Paychex Stock

Good morning, and welcome to Paychex's First Quarter Fiscal 2027 Earnings Call. Participating on the call today are John Gibson and Bob Schrader. [Operator Instructions] As a reminder, this conference is being recorded, and your participation implies consent to our recording of this call.

I would now like to turn the call over to Bob Schrader, Paychex's Chief Financial Officer.

Thank you for joining us to discuss Paychex's first quarter fiscal '27 results. Our earnings release and presentation are available on our Investor Relations website. We plan to file our Form 10-Q with the SEC within the next couple of days. This call is being webcast live and will be available for replay on our Investor Relations portal.

Today's call includes forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference non-GAAP financial measures. A description of these items, along with a reconciliation of non-GAAP measures can be found in our earnings release.

I would now like to turn the call over to John Gibson, Paychex President and CEO.

Thanks, Bob. We delivered a solid start to fiscal year '27 with double-digit growth in operating income and earnings per share. Total revenue growth of 6% was driven by strong revenue growth in PEO and Insurance Solutions and continued progress against our strategic objectives, including accelerating AI across our business and executing on our go-to-market strategy. More broadly, our performance reflects the strength of our differentiated high-value advisory solutions.

This year, we are focused on 3 growth drivers: data and AI leadership, go-to-market evolution and advisory differentiation to strengthen our competitive position to deliver more value to customers and expand earnings over time. First, let me talk about data and AI leadership. We see AI as a way to augment the capabilities of our advisers and customers and help them operate more efficiently, make better decisions and deliver more value and improved outcomes. We believe our combination of proprietary workforce data, purpose-built HCM platforms and advisory expertise creates a differentiated advantage for Paychex.

WISE, our AI-powered intelligence engine now draws on more than 50 trillion proprietary data points across payroll, HR, benefits and other workforce workflows. Because that data is domain-specific and embedded in real customer activity, it enables us to deliver AI-driven automation that is more actionable. As our AI agents take action with our experts in the loop, they create a continuous feedback cycle that help improve outcomes and strengthens our solutions over time. We believe that is where AI creates the most value, not as a stand-alone tool or a search engine, but has intelligence built directly into the system of record and the moment where action needs to happen.

We are very proud to be recognized for our AI leadership as WISE was recently named one of HR Tech's top HR products for 2026. Another source of differentiation is our ability to combine AI with trusted human expertise. As more routine work becomes automated, we believe the value of expert guidance increases in areas where businesses are navigating complexity such as labor, tax, benefits and workforce management. That is why we see AI as enhancing, not replacing the role of our trusted advisers, and that's why we believe our combined technology and service model is difficult to replicate.

We're already seeing early proof points that this strategy is creating tangible value. This summer, we piloted intelligent pace cycle to proactively address the top sources of payroll errors. Based upon the results from more than 50,000 businesses, WISE helped prevent approximately 90% of his payroll errors. Based upon that success, we are expanding those capabilities across additional use cases across the company. This week, we announced WISE Hire an agentic recruiting solution designed to help SMBs find and hire qualified talent faster. Solutions uses AI recruiting agents to help customers source candidates, screen applicants, manage outreach and schedule interviews, all while keeping employers in control and providing access to human recruiting expertise when needed.

We are also extending WISE into business applications where customers already work such as Microsoft, making life easier to access for our customers and their employees. We are also further accelerating AI across our service model and operations. We now have more than 2,000 agents and features deployed across the business. WISE agentic payroll continues to enhance operational efficiency increasing automated payroll processing by nearly 20% from January through August, while also maintaining high service quality and accuracy rates. As this scales, it enables us to automate transactional work and free our teams to focus on more proactive and higher-value advisory support.

Our second area of focus is our go-to-market evolution. We continue to advance our go-to-market strategy by positioning Paychex not simply as a provider of products, but as a strategic partner, helping businesses succeed. Through our One Paychex approach, we are equipping all of our sales and customer success teams to take full advantage of the breadth of our technology and advisory solutions. With this approach, we are better aligning customers to the right solution from the beginning of their relationship with Paychex.

Our partner ecosystem also remains a strategic advantage. Our CPA, bank and broker relationships drive a significant portion of our leads and generate higher win rates. Continued investment in those channels drove higher referral activity year-over-year. We continue to build momentum in the broker channel, signing our third national broker partnership in 6 months with IMA Financial Group. We saw strong growth in broker bookings, supported by higher average deal size and strong ancillary attachment. At the same time, we're expanding our reach to embedded, partner-led and stand-alone channels, creating additional pathways for future growth; and finally, advisory differentiation.

Customers are looking for more than just software. Our Advisory and Benefit Solutions remain an important part of how we help businesses navigate increasingly complex workforce needs. By combining innovative technology with human expertise, we provide trusted support across ASO, PEO and retirement often serving businesses with limited or no in-house HR resources. All 3 advisory solutions delivered strong revenue growth this quarter. We continue to see traction in the enterprise segment for our advisory solutions, which reinforces the strategic rationale of the Paycor acquisition.

PEO remains a key growth driver and delivered industry-leading high single-digit worksite employee growth and delivered record retention. We also saw strong upgrades of ASO clients into PEO relationships, reflecting the trust we've built with clients and the value of our full-service advisory model. In addition to all these things, we improve client retention. We continue to see price realization and strong product penetration, all of which contributed to the strength of our results this quarter and continues to demonstrate the value we deliver for our customers.

I'm pleased to see our progress recognized externally including being named to Times World's Best Companies and Newsweek's America's greatest companies list, reflecting the strength of our brand, culture and operating performance. In addition, our human capital management platforms were recognized by Nucleus Research and Nelson Hall for innovation and capability and talent and workforce management.

Stepping back, we believe Paychex has never been better positioned and continues to offer a compelling investor value proposition. With our multiple durable recurring revenue streams and businesses, industry-leading margins, strong free cash flow, disciplined capital allocation, we see continued opportunity to expand our earnings power through scale, mix, productivity and AI-enabled efficiency. We have a focused strategy, a resilient operating model and increasing momentum in the areas that we believe matter most for long-term growth and profitability. I'm proud of the work that the team has done this quarter.

I will now turn it over to Bob to discuss our financial performance and outlook.

Thanks, John. I'll begin with our first quarter results, and then I'll turn to our updated outlook for fiscal 2027. For the first quarter, total revenue increased 6% to $1.6 billion driven by the strength in our advisory solutions, particularly PEO. Management solutions revenue grew 4% to $1.2 billion driven by product penetration and price realization. And as John mentioned, we saw a high volume of ASO to PEO upgrades in the quarter. as well as strong PEO referral activity from our HCM sales teams, which contributed to strong PEO growth.

PEO insurance growth in the quarter was 12% to $368 million primarily driven by strong growth in PEO worksite employees and increased PEO insurance volumes. Interest on funds held for clients increased 5% to $50 million driven by stronger reinvestment yields on our long-term portfolio. Total expenses for the quarter increased 1% as higher PEO direct insurance costs and continued investments in our go-to-market expansion and strategic priorities were largely offset by lower acquisition-related costs and continued AI efficiencies.

Operating margins for the quarter increased 280 basis points to 38% and our adjusted operating margins increased approximately 130 basis points to 42%, driven by productivity and cost discipline even as we continue to invest in our strategic priorities. Diluted earnings per share increased 14% to $1.21 per share and adjusted diluted earnings per share increased 10% to $1.34.

Our financial position remains strong with cash, restricted cash and total corporate investments of approximately $1 billion and total borrowings of approximately $4.6 billion at quarter end. Cash flow from operations were $414 million and were impacted by the timing of client and corporate tax payments. And our capital allocation strategy is centered on delivering long-term shareholder value. This quarter, we returned $424 million to shareholders through cash dividends. We continue to focus on the drivers of long-term shareholder returns within our control, including strong earnings growth sustained dividend growth and disciplined capital deployment. Our 12-month rolling return on equity remains robust at 47%.

I'll now turn to our updated outlook, which assumes the current macro environment, including stable demand and flat employment levels. We are reaffirming our full year fiscal '27 guidance with updates to segment revenue growth to reflect continued strength in PEO and the latest short-term interest rate change. For fiscal we now expect PEO and Insurance Solutions revenue growth to be in the range of 7% to 8%. This is up from our prior guidance due to continued strength in PEO. As a reminder, comparisons become more challenging over the remainder of the year as we lapped the prior year acceleration in PEO stronger MPP enrollment.

Interest on funds held for clients is now expected to be in the range of $200 million to $210 million, which includes the most recent 25 basis point increase to the Fed funds rate. The remainder of our outlook is unchanged. However, I would like to provide some additional color on the categories. If the strength that we saw in Q1 in PEO upsells and HCM referrals continues, we could see PEO and Insurance Solutions trending toward the high end of the updated range with Management Solutions trending towards the low end. And as I think we've discussed many times with many of you, we view that mix shift favorably as PEO represents not only our highest value solution, the best retention solution that we have, but certainly our highest lifetime value solution.

Now let me turn to provide some color on the second quarter. Second quarter revenue and earnings growth reflect a difficult comparison to prior year due to 2 onetime items that were recognized in Q2 of last year. One, we had a revenue synergy benefit from the acquisition that was recognized in the quarter. as well as the realized gains that we had in Q2 from the repositioning of the portfolio that we did. We would expect Q2 revenue growth to be approximately 4% with an adjusted operating margin of approximately 40%. Excluding those 2 items that I just mentioned, second quarter total revenue growth would be in line with our first quarter growth rate. And as always, this outlook reflects current assumptions and is subject to change.

Our business fundamentals remain strong. We continue to operate from a position of financial strength, supported by our durable recurring revenue, strong cash generation and disciplined investment in areas we believe will drive long-term growth. With a resilient operating model, continued margin opportunity, increasing momentum in AI, go-to-market evolution and advisory solutions. We remain confident in our strategy to drive long-term growth and shareholder value.

And with that, we'll now open up the call for questions.

[Operator Instructions] We'll go first to Andrew Nicholas with William Blair.

I wanted to start on HRMS quarter. Curious if this was in line with your expectations, what additional color could you give us in terms of the underlying drivers of the 4.3% growth number? And if you could speak to the implied ramp throughout the rest of this year considering you did maintain the 5% to 6% outlook?

Maybe I'll -- you want me start and add some color.

Yes, you can start.

Yes, Andrew, listen, I think Management Solutions was, I would say, slightly below our expectations, and I think it's due to 2 things. that we talked about in the prepared remarks, it's really the strength of the PEO. And I think it's driven by 2 dynamics. We certainly saw a strong performance in upgrades from ASO to PEO, that was certainly ahead of our plan and it was up significantly year-over-year. And then the other dynamic that we saw during the quarter is we're seeing a higher level of referral activity from our HCM sales teams into PEO, that was up almost 50% year-over-year. And that's actually driving new sales into the PEO.

And it was really broad-based across the board. Certainly, we're benefiting from our enterprise reps out in the field, not only selling technology, but really selling the full breadth of our solutions, including PEO. And so that -- we're gaining a lot of traction there. As we mentioned in the call, we do view that as favorable overall just because of the economics around the PEO business. So it was probably slightly below our expectation, but PEO obviously, overachieved our expectation, and that's why you see some of the changes that we made to the full year guide.

As far as the acceleration in the back half, in Management Solutions, I mean, we continue to see strength in ancillary attachment. And although PEO has been strong, ASO and retirement continued to be strong. A lot of that is coming from the revenue synergy opportunity. We've been adding sales head count over the last year, those heads are ramping, getting more productive. Our retention trends are very positive, and we would expect that to continue.

And then we have a lot of news of other revenue streams like our Perks product, our employee Perks product, that's probably our strongest growing product that we have. We just launched that. into the Paycor platform into 2.5 million employees. We announced WISE Hire this morning. We have our 650 products. So we expect all those products to continue to gain traction as we move into the back half of the year.

Yes, I'd [indiscernible]. The thing that happened to us, quite frankly, is that the execution of our go-to-market evolution exceeded our expectations. What we're trying to do there is we're trying to put stronger focus on higher lifetime value solutions. We're really driving training, enablement and incentives so that all of our reps are presenting the best solution across all of our sales team and also our customer success team. So we're trying to enable every one of our sellers and everyone that's in direct contact with our clients to be able to represent each one of our products and services.

And I think anyone knows anything about Paychex that used to be a lot more siloed and compartmentalized, if you will. We get a client -- we become a payroll client that we'd go and sell the ASO, then we sell them PEO and we kind of moving them up the ramp. And we've done a lot. We're using AI as one of the tools we're using to enable our reps to be able to speak to these different solutions and capabilities, the same thing with our customer success rep. So quite frankly, that actually exceeded our expectations. I mean, Bob mentioned it, our ASO to PEO conversions were double our expectations. And then we were even better in the referral side of the shop.

In terms of the enterprise, 100 plus the sales teams that we have out there referring PEOs. So you've got a situation where that immediately you got a geography question in terms of management solutions versus PEO. So an ASO client upgrades to the PEO, the revenue is about 3.5x, and you're moving from one bucket to the other. When you look at an HCM sales rep that's out there, potentially going to put them on a HCM platform, and they refer to PEO. Again, that's even more than 3.5x the revenue uptake.

And so if we can get the client in the right solution upfront, the advisory solution, we think that's the right thing to do, and that's actually exceeded our expectations in the quarter. If that continues, I believe that's a good thing for the company and a good thing for our shareholders.

I agree. For my second question, I just wanted to touch on PEO a bit further. One of the bigger themes we've heard in kind of talking to private companies in the space over the past couple of weeks is the potential for health care renewals to accelerate from the low double-digit level during the upcoming renewal season. So I guess a 2-part question. Are you seeing or hearing of that dynamic from your business heads? And second, how do you see that affecting Paychex retention in your PEO business, your ability to take share and maybe the broader sales environment as medical rates continue to move higher?

Yes. Well, look, medical and health and really providing benefits to employees is a major issue that's facing our markets, and that's why our advisory solutions and our benefit solutions are resonating so strong. And at our scale, I think we have a demonstrated track record over a long period of time of being able to manage that cost and give some sort of comfort. I think there's no question when you see the type of health inflation that we're seeing in the marketplace, that causes people to look around.

What I would tell you is we're at record level PEO retention, and that beat our record of last year in the first quarter. We are just beginning our first renewal. If you remember, we have 2 renewal processes, one in October and one in December -- one in January. What I can tell you is, I think we've managed our book well and our rates are going to be highly competitive in the marketplace. And I think that's going to give us a competitive advantage there. So this is a big issue. I think it's going to drive more people shopping and looking for alternatives to access economic benefits. And the good thing is, I think we have the products and solutions to be able to do that.

So I think it's -- that's why I -- part of this acceleration is all things you just talked about. That's why I think when our HCM reps are out there and they're talking to clients about what their problems are, we're hearing, hey, health inflation is a problem. Can you help me here? Guess what? I can't. Let me get one of my PEO partners in to talk to you, and I think that's resonating.

Our next question comes from Daniel Jester with BMO Capital.

I guess I wanted to go back to all the commentary around AI, and it's great to see all of the product advancements there. Can you just spend a moment like talking about 2 things, I guess. Number one, is the advancements in all of these technologies? Are you actually seeing an improvement in your win rate or your seller productivity? I guess, number 2 is can you speak to sort of how these are resonating with your customers repeat usage like on some of these new tools? Just want to get a sense for the customer demand.

Yes. So I think we -- I said some of the stuff in our opening remarks, just as background, our WISE platform just won the HR Tech top HR product for 2026. We're just beginning to launch that. We just started that process. What we've seen thus far, we've got about 50,000 of our clients that were utilizing our advanced payroll processing capabilities and we're actually capturing 90% of the errors up in advance. So what that's doing is driving 2 things. Better customer outcome and less back office work for us organizationally. So that's the kind of uptick.

We just started with the Paycor WISE assistant. We just started a small group of clients, early days. The feedback has been extremely positive. We're just starting to launch -- we just launched the Paycor WISE Pro into the marketplace in August, so that -- we'll start seeing that in the September time frame.

What I'm most happy with is the work that we're seeing going on internally right now. Of course, we've been adopting this internally faster than we probably have from a product perspective. And we now have -- I have like 600 active agents in the company a quarter ago. We have over 2,000 today. We've now deployed AI to over 10,000 of our employees and we're encouraging them to a governance process to figure out how they can enable those tools. And we're seeing 20% reductions in payroll -- manual payroll process using our agentic payroll capabilities and tools. So we're seeing a lot of pick up internally. And I think when we began to embed this into our workflows at the customer level, our customers are going to see a similar type of uptick and the benefits that they're going to have.

So I think we're early there. We just announced today our WISE Hire product, that's going to be agentic recruiting solution, a design for small and midsized businesses. It's going to help them find qualified talent, which is another big issue we hear. And again, when you look at that, it really takes you from the start of engaging a client posting a job looking for a qualified candidate screening the candidate, scheduling the interview and take you all the way through the onboarding process into all 3 of our platforms, all of that embedded into WISE. And so again, that's going to save time. That's going to go to a faster, higher for our clients and they're going to have better outcomes.

So we're in the early stages, I think, of deploying this from a product perspective. But what I can tell you what we've seen internally the uplift we're getting in terms of our ability to drive better outcomes for our customers, drive efficiency across our specialists and our advisers, it's pretty powerful.

That's really great. And then maybe, Bob, to you, appreciate the color on the second quarter. Maybe anything more you can share about what we'd be thinking about sort of enterprise bookings and the last couple of quarters, Paycor was viewed as you've been improving from a bookings perspective. So I guess, how did that perform in the quarter? And I think about the second quarter and maybe in the third quarter, any color about how we should think about those enterprise bookings reramping?

Yes. I mean enterprise bookings were strong in the quarter, certainly up double digits for sure in particularly -- we saw strength in the broker bookings as well an average deal size. So I think all of those trends were very positive. And I think that gives us some level of confidence as it relates to -- as we move into the into the second half of the year. We had the question around the acceleration. Some of that is based on what we saw in Q1 booking strength in the enterprise space was overall.

And I'll just answer the question that I assume is coming overall when we look at the enterprise growth for the quarter, it was in line, our 100 plus across all of our businesses was in line with what we saw in Q4, and that was in the high single digits. So we're seeing a lot of positive trends in the enterprise space. And that is certainly contributing to the strength that we're seeing in the PEO business as well, a lot of that is coming up market. I think Andrew put a note out early this week about PEO playing up upmarket further above 100, and we're definitely seeing that. We saw that in Q1. So those trends were very positive.

Our next question comes from Bryan Keane with Citi.

Bob, can you just walk us the fourth quarter managed services growth, I think, was about 5.5%, and now we're a little bit under 4.5%. I think it was 4 and change. Just to walk through and how much of this is just literally we're going from HR solutions business, the ASO business is getting pulled. We're going one pocket to another over to PEO. And so really, there's not that much difference going on.

Yes. I mean that's exactly it, Bryan. I mean, you hit the nail on the head. It's a little bit left pocket, right pocking again, we view it as positive. I think the organic growth in Management Solutions was probably around 5% in Q4. There was probably a little bit of better price realization in Q4 versus maybe what we thought in -- what came through in Q1. But most of the change is really this mix shift between management solutions and PEO really with the ASO, not only the ASO upgrades, which John -- so that comes directly out of management solutions and gets reported in PEO.

I think the other dynamic that we're seeing there is just the new business that's coming into the PEO because we have all of our enterprise -- or not only our enterprise routes, but all of our HCM reps out in the field selling the full solution. I mean at the end of the day, small businesses are not buying technology. I think John said that in his prepared remarks, they're buying peace of mind. And it's that combination of our AI capabilities with that human in the loop and really trying to find ways to help small businesses solve problems. That is really resonating, and it's driving that strength not only PEO, ASO is strong as well. But to answer your question directly, it is really more of the left pocket, right pocket.

Yes, because the total revenue, we're not really -- it doesn't look like your expectations are really different at the end of the day because it's just -- it's a mix shift between one segment to the other.

Yes. And listen, we took the PEO and insurance up and we -- I made some comments in the guidance around depending on how things continue being at the high end versus the low end of ranges. We're sitting here, we feel pretty good about the PEO, but we have 2 big enrollments in front of us. We have the one here in October, as John mentioned, the one in January. We don't know what we don't know. So we're trying to be a little bit conservative there as we move through the balance of the year. And as we get through Q2, we'll kind of update not only the total but what we see between the splits between the 2 categories.

And our next question comes from Jared Levine with TD Cowen.

I want to start in terms of revenue synergies. Can you talk about the progress so far into this year -- or sorry, with 1Q so far? And any updated expectations in terms of, I think, for the full year you were previously assuming about 70 bps, 75 bps any updated expectations there?

Yes, Jared, this is John. Yes, we're going to stick with what we gave you the last time. I would say that they're going well. Bob talked about the referral side of the equation, continue to see good strength in our advisory solutions, ASO, PEO and retirement. We also mentioned we launched Perks into the Paycor client base or their employees up 2.5 million. We're only not even a month into that already.

What I can tell you about Perks overall, last time we talked, I think it was about over 400,000. We now have over 450,000 employees, double-digit growth in that product. And in the first 3 days, Paycor adoption is outpacing the first month when we launched it in Flex in terms of employee adoption, what I'm even more impressed with, which is not surprising, frankly, given the larger client size, is they're actually buying -- every employee in Flex is buying about 2 products in the Perks -- in the Paycor base, it's 3, 3.5. So we're actually seeing more uptake as well. So that's early on as well. And that's certainly exceeding our expectations there.

Got it. And then I wanted to dig in, in terms of some of the commentary about sustaining the high single-digit WSE growth within the PEO this quarter. I guess you started calling that out last year in 3Q '26. Is this a dynamic where you maybe went from high single-digit WSE growth you call it, accelerate to very high single-digit growth because I guess it would potentially imply maybe the new franchise sales have decelerated, but I just didn't know if it was maybe more of a going from high single digits to very high single digits or the new to the franchise sales decelerate here in terms of still delivering that high single-digit WSE growth in 1Q?

Well, Jared, I'll let Bob fill in the details, but this is what's amazing to me. Our ASO to PEO conversion. So let's talk about selling inside our client base, going into paychecks, going into Paycor and selling PEO. That is 2x our expectations. What's amazing is how that kind of growth happens inside the base, the traditional conversion and also see similar to slightly greater increases in the outside the base new logo component. So whereas we sell more outside the base than inside the base. That's what I would have told you a year ago.

If you would have told me we were going to double the number of conversions, I would have said that's going to flip the other way and we're going to have more internal conversions leading to PEO growth. That is not what happened. Both of them accelerated in the first quarter, both new logo and inside the base conversions.

Yes. I mean, just -- I mean, to answer the question directly, it's very high single digits, I think, was your question without disclosing the exact number. And I think the point that John made is a valid one. Despite all of those internal transfers, the new business into the PEO still skewed more outside the base. And again, I think that's coming from the referral activity the value of having all of our reps out selling the full value proposition is skewed more outside the basin inside the base, which was a pleasant surprise. And I think we've seen a couple of quarters of that trend as well.

Our next question comes from Ashish Sabadra with RBC Capital Markets.

This is William Qi on for Ashish Sabadra. Maybe just wanted to ask on some of the comments around price realization. Could you give a little bit more color there, just maybe how current pricing trends are stacking relative to historicals?

Yes, what I'd say is as we continue to get price realization, retention continues to improve. Product penetration continues to hit our expectations. So we're still seeing the ability because I think our products and services and the quality of our service and our technology are resonating with our clients to be able to go out in the market and achieve the price realization targets that we've historically gotten. So that's where we're at.

Got it. And maybe just a quick follow-up, I guess, maybe on margins outlook. I think the 44% kind of fiscal year '27 margins and 40% guidance for 2Q, it seems to be a bigger ramp, I think, for second half. I know 3Q is usually a little bit lumpier, but any, I guess, like thoughts around cadence there. Is this more just a factor as these new AI products ramp, you're seeing that kind of flow to margins and also productivity improvements as well?

Yes. I think some of it just the timing. I think the full year guide was approximately 44 basis points, which is probably in line with the expansion that we've normally seen historically in that kind of 50 basis point range, and we just expanded Q1 margins 130 basis points. So the Q1 expansion is greater than the full year expansion. You can't look at the absolute number because margins are significantly higher.

You can go back, if you look over the last -- in any year, Q3 margins are just structurally higher because of -- that's when we do a lot of our year-end processing revenue, and that's essentially 100% margin. So Q3 margins are structurally higher. So yes, really no concern. Overall, expense growth was up 1%. And so -- when you're growing your top line 6%, you're only growing your expenses 1%, you can see how it's easy to get double-digit earnings growth and the strong margin expansion that we delivered in the quarter.

Yes.I want to make a finer point on that to give the team a lot of credit, and I want you to think about it this way. When you think about the margin expansion that we saw coupled with the fact that we had PEO growing at a higher rate than what we expected. Our MPP program, our health program that we have in Florida, many of you know about it, right? That was at double digits growth as well. We all know that's pass-through. So where typically, you would say if the PEO was growing at that rate, you would expect it would be difficult to get that kind of margin expansion. That's really the power that we're seeing in terms of AI.

So on top of the margin expansion that we committed to at the start of the year before we knew the PEO was going to accelerate at the rate that it is, we've also increased significantly our investment in AI, and we've increased our investment in expanding our go-to-market efforts, both in terms of channel investments, embedded investments as well as additional salespeople. So all that additional growth investment, all the AI investment, acceleration in the PEO, which normally would compress our margins, and we're still committing to the type of margin expansion in the year. So that's just -- I think it's a testament of what we think the power of AI is and how great the team has done as the best operators in managing the bottom line of the business.

Our next question comes from Mark Marcon with Baird.

I'm going to ask a couple of somewhat repetitive questions just because of the way the stock is reacting. So I just wanted to give you an opportunity to further clarify things. With regards to just that ASO to PEO shift, could you quantify that? Like just how much of ASO revenue ended up shifting out during the quarter. Is that possible or to quantify like what the lift in terms of worksite employees and non-pass-through revenue to the PEO was during the quarter? And then I've got a follow-up with regards to the guidance.

Yes, Mark, I think the way that I would think about it is part of the challenge that we have, and I'm not going to change this because we're not managing the business quarter-to-quarter. And so we provide you guys full year guidance. And we try to give you the splits on a full year basis, and then we try to provide you some color on what the quarter is going to be, but not kind of the splits. And so even before the year started and where I saw where you guys were landing between the 2 categories.

I knew regardless how the quarter came out, I knew you guys are probably going to be too high-end management solutions and too low on PEO and insurance. There's nothing really I can do about that because, again, we're not managing the business quarter-to-quarter. I think when we came into the year, we said we expected the full year to be 5% to 6%, and we expected Q1 to be 5% to 6%. We just delivered a 6%. So the quarter exceeded our expectations. Obviously, there's puts and takes amongst all the different revenue streams. But overall, the quarter exceeded our expectations. And Management Solutions was a little bit lower in PEO and insurance was a little bit higher relative to our expectations.

And I think to Bryan Keane's question, it really is just kind of a left pocket, right pocket shift. And again, we view this as positive just given the strength of that model and the PEO and particularly the retention. Listen, it's the highest value solution, but it is very sticky for clients when they have all their insurances through us. It's very disruptive for them to leave, it's disruptive for their employees.

And so that's why I think you've heard me say this. I'd love to get all 800,000 of my clients in the PEO model because of the stickiness there. And that's part of our strategy. And as John said in one of the answers to the questions, the execution of our strategy was stronger than what we anticipated. So I'm hoping this trend continues to be honest, as we move forward because I think it's the right answer for the company. I think it's the right answer for our customers, and I think it's the right answer for our shareholders.

Yes. Mark, I think it's -- the important message to get out there is that the mix shift towards advisory solutions is positive to our business model and our competitive position. And if the market is demanding both a combination of technology, service and advisory support. I think there's very few that can compete with Paychex at our scale when it comes to leading with technology and advisory solutions. And that's where I see the market going. And AI is just going to simply enable us to do more of that, more advising because we can take more transactional work and repurpose those specialists to more higher-level capabilities.

So I think this is a good thing. Bob already said it. You look at our P&L. It's going to make the P&L better. And it is odd. I almost feel like I'm apologizing for successful execution of our advisory strategy. And we shouldn't be. We should be Pounding our chest and saying, "Well, I can't believe we exceeded our expectations at this degree."

And so hats off to the team and the execution of the go-to-market evolution that we're doing and hats off to the PEO team because not -- I mean, you got to think about it. They were set up for 2x what they were expecting and to be able to continue to have the record -- beating the record retention, they adjust that doing that, going through enrollment and negotiating with carriers and getting rates that I think are going to be highly competitive as we go into selling season -- like I said, that's something I'm very proud of. And again, I think we've got to continue to get the message out that the mix shift towards advisory solutions is positive for our business model and for our competitive position, both in the short term and the long term.

I appreciate that. I mean, the specific question was just if you could actually quantify the amount because you -- I mean, given the way the stock is reacting, it's clear that some people are maybe making the assumption that the PEO lift is partially due to the insurance pass-through revenue, not necessarily a direct shift in terms of revenue on a like-for-like margin for margin basis. So I was trying to ask that question to give you the opportunity to directly answer that.

Yes, Mark, just to comment on the -- certainly, our insurance volumes are up, right? So if you go back to last year, MPP enrollment was down in Q1 before we went in into our 2 annual enrollments. We had great execution through both of those enrollments. So our revenue is certainly up. MPP enrollment is up, I think, double digits.

But to Jared's earlier question, the worksite employee growth is really what drives PEO revenue, and that is high single digits, just shy of double digits, which we continue to, I would say, outperform the overall market there. So we're gaining share, as John said, our advisory message and differentiation is resonating in the marketplace, and that's what you're seeing in the results.

Yes. The other thing is, Mark, and I think you understand the -- and several of you understand the nuance of this. When you look at PEO insurance revenue at Paychex, it's not like all the other competitors. We provide insurance across the nation. That revenue, except for in Florida, you're not seeing an RPO revenue, right? That's not the case on how accounting works on a lot of the other competitive sets where they -- actually all the revenue is going through.

I think that's important because we're only talking about one program in Florida is the only part of that program. We're seeing broad-based across the nation growth in the PEO. And so as Bob said, I think the proxy there is worksite employees, and we're getting administrative fee for every one of those worksite employees.

So we're -- so I think that if that's the question, right? Look, PEO is growing because of insurance inflation. That's not the case. You cannot -- that's apples and oranges in terms of comparing paychecks to other competitors, where all of their insurance programs are embedded in their revenue projections. I don't know if that helps, but...

Our next question comes from Tien-Tsin Huang with JPMorgan.

Thank you for going through all of that. That's helpful. And maybe I'll build on it and ask a couple of questions. Just thinking about the outperformance of ASO, and this is the outcome that you want, this mix shift towards advisory, you overcame a higher cost of it. But help me understand the how that came about? Is it just a consequence of sales incentives or sales alignment pushing this more aggressively than you used to? Or is it somewhat demand-driven as well? Just trying to understand that.

And also, Bob, I heard you say you'd love to get all of your clients to the PEO model. Is there a runway to upgrade I didn't think that 100% of your clients would fit or be eligible, say, for a fully outsourced PEO model.

Yes. Well, maybe I'll start with that, and then John can answer the other question. I mean it's still relatively low penetrated, Tien-Tsin, within our client base. I mean, PEO is largely under 100. Play, if you will. And as you know, our client base is largely under 100. So maybe it's not can be a fit for all 800,000 clients, but I think it's going to be a fit for a good many of them. So I still think there's a ton of opportunity there within the base.

And John can add on to it. I mean, I think -- I don't know that there's anything really different than just good execution on a strategy that we've been focused on for a long time. Going from ASO to PEO has been part of our strategy for a long time. I think we've done a good job leveraging our AI models to really identify those clients that are a good fit. I would tell you what I think is a little bit different is the scale of our distribution has obviously increased with the Paycor acquisition. And so now it's not just my PEO reps. We're really focused on this one Paychex approach to really trying to sell the full value proposition. So now I got all these enterprise reps in the past, who are only out selling a technology solution that are selling these advisory solutions.

And yes, you got to get the incentives right. And we definitely have the incentives right. So they can -- if they're out in the field, they identify a prospect that's a good PEO prospect, and they understand because John and I talk about this with the leadership team constantly, the value that is to paycheck, they understand that they can refer that over to the appeal. And there's obviously an opportunity for them to get credit for that and get paid commissions on it. So I think it's all of the above. It's just execution of the strategy, having more reps out there selling it, and that's really driving the results.

Yes. I agree, Bob. Our One Paychex go-to-market strategy. We've done a lot of work building strong partnerships being able to enable each one of our sales reps and our customer success reps as well. So remember, we also -- we've talked about this. We've moved a lot more people into advisory roles, customer success rules and we continue to expand that as we're able to drive more transactional work down. So we have more people even in our service organization that are actively engaging clients and conversations about the products and services they win as well. So not only have we been educating and enabling all of the increase in our sales teams out in the marketplace to identify this. I think that's going.

I think there was an earlier point that I think is important to understand. There is also market issues that are driving this adoption. More and more people are getting increases and the increases reach the point where they decide to go in to shop. So now it's like -- I really like my brother and all the broker, but wait a minute, the price is getting too high, maybe I should shop. That's happening in the marketplace. So I think more people are coming to market, looking for comprehensive solutions. And I think the PEO has been identified, and there was a good note, like I said, out at the NAPEO conference in terms of all the PEOs are beginning to see that, that larger ones are starting to explore the PEO as an alternative to be able to access higher-quality health programs at a more reasonable cost.

Got it. That's good to hear. Then my quick follow-up, just as we go into enrollment period and your broader selling season, are you going to approach the carriers and plans and the pricing and everything else a little bit differently now that it's becoming a bigger focus. Is that a dollar we can expect Paychex to change not the Florida versus non-Florida risk pass-through model itself, but just thinking about the broader presentation of pricing and plan design for PEO because it seems like it's going to become more important as everybody shifts towards what you just said there, John?

Yes. I don't think we're going to change anything. I think that's been very important for a long time, and it's a key part of what -- why I think we're having the success as we've been doing this for some time in terms of continuing to adjust plan designs, continue to make sure we have the right broad selection. If you go back 3 or 4 years ago, we had a lot of conversations about this in some of the changes that we need to make because it kind of went the other way for us.

