The paragraph is the introduction to the third-quarter fiscal 2025 Paychex earnings conference call, where John Gibson and Bob Schrader are participating. It provides instructions for operator assistance and how to ask or withdraw questions during the call. The call is being recorded, and participation implies consent. Bob Schrader, the CFO, opens the discussion on Paychex's financial results for the quarter ending February 28, 2025. The earnings release and investor presentation are available on their Investor Relations website, and their Form 10-Q will be filed with the SEC shortly. The call is also being broadcast online and will be available on the website for ninety days, with the call containing forward-looking statements regarding future events.

The paragraph discusses Paychex's third-quarter business highlights, including a 5% total revenue growth (or 6% excluding the discontinued ERTC program) and increases in both diluted and adjusted earnings per share. Investments in automation and technology have improved company efficiency, leading to a 180 basis point rise in adjusted operating margins. Paychex announced a definitive agreement to acquire Paycor, a leading HCM payroll and talent software provider, which is expected to enhance their industry position once all conditions are met. The integration promises synergy due to shared values and a strong focus on customer orientation and innovative solutions.

Paychex is acquiring Paycor to enhance its competitive position and offer a comprehensive set of HR and employee solutions to its nearly 800,000 customers. Paycor will operate as a standalone business unit, with its CFO, Adam Manthey, and Chief Product Officer, Ryan Bergstrom, joining Paychex's executive team. Paychex customers will continue using their existing platforms while gaining access to advanced HCM solutions. The acquisition is progressing well, with expected cost synergies exceeding $80 million. Paychex anticipates the acquisition will positively impact their adjusted earnings per share in the next fiscal year.

In the third quarter, the company experienced success in enhancing customer experience and retention rates, with client retention improving from last year and remaining high for HR outsourcing solutions. Despite a decline in enrollment for a specific Florida medical plan, overall revenue retention surpassed pre-pandemic levels. The company's value proposition is supported by strong retention rates and recognition from the Wall Street Journal as a well-managed company. Innovation remains a focus, with the company being named one of Fortune's most innovative companies for the third year, and they've developed an AI-powered HR Copilot tool to address common client queries using proprietary data.

The HR Copilot tool, nearing completion, will allow HR professionals to effectively address client concerns using accumulated knowledge. Paychex is set to launch this at the start of the next fiscal year, continuing its commitment to AI and innovation, exemplified by Paychex Perks, a free digital marketplace offering employee benefits and discounted products. Paychex Perks has seen success since its September launch, with over 180,000 employees making purchases. The company prides itself on ethical conduct, being recognized by Athisphere as one of the world's most ethical companies for the seventeenth time. The US job market has stabilized after post-pandemic growth, but customer employment levels were slightly lower than anticipated, impacted by weather in California and smaller bonus checks.

In the third quarter, Paychex experienced stable revenue growth, with a 5% rise to $1.5 billion, despite the end of the ERTC program affecting results. Management solutions revenue increased due to more clients and higher revenue per client, although this was partially offset by reduced ERGC revenues. PO and insurance solutions revenue saw a 6% rise, driven by more worksite employees and increased PO insurance revenues. However, interest on funds held for clients decreased by 2% due to lower average interest rates. Overall, the company is well-positioned for future success, with an exciting outlook as they plan to integrate Paycor into their operations.

In the third quarter, total expenses, excluding costs from the pending Paycor acquisition, rose 1% to $801 million, with investments in product and technology balanced by productivity gains. Operating income increased 6% to $692 million, and adjusted operating margins grew by 180 basis points to 46.9%. Adjusted diluted earnings per share rose 8% to $1.49. Year-to-date, total revenue grew 4% to $4.1 billion, with Management Solutions and PO and Insurance Solutions both seeing increases. Total expenses increased 3% to $2.4 billion. Operating margins expanded, and adjusted EPS grew to $3.79. The company's financial position remains strong, with significant cash flow from operations and returns to shareholders through dividends and share repurchases. The twelve-month rolling return on equity is 45%. Guidance for the fiscal year ending May 31, 2025, is forthcoming.

