Paychex, Inc.

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good day, everyone, and welcome to the Paycheck Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your touchstone phone. You may withdraw yourself from the queue by pressing star two. Please note, this call will be recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. John Gibson, President and CEO. Please go ahead, sir.

John Gibson, President and CEO, Thanks, Chad. Good morning, everyone. Thank you for joining us for our discussion of the Paycheck Second Quarter Fiscal Year 23 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 second quarter into November 30th. You can access our earnings release on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next day. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days. We'll start the call with an update on the business for the second quarter And then Efren will review our financial results and outlook for fiscal year 23. We'll then open it up to your questions. We delivered solid financial results for the second quarter with total revenue of 7% and adjusted diluted earnings per share growth of nine. Demand for our comprehensive solution suite remains strong and we are well positioned to help our clients succeed. Our unique combination of leading HR technology, HR expertise, and the wide breadth of solutions we have to address the many needs in the marketplace continue to help small and mid-sized businesses navigate this very dynamic and challenging environment. We continue to closely monitor the macroeconomic environment and our internal leading indicators. The latest findings from our Paychex IHS Small Business Employment Watch revealed moderating growth in jobs and steady growth in wages. Our clients continue to be challenged by the continuing impacts of the pandemic, inflationary pressures, and the challenges of this labor market. However, small and mid-sized businesses continue to show their resilience. Our revenue retention remains solid as we focus on retaining clients and driving increased value and penetration of our HR outsourcing, HCM software, and retirement solutions. Our overall HR outsourcing business continues to perform well with strong growth in worksite employees and record revenue retention. We achieved a major milestone this quarter. We now serve over 2 million worksite employees across our ASO and PO business, clearly establishing us as a HR leader. Our industry-leading HR advisory services sets us apart. and our certified HR professionals are truly a unique asset as they're advising our clients on HR issues as well as leveraging our HR technology and the analytics from our vast SMB data set to help our clients achieve greater operational efficiency, increase employee engagement, and reduce turnover. While demand for our technology and HR outsourcing solutions remain strong, We continue to see shifts in what offerings clients find are the best fit for their current situation. Both early and during the pandemic, we saw lower demand for adding employer health benefits. We continue to see this trend and also high demand for our ASO solutions driven by businesses seeking immediate assistance with HR issues and filing for tax credits, but delaying decisions on adding or changing their insurance offering to their employees. In addition, the lower medical plan sales and participant volumes in our health and benefits area of our insurance agency that we discussed last quarter continued in the second quarter, and we saw some similar trends in our Florida at-risk insurance program in the PO, impacting revenue growth in that area of the business. Awareness and demand of our Employee Retention Tax Credit, or ERTC, service which helps clients maximize eligible tax credits continues to grow. To date, we've helped more than 50,000 clients secure billions in ERTC. A recent survey actually showed just 63% of business, that 63% of business owners didn't even know that they were eligible for these credits. We continue to educate existing clients of the benefits as well as leverage this service to attract new clients. We continue to invest and enhance our product suite and customer experiences. In November, we released our enhancements to Paychex Flex, focused on further streamlining the recruiting, onboarding, time and attendance, and benefits administration experiences. Through our HR technology, three out of four Paychex clients surveyed have shortened the time required from recruiting, screening, tracking, and onboarding new employees. Those clients reported an average time savings of 26%, indicating that the typical two-month recruiting cycle has now been reduced to just six. I'm very excited about our retention insights offering, which continues to deliver strong results for our clients at a time when businesses remain committed to retaining their existing staff. This feature uses predictive analytics coupled with our vast data sets to provide insights on potential employee flight risk. Clients leveraging the retention insights offering are showing a 15% reduction in turnover when compared against their industry peers. We're very pleased we received the Bronze Brandon Hall Group Excellence Award for Best Advance in HR Predictive Analytics Technology for this solution. This is the 10th consecutive year they've recognized us. During the quarter, we also were recognized with the IDC 2022 SAS Customer Service Satisfaction Award for Core HR. We are honored to have received this award as another confirmation of the power of our HR technology and the quality of our advisory services. These awards continue to validate that Paychex is a technology leader and that our focus on HR is delivering real impact for our clients and their employees. At this time, we're heading into our critical year-end season. We are fully staffed in both sales and service, and we have good momentum. I want to thank all the employees in advance for all their hard work and dedication in making this the best year-end ever. Now I'll turn it over to Efren, who will take you through our financial results for the second quarter.

