Earnings Call Transcript
PAYCHEX INC (PAYX)
Earnings Call Transcript - PAYX Q4 2023
Operator, Operator
Good day, everyone, and welcome to today's Paychex Fourth Quarter and Fiscal Year-end Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note, this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. John Gibson, President and CEO. Please go ahead.
John Gibson, CEO
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 31. 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 will start 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 6 years to go from $2 billion to $3 billion, 3 years to go from $3 billion to $4 billion, and it took us 3 years to go from $4 billion to $5 billion, but I 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 long-standing 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 a positive impact on our clients and their employees. And in return, they continue to reward us with additional business and their continued loyalty. 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 in the last 2 years, and financial distress in the lower revenue small clients. We continue to see strong demand for our HR outsourcing solutions with worksite employee growth over 10% year-over-year. For 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 remains 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 a retirement plan as a core benefit offering for small and midsize businesses. Recent passage of the SECURE Act 2.0 legislation and various state mandates requiring employers to provide retirement services to employees are making 401(k) the key benefit for small and midsized 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 SMB credit environment has continued to feel demand for our employee retention tax credit service. Our full service ERTC offerings have helped tens of thousands of businesses obtain tax credits, gaining 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 Midsized Business focused Solutions in the Core HR category. Our consistency in winning these awards and being placed repeatedly in the leadership quadrant of respected technology analysts rankings speaks to our market leadership in HR technology. I’m not only proud of these results and the performance of the team, but I'm 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 companies. 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 investment in our employees' development. These awards are a testament to how our employees not only get the job done, but do it the right way. We are constantly looking for new ways 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 midsize businesses navigate the challenges they face in a complex and ever-changing world. We remain committed to our purpose, and that is to help businesses succeed. We will continually strive to have a positive impact on our clients, our employees, our communities, and our shareholders. Now I'll 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, CFO
Thanks, John, and good morning to all of you. I hope you're indoors on this smoky Thursday. I thought we were past it, but not quite. I would like to remind everyone that today's commentary will contain forward-looking statements subject to the customary disclosures that we make. I'm going to 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. Just 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, total revenue increased 7% to $1.2 billion. Management solutions revenue was up slightly over $909 million, driven by additional product penetration. HR ancillary services, which currently mostly include ERTC, also benefited from price realization. We continue to see strong attachment of our HR solutions, retirement, and time and attendance products. Demand for our ERTC service remains strong, as John mentioned, and it contributed approximately 1% to 2% to total revenue growth for the full year. Demand for this service, along with our internal execution, continues to exceed our expectations. While ERTC has been a tailwind, we expect demand to become a moderate headwind next year, especially in the back half of the year. Additionally, 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 somewhat tempered by lower medical plan sales and participant volumes along with a continued preference for ASO in this environment. We expect these trends to start to normalize as we progress through fiscal 2024, though it may not be evident immediately in Q1. 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 repositioned the portfolio heading into the back half of this year. Total expenses increased 3% to $776 million. Expense growth was largely attributable to higher headcount, wage rates, and general costs to support growth in the business. Operating income increased 15% to $453 million, with an operating margin of just under 37%, representing 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 also $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. Management solutions increased 8% to $3.7 billion, while PEO and 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's earlier mention of the 70 basis point expansion highlights the leverage in our model. Other income, net increased by over $30 million due to higher average interest rates and average investment 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 robust, with cash, restricted cash, and total corporate investments of more than $1.6 billion, and total borrowings of approximately $808 million as of May 2023. Cash flow from operations reached $1.7 billion for the fiscal year, reflecting a 13% increase 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, representing a 50% year-over-year increase. It's essential