Q3 2025 Paychex Inc Earnings Call

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John Gibson: Good morning, and welcome to the third quarter of fiscal 'twenty twenty-five Paychex earnings conference call participating on the call today are John Gibson and Bob Schrader.

After the Speakers' opening remarks, there will be a question and answer period.

John Gibson: 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.

John Gibson: As a reminder, this conference is being recorded and your participation implies consent to child reporting 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 Schrader Chief Financial Officer. Please go ahead.

Speaker Change: Thank you for joining us for our review of Paychex 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.

Speaker Change: 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.

Speaker Change: 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 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 earning.

Speaker Change: <unk> release, I will now turn the call over to our CEO John Gibson. Thanks.

John Gibson: Thanks, Bob.

Speaker Change: 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.

Speaker Change: This is an exciting quarter for paychex as we enter the digitally and AI driven era of human capital management, We believe the combination of our positive underlying momentum.

Speaker Change: And the pending acquisition of Pei core position us well for continued success.

Speaker Change: <unk> revenue growth was 5% in the third quarter, excluding the impact of the discontinued the RTC program revenue growth was 6% driven by the strength of our industry, leading HCM solutions.

Speaker Change: Diluted earnings per share increased 4% and adjusted diluted earnings per share grew 8% during the quarter.

Speaker Change: 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.

Speaker Change: During the third quarter, we announced that we entered into a definitive agreement to acquire pay Corp, a leading provider of HCM payroll and talent software.

Speaker Change: The waiting period under HSR expired on February 21.

Speaker Change: After other customary closing conditions are met.

Speaker Change: We look forward to welcoming paid core to the paychex family in the coming weeks.

Speaker Change: Our companies are highly complementary and our dedicated employee share a common set of values and most importantly, a strong customer orientation and a relentless focus on providing innovative solutions to real world challenges.

Speaker Change: Our expected nearly 800000 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.

Speaker Change: We believe the acquisition of Pei core will strengthen our competitive position upmarket, while giving us the ability to offer paychex robust set of HR and employee solutions to pay course, approximately 50000 customers and their $2 7 million employees.

Speaker Change: We are optimistic about what we can achieve together by leveraging the best of both of our current and future offerings.

Speaker Change: We are working diligently towards a closing of the <unk> acquisition in the coming weeks and we have already made several important decisions related to the integration. We are planning to operate <unk> as a standalone business unit.

Speaker Change: Adam ANSI <unk> current CFO will be joining paychex as senior Vice president of decor.

Ryan Bergstrom: And Ryan Bergstrom.

Ryan Bergstrom: <unk> current Chief product Officer is also joining paychex has become the new chief product officer of page Paychex, We're excited to welcome both Adam and Ryan to the Paychex executive team.

Speaker Change: Hey, core and paychex customers will remain on the platforms that are currently using and continue to receive support through their existing service team relationships.

Speaker Change: They will shortly gain access to the most comprehensive flexible and innovative set of HCM technology and advisory solutions in the industry.

Speaker Change: With our share payroll paychex flex Paychex, HR and advisory solutions and now pay course capabilities.

Speaker Change: We have solutions to meet the diverse needs of businesses of all sizes.

Speaker Change: We are making great progress on the acquisition and on integration planning.

Speaker Change: We have done since announcing the transaction has increased our confidence in achieving the cost synergies.

Speaker Change: And we now expect synergies over the $80 million that we shared with you in January.

Speaker Change: Given this we now expect the acquisition to be accretive to our adjusted earnings per share next fiscal year.

Speaker Change: The third quarter was successful as we continue to improve our customer experience and value proposition client retention has improved over last year's solid performance and retention in our HR outsourcing solutions remained near record levels client losses are down across all employee size segments.

Speaker Change: Our revenue retention and improved over last year, we remain above pre pandemic levels as we continue to focus on acquiring and retaining high value clients.

Speaker Change: Our strong retention rates attached to our compelling value proposition, which was validated by a recent wall Street journal ranking of the best managed companies in which paychex achieved the second highest increase in customer satisfaction out of all 250 companies on the list.

Speaker Change: Similar to what we shared with you last quarter, while the 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.

Speaker Change: Decreased year over year.

Speaker Change: We also continued to see more employees opting for lower cost health plans to offset rising health care costs.

Speaker Change: These factors continue to present, a pass through revenue headwind, but have no impact to our earnings or the value proposition of the PEO model.

