Prepared remarks
Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. Any member of our team will be happy to help you. Good morning, and welcome to Paychex, Inc.'s third quarter fiscal 2026 earnings call. Participating on the call today are John B. Gibson and Robert Lewis Schrader. Following the speakers’ prepared remarks, we will open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, please press 2 on your telephone keypad. As a reminder, this conference is being recorded. Your participation implies consent to our recording of this call. I would now like to turn the call over to Robert Lewis Schrader, Paychex, Inc.'s Chief Financial Officer.
Thank you for joining us to discuss Paychex, Inc.'s third quarter fiscal 2026 results. Our earnings release and presentation are available on our Investor Relations website and 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 the reconciliation of non-GAAP measures, can be found in our earnings release. I would now like to turn the call over to John B. Gibson, Paychex, Inc.'s President and CEO.
Thanks, Bob. Hello, everyone. I will cover this quarter's operational highlights, and Bob will come back and discuss our financial results and outlook, and then we will 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, and administrating benefits carry significant regulatory and reputational risk, driving demand for trusted compliance solutions where accuracy matters most. Demand for our comprehensive advisory and benefit solutions remains 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 40 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 streamline benefits selection. We continue extending our SMB benefit leadership with Paychex 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 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 2026 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 Paychex, Inc. 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 2027. Our Paychex Flex and Paycor platforms were recognized as industry-leading HCM solutions with two 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 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, Inc. 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 email 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 removes prior friction and serves as a foundational capability to future agentic 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 dataset to complete work to drive business success. Payroll and HR are mission critical and highly regulated functions where accuracy and compliance matter more than automation alone. We believe Paychex, Inc.'s proprietary payroll data, regulatory expertise, and advisory relationships create a sustainable advantage that will enable us to responsibly embed AI into our solutions while maintaining a durable competitive moat. In our business, trust is critical. It is not just what you do, but how you do it that matters to prospects, clients, partners, employees, and key stakeholders. That is why I am proud that Paychex, Inc. was once again named one of the World's Most Ethical Companies by Ethisphere for the eighteenth 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, Inc. 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 would 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 have 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 2027. I will now turn the call over to Bob to discuss our financial results and outlook.
Thank you, John. I will 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 $1.0 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 $5.0 billion as of the quarter close. Our cash flow generation continues to be a strength of our model. Operating cash flows were nearly $2.0 billion year to date, and our free cash flows increased 27% year over year. After the quarter closed, we repaid the initial $400 million tranche of debt from our Oasis acquisition that matured in March. Our recent $1.0 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 2026, which is based on current market conditions, we reaffirm our prior fiscal 2026 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. Turning to the fourth quarter to provide you a little bit of color, 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, 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, Inc. has never been better positioned to succeed in the AI era of HCM to 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.
Questions and answers
Thank you. If you would like to ask a question, press 1. To leave the queue at any time, press 2. We do ask that you limit yourself to one question and one follow-up. Once again, that is 1 to ask a question. And our first question comes from Bryan C. Bergin with TD Cowen. Your line is now open. Please go ahead.
Hi, guys. Good morning. Thank you. 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.
Yeah. Bryan, 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 have seen sequential improvement each quarter in the organic growth of the business. So if you look at first half total revenue organic growth, it was roughly 4% and that improved from Q1 to Q2. And then when you look at the back half, whether it is 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 are now getting to a back half organic growth rate that is closer to 6%. And then when you put the two of those together, it is roughly 5% on a full-year basis. And so again, I think there are a couple drivers of it.
One, to be fair, is the easier compare on the PEO business. I mean, I think you will see that the headline PEO number sequentially went from 6% last quarter to 9%. There are some timing things there, but there is certainly a 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 is why you are definitely seeing the combination of an easier compare and 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 2027, any important considerations that you want to share?
Yeah. I will maybe head off the question that I am probably going to get. As it relates to next year and guidance, we are in the early stages, I would tell you, of our operating plan and are going to finalize that over the next six to eight 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 the year. I think we needed to do that given some of the uncertainty in the environment back then. Our preference now is to 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 is out there in the models and consensus. And when I look at that, I really do not see any reason that I need to steer you in one direction or another. I am fairly comfortable with what is out there. And I think, Bryan, what you will see is the organic growth rate, whether it is Q3 or Q4—we are 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 what is assumed from a consensus standpoint for next year.
