Good day everyone and welcome to the Paychex first quarter FY23 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question by pressing star and one on your touchtone phone. Please note this call may be recorded. It is now my pleasure to turn today’s program over to Martin Mucci, Chairman and Chief Executive Officer of Paychex. Please go ahead.

Thank you Gretchen, and thank you for joining us for our discussion of the Paychex first quarter fiscal 2023 earnings release. Joining me today are John Gibson, our President and Chief Operating Officer, and Efrain Rivera, our Chief Financial Officer. I do want to start off by saying that all of us are thinking of everyone in the path of Hurricane Ian that is approaching Florida at this time. Certainly our employees, our clients, and everyone else in those areas, we hope are safe. This morning before the market opened, we released our financial results for the first quarter ended August 31, 2022. You can access our earnings release on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next few days, and this teleconference is of course being broadcast over the internet and will be archived and available for approximately 90 days. We’ll start today’s call with an update on business highlights for the first quarter, Efrain will then review our financial results and outlook for fiscal 2023, and then we’ll open it up for your questions. I will start out by acknowledging that this will be my last earnings call in my role as CEO of Paychex. On August 24, we announced I am retiring as CEO effective October 14 - that’s after our fiscal 2022 annual meeting of stockholders; however, I will remain in my role as Chairman of the Board. John Gibson on the call today, our current President and Chief Operating Officer, will assume the role of President and CEO. John has been a member of the executive leadership team since 2013 and has been instrumental in the success of Paychex during this tenure. We have executed on a long term succession plan and I’m confident that John is the right person to lead Paychex into its next phase of growth. Really, many best days ahead of us. I want to thank all of you also, you directly for your interest and coverage of Paychex, some of you for more than two decades, and for your good questions and feedback over my 12 years as Chief Executive Officer. I also want to publicly thank Efrain. You know, everyone knows he’s one of the best CFOs in the business and we’ve done over 40 quarterly calls together, and more than a CFO, Efrain has really been a leader on our executive team who provides not only great counsel but is known for his intelligence, his integrity, and also music trivia - you can try that out sometime. Fiscal 2023 is off to a great start with double digit growth in both revenue and earnings compared to the same quarter last year. We had a record level of first quarter sales with strong trends continuing in the mid market, retirement and HR outsourcing in particular. We have had continued success in the selling of our suite of innovative products from HCM technology to HR solutions that help businesses become more efficient and address complex HR issues in a challenging time for many businesses. We continue to regularly monitor our key leading indicators for signs of changes to the macroeconomic trends, and while we have seen some moderation in key issues, we have not yet seen any significant changes. As an example, the latest Paychex IHS Small Business Employment Watch showed that workers of U.S. small businesses continue to benefit from higher wages. New jobs continue to grow but at a more moderated pace and job growth at U.S. small businesses remains resilient even in the face of a tight labor market and inflation pressures. Employment levels at our existing clients have continued to increase as they’re finding more people to fill those positions, consistent with these findings of our small business index. I will now turn the call over to John and he will provide you with some highlights surrounding our technology and product suite and results. John?

Okay, thank you Marty, and good morning everyone. It’s a pleasure to be with you. Based on our recently released Pulse of HR survey, it’s obvious that businesses of all sizes continue to be challenged with attracting and retaining talent, improving their operational efficiency, and working to increase their financial flexibility. Our continued investments in innovative HR technology combined with our unmatched HR expertise truly and uniquely positions us to help small businesses and midsized businesses navigate a very dynamic and challenging environment. Earlier this month, we attended the annual HR Technology Conference in Las Vegas, where once again Paychex demonstrated the latest of our innovations. We showcased significant enhancements to the Paychex Flex recruiting and applicant tracking experience, which is designed to digitally deliver candidates to clients faster and allow them to leverage mobile technology to recruit, screen and then on-board candidates in a unified and simple to use experience. Already, our digital on-boarding experience was utilized by over 1.7 million new hires in the last year alone. We also introduced our latest innovation, Paychex Voice Assist, and really this is a natural extension of the expansive and ever-growing and utilized self-service capabilities that we have at Paychex, and coupled with our award-winning Paychex pre-check offering which allows employees to further participate in the payroll process by reviewing their gross to net payroll calculations prior to payroll processing, Paychex Voice Assist now enables HR and payroll administrators and small business owners to manage their payroll and HR tasks while on the go through any Google Assistant-capable device. This provides a hands-free experience that includes voice recognition and verification security. I’m proud that Paychex is the first HCM solutions provider to offer voice activated capabilities such as these. Our technology offerings continue to garner national recognition. Paychex is proud to be recognized for the sixth - I repeat, the sixth consecutive year by NelsonHall, a global analyst and research firm, and they positioned us as a leader in its 2022 NEAT report for service providers. Paychex Flex was recognized for its comprehensive technology as one of the most advanced HR platforms that brings the power of benchmarking, data analytics, as well as digital service enablement to drive operational efficiency and improve the employee experience. I also want to mention that we have once again, for the 12th consecutive year, been recognized as the nation’s largest 401(k) record keeper by total number of plans by Plan Sponsor Magazine. We were also recognized by them as an industry leader in the number of new plans that we added in 2021. It’s obvious that our retirement business continues to be an area of strength for us as many business owners and their employees are focused on financial wellness as a key benefit and issue. In addition, our pooled employer plan offering continues to gain traction in the marketplace with approximately 4,000 new plans on-boarded during the first quarter alone. We continue to see strong demand for our employee retention tax credit service. This helps clients to maximize their eligible tax credits and thus provide them more financial flexibility. To date, we have helped over 45,000 clients secure over $8.6 billion in combined ERTC and paid leave tax credits. We continue to have the opportunity to educate more of our existing clients on the benefit of this service as well as leverage the service to attract new clients. We have started off the fiscal year ’23 strong, and while there is uncertainty in the macro environment, our solutions and business model have in the past and continue today to prove their resilience. We help our clients to succeed under any macroeconomic conditions. We continue to focus our product roadmap on the needs of our clients and anticipate releasing further enhancements this fiscal year designed to continue to provide them a positive digital user experience and help them utilize HR technology to simplify their processes. Now before I turn the call over to Efrain, I’d like to take a moment to say thank you - and yes, Marty, you’re going to continue to hear this over and over again over the next couple weeks, but I want to say thank you to Marty for his tireless dedication and strong leadership of the company over the years, and for me personally for his mentorship and his friendship for the nearly decade that he and I have been working together. You know, under Marty’s tenure as CEO, Paychex has more than doubled its revenue and transformed into a leading HCM technology solutions company. Today, Paychex is a tech company and it’s a tech company because of Marty’s vision and his leadership. Marty, it’s been a pleasure to work alongside you, the leadership team, and the nearly 17,000 now employees at Paychex, and I look forward to continuing our relationship in our new roles. As I’ve said many times and to many people, we’re the same great company, it’s the same great leadership team, it’s the same great employees, we’re just each playing a little different roles as we move forward. I know that our collective focus on our purpose, which is to help small and midsized businesses succeed, will continue to drive us in the future as it has in the past. I’ll now turn the call over to Efrain to discuss our first quarter financials.

