Paychex Inc Q3 FY2026 Earnings Call

Good morning, and welcome to Paychex's third quarter fiscal 2026 earnings call. Participating on the call today are John Gibson and Bob Schrader. Following the speaker's prepared 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. If you would like to withdraw your question, please press star two on your telephone keypad. 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's Chief Financial Officer.

Thank you for joining us to discuss Paychex's third quarter fiscal 2026 results. Our earnings release and presentation are available on our Investor Relations website. website. We plan to file our Form 10-Q within this call as 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. The description of these items, along with the reconciliation of non-GAAP measures, can be found in our earnings release. I would now like to turn the call over to John Gibson, Hitchx President and CEO.

John Gibson, Hitchx President and CEO Thanks, Bob. Transformational AI initiatives are stable, talent, and tight in navigating a constantly changing approach by learning and advice, increasingly turning to strategic advisory expertise and assistance over routine transactional support. Expectations of a continues to help our PO business remain strong. Our PEO solution embedded in the employee-specific transferable benefits, just 18 months, PERC can keep to pre-acquisition capture the demand we see. We continue to win larger-than-expected ASO deals and broker-referred PEO opportunities. Platforms were recognized as industry-leading HCM solutions with two 2026. We continue to accelerate clients and complex and recent email agents for payroll processing, enabling service teams to focus on proactive, higher-value advisory support and service tools to the entire sales-registrated real-time information across service personnel to really remove investments or bolstering our leadership in HCM innovation. We are moving from insight and efficiency tools to possibly maintaining operations, That Paychex was recognized as a partner by United Way in the year of 2007. I will now turn the call.

I'll start with our third quarter financial results, then provide an update on our outlook. Increased 20% over the prior year to $1.8 billion. This represents an acceleration in the organic growth of the business relative to the first half of the year. Management Solutions revenue grew 23% to $1.4 billion, driven by product penetration and price realization. PayCorp contributed approximately 19 percentage points to growth. PEO and insurance solutions revenue increased 9% to $398 million, driven primarily by strong growth in the number of average PEO worksite employees, as well as an increase in PEO insurance revenues. Interest on funds held for clients increased 33% to $57 million, largely due to the addition of PayCorp's increase 24% to just over $1 billion, dollars primarily driven by the pay core acquisition excluding a pay core we estimate that expenses grew in the low single digits during the 3.8 percent and adjusted operating income margins increased approximately 80 basis points to forty seven point seven percent driven by increased productivity and cost discipline while increasing our investments in AI for increased nine percent to a dollar fifty six per share and adjusted to diluted earnings per share increased 15 percent to $1.71 per share. Our financial position remains strong with cash, restricted cash, and total corporate investments of $1.8 billion and total borrowings of approximately $5 billion as of the quarter close. This continues to be a strength of our model. Operating cash flows were nearly $2 billion year-to-date and our free cash flows increased 27 7% year-over-year. After the quarter closed, we did repay the initial $400 million tranche of debt from our OASIS acquisition that matured in March. Our recent $1 billion stock repurchase authorization underscores our commitment to delivering long-term shareholder value. We returned $463 million this quarter and over $1.5 billion year-to-date to shareholders in the form of cash dividends and share buybacks, and our 12-month rolling return on equity remains robust at 41 percent. Our guidance for FY26, which is based on current markets, interest on funds held for clients is now expected to be in the range of $200 to $210 million. All other guidance metrics remain unchanged. With an adjusted operating model, the anniversary of the PACOR acquisition, DIRT Q3 benefited modestly from the timing of certain items. However, our second-half outlook remains consistent with our expectations and the organic revenue growth acceleration we saw in Q3. We believe Paychex has never been better positioned to succeed in the AI era of HCM and deliver shareholders opportunity for further expansion. Our financial strength and the durability of our business will 50 companies are shareholders and confident in our ability to deliver sustained value through continued revenue. And I'll turn the call back over to John for questions.

Thank you. If you'd like to ask a question, press star 1 on your keypad. To leave the queue at any time, press star 2. We do ask that you limit yourself to one question and one follow-up. Once again, that is star 1 to ask a question. And our first question comes from Brian Bergen with PD Cowan. Your line is now open. Please go ahead.

Hi, guys. Thank you. Bob, can you put some finer points just first on the level of organic growth in the third quarter and then bridge that forward to your commentary on the fourth quarter. If you can kind of unpack that 12% growth across the business, I think that would help.

