• Total Revenue Growth: 5% in the third quarter; 6% excluding the impact of the discontinued ERTC program.
• Diluted Earnings Per Share: Increased 4% to $1.43 per share.
• Adjusted Diluted Earnings Per Share: Grew 8% to $1.49 per share.
• Adjusted Operating Margins: Increased by 180 basis points compared to the prior year.
• Management Solutions Revenue: Increased 5% to $1.1 billion.
• PEO and Insurance Solutions Revenue: Increased 6% to $365 million.
• Interest on Funds Held for Clients: Decreased 2% to $43 million.
• Total Expenses: Increased 1% to $801 million, excluding one-time costs related to the pending Paycor acquisition.
• Operating Income: Grew 6% to $692 million with an operating margin of 45.8%.
• Cash, Restricted Cash, and Total Corporate Investments: $1.7 billion as of February 28, 2025.
• Total Borrowings: Approximately $817 million as of February 28, 2025.
• Cash Flow from Operations: $1.6 billion in the first three quarters of the year.
• Return to Shareholders: $1.2 billion in the form of cash dividends and share repurchases during the first three quarters.
• 12-Month Rolling Return on Equity: 45%.

• Warning! GuruFocus has detected 7 Warning Sign with RNKGF.

Release Date: March 26, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Paychex Inc (NASDAQ:PAYX) reported a 5% increase in total revenue for the third quarter, with a 6% growth excluding the impact of the discontinued ERTC program.
• Diluted earnings per share increased by 4%, and adjusted diluted earnings per share grew by 8% during the quarter.
• The acquisition of Paycor is expected to strengthen Paychex Inc (NASDAQ:PAYX)'s competitive position and is anticipated to be accretive to adjusted earnings per share next fiscal year.
• Client retention has improved over last year's performance, with retention in HR outsourcing solutions remaining near record levels.
• Paychex Inc (NASDAQ:PAYX) was named one of Fortune's Most Innovative Companies for the third consecutive year, highlighting its commitment to innovation and technology.

Negative Points

• The expiration of the ERTC program continues to present a revenue headwind, impacting overall revenue growth.
• Enrollment in the specialty Florida at-risk medical plan decreased year-over-year, affecting pass-through revenue.
• Interest on funds held for clients decreased by 2% due to lower average interest rates.
• The macro environment presents challenges, with U.S. job growth moderating and customer employment levels softer than expected.
• The acquisition of Paycor involves significant integration efforts and potential risks related to change management and achieving expected synergies.

Q & A Highlights

Q: Can you provide an update on the preference between ASO and PEO models, and the impact of the lower implied Q4 for PEO? A: Robert Schrader, CFO, explained that the lower Q4 guidance is primarily due to challenges with the MPP attachment in Florida. The PEO performance is strong across the country, with no significant switch from PEO to ASO. John Gibson, CEO, added that the PEO business remains robust, with strong bookings and a solid pipeline, despite the specific challenges in Florida.

Q: What are your expectations for revenue synergies from the Paycor acquisition, and what will be excluded to determine accretion? A: Robert Schrader, CFO, stated that they expect the acquisition to be accretive to adjusted EPS next fiscal year, excluding amortization of intangibles, stock-based compensation related to existing shares, and onetime transaction-related costs. John Gibson, CEO, mentioned they are optimistic about revenue synergies but are currently focused on integrating the companies and achieving cost synergies.

Q: How has the macro environment affected client hiring and business sentiment? A: John Gibson, CEO, noted that hiring was broad-based with some regional impacts due to natural disasters. Bonus payouts were higher, but fewer people received them, affecting checks per client. Despite these factors, the small business index shows moderate growth, and there are no signs of a recession.

Q: Can you discuss the potential for revenue synergies with Paycor, particularly in the 401(k) business? A: John Gibson, CEO, highlighted the opportunity to offer Paychex's 401(k) program to Paycor's client base, which includes smaller clients that align with Paychex's strengths. They are optimistic about achieving similar attach rates in Paycor's base as in Paychex's.

Q: How do you currently partner with benefits brokers, and how might this evolve with Paycor? A: John Gibson, CEO, emphasized their commitment to strong relationships with strategic partners, including brokers. They plan to launch a refreshed strategic partner program involving technology investments, improved support, and new marketing initiatives, leveraging best practices from both Paychex and Paycor.

Q: What is the runway for further benefits from AI and automation in driving margin expansion? A: John Gibson, CEO, explained that AI and automation have been integral in improving decision-making and customer service. They continue to refine AI models and explore new applications, such as the HR Copilot tool, to enhance productivity and client value.

Q: How has the competitive landscape affected product adoption and capital allocation strategy? A: John Gibson, CEO, stated that the competitive market remains stable with no major shifts. Robert Schrader, CFO, confirmed no changes to their capital allocation strategy, focusing on business investment, dividends, and M&A, with an emphasis on integrating Paycor.

Q: What are the factors affecting the PEO segment's growth, and is there a fundamental change in the business? A: John Gibson, CEO, attributed the PEO segment's challenges to specific issues in Florida, not a fundamental change. The demand for competitive health offerings is expected to increase due to health inflation, and the PEO value proposition remains strong.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.