jason Kupferberg of Bank of America. Jason, your line is open.
Jason Kupferberg: Sorry, apologies. I was on mute. Well first of all, congrats to Marty and John. I did want to start with a question for Efrain, just on the EPS guidance raise. Efrain, is this just because you now think revenue and margin will both be at the higher end of your full year expectations? I know everything else is kind of unchanged, so just wanted to make sure we have the pieces there for EPS.
Efrain Rivera: Yes, I think for the full year, weâll be a little bit ahead, Iâd say. I think itâs more driven, Jason, by more mix. Thereâs some revenue component to it and thereâs a mix component to it thatâs driving the EPS number.
Jason Kupferberg: Okay, got it. Just the float income guidance for fiscal â23, I know itâs unchanged - youâre talking about being at the higher end. I guess maybe just given the magnitude and the speed of the Fed rate hikes, can you walk through some of the pieces there? Some people, I think, might have thought that that number would be moving a bit higher, but obviously thereâs portfolio duration and other variables to consider. That would be helpful.
Efrain Rivera: Well Jason, thank you. Look, Iâm a little bit cautious and I think we could be accused of some conservatism there, but youâre absolutely right. Just to get one level deeper and get a little bit more into the question that youâre raising, I think the issue for us is at what point do you see the Fed raising and then you lock long based on duration? I donât have the great answer to that. I will say weâre meeting basically every other week to decide what our outlook is on that. That could impact that number. Iâm looking not only at â23 and â24. You were here long enough to know when we wrote that cycle up and that had a bumpy cycle on the way down, and so I want to avoid that, even at the expense of maybe a little bit of upside this year, so weâre trying to figure all that out. Then youâre reading the same thing--you actually have better info than I do. One second, it looks like short term interest rates are going to go to X, and the next second someone says hey, Iâm a little bit concerned about that, that could cause a recession, so balancing all of that with the appropriate level of conservatism so that we can hit what we said we feel good about, the forecast at this stage based on what we know is a little bit trickier. Weâre certainly at the high end of that range and weâll update next quarter.
Jason Kupferberg: Okay, just one last quick one, just picking up on that theme of potential conservatism. Just looking at management solutions, obviously youâre sticking with 5% to 7% for the year, you started at 12. You had some of the ERTC benefit, but it just seems like a lot of decel kind of baked in, so maybe you want to talk through that a little bit. I know youâre talking about higher end, but still.
Efrain Rivera: Yes, Iâd say this - you know, weâll talk more as we get kind of midyear, I think one of the things that ends up happening with ERTC in the back half of the year, it becomes a headwind to growth because it doesnât recur in the same way that the revenues do, so we bake that in. Thatâs one. Weâre against tough comps in the back half of the year, so thatâs another issue, and then employment is really the other part that weâre wondering about. Right now, weâre not assuming that thereâs a lot of employee adds in the back half of the year. Could we see something thatâs different than that? I donât know, both ways. At this point, I canât call it close enough, so Iâm sticking with where we thought we were going to be at the beginning of the year and then weâll update as we go through the year.
Jason Kupferberg: Fair enough, thank you Efrain.
Efrain Rivera: Okay, thank you.
Operator: Your next question comes from Andrew Nicholas from William Blair.
Andrew Nicholas: Hi, good morning. Thanks for taking my question. Wanted to start on the PEO and insurance services segment - obviously growth came in on the bottom end of the full-year range, youâre now guiding to the lower end of the range to full year. I know you mentioned some weakness in the insurance business this quarter. Is there anything else to call out within that business that surprised you, whether it was to the upside or the downside? It sounds like existing clientsâ hiring activities are still quite strong, sales are good, so just want to make sure I understand all the dynamics there as well.
Efrain Rivera: Let me frame it, and then Iâll let John talk to it. Heâs obviously well versed in whatâs going on in terms of the dynamics of the business. In terms of the plan and forecast and our guidance, we started out the year a little bit lower on the insurance side than we had anticipated, thatâs primarily an issue around, and we called it out, on enrollments. We think that trend will persist into the second quarter and then it will start to improve as we get into the back half of the year, so weâre going to have a little bit lower first half than originally anticipated and then the back half as we expected. Thatâs whatâs really kind of moving the PEO numbers down in terms of our outlook. Look - you know, Andrew, better than most, differences in attachment can change revenues really, really quickly, and so weâll see where we end up on that front as we go through the year. Itâs driving our results, largely doesnât have a significant impact on margin, again as you know because those are relatively low margin revenues, but out of a sense of--Iâd say out of a sense of where we ended up in the first quarter and where weâre anticipating second quarter to be. Now Iâll let John talk about the fundamentals of the business, because I think they actually are pretty strong.
