To all sites on hold, we appreciate your patience and ask that you please continue to stand by. Good morning, and welcome to the third quarter of this Fiscal 2025 Paychex Earnings Conference Call. Participating on the call today are John Gibson and Bob Schrader. After the speakers' opening remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. 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, Chief Financial Officer.

Thank you for joining us for our review of Paychex third quarter 2025 financial results. Joining me today is John Gibson, our Chief Executive Officer. This morning before the market opened, we released our financial results for the quarter ended February 28, 2025. You can access our earnings release and investor presentation on our Investor Relations website. Our Form 10-Q will be filed with the SEC within the next couple of days. The teleconference is being broadcast over the Internet and will be archived and available on our website for approximately ninety days. Today's call will contain forward-looking statements that refer to future events and involve some risks. 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 will now turn the call over to our CEO, John Gibson.

Thanks, Bob. I'll start the call today with an update on our business highlights for the third quarter. Then I'll turn it back over to Bob for the financial update, and then, of course, we'll open it up for your questions. This is an exciting quarter for Paychex. As we enter the digital and AI-driven era of human capital management, we believe the combination of our positive underlying momentum and the pending acquisition of Paycor positions us well for continued success. Total revenue growth was 5% in the third quarter; excluding the impact of the discontinued ERTC program, revenue growth was 6%, driven by the strength of our industry-leading HCM solutions. Diluted earnings per share increased 4% and adjusted diluted earnings per share grew 8% during the quarter. Our investments in automation and technology are boosting efficiency across the company, resulting in a strong 180 basis point increase in adjusted operating margins compared to the prior year. During the third quarter, we announced that we entered into a definitive agreement to acquire Paycor, a leading provider of HCM payroll and talent software. The waiting period under HSR expired on February 21st. After other customary closing conditions are met, we look forward to welcoming Paycor to the Paychex family in the coming weeks. Our companies are highly complementary, and our dedicated employees share a common set of values, most importantly, a strong customer orientation, and a relentless focus on providing innovative solutions to real-world challenges. Our expected nearly 800,000 combined customers will benefit from having access to the most comprehensive HCM from the most trusted provider of technology and expertise in the industry. We believe the acquisition of Paycor will strengthen our competitive position upmarket while giving us the ability to offer Paychex’s robust set of HR and employee solutions to Paycor's approximately 50,000 customers and their 2.7 million employees. We are optimistic about what we can achieve together by leveraging the best of both of our current and future offerings. We are working diligently towards closing the Paycor acquisition in the coming weeks, and we have already made several important decisions related to the integration. We are planning to operate Paycor as a standalone business unit. Adam Manthey, Paycor's current CFO, will be joining Paychex as senior vice president of Paycor. And Ryan Bergstrom, Paycor's current chief product officer, is also joining Paychex to become the new chief product officer of Paychex. We're excited to welcome both Adam and Ryan to the Paychex executive team. Paychex and Paycor's customers will remain on the platform they're currently using and continue to receive support through their existing service team relationships. They will shortly gain access to the most comprehensive, flexible, and innovative set of HCM technology and advisory solutions in the industry. With our SurePayroll, Paychex Flex, Paychex HR Advisory Solutions, and now Paycor's capabilities, we have solutions to meet the diverse needs of businesses of all sizes. We are making great progress on the acquisition and on integration planning. The work we have done since announcing the transaction has increased our confidence in achieving cost synergies. We now expect