Yeah, Brian, I think consistently, even if you go back to last year, you know, the organic growth of the business has been a bit weaker. I think a lot of that had to do with comparability issues, particularly in the PEO business with our MPP plan in Florida. But if you go back to Q4 of last year, I think we've seen sequential improvement each quarter in the organic growth of the business. So if you look at the first half, total revenue organic growth was roughly 4%, and that improved from Q1 to Q2. And then when you look at the back half, whether it's Q3 or Q4 combined, you know, we would expect it accelerated in Q3, and we would expect to see similar organic growth performance in Q4. And so you're now getting to a back half organic growth rate that's closer to 6%, and then when you put the two of those together, it's roughly 5% on a full-year basis. And so, again, I think there's a couple drivers of it. You know, one, to be fair, is the easier compare on the PEO business. I mean, I think you'll see that the headline PEO number sequentially went from 6% last quarter to 9%. There are some timing things there, but, you know, there's certainly strength in the underlying operating performance of the business, particularly in the PO, and we get the headwind from the MPP enrollment. And so that's why you're definitely seeing the combination of an easier compare, stronger operating performance, driving accelerated organic growth in the back half of the year.

As far as the 4Q exit rates that are implied, as we think forward into fiscal 27, any important considerations that you want to share?

Yeah, and, you know, I'll maybe head off the question that I'm probably going to get as it relates to guidance. And at these stages, I would tell you, I know we kind of established a precedent coming out of COVID and providing maybe some more details around what we were thinking for next year. I think we needed to do that given, you know, some of the uncertainty in the environment back then. Our preference now is to kind of, you know, build the plant like we historically did and consistent with, you know, that being said, you know, we obviously have visibility to, in fact, set. And when I look at that, you know, I really don't see what you'll see is the organic growth rate. We're really looking at the back half because there are some timing differences, particularly in the PO between Q3 and Q4. or when we look at the organic growth rate in the back half of this year, it pretty much aligns with kind of what's assumed from a consensus standpoint for next year.

And we'll take our next question from Mark Marcon with Baird. Your line is now open.

Thanks for taking my questions. And nice performance this quarter. I'm wondering if you could talk about a couple of things. One, you did mention that, you know, PayCorps was seeing, you know, new broker engagements or a renewal of some of the broker engagements in that pipeline. I was just wondering if you could just talk about new sales, generally speaking, you know, during the core selling season. and what did you end up seeing this year, and how would you describe the competitive environment, win rates?

I'm very pleased with our performance in Q3. Not only have I, but we've come out with a disruption, as you know, at the start of the year with continuing to accelerate back to pre-acquisition levels. We're actually adding headcount in the enterprise space. Again, remember, PayCorp for us is a brand for the enterprise market. 100-plus, and we think that's a great opportunity for our HR outsourcing services as well as technology solutions, and so we're going to continue to go after that as well. So we continue to gain momentum, I think, across the board, and we feel good about where we are positioned going into 27, both in terms of our competitive positioning, our head count, and I think you really look at it. I mean, we're entering 27 with all of the integration work behind us that we did early in the beginning of this fiscal year, but really the most comprehensive, and so I feel good about where we are.

That's great to hear. And then I thought the gross margin performance was particularly impressive. You know, when we take a look, if we're defining gross margin as revenue minus direct costs, and part of that was obviously the higher interest income off of the float. But beyond that, it looks like it's doing extremely well. How much of that is related to some of the AI initiatives that you've put in place in terms of embedding AI across your service infrastructure and making them more productive versus, you know, other initiatives that you've put in place in terms of, you know, perhaps shifting some of your costs to lower-cost labor markets like India? And how much more can we do there? Because it's been fairly impressive. I'm wondering if this is basically setting us up for, you know, continued margin expansion for multiple years.

There's margin expansion as technology that almost every day, something new is coming It's pretty incredible. Some of the things we're doing in terms of genic AI models, which we've now released to scale after the pilots, email payrolls, pages in our beta groups, in sales, using our sales guru. I feel good about what the opportunities are. Look, if we grow the top line, we are going to be able to, in our arsenal, as the best operator. I really feel good about where we are. And I would say that it's part of the thing on 27, we're just getting in. That's a big debate right now. I think that's the big question is how much, how do you begin to quantify the real positive impact from sales productivity, the way we're using it in marketing, what the potential is from a service perspective? So I can assure you we're going to have some very lively discussions next week during our planning sessions about exactly the potential that this technology has, both to drive the top line, but also to continue to expand margins. So I think there's more room ahead, and every year something new comes out, and we are innovators in that regard and are going to grab every tool we can to continue to drive efficiency.

Thank you. We'll go next to Cien-Sin Huang with J.P. Morgan. Your line is now open.

Hey, thanks. I wanted to ask on the advisory work, John, that you talked a little bit about. I think that's probably underappreciated in terms of what Paychex does there. How AI proves is the advisory side of the business? You know, because I get the question quite a bit that, you know, can rules-based advice from AI, you know, come in and supplant what Paychex does on the advisory side? But I'm guessing that a lot of your advisory work is centered around compliance and very complex data issue that only Paychex has. Can you maybe elaborate on that?

