Paychex's Q2 2026: Contradictions Emerge on Paycor Recurring Revenue, Synergy Timelines, and AI Strategy

Date of Call: December 20, 2025

Financials Results

• Revenue: $1.6B, up 18% YOY
• EPS: $1.10 per diluted share, down 4% YOY; adjusted diluted EPS $1.26, up 11% YOY
• Operating Margin: 36.7%; adjusted operating margin 41.7%, up ~80 basis points YOY

Guidance:

• Revenue for fiscal 2026 expected at low end of ranges for Management Solutions, PEO-owned Insurance, and total revenue.
• Interest on funds held for clients expected at high end of $190M-$200M range.
• Adjusted diluted EPS expected to grow 10%-11%, up from prior 9%-11% range.
• Effective income tax rate ~24%.
• Q3 total revenue growth ~18% with adjusted operating margin 47%-48%.

Business Commentary:

• Revenue and Operating Income Growth:
• Paychex reported a revenue increase of 18% year-over-year to $1.6 billion for the second quarter, with adjusted operating income growing 21% over the prior year.

• The growth was driven by higher productivity, operational efficiencies, and the integration of Paycor, which contributed approximately 17 percentage points to the revenue growth.

• Paycor Integration and Synergy Realization:

• Paycor's contribution to revenue was estimated at 8% to 9% growth after adjusting for year-end processing fees from the prior year.

• The integration is progressing well, with revenue synergies on track and cost synergies expected to reach $100 million for fiscal year 2026, up from the initial target of $80 million.

• PEO Business Performance:

• The PEO-owned Insurance Solutions revenue increased 6% to $337 million, driven by solid growth in the number of average PEO worksite employees and insurance revenues.

• Despite challenges in the insurance agency segment, the PEO business continues to perform well with market-leading mid-single-digit worksite employee growth, supported by strong demand and retention.

• AI and Technological Advancements:

• Paychex is advancing its AI initiatives, with innovations such as the AI-powered knowledge mesh system and Gen AI platforms enhancing efficiency and client outcomes.

• These advancements are aimed at strengthening Paychex's competitive position by leveraging its extensive proprietary data sets and combining technology with HR expertise.

• Cost Management and Expense Control:

• Total expenses increased 27% to $986 million, primarily due to the Paycor acquisition, but excluding Paycor, expenses grew only low single digits.
• The company is focused on cost discipline and productivity improvements, which have contributed to an increase in adjusted operating income margins by 80 basis points year-over-year.

Sentiment Analysis:

Overall Tone: Positive

• CEO stated 'We delivered solid second quarter results' with revenue and operating income up double digits. Highlighted 'significant progress' on strategic priorities, including Paycor integration and AI initiatives. Confident in value proposition and demand, with AI advancements seen as differentiators. Reaffirmed fiscal 2026 outlook with raised earnings expectations, and expressed pride in team execution.

Q&A:

• Question from Mark Marcon (Baird): Concerns about Paycor's growth contribution and integration challenges.
  Response: Management estimates Paycor grew 8%-9% pro forma in Q2, in line/slightly better than Q1, with integration progressing, revenue synergies on track, and cost synergies raised to $100M for FY26.

• Question from Bryan Bergin (TD Cowen): Inquiry on fiscal 2026 growth guidance moving to low end of range.
  Response: Attributed to softer revenue per client trends across business lines, including smaller deal sizes, less attachment at point of sale, and softer rates in HR outsourcing, despite PEO outperformance; macro remains stable.

• Question from Bryan Keane (Citi): Paycor growth rate for fiscal year.
  Response: Expect Paycor to be high single-digit to low double-digit grower, with similar revenue per client softness as broader business.

• Question from Tien-Tsin Huang (JPMorgan): Consideration of changing pricing/packaging due to smaller deal sizes.
  Response: Believes current pricing/bundles across platforms are sufficient and competitive; fixed-fee model is an advantage; strategic pricing reviews are ongoing but will take time.

• Question from Andrew Nicholas (William Blair): Upsell motion to PEO from Paycor clients and impact of health care inflation.
  Response: PEO upsell remains ~50/50 inside/outside base; Paycor client receptivity is strong with larger-than-expected deals; health care inflation is a client pressure point but PEO's value proposition is not 'cheap benefits'.

• Question from James Faucette (Morgan Stanley): Impact of realized gains on investment portfolio from Paycor integration on guidance.
  Response: Gains were included in Q2 and are part of full-year guide; resulted from strategic repositioning of long-term portfolio to lock in balances ahead of potential rate cuts.

• Question from Samad Samana (Jefferies): Clarification on guidance shift to low end due to investor feedback or model variables.
  Response: Clarified shift was based on observed business trends (soft revenue per client, PEO insurance headwinds) and easier compares in back half, not investor feedback; PEO performance exceeded expectations in first half.

• Question from Ashish Sabadra (RBC Capital Markets): AI product monetization and pricing power.
  Response: AI will enhance client value and customer experience, potentially adding new products/services; may be productized into bundles to support price increases and drive additional revenue.

• Question from Kartik Mehta (Northcoast Research): Reconciling price-conscious customers with stable price realization.
  Response: Differentiates between prospect pricing sensitivity (choosing lower bundles) and attachment rates for existing customers; value proposition and product enhancements help sustain realization.

• Question from Scott Wurtzel (Wolfe Research): Q3 revenue growth guide of 18% and moving parts.
  Response: Expects PEO acceleration, anniversarying of prior-year headwinds, and synergy realization to drive growth; includes some conservatism ahead of selling season.

