Paychex, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Paychex Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that while posing your question that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Martin Musi, President and Chief Executive Officer, to begin.

Great. Thank you. And thank you for joining us for our discussion of the Paychex fourth quarter fiscal 2019 earnings release. Joining me today is Efren Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the fourth quarter and fiscal year ended May 31, 2019. You can access our earnings release on the Investor Relations webpage. Our Form 10-K will be filed with the SEC before the end of July, and this teleconference is being broadcast over the internet and will be archived and available on our website for approximately one month. On today's call, I will review business highlights for the fourth quarter. Efren will review our financial results for both the fourth quarter and full year and discuss our guidance for the upcoming fiscal 2020, and then we'll open it up for your questions. We closed fiscal 2019 with growth across our major product lines and solid progress toward our objectives. Our total revenue growth was 16% for the fourth quarter, which includes, of course, the incremental results from Oasis Outsourcing Group. Management Solutions revenue grew 4%, while PEO and Insurance Services revenues grew 67%, or 10%, excluding the impact of OASIS. As we look back on fiscal 19, we had a solid service and retention performance, a number of innovative enhancements to our product offerings and mobile app, and we completed the largest acquisition in our history. The acquisition of OASIS added scale to our PEO business. and we ended the fiscal year serving 1.5 million worksite employees across all of our HR outsourcing services. In addition, we are beginning to realize the strategic benefits of the acquisition through the expansion of relationships with insurance partners and opportunities to upsell within the existing OASIS base. Our newly combined PEO leadership team continues to expand our leadership position in the HR outsourcing industry. Fiscal 2019 reflected excellent execution in client service and operations, as seen in our client retention and our client satisfaction scores. Our client retention has continued to increase from the prior year, and we ended the fiscal year with payroll client retention on par with our historic best. We have made significant investments in our sales force this year, particularly in our inside sales and mid-market sales forces and in demand generation. These incremental investments are having an impact as we have experienced increased sales momentum with these efforts. In addition, we have continued to produce solid new sales growth from our Sure Payroll, HR Solutions, Retirement, and PEO sales teams. The momentum in new sales coupled with improved client retention has resulted in overall growth in our payroll client base. As of May 31, 2019, we serve approximately 670,000 payroll clients. In addition, excluding worksite employees acquired as part of the OASIS acquisition, the number of worksite employees served by our HR outsourcing services reflected double-digit growth. America's businesses are operating in challenging times. The unemployment rate is at its lowest in nearly 50 years while employers try to ramp up their hiring. As a result, there is a lack of talent to fill open jobs, and the regulatory environment is complicated and continuously changing. State jurisdictions are continuing to advance employment-related laws and regulations that impact the hiring and employment of workers. Also, the way people work is changing, requiring employers to understand employees' workplace expectations, challenges, and requirements. In this evolving landscape, businesses are looking for simple solutions that help them build their business, stay compliant, improve productivity, and recruit, hire, and retain talent. Paychex is uniquely positioned to meet these needs through our breadth of service offerings, but more importantly, through the combination of our innovative technology and personalized service model. This sets us apart and allows us to be true partners and advocates for our clients. We renewed our commitment to reducing the complexity for our customers related to payroll benefits and HR administration when we launched our new branding earlier this year. Our tagline, The Power of Simplicity, reinforces this commitment. We continually invest in our solutions to make payroll and HR administration simpler for our clients and their employees and provide solutions the way they are working today. Seventy percent of the usage of our five-star mobile app is done by our clients' employees. We are making it easier for the employees and more productive for our clients through an increased number of self-service options. The enhancements we have made throughout this past year include the HR Center with performance and learning management and enhanced HR data analytics, benefits management enhancements with a refreshed enrollment experience for health and benefits and retirement, and increased options through the use of chatbots and artificial intelligence. All of these enhancements are designed to provide simple solutions for our clients and their employees. This focus is on steadily investing in the innovation of our Paychex Flex platform Human capital management technology played a significant part in our recognition by Nelson Hall as a leader in payroll outsourcing for the North American small business market. This was our third year in a row receiving this designation. Shifting to other solutions, we currently face a retirement crisis in the U.S. A recent report from the U.S. Federal Reserve found that a quarter of Americans have no retirement savings. We recently launched enhancements to our 401K product design to help address this crisis by simplifying retirement plan enrollment and management. These enhancements included a new participant dashboard and added functionality in the advisor portal. The new participant dashboard makes the process of enrolling in a 401K simpler than ever and also provides a unique combination of tools and resources to empower participants in preparing for the retirement. Our mobile app allows a new participant to enroll in as few as four clicks, which has already resulted in increased participation rates. We also continue to return value to our shareholders. In May, we announced an increase in our quarterly dividend of $0.06 or 11% to $0.62 per share. During fiscal 19, we returned almost $900 million to our shareholders through a combination of dividends and share repurchases. In summary, our fourth quarter caps another successful year for paychecks. Our state-of-the-art technology, full suite of HCM product offerings, and world-class personalized service is a powerful combination that positions us for sustainable growth within our market ecosystem. Our organic business, combined with our new acquisitions, have positioned us well for fiscal 2020 and beyond. The sustained efforts of our employees and their commitment to our clients continue to drive the company forward. I will now turn the call over to Efren Rivera to review our financial results for the fourth quarter and fiscal year.

