Earnings Call Transcript
PAYCHEX INC (PAYX)
Earnings Call Transcript - PAYX Q4 2025
Operator, Operator
Good morning, and welcome to Paychex' Fourth Quarter Fiscal 2025 Earnings Call. Participating on the call today are John Gibson and Bob Schrader. As a reminder, this conference is being recorded, and your participation implies consent to our recording of this call. I would now like to turn the call over to Bob Schrader, Paychex' Chief Financial Officer.
Robert Lewis Schrader, CFO
Thank you for joining us to discuss Paychex fourth quarter and fiscal year 2025 performance. This morning, we released our financial results for the quarter ended May 31, 2025. You can access our earnings release and presentation on our Investor Relations website. We anticipate our Form 10-K will be filed with the SEC before the end of July. This teleconference is being webcast and will be archived on our website for approximately 90 days. Today's call includes 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 a reconciliation of the non-GAAP measures can be found in our earnings release. I would now like to turn the call over to John Gibson, Paychex President and CEO.
John B. Gibson, CEO
Thanks, Bob. I will start the call today by sharing key business highlights for the fourth quarter and fiscal year, and then Bob will discuss our financial results and outlook. We will then, of course, open it up for your questions. Given that the Paycor acquisition has closed and we have completed key integration activities to bring the 2 companies together, we are now operating as 1 Paychex and not 2 different companies. Our comments today will reflect that fact. Paychex demonstrated solid performance this year against our strategic objectives, underscoring our unique ability to effectively navigate dynamic market conditions while continuing to enhance our customer experience and market position and also maintain our industry-leading operating margins. We delivered 10% revenue growth in the fourth quarter, reflecting continued execution across the business and the addition of Paycor. For full fiscal year 2025, we achieved 6% revenue growth and 6% growth in adjusted diluted earnings per share. We also delivered 60 basis points of adjusted operating income margin expansion in the face of significant ERTC headwinds. Our client retention rates increased year-over-year, underscoring the compelling value we provide as a trusted partner in our clients' growth and success. We grew the number of clients we serve to approximately 800,000 and increased the number of HR outsourcing worksite employees to 2.5 million this year. We have made significant progress on the Paycor acquisition, surpassing our expectations and setting a strong foundation for future success. Based upon our early progress on the integration and our increased understanding of the opportunities we have gained since closing, we are raising our cost synergy expectations to approximately $90 million in fiscal year '26. The actions we have already taken give us high confidence in achieving the synergies. In addition, we have identified a list of additional synergy opportunities that we are actively pursuing. We also believe that there are additional opportunities to invest for future growth, and we will strategically accelerate those investments as the year progresses. We previously outlined to you the business unit structure, leadership continuity and retention of key Paycor talent to mitigate integration risk. Customers are continuing to utilize their existing platform, minimizing the disruption to our client base. Our retention remains strong, and the reception to the combined offerings has exceeded our expectations in their early days. I'll share some of the recent integration accomplishments and focus areas for fiscal year '26. During the quarter, we defined how our HCM platforms will generally serve our market segments moving forward. Paychex Flex will focus on companies with up to 99 employees, and the Paycor platform will target the upmarket enterprise segment above 100 employees. SurePayroll will continue to serve the small business do-it-yourself marketplace. This approach provides the market with the most comprehensive, flexible and innovative HCM solutions for organizations of all sizes and needs. We also completed a comprehensive territory assessment and reassignment review across the sales teams that aligns to these market segments. We have expanded and optimized our sales coverage nationwide in the fourth quarter. Sales representatives who transitioned territories received comprehensive training on the complete suite of HCM solutions they can now offer. We are encouraged by how sales hiring, retention and tenure developments are trending going into the fiscal year. While all of these changes did create some internal disruption and took many of our sales resources out of the field for a portion of the fourth quarter, we believe now is the time to make these changes to best position us to win in the marketplace. With newly trained sales reps on our broad set of capabilities and solutions, realigned territories and a fully staffed sales team, we believe we are well positioned entering the new fiscal year. While we have made significant strides in integrating the teams, optimizing our go-to-market approach and capturing cost synergies, we're most enthusiastic about the opportunities for revenue synergies. While we expect to realize revenue synergies over the next several years, I'm pleased we have already secured our first Paycor customers on our ASO and PEO and are seeing promising growth in our pipeline. Notably, the PEO sale was referred by a Paycor broker, and this was even before we officially launched the product into the client base. We continue to believe the biggest opportunity is the