Paychex, Inc.

Good morning and welcome to Paychex's fourth quarter fiscal 2025 earnings call. Participating on the call today are John Gibson and Bob Schrader. Following the speaker's prepared remarks, there will be a question and answer period. If you'd 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. I would now like to turn the call over to Bob Schrader, Paychex's Chief Financial Officer.

Thank you for joining us to discuss Paychex's fourth quarter and fiscal year 2025 performance. This morning, we released our financial results for the quarter ended May 31st, 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 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 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. 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 PayCore acquisition has closed and we have completed key integration activities to bring the two companies together, We are now operating as one Paychex and not two 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 pay core. 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 PACOR acquisitions, 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 pay core 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 PayCorp platform will target the upmarket enterprise segment above 100 employees. Sure Payroll 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 PACOR customers on our ASO and PO, and are seeing promising growth in our pipeline. Notably, the PO cell was referred by a PayCore 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 PO solutions into the PayCore base of more than 50,000 clients. We also believe there are opportunities to take PayCore's capabilities into the Paychex a 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 longstanding 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 the 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 pay core 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 really operate with greater efficiency and proactively serve their clients. Our PO business continues to also perform well, achieving solid worksite employee growth this quarter. 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 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 health care costs. While these factors continue to pose a pass-through revenue headwind, they do not impact our earnings or our PO value proposition. One of the benefits of the PO model is that it empowers small businesses to truly 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 PO space given our scale and capability in this segment. and just how green-filled 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, inflations, 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 and hourly wage inflation in the recent months. Our data does not currently show any signs of recession. We also see in 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 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 Paychex2Win 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 paychecks, 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.