Good morning, and welcome to the Second Quarter Fiscal 2025 Paychex Earnings Conference Call. Participating on the call today are John Gibson and Bob Schrader. After the speakers’ opening remarks there will be a question-and-answer period. [Operator Instructions] As a reminder, this conference is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. I would now like to turn the call over to Bob Schrader, Chief Financial Officer. Please go ahead.

Thank you for joining us for our review of the Paychex second quarter 2025 financial results. Joining me today is John Gibson, our Chief Executive Officer. This morning before the market opened, we released our financial results for the quarter ended November 30, 2024. You can access our earnings release and Investor Presentation on the SEC's website, as well as on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next couple of days. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days. Today's call will contain forward-looking statements that refer to future events and involve some risks. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference some non-GAAP financial measures, a description of these items along with the reconciliation of the non-GAAP measures can be found in our earnings release. I will now turn the call over to John.

Thanks, Bob. I will start today's call with an update on the business highlights for the second quarter and then I'll turn it back to Bob for a financial update and then, of course we'll open it up for your questions. We delivered solid results in the second quarter and the first half of the fiscal year. Excluding the impact of the expiration of the ERTC program, revenue growth was 7% in the second quarter, as we continue to deliver a comprehensive suite of HCM solutions that help businesses solve real problems. Diluted earnings per share growth was 6%, as we continually find ways to operate the company more efficiently, while also enhancing the value proposition that we offer our customers. The demand for our HR technology and advisory solutions remains healthy, as we head into the key selling season. A challenging labor market and rising health care and benefits costs are forcing many small businesses to reevaluate their HR strategies and technology needs and they can rely on Paychex to help them succeed. Our sales activities and pipelines are strong, most notably in our PEO and middle market HCM businesses where we have invested, as you know, to take advantage of the growth opportunities we see in these attractive markets and where we believe our breadth of solutions provide us with a competitive advantage. We’re fully staffed across our sales and service teams for this critical time of year. We are also investing in advertising to drive improved awareness and adoption of our expanded product offerings. Our PEO business continues to perform exceptionally well, driven by our robust value proposition as evidenced by solid worksite employee growth, due to strong sales performance, record levels of retention and higher overall insurance enrollment. While the underlying business is strong and our attachment and participation levels in our health plans across the country increased mid-single digits, enrolment in our [Florida] (ph) at-risk medical plan was flat year-over-year. We also saw more employees opting for lower cost health plans in light of rising health care costs. These factors create a headwind to our pass-through revenue, but had no impact to our earnings or the strength of our PEO value proposition. Our revenue retention improved during the past year and remains above pre-pandemic levels as we continue to remain disciplined on acquiring and retaining high-value clients. Client retention has improved since last year, and retention in our HR outsourcing solutions remain near record levels. Client losses are down over the past year, with improvements across all our employee size segments. Our continued strong retention in a highly competitive marketplace speaks to the hard work and execution of our service teams and the strength of our value proposition. The pace of U.S. job growth has moderated over the past year, and overall customer employment levels have remained consistent with our expectations. Small and mid-size businesses remain resilient and are generally optimistic, as we head into a new year with hiring intentions in November rebounding to the highest level since last November. We continue to make investment in our product suite to help our customers solve their biggest problems. In October, we announced the Paychex Recruiting Copilot, a digitally AI-powered solution designed to help clients proactively find talent in a challenging labor market. Although it's still early, we are seeing momentum building for the product, as we head into the busiest time of year for hiring. According to a recent NFIB survey, 55% of small businesses reported hiring or trying to hire in November, and 48% reported few or no qualified applicants for the positions that they're trying to fill. This is something we're actively trying to address. We recently expanded our HR analytics offering to provide our customers with deeper and more meaningful insights. With the addition of the Premium Plus offering that we announced last month, businesses of all sizes now have access to real, current market data for compensation benchmarks to enable them to more effectively recruit, manage talent and develop growth strategies. Premium Plus also had a Generative AI assistant and a chat interface. We're pleased to report strong early adoption of our HR analytics solution, which we are planning to launch broadly to our PEO clients this month. Through AI insights, we are using generative AI to provide our customers with access to robust data and meaningful insights through simple, easy-to-use interactions. Since launching the product in September, we've seen a significant increase in customer engagement. Over 80% of the early adopters have actively engaged with the platform, and we've seen AI-focused usage increased significantly in the past three months. As a reminder, Paychex has used AI technology for many years and we believe GenAI offers a new set of opportunities for value creation, especially when paired with a large and high-quality data set. Paychex captures 14 billion data elements last year and we pay one in 12 private sector workers in the U.S., giving us one of the largest workforce data sets in the industry. Our vast and growing data set provides us with the ability to deliver actionable insights to customers and strengthens our competitive mode. Our clients can now leverage Paychex Flex Perks to compete for scarce talent more effectively. Perks is an award-winning digital marketplace that offers our clients employees access to affordable benefits and discounted products and services from third-party providers. Perks is available at no cost to employers and payments are processed automatically through payroll deductions. Since we launched the product in September over 100,000 client employees have purchased at least one product offered in the marketplace. The value proposition of our new product innovation is resonating with our customers and also with industry experts. The Paychex Flex Perks was awarded the Top HR Product of the Year Award by HR executive and also recently received a Brandon Hall Excellence in HR Technology Silver Award. Paychex was also recently named a leader in payroll services by NelsonHall for the eighth consecutive year. We were evaluated and placed in the Leader Quadrant for our ability to deliver immediate client benefit and meet future client requirements. To sum it up, we remain focused on our North Star and that simply is helping small and midsized businesses succeed. By offering the most comprehensive suite of HCM solutions, best-in-class advisory support and actionable insights gleaned from our large proprietary data based upon our long history of helping businesses. I will now turn it over to Bob to give us a brief update on our financial results for the second quarter. Bob?