cross-sell of Paychex retirement, ASO and PEO solutions into the Paycor base of more than 50,000 clients. We also believe there are opportunities to take Paycor's capabilities into the Paychex client base in the years ahead. We are pleased at how quickly our teams were able to complete the bulk of the backing integrations required to cross-sell into Paycor's base and realize these revenue synergies. We also remain excited about Paycor's embedded solution, which enables seamless integration of our payroll and HR technology stack into our partners' platforms. With thousands of potential partners, we are early in executing against this revenue opportunity and are actively scaling and investing in it. We believe the synergies between the companies, coupled with our mutual focus on innovation and customer-centric solutions, position us to continue to deliver strong returns and drive long-term shareholder return. A core component of our go-to-market strategy involves cultivating long-standing relationships with channel partners such as brokers, CPAs and banks, just to name a few. More than half of our new business originates from channel partner referrals. Following the acquisitions, we introduced the Paychex Partner Plus program to brokers to foster relationships and drive mutual growth. Together, we now have a broader suite of solutions to offer brokers, which can supplement their offerings to clients and the Partner Plus program provides a structured framework designed to safeguard mutual clients from competing products. To date, over 1,000 brokers are enrolled in a program and we are hearing positive feedback, which we believe indicates a strong foundation for retaining and expanding this important referral channel. The share of Paycor field bookings referred by brokers increased this past fiscal year. We are also actively gathering feedback from brokers, CPAs and banks to enhance our loyalty programs, designed to ensure we maintain the strongest partner program in the HCM industry. We also recently launched Paychex Partner Pro platform, a new portal designed to provide accountants quick access to critical data, reporting and insights for their clients using Paychex Flex. This innovative platform transforms how CPAs manage their portfolios by providing a centralized hub for accessing client payrolls and HR data, resolving issues and identifying missing information. This is empowering them to operate with greater efficiency and proactively serve their clients. Our PEO business continues to also perform well, achieving solid worksite employee growth this quarter. Similar to what we shared with you last quarter, while the PEO business remains strong and participant levels in our health plans across the country continue to increase, enrollment in our Florida at-risk medical plan did decrease year-over-year. We also continue to see a trend among employees opting for lower-cost health plans to offset the rising healthcare costs. While these factors continue to pose a pass-through revenue headwind, they do not impact our earnings or our PEO value proposition. One of the benefits of the PEO model is that it empowers small businesses to punch above their weight and offer benefits comparable to those of Fortune 500 companies. This enables them to attract and retain top talent in today's still very competitive labor market. We remain bullish on the PEO space given our scale and capability in this segment and just how greenfield the opportunity remains, both inside and outside of our client base. Now turning to the macro environment. We are observing a mix of both optimism and uncertainty within the market and our client base. Many businesses are frozen as they wait for more clarity about a number of macro issues such as tariffs, inflation and taxes. The hard data continues to indicate that small businesses remain fundamentally healthy despite the headlines. Our small business employment watch revealed stable employment levels with moderation in hourly wage inflation in recent months. Our data does not currently show any signs of recession. We also see from our interactions in the market that the uncertainty is prompting businesses to exercise caution when making decisions and being cautious about how much they are spending on products and services. We have also seen an increase in bankruptcies and financial distress in the micro end of the market and in our client base in the fourth quarter. Many businesses, I think, on the edge of failure may have decided not to fight against the new headwinds they see in front of them. We also saw losses due to increases in business combinations and mergers increase more than typical. Both are signs of businesses making strategic decisions based upon their view of the current and future environment. We will continue to monitor the hard data and trends in the market and take the appropriate steps to position Paychex to win in any market conditions. We will also continue to take the actions needed to protect our long-standing track record of financial strength even in challenging times. I am proud of what the entire team at Paychex and Paycor have accomplished together. I would like to thank our dedicated employees for their hard work and contribution in achieving these many successes. They have accomplished a lot in a very short period of time. There has been a lot of change internally and externally to navigate, and they have shown their dedication and real resiliency to deliver for our clients and for Paychex, and I am eternally grateful for that. We are truly better and stronger together as One Paychex, and we believe we are better positioned than ever before to deliver on the future of HCM and help businesses succeed. I'll now turn it over to Bob to provide an update on our financial results and our outlook.
