Paychex Inc Enters into Definitive Agreement to Acquire Paycor Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Bryan Bergin - TD Cowen - Analyst : Congrats on this deal. I guess the first question or I guess the one question I got here is when you consider the most promising revenue synergy and upsell opportunities, can you double-click on that further? Where do you see the most significant opportunities in this combined organization? And the accretion assumptions, like what scale of potential revenue synergy are required to hit those accretion assumptions here over the next two fiscal years?

Question: Kevin McVeigh - UBS - Analyst : Can you hear me?

Question: Kevin McVeigh - UBS - Analyst : Terrific.

Question: Kevin McVeigh - UBS - Analyst : That's all right. Yeah, we'll get more back in. Just real quick -- when I think about the product gaps and interoperability across the modules, it seems pretty interesting. How much of that is kind of dictated based on the average client size as opposed to gaps, I guess. And just to follow-up on that, I think we've always done a really, really nice job framing their PEPM, I think they talked about a $19 PEPM more recently, up from $15 in '21. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 07, 2025 / 2:30PM, PAYX.OQ - Paychex Inc Enters into Definitive Agreement to Acquire Paycor Is there any way to think about where your PEPM sits relative to that $19? And how much of that optionality on the revenue was predicated on client growth as opposed to meaning average client size as opposed to maybe gaps you had in the portfolio if there's a way to think about that?

Question: Mark Marcon - Robert W. Baird & Co. Incorporated - Analyst : Congratulations. Can you hear me now?

Question: Mark Marcon - Robert W. Baird & Co. Incorporated - Analyst : Sorry about that. All right. Great. Since I got cut off, maybe allow me just a little bit. I've got a super short question and then a little bit more of a complex accounting question. From a super short perspective, you run SurePayroll as an independent subsidiary. How are you thinking about branding as you're positioning the Paycor solutions. That's the really fast question. And then the longer question is just with regards to if we take a look at the dilution, I noticed you said adjusted diluted EPS, but got a number of investors that were asking just about how we make the -- how we keep it from not being dilutive given Paycor's $64 million in stock-based comp and $91 million of intangible amortization, would you just exclude that? So that's one that a lot of investors have been asking about.

Question: Andrew Nicholas - William Blair - Analyst : Talked quite a bit about the revenue synergies. I was hoping we could cover the other side of the coin. You've said at least $80 million of cost synergies in the near term. Any more color you can give on kind of primary sources of those savings and maybe how we should think about the cadence of realizing those synergies and especially to the extent that it's baked into your accretion framework?

Question: James Faucette - Morgan Stanley - Analyst : Just a quick clarification on the GAAP to non-GAAP. What about stock-based compensation and how that's likely to be treated? Typically, Paychex hasn't had too much, but I don't know about Paycor and kind of what we should anticipate there? And then my question was really around the financing, et cetera. Are you able to give us a rough outline of what those terms will look like and how we should think about impact to interest expense, et cetera?

Question: Samad Samana - Jefferies - Analyst : Congrats to both the Paychex and the Paycor team. So maybe we'll start with just why now? What is changing either inside of Paychex's business or in the market landscape that's making you think about one of the more sizable acquisitions that you've done. And I guess along that line, did you look at any of the other companies in this space, particularly on the private side? And again, why now? What do you see in the business and landscape? And what did you see in the industry that made you win on Paycor specifically?

Question: Samad Samana - Jefferies - Analyst : I'm just going to sneak in a quick follow-up. Just the distribution side of it. Obviously, Paychex has a very large direct sales organization. Can you just remind us maybe how many quota-carrying reps that you have and how many focus on maybe that 50 employee plus side of the market? And where do you see kind of the biggest distribution so not product or revenue, but in terms of the sales organizations, what are the synergies? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 07, 2025 / 2:30PM, PAYX.OQ - Paychex Inc Enters into Definitive Agreement to Acquire Paycor

Question: Peter Christiansen - Citi - Analyst : Congratulations, gentlemen. We're getting a bunch of questions here. I'd just like to dig a bit more into the capital allocation side here. Bob, if we think about Paychex, $1.7 billion, $1.8 billion free cash flow generation, you pay out $1.5 billion-ish in dividend, thinking about maybe an incremental $200 million in interest cost, it leaves a question about debt service and how you think about that long term? Maybe we're not thinking about the numbers correctly here, but I was just wondering if you could just frame that part of the equation for investors seems to be where we're getting the most questions.

