Paychex, Inc. (PAYX) on Q4 2022 Results - Earnings Call Transcript

Operator: Good day, everyone. And welcome to today’s Paychex’s Fourth Quarter and Fiscal Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. Later you will have an opportunity to ask questions during the question-and-answer session. Please note that this call is being recorded and that I will be standing by should you need any assistance. It is now my pleasure to turn today’s program over to Mr. Martin Mucci, Chairman and Chief Executive Officer. Sir, please begin. Martin Mucci: Thank you. Thank you for joining us for our discussion of the Paychex’s fourth quarter and fiscal year 2022 earnings release. Joining me today are Efrain Rivera, our Chief Financial Officer; and John Gibson, our President and Chief Operating Officer. This morning before the market opened, we released our financial results for the fourth quarter and full year ended May 31, 2022. You can access our earnings release on the Investor Relations website and our Form 10-K will be filed with the SEC before the end of July. This teleconference is being broadcast over the Internet, will be archived and available on the website for about 90 days. We will start today’s call with an update on business highlights for the fourth quarter and the fiscal year. Efrain will review our financial results and outlook for fiscal 2023 and we will then open it up for your questions or comments. We are very pleased to close out our fiscal year with yet another strong quarter. Our successful fiscal 2022 results reflect strong execution across the company. This includes our sales teams highlighting our value proposition, our service teams in retaining clients, our cross-functional partnership to get new products in front of clients quickly and a solid success in HR outsourcing and in the mid-market. Our adjusted diluted earnings per share growth of 24% reflect both strong revenue growth and margin expansion to an operating margin of approximately 40% for fiscal 2022. Our focus on cost control, lower discretionary spend and operating efficiencies has allowed us to both invest in our business and expand operating margins. Macroeconomic trends have been positive this year but with inflation at the 40-year high, there are concerns for potential of a recession in the near future. We continue to monitor key leading indicators for any signs of a change in the macroeconomic environment, but if have not seen any signs of deterioration at this time. Typically the first signs of a macro economic recession would be a decline in employment levels at existing clients, an uptick in non-processing clients or a slowdown in sales activities. These indicators continue to trend in a positive direction. The latest Paychex IHS Small Business Employment Watch reflected a 12-month consecutive -- a 12th consecutive month of increasing hourly earnings gains, though, we did notice slowing a bit of the pace of job growth in May. However, this is more reflective of being near full employment and the difficulty of finding employees. Job growth at U.S. small businesses remained strong in the face of a tight labor market and inflation pressures. Earlier this year, John Gibson was appointed President and Chief Operating Officer. John has been leading our service operation since 2013 and we are glad to introduce you to him on this call and have them participate. I will now turn it over to, John, who will give us an update on our sales and service performance. John? John Gibson: Thank you, Marty. I am happy to be joining all of you today on this call and provide an update on our performance both for the fourth quarter and full fiscal year 2022. We finished the year with over 730,000 total payroll clients, with growth driven by both strong sales and retention. In addition, we now service approximately 2 million worksite employees to our ASO and PEO offerings, with 18% growth in the fiscal year. We had a record level of new sales revenue for both the fourth quarter and full fiscal year. Our sales teams truly executed across the board from digital sales in the low end and continuing momentum in the mid-market and very particularly strong demand in HR outsourcing and retirement. This reflects the strength of our value proposition and was aided by the improved sales productivity by our continued investments in demand generation and sales tools. Our service teams have worked tirelessly to both support our clients and our sales growth throughout the year. We are very pleased with our revenue retention, which was comparable to our pre-pandemic record of last year. We have continued to make strong progress in hiring and we actually accelerate some hiring into the fourth quarter to ensure we are fully staffed and ready to execute our goals in fiscal year 2023. We believe that by partnering with our clients and remaining agile and flexible in how we meet those needs, we will provide them the ability to focus on running their business and increase their success and navigating today’s very complex business environment. Their ability to rely on Paychex to make the complex simple result and their continued success and will, of course, then lead to continued elevated retention that benefits everyone. I will now turn the call back over to Marty. Martin Mucci: Thanks, John. We continue to help our clients deal with the issues they consider most pressing. We were recently recognized for doing just that by receiving the HR Tech Award from Lighthouse Research and Advisory for the best SMB-focused solution in the core HR workforce category for the third consecutive year. What stood out about Paychex Flex was our ability to rapidly respond to changing conditions, delivering a product that is consistently up to date on the latest requirements. We have been able to help clients navigate challenges including recruiting and retaining talent during the great resignation, gaining access to government stimulus programs like the Employee Retention Tax Credit, enhancing benefit offerings and transitioning to a digitally-enabled distributed work environment. Our strong and resilient product suite of HR, payroll, insurance, retirement and PEO have been strategically designed to help businesses maximize every opportunity presented to them. We continue to see expanded utilization of our recruiting and applicant tracking solutions, designed to help businesses find talent in a low unemployment environment. Our deep integration with Indeed is helping our clients gain access to a strong set of candidates. Over 70% of the client employees hired through our Flex recruiting and applicant tracking module were sourced from indeed, the world’s largest job posting site. Our Retirement Solutions are also experiencing record demand due to state mandates and the need for differentiated benefit offerings to retain top talent. The introduction of our pooled employer plan further differentiates our solution set. We now help over 104,000 businesses and over 1.3 million client employees safe for a dignified environment -- retirement with industry leading mobile technology, which allows employees to enjoy -- enroll in their retirement in just workplace. HR has historically been tasked with helping businesses stay compliant and manage their talent. With Paychex HR, we deliver on these goals while also helping businesses operate more efficiently. Paychex HR helps businesses replace paper with modern, easy-to-use digital processes through our cloud-enabled Flex mobile technology. Given current challenges with hiring and the rising cost brought on by inflation, we address head on the need for businesses to operate more efficiently. Over 1.7 million client employees were onboarded through a completely digital experience during fiscal 2022. Maximum gains in efficiency are obtained when the leading technology we bring to payroll, HR and time collection and scheduling are brought together. Paychex Pre-Check debuted in January and the early adopters of Pre-Check have benefited from the proactive approach of letting their employees preview and improve their checks prior to processing. Processes have been excited about the time savings and problem avoidance that comes with Pre-Check. We also continue to innovate in the PEO space, Paychex PEO offers a continuum benefits that is unique to our clients from traditional health, dental and vision, funded by the client to comprehensive employee volunteer packages, including options for employees to purchase anything from critical illness policies to pet insurance, to new and emerging benefit offerings like student loan subsidies, robust benefit offerings designed for part-time employees, telemedicine and mental health counseling. Our Paychex PEO provides a differentiated approach to benefits designed to help our clients attract and retain top talent. Managing cash flow is also a top priority for businesses as they are struggling to address the impact of supply chain issues and rising inflation. We continue to find ways for customers to access government stimulus, including helping our clients gain access to over $8 billion in employee retention and paid leave tax credits. This builds on the momentum of our $65 billion