Paychex (NasdaqGS:PAYX) Q2 2026 Earnings Call December 19, 2025 09:30 AM ET Company ParticipantsSamad Samana - Managing DirectorBryan Bergin - Managing DirectorJohn Gibson - President and CEOBryan Keane - Head of North America Payments Processors and IT Services ResearchKartik Mehta - Executive Managing Director and Director of ResearchBob Schrader - Senior VP and CFOJames Faucette - Managing DirectorTien-tsin Huang - Managing DirectorConference Call ParticipantsMark Marcon - Senior Research AnalystAndrew N ...

Paychex (NasdaqGS:PAYX) Q2 2026 Earnings Call December 19, 2025 09:30 AM ET Company ParticipantsSamad Samana - Managing DirectorBryan Bergin - Managing DirectorJohn Gibson - President and CEOBryan Keane - Head of North America Payments Processors and IT Services ResearchKartik Mehta - Executive Managing Director and Director of ResearchBob Schrader - Senior VP and CFOJames Faucette - Managing DirectorTien-tsin Huang - Managing DirectorConference Call ParticipantsMark Marcon - Senior Research AnalystAndrew N ...

Financial Data and Key Metrics Changes - Total revenue increased by 18% year over year to $1.6 billion, with management solutions revenue growing by 21% to $1.2 billion, primarily driven by product penetration and price realization [12][3] - Adjusted operating income grew by 21% over the prior year, with operating income margins at 36.7% and adjusted operating income margins increasing by approximately 80 basis points year over year to 41.7% [12][3] - Diluted earnings per share decreased by 4% to $1.10, while adjusted diluted earnings per share increased by 11% to $1.26 [12][3] - Interest on funds held for clients increased by 51% to $54 million, reflecting the addition of Paycor balances and higher realized gains [12][3] Business Line Data and Key Metrics Changes - PEO and insurance solutions revenue increased by 6% to $337 million, driven by solid growth in the number of average PEO worksite employees [12][3] - The PO business achieved market-leading mid-single-digit worksite employee growth, supported by strong demand and near-record retention [4][5] - Paycor contributed approximately 17 percentage points to the growth in management solutions revenue [12][3] Market Data and Key Metrics Changes - Clients' workforce levels remained relatively stable with flat same-store employment growth this quarter [5] - The Small Business Employment Watch index has remained stable throughout 2025, showing no signs of a recession at this time [5] - Small businesses continue to face challenges in sourcing qualified talent, indicating a competitive labor market [5] Company Strategy and Development Direction - The company is focused on integrating the Paycor acquisition and achieving approximately $100 million in cost synergies for fiscal year 2026 [3][4] - The company is leveraging AI to enhance operational efficiency and client outcomes, with a strong emphasis on data quality and scale [8][9] - The company aims to position itself as a digitally driven HR leader by reinventing the HCM experience as AI-first [11] Management's Comments on Operating Environment and Future Outlook - Management remains confident in the value proposition and demand for HR technology and advisory solutions, despite macroeconomic challenges [5][6] - The company expects to achieve revenue synergies targets for the fiscal year and is optimistic about the ongoing integration of Paycor [4][12] - Management anticipates total revenue growth of approximately 18% for the third quarter, with adjusted operating margins between 47% and 48% [15][16] Other Important Information - The company has launched a GenAI-powered employment law and compliance platform, which has seen strong adoption and utilization by HR experts [10] - The company is actively exploring additional applications of AI across its business to enhance efficiency and improve client outcomes [11] Q&A Session Summary Question: Concerns about Paycor's contribution to growth - Management acknowledged integration challenges but emphasized that Paycor's growth was estimated to be between 8% to 9% on a pro forma basis, slightly better than Q1 [20][21] Question: Insights on selling season and cost synergies - Management noted that demand remains consistent with historical levels, and they are optimistic about achieving long-term cost synergies through AI initiatives [25][26] Question: Guidance for fiscal 2026 and revenue per client - Management indicated that revenue per client growth was softer than expected, leading to guidance adjustments towards the low end of the range [33][34] Question: Pricing and bundling strategies - Management stated that they have a comprehensive pricing strategy and are exploring adjustments but feel confident in their current pricing model [52][53] Question: Upsell motion to PEO and client receptivity - Management reported strong receptivity to PEO offerings, with a balanced mix of new and existing clients contributing to growth [60][61]

