Paychex - Q4 2023
June 29, 2023
Transcript
Operator (participant)
Good day, everyone, and welcome to today's Paychex fourth quarter and fiscal year-end 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 Star and One on your touchtone phone. You may withdraw yourself from the queue by pressing Star Two. Please note, this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. John Gibson, President and CEO. Please go ahead.
John Gibson (President and CEO)
Thank you, Stephanie. Thank you, everyone, for joining us for our discussion of the Paychex fourth quarter and fiscal year 2023 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 fourth quarter and full fiscal year, ended May 31st. You can access our earnings release 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 with the call today with an update on the business highlights for the fourth quarter and fiscal year. Efrain will review our financial results for fiscal 2023 and our outlook for 2024. We'll open it up for your questions.
We finished fiscal year 2023 with solid financial results and momentum heading into fiscal year 2024. Total revenue grew 9% for the full year, and we hit a major milestone for the company with over $5 billion in total revenue. I was personally reflecting on this last night. When I joined the company, we were just over $2 billion. It took us six years to go from $2 billion-$3 billion, three years to go to $3 billion-$4 billion, and it took us three years to go to $4 billion-$5 billion, but I remind everybody that was during a global pandemic. Certainly very proud of those results. In addition to the revenue growth at 9%, adjusted diluted earnings per share grew 13% to $4.27, and operating margins finished at 41%.
As we continue to benefit from our continued investments in technology, our focus on driving digitalization in all aspects of our business, and our long-standing tradition of operating excellence. These results are due to the hard work and dedication of our more than 16,000 employees. I'm very proud of what we've achieved this fiscal year. Our industry-leading technology and advisory solutions have made a positive impact on our clients and their employees, and in return, they continue to reward us with additional business and their continued loyalty. Momentum in sales has continued with solid growth in new annualized revenue for both the fourth quarter and the full fiscal year. HR Solutions and retirement were areas of particular strength with double-digit growth. We are well-positioned in terms of our staffing levels and rep tenure heading into the new year.
Revenue retention finished the year near record levels as we continue to focus on retaining and increasing our share of wallet with our high-value customer segments. Client retention was impacted by higher losses due to out-of-business, concentrated mainly in newly formed businesses in the last two years, in financial distress in the lower revenue small clients. We continue to see strong demand for our HR outsourcing solutions, with worksite employee growth over 10% year-over-year. For the year, we've achieved record level worksite employee retention due to our strong and unique value proposition of our leading HR technology and advisory capabilities. Businesses of all sizes continue to navigate the challenges of a very complicated regulatory environment, a competitive labor market, and now tightening credit.
Demand for our solutions remains strong due to the depth and breadth of our integrated offerings, including HR technology, designed to deliver efficiency for both the employer and the employee, our comprehensive HR outsourcing, which leverages the strength of our technology and the experience of a trained HR professional and our outstanding compliance organization, and the need for businesses to offer quality benefits, including retirement, to compete for talent. Our retirement solutions are benefiting from the growing expectations of a retirement plan as a core benefit offering for small and mid-sized businesses. Recent passage of the SECURE 2.0 Act legislation and various state mandates requiring employers to provide retirement services to their employees are making 401(k)s a key benefit for small and mid-sized businesses.
With more state mandates expected to take effect in the future, we expect a strong market for retirement to continue for the foreseeable future, and we are well-positioned as a leader to take advantage of this opportunity. The SMB credit environment has continued to fuel demand for our employee retention tax credit service. Our full-service ERTC offering has helped tens of thousands of businesses obtain tax credits and gain access to funds they need to keep their businesses running and growing. We continue to communicate this opportunity to existing clients and prospects. Industry recognition continues to reinforce the competitive strength of our technology solutions. For the fourth consecutive year, Paychex Flex earned an HR Tech award for Best Small and Mid-sized Business Focused Solution in the Core HR category.
Our consistency in winning these awards and being placed repeatedly in the leadership quadrant of respected technology analyst rankings speaks to our market leadership in HR technology. I'm not only very proud of these results and the performance of the team, but I'm also equally proud of how we achieve these results. We have been consistently recognized as one of the world's most admired, most ethical, and most innovative companies. In addition, we've been ranked as one of the best places to work for people in sales, for women, for diversity, and for our outstanding training and investment in our employees for development. These awards are a testament to how our employees not only get the job done, but do it the right way, and we are constantly looking for new ways we can make ourselves and our communities better.
As we move into fiscal year 2024, we will continue our focus on developing leading customer experiences that combine our technology, our advisory capabilities, and our partnerships to deliver superior value to our customers. Paychex is uniquely positioned to help small and mid-sized businesses navigate the challenges they face in a complex and ever-changing and evolving world. We remain committed to our purpose, and that is to help businesses succeed, and we'll continually strive to have a positive impact on our clients, our employees, our communities, and our shareholders. I'll turn it over to Efrain, who will take you through our financial results for the fourth quarter and the fiscal year, as well as our guidance for fiscal year 2024. Efrain?
Efrain Rivera (CFO)
Thanks, John. Good morning to all of you. I hope you're indoors on this smoky Thursday. I thought we were past it, but not quite. I'd like to remind everyone that today's commentary will contain forward-looking statements. Refer to the customary disclosures that we make. I'm gonna start by providing a summary of our fourth quarter financial results, talk about full-year results, and then finish with a review of our fiscal 2024 outlook. Before I start, I also wanted to add that joining us in the room today, this morning, is Bob Schrader, VP of Finance and IR. Many of you have met Bob. Okay. For the fourth quarter, you saw total revenue increase 7% to $1.2 billion.
Management Solutions revenue was up 7%, a little bit over $900 million, driven by additional product penetration into our ancillary services, which currently is mostly ERTC, and also price realization. We continue to see strong attachment of our HR solutions, retirement, and time and attendance products. Demand for our ERTC service remains strong, as John mentioned, and it contributed approximately 1%-2% to total revenue growth for the full year. Demand for this service, along with our internal execution, have continued to exceed our expectations. While ERTC has been a tailwind, and we expect to demand to continue into fiscal year 2024, it will become a moderate headwind next year, especially in the back half of the year, where it will become more of a headwind.
PEO and Insurance Solutions revenue increased 5% to $300 million, driven by higher revenue per client and growth in average work site employees. The rate of growth was tempered a bit by lower medical plan sales and participant buy-ins, along with continued preference for ASO in this environment. We expect these trends will start to normalize as we progress through fiscal 2024, though it won't be evident necessarily in Q1. I'll talk about that in a little bit. Interest on funds held for clients increased 69% to $25 million, primarily due to higher average interest rates, partially offset by realized losses taken in Q4 as we repositioned the portfolio heading into the back half of this year. Total expenses increased 3% to $776 million. Expense growth was largely attributable to higher headcount, wage rates, and general corp to support growth in the business.
Operating income increased 15% to $453 million, with an operating margin of just under 37%, a 240 basis point expansion over the prior year period. Diluted earnings per share increased 18% to $0.97 per share, and adjusted diluted earnings per share increased 20% for the quarter to, again, $0.97 per share. Let me quickly summarize our full-year results. Total revenue increased 9% to $5 billion, and total service revenue increased 8% to $4.9 billion. As you are all aware, we raised guidance a number of times during the year. Management Solutions increased 8% to $3.7 billion. PEO and Insurance increased 6% to $1.2 billion. Total expenses were up 7% to $3 billion.
