Paychex, Inc.

and welcome to the second quarter fiscal 2025 paycheck earnings conference call. Participating on the call today are John Gibson and Bob Schrader. After the speakers opening remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star than the number one on your telephone keypad. If you would like to withdraw your question, please press star two on your telephone keypad. As a reminder, this conference is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. I would now like to turn the call over to Bob Schrader, Chief Financial Officer. Please go ahead.

Thank you for joining us for our review of the Paycheck Second Quarter 2025 financial results. Joining me today is John Gibson, our Chief Executive Officer. This morning before the market opened, we released our financial results for the quarter ended November 30th, 2024. You can access our earnings release and investor presentation on the SEC's website as well as on our investor relations website. Our form 10Q will be filed with the SEC within the next couple of days. This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days. Today's call will contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference some non-GAAP financial measures. A description of these items along with the reconciliation of the non-GAAP measures can be found in our earnings release. I will now turn the call over to John.

Thanks, Bob. I will start today's call with an update on the business highlights for the second quarter and then I'll turn it back to Bob for a financial update and then of course we'll open it up for your questions. We delivered solid results in the second quarter and the first half of the fiscal year. Excluding the impact of the expiration of the ERTC program, revenue growth was 7% in the second quarter as we continued to deliver a comprehensive suite of HCM solutions that help businesses solve real problems. Deluded earnings per share growth was 6% as we continually find ways to operate the company more efficiently while also enhancing the value proposition that we offer our customers. The demand for our HR technology and advisory solutions remains healthy as we head into the key selling season. A challenging labor market and rising healthcare and benefits costs are forcing many small businesses to reevaluate their HR strategies and technology needs and they can rely on paychecks to help them succeed. Our sales activities and pipelines are strong, most notably in our PO and middle market HCM businesses where we have invested, as you know, to take advantage of the growth opportunities we see in these attractive markets and where we believe our breadth of solutions provide us with a competitive advantage. We are fully staffed across our sales and service teams for this critical time of year. We are also investing in advertising to drive improved awareness and adoption of our expended product offerings. Our PO business continues to perform exceptionally well, driven by our robust value proposition as evidenced by solid work site employee growth due to strong sales performance, record levels of retention, and higher overall insurance enrollment. While the underlying business is strong in our attachment and participation levels in our health plans across the country increased mid single digits, enrollment in our Florida at-risk medical plan was flat year over year. We also saw more employees opting for lower cost health plans in light of rising healthcare costs. These factors create a headwind to our pass-through revenue but have no impact to our earnings or the strength of our PO value proposition. Our revenue retention improved during the past year and remains above pre-pandemic levels as we continue to remain disciplined on acquiring and retaining high value clients. Client retention has improved since last year and retention in our HR outsourcing solutions remain near record levels. Client losses are down over the past year with improvements across all our employee site segments. Our continued strong retention in a highly competitive marketplace speaks to the hard work and execution of our service teams and the strength of our value proposition. The pace of US job growth has moderated over the past year and overall customer employment levels have remained consistent with our expectations. Small and mid-sized businesses remain resilient and are generally optimistic as we head into a new year with hiring intentions in November rebounding to the highest level since last November. We continue to make investment in our product suite to help our customers solve their biggest problems. In October we announced the Paychex Recruiting Copilot, a digitally AI-powered solution designed to help clients proactively find talent in a challenging labor market. Although it's still early, we are seeing momentum building for the product as we head into the busiest time of year for hiring. According to a recent NFIB survey, 55% of small businesses reported hiring or trying to hire in November and 48% reported few or no qualified applicants for the positions that they're trying to fill. This is something we're actively trying to address. We recently expanded our HR analytics offering to provide our customers with deeper and more meaningful insights. With the addition of the Premium Plus offering that we announced last month, businesses of all sizes now have access to real current market data for compensation benchmarks to enable them to more effectively recruit, manage talent, and develop growth strategies. Premium Plus also has a generative AI assistant and a chat interface. We're pleased to report strong early adoption of our HR analytics solution, which we are planning to launch broadly to our PO clients this month. Through AI Insights, we are using generative AI to provide our customers with access to robust data and meaningful insights through simple, easy to use interactions. Since launching the product in September, we've seen a significant increase in customer engagement. Over 80% of the early adopters have actively engaged with the platform, and we've seen AI-focused usage increase significantly in the past three months. As a reminder, Paychex has used AI technology for many years, and we believe Gen.AI offers a new set of opportunities for value creation, especially when paired with a large and high-quality data set. Paychex captures 14 billion data elements last year, and we pay one and 12 private sector workers in the US, giving us one of the largest workforce data sets in the industry. Our vast and growing data set provides us with the ability to deliver actionable insights to customers and strengthens our competitive mode. Our clients can now leverage Paychex Flex PERCs to complete, compete for scarce talent more effectively. PERCs is an award-winning digital marketplace that offers our clients' employees access to affordable benefits and discounted products and services from third-party providers. PERCs is available at no cost to employers, and payments are processed automatically through payroll deductions. Since we launched the product in September, over 100,000 client employees have purchased at least one product offered in the marketplace. The value proposition of our new product innovation is resonating with our customers and also with industry experts. The Paychex Flex PERCs was awarded the top HR product of the year award by HR executives, and also recently received a Braynon Hall Excellence in HR Technology Silver Award. Paychex was also recently named a leader in payroll services by Nelson Hall for the eighth consecutive year. We were evaluated and placed in the leader quarter for our ability to deliver immediate client benefit and meet future client requirements. To sum it up, we remain focused on our North Star, and that simply is helping small and mid-sized businesses succeed by offering the most comprehensive suite of HCM solutions, -in-class advisory support, and actionable insights gleaned from our large proprietary data based upon our long history of helping businesses. I will now turn it over to Bob to give us a brief update on our financial results for the second quarter.

