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    PAYX
    Earnings call· Nov 2025(Q2 FY26)

    PAYCHEX INC PAYX

    Dec 19, 2025 Source

    Executive summary

    Paychex Q2 FY26 — Strong Adjusted EPS Growth and Paycor Integration Progress

    Paychex delivered solid Q2 FY26 results, driven by strong revenue growth and increased adjusted operating income, benefiting from the Paycor acquisition and enhanced cost synergies. While the company reaffirmed its full-year outlook, it anticipates revenue to be at the low end of its ranges due to softer revenue per client and insurance agency headwinds, partially offset by strong PEO performance. The company is actively leveraging AI to drive operational efficiencies and enhance client value, positioning itself for continued margin expansion and leadership in the HCM industry.

    Highlights

    5

    • Total revenue increased 18% year-over-year to $1.6 billion.

    • Adjusted operating income grew 21% over the prior year.

    • Adjusted diluted EPS increased 11% to $1.26 per share.

    • Paycor integration cost synergies increased to $100 million for FY26 (from $80 million).

    • PEO business achieved market-leading mid-single-digit worksite employee growth and near-record retention.

    Concerns

    3

    • Management Solutions revenue growth moderated by softer-than-expected revenue per client.

    • Insurance agency remained a headwind due to continued weakness in workers' compensation rates and lower health and benefit volumes.

    • Diluted earnings per share decreased 4% to $1.10 per share.

    Guidance & targets

    8
    CategoryTargetConfidence
    Fiscal 2026 Total Revenue
    Low end of previous range
    high materiality
    Medium
    Fiscal 2026 Management Solutions Revenue
    Low end of previous range
    medium materiality
    Medium
    Fiscal 2026 PEO and Insurance Revenue
    Low end of previous range
    medium materiality
    Medium
    Fiscal 2026 Interest on Funds Held for Clients
    High end of $190 million to $200 million range
    medium materiality
    High
    Fiscal 2026 Adjusted Diluted Earnings Per Share Growth
    10% to 11%
    high materiality
    High
    Fiscal 2026 Effective Income Tax Rate
    Approximately 24%
    low materiality
    High
    Fiscal 2026 Q3 Total Revenue Growth
    Approximately 18%
    medium materiality
    High
    Fiscal 2026 Q3 Adjusted Operating Margin
    Between 47% and 48%
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Management Solutions
    Growth primarily driven by product penetration and price realization, but moderated by softer-than-expected revenue per client.
    Paycor contribution to growth: approximately 17 percentage pointsRevenue growth moderated by softer-than-expected revenue per client
    		$1.2 billion21%——
    PEO and Insurance Solutions
    Driven primarily by continued solid growth in the number of average PEO worksite employees as well as an increase in PEO insurance revenues. Insurance agency remained a headwind due to continued weakness in workers' compensation rates and lower health and benefit volumes.
    Average PEO worksite employee growth: mid-single-digitPEO growth: high single digits (in Q2)PEO YTD growth: 4.5%Retention: near-record
    		$337 million6%——
    Interest on funds held for clients
    Reflecting the addition of Paycor balances and higher realized gains due to some strategic repositioning in the long-term investment portfolio.
    		$54 million51%——

    Operational metrics

    17
    Total revenue growth
    18%YoY
    Q2 FY26

    Total revenue increased 18% over the prior year to $1.6 billion.

    Adjusted operating income growth
    21%YoY
    Q2 FY26

    Adjusted operating income grew 21% over the prior year driven by higher productivity.

    Adjusted operating income margin
    41.7%increased by approximately 80 basis points YoY
    Q2 FY26

    Driven by increased productivity and continued cost discipline.

    Operating income margin
    36.7%
    Q2 FY26

    Operating income margins were 36.7%.

    Diluted EPS growth
    -4%YoY
    Q2 FY26

    Diluted earnings per share decreased 4% to $1.10 per share.

    Adjusted diluted EPS growth
    11%YoY
    Q2 FY26

    Adjusted diluted earnings per share increased 11% to $1.26 per share.

    Cash, restricted cash and total corporate investments
    $1.6 billion
    Q2 FY26 end

    Our financial position remains strong with cash, restricted cash and total corporate investments of $1.6 billion as of the end of the quarter.

    Total borrowings
    $5 billion
    Q2 FY26 end

    Total borrowings of approximately $5 billion as of the end of the quarter.

    Capital returned to shareholders
    $514 million
    Q2 FY26

    During the quarter, we returned $514 million to shareholders in the form of cash dividends and share buybacks.

    Return on equity
    40%
    12-month rolling

    Our 12-month rolling return on equity remains robust at 40%.

    Total expenses growth
    27%YoY
    Q2 FY26

    Total expenses increased 27% to $986 million, primarily driven by the Paycor acquisition. Excluding Paycor, we estimate expenses grew low single digits.

    Paycor pro forma growth
    8-9%
    Q2 FY26

    Our best estimate on a pro forma basis, adjusting for year-end processing fees, is that Paycor grew between 8% to 9% during the quarter.

    Paycor cost synergies
    $100 millionup from $80 million original target
    FY26

    We now expect approximately $100 million in cost synergies for fiscal year 2026, up from the original target of $80 million.

    Client base blue/gray-collar industries
    Over 70%
    current

    Over 70% of our clients' employees work in blue and gray-collar industries that are harder to displace, making the portfolio less exposed to AI employment risk.

