Operator: 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 Mr. Bob Schrader, Paychex's Chief Financial Officer. Please go ahead, sir.
Bob Schrader: Thank you for joining us to discuss Paychex fourth quarter and full-year fiscal 2026 results. Our earnings release and presentation are available on our investor relations website. We plan to file our Form 10-K with the SEC before the end of July. This call is being webcast live and will be available for replay on our investor relations portal. 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 a reconciliation of 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.
John Gibson: Thanks, Bob. I'll begin with our operational highlights for the quarter and the full year, and then Bob will discuss our financial performance and outlook before we open the calls for your questions. We finished the year with strong momentum, delivering double-digit revenue and earnings growth in the fourth quarter and the full year, while also accelerating organic revenue growth in each quarter. Our team executed well against our strategic priorities, expanding upmarket, strengthening our advisory differentiation, and advancing our AI capabilities to drive better client outcomes. Our mission is simple: help businesses succeed. Today, customers are managing more work and complexity than ever before and want more than just a tool. They want a trusted partner that can help them manage cost, attract and retain talent, and navigate a dynamic regulatory landscape.
That trust is reflected in our strong client retention across our payroll clients who rely on Paychex for support and advice across a growing number of solutions. Our differentiated advisory and benefits solutions, including ASO, PEO, and Retirement, continue to resonate in the market and drive robust revenue growth. While other providers offer fragmented tools or limited support models, we believe we stand apart by combining technology with trusted human expertise to help customers solve their most important workforce challenges. That differentiation is driving higher engagement in our HR outsourcing. In ASO, engagements increased more than 60% this year alone, reflecting growing demand for support navigating an increasingly complex HR landscape. We believe our investments in go-to-market and technology strengthened our value proposition and contributed to record worksite employee retention in ASO and PEO this year. PEO, in particular, remains a key growth driver.
PEO worksite employee growth continued to outpace the industry, with high single-digit growth in the quarter and full year. The comprehensive solution helps businesses manage regulatory complexity and offer competitive benefits, often with little or no in-house HR staff. We continue to see a long secular runway for growth in this business. Building on our advisory strength, we launched WISE, also known as our Workforce Intelligence Strengthened by Expertise, which is our AI-powered intelligence engine. WISE extends our capability into agentic AI and is powering approximately 600 AI features and agents. Embedded into the workflow, WISE moves beyond insights and assistance to autonomous execution, helping scale our expertise, enhance productivity, and deliver better client outcomes, all with human-in-the-loop oversight, available on-demand support, and strong governance. We believe differentiated access to large data sets will be a key driver of AI leadership, and that Paychex is exceptionally well-positioned.
For more than 50 years, we have been at the center of HR, payroll, and benefits, giving us access to a vast proprietary and growing amount of data. WISE now draws on more than 26 trillion data points, helping make our solutions smarter, more relevant, and more proactive. What makes this unique is our patent-pending AI knowledge mesh technology, which helps unlock insights from unstructured data, including emails, calls, and other client interactions, and turns it into actionable intelligence. We believe that our unique technology, large data set, and deep HR and compliance expertise make our AI-enabled HR solutions truly unique in the market. We're already seeing the benefits in practice with meaningful reductions in administrative work. We can now automatically create and update client employee handbooks as regulations or business needs change in real time.
Our workforce management solutions intelligently generate schedules in minutes instead of hours and reduce timesheet approvals by more than 50%. Clients can submit payroll by phone or email through a service experience powered by WISE. Our agentic payroll solutions have continued to scale, significantly reducing wait times while maintaining the accuracy our clients expect. Over time, we see WISE as a meaningful driver of long-term value creation through direct monetization opportunities as well as indirect benefits, including stronger upsell, higher revenue per client, improved retention, and greater pricing power. As AI automates more routine tasks, we believe differentiation will increasingly come from compliance expertise, advisory capabilities, proprietary data, and trusted execution, areas where we believe Paychex is structurally advantaged.
Turning to our enterprise business, we continue to perform well upmarket among clients with more than 100 employees. We exceeded our Fiscal Year 2026 synergy targets associated with the Paycor acquisition, contributing more than 50 basis points to revenue growth and generating over $100 million in cost synergies. We continue to make progress cross-selling advisory offerings such as ASO, Retirement, and PEO into the Paycor base and are winning larger deals than originally anticipated. We also saw continued traction in the broker channel, including two new national partnerships this quarter alone.