John Gibson: Yes, look - I feel particularly on the PEO side, Iâll talk about that first, weâre well positioned coming out of first quarter. Remember weâre just now really entering the key selling season, weâre also in open enrollment season within our PEO, so those are two critical periods of time when I look at where we are going into this. Our client retention is extremely strong. Really, we had set some pretty aggressive targets and weâre actually beating those targets in the PEO in the first quarter, so the value proposition is resonating, so retention was very strong. Sales were strong for the first quarter. I look at where we are from a sales headcount - we actually accelerated. If you remember in the fourth quarter, we said we made some investments in the first quarter. Some of that was actually adding because we saw the demand there. Our tenure is great, we have the best sales retention of any of our divisions in the PEO, so our tenure of our team going into the selling season is really strong. We just completed our renewals with our health insurance carriers. I feel good about where we are on those, I think weâve got a good part of that. To Efrainâs point, kind of the attachment of insurance and then once we attach insurance to a client, how many employees are signing up for that, and particularly this may be an affordability issue that weâre maybe seeing, some of the things weâve done is weâve actually expanded low cost plans in this next enrollment. Weâve expanded our enrollment consultants who will go out and engage clients, so weâre working against what weâve kind of seen, some trends in the first quarter, but obviously some of the drag in revenue, as Efrain said, is we had a little lower than we historically have seen relative to attachment of insurance in the PEO and a little lower participation than weâve typically seen as well, and again weâve taken steps in terms of both plan design and in our sales execution to be able to move forward. The insurance agency, some of the things we saw relative to attachment and participation in our HMP area, similar to PEO, common theme there that we saw there in the first quarter, and then as weâve talked about, I think repeatedly, the market is continually soft in P&C and continues to be a headwind.
Andrew Nicholas: Great, thanks John, thanks Efrain. Those comments were super helpful. For my follow-up, I just wanted to ask a bigger picture question. You mentioned the HR tech conference in your press release and I think again in the prepared remarks. Personally, I was impressed by the number of vendors at the conference and the level of innovation really across the sector. With that in mind, given the number of new products, the amount of money thatâs come into the space over the past several years, just wondering if itâs changed how you think about the build versus buy equation. Does M&A make more sense today given the rate of change in the market and how rapidly new products are being built and gaining adoption? Essentially, just want to get your thoughts on build versus buy, appetite for M&A given all thatâs going on right now. Thank you.
Martin Mucci: Yes, this is Marty. Iâll start it out. Itâs an interesting question. I think the appetite is still there. I think valuations are still high, but weâll see if they catch up and come down some and get more realistic. You know, weâve always been able to use M&A not only for growth from a product perspective, but I mean actually adding to the technology, so time and attendance started with M&A back many years ago now, 10 or 11 years ago, and probably 12 for the first time and attendance product which then we built into our product and now is one of the fastest growing products we have from that perspective. But I donât--you know, I donât think so. I think we really look at that very closely whether we can build. We have a very successful development team here, product management and development that kind of decide what do we have to do from a tech standpoint. We like it being bundled into the Flex product suite, and so weâre careful to do an M&A from a product add-on standpoint, and we donât really see--I donât really see, and John can comment on this too, a product that weâre missing right now in the suite that I would have go out and--that we would go out and look at from an M&A perspective. Itâs more adding to what we have. The technology, we feel everything, as John mentioned earlier, the HR--the HCM technology that we have, the combination with being able to do so much on the mobile, we have such a large use now of the mobile app. Weâre also tying much more to the employees and self service, and so if you didnât pick up on some of that at HR Tech, self-service has become a big part of our model. That gets the employees of our clients more involved, and right from just making their own changes, self on-boarding, many aspects of when they sign up to Paychex pre-check, which allows them to view--as you know, view their payroll before itâs processed, has really been important to bring the client employees into the picture, which builds better retention and better level of the Paychex mobile app, which still has a 4.8 out of 5 stars. I donât think thereâs a lot of M&A from a product need that we have to add to, but thereâs still a good appetite for M&A and weâre constantly evaluating opportunities.
John Gibson: Yes, Iâd probably give you a good example that I actually talked about here on the call, one that we have previously announced and is in the works to go live. I think weâre constantly looking for the right combination of partnerships, technology we can build, and acquisitions that we can bolt on to kind of put a unified experience together that resonates with our customers and addresses problems. We talked about the recruiting and applicant tracking and on-boarding experience that we launched, reintegrated. Thatâs a combination of build, we got a partnership with Indeed which weâve talked about numerous times to help get candidates faster, and then it was also an acquisition that we made some time ago of a company on the on-boarding and applicant tracking side and the unification of that into Flex and using the talent that we had bought, and thatâs taken off tremendously, so itâs a better experience. As Marty mentioned, already 1.7 million new hires have went through that process, so thatâs an example. Another example that weâre currently in the process of, and this goes back probably to your question on the insurance agency and about us working to really get more employees participating in all of our insurance products, and that was an acquisition that we made just a little bit ago with the benefits administration and enrollment technology, found a great, small little company could add both talent and how to design that from a user experience perspective. Weâre in the final states of deploying that, and actually that will be deployed in our agency and our PEO as an electronic mobile enabled, a way for employees to enrol in benefits, and itâs also going to really highlight the ancillary benefits. Again, this is showing them the right plan, getting them to participate and getting them to really see the full suite of insurance weâve got electronically and a unified experience. Thatâs in early stages of being launched as we speak right now, so. Thereâs a couple examples of where I think weâre going to continue to look for experiences weâre trying to build for our clients and their employees, what capabilities do we have to build into Flex today, and where can we either find partners or find tech bolt-ons that will help us improve that experience.
Andrew Nicholas: Great, thanks again.
Operator: Our next question comes from Ramsey El-Assal from Barclays.
Ramsey El-Assal: Hi, thank you for taking my question this morning. I wanted to ask about the pricing environment and the degree to which youâve been able to kind of pass through potentially larger price increases given the inflationary backdrop. Should we expect a bigger contribution from pricing in this environment this year than we normally would?