Okay, thanks John, and good morning. I’d like to remind everyone that today’s commentary contains forward-looking statements that refer to future events and therefore involve risks. Refer to the customary disclosures. Let me start by providing key points for the quarter and finish with a review of fiscal 2023 outlook. As Marty and John already mentioned, Q1 was strong and our financial results for the first quarter included service and management solutions revenue and total revenue that increased 11% to $1.2 billion. Management solutions revenue increased 12% to $906 million, driven by higher client employment levels and revenue per client. Revenue per client was positively impacted by additional product penetration, HR ancillary services, largely our ERTC product, and price realization. We continue to see strong attachment of our HR solutions, retirement and time and attendance solutions. I’ll note that the revenue from our ERTC service benefited our first quarter revenue by about 1% to 2%. While we had anticipated ERTC revenue would continue in fiscal 2023, strong execution both in sales and service allowed us to realize some of the revenue a bit earlier in the year. While ERTC was a tailwind to growth for the first quarter, its benefit will decline as the year progresses. For the full year, the impact will be marginal to growth. PEO and insurance solutions revenue increased 8% to $283 million, driven by growth in average worksite employees and PEO health insurance revenue. The rate of growth was tempered by a lower rate of health insurance enrollment in both the PEO and the insurance agency, together with continued softness in workers’ compensation rates, so that really is a little bit more focused at the insurance agency, has more of an impact on the revenue there. Interest on funds held for clients increased 24% for the quarter to $18 million, primarily due to higher average interest rates along with growth in investment balances. Total expenses increased 11% to $711 million. Expense growth was largely attributable to higher headcount, wage rates, and general costs to support growth in our business. In addition, PEO direct costs increased due to higher medical plan enrollments compared to the same period last year. Operating income increased 12% to $496 million with an operating margin of 41.1%, an expansion of 20 basis points over the prior year, a bit above where we anticipated it being in first quarter. Our effective tax rate for the quarter was 22.9% compared to 24.9% in the prior year period. Both periods reflect discrete tax benefits related to employee stock-based compensation payments; however, the prior year also reflected an increase in state taxes. Net income and diluted earnings per share both increased 14% to $379 million and $1.05 per share respectively. Adjusted net income increased 15% and adjusted diluted earnings per share increased 16% for the quarter to $372 million and $1.03 per share respectively. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.3 billion, and our borrowings are at approximately $800 million as of the end of the quarter. Cash flow from operations was $364 million during the first quarter, a small decrease from the prior driven by fluctuations in working capital partially offset by higher net income, and we paid out quarterly dividends at $0.79 per share for a total of $285 million in the first quarter. Our 12-month rolling return on equity was a stellar 46%. Now I’ll turn to our guidance for the current fiscal year ending May 31, 2023. Our current outlook incorporates our first quarter results and our view of the evolving macroeconomic landscape. One thing I want to emphasize as I walk through the guidance, we don’t provide quarter-to-quarter guidance. What we try to do is give you a sense of where we anticipate the quarters will fall, so I’d ask that you keep that in mind. The majority of our guidance remains unchanged from that provided in June, with the exception of an increase in our expected growth for adjusted earnings per share. Let me provide some color in certain areas as follows. Management solutions revenue is expected to grow in the range of 5% to 7%, but now we anticipate it to be towards the upper end of the range. PEO and insurance solutions still expected to grow in the range of 8% to 10%, but we now anticipate it to be towards the lower end of the range. Interest on funds held for clients is expected to be in the range of $85 million to $95 million but is now again anticipated to be towards the upper end of the range. Total revenue is expected to grow in the range of 7% to 8% but, again based on what I just said, is anticipated to be towards the upper end of that range, and adjusted diluted earnings per share is now expected to grow in the range of 11% to 12%, an increase from the previous guidance of 9% to 10%. Just want everyone to remember, I’m talking about adjusted diluted earnings per share. Turning to the second quarter, our current thoughts are that we anticipate revenue growth will be approximately 7% and we expect operating margins to be approximately 38%. Of course, all of this is subject to current assumptions which could change if there are significant changes to the macro environment, and we’ll update you again on the second quarter call. I refer you to our investor slides on our website for more information. I’d also like to take a moment to say thank you to Marty for his years of service to the company. It’s been an incredible pleasure working alongside you, and I wish you the best of luck in your future endeavors. I can say that for all of the shareholders on the call, there was never a moment, never a conversation where putting the interests of shareholders didn’t come first, and so I know that that will continue under John’s leadership. The other thing I’d like to say is that the company that we’re reporting on today simply would not be where it is today without Marty’s efforts. One other thing that I want to add too for the investors on the call, we filed a supplemental proxy statement this week relating to our say on pay proposal. We’d ask that investors who own a position in Paychex take a look, read that closely. I’m always available, the management team is always available for any calls that you’d like to schedule to discuss that. So with that, let me turn it back over to Marty.

Thanks John and Efrain. Thank you very much for the comments and for your updates, and also of course we wouldn’t be where we are today as a company without our over 16,000 employees who have worked so tirelessly for our clients and for our shareholders. We’ll now open it up for your questions and comments. Gretchen, open it up, please.

At this time, to ask a question, please press star one on your phone. We’ll take our first question from Bryan Bergin from Cowen. Bryan, your line is open.

Hi, good morning. Thank you. Marty, John, congrats.

Thanks Bryan.

I wanted to start here. Could we talk about the moderation comment you mentioned on some of the KPIs and whether you have any changed view on macro assumptions in that fiscal '23 guide, particularly regarding client employee levels and retention?

Yes, I don’t think so. I’ll let John comment too, but I think what we’re seeing in the moderation is that on retention we’re kind of heading back toward normal. From a revenue retention standpoint we’re still above pre-pandemic levels. On client retention we’re normalizing back to pre-pandemic. We expected that because there was a lot of new business and start-up growth over the last couple of years during the pandemic, so you’re seeing a few more of those go out of business and a few more bankruptcies. The small business index shows that while wages are going up, they’re starting to slow and moderate, so while job growth is still increasing and moderating for small businesses, wage growth is beginning to moderate slightly. That may be a good sign that some of the Fed’s actions are working and could continue to improve. Other than that, sales continue to be very strong. We’re at record levels of sales, we had a great first quarter in sales, and clients are adding employees, so the moderation is probably more on the retention side normalizing, but the number of employees being added and the sales are still very strong. John, anything you want to add to that?