Robert Lewis Schrader, CFO
Yes. Thank you, John. I'll start with a summary of our fourth quarter and full year financial results, and then I'll share our outlook for fiscal '26. Starting with Q4. Total revenue for the quarter increased 10% to $1.4 billion. Excluding Paycor, total revenue increased 3%. Management Solutions revenue increased 12% to $1 billion for the quarter, driven primarily by the addition of Paycor as well as higher revenue per client from price realization and product penetration. Excluding Paycor, Management Solutions increased 3% in the quarter. PEO and Insurance Solutions revenue increased 4% to $340 million for the quarter, driven primarily by solid growth in the number of average PEO worksite employees. Outside of the at-risk plan headwinds that John discussed, PEO continues to perform well. Interest on funds held for clients increased 18% to $45 million for the quarter, primarily driven by the inclusion of Paycor balances. Excluding Paycor, interest on funds held for clients increased 3%. Total expenses for the quarter, excluding the acquisition of Paycor and the prior year cost optimization initiatives, increased 1%. Operating income margins for the quarter were 30.2% and adjusted operating income margins for the quarter were 40.4%, an increase of approximately 20 basis points driven by increased productivity and cost discipline, offset by the Paycor acquisition. Excluding Paycor, adjusted operating income margins expanded by approximately 110 basis points. Diluted earnings per share decreased 22% to $0.82 per share and adjusted diluted earnings per share increased 6% to $1.19 in the fourth quarter. Now let me turn to our results for the full year fiscal 2025. Total revenue grew 6% to $5.6 billion; Management Solutions revenue increased 5% to $4.1 billion; PEO and Insurance Solutions increased 6% to $1.3 billion; and interest on funds held for clients increased 10% to $162 million. Total expenses for the year, excluding the acquisition of Paycor, increased 1%. Operating margins were 39.6%, and that's on a GAAP basis. Adjusted operating margins were 42.5%. As the best operators in the business, we are constantly seeking ways to enhance operational efficiency. In fiscal year 2025, we expanded adjusted operating income margins by approximately 250 basis points, excluding the impact of Paycor and the ERTC headwinds. Diluted earnings per share decreased 2% to $4.58 a share and adjusted diluted earnings per share increased 6% to $4.98 a share. We continue to exceed the Rule of 50, demonstrating our ability to achieve consistent revenue growth with industry-leading profitability. Now let me turn to our financial position. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.7 billion and total borrowings now of approximately $5 billion as of May 31, 2025. Cash flow from operations was $2 billion for the fiscal year, primarily driven by net income. We returned over $1.5 billion to shareholders during the fiscal year in the form of cash dividends and share repurchases, and our annual return on equity remains robust at 42%. As we look ahead to our fiscal 2026 outlook, we assume the current fluid macro environment will persist. We believe we are better positioned than ever before to win in the digital and AI-driven era of human capital management. Our solutions are mission-critical, and we have ample opportunity to continue driving sustainable growth and enhanced operational efficiency. Total revenue for fiscal '26 is expected to grow in the range of 16.5% to 18.5%. We expect the recent Paycor acquisition to contribute approximately 12 to 13 points of that growth. As previously mentioned, we expect revenue synergies to build over the next several years. And in fiscal '26, we expect revenue synergies to contribute 30 to 50 basis points of that growth that I just gave you. Management Solutions is expected to grow in the range of 20% to 22%. PEO and Insurance Solutions is expected to grow in the range of 6% to 8%. And we would expect revenue to accelerate in the back half of the year for PEO and insurance as we begin to anniversary the at-risk revenue growth headwinds we experienced in the back half of this fiscal year. Interest on funds held for clients is expected to be in the range of $190 million to $200 million, which includes the benefit of approximately $1.1 billion of client fund balances from Paycor. These funds are now being managed by the Paychex team and are part of the Paychex portfolio. Adjusted operating income margin is expected to be approximately 43% and our effective income tax rate is expected to be in the range of 24% to 25% and adjusted diluted earnings per share for next year is expected to grow in the range of 8.5% to 10.5%. Let me turn to the first quarter. We would anticipate total revenue growth in the first quarter to be between 16% and 17% and adjusted operating income margin to be between 40% and 41%. And of course, all that is based on our current assumptions, which are subject to change. And with that, I'll now turn the call back over to John.
John B. Gibson, CEO
Thank you, Bob. We will now open the call for questions.
Operator, Operator
We'll take our first question from Mark Marcon with Baird.
Mark Steven Marcon, Analyst
I'm wondering, can you talk a little bit more about some of the distractions just in terms of putting together the sales forces, how long you actually ended up taking them out of the field and in production and how that ended up impacting the fourth quarter? That's the first question. And then how much do you expect that to spill over into the first quarter? You're guiding to potentially a lower top end of the range than your full year guidance. So I'm wondering if there's some residual effects from that. And then can you talk a little bit about the areas that you're really excited about with regards to the revenue synergies and the cross-sales? You mentioned the initial success on the ASO, but obviously, that's really early. How do you think that's going to build over the course of the year beyond the comments about the 30 to 50 bps, but just like where it's happening and what you think it's going to end up doing from a longer-term perspective?
John B. Gibson, CEO
Yes, Mark, thanks for the question. Yes, I would say relative to the sales transformation that we did and go-to-market changes that we made, as you know, we started planning how we were going to approach this when we announced the deal back in January and have done a lot of work and did a lot of work in preparation and waiting for the close. All of the changes that we wanted to make, we made in the fourth quarter. And we made a strategic decision that given the distractions that were already out there with Liberation Day and everything else in the marketplace, that now was the time to go ahead and move as quickly as we could to get everything done. We certainly could have done it at a different pace that would have dragged it potentially into the first quarter of this fiscal year, but we made an election to get all of it out of the way. So we've made all of the changes, the teams are in place. They're in their new territories. We've completed all the training. We had our kickoff of the first week of June, and they're in the field actively selling the broad set of products and the services that we have. I think that probably what I'm most excited about is the early acceptance and the willingness of the Paycor client base to sit down and have conversations with us about the opportunities. And a week after the actual announcement of the sale before we had actually began the go-to-market, we got our first PEO referral. We went down. They had, had a planned client symposium down in Orlando because of the date of the closing, and was able to go down in the following week and picked up our first competitive deal, actually, a takeaway from a competitor, a client that was in California. And then after we launched the ASO within a week, we had a 900-employee client sign up for our ASO, our base ASO product to help them support their growth plans. And what I'm most excited about is that client is already committed to actually upgrade into our HR Pro package in August because of the support we've given them. So excited there. I also think there's a lot of opportunity from a technology perspective that we continue to discover. And so like I said, I feel like we're in good shape, and we're well positioned going into this fiscal year.