Efren? Thanks, Marty, and good morning. I'd like to remind everyone that today's conference call will contain forward-looking statements that refer to future events and, as such, involve some risks. Please refer to our earnings release for the customary disclosures. In addition, I will periodically refer to some non-GAAP measures such as adjusted operating income, adjusted net income, and adjusted diluted earnings per share. These measurements exclude certain discrete tax items and one-time charges. Please refer to our press release and investor presentation for a discussion of these measures and a reconciliation for the fourth quarter and full-year fiscal 2019 to their related gap measures. I'll start by providing some of the key highlights for the quarter and then follow up with some greater detail in certain areas. I'll touch briefly on full-year results and wrap with a review of the fiscal 2020 outlook. Total revenue and service revenue both grew 16% for the fourth quarter to $980 million compared to $958 million respectively. Excluding OASIS, service revenue and total revenue both grew by 5%. Expenses increased 22% for the fourth quarter to $666 million, but if you exclude the OASIS acquisition, expense growth was 6%. The increase in total expenses excluding OIS is primarily driven by increased headcount due to incremental investments in the sales force, technology resources, and operations to support the growth in business. In addition, an increase in PEO insurance costs contributed approximately 1% to the growth in total expenses in the fourth quarter. Operating income increased 4% to $314 million. Operating margin was 32.1% for the fourth quarter compared to 35.7% for the same period last year. Margins were impacted by business mix due to the growth in the PEO business, accelerated investments in sales, technology, and operations, as well as some one-time acquisition integration and amortization costs associated with the OASIS acquisitions. Our effective income tax was 25.8% for the fourth quarter compared to 28.5% for the same period last year. Net income increased 6% to 230 million, and adjusted net income increased 10% to 228 million for the fourth quarter. Diluted earnings per share increased 7% to 64 cents for the fourth quarter, and adjusted diluted earnings per share increased 9% to 63 cents. I'll now provide some additional color in selected areas. Management Solutions Revenues. As you know, this includes our payroll service revenue together with other HCM products included in many of our product bundles. It increased 4% to $695 million for the fourth quarter. The increase was primarily driven by growth in our client base across many of our services, along with growth in payroll revenue per check, which increased or improved as a result of increases in net of discounts. Within management solutions revenue, retirement services revenue also benefited from an increase in the number of plans served, as well as an increase in revenue earned on the asset value participants 401K funds. PEO and insurances revenue. It increased 67%, as Marty mentioned, to $263 million for the fourth quarter. Excluding the acquisition of OASIS, PEO and insurance services revenue increased approximately 10% for the quarter. The increase was driven by growth in clients and client worksite employees across our combined PBS and HROI PEO businesses. Demand for our existing PEO services along with growth within our client base resulted in double-digit growth in the number of client worksite employees served. Insurance service revenue benefited from an increase in the number of health and benefit clients and applicants. partially offset by the impact of softness in the workers' comp market as we discussed last quarter. Interest on funds held for clients increased 25% from the fourth quarter to $22 million, primarily as a result of higher average interest rates earned. Average balances for interest on funds held for clients remained flat for the fourth quarter as the impact of lower client withholdings resulting from the tax reform legislation and changes in client base mix, were partially offset by the impact of wage inflation. Interest expense net. I'll note that we had a net non-operating interest expense compared to net investment income in the prior year. This is a result of interest expense of the $800 million of debt financing that we utilized to fund a portion of the OASIS purchase price. The $800 million is made up of private placement debt securities with terms of 7 or 10 years with coupon rates of 4.07 to 4.25% respectively. Let me touch on year-to-date results quickly. Management solutions revenue, again, up 4% to $2.9 billion. PEO and insurance services revenue increased 48% to $822 million, 19% excluding OASIS. Interest on funds held for clients up 27% to $81 million driven by interest rate increases and partially offset by impact of decline in average invested balances. Total revenues increased 12% to $3.8 billion, 7% growth excluding OASIS. Operating margins were 36.3% tempered by investments in the business, the acquisition of OASIS and growth in the existing PEO direct insurance costs. Net income increased 4% and adjusted net income increased 11%. Diluted EPS increased 4% and adjusted diluted EPS also increased 11%. Turning to our investment portfolio, as you know, our goal is to protect principal and optimize liquidity. We continue to invest in high-credit quality securities. Our long-term portfolio has an average yield of 2.1% and average duration of 2.9 years. Our combined portfolios have earned an average rate of return of 2.1% and 1.9% for the fourth quarter and fiscal year respectively. These are up from 1.7% and 1.5% for the respective periods last year. Let's talk about our financial position. It remains strong with cash, restricted cash, and total corporate investments of almost $800 million as of May 31, 2019. Funds held for clients were, as of May 31, 2019, were $3.8 billion compared to $4.7 billion as of May 31, 2018. As you know, funds held for clients vary widely on a day-to-day basis and average $4.1 billion for the fourth quarter and $4 billion for the fiscal year. Our total available for sale investments, including corporate investments and funds held for clients, reflected net unrealized gains of $20 million as of May 31, 2019 compared with net unrealized losses of $38 million as of May 31, 2018. The move to a net gain position was due to declines in longer-term yields. Total stockholders' equity was $2.6 billion as of the end of the year, reflecting $827 million in dividends paid and $57 million worth of shares repurchased during 2019. Our return on equity for the past 12 months was a very robust 42%. Cash flows from operations were $1.3 billion for the fiscal year, an increase of 1% from the same period last year. The increase was driven by higher net income and non-cash adjustments, partially offset by fluctuations in working capital. Working capital fluctuations related to timing around collections and related tax payments for a combined PEO business, along with higher accounts receivables related to growth in our payroll funding business for temporary staffing clients. Now let's turn to the guidance. I remind you that our outlook is based upon our current view of economic conditions continuing with no significant changes. Management solutions revenue anticipated to grow 4%. PEO and insurance revenue is anticipated to grow in the range of 30% to 35%, reflecting a full year of OASIS. Interest on funds held for clients is anticipated to grow in a range of 4% to 8%. At this stage, we do not contemplate either any increases, obviously less likely, and no rate declines. We will watch and see what happens. Total revenue is anticipated to grow in the range of 10% to 11%. Operating income as a percent of total revenue is anticipated to be approximately 36% comparable with this year, reflecting the expected impact of higher PEO direct insurance costs. EBITDA margin for the fiscal year 2020 is expected to be approximately 41%, again, comparable to where we end this year. Net interest expense is anticipated to be in the range of $15 million to $18 million, reflecting a full year of interest on outstanding long-term debt, which I discussed previously. The effective income tax rate for fiscal 2020 is expected to be in the range of 24% to 24.5%. Net income and diluted earnings per share are both anticipated to grow approximately 8%, and adjusted net income and adjusted diluted earnings per share are both expected to increase in the range of 8% to 9%. And remember that we don't plan on necessarily the tax benefit when we get a stock comp exercise, which is why we adjust it out. I will provide further color on the gating. Management Solutions revenue quarterly gating is anticipated to be consistent with the full year guidance, with the exception of the first quarter, which is anticipated to be in the range of three to four percent, largely due to a mix of days in the quarter. However, please note that growth rates for the PEO and insurance revenues are anticipated to be significantly higher in the first half of the fiscal year. until we reach the anniversary of the OASIS acquisition. So we anticipate growth in the range of 60 to 65% in the first half of fiscal 2020, and then growth of 11 to 14% in the second half. So let me just repeat that. We anticipate growth in the range of 60 to 65% in the first half of fiscal 2020, for PEO and insurance services and then growth moderates to 11 to 14% in the second half of the anniversary of the OASIS acquisition. Our net income gating is also impacted by the timing of the OASIS acquisition together with related amortization expense and integration costs. This causes lower net income growth in the first half of the fiscal year. In addition, incremental investments in sales, technology and operations are ramped over the year during fiscal 2019, we expect net income growth to be below the full year guidance range provided at approximately 3% for the first half of the fiscal year. And then we expect it to increase to a range of 11 to 13% in the second half of the year. So let me repeat that. We expect net income growth to be below the full year guidance range for the first half of the year, and we expect it to be approximately 3% for the first half of the fiscal year, and then we expect it to increase to a range of 11 to 13% for the second half of the year, due to the factors described above. Then one final point specific to Q1. For the first quarter of fiscal 2020, netting income growth is anticipated to be in the range of 1% to 2%, with the most significant driver being that of investment spending funded by tax reform that was just starting to ramp up during the first quarter of fiscal 2019 and incremental expenses from OASIS. So with that, and with that color on the guidance, I will, one, refer you to our investor slides for more detail that have been posted on the web, and I will now turn the call back to Marty. Thank you, Efren.