Efrain Rivera: Yes, in terms of pricing, Ramsey, I think that--I think Marty mentioned on last quarterâs call that we were towards the higher end of the range of what we typically price, and I think thatâs where weâre at right now and thatâs whatâs holding. Look, I think we are constantly trying to strive for getting the balance between price and value correct, and I think that weâre striking at this point the right balance on that issue.
Martin Mucci: Yes, the price realization feels very good right now, and as John mentioned, I think it was a combination of a lot of things John is saying. When you have a big need for recruiting, hiring and on-boarding employees, and weâre able to solve that particularly with technology, youâre saving--weâre hearing more and more from the clients that theyâre saving operationally, theyâre being more effective, therefore a little big higher on the price range is working and itâs sticking, so discounting has really been not an issue at all.
Ramsey El-Assal: Okay, quite helpful. A follow-up from me, I wanted to ask a question on the relative resiliency of the two parts of your business. Iâm just curious if there are drivers or factors that make management solutions and/or PEO more cyclically sensitive relative to each other. I kind of feel like investors have a better handle on management solutions as itâs sort of the longer dated segment, but Iâm just curious if you feel that PEO also has the resiliency that youâd expect from the overall business.
Martin Mucci: I can start and John can jump in. I think, Ramsey, definitely PEO does right now all the things that John just talked about and I just mentioned - you know, recruiting, hiring, having insurance plans that as a small or midsized business, you might not be able to have on your own. The PEO has continued to be pretty strong. You do see fluctuations - like we mentioned, in this first question we didnât have quite as much enrollment, but weâre also heading into the real selling season and the enrollment portion of the PEO, so PEO has continued to be very popular and I think it is very resilient in a time when Iâm competing for employees, Iâm a business competing for employees, and I need better insurance plans, I need better help in signing people up for those insurance plans, so yes, I think it has very strong resiliency just like the management solutions offerings. Anything you want to add to that?
John Gibson: No. Look, when I look at the clients that are attracted to the PEO value proposition, these are clients that are having to navigate very complex HR or complex employment situations - multi-state, theyâre in difficult states where thereâs a lot of regulatory compliance, and other risks facing their business, and they view our HR support, our compliance support, the way that we assist them in EOC-type of complaints and issues as a critical part of their business. I just had a comment on this from a client - we have a small client that said they couldnât live without their HR person helping them out. I would step again just again and maybe reiterate macro, because maybe weâre not explaining it well. You look at our employment--you look at the HR Pulse survey, and I look at what issues our nearly 700 HR consultants are facing for our clients, our clients are still trying to fill open positions, so not only did we see checks and worksite employees increase, but we continue to see them ask us for technology solutions, support, and how can they continue to fill open positions. Certainly what we see in the underlying macro side in both the managed solutions and the PEO is that theyâre really needing our HR support, itâs a complex environment, and I think thereâs good resiliency going forward.
Ramsey El-Assal: Okay, so similar performance profile through the cycle for both segments, is what I got from that, so I appreciate your answer. Thanks so much.
Operator: Our next question comes from Eugene Simuni from MoffettNathanson.
Eugene Simuni: Thank you, hi guys.
Martin Mucci: Hey Eugene. I know that wasnât your name.
Eugene Simuni: Thatâs okay, no problem at all. I wanted to come back for a second to macro. Iâm hearing loud and clear what you guys are saying, that youâre not seeing any signs of recession, slowdown in the employment numbers, and still very tight labor market - thatâs clear. I wanted to ask about a slightly different metric, which is, letâs say, businessesâ willingness to invest in new technology, so situations where you would get real upgrades, feature additions, or maybe switching from a legacy provider to you guys - things like that. Curious if youâre seeing any incremental caution across your small business customers on that even as performance remains strong, as people just get more cautious looking ahead, and if not, then in your experience running this company for a long time, when times get a little bit more volatile, can we expect that caution to increase, and why or why not?
Martin Mucci: I would say at this point, weâre not seeing that yet because, in fact, in a time like this, theyâre trying to--the biggest things John talked about, some of the surveys weâve been doing lately, itâs about operating efficiency, itâs about how do I fill these positions, so the demand is still there for their products at this stage of the macro, and so theyâre needing people and theyâre needing technology to save them money in other ways because wages are up, they have to give more benefits, so there are actually--I think in this kind of environment, and itâs been this way as the marketâs been tight, small and midsized businesses need to offer better benefits, they need to offer more technology, they need to have a mobile app like ours that you can deal with remote workforces, so actually I donât think that has--you know, they havenât gotten any more skittish, I guess Iâd say, about investing. Theyâre actually really needed at this stage of the game. Typically, depending on what kind of macro environment youâre in, but in this one where itâs about hiring and itâs about retaining employees, theyâre very much looking for technology, benefits, all the things we offer, and even if youâre a midsize and might have to go through some re-shuffling of people, youâre looking to one of those 700 HR specialists that John mentioned that we have, that would say okay, how do I do this, how do I attract people, how do I retail them, how do I maybe lay some off while I hire others in the little bit larger companies, so weâre actually seeing a great demand for technology in the HCM world as well as being able to handle remote workforces which really are here to stay.