not to gloss over these figures; the quality of our earnings and cash generation remains remarkably strong, as noted by some of you. We deliver not only on the top line but also ensure the quality on the bottom line, and we intend to keep doing that. We paid out a total of $1.2 billion in dividends during fiscal 2023, which is 70% of our net income, with a 12-month rolling return on equity at a stellar 48%, which is trending upwards. Now let me turn to guidance for the upcoming fiscal year ending May 2024. Our current outlook is as follows: Management Solutions is expected to grow in the range of 5% to 6%. PEO and Insurance Solutions is expected to grow in the range of 6% to 9%. Interest on funds held for clients is expected to be between $135 million and $145 million. Total revenue is expected to grow in the range of 6% to 7%. Operating income margin is expected to fall in the range of 41% to 42%. Other income, net is expected to be in the range of $30 million to $35 million. Finally, our effective income tax rate is expected to be between 24% and 25%. Adjusted diluted earnings per share are projected to grow in the range of 9% to 10%. This outlook assumes the current macroeconomic 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. Each quarter, we have a little better visibility into the remaining quarters of the year. For the first half of fiscal 2024 and the first quarter, we expect total revenue growth to be approximately 6%. We anticipate operating margins for the first quarter to be around 41% to assist with your modeling. We expect PEO and Insurance Solutions revenue to be below the low end of the range for the first quarter, but we believe it will normalize throughout the year. Before you ask, I anticipate the first quarter was actually the strongest quarter of the year for PEO last year, so the comparisons will be tougher. Of course, all of this is subject to our current assumptions, and we will update you again on the first quarter call. I would also like to request your cooperation in limiting questions to one follow-up in order to keep the call on track. Please refer to our investor slides on our website for additional information. Now, I will turn the call back over to John.
John Gibson, CEO
Okay. Now with all the conditions and restrictions that Efrain has laid out for you, we will now open the call for questions.
Operator, Operator
Our first question will come from Ramsey El-Assal with Barclays.
Ramsey El-Assal, Analyst
Hi. Thanks so much for taking my question this morning. Can you comment on the pricing environment? You called it out a little bit in the press release. And I guess the question is, are you seeing a window right now for more aggressive pricing adjustments just given the inflationary environment? Or are you feeling now that you're in sort of a steady state, a kind of continual trajectory when it comes to pricing?
John Gibson, CEO
Yes, Ramsey, thanks for the question. Yes, 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 is recognized; when we talk about prices within our customer base, they're rewarding us, they're seeing the value we provide. As we did last year, we believe we have pricing power within the base, and we'll continue to avail ourselves of that. In terms of new clients and prospects in the competitive environment, we've always been in a competitive market, and I see stable pricing. I don’t foresee any major shifts in either side of the pricing equation.
Ramsey El-Assal, Analyst
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 about where you were seeing a bit of headwind, I believe from businesses going out of operation, and I think there was some other commentary from Efrain. If you could just elaborate on that a little bit, I would appreciate it.
John Gibson, CEO
Yes, Ramsey, I think we've been pretty consistent. On all the prior calls, I've indicated that we continue to focus our efforts on the high-end part of our valuable clients, particularly in HR outsourcing. We maintain record retention in terms of both revenue and clients in that segment. Where we did see and we have near record retention overall across the business, was due to our focus in driving value in our high-value customer segments. As we anticipated, we did see some losses in client retention, which is what we expected. There was a notably high number of business starts two years ago. In almost every model, regardless of whether we're in a recession or a growth period, about half of businesses that start in their first two years do not survive. So while we are experiencing typical client attrition, we're running on solid stable levels. Even looking at the client retention side, we're back to where we were pre-pandemic levels with nothing dramatic there. It’s a steady state, and we expect typical attrition as we move into '24.
Ramsey El-Assal, Analyst
Got it. Thanks so much.
Operator, Operator
Thank you. Our next question will come from Jason Kupferberg with Bank of America.
Eric Dray, Analyst
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, and it seems like the macro could avoid a hard landing. But I’m curious about the 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, CEO
Yes. Look, I think generally we've continued to see hospitality, particularly leisure and hospitality, lagging through the recession. However, I would say they made a strong comeback in the back half of this fiscal year and are getting back to employment levels similar to other segments. Overall, we’re not seeing anything out of the ordinary. Certainly, smaller companies are facing more pressure to pass price increases due to inflation, along with credit situation challenges.