Speaker Change: We also continued 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.

Speaker Change: This is truly a validation of our strategy to become the digitally driven HR leader.

Speaker Change: As an example of how we are driving innovation and AI. We recently built a G&A AI powered HR co pilot tool that covers the HR questions. Most frequently asked by our clients.

Speaker Change: The tool was developed from our proprietary data.

Speaker Change: Sourced from the hundreds of thousands of conversations are HR professionals have with our clients every year.

Speaker Change: The HR co pilot 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.

Speaker Change: And we are on track to launch it at the start of our next fiscal year.

Speaker Change: We are committed to helping our clients leverage the power of new technologies, and specifically AI and.

Speaker Change: Another example of our innovation and employee solutions gives paychex perks.

Speaker Change: And the award winning digital marketplace that offers our clients employees access to affordable benefits and discounted products and services from third party providers.

Speaker Change: <unk> is available at no cost to the employer and payments are processed automatically through payroll deduction.

Speaker Change: Since we launched this product in September over 180000 client employees have purchased at least one product offered in the marketplace.

Speaker Change: Well im extremely proud of all the innovation and all of the hard and great work of our employees and what they do each and everyday to make paychex successful I'm, even more proud of how they do it by living our company's values.

Speaker Change: And finding ways at the same time to impact the communities in which we serve and live.

Speaker Change: I am pleased to report that Paychex was recently named one of the world's most ethical companies for the 17th time by atmosphere. One of only three companies in the world to achieve this distinction congratulations to the team.

Speaker Change: Turning to the macro environment the pace of U S job growth has moderated from the robust levels observed coming out of the pandemic, but it's been relatively stable during the past year and in line with historical averages.

Speaker Change: 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.

Speaker Change: Year to date, our checks per client had been flat compared to the prior year, suggesting relatively stable U S labor market conditions.

Speaker Change: I mean 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 pay core to the paychex family of companies in the coming weeks as.

Speaker Change: As I said earlier this is an exciting quarter for paychex.

Speaker Change: 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.

Speaker Change: I'll now turn it over to Bob to give us a brief update on our financial results for the quarter. Thank.

Bob Schrader: Thank you John and good morning, everyone I will start with a summary of our third quarter financial results and then provide an update on our fiscal 2025 outlook.

Bob Schrader: Total revenue for the for the quarter increased 5% to $1 5 billion. This includes a headwind from the expiration of the <unk> program that we have called out for the past several quarters. Excluding this headwind total revenue grew 6% and as you guys can all imagine I'm very happy to say that we have now anniversaried. The end of <unk> and this will be the last call that I will have to.

Bob Schrader: Talk about the quarterly impact of the RTC.

Bob Schrader: Management solutions revenue increased 5% to $1 1 billion. This was driven primarily by growth in the number of clients served across our suite of HCM solutions and client Worksite employees for HR solutions as well as higher revenue per client, resulting from price realization and product penetration, partially offset by the lower <unk> revenues.

Bob Schrader: P O and insurance solutions revenue increased 6% to $365 million.

Bob Schrader: Driven primarily by growth in the number of average worksite employees and an increase in PEO and insurance revenues.

Bob Schrader: Interest on funds held for clients decreased 2% to $43 million, primarily due to lower average interest rates.

Bob Schrader: Total expenses, excluding one time costs related to the pending <unk> acquisition increased 1% to $801 million continued investments in product technology and data and AI were offset by productivity and efficiency gains realized from these investments.

Bob Schrader: Operating income grew 6% to $692 million with an operating margin of 45, 8%. As a reminder, operating income was also impacted by the expiration of the TC program adjusted operating margins for the quarter were 46, 9% as John mentioned this represents an increase of approximately 180 basis points due to <unk>.

Bob Schrader: Increased productivity and cost discipline.

Diluted earnings per share increased 4% to $1 43 per share and adjusted diluted earnings per share increased 8% to $1 49 in the third quarter.

Bob Schrader: I'll now quickly touch on the results for the year to date period.

Bob Schrader: Total revenue grew 4% to $4 1 billion management solutions revenue increased 3% to 3 billion PEO and insurance solutions increased 7% to $1 billion and interest on funds held for clients increased 8% to $117 million.

Bob Schrader: Total expenses year to date grew 3% to $2 4 billion.