Summary of Paychex Conference Call Company Overview - **Company**: Paychex - **Industry**: Human Capital Management (HCM) and Payroll Services Key Points AI Innovations and Product Development - Paychex has been working on AI-related innovations for over a decade, leveraging vast amounts of data from servicing 5 million small businesses annually [3][4] - The company plans to update its three core platforms (SurePayroll, Paychex Flex, and Paycor) to be AI-driven by the next calendar year [4] - A provisional patent has been granted for a tool that curates answers based on client interactions, enhancing HR consulting capabilities [5] - Agentic AI is being utilized to automate payroll processes and improve accuracy [6] Employment Landscape and Market Resilience - Despite concerns about a recession, Paychex reports resilience among small businesses, with a small business index showing only a slight moderation [8] - The primary issue in the labor market is a supply problem, exacerbated by restrictive immigration policies and accelerated retirements [11] - Paychex believes there is underemployment in its client base, with more job openings than available skilled labor [11] Impact of AI on Employment - The CEO does not foresee AI leading to mass unemployment, arguing that technological revolutions typically do not result in significant job losses [13] - Jobs will evolve rather than disappear, with a shift towards advisory roles for Paychex employees [14] Acquisition of Paycor - The acquisition of Paycor is seen as a natural extension of Paychex's business, expanding its total addressable market by $10 billion [20] - Integration of Paycor is progressing well, with cost synergies exceeding expectations and revenue synergies anticipated to grow over time [23][28] - Paychex aims to leverage its existing client base to drive revenue growth from the newly acquired Paycor clients [28] PEO Business Growth - Paychex is optimistic about its Professional Employer Organization (PEO) business, which is experiencing better growth than competitors due to increased investment and a strong value proposition [33] - There is significant room for growth in the PEO model, with only about 200,000 of the 6.5 million U.S. businesses currently utilizing it [33] Financial Performance and Growth Drivers - Paychex operates in a large market growing at mid-single digits, with expectations for PEO to grow faster than management solutions [45] - Revenue growth is driven by client-based growth, pricing power, and increased share of wallet from existing clients [46] - The company anticipates continued growth from M&A, particularly following the Paycor acquisition [47] Capital Allocation Strategy - Paychex plans to prioritize debt repayment, particularly with $400 million coming due in March, while maintaining a target gross leverage below 1.5 times [51] - The company aims to grow dividends in line with earnings, with a free cash flow margin exceeding 30% [52] - Share buybacks will be used to offset dilution, with M&A remaining a focus for future capital deployment [53] Additional Insights - The introduction of the Paychex Perks program aims to provide employees with affordable benefits options, addressing health inflation issues [37][38] - The company is focused on integrating AI into its HCM solutions to enhance user experience and operational efficiency [30][31]

Core Insights - Paychex reported a 10% total revenue growth in Q4 2025, driven by the Paycor acquisition, with a full-year revenue growth of 6% and adjusted diluted EPS growth of 6% [1] - The integration of Paycor exceeded management expectations, leading to raised cost synergy targets and guidance for fiscal 2026 projecting total revenue growth of 16.5%-18.5% [2] Integration and Market Strategy - The Paycor acquisition added over 50,000 clients, contributing approximately 12-13 percentage points to consolidated revenue growth in fiscal 2026 [3] - Paychex Flex targets companies with up to 99 employees, while Paycor focuses on enterprises with over 100 employees, and SurePayroll serves the smallest businesses [4] Cost Synergy and Operational Efficiency - Management raised cost synergy expectations for fiscal 2026 to $90 million, with most actions completed shortly after the acquisition [5][6] - Adjusted operating income margins, excluding Paycor, expanded by 110 basis points in Q4 and by 250 basis points for the full year, indicating operational discipline [5] Channel Ecosystem and Revenue Synergies - Over half of new business originates from channel partners, with initial cross-sell achievements validating the combined referral-driven go-to-market framework [7] - The Paychex Partner Plus program has enrolled over 1,000 brokers, fostering relationships and expanding the referral network [8] Future Outlook - For fiscal 2026, management projects total revenue growth of 16.5%-18.5%, with significant contributions from the Paycor acquisition and expected growth in various segments [9] - Most cost synergy actions have been executed, balancing incremental cost reductions and investments for long-term growth [10]

