Good day, everyone, and welcome to today's Paychex Third Quarter Fiscal 2022 earnings. At this time, all participants are in a listen-only mode. Later, you’ll have an opportunity to ask questions during the question-answer session. [Operator Instructions] Please note, this call may be recorded. It is now my pleasure to turn the conference over to Mr. Martin Mucci, Chairman and Chief Executive Officer of Paychex.

Thank you, Katie, and thank you for joining us for our discussion of the Paychex third quarter fiscal year 2022 earnings release. Joining me today, of course, is Efrain Rivera, our Chief Financial Officer. And this morning, before the market opens – financial results for the third quarter ended February 28, 2022. You can access our earnings release on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet and will be archived and available on our website for about 90 days. I will start today's call with an update on our business highlights for the third quarter, and Efrain will review our financial results for the quarter and provide an update on fiscal 2022 – fiscal 2022, and then we'll open it up for your questions or comments. Strong results for the first half of the year continued in the third quarter as both management solutions and PEO and Insurance Solutions revenues increased by double-digit percentages year-over-year and adjusted diluted earnings per share increased 20%. We continue to see positive trends in our key indicators and strong momentum across all our lines of business, driven by a combination of solid internal execution and a market-leading suite of innovative solutions uniquely designed to address today's HR challenges. This momentum carried through calendar year-end and selling season, resulting in record sales performance and near-record level retention. Our value proposition continues to resonate in the market, particularly in this challenging environment and our sales results were broad based with double digit growth in new annualized revenue across all lines of business, HR outsourcing, retirement, payroll and insurance. We continue to improve our traction in the mid-market space, which has benefited from the investments we've made in…

Thanks, Marty. Good morning. Thanks for being on the call. I'd like to remind everyone that today's conference call will contain forward-looking statements, refer to the customary disclosures. Let me start by providing some of the key points for the quarter. I'll follow up with greater detail in certain areas. I'll finish with a review of fiscal '22 outlook and some very, very, very preliminary thoughts on fiscal 2023. Our third quarter results reflect strong internal execution, as Marty mentioned, and continued improvement in key indicators, service revenue and total revenue increased 15% to $1.3 billion. Within service revenue, Management Solutions revenue increased 13% to $960 million driven by higher client bases across our HCM suite, check volumes, revenues per check -- revenue per client, payroll funding and outsourced service for temporary staffing clients and ancillary HR services resulting from ERTC, which Marty just mentioned. Although the revenue associated with ERTC is substantially nonrecurring, ERT has afforded Paychex the opportunity to continue to deepen its relationship with clients, increased revenue with clients and showcase its industry-leading suite of solutions for small and medium-sized businesses. A significant opportunity remains both inside and outside our base. And one thing I'd like to point out here is, there are a number of HCM platforms in the market, you all know that, but they're only a select few partners. In order for you to be able to access the opportunities that arise from having an HCM suite with bundled ancillary services, you have to be a partner, not simply a platform provider. There's only a few of those in the market. Our results demonstrate the power of being one, and we are one of the leading ones. So our results are not surprising to us. Our clients want to know the difference between a…

Thank you, Efrain. We'll now open the call to questions. Katie?

Thank you. [Operator Instructions] Thank you. Our first question will come from Bryan Bergin with Cowen.

Good morning, guys.

Hi, Bryan.

I appreciate you giving us an early fiscal 2023 view here. So Understanding you've got some outsized double-digit growth comps materializing this year. That's good to hear for next year's number. I guess, more importantly though, a question we're often getting is how to think about a sustainable level of growth in your business – you've had some peers speak to medium-term targets in the model. Anything you could share as a framework for how you're thinking about maybe longer-term growth based on what you're seeing in the market and what you've done here to drive that stronger sales execution.