Operating income increased 10% with a margin of 40.6%. John mentioned this earlier, that's a 70 basis point expansion over the prior year. The leverage in the model was pretty evident. Other income net increased by over $30 million due to higher average interest rates and average investment balances within the corporate investment portfolio. Diluted earnings per share increased 12% to $4.30 per share. Adjusted diluted earnings per share increased 13% to $4.27 per share. Our financial position remains rock solid, with cash, restricted cash and total corporate investments of more than $1.6 billion and total borrowings of approximately $808 million as of May 2023.
Cash flow from operations was $1.7 billion for the fiscal year, an increase of 13% from the prior year, driven by higher net income and changes in working capital. Free cash flow generated for the year was $1.5 billion, up 15% year-over-year. While it's easy to gloss over those numbers, I think it's really important that when we note that when we report numbers, the quality of our earnings and our quality of our cash is very, very strong, as noted by some of you. Not only do we deliver on the top line, but we deliver in a quality way for the on the bottom line, and we intend to continue to do that.
We paid out a total of $1.2 billion in dividends during fiscal 2023 or 70% of our net income. Our 12-month rolling return on equity was a stellar 48% with an arrow pointing up. Let me turn to guidance for the upcoming fiscal year ending May 2024. Our current outlook, as you saw, is as follows: Management Solutions expected to grow in the range of 5%-6%. PEO and Insurance Solutions expected to grow in the range of 6%-9%. We widened that a bit just to accommodate the fact that sometimes attachment on insurance can vary from quarter-to-quarter and from year-to-year, as you saw last year. Interest on funds held for clients is expected to be in the range of $135 million-$145 million.
Total revenue is expected to grow in the range of 6%-7%. Operating income margin is expected to be in the range of 41%-42%. Other income net is expected to be income in the range of $30 million-$35 million. Our effective income tax rate is expected to be in the range of 24%-25%. Adjusted diluted earnings per share, expected to grow in the range of 9%-10%. This outlook assumes current macro economic environment, which, as you know, has some uncertainty surrounding future interest rate changes in the economy. We have better visibility in the first half fiscal 2024. As each quarter progresses, we have a little better visibility into the remaining quarters in the year.
For the first half of fiscal 2024 and the first quarter, we expect total revenue growth to be approximately 6%. That's the first half and first quarter. We anticipate operating margins for the first quarter to be approximately 41%. It'll help do a little bit on your modeling. We expect PEO and Insurance Solutions revenue to be below the low end of the range for the first quarter, then it'll be solidly in the range. That's our expectation at this point. Before you ask me the question, I'll answer. The first quarter was actually the strongest quarter of the year on PEO last year, as a consequence, the compare will be a little bit tougher than we expect the business to build as we go through the year.
Of course, all of this is subject to our current assumptions, and they can change. We'll update you again on the first quarter call. There's a number of questions because it's, of course, the time when we give annual guidance. If I could just ask for your forbearance on something, which is to say, ask a question and limit yourself to one follow-up. I will say I understand some of those questions will be compound questions, but if it's a five-part compound question, that violates the rules. But just so we can get through the call without going excessively long. With all of that, I will refer you to our investor slides on our website for additional information, and I'll turn the call back over to John.
John Gibson (President and CEO)
Okay. Now, with all the conditions and restrictions that Efrain has laid out for you, we'll now open the call for questions.
Ramsey El-Assal (Managing Director)
Thank you. At this time, if you'd like to ask a question, please press star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Again, that is star 1 to ask a question. Our first question will come from Ramsey El-Assal with Barclays.
Hi, thanks so much for taking my question this morning. Can you comment on the pricing environment? You called it out a little bit in the press release. I guess the question is, are you seeing sort of a window right now for more aggressive pricing adjustments just given the inflationary environment? Or is this sort of, you know, are you feeling now that you're in sort of a steady state, kind of continual, you know, trajectory when it comes to pricing?
John Gibson (President and CEO)
Yeah. Yeah, Ramsey, thanks for the question. Yeah, I would say we're more in a steady state. I feel good about where we are. I think the value of our products and services, I think what we see when we talk about price inside our customer base, they're rewarding us. They're seeing the value we're getting, and as we did last year, we believe we have a pricing of power inside the base, and we'll continue to avail ourselves of that. Then in terms of new clients and prospects in the competitive environment, hey, we've always been in a competitive market, and I see stable pricing. I think as we go through this year, we'll continue to do what we need to do to be competitive in the marketplace.
I don't see any major shifts of change on either side of the pricing equation.
Ramsey El-Assal (Managing Director)
Okay. I wanted to ask also, about retention. Obviously, retention's at healthy record levels. At the same time, you called out a little bit of where you were seeing a little bit of headwind. I think it was from out of business, from newly formed businesses, and I think there was some other color that Efrain provided. If you could just elaborate on that a little bit, I'd appreciate it.
John Gibson (President and CEO)
Yeah, yeah, Ramsey, I think this has been pretty consistent, and I think on all the prior calls, I said probably as we expected. We continue to really focus our efforts on the high-end part of our valuable clients, particularly in the HR outsourcing there. We continue to maintain both in the PEO and ASO, record retention, from a revenue and client perspective there. Where we did see, and we had near record retention overall across the business, again, because of that focus that we're having and the things we're doing, from driving value in our high-value customer segments. As we expected, we did see some out of business. When I pull that back, what you're seeing is exactly what I thought we'd see.
We had a very high number of new business starts two years ago. In almost every model, I don't care whether we're in a recession, good times or bad times, a business starts, and in the first two years, about half of them are gone. I'm not surprised when we're saying we kind of expected that to be the case, and that's what we saw on kind of the client retention side. Again, even if you look at the client retention side, we're back to where we were pre-pandemic levels, so nothing dramatic there. I'd say that's more stabilizing, and we kind of expect that kind of more typical, stable kind of client attrition to occur as we're going into 2024.
Ramsey El-Assal (Managing Director)
Got it. Thanks so much.
John Gibson (President and CEO)
Mm-hmm.
Operator (participant)
Thank you. Our next question will come from Jason Kupferberg with Bank of America.
Eric Dray (Senior Equity Research Analyst)
Hi, this is Eric Dray on for Jason. Thanks for taking the question. I had a question, just kind of high level. you know, we've seen small businesses be really resilient, kind of seems like the macro may avoid a hard landing. Curious about kind of trends you're seeing among different client groups. you know, anything to call out, maybe blue-collar versus white-collar, any color you can add there?
John Gibson (President and CEO)
Yeah. Look, I think, again, not seeing anything, Eric, that's out of the norm. I think generally, we've continued to see the hospitality. When you go back and look at our jobs index, hospitality has probably been the laggard. Leisure and hospitality have been the laggard through the course of the recession. What we've seen there is they've really made a good, strong comeback, I would say, in the back half of this fiscal year for us and are getting back to what I would call kind of level employment levels of the other segments. Not really seeing anything specifically out of the ordinary. Certainly in the low end of the market, you're seeing a lot more of the small companies, goes back to what we said on the retention side.
Newer startups, smaller companies, finding more pressure relative to inability to pass price, and so they're being squeezed by inflation, and then also the credit, the credit situation.
Eric Dray (Senior Equity Research Analyst)
Okay, great. Thanks. On the... This one's for Efrain. On the float guidance, kind of two parts. What are you thinking about for interest rates? You know, what are your thoughts on kind of managing duration? I know the question comes up every call, but thought I'd ask. Thanks.
Efrain Rivera (CFO)
So what we're thinking and then how we're managing, I'll break those two. I mentioned in the previous quote that I was really concerned about a sharp decline in rates in the first half, so first half of 2024 and the end of this year, calendar year. I don't think that's likely to happen. At this point, our thinking is that there'll be a couple of rate increases as we go through the first half of the year, and likely to see some rate decreases as we enter next year. Certainly, Jerome Powell's comments recently would seem to indicate that's where we're going.