synergies to be over $80 million, which we shared with you in January. Given this, we now expect the acquisition to be accretive to our adjusted earnings per share next fiscal year. The third quarter was successful as we continue to improve our customer experience and value proposition. Client retention has improved over last year’s solid performance, and retention in our HR outsourcing solutions remains near record levels. Client losses are down across all employee size segments. Our revenue retention improved over last year and remained above pre-pandemic levels as we focus on acquiring and retaining high-value clients. Our strong retention rates attest to our compelling value proposition, which was validated by a recent Wall Street Journal ranking of the best-managed company, in which Paychex achieved the second-highest increase in customer satisfaction out of all 250 companies on the list. While the PEO business remains strong and participant levels in our health plans across the country continue to increase, enrollment in our specialty Florida at-risk medical plan decreased year over year. We see more employees opting for lower-cost health plans to offset rising healthcare costs. These factors continue to present a pass-through revenue headwind but have no impact on our earnings or the value proposition of the PEO model. We continue to drive innovation in the quarter. I am proud to announce that we were just named one of Fortune's most innovative companies for the third consecutive year. This is truly a validation of our strategy to become the digitally driven HR leader. As an example of how we are driving innovation and AI, we recently built a Gen AI-powered HR Copilot tool that covers the HR questions most frequently asked by our clients. The tool was developed from our proprietary data from the hundreds of thousands of conversations our HR professionals have with our clients every year. The HR Copilot tool will enable our HR professionals to leverage the collective knowledge base we have built over the years to provide both efficient and effective answers to our clients' concerns. The testing phase for this new tool is nearly complete, and we are on track to launch it at the start of our next fiscal year. We are committed to helping our clients leverage the power of new technologies and specifically AI. Another example of our innovation in employee solutions is Paychex Perks, an award-winning digital marketplace that offers our clients' employees access to affordable benefits and discounted products and services from third-party providers. Perks is available at no cost to the employer, and payments are processed automatically through payroll deduction. Since we launched this product in September, over 180,000 client employees have purchased at least one product offered in the marketplace. I am extremely proud of all the innovation and the hard work of our employees, and what they do each and every day to make Paychex successful. I am even more proud of how they do it. By living our company values and finding ways at the same time to impact the communities in which we serve and live. I am pleased to report that Paychex was recently named one of the world's most ethical companies for the seventeenth time by Athisphere. One of only three companies in the world to achieve this distinction. Congratulations to the team. Turning to the macro environment, the pace of US job growth has moderated from the robust levels observed coming out of the pandemic but has been relatively stable during the past year and in line with historical averages. Our customer employment levels were a little softer than expected in the third quarter and likely impacted by weather-related challenges and devastating fires in California, as well as lower bonus checks than last year and our expectations. Year to date, our checks per client have been flat compared to the prior year, suggesting relatively stable US labor market conditions. But as I look back on it, we have accomplished a lot in the third quarter, both in terms of day-to-day execution and driving our strategy forward, including our preparations to add Paycor to the Paychex family companies in the coming weeks. As I said earlier, this is an exciting quarter for Paychex. We exit the third quarter of this fiscal year better positioned than ever in the company's history. Deliver on our purpose, which is to help businesses of all sizes succeed. I'll now turn it over to Bob to give us a brief update on our financial results.