During Fiscal Year 2026, we completed the organizational and sales territory realignments associated with moving the Paycor under-100-employee businesses into our SMB segment and integrating the Paychex 100+ businesses into our enterprise segment. We enter Fiscal Year 2027 with clearly aligned teams, brands, and platforms focused on the specific needs of each market segment. Beyond shifting upmarket, two emerging growth areas are expanding employee-based revenue streams and growing beyond our payroll base. We introduced Perks, our digital benefits marketplace, less than two years ago, and today more than 400,000 unique employees have already purchased affordable, transferable benefits through the marketplace. We are now expanding access to Perks to employees on the Paycor platform, increasing our addressable market by more than 2.5 million employees.
More broadly, with the modernization of our underlying infrastructure now complete, we are developing more payroll-agnostic and standalone AI-enabled solutions, which we believe will significantly expand our addressable market. TIME named Paychex one of America's Top WorkTech Companies, and Newsweek recognized us as one of America's Most Trustworthy Companies and Greatest Workplaces. I will now turn the call over to Bob to discuss our financial performance and outlook.
Bob Schrader: Thank you, John. For the fourth quarter, total revenue increased 12% over the prior year to $1.6 billion. Management Solutions revenue grew 14% to $1.2 billion, driven by product penetration, price realization, and approximately eight percentage points of growth from Paycor. PEO and Insurance Solutions revenue increased 9% to $370 million. Interest on funds held for clients grew 15% to $52 million. Operating income margins increased approximately 750 basis points to 37.7%. Adjusted operating income margins increased by approximately 170 basis points to 42.1%. Diluted earnings per share increased 43% to $1.17 per share, and adjusted diluted earnings per share increased 11% to $1.32 per share.
For the full year, total revenue increased 17% to $6.5 billion. Management Solutions revenue grew 20% to $4.9 billion. PEO and Insurance Solutions revenue increased 7% to $1.4 billion. Operating income margins for the year were 38.6%, and adjusted operating income margins increased by approximately 70 basis points to 43.2%. Diluted earnings per share increased 7% to $4.89, and adjusted diluted earnings per share increased 11% to $5.51. Cash, restricted cash, and total corporate investments were $1.2 billion, and total borrowings were approximately $4.6 billion. Operating cash flows increased 35% to $2.6 billion, and free cash flows increased 36% to $2.3 billion. We returned $2.2 billion to shareholders through $1.6 billion in cash dividends and $600 million in share repurchases. Our 12-month rolling return on equity remains robust at 45%.
For fiscal 2027, we expect total revenue growth in the range of 5% to 6%. Management Solutions revenue growth is also expected to be in the range of 5% to 6%. PEO and Insurance Solutions revenue growth will be in the range of 6% to 7%. Interest on funds held for clients is expected to be in the range of $195 million to $205 million. Adjusted operating income margins are expected to be approximately 44%, and our effective income tax rate is expected to be approximately 24%. Adjusted diluted earnings per share is expected to grow in the range of 7% to 9%. For Q1, we would expect total revenue growth to be consistent with our full-year guidance, with an adjusted operating margin of 41% to 42%.
John Gibson: Thank you, Bob. We will now open the call to your questions.
Operator: We'll go first this morning to Bryan Keane with Citi.
Bryan Keane: Hey, guys. Good morning. Solid results. Just hoping you guys could talk a little bit about the trend in organic growth that you saw in the second half of the year. As we jump off here into Fiscal Year 2027 with the range of 5% to 6%, what gets us to the low end and what gets us to the high end?
Bob Schrader: We've definitely continued to see a sequential improvement in the organic growth of the business. If you go back to this time last year, we were exiting at around 3%. We've nearly doubled that, with improvement each quarter. The Q4 exit rate is largely in line with the guide we provided. Next year there's a slight headwind from float — interest on funds is expected to be down about 4% to 5%, reflecting the full-year impact of last year's Fed cuts and the lapping of one-time repositioning gains. Bookings momentum has been really broad-based, particularly in ASO, PEO, and Retirement, driven by cross-selling into the Paycor base.