Yes. Thanks, John, and good morning. I'll start with a summary of our second quarter financial results and then provide an update on our outlook for fiscal 2025. Total revenue for the quarter increased 5% to $1.3 billion. This includes the headwind from the expiration of the ERTC program of approximately 200 basis points, which is consistent with the expectation we shared with you last quarter. Excluding this headwind, as John mentioned, total revenue grew 7% in the quarter. Management Solutions revenue increased 3% to $963 million. This was primarily driven by growth in the number of clients served across our suite of HCM solutions, as well as client employees for HR solutions and higher product penetration partially offset by lower ERTC revenues. PEO and Insurance Solutions revenue increased 7% to $318 million, driven primarily by higher average worksite employees and an increase in PEO insurance revenues. Interest on funds held for clients increased 15% to $36 million, primarily due to higher average interest rates and invested balances. Total expenses increased 4% to $779 million. This is due to higher PEO direct generate costs related to growth in our average work site employees and PEO insurance revenues, as well as continued investments in product innovation, data and AI and our go-to-market initiatives. Operating income grew 6% to $538 million with an operating margin of 40.9% which was up year-over-year approximately 60 basis points. And as a reminder, operating income is also impacted by the expiration of the ERTC program. Excluding that impact, operating margins would have expanded 180 basis points in the quarter compared to the prior year period. Diluted earnings per share and adjusted diluted earnings per share both increased 6% to $1.14 in the second quarter. Now let me quickly touch on the results for the first six months of the year. Total revenue grew 4% to $2.6 billion, which includes approximately 300 basis points of headwinds from ERTC as well as having one fewer processing days in the first quarter. Excluding these headwinds, total revenue grew 7% in the first half of the fiscal year. Management Solutions revenue increased 2% to $1.9 billion. PEO and Insurance Solutions increased 7% to $637 million and interest on funds held for clients increased 15% to $74 million. Total expense growth for the first six months of the year was 3% to $1.6 billion, and operating margins expanded approximately 20 basis points to 41.2%. And again, this is despite the ERTC headwind that we had in the first half of the year. Diluted earnings per share increased 4% to $2.32 and adjusted diluted earnings per share increased 3% to $2.30 a share. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.3 billion and total borrowings of approximately $817 million as of November 30, 2024. Cash flow from operations was $841 million for the first half of the year, driven by net income and reflects changes in working capital, influenced by the timing of our quarter end. Through the first six months of the year, we returned a total of $810 million to our shareholders, through cash dividends and share repurchases, and our 12-month rolling return on equity remains robust at 46%. I'll now turn to our guidance for the fiscal year. This outlook assumes the continuation of the current macro environment. And I assume most of you have seen in the press release, we are not making any changes to the guidance. I will -- however, provide color on the guidance ranges for two of the line items. Total revenue is still expected to grow in the range of 4% to 5.5% and as a reminder, this includes approximately 200 basis points of headwind from the expiration of ERTC. Management Solutions is still expected to grow in the range of 3% to 4%. PEO and Insurance Solutions is expected to grow in the range of 7% to 9% due to some of the factors that John discussed earlier as it relates to our MPP enrollment in the state of Florida, we would now expect growth to be at the lower end of that range. Interest on funds held for clients is expected to be in the range of $145 million to $155 million and other income net is expected to be income in the range of $30 million to $35 million. Operating income margin is expected to be in the range of 42% to 43%. However, we would now expect that to be at the higher end of the range. And our effective tax rate is expected to be in the range of 24% to 25%, and earnings -- adjusted diluted earnings per share is still expected to grow in the range of 5% to 7%. Turning to the third quarter. We would anticipate total revenue growth to be in the range of 4.5% to 5%. This includes approximately 150 basis points of headwinds from the expiration of the ERTC program. This will be the last quarter of headwind, as it relates to ERTC. So I'm looking very much forward to anniversary-ing that as we get to the end of Q3. We would also expect our operating margin to be between 46% and 47%. I think as most of you know, Q3 is our largest operating margin quarter. That's due to the fact that that's when we have -- we benefit from our annual form filings. And of course, all of this is based on our current assumptions, which are subject to change and we'll update you again on the third quarter call. I'd also refer you to our Investor Relations website for more information in our investor slides. And with that, I will turn the call back over to John.

Thank you, Bob. We will now open the call to questions.

[Operator Instructions] And we'll take our first question from Mark Marcon with Baird. Your line is open.

Hi, good morning and happy holidays, John and Bob.

Thanks Mark. Happy holidays.

Thank you. Wondering what you're seeing with regards to any sort of change in terms of business sentiment post-election. We did see the NFIB confidence index really jump up fairly materially. And I'm wondering if that's actually translating to events in the field just in terms of the pipeline build. Any commentary there would be really helpful.

Yes, Mark, this is John. Happy holidays. Listen, we -- I think we continue to see really moderate growth in small businesses and you look at our index, that's kind of the story of the year really -- the year that escaped the recession that never happened. I would say, continue to see downward pressure on wages in small businesses where we don't see any signs of a recession. I think that you point out, there was a degree of uncertainty with the election that's behind us. Certainly, the optimism indexes seemed to improve. I would say, we've not seen that at this time, turn into positive momentum. However, what I would tell you is in results. But what I would tell you is, certainly, job openings we've seen increase. We know that the desire of our clients to want to add, employees is still very strong. That's one of the biggest problems, particularly in the small market, still challenging to find qualified people, which is why we've been doing some of the solutions that we've had. So right now, I would say, more optimism, but we've not seen that at this point, translate into any significant change in the moderate growth that we've been seeing through this year.

Thank you for that. And then my follow-up question relates to the PEO business. It actually looks like relative to all the public data that we see, it looks like you're actually growing the PEO business faster than some of the competitors that are out there. And what I'm wondering is, what are you attributing that to? To what degree are some of the new AI field solutions that you are offering helping? What are you doing on the insurance side that's really addressing some of the needs that you outlined?