Bob Schrader: Operating margins expanded approximately 40 basis points to 42, 9% and our adjusted operating margins year to date increased approximately 80 basis points to 43, 3%.

Bob Schrader: Diluted earnings per share increased 4% to $3 76, a share and adjusted diluted earnings per share increased 5% to $3 79 a share.

Bob Schrader: Our financial position remains strong with cash restricted cash and total corporate investments of $1 7 billion and total borrowings of approximately $817 million as of February 28, 2025 cash.

Bob Schrader: Cash flow from operations was $1 6 billion in the first three quarters of the year driven by net income and reflects changes in working capital influenced by timing. We returned a total of $1 $2 billion to shareholders. During the first three quarters in the form of cash dividends and share repurchases and our 12 month Rolling return on equity remained robust at 40.

Bob Schrader: 5%.

Bob Schrader: I will now turn to our guidance for the fiscal year ended May 31, 2025. This outlook assumes a continuation of the current macro environment and excludes the anticipated impact from our pending acquisition of <unk>, which is expected to close in the coming weeks.

Bob Schrader: Our current outlook is as follows.

Bob Schrader: Total revenue is still expected to grow in the range of four to five 5%. We do now expect that it will be at the low end of the range primarily due to the continued headwinds from our pass through insurance revenues and as a reminder, this range includes approximately 200 basis points of headwind from the expiration of the <unk> program last year.

Bob Schrader: Management solutions is still expected to grow in the range of 3% to 4%.

Bob Schrader: And insurance solutions is now expected to grow in the range of six to six 5% due to the factors that we referenced earlier, we previously had guided to the lower end of the range of 7% to 9%.

Bob Schrader: Interest on funds held for clients is expected to be in the range of $145 million to a $155 million. Adjusted other income net is expected to be income in the range of $30 million to $35 million and adjusted adjusted operating income margin is now expected to be approximately 43%. We had previously guided to the high end of.

Bob Schrader: The range of 42% to 43%.

Bob Schrader: Our effective income tax rate is expected to be in the range of 24%, 25% and adjusted diluted earnings per share is still expected to grow in the range of 5% to 7%.

Bob Schrader: As John mentioned earlier, we are making great progress on the acquisition, which has increased our conviction on the near term expense synergies and given this we now expect the acquisition to be accretive to our adjusted diluted earnings per share next fiscal year with.

Bob Schrader: With the anticipated closing in the coming weeks, we would also like to provide an update on the expected financial impact to this fiscal year, including pay core we expect revenue growth up 10% to 12% in the fourth quarter and the impact from the acquisition to adjusted EPS would be neutral.

Bob Schrader: Of course, all of this is based on our current assumptions, which are subject to change and we will update you again in the fourth quarter call I will refer you to our investor slides on our website for additional information and with that I'll now turn the call back over to Jonathan.

Bob Schrader: Thank you Bob Madison, We will now open the call to questions.

Bob Schrader: Thank you.

This time, if you would like to ask a question. Please press the star and one on your telephone keypad.

Bob Schrader: May remove yourself from the queue at any time by pressing star Q and the interest of time, we ask that you limit your questions to one question and one follow up once again that is star one to ask a question.

Speaker Change: And we will take our first question from Andrew Nicholas with William Blair. Please go ahead.

Speaker Change: Hi, guys. Good morning. This is Daniel Maxwell on for Andrew today.

Speaker Change: Just to kick things off I was wondering if you had any updates on the preference between ASO and PEO models I know you called out switching to lower cost health plans, but does any of the trading down.

Speaker Change: Next level.

Speaker Change: And then as the lower implied for Q for PEO, just the at risk corridor payments plans that came in worse than expected in Q3 or maybe how long do you expect that to last.

Speaker Change: Yes.

Speaker Change: Daniel maybe I'll start with the lower Q4 that you mentioned and certainly bringing the total.

Speaker Change: Total revenue guide to the low end of the range is primarily driven by the continued challenges that we've seen with the MPP attachment.

Speaker Change: In Florida.

Speaker Change: I think when we talked to you guys last quarter.

Speaker Change: We weren't seeing the growth there that we expect that I would say it was flat and then as we've come through the annual enrollment overall, our healthcare attachment across the PEO is up.

Speaker Change: In the state of Florida, and that has an impact.

Speaker Change: From a revenue standpoint, and pass through revenue standpoint, really has no impact on net revenue or earnings and Thats really the primary the primary driver.