Yeah, yeah. Look, Tinson, I think this is something I think is extremely interesting for people to understand. For the vast majority of our clients, we are their HR department, right? So not only do we provide them the advice, we literally are talking to them and holding their hand when they're making some of these decisions and supporting them. you look at our PO, the most comprehensive part of our model, we're actually in a co-employment arrangement. We're actually helping represent them and deal with their employee. And so we're actually, you know, doing so much more that there's no way that I think technology is going to replace that, at least that I see in the short term. Now, your point is, we actually own the patent on using Eugenic AI in a mesh form and structured and unstructured data to answer HR compliance status. Why is that? Because we have a huge compliance regulatory team that's constantly keeping that system up to date. What I will tell you is the changes in Akron, Ohio are not automated. Someone has to go on to Akron's website, has to look at it, has to interpret it, has to watch what's going on in Ohio courts to understand how it's being interpreted, and then put that into a system to be able to respond to a client who's asking a question about whether or not they can terminate a client in Akron, Ohio, or not. So I think that part of the – we've got the AI embedded tools, and now we've actually launched those tools inside of our – with our HR generalists. We're having a significant productivity improvement since we've done that. Our clients, we're embedding that into our platforms so our clients can gain access to that. I think that's going to drive more efficiency. But at the bottom line, for most of our clients, and increasingly upmarket, we are becoming the HR department and HR partner for helping people manage people. So as long as our clients have people, they're going to need paychecks holding their hand and helping them understand how to work with those people, in my opinion.

Yeah, well said. Your opinion is very important, John. That's why I'm asking you. So thank you for going through that. Maybe just as a follow-up, thinking about these agents as they get deployed, and as you said, the proprietary data that you have. Does this get monetized through your normal way of pricing that you typically would put through in the spring? Or do you think of this as a new monetizable opportunity for a paycheck?

Well, I think we've been monetizing our data and provide. We won the best with our retention insights. That was before improved the user experience, such as benefits. We mentioned what we're doing in the PEO, which helped advise clients, employees, and what benefits package was right for them. So I think you're going to continue to see us use it to really drive better outcomes. And you made a critical point, data set. And the other thing that we've learned, and particularly when we're building the Agenic AI models for payroll, you had to have a constantly moving set of data. And so the way I look at it is this flywheel effect. Now that we're capturing every interaction that we have from an HR payroll and compliance perspective with our clients through every form of communication, Every interaction we have with them or one of their employees, school's constantly looking and doing the analysis around what are common trends, and those insights are allowing us to be more proactive with our clients. So as the transactional work gets automated, it frees up our time to be able to gain the more insights, and then the system is proactively giving our HRGs a list of insights that they can then call clients and make recommendations on, whether that's compensation, whether that's retention, whether that's workplace trends that we're seeing in specific geographies that they need to be aware of. So I think it's just going to continue to improve the value proposition that we have, and I think it's also going to improve the outcomes that our clients see.

Thank you. We'll move next to Brian Keene with Citi. Your line is now open.

Yeah, hi. Good morning. I was hoping you guys could just talk a little bit about the strength of PEO insurance. It jumped above the range at 9%. Can you talk a little bit about some of the drivers and some of the sustainability as we head into the fourth quarter?

Yeah, maybe I'll start, and then John can add some color. You know, I think it's twofold, Brian, as I alluded to earlier. I think it's strengthened the underlying operating performance of the business. So we saw a double-digit demand for PEO. We continue to see record WSE retention in the PEO. We saw high single-digit worksite employee growth, you know, PO business all about worksite employees, and we continue to outpace the competitors in that space with our ability to drive worksite employee growth. So the underlying operating performance is strong. January is the big annual enrollment, so we anniversary, you know, two things. We anniversary the tougher compares from the prior year when MPP was down, but we got through that annual enrollment, and I tell you you know enrollment in our MPP is up modestly so you have an easier compare we drew the we drew the enrollment and then when you zoom out a little bit and you look at medical enrollment across all the PO not just the at-risk business in Florida but across the entire PO space our medical enrollment was up you know high single digits near double digits as we went through this annual enrollment period and I think that's the strength of the PO value proposition, you know, the ability for us to offer to our, you know, small business clients, the ability to offer, you know, medical insurance or workers' comp insurance, leveraging our scale to be able to offer affordable benefits to them, you know, we had a pretty good year-end enrollment related to that. So it's really a combination of all those factors. I would also just say, and I've alluded to this a little bit, on the agency side, we had some timing benefit. You get some timing between Q3 and Q4, between carrier bonuses. SUI revenue can be a little bit stronger in Q3, a little bit weaker in Q4. And so, you know, relative to our expectations, there was a little bit of timing that came into Q3, but all in all, you know, really strong performance and, you know, pretty much what we planned in the back half of the year, and it's nice to see that, you know, come I just want to add to this.