I think, we think, our assumption is that in the first half of calendar year 2024, or second half, you're gonna see rate decreases. Net-net, that's what's incorporated in our guidance. While we could adjust and play games in terms of where we are with futures, that's what our thinking is. As we get through the year, in the back half of the year, we'll update kind of where we're at. As to positioning the portfolio, you know, my bias is to go long as we go through the year to mitigate what in 2024 is likely to be a set of rate decreases. I can't call it any closer than that.
I think that our current numbers kind of support, that kind of scenario. Stephanie?
Operator (participant)
Thank you. Our next question will come from Rayna Kumar with UBS.
Rayna Kumar (Managing Director of Payments, Processors, and IT Services Equity Research)
... Good morning. Thanks for taking my question. Can you talk about what booking was? Hello. Can you talk a little bit about bookings in the quarter? Anything to call out on different customer sizes and products where you're seeing strengths or weaknesses?
John Gibson (President and CEO)
Look, we actually saw strong demand continuing. You know, I would say actually, we actually saw some acceleration in the fourth quarter when you look at it. The back half of the fiscal year was actually stronger than the first half, which it was a pleasant thing. HR services, our HR solutions continued to resonate in retirement. We even saw a pickup in the low-end digital end of our business in the fourth quarter, which was nice to see. In fact, I would say the PEO had improvement in Q4 as well, which was an encouraging sign that some of the changes and of approach that we've been working on are beginning to get traction.
It's early there, and the key part of that season is in the first quarter, which bleeds into the second quarter. But, again, very pleased with the strong demand that we saw across the platform. I think we've got a good set of products and services. There's strong demand in this environment across all the market segments.
Rayna Kumar (Managing Director of Payments, Processors, and IT Services Equity Research)
Got it. It's very helpful. Just a quick, really quick follow-up to stay within Efrain's guidelines here. Could you call out the ERTC contribution just for the fourth quarter?
Efrain Rivera (CFO)
No, we didn't. I think right now we're gonna stick with it's 1%-2% on growth for the full year. That converts from a tailwind into a headwind next year. That's as far as we'll go.
Rayna Kumar (Managing Director of Payments, Processors, and IT Services Equity Research)
Got it. Okay. Thank you.
Efrain Rivera (CFO)
Yes, you're welcome.
Operator (participant)
Thank you. Our next question will come from Andrew Nicholas with William Blair.
Andrew Nicholas (Equity Research Analyst)
Hi, good morning. Thanks for taking my questions. was gonna ask first on kind of M&A within Paychex. If you could just kind of give us an update on your ambitions, both in the near term and medium term. This is definitely a compound question, but a preference between HCM and PEO and anything you could say on valuations.
John Gibson (President and CEO)
Yeah, yeah. Andrew, thanks for the question. Our ambitions remain the same. We're trying to find opportunities to meet our strategic objectives and at the same time, make sense financially. The latter has been more challenging in the environment, I would say, over the past few years, but I think we've certainly began to see some change in the market dynamics and our pipeline is beginning to expand with opportunities that I think are more realistic for us to consider. I don't think our focus has really changed. We're gonna continue to look for tuck-ins that help us kind of add scale in new markets or expand our product suite.
We're looking for capability enhancements, you know, particularly in the digital area, digital capability, data analytics, HR analytics. We're constantly looking at numerous adjacencies as the market continues to evolve, and looking for new growth platforms that are adjacent to our current suite of solutions, and really help us continue to deliver that value proposition to small, medium-sized businesses to help them succeed. Again, small tuck-ins, capability enhancements, and new growth platforms, that's our areas of focus, and we're gonna continue to just be mindful of making sure we're getting good deals and not overpaying.
Andrew Nicholas (Equity Research Analyst)
That's helpful. Thank you. For my follow-up, I just wanted to ask on kind of the margin guide for next year. I think last quarter you spoke to a preliminary target of 25 to 50 basis points. I think, you know, the 41%-42% range you put out this morning is a decent bit higher at the midpoint. If you could just kind of unpack that a little bit. What's changed in terms of your outlook, if anything, or if it's just a matter of rounded numbers, and that's totally fine as well. Just trying to get a little bit more insight there. Thank you.
Efrain Rivera (CFO)
Yeah, I guess I'd answer that in a couple ways. Look, March is preliminary, meaning that we haven't gone through a plan. I think that John's continued a tradition that we've had in the company, which is to say, where can we find sources of leverage in the P&L? Obviously, mix has an impact on that, Andrew, as you're aware. I mean, if you have more PEO, you have less opportunity. You have more Management Solutions, that gives you more opportunity. I would say we went through a pretty disciplined process in the, in the planning process to see where there were opportunities for leverage, uncovered them, and that's what you're seeing in the guidance. I'd say one other thing that's really important.
The process of planning a year is a 365-day activity. If we get through the first quarter, if we go through, we see opportunities both on the investment side and also on the cost side, we go for it, and we challenge ourselves to find those opportunities. I think that in addition to the fact that that was a by-product, but an aim of the planning process, we think in those terms. Because you have to go into the year with multiple levers to find leverage if you need it. We're, as we speak, thinking about, okay, how can we even do better or offset any potential issues that might come up in the year? It is that.
There's a little bit of planning, and a little bit of DNA.
Andrew Nicholas (Equity Research Analyst)
Perfect. Thank you.
Efrain Rivera (CFO)
Yep.
Operator (participant)
Thank you. Our next question will come from Kevin McVeigh with Crédit Suisse.
Kevin McVeigh (Managing Director)
Great, thanks. I'll just have one-
Efrain Rivera (CFO)
Hey, Kevin.
Kevin McVeigh (Managing Director)
To make up some time. Hey, Efrain. Hey, pardon me. You talked a little bit about, I think, kind of revenue retention versus client retention, and revenue retention being at an all-time high, despite, kind of, I think, a little shift in client. Can you help us frame what the delta is there? Kinda what it is today and kind of where that's been historically, and I'd imagine it's probably narrowed over time, but is there any way to frame that a little bit more?
Efrain Rivera (CFO)
Yeah, yeah. You know, look, when it was approaching the mid-eighties during the pandemic, but that really is, in some ways, kind of an outlier. When we reported last year, which is kind of like one year post the midpoint of the pandemic, I'm sorry, again, the midpoint of the pandemic, we were between 83 and 84, and this year we're between 82 and 83. As John mentioned, we saw some larger losses on the low end of the market. I'll frame that in one second. That 82-83 is consistent with where we've been in prior years. There's nothing unusual about that.
What was unusual during the pandemic was that the number of bankruptcies, or what we call involuntary losses, was much lower than it normally has been. There's obvious reasons. I don't need to tell everyone in the, in the, on the call about PPP. A lot of those clients kind of got through the client base, to John's point. What was going on was that you had a pent-up group of very small clients that were being propped up a bit by funding. In some ways, the losses were higher because of that. I think we're now back to a more normalized environment in terms of losses. I wanna make an important point, and John referenced it. We put a lot of emphasis on revenue retention, especially among high-value clients.
What's not different or what is different from the pandemic, is that our revenue retention is higher than it was pre-pandemic. We're at record retention levels from revenue. That's where we put a lot of our focus on, and I can, you know, I won't do it, but we could cite many efforts that go into retaining our highest clients so we can deliver, you know, approximately 88% revenue retention. That's important. That's an important number for us. While in the past, we talk a lot about unit retention, nothing wrong with that, you want that. The reality is that what's become much more important is that you save and you retain your highest value clients.
