Earnings Call Transcript
PAYCHEX INC (PAYX)
Earnings Call Transcript - PAYX Q2 2023
Operator, Operator
Good day, everyone, and welcome to the Paychex Second Quarter 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 will be recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. John Gibson, President and CEO. Please go ahead, sir.
John Gibson, President and CEO
Thanks, Tadd. Good morning, everyone. Thank you for joining us for our discussion of the Paychex second quarter 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 second quarter ended November 30. You can access our earnings release on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next day. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days. We'll start the call with an update on the business for the second quarter and then Efrain will review our financial results and outlook for fiscal year '23. We'll then open it up to your questions. We delivered solid financial results for the second quarter with total revenue of 7% and adjusted diluted earnings per share growth of 9%. Demand for our comprehensive solution suite remains strong and we are well positioned to help our clients succeed. Our unique combination of leading HR technology, HR expertise and the wide breadth of solutions we have to address the many needs in the marketplace continue to help small and midsized businesses navigate this very dynamic and challenging environment. We continue to closely monitor the macroeconomic environment and our internal leading indicators. The latest findings from our Paychex IHS Small Business Employment Watch revealed moderating growth in jobs and steady growth in wages. Our clients continue to be challenged by the continuing impacts of the pandemic, inflationary pressures and the challenges of this labor market. However, small and midsized businesses continue to show their resilience. Our revenue retention remained solid as we focus on retaining clients and driving increased value and penetration of our HR outsourcing, HCM software and retirement solutions. Our overall HR outsourcing business continues to perform well with strong growth in worksite employees and record revenue retention. We achieved a major milestone this quarter. We now serve over 2 million worksite employees across our ASO and PEO business, clearly establishing us as an HR leader. Our industry-leading HR advisory services sets us apart and our certified HR professionals are truly a unique asset as they are advising our clients on HR issues as well as leveraging our HR technology and the analytics from our vast SMB data set to help our clients achieve greater operational efficiency, increase employee engagement and reduce turnover. While demand for our technology and HR outsourcing solutions remain strong, we continue to see shifts in what offerings clients find are the best fit for their current situation. Both early and during the pandemic, we saw lower demand for adding employer health benefits. We continue to see this trend and also high demand for our ASO solutions, driven by businesses seeking immediate assistance with HR issues and filing for tax credits, but delaying decisions on adding or changing their insurance offering to their employees. In addition, the lower medical plan sales and participant volumes in our health and benefits area of our insurance agency that we discussed last quarter continued in the second quarter, and we saw some similar trends in our Florida at-risk insurance program in the PEO, impacting revenue growth in that area of the business. Awareness and demand of our employee retention tax credit or ERTC service, which helps clients maximize eligible tax credits, continues to grow. To date, we've helped more than 50,000 clients secure billions in ERTC. A recent survey showed that 63% of business owners didn't even know that they were eligible for these credits. We continue to educate existing clients about the benefits, as well as leverage this service to attract new clients. We continue to invest and enhance our product suite and customer experiences. In November, we released our enhancements to Paychex Flex, focused on further streamlining the recruiting, onboarding, time and attendance, and benefits administration experiences. Through our HR technology, three out of four Paychex clients surveyed have shortened the time required from recruiting, screening, tracking and onboarding new employees. Those clients reported an average time savings of 26%, indicating that the typical two-month recruiting cycle has now been reduced to just six weeks. I'm very excited about our Retention Insights offering, which continues to deliver strong results for our clients at a time when businesses remain committed to retaining their existing staff. This feature uses predictive analytics, coupled with our vast data sets, to provide insights on potential employee flight risk. Clients leveraging the Retention Insights offering are showing a 15% reduction in turnover when compared against their industry peers. We're very pleased we received the Bronze Brandon Hall Group Excellence Award for Best Advance in HR Predictive Analytics Technology for this solution. This is the 10th consecutive year they've recognized us. During the quarter, we also were recognized with the IDC 2022 SaaS Customer Service Satisfaction Award for Core HR and we are honored to have received this award as another confirmation of the power of our HR technology and the quality of our advisory services. These awards continue to validate that Paychex is a technology leader and that our focus on HR is delivering real impact for our clients and their employees. At this time, we're heading into our critical year-end season. We are fully staffed in both sales and service, and we have good momentum. I want to thank all the employees in advance for all their hard work and dedication in making this the best year-end ever. Now I'll turn it over to Efrain who will take you through our financial results for the second quarter.