The outlook remains largely unchanged despite current macroeconomic conditions and the upcoming acquisition of Paycor. Total revenue growth is projected at 4% to 5.5%, with expectations at the lower end due to insurance revenue challenges and the expiration of the ERTC program. Management Solutions growth is anticipated at 3% to 4%, while PEO and Insurance Solutions growth is revised to 6% to 6.5%, down from previous guidance. Interest on client funds is expected at $145-$155 million, with adjusted other income at $30-$35 million. Operating income margin is forecasted around 43%, with an effective tax rate of 24% to 25%. Adjusted diluted earnings per share should grow 5% to 7%. The acquisition of Paycor, expected to close soon, is anticipated to be earnings-neutral this fiscal year but accretive next year, with predicted revenue growth from the acquisition at 10% to 12% in the fourth quarter.

The paragraph discusses the company's ongoing challenges with its business models, specifically mentioning a preference between ASO (Administrative Services Only) and PEO (Professional Employer Organization) models. Despite a switch to lower-cost health plans, there are difficulties in Florida with the PEO model's MPP (Medical Payment Plan), leading to revenue impacts. Bob Schrader explains that the company's revenue guidance for the fourth quarter is at the lower end due to these challenges in Florida. However, overall healthcare attachment across the PEO is up, except in Florida. Both ASO and PEO models are performing strongly otherwise.

The paragraph discusses the company's performance in terms of employee growth and health care plan selections. Despite concerns, the Professional Employer Organization (PEO) model is performing well, with strong bookings and a solid pipeline for Q4. However, in Florida, more clients are choosing lower-cost health care options, impacting revenue due to significant participation in a specific program. While employee participation in plans has increased nationwide, smaller deal sizes and selections of lower-cost plans have influenced revenue. The overall outlook remains positive despite these challenges.

The paragraph discusses a conservative approach to underwriting in Florida, emphasizing a strategy that avoids taking risks that could jeopardize plans. The speaker mentions not altering underwriting guidelines and opting for stand-alone plans, focusing on managing these plans well to avoid risks seen in the PEO industry. They have begun preparing for open enrollment by evaluating plan designs. The speaker then addresses Daniel Maxwell's question about lower-than-expected client hiring, stating it was broad-based but with some specific disruptions in California due to natural disasters affecting the PEO and ASO businesses.

The paragraph discusses a financial update related to Paychex, highlighting a discrepancy in bonus payouts where the overall bonus dollar volume increased by 8% from the previous year, but fewer people received bonuses, leading to check compression. The macro environment is showing moderate growth in small businesses without signs of a recession. Mark Marcon from Baird inquires about the Paycor transaction and its expected revenue synergies and accretion. Bob Schrader responds, indicating that they previously outlined the exclusions for accretion, including the amortization of intangibles due to the transaction's size.

The paragraph discusses the financial and strategic considerations involved in Paycor employees joining the Paychex team. It mentions the treatment of stock-based compensation for existing shares and distinguishes those costs from new stock-based compensation for incoming employees. It also notes the exclusion of one-time transaction-related costs. John Gibson expresses optimism about the merger's progress, highlighting the successful timing and anticipated benefits. He is excited about combining their efforts to create a comprehensive set of human capital management solutions, leveraging synergies from both companies' product developments.

The paragraph discusses the integration process of two companies, emphasizing a focus on achieving cost synergies and preparing to explore revenue opportunities. Initially viewing the deal positively, the speaker notes that they have a clearer understanding of expenses and potential revenue. After finalizing the acquisition, teams will work on revenue synergies and aim to quickly introduce their full range of products and services to clients. It is acknowledged that the integration will be challenging and will involve combining elements of Paychex into the new Paycor, particularly in the upmarket segment. The speaker refrains from sharing detailed go-to-market strategies for competitive reasons.

The paragraph discusses the integration of Paychex and Paycor, emphasizing that the two companies will operate as one entity from day one, eliminating standalone operations. The focus is on combining the strengths of both companies to create a solid strategic plan for 2026 and beyond. The speaker, along with Bob, will work with their team over the next few weeks to harness the best practices from both organizations. They acknowledge there are many opportunities and challenges in this process, aiming to enhance results by adopting each other's advantages. Mark Marcon appreciates the detailed response and asks about the impact of macroeconomic factors on business and consumer sentiment, as well as inquiries about business bookings during the key selling season. He also mentions that typical guidance and thoughts for the following year, especially with the ongoing developments in Paycor, are still forthcoming.