Operator, we'll now open up the call for any questions, please.

Thank you. Once again, as a reminder, if you'd like to ask a question, please press star, then the number one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from Lyme of Ramsey, LSL of Barclays.

Hi, guys. Thanks for taking my question. I wanted to ask, again, about just your operating margin guidance. You took it down a little bit, and, of course, you called out higher PO direct insurance costs. Can you, again, just sort of remind us of the drivers of those higher costs? And also, are there any other secondary factors or headwinds? I know there was quite a bit of content in your remarks. Can you just kind of parse out for us exactly what's happening in terms of your expectations for margins in this coming year?

The first thing I'd say is that it wasn't a change from what we said before. We said that operating, go back to Q3, we said it would be consistent with this year, which was 36%. That's what we called out this year. I would say that with respect to your question on the margins, what we're seeing is that By having more PEO revenue in the mix, it has a moderating impact on margins, and it's offset by other efficiencies in the business, which is why even though our PEO revenues are up as a percentage of total revenues for the year, you see that the impact actually year over year is not significant. The other thing I would point you to is that in Q3 we said that our EBITDA margin would be comparable to our operating margin, and that's exactly what we just stated. So I think it's consistent with what we've said before.

Fair enough. I wanted to ask you a broader kind of industry question about the PE market in terms of further consolidation. Just in terms of the industry, do you expect this market to kind of continue to consolidate? You've got another couple of good-sized players out there, probably a lot of smaller regional players as well. How do you see the market landscape changing? And then just a quick final bolt-on is what interest rate assumptions are you using for your float income growth guidance? And with that, I can hop back in the queue.

Okay. I'll take the PEO one. I think you will see some further consolidation, I think, As it becomes more competitive, you need to have the breadth of services and the relationships with the carriers to offer the best combination of product and service, the best technology from a mobile standpoint as well for the enrollment of the benefits. And you've got to have the experience to handle some of the pretty rapidly changing requirements from the state side and from the carriers on what the new insurance plans are, what the new rules are. And the HR piece of it is becoming even more important many times than the benefits themselves. So I think smaller players will continue to find it difficult to provide and compete in this environment. And certainly with our acquisition of Oasis, there's been a lot even more interest, I think, in in the consolidation and the growth in that market, which continues to grow very strong across the board. I think, as I noted and Efren mentioned, I think, as well, our growth in worksite employees was double digits, even without the OASIS acquisition. So we're very proud of the sales and the service that we're providing in the PEO market. And I'll turn it back to Efren on the interest rate.

Yeah, so Ramsey, in my comments I mentioned in the fourth quarter, our combined portfolios were 2.1%. You can see for the year we were 1.9% for the full year. So I would expect that when you look at the full year impact, we're going to tick up slightly from where we are in fourth quarter. We'll have a little bit of benefit from from balances that should be a bit higher than what we had this year, but it's modest. You can see in the guidance a 4% to 8% increase on interest on funds held for clients. We're being somewhat cautious on what we expect in terms of the portfolio.

That's perfect. Thanks so much.

Your next question comes from the line of Jim Schneider of Goldman Sachs.

Good morning. Thanks for taking my question. I may have missed the exact client count growth. You call it out in your prepared remarks. Can you maybe talk about within segments, small, you know, micro, small, and mid-market, kind of where you see the growth?

So, I think it's either on the – I think it's on the press release, and it's on our investor slide. So, We ended the year at about 670,000 clients. Last year we disclosed 650. We saw a lot of growth in the SMB segment of the market.

All right. Your next question comes from Jason Kupferberg of Bank of America.

Hey, good morning, guys. Good morning, Jason. I just want to start with a question on core payroll revenue growth, and thank you for the final quarter disclosure on that metric. I think it did slow a tick, a point down to 2% in Q4, and came in, I guess, 2% rounded for the full year. Was that effectively all pricing, and then would you expect to get a similar amount of pricing in fiscal 20?

Jason, I don't think it's slowed. I think what you're seeing is that we anniversary the acquisition of Lessor last year. So Q3 was a tick higher and it is very difficult, I would caution, to compare Q3 to Q4 now because Q3 has certain kinds of revenue that only occur in that quarter. So I think we ended up, we were pleased with where we ended up. We had client growth. We certainly saw some really robust results in parts of the market. Our internal sales were very good. Sure, payroll was at a really strong year. And we are positioned really well from a digital marketing standpoint and from an internal sales standpoint. So we feel really good about where we're exiting the year, and obviously we had client growth, which is the ultimate indicator of that.

And just anything on the pricing?

Look, pricing is a part of the equation. So you know, we would expect certainly that we can continue to get price and have never had an issue.

Yeah, we've had, especially when you think about the client retention at historic highs, we think the pricing has stuck, you know, very well, and we've been able to sell the value of not only the technology that we've been introducing and the mobile app and so forth, but the service as well. So I think, you know, still having the pricing in the same range we've been in the past It should absolutely be doable, and we should be able to retain and hold that pricing as well.

Okay, understood. And I just wanted to make sure I heard the comments properly around the float income forecast. I think you indicated you're not assuming any changes in Fed funds. I mean, obviously, the market's pricing in a high probability of that. next month. So I just wanted to make sure that you've still got the rule of thumb right on that. If I recall, a 25 basis point change in Fed funds is roughly a percent or so of net income. Does that still hold?

25 BIPs? No, that's not correct. So it's about a 25 BIP drop would result in an impact of about 3 to 4 million. So I haven't done the, maybe that equates to 1%. But But I would caution a little bit about that because one of the things that we looked at when we looked at the guidance was we have ways to adjust the duration of the portfolio to deal with changes and modest changes or declines during the year. So I wouldn't necessarily take that to the bank because we do have some things we can do if we see some modest decreases during the year. Okay. That's why we are conservative on the range we've provided.

Okay. And then just last one kind of on the macro front. I know you guys obviously have no client concentration, but just wanted to see if we can get an update on which parts of the economy these days you're most exposed to, you know, construction, manufacturing, service industries, restaurants, whatever it may be, just as people contemplate where the U.S. economy may be heading in the next, you know, 12 to 18 months, how we should be thinking about paychecks as exposures.