Financial Data and Key Metrics Changes - Total revenue for Q4 increased by 10% to $1.4 billion, while excluding Paycor, total revenue increased by 3% [20] - For the full fiscal year 2025, total revenue grew by 6% to $5.6 billion [23] - Adjusted diluted earnings per share increased by 6% to $1.19 in Q4, while diluted earnings per share decreased by 22% to $0.82 [22] - Adjusted operating income margins for Q4 were 40.4%, an increase of approximately 20 basis points [22] Business Line Data and Key Metrics Changes - Management Solutions revenue increased by 12% to $1 billion for Q4, driven by the addition of Paycor and higher revenue per client [21] - PEO and Insurance Solutions revenue increased by 4% to $340 million for Q4, supported by growth in average PEO worksite employees [21] - Interest on funds held for clients increased by 18% to $45 million for Q4, primarily due to the inclusion of Paycor balances [21] Market Data and Key Metrics Changes - The number of clients served increased to approximately 800,000, with HR outsourcing worksite employees rising to 2.5 million [6] - Client retention rates improved year over year, indicating strong value provided to clients [6] Company Strategy and Development Direction - The company aims to strategically accelerate investments for future growth while focusing on cost synergies of approximately $90 million in fiscal year 2026 [7][26] - The HCM platforms will be segmented, with Paychex Flex targeting companies with up to 99 employees and Paycor focusing on enterprises with over 100 employees [9] - The company is committed to enhancing operational efficiency and maintaining industry-leading operating margins [6][24] Management's Comments on Operating Environment and Future Outlook - The management noted a mix of optimism and uncertainty in the market, with small businesses remaining fundamentally healthy despite external pressures [16][17] - The company expects total revenue growth for fiscal year 2026 to be in the range of 16.5% to 18.5%, with Management Solutions projected to grow by 20% to 22% [26] - Management expressed confidence in achieving revenue synergies and highlighted the importance of cross-selling opportunities [11][90] Other Important Information - The company returned over $1.5 billion to shareholders through cash dividends and share repurchases during the fiscal year [25] - The financial position remains strong, with cash and investments totaling $1.7 billion and total borrowings of approximately $5 billion [24] Q&A Session Summary Question: Can you discuss the distractions related to the sales force integration and its impact on Q4? - Management acknowledged that they made strategic decisions to complete changes quickly to minimize disruption, and they do not expect significant spillover effects into Q1 [33][37] Question: What factors contributed to the deceleration in organic Management Solutions growth from Q3 to Q4? - Management noted softer checks and a mix issue with smaller client sizes, along with MPP enrollment headwinds impacting growth [42][44] Question: How does the company plan to reaccelerate organic client growth? - The company will focus on organic client growth of 1% to 3% while driving product penetration and maintaining pricing strength [49][50] Question: What is the outlook for Paycor's growth in fiscal 2026? - Management expects Paycor to be a strong double-digit grower, with some conservatism in guidance to ensure deliverability [59] Question: Can you clarify the impact of recent bankruptcies and financial distress on the company? - Management indicated that while there were increases in bankruptcies, the impact on revenue was minimal, particularly at the lower end of the client base [72][84]