In the paragraph, Bob Schrader addresses a question about Paychex's future financial planning and whether the fourth quarter's exit rate is a useful consideration for the following year. Schrader acknowledges that while they are not as far in the planning process due to recent integration efforts, they intend to provide a combined guidance and outlook for the next fiscal year by the end of the fourth quarter. He mentions having visibility into the core business and expects that their planning will align with current revenue growth and margin expansion assumptions. Schrader provides some preliminary insights but emphasizes that more detailed planning is needed to integrate and review both businesses. John Gibson concurs with Schrader's statements.

In the paragraph, the speaker discusses the challenges and plans involved in a business integration process. They highlight the importance of exchanging information and learning from Paycor's strategies to enhance demand. The speaker mentions plans to implement successful strategies from both companies to improve sustainable results and acknowledges the risk and complexity involved in change management. Additionally, the speaker mentions discussions with team members about handling macro uncertainties and ongoing financial tasks, like a public debt offering, and asks for patience until they can provide a clearer outlook for the next fiscal year. They assure stakeholders that by the third quarter of the next year, the company will return to standard operations.

In the paragraph, during a call, Peter Christiansen from Citi asks about the progress and growth in the 401k business, particularly in relation to the Paycor acquisition. John Gibson responds by highlighting that the 401k business is experiencing double-digit growth, although it faced some challenges in the third quarter. He emphasizes the importance of encouraging client and employee participation in retirement savings, noting the larger systemic issue in the country regarding retirement savings. He appreciates Paychex's role in addressing this issue but mentions the need for further regulatory action.

The paragraph discusses the opportunities and plans for expanding 401k program offerings, particularly targeting both smaller and larger clients within the Paycor client base. The discussion hints at closing loopholes in the SECURE Act that affect micro businesses. There is a focus on achieving similar success (attach rates) with these 401k programs as seen with other clients. Additionally, the conversation touches on the importance of maintaining and fostering relationships with benefits brokers across both the flex and PEO (Professional Employer Organization) business sectors, especially with Paycor's integration into their operations. The dialogue highlights the prioritization of customer, partner, and employee relations during this phase of integration planning.

The paragraph discusses the strategic focus and growth of a broker program at Paychex, with Paycor also involved. There has been a year-over-year increase in the broker program's referral program for both PEO and HCM businesses. The company plans to refresh its strategic partner program, incorporating the broker channel, CPA channel, banks, and strategic advisors, leveraging investments in technology, improved support, and new marketing programs. Additionally, it mentions that despite some softer demand in early Q3 compared to the previous year, the overall demand environment remains consistent with historical levels, with strong bookings on the PEO side.

The paragraph discusses the current business environment, highlighting both optimism and uncertainty. Despite these mixed sentiments, data indicates a positive outlook, with increased demand, proposal activity, and a double-digit rise in clients adding new locations, suggesting no signs of an impending recession or employment issues. Retention performance has been strong, with client losses decreasing year-over-year, particularly due to fewer businesses closing. Bob Schrader attributes these successes to solid execution and the strength of the company's value proposition. The paragraph ends with a question from Brian Keane of Deutsche Bank about the cost synergies from the Paycor acquisition.

In the paragraph, John Gibson and Bob Schrader discuss the merger of two public companies, highlighting potential synergies and accretion benefits. John mentions identifying redundant areas and best practices that can drive synergies quickly and notes some valuable strategies learned from Paycor. While they are confident the merger will be accretive to their adjusted EPS next year, they are not ready to provide specific guidance yet. The focus remains on ensuring customer and employee satisfaction and effective collaboration post-merger.

The paragraph discusses a company's investment strategies and budget planning. They plan to expand investments in product development and sales growth, considering cost synergies. Brian Keane asks about the timing and revenue expectations related to Paycor's contribution, which is estimated at 10% to 12%. Bob Schrader and John Gibson indicate that they expect the Paycor deal to close soon, possibly in April after finalizing permanent financing. They are unable to provide an exact closing date but assure that updates will be given once finalized, allowing analysts to adjust their financial models. Then, Ramsey El Assal from Barclays asks a new question.