Yeah, I think we're pretty well spread across all of the different sectors, and I don't think we're seeing any big change in any of those. On our small business index that we put out for clients under 50, we're seeing kind of all sectors kind of hanging in there at the same. Manufacturing has been down, but it's about the same. And I would say still the strongest from an index perspective is those other services, discretionary services, uh, and those types of things that were pretty heavy. And so I would think that they're still doing pretty well. And, uh, you know, they're still, they're not necessarily growing, but they're, they're growing, but they're growing at a slower rate than they have in the past, but they're still growing. And I think the thing would be to watch, you know, some of the minimum wage increases and has that done anything? We haven't seen a big impact from those at this point. And, uh, and instead we're seeing sometimes more hours worked in general for those jobs. So I would say we're pretty spread out, and we don't see any major concern at this point. We're not seeing any signs of necessarily a slowdown. Still growth, a little slower growth than in the past, but that was some of the recovery as well.

Right, right. Okay, great caller. Thanks, guys.

Sure.

Your next question comes from the line of James Barkley of Wolf Research.

Thanks for the time. I appreciate it. Just wondering what you guys are seeing for bookings on the PEO side. Are you still trending low double-digit to low teens like you were last quarter? Any change in cadence there? Could you walk us through the workers' comp related impacts to you going forward or just how you're thinking about that in the quarters ahead?

Yeah, I would say on the PEO side, both existing client growth and worksite employees and the new sales have been very strong. As I mentioned, we're double-digit without the OASIS acquisition, and, of course, with that, even stronger in the double-digit side. So we're showing very good strength in worksite employees. We now, across PEO, ASO, all of our products, we serve more worksite employees than anyone else. And we're showing great solid growth there. As I mentioned, the need for HR and the benefits is so significant these days with the unemployment rate so low, particularly for small and mid-sized businesses. If they're going to attract... and retain people, they really need the benefit of good benefit plans and good HR, which includes training and developing their people, data analytics, all the things that we're providing now, learning management systems that give them free training, modules that they can use or develop their own. So I think we're going to see continued good, strong growth in the PEO side in particular, and of course our ASO side as well, if they don't necessarily want the PEO or don't qualify under underwriting. We take them through the insurance agency, which we're the 20th largest in the country, and that gives us a great out that even many other PEO competitors do not have in their favor. Do you want to talk about workers? Yeah.

So just to add some color on that, James, two of the strongest quarters from a bookings perspective in the entire company were PEO, which was very strong. and then a mid-market, which was very strong, too. So we had two parts of business that had very, very strong growth from a bookings perspective. On the workers' comp side, it was, as we called it, a soft quarter. We think that's going to persist for at least two or three quarters. That's built into our guidance. Rates have softened pretty significantly. It tempers. The growth of PEO, you can't see it as much because our PEO growth in the fourth quarter organically was in the upper teens, and so it's tempered a bit by the cyclical nature of the workers' comp market, which currently is soft, but we will see where we end up at the beginning of next year. There's a couple things that mask what is very, very strong performance on the PEO side, and we were very heartened also by strong performance in mid-market HCM.

That's good to hear. Just two more quick things I wanted to touch on, something that you guys mentioned. You talked about your payroll briefly, just saying you had a great year there and you expect it to do well going forward, I think. Can you just expand on that a little bit? And then secondly... The duration comment you made, I think your portfolio is around, like, 3.1 years or so. Like, what can you bring that to, and how would that impact the $3 million to $4 million you referenced? Just a little more color on how we should think about that.

Yeah, I'll lead with a sure payroll. Yeah, I think we have really mastered the handling demand generation. We've put a lot of investment in that from both sure payroll and Flex and Paychex Flex. And I think we've really done a great job as far as the investments in improving demand generation and nurturing, meaning including nurturing leads that were weaker leads in the past that we may have lost because they weren't ready to buy yet. But we've got a quite complex nurturing process now where we can reach out and continue to build the leads and get them when they're ready. Sure, payroll I think has been not only priced effectively but also through the demand generation getting a lot more leads and being able to close them and also allowing some self-service options. So allowing clients to kind of onboard themselves if they wish, which there's a lot more self-service options that prospects want now. They can go in, they can start. If they need help, we'll jump in and help them. But that whole self-service part of it is also another way of capturing a lead that was looking to get started right away and may have been difficult to reach if we call them back. So the whole change, the number of changes we've made in demand generation and handling telephonic sales, both here at Paychex and through Share Payroll have been very strong, and we expect that growth to continue. I think the product, the service, and the positioning of how we sell online and telephonically has become much stronger this year. Efren, you want to take that?

Yeah, you're right, James. So the duration of portfolios in the low threes, we could stretch that up to about 3.75 years of duration if we wanted to. We're obviously playing a number of those different variables across different scenarios. So that's why I think in response to Jason's question, actually maybe Ramsey and Jason's question, what we feel comfortable with is by setting the range where we are we will just see where the Fed ends up from a rate cut perspective, and then we can adjust the portfolio accordingly to not have a major impact.

Okay, great. Thank you very much.

Your next question comes from the line of Brian Keene of Deutsche Bank.

Hi, guys. Good morning. Just a couple of clarifications. On the payroll client growth of 3%, was that – in line with expectations, and how is that tracking historically, and should we just kind of model that same amount of growth going forward?

Every year is a little bit different, Brian. So I would say that what we say is that we expect payroll client growth to be in the 1% to 3% range. Last year we didn't hit that target. This year we were solidly within that. I would say that going forward we expect to be within that range.

Okay, helpful. And then thinking about the PEO insurance revenue growth, I know in the back half we're talking about 11% to 14% growth. I'm guessing the fourth quarter will be the strongest quarter, though, as some of the worker comp issues lap, and then what kind of growth rate should be a more normalized growth rate there once we get through the worker comp issue?

I'm going to hold off talking about it specifically because by the time we get to Q4, there will be lots of specific issues that are going to affect – could affect that growth number. So I'll hold off. I think what we're comfortable with is saying where we are at the second half. We'll update as we go through the year.

But the drag, primarily the drag out there in – kind of the second half is that workers' comp growth rate or just any other puts and takes. I know the business obviously outperformed growing 18. I think it was 18 to 20 was the guide for fiscal year 19 originally, and now that's a little bit of a lower growth rate, X that. So I'm just trying to make the delta change.

I get where you're going. I guess, Brian, what I'd say is that we should have anniversary – a lot of the impacts by fourth quarter, but I have no idea what the existing growth rate will be at that point in market growth rate, I should say, not ours. I know exactly what ours is. So I can't call that specifically. I think the fourth quarter will depend in large measure on how strong how strong we exit the year next year with PEO, with OASIS in the fold. So I think it's going to depend on that and also where we are with the workers' comp market. So there's still miles and miles to go before we get to Q4 of next year, but those will be the factors that will drive Q4 growth.

Okay. I got it. Just last question. It seems like that continues to move forward. and improve, you know, how much room is there still to go that you can improve client retention?

Hey, Brian, you cut out just at the very beginning of that. Could you just say that again?

Yeah, I just was asking about client retention. That seems like it's continued to improve and move the right direction. Just trying to figure out how much more room is there for that to improve as you guys go forward here.

