The operator welcomes participants to the Fourth Quarter 2024 Paychex Earnings Conference Call and introduces the speakers, John Gibson and Bob Schrader. The call will include forward-looking statements and non-GAAP measures. John Gibson provides a brief overview of the company's financial results and directs listeners to the Investor Relations website for more information. Bob Schrader will review the financial results and outlook for the next fiscal year before opening the call to questions.

Paychex has had a successful fiscal year, with 5% growth in total revenue and 11% growth in adjusted diluted earnings per share. They attribute this success to their innovative HR technology and advisory solutions, as well as their efficient business operations. Despite some challenges in certain market segments, their revenue retention and client retention remain strong. They have also seen continued demand for their HR technology and advisory solutions, but have faced some headwinds in sales due to adjustments in their go-to-market strategy and delays in decision-making from clients. However, their HR outsourcing and retirement businesses continue to perform well.

The company's diverse range of solutions allows them to adapt to changing market conditions and continue to serve small and mid-sized businesses facing challenges in the current operating environment. Their recent data shows an increase in job growth and improvements in hiring within their client base. As a leader in the industry, they have launched a new program to help businesses find and retain qualified employees by combining digital HR technology, analytics, and dedicated HR professionals. This program includes seamless integrations with top job boards and offers Fortune 500 employee wellness benefits to attract top talent.

Paychex's HR professionals use data analytics and retention insights to help clients retain employees. The company's PEO business and retirement services are performing well, with a focus on providing affordable retirement solutions for small and mid-sized businesses. Legislation and state mandates are helping to address the retirement crisis in the US, and Paychex is committed to educating business owners and professionals on available programs.

Paychex has been focusing on AI initiatives to enhance customer service, identify at-risk clients, optimize pricing and sales, and drive operational efficiencies. They have received numerous awards and recognition for their technology and commitment to employees. In the post-pandemic era, Paychex is well-equipped to help small and mid-sized businesses navigate challenges and remains committed to their purpose of helping businesses succeed.

In the fourth quarter, the company's total revenue increased by 5% to $1.3 billion, with Management Solutions revenue increasing by 3% and PEO and insurance solutions revenue increasing by 9%. Interest on funds held for clients also saw a significant increase of 54%. However, a one-time charge of $39 million was recognized for cost optimization initiatives, leading to a 5% increase in total expenses. Despite this, the company remains confident in its ability to deliver operating margin expansion for fiscal 2025.

In the fourth quarter, the company's operating income increased by 6% and adjusted operating income grew by 15%, representing a margin expansion of 330 basis points. Diluted earnings per share increased by 8% and adjusted diluted earnings per share increased by 15%. For the full year, total revenue grew by 5%, with management solutions revenue increasing by 4% and PEO and Insurance solutions increasing by 8%. Total expenses grew by 4%, with a 3% growth excluding one-time costs. Operating income increased by 7% and adjusted operating income increased by 9%, with a margin expansion of 130 basis points. Diluted earnings per share increased by 9% and adjusted diluted earnings per share increased by 11%. The company's financial position remained strong, with cash, restricted cash, and total corporate investments of $1.6 billion and total borrowings of approximately $817 million. Cash flow from operations for the year was $1.9 billion, up 11% from the prior year. The company returned $1.5 billion to shareholders through dividends and share buybacks.

In the fiscal year 2025, the company expects total revenue to grow by 4-5.5%, with adjusted diluted earnings per share increasing by 5-7%. Management solutions is expected to grow by 3-4%, while PEO and Insurance Solutions are expected to grow by 7-9%. Interest on funds held for clients is projected to be between $150-160 million, and other income is expected to be between $35-40 million. The operating income margin is expected to be 42-43%, and the effective tax rate is expected to be 24-25%. In the first quarter, the company anticipates 2% revenue growth, with a headwind of over 400 basis points due to the expiration of ERTC and one less processing day compared to the previous year. The operating margin for the quarter is expected to be 40-41%.

The speaker discusses the company's current assumptions and their potential to change, as well as their plans to update investors on the first quarter call. He then invites questions from listeners. The first question asks for more information on the company's lower close rates and changes in their go-to-market strategy, specifically if these changes were due to the company's sales practices or changes in client behavior. The speaker responds by stating that demand for their solutions was solid throughout the year, with a focus on HR outsourcing and advisory services. The company is making changes to their go-to-market strategy in response to the pandemic and to address current client concerns, such as attracting and retaining employees in a stable market.

The speaker discusses three important factors for businesses to consider in the current environment: access to affordable benefits, access to capital, and the tight labor market. They mention a recent acquisition and efforts to pivot towards higher growth market segments. The speaker also notes that while there has been moderate growth and cooling wage inflation, there has been a recent increase in employment.

The speaker discusses the growth in checks and worksite employees in the fourth quarter, which was a positive trend. They engaged with small business owners to understand why they were struggling to retain clients and attract qualified individuals. They found that businesses are being more selective in their hiring and have rolled out products to help with retention and recruitment. The speaker also mentions that they are not seeing any signs of a recession or hearing concerns from clients about a potential recession. The next question is about changes made in the micro segment and whether they were necessary for the company's product.

John Gibson, CEO of a company, was asked about market pressures on a specific segment and when sales conversions would return to normal levels. Gibson explained that after their selling season, they introduced new technology platforms to improve the prospect experience. However, there were some integration issues that caused disruptions and lower conversion rates. He believes that these upgrades will lead to better conversion and attraction rates in the future.