While our unit retention is in line with what it was pre-pandemic, our revenue retention was higher and has remained higher and will be an area of focus going forward.
John Gibson (President and CEO)
Yeah, Kevin, the thing I would add to that, I would remind everybody, because, you know, we go back and look at this over the last, you know, four to five years. When we say pre-pandemic levels, you know, you go back to 2019, and if you got our transcript, what you would also hear in 2019 is that on a client retention, that we actually had historical high client retention back in 2019 as well. We are returning on the client side to levels that historically for Paychex would have been historical highs in terms of client retention. As Efrain pointed out, we've had a lot of focus on what we need to do to drive better retention in our high-value segments, and we've been very successful to do that.
I think coming out of the pandemic, the value that we've demonstrated to those clients in terms of both our technology enhancements as well as the advisory support that we've given them through very challenging times, they rewarded us. They rewarded us by buying more from us. They've rewarded us by giving us the opportunity to have a better pricing for those products and services because they see the value, and they've rewarded us with their loyalty.
Kevin McVeigh (Managing Director)
Very helpful. Thank you.
Operator (participant)
Thank you. Our next question will come from Bryan Bergin with TD Cowen.
Bryan Bergin (Managing Director)
Hey, guys. Good morning. Thank you. I wanted to dig into Management Solutions here a bit more and maybe some of the underlying growth driver assumptions for 2024.
Efrain Rivera (CFO)
Yep.
Bryan Bergin (Managing Director)
When we look here, you know, just this year, in 2023, I see total company client growth of-
Efrain Rivera (CFO)
Yeah
Bryan Bergin (Managing Director)
like a point and a half in 2023, and you're citing-
Efrain Rivera (CFO)
Right
Bryan Bergin (Managing Director)
Increased product penetration and price realization. Can you kind of roll that forward for us here? Can you give us a sense on how you're thinking about the pieces here across the client growth versus, you know, pricing versus product attach?
Efrain Rivera (CFO)
Yeah. Yeah. I would say, Bryan, two things is that, you know, we have said that typical client growth in a year is gonna be in the 1%-3% range. We're on the low end of that range. We expect to be middle or higher next year. That's part of the equation on the pricing side, we're typically in the 2%-4% range, although in recent years, higher than that, we're on the mid to maybe perhaps a little bit higher than mid-level on the pricing side. Those are sort of the basic elements. Then you got mix and additional product penetration, driving the remainder of that. Now, if you start reconciling me, I gotta take the negatives, too.
The negative is, I'm gonna get some headwind from the RTC, which you will see on the Management Solutions side. When you triangulate all those pieces, that's where you get to our 5% to 6% growth.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Okay. How about client employment there? I guess specifically in 4Q, how did it compare to 3Q?
Efrain Rivera (CFO)
That's a good question.
Bryan Bergin (Managing Director)
for 2024 as well.
Efrain Rivera (CFO)
Sorry, I started talking over you. Apologize, Bryan. You were saying 3Q-
Bryan Bergin (Managing Director)
No, no worries.
Efrain Rivera (CFO)
Q4. What were you saying there?
Bryan Bergin (Managing Director)
Yeah. As you think about client employment, I'm curious about how you're factoring that for 2024.
Efrain Rivera (CFO)
Yes.
Bryan Bergin (Managing Director)
Also, I think you guys were assuming 4Q was gonna be relatively flattish from 3Q.
Efrain Rivera (CFO)
Yes.
Bryan Bergin (Managing Director)
Did that play out or was that different too?
Efrain Rivera (CFO)
Yeah, that played out. Going into next year, we expect to be flattish. You know, I will say that, I mean, you know, you always have to have an element of caution on the impact of higher rates. I mean, there are levels there that would cause me to get a little bit more concerned than I am right now. We'll have to play that out, and that definitely would have an impact on worksite employee growth. I think it's manageable, and we've taken that into account in our plan. At this point, we're not expecting that is going to change as we go into next year.
Bryan Bergin (Managing Director)
Okay, makes sense. Thank you very much.
Efrain Rivera (CFO)
Thanks.
Operator (participant)
Thank you. Our next question will come from Bryan Keane with Deutsche Bank.
Bryan Keane (Managing Director and Senior Equity Analyst)
Hi, guys. Good morning. Hi, how are you doing?
Efrain Rivera (CFO)
Good.
Bryan Keane (Managing Director and Senior Equity Analyst)
I just wanted to-
Efrain Rivera (CFO)
Go ahead.
Bryan Keane (Managing Director and Senior Equity Analyst)
Sorry. Yeah, I just wanted to follow up on the, on the client growth question.
Efrain Rivera (CFO)
Yeah.
Bryan Keane (Managing Director and Senior Equity Analyst)
It sounds like you expect it to go up a little bit, you know, higher than it was. It was on the lower end of the range, and then it'll go up.
Efrain Rivera (CFO)
Yeah.
Bryan Keane (Managing Director and Senior Equity Analyst)
Is that a function of what you're seeing in the sales channel, or is that a little bit of retention, just given that maybe some of the smaller clients that churned off during the pandemic, you won't have that same issue as you go into this year?
Efrain Rivera (CFO)
Yeah, Bryan, two answers to that is, and John has mentioned this, because we generally don't go into this level of detail, but we saw a pretty strong unit growth in the back half of the year. It wasn't a sales-driven issue. It was really more of a retention-driven issue based on the factors that we talked about earlier in the call, i.e., just to go one level deeper, we all remember that one of the anomalies in the pandemic was that new business starts really accelerated. I think to this day, a few people can completely explain it. We benefited from that unit growth.
As John said, we know a number of those clients are gonna go out of business. After two years, we did the analysis that we all looked at, and a lot of those clients did not survive once the PPP and other government stimulus went out of business. I'm sorry, once that stimulus was gone. That's primarily driver, somewhat of an anomalous situation, I think that will return to more traditional patterns as we get into next year. That's our expectation.
Bryan Keane (Managing Director and Senior Equity Analyst)
Got it. The guidance looks pretty consistent, you know, as you look at the revenue and the margins, you're not wildly off from the first half to the second half, sometimes there's bigger changes there. Any kind of key macro factors that you watch that we should be watching that could move it up or down, that could change at least maybe as we get into the second half, as we think about the macro?
Efrain Rivera (CFO)
Yeah, I'll let John talk about it too. You know what I'd say, Bryan, is, look, everyone on the call was worried about a crash landing as we moved to 2023. Look, I mean, there was skepticism in the market as to whether we were gonna be able to hit our numbers. I remember those conversations with investors, I assured them of one thing that continues to be the factor or the environment that we're seeing now, which we're not seeing dramatic changes in the environment, and we would start to see them and exercise the appropriate level of caution if we did. We're gonna look at what's the impact of these interest rates at this point. Small businesses seem to be absorbing them.
They seem to be getting what they need to be able to fund their businesses. We don't think that will last forever. There are rates at which it's gonna prove to be difficult. I would say what's happening on the macro is really important. The internal stuff, we can manage that. We will manage that. And that said, too many people that look, if we have to pivot inside the base, there's a lot of opportunity inside the base. We'll pivot inside the base if the external environment doesn't give us opportunities for growth. John, do you want to add anything?
John Gibson (President and CEO)
Yeah, no, I think the other thing that I think to keep in mind a little bit about the macro, again, we'll go back to the macro side. I look at our small business index. I look at the start of this calendar year. We went the first three months, the index actually went up every month. It went up for three consecutive months, and then it sort of stabilized. We've continued to see that. As Efrain said, we probably expected in the first fourth quarter, we're always kind of sitting here waiting for, you know, employment to go down, and it, and it didn't.