• Question from Jason Kupferberg (Wells Fargo): Expectation for Managed Solutions organic growth improvement and PEO acceleration in second half.
  Response: Expects modest acceleration in MS organic growth toward ~5% in back half; PEO acceleration driven by easier compares (lapping enrollment headwinds) and strong execution.

Contradiction Point 1

Paycor's Recurring Revenue Growth Characterization

This is a substantial contradiction regarding the core financial integration outcome. The characterization shifts from a broad, confident "double-digit grower" (2025Q4) to a specific, lower pro forma estimate (8-9% in 2026 Q2) and acknowledges integration disruption (2026Q1). This directly impacts forecasts for a major acquisition's contribution.

Does the 12-13% Paycor contribution to fiscal 2026 growth being more conservative than its standalone public growth stem from churn assumptions? - Samad Samana (Jefferies)

2025Q4: Robert Lewis Schrader: There is conservative in the guide, but Paycor is still expected to be a strong double-digit grower in fiscal 2026. - [Robert Lewis Schrader](CFO)

Has Paycor's recurring revenue growth slowed after integration due to disruption, and does the "double-digit" growth guidance include revenue synergies? - Samad Samana (Jefferies)

2026Q1: For the full year, Paycor recurring revenue is expected to grow double digits. Q1 growth was in line with expectations... Some disruption from integration activities earlier in the year is acknowledged... - [Robert Schrader](CFO) and [John Gibson](CEO)

Contradiction Point 2

Revenue Synergy Realization Timeline

This is a substantial strategic contradiction regarding the timing of a key financial synergy. The narrative changes from a future, multi-year contributor (2025Q4) to a present reality that is already being achieved (2026 Q2). This alters the interpretation of current performance and near-term growth drivers.

What is included in the 2026 guidance for top-line synergies? Can you quantify the cadence of cost synergies? - Andrew Nicholas (William Blair)

20251219-2026 Q2: Paycor's growth contribution for Q2 is estimated at 8% to 9% on a pro forma basis, adjusting for year-end filing headwinds... - [Robert Schrader](CFO) and [John Gibson](CEO)

Can you explain the reasons for the stock price decline related to Paycor's growth contribution and integration challenges? - Mark Marcon (Baird)

2025Q4: Robert Lewis Schrader: Revenue synergies are expected to contribute 30-50 basis points to the 2026 growth guide. This is a conservative estimate that builds over several years, starting with cross-selling... - [Robert Lewis Schrader](CFO)

Contradiction Point 3

Guidance Revision Rationale

This is a substantial contradiction concerning the explanation for a material financial guidance change. The company shifts from attributing the revision to internal derisking and confidence-building post-acquisition (2025Q3) to stating it was due solely to underlying business trends (2026 Q2). This affects trust in management's communication.

Can you provide more details on the $80 million in cost synergies from the Paycor acquisition and the timeline for achieving them? - Daniel Maxwell (Analyst)

20251219-2026 Q2: Integration is progressing well. The company is achieving revenue synergies and exceeding cost synergies... Cross-selling and platform migrations are ongoing, making precise revenue attribution difficult. - [John Gibson](CEO)

Was the guidance cut to the low end due to underlying business trends or risk mitigation from investor feedback? - Samad Samana (Jefferies)

2025Q3: The acquisition of Paycor is expected to be accretive... Work since announcing the transaction has increased confidence in achieving cost synergies... - [John Gibson](CEO)

Contradiction Point 4

PEO Growth Driver Attribution

This is a substantial market strategy contradiction. The explanation for PEO segment performance shifts from being driven by strong internal execution and anniversaring specific headwinds (2026 Q2) to being attributed to a broad, external macroeconomic trend of client cost management (2026 Q2). This changes the perceived sustainability and company-specific nature of the growth.

What factors will drive PEO's 3-point acceleration to hit the low end of the 6-8% range, and what visibility do you have into it? - Jason Kupferberg (Wells Fargo)

20251219-2026 Q2: The adjustment was due to underlying business trends, not investor feedback. - [Robert Schrader](CFO)

What is the outlook for Management Solutions' organic growth acceleration (excluding Paycor), and did any F4Q factors impact F1Q? - Samad Samana (Jefferies)

20251219-2026 Q2: The acceleration is driven by a combination of strong execution (double-digit demand, strong retention) and easier year-over-year comparisons, as the major enrollment headwinds from last year are anniversaried... - [John Gibson](CEO)

Contradiction Point 5

AI Tool Deployment Strategy and Timeline

This is a substantial operational strategy contradiction. The description of a key technological initiative (AI) changes from being in early stages for back-office efficiency (2026Q1) to being a fully deployed, client-facing sales productivity tool (2026 Q2). This indicates a significant and rapid shift in the application and rollout plan for a strategic asset.

What productivity improvements do you expect from the agentic AI pilots, and how do you measure success? - Daniel Jester (BMO Capital Markets)

2026Q1: The trends are macro-driven, with businesses managing costs. This is seen across all market segments, where clients are opting for lower-tier bundles. - [John Gibson](CEO)

What is the deployment status of the AI sales engine, and what productivity gains have you observed? - Scott Wurtzel (Wolfe Research)

2026Q1: A new agentic AI tool is in pilot to handle high-volume client transactions, which is in early stages. The goal is to free up service providers for higher-value advisory work... - [John Gibson](CEO)