Bob Schrader, in response to a question about the cost action taken in the fourth quarter, confirms that it was factored into the preliminary outlook for 2025. He explains that the end of ERTC happened earlier than expected, but they have been preparing for it for a year by focusing on cost savings, enhancing digital capabilities, and making investments while avoiding new costs. As for client and WSE growth, John Gibson clarifies that the disclosed numbers are rounded and the actual growth was closer to 1%.

The speaker discusses the strong growth in worksite employee numbers, particularly in the PEO business. They also mention their growth formula and plans to drive client-based growth and increase their share of wallet. They note that their guidance for next year includes a 200 basis point headwind from ERTC.

John mentions the businesses ASO, PEO, and retirement, which have a lot of momentum and potential for growth within the existing client base. While pricing may not be as high as expected this year, it is still strong and will contribute to growth next year. The company's growth formula is still intact, despite recent challenges such as the PPP and ERTC programs.

The company has experienced strong growth in their PEO worksite employee numbers, with close to double digits. This is due to a combination of factors, including a competitive offering, a strong economy, and improvements made to their insurance program. However, the company did not meet their expectations for growth within their existing client base, leading them to implement a hiring program to address this issue. Overall, the company is confident in their sustainable pricing capabilities and expects continued growth in the future.

The first quarter guidance for Paychex shows a 2% revenue growth, which is a significant decrease compared to the 5% growth seen in the fourth quarter. This slowdown is attributed to one less processing day and the ERTC headwinds, but it is unclear what other factors may be causing this gap.

In response to a question about the expected decline in margins for the first quarter, Bob Schrader explains that the decline is due to the ERTC headwind and lost processing days. He predicts that the growth rate in the first quarter will be similar to the growth rate in the second half of the previous year, excluding the impact of interest rates. He also notes that the company has seen a significant acceleration in growth in the second half of the previous year.

The speaker discusses the growth in volumes and proposals for Paychex in different areas, including retirement, ASO, PEO, and mid-market. They mention that the AI-based system requires an engaged client to generate a proposal and that volumes have increased in all major groups, with retirement showing acceleration in the fourth quarter. The speaker also notes that PEO volumes were particularly strong.

In the fourth quarter, there was a delay in decision-making in the mid-market, resulting in longer sales cycles. However, there are more active deals in the pipeline compared to last year, suggesting that there is a lot of shopping going on in the price-sensitive market. The mid-market had solid volumes for the year, but more deals required discounting. The average deal size was also down, which affected the PEO market as well. Overall, there is good activity and a strong pipeline in the mid-market, but decision-making is slower.

The speaker discusses the segmentation of the market and mentions that there is more buying in the lower end of the market than the upper end. They also mention that promotions and discounts are stable. In response to a question about the slower growth in Q1, the speaker mentions that there is no assumption of M&A contribution in the full year guidance. They also state that the ERTC headwind will ramp down quarter-to-quarter, leading to an acceleration in revenue growth. They expect similar growth rates in the first half and back half of the year, with potential for slightly stronger growth in the back half.

The difference in gating is primarily due to the decrease in ERTC quarter-to-quarter throughout the year. The company will provide updates at the end of Q1 and Q2, but not set a precedent for future quarters. The loss of one processing day in the first quarter will not be made up in the second quarter. The operating margin starts lower in the first quarter due to the ERTC headwind and the loss of one processing day, but will ramp up significantly throughout the year.

The speaker discusses the potential impact of implementing Gen AI in the company, particularly in improving operating performance and decreasing costs. They mention specific areas where Gen AI has been used, such as sales, service, and pricing, and highlight the benefits of real-time analysis for price realization and sensitivity. However, they are unable to quantify the exact revenue or cost benefits at this time.

The company has become more sophisticated in understanding the value they provide to clients through their service experience and utilization of their product and technology. This allows them to realize more price appreciation and deliver more value to clients over time. They have also used AI and data models to improve performance in their PEO business and calculate ERTC more efficiently.

John Gibson and Bob discuss how their company used data and AI models to generate reports and complete applications for clients. They mention that some providers have moved away from offering this service due to its complexity, but their company found it to be highly profitable. They also mention their use of Gen AI for automated chat and reducing labor intensity in servicing clients. They have digitized their entire process and have a large amount of data to analyze and improve their service.

The speaker discusses the growth model for the company, which includes factors such as net client growth, pricing, and ancillary sales. They mention that pricing has been higher in recent years but is expected to return to normal levels. They also note that there has been fluctuation in the number of checks per client, but they are not expecting significant growth in that area. They mention some challenges in the HR outsourcing sector but are cautiously optimistic about growth. Overall, the growth formula is strong and in line with historical trends. The speaker also mentions the importance of considering what is realized from client base growth and pricing.

The company has a broad growth formula and strong product penetration, which has been accelerated by the pandemic. They are entering the post-pandemic era in a stronger position and have established themselves as a trusted advisor with their clients. The company is seeing growth in insurance penetration and HR outsourcing, both inside and outside the base. M&A has also been a key part of their growth formula and they will continue to be active in that market. The market is becoming more rational in terms of valuation, and the company will also look at adjacencies for potential acquisitions.

The speaker discusses the company's interest in expanding partnerships with Fintechs and other companies in order to provide small business owners with access to capital for payroll and other needs. They also mention their cost optimization charges, which include real estate, technology, and headcount actions. The speaker expects no further charges related to this in fiscal year 2025.

The speaker is concluding the call and informing listeners that a replay of the webcast will be available for 90 days. They thank everyone for their interest in Paychex and wish them a great day and fourth of July. The operator then ends the call.

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