Robert Lewis Schrader, CFO
Mark, I’d like to add a few comments. Regarding the spillover, as John mentioned, we made a strategic decision to move past much of that disruption. Therefore, we do not expect significant spillover in Q1, relating to the comment about Q1 being somewhat lower than the full year guidance. This is driven by two factors. First, on the PEO and insurance side, we anticipate better growth in the second half compared to the first half as we overcome some of the MPP challenges. Additionally, concerning the disruption in Q4, while there was some impact, I don't believe it significantly affected our recently reported financial results. The numbers were indeed lower than expected. When John and I provided the Q4 guidance of 10% to 12%, we were confident we would be finalizing the Paycor deal within a week. However, we did not foresee that the investment-grade bond market would be largely inactive due to Liberation Day. Although we successfully closed the deal and had a strong bond offering, the timeline extended by more than a week beyond our expectations. If we had closed the deal as initially planned, we would have landed in the middle of the 10% to 12% range. I just wanted to provide this additional context regarding your question.
Bryan C. Bergin, Analyst
I just want to follow up here, maybe a little bit on the last point you made, Bob, on a 4Q growth bridge from 3Q and maybe the factors going forward. So as we look at the 3% or so organic Management Solutions growth in 4Q, can you just help bridge some of that deceleration from that 4.8%, I believe, in 3Q? Just talk about some of the changes, whether it's underlying demand, checks, retention, pricing. Obviously, you talked about the sales dynamics there, and that sounds transitory, but just trying to think about as we go forward here, what's kind of transitory versus lasting within Management Solutions?
Robert Lewis Schrader, CFO
Yes. I'll discuss the transition from Q3 to Q4 and specifically the Q4 performance. We noticed that checks were somewhat weaker in Q4, which was anticipated, although they came in softer than we had expected. We've done some analysis, and it appears that the issue is largely related to client size and mix. There was also an increased headwind from MPP enrollment in Q4 compared to Q3. Regarding our retirement assets, we have highlighted the strong growth of our retirement business this year, which has been in the mid-teens. In Q4, we continued to grow at a strong pace, close to double digits, but it was not at the same growth rate as in the first three quarters due to market conditions, with the S&P down about 6% on average in Q4 compared to Q3. These are some of the key factors. Additionally, we previously mentioned stronger price realization in Q3 due to year-end processing, which helps explain the transition from Q4 to Q3. Looking at the 3% organic growth, we need to make a few adjustments. Q4 presented a tougher comparison, particularly regarding the timing of our annual price increase, which varies each year. Last year, we had a slight benefit from timing, but this year it was consistent with last year's schedule, which eliminated that advantage and turned into a headwind, compounded by the MPP enrollment issue. After considering these factors for Q4, the exit rate aligns with our full-year guidance for organic business growth, and we remain confident in our projections. Adjusting for Q4, that exit rate is consistent with our expectations for organic growth next year.
John B. Gibson, CEO
Yes, Brian. We are not going to keep focusing solely on our growth formula, which includes 1% to 3% organic client growth across our combined businesses. Our emphasis will shift towards enhancing product penetration, which we believe represents a significant opportunity. This will play a larger role in our midterm guidance, where we see substantial potential. Additionally, we intend to maintain our pricing strength, ensuring we can provide value to our customers. These elements have been fundamental to our growth strategy, which remains unchanged. We aim to be disciplined about growth; the client number can be adjusted if one is willing to invest more than the customer's lifetime value for acquisition, but we will not excessively promote or offer products to artificially inflate client numbers that may not lead to profitability. We strive for aggressive client growth while also seeking profitable growth avenues that benefit our customers over the long term and foster valuable relationships. Demand is present, and our market positioning looks promising. Our go-to-market strategy should provide us a competitive edge across the segments we are now targeting. Regarding our investments, we are committed to exceeding the previously discussed cost synergies and have pinpointed further opportunities, particularly in back-office efficiencies compared to what Paycor had. We will continue to invest in several areas: this quarter, we decided to fully support the Paycor and Flex roadmaps, and we plan to allocate more resources to the SurePayroll platform, which you'll learn more about throughout the year. We're also boosting our investments in the Paycor embedded product, anticipating its potential within our partner network. Some of these investments will begin to pay off in 2026, offering a clearer picture of our strategy for that year.