No, I would say I don’t think there is anything we’re seeing at this point that we’d see as a sign of a recession. As Marty pointed out, there was moderation that we expected going into this year on retention because of the business charge, but when I look at it, employment levels continue to increase, we see that in our checks, we see that in worksite employees per customer. The labor market continues to be tight. Our business watch certainly showed that information. I would also point to our revenue retention is remaining at the record levels we’ve seen before, so again we continue to see the fact that retention and the use of our products, when I look at the underlying pieces, clients are taking high value services from us, those things are creating more stickiness for those customers. Our price value losses continue to remain significantly below even the pre-pandemic levels, so again any moderation that we’re seeing, I view as more of a normalization of what we saw anomaly going on during the pandemic.

Okay, thank you. Then just Efrain, for the 2Q rough targets that you provided here, can you just dig in a little bit more on the dynamics, first on growth as we think about moving from 1Q to 2Q, and then just on margin, the outperformance on margin in 1Q, are there added investments that come back into the model over the course of the year, particularly in 2Q?

Yes, a little bit. Let me just talk to that, because obviously the growth rate in 2Q is a little bit different. This year was always a little odd because the two highest growth quarters were the first and the last and the middle for different reasons, a little bit idiosyncratic to the processing for a planned process ended up a little bit lower. In Q2, I’d call out three things, Bryan, that are important. We don’t anticipate that the level of ERTC I called out in the quarter will continue in the second quarter. Having said that, I don’t know because I didn’t think that was going to happen in the first quarter, so we could be a little bit more, but I’m being a little bit cautious about what we think we will get, so you won’t quite get that level of uptick in growth in Q2. These comments are about Q2, by the way. We’ll talk about the back half of the year when we get a little bit closer to the back half of the year. The second part is that we had, to the point—although there’s been discussion about moderation, what was really interesting in the first quarter is that we had higher growth in what we’d call check volume - pays per control, others call - than we anticipated in our plans. First quarter was actually fairly robust. Out of an abundance of caution, reading the same info you are reading, we think we’re still going to get some benefit in Q2 but it won’t be as pronounced as it was in the first quarter, so that will cause a little bit of a step-down. Then with respect to PEO, we called out some trends that are persisting around PEO and insurance, around healthcare attachment that we think will continue into second quarter, that’s going to drive growth a bit lower than we were. We’re really consistent and some ways a little bit above what I said when we were in the fourth quarter call. That’s really what’s driving it - it really is more of a Q2 phenomenon on the investment side. The challenge for this year was we entered the year—in the first half of the year last year, we were really at much lower employment levels than we are currently, and so as you have a little bit of a step-down in revenue in Q2, you still have relatively higher expense levels that normalize as we get into the back half of the year, and then we’re making investments in marketing, product development, the normal things that you would make in a quarter, and that combines to kind of create a little bit of a lumpy Q2. Those are the key factors in terms of underlying dynamics - no change, and it’s pretty much in line with what we anticipated.

Okay, thank you very much.

Our next question comes from Jason Kupferberg of Bank of America. Jason, your line is open.

Sorry, apologies. I was on mute. Well first of all, congrats to Marty and John. I did want to start with a question for Efrain, just on the EPS guidance raise. Efrain, is this just because you now think revenue and margin will both be at the higher end of your full year expectations? I know everything else is kind of unchanged, so just wanted to make sure we have the pieces there for EPS.

Yes, I think for the full year, we’ll be a little bit ahead, I’d say. I think it’s more driven, Jason, by more mix. There’s some revenue component to it and there’s a mix component to it that’s driving the EPS number.

Okay, got it. Just the float income guidance for fiscal ’23, I know it’s unchanged - you’re talking about being at the higher end. I guess maybe just given the magnitude and the speed of the Fed rate hikes, can you walk through some of the pieces there? Some people, I think, might have thought that that number would be moving a bit higher, but obviously there’s portfolio duration and other variables to consider. That would be helpful.

Well Jason, thank you. Look, I’m a little bit cautious and I think we could be accused of some conservatism there, but you’re absolutely right. Just to get one level deeper and get a little bit more into the question that you’re raising, I think the issue for us is at what point do you see the Fed raising and then you lock long based on duration? I don’t have the great answer to that. I will say we’re meeting basically every other week to decide what our outlook is on that. That could impact that number. I’m looking not only at ’23 and ’24. You were here long enough to know when we wrote that cycle up and that had a bumpy cycle on the way down, and so I want to avoid that, even at the expense of maybe a little bit of upside this year, so we’re trying to figure all that out. Then you’re reading the same thing; you actually have better info than I do. One second, it looks like short term interest rates are going to go to X, and the next second someone says hey, I’m a little bit concerned about that, that could cause a recession, so balancing all of that with the appropriate level of conservatism so that we can hit what we said we feel good about, the forecast at this stage based on what we know is a little bit trickier. We’re certainly at the high end of that range and we’ll update next quarter.

Okay, just one last quick one, just picking up on that theme of potential conservatism. Just looking at management solutions, obviously you’re sticking with 5% to 7% for the year, you started at 12. You had some of the ERTC benefit, but it just seems like a lot of decel kind of baked in, so maybe you want to talk through that a little bit. I know you’re talking about higher end, but still.

Yes, I’d say this - you know, we’ll talk more as we get kind of midyear, I think one of the things that ends up happening with ERTC in the back half of the year, it becomes a headwind to growth because it doesn’t recur in the same way that the revenues do, so we bake that in. That’s one. We’re against tough comps in the back half of the year, so that’s another issue, and then employment is really the other part that we’re wondering about. Right now, we’re not assuming that there’s a lot of employee adds in the back half of the year. Could we see something that’s different than that? I don’t know, both ways. At this point, I can’t call it close enough, so I’m sticking with where we thought we were going to be at the beginning of the year and then we’ll update as we go through the year.

Fair enough, thank you Efrain.

Okay, thank you.

Your next question comes from Andrew Nicholas from William Blair.

Hi, good morning. Thanks for taking my question. Wanted to start on the PEO and insurance services segment - obviously growth came in on the bottom end of the full-year range, you’re now guiding to the lower end of the range to full year. I know you mentioned some weakness in the insurance business this quarter. Is there anything else to call out within that business that surprised you, whether it was to the upside or the downside? It sounds like existing clients’ hiring activities are still quite strong, sales are good, so just want to make sure I understand all the dynamics there as well.

