Paychex Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

• John Gibson, President and Chief Executive Officer
• Efrain Rivera, Senior Vice President, Chief Financial Officer

Analysts

• Ramsey El-Assal, Barclays PLC
• Eric Dray, Bank of America Co.
• Rayna Kumar, UBS Group AG
• Andrew Nicholas, William Blair
• Kevin McVeigh, Credit Suisse Group AG
• Bryan Bergin, TD Cowen
• Bryan Keane, Deutsche Bank Aktiengesellschaft
• Scott Wurtzel, Wolfe Research
• Kartik Mehta, Northcoast Research
• Eugene Simuni, MoffettNathanson
• Peter Christiansen, Smith Barney Citigroup
• Tien-Tsin Huang, J.P. Morgan
• James Faucette, Morgan Stanley
• Unidentified Participant
• Samad Samana, Jefferies Financial Group Inc.

Presentation

[Operator]

Good day, everyone, and welcome to today's Paychex Fourth Quarter and Fiscal Year End Earnings Conference Call. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions]

It is now my pleasure to turn the conference over to Mr. John Gibson, President and CEO. Please go ahead.

[John Gibson, President and Chief Executive Officer at Paychex]

Thank you, Stephanie. Thank you, everyone, for joining us for our discussion of the Paychex fourth quarter and fiscal year '23 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer.

This morning before the market opened, we released our financial results for the fourth quarter and full fiscal year ended May 31st. You can access our earnings release on our Investor Relations website. Our Form 10-K will be filed with the SEC before the end of July. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days.

I'll start with the call today with an update on the business highlights for the fourth quarter and fiscal year. Efrain will review our financial results for fiscal '23 and our outlook for '24, we'll then open it up for your questions.

We finished fiscal year '23 with solid financial results and momentum heading into fiscal year 2024. Total revenue grew 9% for the full year and we hit a major milestone for the company with over $5 billion in total revenue. I was personally reflecting on this last night when I joined the company, we were just over $2 billion. It took us six years to go from $2 billion to $3 billion, three years to go to $3 billion to $4 billion, and it took us three years to go to $4 billion to $5 billion. But I'll remind everybody that was during the global pandemic. So certainly very proud of those results.

In addition to the revenue growth at 9%, adjusted diluted earnings per share grew 13% to $4.27 and operating margins finished at 41%, as we continue to benefit from our continued investments in technology, our focus on driving digitalization in all aspects of our business and our longstanding tradition of operating excellence. These results are due to the hard work and dedication of our more than 16,000 employees. I'm very proud of what we've achieved this fiscal year. Our industry-leading technology and advisory solutions have made positive impacts on our clients and their employees and in return, they continue to reward us with additional business and the continued royalty.

Momentum in sales has continued with solid growth in new annualized revenue for both the fourth quarter and the full fiscal year. HR Solutions and retirement were areas of particular strength with double-digit growth. We are well-positioned in terms of our staffing levels and Rep tenure heading into the New Year. Revenue retention finished the year near record levels as we continue to focus on retaining and increasing our share of wallet with our high-value customer segments. Client retention was impacted by higher losses due to out of business, concentrated mainly in newly formed businesses over the last two years in financial distress in the low revenues small clients.

We continue to see strong demand for our HR outsourcing solutions with worksite employee growth over 10% Year-over-Year. Over the year, we achieved record level worksite employee retention due to our strong and unique value proposition of our leading HR Technology and advisory capabilities. Businesses of all sizes continue to navigate the challenges of a very complicated regulatory environment, a competitive labor market and now tightening credit. Demand for our solutions remain strong due to the depth and breadth of our integrated offerings, including HR Technology designed to deliver efficiency for both the employer and the employee, our comprehensive HR outsourcing which leverages the strength of our technology and the experience of a trained HR professional and our outstanding compliance organization and the need for businesses to offer quality benefits, including retirement to compete for talent.

Our retirement solutions are benefiting from the growing expectations of our retirement plan as a core benefit offering for small and mid-sized businesses. Recent passage of the SECURE Act 2.0 legislation and various state mandates requiring employers to provide retirement services to their employees are making 401(k) the key benefit for small and mid-sized businesses. With more state mandates expected to take effect in the future, we expect a strong market for retirement to continue for the foreseeable future and we are well-positioned as a leader to take advantage of this opportunity.

The S&P credit environment has continued to fuel demand for our employee retention tax credit service. Our full-service ERTC offerings has helped 10s of thousands of businesses obtain tax credits and getting access to funds they need to keep their businesses running and growing. We continue to communicate this opportunity to existing clients and prospects.

Industry recognition continues to reinforce the competitive strength of our technology solutions. For the fourth consecutive year, Paychex Flex earned an HR Tech Award for Best small and mid-sized business focused solution in the core HR category. Our consistency in winning these awards and being praised repeatedly in the leadership quadrant of respected technology analyst rankings speaks to our market leadership in HR Technology.

I'm not only very proud of these results and the performance of the team, but I'm also also equally proud of how we achieved these results. We have been consistently recognized as one of the world's most admired, most ethical and most innovative company. In addition, we've been ranked as one of the best places to work for people in sales, for women, for diversity and for our outstanding training and investments in our employees for development. These awards are a testament to how our employees not only get the job done, but do it the right way and we are constantly looking for new ways so we can make ourselves and our communities better.

As we move into fiscal year '24, we will continue our focus on developing leading customer experiences that combine our technology, our advisory capabilities and our partnerships to deliver superior value to our customers. Paychex is uniquely positioned to help small and mid-sized businesses navigate the challenges they face in a complex and ever-changing and evolving world. We remain committed to our purpose, and that is to help businesses succeed. And we'll continually strive to have a positive impact on our clients, our employees, our communities and our shareholders.

Now, I will turn it over to Efrain who will take you through our financial results for the fourth quarter and the fiscal year, as well as our guidance for fiscal year '24. Efrain?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Thanks, John, and good morning to all of you. I hope you're indoors on this smokey Thursday. I thought we were past it, but not quite. I'd like to remind everyone that today's commentary will contain forward-looking statements, refer to the customary disclosures that we make.

Let me start by providing a summary of our fourth quarter financial results, talk about full year results and then finish with a review of our fiscal 2024 outlook. Before I start, I also wanted to add that joining us in the room today this morning is Bob Schrader, VP of Finance and IR. Many of you have met Bob.

Okay. For the fourth quarter, you saw total revenue increase 7% to $1.2 billion, management solutions revenue was up 7% to 9 -- a little bit over $900 million, driven by additional product penetration, into our ancillary services, which currently is mostly ERTC and also price realization. We continue to see strong attachment of our HR Solutions, retirement and time and attendance of products.

Demand for our ERTC service remained strong, as John mentioned, and it contributed approximately 1% to 2% to total revenue growth for the full year. Demand for this mid service along with our internal execution have continued to exceed our expectations, while ERTC has been a tailwind and we expect demand to continue into fiscal year '24, it will become a moderate headwind next year, especially in the back half of the year where it will become more of a headwind.