Efrain Rivera, Chief Financial Officer
Thanks, John, and good morning. I'd like to remind everyone that today's commentary will contain forward-looking statements that refer to future events. You know the customary comments. Take a look at our press release if you have any questions on that. Let me start by providing some of the key points for the quarter, and then I'll finish with a review of our fiscal 2023 outlook. Both service revenue and total revenue increased 7% to $1.2 billion. Management Solutions revenue increased 8% to $895 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 ERTC and price realization, continue to see strong attachment of our HR solutions, retirement and time and attendance solutions. I will note that revenue from our ERTC service benefited second quarter revenue growth by approximately 1%. We anticipated ERTC revenue would moderate in fiscal 2023 but strong demand and execution have led to better-than-expected results. While ERTC was a tailwind to Management Solutions growth for the first half, it will become a moderate headwind in the second half. PEO and Insurance Solutions revenue increased 4% to $273 million, driven by growth in average worksite employees and revenue per client. The rate of growth was tempered by the impact of factors John previously discussed, including lower medical plan attachment and participant volumes along with the mix shift to ASO. And I would just note on PEO and Insurance Solutions, Insurance Solutions was significantly below the growth rate of PEO. Interest on funds held for clients increased 54% for the quarter to $22 million primarily due to higher average interest rates along with growth in investment balances. Total expenses increased 7% to $718 million. Expense growth was largely attributable to higher headcount, wage rates and general costs to support the growth of our business. Operating income increased 7% to $472 million with an operating margin of 39.7%, in line with the prior year period. Our effective tax rate for the quarter was 24.2% compared to 24.1% in the prior year period. Net income increased 8% to $360 million, and diluted earnings per share increased 9% to $0.99 per share. Adjusted net income and adjusted diluted earnings per share both increased 9% from the quarter to $359 million and $0.99 per share, respectively. Quick summary of year-to-date financial results, total service revenue and total revenue both increased 9% to $2.4 billion. Management Solutions increased 10% to $1.8 billion. PEO and Insurance Solutions increased 6% to $556 million. Operating income increased 10% with a margin of 40.4% with modest expansion year-over-year, and adjusted net income and adjusted diluted earnings per share both increased 12% to $731 million and $2.02 per share. Let's look at our financial position. It's strong with cash, restricted cash and total corporate investments of more than $1.3 billion and total borrowings of approximately $808 million as of November 30, 2022. Cash flow from operations increased and was $686 million for the first half of fiscal 2023, driven by higher net income and changes in working capital. We paid out quarterly dividends at $0.79 per share for a total of $569 million during the first half of 2023. Our 12-month rolling return on equity was absolutely stellar, 46%. Now I'll turn to the guidance for the current fiscal year ending May 31, 2023. Our current outlook incorporates our first half results and our view of the evolving macroeconomic environment. We have raised guidance in many areas but moderated the range for PEO and Insurance Solutions based on factors previously discussed. Updated guidance is as follows: Management Solutions revenue is expected to grow in the range of 7% to 8%. PEO and Insurance Solutions is expected to grow in the range of 5% to 7%. Interest on funds held for clients is expected to be in the range of $100 million to $110 million. Total revenue is expected to grow approximately 8% net other income/expense. And I'd just remind you that the net of our debt service plus earnings on our corporate portfolios, that number is now expected to be income of $5 million to $10 million. Adjusted diluted earnings per share is now expected to grow in the range of 12% to 14%. Guidance for margins and effective tax rate are unchanged, although we do anticipate leaning towards the upper end of the range on operating margin and the lower end of the range on effective tax rate. Turning to the third quarter. We currently anticipate that total revenue growth will be approximately 6% and that operating margin in the third quarter will be in the range of 43% to 44%. Of course, all of this is subject to our current assumptions, which could change if there are changes in the macro environment. We will update you again on the third quarter call, and I will refer you to our investor slides on the website for more information. I'll now turn the call back over to John.
John Gibson, President and CEO
Thank you, Efrain. Tadd, we will now open the call for questions.