Let me frame it, then I’ll let John address it. He’s well versed in the business dynamics. On our plan, forecast and guidance, we started the year a bit lower on the insurance side than expected, primarily due to enrollments, which we previously highlighted. We expect that trend to continue into the second quarter and then to improve in the back half of the year, so the first half will be somewhat lower than originally anticipated while the back half should be as we expected. That’s the main factor pulling down PEO numbers in our outlook. Andrew, as you know, differences in attachment can change revenues very quickly, so we’ll monitor where we finish as the year progresses. It’s driving results but largely doesn’t materially affect margin, since those revenues are relatively low margin. This view reflects where we finished the first quarter and what we anticipate for the second quarter. I’ll now let John discuss the fundamentals of the business, which I believe are quite strong.

Yes, look - I feel particularly on the PEO side, I’ll talk about that first, we’re well positioned coming out of first quarter. Remember we’re just now really entering the key selling season, we’re also in open enrollment season within our PEO, so those are two critical periods of time when I look at where we are going into this. Our client retention is extremely strong. Really, we had set some pretty aggressive targets and we’re actually beating those targets in the PEO in the first quarter, so the value proposition is resonating, so retention was very strong. Sales were strong for the first quarter. I look at where we are from a sales headcount - we actually accelerated. If you remember in the fourth quarter, we said we made some investments in the first quarter. Some of that was actually adding because we saw the demand there. Our tenure is great, we have the best sales retention of any of our divisions in the PEO, so our tenure of our team going into the selling season is really strong. We just completed our renewals with our health insurance carriers. I feel good about where we are on those, I think we’ve got a good part of that. To Efrain’s point, kind of the attachment of insurance and then once we attach insurance to a client, how many employees are signing up for that, and particularly this may be an affordability issue that we’re maybe seeing, some of the things we’ve done is we’ve actually expanded low cost plans in this next enrollment. We’ve expanded our enrollment consultants who will go out and engage clients, so we’re working against what we’ve kind of seen, some trends in the first quarter, but obviously some of the drag in revenue, as Efrain said, is we had a little lower than we historically have seen relative to attachment of insurance in the PEO and a little lower participation than we’ve typically seen as well, and again we’ve taken steps in terms of both plan design and in our sales execution to be able to move forward. The insurance agency, some of the things we saw relative to attachment and participation in our HMO area, similar to PEO, common theme there that we saw there in the first quarter, and then as we’ve talked about, I think repeatedly, the market is continually soft in P&C and continues to be a headwind.

Great, thanks John, thanks Efrain. Those comments were super helpful. For my follow-up, I just wanted to ask a bigger picture question. You mentioned the HR tech conference in your press release and I think again in the prepared remarks. Personally, I was impressed by the number of vendors at the conference and the level of innovation really across the sector. With that in mind, given the number of new products, the amount of money that’s come into the space over the past several years, just wondering if it’s changed how you think about the build versus buy equation. Does M&A make more sense today given the rate of change in the market and how rapidly new products are being built and gaining adoption? Essentially, just want to get your thoughts on build versus buy, appetite for M&A given all that’s going on right now. Thank you.

Yes, this is Marty. It’s an interesting question. I think the appetite is still there. I think valuations are still high, but we’ll see if they catch up and come down some and get more realistic. We’ve always been able to use M&A not only for growth from a product perspective, but actually to add to the technology. Time and attendance started with M&A many years ago, probably 11 or 12 years ago for the first time-and-attendance product, which we then built into our product and now is one of the fastest-growing products we have. I don’t think we need to rush to buy. We really look at that very closely to see whether we can build. We have a very successful development team here—product management and development—that decides what we have to do from a tech standpoint. We like it being bundled into the Flex product suite, so we’re careful about doing M&A from a product add-on standpoint, and I don’t really see, and John can comment on this too, a product we’re missing right now in the suite that we should go out and buy. It’s more about adding to what we have. The HCM technology we have, combined with mobile capabilities, is powerful. We have such large use of the mobile app now. We’re tying much more to employees and self-service, and if you didn’t pick up on some of that at HR Tech, self-service has become a big part of our model. That gets the employees of our clients more involved—making their own changes, self-onboarding, and many aspects when they sign up for Paychex Pre-Check, which allows them to view their payroll before it’s processed. That has been important to bring client employees into the picture, which builds better retention and greater use of the Paychex mobile app, which still has a 4.8 out of 5 stars. I don’t think there’s a lot of M&A necessary from a product-need standpoint, but there’s still a good appetite for M&A and we’re constantly evaluating opportunities.

Yes, I’d probably give you a good example that I actually talked about here on the call, one that we have previously announced and is in the works to go live. I think we’re constantly looking for the right combination of partnerships, technology we can build, and acquisitions that we can bolt on to kind of put a unified experience together that resonates with our customers and addresses problems. We talked about the recruiting and applicant tracking and on-boarding experience that we launched, reintegrated. That’s a combination of build, we got a partnership with Indeed which we’ve talked about numerous times to help get candidates faster, and then it was also an acquisition that we made some time ago of a company on the on-boarding and applicant tracking side and the unification of that into Flex and using the talent that we had bought, and that’s taken off tremendously, so it’s a better experience. As Marty mentioned, already 1.7 million new hires have went through that process, so that’s an example. Another example that we’re currently in the process of, and this goes back probably to your question on the insurance agency and about us working to really get more employees participating in all of our insurance products, and that was an acquisition that we made just a little bit ago with the benefits administration and enrollment technology, found a great, small little company could add both talent and how to design that from a user experience perspective. We’re in the final states of deploying that, and actually that will be deployed in our agency and our PEO as an electronic mobile enabled, a way for employees to enroll in benefits, and it’s also going to really highlight the ancillary benefits. Again, this is showing them the right plan, getting them to participate and getting them to really see the full suite of insurance we’ve got electronically and a unified experience. That’s in early stages of being launched as we speak right now, so. There’s a couple examples of where I think we’re going to continue to look for experiences we’re trying to build for our clients and their employees, what capabilities do we have to build into Flex today, and where can we either find partners or find tech bolt-ons that will help us improve that experience.

Great, thanks again.

Our next question comes from Ramsey El-Assal from Barclays.

Hi, thank you for taking my question this morning. I wanted to ask about the pricing environment and the degree to which you’ve been able to kind of pass through potentially larger price increases given the inflationary backdrop. Should we expect a bigger contribution from pricing in this environment this year than we normally would?

Yes, in terms of pricing, Ramsey, I think Marty mentioned on last quarter’s call that we were towards the higher end of the range of what we typically price, and I think that’s where we’re at right now and that’s what’s holding. Look, I think we are constantly trying to strive for getting the balance between price and value correct, and I think that we’re striking at this point the right balance on that issue.

Yes, the price realization feels very good right now, and as John mentioned, I think it's a combination of many of the things he talked about. When there's a big need for recruiting, hiring, and onboarding employees and we're able to solve that, particularly with technology, we're hearing more and more from clients that they're saving operationally and being more effective. As a result, a slightly higher price is working and sticking, so discounting has not been an issue at all.