Thank you, John, and good morning, everyone. We'll start with a summary of our third quarter financial results and then provide an update on our fiscal 2025 outlook. Total revenue for the quarter increased 5% to $1.5 billion. This includes the headwind from the expiration of the ERTC program that we have called out for the past several quarters. Excluding this headwind, total revenue grew 6%. Management solutions revenue increased 5% to $1.1 billion. This was driven primarily by growth in the number of clients served across our suite of ATM solutions and client worksite employees for HR solutions, as well as higher revenue per client resulting from price realization and product penetration, partially offset by the lower ERTC revenues. PEO and insurance solutions revenue increased 6% to $365 million, driven primarily by growth in the number of average worksite employees and an increase in PEO insurance revenues. Interest on funds held for clients decreased 2% to $43 million, primarily due to lower average interest rates. Total expenses, excluding one-time costs related to the pending Paycor acquisition, increased 1% to $801 million. Continued investments in product, technology, data, and AI were offset by productivity efficiency gains realized from these investments. Operating income grew 6% to $692 million, with an operating margin of 45.8%. Adjusted operating margins for the quarter were 46.9%, which represents an increase of approximately 180 basis points due to increased productivity and cost discipline. Adjusted diluted earnings per share increased 8% to $1.49 in the third quarter. I will now quickly touch on the results for the year-to-date period. Total revenue grew 4% to $4.1 billion. Management Solutions revenue increased 3% to $3 billion. PEO and Insurance Solutions increased 7% to $1 billion, and interest on funds held for clients increased 8% to $117 million. Total expenses year to date grew 3% to $2.4 billion. Operating margins expanded approximately 40 basis points to 42.9%, and our adjusted operating margins year to date increased approximately 80 basis points to 43.3%. Diluted earnings per share increased 4% to $3.76 a share, and adjusted diluted earnings per share increased 5% to $3.79 a share. Our financial position remains strong, with cash, restricted cash, and total corporate investments of $1.7 billion and total borrowings of approximately $817 million as of February 28, 2025. Cash flow from operations was $1.6 billion in the first three quarters of the year, driven by net income and reflects changes in working capital influenced by timing. We returned a total of $1.2 billion to shareholders during the first three quarters in the form of cash dividends and share repurchases, and our twelve-month rolling return on equity remained robust at 45%. We'll now turn to our guidance for the fiscal year ended May 31, 2025. This outlook assumes a continuation of the current macro environment and excludes the expected impact from our pending acquisition of Paycor, which is expected to close in the coming weeks. Our current outlook is as follows. Total revenue is still expected to grow in the range of 4% to 5.5%. We do now expect that it will be at the low end of the range, primarily due to the continued headwinds from our pass-through insurance revenues. And as a reminder, this range includes approximately 200 basis points of headwind from the expiration of the ERTC program last year. Management solutions are still expected to grow in the range of 3% to 4%. PEO and Insurance Solutions is now expected to grow in the range of 6% to 6.5% due to factors that we referenced earlier. We previously guided to the lower end of the range of 7% to 9%. Interest on funds held for clients is expected to be in the range of $145 million to $155 million. Adjusted other income net is expected to be income in the range of $30 to $35 million. And adjusted operating income margin is now expected to be approximately 43%. We previously guided the high end of the range of 42% to 43%. Our effective income tax rate is expected to be in the range of 24% to 25%, and adjusted diluted earnings per share is still expected to grow in the range of 5% to 7%. As John mentioned earlier, we are making great progress on the acquisition, which has increased our conviction on the near-term expense synergies. Given this, we would now expect the acquisition to be accretive to our adjusted diluted earnings per share next fiscal year. With the anticipated closing in the coming weeks, we would also like to provide an update on the expected financial impact this fiscal year. Including Paycor, we expect revenue growth of 10% to 12% in the fourth quarter, and the impact from the acquisition on adjusted EPS would be neutral. Of course, all of this is based on our current assumptions, which are subject to change, and we will update you again on the fourth quarter call. I will refer you to our investor slides on our website for additional information. And with that, I'll now turn the call back over to John.

