Paychex Q2 Earnings Call Highlights

Paychex (NASDAQ:PAYX) executives used the company’s second-quarter fiscal 2026 earnings call to highlight what management described as solid results, continued progress integrating Paycor, and an expanding role for artificial intelligence across operations, service, and sales.

Quarterly results and margin performance

President and CEO John Gibson said the company delivered “solid second quarter results,” citing revenue growth of 18% year-over-year and adjusted operating income growth of 21%, which he attributed to higher productivity and ongoing cost discipline. CFO Bob Schrader reported total revenue of $1.6 billion.

Schrader broke down performance by segment:

• Management Solutions revenue rose 21% to $1.2 billion. Schrader said Paycor contributed about 17 percentage points of that growth, with growth also driven by product penetration and price realization. However, he said results were “moderated primarily by softer-than-expected revenue per client.”
• PEO and Insurance Solutions revenue increased 6% to $337 million, driven by growth in average PEO worksite employees and higher PEO insurance revenues. Schrader noted the Insurance Agency business remained a headwind due to 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 from what Schrader described as strategic repositioning within the long-term investment portfolio.

Total expenses increased 27% to $986 million, which Schrader attributed primarily to the Paycor acquisition. Excluding Paycor, he estimated expenses grew in the low single digits. Operating income margin was 36.7%, while adjusted operating margin increased about 80 basis points year-over-year to 41.7%.

Diluted earnings per share declined 4% to $1.10, while adjusted diluted EPS increased 11% to $1.26. Schrader said Paychex ended the quarter with $1.6 billion in cash, restricted cash, and corporate investments, and approximately $5 billion in total borrowings. Operating cash flow for the quarter was $445 million, and Paychex returned $514 million to shareholders via dividends and buybacks.

Paycor integration: cost synergies raised, growth discussed

Management emphasized progress on Paycor integration. Gibson said Paychex expects approximately $100 million in cost synergies in fiscal 2026, up from an original target of $80 million, and said the company remains on track for the revenue synergy targets it set for the year.

During Q&A, Schrader said Paychex estimates Paycor grew 8% to 9% on a pro forma basis in the quarter, after adjusting for Paycor’s prior-year December quarter form-filing seasonality. Both executives repeatedly cautioned that isolating Paycor’s contribution precisely is difficult now that the businesses are integrated, with cross-sell activity and client movements between platforms affecting where revenue shows up in the financial statements.

Gibson added that Paycor client and revenue retention were “exceeding plan” and that bookings activity had accelerated since the acquisition was announced, including broker-related bookings returning to levels seen before the acquisition announcement, after an initial drop in activity.

Demand trends: cost-conscious buyers and “softer” revenue per client

Schrader said the company is now expecting to land toward the low end of the fiscal 2026 revenue ranges for Management Solutions and for PEO and Insurance, citing trends seen in revenue per client. He said the dynamic was “across the board,” not limited to one business line, and pointed to smaller deal sizes, less attachment at the point of sale, and somewhat softer growth rates in HR outsourcing volumes than assumed in the company’s plan.

Gibson said demand remained consistent with historical levels, but described a market where prospects are “shopping” and being careful with costs. He said customers are still buying, but often choosing lower bundles or adding fewer modules than expected, with Paychex planning to pursue upsells over time once clients are onboarded.

PEO business: worksite growth and retention strength, Insurance Agency headwinds

Gibson said Paychex’s PEO business continued to perform well, delivering “market-leading mid-single-digit worksite employee growth” driven by strong demand and near-record retention. He also addressed enrollment for an at-risk Florida MPP plan, saying October enrollment came in largely as expected and early indications for January enrollment supported confidence in finishing the year with solid PEO revenue growth.

Schrader said PEO performance exceeded expectations in the first half and pointed to easier comparisons in the back half as the company laps prior-year enrollment headwinds. At the same time, both executives reiterated that the Insurance Agency business was a drag due to workers’ comp rate pressure and lower health and benefit volumes, with Gibson noting the company is making changes to improve that area.

AI initiatives: service automation, sales tools, and product direction

Gibson devoted a significant portion of prepared remarks to AI, referencing a newly published company presentation describing Paychex’s positioning in what he called the “AI era.” He said Paychex believes its client base is less exposed to AI-driven employment displacement because more than 70% of client employees work in blue- and gray-collar industries, and because smaller businesses tend to invest less in AI while also facing talent shortages.

Gibson highlighted several AI initiatives discussed on the call:

• A patent-pending “AI-powered Knowledge Mesh” system intended to convert unstructured data such as calls and emails into a searchable network.
• A GenAI-powered employment law and compliance platform that helps generate compliant documents and stays current with changing regulations; Gibson said Paychex HR experts have shown strong adoption and frequent usage.
• Early “agentic AI” pilots that autonomously handled thousands of payroll calls and emails with “nearly 100% accuracy,” reducing payroll processing time.
• A GenAI sales platform providing sales teams with scripts, objection handling, and prospecting insights; Gibson said it was rolled out broadly after demand outpaced an initial pilot.

While Gibson said AI can improve productivity and help Paychex scale with less incremental headcount over time, he framed the strategy around shifting service capacity toward higher-value advisory work to deepen customer relationships and improve lifetime value.

Outlook: guidance reaffirmed with higher EPS growth expectation

Schrader said Paychex reaffirmed its fiscal 2026 outlook except for raising earnings expectations. The company now expects adjusted diluted EPS growth of 10% to 11%, up from the prior outlook of 9% to 11%. He also said interest on funds held for clients is now expected at the high end of the previously provided $190 million to $200 million range, and the effective tax rate is expected to be about 24%.

For the third quarter, Schrader said Paychex anticipates total revenue growth of approximately 18% and adjusted operating margin of 47% to 48%, noting that Q3 is typically a larger quarter due to recognition of higher-margin year-end fees.

About Paychex (NASDAQ:PAYX)

Paychex, Inc, founded in 1971 by B. Thomas “Tom” Golisano and headquartered in Rochester, New York, is a provider of payroll, human resources, and benefits outsourcing solutions for small- and medium-sized businesses. The company’s core services include payroll processing and tax filing, employee benefits administration, retirement services, and workers’ compensation administration, designed to simplify back-office operations and help clients comply with regulatory and tax requirements.

Paychex offers an integrated technology platform, marketed under the Paychex Flex brand, which delivers cloud-based payroll, HR, time and attendance, and reporting tools.