Speaker Change: It relates to kind of the what you see in Q4 in the low end of the guidance range on total revenue and you know as it relates to ASO.

Speaker Change: In PEO, both had been strong we see strong upper digit worksite employee growth in both models and we haven't seen a switch from a preference standpoint, and I think your other question related to the buy down we have seen that.

Speaker Change: Certainly this year, we've seen particularly in Florida more of our client employees.

Speaker Change: Selecting lower cost options and that certainly has an impact as well.

Speaker Change: MPP and in Florida.

Daniel Maxwell: I think Daniel.

Daniel Maxwell: The thing I would take away from the PDR performance getting to Bob's point, we're not seeing a trade off for a downgrade from so that's now overseeing it all peer.

Daniel Maxwell: Performance really across the country is strong our bookings were double digits, we've got a solid pipeline going into it into Q4 and it continued to be strong.

Speaker Change: I would say the challenge you have in your specialty program that we have just in Florida.

Speaker Change: Let all of you are familiar with small changes in our participation level can really make a big difference I mean, you're talking about plans that can range between 11000 and $14000 per employee.

Speaker Change: So you had that that adds up pretty quickly. So what you. What you really have there was overall, we increased the number of clients that are bypassing health care across the country.

And actually saw better participation in our health plans across it but because we saw a reduction in one specific program that we have in Florida, which has an outsized impact on revenue that's really what drove the issue. It was a combination of things. It was when you look at the pipeline. The average deal size was smaller than what we saw last year.

Speaker Change: When you look inside a small deal just percentage of employee benefits was lower than what we typically see and then as we said before when they did take a plant. It was tended to be the lower end plans, which are some of the health care inflation things that I think we see people trading down to but overall.

Speaker Change: We should really see this as a positive outcome as you know in Florida. We're also very conservative in our underwriting.

Speaker Change: The fact of the matter is what we're not going to do is we're not going to try to do anything thats going to jeopardize that plan. So we did not change our underwriting guidelines were not going to do that and we have a lot of options with our agency to be able to get them on standalone plant and we and we've done that.

Speaker Change: We'll continue to do that so I just don't know what I don't want to do is I don't want to chase the headline number and the PEO.

Speaker Change: And then create a risk problem on the backend that once you have that problem, it's hard to get out of I think you've covered.

Speaker Change: The industry.

Speaker Change: Several examples of where that that's not coming out well, so we're going to manage to book well.

Speaker Change: We're going to have to wait.

Speaker Change: Wait for open enrollment, which starts in that October timeframe. We've already started looking at the plan approach looking at the plan design approach.

Daniel Maxwell: In doing our research we've done this several times to make sure that we have the right lineup, there and it's going to be attractive for what people can afford I hope that helps you Daniel.

Daniel Maxwell: Yeah Super helpful detail. Thank you for all that and then maybe as my follow up.

Speaker Change: The client hiring coming in slightly lower than expected was that concentrated in in Florida, as well or any specific geographical or vertical but that was kind of concentrated in or was that more of a broad based experience.

Speaker Change: No I think I would say the hiring was pretty broad based we did have some hotspots in terms of I'd say hotspots, probably not the right word.

Speaker Change: Extremely sensitive to the people that were impacted by the fires in California, So that was it.

Speaker Change: Poor choice of words on my part but.

Speaker Change: But we did see some specific areas that would probably.

Speaker Change: Indicate some natural disaster disruption, we saw that in the PEO and the ASO business in particular in California.

Speaker Change: We just felt we just saw slower checks and what we expected.

Speaker Change: And particularly one of those factors was bonus Jackson's bonuses was interesting this year to me because the overall bonus downward.

Speaker Change: And that was paid out by our clients with about 8% higher than the prior year, but the number of people who got bonuses.

Speaker Change: And so that that also kind of led to some of the check compression. So we're flat right now when I look at the macro environment. Our small business index continues to show a moderate growth in small businesses that we really see no signs of it.

Speaker Change: No signs of recession.

Speaker Change: Thank you and we will take our next question from Mark Marcon with Baird. Please go ahead.

Mark Marcon: Hey, good morning, John and Bob Thanks for all the color it sounds like a very exciting time at Paychex. You mentioned you know very specifically that you now expect.

Speaker Change: No.

Speaker Change: The <unk> transaction to be accretive or you mentioned.

Speaker Change: Good.

Speaker Change: Now expect over $80 million in expense.

