Paychex Inc Q3 2025 Earnings Call Summary

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

Question: Daniel Maxwell - William Blair & Company, L.L.C. (Research) - Analyst : This is Daniel Maxwell on for Andrew today. Just to kick things off, I was wondering if you had any updates on the preference between ASO and PEO models. I know you called out switching to lower cost health plans, but is anyone trading down at the product level? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 26, 2025 / 1:30PM, PAYX.OQ - Q3 2025 Paychex Inc Earnings Call And then is the lower implied 4Q for PEO, just the at-risk Florida plan that came in worse than expected in Q3? Or maybe how long you expect that to last?

Question: Daniel Maxwell - William Blair & Company, L.L.C. (Research) - Analyst : Yes, super helpful detail. And then maybe as my follow-up, the client hiring coming in slightly lower than expected. Was that concentrated in Florida as well or any specific geographical or vertical that, that was kind of concentrated in? Or was that more of a broad-based experience?

Question: Mark Marcon - Robert W. Baird & Co. Incorporated - Analyst : Good morning, John and Bob. It sounds like a very exciting time at Paychex. You mentioned very specifically that you now expect the Paycor transaction to be accretive. You mentioned that you would now expect over $80 million in expense synergies. I'm wondering -- it sounds like you're feeling really excited. Can you give us any more color with regards to what your expectations are with regards to revenue synergies? And then also, just based on client calls that I've had, I'm wondering if you could also provide some detail in terms of when you're talking about the deal being accretive, like what would be the things that you would end up excluding or adjusting out in order to get to that accretion. So amortization of goodwill, bonuses, stock comp where testings are occurring, things of that nature so that people have a clear idea in terms of the accretion potential as we go into '26. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 26, 2025 / 1:30PM, PAYX.OQ - Q3 2025 Paychex Inc Earnings Call

Question: Mark Marcon - Robert W. Baird & Co. Incorporated - Analyst : I really do appreciate the comprehensive answer to that. And then for my follow-up, obviously, from a macro perspective, there's been a lot of fluctuations with regards to sentiment, both from a business and a consumer perspective. I'm wondering if you can talk a little bit about what -- how bookings were during the key selling season? And how things have evolved in terms of just the business sentiment. And typically, during the third quarter, you gave us preliminary guides for preliminary thoughts for the following year. Obviously, with Paycor, you've got a lot of things up and still to be developed. But I'm wondering if you were thinking about things on a stand-alone basis, would -- you typically end up talking about the fourth quarter exit rate as being something to think about with regards to the following year. If we were just thinking about Paychex's on a stand-alone, which obviously is not the case, would that still be the case?

Question: Peter Christiansen - Citi - Analyst : Really nice execution here, good to hear progress on your views on the Paycor acquisition. I was just wondering if we could do a little bit of a dive on the 401(k) business. It's something I don't think that's been called out in particular recently. And obviously, it sounds like a potential for revenue synergy there with Paycor. Just curious if you could speak to some of the growth, attachment rates that you're seeing there? I know the SECURE Act was a catalyst for that area in the past. Just if you could give us kind of like where are we now kind of point of view on that business, that would be really helpful. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 26, 2025 / 1:30PM, PAYX.OQ - Q3 2025 Paychex Inc Earnings Call

Question: Peter Christiansen - Citi - Analyst : So should we think of the attach rate kind of closer -- higher for some of your larger clients versus some of your smaller employee clients? And how do you -- how would you extrapolate that to the degree that you can discuss today? What that means for potential with Paycor clients?

Question: Jared Levine - TD Cowen (Research) - Analyst : It's actually Jared Levine on for Bryan Bergin today. Can you discuss how you currently partner with benefits brokers across both the Flex and PEO business and how that might evolve over time with Paycor part of your business?

Question: Jared Levine - TD Cowen (Research) - Analyst : Great. And then the follow-up here, ignoring the at-risk health insurance, has there been any change in the demand environment relative to last quarter? Or even if you kind of look at the past few weeks there with more of the, call it, tariff-related noise, anything different you're seeing in terms of I guess, the demand environment in recent weeks?

Question: Bryan Keane - Deutsche Bank - Analyst : Congrats on the results here. Just wanted to ask on the Paycor acquisition, the additional cost synergies, exactly where might those be coming from which is giving you some confidence to now talk about some accretion and curious about how much accretion now for fiscal year '26.

Question: Bryan Keane - Deutsche Bank - Analyst : Got it. And just as a follow-up, thinking about the revenue the -- if you include Paycor, I think you're talking about 10% to 12%. So just trying to think about timing of that. Is that -- is that basically 2/3 of a quarter contribution? And then as we get our model set for next year, how much revenue should we be putting in for our models for Paycor or for fiscal year '26?

Question: Ramsey El-Assal - Barclays Corporate & Investment Bank - Analyst : In Management Solutions, you flagged higher revenue per client with pricing being a driver. How should we think about pricing as perhaps a lever you might be able to pull if you see any macro deterioration? I guess, what kind of headroom do you see for pricing at this point?

Question: Ramsey El-Assal - Barclays Corporate & Investment Bank - Analyst : Okay. It's a good segue to my next question, which is basically, you flagged investments in AI and automation in terms of helping drive some of the margin expansion this quarter. What's the runway at this point for further benefits from AI and automation? Is this sort of a new input to your kind of margin algorithm? Will it have a similar impact next year? Or have -- has the lowest hanging fruit been already picked? How would you characterize it?