Eugene Simuni: Got it, okay. Thank you. Then for my follow-up, probably a question for Efrain, actually switching gears a bit. We talked about the margin dynamics over the short term already a bit, so understand there are kinds of ups and downs through the quarters, but I wanted to touch on the longer term margin dynamics for a second. As we are now moving away from the COVID pandemic and settling more in maybe the steady state, where digital channels have become a bigger part, digital buying has become a bigger part post-pandemic of your model, how are you seeing that really impacting structural margins of the business as weâre getting more experience with that more digitally focused model? Iâm curious.
Efrain Rivera: Well you know, Eugene, I think weâve talked about it, certainly talked to many of you on the call, we have a relentless drive for efficiency in the business, and so as more of the business goes into either digitally-enabled solutions or fully automated solutions, we expect over time thatâs going to be a driver of improved productivity and improved operating margins. I always caveat with you also have to balance investment in the business for sustainable growth, so if we get 50 basis points or 75 or 100 of improvement in operating margins, we may decide that in order to create more operating efficiency--Iâm sorry, more sustainable margins over the long haul, we have to invest a part of it, but certainly there are very few weeks that donât pass where weâre not having that conversation. I think that Johnâs been a big driver in the last decade around making that model work, and I expect that to continue over the cycle.
John Gibson: Yes, Iâll jump on that, because I think our business model and our DNA as a company is around being the best operators in the business. I think weâve proven that over decades, and thatâs certainly not going to change with me in this position. I think what youâre seeing is it goes back to the question you asked earlier, is look - clients are demanding technology because their employees are demanding technology. I mean, what weâre seeing relative to the digitalization is really not just us trying to push that on clients. There is a big pull from clients and their employees to expect that theyâre going to have a technology experience, whether thatâs when theyâre recruiting, if they want to recruit people, youâre not putting an ad in the paper. If youâre doing that, youâre probably not going to find many people, particularly the people that are out looking for employment. So whether itâs benefits, whether itâs their finances, theyâre looking for that to drive that, and not only is that a benefit for the customer but thatâs also a benefit for Paychex. Digitization continues with our mobile usage, it continues to accelerate with our clients and our employees. Itâs up 67% year-over-year, and we had a pretty big year the year prior to that, so I continue to see this as kind of being something--itâs not a nice to have anymore, itâs really a must have if you want to go out and compete in the talent market today. Youâve got to have an HR technology solution that is easy to use and really meets the full needs of what employees are looking for.
Eugene Simuni: Got it, okay. Thank you very much.
Operator: Your next question comes from Bryan Keane from Deutsche Bank.
Bryan Keane: Good morning. Wanted to ask about the different market segments. I know you guys called out strength in the mid market, so just thinking about the health in the lower end of the market, could you just talk a little bit about new business starts, retention in that market, any kind of softness in spend youâre seeing there?
Martin Mucci: Well, I think as we mentioned in the beginning, Bryan, small business--you know, new business starts are not as strong as they were last year. The last couple years during COVID and the pandemic, of course, we had a lot of people leave big business and start businesses, and so small business retention from a client perspective, we said was starting to normalize a bit because some small businesses that started during that period have gone out of business. But the demand for employees from small businesses is still needed and weâre still--theyâre still adding employees, so I guess the bad news is some are a little bit more out of business but the good news is that most of our clients, even at the small end, are adding employees and still have a lot of postings and openings to fill. I think that mid market, what weâve said about mid market being stronger is I think weâve executed much, much better in the mid market not only from a product suite and a technology suite of what weâre offering to the client, but the sales team has done really well. We hit our stride last year, and that has continued right through the first quarter with very good double-digit growth there.
John Gibson: Yes, and I would add that not only is the demand still strong in the mid market - you know, double digit first quarter, I think well positioned going forward, retention--when you really look at that mid market, which you get into our HR services, you get into the PEO, you get into the mid market HCM, where our clients are getting the full value utilizing a technology, weâre seeing very good retention levels. As we said, our revenue retention is at record levels. I mentioned and called our PEO particularly, has just had stellar performance in the quarter relative to client retention, and weâve seen strong retention in our HR businesses holistically and the mid market is solid as well. I also think that our price-value equation in that market has held up very, very well as well, with our average sell-in revenue in the first quarter really strong, really strong.
Bryan Keane: Got it, thatâs helpful. Just one clarification for Efrain on the second quarter margin, I heard about the second quarter revenue being lower, and you called out some call-outs there. But on the margin in particular, is it just a revenue issue plus additional investments that just flow in, that cause the drop in the margin? I just want to make sure I have all the pieces there for the 38% margin.
Efrain Rivera: Bryan, you heard exactly what I said. I must have been partially clear on that, so--no, thatâs exactly it, a little lower revenue, a little higher expenses. Itâs typically the lowest revenue quarter of the year, so you get a little bit of that impact, and itâs in line with what we anticipated it to be.
Bryan Keane: Okay, super. Thanks guys.
Operator: Your next question comes from Kevin McVeigh from Credit Suisse.
Kevin McVeigh: Great, thanks so much. Let me add my congratulations, and we share your view on Efrain too, Marty, so.
Martin Mucci: Try that music trivia sometime. Itâs astounding.
Kevin McVeigh: Exactly. Hey, maybe just one, I guess higher level - I mean, John, youâre taking the baton, the organization is super-super strong, but no two CEOs are the same, so any initial thoughts as to areas of focus, maybe, where you might dial in a little bit more? I mean, obviously youâre building on a great legacy, but just any thoughts as to where your initial areas of focus are, whether itâs capital allocation or just technology? Any initial thoughts?