Thank you. And we will take our next question from Mark Steven Marcon with Baird. Your line is now open.
Thanks for taking my questions, and nice performance this quarter. I am wondering if you could talk about a couple of things. One, you did mention that Paycor was seeing new broker engagements or a renewal of some of the broker engagements and that pipeline. I was just wondering if you could 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, etc.?
Hey, Mark. This is John. I would say the competitive environment is stable and the same. It is competitive. I would not say I have seen much change there. From a sales perspective, I am 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 have seen that sequentially as we come out of the disruption at the start of the year with the integration of teams, continuing to grow there. PEO, double-digit bookings; Paycor, double-digit bookings as well. We actually see bookings in the PAR referral continuing to accelerate back to pre-acquisition levels. We are actually adding headcount in the enterprise space. Remember, Paycor for us is a brand for the enterprise market, 100 plus, and we think that is a great opportunity for our HR outsourcing services as well as technology solutions.
And so we are 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 2027, both in terms of our competitive positioning and our headcount. We are entering 2027 with all of the integration work behind us that we did early in the beginning of this fiscal year, and we are entering with not only an aligned 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 is great to hear. And then I thought the gross margin performance was particularly impressive. When we take a look before defining gross margin as revenue minus the direct costs, and part of that was obviously the higher interest income off of the float. But beyond that, it looks like it is doing extremely well. How much of that is related to some of the AI initiatives that you have put in place in terms of embedding AI across your service infrastructure and making them more productive versus other initiatives, perhaps shifting some of your costs to lower-cost labor markets like India, and how much more can we do there? Because it has been fairly impressive. I am 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, as the best operators, margin expansion as we grow revenue in the business. And I think you are 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 have been using AI in predecessor-type models for many years. Now with this new technology, what we are seeing is pretty impressive. It is pretty incredible. Some of the things we are doing in terms of generative AI models, which we have now released to scale after the pilots—doing voice payroll, doing email payrolls—what we are seeing in our beta groups in sales using our sales guru tool and what we are seeing from a service perspective is encouraging. So I feel good about the opportunities. If we grow the top line, we are going to be able to grow margins and expand margins over time. 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.
On 2027, we are just getting in. That is a big question—how do you begin to quantify the real positive impact from sales productivity, the way we are using it in marketing, what the potential is from a service perspective. We will have lively discussions during our planning sessions about exactly the potential that this technology has both to drive the top line and to continue to expand margins. So I think there is more room ahead. Every year, something new comes out. And we are innovators in that regard. We are going to grab every tool we can to continue to drive efficiency.
We will go next to Tien-Tsin Huang with JPMorgan. Your line is now open.
Hey, thanks. Hi, John and Bob. I wanted to ask on the advisory work that you talked a little bit about. I think that is probably underappreciated in terms of what Paychex, Inc. does there. How AI-proof is the advisory side of the business? Can rules-based advice from AI supplant what Paychex, Inc. does on the advisory side? I am guessing that a lot of your advisory work is centered around compliance and very complex data issues that only Paychex, Inc. has. Can you elaborate on that?
Tien-Tsin, I think this is extremely interesting. For the vast majority of our clients, we are their HR department. We not only provide advice, we talk to them and support them when they make decisions. In our PEO, we are in a co-employment arrangement and represent clients in numerous employee situations. There is no way technology is going to replace that in the short term. We actually own a patent on using agentic AI in a mesh form of structured and unstructured data to answer HR and compliance questions. Why is that? Because we have a large compliance regulatory team that constantly keeps that system up to date. Changes in local rules are not automated; someone must go to the source, interpret it, monitor court decisions, and then update the system to respond to a client question. We have launched these AI-embedded tools inside our HR generalists and are seeing significant productivity improvements. We are embedding these tools into our platforms so clients can access them, which will drive efficiency. But for most of our clients—and increasingly upmarket—we are becoming the HR partner for managing people. As long as our clients have people, they will need Paychex, Inc. to help them manage those people.
Well, I will say your opinion is very important, John. That is why I am asking. Maybe as a follow-up, thinking about these agents as they get deployed and the proprietary data that you have, does this get monetized through your normal pricing you typically would put through in the spring, or do you think of this as a new monetizable opportunity for Paychex, Inc.?