Okay, quite helpful. A follow-up from me, I wanted to ask a question on the relative resiliency of the two parts of your business. I’m just curious if there are drivers or factors that make management solutions and/or PEO more cyclically sensitive relative to each other. I kind of feel like investors have a better handle on management solutions as it’s sort of the longer dated segment, but I’m just curious if you feel that PEO also has the resiliency that you’d expect from the overall business.

I can start and John can jump in. I think, Ramsey, definitely PEO does right now all the things that John just talked about and I just mentioned - you know, recruiting, hiring, having insurance plans that as a small or midsized business, you might not be able to have on your own. The PEO has continued to be pretty strong. You do see fluctuations - like we mentioned, in this first question we didn’t have quite as much enrollment, but we’re also heading into the real selling season and the enrollment portion of the PEO, so PEO has continued to be very popular and I think it is very resilient in a time when I’m competing for employees, I’m a business competing for employees, and I need better insurance plans, I need better help in signing people up for those insurance plans, so yes, I think it has very strong resiliency just like the management solutions offerings. Anything you want to add to that?

No. When I look at the clients attracted to the PEO value proposition, these are businesses that have to navigate very complex HR and employment situations — multi-state operations, difficult states with lots of regulatory compliance, and other risks to their business. They view our HR support, our compliance support, and the way we help them with employment-related complaints and issues as a critical part of their operations. I just had a comment from a small client who said they couldn’t live without their HR person helping them. I’ll step back and reiterate the macro point, because maybe we’re not explaining it well. Look at our HR Pulse survey and what the nearly 700 HR consultants are seeing for our clients: they’re still trying to fill open positions. We not only saw checks and worksite employees increase, but clients continue to ask us for technology solutions and support to help them fill those openings. On the underlying macro side, in both managed solutions and the PEO, they really need our HR support in this complex environment, and I think there’s good resiliency going forward.

Okay, so similar performance profile through the cycle for both segments, is what I got from that, so I appreciate your answer. Thanks so much.

Our next question comes from Eugene Simuni from MoffettNathanson.

Thank you, hi guys.

Hey Eugene. I know that wasn’t your name.

That’s okay, no problem at all. I wanted to come back for a second to macro. I’m hearing loud and clear what you guys are saying, that you’re not seeing any signs of recession, slowdown in the employment numbers, and still very tight labor market - that’s clear. I wanted to ask about a slightly different metric, which is, let’s say, businesses’ willingness to invest in new technology, so situations where you would get real upgrades, feature additions, or maybe switching from a legacy provider to you guys - things like that. Curious if you’re seeing any incremental caution across your small business customers on that even as performance remains strong, as people just get more cautious looking ahead, and if not, then in your experience running this company for a long time, when times get a little bit more volatile, can we expect that caution to increase, and why or why not?

I would say at this point we’re not seeing that yet. In a time like this, the biggest things John mentioned and some recent surveys show it’s about operating efficiency and filling positions. Demand for their products remains, so they need people and technology to save money in other ways because wages are up and they have to offer more benefits. I think in this environment, and it has been this way while the market’s been tight, small and midsized businesses need to provide better benefits, more technology, and a mobile app like ours to manage remote workforces. So I don’t think they’ve become more skittish about investing; those investments are actually needed now. Depending on the macro environment, priorities change, but when the focus is hiring and retaining employees, companies are actively looking for technology, benefits, and all the things we offer. Even midsize firms that may need to reshuffle staff will consult one of the 700 HR specialists John mentioned to ask how to attract and retain people or how to lay off some workers while hiring others. We’re seeing strong demand for HCM technology and solutions to handle remote workforces, which are here to stay.

Got it, okay. Thank you. Then for my follow-up, probably a question for Efrain, actually switching gears a bit. We talked about the margin dynamics over the short term already a bit, so understand there are kinds of ups and downs through the quarters, but I wanted to touch on the longer term margin dynamics for a second. As we are now moving away from the COVID pandemic and settling more in maybe the steady state, where digital channels have become a bigger part, digital buying has become a bigger part post-pandemic of your model, how are you seeing that really impacting structural margins of the business as we’re getting more experience with that more digitally focused model? I’m curious.

Well, you know, Eugene, I think we’ve talked about it, certainly talked to many of you on the call, we have a relentless drive for efficiency in the business, and so as more of the business goes into either digitally enabled solutions or fully automated solutions, we expect over time that’s going to be a driver of improved productivity and improved operating margins. I always caveat that you also have to balance investment in the business for sustainable growth, so if we get 50 basis points or 75 or 100 of improvement in operating margins, we may decide that in order to create more sustainable margins over the long haul we have to invest a part of it, but certainly there are very few weeks that don’t pass where we’re not having that conversation. I think that John’s been a big driver in the last decade around making that model work, and I expect that to continue over the cycle.

Yes, I’ll jump on that, because I think our business model and our DNA as a company are centered on being the best operators in the business. We’ve proven that over decades, and that won’t change with me in this position. What you’re seeing goes back to the question you asked earlier: clients are demanding technology because their employees are demanding it. What we’re seeing with digitalization is not just us trying to push it on clients; there is a strong pull from clients and their employees who expect a technology experience. Whether it’s recruiting—if you want to recruit people, you’re not putting an ad in the paper; if you do, you’re probably not going to find many people, particularly those actively looking for employment. Whether it’s benefits or finances, they want technology to drive those functions, and that benefits both the customer and Paychex. Digitization continues with our mobile usage and is accelerating among our clients and employees. It’s up 67% year-over-year, and we had a very strong year the year before, so I continue to see this as more than a nice-to-have; it’s a must-have if you want to compete in the talent market today. You need an HR technology solution that is easy to use and truly meets the full needs of what employees are looking for.

Got it, okay. Thank you very much.

Your next question comes from Bryan Keane from Deutsche Bank.

Good morning. Wanted to ask about the different market segments. I know you guys called out strength in the mid market, so just thinking about the health in the lower end of the market, could you just talk a little bit about new business starts, retention in that market, any kind of softness in spend you’re seeing there?

I think, as we mentioned earlier, Bryan, new business starts among small businesses are not as strong as they were last year. Over the last couple of years during COVID a lot of people left big companies and started businesses, so small business retention from a client perspective is starting to normalize because some of those businesses have gone out of business. However, demand for employees from small businesses remains and they are still adding staff. So the downside is some have closed, but the upside is that most of our clients, even at the small end, are hiring and have many job postings and openings to fill. In the mid market, we’ve been stronger because we’ve executed much better there, not only with our product and technology offerings but also because the sales team has performed very well. We hit our stride last year and that has continued through the first quarter with very good double-digit growth.