Samad Saleem Samana, Analyst
Maybe the first one, just on Paycor and some of the assumptions and admittedly, I'm doing some back-of-the-envelope math on the fly here. But the 12% to 13% contribution for fiscal '26 implies kind of around $700 million at the midpoint for Management Solutions contribution. And then if I think about what Paycor was on track to do in terms of recurring revenue when it was still public, let's call it, a shade under $700 million. So it's not implying a lot of growth for Paycor in fiscal '26. And I'm trying to understand, is that conservatism? Is there some assumption around churn? And again, I understand I'm doing the numbers on the fly, but just help us reconcile what Paycor was growing versus what you're assuming for Paycor's growth.
Robert Lewis Schrader, CFO
Yes. We're still expecting Paycor to be a strong double-digit growth business. There's certainly a conservative element in our guidance. Since we are at the start of the year, we want to ensure that our guidance is something we can confidently achieve. So, while there is some conservatism in our projections, we do anticipate that Paycor will experience double-digit growth next year as part of this plan.
John B. Gibson, CEO
Yes, let me address that. We took a step back and reviewed our entire go-to-market strategy from both sales and marketing angles. We already had segmentation integrated into our strategy, focusing our salespeople on different segments, similar to what Paycor was doing. Our goal was to create the best team in the industry and support them with top-notch tools and marketing. In the last quarter, this was crucial. As Bob mentioned, there was a delay, which led to discussions about how much we could accomplish in a limited timeframe. We merged both marketing teams to create a world-class marketing organization that integrates HCM, Paycor, and Paychex. We also reevaluated our market teams and territories to ensure we were targeting the areas with the greatest potential as we head into 2026. We combined the strengths of both Paychex and Paycor while simultaneously increasing our sales headcount. We are fully staffed and plan to keep investing in sales. As part of our strategy, we anticipate expanding our sales force at a faster rate than Paychex historically has. In just about six weeks, we established all the necessary plans, managed the changes, and completed training. Now, we have segmented sales teams in new territories with enhanced marketing support, and we've achieved a significant amount in a short time.
Tien-Tsin Huang, Analyst
Just want to clarify the impact of the sales disruption and then the comments on the higher bankruptcy and the mergers on the very low end. It sounded like those relatively small and perhaps you would have hit the high end of your guide if it wasn't for the delay in closing of Paycor. I just wanted to make sure I caught all of that.
John B. Gibson, CEO
I think you understood it correctly. Regarding the bankruptcies and financial distress losses, I wouldn't classify those as significant. It's more of a minor issue. After the selling season, we improved client retention year-over-year, so we had a solid retention year. We likely would have reported much stronger numbers if we hadn't experienced what we did in the fourth quarter. This is not uncommon; when there’s an external shock, as seen during the financial crisis, individuals who were already uncertain may decide to give up. This pattern often emerges during periods of high uncertainty, where people may accelerate their decisions. We also observed an increase in bankruptcies during the fourth quarter, as indicated by government reports. However, this is still a minor issue and didn't significantly affect our revenue, as it involved the lower end of our client base. Even with the slight increase in the fourth quarter, we ended up with better retention than the previous year, which was very strong.
Robert Lewis Schrader, CFO
Yes, I wouldn't say there's anything specific to highlight. When we started evaluating, we were cautious. We knew which areas to focus on, and those areas remain the same. We were simply able to achieve some results sooner than expected, leading to numbers that are larger than our initial projections. Additionally, as mentioned, we've identified several other areas that we're still exploring, and we see more opportunities ahead. We'll keep you updated as the year progresses. We hope to exceed our targets, but we also aim to balance that with reinvestments in the business. This is a growth story for us; we pursued this deal not for immediate cost savings but to create a stronger growth trajectory for the company going forward, and we believe we've accomplished that. So, we'll be balancing additional cost savings with ongoing investments.
James Eugene Faucette, Analyst
I want to go quickly to your capital allocation plans. And now that you've got the deal closed with Paycor, how should we think about the mix between return to investors via incremental buybacks versus reduction in debt leverage, et cetera, and just how you're prioritizing that right now?
Robert Lewis Schrader, CFO
Yes, I would say there are no significant changes in our capital allocation strategy. We have been quite transparent about that. We believe we are well positioned to maintain our dividend policy, with our primary focus on investing in the business. We'll continue with that approach, and when we have excess cash, our main method of returning it to shareholders will be through dividends rather than share buybacks. I do not see any change in that philosophy. We perform some share buybacks mainly to offset dilution, and I wouldn't say there are significant changes in that area. We expect to manage leverage effectively; although this transaction doesn't create substantial leverage, it does increase it compared to our historical levels. We will aim to reduce that leverage, which should happen relatively quickly due to two main factors. First, the additional EBITDA generated from this transaction through synergies. Second, if you look at our balance sheet, there is some long-term debt maturing within the next 12 months that we plan to pay down. The combination of these two factors over the next year will help us deleverage our balance sheet.