And so I think the team has done a very good job of both managing the book, managing the plans and making sure that we're working with our carrier partners on the best alternatives we can put in the marketplace. So I don't see us changing our strategy. We're going to keep doing what we're doing because it seems to be working.

Our next question comes from David Grossman with Stifel.

I'm wondering if we could just go back to management solutions for a minute. Maybe at least at a high level, walk us through the mechanics of the growth rate for the quarter and the year. I'm thinking price realization versus revenue retention and new clients because I know you've had a strategy of adding fewer smaller clients, et cetera, maybe that's having a little bit of an impact here. You mentioned, obviously, the transition to the PEO. But maybe just help us walk through that mechanic at a high level.

Yes. I mean, David, it's primarily driven by revenue per client within Management Solutions to the point you just made. And us being prudent on not making sure that we're adding clients that we think are going to be profitable and drive lifetime value over time. It's the 5% to 6% guide on Management Solutions, the assumption there would be it's roughly split between pricing and ancillary attachment.

Now we have this new dynamic where we're seeing more of the ASO. Those are existing clients that were in management solutions transitioning over to PEO. But that's really the assumption that went into the guide was roughly split between pricing and ancillary attachment.

So given what you're seeing then, Bob, you would expect, let's just say, prices at the midpoint of your range, so call it 3 points of pricing and then the balance would come primarily just from...

Yes, roughly. Yes, I think that's a fair way to think about it. Yes.

Okay. And then just back to the PEO. I mean, we've got through periods of hyperinflation, right on cost in the past. And just curious what you've seen in the PEO in the past during these periods? And perhaps is there some kind of cadence to how this plays out, the first level response is we got to shop around and see if we can get something in and that kind of stabilizes. And I'm just curious how it flows through at the employee level. I know there have been periods when employees have had to trade down or they just opt out of the plans. And just kind of curious kind of what you've seen historically when we've gone through periods like this.

Yes. I think, David, that's the one thing that is probably Bob mentioned that we're conservative. I mean we're just going into the enrollment. And remember, the enrollment has a 2-step process. One is to take the new rate to the client and get the clients agreement that this is the rate that we're going to offer their employees. And these are the plans we're going to offer their employees, and we've been trying to do a broad set. So that's step 1. We're just through that okay. We're not in the actual enrollment until October, where the employees then have to make a selection. And that's where it's a little more tricky because you got a 2-stage decision-making.

There's a lot of things going on with the Affordable Care Act, which I'm assuming you're aware of. And in the past, that was an escape valve for people to get off of employer-based plans at some point in time. that valve is kind of getting shut off a little bit, quite honestly, in some states, it's not even viable. In other states, it's the increases there are even greater than what in the employer market is.

So we are in this unique dynamic that I think employees are going to continue to look for plans within their employer plans if they can get them. I think the escape valve is a little not as open as it has been in the past. And what we're trying to predict is which plans will they select because that does have an impact.

Again, for us, that only has an impact in our -- in the portion of our book that's in Florida only. Everywhere else across the nation, it really doesn't matter which plan they select because it's not going to impact our revenue, if you understand. They're going to have insurance with us. They're going to have a great experience with us, and it doesn't matter which plan that they pick, that's not going to impact the up or down of our revenue. In Florida, it does. I don't know if that makes sense.

Our next question comes from Jacob Smith with Guggenheim.

Just on the macro. With oil prices elevated for a sustained period and your 70% blue grade collar customer base. Have you seen any discernible impact this quarter for whether it be hiring decision cycles or sensitivity around price increases? Any real-time color there would be helpful.

No, not at all. I would say the employment and hiring in our -- both in our index and generally what we see, it's really not significantly changed through the fiscal year. Actually, I think we're still in this kind of environment where it's kind of low fire, a little higher. You mentioned Blue and great color, what I tend to hear from our clients right now as they're having trouble finding people.

There's a lot of capital investment going on. There's a need for a lot of electricians and a lot of construction work going on some of this AI boom. And so most of the people that we're talking to, which is why we launched the WISE Hire applications is trying to find qualified people for these jobs.

So we've not seen anything in the macro environment still not seeing any signs of recession. In fact, in the quarter, or out of business and financial losses were actually improved. And if you remember right, they were improving in the back half of last year. So I actually feel a little bit better about where the floor is. Now we said all that. I mean we've got a lot of things globally that are on edge. And just depending if there was an oil shock or some sort of other hyperinflationary shock.

I think -- who knows what would happen. But I think you just look at even the data that Fed is looking at. I think the reason why they felt comfortable with the quarter point was the foundations of the economy are very strong, and the employment picture is very strong. So the feeling that the economy and the employment mandate that they had could handle an additional 0.25 point and really is an opportunity to try to focus on driving inflation down to the 2% target. So I don't see anything in the current data that I'm seeing that would say we're in a recessionary or in some sort of problematic situation from an employment perspective.

I appreciate the color. And then just on the broker channel, with the 2 national partnerships you signed last quarter, another one this quarter, are referrals accelerating? And how is that activity compared to maybe a year ago? And is this an upward trend you expect for the rest of the year?

Referrals were up 43%.

Our next question comes from James Faucette with Morgan Stanley.

It's Michael Infante on for James. You made several comments about your intentional ASO to P mix shift given the higher retention and lifetime value in nature within that segment. But how are you thinking about the risk of clients down selling into lower-cost offerings within the PEO specifically if we do get a little bit of incremental macro shop which is something we've obviously seen in prior cycles? And are you embedding any of that downsell activity into the existing outlook?

Yes. I mean we haven't seen that yet. I mean, I guess if it happens, we'll factor it in. I think John made the comment around record retention, and that's not a 1 quarter thing, that's been going on for a number of years in the deal business. So both the strong worksite employee growth, the demand and each quarter, we keep saying record retention, and we always sign up for better retention than the year before, but the PEO has been on a trend here in the last couple of years with improved retention. And we haven't assumed any further improvements as we move forward. We've just kind of baked in the trends that we've seen thus far. And so that's what's assumed in our guide.

Helpful. And then maybe just a quick follow-up on Paycor revenue growth, Bob. I think I heard you say revenue growth in the high single-digit range, consistent with Q4. But if I sort of recall back to your initial acquisition expectations. I think the hope was for Paycor to grow revenue closer to that double-digit range with the delta attributable largely to some softer revenue per client and smaller deal size trends. So I'm just curious given your commentary about bookings still running in that double-digit range. If you've seen any changes in terms of the underlying revenue per client or deal size trends for Paycor specifically? And if and when we should expect that bookings to rev rec to converge?

Yes. I mean our enterprise bookings have been strong. I think we've made progress every quarter since we closed the deal. And I think the way we've been thinking about our enterprise segment is that we would expect that segment of our business to maybe keep in mind, grow in line with the other assets that are in that space, and that's in that high single-digit range. And so you made the comment about where we were when we bought the acquisition or bought the asset, it obviously was growing faster as were the other assets in that space and employment growth was contributing to some of the growth that was going on in the mid-market, and that just hasn't happened.

As John mentioned, we have seen a little bit stronger employment growth upmarket, a little bit down under 50, and it's been flat overall. But you're not getting that employment growth tailwind coming out of COVID that we saw a few years back, and it's growing in line with where we would expect it to grow. And again, not too dissimilar from the other assets in that space.

Our next question comes from Kartik Mehta with Northcoast Research.

John, on the management solutions side, we've obviously talked about that the fundamentals seem sound, price realization, attrition, check, and I'm wondering if there's been any change from a competition standpoint or if that is still kind of what you saw over the last 6, 12 months?

Yes. Kartik, we've not seen any real shifts at all in the competition, not in terms of discounting is very consistent with what we've seen. The offers that I see, who we run into is very similar really have not seen any change in the market conditions for us, both in terms of demand is still solid across all of our products and services, we've spoken to the fact accelerated demand for advisory solutions. That's been a real strong suit for us. But I've not seen any major changes in the competitive situation at this point in time.

And then just a follow-up, John. Obviously, you've talked a lot about AI. You're investing a lot at Paychex kind of if you look to Dave where you are from an investment and return standpoint, do you think for AI, you're still in an investment standpoint and returns are to come? Or do you think you're at a point where returns or potentially exceeding your investment?

Well, I think -- so our investment in AI in this fiscal year over the last fiscal year is 5x. So we're certainly in the investment phase right now. I like the early returns that we're seeing. Again, I go back -- I'll just point you to the margins. And the fact that we're investing in AI at that pace, we're adding salespeople. We're improving our customer service stats. We're improving our retention. We're seeing our Net Promoter Scores go up across the board.

We are leveraging and embracing tool. We've empowered in the first quarter, 10,000 of our employees with AI tools, giving them the training and education, setting up a structured governance process. We're encouraging them to find ways to use it to make them more productive and shift for time to more what I call proactive and advisory type of activities with our clients and prospects. And so I like what I'm seeing thus far in terms of what we're getting out of it. And again, I think it's going to -- we're going to continue to invest in it. We're going to continue to look for AI-enabled add-on solutions like the WISE Hire that I just talked about because I do think these Agentic AI enhancements that we're going to be able to offer are going to allow us to provide better outcomes for our clients and start driving efficiency in clients' workplaces.

That's where I think the real benefit that we can -- where we can bear is we can go to a small business and say, "Well, let us bring our AI-enabled technology in our advisory solutions. And remember, a lot of our clients don't have an HR department or many of their HR departments are very, very strapped. And we can actually drive productivity in your business. We can help you hire people faster. We can make sure that you're fully compliant in real time. I think that's when we're going to see the real benefit come from is when we're driving outcomes for our clients.

Our next question comes from Scott Wurtzel with Wolfe Research.

Just a couple of quick ones. First on the PEO with respect to guidance. I just want to understand what you guys are expecting in terms of this pace of PSI upsells are you expecting it to continue at this kind of 2x normal rate back to the normal rate, somewhere in between? Just any color on that would be helpful.

I think, look, it's best for us right now. As I said, in the first quarter, it significantly exceeded our expectations to think that would continue would maybe be aggressive. And so we're certainly -- that's what we want to happen, and we're going to continue to execute our strategies, but we executed our strategy in the first quarter, it did better. I think what you would expect that we're looking at right now is will that come back.

I think the bigger point on the PEO guide is we are very early in enrollments are a key part that we have to look at in October in January. And I think as we get through the next quarter, just like we always have in the second quarter, we have better clarity on what that's going to shape up and look like.

Got it. That's helpful. And then just a follow-up. You talked a lot about the enterprise side and the activity you're seeing there. But just wondering if you can give some color on sort of like, call it, the sub-100 sub-50 client base, just any color on bookings trended during the quarter, retention would be helpful.

Yes. So like I said, normal course and speed, you look at the micro side of the market, the SurePayroll brand growing, doing very, very well. You look at that across the board retention as well across the board. So everything I would just say is like stable and steady course. So again, we're not seeing the acceleration that you're seeing in the PEO and other areas, but I would say it's stable and consistent with what we've historically seen.

Our next question comes from Jason Kupferberg with Wells Fargo.

I appreciate all the color on the mix shift from ASO to PEO. I understand why that's positive. But just looking at the total revenue growth guide for the year, I know we're unchanged at 5% to 6%. And based on the Q2 guide, it looks like we'll be at the low end of the full year range through the first half of the fiscal year. So you'd have to accelerate, by, call it, a full point in the second half to get to the midpoint of the full year outlook. I do think the comps get somewhat harder in both the segments. So I just wanted to see if you could comment on the visibility there and the drivers to get you that incremental acceleration in the second half?

Yes. Maybe I'll talk about it in total, Jason, to be easier. I mean, I think first of all, we exited last year at 6% organic growth rate in Q4, and that was a 2x improvement from where we came into the year. So we exited the quarter we came out with a 5% to 6% guide. Some of that contemplated the tougher compare that we mentioned in Q2. And so we just delivered a quarter that's at the high end of the full year guidance range. So we just delivered 6% and then you factor in the tougher compare in Q2. In the back half, you essentially have to deliver revenue growth in line with what you've done in the last 2 quarters. And so we feel pretty confident about that.

Obviously, as we sit here, I don't know that we exactly have the splits right between the categories. Obviously, we're a little bit off on management solutions versus PEO in Q1. I think we feel good enough about where PEO is that we had to take it up and maybe there's some additional upside there, but we are cautious, as John just mentioned as we head into our annual renewals, we got to kind of wait and see and not get too far out over our skis there. And so we'll come back update on the split. But I think when we look at it in total, what's required in the back half is very similar to what we've done the last 2 quarters to kind of hit the midpoint of the guide.

Okay. Understood. And maybe just to drill in on Q2 itself for a second, just in the context of that, 4% guide, just how would you encourage us to model the segment for Q2? And then can you just remind us what the revenue synergies were in last year's Q2. I know you mentioned the grow over there and I just didn't recall what those revenue synergies were in Q2 '26?

Yes. Jason, you always ask me -- it's always a good question. You always ask me this question, and I never answer it because I don't want to get it set a precedent in trying to give you exact guidance by quarter between the categories. And so we're trying to help you guys with getting your models and as best as you can for the quarter. We knew they were going to be off this Q1 because we didn't give you the split. So I don't really want to set a precedent in commented on the split.

The revenue synergies, so there's 2 things that happened in Q2 of last year. One, I think you can very clearly see if you go back to last year where we did some repositioning of the long-term portfolio, and we had some realized gains. I think you'll clearly see that in the Q and the press release and some of that information. The revenue synergy item, when we look at the 2 companies, we both had partnerships that -- where we had rev share arrangements in place and very similar to what we've done with our vendors, we've been able to renegotiate contracts to, at minimum, get the best terms and conditions between the 2 companies. In a lot of cases, leverage our scale to get better terms and conditions for the combined enterprise.

And we've done that on the vendor side, and we've done that certainly where we have partnerships in rev share arrangements. And we did that last Q2. And as part of that, there was an ongoing benefit from it, but there were some onetime benefits associated with that, that were recognized in Q2. And I think I mentioned in the prepared remarks, when you adjust for those 2 things, the Q2 growth would be in line with what we -- approximately 6% that we just delivered in Q1.

Our final question today comes from Brett Huff with Stephens.

I just want to make sure I understand and put a finer point on the guide for MS, seems that the layer take there is some price, some cross-sell and then some of the ASO and PEO, what specifically changed among those 3 to tell us that we're going to be at the lower end of the guide? Is it just the faster migration? Or is it price realization that seems to be waning a little bit?

It's definitely not price realization. It's really the uplift that we've seen in ASO to PEO transfers.

Okay. And then second quick question. as you guys think about selling AI into your base, how are those conversations going? I know the smaller business is just looking for all the help they can get. Are they looking for upfront proof points? Or are they just largely accepting some of these AI solutions just site unseen, just looking for whatever help they can have or do they need some proof points before they're actually putting money on the table and buying?

Well, so we have bundled the AI into our various bundles and we're at the Pro bundle, which we're just starting to launch in the Paycor and our others. So you can get a standard bundle or you can get a pro bundle, which has AI embedded into it. I think in addition, as we talked about on the last call, with our WISE platform, we are enabling certain AI antigenic capabilities across the 3 built-for-purpose platform, sure payroll Paychex Flex and Paycor. And we're including that as what I would say is really an enhancement and that helped us kind of drive the price value that we just talked about.

So I think we're early in what I would say selling an AI-based product. We just mentioned the WISE Hire. We launched 650, which is our HR compliance tool. Those are 2 tools that actually can be bought stand-alone and integrated with other HCM platforms as well, which is something new for payback. So we're early innings on that. But those are what I would say more pure-play kind of AI, agentic AI, stand-alone products that you can buy by stand-alone, and we'll be taking those to market as we go forward this year.

This does conclude today's question-and-answer session. I will now turn the meeting back to John Gibson for any additional or closing remarks.

Thank you, Angela. Well, thank you all for joining us today. We are off to a solid start in fiscal year '27. Remember, the mix shift towards advisory solutions is positive to our business model. and our competitive position long term. So I think we're making meaningful progress across our 3 growth drivers, data and AI leadership, our go-to-market evolution and differentiating ourselves through advisory solutions.

Just as importantly, I remain very confident in the strength of our core business and the durability of our operating model. We have a clear strategy, maybe actually including it too quickly at times, disciplined execution and continued investment in the areas that I think matter most. And we believe that Paychex is well positioned to drive long-term growth and shareholder value, and I appreciate your interest in Paychex. Hope everyone has a great day.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good morning, everyone, and welcome to Paychex's Fourth Quarter Fiscal 2026 Earnings Call. Participating on the call today are John Gibson and Bob Schrader. [Operator Instructions]

As a reminder, this conference is being recorded, and your participation implies consent to our recording of this call. I would now like to turn the call over to Mr. Bob Schrader, Paychex's Chief Financial Officer. Please go ahead, sir.

Thank you for joining us to discuss Paychex fourth quarter and full year fiscal 2026 results. Our earnings release and presentation are available on our Investor Relations website. We plan to file our Form 10-K with the SEC before the end of July. This call is being webcast live and will be available for replay on our Investor Relations portal. Today's call includes forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations.

We will also reference non-GAAP financial measures. A description of these items along with the reconciliation of non-GAAP measures can be found in our earnings release. I would now like to turn the call over to John Gibson, Paychex President and CEO.

Thanks, Bob. I'll begin with our operational highlights for the quarter and the full year, and then Bob will discuss our financial performance and outlook before we open the call for your questions. We finished the year with strong momentum, delivering double-digit revenue and earnings growth in the fourth quarter and the full year, while also accelerating organic revenue growth in each quarter. Our team executed well against our strategic priorities: expanding upmarket, strengthening our advisory differentiation and advancing our AI capabilities to drive better client outcomes.

Our mission is simple, help businesses succeed. Today, customers are managing more work and complexity than ever before and went more than just the tool. They want a trusted partner that can help them manage cost, attract and retain talent and navigate a dynamic regulatory landscape. That trust is reflected in our strong client retention across our payroll clients who rely on Paychex for support and advice across a growing number of solutions.

Our differentiated advisory and benefits solutions, including ASO, PEO and retirement continue to resonate in the market and drive robust revenue growth. While other providers offer fragmented tools or limited support models, we believe we stand apart by combining technology with trusted human expertise to help customers solve their most important workforce challenges. That differentiation is driving higher engagement in our HR outsourcing. And ASO engagements increased more than 60% this year alone, reflecting growing demand for support navigating an increasingly complex HR landscape.

We believe our investments in go-to-market and technology strengthened our value proposition and contributed to record worksite employee retention and ASO and PEO this year. PEO in particular, remains a key growth driver. PEO worksite employee growth continued to outpace the industry with high single-digit growth in the quarter and full year. The comprehensive solution helps businesses manage regulatory complexity and offer competitive benefits often with little or no in-house HR staff. We continue to see a long secular runway for growth in this business. Building on our advisory strength, we launched Wise also known as our Workforce Intelligence strengthened by Expertise, which is our AI-powered intelligence engine.

Wise extends our capability into agentic AI and is powering approximately 600 AI features and agents. Embedded into the work flow, Wise moves beyond insights and assistance to autonomous execution, helping scale our expertise, enhance productivity and deliver better client outcomes, all with human in the loop oversight, available on-demand support and strong governance.

We believe differentiated access to large data sets will set -- will be a key driver of AI readership and that Paychex is exceptionally well positioned. For more than 50 years, we have been at the center of HR, payroll and benefits, giving us access to a vast proprietary and growing amount of data. Wise now draws on more than 26 trillion data points, helping make our solutions smarter, more relevant and more proactive.

What makes this unique is our patent pending AI knowledge mesh technology, which helps unlock insights from unstructured data, including e-mails, calls and other client interactions and turns it into actionable intelligence. We believe that our unique technology, large data set and deep HR and compliance expertise make our AI-enabled HR solutions truly unique in the market.

We're already seeing the benefits in practice with meaningful reductions in administrative work. We can now automatically create and update client employee handbooks as regulations or business needs change in real time. Our workforce management solutions intelligently generate schedules in minutes instead of hours and reduced time sheet approvals by more than 50%. Reflecting on our commitment to flexible service models Clients can submit payroll by phone or e-mail through a service experience powered by Wise. In addition, our agentic payroll solutions have continued to scale, significantly reducing wait times while maintaining the accuracy our clients expect.

Over time, we see Wise as a meaningful driver of long-term value creation through direct monetization opportunities as well as indirect benefits, including stronger upsell, higher revenue per client, improved retention and greater pricing power. As AI automates more routine tasks, we believe differentiation will increasingly come from compliance expertise, advisory capabilities, proprietary data and trusted execution, areas where we believe Paychex is structurally advantaged. Those strengths, combined with continued investment in our innovation road map, will position us well for the long-term AI leadership in our category.

Turning to our enterprise business. We continue to perform well upmarket among clients with more than 100 employees. We exceeded our fiscal year '26 synergy targets associated with the Paycor acquisition contributing more than 50 basis points to revenue growth and generating over $100 million in cost synergies. We continue to make progress cross-selling advisory offerings such as ASO, retirement and PEO into the Paycor base and are winning larger deals than originally anticipated.

We also saw continued traction in the broker channel, including 2 new national partnerships this quarter alone, reinforcing our position as the preferred choice for HCM referrals. During fiscal year '26, we completed the organizational and sales territory realignments associated with moving the Paycor under 100 employee businesses into our SMB segment and integrating the Paychex 100-plus businesses into our enterprise segment.

We enter fiscal year '27 with clearly aligned teams, brands and platforms focus on the specific needs of each market segment. All of this is powered by our scaled, modernized and modular infrastructure, including our new modern tax engine which we expect to further enhance through integration with our Wise intelligence engine. Beyond shifting up market, 2 emerging growth areas for us are expanding employee-based revenue streams and growing beyond our payroll base. We introduced Perks, our digital benefits marketplace less than 2 years ago. And today, more than 400,000 unique employees have already purchased affordable, transferable benefits through the marketplace. We are now expanding access to Perks to employees on the Paycor platform increasing our addressable market by more than 2.5 million employees. More broadly, we now see meaningful opportunities to grow beyond our traditional payroll base.

Historically, many of our solutions could only be sold in connections with a client being on our payroll platforms. With the modernization of our underlying infrastructure now complete, we are developing more payroll-agnostic and stand-alone AI-enabled solutions, which we believe will significantly expand our addressable market to help more businesses succeed. Our momentum this year is also being recognized externally. Time named Paychex one of America's top work tech companies and Newsweek recognized us as one of America's most trustworthy companies and greatest workplaces. This underscores the strength of our brand culture and the trust we have built with clients and employees. Taken together, this progress reflects strong execution against our strategic priorities from integrating the largest acquisition in our history to modernizing our infrastructure and rolling out Wise across our HCM platforms and operations.

We believe we enter fiscal year '27 well positioned for continued growth and long-term leadership in the AI era of HCM. I will now turn the call over to Bob to discuss our financial performance and outlook. Bob?

Thank you, John. I'll begin with our fourth quarter and full year financial results, and then I'll share our outlook for fiscal '27. For the fourth quarter, total revenue increased 12% over the prior year to $1.6 billion, reflecting the mid-quarter anniversary of the Paycor acquisition. As John noted, we accelerated organic revenue growth in each quarter of this fiscal year. Management Solutions revenue grew 14% to $1.2 billion, driven by product penetration, price realization and approximately 8 percentage points of growth from Paycor. PEO and Insurance Solutions revenue increased 9% to $370 million, driven primarily by strong growth in PEO worksite employees as well as an increase in PEO insurance revenues. Interest on funds held for clients grew 15% to $52 million. Total expenses for the quarter were relatively flat as higher compensation, amortization and continued investments in our strategic priorities were offset by lower acquisition-related costs.

Operating income margins increased approximately 750 basis points to 37.7%. Adjusted operating income margins increased by approximately 170 basis points to 42.1% for the quarter. This was driven by increased productivity and cost discipline while increasing our investments in AI. Diluted earnings per share increased 43% to $1.17 per share and adjusted diluted earnings per share increased 11% to $1.32 per share.

Turning to the full year results. For the full year, we delivered on our total revenue guidance, accelerated our organic growth in the back half of the year and exceeded our earnings guidance after raising expectations twice during the year. Total revenue increased 17% over the prior year to $6.5 billion. Management Solutions revenue grew 20% to $4.9 billion. PEO and Insurance Solutions revenue increased 7% to $1.4 billion. Operating income margins for the year were 38.6% and our adjusted operating income margins increased by approximately 70 basis points to 43.2%.

Diluted earnings per share increased 7% to $4.89 a share and adjusted diluted earnings per share increased 11% to $5.51 a share. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.2 billion and total borrowings of approximately $4.6 billion at the end of the quarter. Cash flow generation continues to be a key strength of our model. Our operating cash flows for the year increased 35% to $2.6 billion, and our free cash flow increased 36% to $2.3 billion this fiscal year.

Our capital allocation strategy remains focused on delivering long-term shareholder value. This year, we returned $2.2 billion to shareholders through $1.6 billion in cash dividends and $600 million in share repurchases. In addition to this, we reduced our leverage ratio 0.5x through the combination of our strong earnings growth and repaying the initial $400 million tranche of debt from the Oasis acquisition that matured in March. We remain focused on the levers of long-term shareholder returns that are within our control, including strong EPS growth, sustained dividend growth and disciplined capital deployment. Our 12-month rolling return on equity remains robust at 45%. Turning to our guidance for fiscal '27. Our outlook reflects the current macro environment as well as the assumptions that employment levels will continue to remain flat. For fiscal '27, we expect total revenue growth in the range of 5% to 6%. Management Solutions revenue growth is also expected to be in the range of 5% to 6%. PEO-owned Insurance Solutions revenue growth will be in the range of 6% to 7%. Interest on funds held for clients is expected to be in the range of $195 million to $205 million.

This year-over-year decline reflects the full year impact of the 75 basis points of cuts at the end of last calendar year and the lapping of onetime gains associated with the strategic portfolio repositioning we executed in the second quarter. The outlook also assumes no further changes in the Fed funds rate. Adjusted operating income margins are expected to be approximately 44% and our effective income tax rate is expected to be approximately 24%. Adjusted diluted earnings per share is expected to grow in the range of 7% to 9%.

Now I'll provide a little bit of color on the first quarter expectations. We would expect total revenue growth to be consistent with our full year guidance with an adjusted operating margin of 41% to 42%. And of course, this outlook is based on current assumptions, as I mentioned, and remains subject to change.

Our business fundamentals remain strong as we enter fiscal '27. And as John mentioned, I think we're exiting the back half of the year with strong momentum. We believe Paychex is exceptionally well positioned to succeed in the AI era of HCM and continue delivering shareholder value. Our efficient operating model continues to generate industry-leading operating and free cash flow margins with meaningful opportunity for further expansion over time. The durability of our business, the strength of our cash generation and our disciplined capital allocation support our confidence in continued revenue and earnings growth and sustained Rule of 50 performance. And now I'll turn the call back over to John.

Thank you, Bob. We will now open the call to your questions.

[Operator Instructions]

We'll go first this morning to Bryan Keane with Citi.

Solid results. Just hoping you guys could talk a little bit about the trend in organic growth that you saw in the second half of the year. What are you guys calculating that [indiscernible] as in -- as we jump off here into fiscal year '27 with the range of 5% to 6%. What gets us to the low end and what gets us to the high end for that as we think about organic growth, bookings trends, all that, that adds up to the numbers?

Yes, Bryan, I mean, I'll start and John can add some color. I mean, as you mentioned in your report last week or a couple of weeks ago, I mean, we've definitely continued to see sequential improvement in the organic growth of the business. I think if you go back to this time last year, we were exiting last fiscal year at around 3%. We've nearly doubled the organic growth of the business with improvement each quarter as we move through the year. And so I think if you look at the Q4 numbers, the Q4 exit rate from an organic growth standpoint, I would say, is largely in line with the guide that we provided. And I think if you look at the midpoint of the management solutions and the PEO guide, I think you'll get to a service revenue growth rate that pretty much is in line with the organic growth that we're exiting the year at. Obviously, next year, there's a little bit of a headwind. We had a tailwind this year from Flow with the Paycor balances and some other things.

Next year, there's a little bit of a headwind, I'm expecting interest on funds to be down about 4% to 5%. You got the full year impact of the cuts that happened last year, as I mentioned in the prepared remarks. And then we had some some gains this year from some repositioning that we did earlier in the year. But I think those things added up together, I think, gets you to guide next year that pretty much is in line with a strong organic growth improvement this year and where we're exiting the year. Obviously, it's early on. So better performance would drive higher end. We're assuming a stable macro environment. We're not expecting that to change.

But the typical things that you're aware of that could move the needle in one direction or another. I'd say the other thing, really strong momentum in bookings. We talked about this last quarter. I think you highlighted it in your report, probably one of the stronger selling seasons that we had in Q3, and I think we followed that up, John can provide some more color on it, but we followed that up in Q4 with really another strong performance in bookings. And it was really broad-based across many categories.

Certainly, we're benefiting from the Paycor acquisition. When you look at ASO, PEO, retirement, it's really driving a lot of the growth, both what you see in the P&L as well in bookings. And a lot of that is coming from the ability to go into Paycor's base and upsell them those high-value solutions. So I don't know if you have anything you want to add to that, John?

Yes. No. I think if we go back a year on this call, we kind of laid out, we went through a pretty significant integration of our enterprise business together, and we said our view was as we execute the integration plan that we had, we believe that we were going to continue to build momentum each of the quarters.

And I think there are probably some skeptics about the back half, and I'm very pleased and proud of the team for what they delivered every every quarter, book state bookings got better and better. Fourth quarter was better than the third quarter and the third quarter, as I said on our last call, was the best I've seen in 13 years here.

So I feel good about the momentum we have going into this certainly, having all the disruptions behind us is going to be a positive going into this. I would say the macro environment despite all the potential challenges that we have going on globally around us has been stable, no signs of recession. And in fact, if you look at our index, the last several reports have actually shown an increase in index under 50, we continue to see a good growth -- I'd say solid growth, not good growth but solid growth in the 50-plus and we'll be announcing our index next week.

And again, I'm just amazed at the resiliency. So I think we're going into this year, with all the disruptions behind us with better focus, our product road map, our integration road map is just really accelerating. AI is helping us accelerate that even more. in terms of the development road map. And so I'm very encouraged about what the setup is going into this fiscal year.

Great. And just as a follow-up, just thinking about the launch of Wise and AI in general, how do we think about the potential revenue opportunities that AI could bring Paychex? And how long will it take maybe to start developing some of those?

Well, I would say we're already generating some revenue from that. We've launched several components of Wise. Some of that is in the reporting areas of, what I would say, enhancements to our current reporting capabilities, and we've launched that into the data -- into our client base. We've gotten good success there. When you look at it at this point in time, we also did our intelligence timekeeping in flex. We currently have about 10,000 customers that are in our soft launch of that. And again, we think that's going to be another opportunity. What we're seeing there in terms of just time savings, but more importantly, error prediction.

So we're actually cutting errors down like 70% upfront. And so what I see, that's going to be a good value upsell opportunity for us as we go into the year. So I think we're early in figuring out the monetization. I would say a lot of what we're getting right now from Wise has been turned internally. So our service concierge, where now all of our service individuals have access to all of our knowledge systems across all of our products and services instantaneously and then also what we're calling the Sales Guru, which is a Wise based product, which again gives access to all of our data sets across all of our platforms and all of our service and sales interactions to our salespeople in real time to be able to both plan their calls appropriately and offer the right solution for the clients.

So a lot of it right now is internally, we're starting the product road map. We've launched the first kind of AI-based product we launched was in 2022 with retention insights and now what we're doing is we're going back and looking at refreshing those legacy AI products with the Wise platform.

SP1 We'll go next now to Mark Marcon with Baird.

John and Bob, John, I wanted to ask you about a couple of strategic elements. First of all, you mentioned that you're developing payroll agnostic solutions in order to help businesses to a greater extent. Can you talk a little bit more about that in terms of what your outlook is for that? When should investors expect the launches? What areas do you think you can go into? And with the AI tools in terms of coding, how quickly do you think you can do that?

Well, I think we have been doing -- so this has been a long-term project. Let me step back, Mark. We have been investing really since kind of the COVID ERTC era when we had the opportunity to take some of the cash flow that was being generated during that time. And we looked across the platform and said, how do we want to modernize our back office and our operating layer. And as you well know, our operating layer of our business is best in class. That's how we get the margins we do.

We want to modernize it. We want to modulize it and really allow us to begin to offer more products and services on a stand-alone basis because most of our products and services that we've built at Paychex -- we really do have the means to build a client, to engage a client separately outside of being part of our HCM payroll infrastructure. And so one of the key things we want to do was break that apart -- break our tax engine apart -- break all the payments orchestration that we do apart. So all of that has been done and finally completed over the past fiscal year. So what we have today is the capability that if a customer would leave our HCM platform, but enjoy our insurance agency, they can now stay with our insurance agency. That's something a lot of times, it did not happen in the past. Someone leaves our HCM platform, and they like our 401(k) product, we could do that.

It also gives us the potential to partner with those separate products separately as well, something we've historically not done. So we look at it as a big opportunity for us. That investment that we've made in that back office infrastructure is what allowed us to launch [ Perks ] because it also allows us to treat every 1 of our clients' employees as potential stand-alone customers.

And again, they can continue to be a customer of Paychex even if they leave their current employer and even if they're not on one of our HCM platforms. So this is in the early innings of really getting this put together. Of course, we're going to look at the economics, both in terms of go-to-market and capability. But what I would tell you, it enhances our ability to retain customers in some way across our multiple products. It gives us new go-to-market opportunities, and it gives us new customer segments that we could potentially go after. I also believe particularly as it pertains to Wise and what we're putting together in terms of HR compliance in real-time advisory solutions that can be digitally enabled with our HR people in the background.

I think that could be valuable for customers, small and midsized customers or HR professionals, whether or not they're on one of our platforms or not. And so certainly, one of the things I think is a great potential for us to help businesses succeed is to be able to turn our 50-plus years of HR advisory and HR and payroll and tax compliance capabilities and monetize that for the benefit for a broader market. And those are things we're considering as well.

Could you also get into more of the office of the CFO or the office of the CTO from a longer-term perspective?