We have been monetizing our data and providing insight for years. We won the 2022 best use of AI in HCM with our retention insights before this recent wave of AI. We monetize insights for clients and provide them with retention and other recommendations. Today, we are applying AI into products and services to improve user experience and insights, such as benefits advice in PEO. AI requires a large, robust dataset and constantly moving data. The flywheel effect is important: every interaction from HR, payroll, and compliance adds to our dataset. As our tools analyze common trends, we can be more proactive for clients. As transactional work becomes automated, it frees up time for HR professionals to act on insights—compensation, retention, workplace trends by geography—and improve client outcomes. This will continue to improve the value we provide and the outcomes our clients see.
Thank you. We will move next to Brian Keane with Citi. Your line is now open.
Yeah. Hi. Good morning. 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?
Maybe I will start and then John can add some color. It is twofold. Think strength in the underlying operating performance of the business. We saw double-digit demand for PEO, record WSE retention, and high-single-digit worksite employee growth. This business is about worksite employees, and we continue to outpace competitors. We anniversary a tougher compare in the MPP business. January is the big annual enrollment, and enrollment in our MPP is up modestly. Across the entire PEO space, medical enrollment was up high-single digits, near double digits, during annual enrollment. That reflects the PEO value proposition—the ability to offer medical insurance and workers’ comp leveraging our scale. We had a good year-end enrollment. There was also some timing on the agency side—carrier bonuses and SUI revenue timing—that benefited Q3 a bit versus Q4. Overall, this was strong performance and pretty much what we planned in the back half of the year.
I want to add that the PEO performance is very strong, outpacing the industry significantly. Double-digit revenue growth, double-digit bookings, and success upmarket. We are having success with Paycor sales into broker channels positioning PEO upfront. A Paycor rep discussing existing problems now has multiple solutions, and we are selling more PEOs, including some larger deals than typical. In January that was a positive and should continue to help. Agencies were still a drag in the quarter to the segment, but we saw sequential improvement, even in bookings. We have made changes in the agency, trying to be more innovative. We are building strategies to work around market conditions and are making progress there. Look back at our PEO success over 2020 to 2025: our CAGR of worksite employee growth has been double digits and far surpasses other providers. The setup involved strategic focus and an acquisition of Oasis in 2018, which helped us drive growth and gain share. That is what we aim to replicate with Paycor in the enterprise space.
Got it. And just a quick follow-up, Bob. The 12% revenue growth you called out for Q4 is a point below the Street. It sounds like there was some timing benefit in PEO in Q3. But organically, the organic growth does not move much. Maybe just talk about some of the benefit if Q3 should be stronger organically than Q4.
I think you would probably see a slight uptick, a continued acceleration in the organic growth of the business in Q4 relative to Q3. We do not give quarterly guidance, but I am trying to give color to help your models. Q3 is a big quarter for us—year-end, selling season, large year-end processing fees in January, and the large PEO enrollment. We were intentionally conservative last quarter when providing color on Q3. Q3 was in line and a bit better than our expectations. There were some puts and takes between Q3 and Q4, and the back half of the year is in line with our expectations. You will continue to see sequential improvement in organic growth in the business, positioning us well as we move into fiscal 2027.
Thank you. We will move next to Andrew Owen Nicholas with William Blair. Your line is now open.
Hi, guys. Good morning. This is Daniel on for Andrew today. Thank you for taking my questions. 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 looking forward, can sequential growth in PEO specifically continue into the fourth quarter off of that?
I think the growth rate in Q4 will be lower because of some of those timing items. I do not have the exact percentage. If you look at the two quarters combined, you will see a sequential lift in organic growth for PEO and Insurance in the back half relative to the first half. When you do the math, the growth rate will be a little lower in Q4 than Q3, but the two quarters together represent a meaningful step up in organic growth relative to the first half.
Great. 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 sit, whether that is on the revenue or the cost side?
We are very pleased with the acceleration each quarter. After the deal closed, we made a conscious decision to get the hard integration work done quickly rather than dragging it out, and that has allowed momentum to rebuild. We are back to pre-acquisition bookings volume and broker engagement, and we now have the cross-sell opportunity. Expense synergies are largely behind us—we have taken those actions and exceeded our expectations. The value creation longer term is cross-sell: 401(k)s, ASO, PEO, and other products. You will see Perks in the Paycor ecosystem as well. That is where we see the opportunity as we roll into fiscal year 2027.