Yes. Hey, Bryan, first of all, thanks, really, the comments. I think that we start with, I guess, two things and then one further building block. With respect to management solutions, many of you heard me say this, we start with the premise that we're going to be at least mid, and we would hope over that time frame to get above mid- to upper single digits in management solutions. When we get to Q4, we'll call that out a little bit more. And then, on the PEO and insurance side, we expect to be around double digits. So we start with that premise that yields a certain revenue growth, that we think is going to be upper single digits. And then the other thing is that, our expectation is that we will leverage. And in typical years, we averaged at least 50 basis points; some years, we won't do that. Some years, we'll do 200. So a year like this year from a leverage perspective doesn't come around that long. So I don't suspect there will be too many 200 basis points leverage years in us. But we do expect to continue to leverage going forward, certainly over the intermediate term. And just one other point on that. That's not simply an arithmetic exercise. It's a function of all of the work that's being done in the background around automating and making the business more efficient. I said earlier in the comments that -- we have a -- we are a leading HCM suite provider. But what makes us so unique is, we do that at margins that are industry leading. And so -- we work very hard on that. That's as we go into a planned process here, that will be a mantra that's repeated over and over, and we expect to be able to deliver on those commitments over the intermediate term.

And I think, just to add to that, on the sales execution, we feel very strong this year. We've had great sales execution. Selling season was very strong, record third quarter sales performance. And as we've been going through it, really, across the board, so we're really pleased that not only the marketing and brand work we've done, but the product development that we've done in innovation there has really, I think, hit the marketplace very well at a time. We really timed it very well to hit the market with the HR support that businesses and prospects, current clients and prospects needed from attracting and hiring and retaining talent, we really hit the right timing on that. And then in addition to it, as Efrain said, this just doesn't happen. The thought that went into the employee retention tax credit, which has been very successful for us, we've been able to go to current clients and prospects and talk about how we can get this government subsidy for you. And those tax credits have averaged around $180,000 per client. And when you think of our average client size, it's a significant dollar amount that adds, as Efrain mentioned earlier, a lot of value -- and then to say, 'hey, not only are we helping you with that, here's how we can help you continue to sustain your growth in your business. It's been very successful. And we don't -- that's how we play the game. So we feel we'll continue to be able to do that.

Okay. Makes sense. And just a follow-up on retention. So can you just share where unit retention landed here in 3Q. It doesn't sound like you have any change of your holding higher post pandemic levels, but correct me if I'm wrong there. And just one thing, are you seeing any change in the gap between unit and revenue retention, as your mid-market and larger client push materializes?

It's a good question. I think revenue retention is a little higher. And so we are seeing a little bit of a gap there, as you'd expect just based on the size of the clients and that we're getting more mid-market success in both sales and retention. The overall retention number is going to be better than pre-pandemic, at least that is experienced to be right now. It's better than pre-pandemic. We think that will stay through the rest of the fiscal year. And – but not quite at the record levels. But we -- it doesn't surprise us. I think a lot of people held on through the pandemic, and we're trying to figure out where they were. But again, things like the employee retention tax credit, those things have helped our retention, and we're trying to see if businesses even under the pressure that they're under, can still sustain their business and keep themselves going. There's a lot of challenges out there, as you know, with supply chain and just inflation and so forth. And so we're a little cautious. But right now, we don't see that impacting them very much.

Okay. Thank you.

All right, Bryan. Thanks.

Thank you. Our next question comes from Andrew Nicholas with William Blair.

Hi, good morning. Thank you for taking my questions. First one I had was just on the pricing environment in the PEO business, specifically. Are you seeing any noticeable change in the aggressiveness of your competitors when it comes to price? And if so, is that something that's had any impact on new business generation or competitive win rates to this point?

Yes. No, we have not. I don't see any real changes in that environment. We've been able to, I think, take good price, get good price on our sales and have not seen any increase in the need to discount further or anything like that. So we've been very pleased with not only had sales at a record level, but we've been able to hold price as well.

Andrew, the other thing I'd add is, first of all, nice report on the PEO industry, by the way. The other part is if you get aggressive on price in the wrong way, in the PEO, you pay a ferocious price, but you don't get -- you don't pay the price in the next six to 12 months -- if you discount your health care insurance and then don't price it appropriate to market, and of course, you know this better than I do, you pay a price down the road. So we are really, really careful on that point. I would say it's one of the five things we're probably most careful about is pricing all of that ancillary -- all of the insurance, direct insurance in a way that's appropriate to the risk. And we haven't had any blowups. We monitor that closely. So -- we think there's a really compelling value prop in PEO that's going to continue to grow, but it won't be on the basis of selling cheap insurance. We were very cautious about that.