James Eugene Faucette, Analyst
I wanted to ask about the macro situation. I'm curious about how you're viewing the increases in micro businesses, bankruptcies, and strategic decisions. Is this a trend that you've noticed continuing at the start of your fiscal year? It seems minor, but I want to confirm whether it's ongoing and if it affects how you are shaping your outlook.
John B. Gibson, CEO
No, I would say not at all. In fact, as we discussed in the third quarter, we exceeded our expectations for both client and revenue retention. When we consider the period following Liberation Day, particularly the 6 to 8 weeks thereafter, we noticed some activity occurring. We've encountered these types of shock events before. While I can only speculate on the mindset of business owners, it seems this issue primarily affects sole proprietorships and the lower end of the market. We did observe more business combinations in the upper mid-market, likely because people are looking at the macro environment and seeking opportunities to scale up for future preparedness. Reviewing the hard data from our index, we continue to see moderate growth in small business hiring. As Bob pointed out, the mid-market growth has been slower than anticipated, but it isn't extreme or indicative of a recession; we haven't seen any signs of a recession. There's a significant degree of uncertainty, and it seems many people are currently hesitant. We need more clarity regarding the tax bill and tariffs, and hopefully, global conflicts will begin to ease. Eventually, we'll also need to focus on the Federal Reserve and their decisions on interest rates.
Andrew Owen Nicholas, Analyst
Just wanted to ask a few on synergies. I guess first, in terms of top line synergies, can you speak to maybe what's embedded in your outlook for '26? It sounds like you've already had some indications of cross-sell opportunity and cross-sell success into the PEO and ASO model. Is that something that you're assuming continues in '26? Is there anything that you could kind of quantify there? Or would momentum there be upside to what you've guided?
Robert Lewis Schrader, CFO
Yes, Andrew, you might have overlooked it in my prepared remarks. In our outlook, we indicated that we anticipate revenue synergies contributing 30 to 50 basis points of growth next year. This is where we see the value creation opportunity with this transaction—being able to cross-sell into their client base and vice versa. As you are aware, a significant portion of our growth has stemmed from our ability to monetize our client base and sell higher-value solutions like ASO, PEO, and retirement services. Even before the acquisition, we recognized a long runway of opportunity within our own client base, as many of those products are underutilized. Moreover, with the start of this transaction, we have added 50,000 clients to our payroll funnel, who are generally larger clients more likely to require ASO, PEO, and retirement solutions. We are really enthusiastic about this opportunity. We acknowledge that this will take time, and we won’t capture all of it immediately. We're taking a conservative approach regarding what we can achieve in the first year, but that doesn't hinder us from actively pursuing this opportunity as quickly as possible. As John mentioned, we've already experienced some initial success within just a few weeks of owning the asset with minimal effort. We are excited about the long-term potential of this opportunity. Yes, I would say that most of the actions needed to achieve those cost synergies have already been implemented, as reflected in the profit and loss statement that develops over the year. Some transition resources will be in place for a while, and the benefits will accumulate as the year progresses, but the necessary actions have already been completed. This gives us a strong level of confidence in increasing our projections. Additionally, we are not slowing down; we see further opportunities ahead. There might be procurement possibilities that we haven't fully explored yet, and we will continue to pursue other areas now that we have completed the initial steps.
John B. Gibson, CEO
Yes. I want to highlight a decision we made that I believe is beneficial both in the long term and short term. Early on, it was clear how effectively our teams worked together to address challenges and identify opportunities. During the initial planning stages, I felt increasingly optimistic about the cultural integration and collaboration among teams. In our previous quarter call, we mentioned the new leadership additions that allowed us to take a measured risk concerning our ability to manage significant changes quickly. This was crucial, especially given the external disruptions and uncertainties we faced. We felt it was essential to communicate clearly with our clients, partners, and employees about what to expect. We rapidly ensured employees understood the implications for them, clarified to clients that migration was not necessary, and assured partners that this would benefit them too. We focused on executing these tasks swiftly to minimize distractions heading into the fiscal year. Looking at our achievements in the fourth quarter, we accomplished a great deal, exceeding our synergy plan expectations. We decided to invest fully in the Paycor and Flex roadmaps and the SurePayroll platform, with more details to come. We expanded our sales teams, restructured territories across market segments, and launched a new sales technology stack along with an AI tool for all sales teams. Additionally, we introduced the Paychex Partner Pro platform and the Partner Plus platform program for brokers. We integrated all marketing organizations in just 6 to 8 weeks and delivered impressive results. Now, as we head into 2026, we are better positioned than ever. We are now focused on procurement and vendor negotiations, which will be less disruptive to the company. This decision was made possible by the synergy and commitment from both Paycor and Paychex leadership to guide their teams through this change at such an accelerated pace. I am incredibly proud of and grateful for the hard work everyone in the organization has put in, and I hope you recognize the significance of what we accomplished in a short time.