Eric Dray, Analyst
Okay, great. Thanks. And then this one is for Efrain. On the float guidance, kind of two parts. What are you thinking about the interest rates? And what are your thoughts on managing duration? I know the question comes up every call, but thought I'd ask. Thanks.
Efrain Rivera, CFO
What we're thinking and how we are managing, I will break those two out. I mentioned in previous calls that I was concerned about a sharp decline in rates in the first half of '24 and the end of this 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, likely followed by some declines as we enter next year. Certainly, recent comments from Jerome Powell would indicate that's where we're headed. Our assumption is that in the first half of calendar year 2024, we anticipate rate decreases in the second half of the year. So while we could adjust and play games with our positions, that is our general outlook. In terms of our portfolio, my bias is to lengthen duration as we progress through the year to mitigate what is likely to be a set of interest rate decreases in '24. I can't provide more specifics than that, as our numbers generally support that scenario.
John Gibson, CEO
Stephanie?
Operator, Operator
Thank you. Our next question will come from Rayna Kumar with UBS.
Rayna Kumar, Analyst
Good morning. Thanks for taking my question. Can you talk about what bookings were?
John Gibson, CEO
Hi, Rayna. We actually saw strong demand continuing. I would say we saw some acceleration in the fourth quarter. The back half of the fiscal year performed stronger than the first half. HR services, or HR solutions, continue to resonate. Retirement saw a pickup on the rolling digital side of our business in the fourth quarter, which was pleasing. In fact, I would say PEO had improvement in Q4 as well, which signals that some of the changes we implemented began to gain traction. It’s still early, with the key part of that season upcoming in the first quarter, but we’re encouraged by the strong demand.
Rayna Kumar, Analyst
That is very helpful. And then just a quick, really quick follow-up to stay within Efrain's guidelines here. Can you call out the ERTC contribution just for the fourth quarter?
Efrain Rivera, CFO
No, we're not providing that. We think we're going to stick with a 1% to 2% growth contribution for the full year. Next year, we expect that to transition from a tailwind to a headwind; that’s as far as we will go.
John Gibson, CEO
You're welcome.
Operator, Operator
Thank you. Our next question will come from Andrew Nicholas with William Blair.
Andrew Nicholas, Analyst
Hi, good morning. Thanks for taking my questions. I was going to ask first on 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 is definitely a compound question. But preference between HCM and PEO and anything you could say on valuations?
John Gibson, CEO
Yes, Andrew, thanks for the question. Our ambitions remain the same. We're looking for opportunities that meet our strategic objectives and also make financial sense. The latter has been more challenging in the environment over the past few years. However, we are beginning to see some shifts in market dynamics. Our pipeline has expanded with opportunities that we find more realistic to consider. Our focus has not changed; we will continue to look for tuck-ins to add scale in the markets or expand our product suite. We are also seeking capability enhancements, especially in digital areas such as data analytics. We're keen to explore new growth platforms adjacent to our current suite of solutions to continue delivering that value proposition to small and medium-sized businesses.
Andrew Nicholas, Analyst
That's helpful. Thank you. And then for my follow-up, I just wanted to ask about the margin guidance for next year. I think last quarter you spoke to a preliminary target of 25 to 50 basis points. The 41% to 42% range you provided this morning is significantly higher at the midpoint. Can you unpack this change in outlook?
Efrain Rivera, CFO
I'd answer that in a couple of ways. Look, March was preliminary, which means that we hadn't yet gone through the planning process. John's continued our tradition of seeking sources of leverage in the P&L. The overall mix has an impact; more management solutions yield more opportunities for leverage. We underwent a disciplined planning process to identify all leverage sources. This reflects in our guidance. It's important to remember that planning is a year-long effort. If we identify further opportunities throughout the year, we will pursue them. We've challenged ourselves consistently to seek out and leverage opportunities.