No, that's helpful. And part of why I ask is because some of the conversations we've had indicate maybe – maybe there are some other players that are being aggressive on that front. So not specific to Paychex. In terms of my follow-up, Efrain, I think you mentioned in your prepared remarks at the end that you intend to take some additional investment actions in the fourth quarter. Could you spend a little bit more time talking about areas of interest there? Just to give us a little bit more insight on what to look out for going forward. Thank you.

Yes, Andrew, I can take some of that, too. I would say there's certainly, as you can expect, from an employee retention standpoint, there's some actions we want to take and kind of move some of that up in the process. There's also more marketing. We're finding good response to our SEM and SEO investments on brand and also the products that's worked well with us for sales in the last three quarters. So, we decided to continue to spend there. And then some of the investment in IT that we would have planned typically to start into the first quarter, we can move some of that up we feel and accelerate it to get the products out even a little faster that are coming up. So, it's really kind of across the board. The other thing is, we have been hiring. So, we got a little low in the first part of the year, particularly in service and with turnover and so forth, we have now accelerated that hiring and done well in the third quarter and that will pick up some additional costs in the fourth quarter.

Make sense. Thank you very much.

Okay. Thank you.

Thank you. Our next question comes from Kevin McVeigh with Credit Suisse.

Thanks so much. Hey Efrain, hey Marty nice job. Thanks so much for the preliminary results in terms of outlook for '23. Is there any way to frame what type of Fed funds is in that 7%? I just -- I didn't get that. I know it's fluid, but is there any way to think about just initial thoughts on that?

We have some. We don't have all the big teen at this point in the preliminary outlook, Kevin. We want to get a sense of whether 6 is real, 4 is real, 9 is real, 8 is real. And I think we're all trying to read the tea leaves is at 50 is it 25. We have what we would -- I can characterize as a moderate scenario, certainly not the most aggressive. A lot of that growth is really more being driven by improvements in operating performance. And if the Fed gets very constructive and we avoid a recession that's part of what we'll have a better -- a clearer answer to when we get to June.

That's super helpful. And then my other question is more, I don't know if it's longer term or whether it's for you or Marty, but can you help us understand the addressable market of Paychex today versus last cycle? Because obviously, you've done a ton of investment it seems like what you're able to offer your clients is much more robust today. Is there any way to think about kind of whether it's a dollar amount or just, how you're thinking about the addressable market today versus maybe what it was coming out of the last cycle?

Yes. I think definitely from the product set that we offer and the integration with Flex in the digital approach to everything we've done. I think it is definitely larger. I don't know if I could put a dollar amount on it, but I think our success in the mid-market sales in particular and the retention there over the last three quarters has really shown that we're hitting the mark, as I mentioned earlier. We really focused on the – what would be the impact of coming out of COVID, kind of the heavy COVID period, which is that distributed workforce. How do you allow the hiring, the onboarding, the retaining of employees who are maybe distributed or maybe in the office how do you handle all that? I think those products have really positioned us well to a larger mid-market base. It's not necessarily larger clients, but I think maybe a broader set of solutions that will hit a lot of different areas for clients. And I think at the same time, I think we positioned ourselves well that from what the client is really feeling coming out of COVID. It opened up an opportunity like distributed workforces to say, let me tell you how powerful the mobile Apple Flex is. management did for a team the other day, an investment team looking at products, just the mobile app of time and attendance and how that works and how you can, of course, punch in and out, but how you can shift swap remotely, alert someone that you don't need this shift or you don't need that ship and open it up and take it. And all that is done on a mobile app for across employees, very powerful not to mention retention analytics a lot of the analytics work that we've given to clients. So, I think a long answer, I think we've opened up a lot more opportunities for us at a very perfect time to do that.