of PPP loan program initiative in 2020. Our award winning PPP forgiveness tool has been instrumental in helping our client’s transition 96% of those loans to full loan forgiveness. At Paychex, we know our employees are critical to who we are and what we do, and I believe that our focus on employees and their well-being has helped us manage through the competitive labor market. We are identified as one of the America’s Best Employers for Diversity by Forbes Magazine and we are recognized by Business Group on Health for offering one of the nation’s top health and well-being programs with the Best Employers, Excellence in Health and Well-being Award. As fiscal 2022 came to a close, I am very proud of the excellent results we had for the year and excited about our continued growth. I want to thank our 16,000 employees who are key to our success and have done a tremendous job in this ever changing environment. With that, I will now turn the call over to Efrain Rivera to review our financial results for the fourth quarter and fiscal year as well as our guidance for fiscal 2023. Efrain? Efrain Rivera: Thanks, Marty, and good morning to all of you. It’s great to join you, at the end of one of the most successful years in the company’s history. Despite the success what you have from us and will always have is a team that’s grounded and will continue to work to deliver shareholder returns that lead the market. I’d like to remind everyone that today’s conference call will contain forward invest -- forward-looking investment statements. Refer to the customary disclosures. I will periodically refer to some non-GAAP measures, please refer to the press release and investor presentation for more information. They are pretty modest adjustments. I will start by providing a summary of our fourth quarter financial results, quickly get on full year results and then provide some guidance for fiscal 2023. For the fourth quarter of fiscal 2022, as you saw both service revenue and total revenue increased 11% to $1.1 billion. Management Solutions had another strong quarter, increasing to 12% to $845 million, driven by higher revenue per client and growth in our payroll client base. The higher revenue per client reflects product attachment across our HCM suite, higher employment levels within our base, pricing, revenue from ancillary services including our ERTC service. ERTC revenue reached approximately 1% of total service revenue, that’s for the year. While we do not anticipate this revenue stream to continue at that level, there still remains a significant opportunity both inside and outside our base. PEO and Insurance Solutions revenue increased 10% to $284 million, driven primarily by higher average worksite employees and health insurance revenue. Interest on funds held for clients increased just 2% for the quarter to $15 million, due primarily to growth in average investment balances. Note that while recent rate hikes did not have a significant impact on the fiscal quarter, they will provide a tailwind for next year. Total expenses increased to 11% to $750 million. The growth in expense is resulted primarily from higher compensation cost due to increase headcount to support our growing client base, wage rates and performance-based compensation. In addition, we continue to invest in our products, technology and marketing. And I just want to call out the margin in the quarter, we made very deliberate choices in the fourth quarter to invest back in our client base and in our -- among our employees, that’s why all of the flow through did not go down to the bottomline and that was a deliberate choice that we think leads to the future sustainability of the business and we think we are positioned very well, as a result of those choices. Operating income increased 11% to $394 million with an operating margin of 34.4%, adjusted operating margin was flat for the reasons, I just said, and we anticipated some hiring and marketing spend pull that into Q4. Net income increased 13% for the quarter to $296 million and diluted earnings per share increased 12% to $0.82 per share, despite all of that investment. Adjusted net income and adjusted diluted earnings per share both increased 13% for the quarter to $295 million, $0.81 per share, respectively, as I said, that adjustments were relatively modest. Full year fiscal 2022, let me touch on that quickly. You saw our total service revenue and total revenues both increased 14% to $4.6 billion. Expenses, including one-time costs incurred during the prior year increased 8%. Operating income and adjusted operating income increased 26% and 23%, respectively, to $1.8 billion. Adjusted operating margin was 39.9%, an expansion of 310 basis points over the prior year. And I just call it out, you will search high and low to find someone -- the companies that are at that level. We delivered that. We delivered that while investing in the company, because we think that we are not playing a game from the next quarter or the next year, we are playing a game for the long haul. That’s what you do when you have that kind of company. Diluted earnings per share increased 27% to $3.84 per share. Adjusted diluted earnings per share increase 24% to $3.77 per share. I am really proud of our financial position. We delivered all of that and our financial position remains rock solid with cash, restricted cash and total corporate investments of $1.3 billion, total borrowings were $806 million as of May 31. Cash flow from operations was $1.5 billion during the fiscal year. We translate earnings into cash. That’s what we do. Free cash flow generated for the year was $1.3 billion, up 20% year-over-year. So earnings and cash flow were really strong this year. Given the strong performance and our commitment to returning capital to shareholders, in May, we increased our quarterly dividend 20% to $0.79 per share. And as many of you know, we have one of the leading dividend than certainly in our sector and industry. And during fiscal 2022, we paid out a total of $1 billion in dividends and we also repurchased 1.2 million shares of Paychex common stock for $145 million. Our 12-month rolling return on equity was a superb 45%. Now let’s talk about 2023. I am going to turn to the upcoming fiscal year and our current guidance is as follows. Management Solutions revenue expected to grow in the range of 5% to 7%. PEO and Insurance Solutions is expected to grow in the range of 8% to 10%. Interest on funds held for clients is expected to be in the range of $85 million to $95 million. Let me just call out that this reflects increases in line with what we understand the fed is saying through the end of this calendar year. What does that mean specifically? It means that we think that interest rates by the end of calendar year 2022 will be approximately 3% in a quarter, give or take and we are assuming that in our plans at this stage. Total revenue is expected to grow in the range of 7% to 8%. Adjusted operating income margin is expected to be in the range of 40% to 41%, not only did we deliver a 300-basis-point increase, we are committing to additional leverage as we go into next year, despite having made a lot of investments in the business as we have gone a long. Adjusted EBITDA margin is expected to be another stellar 44%. Other expense net is expected to be in the range of $5 million to $10 million. Just so you all remember that is a combination of both interest expense, less the -- gain the income on the portfolio, that’s why it’s $5 million to $10 million. We expect that we will see income from the portfolio offset some of the interest expense. Our effective income tax is expected to be in the range of 24% to 25% and adjusted diluted earnings per share at this point, we expect to grow in the range of 9% to 10%. This outlook assumes the current macro environment, which is all of you know has some uncertainty. We like you week-to-week struggle to understand sometimes what are the signals that are coming out of the federal government. I want to reiterate something that Marty said. The indicators in our business are strong as we exit the year. So that’s not a concern certainly in the first half of the year in as much as we see it right now, second half, we will see. So where is inflation going to be? Don’t know that. What is the Fed exactly going to do? We think we have some indicators, we will see what they end up doing. We obviously, given all of those comments, have better visibility into the first half of fiscal 2023 than the second half. So here’s what we think about the first half. In the first half of the year at this stage, we expect total revenue growth to be in the range of 8% to 9% with an operating margin of approximately 39%. That’s what we think will happen in the first half and then for the first quarter getting a little closer, we currently are anticipating total revenue growth will be in the range of 9% to 10% with adjusted operating margin in the range of 39% to 40%. Of course, all of this is subject to current assumptions, which are subject to change and we will update you again on the first quarter call. Let me refer you to the investor slides on our website for additional information. And with