Good morning and welcome to the fourth quarter 2024 Paychex earnings conference call. With us today are John Gibson and Bob Schrader. After the speakers' opening remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then one on your telephone keypad. If you would like to withdraw your question, please press star and two on your telephone keypad. As a reminder, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Today's commentary will contain forward-looking statements that refer to future events and therefore involve some risks. In addition, the company will periodically refer to non-GAAP measures such as adjusted operating income and adjusted diluted earnings per share. Please refer to their press release for further information. I would now like to turn the call over to John Gibson, Paychex President and CEO. Please go ahead. Thank you for joining us for our review of the Paychex fourth quarter and fiscal year 2024 fiscal results. Joining me today is Bob Schrader, our Chief Financial Officer. This morning, before the market opened, we released our financial results for the fourth quarter and fiscal year ending May 31st, 2024. You can access our earnings release and investor presentation on our Investor Relations website. Our Form 10-K will be filed with the SEC before the end of July. This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days. I'll start the call today with an update on the business highlights for the fourth quarter and fiscal year. Bob will review our financial results for fiscal year 2024 and outlook for fiscal year 2025. We'll then open it up for your questions. As we close out the fiscal year, I am pleased to report that Paychex delivered solid financial results reflecting our ability to navigate changing market conditions by providing both innovative HR Technology and Advisory Solutions that continue to deliver value for our clients and their employees. As the best operators in the business, we are continually finding ways to run our business more efficiently. For fiscal 2024, we achieved 5% growth in total revenue and 11% growth in adjusted diluted earnings per share. These results are a testament to the hard work and dedication of our more than 16,000 employees and the investments we have made in our Technology and Advisory Solutions. Revenue retention remains near record levels, and HR outsourcing worksite employee retention continued to improve and hit new record levels. We believe our sustained high revenue retention demonstrates that our value proposition is resonating in a competitive marketplace. Our client retention for fiscal year 2024 was in line with last year and pre-pandemic levels, with out-of-business losses back to pre-pandemic levels but stable. We continue to see demand for our HR Technology and Advisory Solutions. Our activity and pipelines remained strong and, in fact, increased year-over-year in the fourth quarter, but close rates were softer than historical norms and our expectations. Sales results in some market segments faced headwinds in the quarter. In SMB, we made some adjustments to our go-to-market strategy and in our digital technology stack in the micro segment, which impacted our lead and sales volumes. We believe these are one-time issues which we have addressed. In the mid-market, we have seen some of the same pressures our competitors have mentioned with delays in decision-making and increased focus on cost. Our HR outsourcing, both ASO and PEO, and our retirement business continue to perform well, and we believe the value proposition for those solutions remains strong. The breadth of our solutions, both technology and complete outsourcing advisory solutions, along with the market segments we serve, provides us with the ability to pivot our sales and marketing investments as market conditions change to maximize the opportunity. Small and mid-sized businesses continue to face a challenging operating environment due to complex regulations, a historically tight labor market, and persistent inflationary pressures. Our Small Business Employment Watch has shown stabilization in job growth and continued downward pressure in hourly wages in the recent months. In fact, our May index posted the biggest one-month increase in job growth this year. We also saw improvements in hiring within our client base, with both better checks per client and worksite employee growth in the quarter after a few quarters of declines. As we mentioned last quarter, our data and conversations with clients reveal they are having a tough time finding qualified candidates. As an innovative leader in our industry, we took this as an opportunity to find a way to help these businesses by launching a new program starting in our PEO called the Employer of Choice Playbook. This program combines our digital HR Technology and Analytics with our dedicated HR professionals to work directly with our clients to find, attract, hire, and retain qualified employees. It starts with our digital recruiting and hiring technology, which provides both seamless integrations with the top job boards. This solution streamlines and automates the hiring process for the employer and provides a better candidate experience. Our PEO clients are able to attract top talent by offering a Fortune 500 suite of employee wellness benefits as well. To help them retain employees, our HR professionals proactively work with our clients to leverage our HR data analytics and our retention insights to identify at-risk employees, determine the top drivers of turnover, and implement strategies to engage and develop their people. We are excited to offer a comprehensive solution to help our clients solve one of their biggest problems: hiring and retaining talented employees. We are planning more innovations in this area for all our market segments in the coming fiscal year. Our PEO business has continued to gain momentum with excellent performance in fiscal year 2024. We finished the year with strong results in sales, retention, and insurance enrollment. We have continued to see a shift back towards the PEO offering, both inside and outside our client base. This mixture has a long-term positive impact on lifetime value in our model, particularly as clients attach insurance benefits. Our retirement services business was another strong contributor in the fourth quarter with double-digit revenue growth. As the industry leader in 401(k) plan record-keeping in the U.S., with approximately $52 billion in assets under management and over 120,000 clients, we are dedicated to helping small and mid-sized business owners offer an affordable retirement