Question: James Faucette - Morgan Stanley - Analyst : I wanted to dig in really quickly on a couple of product-related questions. First, just wondering if you can share any details about early adoption metrics around Flex Engage since its launch? And how should we be thinking about where that will fit in the portfolio?

Question: James Faucette - Morgan Stanley - Analyst : Got it. Got it. Got it. And second question I wanted to ask was also a product-related question. On the recruiting Copilot, it's kind of an interesting extension of some of the things you've been developing over time. What are the specific metrics you're using to measure its effectiveness in helping clients find qualified candidates? And can you maybe describe where that fits within the sales cycle wheel for you right now and where you'd like it to get to be eventually?

Question: Will Qi - RBC Capital Markets - Analyst : This is Will Chi on for Ashish Sabadra. Maybe a bit of a follow-up question there on competitive landscape, if you guys could comment on that. And really curious on those comments about product adoption, if that's been kind of a benefit from your standpoint there as well. And then just as a quick follow-up, maybe if you have any updates on your capital allocation strategy.

Question: Kartik Mehta - Northcoast Research - Analyst : I just wanted to get your perspective on the PEO business. I know you've talked a lot about it, and I understand maybe the reason for reducing your guidance. But just if you look at the business holistically, do you think there's been any change -- a fundamental change in the business that would affect kind of the medium-term growth for this business, either new competition or businesses looking at it differently? Or do you think this is just an anomaly and related to kind of benefits and cost of benefits?

Question: Kartik Mehta - Northcoast Research - Analyst : That's helpful, John. Bob, just one clarification. I think on the pass-throughs, they were accretive this quarter, right, Bob, from a revenue standpoint, but not going to be as accretive as you anticipated. Is that a fair way to make sure I understand it.

Question: Tien-Tsin Huang - JPMorgan - Analyst : As always, it's very complete here. Just thinking about everything you've said, you have Paycor, of course, you've got good retention. We got the update on macro. Has your thinking around sales headcount investment changed at all, whether it's in the aggregate or across the different subunits. Just curious what you're thinking here because you're getting strong productivity, it sounds like in general.

Question: Tien-Tsin Huang - JPMorgan - Analyst : Got it. No, I recall those statements. I didn't know if relative to PEO, ASO, I know some of those things were asked. I didn't know if there was any major change there from a 90-day perspective. It sounds like we'll wait and hear back when we get back on the call together again. I know you're taking a lot of questions, so just thinking about that, I know Ramsey asked about AI and I asked about productivity. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 26, 2025 / 1:30PM, PAYX.OQ - Q3 2025 Paychex Inc Earnings Call But it feels like the productivity in general, better than -- better than you expected. Is there anything here beyond AI that you're getting more productivity here out before thinking about Paycor, it does feel like you're running at a different speed from an operating expense standpoint. Tell me if I'm wrong, though, please.

Question: Samad Samana - Jefferies LLC - Analyst : Maybe I apologize if I missed this. I know you got asked about the potential Paycor contribution for next year. But Bob, what I wanted to ask was, if I think about the F4Q number, and I know there's a little bit of art involved in it because we don't know the timing of the close yet, but if we think about the implied Management Solutions growth rate for F4Q, excluding Paycor, is that a fair way to think about what the starting point for growth for Management Solutions should be for next year given that F4Q is a quarter that doesn't have ERTC in it against the comp?

Question: Samad Samana - Jefferies LLC - Analyst : Yes, understood. And we fully appreciate and understand there's a lot of complexities and moving parts. And we're getting asked the question by a lot of investors. So this is why we're trying to push it back to Bob. Maybe if I think about just the expenses in the quarter, and maybe this is of a similar vein, but was there anything from a -- if I exclude the acquisition-related expenses, 1% growth is pretty low. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 26, 2025 / 1:30PM, PAYX.OQ - Q3 2025 Paychex Inc Earnings Call Obviously, it's a big reflection of the productivity of the organization and your own efforts. But anything in terms of timing of operating expenses or any expenses that you may have otherwise avoided in anticipation of closing the deal? And again, with the full appreciation, this is less of a forward-looking element than understanding the specific quarter, if there was anything that impacted expenses outside of the M&A side in terms of timing?

Question: Scott Wurtzel - Wolfe Research, LLC - Analyst : I'll just ask one question, just going back to the PEO segment. And wondering when we think about the trends in the quarters and now your updated guide for fiscal '25, if we can maybe kind of split out the softer trends between the MPP in Florida and the trade-off to lower cost health benefits, how we should think about sort of that split impacting the growth in the business right now?

Question: Scott Wurtzel - Wolfe Research, LLC - Analyst : Yes. Yes. No, I was just wondering about if there was any way to kind of quantify the split between those factors, but that's helpful.

Question: Jason Kupferberg - BofA Global Research (US) - Analyst : So I'm just trying to think about Management Solutions growth for Q4. I mean if we look at Q3, I guess we're calculating out about a 1.5% headwind on the segment from ERTC. So that would put you, I think, just a hair above 6%, excluding ERTC. If all that math is REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 26, 2025 / 1:30PM, PAYX.OQ - Q3 2025 Paychex Inc Earnings Call right, is that a reasonable number to think about for Q4? And just to confirm, I think you guys said the Q4 guide assumes no change in the macro. I know there's been some data points out there just around declines in small business confidence. So I just wanted to square all that.

Question: Jason Kupferberg - BofA Global Research (US) - Analyst : Okay. That's good color. Just as a follow-up, on the Paycor side, any rough sizing you can give us on the expected revenue synergies? I mean I know there's a lot of cross-sell opportunity, but just wanted to see if we're in a position to put any numbers around it? Or will we get that next quarter?