Paychex released their financial results for the fourth quarter and full fiscal year ended May 31. John Gibson, President and CEO, and Efrain Rivera, Chief Financial Officer, discussed the business highlights and financial results for the fiscal year. They reported total revenue of over $5 billion, a major milestone for the company. They also noted their impressive growth over the past 6 years, especially considering the global pandemic.

This fiscal year, the company achieved 9% revenue growth, 13% adjusted diluted earnings per share growth, and 41% operating margins due to the hard work and dedication of its employees. There was solid growth in new annualized revenue for both the fourth quarter and the full fiscal year, particularly in HR solutions and retirement. Client retention was impacted by higher losses due to out of business, concentrate mainly in newly formed businesses in the last 2 years and financial distress in the lower revenue small clients. The company achieved record level worksite employee retention due to its strong and unique value proposition of its leading HR technology and advisory capabilities.

Paychex Flex has consistently won awards for its HR technology and is well-positioned to take advantage of the growing demand for retirement solutions due to the passage of the SECURE Act 2.0 and various state mandates. The company also offers employee retention tax credits and has helped thousands of businesses access the funds they need to keep their businesses running. The team has achieved success through their market leadership in HR technology.

Paychex has been consistently recognized for its ethical and innovative practices, and has been ranked as one of the best places to work for people in sales, women, diversity, and training. Paychex is focused on developing customer experiences that combine technology, advisory capabilities, and partnerships to deliver value. They are committed to helping businesses succeed and having a positive impact on their clients, employees, communities, and shareholders. They are joined by Bob Schrader, VP of Finance and IR. In the fourth quarter, total revenue increased 7% to $1.2 billion.

Management solutions revenue increased over 909 driven by additional product penetration. HR ancillary services, such as ERTC, saw strong demand and contributed to total revenue growth. PEO and Insurance Solutions revenue increased 5% due to higher revenue per client and growth in average worksite employees. Interest on funds held for clients also increased 69%. Total expenses increased 3% and operating income increased 15% with an operating margin of 37%. Diluted earnings per share increased 18% and adjusted diluted earnings per share increased 20%.

Total revenue increased 9% to $5 billion and total service revenue increased 8% to $4.9 billion, while expenses were up 7% to $3 billion. Operating income increased 10% with a margin of 40.6%, while diluted earnings per share increased 12% to $4.30 per share and adjusted diluted earnings per share increased 13% to $4.27 per share. Cash flow from operations was $1.7 billion, and free cash flow generated for the year was $1.5 billion. For the upcoming fiscal year, Management Solutions is expected to grow in the range of 5% to 6%.

PEO and Insurance Solutions revenue is expected to grow 6-9%, with total revenue expecting to grow 6-7%. Operating income margin is expected to be 41-42%, other income net is expected to be $30-35 million and the effective income tax rate 24-25%. Adjusted diluted earnings per share is expected to grow 9-10%. For the first quarter of fiscal 2024, total revenue is expected to grow 6%, operating margin 41%, and PEO and Insurance Solutions revenue to be at the low end of the range.

Efrain asked the participants to limit their questions to one follow-up and to refer to the investor slides on the website for additional information. John Gibson then opened the call for questions, and the first question came from Ramsey El-Assal who asked about the pricing environment. John Gibson responded that they are in a steady state and that they have pricing power in their customer base and that pricing is stable in the competitive market.

John Gibson of Paychex discusses the company's record-level retention rates, noting that they are back to pre-pandemic levels. He also notes that there is a typical attrition rate to be expected in the first two years of a business, which Paychex has seen. He believes that retention will remain stable in the coming year.

John Gibson reports that the hospitality industry has seen a strong recovery in the back half of the fiscal year, and that small companies are finding it difficult to pass on prices due to inflation and credit situations. Efrain Rivera predicts that there will be a couple of rate increases in the first half of the year and likely rate decreases as we enter next year.