The other thing I'd add, Kevin, is -- and this quarter really is a demonstration of that. When COVID started, we were doing a lot of consulting with our clients and not -- we weren't charging it. It wasn't monetized. But I will say that in the midst of the pandemic, some of our competitors referred their clients to our website in terms of information. I think as we progress through COVID, what we learned was that there is a tremendous amount of opportunity in the services that attach around the HCM suite. So, ERTC is a great example of that situation. Retirement Services promises to be another important opportunity going forward. And there will be others, which we don't know a lot about right now because they haven't been surfaced. What we're finding is that, that -- in addition to the technology that Marty highlighted, that technology opens another door for the opportunity to provide a set of solutions that clients are interested in once we inform them about it or once we partner with them. And I would say our marketing, our product, our IT teams and our compliance teams also are all working very hard and including I put in our legal team, too to uncover those kinds of opportunities that we can monetize. So, there -- within the product set, there's one set of opportunities. And I think there's this growing amount of services that we can provide our clients that play off our technology and that part will be looking to dimension as we go forward. but it's becoming increasingly important.

Yes. And you got excited to talk about this now that adding to what Efrain just said, it's the use of the data. We really have maximized the use of our client data now. And like when the Paycheck Protection loan started, our -- the teams here figured out, hey, look, we use the data to immediately alert the clients that they could file for the loans and we could basically pre-populate the entire application other than they have to sign it. When it became, you could add other expenses in there. Okay, just to add the other expenses. But we pre-populated if you're a client of ours, all of the data that we have in our system. And then -- and so 94%, 95% of those loans now have all been, by the way, turned into grants. So, they've all been approved as complete grants. So, it's also using the power of our data. And as Efrain said, the employee retention tax credit was we use the data to now go to our clients and say, look, based on what we have in our data, we think you can apply for this. And you fill out -- you sign a couple of things electronically, and we'll help you file, and we'll amend the returns and you're going to have $180,000 on average, that's a big deal. So, that added a lot of value to the clients that said, wow, I didn't realize that Paychex could do all this for me and it added a lot, I think, to the retention and the brand value of what we could do for them.

Makes a lot of sense. Thank you.

Okay.

Thank you. Our next question comes from Jason Kupferberg with Bank of America.

Thanks, guys. Good morning. Efrain, I just wanted to start by probing some of your comments in the prepared remarks around macro. I think you said something to the effect of tempering your outlook. But obviously, you raised the outlook, at least for revenue for the year by more than what you just beat the quarter by. So I just wanted to try and reconcile that. Is that really reflected in the initial outlook for 2023?

Yeah. Yeah. That was mostly for people like you, Jason who would dig me on why aren't you more constructive on Q4. As a number of you who know me, and who I've known you for now a number of years, we're going to point out about how we're looking at Q4. There's an element of caution in Q4. And if you look at where facets in Q4, you can derive an imputed number for Q4. Our flow through of what we think could be revenue in the quarter. That's one. And then second, when we were putting all the data together, I think the macro environment looked – it was looking a little bit more uncertain than maybe it is right now. And I don't mean that something suddenly changed in the last week, but the environment is kind of volatile. And I just wanted to highlight that we're sitting here feeling okay from a macro perspective. By the way, business-wise, we feel very okay, but things could change in the next – over the next month. And so I just want to inject small note of caution to what was a really strong quarter for us.

Yeah. Yeah, it was. Okay. Totally understand. I know, I think the past couple of quarters, you've been calling out some tailwinds from temp staffing clients, and I was just curious, if you can quantify maybe how much of a lift that is provided to management solutions and your thoughts on sustainability of the tailwind?

We – it's modest, Jason. So many of you know that we provide funding for staffing companies just to make sure everyone's clear, we don't – we're not in the staffing business. We're in the funding of the staffing business. The staffing business has been on fire over the last six months. And so our funding business has done very, very well this year. So it's still modest. It's a highly profitable business for us. But it's contributed in the mix of things that have gone well, and it's a long list of things that have gotten well this year. It's one of the businesses that's had a pretty robust recovery.

Okay. Yeah. Appreciate the color. Thank you.

Yep. Okay.