Actually, I would say I was actually a little pleasantly surprised at where we were on checks and where we were on work site employee growth inside the base of clients that we had. I'm continuing to see that hiring is also an issue, and staffing is continues to be an issue of our HR concerns. We look at what are the questions and issues that are coming into our HR consultants. We continue to see that to be an issue. I do think you're going to see something interesting here that we've probably not seen. Small and mid-sized business owners are scarred by their experience of employment over the last several years, and they fought to get back to staffing levels.
I think what's going to be interesting is, they're going to be very hesitant to let go because I think they remember what it was like trying to find talent, and there's just simply not enough labor supply here. I think it's going to be very interesting who kind of wins this tug-of-war, back and forth relative to employment. The other thing that we see is we're seeing a lot of non-traditional labor being tapped by businesses, gig workers, contract workers, maybe a little bit more part-time. What I'm curious about to see are, will those be the first things to go?
Would that before a small business owner is going to let go permanent staffing that they've got, that they're paying every week, are they going to try to ride it out by tightening in other areas, such as this non-traditional gig employment that's kind of sprung up? The labor market is a very, very interesting thing, I think, for us to look at and study right now, and I don't think it sets up for traditional recessionary models that people have built. That's just my, you know, pontification based upon my conversations with what we're hearing from clients and what we see in our, in our, in our, in our data.
Bryan Keane (Managing Director and Senior Equity Analyst)
Super helpful. Thanks, guys.
Efrain Rivera (CFO)
Welcome.
Operator (participant)
Thank you. Our next question will come from Scott Wurtzel with Wolfe Research.
Scott Wurtzel (Director Equity Research)
Hey, good morning, guys, and thanks for taking my questions. Just on the expense side, wanted to see if you guys can just go over maybe what some of your top investment priorities are over the next 12 months, and sort of folding into that, you know, how you're thinking about maybe incorporating generative AI into your business as well?
John Gibson (President and CEO)
Yeah. Investments are in growth, in growth. Those are probably the top two. You mentioned digital. I mean, we've been making a lot of investments in the digital area, both in terms of our sales and what we're doing from a go-to-market perspective, which we're very happy with, and how we're leveraging technology AI in the back office. I'm very pleased with several things that we've got going on. We've been actively leveraging AI for several years across every area of the business, driving efficiency, delivering a lot of our large client... One of the things I keep telling people is, you know, we're one of the few players in this industry that has the size of data set that we have.
I do think in these type of, in AI, you've got to have a large data set. We're using it in customer service. We're using it in risk. We're using it in finance. We're using it in our HR outsourcing advisory capacity. We're building it into our products, in our retention insights products. There's a lot of investment that we're making and a lot of learnings that we have in terms of how we can digitize the front office and the front of house and kind of the back office of our business. That's going to be an area that we continue to invest and continue to explore.
Scott Wurtzel (Director Equity Research)
Got it. It's very helpful. Efrain, just a quick clarification on the float income side with the guidance. I'm wondering if you could, you know, maybe help us out with how you're thinking about client balance growth for the year?
Efrain Rivera (CFO)
client balance growth, roughly in line with wage inflation, which is to say low, low single digits.
Scott Wurtzel (Director Equity Research)
Great. Thanks, guys.
Operator (participant)
Thank you. Our next question will come from Kartik Mehta with Northcoast Research.
Kartik Mehta (Executive Managing Director and Director of Research)
Hey, good morning.
Efrain Rivera (CFO)
Hey, Kartik. Are you battling the smoke there in Cleveland, too?
Kartik Mehta (Executive Managing Director and Director of Research)
You know, yesterday was a lot worse than it is today. It's a little bit better today, but thank you for asking, Efrain.
John Gibson (President and CEO)
You should go away, Kartik.
Kartik Mehta (Executive Managing Director and Director of Research)
Will do so. yeah, I'm wondering just on Paychex for control, Efrain, I know they've come down obviously from pretty high levels, and I'm wondering if what your expectations are for FY 2024, not only for the payroll business, but also the PEO, and if you're seeing anything different?
Efrain Rivera (CFO)
Yeah, two good questions. Flattish, I guess, is the short answer to what we expect for 2024. Don't expect too much in terms of in-client base growth, and that's a mix. I think our larger clients are doing fine, and in some cases, adding employees who look at it. Smaller clients, less so, and then you've got to factor in what your anticipated losses are. You always tend to lose a little bit higher than what you gain in a given year, and then you expect your in-client, the clients in the base to grow the worksite employees.
This is an environment where I don't think it's gonna be robust in terms of hiring, in part, because of what John said earlier, which is that many businesses would like to hire, but just simply aren't the people who are there, who are available, and also they figured out how to do it without people. They probably will be, as John mentioned, less inclined to perhaps get rid of them. On the PEO and I'd say also the ASO side, our worksite employee, we had worksite employee growth this year. We expect that to continue into next year. You could see solid worksite employee growth as we see a rebound going into next year.
overall, and I think that Bryan asked this question, it's not gonna be a significant driver of revenue growth. Perhaps in PEO, but not on the HCM side.
Kartik Mehta (Executive Managing Director and Director of Research)
Just one follow-up. John, I'd be interested in your, the thoughts on kind of job openings. You know, we see all these numbers, JOLTS numbers, but seems like, employers have become cautious. Just your perspective on what you really think job openings are as you look at your customers versus maybe what we see in the news.
John Gibson (President and CEO)
Yeah, Kartik, I go back to what I said before: We continue to have clients that are wanting to fill open positions. I've not seen that change. I would say that they're being more successful in filling those positions. We've certainly seen that, and we've seen some recovery. I mentioned leisure and hospitality in particular, which was well behind and had good recovery in the back half of our fiscal year here.
I do think relative to they're not maybe opening up as many positions, I would also tell you that, one of the things that I think did happen is when we were in the great resignation, which was probably 18 months ago, that seems like forever now, but really only 18 months ago, pretty much a lot of business owners were thinking, "Every position I have needs to be posted, because I've got to assume that I'm going to potentially lose those positions." I think there was a lot of postings for jobs that people were passively, looking for.
I think some of the contraction that we've seen in the postings are more of business owners being a little more disciplined about what am I actually going to hire, and being out in the market and focused on that. I don't know if that makes sense or helps you.
Kartik Mehta (Executive Managing Director and Director of Research)
It does. Thank you both. I really appreciate it.
Efrain Rivera (CFO)
Yep, you're welcome.
John Gibson (President and CEO)
I may add that those individuals that are using our onboarding and recruiting, like, experience in Flex are realizing about a 20% improvement in their time to hire. Just if there's any customers or prospects on the phone.
Operator (participant)
Thank you. Our next question will come from Eugene Simuni with MoffettNathanson.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Thank you. Hi, guys. Good morning. Wanted to ask a question about the PEO. Kinda we expected the kind of the deceleration here, and you highlighted again insurance, healthcare insurance attach rates as one of the drivers. I was wondering if you can elaborate a little bit on that. Kind of where are you seeing softness in healthcare insurance attach? What kind of businesses? I think that would be helpful to hear just because you know, there's so much variability about around I feel like the PEO industry in terms of this healthcare insurance rate attach, and it would be helpful to hear specifically in your client base, what you're seeing.
You know, related to that, as we are looking for the re-acceleration in the PEO, and as you're kind of guiding to that, what gives you confidence that this there will be pivot there over the next 12 months?
Efrain Rivera (CFO)
Hey, Eugene. Let me start, and then John will provide any additional comments. With us, it's less about verticals, although I'll caveat that in a second. It's really more about where we derive revenue on the healthcare side, and that flows through the P&L, and that's the state of Florida. For us, on the PEO healthcare, as it relates to revenue, really, it's a Florida game, primarily. The anomaly. When you talk about Florida, you know immediately that you're gonna overindex on leisure and hospitality. So.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Hmm.