In the fourth quarter, John Gibson saw strong demand continuing, with acceleration in the fourth quarter, and the back half of the fiscal year being stronger than the first half. HR services and solutions, retirement, digital end of the business, and the PEO all saw improvement in the fourth quarter, which was encouraging, and the first quarter is key for the season.

John Gibson of Paychex discussed the company's ambitions for M&A, which remain the same: finding opportunities to meet strategic objectives and make sense financially. They are looking for tuck-ins that add scale in the markets or expand their product suite, as well as digital capabilities, data, and HR analytics. The environment in the past few years has made it more difficult to find suitable opportunities, but the pipeline is beginning to expand.

Efrain Rivera explains that the company goes through a disciplined process during the planning process to look for opportunities to leverage in the P&L. This is what is reflected in the guidance, and the process is ongoing throughout the year. If opportunities arise, they will be taken advantage of in order to increase investments and reduce costs.

Efrain Rivera explains that the revenue retention rate, which had dropped to the mid 80s during the pandemic, is now back to where it was before the pandemic, between 82 and 83. He further states that the losses on the low end of the market were larger than normal during the pandemic, but the number of bankruptcies was much lower than usual.

Kevin and John discussed the importance of revenue retention, especially for high value clients, and how they have achieved record retention levels since the pandemic. They also noted that their unit retention was in line with pre-pandemic levels, but their revenue retention was higher and would remain an area of focus. John added that they had achieved historical high client retention levels even in 2019.

Paychex expects to have client growth in the 1-3% range, pricing in the 2-4% range, and additional product penetration driving the remainder of the growth in the coming year. The company has seen higher pricing in recent years and is currently on the mid to higher end of the pricing range.

Efrain Rivera and Bryan Bergin discussed client employment in the fourth quarter of the year and the expectation for it to be relatively flat in the upcoming year. Rivera noted that higher rates could have an impact on worksite employee growth, but that it is manageable and has been taken into account in the plan.

Efrain Rivera and John discussed the strong unit growth in the back half of the year, which was not sales driven, but rather retention driven due to the anomalies of the pandemic. They expect to return to more traditional patterns in the coming year. Bryan Keane asked if there were any key macro factors to watch, to which Rivera responded that everyone was worried about a crash landing in '23, but they were able to hit their numbers.

Efrain and John discussed the macro environment and how small businesses have been able to absorb the changes in interest rates. They noted that the small business index rose for three consecutive months before stabilizing, and that employment and staffing remain issues of concern. They plan to pivot inside the base if external environment does not provide opportunities for growth.

John Gibson discusses the labor market and how small and midsize business owners are hesitant to let go of employees due to their experience over the last several years. He also mentions that nontraditional labor such as gig workers and contract workers are being tapped by businesses, and he is curious to see if those will be the first to be let go. Gibson's top two investment priorities are growth and growth, and he is considering incorporating generative AI into the business.

Efrain and John discussed investments in digital technology, AI, and leveraging data sets. They are using AI in customer service, risk, finance, and HR. They are also investing in digitizing the front and back office of their business. Efrain mentioned that client balanced growth is expected to be in line with wage inflation, which is low single-digit.

Efrain Rivera and John commented on their expectations for FY '24 in terms of payroll business, PEO, and ASO. They expect flattish growth due to the lack of available employees and businesses who are not inclined to hire. They are expecting worksite employee growth for the PEO and ASO side. John then shared his perspective on job openings and how it differs from what is seen in the news.

John Gibson and Kartik Mehta discuss the recovery of the job market since the great recession and the successes that clients have had in filling open positions. Gibson also mentions that businesses are being more disciplined in their job postings and that those using their onboarding and recruiting experience are seeing a 20% improvement in time to hire. He also mentions that the deceleration of the PEO is due to insurance and healthcare insurance attach rates.

Efrain Rivera explains that the softness in health care insurance attach in the PEO industry is primarily seen in the state of Florida due to the hospitality industry. To counter this, the company has taken measures to improve the situation, though the results may not be seen in the first quarter.