Thank you. Our next question comes from Kartik Mehta with Northcoast Research.

Hey, good morning, Marty and Efrain. Efrain, I know one of the areas we always talk about is pays per control, and you've talked about how in this environment that's been difficult. I'm wondering what the trend’s been? And what you kind of expect the trend to be over the next six months or so?

Yes, Kartik. I mean, you know better than most. If I would have said at this point that, unemployment was at 3.8%. I think that, most people would have thought, I was -- and that we were going to base a plan on that, that idea at 3.8%. Yes, look, it's been more robust than we thought. I'll let Marty comment, because we just -- we just, I should say, released the employment index. And so we got a little bit more -- he's got a lot more color on that than I do. But I would say, there -- you're getting to the point where it's going to get difficult for that number to run. It's been running positive and it's been running ahead of what we thought. But you're getting to a point where it's going to be difficult to continue to run quite as hot as it's been. So I'll let Marty talk a little bit.

Yes. I think, we've seen -- Kartik, in the index, this is really the clients under 50 in that index. But we continue to see strong job growth, and it has moderated the last two months, but it's still strong growth over last year. And I think, as we've sold more into the mid-market as well, we're seeing probably a little bit better growth there from the number of employees, because we're into a larger client size. And I think what we're trying to measure is, with the things that are going on now in the macro environment, what is that going to mean going forward? Like, they haven't -- there's a number of government subsidies, but are we getting to the end of those. Now we still think, by the way, the employee retention tax credit will help us in next year as well and help our clients, because there's still a lot we can file for, as we go back through the process. But, I think, it's just, how much are they going to grow going forward. Right now, there's a bit of pessimism in small clients as to -- between inflation, supply chain, et cetera, should we be a little bit careful, but they have demand, right, especially restaurants and so forth. So when you look at leisure and hospitality, job growth is up 21%, the fastest of all of them, but how will that continue given inflation concerns and supply chain stuff that continues. So we'll see. I think it's still positive. We're still seeing growth, but it's moderating.

And then, Marty, just on pricing. Every business has taken -- have taken the opportunity to raise prices, just because of the environment we're in and everybody is faced with inflationary pressures, just like you are. Now, I'm wondering, maybe, what the strategy is for Paychex from a price standpoint, as we move forward or at least for this year.

I think, what we're seeing is, the opportunity to be at the high end of our range. The range would still be in that same, but I think we'll be at the high end of that range. Our -- some costs are up, obviously, for us. But I think that the value of the products to our clients have increased is the -- all the things we've talked about before, with the help that we're giving them through government subsidies, with all of the value we're giving them in HR, then all the product investments we've made. So I think that they’ll tolerate that quite well, actually, because we're just going to be toward the high end of the range that we normally would have.

All right. Thank you, both, very much. Appreciate it.

Thank you. Our next question will come from Eugene Simuni with MoffettNathanson.

Thank you. Good morning, Marty and Efrain. Two quick follow-ups. One, just on retention. I just wanted to clarify separating between out-of-business churn and competitive losses. Can you maybe elaborate a little bit on how those two things are trending in relation to the still near record high retention levels overall? Is it across both of those metrics, or is it one of them now picking up in terms of churn versus the other.

Yes. Out of business is pretty solid. And so the competitive has not changed all that much really. And in fact, if you look at where our largest competitor, if you -- we always look at how much have we sold to their clients and sold them away from the competitor and how much have we lost were a net gain at this point. So we're not losing any more really to competitors, some, but for here and there, but really we're pretty solid on the retention kind of across the board as to how we're doing. Obviously, if we're near record levels, we're continuing to be pretty steady in where we are in retention.

Yes. Got you. And yes, sorry, just to wrap it -- so out of business in terms of like bankruptcies as we maybe move away from government stimulus, you're not really seeing that pressure yet in your business…

No. Not yet.

Great. And then – great, and then another quick one on the PEO, just wanted to see if you can provide some color on what drove the 21% growth in revenue across the major drivers that you call out, which is worksite employees and the contribution of the insurance revenue to that number?