Thank you. We will go next to Kevin McVeigh with UBS. Your line is now open.
Great. Thank you so much. Hey, 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 have been doing a nice job on the integration. But just remind us what the revenue and expense synergies were—I guess we are bumping up on a year. I think that that would help.
Kevin, when we originally announced the deal the expense synergies were in the $80 million to $90 million range. The last update we gave was we expected those to be in the $100 million range, and we have exceeded the expectations we laid out. We will continue to look for additional opportunities, particularly around procurement and other areas. The revenue synergies were expected to contribute 30 to 50 basis points of growth this year; we are probably on the high end of that. The expense synergies helped justify the purchase price, but the long-term value creation is the cross-sell. Paycor average client size is larger than ours and more likely to need higher-value solutions. We are being intentional and cautious in going after that opportunity and building momentum.
Helpful. And then just a real quick follow-up. John, you had some great commentary on AI opportunity. As you think about AI across a 10-person client as opposed to an 80-employee client, is the go-to-market strategy different in terms of consumption patterns, or how are you positioning for serving the full range of clients?
If you look across our client base, many small clients do not have an HR director. Our ASO and PEO businesses allow clients to avoid building an HR department, leveraging Paychex, Inc. at scale—technology, datasets, insights, and HR expertise. AI makes a big difference for a scale player because we have more insights about pay and trends across geographies. For companies above 100 employees, many have an HR department that is understaffed; we can augment their HR organization with our expertise, technology, and support staff to allow them to focus on strategic HR activity. Companies may ask whether to apply AI to an existing HR department or to leverage an external provider that can provide tools and people with broader data and insights. AI allows us to do this at scale. We now offer managed payroll and managed benefits at Paycor too. Clients can buy our tech and get support, or have us do it for them. AI and scale create differentiation across sizes of clients.
Thank you. Our next question comes from Samad Saleem Samana with Jefferies. Hi, good morning, and thanks for taking my questions.
Good to hear it sounds like trends are getting pretty good. You had mentioned recently that maybe the initial land per client was a little bit smaller than historical or fewer add-on modules at the point of sale. I am curious if you have seen that trend change as well. Was that a onetime kind of occurrence—what you saw last quarter—and if that has improved?
I would say the market has been relatively stable in that regard. We probably had higher expectations going into the year about the number of modules we would add, and that did not change much in the Q3 selling season from what we saw before.
Understood. And then in the PEO business, as we try to figure out what is happening under the hood in terms of different verticals and employment outlook, can you remind us what the vertical exposure inside of the PEO business is broadly speaking versus white collar, blue collar? And then related, for that high-single-digit PEO WSE growth, how much of that is driven by net new deals versus headcount growth within the installed base? Thank you again.
We are broad across industries. Our analysis of job codes shows the PEO business skews a bit more toward blue- and gray-collar roles relative to the general workforce, partially because large enterprises skew more white collar. We had good net new client and worksite employee gains in the PEO.
I would say the entire driver is net new. Headcount within the installed base has been relatively flat in most years. The growth in worksite employees is driven by net new demand and record retention.
Thank you. We will go next to Ramsey El-Assal with Cantor Fitzgerald. Your line is now open.
Hi. Thank you for taking my question this morning. 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, Inc.? Do the larger clients translate into a slower conversion process or not so much?
It is a little longer than what we are used to. There is a couple-quarter lag for Paycor conversions compared to legacy Paychex, which can implement clients more quickly. It depends on client size but typically is longer.
And is that the same for cross-sell or new product attach? Or is that something that you can turn on more quickly?
Cross-sell and attach are far more quickly executed. We integrated ancillary products early, and those cadences are much closer to legacy Paychex.
Thank you. Our next question comes from James Eugene Faucette with Morgan Stanley. Your line is now open.
Great. Thank you very much. I wanted to ask a quick macro question and tie it to a margin question. You mentioned that you still see a tight labor environment. Just wondering if you can provide any anecdotes or color on that comment. And then as it relates to margins, you said you expect there is 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. Looking for a little color on timing around those items. Thanks a lot, guys.