Operator, Operator
We'll take our first question from Ramsey El-Assal with Barclays.
Ramsey El-Assal, Analyst
Thanks for taking my question this morning, and happy holidays to you. I had a question on the insurance business. I'm just curious, you mentioned lower medical plan attachment and the mix shift to ASO. What do you think is the underlying driver there? Is there any other color or insight that you have in terms of why those dynamics are occurring right now?
John Gibson, President and CEO
Yes. Look, I think I'll step back a little bit and then I'll zero in on your question. I think our HR solutions, when you look at the combination of ASO and PEO, continues to grow at double-digit rates. We're very happy with the progress there. As we said, we surpassed the 2 million employees served. And if you go back and think about that, in fiscal year '19, we were at 1.2 million disclosed. So that's a 72% increase. And then you think about that, we had one year in COVID where I think it’s probably like 3%. So very solid growth in both of those products. I think when you look inside, the agency has struggled. There’s a lot of economic pressure on employers and employees. Most of our insurance agency tends to attract first-time employers who are offering insurance for the first time, a lot of new business startup-driven activity. And I think in this environment, even though they would want to offer insurance to their clients, they're finding that it's economically difficult for them to consider adding that product. And then when we look at the participation rate, there are two things you need: one, you need an employer to buy it, and then you need employees to contribute their fair share. We've also seen some decreases in employees who are electing not to participate in their employer plans. So you have those two dynamics; I can’t connect the two directly, but certainly, looking at the hours worked, when I look at inflationary pressure on wages, I wouldn't be surprised if that's some of the economic decision-making that's being made there.
Ramsey El-Assal, Analyst
One follow-up for me. You also talked about Management Solutions higher product attachment cross-sell. Can you kind of update us on your strategy there? What levers you're using to execute on cross-sell and what inning we're in terms of that broader opportunity?
John Gibson, President and CEO
Yes. Look, what we've seen across the board, our digital offerings, our online solutions continue to attract and drive efficiency inside companies. That’s what they're looking for. Think about our time and attendance solutions. They're also dealing with more dispersed workforces, driving demand for onboarding, recruiting and onboarding. So we still have a very tight labor market for small and medium-sized businesses. Our recruiting and onboarding experience has really driven demand. It's in partnership with Indeed. As a matter of fact, I think the last time we reported, we were around 1.8 million employees hired through this new onboarding experience, and we're approaching the 3 million mark in just six months since we last reported the number. So that's been very attractive as people are trying to attract and retain staff, and then our Retention Insights. We have our HR professionals talking to our clients. It's interesting on the Retention Insights; we actually have our data analytics team flagging clients that we think have an issue, and then we're proactively reaching out to them and having our HR consultants engage them in a conversation.
Operator, Operator
Our next question comes from Bryan Bergin with Cowen.
Bryan Bergin, Analyst
Wanted to dig in here just on some of the leading indicators and the demand environment. So just since you reported last and particularly over the last few weeks, can you just talk about what you're seeing in that new demand across employer size as well as offering?
John Gibson, President and CEO
Yes. Again, what I would tell you is that even though it's a challenging and mixed macro environment, everything you read about the resiliency that we're seeing in the small and midsized businesses continues to be strong. When we look at the leading indicators, we're not seeing any signs of a downturn at this time, and that's been reported here. I think there’s been a rare coaster effect from the COVID perspective. Certainly, our mid-market customers and larger customers seem to be doing better than our small customers, who in turn seem to be doing better than the micro customers in terms of dealing with inflation and the recruiting scene. Overall, we're not seeing anything at this time in our indicators that would indicate any kind of downturn for small businesses.
Bryan Bergin, Analyst
Okay. Okay. That's good to hear. I guess just a follow-up on that. As we think about the macro assumptions underlying the second half outlook, can you just talk about what you're thinking about for client employment levels, or any business client loss or issues?
Efrain Rivera, Chief Financial Officer
I think pretty much we're assuming an environment similar to what we saw in the first half. And with this caveat, Bryan, as we've looked at quarter-over-quarter, you continue to see a pace that is moderating compared to the previous quarter. I think that's the trend we expect to continue through the end of fiscal. But that assumes that the impact of the Fed's rate raising continues to have the same incremental impact it has in the first couple of quarters. What do I mean by that? I mean, right now, it's starting to tamp wage pressures. It's not having a dramatic impact on hiring, especially in the SME firms we serve. If that started to change, it would change our assumptions.
