Paychex's Q1 2026 Earnings Call: Contradictions Emerge on PEO Growth, Paycor Expectations, and Cost Synergy Realization

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 30, 2025

Financials Results

• Revenue: $1.5B, up 17% YOY
• EPS: GAAP diluted EPS $1.06, down 10% YOY; adjusted diluted EPS $1.22, up 5% YOY
• Operating Margin: 35.2% reported; 40.7% adjusted

Guidance:

• FY26 total revenue growth 16.5%-18.5%; revenue synergies add 30–50 bps.
• Management Solutions +20%-22%; PEO & Insurance +6%-8%.
• Interest on funds held: $190–$200M.
• Adjusted operating margin ~43%; tax rate 24%-25%.
• Adjusted EPS growth raised to 9%-11% (from 8.5%-10.5%).
• Q2: revenue growth ~18%; adjusted operating margin ~41%.
• Expect PEO growth to accelerate in H2 as at-risk headwinds anniversary.
• Revenue synergies to build through FY26.

Business Commentary:

* Robust Revenue Growth: - Paychex reported a 17% revenue growth for Q1 Fiscal 2026, driven by strong demand for its HCM solutions amidst a resilient small business environment. - This growth was supported by the integration of Paycor and sustained demand for Paychex's products.

• Adjusted Earnings and Synergies:
• The company achieved 5% adjusted diluted earnings per share growth, with expectations raised for fiscal 2026 due to increased confidence in cost and revenue synergies from the Paycor acquisition.

• The integration of Paycor and the anticipated cross-selling of Paychex solutions to Paycor clients were identified as key drivers of earnings growth.

• PEO Performance and Enrollment:

• Paychex's PEO business experienced mid-single-digit worksite employee growth and record retention performance, despite some challenges in Florida.

• Demand and retention performance were strong, with increases in medical enrollments in states like California, despite challenges in Florida due to enrollment headwinds.

• AI Integration and Innovation:

• Paychex expanded AI solutions to enhance client experiences and operational efficiency, including the launch of a generative AI-powered HR guidance tool and AI-powered HR insights.
• These innovations are expected to drive measurable value and position Paychex for sustained growth, with potential for future revenue synergies.

Sentiment Analysis:

• Management reported “robust 17% revenue growth” and adjusted EPS up 5% in Q1, raised FY26 adjusted EPS growth to 9%-11%, and reaffirmed revenue outlook. Demand is “stable,” PEO bookings were “double digits,” and integration synergies are on track with potential upside. Q2 revenue growth guided to ~18% with ~41% adjusted operating margin. Retention remains strong at pre-pandemic levels; PEO worksite employee retention at record.

Q&A:

• Question from Jared Levine (TD Cowen): Can you update us on demand by employer size and core offerings?
  Response: Demand is stable with rising activity; PEO bookings up double digits and micro segment improving.

• Question from Jared Levine (TD Cowen): Did Paycor recurring (ex-float) grow low double digits in Q1, and is that the full-year assumption?
  Response: Full-year recurring revenue for Paycor expected to grow double digits; Q1 was in line, with float a headwind; no quarterly splits provided.

• Question from Mark Marcon (Baird): How is the PEO environment and what are the main headwinds?
  Response: PEO is performing well: mid-single-digit WSE growth, double-digit bookings, record retention; Florida MPP competitive but underwriting remains disciplined; agency impacted by workers’ comp rate pressure.

• Question from Mark Marcon (Baird): Outlook for direct expenses vs. SG&A and operating leverage?
  Response: Expense growth mainly from Paycor; organic expense growth ~3% excluding Paycor; focus on synergies and productivity drove 15% adjusted operating income growth; expect similar organic expense trend.

• Question from Samad Samana (Jefferies): Is Paycor recurring growth slowing due to integration disruption?
  Response: Q1 recurring growth was near double digits and in line; some prior go-to-market alignment effects; new segmentation makes granular comparisons noisy.

• Question from Samad Samana (Jefferies): Path to accelerate organic Management Solutions growth from ~4% in Q1?
  Response: FY26 plan targets ~5% organic growth, improving through the year as PEO MPP headwinds lap and revenue synergies build.

• Question from Tien-Tsin Huang (JPMorgan): What drove the EPS guidance increase, and any retention callouts?
  Response: Stronger Q1 and higher confidence in cost and revenue synergies; payroll retention at pre-pandemic highs, PEO WSE retention at record; small-business bankruptcies near pre-pandemic norms.

• Question from Andrew Nicholas (William Blair): Discuss H2 PEO ramp and Florida MPP attach rates.
  Response: Early in enrollment; enhanced plan lineup, underwriting, and AI tools; will not loosen risk standards; easier comps after January; broader PEO enrollments rising.

• Question from Andrew Nicholas (William Blair): How competitive is PEO pricing on admin fees?
  Response: Competitive backdrop is typical; Paychex competes on comprehensive tech and HR advisory value rather than aggressive pricing.

• Question from Michael Infante (Morgan Stanley): BILL partnership—target customers, go-to-market, and ARPU impact?
  Response: Aimed at SMBs and CPAs; fully integrated into Flex; starts with AP, AR in 2026; focused on platform value versus ARPU expansion.

• Question from Michael Infante (Morgan Stanley): Any shift in PEO vs. ASO mix or health plan choices?
  Response: No notable mix shifts; PEO slightly above expectations; agency growth dampened by workers’ comp rate headwinds.

• Question from Daniel Jester (BMO Capital Markets): How are AI pilots affecting productivity and how do you measure success?
  Response: AI enhances product value, pricing/discounting, targeting, and service productivity; agentic AI handling routine tasks to free staff for advisory work.

• Question from Daniel Jester (BMO Capital Markets): Learnings on revenue synergies so far?
  Response: Q1 synergies met; pipeline and channel receptivity improving; strong cultural integration; early large upmarket ASO and 401(k) wins imply upside.

• Question from David Paige Papadogonas (RBC Capital Markets): Impact from regulatory risks (shutdowns, H-1B), and macro stance?
  Response: Minimal direct exposure; SMB backdrop stable with steady employment and <3% wage inflation; policy clarity and rate cuts support confidence.

• Question from Scott Wurtzel (Wolfe Research): Cost synergy milestones and remaining opportunity?
  Response: Most actions completed; majority from overlapping public-company functions; additional opportunities in procurement; balance reinvestment vs. margin.

• Question from Scott Wurtzel (Wolfe Research): Contribution from retirement in the quarter?
  Response: Retirement grew near double digits in Q1.