Yes, Mark, I would tell you that our PEO is gaining share. There's no question about it. I mean, the demand that we see -- I mean, our contracted revenue in the PEO was up high-double digits. I mean we'd say [Indiscernible] contracted -- new contracted revenue that we got in the quarter. Client adds were up high double digits. That's the second year in a row, record retention in that group. Our proposals were up high-double digit. So there's a lot of activity in the PEO market. I think it's fair to say that health inflation is an issue. And that's causing a lot of people to go out and shop and I think that's going to be an annual event. I think people are always going to be looking at, am I getting the best option. I think you raised a good question why are we differentiating ourselves? I do think we have a broad set of products and services. So I think one of the things a client or a prospect knows is they come with us, they don't have to [need] (ph) Paychex if their need change. And so they can build a solid reputation. As you know, we have a very solid ASO business, great HCM business. So there's a lot of optionality there. We also leverage our Insurance Agency embedded in the PEO. So it really would give us a maximum flexibility to both meet the clients' need from a price perspective. Our PEO health plans, we provide a lot of options but it's not every option. You can only manage so many options and manage so much risk. So if they're looking for a little higher deductible plan than we have, then we can go into the open market and do that. What’s great is both from the client perspective and the employee perspective the open enrolment, the billing, all aspects of it really doesn't matter whether or not you're a PEO client on our agency or you're on one of our master plans within the PEO, you're going to have the same experience, and we can move that during the enrollment period without any problem. So I do think that differentiates us the fact that we do have a broad suite of offerings, a client can come to Paychex. They can call it home for the lifetime of their business and know that as their needs change, we can evolve and change with them.

That’s great. Thank you so much. And again happy holidays.

Happy holidays.

Thank you. We'll take our next question from Bryan Bergin with TD Cowen. Your line is open.

Hi guys. Good morning. And happy holidays from me as well. I wanted to start on management solutions growth here. So I guess, like in total, I know you maintained all the growth ranges, and we appreciate the color on the PEO. Do you have an offset in the Management Solutions business that will offset that and help you maybe land favorably within the total range? Just curious where you feel most comfortable in the Management Solutions range.

Yes. I mean I think, Bryan, we gave you the guide. No change to the Management Solutions guide. I think we're comfortable with the range there. And yes, PEO is strong, but ASO has been strong as well. So we've been able to grow both of those businesses, I think when we look at new bookings, worksite employee growth for both of those businesses is upper single digits. I think we flagged that in the investor presentation, retention is strong in both businesses. So we don't really see a trade-off. We've seen that in the past, maybe a trade-off between ASO and PEO. We did not see that this quarter both businesses had strong growth. And then within Management Solutions again, we continue to see strong product penetration. We have several businesses in that category, they grew double digits in the quarter. Retirement Solutions, our Funding Solutions business. So we feel good about the performance of both of those businesses, both for the quarter and then with the updated guidance ranges that we provided.

Okay. That's clear. And then just on ERTC. I know you were reserving revenue for this year given some proposed legislation. Was there any reserve release in the quarter here? And if not, how are you thinking about that going forward as that proposed retroactive legislation on the ERTC seems less likely?

Yes. So I think what you are referencing, Bryan, is the reserve that we did, I believe it was in Q3 of last year for the amount of ERTC that we sold in the month of February when that proposed legislation came out and put that at risk because it was going to be -- we're going to end the program retro to end of January. So we were conservative, we reserved that. It was not a big dollar amount. We did have that in our plan this year to release it. We carried it for a couple of quarters, but we no longer have that reserve, and that was assumed in the guide for Q2 and really the guide for the year. So we couldn't justify holding it anymore. There's been no movement there. And so that reserve is no longer on the books. But it was a small immaterial dollar amount in the grand scheme of things.

Got it. Okay, happy holidays.

Yeah, same to you. Thank you.

Thank you. We'll take our next question from Ramsey El-Assal with Barclays. Your line is open. Ramsey El-Assal: Hi, thank you very much for taking my question. I think last quarter, you were contemplating something like 125 basis points worth of Fed cuts into guidance. You maintain that range despite the solid beat this quarter. I'm just curious about how we should think about that given what the Fed sort of announced yesterday, do you see this range being a little more conservative, perhaps?

Yes. I mean we obviously didn't get a chance to update our forecast based on yesterday's news, but the forecast -- the prior forecast as well as the current forecast contemplated 125 basis points of cuts this year, Ramsey. [100] (ph) have already happened, the 50 in September and then November and then yesterday's cut. So we have one more cut in the back half of this year based on the update that was provided yesterday that may or may not happen. So there could be a little bit of upside there, but it's not going to have a material impact, whether it happens or not just given the timing of the year. So that's kind of what the forecast is based on. Ramsey El-Assal: Got it. Okay. And then you called out higher product penetration of the HCM products and management solutions, which is obviously an ongoing trend. Can you kind of give us an update on your growth algorithm? How much does HCM in totality contribute versus the core business? How has that sort of evolved over time? Just trying to put my finger on the pulse of the way that core key drivers of your growth have changed over time?

Yes. I mean, to be honest, it hasn't changed significantly. And we talk about it in terms of the total business. But we've driven a lot of growth historically out of our ability to get increased penetration, larger share of wallet and really monetizing our existing client base. That's probably driven at least half of our growth. I think we talk about it being typically in the 3% to 4% range and when we kind of take a step back and we look at the penetration rates within our existing client base, they're still relatively low penetration rates around some of those key solutions, particularly in the PEO. So we still see lots of room, as it relates to that -- our growth funnel and our ability to drive growth through product penetration as we move forward.