John Gibson: Well Kevin, thanks for that, and as you know, Iâve been a part of the leadership team for nearly a decade now, so a lot of the things weâve been working on, Iâve been involved in and highly supportive of. Look, I think you can expect weâre going to continue to really focus on expanding our leadership in technology and HR. I mentioned it earlier, going to continue to be the best operators on the business and weâre going to consistently be a top performer in terms of total shareholder return. I think these are three traditions I donât plan to mess with, quite frankly, because theyâre working and theyâre what I believe. Look, weâve got opportunities to expand our offerings and continue to innovate and change. I would tell you that I think Paychex has always done that. Thereâs no question, under Martyâs leadership that has accelerated, and I think you should expect us to continue to accelerate that. Weâre going to continue to look for new ways and growth platforms that we can apply to help our clients grow. Weâre going to continue to invest in improving the experiences - Iâve mentioned that, I keep using this word experiences. We have a lot of great products, weâve got a lot of great service offerings. How we package those things together to address business problems is critical. I think the other thing that weâve begun to do more of and I think youâll see more of is, look, weâre really beginning to use a large amount of internal data we have to really apply that to retention, insights, product that weâve launched for our customers, and being used with our HR professionals with customers to identify how they can retain clients. Weâre also using--ERTC is a good example where weâre using our internal data sets to really identify customers that have specific needs and then able to get our sales force into a situation where they can talk to a client who has that need at that moment and that drives productivity, and I think youâre going to continue to see us do that. I think youâre going to continue to see what I said before - weâre a tech company and weâre going to continue to invest like a tech company, so I think relative to capital utilization, youâre going to continue to see us look at applying capital in areas where we can improve our technology footprint and help our clients.
Kevin McVeigh: Thatâs super helpful. Then just one quick follow-up, I think for you, Efrain - appreciate what youâre saying in terms of the outlook on the Fed funds, things like that. But can you tell us what Fed fund rate is in the implied guidance right now, and then just remind us if you can what 25 basis points--like, what the sensitivity is to the revenue for every incremental 25 BPs?
Efrain Rivera: Yes, so in the first quarter, we called it out, it was between 3 and 4, kind of around the midpoint there where we expected, I think I may have called specifically 3.75, so right now weâre working with something in that range. Obviously everyoneâs chief economist has a different number that ranges probably with a 4 and some probably 5 and above, but I want to call out--and by the way, a quarter basis point is somewhere in the $4 million to $5 million range in terms of net income, so itâs potentially important. It could be important. But Kevin, the one thing I think that Jason pointed out thatâs really important, I think what makes it a little bit trickier is you donât want to push your chips to the middle of the table and go all-in short term and have a great year in terms of year-over-year interest income, only to give it back in the next year, so what weâre really looking at is whatâs the right duration for the portfolio in this environment, and so thatâs why I canât--I wouldnât necessarily, and Iâm cautious about saying, hey, Iâve got 100 basis points up versus my forecast, and that relates to X. I am a little bit cautious about that because I think weâve got to manage a somewhat volatile interest rate environment here with the Fed and figure out what the implications for â24 are. Iâd just leave it at that. So weâre looking at it, and by the way, itâs not like somehow weâre geniuses here. Weâve got some of the best minds in the business on the fixed income side working for us, so weâll take counsel and have a lot of discussion on that.
Kevin McVeigh: Helpful, thank you.
Operator: Your next question comes from Samad Samana from Jefferies.
Jordan Bret : Hey, this is Jordan Bret on for Samad. Marty, Efrain, congrats on the strong results. John, also congrats on the new role.
John Gibson: Thank you.
Jordan Bret: I think weâve touched on a lot already, but I wanted to double-click on the employee growth that youâre spoken about in both management solutions and PEO. Obviously with COVID, the recovery was not completely even by vertical or geographic area. I think in the past, weâve called out Florida was â saw some strength first. Iâm curious, the growth that you saw this past quarter, is that broad based or is it coming from a specific vertical or geographic area, maybe lapping what we saw at the start of the recovery from the pandemic?
Efrain Rivera: Yes, so let me disaggregate. Iâll get started and then let John add some color commentary. The PEO is a little bit different than management solutions per se, so what we saw was strength in ads in larger clients, and thatâs partly a result of really good work that we have done over the last four to six quarters in mid market. Weâd done good work before that, but I think youâve seen the benefits of that coupled with, and thatâs always important, coupled with the improvement from last quarter in terms of the overall hiring environment in the first quarter. We expect that that starts to slow a bit. With respect to PEO, when we look at worksite employees, that was pretty widespread, so obviously because our business is over-indexed in the State of Florida and in certain verticals relative to management solutions, we saw strength there, but PEO was pretty widespread. Now, PEO is a little bit different in the sense that our average client has roughly about 30 or so employees, so youâre also getting a little bit of a larger, letâs call it client effect in terms of the adds. Thatâs a little bit more color. I donât know if Marty or John want to comment.
Martin Mucci: Well, I think weâve seen it kind of across the board. Most of the client base has seen an increase in employees, so weâve seen them adding employees, and of course thatâs going to be in that 1 to 20 range in particular, but 1 to 50 probably weâre seeing that. I think that Florida and the south, weâve seen that in the small business index and that those have been the strongest job growth states for small business because thatâs where the people are. And so thereâs still a lot of job openings, particularly in leisure and hospitality, and theyâre able to fill them in the Texas, Florida, Georgia, even North Carolina kind of areas - theyâre the best job growth kind of areas, so thatâs where small businesses are doing the best. But overall, weâve seen our businesses able to add people, and obviously thatâs adding checks, as John mentioned.