Yes. I'll start and Efrain can jump in. I think, one, we've had very solid sales, very strong sales results. And then with those sales results, we've seen great attachment to insurance, so better attachment for insurance products. I think that's very reflective of the need to provide insurance and the good benefit plans an opportunity that the PEO provides clients and prospects. And then last, we've seen, obviously, an increase in worksite employees from the clients that we have. So they've been adding back employees. So you really kind of got it across the board. You got good sales, good solid retention. You got a better attachment to insurance and growing worksite employees of the existing base.

Yes. And the other -- the only other two to round that out is increasing wages and increase set sooner. So you got really, I don't know there's nights. -- a lot more than a trifecta, but a lot of good things going on. We had a really strong PEO quarter. I mean, obviously, the results speak for themselves, but it was a good quarter in PEO land.

Yes. Got it. Got it. So sorry, so your worksite employee growth, was it -- how was it relative to this maybe 21% number, I assume it was lower since there were other factors, but can you give us a sense of where it was?

Can you give us some of the worksite employee growth?

We'll update that, Eugene, at year-end -- we don't separate out PEO, so you're not disappointed, but we -- it's included in our overall worksite employees served. -- in our HR outsourcing businesses. But the numbers, it's -- both have been pretty robust growth.

Got it. Got it. Okay. Thank you.

Our next question comes from James Faucette with Morgan Stanley.

Hey, good morning, everybody, and thanks for all the color. I wanted to follow up on previous question and some of your commentary. First, on your own customer retention. Obviously, great work there. And you continue to operate at record levels and not really seeing the softening that you had anticipated maybe a couple of quarters ago. But I'm wondering like how are you adjusting your planning for that long-term retention level? And what should we think that, that could baseline at down the road?

Well, I think right now, as I've said, it's a little dicey given, okay, we had some government stimulus that they were able to -- some clients were able to take advantage of. At the same time, you've got rising inflation and then supply chain hopefully getting better. So, you've got a lot of macro things going on at the same time. Right now, we'd expect that it's still going to be strong. I don't -- based on how we are year-to-date, we've said we're not at record levels that we had last year, but we're better than pre-pandemic. We would expect that we continue to be at better than pre-pandemic levels that we have added a lot of value to our clients and that it will continue to be strong. I think that's how we feel. But there's a lot of macro stuff that could go on there with again, with bankruptcies and things like that, that right now, we haven't seen. So, our expectation going forward is that, we're at a pretty similar level to where we are right now.

Got it. No, that's actually really helpful context. And then as far as your investment that you've called out multiple times here and what you want to do, at least in the period on what you're giving guidance over the next quarter or so and then how we should think about that longer term. Can you talk a little bit about where you're seeing opportunities for organic investment and what's the time to pay back on those and what we should be looking for either from a product or service perspective as you continue to invest there?

Yes. I think it's definitely two main things, which would -- well, maybe three. So, you got sales investments, so we'll be continuing to invest in our sales teams. We'll be growing the sales team in select markets. But we're really across the board to see better opportunities for investing in sales. Two is marketing costs. We'll continue to invest in marketing. It's driving a lot of leads into the business and that's the way people are obviously searching and buying now. So, we're going to continue to see that investment go up and it's not getting any less expensive to do it. And I'd say three, would be product. We're going to see new product, as you've seen from us, we've had new product releases, basically every season. We kind of look at them as a season type of thing. And in the spring and summer season, we'll have continued new products that we rolled out. We just released kind of talked about our winter release now going into the spring release, you're going to just see continued product enhancements to what we have. It is going to -- we continue to do a lot, again, as I said, with our data and from a digital standpoint and really maximizing the use of that mobile app, so that we can build even more retention strength with the employees of our clients -- they're the ones that are using that mobile app and always have, even more than our clients. So we're giving -- trying to give our clients, employees everything they possibly can on their mobile app to produce better retention for us and not allow their employer to leave Paychex or want to leave Paychex, just like the diamond attendance, just like punching in and out, ship swapping and being able to do things like when we hire someone, everything is digital now. Everything is paperless. From the time we post with Indeed, we have that automatic integration with Indeed. You can post on Indeed, the world's largest job site that's broad -- that client is -- or that prospect or applicant is brought in without paper. When they hire them, it's brought on and onboarding. You're going to just see us continue to build out our HR suite where everything is around that mobile app to build strength and sustainability for the client.