I think the thing that the trend that continues and this quarter has continued for nearly a decade. Pure payroll has become less than 50% of what really is driving our business. It's really an HR story and a technology story. And when you get under it, we're very pleased with the product attachment that we're seeing in the products that really excited about the new market that we've opened up for ourselves, which is to monetize our clients' employees through our Paychex Flex Perks product we've been investing a lot of the ERTC money into this technology plant. It's basically a rewiring of our technology to be able to really position the clients' employees, as a customer of Paychex. We kind of do that before. Now we can do that. We built this marketplace. And when you think about starting the first initial launch [or wave launch] (ph) in September, and since that launch, we did a small little trial. I think we opened it up to about 100,000 potential client employees. And now we started to open it up to the broader base that's on our Flex platform and relatively short period of time, six weeks, we have 100,000 customers. It's a small dollar amount, but it is a pretty impressive start to something we think has a lot of legs. Ramsey El-Assal: That is impressive. Thanks so much.

Thank you. We'll take our next question from Andrew Nicholas with William Blair. Your line is open.

Hi, thank you and good morning. I wanted to ask about the upper single-digit growth in outsourced or HR outsourcing worksite employees. Is there any way for us to think about how much of that comes from up-sell from clients with an existing payroll relationship versus clients that are new to Paychex entirely?

Yes. And maybe I will add on to the point that Mark made relative to the use of AI and how we are using AI. It certainly in the second quarter, we had a lot of increase inside the base, it’s a time when we have insurance renewal, so we're actually able to look across our client base and do analytics and AI about what they are paying for health insurance, both in our agency and others and then really target that with some sales place to say, hey, we may have a good PEO value proposition with this client. So I think it ebbs-and-flows. We have a very solid both inside and outside the base, capability in the PEO specifically. Almost all of our ASO business is inside the base up-sell. But in the PEO, we had a good balance of performance, I would say, both outside the base, as well as inside the base, tilted a little bit more inside the base. I would say, in the last quarter. But again, I would imagine that will rebalance itself out as we go through the second half of the year. Again, it's -- during that enrollment period that we really gin up the AI models to be able to look across our client base and figure out whether or not what's the best value proposition to target in off of them.

Makes sense. Thank you. And then for my follow-up, just on the enrollment dynamic in Florida. Could you speak a little bit more if you have any insight in terms of what's driving that? And also if there is any way to kind of refresh us on the PEO businesses exposure to Florida, obviously, quite a bit of that came from Oasis over a half decade ago now. But just trying to get an understanding of how much of the business that represents at this point? Thank you.

Yes. I would say this -- I'll start off and Bob can add on if you want. What's driving that performance is us. And quite frankly, I would say it this way. The PEO results, I think, including the flat at-risk MPP insurance revenue growth in Florida, I think should be viewed as a positive for investors and for our clients, quite frankly. I mean, first of all, the pass-through revenue doesn't really impact earnings at all. And I think when you look at the PEO business, we actually expanded insurance penetration. We expanded the percentage of our clients that have insurance attached. We expanded the number of employees within the PEO that has insurance attached and bought an insurance pack, but we did it in less risky ways. So we made the decision to underwrite more conservatively given some of the cost increases that we are seeing and some of the volatility in health cost. So we have more options than just the MPP plan in Florida. We have the agency. And so when you look overall, our actual insurance inside the PEO was up mid-single digits. It was flat in this one program and some of that was a conscious decision. So one of the great things about our model is we have options and we are leveraging those. So we have a client that is looking for a specific plan we don't have in the 40 MPP, then we'll give them something on the agency. And if we're looking at a prospect or we find a competitor that may be doing pricing that's more aggressive than we feel comfortable with. We're not going to put that risk on the business. So look, I think health of inflation is real in the PEO business, particularly if you're at risk, we have to manage that well. We're going to be disciplined growers of the business. And so I think I'm very pleased -- a matter of fact, I'm very pleased with the management team. I think they made the right call in terms of balancing growth with risk, and we got both. I think we got good growth, and I think we've got better managed risk and they actually increased insurance penetration across the base. So that -- these are all winners for me. And the way the economics works out because how you have to recognize revenue, and I'll leave that to Bob to explain to you why the [accounting] (ph).

Well, I mean I'd just add, I mean, we have a little bit of a unique model compared to others. I mean, we made the decision that insurance is a scale game, and we have scale in Florida. So we made a decision a number of years ago strategically that we would be at risk on our medical plans in Florida. That's the only state where we're at risk. So you get -- if you get mix issues, if you're going outside of Florida versus inside of Florida, that could have an impact on the revenue. I think overall, we feel very pleased with the continued strength of our PEO business. I mean someone mentioned earlier relative to the -- I think it was marked relative to the competition. Sales performance in the quarter was strong. Retention was strong. Worksite employee growth is strong. It's the MPP enrollment was not where we thought it was going to be coming into the year in Florida. But when we take a step back, just illustrate the point that John's making when we look at the PEO clients that are on our agency medical plans in Florida, that was up upper single digits. And again those risk-based decisions that we are making for the business. We are not going to make bad decisions just to chase a revenue number because that's not the right thing to do for the company. And if you were to look at this from a net service revenue standpoint or an earnings standpoint, to John's point, it would really have no impact. So we feel pretty good about where we're at with the continued strength of our PEO business.

Yes. I think the other thing I would add on to that because we saw this across not just the PEO, but also the insurance business, as well is employees when given the choices, we're downgrading their plans. We saw downgrades double the percentage. It is in double-digit. Typically, that's a single-digit issue. Most of the time, an employee once they get on in a plan, they stay with the plan. They don't want to change the plan. And actually in the mid-to-high single digits each year, you'll see some people selecting to downgrade their plan. We saw that across the board. So I think this health inflation is a real story. And again, I just get back to it on -- I just want to say this again on the MPP revenue number. We have a lot of control over that. I mean you can hit that number and you can maybe hit that number for a quarter and you maybe hit that number for -- what do you want that number to be and we can probably hit it. But we're only going to do it for a quarter or two quarters and then you're going to have a risk problem and we've seen that movie play out in the industry before. And like I said, that's not the game that we play. We're disciplined. We have options. We avail ourselves of the options, and we're going to constantly disciplined growers of revenue in business.