I mean, the PO performance is amazing, outpacing the industry. Another point, again, I'll make it, this is going to be interesting, we're into the broker channels, positioning PO up front. So this is one of those, what I call, revenue geography problems. So a pay core rep is out, and they're talking to a broker, what would it normally have been, because all they had was HCM in the cell, it was going to be an HCM cell, all of a sudden the discussion comes about what the problem is, and we've got multiple solutions. and now we're selling a PO, and it's larger deals than what we typically would see coming in. So in January, that would continue to certainly still a drag in the quarter to the segment. We saw solid bookings there, a lot of changes there. We've made some changes. We're trying to be more innovative because the market is the market. Health care issues are health care issues. Soft workers' comp is soft workers' comp. We're building strategies to work around those situations, and the team is making some progress there. So that also contributed a little bit as well. The other thing that I think is it's probably a story that duplicating in the – you go back and look at our PO success, and you go back to 2020 through 2025 and look at those five years, I think you're going to find that our kegger of worksite employee growth is in the double digits and far surpasses any of the other providers that I'm aware of, both public and private, in terms of growth. Now, what was the setup for that? We made a decision that strategic HR advisory company that we believe there was more than technology that our clients were going to need and want, and we started to really grow what you should expect us to try to do, and we are doing. We saw the opportunity to take HR advisory solutions upmarket. We wanted more capability to be able to do that, more distribution. And now we're a year into it, and I think we're well positioned to duplicate the story that we did in PEO in the enterprise space.

Got it, got it. And just a quick follow-up, Bob. The 12% revenue growth you called out for Q4, I think that's a point below the street. But it sounds like some timing. Maybe there was a slight benefit, some of the stuff you just talked about, obviously, in the PEO business from Q3 to Q4. But organically, the organic growth doesn't move much. Maybe just talk about some of the benefit, maybe if Q3 should be stronger organically than Q4.

I think you would probably see a slight uptick, a continued acceleration in the organic growth of the business in Q4 relative to Q3. So we should see sequential improvement there. And, I mean, as you guys know, we don't give quarterly guidance. I'm trying to give you some color each call to help you with your models going forward. I would tell you, we were intentionally conservative last, obviously, Q3 is a big quarter for us. You have year-end, you have just the year-end, you have selling season. We have our year-end processing fees, which is a lot of money and margin that hits in the month of January. We had our, you know, our large enrollment in the PEO. So we were intentionally conservative. I would tell you, Q3, you know, was in line a bit better than our expectations. And as I mentioned, there were some puts and takes between Q3 and Q4, and largely the back half of the year was in line with our expectations. And again, you'll continue to see some sequential improvement in the, you know, assuming we deliver the forecast and the guidance, you'll continue to see some sequential improvement in the organic growth of the business, which I think positions as well, as John mentioned, as we move into FY27.

Thank you. We'll move next to Andrew Nicholas with William Blair. Your line is now open.

Hi, guys. Good morning. This is Daniel on for Andrew today. Thanks for taking my questions. Real quick, just turning back to the revenue timing, it sounds like that was mostly concentrated in PEO. Is there any way you can size how large that was, sequential growth in PEO specifically continue into the fourth?

Yeah, I think the growth rate in Q4 will be – I don't have the exact percentage, and I think when we, again, if we look at it, the two quarters combined, Daniel, you'll see a sequential, or if you look at back half, because of some of those puts and takes between the quarter, you'll see a fairly significant lift in the organic sequential growth of the PO and insurance in the back half relative to the to the first half. But the overall growth rate, I think when you start doing the math, you'll see that the math is going to show you that the growth rate is going to be a little bit lower in Q4 than Q3, but when you put the two of them together, it's a fairly big step up in the sequential organic growth relative to the...

And then for my follow-up, going back to the mention of a re-acceleration of referrals and bookings to pre-acquisition levels, can you add any incremental detail on specific areas of momentum there and maybe just level set after a few quarters of integration where the lion's share of the synergy opportunities now set, whether that's on the revenue or the cost side.

Yeah, Daniel, what I would say is we've seen each quarter as we came through the first quarter when we did all of the reorganization, and as we talked about, we made a conscious decision when the deal closed almost a year ago now, April a year ago, that we were going to get the hard work out, and we saw the opportunity rather than dragging it out. And so we did that, and, of course, from the time you announced the deal in January, imagine a lot of questions from brokers about what's going to happen, and we couldn't say much. So as we've gotten our story out there and gained momentum, we've continued to build momentum each of the quarters, and as we said, we've gotten ourselves back to where we were pre, both in terms of bookings year over year, and it's getting back to kind of where we were, except for now we have the cross-sell opportunity. So where I would say, you know, expense synergies are pretty much, you know, we've exceeded the expectations that we laid out as part of the deal model. Now you're in what I call normal, you know, DNA, best operators, you know, continuing to improve the model of both companies and look for opportunities. Where the opportunity is now and we continue to build momentum on, It's a base, 401k, ASO, PO, all of our other products and services. You'll be seeing us putting our PERCS product into the PayCorp ecosystem as well. So that's where we see the opportunity as we roll into fiscal.