    Proprietary data points
    250 million
    current

    With over 250 million data points, Paychex has one of the largest proprietary datasets in the industry, providing a powerful competitive advantage for AI.

    Paycor broker bookings contribution
    50%
    Q2 FY26

    The broker network in the Paycor side is still contributing 50% of the bookings.

    Management Solutions organic growth rate
    modest acceleration towards 5%from current 4% levels
    back half of the year and over time

    We expect some modest acceleration to the organic growth rate in Management Solutions, probably moving closer towards the 5% range over time.

    Industry KPIs

    4
    MetricValueDetails
    Peo metricsmid-single-digit%
    Retention ratenear-record
    Revenue model mixsignificant fixed base fee component
    Client funds balances yield51%%

    Deals & partnerships

    1
    PaycorAcquisition of HCM software provider to expand market reach and capabilities.

    Significant progress made in advancing strategic priorities including the Paycor acquisition and integration. Strengthened broker relationships through Partner Plus program and cross-sales efforts gaining traction. Integration involved moving clients across platforms and upsell efforts.

    Risks & headwinds

    5
    Softer-than-expected revenue per clientQ2 FY26, expected to continue in H2 FY26

    Moderated Management Solutions revenue growth; smaller deal sizes and less attachment upfront.

    Mitigation: Focus on upselling existing clients; comprehensive bundles for various client needs; clients are shopping for value and managing costs carefully.

    Weakness in workers' compensation ratesQ2 FY26

    Headwind to PEO and Insurance Solutions.

    Mitigation: Making changes to improve performance of the insurance agency.

    Lower health and benefit volumesQ2 FY26

    Headwind to PEO and Insurance Solutions.

    Mitigation: Making changes to improve performance of the insurance agency.

    Healthcare inflation for clientscurrent

    10% to 15% increases.

    Mitigation: PEO solution empowers small businesses to offer competitive benefit packages; not seeing clients dropping health care at the rate seen last year.

    Macro environment uncertaintyFiscal '26

    Some uncertainty.

    Mitigation: Reaffirming outlook with adjustments to low end of revenue ranges; confident in value proposition; no signs of recession at this time.

    What to watch in Q3 FY26

    5

    PEO growth

    H2 FY26
    Current4.5% YTD
    Target7.5% in H2 FY26

    Why it matters

    To achieve the lower end of the 6-8% full-year guidance range for PEO and Insurance Solutions, requiring significant acceleration in the second half.

    you're at 4.5% year-to-date, and you'll need to do, I guess, 7.5% in the second half to get to the lower end of the 6% to 8% range that you're pointing us to.

    Q&A highlights

    7

    Asked for clarity on Paycor's growth contribution, noting market reaction (stock down 3.5%) despite positive news.

    Management clarified that Paycor's pro forma growth was estimated at 8-9% for the quarter, in line with or slightly better than Q1, after adjusting for year-end processing fees. They emphasized exceeding cost synergy targets ($100M for FY26) and meeting revenue synergy targets, with strong client retention and accelerating bookings.

    “Our best estimate during the quarter is that it grew between 8% to 9%, and it was certainly in line to, I would say, slightly better than what we saw in Q1.”

    asked by Mark Marcon · answered by Robert Schrader

    2 min read5 chapters

    Detailed Narrative

    01

    Paycor Integration Progress

    Paychex continues to make significant progress on the Paycor integration, identifying additional expense opportunities to increase cost synergies to $100 million for FY26, up from the original $80 million target. Revenue synergies are on track, and client and revenue retention in the Paycor client base continues to exceed plan and is at historical levels. The company is actively cross-selling and moving clients between platforms for optimal fit, with broker bookings returning to pre-acquisition levels.

    02

    AI Strategy and Innovation

    Paychex published a presentation outlining its AI strategy, emphasizing its less exposure to AI employment risk due to its client base (over 70% in blue/gray-collar industries, smaller businesses) and fixed base fee revenue model. The company leverages its proprietary dataset of over 250 million data points for AI-driven solutions, including a patent-pending AI-powered knowledge mesh system and a GenAI-powered employment law and compliance platform. These innovations aim to enhance efficiency and improve client outcomes.

    03

    Agentic AI Pilots Success

    The company successfully piloted agentic AI, which autonomously handled thousands of payroll calls and emails with nearly 100% accuracy, reducing processing time and allowing service teams to focus on strategic advisory support. This is part of a broader strategy to invest in back-office efficiency and reposition employees as proactive client advisors. The AI-powered sales engine has also been launched to a pilot group and is being deployed across the sales force.

    04

    Macro Environment and Client Behavior

    The labor market shows relatively stable client workforce levels with flat same-store employment growth. Small businesses are managing costs carefully, leading to prospects choosing lower-end bundles or fewer add-on modules at the point of sale, impacting revenue per client. Despite this, demand for HR technology and advisory solutions remains consistent with historical levels, with proposal and meeting activities remaining solid.

    05

    PEO Business Strength

    The PEO business continues to perform strongly, achieving market-leading mid-single-digit worksite employee growth and near-record retention. October enrollment for the at-risk Florida MPP plan met expectations, and early January enrollment indications support solid revenue growth for the PEO segment. The PEO's strong performance helps offset headwinds from the insurance agency, which is experiencing weakness in workers' compensation rates and lower health and benefit volumes.

    AI-generated summary of the company’s earnings call. Not investment advice.