Thanks so much.

Thank you. We'll take our next question from Michael Infante with Morgan Stanley. Your line is open.

Hi everyone. Thanks for taking our question. I just wanted to start on the partnership channel more broadly. If I think about one of your competitors striking an SMB partnership to embed some of their payroll capabilities alongside of some of their B2B payments capabilities. I'm just curious how you think about the partnership channel and whether or not that's a source of incremental investment for you. Thanks.

Yes. Look, we have a lot of partners. We have a lot of long-standing partners, including those in the payment space, some of which you're probably referring to. So we partner with them, and we partner with many others. And certainly, we have a capability to partner in a, what I would say, you call it embedded, I call it, wholesale or white label type of way as well within our business. And we're certainly open to that. And I would say in the CPA micro area, that's a healthy business and has been growing. So more to come on that in terms of how we approach broader partnerships. I think what we've tried to look for are ways in which we can bring something to the partner, and they can bring something to us. And like I said, we continue to expand our partnerships and continue to look at ways to expand that going forward.

That's helpful. Maybe just on the retention front, you obviously spoke to the fact that you're sort of tracking above historical ranges. Is that both on a revenue and logo basis? And how would you sort of compare those two buckets relative to historical levels? Thanks.

Listen, retention was solid. Revenue retention was solid, continuing near record levels, I think really demonstrating the value proposition, the hard work of the team, but also value proposition. There's a lot of alternatives out there and client losses are improved over the last year. So even on a logo basis, we saw improvement year-over-year. So very pleasing, it was across all the segments as well which is also a positive. Typically, we have one segment or one business that is kind of not doing, as well as the others, and this is one of those quarters -- where in one of the really first half of the years where we've kind of seen pretty consistent improvements. So hats off to the team there.

Thanks John.

Thank you. We'll take our next question from Bryan Keane with Deutsche Bank. Your line is open.

Hi, guys. Happy holidays. Any pickup yet or any signs of growth that you'll see for kind of new business starts or the development of new business starts?

Yes, Bryan, business starts down kind of year-over-year. What I would tell you, they're still above pre-pandemic levels. We had this odd anomaly during COVID where they really spiked up a lot of people going off on their own and doing that. They continue to kind of what I call moderate. Again, we are still above. I still sense that there's a higher degree of entrepreneurship in the general economy. But again, I'm not seeing -- that's not gone the other direction. That's continued to moderate this year.

And is that something that cyclically comes back if the economy starts to improve? I'm just trying to think about timing on when that might balance.

Well, the underlying premise of your question is the economy is not in great shape. And I think our assessment would be that it's in really good shape. I mean solid shape of the small business. Again, if you look at the large small business index, we continue to see moderate growth. We think optimism is there. We find our clients wanting to grow their business. And I think the challenges they face is -- both is access to capital is one and then the other point, if I'm going to open up another restaurant or I'm going to open up another location, even if I can find the money and I can afford the cost of capital, in the market today. Can I fill that building with people that are qualified to do the work that needs to get done to satisfy my customers. And I think those two are the two things I see right now on Main Street, that's what we deal with every day. We don't deal with Wall Street and chips and bitcoins. We do people that are cutting hair and doing things like that. And so I think those are your real two constraints right now on the economy.

Got it. And just as a follow-up, you called out kind of the mid-market HCM business with strong sales activity. Anything in particular causing that? Is that a competitive dynamic? Or is that a new product that seem to be resonating better?

Well, I think it is a combination of things. I think that certainly, we continue to invest in the product, the new Paychex Flex Engage product, which is an AI-based engagement tool that allows our businesses to manage both performance and rewards and engagement with their employees and compensation more effectively. That's been a big winner in the mid-market. So I think on par, our technology has always been on par. We continue to have a very strong technology capability in the mid-market. I do think that the HR outsourcing value proposition is resonating in the marketplace. I think that our value proposition to be able to say, you can come to Paychex and as your business changing your needs change, you can stay in one place. You don't have to move. You can go back and forth. I think that's resonating. And I think there's been some disruption. I think there's been some disruption in the mid-market that has provided an opportunity for us to position ourselves at the builder table, quite frankly. And so I think, again, that market has changed a little bit. I think there is a little bit more rationality. They're actually talking about profitability, as well as growth, and we've been talking about that for some time. So I think there's more rationality in that market, and I think customers are coming around to Paychex.

Got it. Got it. Okay. Congrats on the results.

Thanks Bryan.

Thank you. We'll take our next question from Kevin McVeigh with UBS. Your line is open.

Great. Thanks so much. You had mentioned, I think, that you were capturing some share in a PEO, which is good news to see. Where do you think that's coming from? I wanted to kind of start there because I thought that was an interesting data point.

Yes, Kevin, I would tell you that we're introducing people to the PEO concept. That's still predominantly what we do. We tend not to do a lot of head-to-head what I call PEO-to-PEO movement, quite frankly. Now we go head-to-head in the marketplace when a client is deciding that they want to select PEO but I would not say, if you're thinking about, am I going to -- is there particular PEOs that we're taking a lot of business from, that's generally not our sales motion. There's a risk involved in that. There's a lot of other issues that we stay away from that. Our general sales plays are interviewing our HCM clients to the PEO value proposition or it's going head-to-head in the market for clients that are moving towards the PEO value proposition. In those cases, we are going head to head with other PEOs in the marketplace. And again, I think it's the strength of our value proposition. It's the strength of our technologies, the strength of our advisory capability. Our HRGs, are the best in the business in terms of the advice that they provide these clients, I think it's our use of AI and data analytics, which we are really driving in the PEO. And then I think it's the fact of what I said earlier, which is we have a broad set of capabilities. So you're going to start with us as a PEO. And if things change, we have a non-PEO HR outsourcing option for you and if something else change, we got that HCM only. And I think, again, customers -- I've read some notes, and I don't know if I -- I would say, totally true, but I do see clients not wanting to have to deal with a lot of vendors. And so I do think this consolidation of vendors and as you get each of the competitors kind of getting even par in terms of capabilities across the HCM suite. Yes. I think if clients can say, look, I can go to a partner, they're going to be reliable. They're going to be predictable, and I can stay there and build a long-term relationship. That makes more sense than trying to spend my time managing multiple vendors and switching every year.