John Gibson: Every quarter, bookings got better and better. Q4 was better than Q3, and Q3 was the best I've seen in 13 years. The macro environment, despite global challenges, has been stable with no signs of recession. AI is helping us accelerate our development roadmap and I'm very encouraged about the setup going into this fiscal year.
Bryan Keane: Just as a follow-up, how do we think about the potential revenue opportunities that AI could bring Paychex, and how long will it take to develop some of those?
John Gibson: We're already generating some revenue. We've launched WISE enhancements in reporting and intelligence timekeeping in Flex, with about 10,000 customers in our soft launch and roughly 70% error reduction. A lot of what we're getting from WISE right now has been deployed internally — our Service Concierge gives all service reps real-time access to our full knowledge base, and Sales Guru gives salespeople access to all datasets across all platforms. The first AI product we launched was Retention Insights in 2022, and we're now refreshing those legacy products on the WISE platform.
Operator: We'll go next to Mark Marcon with Baird.
Mark Marcon: John, you mentioned developing payroll-agnostic solutions. Can you talk more about that — what's the outlook, when should investors expect launches, and what areas can you go into?
John Gibson: This has been a long-term project. Since the COVID ERTC era, we've invested in modernizing and modularizing our operating layer. The key breakthrough was breaking apart our tax engine and payments orchestration — all of that has now been completed over the past fiscal year. What we have today is the capability that if a customer leaves our HCM platform but enjoys our insurance agency or 401(k) product, they can stay with those on a standalone basis. That's something that historically did not happen. That back-office investment also enabled Perks, because it allows us to treat every client's employee as a potential standalone customer. This is in the early innings, but it enhances our ability to retain customers across multiple products, opens new go-to-market opportunities, and gives us new customer segments to pursue.
Mark Marcon: Could you also get into more of the office of the CFO or the office of the CTO from a longer-term perspective?
John Gibson: At this point, we see the opportunity within HR — particularly for the segment we serve, most of whom don't have an HR department — as the best place for our investment. HR is becoming more complex, and what our small clients ask for most is the ability to mimic what large employers offer in benefits without having to contribute financially. That's more important to them right now than us helping be their CFO.
Operator: We'll go next to Andrew Nicholas with William Blair.
Andrew Nicholas: What drives your conviction in the organic acceleration next year, and any color on expected growth by market segment?
John Gibson: We've had continued momentum across the portfolio throughout the year. In Q4, enterprise bookings hit the highest dollar volume all year. The cross-sell motion is really getting going, particularly in the legacy Paycor sales teams. With the integration disruption behind us and all organizational and technology components in place, we're entering the year very well-focused.
Bob Schrader: This year's guide sets up very differently from last year's. Last year required significant back-half acceleration, which we delivered. Now we're guiding in line with momentum we're already exiting at. That gives us much greater conviction.
Andrew Nicholas: Can you walk through PEO versus Insurance in the quarter and level-set where we are heading into 2027 on the healthcare plan dynamics?
Bob Schrader: The underlying PEO business grew double-digits in the quarter with record worksite employee retention. The insurance agency continues to be a drag on the overall category, but we're seeing positive trends in the back half and expect that headwind to subside. We anniversaried last year's MPP enrollment challenges and actually grew our Florida at-risk plan enrollment this year. Better medical attachment upfront is driving stickier retention.
Operator: We'll go next to Kevin McVeigh with UBS.
Kevin McVeigh: Q1 revenue growth consistent with the full year — can you help with the pacing through Q2 to Q4?
Bob Schrader: The gating is fairly consistent quarter-to-quarter. PEO comps get a bit tougher in the back half since we're now comparing against last year's enrollment decline. Otherwise there's not much variation quarter-to-quarter.
Kevin McVeigh: With Paycor in the base now, anything from a seasonality perspective to consider?
Bob Schrader: Nothing meaningful. Similar to our existing business, year-end processing revenue hits Q3 at high margins and drives a lot of profitability there. Outside of that, nothing unusual.
John Gibson: The one thing to watch with larger enterprise deals is they often want to go live at the start of a calendar year, which flows into Q3. This is consistent with our historical pattern.
Operator: We'll go next to Jared Levine with TD Cowen.
Jared Levine: The implied Paycor growth rate looks around 4% in Q4 based on my math. How much of that deceleration is cross-sell revenue shifting to Paychex versus actual churn or weaker bookings?