John Gibson: Yes, just to reiterate, I think weâve seen across the board in pretty much all segments improvement in the employment levels and still, in all the surveys weâre seeing, again both the survey we did, I know there was one I think that was just in the paper recently a couple days ago that I read that reinforced it, small business owners are struggling more than midsized companies, and weâve seen that in our data. When we look at where the number of checks and where are worksite employees have accelerated more, a mid market company that offers more benefits is outcompeting for the talent, and so thatâs why weâve really been focused on this recruiting and the partnerships that weâve built and the technology weâve built to help small business owners have a fair advantage. I would also say, to Efrainâs point, another interesting and again a little data, but we certainly looked at this a lot when we were doing the down trim, what we know is customers who were in our HR products, whether thatâs our ASO product or our PEO product, they decelerated less than the general market, and when it came time for a recovery, they were able to staff up faster. I do think thatâs because of our HR support. We certainly in those areas have seen better recovery, faster recovery, more full employment, and I think that has to do with both our technology and our advisory service and helping them advantage there.
Jordan Bret: Awesome, thatâs all very helpful color. I think along the same lines, I wanted to follow up with--you know, we talked about difficult hiring is at this time, and your own business, youâve seen this hiring pull forward and thatâs obviously impacting the cadence of margins throughout the year. This past quarter, were you hiring plans on track, ahead of or lagging your initial expectations, and was there any change in your ability to hire incremental sales or support staff throughout the quarter? Just curious if there were any changes on that end.
Martin Mucci: No, actually we did very well. The hiring machine really took off here from a recruiting and a hiring perspective, and the retention is better. I think youâre hearing that in the overall market, particularly for larger businesses. Now, weâve made some changes to that. Weâve improved some of our starting wage rates, just like a lot of companies, and did some other things as well for some of the existing employees, and I think thatâs paid off. Yes, weâre fully staffed, and weâre ready to go--actually, weâre ready at the start of the quarter for sales and everything else, so weâve done very well on the hiring front and are ready for the rest of the year.
Jordan Bret: Great, well thanks for taking my questions. Again John, congrats on the new role.
John Gibson: Thanks.
Operator: Your next question comes from James Faucette with Morgan Stanley.
James Faucette: Thank you very much, and my congratulations to both Marty and John as well. I wanted to--youâve addressed a lot of our key questions, but I wanted to quickly follow up. Marty, can you just talk to really quickly again the expected cadence for PEO during the course of the year, and just so I understand the expected improvement later, is that because of the things John mentioned of adjustments to the PEO plan, some changes in sales, etc., or is there something else that you expect to have an impact there?
Efrain Rivera: Hey James, let me talk to that. I think as I said at the beginning of the call, we started the year in the first half a little bit under what we expected from an attachment perspective and insurances were a little softer than we anticipated. The impact on margin is pretty insignificant. As we get through the year, our expectations are that PEO growth accelerates in the back half of the year, and part of it is that we had pretty strong worksite employee growth coming out of first quarter, so if you get that coupled with better healthcare attachment in the back half of the year--look, if people make decisions, are making decisions in this quarter, you donât see the revenue this quarter, you see it in future quarters. Theyâre making those decisions on the assumption that those things materialize as they should, then growth accelerates in the back half of the year. Thatâs basically the explanation for whatâs going on.
James Faucette: Go t it, thatâs helpful. Thanks for the clarification there. Then I guess more from a landscape perspective, youâve touched on and obviously highlighted over time but also on this call everything that youâve done from a technology perspective in terms of Paychexâs ability to help its customers and continue to improve, but what are you seeing happening in the regional provider space? How are they being able to keep up with you, the incumbents, on tech, and do you expect further consolidation? I guess the real question is where youâre not winning from regionals, whatâs the primary reason and how can you address that? Thanks.
Martin Mucci: Yes, sure. Actually, weâre doing very well against the regionals. I think it is hard to keep up. They certainly have been viable competitors, but I think that itâs--we havenât seen a big change in the competitive environment. I think if anything, we feel like weâve really continued to jumpstart - you know, John mentioned the Voice Assist that we just offered, no one else has offered that with Google, the work weâve done to combine for recruiting and on-boarding our clients. You know, I think the regionals, there may be some consolidation. I think theyâre looking for probably some more support from a tech standpoint because there continues to be a lot of investment going forward that we obviously have a great track record of doing, but I think thereâs been a lot of demand, so thatâs kind of kept everybody happy. The pie is--the overall pie has continued to grow, particularly in the mid market, so I think theyâve all done--you know, everybodyâs done pretty well. Weâll have to see how that goes forward as we get into the back half of this year, but we feel very confident, not any big changes in the competitive environment, and weâve performed very well.
James Faucette: Great, thanks a lot.
Martin Mucci: Okay, thank you.
Operator: Your next question comes from Tien-Tsin Huang from JP Morgan.
Martin Mucci: Tien-Tsin? He might be on mute, or he might have been dropped.
John Gibson: Gretchen, are you there?
Operator: Yes--
Tien-Tsin Huang: Can you guys hear me? Iâm sorry, Iâm here.