Thank you. We'll go next to Kevin McVeigh with UBS. Your line is now open.

Great. Thank you so much. Hey, I wonder, can you just remind us what the initial pay core revenue and expense synergies were and where we are today on those? Because it seems like you've been doing a nice job on kind of the integration. But just remind us what, again, the revenue and expense synergies were, because I guess we're bumping up on a year. I think that would help.

Yeah, Kevin, if you go back to I think when we originally announced the deal, now I'm kind of losing track of the core. But at one point in time, I think the expense synergies were in the $80 to $90 million range. I think the last update that we gave that we expected those to be in the $100 million range. And as John said, now we're kind of moving into BAU. We'll continue to look for opportunities. And we haven't stopped, even though we kind of exceeded our target. And I think we have ideas, certainly in areas around procurement and things like that. I think there's additional opportunities. But that was kind of the last update on the expense synergies. And then I think the update we gave on revenue synergies was a current year update. You know, we expected it to contribute 30 to 50 basis points of growth this year. I would say we're probably on the high end of that. And as John said, we're building momentum. And really, listen, I think the expense synergies are not why we did the deal. I think they probably justified the purchase price. But really, the value creation opportunity longer term with this deal is the cross sell. We know we're extremely effective and have driven a lot of growth in our model, selling and expanding the share wallet within our existing client base. When we look at where that growth has come from, our higher value solutions, ASO, PEO, retirement solutions, you know, those are solutions that John mentioned play well, more upmarket. And so, listen, I think we're excited about the opportunity. pay core average client size is quite a bit larger than ours and those clients are more apt to have some of the needs that those solutions meet we're trying to be intentional and cautious and thoughtful and going after the opportunity we know that we're extremely effective at doing it might not always be the best client experience and so we're trying to we're building a lot of momentum there and as we move so phone and just real quick follow-up John you some great commentary on AI opportunity.

As you think about AI across, you know, a 100-person client as opposed to an eight, is the go-to-market strategy on that different in terms of the consumption patterns, or, you know, how are you positioning for, because obviously, you know, you serve a terrific market from kind of micro to medium. Just any thoughts on, you know, the shift in the go-to-market through an AI lens?

Well, I think, Kevin, I'll take a shot As I said, for the vast majority of our – and you mentioned the eight-man company, they know expertise makes a big difference, is what I'll tell you. Because I have a lot more insights about what restaurants are paying in Rochester, New York, or San Francisco. I've got that data. I can bring that together, and I'll present it in a way to give you advice. If you had your own HR director, you're not going to get that. So those are things we can do. When you get into 100-plus, and I would actually say even larger than that, what has been a pleasant surprise to us, as we've had more conversations with, you're talking at 250 in the HR department, it's probably under stenology or additional support staff and begin to augment their HR organization and allow their people to spend more time on strategic HR activities. So I think when you start looking at companies trying to figure out how do I become more efficient, What I think you're going to find companies ask themselves is, yeah, do I apply AI into my HR department and try to make it a little more efficient, or should I really radically think about my HR department differently, right? Should I go and leverage someone who can provide both the tools and the people and have the breadth of the data we have to provide the insights? Is that a better alternative? And that's a, you know, traditional enterprise HR outsourcing value proposition. And I think AI allows and do it at all sides of the market. So one of the things we've actually knocked yourself out, we're now – and we're getting clients that are asking us, would you mind doing it for us? You can buy our tech and get technical support, or you can come and we can do it for you. So I'm real excited about the opportunity here, and I think at scale, AI takes large data sets. We have large data sets, and I think we can add value to our clients in their HR departments, regardless of whether they're eight people or 100.

Thank you. Our next question comes from Samad Samana with Jefferies. Your line is now open.

Hi. Good morning, and thanks for taking my questions. Good to hear. It sounds the trends are getting pretty good. You had mentioned recently that maybe the initial land per client was a little bit smaller than historical goal or like fewer add-on modules at the point of sale. I'm curious if you've seen that trend change as well if that was a one-time kind of occurrence what you saw last quarter and if that's improved and then I have one follow-up question. Thank you.

In that regard I think we probably had higher expectations going into the year but we would be able to from what we saw before.

Understood and then in the PEO business you know I think that as we all try to figure out what's happening it underlying the hood in terms of different verticals and what the employment outlook looks there. Can you remind us what the kind of vertical exposure inside of the PEO business is, broadly speaking, versus let's call it white collar, blue collar? And then related, just as you think about that high single digit PEO WSE growth, how much of that is driven by net new deals versus headcount growth within the install base? Thank you again.

