Paychex's Q2 2026 Earnings Call: Contradictions in Paycor Growth, PEO Performance, and Checks per Client Trends

Date of Call: None provided

Financials Results

• Revenue: $1.6B, up 18% YOY
• EPS: Diluted EPS $1.10, down 4% YOY; Adjusted diluted EPS $1.26, up 11% YOY
• Operating Margin: Operating income margin 36.7%; Adjusted operating income margin 41.7%, up ~80 bps YOY

Guidance:

• Reaffirming fiscal 2026 outlook except raising earnings expectations.
• Now expect adjusted diluted EPS growth of 10%–11% (up from prior 9%–11%).
• Expect to come in toward the 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.
• FY effective tax rate ~24%.
• Q3: total revenue growth ~18% and adjusted operating margin 47%–48%.

Business Commentary:

* Revenue and Financial Performance: - Paychex reported total revenue of $1.6 billion for Q2 FY2026, up 18% year-over-year, with Management Solutions revenue growing 21% to $1.2 billion. - Growth was primarily driven by product penetration and price realization but was moderated by softer-than-expected revenue per client growth.

• PEO Segment Performance:
• PEO-owned Insurance Solutions revenue increased 6% to $337 million, driven by solid growth in the number of average PEO worksite employees.

• The PEO segment performed well, with market-leading mid-single-digit worksite employee growth, despite facing headwinds in the insurance agency due to weak workers' compensation rates and lower health and benefit volumes.

• AI and Operational Efficiency:

• Paychex emphasized its AI-driven innovations and cost-saving initiatives, such as implementing AI-powered payroll processing, which autonomously handles thousands of calls with nearly 100% accuracy.

• These advancements aim to improve client outcomes and enable service teams to focus on strategic advisory support, enhancing the company's competitive position.

• Paycor Integration and Synergies:

• Paycor contributed approximately 17 percentage points to Paychex's growth, with the company expecting about $100 million in cost synergies for fiscal year 2026.
• The integration includes cross-sales efforts, broker relationships, and go-to-market strategy improvements, which have led to increased client retention and bookings back to pre-acquisition levels.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted "solid second quarter results" with revenue up 18% and adjusted operating income up 21%. Leadership emphasized integration progress (Paycor), upgraded cost synergies to ~$100M, and multiple AI pilots delivering near-100% accuracy and productivity gains — then raised EPS guidance while reaffirming outlook.

Q&A:

• Question from Mark Marcon (Baird): Can you address Paycor contribution and what you're seeing with regards to Paycor growth and integration?
  Response: Paycor contributed roughly 17% of Management Solutions growth; pro‑forma Paycor recurring revenue grew about 8%–9% in the quarter and integration is progressing with revenue synergies realized and cost synergies now expected ~ $100M for fiscal 2026.

• Question from Mark Marcon (Baird): What are you seeing in the selling season so far and how do AI pilots affect longer‑term cost synergies?
  Response: Demand/activity is solid but shoppers are cost conscious; AI pilots (handling payroll calls/emails at near‑100% accuracy) are improving productivity and should enable margin expansion and more advisory‑focused headcount over time.

• Question from Bryan Bergin (TD Cowen): Can you expand on softer‑than‑expected revenue per client and its impact on the fiscal '26 growth guide?
  Response: Revenue per client was slightly softer than plan due to smaller deal sizes and lower attachment rates at sale, prompting steering toward the low end of revenue ranges despite overall execution and macro holding up.

• Question from Bryan Bergin (TD Cowen): The 8%–9% Paycor growth — is that adjusted to remove December form filings?
  Response: Yes — the 8%–9% is a pro‑forma adjustment that removes December year‑end processing fees to provide an apples‑to‑apples comparison for the fiscal quarter.

• Question from Bryan Keane (Citi): Should we model Paycor as low double‑digit or ~8%–9% growth for the fiscal year?
  Response: Management still expects Paycor to be a high‑single‑digit to low‑double‑digit grower; timing will depend on attachment and deal size trends through the year.

