Good day, everyone, and welcome to Paychex Q2 FY 2022 earnings conference call. At this time, all participants are in listen-only mode. Later, you will have an opportunity to ask questions during the question answer session. You may register to ask a question at any time by pressing star and one on your touchtone phone. I will be standing by should you need any assistance. Please note, this call may be recorded. It is now my pleasure to turn today's program over to Martin Mucci, Chairman and Chief Executive Officer of Paychex. Thank you, Emma, and thank you for joining us for our discussion of the Paychex second quarter fiscal year 2022 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the second quarter ended November 30, 2021. You can access our earnings release on our investor relations website, and our Form 10-Q will be filed with the SEC within the next day. This teleconference is being broadcast over the Internet, will be archived and available on our website for approximately 90 days. I will start today with an update on the business highlights for the second quarter. Then Efrain will review our financial results for the quarter and provide an update on fiscal 2022. We will then open it up for your questions. Today, we reported strong financial results for the second quarter of fiscal 2022, as both management solutions and PEO and insurance revenues increased double digits year-over-year, and adjusted diluted earnings per share increased 25%. We continued to have strong momentum from the first quarter with positive trends across the entire business. Client bases across all major solutions have continued to grow. Sales performance for the second quarter was strong across the board, resulting in our highest year-over-year growth in new annualized revenue in over 5 years. In fact, a record high level of annualized revenue sold for the second quarter and the first half of the year. The investments we've made in our technology, product, sales, and digital marketing have positioned us well for success in today's environment. Our client retention remains near record levels. This is reflective of both the resilience of small businesses in the U.S. and the value provided by our unique blend of software solutions and HR expertise. Macroeconomic tailwinds persisted, resulting in strong growth in checks per payroll and increases in worksite employees in our HR outsourcing clients. The tight labor market and war for talent has been very challenging for all businesses. In response, Paychex ourselves, we've taken proactive steps, implementing incentives and programs to compete for talent, and we've made significant progress in hiring over the past quarter, and we're well prepared heading into the calendar year-end and selling season. COVID-19 and its variants continue to pressure businesses of all sizes, and we constantly enhance our robust set of COVID-19 related solutions. Most recently, within 10 days of the legislation surrounding COVID-19 vaccination and testing, we introduced a digital solution that businesses can leverage to confidentially capture and store employee vaccination status and request testing results for the unvaccinated. To help our clients stay up to date on all federal and state regulatory changes, we continue to introduce new methods of communication to proactively keep them informed and educated through white papers, webinars, videos, and our podcast series, On the Mark. We closely monitor topics that may have a significant impact on our clients, such as vaccine management, updated guidance on employee retention tax credit or ERTC, and the return of mask mandates in specific states. We remain a trusted resource to support small and mid-sized businesses. The trends we saw accelerate during the pandemic continue, including the need for HR advice, the need to upgrade employee benefits and retirement solutions to attract and retain talent, and the acceleration of digital technology solutions to support a distributed workforce and tools to help businesses maximize available stimulus from the government. We've seen the benefits of these trends and strong demand for our HR solutions. Another business that is benefiting from strong demand is our retirement business, where we have reached the 100,000 client milestone. As a leader in this space, we are uniquely positioned to help businesses meet the growing number of state mandates for retirement plans and provide a critical benefit offering to drive employee retention and satisfaction. In fact, in January, we were one of the first to release a PEP plan or pooled employer plan, and 11 months later, not even a year later, we now have over 10,000 PEP clients. The access to stimulus funding has been a powerful retention tool for Paychex. We're proud that we've been able to help clients obtain billions in Paycheck Protection Program loans, and approximately 90% of our clients have leveraged our award-winning PPP forgiveness tool to gain some or all level of forgiveness for those loans, effectively transitioning the PPP loan into a grant. We've also helped businesses gain access to over $6 billion in employee retention and paid leave tax credits. Returns for clients leveraging our ERTC service represent a significant amount for any business. Two of our most recent technology innovations focus on employee retention. Our Retention Insights offering uses predictive analytics based on a few dozen unique data elements to help employers identify employees who may be more likely to consider leaving their organization. This is Paychex's first client-facing predictive analytic and could not come at a better time given today's competitive labor market. We also introduced a completely enhanced total compensation summary that can be used by employers to communicate the impact of their total pay and benefits packages for employees. These are just two examples of the powerful technology and use of information we're providing to help employers compete and retain talent. We continue to enhance our technology solutions to deliver efficiency for our clients, their employees, and Paychex through self-service and chatbots. Use of our cloud-based applications continues to grow with double-digit increases in both desktop and mobile devices. During our recent open enrollment period for our PEO clients, for example, 99% of our PEO worksite employees completed their open enrollment digitally, resulting in a 26% reduction in call volume. Our continued emphasis on expanding the digital capabilities of Paychex Flex was validated by several recent awards. We were named by NelsonHall, a leading global analyst research firm, as a leader in their annual NEAT Vendor Evaluation Report for Human Capital Management. Paychex placed in the leader quadrant of the Next Generation HCM Technology Report. This designation was based on our ability to deliver immediate client benefits and meet clients' future requirements. In addition, Brandon Hall Group has just recognized Paychex Flex with two Excellence in Technology Awards. Our ERTC service was recognized in the category of Best Advance in HR and Workforce Management Technology for Small and Mid-Sized Businesses, and Paychex Pre-Check was recognized in the category of Business Strategy and Technology Innovation. This is our ninth consecutive year we've been recognized for our technology in this award program, the largest and longest-running award program in the HCM space. Before closing, I'd like to take a moment to discuss the recent change in executive leadership roles that took effect on December first. I have assumed the role of Chairman of the Board and will continue to serve as Chief Executive Officer. Tom Golisano, our founder and prior chairman, will remain a board member and will continue to play a role in the governance and oversight of the company. John Gibson, our Senior Vice President of Service since 2013, has been promoted to the role of President and Chief Operating Officer. John has been an integral part of our executive team and has led the service and operations of all Paychex businesses divisions, including HR outsourcing, payroll, retirement, and insurance. There remains continuity in leadership to drive Paychex of the future, and I'd like to thank Tom for his leadership and for his continued support as we move forward and wish John well in our future growth. In summary, we are proud of our performance during the second quarter. We are well-positioned with our set of innovative technology and service solutions for this selling season and to continue providing industry-leading value to our clients. I will now turn the call over to Efrain Rivera to review our financial results for the second quarter. Efrain Rivera? Thanks, Marty. Good morning to everyone. I'd like to remind you that today's conference call will contain forward-looking statements that refer to future events and therefore involve some risks. In addition, I will periodically refer to some non-GAAP measures, refer to the customary disclosures. Let me start by providing key points for the quarter, follow up with greater detail in certain areas, and I'll finish with a review of our fiscal 2022 outlook. Our second quarter results reflected strong internal execution and continued economic recovery. Both service revenue and total revenue increased 13% to $1.1 billion. Within service revenue, management solutions revenue increased 14% to $832 million, driven primarily by growth in client bases across our portfolio of solutions, higher revenue per client, and improved employment levels. Client base growth resulted from both strong sales performance and high levels of client retention. In particular, our HR solutions business continues to benefit from strong demand as businesses look for more HR support. PEO and insurance solutions revenue increased 11% to $262 million. Our PEO has benefited from higher average work site employees, state unemployment insurance revenue, and health insurance attachment. Interest on funds held for clients decreased 5% for the quarter to $14 million as the impact of lower average interest rates and realized gains was partially offset by 9% increase in average investment balances. Total expenses were up 6% to $668 million. The growth in expenses resulted from higher PEO direct insurance costs, an increase in benefit costs to our employees, and continued investment in our products, technology, sales, and marketing. Operating income increased 24% to $440 million, with an operating margin of 39.7%. Adjusted operating margin was also 39.7% in the second quarter, compared with 36.1% for the prior year period, an expansion of 360 basis points. Our effective income tax rate was 24%, compared to 22.1% for the same period last year. Both periods reflect net discrete tax benefits related to stock-based compensation payments. Adjusted net income and adjusted diluted earnings per share increased 25% for the quarter to $330 million and $0.91 per share, respectively. Year-to-date results, I'll touch on the highlights briefly here. This is for the six-month period, obviously ending November 30. Total service revenue and total revenue increased 15% and 14%, respectively, to $2.2 billion. Expenses, excluding one-time costs incurred during the prior year, increased 5%. Operating income and adjusted operating income were $883 million, increases of 38% and 32% respectively. Diluted earnings per share increased 37% to $1.83 per share. Adjusted diluted earnings per share increased 32% to $1.80 per share. Let's talk about financial position. It remains strong with cash, restricted cash and total corporate investments over $1.1 billion and total borrowings of approximately $800 million as of November 30th. Cash flows from operations were $555 million during the first six months, an increase of 29% from the same period last year. Free cash flow generated was $459 million, up 21% year-over-year. The increases were driven by higher net income, partially offset by fluctuations in working capital. We paid out quarterly dividends at $0.66 per share for a total of $476 million during the first 6 months. Our 12-month rolling return on equity was 43%. Now I'll turn to guidance for the current fiscal year ending May 31, 2022. The outlook reflects the current macro environment, which saw improvement in the quarter. We've taken that into account in the second quarter results, and our second quarter results actually exceeded expectations. We have some conservatism given the macroeconomic uncertainty that prevails during the remainder of the year. We've provided the following updated guidance as you saw. Management solutions revenue is now expected to grow in the range of 10%-11%. We previously guided to a growth of approximately 8%. PEO and insurance solutions is expected to grow in the range of 10%-12%. We previously guided to grow in the range of 8%-10%. Interest on funds held for clients is expected to be flat year-over-year. Total revenue expected to grow in the range of 10%-11%. We previously guided to growth of approximately 8%. Adjusted op income is expected to be in the range of 39%-40%, up from the previous guidance of 38%-39%. Adjusted EBITDA margin is expected to be approximately 44%, up from the previous guidance of approximately 43%. Other expense, net is expected to be in the range of $15 million-$18 million. Our previous guidance was in the range of $23 million-$26 million, with the change due to certain non-operating income received during the second quarter. Our effective income tax is still expected to be in the range of 24%-25%, and adjusted diluted earnings per share is expected now to grow in the range of 18%-20%. We previously guided the growth of 12%-14%. Turning to the third quarter, we currently anticipate total revenue growth to be approximately 9%, and we are expecting an adjusted operating margin of approximately 42%. Note that in your models. PEO and insurance solutions revenues for the third and fourth quarter of fiscal 2021 were impacted by the timing of notification of changes in state unemployment insurance rates. This creates comparability issues for the third and fourth quarters of fiscal 2022. It doesn't affect the whole year. You'll look at our investor presentation when we post it in a little bit, and we provided additional details so you can get the split of the quarters correct. Of course, everything that I just said is subject to our current assumptions, which could change given the current environment. We'll update you again on the third quarter call. With that, I'll turn the call back over to Marty. Thank you, Efrain. Emma will now open the call for questions or comments, please. We will take our first question from Kevin McVeigh with Credit Suisse. Great. Thanks so much and congratulations on the results. Hey, Marty or Efrain, it looks like you delivered a 44.7% margin in the quarter. I think that's the highest on record, and then even going back to 2007 when kind of the float income was half of what it was today. Can you maybe talk to just some of the structural changes? Marty, you talked to kind of the chatbots, things like that, but maybe just can you help us frame it? Is there a new range of margins? Just any thoughts as to just the leverage in the model? Because obviously just you're seeing outsized margin expansion and really, you know, still some headwinds around float income, things like that. So just wanted to start there if we could. Sure. I'll let Efrain jump in, too. I think there's really two parts to it. One is, you know, we've been down some headcount, temporary as you know, in a challenging hiring, but we really picked up a lot of hires in the second quarter due to some creative things we did. I would say overall, the bigger impact is that we have, you know, automated a lot of the service models. When you look at it and you think about chatbots, when someone comes on the web now to ask a question, over 60% of the questions are being answered in an automated fashion with a chatbot before they go to anyone live. I also, as I mentioned in my comments, you know, if you just think about the things we've done with Flex and our PEO offering, 99%, almost 100% of PEO employees, worksite employees, you know, handle open enrollment online digitally now, and that reduced calling in for questions and issues by over 25%. A lot of the things we're doing not only with the product, but with the service models themselves, have reduced the number of calls that are coming in. Not only are the clients happier, they're getting a faster answer, and it's being done the way they wanna receive it, which is either automatically or through chat, et cetera. Also we're saving expense and time and allowing our specialists to handle more value-added calls for the client. Is there a wider range? You know, I think there's always a little bit wider range and, you know, that's our DNA is to kinda drive margin as best we can. I would say a little is temporary, but most of it is the things that we've been doing year after year. Yeah. There's not a lot to add there, Kevin. I mean, I'd just say that you know this very well, and I think many of the analysts that cover us, we have evolved significantly from a technology standpoint. We have evolved significantly in terms of our digital capabilities, and the model shows it, the margins show it. We will put up our margins against anyone in the business because to Marty's point, it's durable, it's sustainable, and it's technology-based. No, I get that. A follow-up on that, and then I'll get back in the queue 'cause the numbers kind of speak themselves. Is that the same level of success on the front end too, in terms of the implementation? Like, is there any way to think about when you're implementing a client for the first time, how much of that is fully digitized as opposed to you know, more a human component to it, or is that too abstract? No, I know what you're saying is exactly where we're heading. You know, there's more and more clients that can self-onboard themselves. I'd say we're still newer into that process, but that is happening not only because it's good for our expenses, it's really good for the clients. The clients want to self-onboard. SurePayroll division has been doing this for some time, and Flex is, you know, continuing to grow into that. If it's particularly a smaller client, they wanna start onboarding themselves, there's a couple benefits. Not only does it reduce cost, it allows the client to onboard themselves at their pace. It also really creates a lot fewer errors and interactions with the service team because the client's doing it at their own pace and when they wanna do it and how they wanna do it. The last thing is that it frankly many times is a better sale if you're buying online digitally and then you start self-onboarding yourself and you might need help, but if you don't, you complete that. It's better than multiple salespeople and service people talking to you to implement you. We're definitely down that path, more on the SurePayroll side, but Flex is increasing as well. Thank you. Again, congrats on the promotions. Thanks. Thanks, Kevin. Thank you. We'll go next to Bryan Bergin with Cowen. Hi, good morning and happy holidays. Thank you. Wanted to start with retention. Could you just talk about what you're seeing there? It sounds like it's still record, but you did expect some moderation in the year. So any change on that front? And can you talk about some of the underlying factors you would typically see that drive retention as it relates to out of business closures or, you know, normal client switching behavior? And just also beyond 2Q, if you can help us a little bit into the December month as well. Yeah. I think so far, yeah, in Q2 was still near record levels. It wasn't quite as high as the record and that we saw in Q1, but it's very close to that. I really still think, as I said last quarter, that we will kind of even out at some place better than we were pre-pandemic, and I think a number of things that are helping that. There is fewer out of business, but there is also just the value of the product. What we're seeing is the value. You know, we're not seeing as many leaving for price value kind of category because they're seeing the value of the product, especially at a time of COVID, you know, with all the value we're bringing them from the product side, from the technology, handling a distributed workforce, with all of the mobile apps that we have and ability, and now the retention tools that we're giving them and the Paychex Pre-Check, where we're allowing the employees to review and approve kind of their own pay before it even gets processed. All these things we're getting back from clients are adding value, and that is doing exactly what we hoped, which is not only adding value to the client, but improving retention. We're near record levels in Q2. Don't see anything changing at this point in December. Of course, you know, December, January is really where we'll see the number for year-end. Right at this point, we expect things to even out certainly better than pre-pandemic levels. Okay. Okay, that's good to hear. I, you know, understand the conservatism and the outlook given everything that's going on with Omicron. Have you seen an actual impact in any sales activity or pipeline yet, or is it just conservatism, making sure you may see some actual impact? I think we're, you know, we're always trying to be conservative, especially in an environment like this, like you said. Right now, you know, record levels of PAR annualized revenue, we're seeing and growth in the first half of the year and in the second quarter. You know, it still seems strong, but, you know, selling season is really when we know, you know, how that'll be. Right now, really all areas. You know, retirement, HR solutions, you know, mid-sized business, you know, our mid-market business and virtual sales, digital sales, all going strong. Okay. Thank you. Be well. Okay. Thanks, Bryan. Our next question comes from Andrew Nicholas with William Blair. Hi, good morning. I appreciate you taking my questions. Sure. I guess my first one is kind of sticking with the technology theme from the responses to the first couple questions. Just as it relates to kind of paying for that kind of talent, my sense is that, you know, engineering, software, building talent is getting more and more expensive, has for some time. Just wondering how you think about that, both from an expense perspective, but also a labor supply perspective as you move forward here through the rest of the year and beyond. Yeah, I think, you know, one thing, we've got a very tenured team, and Mike Gioja and the team have done just a great job. You know, Mike's been in charge of that for over 10 years now, and he's just done a great job with that team. You know, I think one of the things, yes, the costs go up, and you have to compete in this market, and I think we've done that very effectively. We also, you know, make it a great place for them to work. They all can work from home, yet they also have great office space that's available to them to come in, and they meet, you know, regularly, but they're all working from home. They're also working on some of the latest technology and digital services, and that adds a lot of retention as well. You know, years ago, say 10-plus, 15 years ago, you know, there was always an issue, are we working with the latest technology? Well, you know, we've blown well past that. We're a leader from an innovative product development, not only in the products that we have, but the way we develop them and the infrastructure and architecture that we use. I think that is very attractive to candidates and attractive to the employees to stay here. We're very proud of the tenure we have, and I think we pay very competitively, and that's why we've had good retention. That's helpful. Thank you. Just for my follow-up, a different topic, just on the PEO insurance business. Could you maybe break down the PEO performance versus insurance performance in the quarter? I think your expectation last time we spoke was that insurance was gonna be a bit slower this year. Just wondering if that's played itself out to this point, and if second quarter helps speak to that any further. Thank you. Thanks, Andrew. Fair question. When you look at the PEO business versus the insurance business, the insurance business moderated the overall growth of PEO and insurance. PEO was solid double digits, growing nicely, good client adds, good client wins. Insurance is a tale of two cities. The health and benefits side grew upper single digits, but workers' comp still remains a really tough compare because that market continues to be soft. I probably am going on four or five years of talking about softness in workers' comp. It is good to say it at least has moderated to the point where you were flat year-over-year. Increasingly it's a smaller and smaller part of the business, but it hasn't bounced back yet. PEO doing very well. I'd say health and benefits on the insurance side doing well. Workers' comp kind of creating a situation that moderates the overall amount. Hopefully, as we get into next year, that will start to turn around. I've said that before and been wrong before, don't take it to the bank. Thanks. All right, thank you. Happy holidays. Thanks, Andrew. You too. We'll go next to Eugene Simuni with MoffettNathanson. Thank you very much. Good morning. I wanted to ask first about Management Solutions. Very impressive performance this quarter, outperforming, I think, everybody's, including yours, expectations. You listed out a number of drivers that are behind that outperformance. Can you give us a little bit of color of which of these drivers are more one-time, kind of temporary in nature, and which can be sustained as we're moving forward? Let me start, and then maybe Marty can add some further color. If you look at management solutions and you kind of apply kind of a broad umbrella of what's in that revenue stream, you really have three important components as many of you know. You've got HCM solutions that are roughly about a little bit under half of that revenue stream. I would say there's two other parts that we don't talk about as much, but increasingly have become very, very important, which are the combination of retirement services and also what we would call ASO or HR outsourcing. This is not PEO. If you look at that, those two in comparison to HCM, they're now almost 50% of what HCM is, and they're growing at rates that are faster than HCM. HCM had a very strong quarter. It's not that it didn't. It's just that retirement services and HR outsourcing had even stronger quarters. Those are not one-time things. There's demand in the environment for both retirement services. I think Marty mentioned PEP plans, et cetera, and our success there. It's pretty clear we're leading the market in terms of selling of that product. If you trace that back, we didn't release it, but you trace that back to our sales. Sales have been very strong. On the HR outsourcing area, solution side, that's been very strong too. Both of those are driven by unique factors in the market. HR, because of the uncertainty of the environment, the value proposition has never been higher, and as a consequence, demand is very strong. On the retirement side, there are increasing amounts of states that are mandating retirement plans for employees that have benefited our business, and that continues to grow strongly. What have I just said? I've said that a lot of the demand forces within Management Solutions obviously have benefited from a pandemic rebound, but if I isolate HR outsourcing and retirement services, those are responding to other forces in the economy that we think are pretty durable. Long story short, there isn't a lot of one-time in there. There are some things, the rebound certainly is part of it, but there are also structural demands or structural factors that are driving demand higher. Yeah, I think that's very true. As Efrain went through, there's every product is strong. You know, we didn't necessarily expect retirement to be as strong as it is. As I mentioned, our PEP product, you know, we're one of the first to come out with a PEP product, the pooled employer plan, back in just January of this year, so not even a year later, we're at 10,000 clients. We have sold that extremely well. And when you look across the board, Efrain mentioned, you know, between time and attendance, but HR solutions, you know, in a COVID environment is so critically important. The technology that we've introduced on the mobile app, so the ability to really handle distributed workforces, to be able to track vaccinations, and those who are unvaccinated, all these things are part of a digital experience that clients are really seeing. I think most of it is, you know, sustainable growth that we're seeing. Even the macro that you're seeing, more checks and so forth, should be sustainable unless there's a drop off because of the variant in the next year. We don't see that, and still there's room to grow. You know, there's a lot of people that are still not employed, and we expect that could pick up next in the first part or half of the next calendar year. Got it. Thank you. For my follow-up, wanted to quickly ask about inflation impact. With inflation being the word of the day, could you just remind us quickly of the kind of puts and takes of high inflation for your business? You know, inflation in general is a net positive. Hard to say it that way, but what it does is because of the segment of the market that we're in, we have relatively more pricing power than if you were in the enterprise space, although I suspect they'll have more pricing power. It gives us in terms of our model a measure of ability to price that may be a little bit higher than we have experienced in previous years. To the extent that inflation also drives interest rates higher, that also has a benefit to the business. Obviously, there's a balance there in terms of if interest rates and inflation surge too high could have a dampening effect on economic growth. Assuming it's under some reasonable level, it's going to be a net positive for the business. Got it. Thank you. Well, happy holidays, guys. Thank you. Same to you. Thank you. We'll go next to Bryan Keane, Deutsche Bank. Hi, guys. Congrats on the quarter here. I wanna break down kind of my favorite topic, looking at the revenue per client. I know that's been going higher. Just thinking about, you know, the drivers specifically on that, and then price realization. I know that's almost a separate thing, what you guys are doing on that front. Bryan, yeah, I'll start and then let Efrain jump in. I think, one, yeah, I think we're just selling, Bryan, more services. The revenue per client is really been helpful when you think about things like we've talked about time and attendance and some of the other ERTC, you know, things that are driving, you know, the revenue. Even, you know, really you know, doing much stronger even though the client growth is solid as well. You know, we're really seeing more revenue because of more adoption of different services that the client is taking. From a price standpoint, you know, I think we're feeling like we still have good price realization. You know, and I don't think... There's some pressure on it, but as Efrain mentioned, in this inflationary kind of timeframe, I don't think it's probably difficult to get it as it was, and also while it's still very competitive in the market. Also the value that we're bringing, I think it's just not challenged as much given how much we've been able to do. If you just take something like employee retention tax credit, you know, we're bringing so much to our client at a relatively low cost that they're benefiting a lot. I think at that point, they see more and more value that we bring through COVID that has helped us get even better price realization. Bryan, to your point, I think that we've had very, very good average revenue per client, especially on our HCM clients. It's been very positive and our price realization in this environment when you triangulate the retention plus the additional value added in terms of services sold, we've been able to do very, very well. One thing we haven't talked about, which I don't wanna, you know, forget in this process, one of the strengths of our model is that we are really very, very quick, and Marty mentioned this earlier. We're very, very agile in terms of responding to new opportunities that come up as a result of changes in legislation. We mentioned that there's this service we call employee retention tax credit. We have, I think, throughout the pandemic, shown agility in terms of responding very quickly and creating value-added products and services for our clients. That's helped both to raise our average revenue per client, also helped us to get to justify the price realization that we've done. Marty said we've been losing very few clients to because of dissatisfaction with value and price, and it's part because we keep raising the value of what we're providing to clients, and they've responded very well. Got it. The success you guys are having in the mid-market, is there something driving that difference, or is there a competitive thing going on there? I think, Bryan, you know, it's really, we've got a very much more tenured sales force now, great leadership, that's been driving that now for a few years. I think the last year or so, we ran into, great presentations, but people not making decisions. I think we're now going back at those, and we're winning a lot of these deals against competitors. You know, just won a big one yesterday and really doing well against the competitors that are out there, I think because of the product work that's been done, the, and the technology that is really fitting exactly what they need at the moment. As Efrain said, the agility to be able to turn around things like employee retention insights, the fact that we can give them new compensation summaries for their clients or for their employees, whatever they needed, we're feeling like we're kind of a step ahead. In the mid-market in particular, they're really feeling the pinch on retention and attraction of new employees, and we're able to do that. Remember, we've talked about it on other calls, this partnership we have with Indeed, where you are connected digitally through Paychex Flex to Indeed, the world's largest job posting site. You get a credit on Indeed. Indeed, you know, you can post the job electronically, digitally. If they respond to the post, it goes right into the system. If you hire them, everything is paperless. These are all things that mid-market clients in particular right now need, and we've been ahead of it. Really hats off to the product management and development teams. I mean, we have just been a step ahead of everything they need. I think that is real. Then the power of the sales team really has come through. The other thing I'd add, Bryan, is that, you know, in previous years, we talked a lot about client sizes trending down in terms of clients sold. You know, in the last year, what we've seen is the client sizes, especially in our mid-market business, are trending up, not down. I think that part of it is in this environment, the ability to bundle the right level of value-added services to a mid-market client is valued very highly. Not all of the competition can do that because not all of the competition has an integrated platform plus world-class service. I think that that's a winning proposition in the marketplace right now. Got it. All right, guys, have a great and safe holiday. Thanks. Bryan, you too. We'll go next to Jason Kupferberg, Bank of America. Hey. Thanks, guys. Happy holidays. Thank you. Oh, thank you. As we entered FY 2022, I think the expectation you guys had was for net client base growth to return to kind of the more normalized historical levels of 1%-3%. But based on how things have gone through the first half of the year, do you think that figure could come in higher? To the extent that it does, would you attribute it more to the gross client adds or to the retention outperformance? Yeah, I think we're certainly trending at the high end of that range. We'll see whether we actually beat the high end, Jason. I think the second part of that is that, you know, it's really balanced performance. I'd say last year, when I reflect back, you know, in this quarter last year, I think Management Solutions was up 1% and PEO and Insurance was up about 3% or 4%. We were pleasantly surprised that actually we had started to see a quick return to revenue growth. It really was fueled in important measure by retention, which as Marty mentioned earlier, was at record levels. We still continue to have very good retention. That's been great, but our sales performance has been really strong this year. A combination of both of those is really what's driving. I would say it tilts a little bit more towards the sales side rather than the retention side, but both have been strong. Absolutely. Okay. Maybe just picking up on the topic of sales since you are kind of entering the key selling season here. So just in light of the new variant, is that having any bearing on your sales strategy here, virtual versus in-person, you know, over the next couple of months? You know, really, Jason, it's not. I mean, we've been very successful, selling, you know, from, you know, virtually. I think that will continue. They have the option, if the client and the rep agree, you know, to get together, more of them are doing that. I think even with the variant, I think they're still doing that. So many of the presentations now, particularly in the mid-market even, can be done, you know, virtually and really, you know, I think we've really fine-tuned that through this time. The sales engineering team and so forth, they've just done a great job in kind of building out sandboxes and different examples for a client that are very personalized to the client to say, "This is what you're gonna get. This is how you work through it." Frankly, it's probably easier to do it virtually and digitally than it is in front of the client, you know. Because they can all see it right in front of them, and they can take them through it. Yeah, I don't think it will affect us. We're well-staffed. You know, great products. Everything's really moving very well, so it feels very strong right now. We'll know at the end of the selling season. We feel pretty good right now with the momentum. Okay. Well, I appreciate the comments, guys. Thanks again. Thanks. We'll go next to James Faucette with Morgan Stanley. Thanks very much. I wanted to follow up quickly on Retention Insights. You mentioned that as a key tool for you and your customers. Is the retention stability partly a function of Retention Insights integration right now into the Flex platform generally? Can you give some idea on client adoption of that product to date? Yeah, James, it's pretty early, but we're getting a lot of great feedback from clients because everyone's looking for that kind of information. Yeah, I mean, we certainly use the same kind of thing and have for some time internally, and now it's much more built for mid-market and small clients to be able to use. It's using a number of factors just to look at, you know, which employees do you think are most likely to leave. That gives them some insight into that, and it can help them with the retention. It's pretty early in the adoption. I guess early innings of this thing, I would say, but it's really been very well accepted, and I think they feel like it's an easy way to use Flex to get that insight. I would say it's still early, but great feedback with what we're doing from a predictive analytics basis. Great. Then just a quick macro question from me. You know, one of the big lingering uncertainties in the economy overall right now is just labor force participation and being able to fill openings. Can you give a little view into what you are seeing from that perspective? Are you seeing people come back to the labor force? Are there any particular areas or industries that are responding better than others, or are there industries that aren't responding? Just some macro insight there, just as we try to Sure. Get a grasp on kind of what's happening generally. Yeah, sure. You know, we obviously from our small business index, and that really looks at the clients of ours that are under 50 employees. You know, we're seeing continued growth, job growth, you know, for 6 months in a row now. So the job growth is good. Now, we're still, as you know, around a 61% participation rate, I think, which is down a couple percentage points from pre-pandemic. We're still short around 4 million jobs from pre-pandemic. 1.5 million of those are leisure and hospitality. So I would say the ones that are still struggling the most are the restaurants. You probably know everyone kind of sees that anecdotally from cut back hours or even, you know, closed a few more days than they normally would. I think that's where still the biggest struggle has been. It's a combination of, you know, the pay, which has gone up dramatically. You know, we're seeing average part-time pay for our client base per hour is $19.62 last month. It's an amazing thing when you think two years ago, everybody was arguing about getting to $15. It is more costly. The supplies are more costly as well. I think from an employment perspective, that's probably the one that's suffering the most. I do think that as things change now and some of the stimulus money dries up, the unemployment has changed, of course, back to more normal levels. The child tax credit, you know, may end up, you know, going away as well. That's been arguments. You know, you gotta pay your tuition payments now. They've been deferred, many of them. Rent. I think you're gonna see more people come back in the first and second quarter, would be our guess based on what we're hearing from clients. They've seen growth, but there's still a lot of people that are still sitting on the sidelines. I think, you know, as you know, depending on what the market does and of course, just kind of overall cash balances, as things all come together, we expect more people to be hired in the next six months as that continues to pick up. That's great clarity. Thanks a lot, Marty. Thanks, Faucette. We'll go next to Kartik Mehta with Northcoast Research. Hey, good morning, Marty and Efrain. Efrain, I wanted to go back to a little bit of a comment you made when you were answering a question on inflation and just pricing. I know usually you change pricing around May, and I'm wondering, with the current environment, will you stay with the same strategy, or is there an opportunity to change the timing and maybe get two price increases, two smaller ones that add up to a larger price increase? Yeah, that's a good question. I'd say two things. One is, I'll make a statement of philosophy about what the company does and then answer the question. You know, the first thing is that I think you're right, Kartik, typically in the late spring, we actually used to broadcast that, which I was not a big fan of. We typically would look at it in late spring and raise it. I would say in the pandemic, we really have adopted a little bit more flexible timing. We don't necessarily say we're going to do it in, you know, April, May, or we're gonna do it in June, July. We look at what the circumstances are and then decide when it's right to plug in a price increase. That's the first part. I think that, you know, from our perspective, we think it's important to be fair to customers. I think we're guided by that thought. The fact that we can take two or even more price increases does not determine whether we will, because in the end, we value our relationship with clients. Our job is to create value that supports a price increase. Much of what Marty has been saying during this call, I think is an indication of that. We'll take a look in the spring, figure out what makes sense. We certainly don't want to create a situation where clients perceive that they're not getting the value for what we're charging. On the other hand, we task ourselves with creating greater and greater value for clients so that when we do pass an increase along, they don't complain about it. Generally, that's what occurs. Marty, I think this is a difficult question, but maybe you have some insight. You talked a little bit about employees coming back to the workforce in the next six months. If you look at your client base, is there a way to tell maybe how many openings there really are, and if people do come back, what that could mean to your kind of pace per check? Interesting. I think we could tell with some of them because, you know, of course, they use our products for posting jobs and so forth. We can see, and we actually give them, you know, kind of, a notice that says, "Hey, you know, if you've just reduced an employee, would you like to post this? Would you like to, you know, do something with it?" I don't have that number right in front of me, Kartik, but, I think, you know, we continue to try to watch that to see, and we know the average employees. I think definitely we have some sense that it would obviously continue to benefit us from where it is. We're seeing, you know, the tailwind of the economy and that our employees or that our clients are hiring. As Efrain said, you know, that we've seen the average size of the clients grow as well. We still think there's some room to grow there, and that would obviously give us continued tailwind. I'd say, Kartik, we obviously to put our plan together as we get into the spring of next year, we'll create a more detailed estimate of what we think. It will be really important to see where we end up in the January, February timeframe. You know, last year, it seems like many years ago, there was an outbreak. There was the post-Thanksgiving or winter outbreak like we're having now in New York. It did have a little bit of impact. We're not seeing that right now, but we'll have to get through the next month and a half to get a better sense of where we're at. Yeah. The other thing with that is even if we knew, 'cause we have some sense of how many openings there are, you don't know if that, you know, that restaurant or that business is gonna backfill them or not. They may have become more efficient. We certainly have seen our clients become more efficient during this period and realize that they could do without this employee or that one, and not hire back after an extended period of time and not being able to get somebody. So it's a little hard to predict, but we still think there's certainly room for that to grow. Well, thank you both of you. Really appreciate it. Okay, Kartik. Thanks. We'll go next to Mark Marcon with Baird. Hey, good morning, and happy holidays, Marty and Efrain. Thanks, Mark. Marty and John, congratulations on the promotions. Had several questions. On the Paychex Pre-Check, what sort of adoption are you getting, and how much is that actually helping in terms of the accuracy of the payrolls? Yeah. It's early innings for Pre-Check, but we're getting very good feedback that it's very easy for them to check that the accuracy, that from a client perspective, they feel the accuracy is, you know, is helping them, you know, from the standpoint that their employees aren't going to complain that something they got that they didn't expect in the paycheck, that they got a chance to see their hours, that they got a chance to approve those or be able to say from a digital standpoint, "Hey, I disagree with this, and I have a question that the employer can take care of." So it's early, Mark. I'd give you a better sense probably in a quarter or two, but really good feedback on the early clients that we've seen from that standpoint. Great. What are you seeing in terms of on-demand payroll and the demand for that at the small end? You know, it's been steady, but still I'd say pretty light. You know, there's certain clients, more the hourly and you know, restaurants, things like that, and they're still a little bit slow to adopt it, I think. We still got a lot of opportunity, really to advance that, as more people get used to it and there's more demand for it. I think clients are a little concerned sometimes about offering it 'cause they're not sure if that's gonna have a cash flow impact, which it doesn't. Then the employees are not aware of it, and so they don't ask for it. I think you're gonna see, you know, over the next It'll take, I think, the next couple of years, but I think there'll be a very big demand for that as, you know, employees just say, "Hey, look, I wanna get paid today." I think you'll see a resurgence of more gig economy kind of thing where I'm working two or three jobs, but they're all, you know, I want the money now because it's eight hours here and eight hours there. I'd say still pretty light. Success for those who do it, they like it. We're trying to find new ways to build that out and grow that business because we think it's really gonna be a big demand in the future. Great. In terms of the gross sales, you mentioned how strong things are. Obviously, you're in the middle of the key selling season. I'm wondering in terms of what you've seen thus far this season, how would you describe it between the micro versus the small versus, you know, your more medium-sized clients? What are you seeing in terms of the differences between established versus brand new business formations? Yeah. I mean, really strong on all sizes. I would say, you know, right from SurePayroll size, very strong growth on from Sure, strong growth on the flex side from small to mid-size. Mid, you know, the mid-market really we're doing very well. This is one of the best years we've had in years, and I talked a little bit about that. Some of that is clients that got presented to last year that are were ready to decide. But I just think the overall package, as Efrain said, we're really the only, one of the only maybe of two major competitors of the bunch that can offer everything in an integrated fashion with the latest technology. So you can buy parts from other competitors, but you're gonna have to connect to third parties. We can do that too, but if you want it all in one place and the HR expertise to back it up, with over 650 HR experts, which people really like to have as a backup now, that's what they're seeing and, you know, is very strong. So we're seeing it across the board. Sorry, what was the second part of that? It was all the different The established versus the brand new businesses. I mean, what you were just saying in terms of like being the only one of two that can offer everything, are you seeing an increased level of wins with companies coming back to you from, you know, some of the newer competitors that are out there? We're seeing some, yes, in the mid-market, and we're winning more on the upfront. I would say it's stronger on the upfront, like going head to head today, than necessarily winning them back, but we're getting some of those as well. We're still seeing a strong growth in, as you know, new business starts. It's still, I think, up year to date, maybe, 30%-40%. You know, we're still getting a, you know, very small on the low end. There is more typically on the very low end, as you know. We're still seeing a lot of startup businesses, and I think it's just part of the economy right now. That's great. Thank you. Congrats. Okay, thanks. We'll go next to Tien-Tsin Huang with JPMorgan Chase. Hi, guys. It's Andrew Huang for Tien-Tsin Huang. Hi. I just wanted to ask a question. I know about a year ago, in the earlier part of this calendar year, we were talking about ASO outselling the PEO, and I know, you know, last quarter, we talked about PEO coming back strong and into this quarter. I just wanted to ask how that's tilting today, and just more at a high level, how the margins differ across those two solutions. Yeah. First, I'd say that the sales, Andrew, are evened out pretty good. I mean, we're having strong ASO and PEO sales. I think, you know, PEO has come on very strong, particularly in those great markets that we're in. Hats off to the sales and service teams there. We're having not only good growth there, but also ASO. So we're really having good, strong growth in both markets, and I think just shows the demand for HR solutions that not only from a digital solution, but also with the HR expertise that we can bring from both sides and the need for full benefits. You know, one of the things that we just did a survey, and it comes out very strong, is the need, if you're gonna attract and retain employees, you gotta really look out for their well-being, and that's from a financial standpoint, that's from benefits, retirement included. They're really looking for that overall perspective. I'll let Efrain, if you wanna take- Yeah. You know, with respect to the question on margins, the margins on PEO are gonna be lower, not because the core offering has lower margins, but because of the absence, or I'm sorry, the inclusion of pass-through revenues on insurance. To Marty's point, when you sell the full benefit, you've got insurances attached. Those carry lower costs 'cause a portion of them are pass-through. The margin is lower on the PEO, although the revenue can be higher. Got it. Thank you. I just had one follow-up. I mean, we talked a lot about the retention tools you guys are offering to customers, but just on the hiring side What are some of the ways that Paychex can, you know, help SMBs with the actual hiring? I recall last quarter you talked about the partnership with Indeed. Yep. I was just curious also if we could hear how that's trending? Yeah, continuing to trend very well. You know, it's a hot market, as everyone knows, to hire. It's very difficult. I think that partnership of being able to do it, you know, to partner with Indeed, who, you know, as I said, is so many job postings. They're the largest in the world, I think, right now from a job posting site. To have that digitally connect, to also have a deal with them where they get some credits with Indeed to be able to post is all very strong. I think that also attracts people. The full benefit, the full HR solution that I just said, you know, the benefits of retirement and all of the other benefits, insurance benefits, this is really attracting more people and retaining the clients. That is all things that we can offer, not only from a full solution set, but from a technology standpoint that really attracts, you know, a generation that is out there deciding where they wanna work today. You know, they want things on their mobile app. They have the Paychex Flex mobile app is full-featured. You can have your retirement, your insurance, your pay stubs. You have now Pre-Check. You know, you're working for somebody who you feel like not only has full benefits, but they're a leader in technology when you use our products. That's how we're helping our clients, particularly in, I guess I'd say in the mid-market, to succeed, and that drives a lot of value for them and for us. Great. Thank you, and have a happy holiday and New Year to you both. Great. Thank you, Andrew. Bye-bye. Thank you. We'll go next to Peter Christiansen with Citi. Good morning, Marty and Efrain. Happy holidays. Yeah, thanks. Nice results. Thanks. Yep. Yeah. Couple questions here. Martin, you did mention new business formation continues- Yep. -to be strong, and- Yep. I've certainly been observing that from the charts, and that's been, what, 50% typically of new sales. But I was just wondering if you could talk about the opportunity or maybe the trends that you're seeing from, you know, the self-filer or maybe from some of the regional, perhaps less sophisticated players out there. How are some of the trends there behaving as regards to new sales? And then, my follow-up would be, you've talked for a number of quarters since the pandemic, ASO, HRO has been gaining and it's been really strong. Has that mix shift helped them. To what degree is that mix shift helping the margin, I guess, is my follow-up. Thank you. I'll start it out with some of the regional players. We're net, certainly net adding from a regional player perspective, meaning selling versus losing. I think, you know, many of the regional players are really struggling in this environment to provide as much value through COVID. You know, the speed at which regulations are changing and demands on small and mid-sized businesses for vaccination policy, the mandate, you know, what's the latest, you know, you're gonna get that from someone like us. In fact, you know, many smaller players try to copy our stuff off the web. We have a very comprehensive website from marketing that puts all the information out by state, telling you what you have to do, where you have to do it, and then here's the products that will help you with that from a technology and a service standpoint. I think it's really been more difficult on the regional players today that just don't have the breadth of service, knowledge or compliance people to be able to keep up with this. You know, we have over 200 compliance experts that, you know, follow every single thing that's happening and that may happen so that we can be as agile, as Efrain mentioned earlier, on creating these products almost as soon as the issues come out. Very strong from a regional competitor standpoint on the net adds that we've seen year to date. You wanna take the- Yeah. Peter, on the margin part, you know, one of the things that I think you've seen in the model certainly over the last three, four quarters or so, is that when you have growth in revenue, you don't have attendant costs associated with it typically. You scale nicely and drop a lot to the bottom line. I think that's particularly true on Management Solutions, where that's the higher margin portion of the revenue. When ASO is growing at the rates that it's growing, because of the way that our business model works, a lot of that ends up dropping to the bottom line. It's all of the mix shift in terms of the way the business has been growing has been helpful to margins. Very helpful, gentlemen. Happy holidays. Thanks. Same to you. Take care. Are there any other questions? I'll take our final question from Scott Wurtzel with Wolfe Research. Your line is open. Okay. Thank you. Thanks. Hey, guys, this is Scott on for Darren. Just first one. Within Management Solutions, you guys called out one of the drivers being improved market conditions for retirement services. I was just wondering if you could give a little more color on that. Yeah. I think what's happening there is there's a lot of mandates now that are coming out by state. You know, we still haven't seen necessarily the federal mandate, but that's been discussed a lot. A lot of states, California in particular, New York, some others are coming out saying that, you know, businesses of some, in some cases all sizes, have to offer a retirement plan of some sort to their employees. There's going to be some mandates there that will have penalties that are starting to be enacted. You know, some are in place already in California, I think coming up in June. There's a lot of attraction there to people, not only looking at it from that standpoint, but also just from a hiring standpoint and a full benefits. There's a lot of interest, as I've mentioned, in having a full suite of benefits for the well-being of the employees that's helping retain them and attract them in a difficult market. It's retirement, it's insurance, you know, it's what's your work from home policy, your hybrid policy of working in office and home. It's all those things kinda combined. It's not just compensation. That's really picked up, and we continue to have very strong retirement sales and the fact that we offer a multitude of products, and we just went over 100,000 clients, I mentioned earlier. It's a great milestone. We're still number one in new 401 plans that are offered. I think between our PEP plan and our regular 401 plans and IRAs, very strong conditions in the market and great success from our selling team, selling them and servicing them. Great. Just one follow-up. As we think about investments in the business going forward, I know over the course of the pandemic, you guys have been investing a lot on the digital and the self-service side of things. Just maybe as we hopefully approach more of a normalized environment, could you give a little more color on where you may be employing some investment dollars going forward? Yeah, sure. It will continue, certainly on the marketing side as well, you know, to get the leads are coming in. From a digital standpoint, we've been very successful on the work that our marketing team and leadership have done. We expect that to continue. That is accelerated through COVID-19 on how people are buying. But also, you know, you'll continue to see it in the way we sell from a digital standpoint and the way we onboard, as well. You're gonna see that the self-service we talked about, that's gonna be continued because this is the way clients, you know, they wanna go. It's no surprise they wanna go online, they wanna see your product, test your product, price your product, and even start implementing it themselves, and be able to do that with a world-class innovative product and mobile experience, and that's what we've got. You'll see our digital investments continue in that standpoint. We've seen a lot of success from the investment we've put out so far, and that's gonna continue. Great. Thanks, guys. Happy holidays. Thank you. Same to you. There are no further questions in queue at this time. I'd like to turn the call back over to our speakers for any additional or closing remarks. All right. Thank you. At this point, we will close the call. If you're interested in replaying the webcast, it will be archived for about 90 days. Thank you for the time you're taking to participate in this second quarter earnings release call and for your interest in Paychex. We wish you and your families a very happy and safe holiday season. Thank you all. This does conclude today's program. Thank you for your participation. You may disconnect at any time.