Hey, Marty, Efrain, thank you so much as always for your time.

Great. Thank you.

Thank you. Our next question comes from Mark Marcon with Baird.

Hey good morning and congratulations on the strong quarter.

Thanks Mark.

I was wondering a little bit on the new sales. It sounds like things are going really well there. I'm wondering if you can comment a little bit about, are you seeing any sort of change in terms of the source of new sales -- are you -- you mentioned your largest competitor and being a net gainer there. But relative to everybody else that the public companies know about or the public companies that are out there -- or also just the local and regionals and any sort of upshift in terms of on-premise systems, both as it relates to your core sized clients and then also the progress that you're making on the midsized clients.

I'd say on the small side, market continues to be really online. Even a little bit less from -- still pretty strong from CPA referrals and client -- existing client referrals. But more and more of those, we've seen -- and this is over the last few years, it may be in the old days, the CPA would refer us and then the call would come right to us. The CPA may now refers, but someone then looks and comes in through the web and to buy. So, we're definitely seeing an increase from web sales, particularly in the low end and you're going to see even more of those sales come in on a self-serve onboarding basis where the client can sign themselves up in come in in search. So, it's going to be -- and then of course, we've learned that with all of -- virtually all of the salespeople working remotely and virtually, that has been very strong for sales to come in and be sold over the phone or over the web. I think on the mid-market side, yes, I think we've done very well against the competitors that you know well and cover, and we've taken some back some clients back that have left us and found as Efrain mentioned, very eloquently earlier that we have a total platform. You can buy certain pieces of it, but we have a total product set, not just one platform they have your payroll on and then connect to everybody else. We have everything if you want it and makes it much more seamless. And we also can keep whatever components you want on your own and API into virtually anybody through a marketplace. So, I think we've seen, yes, definitely a growth in the opportunity to take back some share from competitors, and we think that's going to certainly continue as we continue to add product.

Great. And then can you talk a little bit on the PEO side in terms of the strong growth that you're experiencing there? How much of it is coming from upsells as opposed to new logos?

I think you'd see a majority probably from upsell, but there's plenty of new logos now that are coming in new businesses that for the first time are -- and especially in those states where we're prominent, the Florida is the Georgia, the Texas they're new to PEO and are not necessarily coming from ASO. But I would say a slight majority are still up sales we're really good at that. They know us, and there's a great close rate there saying, hey, you're on payroll only or maybe your ASO, but you want to go to a better benefit, opportunities, better benefit plans and go into the PEO where you're kind of in those shared plants and so forth. So I'd say a slight majority from up-sells. But – but plenty of new logos. We've really been very successful, obviously, if you're growing over 20% in the quarter.

Great. And then two sort of related macro questions. One, just in terms of the preliminary thoughts with regards to 2023, how are you thinking about float balance growth? That's one. And then two, just a clarification with regards to the tempering of expectations. Are you actually seeing anything that's actually occurring on the ground, or is your comment more related to just the expectation that there would be some reason for tempering, obviously, if rates end up going up significantly.

I think it's more of the latter, Mark on that question. Look, hey, it's all fun and games to say that, we're going to get all the benefit from six, seven, eight raises depending on your perspective, but you've got to be somewhat cautious about what the impact on the economy as a whole, especially on the small end of the market would be, I – we don't have any crystal ball. You have a better one than we do, but that's an issue that we need to realize because the Fed will take and the Fed will give and we're trying to analyze how all of that looks. With respect to balance growth, I would say, it's probably going to be low single digits to the mid-single digits at this point. Depending on what's happening with wage inflation and the other factors that go in insurances. At this point, that's what our thought process is. We've had a pretty robust growth this year, obviously, the recovery in wages and in clients, it's helped a lot. So it will moderate a bit next year.

Great. Thank you.

Okay. Thanks, Mark.