Bob Schrader: It's somewhat apples-to-oranges given how we're managing the business versus how it was managed last year. We look at it as our enterprise segment — 100-plus loosely defined — and saw high single-digit growth across both platforms in Q4. That's our expectation going forward.
John Gibson: Paycor had a sizable under-100 client base that the brand was known as something larger than. We made a conscious decision to focus the Paycor brand on the 100-plus enterprise segment. Our enterprise business is growing faster than it's ever grown, and our 100-plus retention is the highest it's been in my 13 years here.
Jared Levine: With roughly flat client count growth this year, when might that inflect back to growth?
John Gibson: Client losses tend to be at the lower end of the market, often out-of-business situations. We're selective about acquisition — we know what a good client looks like and won't do irrational things just to add unprofitable ones. You cannot achieve our margin profile with a lot of unprofitable clients. That strategy continues.
Operator: We'll go next to Daniel Jester with BMO Capital Markets.
Daniel Jester: On revenue synergies — you exceeded 50 basis points this year. Could cross-sell contribute even more to growth in FY2027?
John Gibson: ASO and retirement penetration exceeded our expectations. PEO, with its longer sales cycle, saw several large deals accelerate as the year went on. We changed territories, management, and leadership structure, and retrained the team — all starting just a year ago. Success breeds more success, and that's what we're seeing. Referrals across the platform were stellar this year.
Bob Schrader: We exceeded this year's synergy targets — now we have to grow over that. We would expect even stronger contribution next year and beyond.
Daniel Jester: On AI monetization — is this more for SMBs or enterprise?
John Gibson: It resonates across all client sizes. For small clients with no HR department, it provides real-time compliance peace of mind — automatically enrolling them in workers' comp or unemployment insurance when they hit state thresholds. For enterprise HR professionals, it's a digital agent that handles compliance work while they focus on strategic initiatives. Our WISE AI compliance tool integrates with most major HCM platforms, so clients can use it regardless of what platform they're on.
Operator: We'll go next to Jacob Smith with Guggenheim Securities.
Jacob Smith: How did Paycor broker referrals trend in the quarter, and what's different about the Partner+ program?
John Gibson: Broker pipeline grew every quarter including Q4, and we're back to pre-acquisition levels. We signed two new national partnerships this quarter — one is Hub International, one is unnamed. The Partner+ program is different because it's holistic — brokers can represent all products and services across the entire Paychex portfolio, including compliance tools and HR capabilities. New and existing brokers are responding well to that comprehensive approach.
Jacob Smith: Update on Paycor sales headcount expansion?
John Gibson: We're committed to continuing to add sales headcount as planned and are actively building as we speak.
Operator: We'll go next to Samad Samana at Jefferies.
Samad Samana: Can you help us understand the FY2027 growth algorithm — unit growth, pricing, bookings, and retention assumptions?
Bob Schrader: We always plan to sell more and lose less. Retention has improved significantly over the last five years, particularly in ASO and PEO. Client base will be relatively flat — maybe improving slightly in the right client sizes. Growth will come primarily from increased revenue per client: roughly half from pricing and half from share of wallet. There's a slight headwind from float given last year's rate cuts.
Samad Samana: Are payroll-agnostic solutions changing the initial land or average revenue per new customer?
John Gibson: We're still figuring out the go-to-market economics. The key breakthrough is that we can now bill, collect, and service standalone products. When a client isn't ready to move their full HCM, we can now offer a compliance tool or a benefit product as a standalone entry point. Previously, if you didn't win the HCM payroll, you didn't win anything. Now we have options. If we get that hook into a client, we know how to build the relationship and monetize over time.
Operator: We'll go next to Bi Qi with RBC Capital Markets.
Bi Qi: The FY2027 approximately 44% adjusted operating margin guidance came in a bit above our expectations. Can you break out the drivers?
Bob Schrader: In a normal year, we target 25 to 50 basis points of margin expansion — this guide assumes the higher end of that. Technology investments continue to drive productivity. We're also getting the full-year impact of Paycor cost synergies, and we'll continue to find opportunities in procurement as contracts come up for renewal.
John Gibson: Our back-office operating model is what drives our margins, and that doesn't get enough exposure. The modernization investment — completing the transformation of our operating layer — is now done. The ability to use generative AI to proactively identify and fix errors at scale is a significant benefit. It frees up resources to move toward advisory and support roles that drive more client value. These are things I was dreaming we'd have someday, and now we have them.