In the paragraph, Bob Schrader discusses Management Solutions' pricing strategy as a lever for growth, emphasizing their strong pricing power even during downturns. He mentions that revenue per client is crucial, achieved through pricing and product attachments, both of which were strong in Q3. He notes that favorable discounting also contributed to growth. John Gibson adds that maintaining disciplined growth is essential, cautioning against acquiring clients at unsustainable costs, especially in uncertain economic environments.

The paragraph discusses the company's conservative approach to revenue generation and business acquisition, highlighting their focus on margin expansion, evidenced by a recent increase of 180 basis points. They have strategically invested in AI and automation to aid in this, showing promising results. AI models, used for about a decade, help in decision-making regarding risk, discounting, and retention. The technology improves decisions at the point of sale and service, proactively addressing issues to prevent client loss and dissatisfaction.

The paragraph discusses the recent efforts to record all interactions between service and sales teams over the past nine months to train AI models. These models are enhancing productivity, especially with a new pilot project called HR Copilot, designed to improve HR services and provide better client responses. Additionally, the company is exploring AI-driven insights to generate revenue. The author is optimistic about future developments under the leadership of Ryan, expecting significant advancements in the coming year. James Faucette from Morgan Stanley asks about early adoption metrics for FlexEngage, an upmarket product, with Gibson noting its positive reception and complementary role to Paycor's workforce management capabilities.

In the paragraph, John Gibson discusses the potential of their recruiting Copilot, a tool with a database of over twenty million workers, aimed at helping clients find qualified candidates by analyzing the entire job market, not just active job seekers. He mentions its integration across sales teams and its use in client interactions by customer success individuals and HR generalists. To measure its effectiveness, they are examining adoption rates, product reuse, and placement success. While there is positive feedback from recruiters, especially in larger companies, Gibson notes that further efforts are needed to ensure that AI tools like the Copilot meet broader market needs.

In the paragraph, the speaker discusses the challenges and strategies related to product adoption, especially for smaller businesses. They highlight the ongoing efforts to combine service and technology to offer solutions and note that while adoption is progressing well in larger markets, it hasn't picked up as much with smaller businesses. A follow-up question about the competitive landscape and capital allocation is addressed. The speaker indicates no major shifts in the competitive market and confirms that there are no changes to their capital allocation strategy, emphasizing continued investment in the business and commitment to dividends and mergers and acquisitions (M&A).

The paragraph discusses the current focus on integrating Paycor as part of the company's capital allocation strategy, indicating no significant changes in their philosophy. John Gibson, responding to Kartik Mehta's question, attributes the reduced guidance for the PEO business to a specific issue in Florida. He doesn't see a fundamental change in the business or increased competition affecting medium-term growth. Instead, he notes that health inflation is causing employers to reconsider their plan designs or shop around when faced with higher renewal costs. Overall, he sees an improvement in demand for health services despite these challenges.

The paragraph discusses the benefits and opportunities of Professional Employer Organizations (PEOs), particularly in relation to offering competitive health insurance options. It highlights the increased demand for health insurance due to macroeconomic factors, and describes how employers in Florida can choose between specialty programs or standalone plans, with both offering a similar experience to employees. The trend shows more employers and employees opting for lower-cost plans, with employees often moving from premium to gold plans. Bob Schrader expresses optimism about the potential of PEOs, emphasizing their value in supporting small businesses by addressing various challenges they face.

The paragraph discusses the strong performance and growth in worksite employees within a business, particularly focusing on the Professional Employer Organization (PEO) segment. The team is seeing strong demand and retention despite some headwinds from pass-through revenues, which are impacting growth projections lower than expected. Despite these challenges, the growth rate is still outpacing competitors, even as client sizes decrease and hiring within existing clients slows down. The growth in pass-through revenues is acknowledged, but it's ultimately not meeting anticipated levels and will pose as a headwind going forward.