And you look at the actual, I would say there's not a, we skew a little bit more towards the blue and gray than what, of course, again, some of that has to do with, you know, large enterprises are more white color. So get up $5,000, $10,000, you're going to have more white color type of jobs. So a little bit more blue and gray across the business, and I think that applies to the PO. We had good net new.

Relatively flat, and it is most years. I mean, it's driven by the double-digit demand that we talked about, Samad, as well as the record retention. So it really is net new is driving the growth in WorkSlay employees.

Thank you. We'll go next to Ramsey L. Assal with Cancer Fitzgerald. Your line is now open.

Hi. Thank you for taking my question this morning. I wanted to ask about something you mentioned, which was that pay core bookings had reaccelerated to pre-acquisition levels. how should we think about the bookings conversion to revenues for pay core relative to legacy paychecks? Do the larger clients translate into sort of a slower conversion process or not so much?

It's much longer than ours where we, you know, you could sell them and implement them in the same.

And is that the same for, I mean, I understand that would be the case for sort of a new client implementation, but does that also apply to cross-sell or new product attach, or is that something that you can kind of turn on more quickly?

We have, again, those things again that we did Thank you.

Our next question comes from James Fawcett with Morgan Stanley. Your line is now open.

Great. Thank you very much. I wanted to ask a quick macro question and I guess tie it to margin question. You mentioned that you still see kind of a tight labor environment. Just wondering if you can provide any anecdotes or color on that comment. And then as it relates to margins, I know you said that you expect there's some margin expansion to go. Just wondering how we should think about the PACOR integration and how that matures and, you know, getting past some of these acquisition-related costs because they still look elevated. Just looking for a little color on the timing around those couple things. Thanks a lot, guys.

Well, I think on the macro side, I think what we've said is and what we see is that it's been low-fire and a low-hire type of environment right now in the fiscal year in terms of the small business index that we report. And, again, I think we're in a dynamic environment right now where, again, what we hear from clients, particularly in the small end of the market, less than 50, is continued in and they have open.

And I think you've got a degree of – but, again, when we look across the – Yeah, and just on the integration-related stuff question as it relates to margin, James, I mean, we're backing a lot of that stuff out, so that's really not included in the adjusted operating margins. I think if you were to look at our margins from a GAAP standpoint, they're still pretty high, probably in the 40% range. But I think John hit on it. I think we still think there's room as we move forward, as we continue to embed AI in all of our processes across the company. we feel like there's still plenty of room to expand margins. That's certainly part of our DNA and we're always trying to make that trade off of trying to find ways to be more productive more efficient so we can expand margins, continue to deliver the strong earnings growth that our investors have come accustomed to and at the same time making sure that we're investing back into the business which is a priority for us to make sure we have a sustainable model as we move forward. So, you know, we will continue to – that's been our model. That's how we go about our business here. And I think today just margins are high from a non-gap standpoint, but given some of the advancements in technology, we feel like we still have a runway to be able to, you know, shuffle all those different priorities and expand margins.

Thanks so much, John. Thanks, Bob.

Thank you. Our next question comes from Daniel Jester with BL Capital Markets. Your line is now open.

Hey, good morning. This is Kyle Aberastrian for Dan Jester. Thank you for squeezing me in here. Just a quick one from me. I was wondering if you guys quantified how much impact the annual form filing revenue had on the business in the quarter? Thank you.

Number in Q3, I would say it's probably consistent with maybe where it was in prior years. Obviously, it's pretty high margin revenues, so that's why you see the higher margins in Q3 relative to the rest of the year. I'd say the one comment that there related to the year-end filing, we definitely saw a little bit better price realization there. Discounting on that was better than what we had seen historically and certainly a little bit better than what we had assumed in our forecast. That is a lever that sales reps can use, particularly as they're getting towards the end of the calendar year and selling new deals, that's kind of a discounting lever that they use. And we fly a little bit blind in finance because we don't really know how that's going to come through until it actually builds in January. I would tell you that the discounting on it and the price realization was a bit better than what we assume. But, you know, not a big growth driver year over year in similar performance probably than what we've seen in past years.

Thank you. Our next question comes from David Grossman with Stiefel. Your line is now open.

Good morning. You know, I think last quarter your bias, you know, was the low end of the revenue growth range. And I'm just wondering and reiterating the guide, are we still favoring the low end or just given some of your commentary about the third quarter and going into the fourth quarter, are you feeling better about the business and feeling maybe we're better than the law?

