Paychex(PAYX) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total revenue increased by 18% year over year to $1.6 billion, with management solutions revenue growing 21% to $1.2 billion, primarily driven by product penetration and price realization [14][15] - 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% [14][15] - Diluted earnings per share decreased by 4% to $1.10, while adjusted diluted earnings per share increased by 11% to $1.26 [15] 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 [14] - Interest on funds held for clients increased by 51% to $54 million, reflecting the addition of Paycor balances and higher realized gains [15] - The PO business achieved market-leading mid-single-digit worksite employee growth, supported by strong demand and near-record retention [6] Market Data and Key Metrics Changes - Clients' workforce levels remained stable with flat same-store employment growth this quarter, and the Small Business Employment Watch index has remained relatively stable throughout 2025 [7] - Demand for HR technology and advisory solutions continues to align with expectations, despite challenges in sourcing qualified talent [7][9] 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 [4][5] - The company is leveraging AI to enhance operational efficiency and client outcomes, with a strong emphasis on data quality and scale as competitive advantages [10][13] - The company aims to balance growth and innovation while expanding margins, positioning itself as a digitally driven HR leader [13][30] Management's Comments on Operating Environment and Future Outlook - Management remains confident in the value proposition and demand for solutions, despite a cautious market where clients are cost-conscious [27][36] - The company expects to achieve revenue synergies targets for the fiscal year and has seen steady progress in client retention and bookings [25][26] - The outlook for fiscal 2026 has been reaffirmed, with expectations for total revenue growth towards the low end of the ranges for management solutions, PEO, and insurance [17][35] 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 [11] - The company is actively exploring additional applications of AI across the business to enhance efficiency and improve client outcomes [12] Q&A Session Summary Question: Concerns about Paycor's growth contribution - Management acknowledged integration challenges but estimated Paycor's growth at approximately 8% to 9% on a pro forma basis, slightly better than Q1 [22][23] Question: Insights on selling season and cost synergies - Management noted consistent demand and activity levels, with a focus on maintaining competitive positioning and leveraging AI for operational efficiency [27][28] Question: Clarification on revenue per client and deal sizes - Management indicated softer-than-expected revenue per client due to smaller deal sizes and less attachment at the point of sale, attributing this to macroeconomic factors [34][48] Question: Pricing and bundling strategies - Management expressed confidence in their pricing strategy, emphasizing the value proposition and the addition of new products to support pricing [56][57] 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 [65][66]