Martin Mucci: Yes, we can hear you now.
Tien-Tsin Huang: I apologize, I had some trouble with my headphones. Sorry to keep you guys waiting. Quick thanks to Marty, of course - always appreciated our conversations through the years, so. Not sure if youâll miss these calls, but definitely weâll miss chatting with you.
Martin Mucci: Oh, definitely!
Tien-Tsin Huang: Yes, there you go; and John, look forward to working with you more. You did, in your remarks, credit Martyâs vision for embracing technology, and I think someone asked you about what your focus or legacy might be - I caught that, but Iâm just curious, John, given your background on services and where you were before Paychex, Iâm curious if you see more opportunity to improve services here further for Paychex to complement tech, or is it one and the same in terms of tech and services starting to blend a little bit further? Iâm just curious how you think about balancing those two things, right, between the services and the tech of the company.
John Gibson: Yes, look Tien-Tsin, I think youâre right, I see it as one and the same, and thatâs probably the reason why Marty and I were reminiscing about my interview here and what really attracted me, was Martyâs vision was very consistent with mine and my experience about where I saw our industry going from my prior experience. My view is I think having the best technology and having a unified user experience is going to be critical not only for the demand and what customers and employees want, but also to drive the operational efficiency that I think customers are going to want. That being said, customers need to know how to use that tool, and they are facing complex issues outside of items that technology can solve, particularly in the HR area. I think we have a unique position to be able to reposition our traditional services, kind of hey, I put something in a system for you, and really position that more as an advisory opportunity. I think about the things weâre doing with the mass sets of data that we have, the benchmarking the data, the way we can do analytics, the fact that we can call a client up and say, we think youâre going to have a retention problem, let us walk you through your insights. Thatâs what service is going to be. Itâs really not even service in the historical sense that you would see a service company talk about. I do believe that thatâs going to resonate, and we see it resonating in this complex environment. More and more companies are going to end up having employees in multiple states than ever before to compete for talent and the remote workforce, that brings regulatory complexities that just technology canât solve for you. Youâve got to think about how youâre going to do this, and so I do think that weâre uniquely positioned and I think youâll continue to see us invest in technology and invest in HR, and really position ourselves as the digital HR leader in the marketplace.
Tien-Tsin Huang: Got it. Appreciate you going through that, because I still think about it--you know, when I started covering Paychex, I always thought of it as a services company, and of course tech and digital has taken over everything, so just wanted to get back to basics there, so thanks for that. If you donât mind, my quick follow-up - I know the callâs getting long here, just thinking about the modules and the breadth of services, you mentioned Paychex being the largest 401K record keeper. I know the equity markets have come down a little bit. Is that having any influence on your outlook in general, and also just clarifying, if you donât mind, two questions in one, just the healthcare enrollment piece, is the lower attach or enrollment a function of mix of clients or is it a competitiveness of the plans issue? I just want to make sure I understand that, if you donât mind those two questions. Thank you.
Efrain Rivera: Well, you got two disparate ones in there.
Tien-Tsin Huang: Sorry, yes. Iâm trying to not take up too much time.
Efrain Rivera: No, Iâll talk to it first and Iâll let John talk a little bit, and Marty if you want, on the second. In our retirement services business, as many of you know, we do have about a third of the revenue there is derived from a basis point, so it has a modest drag in terms of revenue. Itâs not really significant - I mean, Iâd just put it as de minimis in terms of the balance of the year. Then on healthcare enrollment, youâre asking for more color on that, Iâll let John touch on whatâs driving a little bit lower healthcare enrollment.
John Gibson: Yes, look, I think--I wish I had the perfect answer to that. Looking at all the data, my experience tells me a lot of that can be mix of clients. Again, a lot of it has to do with whatâs the average wage of a client, whatâs the industry theyâre in, but you also have, as I said, economic situations where a person may be having benefits and deciding I canât afford benefits right now given my economic situation, and they drop the benefits. We recognize that, thatâs why weâre doing a lot in really looking at our plan designs in the PEO in particular, rolling out lower cost plans, also rolling out non-traditional plans. Weâve actually created an entire wellness kind of spectrum of products and services to really meet the needs, the economic needs of every type of worksite employee that we would have there, and weâre also driving digitalization into our H&B business - I mentioned that earlier, thatâs rolling out in the second quarter, so that we can offer a more full suite of benefit options that can match the price point of both the clients and their employees, regardless of what their economic situation is. We certainly are trying to expand what weâre doing. We recognize that for some employees and some customers, the cost of getting some of these benefits is outside of their capabilities right now, and so weâre really focused from a product development perspective to make sure we have the broadest suite of offerings in the marketplace.
Tien-Tsin Huang: Got it. Thatâs helpful, thanks, and sorry for extending the call.
Martin Mucci: No, no worries, Tien-Tsin. Your questions are always appreciated.
Tien-Tsin Huang: Thanks for the time, guys.
Operator: Our next question comes from Mark Marcon from Baird.
Mark Marcon: Good morning. Marty, congratulations on just tremendous accomplishments over the tenure that youâve been CEO; and John, look forward to working with you.
Martin Mucci: Thanks Mark.
Mark Marcon: With regards to the macro environment, you did mention small business formations are a little bit lower. How are you thinking about the sales pipeline for HR management solutions, and to what extent can you dial the marketing strategy to highlight some of the tech improvements? I was at HR Tech, I was really impressed by the voice recognition program with Google, and are you charging more for those types of solutions?