Bob? Yeah, thanks, John, and good morning. I'll start with a summary of our second quarter financial results and then provide an update on our outlook for fiscal 2025. Total revenue for the quarter increased 5% to $1.3 billion. This includes the headwind from the expiration of the ERTC program of approximately 200 basis points, which is consistent with the expectation we shared with you last quarter, excluding this headwind, as John mentioned, total revenue grew 7% in the quarter. Management solutions revenue increased 3% to $963 million. This was primarily driven by growth in the number of clients served across our suite of HCM solutions, as well as client worksite employees for HR solutions and higher product penetration, partially offset by lower ERTC revenues. PO and insurance solutions revenue increased 7% to $318 million, driven primarily by higher average worksite employees and an increase in PO insurance revenues. Interest on funds held for clients increased 15% to $36 million, primarily due to higher average interest rates and invested balances. Total expenses increased 4% to $779 million. This is due to higher PO direct insurance costs related to growth in our average worksite employees and PO insurance revenues, as well as continued investments in product innovation, data and AI, and our -to-market initiatives. Operating income grew 6% to $538 million with an operating margin of 40.9%, which was up year over year approximately 60 basis points. And as a reminder, operating income is also impacted by the expiration of the ERTC program. Excluding that impact, operating margins would have expanded 180 basis points in the quarter compared to the prior year period. Deluded earnings per share and adjusted diluting earnings per share both increased 6% to $1.14 in the second quarter. Now, let me quickly touch on the results for the first six months of the year. Total revenue grew 4% to $2.6 billion, which includes approximately 300 basis points of headwinds from ERTC, as well as having one fewer processing day in the first quarter. Excluding these headwinds, total revenue grew 7% in the first half of the fiscal year. Management solutions revenue increased 2% to $1.9 billion. PO and insurance solutions increased 7% to $637 million. And interest on funds held for clients increased 15% to $74 million. Total expense growth for the first six months of the year was 3% to $1.6 billion. And operating margins expanded approximately 20 basis points to 41.2%. And again, this is despite the ERTC headwind that we had in the first half of the year. Deluded earnings per share increased 4% to $2.32. And adjusted diluted earnings per share increased 3% to $2.30 a share. Our financial position remains strong with cash, restricted cash, and total corporate investments of $1.3 billion and total borrowings of approximately $817 million as of November 30th, 2024. Cash flow from operations was $841 million for the first half of the year, driven by net income and reflects changes in working capital, influenced by the timing of our quarter end. Through the first six months of the year, we returned a total of $810 million to our shareholders through cash dividends and share repurchases. And our 12-month rolling return on equity remains robust at 46%. I'll now turn to our guidance for the fiscal year. This outlook assumes the continuation of the current macro environment. And I assume most of you have seen the press release. We are not making any changes to the guidance. I will, however, provide color on the guidance ranges for two of the line items. Total revenue is still expected to grow in the range of 4% to 5.5%. And as a reminder, this includes approximately 200 basis points of headwind from the expiration of ERTC. Management solutions is still expected to grow in the range of 3% to 4%. PO and insurance solutions is expected to grow in the range of 7% to 9%. Due to some of the factors that John discussed earlier as it relates to our MPP enrollment in the state of Florida, we would now expect growth to be at the lower end of that range. Interest on funds held for clients is expected to be in the range of 145 to 155 million. And other income net is expected to be income in the range of 30 to 35 million. Operating income margin is expected to be in the range of 42 to 43%. However, we would now expect that to be at the higher end of the range. And our effective tax rate is expected to be in the range of 24 to 25%. And earnings, adjusted diluted earnings per share is still expected to grow in the range of 5 to 7%. Turning to the third quarter, we would anticipate total revenue growth to be in the range of 4.5 to 5%. This includes approximately 150 basis points of headwinds from the expiration of the ERTC program. This will be the last quarter of headwind as it relates to ERTC. So I'm looking very much forward to anniversarying that as we get to the end of Q3. We would also expect our operating margin to be between 46 and 47%. I think as most of you know, Q3 is our largest operating margin quarter. That's due to the fact that that's when we have, we benefit from our annual form filings. And of course, all of this is based on our current assumptions, which are subject to change. And we'll update you again on the third quarter call. I'd also refer you to our investor relations website for more information in our investor slides. And with that, I will turn the call back over to John. Thank you, Bob. We will now open the call to questions.

At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Please limit yourself to one question and one follow-up. Once again, that is star and 1 to ask a question. We will pause for a moment to allow questions to queue. And we'll take our first question from Mark Masson with Baird. Your line is open.

Hey, good morning and happy holidays, John and Bob. Thanks, Mark. Thanks for having me. Thank you. I'm wondering what you're seeing with regards to, you know, any sort of change in terms of business sentiment, you know, post-election. You know, we did see the NFID confidence index really jump up fairly materially. And I'm wondering if that's actually translating, you know, to events in the field just in terms of the pipeline build. Any commentary there would be really helpful.

Yeah, Marcus, John, happy holidays. Listen, I think we continue to see really moderate growth in small businesses. And you look at our index, that's kind of the story of the year really, the year that escaped the recession that never happened. I would say continue to see downward pressure on wages in small businesses where we don't see any signs of a recession. I think that you point out, you know, there was a degree of uncertainty with the election. That's behind it. Certainly the optimism indexes seem to improve. I would say we've not seen that at this time turn into, you know, positive momentum. However, what I would tell you is, in results, but what I would tell you is certainly job openings we've seen increase. We know that the desire of our clients to want to add employees is still very strong. That's one of the biggest problems, particularly in the small market. Still challenging to find qualified people, which is why we've been doing some of the solutionings that we've had. So right now I would say more optimism, but we've not seen that at this point translate into any, you know, significant change in the moderate growth that we've been seeing through this year.

Thank you for that. And then my follow-up question relates to the PEO business. It actually looks like relative to, you know, all the public data that we see, it looks like you're actually growing the PEO business faster, you know, than some of the competitors that are out there. And what I'm wondering is what are you attributing that to? To what degree are some of the new, you know, AI-fueled solutions that you're offering helping? What are you doing on the insurance side that's really addressing some of the needs that you outlined?

