Earnings Call Transcript
PAYCHEX INC (PAYX)
Earnings Call Transcript - PAYX Q4 2022
Operator, Operator
Good day, everyone, and welcome to today’s Paychex’s Fourth Quarter and Fiscal Year-End 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. Please note that this call is being recorded and that I will be standing by should you need any assistance. It is now my pleasure to turn today’s program over to Mr. Martin Mucci, Chairman and Chief Executive Officer. Sir, please begin.
Martin Mucci, CEO
Thank you. Thank you for joining us for our discussion of Paychex’s fourth quarter and fiscal year 2022 earnings release. Joining me today are Efrain Rivera, our Chief Financial Officer; and John Gibson, our President and Chief Operating Officer. This morning before the market opened, we released our financial results for the fourth quarter and the full year ended May 31, 2022. You can access our earnings release on the Investor Relations website and our Form 10-K will be filed with the SEC before the end of July. This teleconference is being broadcast over the Internet, will be archived and available on the website for about 90 days. We will start today’s call with an update on business highlights for the fourth quarter and the fiscal year. Efrain will review our financial results and outlook for fiscal 2023, and we will then open it up for your questions or comments. We are very pleased to close out our fiscal year with yet another strong quarter. Our successful fiscal 2022 results reflect strong execution across the company. This includes our sales teams highlighting our value proposition, our service teams in retaining clients, our cross-functional partnership to get new products in front of clients quickly, and a solid success in HR outsourcing and in the mid-market. Our adjusted diluted earnings per share growth of 24% reflects both strong revenue growth and margin expansion to an operating margin of approximately 40% for fiscal 2022. Our focus on cost control, lower discretionary spend, and operating efficiencies has allowed us to both invest in our business and expand operating margins. Macroeconomic trends have been positive this year, but with inflation at a 40-year high, there are concerns for potential recession in the near future. We continue to monitor key leading indicators for any signs of a change in the macroeconomic environment, but we have not seen any signs of deterioration at this time. Typically, the first signs of a macroeconomic recession would be a decline in employment levels at existing clients, an uptick in non-processing clients, or a slowdown in sales activities. These indicators continue to trend in a positive direction. The latest Paychex IHS Small Business Employment Watch reflected a 12-month consecutive month of increasing hourly earnings gains, though we did notice a slowing a bit of the pace of job growth in May. However, this is more reflective of being near full employment and the difficulty of finding employees. Job growth at U.S. small businesses remained strong in the face of a tight labor market and inflation pressures. Earlier this year, John Gibson was appointed President and Chief Operating Officer. John has been leading our service operation since 2013, and we are glad to introduce you to him on this call and have him participate. I will now turn it over to John, who will give us an update on our sales and service performance.
John Gibson, COO
Thank you, Marty. I am happy to be joining all of you today on this call and provide an update on our performance both for the fourth quarter and full fiscal year 2022. We finished the year with over 730,000 total payroll clients, with growth driven by both strong sales and retention. In addition, we now service approximately 2 million worksite employees through our ASO and PEO offerings, with 18% growth in the fiscal year. We had a record level of new sales revenue for both the fourth quarter and full fiscal year. Our sales teams truly executed across the board from digital sales in the low end and continuing momentum in the mid-market and very particularly strong demand in HR outsourcing and retirement. This reflects the strength of our value proposition and was aided by the improved sales productivity from our continued investments in demand generation and sales tools. Our service teams have worked tirelessly to support our clients and our sales growth throughout the year. We are very pleased with our revenue retention, which was comparable to our pre-pandemic record of last year. We have continued to make strong progress in hiring, and we actually accelerated some hiring into the fourth quarter to ensure we are fully staffed and ready to execute our goals in fiscal year 2023. We believe that by partnering with our clients and remaining agile and flexible in how we meet those needs, we will provide them the ability to focus on running their business and increase their success in navigating today’s very complex business environment. Their ability to rely on Paychex to make the complex simple results in their continued success and will, of course, then lead to continued elevated retention that benefits everyone. I will now turn the call back over to Marty.