Financial Data and Key Metrics Changes - Total revenue for Q4 increased by 10% to $1.4 billion; excluding Paycor, total revenue increased by 3% [21] - For the full fiscal year 2025, total revenue grew by 6% to $5.6 billion [24] - Adjusted diluted earnings per share increased by 6% to $1.19 in Q4, while diluted earnings per share decreased by 22% to $0.82 [23] - Adjusted operating income margins for Q4 were 40.4%, an increase of approximately 20 basis points [23] Business Line Data and Key Metrics Changes - Management Solutions revenue increased by 12% to $1 billion in Q4, driven by the addition of Paycor and higher revenue per client [22] - PEO and Insurance Solutions revenue increased by 4% to $340 million, supported by growth in average PEO worksite employees [22] - Interest on funds held for clients increased by 18% to $45 million in Q4, primarily due to the inclusion of Paycor balances [22] Market Data and Key Metrics Changes - The number of clients served increased to approximately 800,000, with HR outsourcing worksite employees rising to 2.5 million [6] - Client retention rates improved year over year, indicating strong value provided to clients [5] Company Strategy and Development Direction - The company is focused on integrating Paycor and enhancing customer experience while maintaining industry-leading operating margins [5] - A strategic decision was made to accelerate investments for future growth, particularly in technology and sales capabilities [7][54] - The company aims to achieve approximately $90 million in cost synergies in fiscal year 2026, with additional synergy opportunities identified [6][90] Management's Comments on Operating Environment and Future Outlook - The management noted a mix of optimism and uncertainty in the market, with small businesses remaining fundamentally healthy despite external pressures [17] - The company expects total revenue growth in fiscal year 2026 to be between 16.5% and 18.5%, with Management Solutions projected to grow by 20% to 22% [27] - Management expressed confidence in navigating the current macro environment and emphasized the importance of operational efficiency [26][19] Other Important Information - The company has completed key integration activities post-Paycor acquisition and is now operating as one entity [4] - A comprehensive territory assessment and reassignment review across sales teams has been completed to align with market segments [9] Q&A Session Summary Question: Can you discuss the distractions related to the sales force integration and its impact on Q4? - Management acknowledged that the sales transformation was planned prior to the acquisition and all changes were made in Q4 to minimize future disruptions [33][34] Question: What are the expectations for organic growth versus cross-selling? - Management indicated a focus on 1% to 3% organic client growth while emphasizing product penetration and disciplined growth strategies [50] Question: How is the integration of Paycor's sales team progressing? - Management reported that they retained a significant portion of Paycor's sales and marketing organization and are fully staffed, with plans to continue investing in sales [62] Question: What is the outlook for Paycor's growth in fiscal year 2026? - Management expects Paycor to be a strong double-digit grower, with some conservatism in guidance to ensure deliverability [59] Question: How will the company balance capital allocation between shareholder returns and debt reduction? - Management stated that the primary focus remains on investing in the business, with dividends being the main method of returning excess cash to shareholders [76]

Financial Data and Key Metrics Changes - Total revenue for the third quarter increased by 5% to $1.5 billion, with a 6% growth excluding the impact of the discontinued ERTC program [22][24] - Diluted earnings per share rose by 4% to $1.43, while adjusted diluted earnings per share grew by 8% to $1.49 [24] - Adjusted operating margins increased by approximately 180 basis points to 46.9% due to improved productivity and cost discipline [24] Business Line Data and Key Metrics Changes - Management Solutions revenue increased by 5% to $1.1 billion, driven by growth in the number of clients and higher revenue per client [23] - PEO and Insurance Solutions revenue grew by 6% to $365 million, primarily due to an increase in average worksite employees [23] - Interest on funds held for clients decreased by 2% to $43 million, attributed to lower average interest rates [23] Market Data and Key Metrics Changes - Client retention improved, with losses down across all employee size segments, and revenue retention remained above pre-pandemic levels [14] - The overall checks per client remained flat compared to the prior year, indicating stable U.S. labor market conditions [19][20] Company Strategy and Development Direction - The company is focused on integrating the pending acquisition of Paycor, which is expected to enhance its competitive position and expand its customer base [10][11] - The acquisition is anticipated to yield over $80 million in cost synergies and be accretive to adjusted earnings per share in the next fiscal year [13][29] - The company aims to leverage AI and technology to drive innovation in human capital management solutions [15][16] Management's Comments on Operating Environment and Future Outlook - The management noted that U.S. job growth has moderated but remains stable, with some impacts from weather-related challenges and lower bonus checks [19] - The company expects total revenue growth for the fiscal year to be in the range of 4% to 5.5%, primarily due to headwinds from the expiration of the ERTC program [27][28] - Management expressed optimism about the future, citing strong client retention and a solid pipeline for the upcoming quarter [20][85] Other Important Information - The company was recognized as one of Fortune's most innovative companies for the third consecutive year, reflecting its commitment to innovation [15] - Paychex was named one of the world's most ethical companies for the seventeenth time, highlighting its corporate values and community impact [18] Q&A Session Summary Question: Updates on preference between ASO and PEO models - Management indicated that both ASO and PEO models are performing strongly, with no significant preference shift noted [34][37] Question: Client hiring lower than expected - Management clarified that the hiring slowdown was broad-based, with specific impacts from natural disasters in California and lower bonus distributions [43] Question: Expectations for revenue synergies from Paycor acquisition - Management is optimistic about revenue synergies but emphasized the need to finalize integration before providing detailed guidance [46][56] Question: Pricing power in a potential macro downturn - Management expressed confidence in their pricing power, noting strong price realization in the third quarter [98][100]