Yeah, Mark, I would tell you that our PEO is gaining share. There's no question about it. I mean, the demand that we see, I mean, our contracted revenue in the PEO was up high double digits. I mean, we see we weren't at the contracted, new contracted revenue that we got in the quarter. Client ads were up high double digits. That's the second year in a row. Record retention in that group. Proposals were up high double digits. So there's a lot of activity in the PEO market. I think it's fair to say that health inflation is an issue, and that's causing a lot of people to go out and shop. And I think that's going to be an annual event. I think people are always going to be looking at, am I getting the best option? I think you raised a good question. Why are we differentiating ourselves? I do think we have a broad set of products and services. So I think one of the things a client or a prospect knows is they come with us. They don't have to read paychecks if they need change. And so they can build a solid reputation. As you know, we have a very solid ASO business. We have a great HCM business. So there's a lot of optionality here. We also leverage our insurance agency embedded in the PEO. So really it gives us maximum flexibility to both meet the client's need from a price perspective. You know, our PEO health plans, we provide a lot of options, but it's not every option. You can only manage so many options and manage so much risk. So if they're looking for a little higher detectable plan than we have, then we can go into the open market and do that. What's great is both from the client perspective and the employee perspective, the open enrollment, the billing, all aspects of it really doesn't matter. Whether or not you're a PEO client on our agency or you're on one of our master plans within the PEO, you're going to have the same experience. And we can move that during the enrollment period without any problem. So I do think that differentiates us, the fact that we do have a broad suite of offerings. A client can come to paychecks. They can call it home for the lifetime of their business and know that as they're in each change, we can evolve and change with them.

That's great. Thank you so much. And again, happy holidays.

Happy

holidays. Thank you. We'll take our next question from Brian Bergen with TD Cowan. Your line is open.

Hey, guys. Good morning and happy holidays for me as well. I wanted to start on management solutions growth here. So I guess in total, I know you maintained all the growth ranges. We appreciate the color on the PEO. Do you have an offset in the management solutions business that will offset that and help you maybe land favorably within the total range? Just curious where you feel most comfortable in the management solutions range.

Yeah, I mean, I think, Brian, we gave you the guide. You know, no change to the management solutions guide. I think we're comfortable with the range there. And yes, PEO is strong, but ASO has been strong as well. So we've been able to grow both of those businesses. I think when we look at, you know, new bookings, work site employee growth for both of those businesses, upper single digits, I think we had played that in the investor presentation, retention strong in both businesses. So we don't really see a trade off. You know, we've seen that in the past, maybe a trade off between ASO and PEO. We did not see that this quarter. Both businesses, you know, had strong growth. And then within management solutions, again, we continue to see strong product penetration with several businesses in that category. They grew double digits in the quarter. Retirement solutions are funding solutions business. So we feel good about the performance of both of those business businesses, both for the quarter and then, you know, with the updated guidance ranges that we provided.

Okay, that's clear. And then just on ERTC, I know you were reserving revenue for this year, given some proposed legislation. Was there any reserve release in the quarter here? And if not, how are you thinking about that going forward? Is that proposed retroactive legislation on ERTC seems less likely?

Yeah, so I think what you're referencing, Brian, is the reserve that we did. I believe it was in Q3 of last year for the amount of ERTC that we sold in the month of February when that proposed legislation came out and put that at risk because it was going to be, you know, it was going to end the program retro to end of January. So we were conservative. We reserved that. It was not a big dollar amount. We did have that in our plan this year to release it. We carried it for a couple of quarters, but we no longer had that reserve. And that was assumed in the guide for Q2 and really the guide for the year. So, you know, we couldn't justify holding it anymore. There's been no movement there. And so, you know, that that reserve is no longer on the books, but it was a small immaterial dollar amount in the grand scheme of things.

Got it. OK, happy holidays.

Yep, same to you. Thank you.

Thank you. We'll take our next question from Ramsey Ellis with Barclays. Your line is open.

Hi, thank you very much for taking my question. In I think last quarter, you were contemplating something like one hundred and twenty five basis points worth of Fed cuts into guidance. You maintain that range despite the solid beat this quarter. I'm just curious about how we should think about that, given, you know, what the Fed sort of announced yesterday. Do you see this range being a little more conservative, perhaps?

Yeah, I mean, you know, the we obviously didn't get a chance to pay our forecast on

yesterday's news, but the forecast, you know, the prior forecast as well as the current forecast contemplated one hundred and twenty five basis points of cuts this year. Ramsey, you know, a hundred have already happened. You know, the 50 in September and then November and then yesterday's cut. So we have one more cut in in the in the back half of this year, you know, based on the update that was provided yesterday, they that may or may not happen. So there there could be a little bit of upside there, but it's not going to have a material impact whether it happens or not, just given, you know, the timing of the year. So that's kind of what the forecast is based on.

Got it. OK. And then you called out higher product penetration of the HCM products and management solutions, which is obviously an ongoing trend. Can you kind of give us an update on your growth algorithm? How much does HCM in totality contribute versus the core business? How has that sort of evolved over time? Just trying to put my finger on the pulse of the of the of the way that core key drivers of your growth have changed over over time.

Yeah, I mean, to be honest, it hasn't it hasn't changed significantly. And, you know, we we talk about it in terms of the of the total business. But, you know, we've driven a lot of growth historically out of our ability to get increased penetration, larger share of wallet, nearly monetizing our existing client base. You know, that's probably driven at least half of our growth. We I think we talk about it being typically in the three to four percent range. And when we kind of take a step back and we look at the penetration rates within our existing client base, there's there's still relatively low penetration rates there on some of those key solutions, particularly in the field. So we still see lots of room as it relates to that, you know, our growth formula and our ability to drive growth, you know, through product penetration as we move forward.