I think, Mark, at this point in time, we see the opportunity within HR, particularly in the segment we serve to be the best place for our investment in time. We still have a lot of opportunity, I think, and particularly most of our clients don't have an HR department. HR is becoming more complex. I think at this point in time, what we're focused on is continuing to do that and also try to put into our marketplace for their employees, a set of benefit solutions that allows a small employer to mimic a large employer in terms of what benefits they can offer employee without having to contribute to that from a financial perspective because those are the things that we hear from our small clients all the time. It is more important to them than us helping -- help either CFO at this point in time.

We'll go next now to Andrew Nicholas with William Blair.

You've hit on a few of the reasons, but I was just hoping you could expand on kind of what drives your conviction in the HRMS acceleration next year on an organic basis? And any color you can provide on kind of expected growth by market segment would be helpful, like between mid-market and enterprise.

Yes. Well, look, I think that we feel very confident across the portfolio. Again, as we see, we've had continued momentum across the portfolio throughout the year. When you look at the enterprise side, we continue to see good growth there as we combine the groups together, you go back and look at our enterprise bookings in the fourth quarter, we had the highest booking dollar volume we've had all year. And I think as we've told you before, that it continued to build through the third quarter. We've continued to add partners there. And I just think with the integration behind us and all the disruption that caused and having a focus, I think we're entering the year very well focused with a good set of products and services to go in the market.

Then when you look across HR solutions and benefits, retirement, the acceleration there has just been phenomenal. It just really has, I [indiscernible] not stopped. Our bookings have continued to grow in those areas, continued to show strong retention, continue to see strong cross-sell across the various teams. I think that cross-sell motion is really getting going, particularly in the legacy Paycor sales team. I think they're trying to finally figuring out how they can leverage the full power of Paychex to drive not only meetings, but also to drive deals coming to closure.

So I feel good about where we are, again, heading into this fiscal year just with everything behind us. And I think all the all the things are in place. The organizational components are in place, the technology components and all the focus we've been having on, what I would say -- and you guys don't see it what we see, all the inside work we've had to do in finishing the transformation of our operating layer, dealing with all the integration issues with the largest integration we've had, all the internal things we needed to do organizationally around that from a sales and sales to return perspective.

You guys don't see that. We've been seeing that and now to not have to be focused on that and to be able to totally focus on execution. And then the tailwinds that I'm seeing in product development from AI utilization there, that's going to accelerate our ability to execute the road map faster and the benefit that I'm seeing both our sales and service teams are having in leveraging these tools, these wise tools that we've launched to them over the last quarter and the benefits we're seeing in their productivity really makes me encouraged about how we're setting up for this year.

Just the other thing I would just add from a conviction standpoint, Andrew, I think this next fiscal year sets up a lot differently than last fiscal year for all the reasons that John highlighted. But in addition, to hit last year's guide, the '26 guide, there was an acceleration that was required in the back half. There was reasons for that. Some of it was on the compares. But we certainly delivered that. But now I think as we go into next fiscal year, John talked about all the momentum that we have exiting this year. And really what we've set up next year from a guide standpoint, is pretty much in line with what we're delivering and what we're exiting the year. So certainly, from a conviction standpoint, the year sets up much differently than last year did we don't have this big ramp in the second half, we delivered it, like we mentioned, but it certainly gives us a lot more confidence just given the momentum that we have exiting this year and not having to deliver a significant step up as we move through the year.

Helpful. And then -- and maybe I just switch over to PEO and Insurance Services. That was a result that was quite a bit better than what we had expected. Can you walk through kind of what PEO revenue looks like compared to insurance services in the quarter, kind of level set where we're at, heading into '27 from -- in terms of the health care plan and those dynamics that you were kind of fighting against at the beginning of '26.

Yes. I mean the underlying operating performance for the PEO business has been strong for a number of quarters and a number of years. We know we had some challenges last year with some of the optics with the MPP enrollment. And you and I -- we have talked about this. You're very familiar with the PEO industry to me. It's all about driving worksite employee growth, and we continue to do that. And as John mentioned in the prepared remarks, continue to outpace kind of the industry there. And it's really coming from strong demand. And we saw another quarter of double-digit demand in the PEO business as well as record worksite employee retention. And so we know that the strength of that business model, the value proposition is very strong.

And that business grew double digits in the quarter. Obviously, the category was a little bit below that. The agency continues to be a drag on the overall growth of that quarter. we are seeing some positive trends, certainly in the back half of this year as it relates to the agency, both from a demand and retention standpoint. So we would expect prospectively that headwind from the agency side to subside somewhat but continue to expect the momentum that we've seen in the PEO. And the other thing, too, I would just say from a enrollment standpoint, as you know, we had the MPP challenges last year.

We anniversaried those which helped with the compare. But we've also seen the enrollment growth not only overall in medical attachment across the appeal within Florida, where we have that at-risk plan, we actually grew that this year. And so we're seeing good enrollment, we had good annual renewals in those books of business as well as we're seeing, I would say, better attachment of medical upfront, which really helps drive that that worksite employee retention that we talked about because it just really makes those clients much more stickier when they [ attached or ] help with us. So a lot of positive trends as we move forward in the PEO.

We'll go next now to Kevin McVeigh with UBS.

The commentary on the first quarter was helpful in terms of the revenue growth. And Bob, if I heard you right, I think you said the first quarter should be similar to the full year. Maybe just help us the pacing over the course of quarters 2 through 4. And as you start to comp, tougher comps. Where is the offset to that? Is it just the way the bookings come in? Or maybe just help us dimensionalize that a little bit.

Yes. I think -- listen, I think the year sets up, as I mentioned earlier, the gating is fairly consistent when you talk about comps, I mean, we certainly had easier comps in the back half of this year relative to the PEO. So you're not going to have -- we're comparing the back half of this year to last year when we were actually down in enrollment. Now we're going to be up in enrollment. So the comps get a little bit tougher, Kevin, on the PEO business as we move in the back half.

Obviously, we continue to expect improved performance from a bookings and retention and all the things within our control. But when you look at the quarters, the gating is relatively consistent quarter-to-quarter, there's always puts and takes. I don't see as much risk maybe as was perceived with this fiscal year.

Got it. And with Paycor in the base now, is there anything from a seasonality perspective that we should consider just as the year kind of shapes up?

I mean nothing that comes to mind. I mean, similar to our business, there's obviously a lot of year-end processing revenue that hits the third quarter. And obviously, that drives a lot of -- it's high margin, so it drives a lot of profitability in Q3. But outside of that, I can't think of anything [ at hand ] that would give you some differences quarter-to-quarter.

I would add -- anytime you have a larger deals, a lot of times, we'll wait until the end of the year. So that's one of the things we constantly look at the bookings, there's building, building, building in the larger segments, in the larger segments, a lot of times, you'll either they'll wait for a quarter. A lot of times, they want to wait until the end of a calendar year. So again, nothing that I would say is meaningful. Remember, we had a very large enterprise business before we bought Paycor, we're familiar with it. But certainly, as we focus there we're watching how the bookings developed because the bookings may be building, but then the implementation date isn't for 9 months away.

So we're looking at that as well, but we're not seeing anything that's that's meaningful to change substantially, the gating we've seen historically in our business.

And John, just on that point, that would impact your Q3 more, right, in terms of -- as they go live January 1.

That's correct. That's correct. But again, that's something we're very -- very typical in our business. But again, because we're putting more resources against the enterprise area. We're also -- again, we're doing ASO and we're doing PEO at the point of sale as well. And again, as we do larger deals, any larger deal, a lot of times, those clients are going to want to do something on a clean quarter whereas in a small business, we'll do it during the middle of the week if we need to do so.

We'll go next now to Jared Levine with TD Cowen.

I wanted to dig in, in terms of the implied Paycor Excel growth by around 4% based on my math in [indiscernible] 4Q. I guess any way to size how much of that deceleration in growth is more so cross-sells of the ASO and PEO thinking about kind of revenue shifting out of Paycor to Paychex more so than kind of revenue churn or even weaker-than-expected bookings here?

Yes, Jared, I'll talk the way we talked last quarter as it relates to that. I think it's somewhat of an apples to oranges comparison just given the way we're managing the business this year versus the way it was managed last year with revenue and resources moving around between the two. I think the way we've been looking at that business as our enterprise business, which is kind of 100-plus loosely defined and when we kind of look at that, the growth of that business, I think, was fairly strong in Q3, and we saw similar trends in Q4 where our enterprise business across both platforms. So it really doesn't matter where the client was last year and where they are this year, we saw high single-digit growth in our Enterprise business during the quarter. And again, I think we've talked about that. That's our expectation prospectively when you look at the other assets in that space, that growth rate is not too dissimilar to what the other pays are producing, and we would expect at minimum to continue to keep pace with that growth in that segment of the market.

Yes. I guess I want to add on to this because the first thing I'm always cautious of because I don't want to come off as being like defensive about this topic. But it's been challenging as we launch the integration. And I think what's probably not known as you look at the Paycor business and one of the things that attracted us to strategically is -- this was a legacy business that had a rather sizable under 100 client base. And probably the brand was known as something larger than that. But when we look under the -- there was and -- there was a motion in that business to keep that client base at least stable. And we made -- so when you're looking at comps about what growth was 3 years ago, you're looking at a growth of both under 100 and an over 100 business stop right there. We made a conscious decision, which I think is the best decision for the company was we want to focus that technology and brand where it was resonating most and where it was getting the -- both the best traction. So when we separated the two, we took all that under 100 and move that to our small business segment and vice versa. So look, on an aggregate basis it's aggregate basis. But in terms of Paycor is now a brand for our enterprise segment that we define as 100 employees and more.

And we're selling complete solutions there. We're selling at the point of sale, a PEO, an ASO, and those are going into different parts of our business segments. So it's very complicated to do that. What I'm looking at is the enterprise is what I can tell you. Our enterprise business at Paychex is growing faster than it's grown, number one; and number two, our 100-plus retention is the highest it's been since I've been here in 13 years. So again, the combination of having the right technology, the right capabilities focused on these upper end enterprise segments, I think, is benefiting us not only from accelerating our historical organic growth there, but also in retaining clients.

So I certainly think we're better together. We're totally together now. We're totally integrated. And I think as we move forward, what we're going to be focused on is continuing to grow and serve that enterprise segment and making sure we're maximizing the product penetration, both PEO, ASO and HCM and in the 100-plus segment in the marketplace. Hope that helps.

No, that was helpful. And then as my follow-up here, in terms of the roughly flat client count growth this year, I guess anything to call out in terms of notable differences, whether it came to, call it, the core Paychex versus Paycor and when might this potentially inflect and return back to growth?

No. I think when you look at it from a retention perspective across the board, our client retention was record in our ASO, PEO business or site employee basis, our 100-plus as I said, was record level as well. When you look at client losses, client losses tend to be in the lower end of the market and tend to be out of business. And that's just really where the year is going. And as I said repeatedly, we constantly are selective in clients that we're going to bring in to the business. We know what a good client is going to be, a client that we can attach, a client we're going to get lifetime value on.

We understand the cost of acquisition very, very well, and we're not going to do irrational things just to add clients that are not going to be profitable clients. You cannot achieve the margin profile that we do and have a lot of unprofitable clients. So that's going to continue to be our strategy. And we think that's going to continue to not only grow revenue for us, but I think it's also going to make sure that we have the right underlying financial performance in terms of margins and margin expansion going forward.

We'll go next now to Daniel Jester with BMO Capital Markets.

Great. On the revenue synergies, the outperformance that you had this fiscal year more than 50 basis points, it sounded like from some of the comments on the questions that maybe the Paycor sales force was it sort of fully engaged the whole fiscal year. And so is there any way to think about how that cross-sell could progress next year, the opportunity? Could it actually contribute more to growth next fiscal year than this past one?

Yes. I mean, sorry, go ahead.

Well, first, I don't want to categorize it that they weren't engaged. We were very engaged and we had good success. You look at ASO and retirement penetration really exceeded our expectations. PEO, which is a longer sales cycle. We got several large deals, and that's accelerated as the year went on. Look, I just -- I'd go back and remind you. We did change territories. We changed management. We changed the leadership structure, and we retrain them on the various products and services and all that didn't start until June a year ago. So what I would not characterize, it wasn't a lack of engagement. It's really just that point of kind of learning and then getting accustomed to, okay, how do I put this into my sales motion? How do I put these talk tracks in? And how do I engage my Paychex partners in the sales process.

So as you can imagine, you just get better with that over time and we're constantly learning on that. So I don't want to characterize it as we were having engagement. But there's no question, as we do it more frequently, and we have success doing it, that success brings more success and more people are doing it. And that's what we're seeing in our bookings. And our referral -- our referrals this year across all the platform was stellar. It really drove a lot of the bookings success that we had this year.

Yes. I mean the only thing I would just add to it is that, I mean, it's the reason why we did the deal, right? I mean it was one of the main reasons why we did the deal with the opportunity to go after those revenue synergies because how successful that we had been in going in and monetizing our client base, particularly with these higher-value solutions. And so we're already having a ton of success with the Paycor client base. I think when we did the deal, we highlighted that, that wasn't a won and done type of thing that we would continue to build momentum there over time as we went after that opportunity, we exceeded this year's number, and now we got to grow over that, right? And we would expect probably even stronger contribution next year and beyond to growth. And I do think it is what's fueling a lot of the improvement in the organic revenue growth that we've talked about as we move through the year.

That's really helpful context. And then maybe to go back to a question earlier on AI monetization and Wise. As you sort of rolled this out to customers, is this something that you think is going to be more for SMBs? Is this more enterprise? Who do you think is going to be able to engage with these tools kind of out of the gate, how do you see that ramping?

Yes. Look, I think that this product is going to resonate with clients of all sizes. And the reason why I say that -- let's just talk about the HR compliance capabilities that we now have based upon our 50-year history. For a client that does not have an HR department. This enables them to, in real time, make sure that they're always in compliance. So when you're hitting thresholds in a certain state either because you -- you now hired your fifth employee. And now you've got certain state stipulations that you've got to do certain things instead of needing to wait or remembering it's [indiscernible] for us reminding you just have your fifth, the system is automatically doing that and automatically taking the action to enroll you in the workers comp program or unemployment insurance.

So I think in the small end, I think this is going to give them greater peace of mind, I think we're going to have less errors on tax and tax ID issues that we have, which I think is going to be beneficial from a retention perspective. And then I think as you go upmarket, I think this tool in the hands of an HR professional is going to give them far more confidence and capability to be able to focus on strategic HR initiatives and have our AI models and agents actually do the work for them.

Stop this, our Wise AI compliance tool, some of which we did through acquisition integrates with most of the large HCM platforms that are in the market today. So again, as I said, you can have the compliance, AI, agentic AI, patent pending, Paychex compliance capability regardless of the platform that you're on, and we will integrate [indiscernible] platform to help you have a digital HR agent keep you compliant.

We'll go next now to Jacob Smith with Guggenheim Securities.

How did Paycor broker referrals trend during the quarter? Did you continue to see acceleration in bookings like you called out last quarter? And then on the HUB International partnership you announced back in May. Curious what's actually different in that arrangement versus how you and Paycor work with the broker channel before. We've also had several quarters now to gather feedback from partners on what they want to see. I'm wondering if this is an evolution of the Partner Plus program and whether this model is something you're looking to take to other national brokerages to drive new business referrals going forward?

Yes. No. Our bookings holistically through the Paycor, again, our enterprise -- sorry, to our enterprise reps has grown every quarter since the acquisition and the broker pipeline has continued to grow with it including the fourth quarter being higher than the third quarter. So again, even with -- even if you strip out seasonality, which there is in that business in terms of timing, we're seeing -- and we're now back to what I would say is pre-acquisition levels in that area. We did sign actually two, one is named hub. You mentioned one. There's another one, a name that we have already signed, and it is part of our Partner Plus.

The thing that is different about the Partner Plus program that we're going to market with is it is holistic. They are able to represent all of our products and services, any product and services that we have in the Paychex portfolio. We're also partnering with them on some of the HR compliance and some of the HR capabilities that I just mentioned to you. So I really think when you begin to look at the holistic both advisory solutions, compliance tools and then the breadth of the capabilities we have from a technology perspective, we're bringing all that to bear in our Partner Plus program for brokers.

And so we actually are getting good feedback from those loyal brokers that have been there. And as we're adding new brokers, they like the approach that we're bringing that it's a holistic approach.

Great. And a quick follow-up as well. Just on Paycor sales headcount. Last quarter, you mentioned intention to expand there. Maybe just an update there. Should we expect that to help FY '27 bookings or maybe a little bit further out since there's a ramp period.

Yes. I mean we have -- we're committed, as we said, when we did the acquisition to continue to add sales headcount that is in our plan and we are actively building sales headcount as we speak. So we have openings. So if you know anybody you can refer them.

We'll go next now to Samad Samana at Jefferies.

Maybe just unpacking the fiscal '27 guidance a little bit. If I think about the assumptions around unit growth versus pricing contribution versus new bookings. I know you guys don't guide to those components specifically, but just as we think about the fiscal '26 contribution, how are you tilting those variables? Like what are you assuming? Are you assuming retentions flat, up or down? How are you thinking about the amount of price you can take in fiscal '27 versus '26. Just help us understand the growth algorithm given all the changes that have occurred over the last 18 months?

Yes. I mean we always put together a plan where we're trying to sell more and lose less. So retention has improved significantly over the last 5 years, particularly when you look at the ASO and PEO. It's pretty remarkable how much retention has improved. But the teams always challenge themselves, and we're always trying to get better and improve retention, obviously, trying to look to grow sales, as John mentioned, look for opportunities to add headcount. And so when you look at our client base, Samad, in our assumptions there.

Listen, our client base has been relatively flat. We're not getting a ton of growth from that. Really, we don't need to get a ton of growth out of that. We're trying to be thoughtful and make the right investments and really trying to attract the right client. And so overall, we're trying to outsell our losses and grow our client base a little bit, but really trying to grow our client base and the right client sizes. I mean that was one of the reasons why we pulled the trigger on the Paycor acquisition, trying to get larger clients in the door because we know where we've gotten all of our growth from ASO and PEO retirement services, a lot of those solutions meet the needs of larger customers.

But our assumption is not that we're going to generate a ton of client base growth that we would continue to maintain our client base, but maybe improving the right client sizes to really execute on our model, which I think you and I have talked about, this is really a revenue per client model, really our ability to go in, get a larger share of wallet out of our client base.

When we look at the penetration rates, the key solutions within the Paychex Flex client base, they're still relatively low. So we see lots of opportunities there. And then obviously, there's the huge opportunity in front of us that we've been executing on with the Paycor client base. And so when you look at the plan next year, it's that. It's assuming that client base will be relatively flat, but maybe improving a little bit and in the right client sizes. And then it's really going to be an increase in revenue per client, which is really our model, roughly half of that is coming from pricing and half of it is coming from share of wallet. And as I mentioned, there's a bit of a headwind on float this year just given what happened with short-term rates at the end of last calendar year. So that's kind of how we're thinking about the year.

Great. And then I just wanted to ask one follow-up on the -- especially since you just mentioned kind of revenue per client, I got the discussion around, I guess, being able to have products and -- while not having the payroll or core payroll module is a good strategy for the retention component. But how is that impacting maybe the initial land? Are you seeing the funnel either broaden to where you're getting a greater mix of non-payroll customers at the outset of joining the Paychex journey? And is that changing maybe what the average revenue per new customer added looks like? And how should we think about that maybe in your guidance as well?

No. I think, Samad, what you should think about is as we've now had -- now that we have this capability, and we've been using this capability let's say, just somewhat defensively, let's don't lose everything, let's if there's opportunities for us to add a client on a stand-alone basis that is non-stand-alone payroll, let's go and do that. I think what you're going to see is we -- now that we have this capability, we will try to begin to integrate that into our sales motion so that if it's not the right time for a client to transition their payroll provider, their HCM provider, it may be the right time for them to leverage our compliance tool or it may be the right time for them to use another one of our products or services like one of our benefits.

So retirement, et cetera. So I think one of the things that is probably different in the motion that we now have the capability to do that we just have to figure out the economics, the go-to-market strategy around is is, okay, when I'm in that deal, and I'm trying to sell the entire bundle, which is typically what we're trying to do, we're trying to convince someone to move to our HCM and payroll platform. And then we're bringing our 401(k) partner and at the same time, those things are generally -- or insurance or ASO, those things were generally done as an integrated bundle.

If you didn't win the HCM payroll, you don't win anything. And now what we're -- what we have and enable them to do technologically, that's the start, right, is that we can actually bill it and we can actually collect it and we can actually service it. That's the breakthrough here. And I think now we're just really to the point of saying, okay, can you do that profitably? What are the economics of that, but certainly, the capabilities. What I'm excited about because I do think it gives us an opportunity to be able to impact more customers in the marketplace and then build a relationship with them.

And I think over the long term, what we've proven is that over the long term, if we build a relationship with a client, they're going to buy more from us and they're getting value. I look at our retention this year, for example, our price value losses were down significantly. Again, that's -- it's a very competitive environment. And I think it just indicates that customers are seeing the value that we're providing. And I think as long as we continue to do that, and now that we have more products and services that we can serve those clients with, I think, gives us more opportunities to get hooks into a client. And then I think if we get a hook into a client, I think we know how to monetize that relationship over the long term.

We'll go next now to Ashish Sabadra at RBC Capital Markets.

This is William Qi on for Ashish Sabadra. Maybe just on the fiscal year '27 margin guidance, 44% came in a little bit above our expectations. I think you alluded to some of the factors with better client selection, but just wondering if you could break out the drivers there as we kind of rationalize, increased resources towards sales force, but also general kind of run cost management and optimization across the rest of [ listing ]?

Yes. Well, let me start by saying I said approximately 44%. So you can leave that to interpretation. So listen, I think we typically are looking for ways to -- in a normal year, we're looking at 25 to 50 basis points of margin expansion. This is probably on the -- the guide probably assumes the higher end of that. And I think we've talked a lot about this. I think the advancements in technology and what we're seeing from a productivity standpoint. If you asked us a few years ago, we'd be able to get to 44% margins, we probably would have had a different answer, but we continue to look for ways to be more productive, more efficient.

One of the metrics that John and I are holding ourselves and the team accountable to is really trying to drive higher service revenue per employee, and that's growing at a rate higher than our revenue growth rate. And so that certainly helps with driving margin expansion. And then I'd say the other thing to think about there too is we bought a business that had structurally significantly lower operating margins than what we had. And we came in and we applied our operating model to it, got a lot of synergies associated with that.

And you're going to see the full year -- a lot of that was realized this year, but you're also going to get the full year impact of that next year, which helps from a margin standpoint and we're not done. I'm not sure we'll talk further about expense synergies as we go forward. It will be BAU, but we see further opportunities there, certainly from a procurement standpoint, as contracts come up for renewal and those types of things. But it's -- I would say those are probably the things that contributed to maybe being a bit on the high end of a normal year, but not too dissimilar than what we've been able to deliver. I think it was 70 basis points this year. It's in that range next year.

Yes. I don't -- again, I'm going to -- I'm not harp on this a little bit because this is something that doesn't get exposure. You can't go to HR tech and look at our back-office systems. You go to HR Tech, and you look at all of the client-facing components. And so I know for some people at the mystery how we can have the margins we have 42%, 44%. And it really has to do with the heritage of us being a payroll service company that invested a lot of technology and having a very tight operating model and system internally.

And so I always say that because this modernization that we've been able to unlock and do systematically across each portion of the back office component of what we do, I think, has been one of the reasons why you've seen this constant progression. It's why when we went into an acquisition, even I remember in the Oasis days, when we did the Oasis acquisition and someone from their operations comes in and looks at our tax capability and go like, well, when can we get off of VARs, right?

So it's those type of things, you begin to have that because in our business, the most expensive -- most expense is generated by mistakes and errors, because if you have to clean up a tax error, then it takes a lot of manual work to do that with the government, et cetera. So the capability now to prevent these errors upfront and now to be able to use agentic AI to actually proactively identify those issues and get in front of them and actually fix them on our behalf.

At the scale that we operate, that is a significant benefit, and it really frees up resources for us to move more resources to an advisory and support capability so that we can be more responsive to our clients when they need us. And a lot of that benefit, we're going to be able to drive more value to customers. And so I'm really excited, again, as you guys know, I'm the old operator here. So these are the things that I was dreaming we would have someday and now we have them. And I think there's a lot of potential and a lot of runway because it we just got this completed. And so more to come, I think, in the years ahead here.

We'll go next now to Kartik Mehta at Northcoast Research.

I wanted to go back to the comments you made -- or Bob made on client growth and kind of just to understand your philosophy on client growth and looking at that. And I know you said it's going to be kind of flat to up slightly and how you're approaching that and new things you can accelerate clients or would that be bad and hurt margins? I'm just interested to get your perspective on that.

Well, Kartik, I think the first thing we want to do is we want to make sure we're driving retention in our highest lifetime value customer segments. So we already said record PEO, ASO and 100 plus and let's start there. When you look at where we have client attrition, again, you go back and let's look holistically, payroll, our payroll retention is at pre-pandemic levels, which I would remind you, was record levels at the time for Paychex. So at the end of the day, from a retenant perspective, I think we're holding our own in the marketplace where we are putting our go-to-market motions are in our higher value segments. And what we're trying to do as you look in the lower end of the market is we're trying to make sure that we are not overpaying from a cost of acquisition for a client that we know we will not make a long-term return on or monetize.

And again, that's been our philosophy. I think is -- that's how we get the margins we do. That's how we focus on driving more value over the long term. And so that's our operating model. As Bob said, it's not been a big part of our growth story over the past several years. And really, that's been our strategy at this point in time.

Good job. And just a follow-up. Just your perspective on competition. Obviously, based on the bookings growth you've talked about, it looks like PTX is holding its own better than holding its own. So curious as to what the competitive environment looks like?

I don't -- look, I think the competitive environment remains exactly the same. I think it's a very competitive market. I think that we have a broad suite of products and services. I think, obviously, our value proposition is resonating well with our existing clients, given the retention we've had and I think when you look at the bookings accelerating, we're doing very well. We're certainly doing extremely well in the PEO business. And I would say the HR advisory side, just given the growth rates that we're seeing in comparison to the other benchmarks that I've seen in the industry. So I feel good about the way we're positioned. We have a competitive product, and I've not seen any major shifts in the competitors or in competitive behaviors as well.

We'll go next now to David Grossman with Stifel.

So health care costs have been fairly elevated this year, actually quite elevated. And then -- just curious what impact, if any, to the changes in health care inflation have on the growth of the PEO. And if you could just remind us on whether the PEO renewals are skewed to any particular quarter or quarters like it is for some of your peers?

Yes. I mean I'll start and then John can add on. I think in general, medical inflation, which is high, and we would expect to continue to be high. I think that is a tailwind for the PEO business, I think it's helping drive our growth. Certainly, I think we have a long history of trying to help small businesses punch above their weight. And I think that's one of the strengths of that PO business model that we can typically leverage our scale in being able to offer rates and benefits to small businesses that cheaper than what they'd be able to offer on their own.

And so I see that as is contributing to the strength of that business model that we're currently seeing, and we would expect that to continue in the future. As it relates to our renewals, David, I think there's two. There's one that happens just based on acquisitions and so forth, we haven't fully align those, there's one that happens in the fall time frame and then there's one that happens at the beginning of the calendar year. We went through both of those this year with successful renewals.

And when I look across the PEO, whether it's our Florida at-risk medical plans, whether it's maybe attachment within our agency and the open market or whether it's outside of Florida and our other master plans, our medical enrollment was up really across the board. And again, I think that just speaks to the value of that business model in really helping small businesses deal with a pretty big challenge for them, not only inflation, but the cost of medical inflation.

Yes. Look, I think this is one of the top 3 issues that I think our market segment faces is. In order to compete for labor, which is very difficult for small and medium-sized businesses to compete with, you've got to be able to have a competitive benefit packages against larger companies, okay? So I've got to do it to be competitive for labor. And then when you look at the cost, the cost is, in many ways, unsustainable for both the employer and the employee. So it's a double-edged sword, while you get the tailwind of a rising cost of your insurance that may show up in your revenue. The problem is that rising cost also scares people away from being able to afford it. So it kind of balance itself out.

And I think to Bob's point, that's why we've had a multitude of different ways in which we can procure and provide health insurance, both in our PEO and more generally, across our business. And I think it's the other thing that we continue to try to do is come up with innovative approaches to be able to assist small businesses. We look at our Perks product. So again, we offer these type of health and dental and other traditional big company benefits in our Perks marketplace where an employer can say, I offer these benefits, but they don't pay into it and then we're providing a discounted and a better user experience, just like an open enrollment for one of their employees to be able to buy it a la carte.

We have over 400,000 unique employees buying from that marketplace today. And as we mentioned, we're now rolling that out to the Paycor 2.5 million employees. We also have a health reimbursement arrangement solution that we've brought to market, and we'll continue to bring the market to try to help businesses.

So look, I think this health care inflation issue is real. It's a real squeeze for small and medium-sized businesses that want to compete for labor and they're at a disadvantage, and we're providing a ton of different options. And that's why they're gravitating towards RPO because it's not one size fits all. We can give you a multitude of different solutions and your employees will have a very similar experience as if they were on a master plan. So I do think that's another differentiator for us in the marketplace there.

Great. And just 1 other quick one. Bob, I know you said the cadence of growth should be relatively consistent across the year. However, given we all over-indexed to very small variations in growth quarter-to-quarter, just based on the comps, is it reasonable to expect that to be closer to the high end of the range in the first half or the higher -- the upper half of the range in the first half of the year or maybe the lower half than the second half of the year just based on the [indiscernible] in the comparisons.

Yes, David, I'm not sure I want to get into trying to parse the quarters at this point in time. There's puts and takes as we go through the year, we'll kind of update you guys and try to provide more color on at least the next quarter. Again, I'm kind of looking at it in front of me, and there's not really a lot of variation quarter-to-quarter. So we'll provide more color on the splits as we move through the year. But just kind of given we're at the beginning of the year, and it's fairly consistent as we move through the year. I'm not going to kind of get into the puts and takes between the different quarters at this point in time.

We'll go next now to Scott Wurtzel with Wolfe Research.

Just one from me. Just thinking about the potential cross-sell opportunities with the PEO. Have you given any thought to sort of bringing the PEO platform and functionality over to the Paycor side? Or is it going to continue to just remain on the Paychex platform?

So Scott, I think the complexities of PEO tax and unemployment insurance are a pretty heavy lift. We feel like we have a very solid platform. We've worked a lot on managing that migration because renewal, we did that internally as well. I would say that we continually to look particularly with the advances we're seeing from a product development perspective with the use of AI. And as I talked about before, as we now have completed the modularization of our various back office components, that's certainly something that we'll continue to look at. What we are committed to is offering a client a seamless migration path across our platforms and across our solutions. And whether that's done from moving them to one platform to another platform and doing that in a very seamless and effortless way or whether that's empowering each one of our platforms to offer the full suite of capabilities is really going to be a cost benefit analysis that our product team is going to have to do.

And we'll go next now to Jason Kupferberg with Wells Fargo.

So just reflecting on your midterm target for upper single-digit revenue growth. I mean, this year, obviously, we're guiding to 5% to 6%, very consistent with what you had previewed last quarter. But just conceptually, as we think about that medium term, does upper single digits still feel like the right range? Or is it possible we need some more M&A to get there? Would love some perspective on that.

Yes. I mean I think if you look at kind of historically the business, I mean, we updated the slides in the investor side. So when you look at the revenue CAGR, it's it's obviously much higher. I think it's a. -- no, it's actually 13, I think, on the top line over the last 5 years. Obviously, a big contribution from Paycor. But if you strip that out, Jason, we've typically been in that 7% to 8% range historically.

And when you look at the growth formula, whatever you want to call it, typically, we're driving 1% to 2% from M&A. And that continues to be an area of interest to us to look for opportunities. I don't expect us to do anything at least in the near term that -- like we just did with the Paycor acquisition, but there's certainly opportunities out there, and we would expect to leverage M&A prospectively like we have in the past to drive growth in our business where we see opportunities. And so I think if you look at the organic growth of the business, coupled with what we've historically contributed over a longer period of time, 1% to 2% from M&A, you can clearly see where it's in that upper single-digit range.

Okay. That color is helpful. And just coming back to the conversation earlier about some of the recategorization between Paychex and Paycor. I know you took the sub-100 employee clients from Paycor, put them in Paychex and then the 100 plus obviously going to Paycor and that's making some of the comparability in the apples-to-apples harder to really discuss. But sitting here today, if we look at Management Solutions revenue based on all this recategorization, like what percent of MS revenue is now enterprise, i.e., the 100-plus.

I don't have that breakdown in front of me, to be fair, and I don't really want to try to guess. I mean, when we look at that enterprise segment, we're not just talking management solutions. We're looking at the entire business. So certainly in the PEO, we have larger clients as well. So I just -- maybe that's something that we can add to, just based on your feedback, we can add to a future IR deck, but I don't have that breakdown in front of me.

Gentlemen, it appears we have no further questions this morning. Mr. Gibson, I'd like to turn things back to you, sir, for any closing comments.

Thank you, Bo. Well, listen, thanks, everybody, for your questions and for joining us today and your interest in Paychex. We're entering the fiscal year 2027, positioned better than ever. I really feel we've had strong momentum as we went through fiscal year '26. We've made meaningful progress across our strategic priorities, including our upmarket expansion and the integration of Paycor. The work that we've done to drive advisory differentiation and the AI innovation that we've done in a very short period of time.

Very proud of all the work the teams have done across the board. It's just really been -- if you think back what this team and this organization has been through the last year since we just all came together just one short year ago and the amount of work that needed to be done in the back office, the amount of work that needed to be done on the integration front and the progress we've made, I'm just so proud of the company and to deliver these results that we delivered, again, to have hit the original guidance that, I think, probably were some skeptics about a year ago on the back half, but to be able to land that and just be able to raise guidance twice on earnings per share as we went through the year because we demonstrated our best operator capabilities and we're able to exceed the expense synergies in the acquisition.

So look, I think we sit here today with the teams in place, with the technology and platforms that are built for purpose for the markets that they serve and now an AI-enabled organization that I really think is just really going to continue the momentum that we've seen built over fiscal year '26. So we believe this enhances our competitive position. As I said, we're stronger together, and I think it really supports the growth and value creation for Paychex, not only in 2027, but I think well beyond. So again, thank you for your support, and we'll talk to you next quarter.