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

Thank you. And at this time, if you would like to ask a question, please press star and one. We will take our first question from Andrew Nicholas with William Blair.

Hi, guys. Good morning. This is Daniel Maxwell on for Andrew today. Just to kick things off, I was wondering if you had any updates on the preference between ASO and PEO models. I know you called out switching to lower-cost health plans, but is anyone trading down at the product level? And then is the lower implied 4Q for PEO just the at-risk Florida payment plan? That came in worse than expected in Q3. Or maybe how long you expect that to last?

Yeah. So Daniel, maybe I'll start with the lower Q4 that you mentioned. And certainly bringing in the total revenue guide to the low end of the range is primarily driven by the continued challenges that we've seen with the MPP attached in Florida. I think when we talked to you guys last quarter, we weren't seeing the growth there that we expected. I would say it was flat. And then as we come through the annual enrollment, overall, our healthcare attachment across the PEO is up. It's down in the state of Florida, and that has an impact from a revenue standpoint, pass-through revenue standpoint, and really has no impact on earnings. And that's really the primary driver as it relates to what you see in Q4 in the low end of the guidance range on total revenue. And, you know, as it relates to ASO and PEO, you know, both have been strong. You know, we see strong double-digit worksite employee growth in both models. And we haven't seen a switch from a preference standpoint. I think your other question related to the buy-down, we have seen that. Certainly, this year, particularly in Florida, we've seen more of our client employees selecting lower-cost options, and that certainly has an impact on the MPP in Florida.

Yeah. I think, Daniel, the takeaway from the feedback is that we're not seeing a trade-off or a downgrade from PEO to ASO. That's not what we’re seeing at all. PEO performance really across the country is strong. Our bookings were double digits. We got a solid pipeline going into Q4, and it continues to be strong. That said, the challenge you have in this specialty program in Florida is that small changes in a participation level can make a big difference. You're talking about plans that can range between $11,000 and $14,000 per employee. So, yeah, that adds up pretty quickly. While we increased the number of clients that are attaching healthcare across the country and actually saw better participation in our health plans, we saw a reduction in this specific program in Florida, which has an outsized impact on revenue. There was also a combination of things; the average deal size was smaller than last year, and the percentage of employees that took benefits was lower than what we typically see. As we mentioned before, when they did pick a plan, it would tend to be the lower-end plan, which reflects some of the health care inflation trends we're seeing. Overall, I think we should see this as a positive outcome. We're also conservative in our underwriting, and I don't want to jeopardize that plan. We have many options with our agency to get them on stand-alone plans, and we will continue to do that.

Yeah. Super helpful detail. Thank you for all that. And then maybe as my follow-up, the client hiring coming in slightly lower than expected. Was that concentrated in Florida as well, or any specific geographical or vertical that was concentrated in, or was that more of a broad-based experience?

No. I would say the hiring was pretty broad-based. We did have some notable challenges in California, where we saw some disruptions due to natural disasters. We also just saw an overall slower checks than what we expected, particularly related to lower-than-expected bonus checks. While the overall bonus dollar volume was about 8% higher than the prior year, the number of people who received bonuses was less, which affected check volumes. So right now, our small business index continues to show moderate growth in small businesses, and we really see no signs of a recession.

Thank you. We will take our next question from Mark Marcon with Baird.

Hey, good morning, John and Bob. Thanks for all the color. Sounds like a very exciting time at Paychex. You mentioned the Paycor transaction to be accretive. Can you give us any more color regarding your expectations on revenue synergies? Also, could you provide details on what adjustments you might exclude to compute accretion?

Hey, Mark. I'll start with that, and then John can comment on the revenue synergies. It’s important to clarify that we'll exclude three main things: the amortization of the intangible assets given the size of this transaction, the stock-based compensation related to existing shares that will convert, and the one-time transaction-related costs like investment banking fees and lawyers. John can now comment on the revenue synergy opportunity.

Yeah. Mark, let me just step back and provide a broader view. We’re excited about what’s happening. We believe that within a short time frame, we will be able to introduce a comprehensive and flexible set of HCM solutions to the market. We are focused on integrating the two companies to ensure that our customers and strategic partners are taken care of from day one. We’ve also identified several revenue synergy opportunities that we’re optimistic about, but we will focus on that after the closing, especially since Paycor is a publicly traded competitor, and right now we have to be cautious about access to information.

I appreciate that comprehensive answer. My follow-up is on macro sentiment during the key selling season. How is bookings evolving, especially during Q4? Would the fourth-quarter exit rate still be a relevant indicator for the next fiscal year?

Yeah. Thanks for the question. We're looking closely at Q4 but typically do provide insights at the end of the quarter. We’ve been focused on integrating Paycor, so we may be less prepared than in previous years. However, we see a base case for Paychex in line with existing market consensus for revenue growth and margin expansion.