Yes, and I would add that not only is demand still strong in the mid market — double-digit in the first quarter — I think we’re well positioned going forward. When you really look at that mid market, where you get into our HR services, our PEO and mid-market HCM, and where our clients are getting the full value from utilizing technology, we’re seeing very good retention levels. As we said, our revenue retention is at record levels. I mentioned our PEO in particular has had stellar performance in the quarter on client retention, and we’ve seen strong retention in our HR businesses holistically; the mid market is solid as well. I also think our price-value equation in that market has held up very, very well, with our average sell-in revenue in the first quarter really strong.

Got it, that’s helpful. Just one clarification for Efrain on the second quarter margin, I heard about the second quarter revenue being lower, and you called out some call-outs there. But on the margin in particular, is it just a revenue issue plus additional investments that come back into the model, that cause the drop in the margin? I just want to make sure I have all the pieces there for the 38% margin.

Bryan, you heard exactly what I said. I must have been partially clear on that, so no, that’s exactly it, a little lower revenue, a little higher expenses. It’s typically the lowest revenue quarter of the year, so you get a little bit of that impact, and it’s in line with what we anticipated it to be.

Okay, super. Thanks guys.

Your next question comes from Kevin McVeigh from Credit Suisse.

Great, thanks so much. Let me add my congratulations, and we share your view on Efrain too, Marty, so.

Try that music trivia sometime. It’s astounding.

Exactly. Hey, maybe just one, I guess higher level - I mean, John, you’re taking the baton, the organization is super-super strong, but no two CEOs are the same, so any initial thoughts as to areas of focus, maybe, where you might dial in a little bit more? I mean, obviously you’re building on a great legacy, but just any thoughts as to where your initial areas of focus are, whether it’s capital allocation or just technology? Any initial thoughts?

Well Kevin, thanks for that, and as you know, I’ve been part of the leadership team for nearly a decade now, so I’ve been involved in and am highly supportive of much of what we’ve been working on. You can expect us to continue focusing on expanding our leadership in technology and HR. As I mentioned earlier, we will continue to be the best operators of the business and consistently be a top performer in terms of total shareholder return. Those are three traditions I don’t plan to change because they’re working and reflect what I believe. We have opportunities to expand our offerings and continue to innovate. Paychex has always done that, and under Marty’s leadership that has accelerated, and you should expect us to continue accelerating. We will keep looking for new ways and growth platforms to help our clients grow. We will continue to invest in improving the experiences; I keep using this word experiences. We have a lot of great products and service offerings, and how we package those together to address business problems is critical. Another area you’ll see more of is using the large amount of internal data we have to drive retention, provide insights, and support recently launched products for our customers, and to help our HR professionals work with customers to identify how they can retain employees. ERTC is a good example where we’re using our internal datasets to identify customers with specific needs and then position our sales force to speak to those clients at the right moment, which drives productivity. You’ll continue to see us do that. We are a tech company and we’re going to continue to invest like a tech company, so in terms of capital utilization you will continue to see us apply capital in areas where we can improve our technology footprint and help our clients.

That’s super helpful. Then just one quick follow-up. I think for you, Efrain, I appreciate what you’re saying in terms of the outlook on the Fed funds and similar factors. But can you tell us what Fed funds rate is implied in the guidance right now, and remind us what the sensitivity to revenue is for every incremental 25 basis points?

Yes, so in the first quarter we called it out as between 3 and 4, kind of around the midpoint where we expected. I think I may have called specifically 3.75, so right now we’re working with something in that range. Obviously everyone’s chief economist has a different number — some around 4 and some 5 and above — but I want to call out, and by the way, a quarter basis point is somewhere in the $4 million to $5 million range in terms of net income, so it’s potentially important. It could be important. Kevin, the one thing I think Jason pointed out that’s really important is that what makes it a little bit trickier is you don’t want to push your chips to the middle of the table and go all-in short term and have a great year in terms of year-over-year interest income, only to give it back the next year. What we’re really looking at is what’s the right duration for the portfolio in this environment, and that’s why I wouldn’t necessarily, and I’m cautious about saying, hey, I’ve got 100 basis points up versus my forecast and that relates to X. I am a little cautious because I think we’ve got to manage a somewhat volatile interest rate environment with the Fed and figure out what the implications for ’24 are. I’ll leave it at that. We’re looking at it, and by the way, it’s not like we’re geniuses here. We’ve got some of the best minds in the business on the fixed income side working for us, so we’ll take counsel and have a lot of discussion on that.

Helpful, thank you.

Your next question comes from Samad Samana from Jefferies.

Hey, this is Jordan Bret on for Samad. Marty, Efrain, congrats on the strong results. John, also congrats on the new role.

Thank you.

I think we’ve touched on a lot already, but I wanted to double-click on the employee growth that you’re spoken about in both management solutions and PEO. Obviously with COVID, the recovery was not completely even by vertical or geographic area. I think in the past, we’ve called out Florida was – saw some strength first. I’m curious, the growth that you saw this past quarter, is that broad based or is it coming from a specific vertical or geographic area, maybe lapping what we saw at the start of the recovery from the pandemic?

Yes, so let me disaggregate. I’ll get started and then let John add some color commentary. The PEO is a little bit different than management solutions per se, so what we saw was strength in adds in larger clients, and that’s partly a result of really good work that we have done over the last four to six quarters in mid market. We’d done good work before that, but I think you’ve seen the benefits of that coupled with, and that’s always important, coupled with the improvement from last quarter in terms of the overall hiring environment in the first quarter. We expect that that starts to slow a bit. With respect to PEO, when we look at worksite employees, that was pretty widespread, so obviously because our business is over-indexed in the State of Florida and in certain verticals relative to management solutions, we saw strength there, but PEO was pretty widespread. Now, PEO is a little bit different in the sense that our average client has roughly about 30 or so employees, so you’re also getting a little bit of a larger, let’s call it client effect in terms of the adds. That’s a little bit more color. I don’t know if Marty or John want to comment.

Well, I think we’ve seen it kind of across the board. Most of the client base has seen an increase in employees, so we’ve seen them adding employees, and of course that’s going to be in that 1 to 20 range in particular, but 1 to 50 probably we’re seeing that. I think that Florida and the south, we’ve seen that in the small business index and that those have been the strongest job growth states for small business because that’s where the people are. And so there’s still a lot of job openings, particularly in leisure and hospitality, and they’re able to fill them in the Texas, Florida, Georgia, even North Carolina kind of areas - they’re the best job growth kind of areas, so that’s where small businesses are doing the best. But overall, we’ve seen our businesses able to add people, and obviously that’s adding checks, as John mentioned.