Operator, Operator
Our next question comes from Jason Kupferberg with Bank of America.
Jason Kupferberg, Analyst
I wanted to start just on Management Solutions with the raise of the revenue guidance there. Just which of the key operating metrics are you now bullish on? I mean is it pricing, retention, bookings, checks per client?
Efrain Rivera, Chief Financial Officer
Yes. So driving that, Jason, let me pick a couple of those out. Obviously, we expect client retention and revenue retention to remain strong. It's strong, and we expect that to occur during the balance of the year. We’re seeing a little bit more increase in unit and unit churn on the low end—that's to be expected given the mix of the client base over the last couple of years—but it's coupled with very strong client retention, so higher value clients we're retaining, which is what we want to do. On the checks question, that's a good one because in the first half, we saw good checks per payroll or pays per control growth in the first half. We don't expect it to be that strong in the back half of the year, partly due to comparisons and simply because of the amount of growth we saw last year. But it will still be a positive contributor. We think that ERTC will remain a factor in the back half, although I called it out in Management Solutions; that's moderating. It just won't moderate quite as much as we perceive it to be. And the demand environment still seems positive, and we expect sales to remain positive as we go through the year. So that's some color on each of those.
John Gibson, President and CEO
Yes. And Jason, I would probably add that we continue to see the demand for our HR solutions, both ASO and PEO. We're pleased with the demand. We've seen an increase in worksite employees, and the retention in those has been at historic record highs when you look at our HR outsourcing businesses. We have solid revenue retention across the macro level.
Jason Kupferberg, Analyst
Okay. Understood. My next question is just coming back to the insurance side of things. I mean, you talked about some macroeconomic effects that you think are causing that business to be softer than anticipated. But are there any execution issues you feel you need to address or anything that could border on structural challenge versus cyclical? Just wanted to see if we can unpack that a little more.
John Gibson, President and CEO
Yes. Well, Jason, let's talk a little bit because we've discussed the agency. P&C has continued to be a challenging product. Again, remember, most of our P&C business is workers' comp, largely driven by new startup businesses. That's been a soft market for a period of time, so certainly, that's continued to be a drag and has not turned around. When you look at the health and benefits side, that has been a bit more impacted as we went through this pandemic. What I mean is there are slower new business starts, so fewer people we’re engaging with, and the economic pressure of adding a benefit at that cost both from an employer and employee side. I don't think there are any terribly structural issues. What we're doing is adjusting to our approach in terms of driving more digital engagement on the P&C side. We're also doing a lot more on the health and benefits side, where we believe we may have more success in converting existing benefit programs. We're going to continue expanding our insurance product portfolio to meet the market demands with more economical options. Again, this is mostly sluggish demand for P&C and the lack of attachment and employee participation in H&B.
Operator, Operator
We'll take our next question from Kevin McVeigh with Credit Suisse.
Kevin McVeigh, Analyst
Happy holidays, and John, congratulations on the first call. I wanted to drill into the guidance a little bit. I mean, there's been a sizable step-up in float, which is pretty profitable. And then the swing factor on the other income is pretty profitable, too. But we're holding EBITDA, and I know the other income is below the line, but the floats above. Is there anything offsetting that, Efrain? Or is that a little conservatism? It seems like you're outperforming in some of the more profitable parts of the business.
Efrain Rivera, Chief Financial Officer
No, Kevin, not really. When you do the arithmetic, the color I provided was that we saw ourselves more towards the top of the range. There is flow-through on that revenue. In the back half of the year, we don't assume that 100% flows through. We're also positioning ourselves to anticipate potential spending going into '24. We may end up outperforming that number, but we approach this with an element of caution and conservatism as we go through the year.
Kevin McVeigh, Analyst
That makes a lot of sense. And then can you remind us what Fed funds are in that $100 million to $110 million?