Efrain Rivera (CFO)
A bit of what's going on is it depends on what new clients coming into the base are and whether customers in leisure and hospitality are really interested in offering healthcare to the clients. Now, a number of them do. And that's not all clients in Florida, to be fair, that's probably too much of a generalization. It was more of a regional issue than it was, I'd say, as it affected revenue than it was something else. Why do we feel more comfortable? Because we have put a tremendous amount of focus on it.
That's not to say that guarantees success, but I would say as we saw what was going on, we took a lot of measures to prove that aren't gonna necessarily, again, be evident in the first quarter, but should be evident beyond that. There were things in which we've talked about in prior calls, I won't repeat, that were somewhat anomalous that we saw people actually in the PEO deciding they didn't want healthcare insurance. We thought our hypothesis was that they were feeling some pressure from a wage perspective and perhaps decided that, and from a total compensation perspective, they were not going to offer healthcare. We've taken a number of actions that I think will create better momentum going into next year.
I'll let John talk about that issue.
John Gibson (President and CEO)
Yeah, no, not much to add, Eugene. I do think it's important to understand on the insurance component, there was a trend that we saw happen not just in the PEO, but also in our insurance agency, in the health and benefits area, which it's not just the client. There's two decision points here: One is the client deciding they're gonna offer benefits, and second is an employee deciding they're gonna enroll and pay their fair share. We saw in both cases, that the clients, particularly clients, less clients were adding insurance. That's one part of it, right. You certainly can go and try to get someone to switch from their existing insurance carrier, but we saw less people adding health insurance as an option.
When you look inside, when we went through our normal enrollment period, we found that less of the employees that were offered insurance elected to, you know, sign up for it. All the things Efrain just said, we saw that happen in both areas. That caused us to go back, what you can do is you can go back and look at your plan designs, you can look at leaner plans, you can look at different plans, all of those things. We went through a exhaustive review of every one of our core PEO markets to look at every one of our plan designs, to look at every one of our offerings to make sure we have the broadest suite. Those decisions are made. We're actively out in the market selling clients on those today.
Those will go in the July timeframe, if you will. Remember, our enrollment for PO begins in that July timeframe and really goes through the January timeframe. You won't see kind of that pickup of that going on. We've looked at every aspect of it. We've made some modifications and changes where we think it makes sense. We know that the HR outsourcing value proposition is still strong because it's growing at 10%, and we saw, you know, strong demand in the second half of the year. We know that the PO value proposition is strong because of our record retention and the clients that can afford it and have it are doing well.
You know, we have reason to believe there were some early signs, as I said earlier, in the fourth quarter, of improvement, there. Now we're getting into the heart of it, and we'll see that kind of build, as we go into the second, third, and fourth quarter, of this coming, fiscal year. You know, again, we feel confident that we have the right plans in place, and now we'll go out and execute that in the marketplace and see how it goes.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Got it. Super helpful. Quick follow-up on some of the comments you made earlier on, retention, bookings, and client growth, to tie it all together. When we're thinking about your guidance for next fiscal year, Efrain, you mentioned that you expect client growth to pick up from the kind of 1.5% level we saw this year, would that be a result of both improved retention and improved sales, or is it primarily one or the other that will drive the improvement in client growth?
Efrain Rivera (CFO)
No, you got to do both. You got to do both, Eugene.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Okay.
Efrain Rivera (CFO)
I mean, over-relying on one. Long story short, both sides of that equation have pretty powerful incentives to make sure that they occur. You don't always hit it 100%, sometimes you hit it more.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Yeah.
Efrain Rivera (CFO)
You gotta get the both sides to work to get the right net client gaining number.
John Gibson (President and CEO)
Yeah, it.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Great.
John Gibson (President and CEO)
I'll add on to that. Again, I would say, you know, the second half was stronger than the first half from a sales unit perspective. If you dig under our retention numbers, first half to second half, our controllable losses improved in the second half. Again, what we can control, and I do believe that there's a degree of what I call flushing out of the bankruptcies from 2 years ago in terms of us looking at clients that are kind of on the financial edge and whether or not, you know, we wanna continue to, or feel confident we can continue to do business with them. Those type of things are kind of flushed, you know, out of the system.
... We've been investing a lot in what we can do to control what we can control, regardless of the environment. We talked about AI. We've been deploying a lot of very sophisticated AI models inside our service organization and inside our client base that are giving us very strong indications of where we may have a client at risk, and we're demonstrating success and demonstrate success in the back half of the year of being able to intercept those and turn those situations into positive retention stories. You know, when I look at the retention story and the sales story, first half, back half of last fiscal year, I feel good about the progress we're making there.
Eugene Simuni (Managing Director and Lead Fintech Analyst)
Got it. Thank you very much.
Efrain Rivera (CFO)
Welcome.
Operator (participant)
Thank you. Our next question will come from Peter Christensen with Citigroup.
Peter Christensen (Director of Digital Assets and Fintech Services Equity researh)
Thank you. Good morning. Thanks for the question. How you doing? Good. Efrain, I was curious about the portfolio repositioning, and.
Efrain Rivera (CFO)
Mm-hmm.
Peter Christensen (Director of Digital Assets and Fintech Services Equity researh)
I know it wasn't too large, but...
Efrain Rivera (CFO)
Yes.
Peter Christensen (Director of Digital Assets and Fintech Services Equity researh)
Should we expect, I guess, future maybe, operating outperformance to be reinvested for portfolio repositioning, maybe layering to rates faster? Then as a follow-up to that, maybe looking at prior cycles, is there a relationship between interest rates and competitive pricing? I would imagine as floating income becomes a bigger part of the business model, that gives more leeway for competitors to be more aggressive on the pricing side. Any comment there would be helpful. Thank you.
Efrain Rivera (CFO)
Pete, those are two absolutely fantastic questions. Literally, I mean, wow! Okay. Let me take one. You know, part of what you do and part of what you work with the team is to understand what you need to deliver and understand what your degrees of freedom in delivering them are. When you perform at a certain level, you have more degrees of freedom, not surprising. To all my colleague CFOs out there who struggle sometimes because they don't have the degrees of freedom, I feel you. When you do have the opportunity to reposition because performance gives you that option, you look at it, and you figure out, you know, we're pretty disciplined here. Is the NPV of doing that better than the NPV of not doing that?
In the fourth quarter, we thought there was a positive NPV to that approach. Would we do it in the future? I'd have to see. There's other issues that come into play, which is what do you want your max duration to be? Are you picking the right time? You never get it right because you're trying to predict other behaviors, but I think that we've done a good job. To your point, this is really kind of the interesting question that we're wrestling with is so we don't know... I can give you a sense of what happens when interest rates get to 6%.
I know, I know because I studied that pretty extensively when I came into the job now 12 years ago. Two things you gotta worry about or be concerned about there. Number 1 is that, you can attempt to be pretty aggressive on pricing, in that kind of environment. If interest rates are high, you can take it as a signal to price high. What I find, at least in our history, was when you did that, when you get that overly aggressive in pricing, you know, seven or eight, you're gonna pay a price on retention. It just is. It follows. At least that's a conviction that I have.
Maybe you leave some money on the table by not pricing even more aggressively, but I think that there's a balancing act that there for clients because you're trying to create a level of trust in terms of the value that you deliver to them, and there is a tipping point at which that level of trust gets breached. We need to look at that closely. The second part is, as interest rates are now creeping up, if they were to go over 6%, now that starts to become a threshold where it becomes more difficult for small businesses and many medium-sized businesses to operate from a financing perspective. They gotta look for other options.