That makes a lot of sense. And then just -- I've been in and out, I apologize. I think you gave some commentary on the Q3 revenue. Can you just remind us what that is and then the pace in Q4 as well. And what does it take to kind of get to the high end of the guidance range as opposed to the low end, I guess more from a revenue perspective, just trying to kind of help understand that in the back half of the year.

Yes. I think the color that we gave on Q3, Kevin, was that we would be between 4.5% and 5%, and that's still includes about 150 basis points of headwind from ERTC. So this is the last quarter of ERTC. So that's the color that we provided for the quarter. Obviously, the headline numbers with the ERTC headwind going away, you are going to see an acceleration in revenue growth in the back half of the year due to that. We mentioned the guide on PEO. So I would say the PEO in the back half of the year is probably going to be a bit lighter than we saw in the front half of the year, and that's really driven by the at-risk enrollment that we talked about on the pass-through revenues in Florida. Again, no impact in that revenue earnings. So when we kind of take a step back and look at front half versus back half, actually [ex-ERTC] (ph) I think you'll see fairly similar growth rates in the back half of the year than what you saw. In the front half of the year, and again, I think we mentioned this ex-ERTC for the quarter were up 7%. And that's -- going back to the second half of last year, when we turned the corner last year, we started to see a pickup in the organic growth of the business. I think the front half of last year, we drove -- grew 5% ex-ERTC. And then when we turn the corner, this is the fourth quarter in a row that we've seen strong upper single digit, call it, 7% growth ex-ERTC. Now interest rates has continued to help there, certainly helped in the back half of last year, helped in the first half of this year, up 15%. That will turn into a headwind, as we move forward in the back half of the year. But all in all, the performance of the business in the back half, ex-ERTC and interest rates, we would expect to be similar to the front half.

I just realized we're going to have to shorten the calls in the future. We don't have ERTC to talk about it.

Thank you. And we'll take our next question from Tien-Tsin Huang with JPMorgan. Your line is open. Tien-Tsin Huang: Thanks so much. Good morning gentlemen. I just wanted to dig in really quickly just on the Florida comment, always educational, which you guys talked about there. Does that -- given that that's at risk and that safe only, does that inform your thinking on SMB, employee health and demand in general, assuming you get more data there? I'm thinking more about the downgrading of planned comments specifically. Thanks.

Tien-Tsin, I don't view that at all. I view this more as a cost control mechanism, both at the people managing their personal lives and employers managing their employee costs. Again, we saw increases in the percentage of clients and increases in the percentage of employees in our PEO attaching insurance. So we didn't agree that actually more of them are offering insurance. Now when you get under what did I order offer last year or what did I buy, last year, I offered a [Cataract] (ph) plan and people bought a Cataract plan. And now I really don't want to -- I guess, I use old terms for myself, date myself, [CV plan] (ph), right, and that people are downgrading to the CV plan. I think that's what you see going on is more people looking at ways they can manage our cost. And to be fair, health inflation is an issue. And you see health inflation at the -- for us, we've been managing it successfully for our clients over a decade with really what I would call mid- to high single-digit increases over the last decade in that program, and that's beating the market from a medical inflation perspective. And that's the commitment we want to make to our clients is we're going to try to manage those opportunities, so that they could have predictable inflation. But again, you talk about a 9% increase for somebody who's already being exposed at the food market and going to the gas pump and et cetera, et cetera, they're looking for ways they can turn back and they're looking at it and saying, look, I have this really nice plan. I like last year, but this other plan is less money than what I was paying last year. That's what we're seeing people do. They're not dropping it, they're just making different choices in terms of deductibles and plans.

Yes. And the only thing I would add to that is we're somewhat indifferent to that choice. I mean, obviously, it would be great if they pick the higher plan from a revenue standpoint. But at the end of the day, we want them to attach out because what we found in our model, is when we get that health attachment that really drives retention, stickiness and lifetime value in the difference in those plans, there may be a little bit of an impact to the top-line, there's no impact to the bottom-line. And so we want to give them choice and help them find a plan that meets their needs, but provide them that plan because that really drives retention in lifetime value for us. Tien-Tsin Huang: Got it. No, it's good. Now the attach being strong is great, and I'm just trying to learn around the planned selection there? It sounds like it's mostly health care inflation and SMBs attacking that. So this is not intended to be related, but just thinking about that and broader HCM pricing and discounting for you in terms of what you are seeing or maybe thinking any new considerations there? So not a PEO or health specific question, but just broader question around pricing and discounting as you're trying to retain and pursue new growth.

Yes. No, I would say across all of the market segments and across all of the business segments. We've not seen anything out of the ordinary. It's a competitive market. We continue to drive and get a price value premium in the market as -- again, there is a little cost options out there, but I think people recognize value when they see it. So we're not seeing anything out of the ordinary. We had planned on a little more price competitiveness. And we've seen that, but not seeing anything radical across any of the group. Again, I will say this, we're going to continue to be disciplined growers. And I think that's important to understand. When it comes across going after a client, whether that's health insurance risk, we're going to be disciplined. We're not going to do that just to get the revenue. You look at increasing clients, how much I pay Google to get seen by somebody. If what I got to pay Google is double what the lifetime value of that client is going to be, I'll let somebody else pay that free. And so we're going to continue to be disciplined. We're not going to do anything that's crazy that's going to jeopardize our long-standing position, as being predictable and consistent and what we believe that clients are going to appreciate that over the long time. At the end of the day, you've got to make money as a business. And if you are spending more to get a client are taking more risk than you can absorb on your balance sheet, then that's not good business. So we are going to continue to be disciplined. But we're not seeing -- as I said, I think I said on our last call, my sense there's a little bit more rationality coming into our markets where both down market and the mid-market people beginning to realize this thing called profitability, and that will drive -- that will drive no rational pricing. Tien-Tsin Huang: Yeah, the discipline is clear. Thank you for your thoughts.

