Paychex (PAYX) Q4 2025 Earnings Call Transcript

Image source: The Motley Fool

EDTCALL PARTICIPANTSPresident and Chief Executive Officer — John GibsonSenior Vice President and Chief Financial Officer — Bob SchraderNeed a quote from one of our analysts. [ tected]RISKSGibson said, "We have also seen an increase in bankruptcies and financial distress among micro-market participants and within our client base in Q4 FY2025," indicating pressure on the smallest customers

Gibson reported, "Enrollment in our Florida at-risk medical plan decreased year over year in FY2025," highlighting a persistent revenue headwind within the PEO and Insurance Solutions segment

Schrader stated, "Checks per client

Up being a little bit softer than we expected in Q4 FY2025," and Paychex has "checks per client down

Next year in the plan. "Gibson observed, "Many es are frozen as they wait for more clarity a number of macro issues such as tariffs, inflations, and taxes," reflecting client caution

Adjusted Diluted EPS: Adjusted diluted EPS increased 6% year-over-year in the fourth quarter ($1. 19) and for fiscal year 2025 ($4. 98); reported diluted EPS decreased 22% in Q4 ($0. 82) and 2% for FY2025 ($4

SUMMARYPaychex, Inc. 80%) consolidated platforms and sales organizations to target distinct market segments with the Flex, Paycor, and SurePayroll offerings

Despite softness at the micro-client level in Q4 and PEO revenue headwinds in Florida, overall client retention imved, and the firm maintained industry-leading adjusted operating margins

Full-year operating cash flow supported continued investments in innovation and new partner grams targeting accountants and brokers

Schrader indicated sustained strategic focus on growth and margin discipline

Gibson noted, "More than half of our new comes from channel partner referrals," highlighting the significance of the channel partner ecosystem and recent duct launches such as Paychex Partner and Partner Plus

Schrader clarified, "our primary way to return that to holders is through dividend versus buybacks," confirming a stable capital return policy post-acquisition with a deleveraging focus

INDUSTRY GLOSSARYPEO: fessional Employer Organization; a co-employment service where HR, payroll, and benefits administration are managed for client companies

ASO: Administrative Services Outsourcing; an HR solution focusing on administrative support without co-employment arrangements

ERTC: Employee Retention Tax Credit; a government tax incentive impacting reported earnings and growth comparisons for HCM viders

Checks Per Client: Volume metric representing payroll transactions cessed for each client; an indicator of client payroll activity, often linked to underlying employment trends

Full Conference Call TranscriptJohn Gibson: Thanks, Bob

I will start the call today by sharing key highlights for the fourth quarter

And then Bob will discuss our financial results and outlook

We will then, of course, open it up for your questions

Given that the Paycor acquisition has closed and we have key integration activities to bring the two companies together, we are now operating as one Paychex

And not two different companies

Our s today will reflect that fact

Paychex demonstrated solid performance this year against our strategic objectives, underscoring our unique ability to effectively navigate dynamic market conditions while continuing to enhance our customer experience and market position, and also maintain our industry-leading operating margins

We also dered 60 basis points of adjusted operating income margin expansion in the face of significant ERTC

Our client retention rates increased year over year, underscoring the compelling value we vide as a trusted partner in our clients' growth and success

We have made significant gress on the Paycor acquisition, surpassing our expectations and setting a strong foundation for future success

The actions we have already taken give us high confidence in achieving the synergies

In addition, have identified a list of additional synergy opportunities that we are actively pursuing

We also believe that there are additional opportunities to invest for future growth

And we will strategically accelerate those investments as the year gresses

We previously outlined to you the unit structure, leadership continuity, and retention of key pay core talent to mitigate integration risk

Customers are continuing to utilize their existing platform, minimizing the disruption to our client base

Our retention remains strong, and the reception to the combined offerings has exceeded our expectations

I'll some of the recent integration accomplishments and focus areas for fiscal year '26

During the quarter, we defined how our HCM platforms will generally serve our market segments moving forward

SurePayroll will continue to serve the small do-it-yourself marketplace

This apach vides the market with the most comprehensive flexible, and innovative HCM solutions for organizations of all sizes and needs

We also a comprehensive territory assessment and reassignment review across the sales teams that aligns to these market segments

We have expanded and optimized our sales coverage nationwide in the fourth quarter

Sales representatives who transition territories received comprehensive training on the complete suite of HCM solutions they can now offer