Yeah, I think the thing that the trend that continues and this quarter has continued for nearly a decade. You know, pure payroll has become a less than 50 percent of what really is driving our business. It's really an HR story and a technology story. And when you get under it, we're very pleased with the with the product attachment that we're seeing in the products. Really excited about the new market that we've opened up for ourselves, which is to monetize our clients employees through our paychecks, flex, curbs product that we you know, we've been investing a lot of the RTC money into this technology plan. It's basically a rewiring of our technology to be able to really position the clients employed as a customer of paychecks. We couldn't do that before. Now we can do that. We built this marketplace and,

you know,

if you think about starting the first initial launch or wave launch in September and since that launch, we did a small trial. I think we opened it up to about 100,000 potential client employees. And now we started to open it up to the broader base. It's on our flex platform and relatively short period of time, six weeks have 100,000 customers. It's a small dollar amount, but it's a pretty impressive start to something we think

has a lot of legs.

That is impressive. Thanks so much.

Thank you. We'll take our next question from Andrew Nicholas with William Blair. Your line is open.

I thank you and good morning. I wanted to ask about the upper single digit growth in outsourced or HR outsourcing worksite employees. Is there any way for us to think about how much of that comes from upsell from, you know, clients with an existing payroll relationship versus clients that are new to paychecks entirely?

Yeah, and maybe I'll add on to the point that Mark made relative to the use of AI and how we're using AI. Certainly in the second quarter, we had a lot of increase inside the base at the time when we have insurance renewal. So we're actually able to look across our client base and do analytics and AI about what they're paying for health insurance, both in our agency and others, and then really target that with some sales plays to say, hey, we may have a good PO value proposition with this client. So I think it actually flows. We have a very solid both inside and outside the base capability in the PO specifically, almost all of our ASO businesses inside the base upsell, but in the PO, we had a good balance of performance, I would say, both outside the base as well as inside the base. Tilted a little bit more inside the base, I would say, in the last quarter. But again, I would imagine that'll rebalance itself out as we go through the second half of the year. Again, it's during that enrollment period that we really gin up the AI models to be able to look across our client base and figure out whether or not what's the best value proposition to target and offer them.

Makes sense. Thank you. And then for my follow up, just on the enrollment dynamic in Florida, can you speak a little bit more if you have any insight in terms of what's driving that? And also, if there's any way to kind of refresh us on the PO businesses exposure to Florida, obviously, quite a bit of that came from Oasis over half a decade ago now, but just trying to get an understanding of how much of the business that represents at this point. Thank you.

Yeah, I would say that I'll start off by adding on if you want. You know, what's driving that performance is us. And quite frankly, I would say it this way, the PO results, I think, including the flat at risk MPP insurance revenue growth in Florida, I think should be viewed as a positive for investors and for our clients. Quite frankly, I mean, first of all, the past few revenue doesn't really impact earnings at all. And I think when you look at the PO business, we actually expanded insurance penetration. We expanded the percentage of our clients that have insurance attached. We expanded the number of employees within the PO that has insurance attached and bought an insurance pass. But we did it in less risky ways. So, you know, we made the decision to underwrite more conservatively, given some of the cost increases that we're seeing and some of the volatility in health costs. So we have more options than just the MPP plan in Florida. We have the agency. And so when you look overall, our actual insurance inside the PO was up mid single digits. It was flat in this one program. And some of that was a conscious decision. So one of the great things about our model is we have options and we're leveraging those. So we have a client that is looking for a specific plan we don't have in the Florida MPP, then we'll give them something on the agency. And if we're looking at a prospect or we find a competitor that may be doing pricing that's more aggressive than we feel comfortable with, we're not going to put that risk on the business. So, you know what, I think health inflation is real in the PO business, particularly if you're at risk, you have to manage that well. We're going to be disciplined growers of the business. And so I think I'm very pleased. Matter of fact, I'm very pleased with the management team. I think they made the right calls in terms of balancing growth with risk. And we got both. I think we got good growth. And I think we've got better managed risk. And they actually increase insurance penetration across the base. So those are all winners for me. And the way the economics works out, because you have to recognize revenue. And I'll leave that to Bob to explain to you why the accounting is. Well,

I mean, I just add, I mean, we have a little bit of a unique model compared to others. I mean, we

made

the decision that, you know, insurance is a scale game and we have scale in Florida. So we made a decision a number of years ago, strategically, that we would be at risk on our medical plans in Florida. That's the only state where we're at risk. So, you know, you get if you get mixed issues, if you're going outside of Florida versus inside of Florida, you know, that could have an impact on on the revenue. I think overall, we feel very pleased with the continued strength of our PEO business. I mean, someone mentioned earlier relative to the I think it was Mark, relative to the competition, self-performance in the quarter was strong. Retention was strong. Workside employee growth is strong. It's the you know, the MVP enrollment was not where we thought it was going to be coming into the year in Florida. But when we take a step back, that just illustrates the point that John's making. When we look at the PEO clients that are on our agency medical plans in Florida, that was that was up upper single digits. And again, those are risk based decisions that we're making for the business. We're not going to make bad decisions just to chase a revenue number because that's not the right thing to do for the company. And, you know, if you were to look at this from a net service revenue standpoint or an earning standpoint, to John's point, it would really have no impact. So we feel pretty good about where we're at with with the continued strength of that of our PEO business.

Yeah, I think the other thing I would add on to that, because we saw this across not just the PEO, but also the the insurance business as well. If employees, when given the choices were downgrading their plans, we saw downgrades double the percentage. It was in double digit. Typically, that's a single digit issue. Most of the time, an employee, once they get on a plan, they stay with the plan. They don't want to change the plan. And actually, in the mid to high single digit feature, you'll see some people selecting to downgrade their plan. We saw that across the board. So I think this health inflation is is a real story. And again, I just get back to it on. I just want to say this again on the SMPP revenue number. We have a lot of control over that. I mean, you can hit that number and you can maybe hit that number for a quarter and you maybe hit that number for what do you want that number to be? And we can probably hit it. But we're going to do it for a quarter or two quarters. And then you're going to have a risk problem. And we've seen that movie play out in the industry before. And like I said, that's not that's not the game that we play. We're disciplined. We have options. We avail ourselves of the options and we're going to constantly discipline growers of revenue in the business.