Ashish Sabadra, Analyst
I was just wondering if you can comment on checks per client, how that trended in 4Q, but also what your expectations are for fiscal year '26? And have you seen any impact from some of the things going on, on the immigration crackdown.
Robert Lewis Schrader, CFO
Yes, checks per client did trend a little softer in Q4. If we look back at the year, checks per client were actually higher in the first half. We began to see a decline in Q3, which we incorporated into our forecast, but Q4 was softer than we anticipated. We have taken that into account for our guidance and plan for next year, projecting a decrease in checks per client in the plan. We've recognized these trends and adjusted our forecasts accordingly. Yes. I mean a lot of the restructuring stuff, to be honest with you, is behind us. We got a lot of that behind us, a lot of the onetime costs related to the transaction. All that is behind us. When you look at kind of the adjustments going forward, they're mostly noncash related. You have the amortization of the intangibles and you have some of the rollover equity. That's what you're going to see mainly going forward. So it really shouldn't have an impact to free cash flow, and we'll get back to a point where we see free cash flows growing in line with our earnings.
Kartik Mehta, Analyst
John, I know you talked a little bit about pricing and adding value, obviously, for clients. And pre-COVID, we were at a certain level for price. And obviously, a little bit after COVID, you're able to get better pricing than you were historically. As we move forward, where do you think you are on that price kind of realization? Do you think it's higher than it was pre-COVID? Or do you think you'll be at the same level?
John B. Gibson, CEO
Yes, Kartik, what I would say is that I think of it as value, our ability to, as you talked about, bring in a client. Likely in this competitive environment, you're providing them with a discount or some sort of incentive to make the move. And then the question is how good a job do you do that when that discount kind of expires because it's generally promotional, how much of that discount can you get back to retail price? And then how much can you upsell to that client long term? And that goes back to the conversation we had before in terms of the science of picking the type of client you bring in. If you bring in a client on the cheap that you're never going to make money on and all they want is cheap, they're going to be hard to sell anything to. And then you're not going to be able to raise prices, you're not going to be able to sell them anything extra. And so then you're just stuck with a client that you're losing money on and you can't really monetize. We've been very scientific in terms of our risk profiling, our profiling and marketing to understand that. And so when I look at what we realize in terms of generating value in our client base, we're doing better than we were doing before the pandemic. And you look back historically, we're still in the higher end of the range that we have historically done as part of our growth formula. It goes back to what Bob said, we continue to believe in the midterm that both value realization and the ability to drive product penetration will continue to be a significant part of our growth formula in the years ahead.
Robert Lewis Schrader, CFO
We're always monitoring the situation, Kartik. We have some short-term rate decreases factored into our plan, which aligns with the Fed's projections. However, our client funds portfolio is predominantly invested long-term. Recently, we took over Paycor's client fund, which was over $1 billion, and they were mostly invested short-term. Given our financial strength and liquidity, we can utilize those funds effectively and likely secure some of those balances at current rates. There’s nothing significantly different about managing their funds compared to our approach. The yield curve is fairly flat, and we are reinvesting at a rate that exceeds what our current securities are rolling off from the portfolio. Our team will assess the yield curve shape at the time of roll-off to make decisions on how to maximize yield, but I wouldn’t say there’s anything significantly different in our strategy.
Jason Alan Kupferberg, Analyst
Can you just clarify what the organic outlook for Management Solutions specifically is in fiscal '26? I mean based on the Paycor numbers you gave, I'm calculating around 4% to 5% organic. So I just wanted to check on that. And if you can also comment on whether or not the revenue synergies are a part of the organic guide.
Robert Lewis Schrader, CFO
Yes, I have a few comments on that, Jason. John mentioned in his prepared remarks how we've segmented this business. We previously had an upmarket business, and in Q4, we worked on merging these businesses. We transitioned Paychex personnel and clients to Paycor and vice versa. Moving forward, it will be very challenging for us to distinguish between Paycor and Paychex. My intention with the guidance was to provide insight into the total revenue. Most of Paycor falls under Management Solutions. I aimed to give an overall sense of what it comprises. I was able to do this because we are in the process of developing a stand-alone plan, so I had visibility on what that would entail. It's easier for us to indicate what our stand-alone plan looked like and to show the additional contribution from Paycor. John and I have discussed how we will approach this going forward throughout the year, but honestly, I haven't formulated a specific method yet. We will try to provide some insight into the inorganic contribution, but as these businesses become more integrated, it will be increasingly difficult to separate them. The figures you've mentioned seem to align closely with what the organic component might be for Management Solutions. Additionally, I would note that the revenue synergies are somewhat distributed across both, as there are opportunities in both directions.