Thank you. Our next question comes from Tien-Tsin Huang with JPMorgan.

Hi, Tien-Tsin.

Hey, good morning, great results and profitability. I wanted to…

Thanks.

…quickly if you don't mind, just one question, ask about existing versus new client revenue growth? I'm just thinking about what you said, I think, Efrain, you said it or maybe Marty double-digit annualized contract value growth sounded like it was broad-based. So just trying to disaggregate that comment with the growth outlook thinking about it between new clients versus existing clients, if that makes sense, just because it seems like your first look at 23% is pretty consistent with what we typically would observe. I just want to make sure the composition is different?

Yeah. So let me take that, Tien-Tsin. So, I think it is pretty consistent with what we observed. We typically are going to generate about half of our new logos, if you will, from newly foreign businesses. We expect that to continue going into next year. And then with the normal amount of upsell and cross-sell, and growth in revenue per client that we end up getting. So obviously, the net adds will come half of it will come from newly form business. Our new sales will come from newly formed businesses. And then there was one thing that I highlighted that's important is – and I think it was in response to Kevin's question, we're seeing more opportunity to add revenue online as we see more opportunity for the kinds of services that, for example, ERTC as well. So it – it's easy to overlook that, but it's part of the way as Marty said is part of who we are.

Perfect. That's what I needed. Because it looks like you're -- yes, despite the tough comp, get sort of back on, what we usually want to expect from Paychex. So, thank you. Thank you, guys.

Thanks, Tien-Tsin

Thank you. Our next question and our final question for today is from Peter Christiansen with Citi.

Good morning. Thanks for the question. Great job, guys.

Yes. Thanks. Appreciate it.

Yes, to the degree that you can tell, are you winning new business from previous like self-filers still? Is that still a reasonable pool to draw from on the new sales front?

It is, definitely. I mean, there's still plenty of small businesses on the small side that are -- have tried to continue to do things themselves. And I do think over the last two years, that's become even more difficult, and they're losing a lot of opportunity by not going with someone. It's -- so, yes, that's still a great opportunity. It's still a big piece of the pie that's available out there that -- and you're making it easier for them to sign up and do everything themselves, but do it in an automated fashion, to someone who has over 200 compliance experts to make sure they're doing it right. So, yes, that's still a good opportunity for us. And that's why, as Efrain said, half of our sales are coming from new businesses and many of those new businesses may be new, but they might have even tried to do something themselves for a few months or a year before they went to someone like us.

That's interesting. And then, any thoughts on industry consolidation at this point, particularly from, I guess, the more private regional players. Do you see any trends evolving there? And then, maybe juxtapose that with how you're thinking about the M&A landscape for Paychex.

Yes. I think, we've seen some of the smallest ones consolidated. It's just too difficult today for many of them to provide the product suite to that people are demanding and the online presence, the mobile app, the constant increase in product development. They're just not able to keep up and all the compliance. I mean -- and the government is not getting any easier to deal with, they want to -- particularly the IRS, they're underbudgeted, they're understaffed. So it's difficult for smaller payroll in particular companies to keep up with someone like us that has the powerful team behind the products. So I think there is some consolidation there. I wouldn't say any -- on the larger ones just yet, but I wouldn't be surprised if at some point, it just becomes too difficult to keep up with the investment. From an M&A standpoint, there're still plenty of things that we're looking at in PEOs, payroll, everything and a lot of other opportunities. We're finding opportunities. They're not always panning out. We're very selective. Obviously, we've had a great success rate over the -- particularly over the last 10 years on acquisitions. And we're very careful about what we add and that the valuation makes sense. And right now, the valuations are still a little lofty, I'd say.

Great. Well, thanks for the color. Really great. Thank you.

Okay. All right.

Okay. All right.

There are no further questions at this time. I'll now turn it back to our presenters for any additional and closing remarks.

Thank you. At this point, we'll close the call. If you're interested in replaying the webcast, it will be archived for approximately 90 days. Thank you for taking the time to participate in our third quarter earnings release conference call and for your interest in paychecks. I hope you all continue to remain safe and healthy. Thank you.

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.