that, I will turn the call back to Marty. Martin Mucci: Thank you, Efrain. Operator, we will now open it up for questions or comments. Operator: Yes, sir. Our first question will come from David Togut with Evercore ISI. David Togut: Thank you. Good morning. Appreciate all the helpful call-outs… Martin Mucci: Hi. Yeah. David Togut: …Efrain, on fourth quarter margin impacts. Could you frame in your fiscal 2023 revenue margin -- revenue and margin guidance, specifically three things? First, what impact are you assuming from inflation on wage and other expenses? Second, if you could quantify your fiscal 2023 price increase? And third, if you could bracket for us your expectations on client revenue retention, are coming down from the pandemic driven peak, how should we think about year-over-year change in client revenue retention FY 2023 versus FY 2022? Thanks. Efrain Rivera: Okay. Hey, David. Thanks for the questions. By the way that triple header there could take us about 30 minute. We will try to make it. So I am going to let Marty talk to the inflation question as I think that’s a good one and kind of how we think about it in the year. It’s baked into the numbers, obviously, we won’t quantify a specific number, but we will tell you about what we are thinking about with respect to inflation and how it’s affecting us, how we expect that will impact us. Martin Mucci: Yeah. I will touch on it, David and Efrain can jump in any place. I think from an inflation, most of us -- most of our expenses obviously, our wage were not really impacted, obviously, by a lot of material impacts, which is very good for us. Wage that we have captured in these numbers, we think are going to -- the wage increases are a little higher. As Efrain mentioned, we took some steps in the fourth quarter that was somewhere one-time, other were wages that we built in a little bit higher from a competitive market standpoint. The one-time things were some year-end bonuses and so forth that we did given our very successful year for employees. So we think we have captured it very well, wages were a little bit higher than we would normally go. That’s expectation that happens in this first quarter, basically that the wages hit, we think we have captured them well. Other than that really not an overall large impact, we have controlled expenses very tightly, even coming out of the pandemic. Things that we have learned and experienced there with working from home, having sales remote, much less T&E costs, we have been able to continue that trend, yet still invest in the business. So I think the guidance you have there is very strong from a standpoint that we have got those inflationary numbers in there. Efrain Rivera: Yeah. So, I think, the thing I wanted to call out that Marty mentioned is that, we -- in the fourth quarter took a lot of actions that we think position us very well for 2023. So I think we have captured as much as we know right now. There is always some room to make further adjustments, but the adjustments from an inflationary standpoint are really around wages for us. So, I think, we have captured that. On the price increase, we have always said that we are in the 2% to 4% range. I would say this is a year that certainly was at the high end of that range and it varies depending on the product. I think the key thing there is to get the right mixture of value and price, and it’s not just about raising prices, it’s also about delivering better value. So I think we are good there. And then on the client retention, we had a really good year. John mentioned earlier that our pandemic high was -- approximately was a record and it was approximately 88%. When we close the books this year, we were at approximately 88%. So we had a really good year from a revenue retention standpoint. There’s lots of elements to that, but I think we have made a lot of strides for more we were probably three years, four years, five years ago. So that’s -- those are the answers to your question, David. David Togut: And then, Efrain, would you assuming for FY 2023 client retention, can you sustain the 88% or you assuming some step down? Efrain Rivera: I think it’s comparable. I got to say that, it wouldn’t be surprised -- it wouldn’t be surprising to see a little bit of slippage from that number simply, because I think we are transitioning in a more normalized environment, where you are going to see lots of competition. Our assumption in our plan is that discounting will go up a bit because of the level of competition. So everyone has come out of the pandemic swinging. I think some people are in better shape. Others are wobblier. We think we are in pretty good shape and we are in a position to defend pretty well. The other thing, I would say, on that, that’s really helped us in the year as we had a really strong year in the mid-market. And I will let, Marty, talk to kind of what happened there, because that’s really helped us too. Martin Mucci: Yeah. On the revenue retention side, it’s a good point to make that will make probably a couple of times on this call. The mid-market really picked up. And as we said probably a year ago, there was kind of a pent-up demand that we saw a year ago where people had not made some decisions, that opened back up and we have been winning a lot mid-markets. The strongest year we have been in mid-market, probably, in our history and I think it’s a great combination of sales execution, the products and the full suite of products that we are offering, that is really tailored to exactly what clients are looking for now. So we have had a lot of success there, would certainly help on the revenue retention from a go-forward standpoint. Not only are we selling better in that mid-market, but we are retaining in a very strong way as well. David Togut: Understood. Thank you very much. Efrain Rivera: Thank you, David. Martin Mucci: Thanks. Operator: Thank you. Our next question will come from Kevin McVeigh with Credit Suisse. Kevin McVeigh: Great. Thanks so much and congratulations. Hey. I don’t know if this is for Marty or Efrain, but clearly the retention feels like it’s structurally at a higher level, like you may have been flow within a higher level of range. So maybe just help us understand kind of what drove that, was that kind of just the service post-COVID or more robust product offering? Is there any way to kind of think about what drove the structural and again realizing it probably comes off, but it feels like you are in a structurally higher level clearly than where you were in kind of 2007? Martin Mucci: Yeah. I will start. I definitely think Kevin that it, there is consistency there. So I think structurally you are right. We have seen really better -- from a controllable perspective we have definitely seen a trend of continued strength there. I think part of it is really the product side, certainly, I will take it from the product side and then have John talk about the rest of it. The products have just been very responsive and the continued used by the clients and their employees have made the retention stick and we have talked about that for many years, but I don’t think that’s ever been stronger and it really accelerated during the pandemic as people were much more distributed in a workforce, remote workforces. Really got to use and had to use the technology more, the mobile app, for example, and online use as well, but the mobile app really got clients and their employees to use it more. That leads to better retention because clients and employees don’t want to give it up, because they -- things like Pre-Check. They are seeing their check before its cut. They are seeing what their time is that they have returned in. Everything looks good. They know what they are going to get paid. They are able to change the retirement or see their retirement funds on the mobile app and change everything. They are able to on board in a paperless fashion. And so they are making their own direct deposit changes, their bank changes and other things. So all of that, as we talked about over the last few years, I think, has led to that structural improvement, which is pay the employees of my client want to stay with Paychex, because they are invested in us, not just the client’s payroll or HR person. So, I will ask John to add to that as well, but I think that’s a big piece of it. John Gibson: Yeah. No, Marty. And Kevin, I would say, this is probably a multiyear story. You go back before COVID. Things we have been doing in our service model to differentiate our service focus, things we are doing relative to competitive retention triggers, using AI and analytics to anticipate where we may have issues. All of those things have really led to us be getting a better handle on our controllable losses. And if you look, you go back to 2018 or in fiscal year 2019, you can really begin to see that dramatic piece. I would tell you particularly to Marty’s point, not only the -- what we have done from a service perspective with relationship management and the upper market, things we are doing there in our HR outsourcing pieces. But we know that product attachment, particularly in retirement, particularly in HR, particularly attachment