Martin Mucci, CEO
Thanks, John. We continue to help our clients deal with the issues they consider most pressing. We were recently recognized for doing just that by receiving the HR Tech Award from Lighthouse Research and Advisory for the best SMB-focused solution in the core HR workforce category for the third consecutive year. What stood out about Paychex Flex was our ability to rapidly respond to changing conditions, delivering a product that is consistently up to date on the latest requirements. We have been able to help clients navigate challenges including recruiting and retaining talent during the great resignation, gaining access to government stimulus programs like the Employee Retention Tax Credit, enhancing benefit offerings, and transitioning to a digitally-enabled distributed work environment. Our strong and resilient product suite of HR, payroll, insurance, retirement, and PEO has been strategically designed to help businesses maximize every opportunity presented to them. We continue to see expanded utilization of our recruiting and applicant tracking solutions, designed to help businesses find talent in a low unemployment environment. Our deep integration with Indeed is helping our clients gain access to a strong set of candidates. Over 70% of the client employees hired through our Flex recruiting and applicant tracking module were sourced from Indeed, the world’s largest job posting site. Our Retirement Solutions are also experiencing record demand due to state mandates and the need for differentiated benefit offerings to retain top talent. The introduction of our pooled employer plan further differentiates our solution set. We now help over 104,000 businesses and over 1.3 million client employees save for a dignified retirement with industry-leading mobile technology, which allows employees to enroll in their retirement in the workplace. HR has historically been tasked with helping businesses stay compliant and manage their talent. With Paychex HR, we deliver on these goals while also helping businesses operate more efficiently. Paychex HR helps businesses replace paper with modern, easy-to-use digital processes through our cloud-enabled Flex mobile technology. Given current challenges with hiring and the rising costs brought on by inflation, we address head-on the need for businesses to operate more efficiently. Over 1.7 million client employees were onboarded through a completely digital experience during fiscal 2022. Maximum gains in efficiency are obtained when the leading technology we bring to payroll, HR, and time collection and scheduling are brought together. Paychex Pre-Check debuted in January, and the early adopters of Pre-Check have benefited from the proactive approach of letting their employees preview and improve their checks prior to processing. Processes have been excited about the time savings and problem avoidance that comes with Pre-Check. We also continue to innovate in the PEO space; Paychex PEO offers a continuum of benefits that is unique to our clients, from traditional health, dental, and vision funded by the client to comprehensive employee volunteer packages, including options for employees to purchase anything from critical illness policies to pet insurance, to new and emerging benefit offerings like student loan subsidies, robust benefit offerings designed for part-time employees, telemedicine, and mental health counseling. Our Paychex PEO provides a differentiated approach to benefits designed to help our clients attract and retain top talent. Managing cash flow is also a top priority for businesses as they are struggling to address the impact of supply chain issues and rising inflation. We continue to find ways for customers to access government stimulus, including helping our clients gain access to over $8 billion in employee retention and paid leave tax credits. This builds on the momentum of our $65 billion of PPP loan program initiative in 2020. Our award-winning PPP forgiveness tool has been instrumental in helping our clients transition 96% of those loans to full loan forgiveness. At Paychex, we know our employees are critical to who we are and what we do, and I believe that our focus on employees and their well-being has helped us manage through the competitive labor market. We are identified as one of America’s Best Employers for Diversity by Forbes Magazine and we are recognized by the Business Group on Health for offering one of the nation’s top health and well-being programs with the Best Employers, Excellence in Health and Well-being Award. As fiscal 2022 came to a close, I am very proud of the excellent results we had for the year and excited about our continued growth. I want to thank our 16,000 employees who are key to our success and have done a tremendous job in this ever-changing environment. With that, I will now turn the call over to Efrain Rivera to review our financial results for the fourth quarter and fiscal year as well as our guidance for fiscal 2023. Efrain?
Efrain Rivera, CFO
Thanks, Marty, and good morning everyone. It’s a pleasure to be with you as we conclude one of the most successful years in the company’s history. Despite our achievements, we remain a grounded team dedicated to providing shareholder returns that outperform the market. I want to remind everyone that this call will include forward-looking investment statements, so please refer to the usual disclosures. I will occasionally mention non-GAAP measures, and you can find more details in our press release and investor presentation. These adjustments are relatively modest. Let’s start with a summary of our fourth quarter financial results, then review full-year results, and finally provide guidance for fiscal 2023. In the fourth quarter of fiscal 2022, we saw both service revenue and total revenue rise by 11% to $1.1 billion. Management Solutions had another solid quarter, with a 12% increase to $845 million, fueled by higher revenue per client and growth in our payroll client base. The increased revenue per client can be attributed to product attachment within our HCM suite, elevated employment levels among our clients, pricing, and revenue from ancillary services, including our ERTC service. ERTC revenue constituted about 1% of total service revenue, and while we do not expect this revenue stream to maintain that level, there are still significant opportunities both within our base and externally. Revenue from PEO and Insurance Solutions rose by 10% to $284 million, primarily driven by an increase in average worksite employees and health insurance revenue. Interest on funds held for clients rose by just 2% for the quarter to $15 million, largely due to increased average investment balances. While recent rate hikes didn’t significantly impact this fiscal quarter, they will likely benefit us in the next year. Total expenses grew by 11% to $750 million, mainly due to higher compensation costs from increased headcount to support our growing client base, rising wage rates, and performance-based compensation. Additionally, we continue to invest in our products, technology, and marketing. I want to highlight the margin this quarter; we made intentional choices in the fourth quarter to reinvest back into our client base and our employees. Consequently, not all of the flow through went to the bottom line, which was a deliberate decision