Okay. Yeah, I think we're very pleased with what we've done. You know, we're at historic highs, so we'll always try to make that a little bit stronger. I think we're finding ways to service clients as they, you know, differently now as they want to be serviced a little bit differently. It's not all, you know, it's probably half of them that want that necessarily telephonic payroll, dedicated payroll specialist. So many more are calling in. So many more are using the app. the chatbots that we're doing for self-service. So it's putting us in a place that we haven't been before that could drive a little bit more improvement, but given the number of losses in small business, which is still a large majority of the clients, I'd have to say I do see some improvement, but it probably has some top level it can get to when you just have a large number, half of them or more, a little bit more than that, are just out of business. So it'll depend a little bit on, obviously, the economy as well. But those leaving for service, you know, price and those things, I think, can still get a little bit more of improvement out of it.

Okay, helpful. Thanks for taking the questions.

Perfect. Our next question comes from the line of Jeff Silber of BMO Capital Markets.

How are you doing? Thanks so much. Just had a couple modeling-related questions. I know you typically don't guide to free cash flow. Is there anything going on differently next year, or should we just kind of assume this typical conversion rate from EBITDA?

I think it's probably typical, Jeff. We also gave, I think, in the investor slides, we give you an update on the DNA for next year versus this year so you can calculate the incremental amount. I know you're big on those two numbers, and they're important. So they're in the slides there, but there should be no – significant changes in terms of conversion.

All right, great. You caught me on that, Efren.

Thanks. All right. You caught me.

No worries. And then also just a minor one. You gave us some color on the cadence quarterly. I do appreciate that. Is there any specific impact from a margin perspective quarterly and also from a tax perspective quarterly?

No. Well, I mean, from a net perspective, there's some impact. When you work through the model of what I said, where the first half is 3%, and I called out Q1, 1 to 2, and then in the back half. So from a net perspective, obviously in the back half what you're seeing is higher margins. But part of it is, too – that partly due to ASC 606, we're more heavily back half-weighted than we used to be before. And so if you look at our expenses and you assume that there's not big changes quarter over quarter in our expenses, what you see is that the flow-through of the incremental revenue drives higher income in the back half of the year. That's what you're seeing.

Okay. That's actually helpful. Thank you so much. Okay.

Your next question comes from the line of Karthik Mehta of North Coast Research.

Hey, good morning, Marty and Efren. How are you?

Good. How are you doing?

Good. Hey, Marty, I wanted to ask a little bit about the PO business and OASIS. You talked about investment both in sales and technology, and I'm wondering what kind of growth you are anticipating next year for the OASIS sales force, and just from a technology standpoint, is that just that you're going to have a more robust mobile offering, or are there other investments that you're making in the business?

Yeah, I think, Kurt, what you'll see, and we've already been doing some of this, is linking them to our products. So Oasis already now is linked to our time and attendance product. They're linked better to our interfacing with our 401K and our retirement services product. You know, these are things that that sales force has not had before. They also have the opportunity to use our insurance agency, which they didn't have before. So if they didn't fit as a PEO, the underwriting didn't fit primarily, they couldn't necessarily take them for insurance, for the insurance products. And now they can run those through our insurance agency. We're just kind of working through all of the sales teams, but we have all of the leadership team now in place for a number of months, for probably a quarter. And they're working through combining all of the sales processes and compensation plans and directions. And so they'll have more products to offer. They'll have insurance, the insurance agencies to support them. And they'll certainly have all of the tools available. with Salesforce and the level of technology that we use for our sales teams to track the leads and referrals, et cetera. So we're feeling that we're pretty solid coming into this fiscal year as we start this month with Oasis and our PEO teams really combined, and underwriting as well, all kind of combined and streamlined so that they're going to have a lot more to offer.

And, Marnie, I think you talked about maybe changing of how you're obtaining clients in the sense that I mean, I don't know if you use this word or not, but inside sales. And is that – I guess how has over the last six to 12 months changed as to how you're obtaining clients versus just a sales force that knocks on doors versus somebody that's inside?

Yeah, the inside sales are telephonic sales here from a paycheck standpoint. has continued to increase their production, their double-digit growth over last year. We're also introducing and trialing some self-service, and really through Sure Peril, who has had that now for most of this year now, you're seeing that One, the leads come in, and they can either be addressed immediately by either the field or telephonically, depending kind of on the size and what they're looking for. If they're directly referred to by a CPA who is tied to our field sales rep, we'll get them right to the field sales rep immediately, and they'll address it. If they'd rather just deal with something on the phone, do a demo over online, and then close on the sale right there and have it – you know, implemented, we'll do that. And now we're moving, you're going to see us moving toward a self-service option as well that your payroll has and has been working very effectively. One of the biggest issues with telephonic sales and leads, frankly, coming in is that once you have the lead where someone's been interested, they've filled out a form, you can't get back a hold of the prospect because nobody answers their phone anymore. So... So what we're doing is by allowing self-service where the client can actually get started and set themselves up, if they have an issue, then we can talk to them. But they've already started by almost completing the sale by starting to set up themselves, which they'd like to do immediately. So that is also really important. It turned out very well for us, and we're seeing a lot of good leads there for sure. The field is still very important to us, particularly from a channel development. We still continue to be a leader, I think, in the CPA referral market, in current client referrals, and that's done very strongly by the field, and they'll continue to concentrate on that. But as more of the small, the brand-new businesses start up and they come in through the web, the deal is how fast can you handle them and they're certainly fine with handling it over the phone or setting it up themselves.

And then just one last question, Efren. Obviously, the balance sheet, you know, if other acquisition opportunities happen to come up, you know, what's the comfort level in terms of leverage for the company today?

Well, it's hard to go. Right now, as we end the year, we're at zero net debt. Right. So we certainly have the ability to get more leverage or be more levered if we want to. Yeah, I don't think there's a specific number. We're going to be conservative about it, obviously. You know, a turn and a half of EBITDA, that starts to get a little bit higher in the range. Would we go higher? It would really depend on whether we thought an acquisition was strategic or not. So I think it depends on the opportunity. You know, OASIS, we used cash on hand. We borrowed $800 million. OASIS is going to be cash accretive. We have the capability of doing the right kind of targeted acquisitions to be more acquisitive, and it will depend on whether the size of the acquisition and how strategic the opportunity is.

Thank you, gentlemen. I appreciate it.

Your next question comes from the line of David Grossman of Stiefel.

Good morning. Thank you. Sorry to go back to the growth of the PEO, but I guess I'm just having a little trouble following the math. So perhaps you could go back and reconcile the organic growth of the PO in the fourth quarter, which I think you said was about 10%, with the high-teens growth for the year, and then the guide of 11 to 14 in the back half of the year next year, which presumably is an organic number when you lap the comparison. I know workers' comps a little bit of that. So if you could just maybe deconstruct that for us.