We'll take our next question from Ashish Sabadra with RBC Capital Markets. Your line is open.

Hi, thanks for taking my question. There was a reference to an increase in PEO direct insurance cost. I was just wondering if you could comment on how that's trending on a per worksite employee basis just given the health care inflation? And then as we think about going forward, are there any changes to the plan in order to manage this insurance costs. Thank you.

Yes. I mean our direct costs are up, Ashish. I don't have the numbers in front of me, but certainly it's not just -- those costs aren't just help. They're also workers' comp and largely going to be driven by growth in worksite employees, which I had mentioned was upper single digits. So no significant changes planned from a plan design standpoint. I think our books are performing well, both across medical and workers' comp, and that's really going to be a factor of two things, both growth in the business from a worksite employee standpoint and then how we're doing from attachment. Again, not just medical but across the board with workers comp as well.

And I would just say, I think we've talked about this as well. We continue to look for innovative ways. We're constantly evaluating the plans we offer. We're constantly looking at the mix of health products so that we can meet the broadest set of customer needs and we'll continue to do that. But again, health inflation across the board I think is a public policy issue, and it's a real issue. And I think we're still seeing the after -- we've not -- we're still seeing the effects of COVID and the health inflation that occurred during COVID working through the health pricing system right now.

Very, very helpful color. And just for my follow-up, a quick clarification. So in 2Q of last year that was impacted by slower seasonal hiring, I was wondering if you have seen any trends on the seasonal hiring trend this year? Thanks.

No. I mean hiring has been in-line with our expectations. And I think we've talked about this earlier in the year, what was assumed in our guide, which was pretty much not a lot of hiring, assumed in the client base. That's pretty much how the year has been played out. So both Q1 and Q2, I would say, employment levels within our existing client base is it pretty much lined up with what our expectations were.

Very helpful. Thank you, thanks.

Thank you. We'll take our next question from Kartik Mehta with Northcoast Research. Your line is open.

Hi, good morning John and Bob. Just on – John maybe just on the pricing commentary. Obviously, inflation probably a little bit higher than everybody expected. And I know last year, maybe the year before, you've got some better pricing than in the past. I'm wondering how that's playing out this year. You have some ancillary products and stuff, is there an opportunity to get some of that pricing back? Or do you anticipate pricing will be maybe on the lower end than it was couple of years ago?

Kartik, I would say this. I would say that our price value proposition remains strong with our existing clients. And I think that once the client gets on board with Paychex, they see the value of what we're doing. And I think that we've continued to maintain what has been our historical growth formula in that area. I think both in terms of that part of our growth formula, as well as our product penetration and our ability to add new products and services to add more value, which then adds more price to those clients. I think those things have been very sound. I think that prospects and clients are more price sensitive than they were pre-COVID. I don't think that's surprising during COVID, people were running, needing to get digital HR systems to be able to manage dispersed workforces. There was a lot of compliance issues that they were trying to battle and so I think that's certainly true. I think they are in the marketplace today, when I look at our proposal volumes, I look at our call volumes, I mean, there is a lot of activity out there and that indicates to me we're back to a market where there is a percentage of the market that are what I call shoppers, but they're trying to see, they're trying to check their price, they're trying to make sure they're getting the right deal. And -- but again, I don't see that any different than what I saw prior to COVID and what has been my 20-some years history in the industry. So my point would be is we still are a value provider. I think we're still a premium price provider in the marketplace across the segments. And I think clients are continuing to appreciate that value as you see in both our revenue retention, our client retention and our continued growth in each of the segments.

And then just, Bob, on the float, I know you talked about maybe at the beginning of the year, you anticipated more rate cuts that are going to happen. But I'm wondering, any change in maybe how you're managing the float or how you'll manage the float because of this changing environment?

Not anything specific, Kartik. I mean, we did some repositioning a while ago in anticipation that rates were going to come down. So I don't think there's a whole lot for us to do there. I think right now, probably over the most recent past, when we've been reinvesting in the long portfolio, it's probably been more on the shorter end of the curve, just kind of given where the rate curve was a little bit inverted there. As things roll off, we'll continue to look at the shape of the curve. And you got to spread it out, so you don't want to get too much in any one year because then you have reinvestment risk. But we'll look at the shape of the curve and look to place our investments to optimize the portfolio. We have a strong team in our treasury department that's looking at this every day. But I would say no significant changes to our approach philosophy, just looking to optimize based on where the curve is at any given point in time.

Perfect. Thank you both. I really appreciate it.

Thank you. We'll take our next question from Scott Wurtzel with Wolfe Research. Your line is open.

Hi, thanks for taking my questions. Just want to ask on the margin side. I mean, the outperformance has been pretty constructive in our view also pointing towards the higher end of the guide for this year. And I know there's been some investments around the sort of advertising front. So I'm wondering if you can just remind us of where you're kind of finding some of those efficiencies to drive some of the better margin performance that we've seen.