Operator: We'll go next to Kartik Mehta at Northcoast Research.
Kartik Mehta: What's your philosophy on client growth — can you accelerate it, or would that hurt margins?
John Gibson: Priority one is driving retention in our highest lifetime value segments — record PEO, ASO, and 100-plus retention is where we start. In the lower end of the market, we're not going to overpay for acquisition costs on clients where we won't make a long-term return. That's how we get our margins and how we focus on driving long-term value.
Kartik Mehta: What does the competitive environment look like?
John Gibson: Remains exactly the same — very competitive. Our value proposition is clearly resonating given retention and booking acceleration. We're doing particularly well in PEO and HR advisory. No major shifts in competitors or competitive behaviors.
Operator: We'll go next to David Grossman with Stifel.
David Grossman: What impact does healthcare inflation have on PEO growth, and are PEO renewals skewed to any particular quarter?
Bob Schrader: Medical inflation is a tailwind for the PEO business — it helps drive our growth. We can leverage our scale to offer small businesses rates they couldn't obtain on their own. There are two renewal windows: fall and beginning of the calendar year. Both went well this year. Medical enrollment was up across the board — Florida at-risk plans, agency attachment, and master plans outside Florida all grew.
John Gibson: Healthcare cost is one of the top three issues our market segment faces. Small and mid-sized businesses have to offer competitive benefits to attract labor, but the cost is unsustainable for both employer and employee. That's why we offer multiple approaches — PEO, the Perks marketplace, HRA solutions. Over 400,000 unique employees are buying from Perks today, and we're rolling that out to Paycor's 2.5 million employees. We can give clients a multitude of different solutions, and that flexibility is a key differentiator.
David Grossman: Is it reasonable to expect revenue growth closer to the high end in the first half and the low end in the second half based on the comps?
Bob Schrader: I don't want to get into parsing the quarters at this point. There's not really a lot of variation quarter-to-quarter when I look at it. We'll provide more color as we move through the year.
Operator: We'll go next to Scott Wurtzel with Wolfe Research.
Scott Wurtzel: Any thought to bringing PEO platform functionality over to the Paycor side?
John Gibson: The complexities of PEO tax and unemployment insurance are a pretty heavy lift. We feel like we have a very solid platform today. With the modularization of our back-office components now complete, we'll continue to evaluate the cost-benefit of either migrating clients between platforms seamlessly or empowering each platform with the full suite of capabilities. What we're committed to is offering clients a seamless migration path across our platforms and solutions.
Operator: We'll go next to Jason Kupferberg with Wells Fargo.
Jason Kupferberg: Does upper-single-digit medium-term revenue growth still feel right, or does it require more M&A?
Bob Schrader: Stripping out Paycor, we've historically been in the 7% to 8% organic range. We typically contribute 1% to 2% from M&A. I don't expect another Paycor-sized deal in the near term, but M&A remains an area of interest. Organic growth plus our historical M&A contribution puts us squarely in the upper-single-digit range.
Jason Kupferberg: What percent of Management Solutions revenue is now enterprise — the 100-plus segment?
Bob Schrader: I don't have that breakdown in front of me. When we look at the enterprise segment, we're looking at the entire business, not just Management Solutions. That's something we can look to add to a future IR deck.
Operator: Mr. Gibson, I'd like to turn things back to you for closing comments.
John Gibson: Thanks, everybody, for your questions and for joining us today. We're entering Fiscal Year 2027 positioned better than ever. We've made meaningful progress across our strategic priorities — upmarket expansion, Paycor integration, advisory differentiation, and AI innovation accomplished in a very short period of time. I'm proud of what this team has delivered. We hit original guidance that had some skeptics, raised EPS guidance twice during the year, and exceeded expense synergy targets. We now have teams in place, technology and platforms built for purpose for each market segment, and an AI-enabled organization that will continue building the momentum we saw throughout Fiscal Year 2026. We're stronger together, and I believe this sets up strong growth and value creation not only in FY2027, but well beyond. Thank you for your support, and we'll talk to you next quarter.
Operator: This does conclude the Paychex fourth quarter fiscal 2026 earnings call. Thank you all for joining us, and have a great day. Goodbye.