Paychex, Inc. (PAYX) Earnings

Management highlights

### Strategic Execution & Growth Momentum - Delivered double-digit revenue and earnings growth for both Q4 and full-year fiscal 2026, with accelerating organic revenue growth each quarter of the year - Completed organizational and sales territory realignment: moved Paycor sub-100 employee businesses to the SMB segment, and integrated 100+ employee businesses into the enterprise segment, creating clearly aligned teams focused on segment-specific market needs - Exceeded fiscal 2026 enterprise segment growth targets, and secured two new national broker channel partnerships in Q4 - Achieved record worksite employee retention for ASO and PEO segments, with PEO worksite employee growth outpacing industry benchmarks at high single-digit growth for the quarter and full year ### AI Innovation with WISE - Launched WISE (Workforce Intelligence Strengthened by Expertise), the company's agentic AI engine that currently powers ~600 AI features and agents embedded in core workflows, with human-in-the-loop oversight - WISE leverages over 26 trillion data points from Paychex's 50+ years of proprietary HR, payroll, and benefits data, paired with patent-pending AI knowledge mesh technology to unlock actionable insights from unstructured client interaction data - Delivers measurable operational improvements: reduced timesheet approvals by over 50%, cuts HR errors by up to 70%, enables real-time automatic updates to employee handbooks as regulations change, and reduces client wait times while maintaining accuracy - Expected to drive long-term value through direct monetization, stronger upselling, higher revenue per client, improved retention, and greater pricing power ### New Growth Initiatives - Launched Perks, the digital employee benefits marketplace, which now has over 400,000 unique employees using the platform; expanding access to Paycor, increasing the addressable market by over 2.5 million employees - Completed modernization of underlying infrastructure, enabling development of payroll-agnostic standalone AI-enabled solutions that expand Paychex's addressable market beyond its traditional payroll client base - ASO engagement grew over 60% in fiscal 2026, reflecting strong market demand for end-to-end HR support amid growing regulatory complexity ### Financial & Capital Allocation Strength - Generated $2.6 billion in operating cash flow (up 35% YoY) and $2.3 billion in free cash flow (up 36% YoY) - Returned $2.2 billion to shareholders in fiscal 2026: $1.6 billion in dividends and $600 million in share repurchases - Reduced leverage ratio by 0.5x through earnings growth and debt repayment, and maintained a robust 12-month rolling return on equity of 45%

Guidance

For full fiscal 2027: - Expects total revenue growth of 5% to 6%, with Management Solutions revenue growth also in the 5% to 6% range, and PEO and Insurance Solutions revenue growth of 6% to 7% - Expects interest on funds held for clients to total $195 million to $205 million, a year-over-year decline reflecting the full-year impact of 75 basis points of Fed rate cuts and lapping one-time portfolio repositioning gains from fiscal 2026; the outlook assumes no further changes to the Fed funds rate - Expects adjusted operating income margins of approximately 44%, and an effective income tax rate of approximately 24% - Expects adjusted diluted earnings per share growth of 7% to 9% - Expects first quarter 2027 total revenue growth to be consistent with full-year guidance, with an adjusted operating margin of 41% to 42% - All guidance assumes stable macroeconomic conditions with flat employment levels, and reflects the strong momentum Paychex exited fiscal 2026 with

Segment performance

For the fourth quarter of fiscal 2026: - Total revenue: $1.6 billion, up 12% year-over-year. Management Solutions (the largest segment) generated $1.2 billion in revenue (75% of total revenue), growing 14% year-over-year, driven by product penetration, price realization, and 8 percentage points of growth from the Paycor acquisition. PEO and Insurance Solutions generated $370 million in revenue (23.1% of total revenue), growing 9% year-over-year, driven by strong PEO worksite employee growth and higher PEO insurance revenues. Interest on funds held for clients generated $52 million in revenue (3.25% of total revenue), growing 15% year-over-year. For the full fiscal 2026: - Total revenue: $6.5 billion, up 17% year-over-year. Management Solutions generated $4.9 billion in revenue (75.4% of total revenue), growing 20% year-over-year. PEO and Insurance Solutions generated $1.4 billion in revenue (21.5% of total revenue), growing 7% year-over-year.

Risks & headwinds

- Forward-looking guidance is based on current macroeconomic assumptions, which are subject to change; unexpected shifts in the macro environment or employment levels could impact actual performance relative to guidance - Competitive pressure in the HCM and payroll market remains steady, requiring continued investment to maintain market share and pricing power - High medical inflation creates a dual challenge: it acts as a tailwind for PEO demand but can also price out some small business clients, balancing revenue growth against affordability - Cross-selling and integration of Paycor client and sales teams is still maturing, and upside from revenue synergies may take longer to materialize than expected - Realization of margin expansion from operational efficiencies and AI-driven productivity gains depends on successful scaling of new technology and process changes

Analyst Q&A

• Q: What drives the 5-6% 2027 revenue guidance range, and what is the current organic growth momentum exiting fiscal 2026?

  A: Organic growth nearly doubled from ~3% at the end of fiscal 2025 to the range embedded in the 2027 guide, with sequential improvement every quarter this fiscal year. Bookings momentum was very strong in Q4, following a strong Q3 that was the best in 13 years, with broad-based growth across ASO, PEO, and retirement, driven by upselling into the Paycor client base. The guidance assumes a stable macro environment; stronger-than-expected performance would push results to the high end of the range, while unexpected weakness would pull it to the low end. All integration disruptions are now complete, leaving the team well-positioned to execute on the roadmap, with AI accelerating product development timelines.

• Q: What is the opportunity for AI monetization, and what timeline should investors expect?

  A: Paychex is already generating revenue from initial WISE components launched to clients, with additional products like intelligent timekeeping currently in soft launch with 10,000 customers, which will become a upsell opportunity in fiscal 2027. Most early WISE investment has focused on internal productivity improvements, including empowering service teams with instant access to full product knowledge and supporting sales teams with real-time client insight tools. WISE will resonate with clients of all sizes: it provides compliance peace of mind for small businesses without in-house HR teams, and frees up HR professionals to focus on strategic work for enterprise clients. Paychex's compliance AI tool is also able to integrate with competing HCM platforms, opening new standalone market opportunities.

• Q: What is the strategy for payroll-agnostic solutions, and what impact will it have on the business?

  A: Completion of Paychex's multi-year back office infrastructure modernization and modularization broke the historical requirement that all products be tied to a client's payroll on the Paychex platform. This capability allows clients to retain individual Paychex solutions like insurance or retirement if they leave the core HCM platform, and creates new opportunities to sell standalone products to non-payroll clients. It enables the expansion of the Perks benefits marketplace, which treats individual employees as standalone customers that can retain access even if they change employers. Early efforts are focused on validating profitability and go-to-market strategy, but the long-term opportunity is to expand Paychex's 50+ years of HR and compliance expertise to a much broader addressable market, and build relationships that can lead to future full-platform conversions.

• Q: What is the outlook for Paycor cross-sell synergies in fiscal 2027, and will contribution increase from fiscal 2026?

  A: The Paycor sales force was fully engaged this past year, but the organizational and product retraining process that started a year ago naturally created momentum that built over time. Cross-selling referral volume was stellar in fiscal 2026, and penetration of ASO and retirement into the Paycor client base already exceeded expectations. As the sales team becomes more comfortable integrating higher-value Paychex solutions into their sales motion, success will continue to breed more success, so management expects even stronger cross-sell contribution to growth in fiscal 2027 and beyond, which is a core driver of the accelerating organic growth trend.