On the macro side, the environment has been relatively stable; it is a low-fire, low-hire environment. Our small business index has not changed significantly this fiscal year. Small businesses, especially under 50 employees, report continued difficulty finding qualified candidates. We are supporting clients to manage that. There is some hesitancy to add in the uncertain environment as you move upmarket, but overall the business has been relatively flat in payroll levels.
On integration-related items and margin, we back a lot of stuff out for adjusted operating margins, so those are not included. GAAP margins remain high, likely in the 40% range. We still see room to expand margins as we embed AI across processes. That is part of our DNA—we aim to be more productive and efficient to expand margins while investing back into the business. Adjusted margins are high, but given advancements in technology, we feel there is still runway to balance priorities and expand margins.
Thanks so much, John. Thanks, Bob.
Yep. Thank you. Our next question comes from Daniel Jester with BMO Capital Markets. Your line is now open.
Hey, good morning. This is Kyle Aberastri on for Dan Jester. Thank you for squeezing me in here. 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? Thank you.
The annual form filing is always a large number in Q3 and is high-margin revenue, which contributes to the higher Q3 margins. It was probably consistent with prior years. One comment: the discounting on those year-end filings was better than we have seen historically and a bit better than assumed in our forecast. Sales reps sometimes use the filing discounting lever when closing new deals late in the year. We do not know exactly until it bills in January, but price realization and discounting were a bit better than we assumed. It was not a major growth driver year over year, and performance was similar to past years.
Thank you. Our next question comes from David Grossman with Stifel. Your line is now open.
Good morning. Thank you. I think last quarter, your bias was the low end of the revenue growth range. And I am just wondering, in reiterating the guide, are we still favoring the low end? Or given some of your commentary about the third quarter and going into the fourth quarter, are you feeling better about the business and maybe better than the low end?
We would stay where we are at. We were a little conservative last quarter and provided some color. Q3 came in a bit better than expectations and the selling season was strong. We have momentum in a number of businesses. The back half is in line with our expectations, and that is why we are leaving guidance where we had it last quarter.
Got it. One more on pricing: is there anything now being a combined company about how we should think about pays or pricing in Management Solutions going into next year? Particularly given that Paycor is in the base?
We are entering our budget meetings and will finalize pricing decisions during that process. We have a tradition of driving value to clients and getting price accordingly. We are not going to disclose specific pricing ranges at this time. We expect a similar macro environment and are being prudent given the unique macro uncertainty. Right now we feel in good shape and see no signs in our indicators that would change our assumptions around pay across segments.
Thank you. Our next question comes from Jacob Smith with Guggenheim Securities. Your line is now open.
Quick one—just, you are a second company in the mid-market through Paycor really talking about expanding headcount to capture opportunity. Just what are you seeing out there that is giving you conviction?
We have a defined list of clients and prospects, territories with open coverage, and we are expanding headcount to fill those roles. Paycor was already expanding headcount before the acquisition due to opportunity, and with our comprehensive offerings the opportunity has expanded. That gives us confidence to increase headcount and capture upmarket opportunities for HCM and our HR advisory value proposition.
Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is now open.
Thanks for taking my question. I was wondering if you could provide some color on the year-on-year growth in Paycor in the quarter. And if you could quantify the contribution for form filings for Paycor in the quarter? Thanks.
The lines between Paycor and Paychex have become blurred due to our early decision to integrate the businesses. Our best estimate is the organic growth of the Paycor business was consistent with the first half—upper-single-digit range. When we look at enterprise clients above 100 employees, irrespective of the sales organization or platform, that business has been growing. In the first half it grew upper single digits; in Q3 it grew around 10%. That is how we are managing and reporting the business going forward. Our expectation would be to grow at or above other assets in that segment.
That is very helpful color. I was just wondering if you had some initial thoughts on pricing for next year and how that trend compares to your historical range? Also, you mentioned discounting was lower on forms filing—can you comment on discounting for ASO in general?
We will discuss pricing in our budget meetings. We are not going to provide exact ranges or comment on the pricing strategy for next year at this time. Our long-term model remains intact, and we will be deliberate in how we position pricing competitively.
Thank you. Our next question comes from Scott Darren Wurtzel with Wolfe Research. Your line is now open.