Speaker Change: Synergies I'm wondering.

Speaker Change: It sounds like Youre, feeling really excited can you give us.

Speaker Change: Any more color with regards to what your expectations are with regards to revenue synergies and then also.

Speaker Change: Just based on on client calls that I've had.

Speaker Change: I'm wondering if you could also provide some detail in terms of when you were talking about the deal being accretive like what would be the things that you would end up excluding.

Speaker Change: Adjusting out in order to get to that accretion so.

Speaker Change: Amortization of goodwill bonuses stock comp, where testings are occurring things of that nature. So that people have a clear idea in terms of the accretion potential.

Speaker Change: As we go into 2017.

Speaker Change: Hey, Mark I'll start with that and then John can comment and the revenue synergies in it and I thought we were fairly clear.

Speaker Change: That's when we announced the deal on January 7th what we're going to exclude going forward. It's really three things. It's certainly the amortization of the intangibles given the size of this transaction.

Speaker Change: We communicated that there is.

Speaker Change: Stock based comp related to it.

Speaker Change: Existing shares that will convert over.

Speaker Change: And you know I kind of view that is.

Speaker Change: Consideration deal consideration the accounting rules.

Speaker Change: Account for that as period costs and so we are going to just adjust that out to me that was part of the purchase price that we paid paid for the asset.

Speaker Change: Although there will be quite a few pay core pas.

Speaker Change: People employees, joining the paychex team that we'll be getting.

Speaker Change: Mark based comp going forward, we will not exclude that we will treat that like we normally do so anything that we give out new prospectively as they joined the Paychex family will be included it's just the stuff that was outstanding they hadn't invested that converts again that I viewed it as consideration and then the third thing is obviously, there's a lot of one.

Speaker Change: Time.

Speaker Change: Transaction related cost investment banking fees, you know lawyers and those.

Speaker Change: Those types of things that that we would normally exclude so it's really just those three items and then John can comment on the revenue revenue synergy opportunity. So.

Mark Marcon: Mark Let me just step back and just maybe get tried to handle a broader question about where we are in this in this process overall so.

Speaker Change: Obviously.

Speaker Change: We're excited.

Speaker Change: <unk>.

Speaker Change: At the same time.

Speaker Change: I think things are going better than we planned both in terms of the timing of getting this deal done and the expected benefits.

Speaker Change: We think we're going to realize as a combined company.

Speaker Change: And I think in a very short period of time, I think we're going to be able to really bring to the market. The most comprehensive and flexible and innovative set of HCM solutions in the industry. So I'm excited about what we're putting together from a from a product road map and some of the capabilities that we've been able to.

Speaker Change: <unk> paid we're working on and we were working on but I think we can be synergistic.

Speaker Change: We have been very focused on making sure. We're integrating the two companies to make sure that our customers and our strategic partners are cared for from day, one and.

Speaker Change: And so the second part we've been very focused on making sure that the cost synergies that.

That we've committed to.

Speaker Change: Can be achieved and that we're putting the effort that needs to be done to take care of those cost synergies in a respectful way for those that may be impacted from that that's where our focus has been now we are starting to turn towards the revenue side of this we have a long list of potential opportunities that we are.

Speaker Change: And I would say that.

Speaker Change: We're making good headway. So if you think about it on an overall view a year ago at 50000 feet I thought this was a good deal.

Speaker Change: At 30000 feet when we got to December like what I was saying.

Speaker Change: Now we're at the 10000 foot level.

Speaker Change: Good clear visibility relative to expenses.

Speaker Change: Getting to see your line of sight to what the potential is from a revenue perspective, feeling really good about where we are on those we just got to get the plane landed as you know this is a.

Speaker Change: This is a public company competitors that were acquiring we don't have access to everything we can't have access to everything that we want to get.

Speaker Change: Through the through the close and once we have the close we're going to we have the teams identified they're gonna get together.

Speaker Change: And and begin to work the revenue synergy in in earnest.

Speaker Change: Where we want to be as effective very quickly beginning to introduce our full comprehensive set of products and services to our mutual clients as soon as possible. So you know that being said the other thing I just want to make sure everyone understands is that I think theres going be a challenge as we go forward.

Speaker Change: Is.

Speaker Change: We're going to combine the two companies.

Speaker Change: And part.

Speaker Change: Part of Paychex is going to become part of the new pay core.