Thanks so much.

Thank you. We'll take our next question from Michael Infante with Morgan Stanley. Your line is open.

Hi, everyone.

Thanks for thanks for taking our question. I just wanted to start on the partnership channel more broadly. If I think about one of your competitors striking an SMB partnership to embed some of their payroll capabilities alongside of some of their B2B payments capabilities, I'm just curious how you think about the partnership channel and whether or not that's a source of incremental investment for you. Thanks.

Yeah, look, we have a lot of partners. We have a lot of longstanding partners, including those in the payment space, some of which you're probably referring to. So we partner with them and we partner with many others. And certainly we have a capability to partner in a what I would say you call it embedded, I call it wholesale or white label type of way as well. But in our business, and we're certainly open to that. And I would say in the CPA micro area, that's that's a healthy business and has been has been growing. So more to come on that in terms of how we approach broader partnerships. I think what we've tried to look for are ways in which we can bring something to the partner and they can bring something to us. And like I said, we continue to expand our partnerships and continue to look at ways to expand that going forward.

That's helpful. Maybe just on the retention front, you obviously spoke to the fact that you're sort of tracking above historical ranges. Is that both on a revenue and logo basis? And how would you sort of compare those two buckets relative to historical levels? Thanks.

And, you know, listen, retention was solid. Revenue retention was solid, continuing your record levels, I think, really demonstrating the value proposition, the hard work of the team, but also value proposition. There's a lot of alternatives out there and client losses are improved over last year. So even on the logo basis, we saw improvement year over year. So very pleased and it was across all the all the segments as well, which is also a positive. Typically, we have one one segment or one business that, you know, is kind of not doing as well as the others. And this is this is one of those quarters where in one of the really first half of the years where we've been seeing pretty consistent improvements. So hats off to the

team there.

Thanks, John.

Thank you. We'll take our next question from Brian Keane with Deutsche Bank. Your line is open.

Hey, guys, happy holidays. Any pick up yet or any signs of growth that you'll see for kind of new business starts or the development of new business starts?

Yeah, Brian,

I think business starts with a little bit of a little bit of a little bit business starts down kind of year over year. What I would tell you, they're still above pre pandemic levels. You know, we had this odd anomaly during during Covid where they really spiked up. A lot of people going off on their own and doing that. They continue to kind of what I call moderate. Again, we're still above. I still sense that there's a higher degree of entrepreneurship in the general economy. But again, I not seen that's not going the other direction. That's continued to moderate this year.

And is that something that cyclically comes back if the economy starts to improve? I'm just trying to think about timing on when that might bounce.

Well, the underlying premise of your question is the economy is not in great shape. And I think our assessment would be that it's in really good shape. I mean, it's solid shape of the small business. If you look at our small business index, we continue to see moderate growth. We think optimism is there. We find our clients wanting to grow their business. And I think the challenges they face is both is access to capital is one. And then the other point, if I'm going to open up another restaurant or I'm going to open up another location, even if I can find the money and I can afford the cost of capital in the market market today, can I fill that building with people that are outside to do the work that needs to get done to satisfy my customers? And I think those two those two are the two things I see right now on Main Street. That's what we deal with every day. We don't deal with Wall Street and chips and bitcoins. We deal with people that are cutting hair and doing things like that. And so I think those are the real two constraints right now on the economy.

Got it. And just as a follow up, you called out kind of the mid market HEM business with strong sales activity, anything in particular causing that? Is that a competitive dynamic or is that a new products that seem to be resonating better?

Well, I think it's a combination. I think it's a combination of things. I think that certainly we continue to invest in the product. You know, the new the new PitchX Flex Engage product, which is an AI based engagement tool that allows businesses to manage both performance and rewards and engagement with their employees and compensation more effectively. That's been a big winner in the mid market. So I think on par, our technology has always been on par. We continue to have a very strong technology capability in the mid market. I do think that the HR outsourcing value proposition is resonating in the marketplace. I think the R value proposition to be able to say you can come to paychecks and as your business change and your needs change, you can stay in one place. You don't have to move. You can you can go back and forth. I think that's resonating. And I think there's been some disruption. I think there's been some disruption in the mid market that has provided an opportunity for us to position ourselves at the bidder's table, quite frankly. And so I think, again, that market's changed a little bit. I think there's a little bit more rationality. You're actually talking about profitability as well as growth. And we've been talking about that for some time. So I think there's more rationality in that market. And I think customers are coming around to paychecks.

Got it, got it. OK, congrats on the results. Thank you.

Thank you. We'll take our next question from Kevin McVie with UBS. Your line is open.

Great, thanks so much. Hey, you had mentioned, I think that you were capturing some sharing of PEO, which is good news to see. Where do you think that's coming from? I wanted to kind of start there because I thought that was an interesting data point.

Yeah, Kevin, I would tell you that we're introducing

people to the PEO concept. That's still predominantly what we do. We tend not to do a lot of head to head, what I call PEO to PEO movement, quite frankly. Now, we go head to head in the marketplace when a client is deciding that they want to select PEO. But I would not say if you're thinking about it, am I going to, is there particular PEOs that we're taking a lot of business from? That's generally not our sales motion. There's a risk involved in that. There's a lot of other issues that we stay away from that. Our general sales plays are introducing our HCM clients to the PEO value proposition, or it's going head to head in the market for clients that are moving towards the PEO value proposition. In those cases, we are going head to head with other PEOs in the marketplace. And again, I think it's the strength of our value proposition. It's the strength of our technology, the strength of our advisory capability. Our HRGs are the best in the business in terms of the advice that they provide these clients. I think it's our use of AI and data analytics, which we're really driving in the PEO. And then I think it's the fact of what I said earlier, which is we have the broadest set of capabilities. So you're going to start with us as a PEO. And if things change, we have a non PEO HR outsourcing option for you. And if something else change, we got to HCM only. And I think again, customers, I've read some notes and I don't know if I would say it's totally true, but I do see clients not wanting to have to deal with a lot of vendors. And so I do think this consolidation of vendors and as you get each of the competitors kind of getting even par in terms of capabilities across the HCM suite, I think if clients can say, look, I can go to a partner, they're going to be reliable, they're going to be predictable and I can stay there and build a long term relationship. That makes more sense than trying to spend my time managing multiple vendors and switching every year.