We are encouraged by how sales hiring, retention, and tenure developments are going into the fiscal year

While all of these changes did create some internal disruption, and took many of our sales resources out of the field for a portion of the fourth quarter, we believe now is the time to make these changes to best position us to win the marketplace

With newly trained sales reps on our broad set of capabilities and solutions, realign territories, and a fully staffed sales team, we believe we are well-positioned entering the new fiscal year

While we have made significant strides in integrating the teams, optimizing our go-to-market apach and capturing cost synergies, we're most enthusiastic the opportunities for revenue synergies

We expect to realize revenue synergies over the next several years, I'm pleased we have already secured our first Paycor customers on our ASO and PO

And are seeing mising growth in our pipeline

Notably, the PO cell was referred by a Paycor broker and this was even before we officially launched the duct into the client base

We also believe there are opportunities to take Paycor's capabilities into the paycheck client base the years ahead

We are pleased at how quickly our teams able to complete the bulk of the backing a integrations required to cross-sell into Paycor's base and realize these revenue synergies

We also remain excited Paycor's embedded solution

Which enables seamless integration of our payroll and HR nology stack into our partners' platforms

With thousands of potential partners, we are early in executing against this revenue opportunity and are actively scaling and in it

We believe the synergies between the companies, coupled with our mutual focus on innovation and customer-centric solutions, position us to continue to der strong returns and drive long-term holder return

A core component of our go-to-market strategy involves cultivating long-standing relationships with channel partners

Such as brokers, CPAs, and banks, just to name a few

More than half of our new originates from channel partner referrals

Ing the acquisitions, we introduced the Paychex Partner Plus gram, to brokers to foster relationships and drive mutual growth

Together, we now have a broader suite of solutions to offer brokers which can supplement their offerings to clients

And the partner plus gram vides a structured framework designed to safeguard mutual clients from competing ducts

The of PACOR field bookings referred by brokers increased this past fiscal year

We are also actively gathering back from brokers CPAs, and banks to enhance our loyalty grams

Designed to ensure we maintain the strongest partner gram in the HCM industry

We also recently launched Paychex Partner platform, a new portal designed to vide accountants quick access to critical data reporting, and insights for their clients using Paychex Flex

This innovative platform transforms how CPAs manage their portfolios by viding a centralized hub for accessing client payrolls and HR data, resolving issues, and identifying missing information This is empowering them to really operate with greater efficiency and actively serve their clients

Our PO continues to also perform well, achieving solid worksite employee growth this quarter

Similar to what we d with you last quarter, while the PO remained strong at participant levels in our health plans across the country continue to increase, enrollment in our Florida at risk medical plan did decrease year over year

We also continued this to see a trend among employees opting for lower-cost health plans to offset the rising health care cost

While these factors continue to pose a pass-through revenue headwind, they do not impact our earnings or our PO value position

One of the benefits of the PO model is that it empowers small es to truly punch above their weight

This enables them to attract and retain top talent in today's still very competitive labor market

We remain bullish on the PO space given our scale and capability in this segment and just how greenfield the opportunity remains

Both inside and outside of our client base

Now turning to the macro environment

We are observing a mix of both optimism and uncertainty within the market and our client base

Many es are frozen as they wait for more clarity a number of macro issues such as tariffs, inflations, and taxes

The hard data continues to indicate that small es remain fundamentally healthy, despite the headlines

Our small employment watch revealed stable employment levels, with moderation in hourly wage inflation in the recent months

Our data does not currently show any signs of recession

We also see in our interactions in the market that the uncertainty is mpting es to exercise caution when making decisions and being cautious how much they are spending on ducts and services

We have also seen an increase in bankruptcies and financial distress the micro end of the market and in our client base, in the fourth quarter

Many es, I think, on the edge of failure may have decided not to fight the new headwinds, they see in front of them

We also saw losses due to increases in combinations and mergers

Increase more than typical

Both are signs of es making strategic decisions based their view of the current and future environment

We will continue to monitor the hard data and trends in the market and take the appriate steps to position Paychex to win in any market conditions

We will also continue to take the actions needed to tect our long-standing track record of financial strength even in challenging times

I am ud of what the entire team at Paychex and Paycor have accomplished together

I would to thank our dedicated employees for their hard work and contribution in achieving these many successes

They have accomplished a lot

In a very short period of time

There has been a lot of change internally and externally to navigate

And they have shown their dedication and real resiliency

To der for our clients and for paychecks

And I am internally grateful for th.