Speaker Change: In the up market and for competitive reasons, I'm not going to get into details of our go to market strategy with <unk>.

Speaker Change: Day, one we're gonna become one paychecks, there's not going to be a standalone pay checks.

Speaker Change: Upper market and Standalone pay core upper market Theres parts of pay core as we went through that we feel we're doing better there is parts of pay card, that's doing better than paychex, and what Bob and I got to work with the team on over the next three to four weeks is really how do we take the best of those worlds together.

Speaker Change: Put together a viable 'twenty six 'twenty seven and beyond plan. So that's where we are in the process.

Speaker Change: And so I just wanted to do that probably they had off some other questions are going to have about why don't I know, what's going to happen six months from now there is a ton of opportunities that we're trying to work through in terms of what we're seeing that they're doing that's better than what we were doing and if we can apply those learnings to us that's going to improve our standalone.

Speaker Change: And there's things that we're doing that are better than what theyre doing and if we can apply those things to them and assume those things going to happen, they're going to have better results. So we're really putting the best of both both worlds together, so sorry for the long winded answer, but I think this will hopefully cover a lot of questions that are going to be behind us.

Speaker Change: I really do appreciate the comprehensive answer to that.

Speaker Change: And then for <unk>.

Speaker Change: My follow up.

Speaker Change: Obviously from a macro perspective.

Speaker Change: Been a lot of.

Speaker Change: Fluctuations with regards to sentiment both from a business in <unk>.

Speaker Change: <unk> perspective.

Speaker Change: I'm wondering if you can talk a little bit about what how bookings were during the key selling season.

Speaker Change: And you know.

Speaker Change: How things have evolved in terms of just the.

Speaker Change: Business sentiment and typically during the third quarter, you gave us a preliminary guide for preliminary thoughts for the following year, obviously would pay core you've got a lot of things.

Speaker Change: Still to be developed.

Speaker Change: I'm wondering if you were thinking about things on a standalone basis.

Speaker Change: Would you.

Speaker Change: You typically end up talking about the fourth quarter.

Speaker Change: <unk> rate as being something to think about with regards to the following year. If we were just thinking about pay checks on a standalone, which obviously is not the case.

Speaker Change: That still be the case.

Speaker Change: So let me start and thanks for the question Barry I'm not sure that that's one follow up it sounds like it might have been a few follow ups in there, but again good questions.

Speaker Change: You know typically we provide some what I call bread crumbs as it relates to.

Speaker Change: Net next year and as John mentioned, we've been heads down I think we kicked off our integration work on the afternoon of January 17, when we announced the deal in and I would say, we're maybe not as far along in our planning process that we normally are just given the work that we've been working on over the last several months.

Speaker Change: The integration itself and so we obviously want to own the asset we want to get through our planning review process and come back to you guys at the end of Q4.

Speaker Change: Our combined guidance and outlook.

Speaker Change: For the next fiscal year with that being said.

Speaker Change: When I look at kind of that base business, because obviously I have visibility into kind of the base business and the kpis and so forth when I when I look at the base business and I look at Whats currently assumed out there.

Speaker Change: From a from a consensus standpoint for next year from both a revenue growth standpoint, and a margin expansion standpoint, again, we havent been through our full planning process, but I would expect to be able to put together a base case Paychex plan that's in line with with those assumptions.

Speaker Change: The assumptions that are that are out there so.

Speaker Change: That's a little bit of the bread crumbs that we would normally give you a little bit of additional color.

Speaker Change: But we still need to kind of work through our planning process.

Speaker Change: And bring these two businesses together as John mentioned.

Speaker Change: I just want to make a finer point whereby understand the challenge of the question you just asked.

Speaker Change: Because only a small group of us are able to really be involved in some of the details of exchanging information because of the nature of where we are in the process.

Speaker Change: So you asked a good question well I'm sitting in a room and we have members of our team that are in the cleanup.

Speaker Change: Main room and they recognize Oh, my gosh look at what <unk> is doing to drive demand why didn't we think about that well I can assure you. The day that we closed that day number two I'm going to walk over to our marketing Department and say you better start doing X y and Z.

Speaker Change: I don't know if I can get the benefit some of the things that are doing I'll give you. Another list of examples of things that we're doing but theyre not doing that as soon as we own them, we're going to tell them to start building and that's going to improve their standalone results as well. So we got we got a list of things, they're going to they're I think they're going to impact both businesses on a standalone basis.