solution for their employees. According to our own data, less than half of U.S. employers currently offer a retirement plan. We are committed to providing affordable solutions to these companies that will help them offer their employees the opportunity for a secure retirement. Legislation like the SECURE Act and SECURE Act 2.0, the introduction of pooled employer plans and state mandates are helping to address the growing retirement crisis in the U.S., but there is still more to be done. We are committed to educating business owners and industry professionals on available programs, potential tax benefits, and the cost-effective plans available to them and their employees by Paychex. As you know, AI has been a hot topic in our industry and is something we have focused on for many years. Our AI initiatives and investments have been centered around enhancing our customer service model and identifying clients that are at risk, optimizing our pricing and discounting strategies, and driving higher sales productivity through improved marketing and targeting efforts. Additionally, we are focused on harnessing the power of our vast data to drive more value for our customers and continue to drive greater operational efficiencies across the company. We continue to gain recognition for the strength of our technology. For the fifth consecutive year, Paychex Flex, the company's cloud-based SaaS solution, earned an HR Tech Award for Best Small Business- Focused Solution in the Core HR and Workforce category from Lighthouse Research & Advisory. For the tenth time, Paychex was named among the Best Employers in Excellence in Health and Well-being, which affirms our long-standing commitment to our own employees. Paychex was also recently recognized by Forbes as one of America's Best Employers for Diversity. These recognitions and the many product and service awards that we have received in the last year and over the decades are a testament to the strength of our business model, our culture, and our commitment to invest in our business to deliver long-term value for our customers and our investors. In this post-pandemic era, Paychex is uniquely positioned to help small and mid-sized businesses navigate the challenges they face in an ever-evolving world. We believe our value proposition to these businesses remains compelling based upon the breadth and quality of the solutions we can provide. We remain committed to our purpose to help businesses succeed while making a positive impact on our clients, employees, communities, and shareholders. I'll now turn it over to Bob to give us a brief update on our financial results for the fourth quarter and fiscal year. Bob. Yeah thanks John. Good morning everyone. I'll start with a summary of our fourth quarter and full year financial results, and then I'll review our fiscal 2025 outlook. Total revenue increased 5% to $1.3 billion in the fourth quarter, which reflects a lower contribution from our ERTC service, and this impacted revenue growth by approximately 300 basis points in the quarter. Management Solutions revenue increased 3% to $930 million. This was driven primarily by growth in the number of clients served across our HCM Solutions and increased product penetration, partially offset by lower ERTC revenue. PEO and Insurance Solutions revenue increased 9% to $327 million. This was primarily driven by higher average worksite employees and an increase in our PEO insurance revenues. Our PEO saw continued momentum in worksite employee growth and medical plan participant volumes during the fourth quarter. Interest on funds held for clients increased 54% to $38 million. This was primarily due to higher average interest rates and invested balances and lower realized losses on investment sales related to some repositioning of the portfolio that happened in the prior year period. During the fourth quarter, we did recognize a one-time charge of $39 million related to cost optimization initiatives. These initiatives include a reduction of our underutilized real estate, a reprioritization of our technology investments towards AI, and headcount optimization. These measures, along with strong expense management during the year, will allow us to reallocate resources to invest in our strategic priorities as well as continue to deliver operating margin expansion for fiscal 2025 despite the expiration of the ERTC program. Including these charges, total expenses increased 5% to $813 million. Excluding these charges, total expenses were relatively flat for the fourth quarter as compared to the prior year period. Operating income increased 6% to $482 million with an operating margin of 37.2%. Adjusted operating income, which excludes the one-time cost recognized in the fourth quarter, grew 15% to $521 million with an adjusted operating margin of 40.2%. This represents 330 basis points of margin expansion over the prior year period. Diluted earnings per share increased 8% to $1.05 per share, and adjusted diluted earnings per share increased 15% to $1.12 in the fourth quarter. Now I will quickly summarize our full year results. Total revenue grew 5% to $5.3 billion and reflects a lower contribution from our ERTC service, and that impacted growth about 100 basis points on a full year basis. Management Solutions revenue increased 4% to $3.9 billion. PEO and Insurance Solutions increased 8% to $1.3 billion. Interest on funds held for clients increased 47% to $146 million. Total expenses grew 4% to $3.1 billion. Excluding the one-time costs I discussed earlier, expense growth was approximately 3% for the year. Operating income increased 7% to $2.2 billion, and adjusted operating income increased 9% to $2.2 billion with a margin of 41.9%, and that's an expansion of 130 basis points over the prior year period. Diluted earnings per share increased 9% to $4.67 per share, and adjusted diluted earnings per share increased 11% to $4.72 per share. Our financial position remained strong at the end of the year with cash, restricted cash, and total corporate investments of $1.6 billion and total borrowings of approximately $817 million. Our cash flow from operations for the year was $1.9 billion, and that's up 11% from the prior year. That was driven primarily by higher net income and fluctuations in working capital. We returned $1.5 billion to shareholders during the year. That included $1.3 billion of dividends and $169 million of share buybacks, and our 12-month rolling return on equity remains robust at 47%. I will now turn to our guidance for the fiscal year 2025. This outlook assumes the current macro environment, which has some