Thank you, Mr. Gibson, and thank you, Mr. Schrader. Ladies and gentlemen, this does conclude the Paychex Fourth Quarter Fiscal 2026 Earnings Call. We'd like to thank you all so much for joining us today and wish you all a great remainder of your day. Goodbye.

Running a little bit behind, but let's get moving on with program. Thanks, everybody, for joining here. My name is Tien-Tsin Huang. I follow the IT services and payments and processing group. And Paychex has always been one of the early names I've covered and watched it over a couple of decades here, so it always means a lot to me to have Paychex here to support the conference. So I got the whole team here. John Gibson, President and CEO, is here. Thank you for doing this fireside chat. I thought we'd kick it off.

I gathered a lot of questions, John, just to make this conversation as efficient as possible. I know you guys just announced an AI platform. We do want to talk about that. But just to get it out of the way to talk about the macro, if you don't mind. Sitting at Paychex, you see a lot of great data around SMEs and, of course, employment. What do you see? Where are you optimistic? Where is there potentially some room for caution? Thank you for being here.

It's my pleasure. Thanks for having me. It's always great to see you. So it's crazy because I feel like a broken record. For the last few years, I think we've all worried about some sort of employment or some sort of economic challenge, particularly given the uncertainty that we've had. You go back to 1 year ago, this month, month prior, Liberation Day and all the advents of the tariffs and then you look at today and the global uncertainty we have, what I would tell you is what we continue to see is a very resilient small business market.

And in fact, I would say even so far in the last 3 months, really more strength in both sides, both in our 50-plus and our under 50. So I've been very, very pleased. We're in a very much a low hire, low fire type of environment. When we talk to our clients, particularly which are more in the small end of the market, they still are really raising issues about the ability to find qualified labor.

Again, we're in the gray and blue collar segment. So as you think about plumbers and electricians and now you think about building out all this AI infrastructure, a lot of building contractors, a lot of electricians needed and there's a shortage out there. So right now, what I would say, what we see no signs of recession in any of our data, we see strong underlying growth both in the small market and in the mid-market at this point.

Good. Good. So John, you mentioned the gray/blue collar. Just for the benefit of everyone else, because I do get this question quite a bit, can you just remind us of the composition of your client base, your SMB client base as well as those employees that work there, maybe some of the industries that you're exposed to? And the of the question is obvious, right? How cyclical is the portfolio, and then also, where might you be exposed to some of these shifts that are happening in labor.

Yes. So first of all, 95% of our clients have less than 100 employees. So when you really think about what we do for most of our clients, we are the HR department, right? They don't have anyone really assigned to that or they have people that wear multiple hats. When you look in the job classification codes in our client base, we pay 1 in 11 private sector workers. 75% of those are blue and gray collars. Again, think plumbers, barbershops, beauticians, landscapers, those type of things.

What we continue to see in that market is a challenge finding qualified workers. So we've really not seen this overhiring situation that we saw happening in the upper end of the market, and we've not seen the layoffs as well. So when we look at it and we've done analysis on our jobs, we think we're pretty well insulated from it. And in fact, what I would say, if we start training more plumbers and more electricians, our clients would be hiring more. I was just talking to one of our contracting clients in and he says, if I could hire 100 people, he says, I have more than enough work that I could bid on.

But today, I'm just not bidding on work I can compete against because I can't find the labor. I mean you talked about the circular part of it. I think that's one of the things that's a little misunderstood. This problem in the segment that we go after , Paychex, this underemployment, difficult to find workers has been a decade-long problem. So if you go to the NIFB (sic) [ NFIB ] survey, been done for decades, you look at the top 5 issues facing small businesses and you look at the small segment under 100, you're going to find finding qualified labor is a key part of that.

So we really, over a decade ago, had to think about our model differently. So as you know, we've done a lot more advisory business, a lot more adding additional value. You go back 13 years ago, probably 60% to 70% of our revenue was payroll. Now it's less than 40%. Everything else is kind of advisory and other specialty services. So if you go back over the growth rate of the company the last 10 years, employment has had 0 impact on our growth. It's been basically flat.

And so when you go down and even look at the downturns, you look at the financial crisis, you look at COVID, you can go back and look at those models. It's had a really negligible negative impact. So a couple of things. Our model is not built around that, particularly in terms of growth. The second thing is our pricing structure. I think it's another thing that's misunderstood because of our positioning in the smaller end of the market, we've always had a high fixed fee or minimum fee basis. We don't have a pure PEPM. So we're not as cyclical if employment goes up and down. And that's just the nature of how we started more in the small market. And then as we went up in the mid-market, we've continued to kind of match that pricing strategy.

Yes. It only took 20 years to figure it out, right? But the new normal is the normal. Employment is not the primary driver at Paychex.

That's right.

I know that's the perception, but...

Yes. It's just like interest rate is the same way. Those were 2 things that I would say 15 years ago, strategically, the Board and the executive team even before I got there said, we've got to start positioning us away from being a cyclical business. And really, the off-ramp to that has been our advisory business, our HR outsourcing business. And as I said, those other ancillary businesses have really what has driven our growth as you look over the past decade.

Okay. No, thanks for going through that, John. So we should dig into some of those details that you just mentioned, but I did want to make sure we ask now just -- there was a big topic last year, right, with Paycor and the acquisition. We talked at length about that. So it's been over a year now. Any surprise or change in the thesis as you see it? And what can we expect in year 2 from Paycor?

Yes. No, really no surprises and really no change in the thesis. I would say that things have progressed the way that we expected them when you look at, we exceeded our expense synergies. We've met and exceeded our revenue synergies so far this year. And I like the way the setup is. And when you go back, I think it's important to -- I think a year ago, a year ago. It's like last year, at this time, we had just completed the acquisition in April, a $4 billion bond offering. We launched on Liberation Day. That was not very fun.

But if you go back and think about where we were, so you go back last April-May time frame, we had just done the -- completed the acquisition. The January before that's when we announced -- we announced on January 7. So between January 7 and 1st of April, liberation, April 7, if I remember right, we couldn't say anything because we were waiting for all the approvals. As you can imagine, every competitor in the world was saying everything they could about they're going to shut down the platform, they're going to cancel broker contracts. They're going to -- all the parade of horribles. And so you can imagine what was going on in the Paycor sales ecosystem during that period of time.

So then lo and behold, April, we did it. And we said strategically, one of the things that we wanted to do is we wanted to integrate fully our enterprise business with theirs day 1. We could have strung it out, multiyear integration plan. We said we want to do it once because we saw the opportunity there. So in April and right about this time in May, right when we were meeting, I think right after I left this meeting, we announced the new integration. And we took Paychex's enterprise business and reversed engineer into the Paycor brand. changed every territory, sales management, sales leadership, sales compensation.

We redid the broker program with the Partner Plus program, reintroduced that to really attract and address the needs that we were hearing from the broker community. So we did it all the way. So as you can imagine, that was disruptive, right? And so what we told everyone was we said, this is the plan. And I think everyone looked at the plan and said, boy, the back half of that plan looks pretty daunting in terms of expectations, in terms of organic growth acceleration and bookings acceleration.

So now we fast forward exactly what we said, third quarter. Guess what? Bookings, back to where we were pre-acquisition. We had the best quarter-over-quarter bookings improvement in my 13 years at Paychex the third quarter. So when you look at each quarter, we kept getting better and better. We're now back where brokers represent 50% of the Paycor bookings, which is where they were before the acquisition. We're back to bookings at the same level. We just announced yesterday, Hub International has been added to the portfolio, another great firm adding to our portfolio.

Not only are they going to be representing the HCM platform, they're going to represent the full HR outsourcing advisory platform as well. So I look at it from where we are right now. We are continuing quarter after quarter, building momentum, delivering on the plan we said we were going to do. Everything is -- all the disruption is done. So I sit here -- today this May, last May in the middle of a lot of disruption, trying to make the progress, and now we don't have disruption in front of us. We've got all that behind us, the messaging set, the broker program is back on track. And I feel good about where we are from a staffing perspective and a momentum perspective.

Yes. I remember talking to Bob about it and how quickly you went in and didn't waste time and addressed it. And I think sometimes things get dragged out and it has negative consequences. I know you mentioned that you had that vacuum where there was disruption. So I think you addressed it quickly. I know it created some uncertainty, but it feels like you're getting the payoff now.

Yes.

Good. So the Paycor integration piece we just talked about, I know you just announced this AI platform. I'd love for you to talk about it here, too, if you like. But just from a tech prioritization standpoint, with that effort, I know it's never done, but with all this focus on AI and modernizing, maybe the platform is a chance to talk about that now. But where are your priorities today with respect to the tech stack and where you want to push the tech agenda overall?

Well, I -- so look, I think all the pieces are kind of falling into place. Certainly, one of the areas that we wanted to focus on was extending our TAM upmarket. And so Paycor was a particularly part of that, what I would say, platform extension that we were looking for. You mentioned AI. AI is an investment we've been making for decades. And quite frankly, I always have to remind everybody, we started using AI internally over a decade ago. We actually hired the moneyballer for the Buffalo Bills to create a data science team for us. And we began to use it for internal purposes. And we began to really aggregate all of our data across the enterprise. And so we started that journey.

And in fact, 4 years ago, when I was coming in as CEO and I was working through the strategy for the Board, we made 4 key bets that we wanted to make, and the first one was on data and AI. So we started building an organization really around -- and these are the early predecessors, but building the organization, and we talked a lot about on the calls how we were using AI internally, making better decisions, making pricing decisions, doing those type of things.

You go back and look at it in the product, in 2022, we won the best use of AI in HCM and HR Tech for our Retention Insights. Now who was talking about AI in 2022? I mean, who was even talking about it? But we were already beginning to say we set on a very large, sophisticated and proprietary set of information about small and medium-sized businesses. We can begin to look at how our clients' employees are interacting with our systems and protect whether or not they're likely to leave their job. We have compensation data.

So I can tell you how much should a chef be making in Rochester, New York and what's the wage increase going on in that particular job class in Rochester in upstate. We pay 1 in 11 people. We augment that with external data, which we've done, and you've really got a great tool in your hand. So the fact of the matter is that investment has been going on and now you have this acceleration in the capabilities of technology. So you mentioned it today, we announced the introduction of the WISE AI platform.

And just to give you an idea what WISE is going to be, it stands for Workforce Intelligence Supported by Expertise (sic) [ Workforce Intelligence Strengthened by Expertise ]. So marketing had to have their say in the acronym. So I had to come up with that. But really, what we've done is we now have taken both all of our data across all of the companies and all of the business units and all the platforms and all the acquisitions. We've aggregated all of that.

We've created -- we now have a patent pending for the use of AI in using both structured and unstructured HR data to be able to customize actionable steps and then actually inform agents to take those steps on all issues related to HR compliance in our ecosystem. We've been using it with our roughly 900 HR individuals to actually help them advise our clients. And we're now in the process of integrating that across all 3 of our built-for-purpose platform: SurePayroll in the micro kind of do-it-yourself in; Paychex Flex in the mid-market; and now enterprise for Paycor.

So the way to think about it, Tien-Tsin, is this: we have the best operating system, I think, in the industry. That's how you get 42% margins. We have a great back-office operating system. Every one of the acquisitions we do, including Paycor, which we integrated in 3 months, we stripped all of the back-office portions out of their stack, and we put it on our operating stack. So we've always had the best operating stack. And when you think about it, because we were a service company, we invested a lot of money in back office.

What was interesting is we bought technology companies, they tend to make all their investment in the front end and the bells and whistles and the feature, not in the back office. So that's a natural synergy. So now we have one of the industry-leading best operators, operating infrastructures that all of our platforms sat on. We've now coupled that with the next layer, which is the WISE AI layer. And now we're going to start the process of fully integrating and making all of these agents available to all of our customers regardless of platform. And then what I'm most excited about for each of our platforms, we're going to embed our experts into it.

What do I mean by that? So that now means you start with a kind of a chat type of interface. You're asking a question. Look, I'm having a problem with this employee named John. He's kind of a hothead, caused a lot of problem in the office. I want to terminate him. I'm over in California, can I do that? We're going to come back and we're going to look at the parameters of that. And we're going to say, yes, this is what you need to do. And by the way, let me give you the warning letter, okay?

Then we're going to ask you a few questions about John. It looks like it could be a little bit older than the normal guy. That could be a problem here. We maybe want to watch that. At the end of that step, we're going to offer for you to have a free consultation with one of our employment lawyers or one of our HR journalists to talk you through the specific case and actually give you some talking points about how you can approach John and handle that conversation.

That's the human side of it.

That's the human side of it. And that's what we do for our clients every day, right? Most of our clients, again, don't have an HR person sitting in their office. They don't have an HR department. So in essence, we become that HR. We're holding their hand when they're walking into a hearing. And what's amazing about it is because we've taken all the interactions we have with clients and put it into this proprietary and patent-pending infrastructure, we now have case information that can get very specific.

What do I mean by specific? I can actually tell you by mediator in the State of California, if you have an unemployment claim, how much that mediator generally settles for and how much another one settles for. So now you're getting very specific about going in and planning a strategy for an unemployment claim in the state of California, and I can now give you specific based upon knowledge that only we would have because none of the mediation stuff is in public domain. It's only from our experience having worked with clients or in our PEO because actually we've been part of that case that we actually know what the result is. And so now we can open that up to our clients.

And as I said, we're using that to make our HR specialists more proactive. If you thought about the job before, what you would do is you we'd set up an appointment and we do our quarterly or monthly call depending upon your needs. And I go and gather a bunch of data and I look at Retention Insights and I'd look at the compensation report, and I'd sit down with you and say, hey, here's some things that I'm seeing and here's what I'm talking to other clients about, right?

And I'm being proactive to do that. Now we're actually having the agents able to watch this and actually proactively tell you what you need to do in real time and our specialists are seeing that at the same time. So I'm really excited about where we are. The foundation is set. I think we've got all the pieces of the puzzle, both in terms of the built-for-purpose platforms for each of the segments of the market that we want to go after.

I think we've got the best operating layer. And I think now with our large proprietary data set and with the capabilities that we're doing with agentic AIs, I think we're well set. I forgot, Sierra just announced yesterday that they were our partner. We've been working on this for 2 years. We actually have a voice payroll agent. So today, you can call -- it's not my voice. I wanted it to be my voice, but people said, no, I couldn't do that.

You got a good voice.

Yes, exactly. So -- but you can go and you can actually have a conversation and you can provide payroll data, you can add employees and our voice model do it. In a couple of weeks, one of our partners will be announcing that they were our partner on our e-mail agentic bot, which is in production right now, which is taking e-mail data and self-populating that into our system. And then our specialists are doing a final kind of quality check and then we're releasing the payroll.

So again, the efficiencies we're gaining, the opportunity for us to move more of our service transactional support into more advisory, and that's really what I'm leaning into is what's going to differentiate us is our ability to proactively advise clients, leverage our proprietary data and our proprietary system to be able to help them be in front of everything instead of always reacting to it. That's what a small business owner is always doing. They're reacting to a problem because they don't have anyone that can proactively take steps.

And I just think that's what AI is going to bring for us. And look, I think it gives us a competitive advantage over pure tech players because, again, for our customer segment, what they want is they want an adviser. They want someone they trust that's going to hold their hand and not only give them compliant steps and information about what they need to do, but actually help me execute the steps that I need to do, so...

Yes. I know there's a lot of -- everyone saying run, run, run towards AI, but sort of playing back to what you said, you've been taking your data, leveraging AI for a long time. I know we've talked about RPA and machine learning with Paychex over the years, you have a privileged position from a data standpoint. If I'm hearing you correctly on WISE, you can now consume a lot of that data regardless of your categorization, take the data that you're learning and you'll be able to give the advice on how to address it, whether it be a state level side issue or labor issue or municipal, whatever. So is that's -- am I correct in that?

Yes, that's exactly right.

Taking that data and you can consume that regardless of the category.

Regardless of the category and regardless of our business unit, regardless of our market unit. If you're interfacing with a prospect or you're interfacing with a client, we're capturing all of that data from all of those systems and all those transactions as well and dumping that into WISE. So we're constantly refining our data set day in and day out.

So one follow-up question on that just because it's new, and forgive me if I'm just off the cuff asking, but just...

No, that's fine.

Thinking about consuming that and pricing that, so should we expect there to be a lot of products that get spun off of this that again, regardless of what you look like as a customer that you'll be able to consume this ad hoc almost as in a modular way? Is that the thinking around where this is going? Or is it more of a holistic offering, I'm a part of Paychex, this is available to me.

Yes. Look, I think what we want to do is we want to create an ecosystem, and we want to be the definitive source for HR compliance and human capital management, AI-driven answers, right, to deal with anything with the employer-employee relationship. Today, you've got to be in our ecosystem to do that. And if you look at it today, that's really built for our specialists or our HR journalists or our legal team to provide coaching and advice to you and produce documents for you.

What is fundamentally changing with the announcement today is we're going to embed that in the platform. And you're going to be able to start to be able to do that. Now, is that something we may want to share with the world on a per drink or in another basis? Stay tuned. I mean that's one of the things we'll look at. But for me, it's really about making sure that clients know, look, what we're trying to do is drive more value to our clients every year. There's always been the investments we're doing.

That's what allows us to have the price uplift that we typically have. We've continually done that to retain clients because we want to do something that no one else can do. They can't go somewhere else and get this, right? We've continued to try to expose our clients to our advisory services. That's our fastest-growing business, growing faster than our HCM business. And we continue to view that the market is moving towards, I not only want the technology, I want the combination of technology and human support to be able to do this.

And I think if you look upmarket, look, today, most of our clients don't have HR departments. I have a point of view that when you look at the scale of AI and what you need, you need large data to make [indiscernible] work. If there's one thing I've learned and our partners would tell you, and again, I think this is an issue, AI benefits large incumbents. Period. People who have large data and expertise are going to dominate this world because it's unlike the dot-com and the Internet where there could be a level playing field, sure Amazon and eBay and Walmart could have their website. But guess what? Joe's shoe store put -- go to Web.com at the time, if I remember Web.com, you could go and do that.

And you could kind of level the playing field, at least like I could have an e-commerce site, right? I'm telling you, you can't build an AI agent if you don't have data and you don't have expertise and you need large amounts of it. And if you're going to do what we're doing at the accuracy rate that's expected, I mean we're in the largest 401(k) recordkeeper in the United States, have more points than anybody else. We're -- pay 1 in 11. We're the 30th largest insurance agency. The things that we deliver are absolutely critical to people. You can't have mistakes.

I mean a 1% mistake -- 1% mistake in payroll at Paychex equates to $14 billion of missed payrolls. Who are the 14 billion people that we don't want to get paid in the U.S. next Friday? I don't think that's -- I don't -- again, I keep looking at we're a record system, we're a compliance system, and we deal with state and local governments where compliance is not automated. And I can tell stories on that. But I'm pretty excited about where we're positioned and where we are going into this next AI era of our industry.

Yes. No, that's the moat. No errors and got to be fully compliant.

That's right.

And it sounds easy, but I get that it's not. Okay. No, thanks for going through that. It's fine. So let's -- time goes back quickly, less than 10 minutes left. Let's hit a few important subjects. Let's do PEO. So PEO, we had Maria earlier, we talked about it. Just to be candid with you, Paychex has been outgrowing the market, right? I think if we stack up Paychex versus the peers, you are the industry leader in terms of growth in WSEs, et cetera. What are you doing differently and is this premium growth sustainable? Are you benchmarking it this way? What would you share?

Yes. So first of all, I'd say I'm very proud of our PEO team and the work they're doing and executing just because to double-digit revenue, double-digit bookings, record retention, go down -- I mean, I'm used to like -- we got 5 key KPIs. I mean, 4 out of 5 is pretty good. You have 5 out of 5, you're doing pretty damn good, you know, so I'm very happy with what's going on there. And I think it's interesting when you think about the PEO, this is really driven by -- we're a very purpose-driven organization. We're very thoughtful. We're very planful. We think about things a long time.

As you know, we're known as somewhat conservative, right? And you go back, Paychex was not a PEO company a decade ago, 15 years ago. We had a PEO. Our bigger business was our ASO business, and PEO was more something defensively that we had in the business. One of our clients would be approached by a PEO, and we go, oh, we got one of those too. You can stick with us. And almost all of our PEO business was sold inside the base, more of a defensive move or because the client was looking for it. And so when we decided that we wanted to gravitate away from the story we said of kind of being a payroll provider -- back then, 70% of our revenue was payroll. Today, it's less than 40%.

HR was a key part of that. And we certainly saw that not only our ASO business, but the PEO business had an opportunity. So you go back and look at that 10 years ago -- I joined the company 13 years ago. We started focusing on our organic PEO business. We invested in it. We began to get it growing. We then leveraged our balance sheet to make some tuck-in acquisitions. We proved that we could do that. And then we said -- and at that time, we were probably in 3 states. I mean, technically, when you look at the concentration, we were at scale in 3 states in the country.

And we knew we wanted to go national, and it took 2 things. It took the expertise. So we knew we needed scale. So you just mentioned it. At that time, we made the largest acquisition in the company's history with the largest privately held PEO in the country at the time, Oasis at $1.1 billion. We did that in 2018. We integrated that and then we executed the plan. And from that, we now are a national leader. As you said, 50% of our business is coming from within our base, 50% is coming from outside our desk where we're introducing new clients to the PEO outsourcing story. It's just absolutely a fabulous, fabulous story.

So in a decade's time, with a purpose-built strategy, right, we went from a very small player in an industry to be an industry-leading player. I like where we're positioned in terms of our value proposition and how the team is executing and our staffing and how our value proposition stacks up. But I think that's a good example that I think is probably a parallel or my expectations and what we're trying to repeat in the enterprise with the Paycor, which is we were investing in our business in the enterprise side. We knew we needed additional capabilities. We knew we needed a brand that would play in that market. And so now that we've done that, we've integrated it. Now it's about execution and continuing to accelerate the growth there as well.

Okay. Yes. So similar playbook kind of sourced a little bit differently in terms of time. I know you're a big architect, of course, of the Oasis piece, but yes, so the Paycor one is the next one to watch. Okay. Good. So we're running out of time, so just want to make sure I hit a few of the fun ones. Before I talk about the outlook, maybe just on product road map then, John, just we talked about WISE, product velocity is a big subject in broader fintech and processing and payments. And so in a minute or two, what's your philosophy on product velocity? And what should we be watching for and what might move the needle?

Yes. So no question, we already talked about, we'll talk about it again, a lot of our product right now is the integration of WISE into the AI. We'll also see this year that we will offer across all 3 platforms an AI agentic user experience for each of those platforms for people who want to have that going through there. You're going to continue to see us, you mentioned, integrate partners.

So one of the big things that we've been focused on is enabling our systems to allow our clients' employees to be customers of ours. So we've created both a customer marketplace that's embedded. We're using AI to identify customers that would be needing financial products or other products and services that we don't sell through partners. We're increasing that partner network. We're also doing it on the employee side. So we call that program Perks, give you an idea, we continue to add to that. We just surpassed 400,000 paying customers within our employee base.

That's about in 18 months of adding things. So I think you're going to continue to see us look for partners that augment adjacencies, integrate them into our marketplaces, both client marketplaces as well as our employee marketplaces. And then we're going to allow them to leverage our AI and our intelligence to be able to market that at the type of need to both our clients and our employees. And I think right now, that's going to fill our road map for the rest of the year.

No, going to more of a consumer employee model, I thought always made sense given how many touch points you have. So if we mix all of this together and say, hey, what does it all mean for pricing? I know we're accustomed to thinking about Paychex having pricing power. Has your thinking around pricing changed given all the work you put in and some of the things that are coming out now?

No. I think that our viewpoint is, look, we don't take it for granted that we're able each year to go to our customers and charge them more for our products and services and our solutions and also improve retention. And the reason why we can do that is all the things I just said. We're constantly investing in the platform and our solutions so that we're showing the value. And with small businesses, if you show the value, they're willing to pay. Again, in the small scheme of things, when we're talking about the increases we're talking about, it's probably a cup of coffee or two a month for one of our clients in terms of that.

And if we're providing that value, we feel good with the investments we're making, we can continue to do that. I do think there are portions of the agentic AI model -- there'll be things that we're doing that will allow us to provide some outcome-based pricing that could be a potential. Not doing any of that yet, but it's certainly something that we're talking about. And so when I look at it, I think we think we're adding additional value. Our customers are seeing that value, and I think that we're going to be able to continue to really pass that value price on to our customers as we go forward.

Okay. Good. So bringing it back to the numbers, if you don't mind, John, just thinking about the outlook and the models, and I know you didn't give preliminary guidance for fiscal '27. You'll be doing that pretty soon, but you did express comfort with where consensus was, which we had interpreted it, okay, that's fine, no surprise, but it's running a little bit below what we think of as mid-cycle growth guidance for Paychex. Is that a fair characterization? What kind of macro factors maybe could be contributing to that? And what might drive some acceleration or something to do a little bit better? There's so many things happening at Paychex. I'm really curious that what could move the dial in the short term.

Okay. Well, today, I'm not going to give guidance and I'm going to...

I didn't expect you to.

So I think what we said and -- which I think -- what I think is true is what we told everybody at the start of last fiscal year that this was -- we were coming out of an integration and a transition and that there were things that we need to accomplish, and we need to see progress and that what you would see is you would see organic growth building quarter-by-quarter, bookings growing quarter-by-quarter. And so I think what we said on the last call was that when you look at the second half of the year growth rate, that feels to us like a good number for us to think about that we can go into next year.

And I think at the time that we made those comments, there was a lot of macro uncertainty in terms of what's going on. I think there's still -- we're not seeing it show up in the numbers. That will be a question that Bob and I, I'm sure, will be talking about. And then the other thing is I think that we're still working through our -- as we talked about, our product road map and launches that we'll be announcing over the course of the next 60 to 90 days, and those things will go into that equation as well.

But look, I'm pleased with the progress we're making quarter after quarter in a very challenging environment and doing that, and I'm very proud of the team. Because we did it well. Look, it is not easy to integrate a $4 billion acquisition in the middle of all the chaos that's been going on in the last year in the world. There's a lot of things to distract your employees from doing what they got to do each day to get that job done. And so I'm so proud of the team for what they've done and the fact that we ended the third quarter, like I said, with really one of the best booking increases I've seen in my 13 years at Paychex and really see the momentum going into the back half of this fiscal year, and it gives us confidence going into '27.

Yes. No, I think -- look, you guys -- it's been playing out a lot like you have said. So I don't take for granted, right, the execution and how hard it is against the integration, but it does feel like a lot of product momentum. So that's why I asked the question and excited to see how it all translates. Maybe just to close it out, John, and thanks for the time, just thinking about, right, the dividend is what it is. You have upsized though the buyback authorization, and that's created some question, right? Should we infer from that, that there's a bias towards buying back stock versus maybe doing the next acquisition? I know you're a year away from Paycor and your hard work to do there, but how should we interpret the buyback being up?

Yes. I would just interpret it as being opportunistic. And I think the same way we look at M&A, right? I think we don't have a commitment every year we're going to do M&A. But you go back and look over a horizon of 10 years, what you'll find is that, that adds to our growth story and we expect that to happen over the next decade as well, so -- but that's opportunistic. So you look at the things, M&A, dividends, all the things that we want to do, buybacks, to be opportunistic. To your point, number one is we did announce a rather generous -- 10%, 10.2% if you're counting, increase in our dividend. And so that gets us almost a little bit over 5% return there.

That's a commitment that we've made to our shareholders. When we look at the opportunity to buyback, typically, we've had between a $300 million and $400 million authorization currently always active at the company. That's been the historical. And when we ran out of that, Bob -- when that one was expiring, Bob and I went back to the Board and said, look, we really would like some more room opportunistically. And so we approved a $1 billion buyback. It says like 3x what we would normally have available to us. And so Bob and I and the Board are constantly talking about the right balance of opportunistic.

I think a continued commitment to invest in the business, first and foremost, all the things that we just talked about from a product perspective; second is to continue our commitment from a dividend perspective and friendly shareholder return; third is buyback at least dilution that we have. And if it opportunistically makes sense to buy back more in those periods and then continually look at the M&A pipeline. If there's something there, we'll rebalance the allocation of capital. But no major change to the capital allocation for your current shareholders out there. No major change, but we're opportunistically kind of looking at the mix and the blend based upon the environment that we see.

I think that's the right answer. Thank you for the time, John.

Always grateful.

Thank you for having me. Appreciate it. Thank you for your interest in Paychex.

Thank you. Thank you.

Good morning, and welcome to Paychex's Third Quarter Fiscal 2026 Earnings Call. Participating on the call today are John Gibson and Bob Schrader. [Operator Instructions] As a reminder, this conference is being recorded, and your participation implies consent to our recording of this call. I would now like to turn the call over to Bob Schrader, Paychex's Chief Financial Officer.

Thank you for joining us to discuss Paychex's third quarter fiscal 2026 results. Our earnings release and presentation are available on our Investor Relations website. We plan to file our Form 10-Q within a couple of business days. This call is being webcast live and will be available for replay on our Investor Relations portal.

Today's call includes forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations.

We will also reference non-GAAP financial measures. A description of these items along with a reconciliation of non-GAAP measures can be found in our earnings release.

I would now like to turn the call over to John Gibson, Paychex's President and CEO.

Thanks, Bob. Hello, everyone. I'll cover this quarter's operational highlights, and Bob will come back and discuss our financial results and outlook, and then we'll open it up for your questions.

We delivered a strong quarter with revenue up 20% and adjusted operating income up 22% year-over-year, driven by effective execution and progress advancing our strategic priorities, most notably, the Paycor integration and acceleration of our transformational AI initiatives. In this very dynamic environment, financial strength is important, and our free cash flow generation continues to be robust, as Bob will highlight later. Amid a dynamic macro backdrop, our clients' workforce levels remained stable, supported by our solutions that help manage costs and source talent in a tight labor market. In a highly regulated industry, our compliance depth, advisory expertise and award-winning platforms provide a clear competitive advantage in navigating a constantly changing and complex regulatory environment. As we embed AI into our expert enabled technology, we are strengthening that advantage by leveraging our vast data to scale our expertise, enhance productivity and elevate client outcomes.

As you all know, we operate in HR benefits and payroll, some of the most mission-critical aspects of a business, and we are honored that 800,000 clients rely on us for trusted support and advice. For many of our clients, we effectively serve as their HR department, managing a foundational part of their business, their people. Errors paying employees, withholding taxes or administrating benefits carry significant regulatory and reputational risk driving demand for trusted compliant solutions where accuracy matters most. Demand for our comprehensive advisory and benefit solutions remain strong, differentiating us from the tech-only providers. Clients are increasingly turning to our HR professionals for strategic advisory expertise and assistance over routine transactional support.

Robust revenue growth in retirement, ASO and PEO highlights the durability of our model and reinforces our expectations of a long secular growth runway for these businesses. Our ASO and PEO worksite employee growth continues to outpace the industry, reflecting our value in navigating regulatory complexity and ensuring compliance, often for clients with no or, as I said, limited HR support.

Our PEO business remains strong with high single-digit worksite employee growth, driven by robust demand and record retention rates. Our PEO solution empowers small businesses to offer competitive benefit packages on par with Fortune 500 companies, aiding talent attraction and retention in a tight labor market. January enrollment in our at-risk 401(k) MPP medical plan went well and in line with our expectations, helping drive sequential revenue growth. We received positive feedback on the new AI-driven benefits intelligence we embedded in the enrollment workflow this year. It leverages employee-specific data to recommend plan choices and streamlined benefit selection.

We continue extending our SMB benefit leadership with Paychex's Perks, our award-winning digital marketplace offering affordable, transferable benefits to our clients' employees. Perks is a compelling growth opportunity that empowers our clients to offer meaningful benefits with no added cost to the employer or administrative burden. In the first 18 months, Perks has grown to over 25 benefit offerings with purchases from nearly 350,000 unique employees, creating a direct end-user relationship with portable benefits that they can keep if they change employers. By bringing enterprise level benefits down market, we are enabling our clients to to better compete for talent and addressing a historically underserved market.

The Paycor integration continues to progress well. We remain on track to exceed our fiscal '26 synergy targets we discussed last quarter. Leading indicators such as bookings and broker referrals have reaccelerated to pre-acquisition levels, and we are adding sales headcount to capture the demand we see. We are gaining momentum cross-selling Paycor's ASO, PEO and retirement solutions to Paycor's clients, and we continue to win larger-than-expected ASO deals and broker referred PEO opportunities. This momentum reflects the hard work and alignment of our teams and positions us well going into fiscal year '27.

Our Paychex Flex and Paycor platforms were recognized as industry-leading HCM solutions with 2 2026 Lighthouse Tech Awards. This achievement underscores our commitment to empowering businesses with modern AI-powered solutions that simplify HR processes and drive business outcomes.

Integral to our growth strategy, we continue to accelerate in embedding AI into our workflows. This amplifies our expertise with human-in-the-loop oversight and strong governance. We now have over 500 AI-powered capabilities and agents that can drive higher productivity and smarter decisions and outcomes. Our generative AI-powered employment law and compliance platform processed tens of thousands of inquiries this quarter, helping clients and Paychex's HR experts navigate complex and always changing wage and employment law.

Internally, we are expanding AI use cases to enhance the client experience and sales effectiveness. Following successful pilots last quarter, we are scaling the use of our voice and e-mail agents for payroll processing, enabling service teams to focus on proactive higher-value advisory support. We also expanded our agentic AI sales and service tools to the entire sales team with a goal to drive revenue growth and efficiency. AI agents orchestrated real-time information across service and product systems, equipping thousands of service personnel to support clients more effectively. This agent swarm architecture really removes prior friction and serves as a foundational capability to future agenetic developments.

Our strategic AI investments are bolstering our leadership in HCM innovation. We are moving from insight and efficiency tools to proactive agents that leverage our vast and growing data set to complete work to drive business success.

Payroll and HR, as we know, are mission-critical and highly regulated functions where accuracy and compliance matter more than automation alone. We believe Paychex's proprietary payroll data, regulatory expertise and advisory relationships creates a sustainable advantage that will enable us to respond and responsibly embed AI into our solutions while maintaining a durable competitive moat.