The PEO saw a trend of people not wanting to take up health care insurance. To combat this, the company has taken a number of actions to create better momentum going into the next year. They have looked at their plan designs and offerings to ensure they have the broadest suite of options and are actively selling these to clients. These changes will take effect in July.

The PEO value proposition is strong due to its record retention and clients that can afford it. Enrollment for PEO begins in July and goes through January. HR outsourcing value proposition is growing at 10%, and there were signs of improvement in the fourth quarter. In order to improve client growth, both retention and sales need to be improved. The second half of the year was stronger than the first half from a sales unit perspective.

Peter Christiansen is asking John Gibson about the portfolio repositioning and if future operating outperformance should be reinvested for portfolio repositioning. He is also inquiring about the relationship between interest rates and competitive pricing, and if the float income associated with the business model gives more leeway for competitors to be more aggressive on the pricing side.

Efrain Rivera discusses the importance of understanding degrees of freedom in order to deliver results and the need to be disciplined when repositioning. He also mentions the need to consider the maximum duration of a decision and the difficulty of predicting other behaviors. He cites the example of when interest rates are high, the temptation to be overly aggressive in pricing can lead to a decrease in retention.

Efrain Rivera explains that the PEO business is still growing, but he clarifies that the growth is coming from worksite employees, not a contraction. He then goes on to explain that the acceleration of the PEO business is coming from volume, rate, and mix.

The company is expecting higher health care attachment and growth in clients compared to the previous year, and they are not expecting major pricing increases in either health care or general administrative fees. They have seen a tilt towards their ASO product due to an insurance anomaly, and they are now looking to upsell clients into the PEO by finding the right health care solution.

Paychex is using AI to analyze existing payroll and ASO customers' deduction feeds to determine the amount of money they are paying for health care. With this data, Paychex is creating a prepackaged value proposition to approach clients and offer them a chance to save money on insurance through their PEO. Efrain Rivera then addresses investors' concerns about the balance sheet when Paychex originally began offering insurance services.

Efrain and John discuss the company's approach to health care insurance and the potential for taking on more risk in order to capture market share. They note that they have a track record of managing risk appropriately and that taking more risk is not necessarily the solution for accelerating growth. They also mention that they have not done much in terms of PEO M&A in the past five years.

John Gibson states that the rate of businesses going out of business is back to normal pre-pandemic levels, which were historically low. He also mentions that at the start of the pandemic there was a surge in new business starts.

Efrain Rivera explains that the PEO side of the business was most affected during the pandemic, with employers quickly shedding employees. He also notes that during the pandemic, there were not huge client losses, but employers did drop employees. James Faucette then asks which verticals would be hit hardest if the macro environment were to deteriorate further.

Paychex is a leader in managing retirement plans for small and midsized businesses, and they are taking measures to capitalize on the opportunities provided by the SECURE Act and state mandates. They are educating their existing customers and have digital marketing programs in the market to promote their 401(k) services.

John Gibson reports that their sales organization had a record-setting year, and they are looking to capitalize on this success by offering small businesses a valuable benefit in the form of a 401(k) plan with up to $1,000 of matching funds for employees. They have the sales and marketing capabilities to do this efficiently and effectively, and are looking to continue this momentum into the next fiscal year.

John Gibson thanked everyone for attending and expressed his appreciation for the company's employees for their hard work in navigating a complex year, leading to the company achieving a $5 billion milestone. He also noted the investments made in the fourth quarter in terms of marketing and sales training and effectiveness tools, which allowed the sales team to accept higher quotas for the upcoming fiscal year.

Paychex, a company with 16,000 employees, has seen better revenue growth, profit growth, retention metrics, HR outsourcing metrics, new sales revenue and new sales unit rates of growth in the fourth quarter and full year of the past fiscal year than in the previous year. The company has managed to come out of the pandemic in a stronger position than before. The speaker thanked the employees for their hard work and wished everyone a nice 4th of July weekend.

This summary was generated with AI and may contain some inaccuracies.