and utilization of our Flex product and technology tools, we to stickiness and we have been very aggressive in introducing our clients to that capability and so that’s also creating a degree of stickiness. I mean, just -- I look at this all the time and in fact our price value losses were actually less this past fiscal year than they were at the record year. And if I go back to 2018 and 2019, it’s about half of what we would typically have seen historically. So there is a structural component to this that we are going to continue to execute. There’s more we can be doing there. And I feel good about what we can do on the controllable side. The uncontrollable is always a thing we are monitoring and watching. Kevin McVeigh: And then just one quick follow-up, Efrain, I will ask, I know if you could tell us. Like, in terms of the fourth quarter investment, it sounds like it was a little more variable. Is there any way to kind of frame what that was and I’d imagine it was more kind of variable as opposed to fixed cost that would kind of repeat in 2023, is that fair? Efrain Rivera: Well, I guess so, Kevin. Let me answer it in a slightly different way and hopefully it’s responsive what you are saying. So there were a mixture of one-time things that we did that were variable. There were things that we did structurally to increase wages in certain areas and then there were things that we put in place for -- as long-term incentive. So, I would say, one of them was -- one of those with respect to employees was more one-time and the other two were structural and will be their longer term. There were some other items that were not wage related that were also variable that we did in the fourth quarter. So, it was a mix of both. I wouldn’t characterize it one way or the other in terms of percentages, but there were three buckets there, that ended up being part of the expense base. Martin Mucci: And I think as Efrain said, all of that obviously is in the guidance of increasing the margin. So even though somewhere more structural and ongoing wage expense or bonus expense, that’s all in the increasing operating margin over 40% next year in the guidance. Efrain Rivera: Yeah. It’s important. Kevin McVeigh: Super. Thank you, all. Efrain Rivera: Okay. Thanks, Kevin. Martin Mucci: Thank you. Operator: Thank you. Our next question will come from Bryan Bergin with Cowen. Bryan Bergin: Hi, guys. Good morning. Thank you. So commentary on 4Q is broadly positive here. I am hoping you could dig in more specifically on some of those key winning client indicators and what those have been telling in recent weeks? So can you give us a sense on what you are specifically measuring there? Efrain Rivera: Yeah. So, Bryan, what we did was, we kind of dusted off forward indicators we were looking at during COVID. So we go down to daily punches by employee, we did daily punches. I am talking about daily hours clock by employees and our clients. So obviously we have access to that information. We are looking at at that on a daily, weekly, monthly basis to understand what are the trends. We look at sales and we look at losses that’s pretty obvious. And then we look at other micro indicators in terms of engagement with our systems and platforms. We put all of that together and look at those indicators to tell us, are we seeing any sharp changes. On top of all of that Marty mentioned, we have the HIS -- not the IHS employment index that we are looking at 350,000 clients. What’s happening with that base and when you put that all in the blender at the moment, it doesn’t look significantly different than the trends we have been seeing in the first half of the year. So, look, you guys are looking at a ton of different pieces of information. All I can say is, with respect to our corner of the HCM world and our corner of this part of the economy, things are looking about the way they look. And at this point, neither inflation nor the sharp -- beginning to be sharp rise in interest rate seem to be slowing things down. Having said that, I will temper as you all know with a note of caution, things could change, but at this point we are not seeing. Martin Mucci: Yeah. The thing that’s consistent, Bryan, is the demand. That small and mid-size business is still seeing a great demand for products and services and its finding people. So job growth, if anything if it’s slowed in the index, this is under 50 employees. As Efrain said, the growth is still there, but it’s slowed a little bit. It’s more because you are not being able to find the employees, everybody knows that you are hearing particularly front line, leisure and hospitality and other service functions, trying to find people, the demand is still there, so there is a hunger for the need. And you will hear it over and over, the reason that ASO and PEO have performed so well in sales and client retention is because there is such a need for HR support in recruiting, in hiring, in engaging, in training. I mean there is just a huge need for not only our technology in the HCM space, but our over 650 HR specialists, who are there to help them with those things. Bryan Bergin: Okay. And then as we think about fiscal 2023 and the forecast you built, can you unpack, within Management Solutions, specifically, are you still anticipating ASO retirement and some of these other areas to grow double digits versus kind of the payroll and HCM? Can you just help us with the underlying business areas in that segment and how you are thinking about growth in 2023? Efrain Rivera: Yeah. It’s about right. I think that we see strong demand in those areas continuing through 2023. Obviously, on the HCM side, which we haven’t said specifically, but which is implicit, you are not going to see the macro uplift in terms of the number of employees on the payroll. That just is part of the recovery from the pandemic, that’s normalized partly based on some of the things that Marty has said. But demand for all of the other Management Solution services is still very, very robust, I would say, and we are very bullish on all of those other businesses. Martin Mucci: Yeah. The other thing that we hadn’t mentioned yet, is that the work that we did, I mentioned employee retention tax credits in the Paycheck Protection loans. The employee retention tax credit service, that we really -- the team has really got down this to a very tight process and we were very successful in getting $8 billion between those credits and other credits to our clients. That has helped actually spur additional sales where they said, hey, now that you have given me all this value, I think the average employee retention tax credit was around $180,000 per pretty small business at times. That generated a need to say, hey, help let me try your HR service, let me do some other things. And we see that continue that will be continued to have success with ERTC in this year. We are already off to a good start this year. So a lot of clients are still finding a huge benefit from getting that government subsidy. Bryan Bergin: All right. Thank you. Efrain Rivera: Thanks. Martin Mucci: Okay. You are welcome. Operator: Thank you. Our next question will come from Ramsey El-Assal with Barclays. Ramsey El-Assal: Thanks for taking my question this morning. I was wondering if you could give us an update on the sort of mix of your sales channels. I know the digital is clearly a highlight of the model. I am just curious in terms of how the various contributions from your different sales channels have trended over time? Martin Mucci: John, do you want to? John Gibson: Yeah. Yeah. Yeah. Yeah. As you can imagine, we have continued to use and seen digital sales continue to increase particularly in the pandemic. What I would tell you, both in terms of our share payroll.com and paychex.com, we have seen good attach rate there and good traction there. But I would also say, really across all of our sales channels we have seen very strong demand characteristics and we are finding clients doing more hybrid shopping. So starting off, maybe on paychex.com and then ending up in a discussion about how we can help them with ERTC and then other products and services. So I think our sales team has done a very good job of pivoting when the pandemic hit, adjusting to the new reality of how people are buying, and we continue to see and find ways that we can adapt that to drive not only more sales, but also sales productivity. That’s the other thing that we have seen really increased with this. Ramsey El-Assal: Okay. And also if you wouldn’t mind commenting on the competitive environment kind of coming out of the pandemic, I am curious if you perceive any changes, whether you are running into fewer competitors out there in the marketplace or more or how would you characterize how the competitive landscape is evolved? Martin Mucci: Yeah. It’s. Marty. I will start. I think we are seeing it fairly consistent. Although, I would say that, things like the ability to offer the PEP plan and retirement, we were the first out of the gate with the PEP plan. We have had great success with the pooled employer plan for retirement. Other competitors have not offered that yet, not all competitors. So