PAYCHEX INC Q3 FY2025 earnings call

• Business highlights: Third quarter saw 5% total revenue growth, 4% diluted earnings per share increase, and 8% adjusted diluted earnings per share growth. Investments in automation and technology boosted efficiency, leading to an 180 basis point increase in adjusted operating margins. - Acquisition of Paycor: Entered into a definitive agreement to acquire Paycor, with the HSR waiting period expired; expected to close in coming weeks, with synergies over $80M and expected to be accretive to adjusted earnings per share next fiscal year. - Client performance: Client retention improved, HR Copilot tool near launch, Paychex Perks has over 180,000 client employees using. - Awards: Named Fortune's most innovative company for the third consecutive year and one of the world's most ethical companies for the seventeenth time. - Macro environment: US job growth moderated, customer employment softer in Q3 due to weather-related challenges and lower bonus checks.

Total revenue for the quarter increased 5% to $1.5 billion, including a headwind from the expiration of the ERTC program; excluding this headwind, total revenue grew 6%. Management solutions revenue increased 5% to $1.1 billion, driven by growth in client count, price realization, and product penetration. PO and insurance solutions revenue increased 6% to $365 million, driven by growth in worksite employees and PO insurance revenues. Interest on funds held for clients decreased 2% to $43 million due to lower average interest rates.

• Fiscal 2025 total revenue expected to grow in the range of 4% to 5.5% (low end due to pass-through insurance headwinds). Management solutions expected to grow 3% to 4%, PO and Insurance Solutions expected to grow 6% to 6.5%. Interest on funds held for clients expected to be in the range of $145 million to $155 million. Adjusted other income net expected to be in the range of $30 to $35 million. Adjusted operating income margin now expected to be approximately 43%. - Paycor acquisition: Expected to be accretive to adjusted diluted earnings per share next fiscal year; Q4 revenue growth expected 10% to 12% with neutral impact on adjusted EPS.

• Pass-through insurance revenues lower than expected, impacting total revenue guidance. - Macro uncertainty affecting business sentiment and client hiring. - Integration risks with Paycor, including potential challenges in combining businesses and managing change management.

Q: Update on ASO vs PEO models and Florida health plan impact A: Bob Schrader mentioned the lower Q4 revenue guide is primarily driven by challenges in the specialty pass-through program in Florida; John Gibson stated PEO performance across the country is strong, with bookings double digits and a solid pipeline, while the Florida specialty program has an outsized impact on revenue due to small changes in participation levels Q: Bookings during key season and business sentiment A: John Gibson said bookings on the PEO side are double digits with a good pipeline into Q4; overall demand has remained consistent with historical levels, though there were softer areas like California fires and slower checks due to bonus factors Q: Paycor acquisition synergies and accretion A: John Gibson said there are redundant vendor spends, best practices, and new ideas from both companies driving synergies; Bob Schrader mentioned they're not ready to give exact accretion guidance yet but expect the acquisition to be accretive to adjusted EPS in fiscal 2026 Q: Pricing power and AI/automation impact A: Bob Schrader said Paychex has strong pricing power and has achieved it in downturns; John Gibson discussed AI models being used for better decisions in discounting, retention, and intercepting issues before client loss, with more to do in refining and investing in these models Q: PEO business and medium-term growth A: John Gibson stated the Florida specialty program is an anomaly; the PEO business has strong demand with increased shopping for health offerings, and the nature of PEO creates a powerful value proposition despite some pass-through revenue headwinds