aimed at ensuring long-term sustainability for the business, and we believe this positions us very well as a result. Operating income increased by 11% to $394 million with an operating margin of 34.4%; adjusted operating margin remained flat for the reasons mentioned. We anticipated some hiring and marketing expenses, which we accelerated into Q4. Net income increased by 13% to $296 million, and diluted earnings per share rose by 12% to $0.82, despite these investments. Adjusted net income and adjusted diluted earnings per share also saw a 13% increase for the quarter, reaching $295 million and $0.81 per share, respectively, with the adjustments being relatively modest. Now, regarding the full year of fiscal 2022, as you noted, total service revenue and total revenues both climbed by 14% to $4.6 billion. Expenses, accounting for one-time costs from the previous year, rose by 8%. Operating income and adjusted operating income grew by 26% and 23%, respectively, to $1.8 billion. The adjusted operating margin was 39.9%, reflecting a 310 basis point expansion from the prior year, which is quite remarkable, and we have successfully achieved this while investing in the company. Our approach is not just about the next quarter or year, but focused on long-term growth. Diluted earnings per share went up by 27% to $3.84, while adjusted diluted earnings per share increased by 24% to $3.77. I take great pride in our financial position; we’ve delivered these results while maintaining a strong financial standing with cash, restricted cash, and total corporate investments amounting to $1.3 billion. Total borrowings stood at $806 million as of May 31. Cash flow from operations reached $1.5 billion during the fiscal year. We effectively translate earnings into cash. Free cash flow generated for the year was $1.3 billion, showing a 20% year-over-year increase. Therefore, our earnings and cash flow were exceptionally strong this year. Given our impressive performance and commitment to returning capital to shareholders, we raised our quarterly dividend by 20% to $0.79 per share in May. As many of you know, we have one of the top dividends in our sector and industry. In fiscal 2022, we paid a total of $1 billion in dividends and repurchased 1.2 million shares of Paychex common stock for $145 million. Our 12-month rolling return on equity was a remarkable 45%. Now, looking ahead to 2023, here’s our current guidance: Management Solutions revenue is projected to grow by 5% to 7%; PEO and Insurance Solutions revenue is expected to increase by 8% to 10%. Interest on funds held for clients is anticipated to fall between $85 million and $95 million, aligning with the Fed’s insights through the end of this calendar year. Specifically, we expect interest rates to be around 3% by the end of calendar year 2022, give or take, which we are factoring into our plans. Total revenue is expected to grow by 7% to 8%. The adjusted operating income margin is expected to range from 40% to 41%, and despite significant investments in the business, we are committing to additional leverage as we move forward. The adjusted EBITDA margin is projected to be another impressive 44%. Other net expenses are expected to be between $5 million and $10 million. This represents a combination of interest expenses minus income from our portfolio, which is why it’s in that range. We foresee income from the portfolio helping to offset some of the interest costs. Our effective income tax is expected to be between 24% and 25%, with adjusted diluted earnings per share anticipated to grow by 9% to 10%. This outlook is based on the current macro environment, which has some uncertainties. We sometimes find it challenging to interpret the signals coming from the federal government. I want to reiterate what Marty mentioned. The indicators in our business are strong as we close out the year, which is not an immediate concern for the first half of the year as we see it now; we will assess the second half as we progress. There remain questions about inflation and the Fed's actions. We believe we have some indicators to consider, but the exact outcome is still uncertain. We have better visibility into the first half of fiscal 2023 than into the second half. For the first half of the year, we expect total revenue growth to be in the range of 8% to 9%, with an operating margin of approximately 39%. Specifically, for the first quarter, we currently anticipate total revenue growth between 9% and 10%, with an adjusted operating margin projected in the range of 39% to 40%. All of this is based on current assumptions, which are subject to change, and we will provide updates on the first quarter call. Please refer to the investor slides on our website for additional information. Now I’ll pass the call back to Marty.
Martin Mucci, CEO
Thank you, Efrain. Operator, we will now open it up for questions or comments.
Operator, Operator
Yes, sir. And our first question will come from David Togut with Evercore ISI.
David Togut, Analyst
Thank you. Good morning. I appreciate all the helpful insights. Efrain, regarding the impact on margins in the fourth quarter, could you provide some context for your fiscal 2023 revenue and margin guidance, specifically addressing three points? First, what effects are you anticipating from inflation regarding wages and other costs? Second, could you specify your anticipated price increase for fiscal 2023? And third, can you give us an overview of your expectations for client revenue retention as it comes down from the pandemic peak? How should we view the year-over-year change in client revenue retention for fiscal 2023 compared to fiscal 2022? Thank you.
Efrain Rivera, CFO
Okay. Hey, David. Thanks for the questions. By the way, that triple header could take us about 30 minutes. We will try to make it. So I am going to let Marty talk to the inflation question as I think that’s a good one and kind of how we think about it in the year. It’s baked into the numbers; obviously, we won’t quantify a specific number, but we will tell you about what we are thinking about with respect to inflation and how it’s affecting us, how we expect that will impact us.
Martin Mucci, CEO
I will address the inflation question, and Efrain can add his insights as needed. From our perspective, inflation hasn't significantly affected most of our expenses, particularly our wages, which is a positive outcome for us. The wages reflected in our figures have seen some increases, which are slightly above our typical rates. As Efrain pointed out, we implemented some changes in the fourth quarter that included both one-time adjustments and higher wages in response to market competition. The one-time adjustments included year-end bonuses, acknowledging our employees' contributions to a successful year. We believe we have effectively accounted for these factors, with wages being somewhat higher than usual. We anticipate that this trend will continue into the first quarter, and we are confident in our handling of wage adjustments. Overall, we have maintained tight control over our expenses, even as we emerge from the pandemic. We've adapted to new conditions, such as remote work and reduced travel expenses, allowing us to sustain investments in the business. Therefore, we believe our guidance includes a solid reflection of the inflationary pressures we are facing.