PEO and insurance solutions revenue increased 5% to $300 million, driven by higher revenue per client and growth in average worksite employees. The rate of growth was tempered a bit by lower medical plan sales and participant borrowings, along with continued preference for ASO in this environment. We expect these trends will start to normalize as we progress through fiscal 2024 that won't be evident necessarily in Q1, and I'll talk about that in a little bit.

Interest on funds held for clients increased 69% to $25 million primarily due to higher average interest rates, partially offset by realized losses taken in Q4 as we reposition the portfolio heading into the back half of this year. Total expenses increased 3% to $776 million since growth was largely attributable to higher headcount, wage rates in general costs to support growth in the business. Operating income increased 15% to $453 million with an operating margin of just under 37%, a 240 basis point expansion over the prior year period. Diluted earnings per share increased 18% to $0.97 per share and adjusted diluted earnings per share increased 20% for the quarter, to again $0.97 per share.

Let me quickly summarize our full year results. Total revenue increased 9% to $5 billion and total service revenue increased 8% to $4.9 billion. As you are all aware, we raised guidance a number of times during the year. Management Solutions increased 8% to $3.7 billion, premium on insurance increased 6% to $1.2 billion. Total expenses were up 7% to $3 billion. Operating income increased 10% with a margin of 40.6%. John mentioned this earlier, that's a 70 basis point expansion over the prior year. The leverage in the model was pretty evident.

Other income net increased by over $30 million due to higher average interest rates and average invested balances within the corporate investment portfolio. Diluted earnings per share increased 12% to $4.30 per share and adjusted diluted earnings per share increased 13% to $4.27 per share. Our financial position remains rock-solid with cash, restricted cash and total corporate investments more than $1.6 billion and total borrowings of approximately $808 million as of May 2023.

Cash flow from operations was $1.7 billion for the fiscal year, an increase of 13% from the prior year, driven by higher net income and changes in working capital. Free cash flow generated for the year was $1.5 billion, up 15% year-over-Year. And while it's easy to gloss over those numbers, I think it is really important that when we report numbers, the quality of our earnings and the our quality of our cash is very-very strong as noted by some of you, not only do we deliver on the topline, but we deliver it in a quality way on the bottom line and we intend to continue to do that. We paid out a total of $1.2 billion in dividends during fiscal 2023, or 70% of our net income on a 12-month rolling return-on-equity with the stellar 48% with an arrow pointing up.

Now, let me turn to guidance for the upcoming fiscal year ending May 2024. Our current outlook, as you saw, is as follows. Management solutions expected to grow in the range of 5% to 6%. PEO and insurance solutions expected to grow in the range of 6% to 9%, widen that a bit just to accommodate the fact that sometimes attachment on insurance can vary from quarter-to-quarter and from year-to-year as we saw last year.

Interest on funds held for clients is expected to be in the range of about $135 million to $145 million. Total revenue is expected to grow in the range of 6% to 7%. Operating income margin is expected to be in the range of 41% to 42%. Other income net is expected to be income in the range of $30 million to $35 million. And then, our effective income tax rate is expected to be in the range of 24% to 25%. Adjusted diluted earnings per share expected to grow in the range of 9% to 10%.

This outlook assume current macro economic environment, which as you know has some uncertainty surrounding future interest rate changes in the economy. We have better visibility in the first half of fiscal 2024. As each quarter progresses, we will have a little better visibility into the remaining quarters in the year.

For the first half of fiscal 2024 and the first quarter, we expect total revenue growth to be approximately 6%. That's the first half and the first quarter. We anticipate operating margins for the first quarter to be approximately 41%, or due to a little bit on your modeling. And we expect PEO and insurance solutions revenue to be below the low-end of the range for the first quarter, then it will be solidly in the range. That's our expectation at this point.

Before you ask me the question, I will answer the first quarter was actually the strongest quarter of the year on PEO last year and as a consequence, the compare will be a little bit tougher and we expect the business build as we go through the year. Of course, all of this is subject to our current assumptions and they can change. We'll update you again on the first quarter call. There's a number of questions because it's, of course, the time when we give annual guidance, so if I could just ask for your forbearance on something, which is to say, ask a question and limit yourself to one follow now, I will say I understand some of those questions will be compound questions, but if it's a five-part compound question that violates the rule. So, but just so we can get through the call without going excessively long.

With all of that, we'll refer you to our investor slides on our website for additional information. And I'll turn the call back over to John.

[John Gibson, President and Chief Executive Officer at Paychex]

Okay. So, now with all the conditions and restrictions that Efrain has just laid out for you, we'll now open the call for questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question will come from Ramsey El-Assal with Barclays.

[Ramsey El-Assal, Analyst at Barclays]

Hi, thanks so much for taking my question this morning. Can you comment on the pricing environment you called that out a little bit in the press release. And I guess the question is, are you seeing sort of a window right now for more aggressive pricing adjustments just given the inflationary environment or is this sort of -- are you feeling now that you're in sort of a steady state kind of continual trajectory when it comes to pricing?

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, Ramsey. Thanks for the question. Yeah. I would say we're more in a steady state. I feel good about where we are. I think the value of our products and services I think what we see when we talk about price inside our customer base, they're rewarding us. They're seeing the value we're getting and as we did last year, we believe we have a pricing power inside the base and we'll continue to avail ourselves of that. And then in terms -- in new clients and prospects in the competitive environment, hey, we've always been in a competitive market and I see stable pricing. And I think as we go through this year, we'll continue to do what we need to do to be competitive in the marketplace. So I don't see any major shifts of change on either side of the pricing equation.

[Ramsey El-Assal, Analyst at Barclays]

Okay. And I wanted to ask also about retention. Obviously, retention is at healthy record levels, at the same time you called out a little bit of where you were seeing a little bit of headwind. I think it was from out of business from newly formed businesses and I think there were some other color that Efrain provided. If you could just elaborate on that a little bit, I'd appreciate it.

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, Ramsey. I think it's been pretty consistent, as I think on all the prior calls I've said probably as we expected. So we continue to really focus our efforts on the high-end part of our valuable clients, particularly in HR outsourcing there. We continue to maintain both in the PEO and ASO record retention from a revenue and client perspective there. Where we did see -- and we have near record retention overall across the business, again because of that focus that we're having, the things we're doing from driving value in our high-value customer segments. As we expected, we did see some out of business. And when I tell that back, what you're seeing is exactly what I thought we'd see. We had a very high number of new business starts two years ago in almost every model, and I don't care whether we're in a recession, good times or bad times, a business starts in the first two years, about half of them are gone. And so I'm not surprised when we were saying we kind of expected that to be the case. And that's what we saw on kind of the client retention side. But again, even if you look at the client retention side, we're back to where we were pre-pandemic levels. So nothing dramatic there. So I'd say that's more stabilizing and we kind of expect that kind of more typical stable kind of client attrition to occur as we're going into '24.

[Ramsey El-Assal, Analyst at Barclays]

Got it. Thanks so much.

[Operator]

Thank you. Our next question will come from Jason Kupferberg with Bank of America.

[Eric Dray, Analyst at Bank of America]

Hi, this is Eric Dray on for Jason. Thanks for taking the question. I had a question just kind of high-level. We've seen small businesses be really resilient, kind of seems like the macro may avoid a hard landing. But curious about kind of trends you're seeing among different client groups. Anything to call out, maybe blue-collar versus white-collar. Any color you can add there?