In our business, trust is critical. It's not just what you do, but it's how you do it that matters to prospects, clients, partners, employees and key stakeholders. That's why I'm proud that Paychex was once again named one of the world's most ethical companies by Ethisphere for the 18th time. This rare achievement highlights our unwavering commitment to ethical operations and corporate responsibility.

Supporting communities is also integral to our identity, and I am pleased that Paychex was recognized as a leading corporate partner by United Way Worldwide, reflecting our commitment to making a positive impact where we live and work.

Lastly, I'd like to thank our team for the exceptional hard work during this busy year-end season and through a very, very challenging year of integration. The work that they've done to support our clients to come together is truly exceptional, and I think really is positioning us well as we move into fiscal year '27.

I will now turn the call over to Bob to discuss our financial results and outlook.

Thank you, John. I'll start with our third quarter financial results, then provide an update on our outlook. Total revenue increased 20% over the prior year to $1.8 billion. This represents an acceleration in the organic growth of the business relative to the first half of the year. Management Solutions revenue grew 23% to $1.4 billion, driven by product penetration and price realization. Paycor contributed approximately 19 percentage points to growth. PEO and Insurance Solutions revenue increased 9% to $398 million driven primarily by strong growth in the number of average PEO worksite employees as well as an increase in PEO insurance revenues.

Interest on funds held for clients increased 33% to $57 million, largely due to the addition of Paycor balances. Total expenses increased 24% to just over $1 billion, primarily driven by the Paycor acquisition. Excluding Paycor, we estimate that expenses grew in the low single digits during the quarter.

Operating income margin was 43.8%, and adjusted operating income margins increased approximately 80 basis points to 47.7%, driven by increased productivity and cost discipline while increasing our investments in AI.

Diluted earnings per share increased 9% to $1.56 per share and adjusted diluted earnings per share increased 15% to $1.71 per share. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.8 billion and total borrowings of approximately $5 billion as of the quarter close.

Our cash flow generation continues to be a strength of our model. Operating cash flows were nearly $2 billion year-to-date, and our free cash flows increased 27% year-over-year.

After the quarter closed, we did repay the initial $400 million tranche of debt from our Oasis acquisition that matured in March. Our recent $1 billion stock repurchase authorization underscores our commitment to delivering long-term shareholder value. We returned $463 million this quarter and over $1.5 billion year-to-date to shareholders in the form of cash dividends and share buybacks. And our 12-month rolling return on equity remains robust at 41%.

Shifting to our guidance for FY '26, which is based on current market conditions, we reaffirm our prior fiscal '26 outlook, except for raising our interest on funds held for client expectations. Interest on funds held for clients is now expected to be in the range of $200 million to $210 million. All other guidance metrics remain unchanged.

I'm going to turn to the fourth quarter to provide you a little bit of color on the fourth quarter. We would anticipate fourth quarter growth to be approximately 12% with an adjusted operating margin of 41% to 42%. The fourth quarter growth rate reflects a couple of dynamics. First and foremost, I think most of you know, we anniversary the Paycor acquisition during the quarter, and to a lesser extent, Q3 benefited modestly from the timing of certain items relative to Q4. However, our second half outlook remains consistent with our expectations and the organic revenue growth acceleration we saw in Q3. We believe Paychex has never been better positioned to succeed in the AI era of HCM and deliver shareholder value.

Our business fundamentals remain strong. As the best operators, we have unrivaled operating and free cash flow margins with an opportunity for further expansion. Our financial strength and the durability of our business model are evident in our consistent performance as a Rule of 50 company. We are committed to returning capital to shareholders and confident in our ability to deliver sustained value through continued revenue and earnings growth.

I will now turn the call back over to John for questions.

Thank you, Bob. We will now open the call to questions.

[Operator Instructions] And our first question comes from Bryan Bergin with TD Cowen.

Bob, can you put some finer points just first on the level of organic growth in the third quarter, and then bridge that forward to your commentary on the fourth quarter, if you can kind of unpack that 12% growth across the business, I think that would help.

Yes, Brian, I think consistently, even if you go back to Q4 of last year. The organic growth of the business has been a bit weaker. I think a lot of that had to do with comparability issues, particularly in the PEO business with our MPP plan in Florida. But if you go back to Q4 of last year, I think we've seen sequential improvement each quarter in the organic growth of the business. So if you look at the first half, total revenue organic growth was roughly 4%, and that improved from Q1 to Q2. And then when you look at the back half, whether it's Q3 or Q4 combined, we would expect -- it accelerated in Q3, and we would expect to see similar organic growth performance in Q4. And so you're now getting to a back half organic growth rate that's closer to 6%. And then when you put the 2 of those together, it's roughly 5% on a full year basis.

So again, I think there's a couple of drivers of it. One, to be fair, is the easier compare on the PEO business. I mean, I think you'll see that the headline PEO number sequentially went from 6% last quarter to 9%. There are some timing things there, but there's certainly strength in the underlying operating performance of the business, particularly in the PEO, and we can get into that probably in maybe some later questions. But we did anniversary the headwind from the MPP enrollment. So that's why you're definitely seeing the combination of an easier compare, stronger operating performance, driving accelerated organic growth in the back half of the year.

Okay. As far as the 4Q exit rates that are implied, as we think forward into fiscal '27, any important considerations that you want to share?

Yes. And I maybe head off the question that I'm probably going to get as it relates to next year in guidance. And we're going to -- we're in the early stages, I would tell you, of our operating plan, and we're going to finalize that over the next 6 to 8 weeks. And I know we kind of established a precedent coming out of COVID in providing maybe some more details around what we were thinking for next year. I think we needed to do that given some of the uncertainty in the environment back then. Our preference now is to kind of build the plan, come out in Q4 like we historically did, and consistent with what our competitors do and provide guidance at that point in time.

That being said, we obviously have visibility to what's out there in the models in FactSet. And when I look at that, I really don't see any reason that I need to steer you in one direction or another. I'm fairly comfortable with what's out there. And I think, Bryan, what you'll see is the organic growth rate, whether it's Q3 or Q4, we're really looking at the back half because there are some timing differences, particularly in the PEO between Q3 and Q4. When we look at the organic growth rate in the back half of this year, it pretty much aligns with kind of what's assumed for -- from a consensus standpoint for next year.

And we'll take our next question from Mark Marcon with Baird.

I'm wondering if you could talk about a couple of things. One, just you did mention that Paycor was seeing new broker engagements, or are we -- a renewal of some of the broker engagements in that pipeline. I was just wondering if you could just talk about new sales, generally speaking, during the core selling season? What did you end up seeing this year? And how would you describe the competitive environment, win rates, et cetera?

Mark, this is John. I'd say the competitive environment is stable and the same. It's competitive. I wouldn't say I've seen much change there. From a sales perspective, look very pleased with our performance in Q3, not only in line with our expectations, but quite frankly, we were accelerating par and bookings growth in the third quarter. And we've kind of seen that sequentially as we come out with the disruption, as you know, at the start of the year with the integration of the teams continue to grow there. PEO, double-digit bookings, Paycor, double-digit bookings as well. We actually see bookings and the par referral continuing to accelerate back to pre-acquisition levels. We're actually adding headcount in the enterprise space.

Again, remember, Paycorp for us is a brand for the enterprise market, 100 plus, and we think that's a great opportunity for our HR outsourcing services as well as technology solutions. And so we're going to continue to go after that as well. So we continue to gain momentum, I think, across the board, and we feel good about where we are positioned going into '27, both in terms of our competitive positioning, our headcount, and I think you really look at it. I mean, we're entering '27 with all of the integration work behind us that we did early in the beginning of the -- this fiscal year. And we're entering with not only in line team, but really the most comprehensive and I think, flexible and innovative set of solutions in the marketplace. And so I feel good about where we are.

That's great to hear. And then I thought the gross margin performance was particularly impressive. When we take a look -- if we're defining gross margins is revenue minus minus direct costs. And part of that was obviously the higher interest income off of the float. But beyond that, it looks like it's doing extremely well. How much of that is related to some of the AI initiatives that you've put in place in terms of embedding AI across your our service infrastructure and making them more productive versus other initiatives that you've put in place in terms of perhaps shifting some of your costs to lower-cost labor markets like India? And how much more can we do there? Because it's been fairly impressive. I'm wondering if this is basically setting us up for continued margin expansion for multiple years?

Mark, I think that we have a long track record of being able to drive the best operators margin expansion as we grow revenue in the business. And I think you're going to continue to see that. We use every lever imaginable to do that. I think that when you look at AI, as you know, we've been using AI and predecessor type of models for many, many years since I've been here. And now with this new technology that almost every day, something new is coming out, what we're seeing is pretty impressive. It's pretty incredible. Some of the things we're doing in terms of agentic AI models, which we've now released to scale after the pilots, doing voice payroll, doing e-mail payrolls, what we're seeing early stages in our beta group ups in sales using our sales guru and what we're seeing from a service perspective. So I feel good about what the opportunities are.

Look, if we grow the top line, we are going to be able to grow margins and expand margins over time. And then when you look at these new tools that we can put in our arsenal as the best operator, I really feel good about where we are. And I would say that it's part of the thing on [indiscernible], we're just getting in. That's a big debate right now. I think that's the big question is how much -- how do you begin to quantify the real positive impact from sales productivity, the way we're using it in marketing? What the potential is from a service perspective? So I can assure you, we're going to have some very lively discussions next week during our planning sessions about exactly the potential that this technology has, both to drive the top line, but also to continue to expand margins.

So I think there's more room ahead, and every year, something new comes out, and we are innovators in that regard and are going to grab every tool we can to continue to drive efficiency.

We'll go next to Tien-Tsin Huang with JPMorgan.

I wanted to ask on the advisory work. John, that you talked a little bit about it. I think that's probably underappreciated in terms of what Paychex does there. How AI [indiscernible] the advisory side of the business? Could I get the question quite a bit that can rules base advice from AI come in and some [indiscernible] what Paychex does on the advisory side. But I'm guessing that a lot of your advisory work is centered around compliance and very complex data issue that only Paychex has. Can you maybe elaborate on that?

Yes. Look, Tien-Tsin, I think this is something I think is extremely interesting for people to understand. For the vast majority of our clients, we are their HR department, right? So not only do we provide them the advice, we literally are talking to them and holding their hand when they're making some of these decisions and supporting them. You look at our PEO, the most comprehensive part of our model, we're actually in a co-employment arrangement. We're actually helping represent them and deal with their employee situations, which are numerous, I may ask, in today's world. And so we're actually doing so much more that there's no way that I think technology is going to replace that, at least that I see in the short term.

Now your point is we actually own the patent on using agentic AI in a mesh form in structured and unstructured data to answer HR and compliance data. Why is that? Because we have a huge compliance regulatory team that's constantly keeping that system up to date. What I will tell you is the changes in Akron, Ohio, are not automated. Someone has to go on to Akron's website, has to look at it, has to interpret it, has to watch what's going on in Ohio courts to understand how it's being interpreted and then put that into a system to be able to respond to a client who's asking a question about whether or not they can terminate a client in Akron, Ohio or not.

So I think that part of the both the -- we've got the AI embedded tools. And now we've actually launched those tools inside of our -- with our HR journalists. We're actually seeing pretty significant productivity improvements since we've done that. our clients. We're embedding that into our platforms. So our clients can gain access to that. I think that's going to drive more efficiency. But at the bottom line, for most of our clients and increasingly upmarket, we are becoming the department and HR partner for helping people manage people. So as long as our clients have people, they're going to need Paychex holding their hand and helping them understand how to work with those people, in my opinion.

Yes. Your opinion is very important, John. That's why I'm asking it. So thank you for going through that. Maybe just as a follow-up, thinking about these agents as they get deployed, and as you said, the propriety data that you have, does this get monetized through your normal way pricing that you typically would put through in the spring? Or do you think of this as a new monetizable opportunity for Paychex?

Well, I think we've been monetizing our data and providing insights going back to the early days. We won the -- in 2022, we won the best use of AI in HCM with our Retention Insights. That was before all this AI madness [indiscernible]. And the fact of the matter is that we've been doing that. We monetize that with our clients and actually provide them insights about how to retain their clients. I think what you're seeing today is we're applying it into our products and services to improve the user experience. We're putting it in there to be able to improve really the insights that we can provide in other areas such as benefits. We mentioned what we're doing in the PEO, which was just phenomenal the way the tool helped advise clients, employees and what benefits package was right for them.

So I think you're going to continue to see us use it to really drive better outcomes. And you made a critical point. In order for AI to work, you have to have a large, robust data set. And the other thing that we've learned, and particularly when we were building the agentic AI models for payroll, you had to have a constantly moving set of data. And so the way I look at it is just flywheel fact. Now that we're capturing every interaction that we have from an HR payroll and a compliance perspective with our clients through every form of communication, every interaction we have with them or one of their employees adds to our data set, and with our tools constantly looking and doing the analysis around what are common trends, we're getting more insights. And those insights are allowing us to be more proactive with our clients.

So as the transactional work gets automated, it frees up our time to be able to gain the more insight and then the system is proactively giving our HRG's a list of insights that they can then call clients and make recommendations on, whether that's compensation, whether that's retention, whether that's workplace trends that we're seeing in specific geographies that they need to be aware of. So I think it's just going to continue to improve the value proposition that we have, and I think it's also going to improve the outcomes that our clients see.

We'll move next to Bryan Keane with Citi.

I was hoping you guys could just talk a little bit about the strength of PEO insurance. It jumped above the range at 9%. Can you talk a little bit about some of the drivers and some of the sustainability as we head into the fourth quarter?

Yes, maybe I'll start, and then John can add some color. I think it's twofold, Bryan, as I alluded to earlier, I think strength in the underlying operating performance of the business. So we saw a double-digit demand for PEO. We continue to see record WSE retention in the PEO. We saw high single-digit worksite employee growth. PEO business is all about worksite employees, and we continue to outpace the competitors in that space with our ability to drive worksite employee growth. So the underlying operating performance is strong. January is the big annual enrollment. So we anniversary -- 2 things, we anniversary the tougher compares from the prior year when MPP was down, but we got through that annual enrollment. And I would tell you, enrollment in our MPP is up modestly. So you have an easier compare. We grew the enrollment. And then when you zoom out a little bit and you look at medical enrollment across all the PEO, not just the at-risk business in Florida, but across the entire PEO space, our medical enrollment was up high single digits, near double digits as we went through this annual enrollment period. And I think that's the strength of the PEO value proposition, the ability for us to offer to our small business clients, the ability to offer medical insurance and workers' comp insurance, leveraging our scale to be able to offer affordable benefits to them, we had a pretty good year-end enrollment related to that. So it's really a combination of all those factors.

I would also just say, and I've alluded to this a little bit. On the agency side, we had some timing benefit. You get some timing between Q3 and Q4 between carrier bonuses. So your revenue can be a little bit stronger in Q3, a little bit weaker in Q4. And so relative to our expectations, there was a little bit of timing that came into Q3, but all in all, really strong performance. And pretty much what we planned in the back half of the year, and it's nice to see that come into fruition.

Yes. I just want to add to this. I mean, the PEO performance is amazing outpacing the industry, I think, rather significantly, double-digit revenue growth, double-digit bookings, seeing success upmarket. I think this is another point. Again, I'll make it, it's going to be interesting. We're having success with the Paycor sales team into the broker channels positioning PEO upfront. So this is one of those, what I call, revenue geography problems. So a Paycorp rep is out and they're talking to a broker, what would have normally been because all they have was HCM to sell. It's going to be an HCM sell, all of a sudden, the discussion comes about what the problem is and we got multiple solutions. And now we're selling a PEO. And we had some -- and it's larger deals than what we typically would see coming in. So in January, that was another -- a big positive that, quite frankly, I think, is going to continue to to help us and move forward.

I would also say because I do want to say this, look, the agency was certainly still a drag in the quarter to the segment, but we saw sequential improvement. And I'd actually say even in bookings, which is the precursor to revenue moving, we actually saw solid bookings there in the quarter. And so I'm pleased with the team's made a lot of changes there. We've made some changes in the agency. We're trying to be more innovative because the market is the market, health care issues are health care issues, soft workers' comp a soft worker's comp. We're building strategies to work around those situations and the team is making some progress there. So that also contributed a little bit as well.

The other thing that I think is -- that I would point out you guys to go back and look at, and I think it's probably a story that we plan on duplicating in the enterprise space. If you go back and look at our PEO success, and you go back to 2020 through 2025 and look at those 5 years, I think you're going to find that our CAGR of worksite employee growth is in the double digits and far surpasses any of the other providers that I'm aware of, both public and private in terms of growth.

Now what was the setup for that? [ 2028 ], we make an acquisition of Oasis. Prior to that, we made a decision that strategically, we were going to position the company as an HR advisory company that we believe there was more than technology that our clients are going to need and want, and we started to really grow our business organically. We then made an acquisition 1 year after that acquisition, we're growing that business at industry, and we're gaining share in that industry. I think that's exactly what you should expect us to try to do and we are doing with the Paycor acquisition.

We saw the opportunity to take HR advisory solutions upmarket. We wanted more capability to be able to do that more distribution, and now we're a year into it, and I think we're well positioned to duplicate the story that we did in PEO in the enterprise space.

Got it. Got it. And just a quick follow-up, Bob. The 12% revenue growth you called out for Q4, I think that's a point below the Street, but it sounds like some timing, maybe there was a slight benefit, some of the stuff you just talked about, obviously, in the PEO business from Q3 to Q4. But organically, the organic growth doesn't move much. Maybe just talk about the -- some of the benefit, maybe if Q3 should be stronger organically than Q4?

No, I think you would probably see a slight uptick of continued acceleration in the organic growth of the business in Q4 relative to Q3. So we should see sequential improvement there. And as you guys know, we don't give quarterly guidance. I'm trying to give you some color on each call to help you with your models going forward. I would tell you, we were intentionally conservative last quarter when we kind of provided some color on Q3. Obviously, Q3 is a big quarter for us. You have year-ends, you have selling season, we have our year-end processing fees, which is a lot of money and margin that hits in the month of January. We had our large enrollment in the PEO. So we were intentionally conservative. I would tell you Q3 was in line, a bit better than our expectations. And as I mentioned, there were some puts and takes between Q3 and Q4 and largely the back half of the year was in line with our expectations. And again, you'll continue to see some sequential improvement in -- assuming we deliver the forecast in the guidance, you'll continue to see some sequential improvement in the organic growth of the business, which I think positions us well, as John mentioned, as we move into FY '27.

We'll move next to Andrew Nicholas with William Blair.

This is Daniel on for Andrew today. Real quick, just turning back to the revenue timing. It sounds like that was mostly concentrated in PEO. Is there any way you can size how large that was? And and looking forward, can sequential growth in PEO specifically continue into the fourth quarter off of that?

Yes. I think the growth rate in Q4 will be lower because of some of those things. I don't have the exact percentage. And I think when we -- again, if we look at it, the 2 quarters combined, Daniel, you'll see a sequential or if you look at the back half because of some of those puts and takes between the quarter, you see a fairly significant lift in the organic sequential growth of the PEO and insurance in the back half relative to the first half. But the overall growth rate, I think when you start doing the math, you'll see that the math is going to show you that the growth rate is going to be a little bit lower in Q4 than Q3, but when you put the 2 of them together, it's a fairly big step-up in the sequential organic growth relative to the first half of the year.

Great. That's helpful. And then for my follow-up, going back to the mention of a reacceleration of referrals and bookings to pre-acquisition levels. Can you add any incremental detail on specific areas of momentum there and maybe just level set after a few quarters of integration, where the lion's share of the synergy opportunities now whether that's on the revenue or the cost side?

Yes, Daniel. What I would say is very pleased with the acceleration we've seen each quarter as we came through the first quarter when we did all of the reorganization. And as we talked about, we made a conscious decision when the deal closed almost a year ago now, April a year ago, that we were going to get the hard work out in way. And we saw the opportunity rather than dragging it out. And so we took -- we did that. And of course, from the time you announced the deal in January of last year to the time that we closed the deal in April, as you can imagine, a lot of competitive noise in the market, a lot of questions from brokers about what's going to happen, and we couldn't say much. So as we've gotten our story out there and gain momentum, we've continued to build momentum in each of the quarters. And as we said, we've gotten ourselves back to where we were pretty pre, both in terms of bookings volume, it was double digits again year-over-year, and broker engagement.

So I would say it's getting back to kind of where we were, except for now we have the cross-sell opportunities. So where I would say expense synergies are pretty much behind us at this point in time, we've taken those actions, we've exceeded the expectations that we laid out as part of the deal model, now you're in what I call normal DNA best operators continuing to improve the model of both companies and look for opportunities. Where the opportunity is now, and we continue to build momentum on is around the cross-sell inside the client base, 401(k), ASO, PEO, all our other products and services, you'll be seeing us putting our Perks product into the core ecosystem as well. So that's where we see the opportunity as we roll into fiscal year '27.

We'll go next to Kevin McVeigh with UBS.

I wonder, can you just remind us what the initial Paycor revenue and expense synergies were and where we are today on those? Because it seems like you've been doing a nice job on kind of the integration, but just remind us what the -- again, the revenue and expense synergies were because I guess we're bumping up on a year, I think that would help?

Yes. Kevin, if you go back to -- I think when we originally announced the deal, now I'm kind of losing track of the quarters. But at one point in time, I think the expense synergies were in the $80 million to $90 million range. I think the last update that we gave that we expected those to be in the $100 million range. And as John said, now we're kind of moving into BAU, we'll continue to look for opportunities. And we haven't stopped even though we kind of exceeded our target, and I think we have ideas certainly in areas around procurement and things like that, I think there's additional opportunities. But that was kind of the last update on the expense synergies. And then I think the update we gave on revenue synergies was a current year update. We expected it to contribute 30 to 50 basis points of growth this year. I would say we're probably on the high end of that. And as John said, we're building momentum.

And really, listen, I think that the expense synergies are not why we did the deal. I think they probably justified the purchase price, but really the value creation opportunity longer term with this deal is the cross-sell. We know we're extremely effective and have driven a lot of growth in our model selling and expanding the share of wallet within our existing client base. When we look at where that growth has come from, our higher-value solutions, ASOP retirement solutions, those are solutions that John mentioned, play well, more upmarket. And so listen, I think we're excited about the opportunity. Paycor average client size is quite a bit larger than ours. And those clients are more apt to have some of the needs that those solutions meet.

We're trying to be intentional and cautious and thoughtful in going after to the opportunity. We know that we're extremely effective at doing it, might not always be the best client experience. And so we're trying to go after it the right way, and we're building a lot of momentum there. And as we move forward, we expect to continue to be able to capitalize on that opportunity.

Helpful. And then just a real quick follow-up. John, you had some great commentary on the AI opportunity. As you think about AI across 100-person client as opposed to an 8, is the go-to-market strategy on that different in terms of the consumption patterns? Or how are you positioning for -- because obviously, you serve a terrific market from kind of micro to medium. Just any thoughts on the shift in the go-to market through an [indiscernible]?

Well, I think -- Kevin, I'll take a shot at it. As I said, for the vast majority of our clients, we are their HR department. And you mentioned an 8-man company, they don't have an HR director, right, probably do have a payroll person. And I think the thing that you find with our ASO and our PEO business is that a lot of the clients are forgoing building that capability, right? So what they're saying is why would I build a department when I can leverage Paychex at scale, their technology, now you get their data sets and our insights and our HR expertise and depth of knowledge. And oh, by the way, we have actually employment lawyers on staff that support those people. So you're getting a lot more capabilities. So people are avoiding building HR departments. So I think the value proposition there is I'm going to leverage something at scale. And AI really makes -- if you're a skilled player, really makes a big difference is what I'll say you because I have a lot more insights about what restaurants are paying in Rochester in New York or San Francisco. I've got that data. I can bring that together and I'll present it in a way to give you advice. If you had your own HR Director, you're not going to get that.

So those are things we can do. When you get into 100-plus and I would actually say even larger than that, has been a pleasant surprise to us as we've had more conversations with the Paycor client base is how much they're looking for our support. So now you're talking at 250- or 500-person company that does have an HR department that's probably understaffed and under equipped. And we can bring our expertise, our technology, our additional support staff and begin to augment their HR organization and allow their people to spend more time on strategic HR activity.

So I think when you start looking at companies trying to figure out how do I become more efficient, what I think you're going to find companies ask themselves is, yes, do I buy AI into my HR department and try to make it a little more efficient? Or should I really radically think about my HR department differently, right? Should I go and leverage someone who can provide both the tools and the people and have the breadth of the data we have to provide the insights, is that a better alternative? And that's a traditional enterprise HR outsourcing value proposition. I think AI allows us to do that at scale and do it at all sides of the market.

So one of the things we've actually begin to introduce at Paycor is that they didn't have as they managed payroll and a managed benefit offering. So now we're typically -- the tech players say, here's the tool knock yourself out. We're now and we're getting clients that are asking us, would you mind doing it for us or doing it with us. And so now we're approaching that market with either, you can buy our tech and get technical support or you can come and we can do it for you. So I'm really excited about the opportunity here. And I think at scale, AI takes large data sets. We have large data sets, and I think we can we can add value to our clients in their HR departments, regardless of whether they are 8 people or 100 people.

Our next question comes from Samad Samana with Jefferies.

Good to hear it sounds the trends are getting pretty good. You had mentioned recently that maybe the initial land per client was a little bit smaller than historical or like fewer add-on modules at the point of sale. I'm curious if you've seen that trend change as well if that was a onetime kind of occurrence what you saw last quarter? And if that's improved, and then I have 1 follow-up question.

Yes. Samad, I would say that the market has been relatively stable in that regard. I think we probably had higher expectations going into the year about the number of modules that we would be able to add and I would say that did not change much in Q3 selling season from what we saw before.

Understood. And then in the PEO business, I think that as we all try to figure out what's happening underlying the hood in terms of different verticals and what the employment outlook looks there. Can you remind us what the kind of vertical exposure inside of the PEO businesses, broadly speaking, versus let's call it, white collar, blue collar? And then related, just as you think about the high single-digit PEO WSE growth, how much of that is driven by net new deals versus headcount growth within the installed base?

Yes. So on the industry thing, again, as big as we are, we take every -- we're very broad in terms of where we are. Now I would say that when you look at our aggregate business because we did an analysis on this, and you look at the actual job codes of our employee bases across the business, and I would say there's not a major variance in the PEO business, we skew a little bit more towards the blue and gray than what you would see in the general workforce. Again, some of that has to do with large enterprises are more white color. So you get 5,000, 10,000 have more white collar type of jobs. So a little bit more blue and gray across the business, and I think that applies to the PEO. We had good net new client and worksite employee gain in the PEO.

And I would say that the entire driver. I mean, employment has been relatively flat. And it is most years. I mean it's driven by the double-digit demand that we talked about, Samad, as well as the record retention. So it really is net new is driving the growth in worksite employees.

We'll go next to Ramsey El-Assal with Cantor Fitzgerald.

I wanted to ask about something you mentioned, which was that Paycor bookings had reaccelerated to pre-acquisition levels. How should we think about the bookings conversion to revenues for Paycor relative to legacy Paychex? Do the larger clients translate into sort of a slower conversion process or not so much?

Yes, it is a little longer than what we're accustomed to. I think that's a fair, so there's a couple of quarter lag, as nerves I can tell. Again, just what I see in the data is a couple of quarters.

It obviously depends on the size of the [indiscernible], but it is much longer than ours, where you could sell them and implement them in the same day, same week. So yes.

And is that the same for -- I mean, that would -- I understand that would be the case for sort of a new client implementation, but does that also apply to cross-sell or new product attached? Or is that something that you can kind of turn on more quickly?

Yes, that's far more quickly. I mean, again, those cadences, if you recall, one of the things, again, that we did is to drive all the disruption upfront. And we -- so we integrated all of our ancillary products than we did I think it was in probably the first quarter post the acquisition. So those things are very similar to the legacy Paychex.

Our next question comes from James Faucette with Morgan Stanley.

I wanted to ask a quick macro question and I guess, tied to margin question is you mentioned that you still see kind of a tight labor environment. Just wondering if you can provide any anecdotes or color on that comment? And then as it relates to margins, I know you said that you expect there's some margin expansion to go. Just wondering how we should think about the Paycor integration and how that matures and getting past some of these acquisition-related costs because they still look elevated? Just looking for a little color on the timing around those couple of things.

Well, I think on the macro side, I think what we said is and what we see is that it's been relatively stable. It's really a low fire and a low higher type of environment right now. We've not seen a significant change in the -- in this fiscal year in terms of the small business index that we report. And again, I think we're in a dynamic environment right now, where, again, what we hear from clients, particularly in the small end of the market, less than 50, is continued inability to find qualified people for the jobs that they have open, and we're doing a lot of things to try to support them there. And then I think you got a degree of potential hesitancy to add in this uncertain environment as you move up market. But again, when we look across the business, it's been relatively flat employment levels.

Yes. And just on the integration-related stuff question as it relates to margin, James, I mean, we're backing a lot of that stuff out. So that's really not included in the adjusted operating margins. I think if you were to look at our margins from a GAAP standpoint, they're still pretty high, probably in the 40% range. But I think John hit on it, and I think we still think there's room -- as we move forward, as we continue to embed AI in all of our processes across the company, we feel like there's still plenty of room to expand margins. That's certainly part of our DNA, and we're always trying to make that trade-off of trying to find ways to be more productive, more efficient, so we can expand margins, continue to deliver the strong earnings growth that our investors have come accustomed to and at the same time, making sure that we're investing back into the business, which is a priority for us to make sure we have a sustainable model as we move forward. So we'll continue to -- that's been our model and that's how we go about our business here. And I think today, just margins are high from a non-GAAP standpoint. But given some of the advancements in technology, we feel like we still have a runway to be able to shuffle all those different priorities [indiscernible] going to expand margins.

Our next question comes from Daniel Jester with BMO Capital Markets.

This is [indiscernible] on for Dan Jester. Just a quick one from me. I was wondering if you guys quantified how much impact the annual form filing revenue had on the business in the quarter?

How much impact I had on -- I mean it's always a large number in Q3. I would say it's probably consistent with maybe where it was in prior years. Obviously, it's pretty high margin revenues. So that's why you see that the higher margins in Q3 relative to the rest of the year. I'd say the 1 comment that they're related to the year-end Finally, we definitely saw a little bit better price realization there discounting on that was better than what we had seen historically and certainly a little bit better than what we had assumed in our forecast. That is a lever that sales reps can use particularly as they're getting towards the end of the calendar year and selling new deals, that's kind of a discounting lever that they use. And we fly a little bit blind in finance because we don't really know how that's going to come through until it actually builds in January. And I would tell you that the discounting on it in the price realization was a bit better than what we assumed. But not a big growth driver year-over-year and similar performance probably than what we've seen in past years.

Our next question comes from David Grossman with Stifel.

I think last quarter, your bias was the low end of the revenue growth range. And I'm just wondering and reiterating the guide that are we still favoring the low end? Or just given some of your commentary about the third quarter and going into the fourth quarter, are you feeling better about the business and feeling maybe we're better than the long end?

Yes, I think we would stay where we're at, Dave, that's why we reiterated as we mentioned. Listen, I think we are a little bit conservative than what we guided towards in Q3. There were some puts and takes. I mean, obviously, we feel good about the business. We feel good about the business last quarter as well. It's nice getting through Q3 and throwing up the quarter that we had John mentioned a lot of positive momentum. I'd have to say, it's probably 1 of the stronger selling season that I've seen in a while, and we have a lot of momentum in a number of businesses. So we feel good. And obviously, that translates into the P&L further down the road, particularly when you're talking about the enterprise space. And so I'd say largely the back half, as I mentioned, is in line with our expectations, and that's why we're kind of leaving it where we had said it was going to be last quarter.

Got it. And sorry to kind of stick on the financials here. But just you did make a general comment about a certain level of comfort with where consensus was for next year. And I know you don't want to make any specific comments about next year. But is there anything now that you're a combined companies that -- how we should think about pays or pricing and management solutions going into next year, particularly given now that we've got Paycor in the base? I know it sounds like pays look like they're pretty stable, but I thought I should just ask the question. Anything you want to call out there and either pays or pricing.

No, David, I don't think there's any changes that we're making in any of our assumptions. I think, as you know, we had clients of all sizes before we had Paycor, we've added more upmarket, but I think relative to our assumptions and what we're expecting, we're expecting very similar macro environment that we're seeing right now in a very uncertain time. And that's the other thing that I'm sure Bob and I are going to be having a lot of conversations about. And by the time we consult with the Board and in a few months, and we come back to you, hopefully, we have even more certainty about the external environment and what the risks are going in to '27. So we're trying to be prudent here. As you can imagine, this is a very unique time on a macro basis. And every day something could change that could impact where we are.

Right now, we feel in good shape. What we're seeing is stable, a macro environment, no signs of recession any of our data or indicators, nothing that would indicate that we would change what we're thinking in terms of pace on any of our segments at this point in time.

Our next question comes from Jacob Smith with Guggenheim Securities.

A quick one. Just your second company in the mid-market through Paycor, can you really talk about expanding headcount to capture opportunity? Just what are you seeing out there that's giving you conviction?

Well, I think the key thing is going into that, we have a list of -- we know who the clients are and prospects are, and we have territories and we have open territories that we want to fill. And so we're continuing to expand that. I think before we bought Paycor, they were expanding headcount because they saw more opportunity. And we believe now with our comprehensive offerings that we have, the opportunity has expanded. And so that's what gives us confidence to be able to expand the headcount and go after and capture the upmarket, not only for HCM, but as I said, really, you're bringing our entire HR advisory value proposition to the enterprise market.

Our next question comes from Ashish Sabadra with RBC Capital Markets.

I was wondering if you could provide some color on the year-on-year growth in Paycor in the quarter? And any -- if you could quantify the contribution for form filings for Paycor in the quarter?