we really jumped the market on that one and did very well. I think, again, if you go back to us going to the client and prospect and saying, hey, we have employment retention tax credits that we think you can receive and let me go through that. We have jumped the gun over a lot of competition with that. I am surprised that the lack frankly of participation in that market. We have done very well with that which has helped our sales and bring value to prospects in current clients. So, I think, generally, the competitive environment is the same, but I actually -- but I also think that some of our product improvements and introductions have really positioned us a little bit stronger. I think particularly in the mid-market, mid-market that we haven’t been as strong, I think, if you went back four years, five years ago, is we want it to be the introduction of the products over the last three years really positioned us, they have a really strong sales response to this last year and it’s continuing into the first quarter. So we are feeling very good about the mid-market in particular. Ramsey El-Assal: Got it. All right. Thank you very much. Martin Mucci: Okay. Efrain Rivera: Thanks, Ramsey. Operator: Thank you. Our next question will come from Jason Kupferberg with Bank of America. Jason Kupferberg: Good morning, guys. I just wanted to start on HR management. I know you mentioned increased attach rates there and I am wondering if you can provide any quantification perhaps on that front for certain products that are driving that dynamic. John Gibson: Yeah. Hey, Jason. Hi. We will update the number of clients in the 10-K. So you will see that. We are approaching -- we are between 40,000 and 50,000 clients. You will see pretty strong double-digit growth in the number of clients there too. We will give you an exact number that you can look at when we file the 10-K in a few weeks. Martin Mucci: And John mentioned, I think that, we have hit over 2 million worksite employees in the HR space between our products in HR outsourcing and also a great attachment things like time and attendance. So we have been -- even something that we don’t talk about as much time and attendance, we have introduced the new latest technology Iris Scan Clock. These are clocks whether you are wearing a mask or not, you don’t -- they are non-touch, their kiosk that your just use your iris, your eyes the scan between that in the mobile punch in and punch out. We have seen very good attachment in time and attendance. When you have time and attendance and Flex, you now can use Pre-Check. So Pre-Check is now sending a notice, as I said to employees and saying, okay, you -- we have got you recording this many hours of working. This is your check. Do you see any issues with it? If you don’t see issues, let us know that you confirmed it. If you have issues, let your employer know. We are seeing about 5% of the time that they are finding some issue that the employer, their employer didn’t catch something right and that’s resolving the issue before the payrolls cut, that is huge benefits. So you are seeing more attachment and use again by employees of clients and so the attachment of time and attendance and Pre-Check and retirement, all those things are making better retention and we are seeing attachment go up. Jason Kupferberg: Okay. Thanks for that. I wanted to ask follow-up just on float income, it looks like that’s forecasted to be up about $30 million year-over-year and assuming you get 100% flow-through on that. It looks like that would drive about 60 bps of margin expansion if our math is right and that would basically get you to the midpoint or roughly the midpoint of your margin guide for fiscal 2023, which would kind of suggest flattish margins in the core business. So I wanted to check on all that, if you agree with that general assessment? And also, I guess, just wondering if you can remind us a bit on duration of the portfolio, just given the magnitude and trajectory of rate hikes, perhaps, some would have thought even a bigger increase in float income for this upcoming year? Thanks. Efrain Rivera: Yeah. Interesting math. I think -- I wouldn’t probably dispute the math, Jason. I would say that, the only comment I would make with respect to looking at the business that way is that, when you put a plan together what you are doing is making choices around a lot of different investments, even in a plan where we choose to increase margins 50 basis points. There are investment choices being made in that process. So while I think your math is probably not far off, that doesn’t indicate that there isn’t leverage -- underlying leverage in the business. It’s just that we chose to deploy that in different parts of the business, could ahead greater flow-through some of it was some of the choices that we made with respect to wages and other items that we discussed previously. The second thing I’d say, on everything we do, especially in the area of how we look at the portfolio, there is an element of conservatism in the way we think about it. This is an unusual year in the sense that the fed has said certain things, they change it, but they have been saying certain things and we have to incorporate the outlook that they have given to the extent that that changes, then we would come back and have different discussions, which could in some ways impact other parts of the P&L. But we will have to walk through that when we get there. We have ways to get more leverage if we choose that -- choose to use it. Then the final point is that, right now the duration is a little bit over three and our portfolio is positioned about half and half short-term and long-term. We have a lot of levers to pull there if we want to address duration on the portfolio either go longer or even shorter if we wanted to. So I wouldn’t quibble with your math. I just would quibble with your conclusion a little bit about the underlying leverage in the business. Jason Kupferberg: Good color. I appreciate that. Thanks, Efrain. Efrain Rivera: Sure. Operator: Thank you. Our next question will come from Bryan Keane with Deutsche Bank. Bryan Keane: Hi, guys. Good morning. Efrain, how would you compare the preliminary guidance for fiscal year 2023, I think, you gave last quarter high single-digit revenue growth of 50 basis points of margin expansion with the detailed guidance. Just wanted to figure out if there were some adjustments you made either due to macro or some other factors? Efrain Rivera: Yeah. I’d say, Bryan, kind of this -- if -- I was looking at it. I think we said approximately 7% or so. So this is a little bit stronger. The thing that, I called out, 3Q was, we knew ERTC was not going to recur. I call that out is 1% of this year’s revenues. So that was a little bit of a hurdle that we were going to have to overcome. I think we have overcome that to significant degree, although it won’t be as high as it was last year. The other factor really was around what happens with employment levels. That really is the tough part. Marty called that out. There is demand there for people, but there are unfortunately not as many people to fill those jobs. So what we are seeing by the way in the market is more creative use, things like part-time employees to fill jobs that otherwise would have been filled by full-time. That’s not a bad thing for us from a wage perspective, but it’s a little bit different than the way maybe you would have thought about it two years or three years ago. And then the final point is that. Look, the fed and you are looking at this just like we are. There is a lot of variability there, let’s just put it that way. And so we haven’t assumed anything beyond about 3.25% increase. The back half of the year is going to be very interesting from our perspective just in terms of what happens with -- whether there is a soft landing or not. So, we tried to create a plan that gets us through what we understand the current environment to be. And then, so this set of -- this guidance that you see here is a little bit stronger on the interest side than it was -- than we were and we said this since March, April, but because the fed’s changed some of its thinking. Hey, I -- having said all of that, that word solid basically said, a lot of stuff could change. So we will uptake you. But I would say, in terms of the macro, it’s probably changeable as any of the 11 or 12 plans that have been involved with here. Bryan Keane: Got it. Got it. And then just at a high level as, there’s a lot of worry about a movement towards an economic slowdown and a recession. How does the model hold up, just on a high level in the recessionary environment or what are some of the variables that could impact the model, if we do see a recession in the U.S. and global? Efrain Rivera: Yeah. I think we called out in the comments. I think in Marty’s, where we would see it, obviously is, you would see less clients processing. That’s the first part that you see even before you saw slowdown in demand. But there is an interesting offset, Bryan, that we saw during the pandemic is that, it actually sometimes retention picks up in those kinds of environment. So what’s the net of that, I don’t have