Efrain Rivera, CFO
Yeah. So, I think, the thing I wanted to call out that Marty mentioned is that we, in the fourth quarter, took a lot of actions that we think position us very well for 2023. So I think we have captured as much as we know right now. There is always some room to make further adjustments, but the adjustments from an inflationary standpoint are really around wages for us, so I think we have captured that. On the price increase, we have always said that we are in the 2% to 4% range. I would say this is a year that certainly was at the high end of that range and it varies depending on the product. I think the key thing there is to get the right mixture of value and price, and it’s not just about raising prices; it’s also about delivering better value. So I think we are good there. And then on the client retention, we had a really good year. John mentioned earlier that our pandemic high was approximately a record and it was approximately 88%. When we closed the books this year, we were at approximately 88%. So we had a really good year from a revenue retention standpoint.
David Togut, Analyst
And then, Efrain, would you assume for FY 2023 client retention, can you sustain the 88% or are you assuming some step down?
Efrain Rivera, CFO
I think it’s comparable. I got to say that it wouldn’t be surprising to see a little bit of slippage from that number simply because I think we are transitioning into a more normalized environment, where you are going to see lots of competition. Our assumption in our plan is that discounting will go up a bit because of the level of competition. So everyone has come out of the pandemic swinging. I think some people are in better shape; others are wobblier. We think we are in pretty good shape and we are in a position to defend pretty well. The other thing I would say on that that’s really helped us in the year is we had a really strong year in the mid-market. And I will let Marty talk to kind of what happened there because that’s really helped us too.
Martin Mucci, CEO
Yeah. On the revenue retention side, it’s a good point to make that will make probably a couple of times on this call. The mid-market really picked up. And as we said probably a year ago, there was kind of a pent-up demand that we saw a year ago where people had not made some decisions that opened back up and we have been winning a lot of mid-markets. The strongest year we have been in mid-market, probably, in our history and I think it’s a great combination of sales execution, the products and the full suite of products that we are offering, that is really tailored to exactly what clients are looking for now. So we have had a lot of success there and that certainly helped on the revenue retention from a go-forward standpoint. Not only are we selling better in that mid-market, but we are retaining in a very strong way as well.
David Togut, Analyst
Understood. Thank you very much.
Efrain Rivera, CFO
Thank you, David.
Operator, Operator
Thank you. Our next question will come from Kevin McVeigh with Credit Suisse.
Kevin McVeigh, Analyst
Great. Thanks so much and congratulations. Hey, I don’t know if this is for Marty or Efrain, but clearly, the retention feels like it’s structurally at a higher level, like you may have been flowing within a higher level of range. So maybe just help us understand kind of what drove that, was that just the service post-COVID or a more robust product offering? Is there any way to kind of think about what drove the structural and again realizing it probably comes off, but it feels like you are in a structurally higher level clearly than where you were in kind of 2007?
Martin Mucci, CEO
I will start by saying that there is consistency here. From a controllable perspective, we have seen a trend of continued strength. Part of this can be attributed to our products, and I will elaborate on that before having John discuss the rest. Our products have been very responsive, and the ongoing engagement from clients and their employees has significantly contributed to retention. We have discussed this for many years, but the strength of this engagement has never been greater, especially during the pandemic when remote workforces had to utilize our technology more than ever, including the mobile app and online services. This increased usage has led to better retention, as clients and employees find it hard to let go of features like Pre-Check, which allows them to see their earnings before payday. They can track their time, understand their pay, manage their retirement funds, onboard in a paperless manner, and make their own direct deposit changes. Over the last few years, all of this has contributed to a structural improvement, making employees want to stay with Paychex because they feel invested in our services, not just in their company's payroll or HR staff. I will now ask John to add more to this, but I believe this is a significant aspect of the situation.
John Gibson, COO
Yeah. No, Marty. And Kevin, I would say, this is probably a multiyear story. You go back before COVID. Things we have been doing in our service model to differentiate our service focus, things we are doing relative to competitive retention triggers, using AI and analytics to anticipate where we may have issues. All of those things have really led to us getting a better handle on our controllable losses. And if you look, you go back to 2018 or in fiscal year 2019, you can really begin to see that dramatic piece. I would tell you particularly to Marty’s point, not only what we have done from a service perspective with relationship management in the upper market, things we are doing there in our HR outsourcing pieces. But we know that product attachment, particularly in retirement, particularly in HR, particularly the attachment and utilization of our Flex product and technology tools, we need to stickiness, and we have been very aggressive in introducing our clients to that capability, and so that’s also creating a degree of stickiness. I mean, I look at this all the time, and in fact, our price value losses were actually less this past fiscal year than they were at the record year. If I go back to 2018 and 2019, it’s about half of what we would typically have seen historically. So there is a structural component to this that we are going to continue to execute. There’s more we can be doing there, and I feel good about what we can do on the controllable side. The uncontrollable is always a thing we are monitoring and watching.