In Q3, there were some puts and takes. I mean, obviously, we feel good about the business. We felt good about the business last quarter as well. It's nice getting through Q3 and throwing up the quarter that we had. You know, John mentioned a lot of positive momentum. You know, I'd have to say it's probably one of the stronger selling seasons that I've seen in a while. And we have a lot of momentum in a number of businesses, so we feel good. And obviously, that translates into the PNOW, you know, further down the road, particularly when, you know, when you're talking about, you know, the enterprise space. And so I'd say largely the back half, as I mentioned, is in line with our expectations, and, you know, that's why we're kind of leaving it where we had said it was going to be.

Got it. And sorry to kind of stick on the financials here, but just, you know, you did make a general comment about a certain level of comfort with where consensus was for next year. And I know you don't want to make any specific comments about next year, but is there anything now that you're a combined company that, you know, how we should think about pays or pricing and management solutions going into next year, you know, particularly given now that we've got pay core in the base. I know it sounds like pays look like they're, you know, pretty stable, but I thought I should just ask the question, anything you want to call out there on either pays or pricing?

I think, as you know, we had clients of all sizes before expecting, you know, we're expecting environment that we're seeing right now about, and by the time we, you know, consult with the board and we come back to you, hopefully we have even more certainty about the external environment and what the risks are going into 27. So we're trying to be prudent. Macro environment, no signs of recession, any of our data's or indicators, nothing that would indicate that we would change what we're thinking in terms of pays on any of our segments at this point in time.

Thank you. Our next question comes from Jacob Smith with Guggenheim Securities. Your line is now open.

Hey, thanks for taking my question.

A quick one, just you're a second company in the mid-market through PayCorp. You really talk about expanding headcount to capture opportunity.

What are you seeing out there that's giving you conviction?

I think the key thing is, as good prospects are, and before we bought PayCorp, they saw more opportunity. And so that's what captured the upmarket, not only for HCM, but as I said, HR advisory value proposition to the...

Great, thanks for taking my question.

Thank you. Our next question comes from Ashish Sabhadra with RBC Capital Markets. Your line is now open.

Thanks for taking my question. I'm wondering if you could provide some color on the year-on-year growth in PACOR in the quarter and if you could quantify the contribution for form filings for PACOR in the quarter.

In the past, I'm increasingly blurred between what's PayCorps and what's Paychex, you know, based on our early on decision to integrate those two businesses. And so I think if we look at it, you know, our best estimate is if you were to look at the organic growth of the PayCorps business, it was consistent in Q3 with what we saw in the first half of the year, which is in that upper single-digit range. I would tell you what's less blurred, and this is how we'll talk about the business as we move forward, is when we look at our enterprise business above 100, irrespective of the business sold at which platform. You know, that business has been growing. I would tell you in the first half of the year, it was growing up for single digits, and in Q3, it grew around 10%. And so that's how we're managing the business. That's how John and I are thinking about it. That's how we're going to market and the acquisition, and we provide color on, you know, the different areas of the business and how they're performing. That's how we're going to be looking at it. And, again, I think that's, you know, similar and maybe not too different than what the other assets in that space are going at. And our expectation would be that we would, you know, prospectively be growing at or above the other assets in that segment of the market. and that's currently performed in Q3.

That's a very helpful color. I was just wondering if you had some initial thoughts on pricing for next year and how does that trend compare to your historical range? And also maybe a quick one on discounting. You made some comment around discounting was much lower. I think that was specifically for forms filing. I was wondering if you could comment on discounting for ASO in general.

Yeah, so I'm going to say this. We're going into our budget meeting. this is where we discuss competitively how we want to position ourselves going into the next market. We have a tradition of being able to drive value to our clients and get price accordingly. So I'm not going to make any comments on how we're going to set pricing going into next year at this time. I'm not going to give anybody a heads up.

Thank you. Our next question comes from Scott Wartel with Wolf Research. Your line is now open.

Hey, guys. Thanks for squeezing me in. I'll limit it to one. Just going back to the P, I mean, it sounded like your commentary on enrollment sounded pretty positive. And I remember I think you guys made some changes to benefits of operators and everything. But I also wonder, is there any element of you think that employees are maybe just sort of adjusting to this higher health care premium inflation environment? And that could also be, you know, kind of helping to drive some of this enrollment growth that we've seen as well.

Yeah, Scott, I think everyone's adjusting. I think, you know, I mentioned that given your dependents to participate in these AI tools, the ability to model that for you versus the lower in place, that a better outcome for the participant as well because it's a – Great.

Thanks, guys.

Thank you. Our next question comes from Kartik Mehta with North Coast Research. Your line is now open.

Hey, good morning, John and Bob. John, you talked about ACOR revenue synergies as we go into FY27 and the opportunity to really take advantage of that. I'm wondering how the Salesforce alignment is going because I'm guessing that's part of the revenue synergies that you'd be able to capture.