That's one thing, by the way, that we're looking at very closely. How do we help clients? ERTC was a great example of how we did that this year. That's why we think it did so well within the base. You gotta play those two elements off each other in determining what to price, and how to help your clients navigate through an environment where interest rates are high. Hopefully that answered your question.
Peter Christensen (Director of Digital Assets and Fintech Services Equity researh)
Yeah, it certainly does. The balance, yeah, that's certainly a challenge. I'd imagine. I don't envy you. Thanks for the insight. Very helpful.
Efrain Rivera (CFO)
Yeah, you're welcome.
Operator (participant)
Thank you. Our next question comes from Tien-Tsin Huang with JPMorgan.
Tien-Tsin Huang (Senior Analyst)
Hi. Thanks. Good morning, John, Efrain.
Efrain Rivera (CFO)
Thank you.
Tien-Tsin Huang (Senior Analyst)
Bob. Just wanted to ask on PEO. Again, I know it's growing in line with peers in the quarter here. You're looking for some acceleration. You talked through that with Eugene. How much of the acceleration, again, just to simplify it, is coming from volume versus rate versus mix? Just wanna make sure I understand the components.
Efrain Rivera (CFO)
I'll take that, Tien-Tsin. Look, I wanna kind of clarify something to start, which is that we have worked on employee growth in the PEO. It's not as though we contracted in that area. We think we're off to a pretty strong start actually, in terms of at least our bookings activity. We expect relative to last year, for healthcare attachment to be higher than it was, the contribution from healthcare attachment to be higher than it was last year. We just couldn't have hit the numbers that we hit, last year if we had also seen, simultaneously that, the base business in admin was going down. It would've been very difficult and challenging.
We expect growth in the business, growth in clients. We expect growth in attachment. That's what's really kind of driving the a mix, less so, Tien-Tsin, I think that's less of an issue. Typically, just to remind everyone, our, you know, our PEO clients are typically upper 20s, it's low 30s in terms of clients. We're not trying to go downstream necessarily. But it's really gonna come from more clients, better healthcare attach.
John Gibson (President and CEO)
We're just really not expecting any type of major pricing increases, either on the health side or on the general administrative fee side. I mean, it's gonna be well within our normal course. Although I would mention that on the healthcare side, our normal course is in the, you know, the single digits, which far beats on a historical basis what healthcare inflation is. That's a benefit and a retention benefit for our clients. The other thing we haven't talked about, that we have a thesis around, is that we had very good HR outsourcing growth. One of the things that we saw because of the insurance anomaly was a tilt towards our ASO product.
When we look on a, on the aggregate, we had a very, very solid year, our HR outsourcing offerings, ASO on the managed service side and PEO, we tilted towards one versus the other. I look at that now and say, "Well, wait a minute, I now have more clients that love our technology, love our HR, and now it's just a matter of finding the right healthcare solution and going back and upselling them kind of into the PEO." We have a pretty concentrated effort on that.
Actually, that's another area where we're using AI, where we are actually analyzing the deduction fees from existing payroll and ASO customers, so that we can triangulate what we think they are currently paying for healthcare, and then using the demographic data that we have to do AI-based underwriting to give us a computer-based targeted list of clients that we can approach with a really almost prepackaged value proposition that says, "Hey, we think we can help you save money on your insurance, if you join our PEO, you're already an ASO client of ours." You know, we've been working on that model for nine months as part of our efforts.
That's an area too, that we think there's opportunity inside our base to go back, with our new insurance value proposition in the PEO and, see if we can't move some clients over.
Tien-Tsin Huang (Senior Analyst)
Good. That's the beauty of Paychex having both ASO and PEO. I guess as my follow-up, any change in your appetite on the whole self-insured versus the fully guaranteed PEO model to the extent that you can better maybe control the insurance packages? I know everyone's probably thinking I'm trying to trick you guys to answer the consolidation question, but I'll ask it too. Right, appetite to do acquisitions on the PEO side? I know it's been, what, 5 years since you did Oasis. You said tuck-ins, but I know there's been some news in the market around consolidation. I know that probably is a multi-part question, so I'm on the bad guy list.
Efrain Rivera (CFO)
No, no, Tien-Tsin...
Tien-Tsin Huang (Senior Analyst)
Anyway, thank you.
Efrain Rivera (CFO)
You could ask, sorry. hey, let me answer the first one. I get that question, and I think investors are sensitive to the level of balance sheet.
Tien-Tsin Huang (Senior Analyst)
Yes
Efrain Rivera (CFO)
... the risk. When we originally did this a number of years ago, I said, "I don't wanna be reporting quarters where we blew up the balance sheet because we were doing the wrong things on the insurance side." I would, wrong things, wrong, very poor use of words. What I mean by that is just taking excessive risk. Everyone knows what they get when they invest in the company. We have managed that without any hiccup because two things help us. One is that even though we go at risk, we don't make money, we make very little money on healthcare insurance, and that removes the incentive to necessarily push insurance, cheap insurance as a way of selling PEO. That's a fool's game. We don't play it.
We'll never play it. Having said that, as we get to a certain density in markets, and many of the people on the call know what the big markets are, we look at that, we evaluate whether a going at risk in insurance in a market would make sense. I won't forestall that we would not, but it would be subject to the same very tight criteria. The other part is that the reason for doing it would not be necessarily to increase revenue, but for us to capture share in that market. Nothing imminent, but that's our thought process. I think we've got a track record in terms of managing it in an appropriate way. I'll let John talk to PEO and M&A.
John Gibson (President and CEO)
Yeah, I just to add to that, I don't think that our current approach to insurance in the PEO was a driver to what we saw last year. I don't think taking more risk is necessarily the solution. I think that our current approach has demonstrated that we can grow at industry rates without exposing ourselves to additional risk. To Efrain's point, I don't see that as a magic bullet. I don't think you need that to grow the PEO value proposition, to Efrain's point, to the degree in which we thought it could accelerate growth in some way, and the risk could be balanced. It's something to consider, but not something that we're looking at.
I mean, I think in terms of the PEO M&A front, we haven't done much in five years. It's obviously a very attractive industry for private equity to pay very high multiples for which for my opinion, not much capability. You know, when we made the acquisition of Oasis, we were looking at both getting significant scale on the PEO and capability. We got that with Oasis. You know, we were typically a smaller, you know, kind of regional PEO, and we knew we needed some national scale to get there. We're now, you know, the top player in the industry. You know, I think what we would be looking for is tuck-ins in markets where that makes sense.
If we were gonna add a capability, right, but, you know, a capability in terms of something different in the PEO, that's interesting. You know, again, you know, what I continue to see is when we're involved in know about almost every deal in the industry, I still think the multiples are a little high for what they would bring value, and we have enough organic and inside the base, opportunity for us to continue to invest our dollars in.
Tien-Tsin Huang (Senior Analyst)
Awesome. Thanks for the complete answer. I promise just one question.
Efrain Rivera (CFO)
Yeah, thank you.
Tien-Tsin Huang (Senior Analyst)
Thanks, guys.
Operator (participant)
Thank you. Our next question comes from James Faucette with Morgan Stanley.
James Faucette (Managing Director)
Hey, good morning. Just a couple of quick follow-ups. Hey, thanks. Just a couple of quick follow-ups for me. On the out-of-business commentary, I understand kind of, kind of the conditions there, where you maybe were below normal, especially during the height of the pandemic, and that's normalizing. I'm just wondering if right now you would characterize that out-of-business run rate as being more elevated still, or has it kind of come back more into line with what you would expect to be kind of normal?