Efren? Thanks, John, and good morning. I'd like to remind everyone that today's commentary will contain forward-looking statements. that refer to future events, you know the customary comments. Take a look on our press release if you have any questions on that. Let me start by providing some of the key points for the quarter, and then I'll finish with a review of our fiscal 2023 outlook. Both service revenue and total revenue increased 7% to $1.2 billion. Management solutions revenue increased 8%. to 895 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 ERTC and price realization. We continue to see strong attachment of our HR solutions, retirement, and time and attendance solutions. I will note that revenue from our ERTC service benefited second quarter revenue growth by approximately 1%. We anticipated ERTC revenue would moderate in fiscal 2023, but strong demand and execution have led to better than expected results. While ERTC was a tailwind to management solutions growth for the first half, it will become a moderate headwind in the second half. PO and insurance Solutions revenue increased 4% to $273 million, driven by growth in average worksite employees and revenue per client. The rate of growth was tempered by the impact of factors John previously discussed, including lower medical plan attachment and participant volumes, along with a mixed shift to ASO. And I would just note on PEO and insurance solutions, Insurance Solutions was significantly below the growth rate of PEO. Interest on funds held for clients increased 54% for the quarter to $22 million, primarily due to higher average interest rates along with growth in investment balances. Total expenses increased 7% to $718 million. Expense growth was largely attributable to higher headcount, wage rates, and general costs to support the growth of our business. Operating income increased 7% to $472 million with an operating margin of 39.7% in line with the prior year period. Our effective tax rate for the quarter was 24.2% compared to 24.1% in the prior year period. Net income increased 8% to $360 million, and diluted earnings per share increased 9% to $0.99 per share. Adjusted net income and adjusted diluted earnings per share both increased 9% from the quarter to $359 million and $0.99 per share, respectively. Quick summary of year-to-date financial results. Total service revenue and total revenue both increased 9% to $2.4 billion. Management solutions increased 10% to $1.8 billion. PEO and insurance solutions increased 6% to $556 million. Op income increased 10% with a margin of 40.4% with modest expansion year over year. And adjusted net income and adjusted diluted earnings per share both increased 12% to $731 million and $2.02 per share. Let's look at our financial position. It's strong with cash, restricted cash, and total corporate investments of more than $1.3 billion and total borrowings of approximately $808 million as of November 30, 2022. Cash flow from operations increased and was $686 million for the first half of fiscal 2023. And this was driven by higher net income and changes in working capital. We paid out quarterly dividends at 79 cents per share for a total of $569 million during the first half of 2023. Our 12-month rolling return on equity was an absolutely stellar 46%. Now, I'll turn to the guidance for the current fiscal year ending May 31, 2023. Our current outlook incorporates our first half results, obviously, and our view of the evolving macroeconomic environment. We have raised guidance in many areas, but moderated the range for PEO and insurance solutions based on factors previously discussed. Updated guidance is as follows. Management solutions revenue expected to grow in the range of 7% to 8%. PEO and insurance solutions expected to grow in the range of 5% to 7%. Interest on funds held for clients is expected to be in the range of 100 to 110 million. Total revenue is expected to grow approximately 8%. Other income slash expense net, and I just remind you that the net of our debt service plus earnings on our corporate portfolios, that number is now expected to be income of 5 to 10 million. Adjusted diluted earnings per share is now expected to grow in the range of 12% to 14%. Guidance for margins and effective tax rate are unchanged, although we do anticipate leaning towards the upper end of the range on operating margin and the lower end of the range on effective tax rate. Turning to the third quarter, we currently anticipate that total revenue growth will be approximately 6% and that operating margin in the third quarter will be in the range of 43 to 44%. Of course, all of this is subject to our current assumptions which could change if there are changes in the macro environment. We will update you again on the third quarter call and I will refer you to our investor slides on the website for more information. I'll now turn the call back over to John.