a crystal ball on that. I think it would help to offset some of the softness on the revenue side. And it depends also what’s happening with interest rates, if interest rates remain at current levels or because of a slowdown, the fed decides, well, we are going to just ratchet them down, that would have an immediate impact from a revenue standpoint. I think if it’s gradual we will manage through it and I think we certainly will manage through it on. We have a good shot at managing through on the bottomline. I think that we are prepared to handle that, if it’s abrupt it’s really tough to manage through those kinds of situations. Bryan Keane: Got it. Very helpful. Thanks guys. Efrain Rivera: Thanks. Martin Mucci: Thanks. Efrain Rivera: Thanks, Bryan. Operator: Thank you. Our next question will come from Andrew Nicholas with William Blair. Andrew Nicholas: Hi. Good morning. Thanks for taking my questions. I wanted to follow up on that last comment you made Efrain, maybe spend a bit more time if you could on the flexibility of the expense base in a more challenging economic environment, where some of the areas where you have a bit more leeway to manage that bottomline relative to an environment that you have been in here over the past year or two where margins are at very strong levels? Efrain Rivera: Well, I’d say, three things. So the first thing is, in an environment like this, you have to have the appropriate level of areas in the P&L to go, if you see a slowdown and we assume that we will manage through the current environment as it is and if it gets a little bit worse, we can handle that. So we have taken appropriate precautions is what I would say on that. That’s the first thing. Second thing is that, we have a unique model where we -- and we do this quite a bit. We don’t talk about it, but we do it. To the extent that the client base doesn’t flex up in the way we do. We simply don’t do the hiring that we expect to do. So, if we don’t do the hiring, then you get the benefit of the 60% to 65% of -- on the 60% to 65% of the wages that are in the plan. And then the third thing is, we have flexibility in terms of adjustments on the portfolio to address duration depending on what we are seeing in terms of the macro environment. I think with those tools, if you will, in the toolkit and there are others, by the way, we should be able to manage through at least any of the environment that are right in front of us. There is certainly environments that could prove a lot more challenging. I’d just point this out one thing is, the history is no guide. But in terms of precedent, I remember being here in April of 2021, when everyone was gone and the stock went down to $48 and everyone thought that we were not going to be able to manage through. I would say, history has shown that to be incorrect. Martin Mucci: Yeah. And I think the other thing, during some of those times that could -- during depending on the recession, there will be a need for even more need some -- for some many clients for HR support. How do I manage my costs down? How do I -- and I think we showed during the pandemic that we could respond to that very well. So we are really quite broad in the way that if it’s -- the economy is growing fast and you need to hire and you need growth and you need to help with your HR, we are there to help you with the technology and the people to support you. If things turn and it’s a recession and you got to manage people out or cost down, we have the products, the technology and the people to help you do that as well and I think we showed that as Efrain said in the pandemic when people thought, jeez, I don’t know, will they be able to keep their margins, we did extremely well. And so we have been able -- we have learned a lot from that and frankly probably got a few more levers out of the pandemic that we could use during a recessionary period, which is one obviously not hiring, as Efrain mentioned, but also drive some other costs out through the fact that we have very remote hybrid workforces now that give you more flexibility even than before and where you hire too. Andrew Nicholas: Great. No. That’s all very helpful. Thank you. And then for the fourth quarter, just a quick question there that I want to coming up, can you talk a little bit more on kind of the performance of the PEO business specifically relative to the insurance within that segment? Thank you. Efrain Rivera: So you mean insurance in the PEO or insurance as part of part of the PEO revenue stream? Andrew Nicholas: Yeah. The latter. Thank you. Efrain Rivera: Okay. Do you want to… Martin Mucci: Yeah. Do you want, John. Efrain Rivera: I think. Martin Mucci: Yeah. Take it. John Gibson: Yeah. I think -- so just how I understand the question, you are talking about the attachment of insurance within the PEO and how the insurance is performing. Andrew Nicholas: Yeah. I guess, I am just -- within that segment, if you could just kind of break down the PEO business relative to the insurance business on standalone basis… John Gibson: Yeah. Yeah. Andrew Nicholas: That would be helpful. John Gibson: Yeah. So, I would say this, I think in the last call we talked about that the PEO business continues to support very well, double-digit growth, insurance slightly below that growth rate. Again, but that’s really the tale of two cities. I would say again, back what we said, strong demand for clients to increase benefits to attract and keep employees they had, particularly in the small segment where they are trying to compete against larger employers, they have to be able to put together a portfolio of benefits that are going to attract and keep their employees. So we are in -- health and benefits, we continue to see good growth there and good demand there. PNC, again it’s been a soft market for long time. So that’s a bit more of a rate issue, but still see good attachment there -- historical attachment that we have always seen in our base. So still strong performance of the PEO, insurance right behind it, predominantly led by the demand for health and benefits. Martin Mucci: And the other thing I mentioned in my comments was the broad -- in the PEO, we worked really hard, John’s team have broaden the PEO offering. So it’s not just about health and dental envision now, it’s really, as John said, this broader offering that the PEO can bring to small businesses in particular to say, hey, you can offer other things in insurance and you can offer more mental health support that is very hot right now and you can offer other plans that you would not be able to do by yourself. So that is really supported the PEO growth with the creativity that the team has shown in the offerings that we can give them. John Gibson: Yeah. That’s what I thought maybe the other part of the question was. The attachment that we saw in the PEO and the attachment and generally we are seeing from our clients, as Marty said, 401(k), health and benefits, gravitating towards these technology tools that they want to be able to provide their employees. Those things have really been across the Board very, very well received and so in our comments, we stated, it’s one of the things that we have seen now the opportunity for us to even add to that attachment. So when you think about now we are going to add a whole other set of voluntary benefits that we are going to go back and be able to offer to all of our PEO and all of our insurance clients over the course of the open enrollment period, which will start in October, and those are all will generate revenue. So, again, offering more benefits to the clients and their employees is another way that not only does that help the retention, but it also helps the revenue as well. We are seeing good demand in the marketplace there. Efrain Rivera: Yeah. Sorry. Andrew, the -- as John said, the revenue growth on the insurance side absent lower than PEO based on the fact that workers’ comp continues to be a very, very side of the market over a number of years. Andrew Nicholas: No. That’s helpful. You did a much better job answering it tonight. I didn’t ask it. So I appreciate it. Efrain Rivera: No. No. Not at all. Thanks. Operator: Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Kartik Mehta: Good morning. Efrain Rivera: Good morning. Kartik Mehta: Marty, maybe, I know talked a little bit about recession and Efrain you gave a good answer on how you might manage a business. I am wondering, based on some of the slowdowns as you have seen, would you manage Paychex any different? I mean would you think that you could continue hiring or investing? Would this time be all different than in the past based on what you have learned? Martin Mucci: Well, Kartik, right now, as I mentioned, we are not really seeing that slowdown. So, yeah, I mean, we really got behind at the beginning of last year in hiring, because it was difficult on the service side in particular and we actually made great headway in the last half of the year John and the HR team to get ahead of that and we are actually over-staffed right now a little bit going into the fiscal year. So we are very pleased with that. So we are making, still strong hiring decisions. The investments that