Yes, Scott. I would start off with number one, as we always talk about, it's built into the basic DNA of the company is to continue to just ask ourselves, how could we do this better than we're doing it yesterday. And so I think across the board, all aspects of the business, every part of the company, we're constantly doing that. I think the real tailwinds we have right now is digital adoption and the way that we're leveraging AI in the data sets that we have far more effectively across all the areas to be able to drive productivity. And so I think that's been a big boost to us. We continue to see our clients. We continue to see our employee -- their employees adopt digital means to get work done. And that helps us provide better customer experiences. And I continue to see our employees come up with very creative ways to reengineer work and to digitize it and to leverage the insights and data that we have to make better decisions that make us more effective, whether that's increasing close rates, whether that's saving a client or getting in front of a client before they're about ready to call us and say, hey, I got a better offer. I won't go into the detail for anticompetitive reasons, but we're getting in front of that. And that reduces the cost to save a client right? We don't have to send them to the save desk, and I don't have to pay a commission for the same client. So the fact of the matter is the fact we're getting in front of that, I think, across the board continues to add to the markets.

Got it. That's helpful. And then just as a follow-up, just on the go-to-market side. I'm wondering if you're kind of seeing in your environment with your clients, are you seeing clients sort of maybe adopt more on the initial sale instead of maybe selling sort of the initial product and then going in more for sort of the cross-sell upsell dynamic.

I would say I'm not seeing a major difference in that. I would say that we've done a better job from a sales execution kind of what we call integrated selling and making sure that we're offering a full value proposition of Paychex upfront in the initial dialogue versus waiting for them to become a payroll client and then 30 days later, upgrading them to ASO or upgrading them the PEO. So that if you look back on our old model, I would say that was a little more how we would operate. And so you saw a lot more upsell if is get them in. I would say today, that still happens. It's probably still the majority of what we do. But I do think we're doing a better job upfront that if we think we can add a higher-value product package. I would say in the other market HCM area, that's the area where I do see clients wanting to go with more of the full suite. And a lot of times, that's really their dropping point solutions, point solutions that they have kind of cobbled together and therefore, they're looking for a talent management. They have talent management suite that they're using that was an ancillary and then what that integrated in. So I'm seeing that a little bit more in, I'd say, more the upper end of the mid-market and lower in the enterprise.

Got. Thanks guys. Happy holidays.

Thank you. We'll take our next question from Jason Kupferberg with Bank of America. Your line is open.

Thanks guys. Good morning. I was just wondering as you entered the key selling season, is there anything different you're preparing for in the environment versus last year's selling season, whether that's regulatory backdrop for a competitive environment or other factors?

I would say that we're not preparing for anything different from a competitive perspective. I think what you're going to see is we'll be kicking off some advertising, and I think you'll really see us leaning into the award-winning product suite that we've introduced this year. I think when you look at what we've done in enhancing our HR analytics with our Premium Plus product, which is now GenAI insights. We now have 20 million employee records in that, it's going to allow you to be able to figure out what you should be paying from a compensation benchmarking perspective is going to provide advanced workforce analytics. The fact that you can actually ask the chatbot a simple question, and it'll come back and bring you an analytical report and compare you against these benchmarks. I think we're going to continue to read into that. What we're doing with our Paychex recruiting copilot, which is another AI-assisted talent acquisition solution. What's great about that is you only have to be a Paychex or a Paychex Flex client that you can buy that as a stand-alone product. I think you'll hear us talk about more of that and then I think the Perks product that we talked about, for a lot of small businesses, they can't offer any benefits to their employees. And so they're at a significant competitive disadvantage because they don't have benefits. And I've got a choice. I can go over here to a midsized company that has benefits or go to a small company that doesn't. And what this really allows the employer to do is to sell a value proposition to their employees that if you come on board, you have a set of benefits that you can get access to. It's at no cost to the employer. And as I said, that has been really been interesting to see the client adoptions of excited that they can offer their employees something and then to see their employees go through the open enrollment process. And to see the attach rates on that. So I think you're going to see us lean more into our value proposition, what we can do that no one else can do. And I'm not expecting -- again, I'm expecting the market to be rational across the various segments. And what I can assure you is if the market is not rational, we will be. We're going to continue to be disciplined growers.

Understood. Understood. And just as a follow-up, can you give us an update on your M&A pipeline, what you're seeing out there? And just remind us whether or not there is any inorganic contribution in the fiscal '25 guidance?

No, there is no M&A. We don't plan on M&A because then you know what that does, that causes you to do stuff that's not smart. So to me, that's got to be the icing on the cake that can't be the cake. Look, I would tell you this, the pipeline is good and strong. Probably the largest pipeline I've seen across the various areas since I've probably been in the business in a bit of Paychex for sure. It seems like people are coming back to more rational realizations about value. It seems like more people want to try to do deals and transact deals across the various areas. So again, we continue to be focused on opportunity that's going to add scale either in new or existing markets that we're currently in. Areas where we can go and drive our full breadth of our advisory solutions and outsourcing and really leverage our best operators capabilities to drive synergies from those targets. We're going to continue to look at opportunities to drive and expand our product suite. I think there's a lot of good opportunities there that we're looking at. We're really working on completing and building our capabilities in digital HR and data analytics. So we'll continue to focus on. We got a good pipeline there. And then we're looking for new growth platforms that are adjacent and so continuing to talk it. And like I said, it's been interesting how many individuals, how many targets have come to us and see synergies in joining our ecosystem and so pretty pleased with that. But I go back to what I said, we're going to be disciplined around the growth and not only in organic growth but I would say inorganic growth as well. So we're going to make sure that we're finding targets where we're getting a fair value for our shareholders and where we think we can drive synergies to have a multiplier. So it's got to be one plus one equals 3, and that's what we're going to continue to do.

Well, I appreciate the thoughts. Have a great holiday.

Thank you.

And it appears that we have no further questions at this time.

Okay. Well, it must be the holiday, short on questions here. So great. Look, at this point, we're going to close the call. If you're interested in a replay, the webcast of the conference call will be archived for approximately 90 days. Look, I would like to wish each and every one of you and your families a safe and happy holiday season. We look forward to talking to you in the new year, and so I wish all of you a happy New Year as well. So thank you for your interest in Paychex, and have a great day.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.