level of uncertainty. Our current outlook is as follows. Total revenue is expected to grow in the range of 4%-5.5%. If you take the midpoint of this range, that is consistent with the preliminary thinking we provided last quarter. And as a reminder, this includes approximately 200 basis points of headwind from the expiration of ERTC. Adjusted diluted earnings per share is expected to grow in the range of 5%-7%. I'll now give you the breakdown of some of the components. Management Solutions is expected to grow in the range of 3%-4%. PEO and Insurance Solutions is expected to grow in the range of 7%-9%. Interest on funds held for clients is expected to be in the range of $150 million-$160 million. Other income net is expected to be income in the range of $35 million-$40 million. Those last two metrics both are impacted by short-term interest rates. We can talk more in the Q&A, but it is our expectation that the Fed begins to lower short-term interest rates as we get into the back half of the year. Operating income margin is expected to be in the range of 42%-43%. This is also consistent with our preliminary expectations around margin expansion, and our effective tax rate is expected to be in the range of 24%-25%. Turning to the quarter, we anticipate total revenue growth of approximately 2%. The first quarter growth rate is impacted by two headwinds. The first is the ERTC headwind that you're all familiar with. The second one is one less processing day in the quarter versus the prior year, and it's one of our largest revenue days. Combined, these two items represent a headwind of more than 400 basis points to revenue growth. We would also expect an operating margin in the range of 40%-41% in the quarter. Of course, all of this is based on our current assumptions, which are subject to change. We'll update you again on the first quarter call. I will refer you to our investor slides on our website for additional information. With that, I'll now turn the call back over to John. Thank you, Bob. We will now open the call to questions. Thank you. Ladies and gentlemen, at this time, the floor is open for your questions. To ask a question, please press star one of your telephone keypad. To get out of the queue, press star and two. In the interest of time, we do ask that you limit yourself to one question so that everyone has a chance to ask their questions. We will take our first question from Bryan Bergin with TD Cowen. Hi, guys. Good morning. Thank you. Maybe we'll just kick off with the demand and the go-to-market commentary that you had there, John. Can you just get more color on your comments on the lower close rates and the go-to-market changes you need to make? I'm curious if that was required because of something in your strategy and sales practices or reactions to just how clients are spending and their changing behavior. Yeah yeah Bryan just step back. I'd say we had solid demand on our solutions for the year. Activity was high across the teams, as we talked about, and you can tell from the results. The HR outsourcing and HR advisory areas are really picking up traction with the market. That's what we're seeing versus the pure tech. And so we certainly are pivoting heavy into that. Retirement also is another area where we can see that. So look, we see good demand for our products and services. The changes we're making are really - we talked about it on the last call - we're really relooking at, as you can imagine, we just went through the last three years of a pandemic year. As the ERTC program ends, we're really refreshing our entire go-to-market talking points, our sales plays, our marketing position, and really focused on the things that we find clients are most concerned about in today's post-pandemic world. Those things are attracting and retaining qualified employees in a very tight labor market. The second thing is being able to get access to affordable benefits with health inflation likely to continue to increase. They've really got to be able to put together a benefits package to be able to go out and compete against larger firms. Then the third thing is access to capital, both constrained capital and cost of capital. I think we made a little tuck-in acquisition of a company out there that we're very excited about, and we continue to expand our digital access to fintechs so that our clients have access to capital during the payroll process as well. We're really trying to retrain our sales team on those new areas. We also are pivoting some of our resources into those market segments where we think there's going to be higher growth as we go into fiscal year 2025. Thank you. We will take our next question from Kevin McVeigh with UBS. Great. Thanks so much. And always super, super helpful commentary. Hey, John, could you maybe talk a little bit about, because I find your commentary in the press release is super helpful. Just, it seems like the environment overall, if we're hearing it right, is still relatively tight labor as opposed to maybe some increase in capacity. Maybe are we right on that? And maybe think about kind of the current environment in terms of clients and where their kind of retention rates are of their employees. Has there been any change at the margin on that? I just want to start there because it feels like some of the macro data employment-related is slowing a little bit, but it definitely, if I'm understanding right, doesn't seem like you're seeing that yet, or am I not thinking about that right? Look, I think on the macro area, what we continue to see is growth and moderate growth. We continue to see wage inflation cool. I would tell you in May in our report, we had the biggest one-month increase there. As we said in our comments, we actually saw growth in checks and worksite employees in the fourth quarter. And that was a positive trend. We started engaging because, again, when you got the economy growing at the rate it's growing, our models would suggest that you'd see more hiring. So to your point, what's going on here? And what we did is we went out and started looking at our analytics and data and to the point, retaining clients is a challenge for small business owners. Second, attracting qualified. And so we started engaging them. We did a lot of surveys. What we found was they have open positions. They're just struggling to find them with qualified individuals. And I think another thing they learned during the pandemic when everyone was just trying to hire just anybody, that hiring just anybody doesn't help your culture or your workforce. And so I think they're being a little more selective. So