Kevin McVeigh, Analyst
And then just one quick follow-up, Efrain, I will ask, I know if you could tell us. Like, in terms of the fourth quarter investment, it sounds like it was a little more variable. Is there any way to kind of frame what that was, and I’d imagine it was more kind of variable as opposed to fixed cost that would kind of repeat in 2023, is that fair?
Efrain Rivera, CFO
Let me respond to that in a different way that hopefully addresses your question. We had a mix of one-time actions we took that were variable. There were also structural changes made to increase wages in certain areas and initiatives established for long-term incentives. I would say one of the employee-related actions was more one-time, while the other two were structural and will have a longer-lasting impact. Additionally, there were other variable items unrelated to wages that we implemented in the fourth quarter. So, it was a blend of both. I can't categorize it strictly by percentages, but there were three categories that contributed to the overall expenses.
Martin Mucci, CEO
I think as Efrain said, all of that obviously is in the guidance of increasing the margin. So even though some were more structural and ongoing wage expense or bonus expense, that’s all in the increasing operating margin over 40% next year in the guidance.
Kevin McVeigh, Analyst
Super. Thank you, all.
Efrain Rivera, CFO
Okay. Thanks, Kevin.
Martin Mucci, CEO
Thank you.
Operator, Operator
Thank you. Our next question will come from Bryan Bergin with Cowen.
Bryan Bergin, Analyst
Hi, guys. Good morning. Thank you. So commentary on 4Q is broadly positive here. I am hoping you could dig in more specifically on some of those key winning client indicators and what those have been telling in recent weeks? So can you give us a sense on what you are specifically measuring there?
Efrain Rivera, CFO
We revisited some forward indicators that we had monitored during COVID. We analyze daily employee work hours and monitor this information on a daily, weekly, and monthly basis to identify trends. We also assess sales and losses, which is quite straightforward, along with various engagement metrics with our systems and platforms. By combining all these indicators, we can determine if there are any significant changes. Additionally, as Marty mentioned, we are examining the IHS employment index covering approximately 350,000 clients to observe trends within that base. Currently, the overall situation does not appear to be significantly different from the trends observed in the first half of the year. While we are considering various data points, in our specific area of the HCM sector and this part of the economy, things seem to be consistent. So far, neither inflation nor the rising interest rates appear to be impacting our operations. However, I want to note a word of caution, as circumstances can change, but at this moment, we are not observing any shifts.
Martin Mucci, CEO
Yeah. The thing that’s consistent, Bryan, is the demand. That small and mid-size business is still seeing a great demand for products and services, and it’s finding people. So job growth, if anything, if it’s slowed in the index, this is under 50 employees. As Efrain said, the growth is still there, but it’s slowed a little bit. It’s more because you are not being able to find the employees, everybody knows that; you are hearing particularly front line, leisure and hospitality and other service functions, trying to find people, the demand is still there, so there is a hunger for the need. And you will hear it over and over, the reason that ASO and PEO have performed so well in sales and client retention is because there is such a need for HR support in recruiting, in hiring, in engaging, in training. I mean there is just a huge need for not only our technology in the HCM space, but our over 650 HR specialists who are there to help them with those things.
Bryan Bergin, Analyst
Okay. And then as we think about fiscal 2023 and the forecast you built, can you unpack, within Management Solutions, specifically, are you still anticipating ASO, retirement, and some of these other areas to grow double digits versus kind of the payroll and HCM? Can you just help us with the underlying business areas in that segment and how you are thinking about growth in 2023?
Efrain Rivera, CFO
Yeah. It’s about right. I think that we see strong demand in those areas continuing through 2023. Obviously, on the HCM side, which we haven’t said specifically, but which is implicit, you are not going to see the macro uplift in terms of the number of employees on the payroll. That just is part of the recovery from the pandemic; that’s normalized partly based on some of the things that Marty has said. But demand for all of the other Management Solution services is still very robust, I would say, and we are very bullish on all of those other businesses.
Martin Mucci, CEO
The work we've done on employee retention tax credits and Paycheck Protection loans has been effective. Our team has streamlined the employee retention tax credit service, successfully securing $8 billion in credits for our clients. This has led to increased sales as clients recognize the value we've provided. The average employee retention tax credit has been around $180,000 for smaller businesses, creating opportunities for them to explore our HR services and other offerings. We expect to continue succeeding with the employee retention tax credit this year, and we’ve already made a strong start. Many clients are still seeing significant benefits from these government subsidies.
Bryan Bergin, Analyst
All right. Thank you.
Efrain Rivera, CFO
Thanks.
Martin Mucci, CEO
Okay. You are welcome.
Operator, Operator
Thank you. Our next question will come from Ramsey El-Assal with Barclays.
Ramsey El-Assal, Analyst
Thanks for taking my question this morning. I was wondering if you could give us an update on the sort of mix of your sales channels. I know digital is clearly a highlight of the model. I am just curious in terms of how the various contributions from your different sales channels have trended over time.