Yes, Ashish, I mean, we -- I think as we've talked about in the past, the lines are somewhat blurred and have become increasingly blurred between what's Paycor and what's Paychex based on our early on decision to integrate those 2 businesses. And so I think if we look at it, our best estimate is if you were to look at the organic growth of the Paycor business, it was consistent in Q3 with what we saw in the first half of the year, which is in that upper single-digit range. I would tell you what's less blurred, and this is how we'll talk about the business as we move forward is when we look at our enterprise business. So when we look at our client base above 100 irrespective of whether which sales organization sold, at which platform that it was on -- that business has been growing. I would tell you, in the first half of the year, it was growing upper single digits. And in Q3, it grew around 10%. And so that's how we're managing the business, that's how John and I are thinking about it. That's how we're going to market.

And as we move forward after we anniversary the acquisition and we provide color on the different areas of the business and how they're performing, that's how we're going to be looking at it. And again, I think that's similar and maybe not too different than what the other assets in that space are going at. And our expectation would be that we would prospectively be growing at or above the other assets in that segment of the market, and that's currently where that enterprise base performed in Q3.

That's very helpful color. I was just wondering if you had some initial thoughts on pricing for next year? And how does that trend compare to your historical range? And also maybe a quick one on discounting. You made some comment around discounting was much lower. I think that was specifically performance filing. I was wondering if you could comment on discounting for ASO in general?

Yes. So I'm going to say this. We're going into our budget meeting. This is where we discuss competitively how we want to position ourselves going into the next market. We have a tradition of being able to drive value to our clients and get price accordingly. So I'm not going to make any comments on how we're going to set pricing going into next year at this time. So I don't want to give anybody a heads up. So -- but I think our model and our long-term model is still in existence and viable, but we're not going to talk about the exact ranges we're looking at.

Our next question comes from Scott Wurtzel with Wolfe Research.

Just going back to the. I mean it sounded like your commentary on enrollment sounded pretty positive. And I remember, I think you guys made some as the benefits of offerings and everything. But I also wonder, is there any elements of you think that employees are maybe just sort of adjusting to this higher health care premium inflation environment and that could also be kind of helping to drive some of this enrollment growth that we've seen as well?

Yes, Scott. I think everyone is adjusting. I think we adjusted our plan designs. I think employees are adjusting in terms of what they're going to do and employers are adjusting how they're going. I mentioned the use of AI. I will say this. In test where AI was used and where it wasn't, the choices that employees made, I think, improved their outcomes and improved our outcomes. So -- and what do I mean by that? As you know, you can immediately go to the cheapest plan. But given your -- the circumstances or what you spent last year or changes that may have happened in your life relative to dependents, that may not be the most economic plan for you to participate in these AI tool's ability to model that for you and for you to maybe make the middle plan choice versus the lower end plan choice as I said, a better outcome for the participant. And of course, that impacts a benefit for us as well because it's a higher price plan.

Our next question comes from Kartik Mehta with Northcoast Research.

John, you talked about Paycor revenue synergies as we go into FY '27 and the opportunity to really take advantage of that. I'm wondering how the sales force alignment is going because I'm guessing that that's part of the revenue synergies that you'd be able to capture?

Yes. So on the alignment question, just so everyone's kind of clear card and this is -- I think this is the challenge and hopefully, don't talk about Paycor anymore going forward. Because Paycor for us is a brand that we're using to go and target the enterprise market as we're designing 100-plus. And we've taken all the assets of the company regardless of where they were, and we've placed them in that business unit for that unit to focus on that particular market. We're doing marketing there specifically for that target segment. So now we're spending marketing money in that segment. We're putting sales reps into that segment to go after that segment. And we're going to capture as much of the market as we can at 100 plus. Now once, let's say, a lead comes in digitally, from marketing spend at Paycor. And we look at that lead and we go, "Hey, that looks like a great PO opportunity. We're going to move that over to the PL right? And so all of a sudden, you've got an expense that's on the Paycor side of the equation. Same thing is happening with our reps as well. So we've got this segment, if this is your question, the segmentation of the sales force is clear. how we're going to market from a brand perspective is clear. And then what we're doing is both in terms of using our AI and also our incentives for all of our sales reps is making sure we have every sales rep in the market, looking and representing the entire capabilities of the company.

And so that goes back to every rep is representing the comprehensive capabilities of the company, whether that's technology, whether that's the platform, whether that's do-it-yourself, do it for you or do it with you. We're offering every rep and every market the capability to do that, if that makes sense.

Yes. And then just a follow-up question, Bob, and this might be crazy considering it's Paychex, but I thought I'd ask anyway. Any thought about potentially using a little bit of leverage to buy back stock considering where the stock price is?

Yes. I mean, are listen, I think you saw our -- we just recently announced a new share back authorization significantly larger than what we've had in the past. And when you look at there's obviously -- at least in my opinion, there's a disconnect between the underlying fundamentals of the business and the valuation. And that obviously, I was always talk to buy low and sell high. And so you've seen us be a little bit more opportunistic there. I would tell you, I don't think we've necessarily changed our overall philosophy around share buybacks, but we know we're going to have to buy shares back in the future to offset dilution. And we've done more of that this year than what we normally would have, as you guys can see in some of the disclosures.

So I don't ever want to say never. Our leverage is pretty low. That's obviously a Board-level decision. And as you can imagine, I'm assuming a lot of CEOs and CFOs are in this market are having these conversations with their Board on a regular basis, and John and I are certainly doing that. And so we'll continue -- we have lots of priorities from a capital allocation standpoint, certainly, we want to continue to invest in the business. But we'll continue to have those conversations. So I don't want to say never, but it's something that we'll continue to evaluate.

And our next question comes from Jason Kupferberg with Wells Fargo.

I wanted to ask about Management Solutions specifically. I think the organic growth was 4% in the quarter. I think that's the same as we saw last quarter. Do we expect that to accelerate in Q4? And if so, is that because you'll start to lap Paycor during the quarter? Or would there be other accelerants we should be considering?

Jason, yes, I would say, I think it was 4% in Q2 and 4% in Q3. I would tell you, 1 was a round up and 1 was probably run down. And so you're also seeing sequential improvement in the organic growth of Management Solutions as well. Part of it is, when you get to Q4, we would expect that to continue and maybe accelerate a little bit to the point that you're making, you're anniversarying the acquisition so now we have a scale business that's growing faster than the overall growth of the business. So that would be accretive to the organic growth. And then we're continuing to build momentum on the synergy opportunity. And I think that showed up in the Q3 selling results, and that will eventually make its way into P&L. And so you should see improvement in Management Solutions organic growth as we move into Q4 as well.

Okay. Understood. And then just a clarification. I know we're not changing EPS guidance, but we did up the float income guide a little bit, which I would have thought would have lifted the EPS, I don't know, maybe 1% or so. I mean there's only a quarter left in the year. So just curious, is there just some conservatism there leaving the EPS guide as is? Or are you going to reinvest some of that upside...

It's a combination of both. I think we're certainly going to look for opportunities as we move through the balance of this year to invest. We want to get out the gate strong when we get into next fiscal year. So it's always balancing those trade-offs, Jason. John and I will manage through that as we go through the quarter and see where the opportunities are. But it's really a combination of maybe a little conservatism in where we may potentially want to take advantage and make some investments as we end the year.

The great position we find ourselves in is we have plenty of opportunities for investment coming out of the third quarter that have the opportunity to both accelerate growth and accelerate margin expansion. And that's -- we've got a lot of decisions to make over the next couple of weeks as we get to our planning process. And anything that we're thinking is a good investment in the first quarter in '27, I don't think that we want to wait to make that investment. So we're certainly trying to contemplate that as we go into our planning session next week.

At this time, there are no further questions in queue. I will now turn the meeting back to John Gibson.

Okay. Well, thank you, everyone. Just to highlight, we delivered a strong double-digit revenue and earnings growth continuing just really to reflect, I think, very disciplined execution and focus of the teams. I do want to call out, we're approaching a 1-year anniversary mark of the acquisition of Paycor. And I want to call out the Paycor team in particular. Group's been through a lot. If you think back a year ago this day and what we were starting to prepare for and take the organization through. And I think the way that we've responded and the way we've continued to come together and build momentum as this fiscal year has come together has been just really impressive. I said it a year ago, we will be better together and we are better together. And I'd point to you the example of what we did in the PEO industry and how we focused on that strategically many years ago. I think that's a good model for us to replicate as we go into fiscal year '27 and beyond in the enterprise space.

So I think Paychex has never been better positioned than it is today. I think we've differentiated ourselves in the marketplace repeatedly. I think in this new AI era, our scale, our breadth our capabilities from an expertise perspective and the fact that we're dealing a mission-critical type of work where errors are costly, I think that you're going to continue to find more and more clients of all sizes turn to Paychex to be their HR department and to provide them leading-class technology and advisory solutions in the years ahead. So I like where we're positioned, and I want to thank you for your interest in Paychex.

This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good morning, and welcome to Paychex Second Quarter Fiscal 2026 Earnings Call. Participating on the call today are John Gibson and Bob Schrader. [Operator Instructions] As a reminder, this conference is being recorded, and your participation implies consent to our recording of this call. I would now like to turn the call over to Bob Schrader, Paycheck Chief Financial Officer.

Thank you for joining us to discuss Paycheck second quarter fiscal 2026 results. Our earnings release and presentation are available on our Investor Relations website. We plan to file our Form 10-Q with the SEC within a couple of business days. This call is being webcast live and will be available for replay on our Investor Relations portal.

Today's call includes forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference non-GAAP financial measures. A description of these items along with the reconciliation of the non-GAAP measures can be found in our earnings release. I would now like to turn the call over to John Gibson, our President and CEO.

Thanks, Bob. I'll start with the second quarter business highlights, and then Bob will cover financial results and our outlook. And then afterwards, of course, we'll open it up for your questions. We delivered solid second quarter results. with revenue up 18% year-over-year and adjusted operating income grew 21% over the prior year, driven by higher productivity as we continue to demonstrate our long-standing capability to be the best operators and begin to drive AI into our operational systems and overall DNA as a company.

We are proud of the significant progress we've made in advancing our strategic priorities, including the Paycor acquisition and the integration and our data and AI initiatives. We continue to make progress on the Paycor integration. As best operators, we continue to identify additional expense opportunities and now expect approximately $100 million in cost synergies for fiscal year 2026. We also remain on track to achieve the revenue synergies targets we set for this fiscal year. We continue to strengthen broker relationships through our Partner+ program and refreshed value proposition centered on delivering greater value to our partners as we continue to expand and fully integrate the Paychex Enterprise team with Paycor.

Cross sales efforts continue to gain traction, including broker referred PO deals and with larger clients than initially anticipated. We continue to make steady progress executing our go-to-market technology and cultural integration initiatives that are critical in an acquisition of this size, scale and complexity. Our PEO business continues to perform well, achieving market-leading mid-single-digit worksite employee growth, driven by strong demand and near-record retention.

Our PEO solution empowers small businesses to offer competitive benefit packages on par with Fortune 500 companies, supporting their efforts to attract and retain talent in a tight labor market. October enrollment for our at-risk Florida MPP plan came in largely as expected and early indications for January enrollment gives us confidence in finishing the year with solid revenue growth in the PEO. Regarding the labor market, our clients' workforce levels remained relatively stable with flat same-store employment growth this quarter.

Our Small Business Employment Watch Index, while down from last year, has remained relatively stable throughout 2025, and our other indicators show no signs of a recession at this time. Small businesses continue to face challenges, sourcing qualified talent in competitive labor markets, areas where we believe our solutions are uniquely positioned to add value. They are also looking for ways to manage cost. We remain confident in our value proposition and demand for our HR technology and advisory solutions continues to be in line with our expectations.

We are halfway through the year and pleased with the progress we've made to date. As we look at where we are today in the middle of our busy selling season, we have seen some trends that impact a few key metrics. Bob will provide more color about how we are thinking about those in context of the balance of the year. Given the increased focus on AI, this morning, we published a presentation outlining why we believe Paychex is well positioned to succeed in this AI era, why we see ourselves as less exposed to AI employment risk and how we are capitalizing on AI-driven opportunities. I encourage you to review it, but I'll share a few highlights. Starting with AI-related employee risk.

We believe our portfolio is less exposed due to our client base and our business model. Over 70% of our clients' employees work in blue and gray collar industries that are harder to displace and the majority work at smaller businesses where staff often wear multiple hats and AI investment tends to be lower. If AI disrupts large firms disproportionately, talent may shift to smaller businesses, benefiting our clients. Meanwhile, our clients continue to face talent shortages and AI can help improve efficiencies to address those gaps.

From a business model perspective, our revenue model has a significant fixed base fee component and has for years, providing downside protection against employment fluctuations. We also differentiate from tech-only providers by combining advanced technology with HR experts who provide strategic guidance and nuanced advice, which is difficult for our competitors and AI to replicate. In terms of our differentiation, AI success hinges on data quality and data scale with one of the largest proprietary data sets in the industry we believe we have a powerful competitive advantage to drive superior AI performance.

In December, we proudly announced our patent-pending AI-powered knowledge mesh system, which transforms unstructured data such as phone calls and e-mails into a connected searchable network. This innovation unlocks deep insights and enables smarter workforce management, positioning us at the forefront of AI-driven solutions. Paychex has a strong track record of delivering pragmatic AI solutions focused on measurable outcomes such as time saved and friction removed from everyday processes. We are accelerating AI innovations that enhance efficiency and improve client outcomes while fueling our growth. We recently launched our Gen AI-powered employment law and compliance platform that helps clients and Paychex HR experts efficiently navigate thousands of constantly changing federal, state and local laws, generating compliant documents, and it stays current with the regulations.

Since its deployment, we have seen strong adoption and frequent utilization by our HR experts. This advancement is key to our strategy to have the leading expert embedded technology platforms for businesses of all sizes, and we will be integrating across our 3 platforms: SurePayroll, Paychex Flex and Paycor. We are proud that both Paychex Flex and Paycor platforms were recognized as leaders in [indiscernible] 2025 HCM technology and Gen AI evaluation.

This distinction highlights our strength in delivering intelligent HCM solutions that enhance client outcomes, streamline HR processes and supports our partners. We are excited to share that our first agenic AI pilots or a success this quarter. They autonomously handle thousands of payroll calls and e-mails with nearly 100% accuracy decreasing payroll processing time and enabling our service teams to focus on higher-value strategic advisory support.

Weare continuing to invest in these capabilities and are actively exploring additional applications across the business. In sales, we are leveraging a new Gen AI platform to drive revenue growth and improve efficiency by equipping our sales teams with instant answers tailored strips, objection handling and prospecting insights. These AI-driven advancements reinforce our commitment to being the digitally driven HR leader by reinventing the HCM experience as AI first. By leveraging our unique blend of innovative HCM technology, our unrivaled data and the deep HR expertise we believe Paychex is well positioned to capitalize on the evolving AI landscape to drive growth, expand margins and strengthen our leadership in HCM.

I will now turn the call over to Bob to discuss our financial performance and outlook.

Thank you, John. I'll begin with an overview of our second quarter financial results, followed by an update on our fiscal 2026 outlook. Total revenue increased 18% over the prior year to $1.6 billion. Management Solutions revenue grew 21% to $1.2 billion with Paycor contributing approximately 17 percentage points to the growth. Growth was primarily driven by product penetration and price realization, but was moderated primarily by softer-than-expected revenue per client.

PEO-owned Insurance Solutions revenue increased 6% to $337 million, driven primarily by continued solid growth in the number of average PEO worksite employees as well as an increase in PEO insurance revenues. Our PEO continues to perform well, but our insurance agency remained a headwind in the quarter due to continued weakness in workers' compensation rates and lower health and benefit volumes. Interest on funds held for clients increased 51% to $54 million, reflecting the addition of Paycorp balances and higher realized gains due to some strategic repositioning and our long-term investment portfolio. Total expenses increased 27% to $986 million, primarily driven by the Paycor acquisition.

Excluding Paycor, we estimate expenses grew low single digits. Operating income margins were 36.7%, and adjusted operating income margins increased by approximately 80 basis points year-over-year to 41.7% in the quarter, driven by increased productivity and continued cost discipline. Diluted earnings per share decreased 4% to $1.10 per share and adjusted diluted earnings per share increased 11% to $1.26 per share.

Our financial position remains strong with cash, restricted cash and total corporate investments of $1.6 billion and total borrowings of approximately $5 billion as of the end of the quarter. Operating cash flows for the quarter were $445 million, largely driven by net income. And during the quarter, we returned $54 million to shareholders in the form of cash dividends and share buybacks. And our 12-month rolling return on equity remains robust at 40%.

I'll now turn to our guidance for fiscal '26. This outlook reflects the current macro environment, which has some uncertainty. We are reaffirming our fiscal '26 outlook with the exception of raising our earnings expectations. However, given some of the trends that we've discussed earlier, we would now expect to come in towards the low end of the ranges for management solutions, PEO-owned insurance and total revenue. Interest on funds held for clients is now expected to be at the high end of the range of the $190 million to $200 million range that we previously provided, and we are also raising our earnings expectations with adjusted diluted earnings per share now expected to grow between 10% and 11%, and that is up from the 9% to 11% we shared last quarter. And our effective income tax rate for the year is expected to be approximately 24%. All other guidance metrics remain unchanged.

So let me turn to the third quarter just to provide you some color with where we would expect to come out in the third quarter. We anticipate total revenue growth of approximately 18% with an adjusted operating margin between 47% and 48%. Just as a reminder, Q3 is one of our larger quarters. We have both from a revenue and operating margin standpoint, driven by the higher-margin year-end fees that get recognized during the quarter. I'll now turn the call back over to John.

Thank you, Bob. We will now open the call for your questions.

[Operator Instructions] Our first question comes from Mark Marcon with Baird.

And Nice to see the earnings strength. The stock is down 3.5% right now. And you've got so many positive things to talk about, but wanted to address initially the underlying reason, which seems to be around Paycor when we go through the math, in terms of the contribution from Paycor. It looks like even if we adjust in the form filings from December, that the growth wasn't significant. So I was wondering, it seems like it's optics and there's obviously integration challenges. But can you just initially address this, what you're seeing with regards to Paycor. And then I'd like to follow up.

Sure, Mark. This is Bob. Happy holidays. I'll address the first question. First of all, I think as we've talked about in the past, we're trying to give our best estimates of what the contribution to Paycor is. I think we've talked about how we've integrated the business. And I think when you do that math, we're giving round number is approximately 17%. I think to give a point specific number would imply a level of specificity that just isn't there given how we've integrated the businesses. But I think when you do that math and whether it's 17%, a little bit north of that, a little bit south of that, as you know, you've already done kind of looking at last year. If you look at their quarter last year, that ended in December. In December is when they have a lot of their year-end processing fees. So you have to adjust, and I know you're trying to adjust for that, I'm not sure that I have your math in front of me. But our best estimate on a pro forma basis. Now you're asking us to explain how it grew versus last year when we didn't own the asset. Our best estimate during the quarter is that it grew between 8% to 9%, and it was certainly in line to, I would say, slightly better than what we saw in Q1.

Yes. And Mark, I would just say -- this is John. I think look, when we looked at it against how we're measuring it, we continue to progress well against the opportunities we identified to drive value. We're achieving the revenue synergies that we laid out for this fiscal year for the first half. And quite frankly, we're beating the cost synergies. As you recall, our original target was $80 million. and we've now committed to $100 million, and we have more opportunities we're pursuing. Client and revenue retention in that client base continues to exceed plan and is at their historical levels. activity and bookings continue to accelerate through the first half of the fiscal year. As you can imagine, when we announced the deal in January, a lot of uncertainty, as you can imagine, bookings kind of dropped at that point in time. We finally own the asset in April, we've seen steady progress -- actually see [indiscernible] bookings in the quarter. We're back to pre-acquisition quarters again, after dropping for the announcement. So we feel good about where we are at this point in time. As Bob said, we've integrated the businesses. we're upselling our products and services. Some of that revenue goes to other places. We're moving clients across platforms where potentially the client is not in the best platform position, both in terms of moving Flex clients into Paycor, moving Paycor clients into Flex. And so there's a lot of movement going on. It's extremely difficult to get with precision because we're not looking at the business as Paycor Enterprise, 100-plus market segment. I hope that helps.

That does. And just as a follow-up, just 2 quick ones. Quick commentary just with regards to -- so I know we're halfway through the selling season. But what are you seeing so far? And then secondly, just on the cost side, you're clearly doing a great job, and I'm particularly excited about what you're talking about with regards to the genic pilots that have handled things with 100% accuracy. What does that make you -- how does that make you feel with regards to the longer-term cost synergies that you could end up getting from some of these efforts? And happy holidays.

Let me [indiscernible], let's start kind of maybe with with demand. I mean, I think we feel good about our competitive position and staffing going into now, as you know, in the lower end of the market. We're into the -- we're not even into the selling season yet. Q2 was in line with our expectations and past Q2s. I think demand for our solution remains consistent with historical levels, really no surprises there. Our activity is actually up pretty significant. What I would tell you is what I see is I see a lot of shoppers out there. Again, we know that [indiscernible] very cost conscious right now. And I would say, prospects and clients are looking for value in managing their cost very carefully. That's what we see in the market. We feel good about where we are in terms of where we are at this point in the selling season and feel good about our setup going into the remaining of the selling season. Look, on the cost side, look, we take great pride as a company in our DNA of being the best operators I think we have been working with, I don't know whatever AI was called before it was AI. We've been doing that, that's built in. Certainly, the revolution that's occurring in the speed of the advancement as we're getting our hands on these tools, we've now deployed to every one of our 19,000 employees. And we have a process by which we're encouraging them to build their own AI models to help them each and every day. So I think we're just scratching the surface of what the potential is. What I would tell you is, at least strategically for us, we're going to continue to balance what we've always done, which is we're going to continue to grow the business, invest in growth and innovation, the top line of the business. As we do that, we're going to continue to look for ways to expand margins proportionally to that. And then we're going to invest, and we're going to continue to invest in our back office, one of the great opportunities that I see for us with AI and some of the things that we're doing with our patent-pending mesh network is we're really putting our service providers in a position now where they can be true advisers. And I think -- what we've learned in our advisory side of the business is when we have an advisory relationship with the client lifetime value goes up, retention goes up, our ability to upsell goes up. So I think you'll see that as we displace some of the transactional work we're going to do a lot. We're going to invest a lot in really repositioning our people to be more proactive and be proactive advisers for our clients and look for ways that we can use our data assets and information we have to provide higher value to our clients. And we think if we do that, we're going to improve the lifetime value of the customers. And I think we're going to create a competitive moat that's going to be very challenging for others to have. I encourage all of our competitors at 1,000 HR professionals to their business model next week.

We'll take our next question from Bryan Bergin with TD Cowen.

Happy holidays. Let's start on the fiscal '26 growth guide here. So I just wanted to dig in on your comment there, Bob, on the great comfort at the low end of the range now. I know you noted penetration in price realization, the driving growth so far, but I guess, softer-than-expected revenue per client. So can you just talk about that a bit more?

Yes. I mean it's really across the board and in any one specific business. I mean -- obviously, when we look at those 2 items that you highlighted, price realization, product penetration drive revenue growth and revenue per client growth and that has been strong. It just was a bit softer than what we assumed in the plan. I'd probably call out a few areas -- we are seeing a little bit smaller deal sizes and John can comment on that. We've seen a little bit less attachment upfront at the point of sale. Obviously, those things impact revenue per client. And then I would tell you, on our HR outsourcing solution, which is one of our highest value solutions, volumes have been in line or better than our expectations, but it has been at a little bit softer rate than we assumed when we put together our plan. And so as we sit here halfway through the year, I would say the year has largely played out in line with our expectations, both from an execution standpoint. Certainly, the macro has held up. PEO has been strong, actually probably has performed a little bit better through the first half of the year. And -- but we've seen some of these trends and revenue per client. We're assuming that will continue in the balance of the year. We still have the important selling season in front of us. And so we thought it made sense to kind of steer more towards the low end of the range. I think when you look at consensus, that's where most people are. I think we had gotten some feedback that people thought we had too much risk in the back half. And so those are the things that kind of caused us to guide more towards the low end, Brian.

Yes. Brian, I'd just add from a demand and market perspective. I think Bob said it, but our average revenue per customer is up year-over-year, and it's consistent with what we've historically delivered. I think our certain view was, given all the additional products and services and additional modules, I think we're now up to close to 100 different additional products and services that we could sell is -- I thought we were well positioned. What I would tell you is I think prospects and clients are looking for value and they're managing their costs very closely. So I look at setting a rep into the field and they have 3 bundles good, better, best to sell. And we're making some predictions about historically how people have picked those various bundles. What I would say is I think people are being careful in what they're adding. So we were generally adding 2 modules additional our 3 modules, maybe we're adding today. The good thing is we're getting the clients. Now we got to go back as we've had a track record of doing is going back into our base and upselling them as times go forward. So that's just what we see in the market right now, like you said, a lot of activity, the proposal activity and the meeting activities are are solid. I just think there's a lot of shoppers out there. That's what I would say.

Okay. Understood. And my follow-up is on Paycor. So the 8% to 9% that you mentioned earlier, is that a adjusted to remove out the December 4 filings? Just any context around that, please?

Yes. Absolutely. Again, as I mentioned, Bryan, it's an estimate at best, but I assume that most of you guys would go back to their Q2 and look at what the recurring revenue. My team did that and we're like, well, that doesn't make sense. And then we realized that, hey, December, we didn't own the asset last year, but we realized that they had all their form filing in December. And so when we adjust that and compare apples to apples and adjusted to our fiscal quarter and you do that math, that's where you get to the 8% to 9% pro forma growth.

We'll move next to Bryan Keane with Citi.

Just to follow up on Paycor. Is it still a low double-digit grower? Or should we be modeling more in this 8% to 9% growth territory for this fiscal year?

Yes. I think we generally said, Brian, we expect it to be double digits. I would tell you the revenue per client comments that we made related to maybe being a bit softer than our expectations. It was interesting. It was really across the board, every line of our business. We saw that. And same thing with Paycor, I do think we saw some similar trends with maybe not as much attachment upfront than what we assumed as well as maybe a little bit low average deal size. So hey, we'll see where it plays out as we get through the balance of the year, but I would still expect it to be, if not low double digit, high single-digit grower as we move forward.

Got it. [indiscernible], just probably for everybody because this is where I continually want to make sure everybody understands how we're managing the business. And I understand why you're asking the question, what you're asking it. And Bob and the team are trying to model 2 different companies at the same time. We've integrated the business, and we have integrated businesses, and we're going into the 50,000 or clients, and we're getting set. So remember, we upsell something ASO or insurance or whatever we upsell that money -- that revenue is going to show up somewhere else in the P&L. We're also -- they had a lot of customers in the lower end of the market. Those guys may have been better off on our Flex platform in terms of what they were looking for, or we had clients in the upper end, the [indiscernible] platform [indiscernible] we're in our P&L that we're moving over to Paycorp because that's a better technology fit for them. So you've got all this geography moving that's going on. So it's very difficult I think for us, too, as we continue to get into this -- into the cross-sell movements that we get into the customer success movements that we're doing that, again, we just really got to begin to look at Paycor as our enterprise segment for Paycheck going forward. We're going to continue to try to do everything we can to guide you guys and give you the information as best we can, but I wanted to at least give Bob and his team some air coverage and some of the challenges that we're creating for them because we're saying we're going to go do this. And it's the right thing to do for the customer, and it's the right thing to do for the shareholders, too.

No, that's helpful. And then just a follow-up on managed services. So the smaller deal sizes, the less attachment and then the softer rates in -- are those all macro driven? Or is anything fundamental happening there, competition causing some of that softness?

Yes. There's nothing competitive that I'm seeing. It's all macro. But what's interesting is when you go -- remember, we've got market segments set up. So we've got various market segments based upon client size, and so we start there. Then we got multiple bundles for each of those segments that each of the sales forces go. What's interesting, you go to retirement, and we go out in the retirement market. And typically, we see an average client size of x. And lo and behold, the average size is lower. Okay. Now you we go over into our under 10 segment. go out there. We're selling the volume. We have an average number of -- we have an average number of client size. We also have a regular distribution of our 3 packages they can sell or old in that market. Average size is lower and we're seeing more clients pick the lower end bundle. They're still buying, but they're buying a lower bundle. They're not buying as many in the middle bundle. Then you go to the mid segment. And you see some of the similar trends that are going across each of the segments, and you just begin to realize that there is a macro. What I think you're seeing is what I said, which is I think there's a lot of people shopping, and I think a lot of businesses are trying to manage their costs. It's not that they don't want to have the bell and whistle, but at the end of the day, they may only be able to afford the bell. And what we got to do is just continue to try to see if we can sell them the whistle down the road.

We'll move next to Tien-Tsin Huang with JPMorgan.

I'm just curious, given the smaller deal size commentary just shared there, any consideration or thought to changing your pricing and packaging of bundles? Maybe there's an opportunity here to sell more at a more value or at a lower price. Curious if this is a normal how you might adjust is really what I'm trying to get at here.

Yes. Well, Tien-Tsin, I would say between SurePayroll, AX Flex and Paycor and the various bundles and options that we have. I think we have everything we need in our arsenal to position the clients. I would say there's more work, and we're still working through this from a go-to-market strategy. We don't have rep selling across all the platforms, like probably we will someday, but that will take time to do. But my point is I think we have everything that we need. I actually view that our pricing is an advantage to us particularly some of the commentary that I hear out there. We have a lot of fixed fee components to our pricing model. We think that's advantaged given the employment situation. So we feel good about where our pricing is. We do have initiatives and effort underway across the 3 platforms to look at that strategically, but that's something that's going to take time both for us to model and for us to execute. But we feel right now that between the 3 platforms and the various bundles and offerings that we have, that we have something pretty much for everyone. And so I feel good about where we are.

No, it does seem like an opportunity, which is why I thought I'd ask the question. Just on -- just my follow-up just on PEO that did come in better. Similar question. Is the insurance rate a bigger selling point here I'm just trying to understand if you're reading it that way, and there's an opportunity to lean harder on the PEO front given this macro situation that we're in perhaps prospects or value in the insurance offering more in this push towards value, your thoughts?

Well, I think the PEO is performing extremely well on all aspects of it. Demand retention really across the board. Like I said, the numbers would be even more impressive for the PEO and insurance market. If we didn't have the insurance agency dragging us down, and we're making some changes there to improve that performance. But we've never been a cheap insurance value proposition and nor do we intend to be. I will tell you that A lot of clients are shopping, health care inflation is a real issue. It probably feeds some of the macro comments I just said in terms of -- if you're a business and you're facing high health care costs, now you got to come up and figure that out. What we did see in our enrollment is we've not seen clients dropping health care at the rate we saw last year, which is a positive thus far. So that's pretty much through and kind of know that. But that puts a lot of pressure when you're getting 10% to 15% increases. So I think we're doing very well externally. I do think that when you look out in the PEO market, there's a lot of very high rate increases going out there. We may be a bit of a benefactor from some of that coming into the market. But again, cheap benefits is not our value proposition, never has been, never will.

We'll take our next question from Andrew Nicholas with William Blair.

I wanted to talk a bit about the upsell motion to PEO specifically. Kind of a 2-parter here. One on just overall Pay core client receptivity to PEO? And then also kind of in this environment and you just spoke to some of the unique dynamics with health care inflation, is the percentage of worksite employees going into the PEO business from your kind of HR MS segment evolved at all? Is there a bigger percentage coming from existing clients than previously? Or has that remained relatively steady in this environment?

Yes. It remained consistent, and the PEO is one of our stronger outside the base organization. So it's probably 50-50, I would imagine somewhere around there. maybe some time until a little more outside the base, sometimes it built some more insight beta, but it's not an inside the base play. Your question on the Paycor side, we've actually been very pleased with the receptivity of the PEO. Remember, our PEO did partner with brokers, insurance brokers already. So that was the one area of our business where we already had a broker relationship program. brokers, insurance brokers tend to use the PEO as one of the alternatives that they position to their clients where it makes sense. And we've actually been very pleased with the early progress and what we've been most pleased with is the size, been very surprised at the size of deals that we've been able to both get on our ASO HR outsourcing, but also on the PEO side. So we are working jointly within the Paycor client base, looking with our customer success leaders as well as with our brokers to make sure that they know that we have this option, and it's a great option for them to consider if their client is facing rate that maybe we can do better at in the PEO.

That's helpful. And then switching gears. I really appreciate the AI investor presentation that you put out including some of the examples of wins and benefits. Is there any way to quantify or maybe it's not in the numbers yet, but kind of the impact on cost efficiency. Like it sounds like you're doing things using Agentic AI to streamline payroll without people. Is that something that is already impacting headcount, you'd expect to impact head count in the future? Or is it more having those same individuals do more with their current hourly availability or capacity?

Yes. Look, I think that we have been using predecessors of AI and early models of AI for decades. Since I've been with the company, it's been a big part of what we're doing. You don't get to our margins. If you compare our margins to other players, unless you're using every tool in your arsenal to be able to drive margins. Now what we're going to do with that margin because I think this is important. Our point of view is what's going to continue to differentiate us is we're going to have experts and advisers embedded into our technology, and we're going to more proactively engage our customers in the small and mid end with our people. And so when we're using these tools, we're making our people more productive. And then we're driving more advisory conversations and relationship building conversations with our customers. That's our goal. Now over time, do I think we can grow our business without adding as much headcount as we historically have. Absolutely. I think that's well -- and we've done that for the last decade. If you go back, if you look at the number of service people we had when we had 400,000 clients versus what we now have with 800,000 clients, I think you would say that we've done that very effectively. And I think that's a model that we will continue to work on.

We'll move next to James Faucette with Morgan Stanley.

A couple of follow-up questions from me. First, on the incremental realized gains on the investment portfolio from Paycor, are those gains included in the guide moving forward? And were they contemplated when you put together your forecast for the second quarter?

Yes. I mean it's definitely in the full year side because it already happened in Q2 and it was contemplated. Maybe I'll just provide a little more color on it, James. I mean this was part of our integration plan. taking over the client funds portfolio at Paycor given they were largely invested short just given our liquidity and financial strength our main priority when we took it over, it was understanding the cash flow needs of it, but really wanted to allocate that long to lock in those balances before interest rates went down. And so that was part of what we did in Q1 when -- and that was our main priority. And when we looked at -- they did have a long-term portion, but their long-term portion, I would say, skewed more on the front end of the curve. And so when we put the 2 portfolios together, and I started looking at the treasury team started looking at our long-term portfolio, it was getting well below what we typically target. Typically, we're around 3 years on average duration, and we are getting closer to 2. So this was an opportunity that was identified early on. We didn't get to execute it on it in Q1, we knew we were going to execute on it in Q2. I had some sense of what the impact was going to be. I didn't know exactly what it was going to be. It's probably a little bit higher than what I thought it was going to be, as you know, interest rates move every day. But this was certainly part of the plan, and I think a big win. [indiscernible] Now that we've taken over the balances. And I would tell you, we now have a more balanced laddering of the securities across the curve when we look at our long-term portfolio.