we rolled out a series of products. We'll have more on the way. We started it in the PEO because that's an area where we have a lot of direct contact with the client and their employees and started doing a lot of comprehensive work both on retention and helping them directly attract using both our technology capabilities as well as our AI capabilities and then directly building recruiting strategies. We saw success in that program, and we're going to look to continue to move that forward as we go forward. We're not seeing any signs of a recession or hearing from our clients or seeing layoffs or seeing those types of things that we would typically see in a recessionary period. Thank you. We will take our next question from James Faucette with Morgan Stanley. Great. Thank you very much. I want to go back a little bit on the changes you were making in the micro segment. Just to be clear, was that something that you felt like you needed to do for your own product, or were you seeing some market pressures, etc., on that segment? When you say one time, how quickly should we start to see some of those sales conversions, etc., come back to more normalized levels? Yeah. Look, let's make this pretty simple. As we got through the selling season, as everyone knows, after our selling season is the time to begin to introduce new technology platforms and other things into our sales and marketing engine as we gear up for the next fiscal year. Look, one of the things we're constantly trying to do is improve the prospect experience digitally from the time of attraction all the way through to running their first payroll and doing as much of that digitally as possible. One of the things that we've been working on were some ways in which we wanted to improve that customer experience in ways that we thought we could enhance digital attraction in the micro market. So think of this as the digital micro market. We made some technology platform changes. We introduced some other third-party capabilities there. To just be blunt, we had some integration issues. Any time you have a disruption in that process, the people bug out of the process. So you just did not have the—you had to leave the conversion issues. Now, we can go back and go after those individuals, but again, it was just not smooth, and we've got that behind us at this point in time. That was what I would say a very specific market segment and a very specific technology upgrade that we were doing. I do believe that that upgrade will end up giving us better conversion rates and better attraction rates as we go into fiscal year 2025. Thank you. We will take our next question from Samad Samana with Jefferies. Hi. Good morning. Thanks for taking my question. So maybe first just on some of the assumptions underpinning the outlook for the year. I guess first, when you think about the cost actions that you did in the fourth quarter, Bob, was that factored in when you gave the preliminary outlook for 2025? I'm just trying to understand how much the cost actions are influencing the EPS growth outlook. And then I have a couple more quick follow-ups. Yeah sure Samad. Thanks for the question. Yeah. I mean, it absolutely was factored in. I'd say the only thing that surprised us about the end of ERTC was that it happened probably a quarter earlier than what we expected. But we knew that it was going to come to an end this year. So we've been really focused all year on preparing for that. John's actually been talking to the team about it for two years, telling us that it was going to come to an end. So we've been focused on our cost savings initiatives, really trying to find ways to continue to enhance our digital capabilities, find ways to be more productive, more efficient while making investments in the business to prepare for this, really focus on not letting new costs in the business. And so we've been working on a plan for 12 months. What you saw as it relates to the cost actions that's been underway for some time, obviously, I wasn't going to communicate it, but I had a high degree of confidence on the execution of those plans, which enabled me to provide the preliminary color around margin expansion that I did on the last call. Great. And then as I just look at the data from this year, it looks like client growth was about 60 basis points if I look at the 745K clients versus the 740 ending last year. And WSE growth, 2.3 versus 2.2, is about 4.5% growth. What are you assuming for, I guess, client growth and WSE growth in the fiscal 2025 outlook? Yeah. So a couple of things. We disclose round numbers there. So the client-based growth was closer to 1% when you kind of have the full numbers and not the round numbers, Samad. And I'm not sure on the worksite employee because our worksite employee growth was upper single digits. It was strong both in ASO and PEO, and it was close to double digits, I'd say, on the PEO. We've had a lot of strength there. So I'd have to look at those numbers again. But the worksite employee growth across both solutions has been extremely strong this year, in particular in that PEO business. Great. I know it's breaking the rules, but I'm going to squeeze a third one in because it was kind of housekeeping questions. You did this last time, Samad. I remember. You're on my naughty end, but. Sorry. I'm habitual once ever. I'm sorry. Was your follow-up question on what the assumption is for next year related to those metrics? Yeah. Yeah. What are you embedding in the guidance, right? Just trying to get an idea of how you're thinking about the building blocks between, let's call it, seats or units versus price action versus retention changing in any direction. Just trying to triangle a little bit more on how that 4-5 or that 4-5.5 range breaks out and what the factors and what underpins it. Yeah. Yeah, Samad. I'd say our growth formula, which is proven, and the 4%- 5.5%, you take the midpoint of that. You got to factor in the 200 basis point headwind from ERTC. I'd say very similar. We're always putting together plans. We're trying to find ways to be more productive from a sales standpoint, trying to sell more and lose less and drive client-based growth. I'd say we're not as maybe dependent on that as others because we have lots of different solutions that we can sell. And we want to get client-based growth. And then the big part of the formula is really going back into that base and getting a larger share of wallet over time. We've driven a lot of growth historically in our ability to do that when you look at kind of the penetration rates in those key solutions. And John really