So on the alignment question, marketing money in that segment, much of the market as we can at 100 digitally from marketing spend. And we look at that lead and we go, hey, that looks like a great PO opportunity. We're going to move that over to the PO, right? And so then all of a sudden you've got an expense that's on the pay core side of the equation. Same thing is happening with our reps as well. So we've got the segment, if this is your question, the segmentation of the sales force is clear. How we're going to market from a brand perspective is clear. And then what we're doing is both in terms of using our AI and also our incentives for all of our sales reps is making sure we have every sales rep in the market looking and representing the entire capabilities of the company. And so that goes back to abilities of the company where that's tech for you.

Yeah, and then just a follow-up question, Bob, and this might be crazy considering it's paychecks, But I thought I'd ask anyways, any thought about potentially using a little bit of leverage to buy back stock, considering where the stock price is?

And I think you saw our announced a new shareback authorization significantly larger than what we've had in the past. And when you look at, you know, there's obviously, at least in my opinion, there's a disconnect between the underlying fundamentals of the business and the valuation. And that, obviously, you know, I was always taught to, you know, buy low and sell high. And so you've seen us be a little bit more opportunistic there. I would tell you I don't think we've necessarily changed our overall philosophy around share buybacks, but we know we're going to have to buy shares back in the future to offset dilution. And we've done more of that this year than what we normally would have, as you guys can see in some of the disclosures. So, yeah, I don't ever want to say never. You know, our leverage is pretty low. That's obviously a board-level decision. And as you can imagine, I'm assuming a lot of CEOs and CFOs in this market are having these conversations with their board on a regular basis, and John and I are certainly doing that. And so we'll continue. You know, we have lots of priorities from a capital allocation standpoint. Certainly want to continue to invest in the business, but we'll continue to have those conversations. So I don't want to say never, but, you know, something that we'll continue to evaluate.

Thank you. And our next question comes from Jason Kupferberg with Wells Fargo. Your line is now open.

Thanks, guys. Good morning. I wanted to ask about management solutions specifically. I think the organic growth was 4% in the quarter. I think that's the same as we saw last quarter. Do we expect that to accelerate in Q4? And if so, is that because you'll start to lap PACOR during the quarter, or would there be other accelerants we should be considering?

Hey, Jason. Yes, I would say, you know, I think it was four in Q2 and four in Q3. You're also seeing sequential improvement in the organic growth of management solutions as well. Part of it is when you get to Q4, you know, we would expect that to continue and maybe accelerate a little bit to the point that you're making. You're anniversary-ing the acquisition, so now, you know, we have a scale business that's growing, you know, faster than the overall growth of the business, so that would be accretive to the organic growth. And then we're continuing to build momentum on the synergy opportunity, and I think that showed up in the Q3 selling results, and that will eventually make its way into P&L, and so you should see improvement in management solutions organic growth as we move into Q4 as well.

Okay, understood. And then just a clarification, I know we're not changing EPS guidance, but we did up the float income guide a little bit, which I would have thought would have lifted the EPS, I don't know, maybe a percent or so. I mean, there's only a quarter left in the year. So, just curious, is it just some conservatism there, leaving the EPS guide as is, or are you going to reinvest some of that upside float income?

It's probably a combination of both. I think we're certainly going to look for opportunities as we move through the balance of this year to invest. We want to get out of the gate strong when we get into next fiscal year, so it's always balancing those trade-offs, Jason. John and I will manage through that as we go through the quarter and see where the opportunities are, but it's really a combination of maybe a little conservatism in where we may potentially want to take advantage and make some investments as we end the year.

Yeah, the great position we find ourselves in is we have plenty of opportunities for investment coming out of the third quarter to both accelerate growth and that's over the next couple weeks as we get to our planning process and anything that we're thinking is a good investment in the first quarter in 27 I don't think that we want to wait to make sure we're trying to contemplate that as we go into our planning session next week.

Thank you. At this time there are no further questions in queue. I will now turn the meeting back to John Gibson.

Okay, well thank you everyone Just continuing, just really to reflect, I think, very disciplined execution and focus of the teams. I do want to call out, you know, we're approaching a one-year anniversary core team in particular. The group's been through a lot. If you think back a year ago, this organization through, and I think the way that we've responded and the way we've continued to come together and build momentum, as particularly many years ago, So I think that's a good model for us to replicate as we go into fiscal year 27 and beyond. NEX has never been a better position than it is today. I think we've differentiated ourselves in the marketplace repeatedly. I think in this new AI era, our scale, our breadth, our capabilities from an expertise perspective, and the fact that we're dealing in mission-critical type of work where errors are costly, I think that you're going to continue to find more and more clients of all sizes turned to paychecks to be their HR department and to provide them leading-class technology and advisory solutions in the years ahead. So I like where we're positioned, and I want to thank you for your interest in paychecks.

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