Yes, just to reiterate, I think we’ve seen across the board in pretty much all segments improvement in the employment levels and still, in all the surveys we’re seeing, again both the survey we did, I know there was one I think that was just in the paper recently a couple days ago that I read that reinforced it, small business owners are struggling more than midsized companies, and we’ve seen that in our data. When we look at where the number of checks and where our worksite employees have accelerated more, a mid market company that offers more benefits is outcompeting for the talent, and so that’s why we’ve really been focused on this recruiting and the partnerships that we’ve built and the technology we’ve built to help small business owners have a fair advantage. I would also say, to Efrain’s point, another interesting and again a little data, but we certainly looked at this a lot when we were doing the down trim, what we know is customers who were in our HR products, whether that’s our ASO product or our PEO product, they decelerated less than the general market, and when it came time for a recovery, they were able to staff up faster. I do think that’s because of our HR support. We certainly in those areas have seen better recovery, faster recovery, more full employment, and I think that has to do with both our technology and our advisory service and helping them gain a competitive advantage there.

Awesome, that’s all very helpful color. Along the same lines, I wanted to follow up. You know, we talked about difficult hiring at this time, and in your own business you’ve seen this hiring pull forward, which is obviously impacting the cadence of margins throughout the year. This past quarter, were your hiring plans on track, ahead of, or lagging your initial expectations, and was there any change in your ability to hire incremental sales or support staff throughout the quarter? Just curious if there were any changes on that end.

No, actually we did very well. The hiring machine really took off here from a recruiting and hiring perspective, and retention is better. I think you’re hearing that in the overall market, particularly for larger businesses. We’ve made some changes. We’ve improved some of our starting wage rates, like a lot of companies, and did other things for some of the existing employees, and I think that’s paid off. Yes, we’re fully staffed and ready to go; we were actually ready at the start of the quarter for sales and everything else, so we’ve done very well on the hiring front and are ready for the rest of the year.

Great, well thanks for taking my questions. Again John, congrats on the new role.

Thanks.

Your next question comes from James Faucette with Morgan Stanley.

Thank you very much, and my congratulations to both Marty and John as well. You’ve addressed many of our key questions, but I wanted to quickly follow up. Marty, can you briefly describe the expected cadence for PEO over the course of the year? Also, to understand the anticipated improvement later in the year, is that driven by the adjustments to the PEO plan and changes in sales that John mentioned, or do you expect other factors to have an impact?

James, let me address that. As I said at the start of the call, we began the year a bit below expectations on attachment and insurance sales were softer than we anticipated. The impact on margin is minimal. We expect PEO growth to accelerate in the back half of the year. Part of the reason is that we saw strong worksite employee growth coming out of the first quarter, and coupled with improved healthcare attachment in the back half, that should drive acceleration. If customers make decisions this quarter, you won't see the revenue immediately but in future quarters. They are making those decisions assuming these trends materialize, and if they do, growth will pick up in the second half. That's the basic explanation.

Got it, that’s helpful. Thanks for the clarification there. Then I guess more from a landscape perspective, you’ve touched on and obviously highlighted over time but also on this call everything that you’ve done from a technology perspective in terms of Paychex’s ability to help its customers and continue to improve, but what are you seeing happening in the regional provider space? How are they being able to keep up with you, the incumbents, on tech, and do you expect further consolidation? I guess the real question is where you’re not winning from regionals, what’s the primary reason and how can you address that? Thanks.

Yes, sure. Actually, we’re doing very well against the regionals. I think it is hard for them to keep up. They have been viable competitors, but we haven’t seen a big change in the competitive environment. If anything, we feel like we’ve continued to jumpstart things. John mentioned the Voice Assist we just offered with Google; no one else has offered that. We’ve also done work to combine for recruiting and onboarding our clients. There may be some consolidation among the regionals. They are likely looking for more support from a technology standpoint because there continues to be a lot of investment going forward, and we have a great track record of doing that. There’s been strong demand, which has kept everyone happy. The overall pie has continued to grow, particularly in the midmarket, so everybody has done pretty well. We’ll have to see how that goes as we get into the back half of the year, but we feel very confident. There are no big changes in the competitive environment, and we’ve performed very well.

Great, thanks a lot.

Your next question comes from Tien-Tsin Huang from JP Morgan.

Tien-Tsin? He might be on mute, or he might have been dropped.

Can you guys hear me? I’m sorry, I’m here.

Yes, we can hear you now.

I apologize, I had some trouble with my headphones. Sorry to keep you guys waiting. Quick thanks to Marty, of course - always appreciated our conversations through the years, so. Not sure if you’ll miss these calls, but definitely we’ll miss chatting with you.

Oh, definitely!

Yes, there you go; and John, look forward to working with you more. You did, in your remarks, credit Marty’s vision for embracing technology, and I think someone asked you about what your focus or legacy might be - I caught that, but I’m just curious, John, given your background on services and where you were before Paychex, I’m curious if you see more opportunity to improve services here further for Paychex to complement tech, or is it one and the same in terms of tech and services starting to blend a little bit further? I’m just curious how you think about balancing those two things, right, between the services and the tech of the company.

Yes, look Tien-Tsin, I think you’re right, I see it as one and the same, and that’s probably the reason why Marty and I were reminiscing about my interview here and what really attracted me, was Marty’s vision was very consistent with mine and my experience about where I saw our industry going from my prior experience. My view is I think having the best technology and having a unified user experience is going to be critical not only for the demand and what customers and employees want, but also to drive the operational efficiency that I think customers are going to want. That being said, customers need to know how to use that tool, and they are facing complex issues outside of items that technology can solve, particularly in the HR area. I think we have a unique position to be able to reposition our traditional services, kind of hey, I put something in a system for you, and really position that more as an advisory opportunity. I think about the things we’re doing with the mass sets of data that we have, the benchmarking the data, the way we can do analytics, the fact that we can call a client up and say, we think you’re going to have a retention problem, let us walk you through your insights. That’s what service is going to be. It’s really not even service in the historical sense that you would see a service company talk about. I do believe that that’s going to resonate, and we see it resonating in this complex environment. More and more companies are going to end up having employees in multiple states than ever before to compete for talent and the remote workforce, that brings regulatory complexities that just technology can’t solve for you. You’ve got to think about how you’re going to do this, and so I do think that we’re uniquely positioned and I think you’ll continue to see us invest in technology and invest in HR, and really position ourselves as the digital HR leader in the marketplace.

Got it. I appreciate you going through that, because I still think about it, you know, when I started covering Paychex I always thought of it as a services company, and of course tech and digital has taken over everything, so I just wanted to get back to basics there, so thanks for that. If you don’t mind, a quick follow-up: I know the call’s getting long, but thinking about the modules and the breadth of services, you mentioned Paychex being the largest 401(k) record keeper. I know the equity markets have come down a little bit. Is that having any influence on your outlook in general? And just to clarify, could you please answer those two questions? Thank you.