mentioned them, ASO, PEO, retirement. We have a lot of momentum in those businesses, and there's still a lot of runway within the existing client base. Pricing, we've talked a little bit this year about maybe pricing being a little bit of a headwind or a little bit less than our expectations. I will tell you the price realization in our model is still strong. Maybe our expectations this year were a bit high, but pricing in our model is still strong, and that would be a contributor to growth next year, maybe not at the same level it has the last couple of years. But when you kind of put those things together, that gets you close to that growth rate ex-ERTC that's implied in the guide. Great. Thanks again for taking my questions. Appreciate it. Thank you. Our next question comes from Jason Kupferberg with Bank of America. Hi. This is Caroline Latta on for Jason. I just wanted to get in a little bit more on pricing. I know you guys just kind of mentioned it, but typically Paychex would periodically talk about taking like 2%-4% of price in an average year. But given that there are some signs of softness in SMBs, might the lower end of the range be more likely this year? I would tell you this: that our growth formula that we've historically had is well intact. I think that particularly when you even looked, I looked at these numbers, ERTC, there are so many headwinds, things that are difficult to look at over the last three years because you have the PPP, you have ERTC. You got a lot of one-time programs that we were engaging our clients with, which was critical for their success. And that certainly gave us a lot of opportunities to talk to our clients about the value we provide. What Bob said is exactly what we would say. We continue to have good value pricing opportunities in our base, and we have a demonstrated track record that as we bring clients in, we can move them up the value chain, demonstrate value, and get price realization. I think that the historical pricing capabilities that we have in the market, we continue to see, and we continue to believe those are sustainable into the future. Okay. That helps a lot. Thank you so much. Thank you. We will take our next question from Andrew Nicholas with William Blair. Hi. Thank you for taking my questions, and good morning. I wanted to double back on the PEO worksite employee growth that you cited. I think you said close to double digits. You mentioned both this quarter and in past quarters some of the things that you've done and some of the things that are going really well. I just maybe to ask it more simply, how do you get to that number? What are the number of things that you think are driving? Is it competitive differentiation? Is it the market being more receptive to more HR outsourcing? Is it something that you've done with your insurance plans? Is there any way to kind of break down kind of where all these new wins are coming from? Just a really strong number, so I wanted to get a better sense for what's going on in the market. Yeah, Andrew. It is a very strong number. The thing to remember is we did not reach our expectations in terms of worksite growth inside the client base. I mean, if the economy is growing at the rate it's growing, we expected to see a lot more worksite employee hires in the PEO. That's part of the reason why we put this hiring program in place in the PEO because what we heard from our clients there was they had a lot of openings, but they were struggling to find them. These numbers are very impressive, and they're volume-driven. I think we do have a very competitive offering. We did a lot of things on our insurance program. We had strong medical attachment exceeding our expectation. And then the enrollment, based upon the breadth of the offerings that we're providing the employees, the participation rates actually increased as well. So really, pretty much across the board, when I look at it, I think there's increasing demand for HR advisory and HR outsourcing solutions. And again, I remind everybody that's one of the things that I think is going to end up differentiating Paychex is we can go all the way from a pure tech play, which maybe there's a little more choppiness in, all the way up to a full outsourcing play. And when you have inflationary and you're trying to do more with less and you're trying to look at cutting costs, the old play of outsourcing moves in there. So now, do I need to add another person to my HR department? Do I even need to add an HR person? Or can I outsource that? I think there's a growing demand and interest. And I think in an inflationary and where people are being very cost-conscious, outsourcing is one of the key tools everyone goes to. And a CFO knows you go to outsourcing when you want to cut your cost. And we've got the offering to do that. And I think we've positioned our value proposition very strongly against the competitive set that we're going up against. Great. Thank you. That's certainly where a lot of the competitors are moving towards in terms of the spectrum. So I appreciate the color. Better late than never. Thank you. We will take our next question from Ashish Sabadra with RBC Capital Markets. Thanks for taking my question. I just had two quick questions on the first quarter guidance. First one on that, if I understood correctly, 2% revenue growth, that's a material slowdown compared to 5% we saw in the fourth quarter. I understand the one less processing day, but the ERTC headwinds were in the fourth quarter as well. So just trying to bridge that gap on what's causing that slowdown. And then on the margins, the margins at the midpoint of 41%-42% would suggest a modest decline in margins in the first quarter. And so just wanted to better understand the puts and takes weighing on margins in the first quarter and then the improvement as we go through the year. Thanks. Yeah. Ashish, I'm actually surprised it took this long into the Q&A to get the question on Q1. Obviously, the 2% number, I think people would look at that and you really need and have some questions. You need to peel back the onion a little bit and understand it. I'd say that I talked about the ERTC headwind being a 200 basis points headwind on a full year basis. Obviously, that's larger in the first half and in the first quarter, and that subsides as we go through the year. So it's north of 300 basis points. It's a stronger headwind in Q4. And then, listen, processing days, typically, they balance out through the year in a given year. They can have an impact on the quarter. It's not going to have much of an impact on the full year. We're