Paychex Inc 2027 Q1 Earnings Call

Thank you for joining us to discuss Paychex first quarter fiscal 2027 results. Our earnings release and presentation are available on our investor relations website. We plan to file our Form 10-Q with the SEC within the next couple of days. This call is being webcast live and will be available for replay on our investor relations portal. Today's call includes forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference non-GAAP financial measures. A description of these items, along with a reconciliation of non-GAAP measures, can be found in our earnings release. I would now like to turn the call over to John Gibson, Paychex President and CEO.

Thanks, Bob. We delivered a solid start to fiscal year 2027, with double-digit growth in operating income and earnings per share. Total revenue growth of 6% was driven by strong revenue growth in PEO and insurance solutions and continued progress against our strategic objectives, including accelerating AI across our business and executing on our go-to-market strategy. More broadly, our performance reflects the strength of our differentiated high-value advisory solutions. This year, we are focused on three growth drivers, data and AI leadership, go-to-market evolution, and advisory differentiation to strengthen our competitive position, deliver more value to customers, and expand earnings over time. First, let me talk about data and AI leadership. We see AI as a way to augment the capabilities of our advisors and customers and help them operate more efficiently, make better decisions, and deliver more value and improved outcomes.

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

We are very proud to be recognized for our AI leadership as WISE was recently named one of HR Tech's top HR products for 2026. Another source of differentiation is our ability to combine AI with trusted human expertise. As more routine work becomes automated, we believe the value of expert guidance increases in areas where businesses are navigating complexity, such as labor, tax, benefits, and workforce management. That is why we see AI as enhancing, not replacing, the role of our trusted advisors, and that's why we believe our combined technology and service model is difficult to replicate. We're already seeing early proof points that this strategy is creating tangible value. This summer, we piloted Intelligent Pay Cycle to proactively address the top sources of payroll errors. Based upon the results from more than 50,000 businesses, WISE helped prevent approximately 90% of those payroll errors.

Based upon that success, we are expanding those capabilities across additional use cases across the company. This week, we announced WISE Hire, an agentic recruiting solution designed to help SMBs find and hire qualified talent faster. Solution uses AI recruiting agents to help customers source candidates, screen applicants, manage outreach, and schedule interviews, all while keeping employers in control and providing access to human recruiting expertise when needed. We are also extending WISE into business applications where customers already work, such as Microsoft, making WISE easier to access for our customers and their employees. We are also further accelerating AI across our service model and operations. We now have more than 2,000 agents and features deployed across the business. Wise Agentic Payroll continues to enhance operational efficiency, increasing automated payroll processing by nearly 20% from January through August, while also maintaining high service quality and accuracy rates.

As this scales, it enables us to automate transactional work and free our teams to focus on more proactive and higher value advisory support. Our second area of focus is our go-to-market evolution. We continue to advance our go-to-market strategy by positioning Paychex not simply as a provider of products, but as a strategic partner, helping businesses succeed. Through our One Paychex approach, we are equipping all of our sales and customer success teams to take full advantage of the breadth of our technology and advisory solutions. With this approach, we are better aligning customers to the right solution from the beginning of their relationship with Paychex. Our partner ecosystem also remains a strategic advantage. Our CPA, bank, and broker relationships drive a significant portion of our leads and generate higher win rates. Continued investment in those channels drove higher referral activity year-over-year.

We continue to build momentum in the broker channel, signing our third national broker partnership in six months with IMA Financial Group. We saw strong growth in broker bookings, supported by higher average deal size and strong ancillary attachment. At the same time, we're expanding our reach through embedded, partner-led, and standalone channels, creating additional pathways for future growth. Finally, advisory differentiation. Customers are looking for more than just software. Our advisory and benefit solutions remain an important part of how we help businesses navigate increasingly complex workforce needs. By combining innovative technology with human expertise, we provide trusted support across ASO, PEO, and retirement, often serving businesses with limited or no in-house HR resources. All three advisory solutions delivered strong revenue growth this quarter. We continue to see traction in the enterprise segment for our advisory solutions, which reinforces the strategic rationale of the Paycor acquisition.

PEO remains a key growth driver and delivered industry-leading, high single-digit worksite employee growth and delivered record retention. We also saw strong upgrades of ASO clients into PEO relationships, reflecting the trust we have built with clients and the value of our full-service advisory model. In addition to all these things, we improved client retention, we continued to see price realization and strong product penetration, all of which contributed to the strength of our results this quarter and continues to demonstrate the value we deliver for our customers. I am pleased to see our progress recognized externally, including being named to Time's World's Best Companies and Newsweek's America's Greatest Companies list, reflecting the strength of our brand, culture, and operating performance. In addition, our human capital management platforms were recognized by Nucleus Research and NelsonHall for innovation and capability in talent and workforce management.

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

Thanks, John. I will begin with our first quarter results, and then I will turn to our updated outlook for fiscal 2027. For the first quarter, total revenue increased 6% to $1.6 billion, driven by the strength in our advisory solutions, particularly PEO. Management solutions revenue grew 4% to $1.2 billion, driven by product penetration and price realization. As John mentioned, we saw a high volume of ASO to PEO upgrades in the quarter, as well as strong PEO referral activity from our HCM sales teams, which contributed to strong PEO growth. PEO and insurance growth in the quarter was 12% to $368 million, primarily driven by strong growth in PEO worksite employees and increased PEO insurance volumes. Interest on funds held for clients increased 5% to $50 million, driven by stronger reinvestment yields on our long-term portfolio.

Total expenses for the quarter increased 1%, as higher PEO direct insurance costs and continued investments in our go-to-market expansion and strategic priorities were largely offset by lower acquisition-related costs and continued AI efficiencies. Operating margins for the quarter increased 280 basis points to 38%, and our adjusted operating margins increased approximately 130 basis points to 42%, driven by productivity and cost discipline, even as we continue to invest in our strategic priorities. Diluted earnings per share increased 14% to $1.21 per share, and adjusted diluted earnings per share increased 10% to $1.34. Our financial position remains strong with cash, restricted cash, and total corporate investments of approximately $1 billion, and total borrowings of approximately $4.6 billion at quarter end. Cash flow from operations were $414 million and were impacted by the timing of client and corporate tax payments.

Our capital allocation strategy is centered on delivering long-term shareholder value. This quarter, we returned $424 million to shareholders through cash dividends. We continue to focus on the drivers of long-term shareholder returns within our control, including strong earnings growth, sustained dividend growth, and disciplined capital deployment. Our 12-month rolling return on equity remains robust at 47%. I will now turn to our updated outlook, which assumes the current macro environment, including stable demand and flat employment levels. We are reaffirming our full year fiscal 2027 guidance with updates to segment revenue growth to reflect continued strength in PEO and the latest short-term interest rate change. For fiscal 2027, we now expect PEO and insurance solutions revenue growth to be in the range of 7%-8%. This is up from our prior guidance due to continued strength in PEO.

As a reminder, comparisons become more challenging over the remainder of the year as we lap the prior acceleration in PEO from stronger MPP enrollment. Interest on funds held for clients is now expected to be in the range of $200 million-$210 million, which includes the most recent 25 basis point increase to the Fed funds rate. The remainder of our outlook is unchanged. However, I would like to provide some additional color on the categories. If the strength that we saw in Q1 in PEO upsells and HCM referrals continues, we could see PEO and insurance solutions trending toward the high end of the updated range, with management solutions trending towards the low end.