That makes a lot of sense. And then just I've been in and out. I apologize. I think you gave some commentary on the Q3 revenue. Can you just remind us what that is and then the pacing of Q4 as well? And, you know, what does it take to kind of get to the high end of the guidance range as opposed to the low end? It gets more from a revenue perspective. Just is just trying to kind of help understand that in the back half of the year.

Yeah, I think the color that we gave on Q3, Kevin, was that we would be between four and four and a half and five percent. And that still includes about one hundred fifty basis points of headwind from from from ERTC. So this is the last quarter of ERTC. So, you know, that's the color that we provided for the quarter. Obviously, the headline numbers with the ERTC headwind going away, you're going to see an acceleration in revenue growth in the back half of the year, you know, due to that. You know, we mentioned the guide on on PO. So I would say the PO in the back half of the year is probably going to be a bit lighter than we saw in the front half of the year. And that's really driven by the at risk enrollment that we talked about on the path through revenues in Florida, again, no impact in that revenue or earnings. So, you know, when we kind of take a step back and look at front half versus back half, I you know, actually, I think you'll see fairly similar growth rates in the back half of the year than what you saw in the front half of the year. And again, I think, you know, we mentioned that actually, RTC for the quarter, we were up seven percent. And that's, you know, going back to the second half of last year, you know, when we turned the corner last year, we started to see a pick up in the organic growth of the business. I think the front half of last year, we grew five percent, actually, RTC. And then when we turn the corner, you know, this is the fourth quarter in a row that we've seen strong, you know, upper single digit, you know, called seven percent growth, actually, RTC. Now, you know, interest rates has continued to help. They're certainly helped in the back half of last year, helped in the first half of this year, up 15 percent, you know, that that will turn into a headwind as we move forward in the back half of the year. But, you know, all in all, you know, the performance of the business in the back half, actually, ERTC and Interstates, we would expect to be similar to the front half.

I just realized we're going to have to

shorten the calls in the future. We don't have the RTC to talk about.

Thank you. And we'll take our next question from Tian Xin Huang with JP Morgan. Your line is open.

Thanks so much. Good morning, John and Bob. Just wanted to dig in really quickly on just on the Florida comments, always educational, what you guys talk about there. Does that given that that's at risk and that safe only, does that inform your thinking on SMB employee health and demand in general? Assuming you get more data there, I'm thinking more about the downgrading of plan comments specifically.

Thanks. No, I

don't view that at all. I view this more as a cost control mechanism, both at the people managing their personal lives and employers managing their employee costs. Again, we saw increases in the percentage of clients and increases in the percentage of employees in our PO attaching insurance. So we didn't agree. Actually, more of them are offering insurance. Now, when you get under what did I order offer last year or what did I buy last year? I offered a cataract plan and people bought a cataract plan. And now I really only want to I guess I use old terms for myself, date myself or the Chevy plan, right? And that people are downgrading to the to the Chevy plan. I think that's what you see going on is more people looking at, ways they can manage your costs. And to be fair, health inflation is an issue. And you see health inflation for us, we've been managing it successfully for our clients over a decade with really what I would call mid to high single digit increases over the last decade in that program. And that's beating the market from a medical inflation perspective. And that's the commitment we want to make to our clients is we're going to try to manage those opportunities so that they can have predictable inflation. But again, you talk about a nine percent increase for somebody who's already being exposed at the food market and going to the gas pump and etc, etc. They're looking for ways they can turn back and they're looking at and saying, look, I have this really nice plan. I like last year, but this other plan is is less money than what I was paying last year. That's what we're seeing people do. They're not dropping it. They're just making different choices in terms of deductibles and plans. Yeah. And that's the only

thing I would add to that is, you know, we're somewhat indifferent to that choice. I mean, obviously, it would be great if they picked a higher plan from a revenue standpoint. But at the end of the day, we want them to attach out because what we found in our model is when we get that health attachment, that really drives retention, stickiness in lifetime value. And the difference in those plans, you know, there may be a little bit of an impact to the top line. There's no impact to the bottom line. And so, you know, we want to give them choice and help them find a plan that that meets their needs. But, you know, provide them that plan because that really drives retention in lifetime value for us.

Got it. No, it's good. No, the attach being strong is great. And I'm just trying to learn around the the plan selection there. It sounds like it's mostly health care, inflation and SMBs attacking that. So this is not intended to be related, but just thinking about that and broader HCM pricing and discounting for you in terms of what you're seeing or maybe thinking any new considerations there. So not a not a PEO or health specific question, but just broader question around pricing and discounting as you're trying to retain and pursue new new

growth. Yeah, no, I would say across across all of the market segments and across all of the business segments, we've not seen we've not seen anything out of the ordinary. It's a competitive market. We continue to drive and get a price value premium in the market. As again, there's a little cost options out there, but I think people recognize value when they when they see it. So so we're not seeing anything out of the ordinary. We had planned it on a little more price competitive competitiveness. And we've seen that, but not seeing anything radical across any of the groups. Again, I will say this, we're going to continue to be disciplined growers. And I think that's important to understand when it comes across going after a client, whether that's health insurance risk, we're going to be disciplined. We're not going to do that just to get the revenue. You look at increasing clients, you know, how much I pay Google to get seen by somebody. If what I got to pay Google is double what the lifetime value of that client is going to be, I'll let somebody else pay that free. And so we're going to continue to be disciplined. We're not going to do anything that's crazy, that's going to jeopardize our longstanding position as being predictable and consistent. And what we believe is that clients are going to appreciate that over the long term. At the end of the day, you've got to make money as a business. And if you're spending more to get a client or taking more risk than you can absorb on your balance sheet, then that's not good business. So we're going to continue to be disciplined. But we're not seeing, as I said, I think I said it on the last call, my sense there's a little bit more rationality coming in to our markets where, you know, both down market and the mid-market, you know, people are beginning to realize this thing called profitability. And that will drive no rational pricing.