actually losing one of our bigger days of the week in the quarter. So that certainly is a headwind to growth. I think if you take those two headwinds—and again, I'm giving you round numbers here—and you do the math, you're going to get to a growth rate in Q1 that is very similar to the growth rate ex-ERTC that we delivered in the back half of the year. It's very similar to that. And obviously, you got to exclude interest rates because we were still getting a fairly significant lift in interest rates in the back half of the year. But if you look at service revenue and you add in those headwinds, you're going to see a growth rate in Q1 that's very similar to what we delivered in the back half of the year. And I'll remind everyone, we've had a significant acceleration in the growth rate of the business in the back half of ERTC relative to the first half. So I know the print number or the number on the face of it looks weak, but when you factor in those components, you're still seeing growth that's very similar to what we had in the back half of the year. And then on the margin, there's a lot of that is going to have to do with the ERTC headwind year-over-year. I mean, ERTC was highly profitable. It wasn't a 100% margin, but it was pretty close to a 100% margin. And that's where you see a little bit of a headwind on the margin quarter-over-quarter. That's very helpful color. Thanks, Bob. Yep. Thank you. And our next question comes from Peter Christiansen with Citi. Thank you. Good morning. John, I was just hoping we could do a little bit into your middle market commentary on decision delay that you're seeing there. Is that a function of tech issues, or is it high switching costs? Just your thoughts on perhaps how switching costs have kind of trended competitive landscape, what have you. Just it would be great to hear you expand on that dynamic just a bit more. Thank you. Yeah. Yeah. So let me maybe dive get a little deeper into this relative to volumes and what we're seeing. So volumes were up for us relative to proposals across the major groups. And I would remind everybody to generate a proposal in our system. And it's an AI-based system. We're actually then we got to have an engaged client because there's information we want. So this is not, "I drove by a place and think they may be interested in Paychex." This is, "We counted as in our pipeline, really there's a live proposal that we've got information in the clients engaging us." So as we said, in retirement, we saw volumes up in retirement, actually acceleration in the fourth quarter. ASO and PEO strong and stable. PEO very strong, including mid-market volumes were up both in the quarter and for the full year. What we saw there in the fourth quarter in the mid-market was more a delay in decision-making, so longer sales cycles. So we have more active deals in the pipeline today, right, than we did last year at this time going into the fiscal year. They're not closing out and saying no. They're just more there. My sense of it is there's a lot of shopping going on. Again, let's go back. Price-sensitive market. People are going out and say, "Can I get a better deal somewhere else?" Maybe they're not as happy with their current provider or where their current provider is heading from a technology roadmap perspective. And so they're wanting to engage Paychex even more. So the mid-market actually for the year was very solid, very solid from a volumes perspective. What we did see in mid-market to get deals, more of the deals required discounting. So one of the things we look at is what percentage of our deals do we have to give any discount to get? Believe it or not, there's a lot of deals that we don't have to give discounts to get. And then second, what is the percentage of the amount of the discount when we do have to get it? And both of those were up a little bit. The other thing I would say in the mid-market to peel back even more is our average deal size was down. And this phenomenon actually occurred also in the PEO, which was another size headwind even given the great results. And that was in the higher end of the market, the higher end of the market, even less decision-making and slower decision-making. And so again, if you think about it, if your average deal size goes from 75- 72, that may not seem like much, but you spread that across our volume, those three extra or three less worksite employees or checks can add up to be significant. So what we saw in the mid-market was good volume. There's good activity, good proposals, a little slower decision-making. We have a good active pipeline. And what I would say, there's a segmentation from the upper end of that market to the lower end of the market, more buying in the lower end of the market than the upper end. Does that give you some more color, Peter? Absolutely i t does. It's fantastic color. But back on the discounts, I guess on an overall level, promotions, discounts, all that, would you say that that's rising? No i t's stable. It's really stable. All right t hat's super helpful. Thank you John. Appreciate it. Yep. Thank you. Our next question comes from Ramsey El-Assal with Barclays. Hi. Thanks for taking my question. Given the slower growth in Q1, can you help us think through the Q2 through Q4 cadence in terms of our models for management solutions? And also, if I could just tack on, how much M&A contribution are you assuming in the full year guidance? Thank you. Yeah. Let me start with your second question first. And the answer to that is none. I mean, we did do a really small acquisition last year. There may be a few weeks of benefit, but it probably doesn't even round to 0.1. So there's really no assumption around M&A in the model. You know, Ramsey, I don't necessarily want to get into the giving you quarterly guidance here. But what I will say is, obviously, the ERTC headwind ramps down quarter-to-quarter as we go through the year. And so the revenue growth that we see in the model, both total revenue management solutions, is going to accelerate during the year, quarter-to-quarter, based on that ramp down. When I just kind of take a step back and look at maybe first half, back half ex-ERTC, I'd say right now our thinking is the growth rates are similar: front half, back half, maybe a little bit stronger, but not materially different in the back half versus the front half. You saw we did that this year. We have plans in place that we're executing on. But really, the difference in the gating is primarily being driven by the ramp down of ERTC quarter-to-quarter as we move through the year. Hey, we'll get through