Paychex Inc Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Bryan Bergin - TD Cowen - Analyst : Hi, guys. Good morning. Thank you. And maybe we'll just kick off with the demand and go-to-market commentary that you had there, John. Can you just give more color on your comments on the lower close rates? And the go-to-market changes you think you're making? I'm curious about what was required because of something in your strategy and sales practices or reactions here.

Question: Kevin McVeigh - UBS - Analyst : Great. Thanks so much, and always super, super helpful commentary. Hey, John, could you maybe talk a little bit about, you know, 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?

Question: James Faucette - Morgan Stanley - Analyst : Great. Thank you very much. I want to go back a little bit on the changes you were making in the micro segment. And 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, et cetera, on that segment? And when you say one time, how quickly should we start to see some of those sales conversions, et cetera, come back to more normalized levels?

Question: Samad Samana - Jefferies - Analyst : Hi. Good morning. Thanks for taking my questions. So maybe first just on some of the assumptions underpinning the outlook for the year. I guess first, when you think about the cost action that you did in the fourth quarter, Bob, was that factored in when you gave the preliminary outlook for 2015? I'm just trying to understand how much the cost action is influencing the EPS growth outlook, and then I'll have a couple more quick follow-ups.

Question: Samad Samana - Jefferies - Analyst : 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 745,000 clients versus the 740,000 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 '25 outlook?

Question: Samad Samana - Jefferies - Analyst : Great. I know it's breaking the rules, but I'm just squeeze in third one in because they're just going to have new questions.

Question: Samad Samana - Jefferies - Analyst : 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 what's called seats or units versus price action versus retention changing in any direction. Just trying to triangle a little bit more on how that 4% to 5.5% range breaks out and what the factors in -- what underpins it?

Question: Caroline North - Bank of America - Analyst : Hi, this is Caroline North 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 Berkeley Paychex would periodically, talk about taking like 2% to 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?

Question: Andrew Nicholas - William Blair & Company - Analyst : Hi. Thank you for taking my questions and good morning. I wanted to double back on the PEO works at 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, like 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.

Question: Andrew Nicholas - William Blair & Company - Analyst : 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.

Question: Ashish Sabadra - RBC Capital Markets - Analyst : Thanks for taking my question. I just had two quick questions on the first-quarter guidance. First one on [tax]. If I understood correctly, 2% revenue growth, that's a material slowdown compared to 5%. You 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 slow down. And then on the margins, the margins at the midpoint of [41 to 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 on the first quarter and then the improvement as we go through the year. Thanks. **

Question: Peter Christiansen - Citi - Analyst : 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 cost? Just your thoughts on perhaps switching costs of kind of trended, competitive landscape, what have you. It would be great to hear you expand on that dynamic just a bit more. Thank you.

Question: Peter Christiansen - Citi - Analyst : Absolutely, it 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?

Question: Ramsey El-Assal - Barclays - Analyst : 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.

Question: Bryan Keane - Deutsche Bank - Analyst : Hi, good morning, guys and Bob, just a follow up on the one last 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 that the processing day ends up adding to the second quarter? Is that how it works?

Question: Bryan Keane - Deutsche Bank - Analyst : Okay. And then 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 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?

Question: David Togut - EVERCORE ISI - Analyst : Thank you very much. Could you quantify the 2025 revenue or cost benefits from implementing a gen AI? You called out use of gen AI and 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.

Question: David Togut - EVERCORE ISI - Analyst : Just following up on your points around service, are you able to use gen AI a lot to create more automated chat and reduce the labor intensity of servicing the client?

Question: Kartik Mehta - Northcoast Research - Analyst : Hey, good morning, John and Bob. If we took a step back at FY25 and looked at the growth model for the company. I always used to think about net client growth, pace for control price, and then ancillary sales. And 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? And then I'm assuming the pace for control, since they've been so strong, are likely flat. So if you kind of look at that growth model, how would you say things are different than historical?

Question: Kartik Mehta - Northcoast Research - Analyst : Yeah. And John, just the 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?

Question: Scott Wurtzel - Wolfe Research - Analyst : Hey, good morning guys. And thanks for squeezing me in. 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 fiscal '25 as well?