• Question from Bryan Keane (Citi): Are smaller deal sizes, less attachment and softer rates macro driven or competitive?
  Response: Primarily macro driven — clients are more cost conscious across segments and selecting lower‑tier bundles rather than reflecting competitive share loss.

• Question from Tien-Tsin Huang (JPMorgan): Any consideration to change pricing/packaging to address smaller deal sizes?
  Response: No immediate pricing change — management believes current bundles and fixed‑fee pricing are advantaged; strategic pricing/packaging initiatives are underway but will take time to model and execute.

• Question from Tien-Tsin Huang (JPMorgan): Given PEO strength, is there opportunity to lean harder on PEO given insurance dynamics?
  Response: PEO demand and retention are strong and could benefit from market rate dynamics; PEO‑owned insurance agency remains a headwind (workers' comp weakness) and management is making changes there.

• Question from Andrew Nicholas (William Blair): How receptive are Paycor clients to PEO and are worksite employees coming from existing clients?
  Response: Receptivity is strong; upsell momentum is meaningful with sizable deals and roughly a 50/50 mix of worksite employee growth from inside and outside the existing base.

• Question from Andrew Nicholas (William Blair): Is Agentic AI impacting headcount or mainly productivity?
  Response: AI is increasing productivity, enabling growth with less incremental headcount over time and allowing service staff to shift toward higher‑value advisory roles.

• Question from James Faucette (Morgan Stanley): Were the incremental realized gains on the investment portfolio from Paycor included in guidance and forecast?
  Response: Yes — realized gains from repositioning Paycor client funds were executed in Q2, were contemplated in the full‑year guide, and resulted from an intentional portfolio reallocation to lock in rates.

• Question from James Faucette (Morgan Stanley): What are you seeing from territory resets and broker program changes and timing for booking benefits?
  Response: The disruptive work (territory resets, Partner+ launch) was largely completed early in the year; bookings and broker contributions have accelerated back toward pre‑announcement levels and momentum is improving.

• Question from Samad Samana (Jefferies): Did investor feedback drive the move to the low end of the guide or was it business dynamics?
  Response: The decision was driven by business factors — slightly softer revenue per client and continued agency headwinds in PEO‑owned insurance — not by investor feedback.

• Question from Samad Samana (Jefferies): On renewals inside the installed base, are you moderating price increases or seeing discounts?
  Response: No material moderation — renewal price realization is in line with plan (and above pre‑pandemic levels) aided by added product/ capabilities and value messaging.

• Question from Unknown Analyst (RBC for Ashish Sabadra): Do AI products enable more pricing power or offset revenue per client weakness via productivity/value?
  Response: AI will both enhance value within bundles (supporting price realization) and create new premium products customers may pay for; it should improve retention and attract clients as adoption scales.

• Question from Kartik Mehta (Northcoast Research): If customers are more price conscious, how are you avoiding pushback and sustaining price realization?
  Response: Existing customers accept enhanced bundled value; prospects are more price sensitive at sale (choosing lower bundles) but management expects to upsell the base over time.

• Question from Kartik Mehta (Northcoast Research): Is the higher buyback level a change in strategy or opportunistic?
  Response: Opportunistic — philosophy unchanged (offset dilution/maintain share count) but management pulled forward purchases given perceived value in the stock.

• Question from Scott Wurtzel (Wolfe Research): Can you add color on Q3 guide components and timing around Paycor form‑filing revenue?
  Response: Expect back‑half acceleration (PEO improvement as comps ease and synergy realization), with some conservatism baked in but revenue and margins anticipated to improve into Q3.

• Question from Scott Wurtzel (Wolfe Research): How broadly deployed is the AI sales engine and any productivity gains yet?
  Response: Pilot started ~60 days ago and adoption ramped quickly; tool is effectively fully deployed across Paychex sales force with early positive feedback and usage during selling season.