Great. And then I want to just check in on kind of some of the go-to-market changes you made -- you've talked about territory resets and broker program launches. What are you seeing there? And how are you feeling about the your ability to deliver efficacy? And when do you expect to see the full benefit in bookings momentum?

Yes, Jim, I'll handle that one. As you know, we did a lot of that disruptive work right after the acquisition was announced. We talked about that in prior piece was we tried to move very quickly. We reestablished a lot of new teams, new territories reset that. So a lot of that was done right after the acquisition was [indiscernible] April, May time frame going into the fiscal year. As you can imagine, that was disruptive. And so what we've been focused on is really continuing to just drive execution there, continuing to support the team. So look, we feel good about where we are. That hard lifting is kind of behind us. We've kind of got the model set up. We've got the go-to-market message. We have the Partner Plus program out there for the brokers. Everybody knows what their list is. Everybody knows what they should be doing. Everybody knows what they're selling. And we're continuing to see activity and bookings accelerate through the first half of the year. So again, these things take time. This is very complex, as you can imagine, particularly when you do this much go-to-market disruption. But I'm very pleased that, like I said, every quarter, since we've done this, we've seen improvements the broker network in the Paycor side is still contributing 50% of the bookings, and we continue to see that up, and we actually saw in the second quarter, we got back to booking numbers from brokers that were similar to what it was before the acquisition was announced. So I'm pleased with the progress, and I feel very good about where we are from a staffing perspective going into the remainder of the selling season.

We'll take our next question from Samad Samana with Jefferies.

Maybe first, Bob, just on the question about the guidance and nudging towards the low end. You mentioned in that comment that about that, I guess, you got feedback from investors that maybe there was risk in the back half guidance, and that's partly what drove the recalibration. I guess I just want to understand -- is it the underlying variables in the model that made you think the lower end is better for us to be at because of what you're seeing in the business? Or is it more about derisking the numbers because we all thought it might be tough to hit just maybe help us understand the mechanics and the variables and what the adjustments were to bring that lower end, which implies that back half reduction down.

And maybe I misspoke, Samad there. I mean, certainly, that did not factor into what we did with the guide. I think we felt like the guide when we came out with it in Q1 and last quarter, we felt comfortable with it. I was just making the point that, that -- in addition, we heard that you guys thought we were too aggressive in the back half, but that's not really what drove the guide down. It's really again, I would tell you, through the first half of the year, it's largely played out from an execution and certainly from a macro standpoint, where we expected. It's a couple of things that we highlighted on the Management Solutions side, it is strong revenue per client just a little bit softer than than what we had in our plan, and we talked about some of those reasons. And then on the PEO side, the PEO has exceeded our expectations through the first 6 months of the year. We had another quarter of double-digit demand. We had near record levels of retention. We continue to see strong worksite employee growth. And when you look at the PEO and insurance category, and this is what I was telling everyone was going to happen because you start getting easier compares as you move into the back half of the year and we anniversary those enrollments that we have where we had the headwind last year, sequentially, PEO insurance went from 3% in Q1 to 6%. And that's despite some of the challenges that we continue to see on the agency, John mentioned, we're -- we're working on that, but agency -- the agency has been a headwind. We continue to see some challenges with worker comp rates and lower health and benefit volumes. The PEO grew high single digits in the quarter. So it's really the combination of what we're seeing on the agency side on the PEO owned Insurance business. And then the revenue per client comments that we made on Management Solutions, that's really what's staring us to the lower end of the range ranges. I was just also commenting that you guys were already kind of there from a consensus standpoint and had shared that feedback that you thought we were too aggressive, but that certainly didn't play into our thinking. Although I do appreciate your [indiscernible].

Appreciate that. And then maybe just one follow-up. I know it's been covered about what you're seeing in terms of maybe new bookings and average revenue per customer there. But in terms of pricing inside the installed base on renewals, are you seeing any other -- is it kind of a similar consistent pricing environment where traditional price increases are going through? Are you moderating price increases on renewal, maybe discounting? Just help us understand what's going on inside the existing book of business, both in maybe management solutions at PEO?

No. We continue to drive the value proposition and value in the customer base, and we continue to get the realization that we expected in our plan, which I would also say is higher than what we were getting prior to Pandemic. We've added a lot of product to that. So we've added some things to the bundles to support our clients in understanding why the price is the price, but we've added additional product capabilities, and we've been able to sustain that in the payroll business.

We'll take our next question from Ashish Sabadra with RBC Capital Markets.

This is [indiscernible] on for Ashish Sabadra. Maybe just on the AI presentation report. On Slide 15, as you guys are thinking about the go-to-market strategy and the monetization there, do these AI products lend itself to more pricing power than some of the non-AI products improving kind of revenue per client? Or given the current environment where there's some choice of cost, is it helping offset some of that with the productivity improvement that you're able to show to clients -- and just in general, from a timing perspective, do you see any uplift from these products as they start hitting more clients or there's more traction gain from an adoption perspective?

It's a broad question. I would say that AI is going to help us in multiple ways, improve the value proposition for clients. in terms of our ability to do more for them, probably at less cost, the ability for us to provide more insights. When I look at what we're planning to do across each 1 of the 3 platforms over the course of the next year in terms of redoing the customer experience and making a more AI forward I think our clients are going to love that. And I think that's going to help us not only keep our existing clients, but I think is going to allow us to attract new clients as well. The productization of AI, I think, is still to be determined. And I think there are areas where we will add that into the bundles as a way to enhance and support the price increases that we've just talked about and driving additional value. And then I think there are other components of AI that will have such value to the customer that I think the customer will be willing to pay for that. Think of our retention insights where our clients that are using our compensation insights that we're that we're providing. Again, where else can you get if you're a small, medium-sized business owner, information to tell you whether or not you're paying your chef the right amount or the wrong amount. And we have over 250 million data points relative to that. Those are compensation surveys. Every large company in America can buy them. Small business owners have never had access to that kind of information. That's something we think is valuable. We think they'll pay more for us. So again, I think AI is going to be very interesting as we try to productize it. We're going to try to improve the customer experience. We're going to try to add more value to our products and differentiate ourselves because no -- there's very few players who are going to have the depth of insights and information from our data that we can provide inside the technology. And then at the end, I think there's going to be additional products and services that we're going to be able to charge incremental or because they're going to provide more value are simply things are -- have never been available to small and medium-sized businesses. And -- it's one of the great things I think Paychex has done historically is we democratize these things that are only for big businesses, right? That's our 401(k) business. When you look at our insurance business, it's in the low end of the customer segment where a lot of people don't want to go or they don't know how to go and do it profitably and we're going to continue to look for ways that we can drive AI into our products for all of our customers.

We'll take our next question from Kartik Mehta with Northcoast Research.

John, you've talked about customers being a little bit more price conscious, especially around where the economy is. But then you also said you feel good about getting the price realization that you had originally anticipated. I'm wondering just trying to make sense about those comments if customers are being more conscious Will they not push back on pricing? Or are you doing something different to make sure that doesn't happen?

Well, I think you got to separate the world, right? I think once you're a customer of ours, we're going to do everything we can to make sure that you love us and that we're providing additional value and support to you to the point where you're saying, yes, this is worth what I what I had. And quite frankly, then you've got the whole prospect area. What I would say to you as we go out into the market, what we see people are shopping. They want a lot of things. They're not willing to pay their own going to pay a certain amount for what they're going to do. And what we're seeing is they're picking the lower bundles or they're not attaching as many things. It's not that we're not getting attachment. Let's be very clear. We're giving the attachment. We're just not getting the attachment at the rate that we had put in the plan which is what we assumed. I don't know if that answers your question or not.

No, that helps. I just had a question for you on your buyback. It seems like the buyback was higher this water than you've done in the past, in the past, the strategy has been [indiscernible] to offset dilution. But it seems like this has a little bit more. I'm wondering, is that a change in strategy, a 1-quarter event? Or is this something you can continue doing?

Yes. I mean, yes, good question, Kartik. Yes, I mean we had an existing authorization out there we had capacity on it. And as you mentioned, I think our philosophy hasn't necessarily changed. We typically try to maintain a flat share count and buy back shares to offset dilution. That being said, I think if you go back 6 months ago, when we kind of closed out last year and provided our outlook for this year. I think as we sit here today, I don't think John and I believe that our future growth opportunities are any less today than they were 6 months ago. And 6 months ago, the stock was in the in the 150s. And so hey, we're going to continue to focus on the fundamentals I think I know we're going to continue to manage the business to try to continue to be a high-quality compounder. And my hope is, over time, that comes back into favor, and opportunistically, I looked at where the value was and pull forward some future purchases. And so really no change in philosophy, just more opportunistic, [indiscernible]

We'll move next to Scott Wurtzel with Wolfe Research.

Bob, I just had a question on the sort of 3Q guide and calling for a total revenue growth of 18%. If I kind of do some back of the envelope math and assume some degree of acceleration on the PEO side of the business as you lap the headwinds, it implies not really too much change on the MS side. I'm just trying to kind of square that with some of the timing around Paycor form filing revenue that they show up in fiscal 3Q. So any color you can give on the different moving parts there would be super helpful.

Yes. I mean again, I don't want to get into the habit of giving quarterly guidance. We try to give you color. And obviously, I try to set myself up so I can at least be in line with number. So we expect the business, as you mentioned, you're going to see acceleration like we did this quarter with the PEO in insurance. We're going to anniversary the annual enrollment in January and some of the headwinds from last year. And we're going to continue to make progress on core the integration, the synergy realization where we've had success, that revenue is going to start flowing into the back half of the year. So I'm sitting here in the middle of the year, we still have selling season. There's probably an element of conservatism in there, but we would expect the business to continue to accelerate. Got it.

That's helpful. And then just on the AI side, I know you guys mentioned having sort of like an AI-powered sales engine. Just wondering how much that's deployed across your sales force and any noticeable productivity gains that you're seeing off of that.

Yes, Scott. I would say that we launched it, maybe it's been 60 days ago into a pilot group. And it took actually -- it went rogue on us is what happens was we were going to do a pilot and then people start hearing about it and started demanding it. So it's early on. We'll certainly use it during selling season. It's a pretty powerful tool. And we're pretty much fully deployed at this point in time within the Paychex sales force. We're still doing some additional integration work on the payor side inside their go-to-market systems. But the sales teams are loving it at this point in time.

And we'll take our next question from Jason Kupferberg with Wells Fargo.

So I'm wondering just in the Managed Solutions segment, if you expect the organic growth rate to improve off the current 4% levels just as we move into the second half. And then just any thoughts on a realistic organic growth rate for the MS business once you lap Paycor?

Yes. I mean we definitely expect it to get better in the back half of the year, Jason. I mean, I don't want to give a longer-term growth until we get through this year with integration and obviously, synergy realization plays into that. But we expect some modest acceleration to the organic growth rate in Management Solutions, probably moving closer towards the 5% range over time, but that definitely -- there is some acceleration there in the back half of the year.

Understood. Understood. And then I wanted to just ask a follow-up on PEO. I know we've talked about it already on the call. But you're at 4.5% year-to-date and you'll need to do, I guess, 7.5% in the second half to get to the lower end of the 6% to 8% range that you're pointing us to. And obviously, we know the lapping of the comps et cetera. But maybe if you can just talk through any other factors driving the acceleration and just some commentary on your visibility to kind of get 3 points of acceleration from first half to second half.

It's a good question. I would start pointing to the 3 points of acceleration that happened this quarter relative to last quarter. And again, some of that is -- I know there's been some confusion around it and concern. And a lot of it -- there's strong execution there for sure, as I mentioned, we had double-digit demand and really strong retention again this quarter. But some of it is just the easier compare, Jason, as you move into the back half of the year. So we just anniversaried in October, the annual enrollment. Last year, there were some headwinds from that. that's probably only 25% of the MPP enrollment is in knock-over the rest of it is in January. So you're going to have another lapping or anniversary-ing of the enrollment and the headwind from last year. So the comps are just going to get better. So it's a combination of the comps getting better and we continue to see strong execution in the business. As I mentioned, I mean, that 6% number was was weighted down from some of the challenges that we see in the agency, the PEO grew high single digits in the quarter. So we feel really good about where we are with the PEO and as we move into the back half of the year.

At this time, there are no further questions in queue. I will now turn the meeting back to the presenters for any additional or closing remarks.

Thank you, [indiscernible]. So Listen, I appreciate everybody being with us here, Friday before the holiday. So just to summarize, we delivered solid double-digit revenue and adjusted operating income growth this quarter. I'm very proud of the team and all the hard work that's went in. This has been a challenging year for both the Paychex team and the Paycor team coming together, working together. As you can imagine, go through integrations like this are always challenging from an emotional side and a cultural side, on the people side, you have to make some tough decisions.

Everyone has to deal with change. And I've just been so proud of the team, not only the Paychex team but the Paycor team, as you know, we've had great employee retention there, and we've brought on some great talent into the organization, and there's no question to me that we're better together. And I think as we continue to come together as an organization around a one Paychex strategy that we're executing, I really think there's tons of opportunity. And that's why Bob said before, this combination added $10 billion of total addressable market. And so we like the runway in front of us. We like the team we have, and we're committed to executing as we go into 2026.

So we're very proud of the significant progress we've made. Our latest AI advancements, I'm very proud of the innovation is being driven across all the platforms I really think we're going to further differentiate us and position Paychex for growth, margin expansion, which we're known for and really leadership in the human capital management industry as we enter this new AI era that we're all entering. So thank you for your continued support and interest in Paychex. And I hope everyone has a Happy Hanukkah and Happy Holidays.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

All right. I think we've gotten the people that want to leave out, and we'll get the people who are coming in still coming in as I get started here. So thanks, everybody, for joining us here at the Nasdaq Conference and appreciate their partnership with us here at Morgan Stanley to put on this event. It's always a great time, and certainly, enjoy having the companies that come over to visit, including the senior management here from Paychex.

I'm James Faucette, Senior FinTech Analyst at Morgan Stanley, and I'm very pleased today to have John Gibson, CEO of Paychex as well as Bob Schrader, CFO of Paychex.

Obviously, time is short, and these go quick. So, I guess without any further ado, John, Bob, pretty interesting start to the week. We know that you've got earnings coming up, but you had some AI-related announcements that certainly is a topic in every conversation that we're having today. Why don't you kind of talk to us about some of your recent announcements, and we can start to talk a little more broadly about how you think that will impact -- how you think AI will impact the labor market? But I'd love to hear what the work you're doing now.

Yes. No, actually, it's been a work in progress for probably a decade. I don't know whatever you call AI or its predecessors, but that's something we've been working on. As you can imagine, we pay 1 in 11 private sector workers in the United States, the largest 401(k) provider in the United States, 30th largest insurance agency in the United States. And we're arguably the largest HR outsourcer of small and medium-sized businesses. So we talked about 5 million small businesses every year within our sales process when you think about the number of clients we have. So we've got huge amounts of data. So we've been leveraging that for over a decade.

We have an AI innovation center. And we've now gotten enough things far enough along. We made a series of announcements in terms of AI products. So we've made a commitment to take all 3 of our core platforms. We have 3 platforms, all built for purpose. In the small market, SurePayroll. In the mid-market, we have the Paychex Flex product. And then, with the recent acquisition of Paycor, we now have Paycor for enterprise. And we're going to be introducing new platforms. All 3 of those will be updated. They'll be AI-driven as we go into next calendar year. So that's one product side announcement we've made.

We also announced that we've been given a patent, a provisional patent by the U.S. government. And we have been working for some time on the ability to take our data sets unstructured and structured and in compliance and in all the interactions we have with our clients. So we record every one of our conversations. We digitize those, all of our e-mails. Now, the ability to take all that information, and by asking it a question, we can give a curated answer based upon the role you play in an organization to give you guidance.

So we thought it was interesting. We thought it was unique. We thought we'd try to go for a patent. And indeed, we got the pending patent. So we're excited about that. That's already been introduced in our back office. So all of our HR professionals that are consulting with our clients each and every day are using that tool, and we're making that tool better. We've just embedded it into the SurePayroll product. That will be available for the micro market, and we'll continue to expand that up, excited about that.

And then, we put into production agentic AI. So we now have agentic AI actually taking -- digesting e-mails and running payrolls with accuracy that we get historically from someone doing it themselves. We also have a voice agentic AI tool. So you can talk to our bot, tell them what to do, and it's going to run your payroll. So I'm excited about that innovation.

Yes. Yes. A lot of interesting tools for sure there. So I want to come back to that and have some questions about impact on labor markets, but maybe as we're talking about labor markets, let's start with the big picture.

What are you seeing across the U.S. employment landscape, particularly among the small and midsized businesses that you serve primarily? And how are you thinking about managing the potential for an acceleration in small business bankruptcies in the base? I mean, I think if we go back to COVID, it's been this like period where we've seen fewer out of businesses and bankruptcies than we have historically. There seems to be some normalization, but I don't know if we're fully there. So how do you think about the market generally?

Well, so James, I feel like for the last 18 to 24 months, the only thing I've done, wherever I'm at, is talk about the pending recession and collapse of employment in the U.S. And I keep saying. I don't see it, it's not coming. Continue to see -- we don't see it. We -- when we look at all of our data across the board, I would say the small businesses continue to be very resilient. We continue to see moderation.

When you go back, the index that we actually produce, the small business index for firms under 50 in the U.S., that actually went up in November. It's moderated over last year, less than 1 percentage, and so what we see is just continued moderation. I look at all the other data that we have, we don't see that. And in fact, in the small end of the market, the real labor discussion is the supply problem still, still a supply problem. I mean, our -- in the small end of the market, both because of restrictive immigration, right? That's one thing.

Another problem you have is we continue to see accelerated retirements in the U.S. So you've got that movement. And then quite frankly, I think that for small businesses, it's a skill problem. Remember, about 70% of our clients are blue and gray collar. So when you begin to think about the trades and you begin to think about those type of jobs, those are in short supply in the U.S. So actually, for us, it's interesting. I actually believe that we have underemployment in our client base, and we actually have more openings than what you would generally index in the general economy, and a lot of it has to do with supply problem.

So I want to ask back tying AI and labor, there's been some speculation. We even have this debate internally at Morgan Stanley about is AI hurting job growth, is it impacting some elements of employment, at least in -- even in introductory or entry-level, white collar, et cetera. You talked about that you're -- you guys have a high level of exposure to blue and gray collar. But what is your view on the AI's impact on the labor market? And is the pace of employment growth due to AI not a risk to bookings? Or how should we think about that?

Well, look, I think the buying room should cheer up. All this doom and gloom and the big debate -- and you got to debate something, right? There is got to be something that is catastrophic, that is looming for all of us. But I just don't see it. I've not seen it quite frankly. I don't think -- I don't buy into AI is going to wipe out employment. And a technological -- maybe I've lived long enough to see it. The technological revolutions do not wipe out unemployment. Financial bubbles do, pandemics do, but you don't see mass unemployment. The fact of the matter is people adapt, right? Government policymakers are going to adapt. Does anyone think any government in the developed world is going to allow their unemployment rate to go to 10% to 15% and not do anything? It's not realistic.

So our general view is and my general view is just based upon my past history of watching technology get introduced is rules -- jobs are going to change. I was just talking to our team here in Europe in Copenhagen yesterday. I said everyone should expect your job is going to be much different over the next 2 years as we introduce all the AI tools that we're expecting our employees to use, right?

But I look at it and say they're going to adapt. They're going to be doing something different. We're really trying to move ourselves more into an advisory capacity for our clients. That's what we're trying to do. Let's get out of the transactional work. Let's be able to use our data sets with NAI to really get them more insights in the hands of our employees and then allow them to go and talk to our employees about how to do that.

So I look at it -- look, I say today, are there less bank tellers than there were 4 years ago? Absolutely. But there are far -- I think it's like 9x more people employed in financial services than it was 40 years ago. And that's where I think AI is going to impact.

James, I would just add on to that. When you look at our model, employment growth is not a big part of our model. We're not dependent on getting employment growth within our client base to drive revenue growth. So when you look at like our checks per client, that's kind of our same-store measure of what's going on with employment within our client base. Outside of some of the disruption you saw during COVID and the recovery, it's typically flattish, and so it's not a real -- there's not a tailwind to growth there or a real headwind to growth. And so we're not dependent on employment growth to drive revenue growth.

And then the other thing I would add to that, when you look at kind of our billing model, we have some defense relative to pure people models because all of our billing models have a base fee component and then a per employee or per check. And when you get to the low end of our client base, that base fee is a larger percentage of the overall. It could be as high as 70% of the overall fees. So we have some defense or some mitigation on downside. And I think if you go back to COVID, you'll see that in the numbers. When unemployment was very high that year after COVID, our service revenue was still flat to up 1%. So we have some defense on the downside just based on our billing models.

So I think that that's a good place for us to look at kind of on a kind of look forward and both -- Paychex has always been like a very consistent business. I mean, you guys do a very good job historically, and up to today, continuing to drive that business the way you have. But one thing that certainly raised eyebrows was your announced acquisition of Paycor. And can you walk us through a little bit the strategic rationale? It was a little bit of a product and market pivot for you, at least on -- at least looking at it from the outside. Like what was the strategic rationale for you? How is the integration progressing? And what are you talking about in terms of potential revenue synergies?

Yes. So well, that's a big question. So I had put it in context, so I don't think it's as far-fetched. I mean, number one is Paycor was a natural extension of the journey that we've been under at Paychex for probably 15 years. And it's a natural extension to our business. We were in that business. We had a nice size enterprise business. And we felt like it was an opportunity for us to extend our total addressable market by another $10 billion and get us over $100 billion in addressable market. So it's a natural extension for us.

So I think you have to put the -- everybody looks at the Paycor thing. You got to put it in broader context as to the journey we've been on for really the last 15 years as a company to really build the most comprehensive capable -- capabilities in HCM, both in terms of technology and advisory services for businesses of all size. So let's stop there.

15 years ago, Paychex had no technology that our clients used. We made an acquisition, SurePayroll, in the low end of the market. That gave us a technology capability in the micro market, okay? We were predominantly an advisory firm. We were in insurance and benefits. We were in retirement 401(k) business, but we were a services business.

This transformation to integrate technology and what we're doing. So we started there. We started investing in building Paychex Flex. Along that journey, we also want to build up our advisory and our HR outsourcing capabilities, so we made a series of acquisitions there, including the Oasis acquisition, which at the time, $1 billion, was the largest acquisition the company had done.

So move forward. We're building out capability, and we're constantly looking, do we build or buy, speed to market capability, what do we have to do? Our vision was always to have the most comprehensive set of products and services, both technology and advisory for businesses of all sizes. So we were constantly looking at that, and the opportunity to acquire Paycor came up, and it was a natural extension to what we were trying to do in the enterprise space, and we would admit it.

And the thing I would say to investors, I want you to think about, is think about all the money we invested over the last 15 years. And you look across the board, and our margins are higher today than they were 15 years ago. So we've invested in the business. We've grown the business. We've made strategic acquisitions, and we've improved the margin profile of the business.

Now, let's talk about even on the debt side. I mean, our leverage is still less than 2. And I think Bob is going to write a check in March, and it will be down below 1.5. And we have tremendous cash flows and capabilities to support the debt that we have.

So I go back on the Paycor side, it's going exceptionally well. We're best operators in the industry. Cost synergies, we've already exceeded the ones we've set. Revenue synergies, Bob can give you some more numbers, but we're on pace to do what we want to do. And what's amazing is we now have an opportunity to go into the Paycor base of 50,000 customers, and they've never been offered our managed services or our advisory services, and that's resonating there.

They also -- when we -- as part of that acquisition, we picked up an embedded capability. We have been -- we have SurePayroll, we do embedded for banks and for other technology companies and for other CPA firms in the U.S. We're now putting those assets together and creating an entire embedded strategy that's going to come out of the Paycor acquisition as well. So it's another extension. That's not even included in my TAM numbers I gave you today. So we're just beginning to put those investments together.

So look, Paycor is one step in the journey of us building, buying and assembling the most comprehensive HCM set of products and services, and it's not just tech, it's also our advisory and HR capabilities, which I think are going to be really what differentiate us in the market.

And let me maybe add just a couple of comments on the synergies. As John mentioned, what we've communicated this year, we're well on track to meet our cost synergies. I think we said $90 million. A lot of those actions are already behind us, and we're not stopping there. We're seeing other opportunities from a cost synergy standpoint. One area that stands out to me is procurement, a lot of overlap with vendors. And as those contracts are coming up for renewal, we're seeing some success there with the combined leverage. So feel really good about the cost synergies. But the reality is that's not why we did the deal, although I would say the cost synergies alone really justified the purchase price that we paid for it.

We did it for the revenue synergy opportunity. I think most people understand, we've had a lot of success in monetizing our client base, as John mentioned on day 1. We just inherited 50,000 clients on the top of our payroll funnel that, on average, are larger than our client base and are more apt to have the needs that our solutions, our ancillary solutions, particularly ASO, PEO and retirement sell for. What we said this year is we expected about 30 to 50 basis points worth of growth for revenue synergies. But that grows over time.

I think we're trying to be thoughtful and intentional how we go after the opportunity. We didn't want to just unleash our 3,000 sales reps on day 1 on their client base. We didn't think that, that would turn into a good client experience. And we're doing what we've done with our client base. We're leveraging our data and our AI models to really identify those clients that are great fits for these solutions, and then, we're going to go after that opportunity. So we feel great about the opportunity. Again, we're trying to be intentional as we go after it, and those revenue synergies will build over time.

So John, I will come back, it is like a -- and just have you elaborate a little bit on how you're thinking about the incremental steps now that you've got Paycor, you're integrating that, but what are the incremental steps that you look at in terms of adding incremental functionality to the HCM solution, et cetera? Like what are your priorities for the next few years?

Yes. I think in terms of -- I think we've pretty much got every bell and whistle there is in HCM covered at this point in time. I think what we're really trying to do now is really integrate our data and AI and the insights into the products. And part of the product roadmap that we just announced on Monday is we kind of want to blow up the HCM experience with AI, so you're not going to menus and you're not going point and click. We're basically just telling our systems what you want done. And we need to close a factory, or we need to close this site in Texas, okay? We'll do that for you. We'll do all -- take care of all that for you.

All the way up to and including now you're going to engage in our technology with one of our HR advisers to help you work through with the human capital change management issues that AI can't do, right? So it's just really putting the expert and embedding the expert into the technology, and we really think the AI is going to be able to do that. So that's kind of where we're at.

So let's transition a little bit to PEO. This has been really an area of strength for Paychex, especially when we compare your worksite employee growth versus some of the competitors. What's driving the dynamic for you and PEO generally?

Yes. Yes, I'll take that one. One, I think...

We're significantly better than the...

One, I think that deal business -- John and I are both bullish on the PEO opportunity. And I think one of the reasons is we're trying to help small businesses and medium-sized businesses solve problems. And that business model checks a lot of boxes there. And so we're bullish on the opportunity, and I'd say, in general, there's a lack of awareness overall on that PEO business model. It's very popular in New York, California, Texas and Florida. But there's just a long runway for growth. There's only roughly 200,000 of the 6.5 million businesses in the U.S. that are in that model. So we're bullish on the opportunity.

I'd say there's probably 3 things that stand out to me on why we're seeing a little bit better growth than maybe our competitors. One, we've been investing in that area, right? So it's probably one of the areas that we continue to invest in sales and marketing resources. So that's certainly helping to drive the growth. Over the last several years, we strengthened the value proposition, and we've seen record levels of retention, and we continue to see that. And so that's driving worksite employee growth.

And I would say that the third thing that probably stands out for us, certainly relative to the public PEOs, is we have a captive audience, right? We have 800,000 clients. Obviously, ADP has that as well, but we have 800,000 clients, and we can leverage our data and AI models to really go in and cherry-pick that client base, and that gives us an advantage as well. So that's what's really driving the better performance.

So I want to ask you, just as a follow-up there, just to help at least me understand the business a little bit better. One of the trends that we've observed within PEO businesses generally is that when employment or macro maybe softens, employees tend to offer lower-cost health plans and/or employers stop offering some of the ancillary services like insurance and 401(k). Is that a structural phenomenon? And is that accurate? I guess, maybe it's the first question. And is that structural? Or what can you do to mitigate the impact as we see different parts of the economic cycle?

Well, I don't think that the ability for employees or employers to afford benefits, particularly health benefits in the U.S., has anything to do with employment. It has everything to do with health inflation. And we have a significant health inflation. And I actually think you're still seeing the sonic boom of the COVID era ripple through the U.S. health center. It's the center of attention in Washington right now for sure.

So certainly, there's no question that for employers and for employees, the affordability issue is what causes them to maybe downgrade their plans, capabilities. And so one of the things that we do because we have an insurance agency, right, and then, we have the ability through our PEO to pool insurance pools together, we're actually able to give them something better than what they could get in the open market, right? Now, whether or not they can afford that is a question.

So what we've continued to try to do is have the broadest set of capabilities and options for small, medium-sized businesses to be able to offer to their clients, their employees' benefits because that's a competitive advantage against larger firms. If you're a small business, you've got to be able to offer competitive benefits to be able to attract and retain employees against larger firms. So we've done a lot of things across there up to and including something we launched last year, very innovative, which was also part of our monetize the employee effort, which is our Paychex Perks program.

So to give you an idea, so we launched this in July of last year. We have -- Bob is going to kick me if I hit the wrong number. We have over 225,000 active individual customers on the Perks product. We launched a product there 2 weeks ago, we got 8,000 customers. And what this basically does, we go to an employer, and we say you can no longer afford employee benefits, but we're going to let you tell your employees that you're going to offer them benefits. Because in the Perks platform, we've created a marketplace where we went with the insurance carriers, fintech companies, things that are relevant part of any big company package. And we've pulled those together and gotten great deals by high -- so now you can go on individually as an employee, you can buy the insurance, and we deduct it from your paychecks. So no longer do you have to write 3 months in advance or a year in advance. So that becomes a cash flow issue.

We take it right out of your paychecks every week, just like your employer was providing it, but it's direct pay from the employee. And because we have such scale, I mean, we pay 1 in 11 private sector workers, we have a lot of insurance companies that want to talk to us because we're -- it's a digital distribution. You go in as an employee. You're onboarding a new employee. It takes you through open enrollment digitally, just like you would in a large company, and it says, you want dental, you want this, this is how much it's going to come out of your check every week. And it's all automatic.

And then, we take care of all of the receivable and payments for the carrier as well. So it's a win-win for them because they reduce their cost of administration. So we've got a curated set of products, and we've identified about 100 different products we want to do there. And as Bob says, what we're doing is we're really using AI to really determine what you're seeing in terms of age and other factors. So what we're trying to do in the benefits area is a problem. It is a big problem for small businesses because if they can't offer competitive benefits, they can't go and attract the type of labor that they want.

Right. And then, it goes back then to the point that you're making earlier, there's still some underemployment there to lack of skills, et cetera, for your customer base. We've got just a few minutes left. I did want to touch on a couple of financial questions, and obviously, keeping in mind that you guys are due to report earnings next week.

I'll let Bob answer these.

Yes, yes. So -- but how should investors be thinking about the drivers of medium-term revenue growth, either by segment or consolidate across new logos, upsell, cross-sell? Just elaborate that a little bit.

Yes. I think, in general, we operate in a large market opportunity, well positioned, growing by our estimates, mid-single digits. So I'd say, in general, we're growing at or above market. Just given the comments on the PEO and the opportunity there, it would be our expectation that PEO would continue to probably grow at a faster rate than our Management Solutions business.

And then, when you kind of look at the components, James, we call it our growth formula, it really hasn't changed. We're typically trying to get some growth from client base growth. That's usually in that 1% to 3% range. And it's easier to grow your client base when you have 30,000 clients. When you have 800,000 clients, it's a little bit harder, but that is certainly an area that we're focused on driving client base growth.

But when you look at our model, it really is a revenue per client model, and that comes from 2 areas. One, obviously, we have to deliver on our value proposition, continue to find ways to create new value for our customers. When we do that, that gives us pricing power, and that's typically in that 2% to 4% range. We get very little pushback from our customers on that. And then the other area that drives revenue per client is a larger share of wallet in our ancillary attachment. We've driven a lot of growth there.

Historically, I think when John and I take a step back and we look at our client base, our Paychex client base, and we look at the penetration rate of a lot of those key solutions, ASO, PEO, retirement, they're still relatively underpenetrated within our own client base. So we feel like there's a lot of opportunity to continue to grow revenue there. And then, as we mentioned, we now have the 50,000 Paycor clients that is going to provide us an opportunity to drive share of wallet over time. And so those are kind of the components.

The other area, if you look historically, we typically have gotten about 1% to 2% of growth from M&A. Obviously, this year, it's much higher with the Paycor acquisition, but we would look to continue to deploy capital towards M&A opportunities to drive revenue growth in the future as well. After we get through kind of this big integration, we'll continue to look for opportunities there.

So just last question here to wrap this up. Just elaborate in a little more detail there on capital allocation. You took on about $5 billion in debt, some of that comes due within the next 12 months. How are you prioritizing capital allocation between the debt paydown? Dividends are currently like 97% payout ratio and that kind of thing. So just...

In there, we have 4% return.

Yes. I would say -- let's talk about the debt first. John mentioned it. We have some of the debt that we took on about 7 years ago from the Oasis acquisition. That was roughly $400 million. That comes due in March. Our plan would be to pay that off. And I think that with the synergies that we're going to realize from the Paycor acquisition, that's going to drive our leverage. We're targeting our gross leverage to be below 1.5x.

And then, just in general, I think we've been very clear with the acquisition that really not a significant change in our capital allocation policy. Certainly, number one, we're going to continue to invest in the business. We've talked about the areas. I think the priorities there are data, AI technology and our go-to-market are probably the 2 areas that we would focus on.