we made in compensation and benefits are attracting now. We are getting back on track and attracting more not only service, but sales individuals and our retention is looking better. So, yeah, I don’t think, I think what we learned as I mentioned out of the pandemic though, was that we could manage in a lot of different ways and more remote and hybrid work, handling sales differently, there is more flexibility in where those sales forces are and how they are selling, more digital sales are coming in through the marketplace and we are well prepared for that. So, yeah, I think you are always learning and we certainly learned during the pandemic and we were very successful. It’s all about having the right people in place and making those right decisions and I think we have made some good ones. Obviously, we are very pleased with a record breaking year that we had and we are certainly well set up for fiscal 2023 to have another one, so. Kartik Mehta: And then just, Efrain, one of the areas that I think you have had success is in the programs like California kind of retirement mandates that they have had for SMBs. I am wondering how successful that plan has been and maybe you can talk about if you continue to expect growth in that business. Martin Mucci: Yeah. I will take that, Kartik. It’s Marty. I think that was very successful. We were a little early in some of the advertising last summer because the mandate, business don’t always respond to mandates that are going to have a penalty effective really this month and so we were a little bit early on that. But what we found was, the advertising that we did had really generated a lot of understanding that Paychex is a retirement provider to small business and even fighting against free, California had a very basic retirement higher rate plan for free. We have done very well. So retirement, we have had the fastest growth in retirement -- in retirement sales in California, obviously in our history. And so we see the approach that we made there, maybe we have learned a little on timing of marketing and advertising, but the approach that we made there has been very successful and we think that will certainly carry to other states and maybe even a federal mandate, if it comes out on retirement as well in the Secure Act and so forth. Kartik Mehta: Thank you. Thanks, Marty. Appreciate it. Martin Mucci: All right, Kartik. Operator: Thank you. Our next question will come from Peter Christiansen with Citi. Peter Christiansen: Good morning, gentlemen. Thanks for the question and giving a chance here. I was just wondering, I know you called it out a little bit before, activity in the staffing industry, your staffing clients, I know sometimes that’s been a leading indicator at both ends of the cycle. Just wondering if you could dig into -- if you can dig into a little bit of the color you are seeing there and maybe some implications that you are thinking about around that? Efrain Rivera: Yeah. That’s a really interesting question and some of you are staffing analyst. So I differ a little bit to you, but here’s what we do, just to level set with everyone. What we do and we have had a very, very successful year, this year is to provide funding for typically small and medium size, some larger staffing firms. So we have a window into what is happening with staffing trends in the business. And right now the staffing businesses are doing very, very well. So there’s a lot of demand for services. You can argue, well, why is that? It seems that in portions of the economy, certain portions of the economy. In skilled labor, you are seeing a lot of demand. I -- many of you probably know this, but skilled occupations like nursing and other technical disciplines, there’s a lot of temp labor that is used in that part of the business. But what’s been surprising, I would say, over the last three months to six months has been the rebound and what’s called light industrial. So that’s more typically blue collar work. It’s -- the demand is robust and it’s projected to continue to do that through the end of the year. It could be argued that perhaps people are starting to position themselves for a more flexibility on the workforce. But we don’t have any indications of that. What we know is that the number in absolute terms of temp workers is up and that we are benefiting from that demand. Peter Christiansen: Okay. That’s helpful, Efrain. And then, again, back on things like the PEP plan, where you just had phenomenal growth there and I realize like products -- attach products like that, I think, certainly help things like retention and value-based pricing for sure. But is there any way you could frame what type of contribution, a product like that has had overall growth, I guess, in the last year? Efrain Rivera: Yeah. So I called it out, because I think it’s fair to say it’s not. I am going to characterize it two ways. The first way I’d say, it’s been a little bit above 1% of revenue for the year. So it obviously was a great product and but I would highlight something that Marty said, the great thing about a product like that is the profound impact that has on clients and we had a review of it. If you saw the stories, they are really, really important and they are important not just because you feel good about them. That’s good. It’s good to feel good. But the reality is that it had a lot of impact on the clients that got it and the testimonials are amazing. But I think the second part of it is, Marty mentioned that, there is still opportunity in the PEP. So we expect that this year we are going to continue to get a benefit, not the same level of benefit we got last year, but we will continue to get. Martin Mucci: Efrain, just to clarify, I think, you used term ERTC, he might have said PEP. Did you say, PEP, Peter? Peter Christiansen: Yeah. Efrain Rivera: He is talking about the PEP. Martin Mucci: Okay. Everybody, I apologize. Yeah. PEP is a little bit different. So the final point. I would say on that simply is that, whether it’s PEP or ERTC, there is a set or a suite of services that we provide to clients that really are very important in terms of cementing a relationship with Paychex. So this year it’s ERTC. Last year it was PEP. We are constantly on the lookout or opportunities to cement that relationship with clients, so that what I say, sorry. John? John Gibson: Yeah. I know… Martin Mucci: He would talking about ERTC, apologize. John Gibson: Yeah. I would also probably add to that, Peter. Those things are cousins in somewhat of an innovation machine that we are driving with our nearly 700 HR professionals who are out there talking to our clients on a daily basis. And I say that because for whatever reason, other companies are deciding not to be as supportive in these tax credit areas and in the PEP plan, which is really resonating with small business owners because of some of the complexities that if reduces from a traditional 401(k) plan and so, again, I look at this very closely. Those are two products that when I look at the clients that are attaching those, we see a measurable improvement in our overall retention and more ability to price. Price, that you said the price value package that we can get from those clients is much good as well and they are appreciative because there’s not a lot of other places, they can go to get that assistance. So it’s a combination of us leveraging our technology and then also having the individuals in the field to help really advice and support them in building a package and getting that done. It’s really resonating and again that they are just real appreciative. Marty, I mean, Efrain mentioned the stories, I mean I have people calling me and thanking me for saving their business with ERTC and we hear that -- hear the stories about how well the PEP plan is helping our clients. Martin Mucci: Yeah. Just, sorry about that. I heard PEP and… John Gibson: Yeah. Martin Mucci: … I interpreted to be ERTC. The other thing I would say that the quantification of that is that, it’s part of the growth and management solutions. If you take what happened to our retirement business, pre-PEP and post-PEP, we took that business from kind of mid single-digit to upper single digits and approaching 10% growth on a revenue basis and it’s been really driven on the back of the ability to offer a PEP solution. So, sorry about the digression into ERTC. Peter Christiansen: No. No worry. That’s great color and John I really like the innovation machine cousins. I might still that. Last one from me, Efrain, you mentioned it earlier before or maybe John did, price to value losses have been really minimal. But you are seeing ramping up discounting and promotional activity from some peers in the market. Just overall your sense for across the market for pricing elasticity and whether that’s different pre-pandemic versus today? Martin Mucci: I think, it feels -- we feel pretty good, obliviously, our prices. I think, Efrain I mentioned earlier on the price increase toward the higher end, but it depends on the product and the bundle and so forth. But I think we feel very good about the fact that other than
PAYX Ratings Summary
PAYX Quant Ranking
Related Analysis

