PAYCHEX INC Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• Business delivered solid results in Q2 and first half of fiscal year. Excluding ERTC impact, Q2 revenue growth 7%, EPS growth 6%. Demand for HR technology and advisory solutions remains healthy. Sales activities and pipelines strong, especially in PEO and middle market HCM. Invested in sales/service teams and advertising. PEO business performing well with worksite employee growth, but Florida at-risk medical plan enrollment flat and employees opting for lower cost plans creating pass-through revenue headwind. Revenue retention improved, client retention near record levels. Invested in product suite, e.g., Paychex Recruiting Copilot and HR analytics Premium Plus. AI usage driving customer engagement, with over 80% early adopters of HR analytics engaging with platform.
• Financial update: Total revenue Q2 $1.3 billion (+5%), including ~200bps ERTC headwind. Management Solutions revenue $963M (+3%), PEO and Insurance Solutions $318M (+7%), interest on funds held for clients $36M (+15%). Total expenses +4% to $779M. Operating income +6% to $538M with 40.9% margin. First half of year total revenue +4% to $2.6B, operating margins expanded 20bps. Strong financial position with cash, restricted cash, and investments $1.3B, borrowings $817M. Returned $810M to shareholders via dividends and repurchases.

Segment Performance:

• Management Solutions: Revenue increased 3% to $963 million, contributing approximately 74% to total revenue. Growth driven by number of clients served, client employees for HR solutions, and higher product penetration, partially offset by lower ERTC revenues.
• PEO and Insurance Solutions: Revenue increased 7% to $318 million, driven by higher average worksite employees and increased PEO insurance revenues, contributing approximately 24.5% to total revenue.
• Interest on funds held for clients: Increased 15% to $36 million, primarily due to higher average interest rates and invested balances.

Guidance:

• Total revenue expected to grow 4%-5.5% (includes ~200bps ERTC headwind).
• Management Solutions expected to grow 3%-4%.
• PEO and Insurance Solutions expected to grow 7%-9%, but lower end due to Florida MPP enrollment.
• Interest on funds held for clients expected $145M-$155M.
• Other income net expected $30M-$35M.
• Operating income margin expected 42%-43%, higher end.
• Adjusted diluted EPS expected to grow 5%-7%.
• Q3 total revenue expected 4.5%-5% growth (last quarter of ERTC headwind), operating margin 46%-47%.

Risks:

• Health care inflation creating a headwind to pass-through revenue in PEO as employees opt for lower cost plans.
• ERTC headwind was a factor in previous quarters, though it will be the last quarter of such headwind.
• Competitive market dynamics affecting pricing and client acquisition efforts.

Q: Wondering what you're seeing with regards to any sort of change in terms of business sentiment post-election...

A: John Gibson responded that there's been moderate growth in small businesses, job openings have increased, but no significant change in momentum yet.

Q: Thank you for that. And then my follow-up question relates to the PEO business...

A: John Gibson discussed PEO business growth, differentiators like broad suite of offerings, and how they leverage AI and data analytics.

Q: Hi guys. Good morning. And happy holidays from me as well. I wanted to start on management solutions growth here...

A: John Gibson stated Management Solutions guide remains unchanged, with strong growth in both ASO and PEO, and strong product penetration.

Q: Hi, thank you and good morning. I wanted to ask about the upper single-digit growth in outsourced or HR outsourcing worksite employees...

A: John Gibson mentioned a balance of inside and outside base growth in PEO, with AI used for analytics during insurance renewal.

Q: Hi everyone. Thanks for taking our question. I just wanted to start on the partnership channel more broadly...

A: John Gibson spoke about partnerships, including CPA micro area, and openness to embedded/wholesale partnerships.

Q: Hi, guys. Happy holidays. Any pickup yet or any signs of growth that you'll see for kind of new business starts or the development of new business starts?

A: John Gibson said new business starts are down year-over-year but still above pre-pandemic levels, with moderate entrepreneurship.

Q: Great. Thanks so much. You had mentioned, I think, that you were capturing some share in a PEO, which is good news to see. Where do you think that's coming from?

A: John Gibson discussed introducing PEO concept, strength of value proposition, technologies, advisory capability, and broad set of capabilities.

Q: Thanks so much. Good morning gentlemen. I just wanted to dig in really quickly just on the Florida comment...

A: John Gibson and Bob Schrader discussed Florida MPP enrollment, risk management, and how PEO business balances growth with risk, with agency medical plan enrollment up in Florida.

Q: Hi, thanks for taking my question. There was a reference to an increase in PEO direct insurance cost...

A: Bob Schrader said direct costs are up due to growth in worksite employees, with no significant plan design changes planned.

Q: Hi, good morning John and Bob. Just on – John maybe just on the pricing commentary...

A: John Gibson stated Paychex remains a value and premium price provider, with clients appreciating value as seen in retention and growth.

Q: Hi, thanks for taking my questions. Just want to ask on the margin side...

A: John Gibson talked about digital adoption, AI leverage, and integrated selling improving margin performance.

Q: Thanks guys. Good morning. I was just wondering as you entered the key selling season...

A: John Gibson discussed leaning into value proposition, including AI-assisted solutions and Perks product, and being disciplined growers.

Q: Understood. Understood. And just as a follow-up, can you give us an update on your M&A pipeline...

A: John Gibson stated no M&A planned, with a strong pipeline of opportunities for organic growth and strategic acquisitions.