Efrain Rivera, Chief Financial Officer
Yes. We assume we’ll end up close to where the Fed is around a 5% terminal rate as we get into the spring. Just caution that you can't simply take the portfolio and put that rate in because it will depend on the balance between short-term and long-term rates. My objective is to position the portfolio effectively so we can protect against sudden changes in the market.
Operator, Operator
Our next question comes from Samad Samana with Jefferies.
Samad Samana, Analyst
Maybe just on the record sales performance. Can you comment on bookings activity, in aggregate, and the linearity of the quarter as well as what you're seeing as we get closer to the end of the year and as your clients adjust to possibly the changing macroeconomic environment?
John Gibson, President and CEO
Yes. We continue to see strong demand for our products and services. On the HR side, demand remains solid across all our digital products. We're not seeing much change in the competitive landscape currently. Clients are struggling with inflation, and our technology solutions are helping improve their efficiency. We’re providing significant economic assistance through the ERTC program. We've helped 50,000 clients secure an average of over $150,000 each. Additionally, we’re seeing strength in the 401(k) business, which is becoming increasingly popular due to state mandates. Our time and attendance and other online services are resonating well with small businesses.
Efrain Rivera, Chief Financial Officer
If I look at first half sales bookings growth, it was solid. You have to go back to how we compare now over a two-year stack pre-pandemic, and we compare favorably to that time. The question for this business is, as everyone knows, Q3 is our most important selling quarter. When strong in the first half, we usually maintain that strength. Conversely, if we wobble a bit in the first half, it tends to be tougher in the second half. We're well positioned for the selling season, but we need to get through it to assess our standing once Q3 wraps up.
Samad Samana, Analyst
And then maybe just to follow on that regarding your customers. You said you’re at expected staffing levels. How are you planning for hiring in the sales and marketing organization based on your guidance?
John Gibson, President and CEO
Yes. We're fully staffed in sales and service heading into the selling season, exactly where we need to be given the demand. We will continue to monitor this, being cautious about additional hiring right now. That said, we see some investment opportunities and will target the selling season to promote selected resonating products and services. Our approach is to be prudent but prepared for adjustments based on market responses.
Operator, Operator
Our next question comes from Kartik Mehta with Northcoast Research.
Kartik Mehta, Analyst
Efrain or John, just thoughts on pricing, how it's taking? I know, John, you said the competitive environment isn't changing. So I'm wondering how customers have reacted to the most recent price increases you had to introduce?
John Gibson, President and CEO
Well, Kartik, our average revenue per client is double digits—above any pricing level—and that's driven by the value we’re providing. The achieving product upgrades and increasing attachments we are seeing from our digital experiences adds value. Revenue per customer is doing very well, which demonstrates the pricing power we have.
Kartik Mehta, Analyst
And then just looking at the balance sheet. It's in great shape. If the economy slows and valuations come down, your thoughts on buying back stock versus M&A opportunities? What makes more sense for Paychex?
Efrain Rivera, Chief Financial Officer
I don't think anything has changed in terms of our interest in M&A opportunities if the right opportunities arise. We have a range of opportunities in our funnel. We see certain opportunities worth pursuing more aggressively. With respect to buying back shares, I don't think our stance has changed—we will seek to combat dilution, but likewise, we're looking at M&A more than ever.
John Gibson, President and CEO
Yes. The market is changing for sure. Our position regarding M&A has not shifted; we are always looking for opportunities. Interests in technology or market acquisitions are very possible. However, valuations haven't aligned well for us previously, but we are seeing some moderation now.
Operator, Operator
Our next question comes from Bryan Keane with Deutsche Bank.
Bryan Keane, Analyst
Just thinking about wage inflation or general inflation. What's the direct effect for Paychex? Is it less attachment or decreased spending from clients?
John Gibson, President and CEO
So let's talk about wage inflation. First of all, we have wage inflation, but it’s been moderating—our Paychex IHS index shows it steady at about 5% for the last three months. That’s moderated a little from previous increases. Wage rates do not have a significant impact on our revenue overall.
Bryan Keane, Analyst
And it typically doesn't affect their willingness to buy attachments or spend more with you?
John Gibson, President and CEO
Not really. I wouldn’t say that analysis would indicate that. The number of employees—worksite employees—is the key driver in our HR business; the more employees getting checks, the better for us. Notably, we're seeing employees work more hours and obtaining checks from two different employers as they respond to inflation pressures—for us, this is inherently positive.