Q1. I'm trying to provide you guys some color on Q1. And just given the pluses and minuses over the last few years with ERTC, we're trying to help you get close to where you need to be for the next quarter, but not necessarily get into setting a precedent of giving exactly where we expect to be for each quarter. I'll provide another update when we get to the end of the Q1 and we have that call. Fair enough. Thanks so much. Yep. Thank you. We will take our next question from Bryan Keane with Deutsche Bank. Hi. Good Good morning, guys. Bob, just a follow-up on that. On the one less processing day in the quarter, does that just automatically like there's a catch-up in the second quarter, so you'll see the boost, the processing day ends up adding to the second quarter? Is that how it works? Unfortunately, not. I mean, sometimes it does, Bryan. Sometimes it balances out in the quarter. Sometimes it balances out in the year. This year, we actually this year, just the way the calendar falls, we actually lose the day. But the impact of growth on a full year basis is minimal, but it impacts the quarter. So I wish I could get it back in the next quarter, but I don't. But the full year impact is minimal. Okay. And then just on the operating margin component in itself, it starts lower in the first quarter, and then it ramps pretty significantly. Is there cost actions that are doing that, or is that part of the processing, the less processing day that comes back, or just trying to think about the pickup in operating margin? Yeah. There's the less processing day. There's the ERTC headwind, right? Again, the headwind gets smaller as you move through the year. That's high margin. So that's going to have an impact. And then just in general, when you look at our margins, they're typically stronger in the back half than the first half. And that's because of some of the way we recognize revenue around some of the year-end processing stuff in Q3, which is also very high margin. So historically, if you go back and look at our margins by quarter, you're going to see that Q3 and the back half are typically a little bit higher. So those are the big differences. Got it. Thanks for the color. Yep. Thank you. And our next question comes from David Togut with Evercore ISI. Thank you very much. Could you quantify the 2025 revenue or cost benefits from implementing GenAI? You called out use of GenAI in prospecting, and I'm curious if you could go a little deeper into how you implement that in the business and what the financial benefits are? Yeah. I really can't quantify it outside of just looking at how we've historically improved our operating performance without increasing our costs, actually decreasing our costs is the way I look at it. So whether that's in the sales area, where I look at how it's been used to increase prospecting, how we've used it to drive rep productivity. I look at it in the service area in terms of what we're doing from a retention perspective. The biggest probably benefit that we see from it, quite frankly, is in this pricing and price realization area, where we can in real time do a lot of analysis around price realization and price sensitivity at the client level so that as we're both proposing to a prospect as well as looking at the roll-downs of discounts of prospects that have become clients and now their discount is rolling down, how much of that can we get back? We've gotten very sophisticated in understanding what their service experience has been, what their utilization of our product and technology has been. We know those are predictable factors in understanding the value they're seeing us providing. Where we're having the most value being delivered to a client, as you can imagine, we can realize more price appreciation as we benefit them over the lifetime of the client. So nothing specific that I could really pull out, but I can certainly tell you that across the board, if I went and told my team I was going to turn off AI and that sort of thing, they would not be happy about keeping their commitments. Yeah. I see another example, and it kind of tags along to a question that was asked earlier about the PEO performance. Another example where we've leveraged these technologies is in the PEO business. I mean, we talked to you guys about this in the beginning of the year. That was one of our strategies to re-accelerate growth in the business. We had a really strong year last year with ASO, and we knew that we were going to be able to leverage our data and AI models to really go back into that customer base, identify those prospects that were good clients for the PEO model, and really go back in and upgrade them to PEO and be able to do that in a productive and efficient way with low customer acquisition costs. That is one of many things that we did to really improve the PEO performance this year. I think that is a great example on the real benefit it's having in our business model. Now, I'd go back again. I guess we pull ERTC. Without the models that we have from an AI perspective, ERTC would have been a very difficult and manual calculation that we would have had to have done relative to the parameters. And all of that was really done through a data and AI model that was generating reports. And basically, the client was giving us a couple of the missing data points that we needed to be able to complete the application and complete the processing. So if we would have, and I think some providers actually moved away from wanting to even offer ERTC because they looked at it as a very complicated, very labor-intensive type of effort. We know a lot of our CPA partners did not want to touch it at all. And really, as Bob said, it's highly profitable because that was really built off of an AI and data model that we built and automated that entire process. Just following up on your points around service, are you able to use GenAI a lot to create more automated chat and reduce the labor intensity of servicing the client? Yes. And I would say even more to come as we have now began to digitize our entire, from prospect to servicing, all of our interactions with our clients. In 2023, we captured 158 years of call interactions. Now, that means we took the calls. They were recorded. They were transcribed. They are now sitting in a data model where we can use that to do. And then another 250 years of calls in electronic communications between chat and emails that we have between the clients. And all of that data is being used to analyze what are our clients asking us, why are they asking us, and how do we avoid them needing to ask us