So now you started with a faulty premise. You said that PEO was 10%. PEO was not 10%. PEO and insurance was 10% in the quarter. PEO, as I mentioned to you before, if we isolate it, was upper teens, number one. Worksite growth, worksite employee growth was, again, double-digit. We didn't disclose an exact number, but you can see from the growth in worksite employees that Marty mentioned cited we're up to 1.5 million of worksite employees serviced across our ASO and our PEO that we had nice growth. So we had really good bookings growth organically on the PEO. The PEO at the end of the year organically was growing in the upper teens. And then in the back half of next year, we're calling out 11% to 14% once we anniversary oasis. And what's going on there is that there's a drag from workers' comp that's impacting that number. So if there were no workers' comp, the number would be higher based on where we anticipate things will be as we get to the third and fourth quarter of next year. So hopefully that... Right.

So I'm sorry. So you were high teens, TEO growth in the fourth quarter, and you were high teens for the year. Is that it?

I think it's called out either in one of the slides or I called it out in my comments, but our PEO growth for the year was 19%. Got it.

Sorry about that.

Thank you for that clarification. It's always important to remember that PEO and insurance has a paychecks insurance agency, and we're battling a bit of a drag on the workers' comp side that we will battle into next year. But we're obviously showing some pretty good underlying growth.

Right, right. And then just there was a comment, I think, Marty, you made about the integration with the carriers as it relates to OASIS. So perhaps you could just give us a little bit more color on kind of where you are in that process and And how much incremental geographic reach you're getting as a result of that as you try to convert the payroll install base?

Sure, David. There's really two pieces of that. Well, first of all, I'll say I think we're in good shape. We're in the middle of that now, but have been already working through it, particularly the last few months. So, one, there's geographic growth because they were in some states and areas that we weren't, so they had relationships there. there and already had some clients that we could gain referrals from. From the carriers, they were stronger with one particular carrier that we have not been quite as strong with. That gave us a little bit more leverage. When you put us together, now we have more strength and more clout with all the carriers that we're involved with. So we think we've got very good plans between the two of us going forward into fiscal 20 and those roll out kind of through the year and so that gives us a better also when you have more more cloud I guess or more clients obviously we will have better integration with those carriers as well so I think we're set up well with the number of carriers the plans and and the integration with them so it's going to give us an expansion into A few more states that we're not in, but better than that, a little bit stronger carrier relations for the best benefit plans, which is one of the most important things to have as you go out and compete.

Right. So as you look at kind of the geographic template with Oasis, do you think you've got pretty much solid coverage across the overlap with your installed base of payroll customers?

Yeah, we certainly do. Particularly, I wouldn't say it covers the whole map by any means, but it covers those states that particularly have an interest in PEO. And I don't mean just the Georgia, Florida, Texas, California kind of thing. It's going into more states as we expanded. But it definitely picked up. I think they were in 14 different states. So we definitely picked up more states where there is more interest in PEO. So it expanded significantly. where we were from that standpoint. And again, as I mentioned earlier, we're already integrating them with some of our products that they didn't have to offer as well. So not only do you get caught with the carriers and the benefit plans that they can offer, but also now they can more easily sell time and attendance that's integrated, 401K that's integrated, and they have our insurance agency to back them up if there's a client we don't want to underwrite.

Hey, David, one other thing I would say, I want to make sure that it's not implicit in your in the assumption in your question. PEO is probably unique among the products that we sell in that a significant amount of the sales come from outside the paychecks client base. So if you take HROI and OASIS, you now have access to clients that are outside of the paychecks traditional client base. So our expectations about growth in PEO are not solely based on the upsell of existing paychecks clients. They're based on going out and getting new, brand new to paychecks clients in PEO. So it's a mixture of both. So when we talk geographic coverage, not just the base, it's also being in those geographies in a more concentrated way.

Okay, got it. Very helpful. Thank you.

Okay, David.

Our next question comes from the line of Lisa Ellis of Moffitt Nathanson.

Hi. Good morning, guys. Can you talk a little bit about the investment-focused areas for 2020? I mean, you've had terrific success now with the digital marketing initiatives, sales initiatives, et cetera. You've got client base up, retention up. As you're looking out into 2020, what's the next wave of investment areas?

Yeah, I think it continues to be in the innovation of the products and adding, you know, about every six weeks we're adding additional feature and functionality to the payroll products and particularly the HR side of the business, whether it's learning management, whether it's a partnership with, you know, let me stick with the products for a second. I don't want to go to partnership. But with the products like learning management, data analytics, I think you'll see also we're continuing to invest in the chatbot and artificial intelligence that we're using. We're seeing that to be a big help from the service perspective and also on the mobile app. So we're continuing to make things simple for clients and their employees. You know, 70% of our mobile app usage is employees of our clients. And what we're finding is things like when we make it easy to enroll in 401K, they can do it in four clicks now versus... the paperwork and the passing of the paperwork to the client and to us and back and forth that participant rate is already going up and those who are signing up for the 401k that leads to better client retention because they now pass all the compliance tests and they have their employees that are happy with their retirement plans and gives them better retention so The investment will be to continue to make things simple from the mobile app side, from the client-employee side. Self-service is going to be – it just continues to be very important, right from initially signing up right through to setting up everything for yourself. There's a whole wave – these days, of clients and their employees wanting to do things themselves when they want to do it. So you've got to make everything simple. Luckily, our investments very long ago started to be our development was mobile first, meaning everything is made, designed simple for the mobile app, and then can expand for your desktop as you need it. So a big thing there. Partnerships will be, again, we have the only large partnership that's been announced with Indeed. We are out there providing a connection directly to Flex with basically the push of a tile or a button that will get you to Indeed and help you post a job. Critically important right now in this low unemployment area. These are partnerships that we haven't necessarily done before and we're being much more aggressive in trying to partner with what the needs of the client have been. We're very pleased with the investments in artificial intelligence and chatbots. You know, what that also, I didn't even mention, has done for service. Now we're taking, I mean, 60% of the service requests coming in on a chatbot are handled by that, or coming in online are being handled by that chatbot. That's freeing up our personnel for much more complicated questions and for more clients that they can handle. So it's really helping us from a service perspective as well.

Terrific. Thank you. Efren, I have just my follow-up, a sort of back-to-basics question on the PEO and ASO business because you've mentioned a few times now your insurance agency. Can you just remind us when and what types of clients you will take on the underlying actuarial risk? And then I guess I always thought that you reinsure that. So can you just clarify that? you know, sort of in what situations are, you know, does the client end up entering the PEO versus end up using your insurance agency potentially? And, like, what differentiates those two? And sort of how does it impact your economics?