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah. Look, I think again, not seeing anything Eric that's out of the norm. I think generally we've continued to see the hospitality. When you go back and look at our jobs Index, hospitality has probably been the laggard -- hospitality been the laggard through the course of the recession. What we're seen there is they've really made a good strong come back, I would say in the back half of this fiscal year for us and are getting back to kind of level -- employment levels of the other segments, not really seeing anything specifically out of the ordinary. Certainly in the low end of the market you're seeing a lot more of the small companies get back to what we said on the retention side. Newer start-ups, smaller companies finding more pressure relative to inability to pass price and so they're being scores by inflation and then also the credit situation.

[Eric Dray, Analyst at Bank of America]

Okay, great, thanks. And then on the business, for Efrain. On the flow guidance, kind of two-parts. What are you thinking about for interest rates? And then what are your thoughts on kind of managing duration? I know the question comes up on every call, but thought I'd ask. Thanks.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

So we're thinking, and then we're managing and operate those two. And I mentioned in previous calls that I was really concerned about a sharp decline in rates in the first half of '24 and the end of this year -- calendar year. I don't think that's likely to happen. So at this point, our thinking is that there will be a couple of rate increases as we go through the first half of the year and likely to see some rate decreases as we enter next year. Certain, Jerome Powell's comments recently did seem to indicate that's where we're going. But I think -- we think our assumption is that in the first half of calendar year '24 or second half, you're going to see rate decreases. So net-net, that's what's incorporated in our guidance.

So, while we could adjust and play games in terms of where we are with futures, that's what our thinking is. And as we get through the year in the back half of the year, we'll update kind of where we're at. So as to positioning the portfolio, my bias is to go along as we go through the year to mitigate what in '24 is likely to be a set of rate decreases. I can't call it any closer than that. I think that are numbers kind of support that kind of scenario.

[Operator]

Thank you. Our next question will come from Rayna Kumar with UBS.

[Rayna Kumar, Analyst at UBS Group]

Good morning. Thanks for taking my question. Can you talk about what -- Hello. Can you talk a little bit about bookings in the quarter. Anything to call-out on different customer sizes and products where you're seeing strength or weaknesses?

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah. So look, we actually saw strong demand continuing. I would say, actually -- we actually saw some acceleration in the fourth quarter when you look at it. In the back half of the fiscal year was actually stronger than the first half, which it was progressing. HR Services -- our HR solutions continue to resonate and retirement mainly saw pickup in the growing end digital end of our business in the fourth quarter, which is nice to see. And in fact, I'd say the PEO had improvement in Q4 as well, which was an encouraging sign that some of the changes in our approach that we've been working on are beginning to get traction. It's really there. And the key part of that season is in the first quarter, which we did to the second quarter. But again, very pleased with the strong demand that we saw across the platform. So I think we've got a good set of products in services. There is strong demand in this environment across all the market segments.

[Rayna Kumar, Analyst at UBS Group]

That is very helpful. And then just a quick, really quick follow-up to stay within Efrain guidelines here. Could you call out the ERTC contribution just for the fourth quarter?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

No, we didn't. I think we're going to stick with the Q1 1% to 2% on growth for the full year, so -- and the net converts from a tailwind into a headwind next year, that's as far as we'll go.

[Rayna Kumar, Analyst at UBS Group]

Got it, okay. Thank you.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yes, you're welcome.

[Operator]

Thank you. Our next question will come from Andrew Nicholas with William Blair.

[Andrew Nicholas, Analyst at William Blair]

Hi, good morning. Thanks for taking my questions. Was going to ask first on kind of M&A within Paychex. If you could just kind of give us an update on your ambitions both in the near-term and medium-term. This just is a compound question, but a preference between HCM and PEO, and anything you could say on valuations?

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah. Andrew, thanks for the question. Our ambitions remains the same. We're trying to find opportunities to me are strategic objectives and at the same time makes sense financially. The latter has been more challenging in the environment, I'd say over the past few years, but I think we certainly began to see some change in the market dynamics in our pipeline. We are beginning to expand with opportunities that I think are more realistic for us to consider. I don't think our focus has really changed. We're going to continue to look for tuck-ins that help us kind of add scale in new markets or expand our product suite. We're looking for capability enhancements, particularly in the digital area, digital capabilities, data analytics, HR, HR analytics. And again, we're constantly looking at numerous adjacencies as the market continues to evolve and looking for new growth platforms that are adjacent to our current suite of solutions and really help us continue to deliver that value proposition, small-medium sized businesses to help in succeeding. So, and again, tuck-ins, capability enhancements in the growth platforms. That's our areas of the focus and we're going to continue to be mindful of making sure we're getting good deals and not as depending.

[Andrew Nicholas, Analyst at William Blair]

That's helpful. Thank you. And then for my follow-up. I just wanted to ask on kind of the margin guide for next year. I think last quarter you spoke to a preliminary target of 25 to 50 basis points, I think the 41% to 42% range. You put out this morning is, is a decent bit higher at the midpoint. So if you could just kind of unpack that a little bit, what's changed in terms of your outlook if anything, or if it's just a matter of rounded numbers and that's still the plan as well? Just trying to get a little bit more insight there. Thank you.

[Ramsey El-Assal, Analyst at Barclays]

Yeah. I guess I'd answer that in a couple of ways. Look, March is preliminary, mean that we haven't done to a plan. I think that chance continued a tradition that we've had in the company, which is to say, where we can find sources of leverage in the P&L. So obviously, the mix has an impact on. And then Andres as you are aware, you have more opportunity and more management solutions that gives you more opportunity. But I would say we're into pretty disciplined process in the planning processes where there were opportunities to leverage and cover them and that's what you're seeing in the guidance.

I'd say one other thing that's really important. The process of planning a year is a 365 days activity. If we get through the first quarter as we go through, we see opportunity both on the investment side and also on the cost side, we go for it and we challenge ourselves to find new opportunities. So I think that in addition to the fact that that was biproduct for now -- byproduct, but aim of the planning process we think in those terms. And so because you have to go into the new year with multiple levers to find leverage if you need it. So as we speak, thinking about, okay, how can we even do better to offset any potential issues that might come up in the year, so it's that. There's a little bit rounding, little bit of planning and a little bit of DNA.

[Andrew Nicholas, Analyst at William Blair]

Perfect. Thank you.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah.

[Operator]

Thank you. Our next question will come from Kevin McVeigh with Credit Suisse.