Andrew Nicholas, Analyst
Perfect. Thank you.
Operator, Operator
Thank you. Our next question will come from Kevin McVeigh with Credit Suisse.
Kevin McVeigh, Analyst
Great, thanks.
John Gibson, CEO
Hey, Kevin.
Kevin McVeigh, Analyst
I'll just have one to make up some time. Hey, Efrain, you talked a little bit about revenue retention versus client retention, and revenue retention being at an all-time high despite a little shift in clients. Can you help us frame what the delta is there? What it is today, and kind of where that's been historically? I would imagine that's probably narrowed over time. But is there any way to frame that a little bit?
Efrain Rivera, CFO
Yes, yes. Look, revenue retention approached the mid-80s during the pandemic, which was an outlier. When we reported last year, we were between 83 and 84, this year we're between 82 and 83. As John mentioned, we observed larger losses among smaller clients. That 82, 83 is consistent with prior years, nothing unusual about that. However, during the pandemic, the number of bankruptcies or involuntary losses was much lower than it normally has been. There were various reasons for this, and many clients weathered the storm due to support programs. Hence, we are now returning to more typical levels of losses. Nonetheless, we emphasize revenue retention, especially among high-value clients, and our revenue retention rates remain strong, above pre-pandemic levels.
John Gibson, CEO
Kevin, I’d add that over the past 4 to 5 years, when we mention pre-pandemic levels and go back to '19, we had historical highs in client retention then. We are now returning to those strong levels of performance, and as Efrain pointed out, we’ve focused on retaining our highest-value clients, which has yielded positive results. Coming out of the pandemic, clients appreciated our technology enhancements and advisory support through challenging times, rewarding us by purchasing more and increasing our loyalty.
Kevin McVeigh, Analyst
Very helpful. Thank you.
Operator, Operator
Thank you. Our next question will come from Bryan Bergin with TD Cowen.
Bryan Bergin, Analyst
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 at total company client growth of .5% in '23 and you're citing increased product penetration and price realization, can you kind of roll that forward for us here? Can you give us a sense of how you're thinking about these pieces?
Efrain Rivera, CFO
Yes, I'd say, Bryan, that our typical client growth for the year is in the 1% to 3% range. We saw the low end of that in '23 and expect to be in the middle or higher in '24. Pricing typically falls in the 2% to 4% range. We were near mid-level on pricing last year. You also need to consider both the negative impacts of ERTC, with its expected transition from tailwind to headwind, and how these components contribute to the overall 5% to 6% growth target.
Bryan Bergin, Analyst
Okay. How about client employment there? So I got specifically in 4Q you had mentioned things being flat from 3Q going into '24 as well.
Efrain Rivera, CFO
Yes, that played out. We expect continued steady employment growth. I would add we still have to be cautious about the potential impact from higher interest rates, which could cause some concern. But I believe we can manage this effectively moving forward.
Bryan Bergin, Analyst
Okay, makes sense. Thank you very much.
Efrain Rivera, CFO
Thanks.
Operator, Operator
Thank you. Our next question will come from Bryan Keane with Deutsche Bank.
Bryan Keane, Analyst
Hi, guys. Good morning. How are you doing?
Efrain Rivera, CFO
Good morning. Go ahead.
Bryan Keane, Analyst
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 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 more of a retention issue given that some clients that turned off during the pandemic are less of a concern?
Efrain Rivera, CFO
Yes, Bryan, as John mentioned, it’s generally driven by sales. However, we experienced strong unit growth in the latter half of the year, demonstrating it was driven more by retention issues rather than sales. The surge in business starts during the pandemic has led to some instability in retention, but overall, we're returning to more traditional patterns. Our expectation is that we will see typical attrition going into next year, which is part of our forecasting.
Bryan Keane, Analyst
Got it. The guidance looks pretty consistent. As you look at the revenue and the margins, you're not wildly off from the first half, the second half. Are there key macro factors we should watch that could move it up or down as we think about the macro?