Paychex Stock Falls 5% After Quarterly Revenue Misses Estimates

Paychex (NASDAQ:PAYX) shares dropped over 5% intra-day today after the company announced its latest quarterly earnings, falling short of the consensus revenue forecast.

The company reported second-quarter earnings of $1.08 per share, slightly better than the analyst estimate of $1.07. However, its revenue, which increased by 6% year-over-year, totaled $1.26 billion, just below the expected $1.27 billion.

Despite these figures, Paychex noted that the macroeconomic environment remains generally stable for small and mid-sized businesses. They acknowledged challenges related to the cost and accessibility of growth capital, as well as difficulties in recruiting quality talent. The company's Small Business Employment Watch indicates a moderation in both job growth and wage inflation.

Looking forward to the fiscal year ending May 31, 2024, Paychex expects its PEO and Insurance Solutions revenue to grow by 7% to 9%. Other income is projected to be in the range of $35 million to $40 million. The company also anticipates adjusted earnings per share growth of 10% to 11% for the year.

Paychex Reports Q2 EPS Beat, Revenues In Line

Paychex (NASDAQ:PAYX) reported its Q2 results, with EPS of $0.99 coming in better than the Street estimate of $0.95. Revenue was $1.19 billion, in line with Street expectations.

For fiscal 2023, the company expects total revenue to grow approximately 8%, Management Solutions revenue to grow in the range of 7%-8%, and PEO and Insurance Solutions revenue to grow in the range of 5%-7%.

According to management, the near-term outlook is somewhat cautious due to moderating employment trends and steady wage growth. However, there is still strong demand for the company's Managed Solutions and small to medium-sized businesses are continuing to rely on the company, despite macroeconomic uncertainty.

The company is focusing on retaining clients and increasing value and penetration in HR outsourcing, HCM software, and retirement solutions. On the other hand, there has been a decrease in demand for PEO and Insurance Solutions as employers and employees are reducing the additional coverage offered or purchased for their medical plans.

Paychex Shares Down 3% Despite Q2 Beat & Raised Guidance

Paychex (NASDAQ:PAYX) shares were trading more than 3% lower Thursday afternoon despite the company’s reported Q2 results, with EPS of $1.03 coming in better than the Street estimate of $0.97. Revenue grew 11.4% year-over-year to $1.21 billion, beating the Street estimate of $1.18 billion.

Despite continued investor concern surrounding macro and the health of SMBs, the company raised its fiscal 2023 EPS guidance growth to approximately 11-12% year-over-year (vs. 9-10% prior).

Margins and revenue growth are set to decline sequentially in Q2/23 before recovering in the second half of the year.

Paychex Reported Strong Q2 Beat & Raised 2022 Outlook

Paychex, Inc. (NASDAQ:PAYX) reported its Q2 results, with EPS coming in at $0.91, beating the consensus estimate of $0.80. Quarterly revenue grew 13% year-over-year to $1.09 billion, above the consensus estimate of $1.05 billion.

The beat was helped by full employment levels, SMB formation strength, effective monetization initiatives (cross-selling insurance, back office as well as professional services) as well as a more favorable float income outcome.

The company provided its full 2022-year outlook, expecting EPS growth of 18-20% (up from prior guidance of 12-14%) and total revenue growth of 10-11% (up from prior guidance of 8%).

Paychex Price Target Raised at Wedbush Following Strong Q1 Results

Analysts at Wedbush raised their price target on Paychex, Inc. (NASDAQ:PAYX) to $125 from $105 following strong Q1 results, which drove the share price more than 4% higher on Thursday.

The company delivered strong Q1 results and better-than-expected full 2022-year guidance, reflecting normalized new SMB formation levels, tracking above pre-pandemic levels.

Quarterly revenue came in at $1.08 billion, better than the Street estimate of $1.04 billion, and EPS came in at $0.89, compared to the Street estimates of $0.80.

The company’s management highlighted strong results driven by favorable compares, an improved economic environment, and good execution. Margins benefited from pandemic related expense adjustments, including delayed hiring and increased efficiencies from technology investments.