[Kevin McVeigh, Analyst at Credit Suisse Group]

Great, thanks. I just have one to make up some time. Hey Efrain, hey. Pardon me. You talked a little bit about I think kind of revenue retention versus client retention and revenue retention being at all-time high despite I think a little shift in client. Can you help us frame what the delta is there? Kind of what it is today and kind of where that's been historically and I'd imagined probably narrowed over-time. But is there any way to frame that a little bit more?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah, yeah. So look, it was approaching the mid 80s during the pandemic. But that's really and somewhere its kind of an outlier when we reported last year, which is kind of like one year post the midpoint of the pandemic -- against the mid point of the pandemic, they were between 83 and 84 and this year were between 82 and 83. So, as John mentioned, we saw some larger losses on the low-end of the market. I'll frame that in one second. That 82, 83 is consistent with where we've been prior years. So there's nothing unusual about that. What was unusual during the pandemic was that the number of bankruptcies or what we call involuntary losses will be much lower than it normally. And there is probably reasons, but I don't need the color on the call about PPP. So a lot of those clients kind of got through the client base to John's point. What was going on was -- you had tenant group of very small clients that were being propped up a bit by funding. In some ways, the losses were higher because of that and I think we're now back to a more normalized environment in terms of the losses.

Bit I want to make an important point and John referenced this. We put a lot of emphasis on revenue retention, especially among high-value clients and was not different or what is different from the pandemic is that our revenue retention is higher than it was pre-pandemic. So we're at record retention levels from revenue, that's where we put our -- that's where we put a lot of our focus on and I can -- I won't do it, but we can say many-many efforts that go into retaining our highest clients, so we can deliver approximately 88% revenue retention. That's important and that's an important number for us.

And so while in the past we talk a lot about unit retention, nothing wrong with that, you want that. The reality is that what's become much more important is that you save and you retain your highest-value clients. And so while our unit retention is in-line with what it was pre-pandemic our revenue retention was higher and has remained higher and will be an area of focus going forward.

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, Kevin. The thing I would add to that. I will remind everybody. We go back and look at this over the last four to five years. When we say pre-pandemic levels, you go back to '19, and you got our transcript. What you would also here in '19 is that on a client retention we were aligned that we actually had historical high client retention back in '19 as well. So we are returning on the client side to levels that historically for Paychex wouldn't been historical high in terms of client retention and then as Efrain pointed out, we've had a lot of focus on what we need to do to drive better retention in our high-value segments and we've been very successful to do that. And I think coming out of the pandemic, the value that we demonstrated to those clients in terms of both our technology enhancements as well as the advisory support that we've given them through very challenging times I think they've rewarded us. They rewarded by buying more from us. They rewarded us by giving us the opportunity to have a better pricing for those products and services because they see the value and they rewarded us with the royalty.

[Kevin McVeigh, Analyst at Credit Suisse Group]

Very helpful. Thank you.

[Operator]

Thank you. Our next question will come from Bryan Bergin with TD Cowen.

[Bryan Bergin, Analyst at TD Cowen]

Hey guys, good morning. Thank you. I wanted to dig into management solutions here a bit more and maybe some of the underlying growth driver assumptions for '24. When we look here just this year in '23 you see total company client growth, like a 0.5% in '23 and you're citing increased product penetration and price realization. Can you kind of roll that for us here? Can you give us a sense on how you're thinking about the pieces here across the client growth versus pricing versus product attach?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah, yeah. I would say Brian is interesting is that we have said that typical client growth in a year is going to be in the 1% to 3% range. We were in the low-end of that range. We expect to be middle or higher next year. So that's part for the equation on the pricing side. We're typically in the 2% to 4% range, although in recent years higher than that. We're we're on the mid to maybe perhaps a little bit higher than mid level on the pricing side, probably sort of the basic elements that many got mixed and additional product penetration driving the remainder of that. Now, if you start reconciling, I got to take the negative to and the negative is I'm going to get some headwind from ERTC which you will see on the Management Solution side. So that when you triangulate all pieces, that's where get to a 5% to 6% growth.

[Bryan Bergin, Analyst at TD Cowen]

Okay. How about client employment there. S, and I guess specifically in 4Q, how did it compare to 3Q and then for '24 as well?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Sorry, I started talking already. You were saying Q4, what were you saying then?

[Bryan Bergin, Analyst at TD Cowen]

Yeah. So as as you think about client employment, curious about how you're factoring that for '24? But also I think you guys were assuming 4Q is going be relatively flattish from 3Q, did that play out or was that different too?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah, yeah that's played out and going into next year we expect to be flattish. I will say that, I mean, you always have to have an element of caution on the impact of higher rates. They're tier levels there that would cause me to get a little bit more concerned than I am right now. So we'll have to play that out, and that definitely would have an impact on worksite employee growth. I think it's manageable, and we've taken that into account in our plant. But at this point, we're not expecting that its going to change.

[Bryan Bergin, Analyst at TD Cowen]

Okay, makes sense. Thank you very much.

[Operator]

Thank you. Our next question will come from Bryan Keane with Deutsche Bank.

[Bryan Keane, Analyst at Deutsche Bank Aktiengesellschaft]

Hi guys, good morning. Hi, how are you doing. I just wanted to -- sorry, yeah. I just wanted to follow-up on the client growth question. It sounds like you expect it to go up a little bit higher than it was, it was on the low-end of the range and then it will go up. Is that a function of what you're seeing in the sales channel or is that a little bit of retention, just given that maybe some of the smaller clients that churned off during the pandemic, you won't have that same issue as you go into this year?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah, Bryan, two answers of that is. And John did mention that generally we don't into this level of detail. But we saw a pretty strong unit growth in the back-half of the year. So wasn't a sales-driven issue, was really more of a retention driven issue based on the factors that we talked about earlier in the call, i.e., Just to go one level deeper. We all remember that one of the anomalies in the pandemic was that the business start to really-really accelerate, and I think to this date we think can completely explain it. And so we benefited from that unit growth. But as John said, we know a number of those clients are going to go out of business. And after two years, we did the analysis and that we all looked at and a lot of those clients did not did not survive once the the PPP and other government stimulus went out of business, I'm sorry, once that stimulus was gone. So that's primarily driver somewhat of a anomalous situation I think that will will return to more traditional patterns as we get into next year. That's our expectation.

[Bryan Keane, Analyst at Deutsche Bank Aktiengesellschaft]

Got it. And the guidance looks pretty consistent as you look at the revenue and the margins that you're not -- you're not wildly off from the first half to the second half and sometimes there's bigger changes there. Any kind of key macro factors that you watch that we should be watching that could move it up or down that could change at least maybe as we get into the second half as we think about the macro?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah, I'll let John talk about the true back. But what I'd say, Bryan is look, everyone on the call was worried about a crash landing. With that, we move to '23. And look, I mean there was skepticism in the market as to whether we were going to be able to hit our numbers. I mean, there were conversations with investors and I assured them of one thing that continues to be the factor that -- the environment that we're seeing now, we're not seeing dramatic changes in the environment and we would start to see them and exercise the appropriate level of caution that we did. So we're going to look at what's the impact of these interest rates at this point. Small business seem to be absorbing them. They seem to be getting what they need to be able to fund their businesses. We don't think that will last forever. There are rates at which it's going to prove to be difficult. I would say what's happening on the macro is really important. The internal stuff, we can manage that. We will manage that. And I've said, too many people that look at. We have to pivot inside the base. There's a lot of opportunity inside the base. We will pivot inside the base if the external environment doesn't give us opportunities for growth. John, do you want to add anything?