Bryan Keane, Analyst
Got it. No, that's helpful. And then obviously, as you discussed, the key selling season is occurring over the next few months. What are your expectations for new client growth? Is it at the high end, low end of that 1% to 3% range as you head into the season?
Efrain Rivera, Chief Financial Officer
Typically, we say 1% to 3%. We'll see where we come out of that. We expect it to be a good season; that's about all I feel comfortable saying.
Operator, Operator
Our next question comes from Eugene Simuni with MoffettNathanson.
Eugene Simuni, Analyst
I wanted to return to the PEO insurance for a moment. A lot of questions have been answered on the insurance side. However, I wanted to dig deeper specifically into PEO: can you comment on what you're seeing in terms of bare-bones PEO, worksite employees, bookings trends in that area? That would be very helpful.
Efrain Rivera, Chief Financial Officer
Yes. I'll let John talk to sales, but to clarify the PEO revenue influenced by the State of Florida, particularly regarding health care or insurance. Workers' comp operates differently but healthcare is primarily affected by that state. In the first half, we observed unusual conditions where employees with insurance chose not to participate. We didn't detail Florida issues initially, not wanting to overemphasize, but we recognize we didn't see the attachment levels we expected. We anticipate improved revenue for PEO in the second half, but we remain cautious about insurance attachment, which is why we moderated revenue expectations.
John Gibson, President and CEO
Right. The insurance attachment concern is localized to Florida. Our attachment rate in Texas clients hasn’t impacted revenue. The PEO value proposition remains strong, and retention metrics are near record levels, with solid worksite employee growth as well. We’re confident as we enter the selling season with the right products and services.
Eugene Simuni, Analyst
Got it. Very comprehensive answer, very helpful. For my follow-up, I wanted to ask about the HR management side. I'm curious about your thoughts on how embedded payroll into software solutions by payment and software providers impacts your competitive landscape?
John Gibson, President and CEO
I wouldn't say we've seen a dramatic change that poses a major threat to our growth. We can always watch out for emerging competitors who may not need to prioritize profitability right now, impacting their operational approach. We may sense some dialing back of that as we approach the selling season.
Efrain Rivera, Chief Financial Officer
Yes, I want to reinforce that our responses to competitive pressures are measured. These small firms need careful alignment with client needs—our strength lies in the service models that provide a blend of efficiency and support.
Operator, Operator
We'll take our next question from Peter Christiansen with Citi.
Peter Christiansen, Analyst
Welcome, John, and happy holidays to all. Efrain, I wanted to ask about working capital. You mentioned it as a benefit this quarter. Is that indicative of changes in activity with some of your staffing clients? Is it a tailwind to macro conditions?
Efrain Rivera, Chief Financial Officer
So the staffing business has been strong. Our Advance Partners business continues to see growth, but we’re not experiencing the growth in receivables we had in the prior year, resulting in no net use of working capital, mainly due to the net changes we had from the equivalent period last year.
Peter Christiansen, Analyst
And I'd just like to dig deeper on the merchant side—how are things going with channel sales? You have a relationship with Clover and other distribution partners. Can you share insights on sales efficiency there?
John Gibson, President and CEO
In business development, we are continuing to add additional channels—even though it remains a small portion of our client acquisition strategy. We primarily achieve clients through CPA partners, current client referrals, and digital marketing. I'm pleased but don't identify any significant market shifts worth noting; thus far, they're all adding incrementally.
Operator, Operator
We'll take our last question from James Faucette of Morgan Stanley.
James Faucette, Analyst
First on margins. It seems like we're nearing peak levels right now. How should we think about the durability of these margins going forward? Particularly, if we were to see a recession and revenue growth were impacted, what would that look like for margins? What levers do you have to move toward higher margin outlook versus lower?
Efrain Rivera, Chief Financial Officer
Let me answer it in two ways and then hand it over to John. Yes, I think there's been significant transformation over the past years, especially post-tax reform, to accelerate our transition to a technology-oriented firm. If you look back five years ago, I wouldn't have predicted hitting a 40% margin, and we're now discussing our potential to expand beyond it. We’re still in the early phases of optimizing digitally what we do and thus challenge ourselves every year on margin improvements balanced with revenue growth investments. The answer is we are still seeing ways to enhance margins despite potential downturns.