those questions to start with? So you do that math there. That's the scale of the dataset that we generated in one year by digitizing and leveraging data and AI in our service area. That's service alone, by the way. That doesn't include the millions of SMB companies that we engage in our prospecting and sales process through the years. Understood t hanks so much. Yep. Thank you. And we will take our next question from Kartik Mehta with Northcoast Research. Hey g ood morning John and Bob. Hey. We took a step back at FY2025 and looked at the growth model for the company. I always used to think about net client growth, pays per control, price, and then ancillary sales. On those factors, would you say price is more historical, or are we still at a point where you're getting a little bit better price? Then I'm assuming pays per control then, since they've been so strong, are likely flat. If you kind of look at that growth model, how would you say things are different than historical? I'd say they're similar to historical, Kartik. I mean, if you were to kind of break down the components of it and look at the guidance ERTC, we've talked about pricing has been a little bit higher the last couple of years. I'd say that's getting back in our expectation is that that gets back more towards normal levels. The checks per client, and that's been an up-and-down thing over the last couple of years. And right now in the plan, we're not really assuming a lot of growth. We really have that flattish. And then when you look at maybe some of the larger client size, what we refer to kind of change in base in our HR outsourcing models, we typically see growth there. We had a couple of challenging quarters this year. John mentioned it. We actually saw that turn around a little bit in Q4. Hopefully, that continues. We have a little bit of growth assumed there. I'd say it's probably we're a little cautious there given the macro uncertainty and maybe have dialed that back a little bit relative to where it's been historically. But right now, we're not expecting a big impact, positive or negative. What's assumed in the plan as it relates to macro and employment and those types of things. So I think our growth formula is strong, and what's assumed in the plan next year is in line with where it's been historically. Yeah. Kartik, I think we talk a lot about what do you realize from client-based growth? What do you realize from price? Remember, we got a pretty broad growth formula. And when you look at product penetration, that's been an area that's been historically very strong. And I would say that accelerated during the pandemic. So if I look pre-pandemic to post-pandemic and say what changed, we're exiting the pandemic and entering the post-pandemic era in a stronger position as a company. And we're more profitable. I think we're more agile. We have a stronger value proposition instead of solutions. I think we've established ourselves as a trusted advisor with our clients. I mean, we got over $90 billion of money in our clients' hands from ERTC and PPP. And so that built up a lot of goodwill. So when I look at what we can do from an insurance penetration, what we're seeing in the PEO, remember we sell the PEO both inside the base and outside the base, and we're seeing both of those accelerate. We're seeing our HR outsourcing inside the base. We're seeing 401(k) inside the base accelerating. So that product penetration is something that sometimes gets left out. And that's also a key part of our growth formula as a company. It has been for, as you know, for 50 years. Yeah. John, just a last question. Just on acquisitions, you mentioned earlier in the call the ability to provide clients with access to capital. I'm wondering, as you look at maybe acquisitions, is the thought that you'd want to continue building on that, or would the strategy be to acquire other types of companies? Well, let me talk about M&A in general. I would say another part of our growth formula has been historically M&A as well. That would be one that we've continually looked at. I would tell you that I do find the market getting back to more rational valuations, both directly in our space and then at the adjacencies that we have been looking at historically, where I think there was a lot of inflation. As I see those go back, we're going to continue to be very active in that market. Specifically in the area you're asking the question, we're more interested in expanding our partnerships with fintechs and other companies digitally so that as the client comes in to run their payroll, remember, for most small business owners, the biggest check they're going to write every month is their payroll. So that's a source that if we can provide them alternatives to float some of that or get a loan if they need to repair a truck or something like that in their business. So what we're trying to do is build more partnerships there so that we can actually give them access to capital at the point of funding their payroll. Perfect. Thank you so much. Thank you. We will take our last question from Scott Wurtzel with Wolfe Research. Hey. Good morning, guys. And thanks for squeezing me in. I just wanted to go back quickly to the cost optimization charges and wondering if you can maybe provide a split out between the real estate optimization, the shifting of technology investments, and the headcount actions would be appreciated. And then also, are you expecting any incremental charges related to these in fiscal 2025 as well? Yep. So the answer to the second question is no, Scott. I think we have all that behind us. It's $30 million. I'd say roughly 20% of that is probably headcount related. And then the balance from there is probably split roughly half between the real estate assets and the technology assets. There'll be some more disclosures when you see our 10-K in a couple of weeks around that. But that's the rough breakdown of those costs. Great t hanks guys. Yep. Thank you. Okay. Madison, that wraps it up. Yes. That concludes our question and answer period. I would now like to turn the call back over to John Gibson for closing remarks. Okay. Thank you, Madison. At this point, as we close the call, if you're interested in a replay of the webcast, it will be archived for approximately 90 days. Again, want to continue to thank each and every one of you for your interest in Paychex. And I hope everybody has a great day and a great 4th of July. Take care. Thank you. That concludes today's 4th Quarter 2024 Paychex Earnings Conference Call. You may now disconnect your lines at this time and have a wonderful day.