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, no, I think these are thing that I think to keep in mind a little bit about the macro, we'll go back to the macro side. I go through our small-business index. I look and start this calendar year. We went the first three months, the index actually went up every month. So went up for three consecutive months and then it sort of stabilized. So we continued continue to see that. As Efrain said, we probably expected in the fourth quarter always kind of sitting here, waiting for employment to go down. And again, so actually I would say it was actually a little pleasantly surprised where we were on checks and where we were on worksite employee growth inside the the base of clients that we had. So, continuing to see that hiring is also an issue and staffing continues to be an issue of our HR concerns. So we could look at one of the questions and issues that are coming into our HR. Consultants. We continue to see that to be an issue. And I do think you're going to see something interesting here that we probably not seen.

Small and mid-sized business owners are scarred by their experience of employment over the last several years and they fight to get back to staffing levels. And I think what's going to be interesting is, is they're going to be very hesitant to let go because I think they remember what it was like trying to find talent and there is just simply not enough labor supply here. So I think it to be very interesting who kind of wins this tug-of-war back-and-forth relative to employment.

The other thing that we see is we're seeing a lot of non-traditional waiver being tapped by businesses, workers, contract workers may be a little bit more part-time and what I'm curious about to see, will those be the first things to go. Would that before a small-business owner is going to let go permanent staffing that they've got, that they're paying every week. Are they going to try to write it out by tightening in other areas such as this non-traditional gig employment that's kind of sprung up. So the labor market is very-very interesting thing. I think for us to look at and study right now and I don't think it sets up for traditional recessionary models that people have built. So that's just my quantification based upon my conversations with what we're hearing from clients and what we see in our in our data.

[Bryan Keane, Analyst at Deutsche Bank Aktiengesellschaft]

Two super helpful. Thanks guys.

[Operator]

Thank you. Our next question will come from Scott Wurtzel with Wolfe Research.

[Scott Wurtzel, Analyst at Wolfe Research]

Hey, good morning guys and thanks for taking my questions. Just on the expense side. Wanted to see if you guys can just go over maybe what some of your top investment priorities are over the next 12 months and sort of folding into that, how you're thinking about maybe incorporating generative AI into your business as well?

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, so -- so investments are in growth and growth. Those are probably the top two. And then you mentioned the digital. I mean, we've been making a lot of investment in the digital, the area, both in terms of our sales and what we're doing from a go-to-market perspective, which we're very happy with and how we're leveraging technology, AI, in the back office and I'm very pleased with several things that we've got going on. So we've been actively leveraging AI for several years across every area of the business, driving efficiency, delivering a lot of our large clients. And one of the things I keep telling people was we were the few players in this industry to have the size of dataset that we have. And I do think in these type of -- in AI, you've got to have avoided dataset. We're using it in customer service, we're using it in the risk, we're sing it in finance, we're using it in our HR outsourcing advisory capacity. We're building it into our products in our Retention Insights products. So there's a lot of investment that we're making and a lot of learnings that we have in terms of how we can digitize the front office, in the front-of-house and kind of the back-office of our business and so that's going to be an area that we continue to invest and continue to explore.

[Scott Wurtzel, Analyst at Wolfe Research]

Got it. That's very helpful. And then Efrain just a quick clarification on the float income side with the guidance. So I'm wondering if you could maybe help us out with how you're thinking about client balance growth for the years?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Client balance growth roughly in line with wage inflation, which is the trade of the business.

[Scott Wurtzel, Analyst at Wolfe Research]

Okay. Thanks guys.

[Operator]

Thank you. Our next question will come from Kartik Mehta with Northcoast Research.

[Kartik Mehta, Analyst at Northcoast Research]

Hey, good morning.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Heh, Kartik [Indecipherable]

[Kartik Mehta, Analyst at Northcoast Research]

Yesterday was a lot worse than it is today. So it's a little bit better today, but thank you for asking Efrain.

[John Gibson, President and Chief Executive Officer at Paychex]

You said it is out of way, Kartik.

[Kartik Mehta, Analyst at Northcoast Research]

Will do so. I'm wondering just on pays per control. Efrain, I know they've come down obviously from pretty high levels. And I'm wondering if what your expectations are for FY'24, not only for the payroll business but also the PEO and if you're seeing anything different?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah, two good questions. So, flattish I guess is the short answer to what we expect for '24. Don't expect too much in terms of in client base growth. And that's a mix. I think our larger clients are doing fine and in some cases adding. Employees. We look at it. Smaller clients let so and then you got to factor-in what you're anticipated whilst is ours. So your independent moves a little bitt higher than what you've gained in the given year and then expect your inclining the clint from the base to grow the worksite employee. But this is an environment where I don't think it's going to be robust in terms hiring in part because of what John said earlier, which is that many businesses would like to hire, its just simply hard for people who were there -- were available and also figured out how to do it without people, but things probably will be as John mentioned, less inclined to jut perhaps get rid of them.

On the PEO and I'd say also the ASO side, our worksite employees -- we have worksite employee growth. This year we expect that to continue into next year and could see solid worksite employee growth as we see a rebound going into next year. But overall, and I think that the Bryan had some questions. It's not going to be significant driver of revenue growth. And perhaps in PEO, but not the HCM side.

[Kartik Mehta, Analyst at Northcoast Research]

And then just one follow-up. John, I'd be interested in your thoughts on kind of job openings. We see all these numbers, Jolts numbers, but seems like employers have become cautious. So just your perspective on what you really think job openings are as you look at your customers versus maybe what we see in the news?

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, correct. I go back to what I said before. We continue to have clients that are wanting to fill open positions, and I know -- I've not seeing that change. I would say that they're being more successful in filling those positions. So we certainly seen that and we've seen some recovery. I mentioned regional hospitality in particular which was well behind and had good recovery in the back-half of our fiscal year here. I do think relative to do not maybe opening up as many positions. I would also tell you that one of the things that I think did happened is when we were in the the great resignation, which was probably 18 months ago that seems like forever now, but really only 18 months ago. Pretty much a lot of business owners were thinking every position I have needs to be posted because I've got to assume that I'm going to potentially lose those positions. So I think there was a lot of posting for jobs that people were passively working for. And I think some of the contraction that we've seen in the postings are more of business owners being more little more disciplined about what am I actually going to higher and being out in the market and focused on that. I don't know if that makes sense or helps you.

[Kartik Mehta, Analyst at Northcoast Research]

It does. Thank you, both. I fully appreciate it.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yes, you are welcome.

[John Gibson, President and Chief Executive Officer at Paychex]

I may add that those individuals who are using our on-boarding and recruiting experience in Flagstar, realizing about a 20% improvement in their time to hire. If there's any customers or prospects on the phone.

[Operator]

Thank you. Our next question will come from Eugene Simuni with MoffettNathanson.

