Paychex, Inc.

Good morning and welcome to the third quarter fiscal 2025 Paycheck Earnings Conference call. Participating on the call today are John Gibson and Bob Schroeder. After the speaker's opening remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star two on your telephone keypad. As a reminder, this conference is being recorded and your participation implies consent to our recording of this call. If you do not agree to these terms, please disconnect at this time. I would now like to turn the call over to Bob Schroeder, Chief Financial Officer. Please go ahead.

Thank you for joining us for our review of Paycheck's third quarter 2025 financial results. Joining me today is John Gibson, our Chief Executive Officer. This morning, before the market opened, we released our financial results for the quarter ended February 28, 2025. You can access our earnings release and investor presentation on our investor relations website. Our Form 10-Q will be filed with the SEC within the next couple of days. This teleconference is being broadcast over the internet and will be archived and available on our website for approximately 90 days. Today's call will contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ from our current expectations. We will also reference non-GAAP financial measures. A description of these items along with the reconciliation of non-GAAP measures can be found in our earnings release. I will now turn the call over to our CEO, John Gibson. Thanks, Bob.

I'll start the call today with an update on our business highlights for the third quarter. Then I'll turn it back over to Bob for the financial update. And then, of course, we'll open it up for your questions. This is an exciting quarter for paychecks. As we enter the digitally and AI-driven era of human capital management, we believe the combination of our positive underlying momentum and the pending acquisition of PACOR position us well for continued success. Total revenue growth was 5% in the third quarter, excluding the impact of the discontinued ERTC program. Revenue growth was 6%, driven by the strength of our industry-leading HCM solutions. Diluted earnings per share increased 4% and adjusted diluted earnings per share grew 8% during the quarter. Our investments in automation and technology are boosting efficiency across the company, resulting in a strong 180 basis point increase in adjusted operating margins compared to the prior year. During the third quarter, we announced that we entered into a definitive agreement to acquire PayCorp. a leading provider of HCM payroll and talent software. The waiting period under HSR expired on February 21st. After other customary closing conditions are met, we look forward to welcoming Paycor to the Paychex family in the coming weeks. Our companies are highly complimentary, and our dedicated employees share a common set of values Most importantly, a strong customer orientation and a relentless focus on providing innovative solutions to real-world challenges. Our expected nearly 800,000 customers combined will benefit from having access to the most comprehensive HCM portfolio from the most trusted provider of technology and expertise in the industry. We believe the acquisition of Paycor will strengthen our competitive position upmarket while giving us the ability to offer Paycheck's robust set of HR and employee solutions to Paycor's approximately 50,000 customers and their 2.7 million employees. We are optimistic about what we can achieve together by leveraging the best of both of our current and future offerings. We are working diligently towards a closing of the Paycor acquisition in the coming weeks. and we have already made several important decisions related to the integration. We are planning to operate PACOR as a standalone business unit. Adam Ante, PACOR's current CFO, will be joining Paychex as Senior Vice President of PACOR. And Ryan Bergstrom, PACOR's current Chief Product Officer, is also joining Paychex to become the new Chief Product Officer of Paychex. We're excited to welcome both Adam and Ryan to the Paychex executive team. ACOR and Paychex customers will remain on the platforms they're currently using and continue to receive support through their existing service team relationships. They will shortly gain access to the most comprehensive, flexible, and innovative set of HCM technology and advisory solutions in the industry. With our sure payroll, Paychex Flex, paychecks HR advisory solutions, and now pay course capabilities. We have solutions to meet the diverse needs of businesses of all sizes. We are making great progress on the acquisition and on integration planning. The work we have done since announcing the transaction has increased our confidence in achieving the cost synergies. And we now expect synergies over the $80 million that we shared with you in January. Given this, we now expect the acquisition to be accretive to our adjusted earnings per share next fiscal year. The third quarter was successful as we continue to improve our customer experience and value proposition. Client redemption has improved over last year's solid performance. and retention in our HR outsourcing solutions remain near record levels. Client losses are down across all employee size segments. Our revenue retention improved over last year and remain above pre-pandemic levels as we continue to focus on acquiring and retaining high-value clients. Our strong retention rates attest to our compelling value proposition, which was validated by a recent Wall Street Journal ranking of the best managed companies. in which paychecks achieved the second highest increase in customer satisfaction out of all 250 companies on the list. Similar to what we shared with you last quarter, while the PO business remains strong and participant levels in our health plans across the country continue to increase, enrollment in our specialty Florida at-risk medical plan decreased year over year. We also continue to see more employees opting for lower-cost health plans to offset rising healthcare costs. These factors continue to present a pass-through revenue headwind, but have no impact to our earnings or the value proposition of the PO model. We also continue to drive innovation in the quarter, and I'm proud to announce that we were just named one of Fortune's most innovative companies for the third consecutive year. This is truly a validation of our strategy to become the digitally driven HR leader. As an example of how we are driving innovation in AI, we recently built a GenAI powered HR co-pilot tool that covers the HR questions most frequently asked by our clients. The tool was developed from our proprietary data sourced from the hundreds of thousands of conversations our HR professionals have with our clients every year. The HR Copilot tool will enable our HR professionals to leverage the collective knowledge base we have built over the years to drive both efficient and effective answers to our clients' concerns. The testing phase for this new tool is nearly complete, and we are on track to launch it at the start of our next fiscal year. We are committed to helping our clients leverage the power of new technologies and specifically AI. Another example of our innovation in employee solutions is Paychex Perks, an award-winning digital marketplace that offers our clients' employees access to affordable benefits and discounted products and services from third-party providers. Perks is available at no cost to the employer and payments are processed automatically through payroll deduction. Since we launched this product in September, over 180,000 client employees have purchased at least one product offered in the marketplace. You know, while I'm extremely proud of all the innovation and all the hard and great work of our employees and what they do each and every day to make paychecks successful, I'm even more proud of how they do it by living our company's values and finding ways at the same time to impact the communities in which we serve and live. I am pleased to report that Paychex was recently named one of the world's most ethical companies for the 17th time by Ethnosphere, one of only three companies in the world to achieve this distinction. Congratulations to the team. Turning to the macro environment, the pace of US job growth has moderated from the robust levels observed coming out of the pandemic. but has been relatively stable during the past year and in line with historical averages. Our customer employment levels were a little softer than expected in the third quarter and likely impacted by weather-related challenges and devastating fires in California, as well as lower bonus checks than last year and our expectations. Year to date, our checks per client have been flat compared to the prior year. suggesting relatively stable U.S. labor market conditions. As I look back on it, we have accomplished a lot in the third quarter, both in terms of day-to-day execution and driving our strategy forward, including our preparations to add PAYCOR to the Paychex family companies in the coming weeks. As I said earlier, this is an exciting quarter for Paychex. We exit the third quarter of this fiscal year better positioned than ever in the company's history to deliver on our purpose, and that is to help businesses of all sizes succeed.