Efrain Rivera, CFO
Yes, I'll let John speak as well, but I would say it’s crucial to monitor what's happening in the macro environment. There was significant uncertainty regarding a potential crash landing through ‘23. Despite skepticism in the market about hitting our numbers, we maintained an optimistic forecast. The current macro environment has seen no dramatic changes, but with the focus on interest rates, we believe they will impact small businesses. We are monitoring closely how they absorb impacts to funding.
John Gibson, CEO
Yes, I’d add that while we anticipated a downturn, our small business index showed an upward trend across the first three months and stabilized thereafter. We’ve observed positive checks and worksite employee growth within the client base we have. Hiring remains challenging, and we're also seeing clients increasingly tapping into nontraditional labor sources. It will be interesting to observe whether businesses maintain their current staffing levels or leverage gig workers more heavily during economic uncertainties.
Bryan Keane, Analyst
Super helpful. Thanks, guys.
Operator, Operator
Thank you. Our next question will come from Scott Wurtzel with Wolfe Research.
Scott Wurtzel, Analyst
Hey, good morning, guys, and thanks for taking my questions. Just on the expense side, can you share some of your top investment priorities over the next 12 months and how you're thinking about incorporating generative AI into your business?
John Gibson, CEO
Yes, so our primary investments are in growth and digitization. We have been focusing heavily on various digital initiatives, especially in sales and our marketing approach, which has yielded positive results. We've been actively leveraging AI for several years across all facets of our business to improve efficiency and enhance client service. We have one of the largest data sets in this industry, which is invaluable in developing effective AI capabilities. We're using it in customer service, risk assessment, finance, HR outsourcing advisory, and integration into our products.
Scott Wurtzel, Analyst
Got it. That's very helpful. Efrain, I’d love to clarify your income guidance regarding clients' balance growth for the year.
John Gibson, CEO
Client balance growth is roughly in line with wage inflation, which is to say, low single-digit growth.
Operator, Operator
Thank you. Our next question will come from Kartik Mehta with Northcoast Research.
Kartik Mehta, Analyst
Hey, good morning.
Efrain Rivera, CFO
Hey, Kartik. Are you battling with smoke there in Cleveland too?
Kartik Mehta, Analyst
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, CEO
You’re welcome, Kartik.
Kartik Mehta, Analyst
I'm wondering about payroll control. They have come down from pretty high levels; what are your expectations for FY '24, not only for the payroll business but also for the PEO, if you're seeing anything different?
Efrain Rivera, CFO
Yes, we expect flattened growth in the payroll business and a gradual increase in the PEO. We anticipate solid worksite employee growth—especially in PEO—as we move forward, but overall, significant growth isn't expected in both areas.
Kartik Mehta, Analyst
And just one follow-up. John, I would be interested in your insights on job openings. We see all these JOLTS numbers, yet it seems like employers have become cautious. So from your perspective, what do you think job openings are with your customers versus what we see in the news?
John Gibson, CEO
Yes, I can confirm that clients are interested in filling open positions. I have not seen a change in that demand. They seem to be filling those roles quite well, as evidenced by the uptick in hospitality jobs in the last half of the fiscal year. While employers may be cautious in posting new positions, many remain eager to fill roles that are critical for their business.
Kartik Mehta, Analyst
That does make sense. Thank you both. I really appreciate it.
John Gibson, CEO
Yes, you’re welcome. I may add that those individuals using our onboarding and recruiting experience have realized about a 20% improvement in their time to hire. Just putting that out there for any customers or prospects on the line.
Operator, Operator
Thank you. Our next question will come from Eugene Simuni with Masset Makinson.
Eugene Simuni, Analyst
Thank you. Hi, good morning. I wanted to ask a question about the PEO. We anticipated some deceleration here, and you highlighted again that insurance attach rates have driven recent performance. Can you elaborate on where you're seeing softness in healthcare insurance attachment? What kinds of businesses does that relate to? I think it'll be helpful to hear because there’s so much variability around the PEO industry in terms of healthcare insurance rates.