And then, as it relates to returning excess capital to shareholders, we're going to favor the dividend. We target -- you mentioned a higher number. That's because of the amortization. But from a non-GAAP standpoint, we typically target 70%, 80% payout ratio. We've committed to growing our dividend in line with our earnings. And when you kind of take a step back and you look at the free cash flow generation of our business, I mean, we're 30-plus percent free cash flow margins. And so we have the free cash flows not only to pay the dividend, but to service the debt, and that's before we even include the free cash flows that we got from the Paycor acquisition.

So -- I'll just touch on share buybacks. We do, do share buybacks. Our philosophy there is really just to maintain our share count, offset dilution. You could have some timing differences there based on opportunities. But in general, that's how we think about share buybacks. And then, again, I mentioned M&A as being an area that we'll continue to deploy capital as we move forward.

Great. Well, that's all the time we have. John, Bob, thanks for joining us today.

Yes. Thank you.

Thanks for having us.

Good morning, and welcome to Paychex First Quarter Fiscal 2026 Earnings Call. Participating on the call today are John Gibson Gibson and Bob Schrader. [Operator Instructions]

As a reminder, this conference is being recorded, and your participation implies consent to our recording of this call. I would now like to turn the call over to Mr. Bob Schrader, Paychex Chief Financial Officer. Please go ahead, sir.

Thank you for joining us to discuss Paychex First Quarter Fiscal 2026 results. This morning, we released our financial results for the quarter ended August 31, 2025. You can access our earnings release and presentation on our Investor Relations website. We plan to file our Form 10-Q with the SEC within the next couple of days. This conference call is being webcast live and will be available for replay on our Investor Relations portal.

Today's call includes forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference non-GAAP financial measures. A description of these items along with a reconciliation of non-GAAP measures can be found in our earnings release.

I would now like to turn the call over to John Gibson, Paychex President and CEO.

Thanks, Bob. I will start by sharing our first quarter business highlights, and then Bob will come back and discuss our financial results and outlook. And then, of course, we'll open it up for your questions.

We are off to a strong start in fiscal year '26, delivering robust 17% revenue growth and solid adjusted diluted earnings per share growth of 5% in the first quarter. This performance reflects continued progress integrating Paycor and sustained demand for our HCM solutions amid a resilient small business environment. We remain pleased with the progress of the Paycor integration, we are on track to achieve targeted Paycor revenue synergies and exceed our initial cost synergy expectations.

Our fiscal year '26 cost synergy target remained approximately $90 million. We are pursuing additional synergies beyond this target while retaining our flexibility to reinvest those gains for additional growth and innovation investments. Bringing the 2 companies together provides us a broader set of technology solutions and service models and retain business.

[Audio Gap]

Building on the momentum from Paycor, another quarter stone of our growth strategy is our long-standing relationships with channel partners, brokers, CPAs and banks are important referral sources for new business for us and have been for decades. The Partner Plus program for brokers continues to be received well with broker enrollment nearly doubling since our last earnings call in June. We believe this momentum provides a strong foundation to retain and expand this vital referral channel.

The program centers on helping brokers maximize client impact, grow their book of business and deliver exceptional service and advisory support. We remain confident our partner program is the best in the industry and we recently launched new marketing campaigns to further expand awareness and growth.

Building on our long-standing partnership with the CPA community, we launched our new CPA Partner Pro portal in the quarter. We recently introduced another powerful Paychex Flex solution supporting small and midsized businesses and their CPAs. Bill Pay powered by Bill is our new financial management solution designed to simplify payments for SMBs. Bill Pay integrates payroll, HR and accounts payable into a seamless experience providing small business owners real-time financial clarity to make smarter and faster decisions.

Additionally, Bill Pay will enhance CPA's ability to support their clients by integrating critical payment and HR functions to deliver even more valuable insights. We plan to expand Bill Pay to include accounts receivable and roll that out in our additional platforms in the future.

Continuing our track record of innovation, Paychex lead the digital and AI-driven transformation of the human capital management. We deliver pragmatic AI solutions that drive measurable value for our clients and our business. I'm excited to share several recent advancements that demonstrate how we are harnessing AI internally and externally to enhance client experiences, boost operational efficiency and we believe position Paychex for sustained growth. We recently expanded AI Insights, our generative AI assistant for workforce questions to serve our PEO clients in addition to our HCM clients. This AI-powered tool provides instant natural language insights on pay, equity, turnover, hiring trends and labor costs. Through an intuitive chat interface, users can query complex HR metrics drill down in the detailed analytics and follow-up questions to uncover deep insights and predictive trends. In June, we launched our degenerative AI-powered HR guidance tool developed using HR insights drawn from our nearly 40 million client interactions each year. This internal AI-enabled tool empowers our HR experts to deliver efficient, effective responses to client queries and provide enhanced client support. In addition, we have deployed AI tools across our organization, empowering our teams to focus on higher-value work while enhancing quality, efficiency and innovation.

For example, AI is augmenting our software engineering group by automating tasks, improving code quality and allowing us to accelerate our development. We are also piloting a genic AI solutions this quarter to transform some of our higher-volume inbound client task across multiple channels. These AI agents autonomously manage routine client interaction, enhancing operational efficiency and elevating the client experience, all while freeing up our service providers to focus on high-value advisory and support to our customers.

Our PEO business continues to also perform well with another strong quarter of strong demand and retention performance, leading to mid-single-digit worksite employee growth. We remain bullish on PO due to our scale, capabilities and the growth opportunities we see. The PEO model empowers small businesses to offer benefits comparable to Fortune 500 companies, addressing one of the top challenges of attracting and retaining talent.

Turning to the macro environment. small businesses remain resilient. Our small business employment watch shows stable employment and moderating wage inflation and has over the past year with no signs of recession. Since our last call, we've seen great clarity on key issues such as tariffs, taxes and inflation. With the tax bill in place and Fed rate cuts done, we believe this will support renewed business confidence. This clarity should encourage business owners, particularly those previously adopting a wait-and-see approach to make more informed strategic decisions, potentially boosting investment and hiring.

Lastly, I'm proud of the hard work demonstrated by our employees. Despite an ever-evolving external environment and the integration of our largest acquisition in the company's history, the team has remained focused on our clients and our purpose. Their dedication and efforts have been recognized once again this time by Newsweek, which named Paychex one of the America's greatest companies and most admired workplaces. Our people and our culture remain a key differentiator underscoring the vital role our employees play in driving our sustained success.

I will now turn it over to Bob to provide an update on our financial results and outlook. Bob?

Thank you, John. I'll start with a summary of our first quarter financial results and then share an update on our outlook for fiscal 2026.

Let me begin by sharing our first quarter results. Total revenue increased 17% over the prior year to $1.5 billion. Management Solutions revenue increased 21% to $1.2 billion primarily due to the addition of Paycor as well as higher revenue per client, driven by price realization and increased product penetration. Paycor contributed approximately 17% to Management Solutions revenue growth year-over-year.

PEO and Insurance Solutions revenue increased 3% to $329 million, primarily driven by solid growth in the number of average PEO worksite employees. Outside of the at-risk plan headwinds, PEO continues to perform well. Interest on funds held for clients increased 27% to $48 million due to the inclusion of the Paycor balances. Total expenses increased 29% to $998 million, primarily driven by the Paycor acquisition.

Operating income margins for the quarter were 35.2% and adjusted operating income margins were 40.7%. Diluted earnings per share decreased 10% to $1.06 per share our adjusted diluted earnings per share for the quarter increased 5% to $1.22. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.7 billion and total borrowings of approximately $5 billion as of August 31, 2025.

Cash flow from operations was [ $718 ] million for the first quarter, primarily driven by net income. We returned $549 million to shareholders during the quarter in the form of cash dividends and share repurchases. Our 12-month rolling return on equity remains robust at 40%.

Let me now turn to our updated guidance for the year, which assumes the current macro environment. We are reaffirming our fiscal 2026 outlook with the exception of our earnings expectation, which we are raising. Total revenue is still expected to grow between 16.5% and 18.5% and as we previously noted, we would expect revenue synergies to contribute 30 to 50 basis points of growth in fiscal 2026.

Management Solutions is expected to grow in the range of 20% to 22%. PEO and Insurance Solutions is expected to grow in the range of 6% to 8%. And as previously noted, we expect revenue to accelerate in the back half of the year as we anniversary the at-risk revenue growth headwinds we experienced last fiscal year.

Interest on funds held for clients is still expected to be in the range of $190 million to $200 million. Adjusted operating income margin is expected to be approximately 43%. Our effective income tax rate is expected to be in the range of 24% to 25%. And as I mentioned, we are now raising our earnings expectations with adjusted diluted earnings per share now expected to grow between 9% and 11%, up from 8.5% to 10.5% that we shared with you last quarter.

I'll provide you a little bit of color for the second quarter. We would anticipate total revenue growth to be approximately 18% in Q2 with an adjusted operating margin of approximately 41%. And of course, this is based on our current assumptions, which are subject to change. And with that, I'll now turn the call back over to John.

Thank you, Bob. And with that, we will now open up the call for your questions.

[Operator Instructions] We'll go first this morning to Bryan Bergin of PD Cowen.

This is actually Jared Levine on for Bryan Bergin today. I guess to start here, can you give us an update in terms of the demand environment? Any notable differences when you think about employer size segments or across core offerings here? .

Jared, this is John. No real change. I mean night book demand remains consistent with what we've been seeing historically. Matter of fact, activity is up. I'd say I think there's a lot of shoppers in the market right now. Our PEO bookings continued to be very solid, up double digits this past quarter. So you really across the board to see a lot of activity and good traction in the micro segment as well, which has been a little lighter in the fourth quarter. But like I said, right now, demand environment seems stable to me.

Great. And then we've been getting a lot of questions in terms of the Paycor XO growth there. So I just want to confirm in 1Q, did it still grow low double digits in terms of [indiscernible] growth? And is that still what you're assuming for the year as well?

This is Bob. I certainly on a full year basis, we expect the recurring revenue to be on Paycor to be a double-digit. I don't want to get into the quarterly split. Obviously, they were invested short the client funds so that with rate decreases that occurred last year and where we are now, that would have been a little bit of a headwind. But the recurring revenue growth for Paycor in Q1 was in line with our expectations, and we would expect the business to grow double digits on a full year basis.

We'll go next now to Mark Marcon of Baird.

So one, just on the PEO side. I know we're going to lap some tough or some easier comps in the second half on the PEO side when we get to the second half. But aside from that, how would you characterize the PEO environment? Because it has been slowing down. And when we take a look at the sequential pattern. Q1 relative to Q4 is a little bit worse than what we've typically seen. And so I'm just wondering, is the environment solid for the PEO? Or what are the primary headwinds right now?

Well, Mark, I'll start and then Bob can add maybe a little more color for you. Look, our PEO continues to perform well. And if you look at the numbers, mid-single-digit worksite employee growth, I think you're going to find we're leading the market there. Our bookings were double digit in the quarter. We had record retention in the first quarter. Remember last year, we had record retention and [indiscernible] we're continuing on that pace. So I continue to see strong demand there. I look at some states take California our medical enrollment is up 10%. There, our medical enrollment overall across the country is up. We can talk about it later, where we are in Florida, which is where we have our MPP. That's where we have a little more challenge. And again, you know that market pretty competitive in that market, and we don't take a lot of risk. So we're not going to go after business that's going to be a bad risk. So overall, I feel very good about where we are from a PEO perspective, really, really like what I'm hearing in the early engagements with clients and our broker partners as we approach some of the Paycor clients as well. So we've been building a pipeline there. As you know, that sales cycle is a little longer, but I'm very pleased with the activity and what we have going on there.

Yes, just to add a little color, Mark. I mean, certainly, the PEO, I would say, was probably a bit better than our expectations in the quarter, as John mentioned, and we've talked about this in the past with PEO. It's all about worksite employees, and that was strong in the quarter. I think John highlighted in prepared remarks, mid-single digits. I think when you pull the PEO apart from the agency, the growth of the PEO was in line with that worksite employee growth despite the at-risk headwinds that we have, which we will anniversary here as we turn into the new calendar year. The growth rate overall, I'd say if there's one aspect of our business that was maybe a little bit softer than what we expected in the quarter, it was the agency on that was a drag on the growth rate of the category. We continue to see some rate pressures from a workers' comp standpoint. Certainly, demand was good from an agency standpoint. But overall, we feel really good about where the PEO is. And as you mentioned, we will anniversary those MPP headwinds, and we'll start seeing some stronger growth with the easier compares as we move into the back half of the year.

Great. And then for my follow-up, direct expenses as a percentage of revenue, you ended up seeing some pretty nice leverage there. And so I'm wondering that was really strong. How would you characterize direct expenses on a go-forward basis? And then compare and contrast that to SG&A when we strip out the onetime charges and the goodwill just in terms of the ongoing operating expenses. Because it seemed like there was a little bit of a contrast between the two. In other words, direct expenses stripping out everything else looked better, SG&A expense. I imagine just because you've got more overlap and a number of items, maybe a little bit heavier than what we were looking for. So how would you expect those to go as the year unfolds? And it seems really encouraging.

We think so as well. Obviously, we've been focused on the synergies. And as you know, we're the best operators in the business. And so we're always focused on trying to be efficient and productive. I think the expense growth in the quarter, obviously, is a big number driven by the Paycor acquisition. If you were to strip it out, it's probably closer to about 3% expense growth overall. And the one thing we did highlight in the script, which was probably a miss. I mean, if you look at the adjusted operating income growth in the quarter, it was 15%, right? So obviously, that's coming from the strong top line growth of 17%, but certainly trying to find ways to be more productive and more efficient and really strong adjusted operating income growth for the quarter. And on a full year basis, expense growth, we're -- I would probably think what we saw this quarter organically would probably be consistent with what we would see going forward.

We go next now to Samad Samana at Jefferies.

This might be a little bit pointed, but I want to get back to the Paycor just the recurring revenue component, excluding flat revenue, which is uncontrollable, right? Rates will do what rates will do. If we think about the contribution in the quarter, it implies essentially, let's call it, around 7%, 8% growth for Paycor recurring revenue, which is a pretty material slowdown than what Paycor was doing on a stand-alone basis. So is there some sort of integration-related disruption? I know we're not trying to do quarterly businesses, but that's a pretty material difference versus what the growth rate what Paycor had as a stand-alone business. So we're just trying to understand in the first full quarter integrated or what the implications of that are? And how we should think about that accelerating or improving and if that improvement or that double digit that you're calling out includes the revenue synergies? And then I have one follow-up.

Yes, let me start and then maybe John could add some color there. I would -- again, I don't want to get into a math reconciliation, but I think our numbers would suggest that the recurring revenue growth is closer to double digits than what you had in Q1. As I mentioned, Q1 was in line with our expectations for Paycor. Obviously, there is some performance it builds during the year. We know that we -- last year, particularly in Q4, we were going through an integration and getting our go-to-market aligned in our new segments aligned and we called that out last quarter -- last Q4 getting that behind us. Obviously, there's probably some level of disruption there coming into the year. But Q1 was strong for Paycor. It was in line with our expectations. And John can probably add a little bit of color to that.

Yes. Samad, Look, as Bob said, Paycor was in line with our expectations that we put together client retention was in line and they're at their historical levels. I think the one thing I think that's going to be a challenge for all of us here to talk about. I think we talked about this on the last call, we purposely determined to segment our business, and we co-mingled all of the Paychex assets over 100 employees with Paycor. And then Paycor had a business that was under 100, and we moved that business into our mid-market and small market at Paychex. So we have a lot of moving parts you didn't take the ancillary components over it. So as I said, this is going to be extremely difficult for Bob and the team, and it's not the way I'm looking at the business or operating the business. We now have operating segments they're performing well. Very happy with our sales performance, actually exceeding our expectations across the board and very happy with the progress that we're making with the Paycor acquisition. I mean we're making strong progress there. A good example is we have HR outsourcing. So I sell a multi-thousand one of the largest ASO deals in the company's history and the ASO portion of that revenue, where do I allocate that? Is that Paycor or is that historical Paychex? Where do I put that, $750,000 incremental a year. And depending on where I want to stick it, I guess, we have the number, whatever we want the number to be. But I think what we're looking at is segments, and we believe that the Paycor acquisition is going to help us in the upmarket, and we believe by combining the two assets together, we're going to be better together, and we're seeing progress there and very pleased with the progress we're making in the quarter.

Understood. And then maybe just, again, if I think about -- and this will probably be equally difficult just based on the commentary about disaggregating where things should be placed. But if I exclude the paper contribution, it's kind of getting us to -- and Bob, I appreciate there's rounding given how you guys give us the contribution, but [indiscernible] to somewhere close to about 4% organic growth for the Management solutions revenue in the quarter, which, again, is a slightly easier comp, again, and based on what we were expecting for 4Q I guess, how should we think about that acceleration for the -- through the year? Do you still expect that? It seems to be maybe a little bit out of the gate slow or did anything from 4Q carry into F1Q we should be aware of? Again, we're just trying to juggle the different pieces with the full appreciation that it's difficult.

Not really, I mean, I think -- yes. No, I appreciate that. And no, I wouldn't say anything significant. I think you see an improvement. And again, we are giving you round numbers. So we can debate whether they're higher or lower, but you saw an improvement in the organic growth of the overall business from a total revenue standpoint. I think the guide implies an organic growth of 5% on a full year basis. We're at [indiscernible] in Q1. We knew that. That's how the plan was built. There's a couple of drivers of it, but the big driver of it is PEO, MPP headwind that we have in the front half of the year that we anniversary and you got an easier compare as we move forward. So we feel good about where we are through Q1. As John said, we made a ton of progress on the integration. We're really starting to see a lot of momentum on going after the revenue synergies and kind of building a strong pipeline. We haven't talked about that, but we feel good about where we are. And the organic growth, there is some improvements as we move through the year as the revenue synergies build on, particularly to the management solutions side. So hopefully, that provides you some additional color.

We go next now to Tien-Tsin Huang of JPMorgan.

Just a clarification on the question. Just on the clarification, what's driving the EPS increase of, I think, 50 bps on either end? And then just with retention, any call-outs there? It sounds like PEO was a record Paycor in line? Any other callouts? I remember there were higher bankruptcies and mergers at the low end last quarter, anything new beyond that?

Yes. Maybe I'll hit the EPS and then John can touch on the retention. I mean, obviously, the Q1 came in a little bit strong retention. Obviously, we have a quarter behind us of owning the asset. There's a higher degree of confidence and certainly the -- both the cost and revenue synergies. And so you see some of that playing through. And as you know, there's always an element of conservatism as you come into the year, particularly when you have a new asset like that. And so just increased confidence. We feel good about -- we achieved what we thought we were going to achieve in Q1, and we see a lot of momentum both from the cost synergy and revenue synergies, so just letting that play to the bottom line, and John can touch on the retention.

Yes, I'll add on to that. Just to remind everybody, we made a strategic decision, we talked about last quarter, to get a lot of stuff out of the way quickly. A lot of disruption in the sales organization, pulling them out of the field, resetting territories, relaunching the broker program and really got aggressive on the synergy front out of the gate. We wanted to get it behind us so we could focus on execution and moving forward into the selling season. We're going to drag that out for a long time. So I think we feel confident that we've got the cost synergies that we committed to, which were higher than our original commitments at the time remind everybody that and we have a good list of other items that we can work on. I will say that we also see additional opportunities for investment, both in terms of expanding marketing and sales investment and innovation investments. So we'll manage that appropriately. But we felt based upon where we were, the degree of confidence we have in the certainty of the synergies that we've already executed that we felt comfortable in raising the earnings guidance. Relative to retention, I'd say payroll client and revenue retention continued to be strong at prepay levels, which I'll remind you, were near record levels for the company. We did continue to see concentrated losses in the small business area, predominantly out of business. I think you see bankruptcies that we kind of saw in the fourth quarter kind of continue into the first part of the first quarter. But I'll remind everybody, if you go back and look at the bankruptcy data, while it's a little bit elevated, it's still at that kind of pre-pandemic type of level, it's not out of the ordinary. So -- and then as we mentioned, the PEO worksite employee retention is maintaining a record level of performance from last year. So I feel very good about where we are from a retention. I think our value proposition is resonating good job with all the disruption when you think about all the disruption, what we're seeing in the Paycor client base there, what we're seeing in our client base, given all the uncertainty in the market and all the talk about challenges in the economy. We certainly are not seeing that in our retention numbers, and we're not seeing it in any of our other indicators as well.

We'll go next now to Andrew Nicholas of William Blair.

You touched on it briefly in your response to one of your earlier questions, but I just wanted to kind of dig into the second half ramp for PEO. Can you speak a little bit more to how the attach rate dynamics in Florida specifically, have they stabilized? And it is mostly just a comp dynamic or have you seen some improvement there in Florida with that plan?

Yes. So I'll take it first, Andrew. What I would say is, look, we're very early. You know our enrollment cycles. We're very early in the process. We have enrollments in October. We have another one in January, not only about 25% the employees will end up electing in the October time frame. So we're in very, very early days. What I would say is we've got a lot of work to make sure we have a different plan lineups those have been put in place. We have several initiatives going on there. We've done some improvements in the underwriting side. We're providing hand on client and employee enrollment support. We launched an AI partnership that we just recently announced as well that will actually provide a tool to help employees select a plan that they can afford and then combine some things together with savings accounts, which I think is going to help us as well.

So look, I think we're early in there. We continue to see across insurance, both the agency and in the PEO employees being very particular in terms of cost and value in the plan. So we've done everything we can, and we think that we need to do to be able to make sure that we get the participation. When I step back at it, what I know all the stuff we're doing is working because we're expanding our overall enrollment in our health plans in the PEO. The issue really is in the Florida plan, as we've talked about, we continue to monitor. What I'm not going to do is I'm not going to adjust in an environment -- a competitive environment in Florida. I'm not going to adjust my underwriting to take on undue risk. That doesn't get you in a lot of places and it ends up at a place. And again, when I look at it, I look at California, we're increasing our participation 10% and that's because we've been rational there the whole time, and we're taking opportunities as they present themselves. So it's a very delicate balance, particularly in the case where we have this program in Florida in balancing risk along with the growth of the plan. Remind everybody, it doesn't have anything to do with our profitability, and I don't think it has anything to do with the value of our proposition overall.

Yes. And just the only thing I would add to that, Andrew, on your compare question is the enrollment headwind, the lower enrollment that we had in Florida occurred as we went through the annual enrollment cycles last year. So when you look at the front half of the year, we have a tougher compare because we had higher enrollment last year. Once you get through that January enrollment then you kind of anniversary that, that headwind goes away and you have a much easier compare. And then all the things that John talked about that we're focused on driving enrollment as well as worksite employee growth, and that's why you get the acceleration in the PEO in the back half of the year.

Perfect. Makes sense. And maybe just sticking with the PEO market. Just broadly, I hear all the momentum there, mid-single-digit worksite employee growth, double-digit bookings, record retention. Is -- how would you describe the competitiveness of the environment, maybe outside of kind of the health care and the insurance piece. Like are your competitors there being aggressive with price on the admin fee? Or how aggressive are you willing to be on kind of the administration fee relative to maybe some desperate competitors in that market that are seeing the same level of growth as you had this quarter?

Yes, Andrew, I don't view it -- I've been in that business a long time, as you know. So I don't view it any different than any other cycle we've seen ebbs and flows of who's being more aggressive or less aggressive. I'd say the overall environment is very consistent. There's always going to be 1 or 2 irrational players out there. My view is of that value proposition, it's a holistic value proposition. You mentioned admin fee. Well, what the client wants to know is what are you providing from a technology and HR advisory support for the fee that I'm paying. I believe with all the investments we've made with the data assets we have, we introduced our AI-based HR assistance tool to support our HR experts in helping clients, we got the retention insight. So while we're going and telling them, what are you getting for your admin fee. It is a comprehensive HCM technology platform supported by the best supported HR experts in the industry. And so I think head-to-head with smaller provider that doesn't offer that type of capability, someone that's looking for HR outsourcing and looking for someone to help them build HR strategies, I think they're going to pay the additional admin fees. So we're not being -- we believe we provide a great value proposition comprehensively from our benefits offering from our technology platforms from our HR advisory support and so I feel very good about where we're positioned right now in terms of the competition.

We'll go next now to James Faucette of Morgan Stanley.

It's Michael Infante on for James. I just wanted to ask about the bill partnership. Can you maybe just paint a picture for us in terms of the customer profile who would be most likely to initially adopt some of these capabilities. How you think about some of the go-to-market dynamics between the 2 organizations? And maybe how we should be thinking about ARPU uplift potential for your average payroll customer that begins to use some of those AP capabilities?

We're really excited about the partnership. We've kind of been in the payments business allow our clients to make ancillary payments in the millions, believe it or not, through our system. It's not been our core business. And certainly, we viewed it as another value add. So I'm not looking at a big ARPU increase. We're trying to add value to the platform. And with this full digital integration that we're going to have with Bill.com, it really blossomed out of our relationship with the CPAs. And we've had a long-standing 1 with the association of CPAs [indiscernible] and that's what kind of you've started. So this really allows us to very quickly integrate. It's going to be integrated in our Flex application. Again, it's focused towards small businesses. They have 7 million payer and vendor network already built into their system. So it's a big advantage for easy payments. We're also going to augment that. So our clients are going to have the most broad set of payment options embedded in the application. We're going to start with AP and then look to add accounts receivable in 2026. So we're going to bundle this offering really to bring more value to our overall HCM bundle. And I'm not going to get into a lot of details of how we're going to do that because we're getting ready to go in selling season. But I think it's simple to say that we continue to look for opportunities to partner and fully integrate to add the most value in the HCM industry.

That's helpful. I appreciate that. Bob, just a quick housekeeping one on the agency dynamic within the PEO. I know you called out the agency piece, but was there anything incremental either in terms of PEO versus ASO mix shift and/or employees opting for lower cost health plans and maybe how that trended sequentially?

Yes, no difference there at all, Michael, than what we've seen in the past, I'd say, good balance between ASO and PEO. So we didn't see the pendulum swinging in one direction or the other. And as I mentioned, the PEO was actually slightly above what we expected in the quarter. And I wanted to highlight the agency because the overall growth of that category is being impacted by what we continue to see is some workers' comp rate headwinds on the agency side. But overall, the PEO business performed solidly and slightly above our expectations in the quarter.

We go next now to Daniel Jester of BMO Capital.

I wanted to go back to the comment in the prepared remarks about piling some Agentic AI in your sedan organization. I guess I know it's early days, but any sense about how much you would expect productivity to improve? Or how are you measuring the success of these pilot programs?

Yes. So Daniel, let me kind of maybe lay out to you. It's a pretty impressive track record of what we've done from an AI perspective, dating back to the first AI-based product before Chat GPT when we won the award for our retention insights dating back in early 2022. And we've continued to add a series of capabilities into our product set that really are providing more value for our clients. One of the things we strongly believe is we have the one of the largest data sets of small, medium-sized businesses when it comes to HR, we have [indiscernible] 40 million interactions with our clients on an annual basis that we're now capturing and analyzing. We believe that we are now applying that technology capability to really be able to provide them better insights. We think that's going to differentiate our products and our technology in the industry. And so we -- number one, the biggest thing we're looking at is how does it continue to help us drive more value, get price in the marketplace? How does it help us win. So that's one key way. We're using it a lot in the back office in terms of determining how we do discounting, how we do pricing. We're using it to help our service providers be more productive, as you mentioned, and we continue to look at ways in which we can leverage it to help our sales forces target their messaging and the clients in which they're talking to. So it's really across the board. We're doing a lot of different things there. We have also just recently launched an actual [ Agentic AI ] tool that will actually begin to handle some of these high-volume transactions through multiple channels. And so it's early, early innings in this, but we're really optimistic about what the impact can be to really allow us to provide more value for the clients. And then for us to free up the transactional time that our frontline service providers are doing today for the client so that they can look at the analytics and go and provide more advisory support. We think that's going to differentiate us from anyone else, particularly the smaller [indiscernible] in the industry that don't have access to the massive data set that we have.

That's great color. And then on the revenue synergies, holding them consistent with what you shared last quarter, I guess, would you be able to provide any color on sort of the learnings that you've had? You highlighted that big win in the prepared remarks. But as you're approaching the cross-sell revenue synergy opportunity, anything that you may be modifying now that you've been out in a couple of months trying to do this.

Yes. Look, I think -- look, the integration has been going really well. I mean all the things that can happen during a large integration, we've been very happy with the progress we're making on getting the cost synergies as we've already talked about. And I think we actually believe that there's additional opportunities over the long term to go after those. There's also additional investment opportunities that we see that we think could drive growth and drive further innovation. On the revenue side, we met our revenue synergy expectations for the first quarter. And every month that we were engaging with Paycor's clients, we continue to see the pipeline grow and we continue to see the receptivity grow. When we look to areas where we thought that we may have concerns with channels, we've seen that continue to improve through the course of the [ quarter. ] So all the things that we kind of knew going into it, the known, if you will, I've been very pleased with how we've worked through those. The culture and the people side is always the thing you get concerned about, you get concerned about client disruption. So I go and I look at attrition, employee attrition, actually is better than what Paycor had seen historically. You take the synergies we took out aside. You look at what we've done from integrating them into the executive leadership team that are making huge contributions both from the terms of just general management expertise, product expertise, marketing expertise, legal expertise across the board, the people of Paychex and Paycor have come together and we're making more powerful decisions, I think, as an organization. And so then I look at it and I go, what's my biggest surprise? We have a very specific model at Paychex that we went after, particularly an upsell. And we have these target segments that we know exactly what the sweet spot is for an ASO client, so one's going to use our HR outsourcing. What surprised me is how much further upmarket that value proposition could potentially go. I mean when I'm getting multi-thousand ASO HR outsourcing deals, two of them, early stages, that was surprising to me. And we're actually now trying to rethink, okay, what does that look like upmarket in a much bigger scale than what we're used to. We've done it before at Paychex. But again, in the first 6 to 8 weeks, we're landing some large clients that we really would not have thought or certainly was not in our model because we were targeting more of our sweet spot. So that's the thing that I'm most excited about is I think the value -- same thing in 401(k). I think the value proposition that we've historically had at Paychex, I think, is also resonating more upmarket, and I think that's going to give us some upside opportunity.

[Operator Instructions] We'll go next now to Ashish Sabadra of RBC Capital Markets.

This is David on for Ashish. Just taking a step back in terms of the regulatory environment, government tuck-ons and maybe changes H1B. How are you thinking about that? And how is the business I guess, positioned to weather those changes, whether it be good or bad?

Yes. Look, I mean we've been through a lot of cycles. And what I would say is that our small business clients tend to be resilient. In terms of the paycheck specifically, we don't have a heavy concentration with government -- with the federal government. And so I don't expect any impact directly to our business. I'm sure we'll have some clients in the DC area that may have some some issues. And then we don't have a lot of H1B visa issues internally as a company. So again, I don't view those things as a big issue. What I would tell you is the small, medium-sized business market continues to be resilient. We've seen stability in terms of employment since the start of the year. It's not taking off, but it's not going down in a recessionary mode. We continue to see wage inflation below 3%, very steady. That's been very steady for almost 18 quarters now. So we see a very stable small business environment. I think some of the things with the tax bill being behind us and there's -- at least some degree of certainty there, which is probably important for people to make some investment decisions, particularly the R&D credit issue. And then also I think with now you getting the Fed, but the first rate cut is underway. We'll see where that's going. I would say that we're still in kind of restrictive environment. But I think if you continue to see that, you continue to see investment capital I feel pretty good about where small businesses are set up. I think they're more optimistic now than they were at the start of the year. And like I said, I just think we continue to work through additional surprises.

We'll go next now to Scott Wurtzel of Wolfe Research.

I appreciate the incremental color on the cost synergy side and sort of your view on the targets there. Wondering if you can just talk about -- just give us a kind of update or inform us of the milestones that you've had so far? What's left to come and where maybe some of these incremental potential cost synergies will be coming from down the line?

Yes. Yes, maybe I'll start and John can answer. I would say most of the actions required to realize the cost synergies are behind us, Scott. So a lot of that happened early on after we closed the transaction. Obviously, we had some transition resources that we carry through a period of time and to help us there. And I would say most of the cost synergies, obviously, a lot of that is overlap and functions, you have 2 public companies coming together. And there's other areas that we're going after. We think there's certainly some opportunities from a procurement standpoint and leveraging the combined spend to get better rates and things like that. So those are the additional opportunities that we're going to go after. And as we've said, we're going to how much of that we drop to the bottom line versus looking for additional investment opportunities as we move forward.

Got it. And then just a quick follow-up. Just on the retirement side. Wondering if you can maybe quantify how contributory that was to growth this quarter, just given where kind of equity markets landed at the end of the quarter relative to when you guys reported earnings if there was any incremental tailwind on the retirement side during the quarter.

Yes. I mean that's been a strong growth business for us for some time. And in the quarter, that continued. I would say it was near double-digit growth in Q1.

And gentlemen, it appears we have no further questions this morning. Mr. Gibson, I'd like to turn the conference back to you for any closing comments.

Okay. Well, thank you, Bill. Appreciate it. Well, listen, in summary, as we stated, we're off to a good start in fiscal year '26, delivering robust revenue growth, solid earnings per share. The integration continues to exceed our expectation. We're hitting the cost synergies, revenue synergy opportunity continues to just reinforce to me the strategic value of the acquisition and we truly believe that the innovation that we have in front of us with AI-driven solutions are going to drive better value and efficiency really across the entire business for our clients and for our shareholders.

I think as you look at the company today, having gotten the major lifting and the integration behind us, we are now stronger as one Paychex, and that's really what we are going forward. And I really believe that we have the most comprehensive set of platforms and capabilities in the industry to meet the need of any client of any size, and that's only been reinforced in the last quarter understanding the power of our HR outsourcing and its ability to move upmarket. And I think that we're better positioned than we've ever been to fulfill our purpose to help businesses succeed. So I want to thank you for your interest in Paychex. And hope you have a great day.

Thank you, Mr. Gibson, and thank you, Mr. Schrader. Again, ladies and gentlemen, that will conclude Paychex First Quarter Fiscal 2026 Earnings Call. Again, thank you so much for joining us this morning. And again, we wish you all a great day. Goodbye.