No, the discipline is clear. Thank you for your thoughts.

Thank you. We'll take our next question from Ashish Sabhadra with RBC Capital Markets. Your line is open. Thanks

for taking my question. There was a reference to an increase in PO direct insurance costs. I was just wondering if you could comment on how that's trending on a per-workside employee basis, just given the health care inflation. And then as we think about going forward, are there any changes to the plan in order to manage those insurance costs? Thank you.

Yeah, I mean, our direct costs are up,

Ashish. I don't have the numbers in front of me, but certainly it's not just, you know, those costs aren't just health. They're also workers' comp and largely going to be driven by growth in worksite employees, which I had mentioned was upper single digits. So, you know, no significant changes planned from a plan design standpoint. I think, you know, our books are performing well, both across medical and workers' comp. And, you know, that's really going to be a factor of two things, both growth in the business from a worksite employee standpoint and then how we're doing from attachment, again, not just medical, but across the board with workers' comp as well.

And I would just say, I think we've talked about this for... Yeah, I think we've talked about this as well. We continue to look for innovative ways. We're constantly evaluating the plans we offer. We're constantly looking at the mix of health products so that we can meet the broadest set of customer needs. And we'll continue to do that. But again, health inflation across the board, I think, is a public policy issue and it's a real issue. And I think we're still seeing the after... We're still seeing the effects of COVID and the health inflation that occurred during COVID working through the health pricing system right now.

Very, very helpful, Color. And just for my follow-up, a quick clarification. So in two Qs of last year, that was impacted by slower seasonal hiring. I was wondering if you have seen any trends on the seasonal hiring trend this year?

No, I mean, hiring has been in line with our expectations. I think we've talked about this earlier in the year, what was assumed in our guide, which was pretty much not a lot of hiring assumed in the client base. That's pretty much how the year has been played out. So, you know, both Q1 and Q2, I would say, employment levels within our existing client bases is pretty much lined up with what our expectations were.

Very helpful. Thank you.

Thanks. Thank you. We'll take our next question from Kartik Mehta with North Coast Research. Your line is open.

Hey, good morning, John and Bob. Just on a, John, maybe just on the pricing commentary. Obviously, inflation probably a little bit higher than everybody expected. And I know last year, maybe the year before, you got some better pricing than in the past. I'm wondering how that's playing out this year. You have some ancillary products and stuff. Is there an opportunity to get some of that pricing back? Or do you anticipate pricing will be maybe on the lower end than it was a couple of years ago?

Kartik, I would say this. I would say that our price value proposition remains strong with our existing clients. And I think that once a client gets on board with Paychex, they see the value of what we're doing. And I think that we've continued to maintain what has been our historical growth formula in that area. I think both in terms of that part of our growth formula, as well as our product penetration, our ability to add new products and services to add more value, which then adds more price to those clients. I think those things have been very sound. I think that prospects and clients are more price sensitive than they were pre-COVID. I don't think that's surprising. During COVID, people were running, needing to get digital HR systems to be able to manage dispersed workforces. There was a lot of compliance issues that they were trying to battle. And so I think that's certainly true. I think they're in the marketplace today. When I look at our proposal volumes, I look at our call volumes. There's a lot of activity out there. And that indicates to me we're back to a market where there is a percentage of the market that are what I call shoppers. They're trying to see, they're trying to check their price, they're trying to make sure they're getting the right deal. But again, I don't see that any different than what I saw prior to COVID and what has been my 20-some years of history in the industry. So my point would be is we still are a value provider. I think we're still a premium price provider in the marketplace across the segments. And I think clients are continuing to appreciate that value as you see in both our revenue retention, our client retention, and our continued growth in each of the segments.

And then just Bob, on the float, I know you talked about maybe at the beginning of the year, you anticipated more rate cuts that are going to happen. But I'm wondering, any change in maybe how you're managing the float or how you'll manage the float because of this changing environment?

Not anything specific, Arnek. I mean, we did some repositioning a while ago in anticipation that rates were going to come down. So I don't think there's a whole lot for us to do there. I think right now, probably over the most recent past when we've been reinvesting in the long portfolio, it's probably been more on the shorter end of the curve, just kind of given where the rate curve was a little bit inverted there. You know, as things roll off, we'll continue to look at the shape of the curve. And you know, you got to spread it out so you don't want to get too much in any one year because then you have reinvestment risk. So we'll look at the shape of the curve and look to place our investments to optimize the portfolio. We have a strong team in our Treasury Department that's looking at this every day. But I would say no significant changes to our approach or philosophy, just looking to optimize based on where the curve is at at any given point in time.

Perfect. Thank you both very much. I really appreciate it. Yeah. Thanks, Art.

Thank you. We'll take our next question from Scott Wurzel with Wolf Research. Your line is open.

Hey, good morning, guys. Thanks for taking my questions. Just want to ask on the margin side. I mean, the outperformance has been pretty constructive in our view also pointing towards the higher end of the guide for this year. And I know there's been some investments around the sort of advertising front. So I wonder if you can just remind us of where you're kind of finding some of those efficiencies to drive some of the better margin performance that we've seen.