• Question from Jason Kupferberg (Wells Fargo): Will organic growth in Managed Solutions improve from current ~4% and what is a realistic longer‑term organic rate post‑Paycor lap?
  Response: Expect modest acceleration in the back half and over time toward roughly a ~5% organic growth rate for Management Solutions as integration and synergies progress.

• Question from Jason Kupferberg (Wells Fargo): For PEO, what drives the jump from ~4.5% YTD to ~7.5% in H2 to hit the 6%–8% FY range?
  Response: Acceleration driven by easier comps (anniversaries of prior headwinds/enrollments) plus continued strong demand and retention — PEO grew high‑single digits in the quarter.

Contradiction Point 1

Paycor Growth Expectations

It involves differing expectations for Paycor's growth, which directly impacts revenue forecasts and investor expectations.

Should Paycor's growth be modeled at 8% to 9% for fiscal 2026? - Bryan Keane(Citi)

20251219-2026 Q2: We expect Paycor to be a low single-digit grower. Trends show similar challenges in revenue per client growth, including smaller deal sizes and lower attachment. - Robert Schrader(CFO)

Can you address Paycor's growth challenges and integration concerns? - Mark Marcon(Baird)

2026Q1: Paycor's recurring revenue is expected to grow double digits on a full-year basis. Q1 was in line with expectations. - Robert Schrader(CFO)

Contradiction Point 2

PEO Performance and Market Environment

It pertains to the performance and market environment of the PEO, which affects the company's revenue and competitive positioning.

How do you assess the upsell potential for PEO among existing clients amid healthcare inflation? - Andrew Nicholas(William Blair)

20251219-2026 Q2: The PEO is performing well, with demand and retention at strong levels. There's no shift in worksite employee growth from existing clients, and the PEO is positioned well in the market despite challenges in health care inflation. - John Gibson(CEO)

How would you characterize the PEO environment given Q1's sequential performance compared to Q4 is worse than usual? - Mark Marcon(Baird)

2026Q1: PEO continues to perform well with mid-single-digit worksite employee growth and record retention. The agency portion saw some workers' comp rate headwinds, but overall, the PEO performed slightly above expectations. - John Gibson(CEO)

Contradiction Point 3

PEO Performance and Market Demand

It involves differing perspectives on the performance and market demand for the PEO division, which is a key segment of the company's business.

How do you assess the upsell to PEO from existing clients, given healthcare inflation? - Andrew Nicholas(William Blair)

20251219-2026 Q2: The PEO is performing well, with demand and retention at strong levels. - John Gibson(CEO)

Can you discuss the core Paychex PEO trends this quarter and plans for fiscal 2026? - Scott Darren Wurtzel(Wolfe Research)

2025Q4: There was a higher level of demand, particularly among larger clients, with record worksite employee retention. - John Gibson(CEO)

Contradiction Point 4

Checks per Client Trends

It involves differing expectations regarding checks per client, which directly impacts revenue and financial projections.

Can you explain the change in growth from 3Q to 4Q and the factors driving growth as we move into 2026? - Bryan C. Bergin(TD Cowen)

20251219-2026 Q2: We believe the checks per client trend is a temporary softness. We've taken that into consideration in the guide. - Robert Schrader(CFO)

How did checks per client trend in Q4, and what are your expectations for fiscal 2026? - Ashish Sabadra(RBC Capital Markets)

2025Q4: Checks per client were softer in Q4, and this trend has been factored into the plan for the coming year. - Robert Schrader(CFO)

Contradiction Point 5

Paycor Growth and Integration Challenges

It highlights differing perspectives on the growth trajectory and integration progress of Paycor, which could impact investor expectations and operational strategies.

Can you address Paycor's growth issues and integration challenges? - Mark Marcon (Baird)

20251219-2026 Q2: The Paycor contribution is rounded to 17%. The Q2 growth is estimated to be between 8% to 9%. - Robert Schrader(CFO)

Can you provide an update on the Paycor acquisition? - N/A

2025Q3: During the third quarter, we announced that we entered into a definitive agreement to acquire Paycor, a leading provider of HCM, payroll and talent software. - John Gibson(CEO)