Hey, guys. Thanks for squeezing me in. I will limit it to one. Just going back to the PEO—I mean, your commentary on enrollment sounded pretty positive. I remember you made some changes to benefits offerings. But I also wonder, is there any element of employees adjusting to higher health care premium inflation that could also be helping to drive some of this enrollment growth as they make choices? Thanks.
Everyone is adjusting. We adjusted plan designs and employees are adjusting their choices. In tests where AI was used versus not used, employees made better choices that improved outcomes. AI's ability to model prior spend and personal circumstances can lead to better plan selection—sometimes a middle plan instead of the cheapest plan—which is better for participants and impacts benefits revenue because it results in higher-priced plan selection.
Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is now open.
John, you talked about Paycor revenue synergies as we go into FY 2027 and the opportunity to really take advantage of that. I am wondering how the Salesforce alignment is going because I am guessing that is part of the revenue synergies that you would be able to capture.
On alignment: Paycor is a brand for the enterprise market (100-plus). We placed assets into that business unit to focus on that market, spending marketing dollars and adding sales reps specifically for that target segment. A lead from Paycor marketing that looks like a PEO opportunity will be moved to the PEO team. We are ensuring all sales reps represent the full capabilities of the company through incentives and AI tools, so every rep in the market can present the comprehensive capabilities—technology, do-it-yourself, do-it-for-you, and advisory services.
Yeah. And then just a follow-up question, Bob. Any thought about potentially using a little bit of leverage to buy back stock considering the stock price is?
We recently announced a new $1.0 billion share buyback authorization, significantly larger than prior authorizations. We have been opportunistic this year and returned capital. Our leverage is low, and these decisions are board-level. We will continue to evaluate capital allocation priorities, including investments in the business and share repurchases. I do not want to say never, but we will continue to have those conversations with the board.
And our next question comes from Jason Alan Kupferberg with Wells Fargo. Your line is now open.
Thanks, guys. Good morning. I wanted to ask about Management Solutions specifically. I think the organic growth was 4% in the quarter. I think that is the same as we saw last quarter. Do we expect that to accelerate in Q4? And if so, is that because you will start to lap Paycor during the quarter? Or would there be other accelerants we should be considering? Thanks.
Jason, it was about 4% in Q2 and 4% in Q3, with sequential improvement in organic growth for Management Solutions. We would expect continued improvement and potential acceleration in Q4. You are anniversarying the acquisition, so a scale business growing faster than the overall business will help the organic number. We are building momentum on cross-sell and synergy opportunities that showed up in Q3 selling, which should feed into the P&L as bookings convert to revenue. Expect improvement in Management Solutions' organic growth into Q4.
Okay. Understood. And then just a clarification. I know we are not changing EPS guidance, but we did up interest income guidance a little bit. I would think that would lift EPS maybe modestly. Is it conservatism leaving EPS guide as is, or are you going to reinvest some of that upside? Slight combination of both?
It is a combination. We will look for opportunities to invest as we finish the year and into fiscal 2027. We balance trade-offs between returning capital and investing for growth and will manage through the quarter to optimize priorities.
We have many opportunities for investment post-Q3 that can accelerate growth and margin expansion. We will be making decisions in our planning process, and if an investment benefits early fiscal 2027, we will consider making it rather than waiting.
Thank you. At this time, there are no further questions in queue. I will now turn the meeting back to John B. Gibson.
Okay. Well, thank you, everyone. Just to highlight, we delivered strong double-digit revenue and earnings growth, continuing to reflect very strong execution and focus of the teams. I do want to call out that we are approaching a one-year anniversary of the acquisition of Paycor, and I want to call out the Paycor team in particular. The group has been through a lot. If you think back a year ago and what we were preparing for, the way our organizations have come together and built momentum this fiscal year has been impressive. I said a year ago we would be better together, and we are better together. I point to our PEO example and how we focused on that strategically many years ago; that is a good model to replicate as we go into fiscal year 2027 and beyond in the enterprise space. Paychex, Inc. has never been better positioned than it is today. We have differentiated ourselves in the marketplace repeatedly. In this new AI era, our scale, breadth, capabilities from an expertise perspective, and the fact that we are dealing in mission-critical work where errors are costly will continue to drive clients of all sizes to turn to Paychex, Inc. to be their HR department and provide leading technology and advisory solutions. I like where we are positioned, and I want to thank you for your interest in Paychex, Inc. Thank you.
This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.