Yes, I would start off with, you know, number one, as we always talk about, you know, it built into the basic DNA of the company is to continue to just ask ourselves, how can we do this better than we're doing it yesterday? And so I think across the board, all aspects of the business, every part of the company, we're constantly doing that. I think the real tailwinds we have right now is digital adoption and the way that we're leveraging AI in the data sets that we have far more effectively across all the areas to be able to drive productivity. And so I think that's been a big boost to us. We continue to see our clients, we continue to see our employees, their employees adopt digital means to get work done. And that helps us provide better customer experiences. And I continue to see our employees come up with very creative ways to re-engineer work and to digitize it and to leverage the insights and data that we have to make better decisions that make us more effective. Whether that's increasing close rates, whether that's saving a client or getting in front of a client before they're about ready to call us and say, hey, I got a better offer. We'll go into the details for anti-competitive reasons, but we're getting in front of that. And that reduces the cost to save a client. Right. We don't have to send them to the save desk and I don't have to pay a commission for a saved client. So the fact of the matter is the fact we're getting in front of that, I think across the board continues to add to the market.

Got it. That's helpful. And then just as a follow up, just on the go to market side, I'm wondering if you're kind of seeing in your environment with your clients. Are you seeing clients sort of maybe adopt more on the initial sale instead of maybe selling sort of the initial product and then going in more for sort of the cross-sell upsell dynamic?

I would say I've not seen a major

difference in that. I would say that we've done a better job from a sales execution kind of what we call integrated selling. And making sure that we're offering the full value proposition of paychecks up front in the initial dialogue versus waiting for them to become a payroll client and then 30 days later upgrading them to ASO or upgrading them to PO. So that's that if you look back on our old model, I would say that was a little more how we would operate. And so you saw a lot more upsell of this get them in. I would say today that still happens. It's probably still the majority of what we do. But I do think we're doing a better job up front that if we think we can add a higher value product package. I would say in the upper market HCM area, that's the area where I do see clients wanting to go with more of the full suite. And a lot of times that's really they're dropping point solutions that they have kind of cobbled together. And therefore they're looking for a talent management. They already have a talent management suite that they're using that was an Anselary and then with that integrated in. So I'm seeing that a little bit more in I'd say more the upper end of the mid market and lower in the enterprise.

Got it. Thanks guys. Happy holidays.

Thank you. We'll take our next question from Jason Kupferberg with Bank of America. Your line is open.

Thanks guys. Good morning. I was just wondering as you enter the key selling season. Is there anything different you're preparing for in the environment versus last year's selling season, whether that's regulatory backdrop for competitive environment or other

factors. Okay, I would say

that we're not preparing for anything different from a competitive perspective. I think what you're going to see is we'll be kicking off some advertising and I think you'll really see us leaning into the award winning product suite that we've introduced. This year, I think when you look at what we've done in enhancing our HR analytics with our premium plus product, which is now your Gen. AI insights, we now have 20 million employee records. In that it's going to allow you to be able to figure out what you should be paying from a compensation benchmarking perspective. It's going to provide advanced workforce analytics. The fact that you can actually ask the chat bot a simple question and it'll come back and bring you an analytical report and compare you against these benchmarks. I think we're going to continue to lean into that. What we're doing with our paychecks recruiting co-pilot, which is another AI assisted talent acquisition solution. What's great about that is you don't even have to be a paychecks or paychecks flex client to get that. You can buy that as a standalone product. I think you'll hear us talk about more of that. Then I think the perched product that we talked about, for a lot of small businesses, they can't offer any benefits to their employees. They're at a significant competitive disadvantage because they don't have benefits. I've got a choice. I can go over here to a mid-sized company that has benefits or go to a small company that doesn't. What this really allows the employer to do is to sell a value proposition to their employees that if you come on board you have a set of benefits that you can get access to. It's at no cost to the employer. As I said, that has really been interesting to see the client's adoptions. I'm excited that they can offer their employees something. Then to see their employees go through the open enrollment process and to see the attach rates on that. I think you're going to see us lean more into our value proposition, what we can do that no one else can do. I'm not expecting, again, I'm expecting the market to be rational across the various segments. What I can assure you of is if the market is not rational, we will be. We're going to continue to be disciplined growers.

Understood. Just as a follow-up, can you give us an update on your M&A pipeline, what you're seeing out there? Just remind us whether or not there is any inorganic contribution in the fiscal 25 guidance.

There's no M&A. We don't plan on M&A because then you know what that does? That causes you to do stuff that's not smart. To me that's got to be the icing on the cake. That can't be the cake. I would tell you this, the pipeline is good and strong. Probably the largest pipeline I've seen across the various areas since I've probably been in the business, since I've been at Paychex for sure. Seems like people are coming back to more rational realizations about value. It seems like more people want to try to do deals and transact deals across the various areas. Again, we continue to be focused on opportunities. It's going to add scale either in new or existing markets that we're currently in. Areas where we can go and drive our full breadth of our advisory solutions and outsourcing and really leverage our best operators capabilities to drive synergies from those targets. We're going to continue to look at opportunities to drive and expand our product suite. I think there's a lot of good opportunities there that we're looking at. We're really working on completing and building our capabilities in digital HR and data analytics. We'll continue to focus there and have a good pipeline there. Then we're looking for new growth platforms that are adjacent. So continually to talk. Like I said, it's been interesting how many individuals, how many targets have come to us and see synergies in joining our ecosystem. So pretty pleased with that. I go back to what I said. We're going to be disciplined around the growth and not only in organic growth, but I would say inorganic growth as well. So we're going to make sure that we're finding targets where we're getting a fair value for our shareholders and where we think we can drive synergies to have a multiplier. So it's got to be one plus one equals three. And that's what we're going to continue to do.

Okay, well, I appreciate the thoughts. Hope you have a great holiday.

Thank you.

Thank you. And it appears that we have no further questions at this time.

Okay, well, it must be the holiday move. Short on questions here. So great. You know, look, at this point, we're going to close the call. If you're interested in a replay, the webcast of the conference call will be archived for approximately 90 days. I look, I would like to wish each and every one of you and your families a safe and happy holiday season. We look forward to talking to you in the new year. And so we show you a happy new year as well. So thank you for your interest in paychecks and have a great day.

That concludes today's teleconference. Thank you for your participation.