John B. Gibson, CEO
I think it's important to understand that we now have Paycor positioned as our 100-plus market segment and platform. All the resources that were at Paychex supporting our enterprise business are now part of that business unit. You will continue to see it as two separate entities. Additionally, there was downmarket business that Paycor was involved in, and we've transitioned that into the Paychex market segment. Going forward, one reason we aimed to clarify our organization internally quickly was to avoid dragging this out over multiple fiscal years. We believed that we had the opportunity when the deal closed to complete this work so that we could start fiscal year '26 with everyone clear on their focus and responsibilities. This is part of the challenges we will face.
Jason Alan Kupferberg, Analyst
Yes. As a follow-up, it seems we are discussing some acceleration in the organic component of Management Solutions in fiscal '26 following the 3% growth in Q4. Could you elaborate on the visibility and the components involved? Also, you mentioned assuming a steady macro environment, but noted some challenges in client decision-making. Are you suggesting that the worst is behind us in that respect and that we can expect some normalization or improvement in client decision-making?
Robert Lewis Schrader, CFO
Let me discuss the numbers, and then John can provide insights on the macro perspective. When examining the Management Solutions guidance, the first half and the second half are quite similar, although the latter is slightly lower, especially in Q4 as we anniversary the Paycor acquisition. One point I mentioned earlier, Jason, is that you often use the exit rate to gauge the organic growth rate. The point I was trying to make, which I may not have articulated well, is that the 3% figure, whether viewed from total revenue or Management Solutions, must take into account that we had a challenging comparison with Q4 of last year. We adjusted the timing of our price increase last year compared to the previous year, and we actually saw a slight rise in pricing last year. Thus, when you factor in these elements, both for Management Solutions and total revenue, including MPP enrollment, the exit rate in Q4 appears to be 3%. However, that figure doesn't truly reflect the reality because of these headwinds. When adjusted, the exit rate aligns closely with the mid-range of the guidance I provided for the organic business. We feel confident about that. I understand the numbers can be a bit perplexing, especially with the ERTC factors. However, those are two growth challenges in Q4 that should be considered for a more accurate comparison as we conclude the year and transition into fiscal '26.
John B. Gibson, CEO
Yes, and I would just add on the macro side. When you look at the data that we have, which I think is directionally very accurate, in our Small Business Index focused on the under 50 segment, we're seeing and continue to see moderate growth in small businesses, and we don't see any signs of recession. When I look at the fourth quarter, what I would say is given the GDP that we had, stability there on the micro side, some people dropping out, maybe throwing in the towel. In the upper market 50- plus, for the GDP numbers we saw, and you run our models, you would have said there was more hiring going to happen there than maybe what we saw. So there's a little softness, but there's no real signs of challenge. Now what do I assume in the future of the macro environment? Are we going to have a budget bill or not? Probably more like we are next quarter than last quarter. Are we going to have a situation where 20% to 40% tariffs are thrown out every quarter? I don't know. That's what happened on Liberation. There's been a lot of things hit the market that drive uncertainty in the fourth quarter. I think we all have been living through that, including global conflicts. Our assumptions are that some of that is going to get worked out. That's what we've been told out of Washington, and we'll wait to see what happens.
Scott Darren Wurtzel, Analyst
I wanted to ask on the PEO side. I know there's a lot of moving parts with the MPP plan and then also thinking about the cross-sell opportunity. But wondering if you can talk about some of the kind of core Paychex PEO trends you saw in the quarter? And how you're thinking about that as we move into fiscal '26 and think about that acceleration in the back half of the year once we lap the MPP headwinds?
Robert Lewis Schrader, CFO
I can start, and John can add on. I mean, I think if you look at the PEO in Q4, I mean, we're very happy with the performance. I think the demand continued to be strong. I mean demand from a sales standpoint was strong double digits in the quarter. We had record worksite employee retention for Q4. So we feel good. I think you see that reflected in the worksite employee number that we provided for the year. That obviously includes our ASO business as well. But those are the areas that we're focused on, both ASO and PEO, those are our higher-value solutions. And at the end of the day, we're focused on driving worksite employee growth, and I think we delivered that this year in some of the positive, I'll say, outside of the at-risk kind of noise and headwinds that we've talked about, the underlying operating performance of that business all year has been strong and Q4, in particular, was strong both from a demand and retention standpoint.
John B. Gibson, CEO
Yes. And I'd echo everything Bob said. And look, on an aggregate basis, the value proposition that the PEO brings to the marketplace has never been in more need. There is a health inflation issue out there, and we have solutions to solve that problem. And when you look at it on an aggregate basis, we increased the number of people participating in our PEO health plans across the country and continue to see strong demand for the product and service with the exception of Florida. And because Florida is a unique animal, as we've talked about before, it has an oversized impact on revenue, but again, not on the really operating performance of the business or the profitability of the company. Okay, Margot, thank you very much. At this point, we will close the call. If you're interested in a replay, the webcast of this conference call will be archived approximately 90 days. Once again, thanks, everyone, for your interest in Paychex, and hope you have a great day and a great 4th of July. Thanks, Margot.
Operator, Operator
Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.