Efrain Rivera, CFO
With us, it’s less about verticals, but rather where we derive revenue, which is primarily in Florida. The issue tends to be concentrated here, especially given its over-indexing in hospitality. So revenue from PEO healthcare is significantly affected by client retention in Florida; particularly in leisure and hospitality. We expect improved performance, and while success is not guaranteed, we will see further momentum as we’ve put a lot of effort into changing this perspective.
John Gibson, CEO
Yes, I would echo Efrain's points. The insurance component presents two decisions; acquiring benefits is one side, but it is equally essential for employees to elect to enroll. While some clients decided against enrolling, we've reviewed and modified many elements of our offering to approach our customers effectively. We have initiated extensive changes and will evaluate outcomes starting in July, our main enrollment window.
Eugene Simuni, Analyst
Got it. That's super helpful. One follow-up on retention bookings and growth—when factoring your guidance for next fiscal year, Efrain, you mentioned that you expect client growth to shift from .5% to something higher. Would that be representative of both improved retention and sales gains or primarily driven by one versus the other?
Efrain Rivera, CFO
You need both factors—over-relying on one could skew the data. Sometimes you achieve a balance better than others, but both elements need to work together.
John Gibson, CEO
Efrain has accurately addressed it. Our strong performance in the latter half of the year has laid a solid foundation for growth in fiscal year '24. Client retention, in addition to positive sales, underscores our full-year expectations moving forward.
Operator, Operator
Thank you. Our final question will come from Peter Christiansen with Citigroup.
Peter Christiansen, Analyst
Thank you. Good morning.
John Gibson, CEO
Thanks for your question. How are you doing?
Peter Christiansen, Analyst
Good. Efrain, I was curious about the portfolio repositioning. Should we expect future operating outperformance to be reinvested in portfolio repositioning? Will you be layering to maximize returns?
Efrain Rivera, CFO
Your questions are fantastic. Performance allows us flexibility, which we analyze methodically. We believe there’s positive NPV in repositioning approaches; as we measure different methods, we weigh their merits consistently. If a restructuring presents strong value, we will do so. Regarding maximum duration across the portfolio, we don’t target but monitor our stance in the context of market and economic trends.
Peter Christiansen, Analyst
Thank you. That’s helpful.
Efrain Rivera, CFO
You're welcome.
John Gibson, CEO
I will add that as interest rates rise, there is a tendency to be aggressive with pricing, initially, but according to historical trends, such behavior often leads to issues with retention. Therefore, we tread carefully when adjusting pricing in response to interest shifts.
Operator, Operator
Thank you. Our final question comes from Tien-Tsin Huang with J.P. Morgan.
Tien-Tsin Huang, Analyst
Hi. Thanks. Good morning, John, Efrain. I wanted to ask about PEO growth; are you looking for acceleration? You've talked about improvements in health insurance attachment rates, can you help us disentangle how much of the acceleration is attributable to volume versus price versus mix?
Efrain Rivera, CFO
We have worksite employee growth in PEO. We expect further growth in clients, particularly through enhanced healthcare attachment. While we've seen growth in worksite employees, we don’t anticipate any major pricing increases; we're seeing growth in attachment rates generally.
John Gibson, CEO
While our current pricing remains steady, our health benefit increases will align with historical limits. What we view as notable is the recent uptick in PEO client numbers demonstrating the loyalty we’ve gained in our offerings, underscoring the fact that our HR and technology solutions remain competitive. We have ongoing initiatives in place to capitalize on this.
Tien-Tsin Huang, Analyst
And what’s your growth appetite regarding self-insured versus fully guaranteed PEO models, especially considering how insurance dynamics can change?
Efrain Rivera, CFO
We’ve been cautious following the lessons learned during previous years. We're focused on growing sustainably and responsibly, ensuring we don't overextend ourselves relative to risk.