John Gibson, COO
Yeah. As you can imagine, we have continued to use and seen digital sales continue to increase, particularly in the pandemic. What I would tell you, both in terms of our share payroll.com and paychex.com, we have seen good attach rate there and good traction there. But I would also say, really across all of our sales channels, we have seen very strong demand characteristics, and we are finding clients doing more hybrid shopping. So starting off maybe on paychex.com and then ending up in a discussion about how we can help them with ERTC and then other products and services. So I think our sales team has done a very good job of pivoting when the pandemic hit, adjusting to the new reality of how people are buying, and we continue to see and find ways that we can adapt that to drive not only more sales but also sales productivity. That’s the other thing that we have seen really increase with this.
Ramsey El-Assal, Analyst
Okay. And also if you wouldn’t mind commenting on the competitive environment kind of coming out of the pandemic. I am curious if you perceive any changes, whether you are running into fewer competitors out there in the marketplace or more, or how would you characterize how the competitive landscape has evolved?
Martin Mucci, CEO
Yeah, it's Marty. I'll begin. I think we are seeing consistent results. I would say we've been able to offer the PEP plan and retirement options successfully, being the first to launch the PEP plan. We've achieved great success with the pooled employer plan for retirement, while not all competitors have offered that yet. We effectively captured market interest there. Furthermore, when we reach out to clients and prospects to discuss potential employment retention tax credits, we've stayed ahead of many competitors in that area. I'm surprised by the low participation in that market, but we've done well, which has boosted our sales and provided value to both prospects and existing clients. Generally, the competitive environment remains the same, but I believe our product improvements and introductions have strengthened our position. Particularly in the mid-market, where we weren't as strong a few years ago, we have made significant strides with product introductions in the last three years that have led to a strong sales response, continuing into the first quarter. We're feeling very positive about the mid-market specifically.
Ramsey El-Assal, Analyst
Got it. All right. Thank you very much.
Martin Mucci, CEO
Okay.
Efrain Rivera, CFO
Thanks, Ramsey.
Operator, Operator
Thank you. Our next question will come from Jason Kupferberg with Bank of America.
Jason Kupferberg, Analyst
Good morning, guys. I just wanted to start on HR management. I know you mentioned increased attach rates there and I am wondering if you can provide any quantification perhaps on that front for certain products that are driving that dynamic.
John Gibson, COO
Yes, we will provide an update on the number of clients in the 10-K report. Currently, we have between 40,000 and 50,000 clients, and we expect to see robust double-digit growth in that number as well. You will be able to see the exact figure when we file the 10-K in a few weeks.
Martin Mucci, CEO
John mentioned that we have surpassed 2 million worksite employees in the HR sector through our HR outsourcing products, as well as a notable connection to features like time and attendance. Although we don't often emphasize time and attendance, we have launched the latest technology called the Iris Scan Clock. These clocks are touchless, allowing users to scan their iris, whether or not they are wearing a mask. Coupled with mobile punch in and punch out, we have observed strong adoption in time and attendance. With time and attendance and Flex, we now offer Pre-Check. Pre-Check notifies employees about their recorded working hours and asks if they see any discrepancies. If there are no issues, they can confirm it; if there are, they can notify their employer. We find that about 5% of the time, employees identify issues that their employers missed, which helps resolve problems before payroll processing. This provides significant benefits, leading to increased usage and integration among clients' employees. The combination of time and attendance, Pre-Check, and retirement options is enhancing retention and driving higher attachment rates.
Jason Kupferberg, Analyst
Okay. Thanks for that. I wanted to ask follow-up just on float income; it looks like that’s forecasted to be up about $30 million year-over-year. Assuming you get 100% flow-through on that, it looks like that would drive about 60 bps of margin expansion if our math is right, and that would basically get you to the midpoint or roughly the midpoint of your margin guide for fiscal 2023, which would kind of suggest flattish margins in the core business. So I wanted to check on all that, if you agree with that general assessment? And also, I guess, just wondering if you can remind us a bit on duration of the portfolio, just given the magnitude and trajectory of rate hikes, perhaps, some would have thought even a bigger increase in float income for this upcoming year. Thanks.
Efrain Rivera, CFO
I find your analysis interesting, and I wouldn't necessarily contest your calculations. However, I'd like to point out that creating a plan involves making various investment choices, even if we aim to increase margins by 50 basis points. While your math seems reasonable, it doesn't mean there isn't underlying leverage in the business. We've opted to allocate resources differently, which could lead to greater flow-through. Some of these decisions relate to wages and other factors we've discussed before. Moreover, we approach everything we do, especially regarding our portfolio, with a degree of conservatism. This year is unique, as the Fed has provided certain guidance that has changed, and we need to factor that outlook into our planning. If there are any shifts in that guidance, our discussions might change, potentially affecting other areas of the P&L. However, we do have options for increasing leverage if we choose to do so. Currently, the duration is slightly over three, and our portfolio is split roughly evenly between short-term and long-term investments. We have several options to adjust the duration if we wish to go longer or shorter. While I don't disagree with your calculations, I do have some reservations about your conclusion regarding the underlying leverage in the business.