Yeah, so just the 120-second flyover. On workers' comp, I'm going to say between 60% and 65% of all clients in PEO end up being underwritten by PEO. by paychecks and then we set reserves and have reinsurance above certain levels have been doing that for more than two decades without any issues we look at that very very closely so then you say well what happens to the other third well there's certain clients that you don't want to underwrite workers comp or we have the unique advantage of having a insurance agency right next door so we will we will place those clients with Paychex Insurance Agency. And one of the things that we found this year that was really a help was that by creating more of a tight linkage between the PEO and the insurance agency, it's now much more seamless to say to a client that otherwise we would not do workers' comp to simply refer them to the agency to see if they can get a policy placed. That's been a a big plus and a big hit with our sales force too. On the healthcare side, it's primarily a state of Florida issue. There's a little bit of other risk we take, and that's just a function of the concentration of clients that we have in Florida. We have an MPP plan. We do insurance with the Blues of Florida that gives access to a much broader network to a broader network of healthcare providers. And again, we look at the projected MLRs or medical loss ratios for the pool. We adjust the reserves appropriately and above a certain amount. We re-insure that risk. So that's basically what we're doing. More limited risk taking on the healthcare side. We take some risk on workers' comp, reinsure it, and then are very strict about who we let into the pool in either case and refer other clients. By the way, I said workers' comp in terms of insurance referrals. We also refer for health care to our agency. So we've got flexibility, and this helps us kind of protect the quality of the pool and workers' comp and in health care.

Terrific. Thank you. Super helpful. Your next question comes from the line of Kevin McVeigh of Credit Suisse.

Great, thanks. Hey, so I know you mentioned a couple of times on the retention that you're bumping up against historical levels, but if you think about the investments you've made, the kind of diversification into PEO, is it, you know, what's the probability we enter a new range on that? And I guess, Marty, can you remind us kind of where we are, where that number is today, and if it is, in fact, the case that we can kind of reset that range? What's a better way to think about that? And then just what's the sensitivity to 100 basis points in terms of revenue?

Yeah, I'll start with it's a little stronger than 82% on the client retention, the way we look at it. I think it's a little bit better than that from a revenue perspective. We don't typically give that, but it's better than that. So our historic high has been right around that 82%. Now, when you think about, as I said, you know, Kevin, earlier, when you think about losses for the small business side, it's pretty tough to get a lot better than that because small businesses just start up and go out of business, and obviously we've been able to handle that very effectively and profitably. But I think we'll look through the investments that I just talked about on Lisa's question. When you think about the investments in small, and artificial intelligence and responding to clients even quicker. Is there something there? Not to mention we've done a lot of investment in data analytics and knowing models of which clients are most likely to leave us, and then we approach them kind of proactively through a retention team I think all of that and the great service, which we are at historic highs for our net promoter score as well, I think are all benefiting that, getting us to the best. So do I think we can do a little bit better than that? I think so, but I just think it does have a top limit because of just the number of out-of-businesses that happen in the small business market.

Understood. And then just real quick, I know obviously we've taken about 200 base points of investment, put it back into the business. but you've shifted a lot of the capacity of the cloud. So just trying to get a sense, where are we in that cloud evolution, number one, and then just obviously there's a certain amount of margin benefit from that as well. I guess twofold, when do some of those investments run off, and then what's the uplift on the margin as the capacity is done through the cloud as opposed to the traditional service?

Yeah, I think, you know, pretty much you could say everything is pretty much in the cloud now, the way the clients approach us and where our services are. I mean, everything is software as a service and everything is built, as I said, mobile first. Everything is. is available that way. I think some of the additional investments that we've made and talked about will start to run off at the end of this year. We made an investment and a very deliberate investment to speed up some of the product development that we could see ourselves doing in the future and said to take advantage of the tax savings to instead of just run it all to the bottom line in a one-time kind of fashion, hey, let's put some of this to accelerate the product development. We've been very happy with that. Obviously, it's driven the best client satisfaction and retention scores. It's improved our sales. Overall, our power growth is the best it's been in three years from a sales perspective. So we're feeling like the right investments were put in place for sales, for telephonic sales, for demand generation through marketing. and through IT, but some of that through the IT will start to come off toward the back of the year. I don't think we've given, hey, what that will do necessarily to margins or probably will at this point, but it will roll off. Some of that will go back down to a little bit less investment, normalized investment toward the end of this fiscal year.

Yeah. Hey, Kevin, one other thing. To answer that question qualitatively, as Marty said, the investment's start to roll off as we exit this year, which is what we had said before. At that point, in the absence of any change in the mix of the business, you would expect operating margins now to start to float back up. The only caveat that I've said when I get asked on that question is, what is the growth of the PEO? Because the PEO has a moderating impact on margins. Now, the offset to that would be faster revenue growth potentially But I would say as we go through the year, we'll have a better sense of kind of what the overall margin uplift, underlying margin uplift excluding PEO is going to go up. PEO will have an impact, though, overall depending on mix.

Got it. And then, Efren, if I could real quick, are you kind of where you are from a headcount perspective or would there be some more optimization based on how the capacity sits?

You mean just in general or are you specific to anything?

I would say just either, however you want to answer that.

I think we've got a history of being very profitable and making sure that we keep our costs low. I think we continue to always look for leverage. As Efren said, the change in the margins is have been mostly because of the PEO business and the way that that hits your financials, drives a lot of revenue, but also has higher expenses and brings the kind of margin percent down. I think we're always looking for ways to continue to leverage, and I think the investments we've made, again, back to when you think about artificial intelligence and chatbots and so forth, answering 60%, 70% of the questions, we certainly are looking to continue to drive some headcount down where it's not needed. But we've also been very good at then reinvesting that headcount where it is needed. So for years we've taken – headcount out of operations where we got more efficient and put it into technology where we knew the market was going. So I'm not sure headcount itself. It'll all depend on where the growth is. And, of course, we've grown headcount really because of the growth in the business, not necessarily. We've never really deleveraged from a headcount perspective in my at least 15 years. We've always driven headcount down but may have invested that somewhere else.

Awesome. Thank you all.

Your next question comes from the line of Tenjin Wong of J.P. Morgan.

Hey, good morning. Just a quick question on retention. You had a lot of good questions there already, but just on OASIS specifically, do you have a pretty good line of sight now on the retention there in the initial period? And I can't remember if you've said that there's an opportunity to maybe improve retention there once you apply the Maybe the paycheck's way there or not.

Yeah, no, we really haven't broken that out. I think we have a pretty good line of sight that it's been pretty solid. We had no surprises whatsoever, which is always good on an acquisition. I think they've done a good job on the service side and selling to the right clients. We have not seen any fallout from insurance plan changes or anything else at this point. So I think the retention has been solid, and, you know, we're always looking for ways to improve it. But we certainly did not have any surprises, and we're very satisfied with where they are in retention.

All right, very good. That's all I have. Thank you.

Okay, thanks.