[Eugene Simuni, Analyst at MoffettNathanson]

Thank you. Hi guys, good morning. Wanted to ask a question about the PEO So we expected the kind of the deceleration here and you highlighted again insurance -- healthcare insurance attach rates is one of the drivers. So was wondering if you can elaborate a little bit on that kind of where are you seeing softness in healthcare insurance attach? What kind of businesses? I think that'll be helpful to hear just because there is so much variability about -- around, I feel like the pure industry in terms of this healthcare insurance rate attach. And it would be helpful to hear specifically in your client base what you're seeing. And then related to that, as we are looking for the reacceleration in the PEO and as you kind of guiding to that, what gives you confidence that there will be pivot there over the next 12 months?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Hey, Eugene, let me start and then John will provide additional comments. With us, it's less about verticals, although I'll caveat that in a second. It's really more more about where we derive revenue on the healthcare side that flows through the P&L and that's the state of Florida. So for us on the PEO healthcare as it relates to revenue, really it's a Florida gain primarily. And the anomaly, and when you talk about Florida, you know immediately that you're going to over index on leisure and hospitality, so. So a bit of what's going on is it depends what new clients coming into the base are and whether the customers and leader in hospitality are really interested in offering healthcare new clients. Now a number of them do. And that's not all clients in Florida to be fair, that's probably too much of a generalization. But it was more of a regional issue than it was, I'd say as it affected revenue than it was something else.

So why do we feel more comfortable, because we have put a tremendous amount of focus on it and that's not to say that guarantee success. But I would say as we saw what was going on, we took a lot of measures to improve that, that aren't going to necessarily again be evident in the first-quarter, but should be evident beyond that. And there were things in which we've talked about in prior calls, so I wont repeat that was somewhat anomalous, that we saw people actually in the PEO deciding they didn't want healthcare insurance. We thought our hypothesis was that they were feeling some pressure from a wage perspective and perhaps despite of that and from a total compensation perspective they we're not going to offer healthcare, but we taken a number of actions that we think will create better momentum going into next year on than chunk. I'm talking about that issue.

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, not much to add Eugene. I do think it's important to understand on the insurance component there was 0a trend that we saw happen not just in the field, but also in our insurance agency, in the health and benefits area, which it's not -- it's not just the client. Three is two decision point here. One is the client deciding they're going to offer benefits. And second is an employee deciding they're going to enroll and pay their share, and we sell in both cases that the clients, particularly clients, that clients were adding in and insurance. That's one part of it, right? You should certainly can go and try to get someone to switch from their existing insurance carrier. But we saw less people adding health insurance as an option. And then when you look inside, when we went through our normal enrollment period, we found that less of the employees that were offered insurance elected to sign-up for it. And so all the things Efrain just said, we saw that happen in both areas. That caused us to go back and what you can do is you can go back and look at your plan designs, you can look at within you plan, you can look at different plans, all of those things. We went through an exhaustive review of every one of our core PEO market to look at every one of our plan designs and look at every one of our offerings to make sure we have the broadest suite.

Now, those decisions are made. We're actively out in the market selling clients on those today, those all go in, in the July timeframe, if you will. And remember our enrollment for PEO in that July timeframe and really goes through the January timeframe. Son once kind of got picked-up of that go along. So we've looked at every aspect of it. We've made some modifications and changes where we think it makes sense. We know that the HR outsourcing value proposition is still strong because it's growing at 10% and we saw a strong demand in the second-half of the year. We know that the PEO value proposition is strong because of our record retention and the clients that can afford it and have it are doing well. So we have reasonably some early signs, as I said earlier in the fourth quarter of improvement there and now we're getting into the heart of it and we'll see that that kind of build as we go into the the second, third and fourth quarter of this coming fiscal year. So again, we feel confident that we have the right plans in place and now we'll go out and execute that in the marketplace and see how it goes.

[Eugene Simuni, Analyst at MoffettNathanson]

Got it. Super helpful. And then quick follow-up on some of the comments you made earlier on retention, bookings and cline growth to tie it all together. So when we're thinking about your guidance for next fiscal year and Efrain you mentioned that you expect client growth to pickup from the kind of 1.5% level with so this year. Would that be a result of both improved retention and improved sales or is it primarily one or the other that will drive that improvement in client growth?

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

No, you have the both. I mean, over relying on one -- long start short, both sides of that equation have pretty powerful incentives to make sure that they occur. Say, hit at a 100%, sometimes you hit it more, but you got it -- you got to you got to get both sides to work to get the right client getting the number.

[John Gibson, President and Chief Executive Officer at Paychex]

And I'll add-on to that. Again, I would say the second half was stronger than the first-half from a sales unit perspective. And if you dig under our retention numbers, first-half to second-half, our controllable losses improved in the second-half. So again what we can control, and I do believe that there is a degree of what I call flushing out of the bankruptcies from two years ago in terms of us looking at clients that are kind of on the financial edge and whether or not we want to continue to or feel confident we can continue to do business with them. Those type of things are kind of flushed out of the system. We've been investing a lot in what we can do to control what we can control regardless of the environment.

We've talked about AI. We've been deploying lot of very sophisticated AI models inside our service organization and inside our client base that are giving us very strong indications of where we may have a client in risk and we're demonstrating success and demonstrate success in the back-half of the year of being able to intercept those and turn those situations into positive retention story. So when I look at the retention story in the sales story first-half back-half of last fiscal year, I feel good about the progress we're making there.

[Eugene Simuni, Analyst at MoffettNathanson]

Got it. Thank you very much.

[Operator]

Thank you. Our next question will come from Peter Christiansen with Citigroup.

[Peter Christiansen, Analyst at Smith Barney Citigroup]

Thank you. Good morning. Thanks for your question. How you doing. Efrain, I was curious about the portfolio of repositioning and not wanting to large, but should we expect, I guess future maybe operating outperformance to be reinvested for portfolio repositioning maybe layering into rates faster? And then as a follow-up to that, maybe looking at prior cycles. Is there a relationship between interest rates and competitive pricing? I would imagine this float income becomes a bigger part of the business model that gives more leeway for competitors to be more aggressive on the pricing side. Any comments there would be helpful. Thank you.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Those are two absolutely fantastic questions, literally. I mean, well, okay. So let me take one. Part of what you do and part of what you work with the team is to understand what you need to deliver and understand what your degrees of freedom and delivering them are. When you perform at a certain level, you have more degrees of freedom, not surprising. So my colleague CFO is out there who struggle sometimes because they don't have the degrees of freedom I I feel. When you when you do have the opportunity to reposition because performance gives you that option, you look at it and figure out. We're pretty disciplined here is the NPV of doing that better than the NPV of not doing that. And so in the fourth quarter we thought that was a positive NPV to that approach, but we do it in the future. I'll have to see there's other issues that come into play, which is how much, what do you want your max duration to be and are you picking the right time. You never get it right because you're trying to predict other behaviors, but I think that we've done a good job.

To your point, this is really kind of an interesting question that we're wrestling with is so -- we don't know, I can give you a sense of what happens when interest rates get to 6%. I know -- I know because I studied that pretty extensively when I came into the job now 12 years ago and two things you got to worry about or be concerned about. Number one is that you can attempt to be pretty aggressive on pricing in that kind of environment. So interest rates are high, you can take it as a signal for price hike. But what I find at least in our history was when you did that and when get that overly aggressive in pricing in '07, '08, you're going to pay a price on retention, it just it follows. And at least that's the conviction that I have.

Now maybe leave some money on the table by not pricing even more aggressively. But I think that there is a balancing there for clients because you're trying to create a level of trust in terms of the value that you deliver to them and there is a tipping point at which that level of trust gets breached. So we need to look at that closely.

