沛齊 (PAYX) 2026 Q2 法說會逐字稿

(Operator Instructions) 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, Paychex Chief Financial Officer.

Thank you for joining us to discuss Paychex 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 Plus program and refreshed value proposition centered on delivering greater value to our partners as we continue to expand and fully integrate the Paychex's 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 GenAI-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 three platforms: SurePayroll, Paychex Flex, and Paycor. We are proud that both Paychex Flex and Paycor platforms were recognized as leaders in NelsonHall's 2025 HCM technology and GenAI 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 agentic AI pilots were 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. We are continuing to invest in these capabilities and are actively exploring additional applications across the business.

In sales, we are leveraging a new GenAI 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 and 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 Paycor 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 $514 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 and Insurance in 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) Mark Marcon, Baird.

Good morning and thanks for taking my questions, 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 I 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 -- looking at last year -- if you look at their quarter last year, that ended in December and that 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.

Yeah. 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 dropped at that point in time. We finally own the asset in April, we've seen steady progress, actually see broker 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 as a standalone business. It is now our enterprise 100-plus market segment. Hope that helps.

That does. And just as a follow-up, just two 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 agentic 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? Thank you and happy holidays.

Let me segment. Let's start with -- maybe 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 people are 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 AI 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, add 1,000 HR professionals to their business model next week so.

Great. Thanks a lot and happy holidays.

Thanks, Mark. Happy holidays.

Bryan Bergin, TD Cowen.

Hey, guys. Good morning. 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 greater comfort at the low end of the range now. I know you noted penetration and price realization have been driving growth so far, but I guess, softer-than-expected revenue per client. So can you just talk about that a bit more?

Yeah. I mean it's really across the board and in any one specific business. I mean -- obviously, when we look at those two 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 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, Bryan.

Yeah. Bryan, 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 three 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 two modules additional; our three modules, maybe we're adding, too, today. The good thing is we're getting the clients. Now, we got to go back and 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 solid. I just think there's a lot of shoppers out there. That's what I would say.

Okay. Understood. Thank you for that detail. And my follow-up is on Paycor. So the 8% to 9% that you mentioned earlier, is that adjusted to remove out the December form 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.

Okay. Thank you. Happy holidays.

Bryan Keane, 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?

Yeah. I think we generally said, Bryan, 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.

Bryan, again, 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 two different companies at the same time.

We've integrated the business, and we have integrated the businesses and we're going into the 50,000 Paycor clients and we're beginning to upsell them. 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 clients 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 of our own Flex platform that were in our P&L that we're moving over to Paycor 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 to, 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 Paychex 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 HR, are those all macro driven? Or is anything fundamental happening there, competition causing some of that softness?

Yeah. 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 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 three packages they can sell. And lo and behold, 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 cutting 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.

Okay. Very helpful. Happy holidays.

Tien-Tsin Huang, 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 new normal, how you might adjust is really what I'm trying to get at here.

Yeah. Well, Tien-Tsin, I would say between SurePayroll, Paychex 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 three 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 three 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. Thank you for that. 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 -- healthcare 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 healthcare 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 healthcare at the rate we saw last year, which is a positive thus far. So that's pretty much through and we 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.

Andrew Nicholas, William Blair.

I wanted to talk a bit about the upsell motion to PEO specifically. Kind of a two-parter here. One on just overall Paycor client receptivity to PEO? And then also in this environment and you just spoke to some of the unique dynamics with healthcare inflation, is the percentage of worksite employees going into the PEO business from your 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?

Yeah. 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 a little -- some time it tilts a little more outside the base, sometimes it tilts more inside base, 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, working with our customer's 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 a rate that maybe we can do better at in the PEO so.

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 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?

Yeah. 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.

James Faucette, 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?

Yeah. 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 fund's portfolio at Paycor given they were largely invested short.

And 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 two 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 three years on average duration, and we are getting closer to two. 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 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 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?

Yeah, 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 re-established a lot of new teams, new territories, reset that. So a lot of that was done right after the acquisition was announced, what, 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 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.

Samad Samana, 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 de-risking 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.

Yeah, 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 the couple of things that we highlighted on the Management Solutions side. It is strong revenue per client just a little bit softer 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 six 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 and 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 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 feedback, Samad.

Appreciate that. And thank you for that color. 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 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 and 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.

Understood. Have a happy holidays, guys. Thanks again.

Ashish Sabadra, RBC Capital Markets.

This is (inaudible) on for Ashish Sabadra. Appreciate you guys taking our question. 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 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 one of the three 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 so.

Thank you, guys. Happy holidays.

Kartik Mehta, Northcoast Research.

Hey, 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 cost 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, yeah, 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 -- they're not willing to pay their own -- they're 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. Hey, Bob, I just had a question for you on your buyback. It seems like the buyback was higher this quarter than you've done in the past. In the past, the strategy has been let's do enough to offset dilution. But it seems like this has a little bit more. I'm wondering, is that a change in strategy, a one-quarter event? Or is this something you can continue doing?

Yeah. I mean -- yeah, good question, Kartik. Yeah, 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 buyback shares to offset dilution.

That being said, I think if you go back six months ago, when we 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 six months ago. And six 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, Kartik.

Perfect. Thanks, Bob. I appreciate that. I hope you and John have a great holiday.

Scott Wurtzel, Wolfe Research.

Bob, I just had a question on the 3Q guide and calling for a total revenue growth of 18%. If I 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 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.

Yeah. 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 and 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 Paycor, 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 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?

Yeah, 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 happened -- 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 Paycor side, inside their go-to-market systems. But the sales teams are loving it at this point in time.

Jason Kupferberg, 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?

Yeah. 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. 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 get 3 points of acceleration from first half to second half?

It's a good question. I would start with 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 October, 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 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.

Okay. Understood. Enjoy the holidays. Thanks.

Thank you. 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, Koy. So listen, I appreciate everybody being with us here, Friday before the holidays. 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, going through integrations like this are always challenging from an emotional side and a cultural side. And 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 a happy holidays.

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