John Gibson (President and CEO)
It's that. It's back to normal. Again, I'd go back to say it's back to normal pre-pandemic 19, which again, we're at reasonably historically, you know, low levels for us, if you went back historically before that. You know, look, there was a big surge in new business starts right at the start of the pandemic. We knew in our models whether or not there was recession, whether or not interest rates were 1% or 6%, those businesses, a fair number of them were not going to survive after two years. We didn't know when it was gonna come, but I think we knew it was going to come. I think we've seen that begin to flush through.
We've kind of returned back to what I would say are more, you know, normal business start levels. Again, business starts are still reasonably solid. We're not seeing a dip in business starts. Again, we got the big spike. We're now back to where we were kind of pre-pandemic, which again, were very, very solid, and conducive numbers for growth in our business before the pandemic.
James Faucette (Managing Director)
Yep, yep. No, that makes sense. Appreciate that. Just a quick question to make sure that we're thinking about business sensitivities correctly. If we were to see macro deteriorate further, which of the underlying verticals, whether it be payroll, HCM software, retirement, ASO and Management Solutions, would be hit hardest versus what would be most resilient? I think we have some ideas there, but I just want to make sure we're thinking about that correctly.
Efrain Rivera (CFO)
Yeah, I'd say so, you know, you got two points of comparison, kind of what happened in 2007 and 2008, and then what happened during the pandemic. What we saw during the pandemic was that on the PEO side, PEO, our base at least, PEO clients shed employees more quickly. It was I was surprised by the speed with which they did it. I think you'd see more of an impact there on the PEO if you saw more of a sharp downturn. A garden variety softness, probably not. Second, James, and we'll see, but if we go back, certainly to the pandemic, you saw employers start to shed clients, I should say, shed employees.
Interestingly enough, what was a little bit anomalous during the pandemic is we didn't see huge client losses, but we did see them drop employees. Then you'd see that impact. I'd remind everyone that our model is not a pure people model, it's subscription plus, people, and so we have some insulation in the event that there's a downturn and overall employment levels fall. Finally, last caveat, we do have the ability to pivot in the base, which we did during the pandemic, which helped to mitigate the impact of what was going on in the economy as a whole.
John Gibson (President and CEO)
I would probably say we're actually more effective in terms of both our capabilities analytically, to be able to target inside the base, our capabilities from a sales and marketing and digital perspective inside the base, than we were in any of the in the prior downturn. I mean, we just have gotten very effective in driving product penetration and identifying opportunities within our client base, where we can add additional value with a pretty broad set of products and services.
James Faucette (Managing Director)
That's great. Appreciated.
Operator (participant)
Thank you. Our next question comes from Mark Marcon with Baird.
Andre Childress (Senior Research Associate)
Hey, Mark, this is Andre Childress on for Mark. Thank you for taking our questions. I'll just leave it at one. Retirement Solutions continues to see strong growth and clearly has some nice tailwinds. Can you talk about some of the measures you are taking to capitalize on the opportunity provided by both the Secure Act as well as state mandates?
John Gibson (President and CEO)
Yes. As you know, we're a leader in small and mid-sized businesses in terms of the number of plans. We manage more retirement plans than any other company. For the 12th straight year, we actually have prepared and supported businesses, more businesses than any other provider. We are actively already educating our existing customers and have a variety of digital marketing programs in the market. I think you'll continue to see more aggressive positioning of Paychex in the 401(k). We're looking at how it can play a bigger role in our bundles, in all of our payroll bundles as well.
Again, what we're finding is, given both the state mandate coupled with the SECURE 2.0 Act, where literally, if you're a company of 20 employees and we're working on trying to make some changes to that legislation that actually drop it down even lower than that, we can start up a 401(k) plan and basically at no cost to you, and you can then provide up to $1,000 of match to your employees and get that money back as well. When this is like one of those ERTC moments where our value proposition, where we can go to a small business owner and say, "You can have a valuable benefit that's going to help you retain your employees, help you attract employees, and really for...
It's not going to cost you anything, to get it started. We think there's a powerful value proposition, and like I said, we're already the largest. We already know how to do this. We already have the sales and marketing capabilities and the operational capabilities to do this in a very efficient and effective way. We're going to continue to capitalize on this as we go into this fiscal year.
Andre Childress (Senior Research Associate)
Great. Thank you for the color.
Operator (participant)
Thank you. Our final question will come from Samad Samana with Jefferies.
Samad Samana (Managing Director)
Great. Good morning, guys. Thanks for squeezing me in. I just wanted to ask on maybe your own sales organization, can you help us think through just between the last couple of years being strong and then us entering, let's say, a slightly different environment, maybe looking forward, how maybe the sales organization performed versus quota in fiscal 2023, and maybe what assumptions around quota you're thinking for fiscal 2024 in terms of like quota increases for your sales organization?
John Gibson (President and CEO)
Well, as I said, we were very pleased with the record-setting year that we had in sales execution. It really was a stellar year from a sales performance perspective. My hat's off to the entire team. As I said, the back half was stronger than the front half. Given that momentum we have coming out of there, the investments we made in the fourth quarter in terms of marketing, also a lot of work on what I would say is go-to-market support for our sales teams, the things we're doing relative to sales training and sales effectiveness tools that we invested in the fourth quarter, given the momentum we've seen, our sales team has readily and happily accepted higher quotas for fiscal year 2024.
Samad Samana (Managing Director)
Appreciate that. Efrain, I'd love to ask you another PEO follow-up question.
Efrain Rivera (CFO)
Sure.
Samad Samana (Managing Director)
I'll just save that for another time.
Efrain Rivera (CFO)
Go ahead. No, I'll give you one.
Samad Samana (Managing Director)
I'm joking. I'm going to give it one question.
Efrain Rivera (CFO)
All right, thanks.
Samad Samana (Managing Director)
You guys have a great day. Be safe out there.
John Gibson (President and CEO)
Have a great fourth!
Samad Samana (Managing Director)
Thanks a lot.
Efrain Rivera (CFO)
See you, thanks.
Operator (participant)
Thank you. There are no additional questions at this time. We'd like to now turn it back to our presenters for any closing remarks.
John Gibson (President and CEO)
Okay. Well, I'd like to thank everybody for being with us today. I know probably many of you are starting to head, or are headed, or about to head to, the Fourth of July weekend. I hope you have a great time, with your family. I want to thank you for, your questions and support. You know, I want to reflect, again, on, this past fiscal year. Certainly a transition year for me, and, you know, coming in, into my new position as CEO. An absolutely phenomenal year for the company. The employees did a great job navigating a very complex, fiscal year. For the company to achieve that $5 billion milestone is really, a testament to their hard work.
To do it at the speed we did it during the global, you know, pandemic is something to say. I was reflecting last night as I was looking back over the last 5-year results across the board, and I go back and anchor myself to fiscal year 19, which is hard to remember. That was before the pandemic. I looked at our fourth quarter, and I looked at our full year statistics, when you go down there and see we had better revenue growth, better profit growth, better retention metrics, better HR outsourcing metrics, better new sales revenues, better new sales unit rates of growth in the fourth quarter of this past fiscal year and the full year than we had in fiscal year 19.
We not only weathered the pandemic, but I think we actually came out of the pandemic in a stronger position across the board. I just want to thank the 16,000 employees at Paychex for making that happen, and hope you all have a very nice Fourth of July weekend. Thank you very much. Have a great day.
Operator (participant)
Thank you, ladies and gentlemen. That concludes today's presentation. You may now disconnect.