The second part is, as interest rates are now creeping up. If they were to go over 6% now, now that starts to become a threshold where it becomes more difficult for small businesses and medium-sized businesses to operate from a financing perspective. They got to look for other options, that's one thing by the way that we look we're looking at very closely. How do we help clients. ERTC was a great example of how we did that this year. That's why we think it did so well within the base, but you've got to play those two elements off each other in determining what the price and how to help the clients navigate through an environment where interest rates are high. So hopefully that answers your questions.

[Peter Christiansen, Analyst at Smith Barney Citigroup]

Yeah, certainly does the balance. It's certainly a challenge, I'd imagine. I don't envy you, but thanks for the insight. Very helpful.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

You are welcome.

[Operator]

Thank you. Our next question comes from Tien-Tsin Huang with J.P. Morgan.

[Tien-Tsin Huang, Analyst at J.P. Morgan]

Hi, thanks. Good morning, John, Efrain and Bob. Just wanted to ask on PEO again. I know it's growing in line with peers. In the quarter here. You're looking for some acceleration you talked through that with Eugene. How much of the acceleration again, just to simplify is coming from volume versus rate versus mix? Just want to make sure I understand the components.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Well. I'll take that Tien-Tsin. So look, I want to clarify something to start, which is that we have worksite employee growth in the PEO. It's not as though we have contracted in that area. We think we're off to a pretty strong start actually in terms of at least our bookings activity. But we expect relative to last year for healthcare attachment to be higher than it was. The contribution from healthcare attachment will be higher than it was last year. And we just couldn't hit the numbers that we hit last year that we had also seen simultaneously that the base business was going down, had been very difficult, challenging. So we expect growth in the business, growth in clients. We expect growth in attachment, that what is really kind of driving the mix.

Let's so, Tien-Tsin, I think the influx of an issue. Typically, just to remind everyone, our PEO clients are typically upper 20s and low 30s in terms of our clients. We're not trying to get down stream thoroughly. But it's really going to come from more clients that are out to attach.

[John Gibson, President and Chief Executive Officer at Paychex]

And we're just really not expecting any type of major pricing increases either on the health side or on the general and administrative fee side. I mean, it's going to be well within our normal course, although I would mention it on the healthcare side, our normal course is in the single-digit, which far beats on a historical basis where healthcare inflation is. So that's a benefit and a retention benefit for our clients.

The other thing probably we haven't talked about. We have a thesis around. We had very good HR outsourcing growth and one of the things that we saw because of the insurance anomalies was a tilt towards our ASO product. So we look on the aggregate, we had a very-very solid year or HR outsourcing offerings, ASO and then we had the service side and PEO, but we tilted towards one versus the other. We're actually -- we actually -- I look at that now and say wait a minute. I now have more clients that love our technology, love our HR and now it's just a matter of finding the right healthcare solution going back and up-selling them into the peers. We have a pretty concentrated effort on that. Actually, that's another area where we're using AI, where we are actually analyzing the deduction feeds from existing payroll and ASO customers so that we can triangulate what we think they are currently paying for healthcare and then using the demographic data that we have to do AI-based underwriting to give us a computer-based targeted list of clients that we can approach within really almost prepackaged value proposition, let's say, we think we can help you save money on your insurance if you join our PEO, you're already a ASO client of ours.

We're Just getting. We've been working on that model for nine months as part of our efforts in that scenario and we think there's opportunity inside our base to go back with our new insurance value proposition in the P&L to see if we can meet some clients over.

[Tien-Tsin Huang, Analyst at J.P. Morgan]

Good. And that's the beauty of Paychex having both ASO and PEO. So I guess as my follow-up. Any change in your appetite on the whole self-insured versus the fully guaranteed PEO model to the extent that you can may be control the insurance packages and [Indecipherable] but I think I'm trying to trick to you guys to answer the consolidation question, but I'll ask it too. So right appetite to do acquisitions on the PEO side and that was been about five years since you did Oasis. You said tuck-ins, but I know there's been some news in the market around around consolidation. So I know that probably is a multipart question. So I'm on the bad [Speech Overlap] anyway. Thank you.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Let me answer the first one. I get that question and I think investors are sensitive to the level of balance sheet and the risks. So when we originally did this a number of years ago, I said I don't want to be reporting quarters where we blew out balance sheet because we were doing wrong things on the insurance side. I would say one thing. Well, that's very important piece. What I mean by that is just taking excessive risks. So everyone knows what they get when they invest in the company. We have managed that without any hiccup because two things helped us. One is that even though we go at risk, we don't make money, we make very little money on healthcare insurance and that removes the incentive to necessarily push cheap insurances away for PEO. That's a fools game, we don't play. We will never play it.

Having said that, as more as we get to a certain density in markets and many of people on the call know what the big markets are, we look at that, we evaluate whether going and risk an insurance in a market would make sense. I won't forestall, but we would not, but it will be subject to the same very tight criteria. And the other part is that the reason for doing it would not be necessarily to increase revenue, but for us to capture share in that market. So nothing imminent, but that's our thought process. I think we've got a bit of a track record in terms of managing it in an appropriate way. I'll let John talk to PEO and M&A.

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah, just to add to that. I don't think that our current approach to insurance in the PEO was the driver to what we saw last year. And so I don't think taking more risk is necessarily the solution. I think that our current approach has demonstrated that we can grow at industry rates without exposing ourselves to additional risks and so to Efrain's point, I don't see that as magic bullet. I don't think you need that to grow the PEO value proposition to Efrain's point to the degree in which we thought it could accelerate growth in some way and the risk to be balanced is something to consider, but not something that we're looking at.

I mean I think in terms of the PEO M&A front, we haven't done much in five years. It's obviously a very attractive industry for private equity to pay very-high multiples for which per my opinion that much capability. When we made the acquisition of Oasis, we were looking at both getting significant scale on the PEO and capability. We got that with Oasis. We were typically a smaller kind of regional PEPO that, and we knew we needed some national scale to get there. We're now the top player in the industry. So I think what we would be looking for it's tuck-ins in markets where does that makes sense. If we were going to add a capability, right? But a capability in terms of something different in the PEO, that's interesting. But again, what I continue to see we're involved in and build out almost every deal in the industry. I still think the multiples are a little high for what they would bring value and we have enough organic and inside the base opportunity for us to continue to invest our dollars in.

[Tien-Tsin Huang, Analyst at J.P. Morgan]

Awesome. Thanks for the complete answer. And I promised just one question. Thanks guys.

[Operator]

Thank you. Our next question comes from James Faucette with Morgan Stanley.

[James Faucette, Analyst at Morgan Stanley]

Hey, good morning. I have a couple of quick follow-up. Hey thank. Just a couple of quick follow-up from me. On the out of business commentary, I understand kind of the conditions there where you maybe were below normal during the height of the pandemic and that's normalized. I'm just wondering if right now you would characterize that out of business run-rate as being more elevated still or is it kind of come back more into line with what you would expect to be kind of normal?