Well, you got two disparate ones in there. In our retirement services business, as many of you know, we do have about a third of the revenue there is derived from a basis point, so it has a modest drag in terms of revenue. It’s not really significant - I mean, I’d just put it as de minimis in terms of the balance of the year. Then on healthcare enrollment, you’re asking for more color on that, I’ll let John touch on what’s driving a little bit lower healthcare enrollment.

Yes, look, I wish I had the perfect answer to that. Looking at all the data, my experience tells me a lot of that can be a mix of clients. Again, a lot of it has to do with what the average wage of a client is and the industry they're in, but you also have economic situations where a person may be having benefits and deciding they can't afford benefits right now given their economic situation, and they drop the benefits. We recognize that, which is why we're doing a lot in really looking at our plan designs in the PEO in particular, rolling out lower-cost plans and non-traditional plans. We've actually created an entire wellness spectrum of products and services to meet the economic needs of every type of worksite employee that we serve, and we're also driving digitalization into our HR & benefits business, as I mentioned earlier, rolling out in the second quarter, so that we can offer a more full suite of benefit options that can match the price point of both the clients and their employees, regardless of what their economic situation is. We certainly are trying to expand what we're doing. We recognize that for some employees and some customers, the cost of getting some of these benefits is beyond their capabilities right now, so we're really focused from a product development perspective on making sure we have the broadest suite of offerings in the marketplace.

Got it. That’s helpful, thanks, and sorry for extending the call.

No, no worries, Tien-Tsin. Your questions are always appreciated.

Our next question comes from Mark Marcon from Baird.

Good morning. Marty, congratulations on just tremendous accomplishments over the tenure that you’ve been CEO; and John, look forward to working with you.

Thanks Mark.

With regards to the macro environment, you did mention small business formations are a little bit lower. How are you thinking about the sales pipeline for HR management solutions, and to what extent can you dial the marketing strategy to highlight some of the tech improvements? I was at HR Tech, I was really impressed by the voice recognition program with Google, and are you charging more for those types of solutions?

Yes, we’re really, I mean, let’s take the marketing side of it. It’s doing exactly that, Mark; being at HR Tech is getting the word out. We’re doing a lot and trying to partner with folks like Google to be sure it’s known that we’re the only company that can do this with their Google Assistant and let you use it totally hands free. We’re pushing, and marketing has been pretty aggressive for years through webinars, tech conferences, podcasts and all of the online work we’ve done, which has been very important to get the message out, and we think that has worked well. So I think that’s been good. We think there’s still huge demand, and John mentioned earlier that product penetration rates continue to go up. The tech word has gotten out and the need, as we’ve talked about a lot on the call, has driven additional product penetration. Even if new business starts are lower than they were, they’re still up, just not at the big numbers they were during COVID, when many people left large businesses and started small ones. So starts are still up, we’re doing very well on start-ups, and we’re doing even better with the product suite to increase penetration in the existing client base.

Right, so the way I’m taking it, it sounds like the pipeline in terms of the key selling season for management solutions, as well as PEO continues to be robust, and you’re not really seeing much of a change in terms of what we’re reading about from a macro headline perspective as it relates to that?

Correct. We still feel it should be a good selling season. It’s early, but we feel good about it.

Great, and then can you talk a little bit about retention? How do you think that ends up being impacted as ERTC kind of winds down? Does that have any sort of impact?

Hey Mark. So you know, we gave a little bit of color in Marty’s call. I think what I’d call out is two things. One is, and it’s one thing that John mentioned, but from a revenue retention standpoint, we’re at near record highs, so that makes sense. Marty called out on the very lower end, we’ve seen a little bit more churn, and that is to be expected given where the market is right now, so on those two, I think we feel we’re pretty well positioned going into the balance of the year. ERTC really should not have a significant impact on client retention. I think that it is, if anything, positive in the sense that it just demonstrates the value add of Paychex. A lot of our competitors are not talking about it because, candidly, their model doesn’t allow them to get there. Some are doing it, but I think about giving our clients that level of consulting and expertise that John was mentioning earlier, so from a retention standpoint, it really should not have a significant impact.

Terrific, thank you.

Okay, thanks Mark.

Your next question comes from an analyst from Northcoast Research.

Good morning gentlemen, and congrats on a great quarter. I just want to get some color around your float portfolio. As the Fed continues to hike rates, do you think there will be any changes, or has there been any changes in the management of your float portfolio?

Hey, I think I answered earlier that in the environment, every time the Fed makes another pronouncement about what they expect to do, we huddle and figure out what the implications on the portfolio are, and what we’re trying to do is adjust the duration based on what we believe is going to happen and when we think we’re going to see peak interest rates to position the portfolio, not just for ’23 but for ’24. I would say the change is we’ve become a little bit more dynamic in terms of what’s the balance between short and long term is, and as the year progresses, we’ll continue to make adjustments real time to take advantage of what we think are changes in the landscape.

All right, thank you for re-answering that question. Do you have any thoughts on change in your return of capital to shareholder strategy?

The short answer is no. I think Marty and John talked a little bit about this, which is obviously we’re going to continue to pay a pretty strong dividend, we will buy back shares to offset dilution, and we will look at deployment of capital in terms of M&A if it makes sense, if it builds value in the portfolio, so from that standpoint, no significant changes.

Thank you so much.

Okay.

Our last question comes from Scott Wurtzel from Wolfe Research.

Hey, good morning guys. Just one question from me, just on the revenue retention side of things. I know you called out it’s still trending above pre-pandemic levels, and I think John had mentioned you’re continuing to see attach rates of high value products, so just wondering if you can just maybe give a little bit more color on what products are exactly resonating most with the client base.

Yes, it’s really our HR suite of products. You continue to see our online products, I just mentioned the recruiting and applicant tracking really popular right now, 401(k) retirement very popular, and then time and attendance is the other. I put that in kind of the online area, anything around the automation of the employee-employer relationship is in very high demand, very high demand right now. People are looking for those operational efficiencies, their workforces are more dispersed than ever before, and they’re leveraging technology to keep track of what’s going on.

Got it, that’s helpful. Thanks guys.

Okay, thank you. Gretchen, that’s it, right, for calls?

Yes, no further questions.

All right, well one more thank you to the over 16,000 employees of Paychex who deliver the great results for us all. At this point, we’ll close the call. If you’re interested in replaying the webcast of this conference call, it will be archived for approximately 90 days. I would like to thank you all for your support you have given me in my role as CEO over the years, and I know I’m leaving you all in good hands. Have a great day, thank you.

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect.