Good day, everyone, welcome to today's Paychex third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and one on your touchtone phone. You may withdraw yourself from the queue by pressing star and two. Please note today's call will be recorded, I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. John Gibson. Please go ahead, sir. Thank you, Todd. Thank you, everyone, for joining us for our discussion of the Paychex third quarter fiscal year 23 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning, before the market opened, we released our financial results for the third quarter ending February 28. You can access our earnings release on our Investors Relations website. Our Form 10-Q will be filed with the SEC within the next day. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days. I'm gonna start the call today with an update on the business highlights, and then Efrain will review our financial results and outlook for fiscal year 23. We'll then open it up for any of your questions. As you saw in our press release, we delivered solid financial results for the third quarter, with total revenue of 8% and adjusted diluted earnings per share growth of 12%. Thanks to the outstanding efforts of our employees, we completed a successful selling and calendar year-end season with strong sales volumes and revenue retention for the quarter. We continue to see a stable macro environment and demand for our solutions. Our unique value proposition is clearly resonating in the market. Small and mid-sized businesses continue to show remarkable resilience, as seen in our Jobs Index the last two months, as they contend with a constantly changing labor market, inflation, increasing regulations, and rising interest rates. Before we get into the third quarter results, I wanna take a minute to address the recent volatility in the U.S. banking market as a result of two highly publicized bank closings. We have no cash, restricted cash, or investments deposited within Silicon Valley Bank or Signature Bank. We've met all client fund obligations related to employee payment services and remittances to applicable tax or regulatory agencies. We continue to monitor the situation and believe that our existing client funds held, cash equivalents, and investment balances are more than sufficient to meet all client fund obligations. We remain ready, as we were when the crisis was unfolding, to help businesses and their employees whose payroll processing or direct deposits may have been impacted by these bank closures. Paychex has a long-standing track record for being a stable place for customers, employees, and investors during all types of macroeconomic situations and crisis, and we demonstrated that once again. The selling season was positive in terms of both revenue and volumes in a very highly competitive environment. In particular, demand has remained strong for our HR outsourcing solutions, though, as we've reported in prior quarters, we continue to see a trend of clients shifting preferences for our ASO model over the PEO model. In the third quarter, we saw revenue retention remaining near record levels and normalization of uncontrollable losses at the very low end of the market. The focus and investment we continue to put in our high-value clients is making a difference in the customer experience. In addition, the advisory assistance we provide our clients is critical in these challenging times. Our retention for our HR outsourcing businesses, both ASO and PEO, stand at an all-time record high year to date. PEO and insurance solutions continues to show lower health insurance attachment and enrollment inside those clients that are attaching. This is specifically impacting our PEO in the Florida market, and the softer rates for workers' compensation insurance continue to impact the property and casualty part of our insurance agency. We expect these trends to continue early into the next fiscal year and normalize as the year progresses. Paychex is uniquely positioned with a continuum of solutions designed to help businesses in any macro environment. We help them recruit and train employees, gain access to capital, and provide valuable benefit packages such as insurance and retirement. Through our innovative technology, compliance, and HR expertise, we are here to help businesses drive efficiency within their HR processes, which therefore frees up valuable time for them to focus on growing their business. Competing for and retaining employees remains a challenge for today's workforce. I wanna commend Congress and the President for signing the recent SECURE 2.0 Act, which will introduce a range of new opportunities for businesses looking to introduce a retirement benefit and make their employee value proposition more competitive. We have begun to launch campaigns to educate the market on the SECURE 2.0 Act and continue to position Paychex as the industry leader in retirement plans that we are. We are working on strategies to leverage our strength in this market and capitalize on this opportunity in the years ahead. Higher interest rates and disruptions in the banking system have both impacted the cost and access of capital for many small and mid-sized businesses. We have fully embraced this challenge to help them out by proactively assisting our clients and prospects with obtaining financial assistance available to them through nontraditional financial partnerships and through government programs such as PPP and the ERTC program. We continue to see strong demand for our full-service ERTC solution. Many of the businesses we've helped are leveraging their new financial flexibility to reinvest in new solutions, such as a retirement plan, or one of our integrated HCM technologies. Recently, our ERTC service was recognized with a Stevie Award for helping businesses obtain critical financial support. In uncertain times, people look for stable, trusted advisors to help them succeed. I am proud that we have recently been recognized as one of the most admired, one of the most ethical, and one of the most innovative companies by several prominent and respected brands. We were named one of Fortune's Most Admired Companies in 2023, for the 15th time, we were named among one of the most ethical companies in the world by Ethisphere. This is a select group of companies that show exceptional commitment to ethical operations, compliance performance, and governance, and risk practices, including strong commitments to ESG and diversity, equity, and inclusion. Today, we are announcing that we have been named to Fortune's list of America's Most Innovative Companies for 2023 due to the innovation we've shown in our products, processes, and culture. These awards are the result of the dedication of our 16,000+ employees who daily are supporting our clients and helping them succeed and doing business the right way every day. Very proud of the team, and I'm very proud of Paychex. There's no question that we are a well-managed and stable market leader that people can depend on. We have a long-standing track record of being there for our customers when they need us most, and we continue to be well-positioned to help them through the HR challenges they are facing and whatever comes their way in the future. Now I'll turn it over to Efrain, who will take you through our financial results for the third quarter. Thanks, John. Good morning to everyone on the call. I'd like to remind you of the customary things I remind you, that during these conversations, we're gonna talk about forward-looking statements, items like EBITDA, non-GAAP measures. Please refer to our press release for more information on these topics. I'll start by providing some of the key points for the quarter and finish up with a review of our fiscal 2023 outlook. Total revenue for the quarter, as you saw, grew 8% to $1.4 billion. Total service revenue increased 7% to $1.3 billion, obviously benefiting from increase in interest rates. Management solutions revenue increased 7% to $1 billion, driven by additional product attachment, HR ancillary services. That's largely what we've discussed previously, our ERTC product, and price realization. We continue to see strong attachment of our HR solutions, retirement, and time and attendance products. Demand for our ERTC service remained strong and contributed approximately 1% to revenue growth in the quarter. Demand for this product, along with our internal execution, have continued to exceed our expectations. While ERTC has been a tailwind, and we expect demand to continue into fiscal year 2024, it will eventually moderate and become a headwind as we progress through next year, next fiscal year. PEO and insurance solutions revenue increased 6% to $321 million, driven by higher revenue per client and growth in average worksite employees. The rate of growth was impacted by factors previously discussed, including lower medical plan sales and participant volumes, along with a mix shift to ASO, as John called out. We expect these trends to normalize as we progress through fiscal 2024, meaning a little bit more of a balance between PEO and ASO. Interest on funds held for clients increased significantly to $35 million in the quarter, primarily due, as you know, to higher average interest rates. Total expenses were up 8% to $769 million. Expense growth was largely attributable to higher headcount, wage rates, and general costs to support growth in our business. Op income increased 9% to $612 million, with an operating margin of 44.3%, a slight expansion over the prior year period. Our effective tax rate for the quarter was 24.3%, compared to 22.3% in the prior year period. The prior year period included a higher volume of stock-based comp and the stock-based comp payments and the recognition of a tax credit related to our development of client-facing software that generated the difference in rates. Net income increased 9% to $467 million, and diluted earnings per share increased 8% to $1.29 per share. Adjusted diluted earnings per share increased 12% for the quarter to $1.29 per share. Let me quickly summarize the results for the first nine months of the fiscal year. Performance has been strong. Total service revenue increased 8% to $3.7 billion, and total revenue was up 9% to $3.8 billion. Management solutions up 9% to $2.8 billion. PEO and insurance solutions up 6% to $877 million. Op income increased 9% with a margin of 41.8%. Adjusted net income and adjusted diluted earnings per share both increased 12% to $1.2 billion and $3.31 per share. Our financial position remains strong, as you can see, with cash, restricted cash, and total corporate investments of more than $1.6 billion, total borrowings of approximately $808 million as of February 28, 2023. Cash flow from operations, again, solid for the first nine months was at $1.3 billion and was an increase from prior, driven by higher net income and changes in working capital. We've had our quarterly dividends at $0.79 per share for a total of $854 million during the nine months of fiscal 2023 or a 12-month rolling return on equity was a stellar superb for 47%. Now, let me turn to our guidance for the current fiscal year ending May 31, 2023. Our current outlook incorporates our results for the first nine months in our view of the evolving macroeconomic environment. We have raised guidance on certain measures based on performance this past quarter. Updated guidance is as follows: Management solutions revenue now expected to grow at or slightly above 8%. We previously guided to a range of 7%-8%. PEO and insurance solutions outlook is unchanged at growth in the range of 5%-7%, although we anticipate it to be towards the lower end of the range. We expect Q4 PEO and insurance solutions growth to be below 5% due to the factors that we've talked about through much of the year. Interest on fund held for clients is expected to be in the range of $100 million-$105 million. Total revenue is expected to grow approximately 8%. Other income expense net is now expected to be income of $10 million-$15 million, obviously, due to higher interest rates. Remember, we net interest income there with our expense on the debt. Adjusted diluted earnings per share is now expected to grow in the range of 13%-14%. We previously guided the growth of 12%-14%, so we tightened the range, obviously, one quarter left. Guidance for margins and effective tax rates are unchanged. We do anticipate being on the higher end of the range for operating margin and the lower end of the range for effective tax rate. We currently are in the middle of our annual budget process and are working on expectations for next fiscal year. As you know, this is challenging for a number of different reasons, not the least of which are expected outcomes in terms of interest rates and also macroeconomic environment. We'll provide final guidance for fiscal 2024 during fiscal 2023's fourth quarter earnings call in June. Let me share some of our preliminary thought process around fiscal 2024. On a preliminary basis, we believe that the exit rate in the fourth quarter is a decent approximation for total revenue growth for 2024. This should result somewhere in the range of 6%-7%. Again, we got more to do there, but just giving you what our thought process is at the moment. It's heavily dependent on what we think will happen with interest rates during the year, and at this point, our assumptions are conservative. Management solutions is expected to be lower as a result of moderating ERTC revenues. We called that out last year, didn't happen. It actually went the other way. We do think it's going to happen next year. Then PEO and insurance revenue growth is expected to trend higher as we progress through the year with moderation in some of the headwinds we have experienced this year, primarily around insurance attachment and also, as we've called out several times, a mix shift to ASO. We remain committed to improving margins, and we anticipate that operating margin will expand at this stage in the range of 25-50 basis points for fiscal 2024. Of course, all of this is subject to our current assumptions, which can change, especially if there are significant changes to the macro environment, which at this stage we are not seeing. I'll refer you to our investor slides for on our website for more information. Now let me turn the call back over to John. Thank you, Efrain. With that, now being complete, Todd will open up the call for any questions people have. Thank you. At this time, if you would like to ask a question, please press the star and one on your touch tone phone. If you need to remove yourself from the queue, you may press star two. Once again, to ask a question, please press star one. Our first question comes from Kevin McVeigh with Credit Suisse. Hello, Kevin. Great. Hi, Kevin. John. Hey, Efrain. Hey, congratulations. Just really, really strong results here. I don't know, John or Efrain, maybe... I know it's preliminary, Efrain, but the 2024 looks, you know, pretty similar to 2023, and there's a lot of crosscurrents from a macro perspective. You know, and you folks tend to be pretty conservative. Maybe help us understand some of the puts and takes. Is it maybe there's a little bit more pricing? And just any base underlying assumptions around unemployment, because, again, just really, really nice outcome or just Trying to understand maybe that a little bit more. Yeah. I'll let John talk a little bit more to kind of what our thinking is from a macro perspective. Kevin, just to kind of address some of the higher level assumptions that go into the plan. I called out the fact that ERTC is not going to be the headwind... I'm sorry, the tailwind that it was this year. We called that out last year, but it's definitely gonna happen next year. I wouldn't say definitely. I will say we have a very high degree of belief that we won't see it. However, you're gonna see that more in the second half of the year than the first half of the year. That's the first thing I'd say. If we look back at where we started this year, we were getting a nice macro uplift from employment as we started the year. That seems to have run its course. It is not going the other way. At this stage, what we're seeing is that there's been a pretty significant moderation in terms of, in terms of employee adds, and that's happened as we progress through the year. Those two things will become headwinds as we go through the year. Interest rates, I called out. The first half of the year, I think we've got some sense of where we at, of where we're at. The market does too. What is really hard to understand is what happens in the second half of the year and whether we start going in reverse on interest rates. We're taking steps to position the portfolio to deal with that if that's what happens, but no one knows there. That's all the stuff that's headwinds. Positives. We think HR continues to be strong. We think, as John pointed out, we think retirement continues to be strong. We think that HCM continues to proceed well. We think PEO, which has been a little bit of a tailwind to growth this year, it does better next year. The insurance business, although we called out PEO, a lot of the moderation on the growth rate in PEO insurance coming from insurance, we think that starts to improve as we go into next year. We have the normal level of cost discipline in the business that drives the results that we're anticipating in 2024. That's a broad overview of how the numbers were put together. I'll let John talk to macro and any other parts of the business we need to call out. Yeah. Yeah. I think, Kevin, keep in mind that we've certainly seen the deference of, and really expected to see some moderation. I mean, we don't expect another 4.5, you know, basis points increase in interest rates, and we don't expect the type of hiring that we saw from the. It's hard to believe that the great resignation was just last year, a year away. You know, certainly we've had the benefit of staffing up, but we're not seeing any contraction, moderation. In fact, you look at our Jobs Index, which has been a great indicator of kind of small business health, and what we've seen in both January and February that we've reported, is actually an increase in the index. We really have not seen that through all of this fiscal year. These are the really first two months where we've seen an increase in the index, and also saw some moderation in wage inflation as well. We're certainly not seeing it. We haven't reported March yet, but I can tell you we continue not to see anything there. Demand for our products, the HR products, the online products that we're offering, the HCM products, the 401(k) effort is really strong. I mean, we had a strong sales quarter in the second quarter, and the third quarter was actually better than that, even in a relative basis, you know, quarter to quarter from prior periods. We're seeing good demand and what I would say moderation and stabilization. We're certainly closely watching all of the indicators, but we're not seeing anything. You know, the other thing I would point out on a macro basis, there's a lot of noise in the system. You know, I think it's important to understand, we have a very diverse client base. And I think it's fair to say, Paychex, we're more of a Main Street, small and mid-sized business company. We're not the Silicon Valley. We're not focused on one particular vertical or, you know, we're not heavily weighted here or there. We tend to represent what's going on on Main Street. I don't think Main Street small business owners have been reckless in hiring or reckless in spending or able to spend more than they make. Again, they struggled through this and we've been helping them get through it. Our retention's been strong as well, and particularly with accounts in our HR advisory products, both PEO and ASO, again, at record levels. We have a good degree of confidence that our value proposition is resonating with our current clients. We still think there's a ton of opportunity inside our client base to provide them further assistance. While we've seen a tilt towards ASO versus PEO this year, I always look at it this way: Those ASO clients are Paychex clients, and we'll be talking to them again next year about whether or not it's the right time and whether or not you've got the right benefits offering that now meets their needs. We're certainly doing a lot of work there to try to make sure we've got the right continuum of insurance products to meet the market conditions for small businesses today. I feel like, look, this labor challenge that we have is not gonna go away, and I don't think the complexities of hiring people is gonna go away. I think that bodes well for how we've positioned ourselves both from a HCM perspective, our technology's driving efficiencies. It's helping people manage remote workers. It's helping them attract workers, and quite frankly, our HR advisory services are paying big dividends. I hope that gives you some color on what we're seeing. Super helpful. I'm gonna get back in the queue. Congrats again. Okay. Thanks, Kevin. Thank you. Our next question comes from David Togut with Evercore ISI. Thank you. Good morning. Good morning, Efrain. Good morning, John. Just to dig into the fiscal 2024 guidance a bit more, could you walk through some of the underlying drivers of Management Solutions revenue growth for next year in a little greater depth? In particular, if you could, let's say, start with the critical year-end selling season, which you've just gone through. You've indicated it was strong. You know, if you could kinda walk through kinda what parts of the bookings were particularly strong within your client base, you know, small end, like SurePayroll versus kinda more of the core, you know, payroll processing business. Then in addition to that, if you could comment on your expectations for client revenue retention next year, and also for pricing. Okay. Let me break it into two pieces, and I'll let John comment on the selling season. David, look, to put the revenue plan together for Management Solutions, I'd say you gotta, you've gotta get several dimensions reasonably right. You know, the first is obviously what do we expect from a client growth perspective, and John can talk to what we saw during the selling season. What I mean is unit growth in terms of sales. The second part is what do you expect from a pricing standpoint. Too early to talk exactly what we're gonna do, but those two components, both client growth and also pricing are part of our assumptions going into next year. You wanna get the right level of product attachment, continued growth on the ancillary products in the bundled suite, including time and attendance, HR administration. Increasingly within Management Solutions, retirement and HR drive a lot of growth. We're assuming strong years in both of those products, partly on the retirement side, based on what John said. You put all those together, that forms the basis of our thought process around Management Solutions. and insurance we expect to grow faster than we've seen this year in part because some of the headwinds we feel will abate as we get into next year, although they may still be evident in Q1. You framed the question correctly in the sense that if we come out of the selling season and we haven't felt like we've hit some of our objectives, it becomes a little bit more challenging to put the plan for 2024 together. John called out the fact that we thought we had a good performance in the selling season. We obviously are not gonna give you percentages at this point. After Q4, we give you a lot of detail about client base, et cetera. We'll talk about that. I'll let John talk to what we were seeing during the selling season. Yeah, no. I think, David, the key point was, is we had both strong revenue production, new revenue production, and good volume production across the core business, and then really just continue to see this accelerated level. I mean, our HR businesses were growing a good healthy clip before the pandemic. When the pandemic hit, we started to come out of it, they accelerated. We're really seeing strong growth there, strong growth in retirement services, our online services, time and attendance, the other bundles that we're offering, retention insights. We're just seeing a lot of traction in our products and services, and we saw it in the third quarter. I said the third quarter was a step up from the second quarter, and we felt pretty good about the second quarter. It was a very highly competitive environment. I would say there's a lot of aggressive competitors out there, and I think our products and our sales team did a great job executing. Also, the other thing I feel good about in that quarter is, you know, we sell a lot of our business, over 50% of our new clients come to us from strategic partnerships, and we had a good year-over-year increase there. Again, I think what's going on there, not only is our products and services resonating, but I think people that are advising clients are beginning to put a preference on, "Hey, if I'm gonna advise my clients where to go, maybe they need to be in a nice, safe place, where I don't have to have worries about whether or not their employees are gonna get paid." I think that's also helped us in the third quarter as well. Thanks for that. Just pivoting to the float, Efrain. Yeah. How are you positioning the float, you know, if the Fed is almost done raising short-term interest rates? That's an interesting point, David. I wonder whether they're almost done raising short interest rates. I tend to agree with you, but I'm not so certain about it. But, you know, the lever you have there is what% you have long term versus what% you have short term, and where do you lock long-term rates in over a period of time so you can manage what happens on the downside of the cycle? We're starting to extend duration now because we're of the conviction that interest rates seem to be getting close to some sort of peak. Having said that, my prognostication skills on this are not anything anyone should take to the bank. I do think from a portfolio management perspective, it's probably better to start going longer now, whereas we were shorter earlier in the year. Understood. Thanks so much. Yeah. You're welcome. Thanks, David. Thank you. Our next question comes from Ramsey El-Assal with Barclays. Hi, thank you very much for taking my questions this morning. Hey, Efrain, can I ask you to drill down a little bit in terms of the factors that are giving you confidence that the insurance side of PEO will improve next year? Yeah. Just curious about the drivers or sort of reasoning behind that expectation. Yeah. Two things, Ramsey. It's interesting. It's been an unusual year in the sense that we've seen softness in insurance inside the PEO, and we've seen softness in insurance, particularly healthcare insurance in our agency. You know, I'd start with the kinda obvious point that at some point people do need health insurance. At some point, as clients grow within the PEOs, we add more clients, we're going to get more healthcare attachments. What's happened this year is that in the PEO in particular, you have renewals that occur in the fall, and then you have renewals that occur at the beginning of the year. If in that cycle you don't get what you expected, you basically have to wait for some period of time before you start all of that process all over again. We as we went through the year, in the first half of the year, thought, "Okay, well, we're gonna have to come out of the year with a robust insurance as we get to the end of the year." It was better, but it wasn't what we expected. On the agency side, it's been moderating as we've gone through the year. We've gone through cycles like this where it seems attachment is lower, and then it picks up. Part of it is almost a mean reversion phenomenon that we think will occur. The second part is we put a number of different initiatives in place that don't bear immediate fruit, but we think will bear fruit as we go into next year. One thing that's really interesting, final point on that, John, just to highlight something John said, which is this preference for ASO versus PEO isn't a permanent preference for many clients eventually that want a PEO solution because they want the benefits bundled. We're expecting that we're gonna see more of that as we head into next year. While PEO performance, I would just highlight this, PEO performance has been lower than what we anticipated during the year. It's still been growing, at a decent clip. It's being somewhat attenuated by the insurance business, which has been very, very sluggish through the year. Yeah. I, Ramsey, I would add to that. I think it's important to understand that, you know, particularly on the insurance attachment side in the PEO, remember that's a lot of pass-through revenue, not a lot of margin. It's a big dollar number, so a small% change in any direction has probably an overweighted impact on the revenue in the PEO, right? You know, extra 1% or 2%, and then another 1% or 2% participation within the base, I think is critical. To Efrain's point, you know, you have this opportunity to reset your insurance portfolio every open enrollment, and you're hoping that you have the right portfolio of cost and the type of plans that people can afford, and they wanna gravitate to and what they're going to do, and that cycle comes up every fall and into the winter. Certainly, you know, we're taking a lot of data. We're doing a review of every market for the PEO and looking at our health insurance lineup, making sure it's competitive. We're taking and affordable for clients. We're talking to our clients. We're already in the process of beginning to reset that and talk about that reset. We're confident that we'll have the right lineup and the right opportunity. As Efrain said, you know, historically, most of Paychex PEO sales, really prior to our acquisition of Oasis, was coming from upgrading ASO clients into the PEO business, a lot of inside the base. Now it's far more outside the base, but we still have that capability inside the base. We think there's additional opportunity inside our client base to upgrade them to PEO, and that not only increases the revenue, but it also increases the lifetime value of the customer. To us, it's the right thing to do for the business, and we'll be looking at plans to do that as we go into next year as well. Okay, thank you very much for that. Let me sneak one follow-up in. You called out higher revenue per client as a driver in the quarter. I'm just curious, over time, have you seen the kind of overall growth algorithm of the business shift more such that that higher rev per client metric is sort of more important? I guess the underlying question is, do you expect sort of ongoing gains there to sort of persist, or was there something a little more lumpy about it that we should be aware of? No, for sure. I mean, if you look at, if you parse all the data, I'm not sure you'd get it from all of the public disclosures, you get pretty close. You've seen persistent growth in revenue per client. I think we've been very skillful at finding new opportunities, both with product attachment, but also the ability to create new products and services within our client base to drive that revenue higher. Yeah, we can talk about an algorithm that's about units and price, or we can talk about an algorithm that's really around revenue per client, and revenue per client has become more important, certainly in the last five years. I think it's important, Randy, to keep in mind, you know, we're at a stage where we're driving more value to the customer and both through our technology as well as our advisory services. That value is driving retention, it's driving pricing power, and it's driving an openness to add additional products and services over time. The old traditional model we've always had, which is, you know, we've always been able to drive price increases over time to cover our cost increases. We've been able to go into the base and drive attachment. I would lay on top of that because we focus so much on the HR value proposition and driving customers up our kind of value continuum, that the other benefit we're seeing here is revenue retention. Now they're looking at us as their trusted advisor, and they're saying, "I want my 401 with Paychex. I want my time and attendance with Paychex. I want my other digital offerings from Paychex. I want my insurance from Paychex. That was very helpful. Thanks a lot. You're welcome. Thank you. Our next question comes from Andrew Nicholas with William Blair. Hi, good morning, guys. This is Daniel Maxwell on for Andrew today. Sort of similar to the last question, but specifically on WSE growth in the PEO and ASO client base, if you can break apart how much of that is coming from existing clients versus new clients and attrition, and any color on why there's been a preference for ASO over PEO and the reasons you expect that balance to normalize. Is that just coming from increased confidence in upselling to PEO or is there anything else in there? Yeah, Daniel. We've seen healthy growth in WSEs across ASO and PEO. We don't separately break them out, but both have been growing. We're seeing positive results on that side of the equation, splitting it out between new adds versus existing base. The reality is that because the existing base is so large, it dwarfs the impact of new adds, from a WSE perspective, especially when you consider losses. We've seen good growth on WSE that makes us, as John said, more positive about the general value of our HR advisory services, both across ASO and PEO. I'll let John talk to the shifting preferences in a given year between ASO and PEO. Yeah, Daniel. I think that what you're seeing is, again, some of this is just speculation on our part. When you see, clients that had our insurance and we go through enrollment and where they had 25 employees that bought the insurance, now they have 22. You see clients that had your insurance in the PEO and decide that they no longer going to have insurance or offer insurance for their employees. I just think you're in a position where, given some of the uncertainty, people are being cautious of adding a benefit. It's interesting. They know they need to have benefits to attract or retain employees. 401 is doing very, very well. It's a lower cost benefit. It's a lower commitment. Now when you take the SECURE 2.0 Act, you know, technically, if you're a 20-50 man, company, person company, you now can basically get a 401 set up and have all of the setup costs and the annual costs covered, through tax credits. Those are things they're adding. The, the health insurance, because of the size of the expenditure and the fact of the matter is once you start offering it's a, it's a pretty long-term commitment you're making, I think there's a degree of hesitance to that. Again, as I said, I think there's more we can do in going out and looking for more innovative product sets that gives access, affordable access, to health care for our employees and our teams are working on that as we go through the new enrollment. Again, the issue you'll have there, that's gonna be enrollment, you know, when we get into the fall, of this calendar year and into the second quarter, of our fiscal year. Does that help? Yeah, that's helpful. Just generally on capital allocation, anything on the attractiveness of buybacks going forward or any M&A opportunities that have become more attractive in the last few months in the pipeline? I think, look, with respect to buybacks, I think we've talked about what our philosophy is in general. At this stage, we're evaluating a range of opportunities from an M&A perspective. If the right opportunity, I'll let John talk to that what we're looking at, but if the right opportunity comes along, we obviously have the dry powder to be able to make something happen. Yeah, I think, Daniel, I think our position's changed on this. I think the market conditions are changing and have changed. I think we're gonna continually be on the lookout for opportunities that accelerate our position from an HR leader and a technology leader and continue to position us as a leading digital HR human capital management provider. I would say we've seen some valuations starting to come down. I'm sure the recent disruptions in the financial markets may create additional opportunities. As Efrain said, we stand ready if the right opportunity comes around to pull the trigger. It's not that we haven't wanted to do something, but we also are not going to overpay for something. We're gonna be... You're going to see the same financial discipline you've continued to see from Paychex. We believe that the market conditions are more conducive to us moving forward on the M&A front. We'll see if that actually transpires. Thanks a lot. You're welcome. Thank you. Our next question comes from Samad Samana with Jefferies. Hi, good morning. Thanks for taking my questions. Good morning. Maybe one, just as I think about that comment about the number of new customers coming through strategic partnerships, how should we think about maybe how that impacts kind of customer acquisition costs? Do those tend to be slightly larger, smaller, more profitable, less profitable? How should we think about where you're acquiring the customers from and what the impact of that is to the financials? I wouldn't think anything about it. I would just really more commenting that's been Paychex for 50 years. You know, over 50% of our new clients have always come from strategic alliances we have. We're a respected partner with the Association of Independent CPAs. They've always been a big source of ours. It doesn't do anything to our cost of acquisition. I just think, you know, they killed it certainly during the selling season. We saw a good uptick in how they were referring Paychex over other options that they have. That was my comment. Okay, great. As we think about the bookings in the quarter, anything to call out between the different kind of customer sizes? Think about it as very downmarket and maybe more micro customers versus your average customer size. Just any trends or pockets of strength or weakness? Well, actually, what I would say is, we have good strength, I think, you know, across the board. Actually, you know, what I would tell you is that we actually saw a little more strength upmarket, not just the small startup ones and twos and on the digital side, which is, you know, during the pandemic, that's where we saw a lot of growth. You know, business starts were up through the roof, crazy levels. You know, they've subsided, but they're still at high levels in comparison to pre-pandemic. At that time, when all these startups were happening, also, we do a lot of nanny payrolls, SurePayroll. As you can imagine, a lot of people were hiring household staff during the pandemic. We saw a lot of escalation in the very micro end of that space. I would say that's balanced out. It's gotten back to a more balanced world. What we saw in the third quarter was strength in the more traditional segments for Paychex. Great. Good to see the strong execution, guys. Yeah, thank you. Thank you. Our next question comes from Bryan Bergin with TD Cowen. It's actually Jared Levine for Bryan today. Mm-hmm. How did the 3Q PEO revenue and Worksite Employees come in relative to your expectations? What is the expectation for 4Q in terms of how Worksite Employees and at-risk health insurance revenue will compare to 3Q? Yeah, I, Jared, I won't get into that level of granularity at this point. We'll report, you know, as we get through the quarter and year-end. I'm not ready to dive into specific operational metrics for the PEO at this point. You know, we called out that the revenue was going to be lower in Q4. That's a function of the topics that we've been talking about relative to insurance. Yeah, I won't go any farther than that. We'll have more to say as we get through Q4. Okay. Then in terms of that 25-50 basis points of potential margin expansion for FY 2024, can you discuss what the primary drivers of that expansion would be? Yeah. I mean, it's an emphasis that the company has had. You know, we're going through the budget process, frankly, after this call is done. We'll start the process of putting our budget together. We just have a mantra to get more efficient where we can get more efficient. Some of it comes from operations, some of it comes from sales, some of it comes from G&A. It's really across the business. Where we see an opportunity to become more efficient, not simply just cut costs, obviously that's important, but also deploy technology where appropriate to become better at doing what we're doing, we do it. I would say that, you know, many of the technologies that you read about and that you hear, we don't trumpet, but we use. We think that advances in things like AI can be a tremendous help to tech-enabled services businesses. We're excited about the potential, we understand the risks, and are actively looking at how we can deploy those technologies to get more efficient, get better at serving our clients. Great. Thank you. Thank you. Our next question comes from Jason Kupferberg with Bank of America. Hey, good morning, guys. I guess there's a school of thought out there. Hey, Efrain. There's a school of thought out there that just, you know, one of the byproducts of the banking crisis could be some tightening of credit. Small businesses find it harder to get loans. They tend to bank with a lot of the regionals, et cetera. I just wondering what your take is on that as we start to look into fiscal 24? It doesn't sound like you guys are really assuming a recession per se in this preliminary outlook for next year. Just wanna get reaction to that to start. Thanks. Yeah, Jason, I think I kind of mentioned it in my remarks and some other questions. I don't think there's any doubt. I mean, prime's at 8% for small and midsize business owners. You talk to any regional bank that I've heard, and there's going to be some tightening of credit. That's part of the reason why we've seen a lot of our customers engaging us on our ERTC product. It was interesting. You know, I would say, as we approach some of our clients, some of our clients were like, "Yeah, I really don't need that." A lot of our clients don't. We're Main Street small business owners. They're not, you know, they're not looking for a handout, and they're probably sometimes a little gun-shy to get out. You know, there's been a lot of talk about auditing this stuff. We had a bunch of clients come that come back to us and said, "Hey, I can use this money." On average, it's $180,000 per client. We've been doing that. We created partnerships with Fintechs during the PPP during the pandemic, and we're also helping our clients from that perspective as well because we've really become a trusted source for our clients to help them when they're trying to figure out how to take advantage of tax programs, of government programs. When you look at the PPP loans, 9% of all of the PPP loans in the U.S. was placed by Paychex. That was more than JPMorgan and Bank of America, you guys, combined. I think, you know, we're continuing to support them and help them, and we'll continue to look for ways that we can help them, access non-traditional, funding sources. I think that's another part of our value proposition that our customers and our CPA partners are appreciating. Okay. Understood. As a follow-up, I just wanted to ask, on the float side of things, maybe a two-parter there. The first part just being, you know, obviously, the unrealized losses have increased with the rates going up, but just wanted to confirm you guys can comfortably meet all the float obligations just with the short-term component. I know you said so far to date, obviously, that's been the case, but just wanted to make sure we shouldn't expect any material amount of realized losses. Then just any thoughts on FedNow coming this summer? Do you see any potential impacts on float if it's adopted by enough banks? Maybe just talk about how your float income breaks down between payroll and the tax pieces. Yeah. Let me take the first part. Yeah, Jason, obviously, when as John mentioned earlier in the call, when you have interest rates rising 450 basis points at the pace it did, and you're holding, you're holding very high quality securities but are at interest rates at 1.5, you're gonna take, you're gonna take, you're gonna see some of the unrealized losses that you see in the portfolio. We hold our securities to maturity, so that really doesn't represent an issue. We've had swings from, you know, +$100 million plus now obviously to this, to this point. Had nothing to do with credit, so there's really no issues there. Understand why you ask and understand all of the concerns that others had. Those securities will roll off the off the portfolio as as they mature. Just to remind people on the call, our average duration's around 3.5 years or so this is relatively quick. No issues there. High quality, we really only invest typically in A or above, and no concerns there. The second part of your question I didn't catch. I was focusing too much on the first part, Jason. Could you repeat it? Yeah, sorry, I was just asking about FedNow with those real-time rails coming out this summer. Just any thoughts on how that could, if at all, impact float balances, float income? Yeah. Yeah. Yeah. Obviously, like we'll see how many banks adopt it, right? Then anything just on your float income, how it breaks down between the payroll and the tax pieces? 'Cause I know. Yeah. Obviously some of the float you hold a lot longer. Yeah, yeah. Good question. Yeah, we've been anticipating that at some point, what, you know, the current landscape of payments, certainly ACH windows, which provide some measure of the float that we have is going to narrow. You, of course, you know the business very well. A lot of our float income is not coming necessarily from overnight payroll. It's coming from taxes, and that should not be impacted significantly under the Fed rules. The other part that I would say and flip around there is that we've stopped, and there's not been a lot of conversations really as much lately about real-time payments. We do think that there will be opportunities in the future, that may be an opportunity to monetize even if you lose some element of a float income. Final point, just advertorial since this is my 12th year now, as you know, Jason. There was a point when our business was heavily dependent on float, 27% or so of net income. We're in a different world right now. We'll manage through it even if it doesn't materialize quite the way we expect it to do. That's a breakdown of the three pieces that I think will impact us going into the future. Okay. Well, thank you. Appreciate it. Okay. Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Hey, good morning, John and Efrain. Efrain, I wanted to go back to your comment on management solutions, payroll, and pricing. Do you think it's fair to assume that considering the inflationary environment we're in, and obviously, that's impacting your costs as well, that the pricing on the payroll side will be higher than normal, maybe not as high as it was last year, but higher than normal? I'll turn over to John some comments on pricing because I think that's that. I think we need to distinguish between pure pricing and value delivered to customers. Let me answer your question. As you know, Kartik Mehta, and everyone on the call knows, we typically have said that pricing is in the 2%-4% range on a realized basis. Meaning it could be a little bit higher for some clients, but frequently or sometimes it's discounted. I don't wanna talk too much to the specifics around pricing next year. I think the pricing environment will not be quite the same as it was this year. I think it was somewhat of an unusual situation given inflation. Having said that, I just wanna limit that comment to the issue of pricing and let and not include value. I do think there's always an opportunity to think about how to add more value to a customer and then charge them for that because they're willing to accept it. I'll let John comment on some of the things that we think about in that respect. Yeah, I think, Kartik, we certainly don't wanna talk about future pricing on this call. I think it's fair to say that we have gotten far more scientific and precise about the ability and willingness of our customer base to pay based upon a series of attributes about the way that they consume our services, the way they wanna be served, and what products that if we attach, we see better stickiness and price elasticity. A lot of AI, a lot of data science, a lot of modeling for us to be very precise in that regard. As Efrain said, I think we try and talk a lot more about value and about how we engage them in the utilization of our products and services. We approached over... for the first time in third quarter, over 100 million mobile uses, interactions with our Paychex Flex product. A vast majority of those are employees engaging the product. We've been doing a lot to really introduce that to not only our clients, but their employees. Now they're getting accustomed to the notification, the way Paychex, the way they can make changes in real time. What we're seeing is people that we can do that with actually see that as a higher value. As you can imagine, it's a higher, it's a better customer experience, and there's also some service margin benefit there at the same time. That's been another lever that we understand as well that we're pushing on. I think what you're gonna see is us continue to understand what things we need to engage the customer around, that if we engage them on those items, it's going to increase the value they get from Paychex. Because of our competitive position, allow us to, I think generate more value to the bottom line at the same time. Sure. Hey, and then just, we've talked a lot about obviously PEO and ASO, and I'm just wondering if you could give a little bit of context as to revenue per client PEO versus ASO. Yeah. I'd say Kartik, the way to think about it is, ASO does not, in general, includes insurances. What you end up getting, you know, and a little bit of price on PEO, on the base product is the added revenue that comes from a benefit attachment, typically workers' comp and also healthcare. Not all clients take healthcare, but when they do, then the revenue can be significantly higher. Perfect. Thanks, Efrain. Thanks, John. I appreciate it. Thank you. Thank you. Our next question comes from Bryan Keane with Deutsche Bank. Good morning. Just a clarification on the preliminary outlook for fiscal year 2024. It doesn't sound like you expect a U.S. recession in that guidance. Is that correct? I guess if we do see a U.S. recession, how would it show up in the numbers, Efrain, because there's definitely a lag impact to. Yep ... you know, to where it shows up in the actual financials. Yeah. Bryan, that's a good point, and obviously, you know, we all hear the same chatter everyone is hearing. Let me just, you know, give an answer to that that's a little bit more nuanced. At this point, I can only tell you what we see right now. I can say, as we said, as we've repeated earlier, we see signs of moderation that we've been seeing frankly since the fall after Q1. We don't see any significant signs of slowing. We just got through the last three months. John gave an overview of kinda what was happening from the selling season. That would've been to us a signal that, hey, maybe something's going on here that we needed to pay attention to, and incorporate. At this point, through the selling season, we haven't seen signs of a slowdown. again, have seen signs of moderation, and we've incorporated that in our thinking. To the extent that we saw a slowdown, obviously, we'd see it by July, and we'd incorporate that in our thinking, and we'd come back and say, "Guess what? Things are slowing down." Don't think that things will occur that way, but it could. The way we think about the year is really, and I've said this probably for the last thre or four years, is in two halves. So I think that our confidence in terms of what we expect to see in the first half is at this stage decent. What do I mean by decent? I mean, we've got enough trending to say something should not fall off the off the cliff in the first half of the year. The Fed has tightened. John said, you know, our clients are gonna be much more impacted by raises, increases in the prime rate than anything else. At this point, they seem to be absorbing where we're at and seems to be absorbing a higher rate environment. The other thing that that I would say is that our thought process is that we're getting close to peak short-term rates. If we put that, all of those factors into the gumbo and then stir it up a bit and see what our view is of first half and look at the micro factors in the business, strength in retirement services, strength in HR, we're seeing good progress on HCM, and then a rebound in PEO, it produces the results we have. The nuance that I would provide to that is that that takes us through, as you know, the end of November. That's the first half. We'll come up for air and see if that the trends that we expected to occur in the back half of the year actually materialize. At this point, it's a little tough to call that nine months out, but that's why we label it preliminary. Right now, the point though, Bryan, after I said all of those words is simply to say, at this point, we don't have anything in our data that's suggesting to us that a slowdown is occurring or is imminent. Now, if the Fed were to decide that it needs to go back to a cycle of 50 basis point increase rates, we're gonna have a different conversation really quick. Don't see that happening. One final point. You know, all of us on the call were wondering two or three weeks ago, were we gonna have a systemic banking crisis on our hands? We certainly were looking at that and concerned about it. It seems like the economy was resilient enough, and the Fed did, or I should say Treasury did the right things in terms of shoring up the banking system. We have the environment we have. We understand what factors are moderating. We think that what this outlook incorporates is our best thinking on the environment. I think that, having said that, our confidence in the second half, obviously will be something that we'll talk about, talk more about as we go through the year. Yeah. Got it. Bryan, I just point you to our Paychex | IHS Markit Small Business Employment Watch reports on our website, and look at January and look at February. We release it every month. Both months, the Jobs Index improved. We didn't see that in any other consecutive months in the prior fiscal year. You know, certainly we don't see, as Efrain said, I'm not gonna reiterate what Efrain said, but even the benchmarks that we would see that would be signs, we've been doing this for a while. And we have a lot of the historical models of what it looks like leading into recession, and we're just not seeing those. What we hear from our clients in terms of the labor market, in terms of their employment, again, moderation, stabilization, they're not signing up for any big pieces. I understand the challenge, and I try to put it in perspective of saying, how can you hear all this on the TV and the newspapers of what's happening, and then rationalize that with what I walk into the office and hear every day. I do think in some respects, I said it in earlier comments, the way I've rationalized it is, you know, we there's two different small business worlds. I think there's a lot of money poured into a lot of tech companies, a lot of people that didn't have to make money, could spend money, could pay whatever they needed to, could hire as many people, even if they didn't have stuff for them to do. I think that bubble is bursting, and you're seeing that being digested. I don't see the foundation of Main Street small business at this point, having those same type of dynamics that you're reading in the paper. I just simply can't put it any other way. We're just not seeing it in numbers. Now, is there gonna be a trickle-down? Certainly the banking thing last week was concerning because that gets contagious. Hopefully, the policymakers and individuals can do things to continue to help support Main Street small businesses, from being impacted from those kind of, irrational, actors, that are doing things that don't make sense. I'll get off that soapbox. No, that was great. Super helpful. Thank you. Sure. Thank you. Our next question comes from Peter Christiansen with Citi. Good morning, John, Efrain. How are you? Good. Good. Just wondering if we can get a sense for the health of the top of the funnel. If we were to exclude the ERTC side of things, what are you seeing from, you know, I know new business formation and also perhaps some share shift from regional self-filers, that kind of stuff would be helpful color there. Thank you. Yeah. Yeah. No, Peter, again, I'll go back. What we see is on business applications, business starts, again, They're back to pre-pandemic levels. I always try to explain to people that when I look at it at five, because we're doing our budget planning, so I'm looking back, you know, for almost five fiscal years now. Fiscal year 19 stands out at me because then you see all this oddity going on in the other fiscal years. You know, business starts are down from where they were historically. That's why when I even look at some of our, you know, retention in the small end, that doesn't surprise me because even in good times or bad times, small businesses starts, two years later, most of them aren't in business. When I look at it, there's good, stable, new business starts. When I looked at our sales for the third quarter, they were strong across the board, not just in ERTC, but across the board. I really, again, I'll go back. I'm not seeing anything on a macro level that would indicate to me that there are macro issues or there are demand issues relative to the products and services that we're offering. Great. Thank you so much. Yeah. You're welcome, Peter. Thank you. Our next question comes from Mark Marcon with Baird. Hey, good morning, John and Efrain. Hi, Mark. A couple of questions. One is basically, you know, in terms of the, you know, the margin guide, you know, or the preliminary thoughts with regards to margins for next year. You know, to what extent, would you expect to see any sort of improvement in terms of the margins, ex the impact of float income? How are you thinking about that? That's a good question. Mark, I don't think float will play as big an impact on margin expansion as it did this year. I will hold the answer to that question until I've gone through the budget process because it will depend on where I end up in terms of float income for next year. We anticipate that it will grow, so that will have a modest impact. It will exert a positive impact on margin next year. Remember, Mark, one other thing is that we called out ERTC as moderating. That's gonna exert a countervailing force. When I pull those two together, I'll figure it out and answer on two, four. I don't think... I think there will be, at the end of the day, likely, real improvement in operating margin when all is said and done. You think there will or will not be? Will. Okay. That's my expectation. I haven't gone through it all. ex quote, we should see some margin improvement. I. And then with regards to, you know, I know you're in the budget process now, but are you anticipating you know, an increase in terms of the sales force, you know, and in terms of the overall headcount within the business, or are the technological, you know, innovations that you're making, you know, sufficient to basically, you know, continue to drive the business with the same headcount? Yeah. Good question. I'll answer it in two ways and then let John give his commentary 'cause I am sure he will be scrutinizing every headcount in the sales budget. The short answer is that where Mark, where it makes sense to add headcount to drive greater sales, we are likely to do that, and I'll let John talk to that. I think you rightly identify something that has been a feature of the company, which is increasingly, if you look at not only in the U.S. but also in Europe, where we also have a growing business, a lot of our sales are done digitally and do not require, at least at a minimum, the level of sales involvement that our field sales force provides. You're gonna have a mix, and I don't think that we know quite yet whether there are adds, but I would be careful because I know our competitors tout their, tout their headcount adds as a precursor or a driver of growth. That is not necessarily where we are at. We can grow without adding headcount, although there are places where we may choose to do that. Let John talk to that issue. Yeah. I don't tout adding expense to the business very frequently. You know, I think that, you know, we're constantly looking to make sure that we have the right go-to-market strategies and the right go-to-market coverage. We are certainly focused on using our vast data sets and analytics and digital engagement as much as we can. As Efrain said, I went back five years ago. You know, our digital, if you think about just in the U.S., I mean, including international paychex.com and surepayroll.com, you know, probably a 20 point improvement in the percent, 20 percentage point improvement in what we're getting there. We're driving analytics to make our sales force more productive. Instead of just cold calling across the market or inside our client base, we're using data analytics and models and triggers of behaviors of people engaging our systems to give them active lists. I think there's opportunity for productivity. We're doing a lot more digital e-engagement inside our applications and actually creating digital experiences to drive more attachment of ancillary products and services. I think when we're sitting down for the budget, we're certainly gonna add sales reps, engaging our strategic partners, doing things that we need to do to cover the market and the market opportunity we have. We're equally balanced on making sure we're making the investments in digital engagement and driving productivity and using the data analytics we have to make sure we're making every rep as productive as they can be. Fantastic. One last one. Did you say how much pace per control ended up increasing over the course of this, of this quarter or this year on a year-over-year basis? I've got some investors that, you know, are under the impression that your pace per control might be up by 300 basis points, and then they're factoring in the ERTC and looking at, you know, the underlying growth. You know, I'm not sure that the numbers are right. Yeah. What did you see in terms of pace per control for this last quarter? We didn't talk about it. I will say this, through the year, we have seen increases in pay per control, or we would say, checks, and it moderated as we've gone through the year. That, in some ways, it's been a tale of two cities. The first half is going to end up being different than the second half of the year. Yeah. Again, just keep in mind, remember where Main Street small business was a year ago in terms of their ability to hire people. They were. Yeah understaffed, desperate to get people. You got the benefit of that hiring up. It's not that there's a deceleration. This has been an interesting year in terms of people getting and us helping them getting staffed up. Now they're staffed up, I'm not expecting that they're gonna add another, you know, a big group of employees, regardless of whether or not there was a recession or not, right? I mean, they're fully staffed, and we would expect a moderation of the growth in the number of employees in our clients. Great. Thank you. Thank you. Our next question comes from Eugene Simuni with MoffettNathanson. Thank you, guys. Hi, John and Efrain. Thanks for squeezing me in. Sure. I just have one quick question. Wanted to follow up on the comment, John, you made on SECURE 2.0 Act. Always very interesting to hear about how kind of regulatory developments can help you guys. Can you elaborate a bit specifically on what the opportunities for Paychex might be from that act? What is the timeframe for when we might see that flow into your, into your financial results? Yeah. Yeah. As we said, we're in our budget, and we're really in our planning stages to figure out how we want to approach the Secure Act 2. We started some education certainly within our base, and we're trying to figure out and scope the size of the opportunity across the market and determine what investment we're going to do that. That's something I think we'll talk about more in the next, in the next call. We're doing a lot of surveys trying to get where people are in their understanding of what it means. There's a huge education effort that I think has to go on, but I think it's a pretty powerful value proposition. Like I said, I think this secular labor problem is gonna continue. I know even we go through a recession, we just simply don't have enough people working. The labor participation rate is just not big enough to meet even a lower demand. We're at three point what? 3.4, 3.5 unemployment. I think the simple fact is small and mid-sized businesses needing to compete against large employers who typically have richer benefit plans is gonna be a secular trend that's gonna continue, and I think we're well positioned to do that. I say that because that's gonna create the opportunity for a 401 plan. The SECURE 2.0 Act, just to give you an idea, pretty much if you're an employer with between 20 and 50 employees, we could provide you and start up a 401 plan, and you would pay Paychex literally nothing because you would net. You'd pay us for a start-up fee. You'd pay us for the other fees that we would have there, but you'd get all that back through tax credit. It's basically you can add the plan, and then if you wanna contribute up to $1,000 to each employee, you can get that $1,000 as a tax credit as well in many circumstances. There, you know, I think there's not a lot of awareness. Look, we found the same thing with ERTC. There are just a lot of small, mid-sized business owners who not even aware these programs exist. Then they have reluctance to participate because whether we wanna like it or not, they have some skepticism about government programs and being on some government list. We're really positioning ourselves as kind of this trusted advisor to help them and help facilitate that. So we're doing a lot of studies on it. We're trying to figure out how big the opportunity is. Certainly we think it's a great thing for small and mid-sized businesses. Again, I applaud the Congress and all the partisanship that goes on in Washington. It's great to see them have a program like this, and I hope there's more programs like this, in the years to come to support, Main Street, small business owners. Got it. Thank you. That's all I had. Yep. Thank you. Our next question comes from James Faucette with Morgan Stanley. Hey, thank you very much, John, Efrain, for all the detail. Yep ... and color. Just a couple of questions from me. First, and I know we've talked a little bit about this both in previous quarters, but now, but can you recap for us a little bit why you think ERTC outperformed what you thought it would do during the course of this fiscal year? Then kinda how that contributes to you thinking that it could slow a little bit in next. Look, I'll just start. John can take from here. Yeah, James. I think that when we entered the year, we thought that there was widespread understanding and knowledge of the program such that as we went further and further into the base, clients would have already availed themselves of the service. What we actually found was that they were anxious to hear and to be educated with respect to the program and the way it worked. Our ability to facilitate their access to the program made them constructive about wanting to participate. The level of understanding was lower than we anticipated, John talked about that, for many reasons, it turned out that there was a much bigger opportunity coming into this year than we had realized. As we get into next year, more and more time has elapsed with the ability to access the programs is running out. One, it relates to a period of time that now will have been 18, 24 months ago. As we round the next year into the beginning of calendar 2024, we think that the opportunity both within our base and in general will have moderated. The back half of the year, we don't anticipate that there will be as much demand or opportunity. Any wanna add, John? Yeah, no. I, again, I would just reiterate, I think this is a good example of how we're trying to approach helping our clients. I think when the program was first announced, we did a lot with the PPP loan program. I talked about that, 9% of all of them, we paired with Fintech companies to be able to facilitate that. We really developed a muscle there to build an automated, simple solution and a educational package and program for both our strategic partners, CPAs, and for our clients to go through. When the ERTC program came out, I think we thought they kinda knew about it, and we're just trying to do general education. I think what we learned early on is that was just not resonating. A lot of people either thought they didn't qualify or weren't sure, or quite frankly, by some of the just hassles and other challenges of participating in to some other government programs. They felt like, "Hey, I don't need this right now, and I just can't tolerate." I think we had two things kind of happen. One is our data science team began to look at actual data models, and we started to be able to pinpoint accurately, be able to go to a client and say, "We actually know from our data that you qualify, and this is how much we're talking about." Now you're saying, "Hey, I can get you a check for $180,000." What you had to do with education, there was some more information, and then we made that a very simple process. One was we were now, instead of broadcasting to all of our clients, we were going with a specific database analysis to a specific client and saying, "We have a high degree of confidence that you spend 10 minutes with us, and we get a few pieces of information, we're gonna be able to get you a check that would be meaningful and worth your time." That's one. We had to overcome all the obstacles. I think simultaneously to that, interest rates started to go up, and the cost of capital started to go up. I think a lot of small business owners who said, "Hey, I don't need it's not worth my time, I don't wanna be associated with a government program, I may get audited." You know, most business owners, small business owners are concerned an audit would put them out of business worse than anything else. I think they were avoiding it. I think as we saw that happening, now the receptivity and the demand that said, "Hey, I really need that $180,000 to bridge inflation, to be able to bridge the cost to capital to grow my business." I think we had those two things, us being more precise in terms of our messaging and getting our sales and our education teams out there. Then second, I think there was some macro pressures on small business owners that created that tailwind that exceeded what we expected. That's really helpful color. Just last thing for me is, you know, Efrain, is you talked about that at least at the initial planning stages, you think margins next year can expand some. Mm-hmm. You know, if I, if I reflect back on where you've talked about your, you know, margin targets in the past, we're kind of getting towards the upper end of that. Yes. Are we at a stage we can start contemplating that maybe, the margin structure can even move above where you've talked about in the past? What would have to happen for that to be the case? Yeah, that's a good question, James. That's the benefit of listening to what I've said over a period of time. You know, if you would've said to me persistently we could be above 40%, I would've urged caution because I didn't know whether we had all of the set of initiatives that could drive us there. The short answer to that is I don't have a great answer. I have a sense of when we're probably getting closer to the ceiling. I do think that you're right in saying that it's been reset a bit, and it's been reset a bit because of technology. Technology keeps giving us opportunities to automate things that we. If you would've said seven years ago, is that a chatbot could be as good or better than a human answering 275 questions that are 90% of what clients wanna know, I would've said, "I don't know about that." The short answer now is that number's not 275, it's probably 375 or 400 questions. Short answer is technology is gonna set the limit, especially in the tech services business. I think we probably have developed some more headroom with some of the actions that we have taken. It's not just pure technology, but I think we've learned to become more automated efficiently. A lot of the initiatives that John started years ago have paid these dividends. That's great. Hey, thank you very much for all the input, John and Efrain. Have a good day. You're welcome. Thank you. Thank you. Appreciate it, James. Thank you. Our last question will come from Andrew Polkowitz with JPMorgan. Hey, John and Efrain. Thanks for fitting me in. Hey, guys. Just wanted to ask, you mentioned earlier that it was a highly competitive selling season. I just wanted to ask, if you could share where that competition is coming from, whether it's newer entrants, usual suspects like the regionals. If there is anything different from history regarding balance of trade. I wouldn't say any new entrants, it's the same suspects. I think, you know, I think what we found was just everyone was more aggressive in trying to go after and grab market share. I'm very proud of our sales team for really outcompeting. Our competitive metrics were very strong for the quarter. I think, you know, in a very aggressive market, and I would say every one of our market segments saw that. I think that's gonna continue. Look, I think very proud of where we are and where we're positioned. I'm sure, a lot of our smaller competitors and those that are maybe, you know, a little more focused in niches that aren't doing as well, as the traditional small business market is doing, will maybe get more aggressive. I feel good about where our value proposition is. I think what we're finding is, as I said, I think our strategic partners, our clients, I think prospects are beginning to put a premium on: A, I wanna be somewhere where they know what they're doing, they're doing it right, and they're stable, and they're going to be able to have the financial capability to continue to invest in their products and services over the long term. I think there may be a little less chasing shiny objects as we go forward. Got it. Thank you. I just had one quick follow-up on op margins. I mean, I've heard the quarter, this quarter, it came out a little bit ahead of the 44%-43% you laid out three months ago. Just wanted to ask if there is anything that came out better than you expected three months ago relating to the expense line. Well, I think, you know, revenue obviously was a little bit higher than we expected. A lot of the flow-through, then drove higher margins, and our expenses were in line with, maybe a little bit better than we anticipated. The combination of that is really what drove better margin performance in the quarter. All right. Great. Thanks, and congrats again. Yep. Thanks. Thank you. At this time, I have no further questions in queue. I'll turn the call back over to John Gibson for any additional or closing remarks. Well, thank you, very much, Todd. I appreciate it. At this point, we'll close the call. If you're interested in a replay of the web, webcast, it'll be archived for approximately nine days on our website. I wanna thank everybody for your interest in Paychex, and hope everybody has a great day. This concludes today's call. Thank you for your participation. You may disconnect at any time.