John Gibson, President and CEO
I completely agree; we are recognized as the best operators in this business. Macro efficiencies will be benefitting us as clients shift to more digital services—solutions that allow employees to engage with our services without direct contact. That trend will enhance operations as we digitize back-office processes. We have multiple digital sales investments and onboarding capabilities rolling out this fiscal year, which will strengthen our efficiencies.
Operator, Operator
We'll take our next question from Mark Marcon with Baird.
Mark Marcon, Analyst
Happy holidays, John and Efrain. Can you break out the PEO and Insurance Services revenue of $273.3 million? Specifically, a breakdown between agency and PEO components?
Efrain Rivera, Chief Financial Officer
I'd guide all investors with questions to our previous quarter disclosure where we break out revenues by segments. To summarize, about half of the insurance revenue comes from Health & Benefits (H&B) and the other half from property and casualty (P&C) insurance, primarily workers' comp. H&B is growing in the low single digits but P&C has remained flat or declined due to ongoing market pressures.
Mark Marcon, Analyst
Got it. If we strip out the insurance component, is the PEO business still growing in the high single digits or low double digits?
Efrain Rivera, Chief Financial Officer
It’s challenging to separate the numbers because we evaluate PEO and ASO based on underlying revenue growth rates. However, the focus remains on strong worksite employee growth across those models.
Mark Marcon, Analyst
And what was the worksite employee growth?
Efrain Rivera, Chief Financial Officer
We have not disaggregated that data. We surpassed 2 million worksite employees, and the demand appears to be strong across both PEO and ASO. Importantly, we don’t force a client choice between those options; we allow flexibility based on their needs.
Mark Marcon, Analyst
Understood. I also wanted to follow up on Management Solutions—better than expected there. However, why did Management Solutions show a slowdown in Q2 relative to Q1?
Efrain Rivera, Chief Financial Officer
The slowdown in Management Solutions can be attributed to three factors. First, there was significant growth in checks per payroll in the first half versus prior quarters. Second, while ERTC was a significant contributor previously, it did not have as large of an incremental growth in the second quarter. Thirdly, we still see positive trends overall.
Mark Marcon, Analyst
Great. John, you mentioned innovative tools during the last quarterly discussion—can you provide a sense of the uptake for your most innovative tools, including the voice-activated solution?
John Gibson, President and CEO
The onboarding and hiring platform we launched has already seen substantial use—it has enabled approximately 3 million hires. Likewise, Retention Insights is showing significant uptake and the expected impact is promising.
Operator, Operator
Our last question will come from Tien-Tsin Huang with JPMorgan.
Tien-Tsin Huang, Analyst
I wanted to ask about retention rates, which have been strong. As we potentially enter a recession, what has your experience been regarding client retention through past downturns, and what are your thoughts on how this will play a role going forward?
Efrain Rivera, Chief Financial Officer
Absolutely. In past downcycles, we saw unit retention rates around 77%, with about 23% attrition rates. Retention has improved significantly since then, mainly due to our diversified offerings. The model we have now provides better conservation of clients even in economic downturns. We do see some elevated churn in our micro segment versus a year ago, but overall, net retention remains strong across our higher-value clients.
Tien-Tsin Huang, Analyst
For my quick follow-up, what are the primary contributions to margin overperformance you've seen?
Efrain Rivera, Chief Financial Officer
In summary, we had a structured approach that beat our expense planning, countered by beneficial revenue mix shifts. Management Solutions revenue showed exceptional performance, additionally contributing to the margin overperformance.
Operator, Operator
Thank you. We have no further questions at this time. I'll turn it back to Mr. John Gibson for any additional or closing remarks.
John Gibson, President and CEO
Thank you, Tadd. We'll close the call. Thank you for your support during my first call as President and CEO. I look forward to getting to know each of you better in the future. If you're interested in a replay of the webcast of this conference call, it will be archived for approximately 90 days. I hope you and your families have a happy holiday and a Happy New Year.
Operator, Operator
Thank you. This concludes today's call. We appreciate your patience. You may disconnect at any time.