Our next question comes from the line of Samad Samana of Jefferies.

Hi, thanks for taking my question. So, Marty, based on your commentary, it looks like retention was up 100 basis points. It was 81% in last year's. and you mentioned it's over 82% this fiscal year that just ended. So I'm curious, what did gross new customer ads grow in fiscal 19 versus fiscal 18? I'm just trying to parse how much of that 3.1% total customer growth was driven by the improvement in gross retention versus new customer ads.

Yeah, it's a mix of both. We don't break it out, and we don't give that level of detail. But certainly the overall growth of clients was a benefit of both good sales results and a little bit better retention. Just that improvement in retention alone on the payroll side would not have made that total difference there.

Great. Thanks for taking my question. Okay.

Your next question comes from the line of Mark Marcon of Baird.

Good morning, Marty and Efren. I was wondering, you mentioned that in the mid-market you ended up seeing good growth. And I'm wondering specifically, were there some new additions to the overall bundle that's driving that? What's the primary driver, do you think, of the improvement there? And I'll leave it there for now.

I think a couple of things. One, I think certainly the product adjustments that were the product enhancements that we've made, so adding data analytics, adding a new HR center, what we call HR center, gives performance management support. Also, I didn't mention it, the learning management. So everything that's needed this year from a recruiting standpoint, training, personnel development that clients have been looking for, prospects are looking for, we have added and made it much stronger. And so I think from a product set, that's very good. From a sales perspective, I think the approach of going totally with HR and the HR needs has been very strong as well. So I think the approach of selling HR and approaching the client from their total HR needs has been strong, and sales are up, probably the best growth we've seen, again, in three years in the mid-market, and we seem to be on a good path to start the new fiscal year as well.

That's great. And then any change in terms of the profile of those mid-market clients in terms of who you're winning them from or what sort of systems they had in place previously?

No, I don't think so. I think... I think from any of the competitors, I think we're doing pretty well. It's been pretty consistent. I think we're obviously winning a few more, I think, than we were. And I think that's, again, the sales execution is stronger, the sales training is stronger, and the product itself is stronger. So we're pretty pleased with the momentum we're seeing in the mid-market. And I wouldn't say it's from any one competitor. I think we're doing pretty well against all of them when you compare it historically.

Great. And then With regards to the improvements that you've made, it's been a very short period of time, but you've already ramped up in terms of the chatbots and the ability to answer questions, and you're getting the 60% to 70% of them now. Where do you think that goes in a couple of years?

I think, I mean, based on the improvements so far and what I read when you research this kind of approach, you know, around the country, I would think you could get up to 75%, maybe even 80%. You know, and it's so easy. Well, I think it's easy, but our development team might not. But you can be so responsive to the feedback of seeing if the question was answered or not that you get so much better about refining the questions that they're being able to read the questions they're asking and respond to that. But I definitely think it could get up into the 75% range anyway, maybe even 80.

And you're directly tying the improvement in terms of the client retention and the client satisfaction scores to people who utilize the chatbot or are being serviced by it?

I wouldn't say it's that direct yet. I don't have it that specific, but I think it certainly is part of it. I mean, we really ramped that up this year, and obviously we've seen good satisfaction, and we get good results. You know, we always ask the client after they've received their answer, did this satisfy, you know, what you were looking for, and we're getting very good feedback on that and very good results. So it certainly, I think, has helped in the client satisfaction, but I think primarily the satisfaction is, has been on the product, the ability of the product to serve the client, the ease of use of the product, and the great personalized service that we're providing.

Great. And then with regards to the self-implementation on the small end, and I know it's really early days, but are you seeing any sort of, and it may be too early to tell, but is there any difference in terms of the client retention level that you see from clients that are willing to self-implement?

I think it's a little early to really have enough data there. But, you know, what you do see is typically clients who set themselves up historically, even in a small sample, are more likely to be retained because they feel like it was their fault that there was a problem because they set themselves up, and therefore they own it a little bit more and they're a little more tolerant of giving us a chance to help fix the issue that they may have created.

Got it. Great. And then lastly, just workers' comp for next year and how we should think about insurance services. I'm not talking about the next fiscal year beyond the one that you've already guided for, but for the second half when we go into the new calendar year, are you assuming that workers' comp rates are going to be down 15% to 25% in terms of your overall assumption? And then within PEO and insurance, where are you expecting the insurance part to be down?

Okay, so that's a compound question. It's got two pieces to it. So let me just parse them. So with respect to workers' comp, the workers' comp I'm talking about is not workers' comp that has anything to do with the PEO. So ignore that. Take that out of your mind.

I've got that in my mind. Okay.

It was purely the workers' comp, the workers' comp, yeah, paychecks workers' comp. So I would say, Mark, I don't know in the back half specifically how much we have it down, but certainly in the first half, we declined pretty significantly versus first half of last year, and then it starts to moderate. That decline starts to moderate in the back half of the year because we started to experience the declines in workers' comp heavily in third and fourth quarter. So I think it moderates as we go through the year. I would not expect to be 15% to 20% down in fourth quarter. Again, that's way too much. I would think we're getting closer to kind of flat or maybe even slightly above by the time we get to two-four, just because we're anniversaring some sharp declines in the back half of the year.

And then just for the insurance services revenue for the year?

Insurance in total, no, because health and benefits is growing nicely. I actually had a good quarter revenue-wise for health and benefits. This is, again, health insurance as opposed to paychecks clients. That's growing nicely at upper single digits. And, you know, we'd expect that to continue to grow nicely through the balance of the year.

Okay, great. Thank you.

Thanks, Mark.

Your final question comes from the line of James Fawcett of Morgan Stanley.

Hi, good morning. It's Stephen Wald on for James. Just maybe one quick one following up on the margin discussion. I think you said all of us equal past sort of 2020 results with OASIS expected. the margin to sort of float up. I think on the last call you guys talked about expecting year-over-year EBITDA margin improvement in 2021. Could you speak to whether that's still your expectation and also maybe sort of if the okay times or good times, however you want to call it, continue what the sort of upper limit is on the EBITDA or operating margin?

Yeah, I'll answer the first and can't answer yet the second. I think we need to have a full year of OASIS under our belt and understand what the behavior of costs is in the business, we understand what it will be in 21. We would expect EBITDA margin to float up in 21. There's many reasons for that, but I think that we should see some improvement on EBITDA margin. What is the ceiling of that? A little bit early to say at this point. We'll have a better sense as we go through the year.

Okay, thanks.

Okay.

Thank you. I'll now return the call to Mr. Musi for any additional or closing remarks.

Thank you. And at this point, we'll close the call. If you're interested in replaying the webcast of the conference call, it will be archived for approximately 30 days. Thank you for taking the time to participate in our fourth quarter press release conference call and for your interest in paychecks. Have a great day.

Thank you. That does conclude the Paychecks Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. You may now disconnect.