Jason Kupferberg, Analyst
Good color. I appreciate that. Thanks, Efrain.
Efrain Rivera, CFO
Sure.
Operator, Operator
Thank you. Our next question will come from Bryan Keane with Deutsche Bank.
Bryan Keane, Analyst
Hi, guys. Good morning. Efrain, how would you compare the preliminary guidance for fiscal year 2023, I think you gave last quarter high single-digit revenue growth of 50 basis points of margin expansion with the detailed guidance? Just wanted to figure out if there were some adjustments you made either due to macro or some other factors?
Efrain Rivera, CFO
I think we mentioned approximately 7% growth, so this is slightly stronger. In the third quarter, we were aware that the ERTC would not be a recurring revenue stream, which accounted for about 1% of this year's revenues. This was a hurdle we needed to clear, and I believe we have done so to a significant extent, although this year's figures won't reach last year's levels. Another challenge is related to employment levels; while there is demand for workers, there are not enough people available to fill those positions. We are observing a shift in the market where employers are increasingly using part-time employees for roles that used to be full-time. This isn't detrimental for us in terms of wages, but it's different from the approach taken two to three years ago. Additionally, the Federal Reserve's stance is being closely monitored as there is considerable uncertainty. We have not made any assumptions for increases beyond about 3.25%. The latter half of the year will be crucial for us regarding whether there will be a soft landing. Our planning reflects the current environment as we perceive it. The guidance we provided appears stronger on the interest side than what we shared in March and April, partly due to some shifts in the Fed's approach. However, I want to emphasize that things could change significantly, so we will keep you updated. Overall, the macro situation is likely more fluid than any plans we have had in recent times.
Bryan Keane, Analyst
Got it. Got it. And then just at a high level, as there’s a lot of worry about a movement towards an economic slowdown and a recession, how does the model hold up, just on a high level in a recessionary environment, or what are some of the variables that could impact the model, if we do see a recession in the U.S. and globally?
Efrain Rivera, CFO
Yeah. I think we called out in the comments, I think in Marty’s, where we would see it, obviously is, you would see less clients processing. That’s the first part that you see even before you saw a slowdown in demand. But there is an interesting offset, Bryan, that we saw during the pandemic is that, it actually sometimes retention picks up in those kinds of environments. So what’s the net of that? I don’t have a crystal ball on that. I think it would help to offset some of the softness on the revenue side. And it depends also on what’s happening with interest rates; if interest rates remain at current levels or because of a slowdown, the Fed decides, well, we are going to just ratchet them down, that would have an immediate impact from a revenue standpoint. I think if it’s gradual, we will manage through it, and I think we certainly will manage through it on the bottom line. I think that we are prepared to handle that, if it’s abrupt; it’s really tough to manage through those kinds of situations.
Bryan Keane, Analyst
Got it. Very helpful. Thanks guys.
Efrain Rivera, CFO
Thanks.
Martin Mucci, CEO
Thanks.
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 wanted to follow up on that last comment you made Efrain, maybe spend a bit more time if you could on the flexibility of the expense base in a more challenging economic environment, where some of the areas where you have a bit more leeway to manage that bottom line relative to an environment that you have been in here over the past year or two where margins are at very strong levels?
Efrain Rivera, CFO
I have three main points to address. First, in a challenging environment, it’s crucial to have the right areas in the profit and loss statement that can be adjusted. We believe we can navigate the current environment, and if conditions worsen, we are prepared to handle that. We've taken the necessary precautions. Second, we employ a unique model that allows us to adapt our hiring plans based on client demand. If client engagement doesn't increase as anticipated, we won't proceed with the expected hiring. This way, we can realize savings on 60% to 65% of the planned wages. Third, we possess the flexibility to make adjustments in our portfolio based on macroeconomic conditions. With these strategies in place, we believe we can manage through the upcoming challenges. While some scenarios may be more difficult, historical context can sometimes be misleading. For instance, I recall April 2021 when the stock fell to $48, and many doubted our ability to manage the situation; history has proven that skepticism was unfounded.
Martin Mucci, CEO
I believe that during certain economic conditions, especially a recession, many clients may require additional HR support to manage their costs. We demonstrated our ability to respond to these needs quite effectively during the pandemic. We're equipped to assist whether the economy is thriving, necessitating hiring and growth, or whether it turns south, requiring cost management and potential layoffs. As Efrain mentioned, we proved our capability to maintain margins during those challenging times. We have gained valuable insights and strategies from that period, including operating with remote and hybrid workforces that provide greater flexibility in hiring and cost management.
Andrew Nicholas, Analyst
Great. No. That’s all very helpful. Thank you. And then for the fourth quarter, just a quick question there that I want to come up; can you talk a little bit more on kind of the performance of the PEO business specifically relative to the insurance within that segment? Thank you.
Efrain Rivera, CFO
So you mean insurance in the PEO or insurance as part of the PEO revenue stream?
Andrew Nicholas, Analyst
Yeah. The latter. Thank you.