In this paragraph, Tien-Tsin Huang from JPMorgan asks John Gibson about any changes in Paycor's sales headcount and investment strategy, particularly after their recent acquisition. Gibson clarifies that their initial plan was to expand their go-to-market and sales teams as part of their strategy to capitalize on upmarket opportunities. They are currently evaluating their investments and cost synergies to decide if they should accelerate their original plans further. A final decision will be made during their budget planning process scheduled for the first part of April, with an anticipated increase in sales coverage expected in fiscal year 2026 and beyond. Tien-Tsin acknowledges the response and notes that further details will be provided in future discussions.

In the paragraph, John Gibson highlights that Paychex has consistently operated efficiently, achieving better productivity and margins than competitors, partly due to effective technology adoption, including AI. He notes that clients and employees increasingly prefer self-service technology, reducing service costs and improving satisfaction. AI-driven tools, such as chat features, enhance the customer service experience. Although AI's application is still in its early stages, its potential is significant, including making HR generalists more productive. Bob Schrader adds that despite a major challenge this year due to the expiration of ERTC, advancements continue.

The paragraph discusses the company's financial strategy and outlook. They faced revenue and earnings challenges, prompting efforts to improve their cost structure and implement a cost savings plan. They emphasize digital transformation, including AI and digital tools, and see globalization opportunities. Despite these challenges, they are optimistic about balancing margin expansion, earnings growth, and investment. The company believes they can continue investing in sustainable growth while delivering strong margins and earnings, consistent with previous years. The paragraph ends with a transition to a question from an analyst, Samad Samana, regarding financial contributions and timing related to Paycor.

The paragraph involves a discussion about the anticipated growth rate for management solutions in the coming year, excluding the effects of Paycor and the Employee Retention Tax Credit (ERTC). Bob Schrader refrains from giving specific guidance for the following year, stating that more details will be provided later. He acknowledges opportunities for growth in management solutions, such as client base expansion, product attachment, and pricing, suggesting that the growth should align with expectations. John Gibson emphasizes the challenges in reporting due to the integration of Paychex and Paycor, noting that defining and measuring the impacts of such integration initiatives can be complex. He highlights their efforts to create a unified plan to ensure a seamless integration process.

The paragraph is a discussion about a business merger strategy. The speaker emphasizes the complexity of combining two standalone businesses to maximize the benefits of an acquisition, suggesting that simply leaving them separate would not be beneficial. They note that there will be reporting challenges in the future due to this merger. Additionally, there is a focus on managing investor concerns and questions about the merger process. Samad Samana, another participant in the conversation, acknowledges these complexities and inquires about the low growth of expenses in the quarter, excluding acquisition-related costs. Bob Schrader responds that the quarter's expenses were as planned, with no significant deviations outside of the merger and acquisition context.

The paragraph features a Q&A session during an earnings call, where Scott Wurtzel from Wolfe Research asks about the trends affecting the Professional Employer Organization (PEO) segment, specifically in relation to fiscal 2025 guidance. Bob Schrader responds by explaining that the softer trends in PEO growth are due to several factors impacting the medical plans in Florida: lower attachment rates, increased plans going through the agency versus at-risk plans, and more individuals opting for lower-cost health benefits. While Schrader acknowledges that these factors collectively contribute to lower enrollment and revenues, he admits that he doesn't have a precise breakdown for each factor's impact.

In this discussion between Jason Kupferberg and Bob Schrader, they talk about the growth expectations for Management Solutions in Q4 relative to Q3, noting a 1.5% headwind in Q3 due to ERTC. Kupferberg highlights concerns about small business confidence and macroeconomic stability. Schrader acknowledges a slight Q3 tailwind from price realization that won't repeat in Q4, and emphasizes uncertainty in Q4, mentioning stable client checks and a mix of asset balance impacts, including a deceleration from strong 401k business growth due to recent market performance. The conversation closes with Kupferberg seeking information about potential revenue synergies on the Paycor side.

In this paragraph, John Gibson discusses the focus on cross-sell opportunities and states that concrete numbers will be available next quarter. He emphasizes the company's current efforts on client and employee integration and support, while indicating a shift towards growth initiatives. The operator then concludes the Q&A session and Gibson closes the call by expressing excitement about the future of Paychex and informing listeners about the webcast replay availability. The call ends with thanks to participants and a note about the end of the Paychex earnings conference call.

This summary was generated with AI and may contain some inaccuracies.