Question: Peter Christiansen - Citi - Analyst : That's helpful. And just a quick one for John, maybe Raul. What do you see as potentially what could be some integration risk here?

Question: Bryan Keane - Deutsche Bank - Analyst : Congratulations. I was just hoping you could talk a little bit about Paycor's organic growth rates? Where have they been at for some of us who are a little less familiar? And what would be the normalized growth rate trying to figure out maybe if there's a bump from the economy or have they had any softness due to economic slowdown? Just trying to understand the model a little bit.

Question: David Grossman - Stifel Financial Corp. - Analyst : Congratulations to all of you. I just had a couple of very brief follow-up questions. And one was about the float. I see that they do generate float income at Paycor. And just wondering, is there any synergies or things we should think about in the context of ¡ you are obviously a much larger company and whether there's some real benefits to running that flow through the Paychex platform. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 07, 2025 / 2:30PM, PAYX.OQ - Paychex Inc Enters into Definitive Agreement to Acquire Paycor

Question: David Grossman - Stifel Financial Corp. - Analyst : Right. And then just back to a question that was asked before a couple of times about stock comp, is that I believe if we use -- when you think about how we model the financial effect going forward, do you want to -- just looking at consensus, do you want us to reduce that by the amount of stock comp? Because I think they're -- if I'm remembering right, it's about a $50 million run rate this year. And I just want to make sure I got the mechanics of that right?

Question: David Grossman - Stifel Financial Corp. - Analyst : Got it. I appreciate that and the timing. And if you don't mind, can I just ask a little question. As you think about kind of your sweet spot in the market and for folks like maybe who just have to simplify this down and think about it in terms of number of employees. And I know that small companies can have fairly sophisticated needs from an HCM perspective. But when you think about your core business today, what do you think your sweet spot is right now in terms of number of employees? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 07, 2025 / 2:30PM, PAYX.OQ - Paychex Inc Enters into Definitive Agreement to Acquire Paycor

Question: Ashish Sabadra - RBC Capital Markets - Analyst : If I can just ask two questions. First one on the PEO opportunity, your ability to potentially upsell cross-sell PEO into the Paycor customer base. That's one. And then secondly, I know there were some questions asked on the intangible amortizations, but I just wanted to clarify how do you think about the treatment going forward, both for what Paycor might already have, but through the acquisition as well. Would that be excluded on a pro forma basis?

Question: Ramsey El-Assal - Barclays Corporate & Investment Bank - Analyst : It doesn't sound like there's much overlap in your respective client bases. But I just wanted to ask, are there any dyssynergies to consider in the context of the transaction?

Question: Kartik Mehta - Northcoast Research - Analyst : Bob, just a question. I know you've answered a lot on debt service. But I'm wondering, as you look at the balance sheet, just the minimum amount of cash you'd want to keep on the balance sheet. And then just, John, on margins. Any thoughts on how this will impact margins as you move up market? And could you -- could this pressure margins, but you get revenue growth as an offset?

Question: Kartik Mehta - Northcoast Research - Analyst : No worries, Bob. Just wondering the amount of cash, minimum amount of cash you want to maintain on the balance sheet. Yeah.

Question: Jason Kupferberg - BofA Securities - Analyst : I just had two numbers questions. The first, just how free cash flow may be impacted by the acquisition in terms of dollars as well as net income conversion? And then secondly, I know that Paychex's medium-term guidance for revenue growth has been upper single digit. Does this acquisition change that view at all?

Question: Zachary Gunn - FT Partners - Analyst : I just wanted to ask, if I remember correctly, this is largest deal Paychex has done. So I guess just what gives you confidence that right now is the right time for a deal like this? And just as we frame the kind of $80 million in expense synergies, just wondering what level of conservatism there is just with the uncertainty having not done deals of size and not necessarily having that muscle memory there.