John Gibson, COO
I understand your question is about the insurance aspect within the PEO and its performance. I believe we mentioned in our previous call that the PEO business continues to show strong double-digit growth, while insurance is growing at a slightly lower rate. This reflects two different dynamics. There's a strong demand from clients to enhance their benefits in order to attract and retain employees, especially in the small business sector where they are competing against larger firms. They need to offer a comprehensive benefits package to retain their workforce. In health and benefits, we are experiencing solid growth and demand. On the PNC side, the market has been soft for a while, which relates more to pricing issues, but we still see good attachment rates consistent with our historical performance. Overall, the PEO is performing strongly, followed closely by insurance, mainly driven by the demand for health and benefits.
Martin Mucci, CEO
I also mentioned that we have worked really hard to expand the PEO offering. It’s no longer just about health, dental, and vision; as John noted, the PEO can now deliver a wider range of services specifically tailored for small businesses. This includes additional insurance options and enhanced mental health support, which is very much in demand right now. These offerings allow businesses to provide plans they couldn’t manage on their own, significantly contributing to PEO growth, thanks to the creativity demonstrated by our team.
John Gibson, COO
Yeah. That’s what I thought maybe the other part of the question was. The attachment that we saw in the PEO and the attachment, and generally we are seeing from our clients, as Marty said, 401(k), health, and benefits gravitating towards these technology tools that they want to be able to provide their employees. Those things have really been across the Board very, very well received. So in our comments, we stated, it’s one of the things that we have seen now the opportunity for us to even add to that attachment. So when you think about now we are going to add a whole other set of voluntary benefits that we are going to go back and be able to offer to all of our PEO and all of our insurance clients over the course of the open enrollment period, which will start in October, and those will all generate revenue. So again, offering more benefits to the clients and their employees is another way that not only does that help the retention, but it also helps the revenue as well. We are seeing good demand in the marketplace there.
Efrain Rivera, CFO
Yes, Andrew. As John mentioned, the revenue growth from the insurance side is lower than that of PEO due to the ongoing challenges in the workers’ compensation market over the past several years.
Andrew Nicholas, Analyst
No. That’s helpful. You did a much better job answering it than I didn’t ask it. So I appreciate it.
Efrain Rivera, CFO
No. No. Not at all. Thanks.
Operator, Operator
Thank you. Our next question comes from Kartik Mehta with Northcoast Research.
Kartik Mehta, Analyst
Good morning.
Efrain Rivera, CFO
Good morning.
Kartik Mehta, Analyst
Marty, maybe, I know talked a little bit about recession, and Efrain you gave a good answer on how you might manage a business. I am wondering, based on some of the slowdowns as you have seen, would you manage Paychex any different? I mean, would you think that you could continue hiring or investing? Would this time be all different than in the past based on what you have learned?
Martin Mucci, CEO
Well, Kartik, right now, as I mentioned, we are not really seeing that slowdown. So, yeah, I mean, we really got behind at the beginning of last year in hiring because it was difficult on the service side in particular, and we actually made great headway in the last half of the year John and the HR team to get ahead of that and we are actually overstaffed right now a little bit going into the fiscal year. So we are very pleased with that. So we are making still strong hiring decisions. The investments that we made in compensation and benefits are attracting now; we are getting back on track and attracting more, not only service but sales individuals, and our retention is looking better. So, yeah, I don’t think; I think what we learned as I mentioned out of the pandemic though was that we could manage in a lot of different ways and more remote and hybrid work, handling sales differently; there is more flexibility in where those sales forces are and how they are selling. More digital sales are coming in through the marketplace, and we are well prepared for that. So, yeah, I think you are always learning, and we certainly learned during the pandemic, and we were very successful. It’s all about having the right people in place and making those right decisions, and I think we have made some good ones. Obviously, we are very pleased with a record-breaking year that we had, and we are certainly well set up for fiscal 2023 to have another one, so.
Kartik Mehta, Analyst
And just, Efrain, one of the areas that I think you have had success is in the programs like California kind of retirement mandates that they have had for SMBs. I am wondering how successful that plan has been, and maybe you can talk about if you continue to expect growth in that business?
Martin Mucci, CEO
Yeah. I will take that, Kartik. It’s Marty. I think that was very successful. We were a little early in some of the advertising last summer because the mandate, businesses don’t always respond to mandates that are going to have a penalty effective really this month, and so we were a little bit early on that. But what we found was the advertising that we did had really generated a lot of understanding that Paychex is a retirement provider to small business and even fighting against free. California had a very basic retirement higher rate plan for free. We have done very well. So retirement, we have had the fastest growth in retirement sales in California, obviously in our history. And so we see the approach that we made there, maybe we have learned a little on timing of marketing and advertising, but the approach that we made there has been very successful, and we think that will certainly carry to other states and maybe even a federal mandate, if it comes out on retirement as well in the Secure Act and so forth.
Kartik Mehta, Analyst
Thank you. Thanks, Marty. Appreciate it.
Martin Mucci, CEO
All right, Kartik.
Operator, Operator
Thank you. Ladies and gentlemen, this does conclude today’s conference call and we appreciate your participation. You may disconnect at any time.