I want to emphasize the complexity of our integration and the efforts we’re making to combine the two businesses effectively. We want to ensure that each business grows faster when combined. We have a lot of potential opportunities that we’ll discuss as we move forward.

Thank you. We will take our next question from Peter Christiansen with Citi.

Thanks for the question. Can you discuss the 401k business? What attachment rates are you seeing and how does that fit in with the Paycor acquisition?

Yeah. Thanks for the question. The 401k business is doing well; it's double-digit growth. While we faced headwinds in Q3, we're optimistic about the future based on regulatory trends. Our focus is on convincing clients and their employees to participate in retirement savings. Market conditions are vital, and we're working with regulators to close loopholes to support micro-businesses.

Should we expect higher attachment rates from larger clients compared to smaller employees? How does this translate to potential Paycor clients?

We believe there's opportunity in the Paycor base to offer our 401k program. We expect to achieve similar attachment rates across client sizes. We're improving our execution in integration planning, focusing on clients first.

Thank you. We will take our next question from Brian Bergin with TD Cohen.

Can you discuss how you currently partner with benefits brokers, and how this might evolve with Paycor?

We have a strong relationship with brokers for over a decade, with referral programs growing double digits. We will launch a major strategic partner program refresh focusing on brokers and other advisors, combining technology investments and improved support.

Ignoring the at-risk health insurance, has there been any change in the demand environment relative to last quarter?

On the PEO side, our bookings are double digits with a good pipeline going into Q4. Demand remains consistent, and our retention rates have improved, showing strength overall despite some external uncertainties.

It's a testament to the strength of our value proposition, and it reflects solid execution from our team.

Thank you. We will take our next question from Brian Keane with Deutsche Bank.

On the Paycor acquisition, can you elaborate on the additional cost synergies and their impact on earning accretion for fiscal year 2026?

As you know, merging two public companies involves eliminating redundancy in vendor spend and leveraging best practices. We’ve identified several areas where we can improve immediately upon closing.

We're not ready to provide specific guidance on accretion sizes just yet, but we're increasing our confidence based on what we've worked on over the past several months. We'll provide updates on this in Q4.

Our focus on customer care, strategic partners, and employee satisfaction remains key during this transition. We're excited for what comes next as we synergize our operations post-acquisition.

Thank you. We will take our next question from Ramsey El-Assal with Barclays.

In Management Solutions, you noted higher revenue per client. How do you view pricing as a lever in a declining macro environment?

We feel we have strong pricing power. Although, in a macro downturn, pricing may not be as high as in recent years. Our pricing realized well in Q3 due to effective year-end processing and discounting.

Disciplined growth is vital. We focus on ensuring that any new clients we bring in are profitable. Our strong margin expansion demonstrates this focus.

You mentioned investments in AI and automation are benefiting margins. Can you speak to the runway available for further gains from these technologies?

We've been using AI models to make better decisions across our operations for nearly a decade. As we further refine and invest in these models, we expect significant productivity gains.

Could you provide details on the early adoption metrics surrounding FlexEngage and its fit within the overall portfolio?

FlexEngage is performing well, especially among larger clients. We're excited about combining it with Paycor's workforce management capabilities, which should enhance our overall offering.

Regarding Management Solutions for Q4, the ERTC headwind implies a growth rate around 6%. Any additional factors to consider for our models?

We’re not providing specific guidance for Q4 splits, but your math seems reasonable. There’s uncertainty, especially with asset balances and potential headwinds from market performance.

We’ll focus on maximizing both standalone businesses' growth post-merger and strive for effective integration. We appreciate your understanding of the complexities involved.

Thank you. That concludes our question and answer period. I would now like to turn the call back over to John Gibson for closing remarks.

Thank you all for joining us today. As I mentioned earlier, these are exciting times at Paychex. Should you wish to replay the webcast, it will be archived for approximately ninety days. Thank you for your interest in Paychex, and have a great day.