[John Gibson, President and Chief Executive Officer at Paychex]

It's that, it's back to normal. And again, I go back to say it's back to normal pre-pandemic '19, which again were at reasonably historically low levels if you went back historically before that. So look, there was a big surge in new business starts right at the start of the pandemic and we knew in our models whether or not there was recession, whether not interest rates were 1% or 6%. Those businesses, a fair number of them we're not going to survive after two years. And so we didn't know whenever is going to come, but I think we knew it was going to come. I think we've seen that begin to flush through. We've kind of returned back to what I would say a more normal business start levels. And again, business starts are still reasonably solid. We're not seeing a dip in business starts. Again, we were the big spike. We're now back to where we were kind of pre-pandemic, which again were very-very solid and conducive numbers for growth in our business before the pandemic.

[James Faucette, Analyst at Morgan Stanley]

Yeah, no, that makes sense. Appreciate that. And then just a quick quite question to make sure that we're thinking about business sensitivity correctly. If we were to see macro deteriorate further, what's the underlying vertical? Will it be payroll, HCM software, retirement, ASO and management solutions would be hit hardest versus what would be most resilient? I think we have some ideas there, but I just want to make sure we're thinking about that correctly.

[Efrain Rivera, Senior Vice President, Chief Financial Officer at Paychex]

Yeah, I'd say. So, you know, you got two points of comparison, kind of what happened in 2007 and '08 and then what happened during the pandemic. What we saw during the pandemic was that on the PEO side, PEO was our base' PEO clients shared employees more quickly. It was and I was surprised by the speed with which they did it. I think you'd see more of an impact there on the PEO if you saw more of a sharp downturn. A garden variety of softness probably.

And then second, James. We'll see -- but if we go back, certainly during the pandemic, you saw employers start to shed -- shed employees I should say employees. Interestingly enough, what was a little bit anomalous during the pandemic, we didn't see huge client losses. But what we did see that dropped employees and so we then, but you did not see that impact. I'd remind everyone that our model is not a pure people model, its subscription plus people, and so we have some insulation in the event that there is a downturn and overall employment levels fall. And finally, last caveat. We do have the ability to pivot interface, which we did during the pandemic which helped to mitigate the impact of what was going on in the economy as a whole.

[John Gibson, President and Chief Executive Officer at Paychex]

Yeah. And that was probably, say we're actually more effective in terms of both our capabilities analytically to be able to target inside the base, our capabilities from a sales and marketing and digital perspective inside the base than we were in any of the -- in the prior downturn. And we just have gotten very-very effective in driving product penetration, in identifying opportunities within our client base where we can add additional value with a pretty broad set of products and services.

[James Faucette, Analyst at Morgan Stanley]

Great. Appreciate it.

[Operator]

Thank you. Our next question comes from Mark Marcon with Baird.

[John Gibson, President and Chief Executive Officer at Paychex]

Hey Mark.

[Unidentified Participant, at Paychex]

This is [Indecipherable] on for Mark. Thank you for taking our questions. So I'll just leave it at one. Retirement solutions continues to see strong growth and clearly had some nice tailwinds. Can you talk about some of the measures you're taking to capitalize on the opportunity provided by both the SECURE Act as well as state mandates?

[John Gibson, President and Chief Executive Officer at Paychex]

So as you know, we're a leader in small and mid-sized businesses in terms of the number of plans. We manage more retirement plans than any other company. But for the 12th straight year, we actually have prepared with supporting businesses -- more businesses than any other provider. So we are actively already educating our existing customers and have a variety of digital marketing programs in the market. I think you'll continue to see more aggressive positioning of Paychex in the 401(K). We're looking at how it can play a bigger role in our bundles in all of our payroll bundles as well, because again what we're finding is given both the state mandates, coupled with the SECURE Act II data will literally, if you're a company is of 20 employees that were working on trying to make some changes to that legislation that actually drop it down even lower than that, we can start of put 401(k) plan and basically at no cost to you, and you can then provide up to a $1,000 of match to your employees and get that money back as well.

So when you -- this is like one of the GRT fee moments where our value proposition of what we can go to a small-business owner and say you can have a valuable benefit that's going to help you retain your employees, help you attract employees and really for -- its not going to cost you anything to get it started. We think there is a powerful value proposition. And like I said, we're already the largest. We already know how to do this. We already have the sales and marketing capabilities in the operational capabilities to do this in a very efficient and effective way, and so we're going to continue to capitalize it on this as we go into this fiscal year.

[Unidentified Participant, at Paychex]

Great. Thank you for the color.

[Operator]

Thank you. Our final question will come from Samad Samana with Jefferies.

[Samad Samana, Analyst at Jefferies Financial Group]

Great, thanks for -- Hey, good morning guys. Thanks for squeezing me in. So I just wanted to ask on maybe your own sales organization. Can you help us think through just between the last couple of years being strong. And then as entering, let's say a slightly different environment maybe looking-forward. How maybe the sales organization performed versus quota [Phonetic] in fiscal '23 and maybe what assumptions around quota you're thinking for fiscal '24 in terms that quota increases for your sales organization?

[John Gibson, President and Chief Executive Officer at Paychex]

Well, as I've said, we were very pleased with the record-setting year that we had in sales execution. It really was a stellar year from a sales performance perspective. My hats off to the entire team. And as I said, the back-half was stronger than the front-half and given that momentum we have coming out of there, the investments we've made in the fourth quarter in terms of marketing, also a lot of work on what I would say it's go-to-market support for our sales teams, the things we're doing relative to sales training and sales effectiveness tools that we invested during the fourth quarter, given the momentum we've seeing, our sales team that's readily and happily accepted higher quotas for fiscal year '24.

[Samad Samana, Analyst at Jefferies Financial Group]

I appreciate that. Efrain I'd love to ask you another PEO follow-up question, but I'll just add that for [Speech Overlap]

[Operator]

Thank you. There are no additional questions at this time. I'd like to now turn it back to our presenters for any closing remarks.

[John Gibson, President and Chief Executive Officer at Paychex]

Okay, well, I like to thank our Viper for the being with us today, and then probably many of you are starting to head or headed or about to head to a the 4th of July weekend. Hope you have a great time with their family. I want to thank you for your questions and support. I want to reflect again on this past fiscal year, certainly a transition year for me. And coming in into my new position as CEO, an absolutely phenomenal year for the company. The employees did a great job navigating a very complex fiscal year and for the company to achieve that $5 billion milestone is really a testament to their hard work and to do it, its the speed we did it during the global pandemic is something that, say, I was reflecting last night as I was looking back over the last five-year results across-the-board and I go back and anchor myself for fiscal year '19. Which is -- that was before the pandemic and I looked at our fourth quarter and I looked at our full-year statistics. And when you go down there and see, we had better revenue growth, better profit growth, better retention metrics, better HR outsourcing metrics, better new sales revenues, better new sales unit, rates of growth in the fourth quarter of this past fiscal year and the full-year than we had in fiscal year '19. We not only weathered the pandemic, but I think we actually came out of the pandemic in a stronger position across the board. And I just want to thank the 16,000 employees at Paychex for making that happen and hoping that you all have a very nice and fruitful July weekend. Thank you very much. Have a great day.

[Operator]

[Operator Closing Remarks]