Martin Mucci: Yes, weâre really--I mean, letâs take the marketing side of it. Itâs doing exactly that, Mark - itâs being at HR Tech, itâs getting the word out there. Weâre doing a lot with and trying to partner with folks like Google to be sure that itâs known that we have the only--weâre the only one that can do that with their Google Assistant and have you be able to do it totally hands free. Weâre pushing--you know, the marketing has been pretty aggressive for years through webinars, through the tech conferences, and of course through all the podcasts and then just all of the online work that weâve done, and thatâs been very important to us to get the message out, and we think that thatâs worked well, so I think thatâs been good. I think on the--so we think thereâs still a huge demand, and John mentioned, I think earlier, the product penetration rates continue to go up. I think that s the tech word has gotten out there and the need, of course, as weâve talked about a lot on the call, weâve really seen this additional product penetration, and even if new business starts are less than what they were, theyâre still up, theyâre just not up the big numbers that they were d during COVID, when everybody--or many people ran from large businesses and started small businesses. So theyâre still up, weâre still obviously doing very well on the start-ups, but I think weâre doing even better with the product suite to make the additional penetration of the existing client base.
Mark Marcon: Right, so the way Iâm taking it, it sounds like the pipeline in terms of the key selling season for management solutions, as well as PEO continues to be robust, and youâre not really seeing much of a change in terms of what weâre reading about from a macro headline perspective as it relates to that?
Martin Mucci: Correct. We still feel it should be a good selling season. Itâs early, but we feel good about it.
Mark Marcon: Great, and then can you talk a little bit about retention? How do you think that ends up being impacted as ERTC kind of winds down? Does that have any sort of impact?
Efrain Rivera: Hey Mark. So you know, we gave a little bit of color in Martyâs call. I think what Iâd call out is two things. One is, and itâs one thing that John mentioned, but from a revenue retention standpoint, weâre at near record highs, so that makes sense. Marty called out on the very lower end, weâve seen a little bit more churn - that is to be expected given where the market is right now, so on those two, I think we feel weâre pretty well positioned going into the balance of the year. ERTC really should not have a significant impact on client retention. I think that it is a--if anything, itâs positive in the sense that it just demonstrates the value add of Paychex. A lot of our competitors are not talking about it because, candidly, their model doesnât allow them to get there. Some are doing it, but I think that we think about giving our clients that level of consulting and expertise that John was mentioning earlier, so from a retention standpoint, it really should not have a significant impact.
Mark Marcon: Terrific, thank you.
Martin Mucci: Okay, thanks Mark.
Operator: Your next question comes from from Northcoast Research.
Unknown Analyst: Good morning gentlemen, and congrats on a great quarter. I just want to get some color around your float portfolio. As the Fed continues to hike rates, do you think there will be any changes, or has there been any changes in the management of your float portfolio?
Efrain Rivera: Hey, I think I answered earlier that in the environment, every time the Fed makes another pronouncement about what they expect to do, we huddle and figure out what the implications on the portfolio are, and what weâre trying to do is adjust the duration based on what we believe is going to happen and when we think weâre going to see peak interest rates to position the portfolio, not just for â23 but for â24. I would say the change is weâve become a little bit more dynamic in terms of whatâs the balance between short and long term is, and as the year progresses, weâll continue to make adjustments real time to take advantage of what we think are changes in the landscape.
Unknown Analyst: All right, thank you for re-answering that question. Do you have any thoughts on change in your return of capital to shareholder strategy?
Efrain Rivera: The short answer is no. I think Marty and John talked a little bit about this, which is obviously weâre going to continue to pay a pretty strong dividend, we will buy back shares to offset dilution, and we will look at deployment of capital in terms of M&A if it makes sense, if it builds value in the portfolio, so from that standpoint, no significant changes.
Unknown Analyst: Thank you so much.
Efrain Rivera: Okay.
Operator: Our last question comes from Scott Wurtzel from Wolfe Research.
Scott Wurtzel: Hey, good morning guys. Just one question from me, just on the revenue retention side of things. I know you called out itâs still trending above pre-pandemic levels, and I think John had mentioned youâre continuing to see attach rates of high value products, so just wondering if you can just maybe give a little bit more color on what products are exactly resonating most with the client base.
John Gibson: Yes, itâs really our HR suite of products. You continue to see our online products, I just mentioned the recruiting and applicant tracking really popular right now, 401K retirement very popular, and then time and attendance is the other. I put that in kind of the online area, anything around the automation of the employee-employer relationship is in very high demand, very high demand right now. People are looking for those operational efficiencies, their workforces are more dispersed than ever before, and theyâre leveraging technology to keep track of whatâs going on.
Scott Wurtzel: Got it, thatâs helpful. Thanks guys.
Martin Mucci: Okay, thank you. Gretchen, thatâs it, right, for calls?
Operator: Yes, no further questions.
Martin Mucci: All right, well one more thank you to the over 16,000 employees of Paychex who deliver the great results for us all. At this point, weâll close the call. If youâre interested in replaying the webcast of this conference call, it will be archived for approximately 90 days. I would like to thank you all for your support you have given me in my role as CEO over the years, and I know Iâm leaving you all in good hands. Have a great day, thank you.
Operator: Thank you. Ladies and gentlemen, this concludes todayâs conference. You may now disconnect.