John Gibson, CEO
We have not pursued significant acquisitions in the PEO space recently as the valuations in the industry are high relative to capability. We're currently leveraging our growth potential organically and have enough opportunities from existing customer bases to focus on rather than pursuing M&A heavily at this time.
Tien-Tsin Huang, Analyst
Awesome. Thanks for the complete answer. I promise just one question. Thank you, guys.
Operator, Operator
Thank you. Our last question comes from James Faucette with Morgan Stanley.
James Faucette, Analyst
Hey, good morning. Just a couple of quick follow-ups. Thanks. I wanted to confirm your commentary on the out of business commentary; could you characterize that out-of-business run rate as being elevated right now, or is it back to a more normalized level?
John Gibson, CEO
It has returned to normal. We are back to pre-pandemic numbers, which historically were conducive to business growth before the pandemic. Overall, small business starts remain stable, even with what we experienced during the pandemic.
James Faucette, Analyst
That makes sense, appreciate it. Lastly, can you help us think through business sensitivity? In the event of further macro deterioration, which underlying verticals, such as payroll, HCM software, retirement, HR management, would be hit the hardest versus those that might be more resilient?
Efrain Rivera, CFO
I'd say payroll could be one of the more adversely affected areas, particularly job reductions. However, our model is diversified, combining subscription with service elements, which provides buffer against downturns. As we saw through the pandemic, PEO clients shed employees quickly. However, we didn’t see heavy client losses, allowing us to remain well-positioned amidst economic downturns.
John Gibson, CEO
As I mentioned previously, we’ve improved our internal capabilities, particularly in targeting our client base more effectively. This positions us well to weather macro challenges more efficiently than we have in the past.
James Faucette, Analyst
That's great. Appreciate it.
Operator, Operator
Thank you. Our final question will come from Mark Marcon with Baird.
Unidentified Analyst, Analyst
Thank you for taking our questions. I'll keep it to one. Retirement solutions continues to see strong growth and has some favorable trends. Can you discuss the measures you're implementing to take advantage of the opportunities presented by both the SECURE Act and state mandates?
John Gibson, CEO
Yes, we already lead with the number of plans we manage, outpacing any competitor in the space. The SECURE Act and state mandates enhance our proposition; we are currently pushing aggressive initiatives to educate our existing customers, expand marketing outreach, and seek partnerships to help small businesses seamlessly adopt retirement offerings. We believe we can sustainably grow within this segment by providing valuable benefits at no cost to our clients, particularly to promote employee retention.
Unidentified Analyst, Analyst
Great. Thank you for the color.
Operator, Operator
Thank you. Our final question will come from Samad Samana with Jefferies.
Samad Samana, Analyst
Hi. Great. Thanks for squeezing me in. I wanted to ask on maybe your own sales organization. Can you help us think through the performance of your sales team against quota in fiscal '23 and expectations for fiscal '24 in terms of quota increases?
John Gibson, CEO
We were pleased with record-setting sales execution. The back half of the year outperformed the front half. Due to the success and momentum, our sales team has accepted increased quotas for fiscal '24.
Efrain Rivera, CFO
Go ahead; you can ask your follow-up.
Samad Samana, Analyst
I'm just kidding. I'm going to address the question. Have a great day, everyone. Thank you.
John Gibson, CEO
Thank you, everyone, for joining us today. I wish you a great 4th of July weekend. I reflect on our past fiscal year, it’s been a transition for me coming into the CEO role, but extraordinarily fulfilling. We achieved an important milestone with $5 billion in revenue, and I want to express my gratitude for our employees’ hard work and dedication. The employees of Paychex displayed resilience during a complex fiscal year, and it is this teamwork that helped us achieve success amidst challenging times. I hope you have a relaxing holiday ahead.
Operator, Operator
Thank you, ladies and gentlemen. That concludes today’s presentation. You may now disconnect.