Speaker Change: To improve the businesses you've got change management involved there's always risk around that but we're working to manage it as one of the things I'm talking to Adam and Ryan about and I. Just I. Just think you have all this working together and then on top of it you you brought up the question, where there's a lot of macro.

Speaker Change: Macro uncertainty out there as well so so we've got a lot of things that we need to stand back and Bob and the team has not only been focused on all the things they've always been doing and the integration. We're also doing a public.

Speaker Change: The debt offering as well bond offerings. So that's in progress as well it needs to be done. So I guess, just would ask everyone to be patient with us I know that you're used to hearing from us.

Speaker Change: A good understanding what's going to happen in the next fiscal year and I can tell you when we get to next year's third quarter call. We will be back to standard pay checks, but this is just not a stable third quarter. So just bear with us.

Speaker Change: Thank you and we will take our next question from Pete Christiansen with Citi. Please go ahead.

Pete Christiansen: Thanks for the question really nice execution here and good to hear progress on your views on the <unk> acquisition. I was just wondering if you could do a little bit of a dive on on the 401K business.

Pete Christiansen: But it's something that I don't think that's been called out in particular recently and obviously it sounds like.

Pete Christiansen: The potential for revenue synergy that would pay core just curious if you could speak to some of the growth in attachment rates that youre seeing there.

Pete Christiansen: I know the secure act as catalysts for for that area in the past.

Pete Christiansen: If you could give us kind of like a where are we now kind of point of view on that business that would be really helpful. Thank you.

Pete Christiansen: Yes, yes.

Pete Christiansen: The question you are probably right, we don't talk about a double digit growing business as much as we should but.

Pete Christiansen: The 400 K business is doing well I think.

Pete Christiansen: You've got assets that what that's one of the things the asset part of that business.

Pete Christiansen: Little bit of a headwind in the third quarter, but fourth.

Pete Christiansen: It probably will be in the fourth quarter, given where the market is right now, but overall the underpinnings are strong as you said, there's a lot of regulatory environment I continue to explain the people though.

Pete Christiansen: You, particularly given the.

Pete Christiansen: Where the consumer is you have to still convinced our clients and the employees to participate in saving for their retirement I am not going to go off on my bandwagon.

Pete Christiansen: On this I think is a big.

Pete Christiansen: And the issue that the country faces.

Pete Christiansen: I'm proud that paychex has been part of the solution of introducing clients to them, but.

Pete Christiansen: We're going to need more regulatory action I'm hopefully win when the fed federal government gets done with all the tariff talk we can we can turn to some.

Pete Christiansen: Closing of some of the loopholes that are in the secure act.

Pete Christiansen: You need to be closed, particularly for micro businesses.

Pete Christiansen: We're continuing to work in Washington for that.

Pete Christiansen: I feel good about where the <unk> businesses and I feel good about what the future holds as well there.

Pete Christiansen: So should we think of the attach rate kind of closer higher for the for some of your larger clients versus some of your smaller employee claims in.

Pete Christiansen: How do you how would you extrapolate that to the degree that you can discuss today, what that means for potential with core clients.

Pete Christiansen: Yeah.

Pete Christiansen: We think that there is an opportunity in the core base for us to be able to go in and off with a 401K program and I would say that.

Pete Christiansen: This is the size take or has a has some smaller client sizes as well, which are right in our sweet spot and we have experience with larger clients as well so.

Pete Christiansen: We're going to we're going to introduce the concept in.

Pete Christiansen: And I think that we have the chance to it too.

Pete Christiansen: You don't have similar attach rates in our base that they have in their base based upon the client side and as I said earlier on we're just getting to that that level of execution in our.

Pete Christiansen: Integration planning because we've been focused on customers partners people and that's where we've been focused at this point in time.

Speaker Change: Thank you and we will take our next question from Brian <unk> with TD Cowen. Please go ahead.

Ensured Levine: It's actually ensured Levine on for Bryan Bergin today can you discuss how you're currently partner with benefits brokers across both the flex in PEO business.

Speaker Change: Might evolve over time with pay core part of your business.

Ensured Levine: Yeah well.

Ensured Levine: Funny, you should ask that question I'm actually going to that that is something we've been talking a lot about.

Ensured Levine: We're committed to fostering strong relationships with all of our strategic partners.

Ensured Levine: <unk> brokers, we have a very vibrant broker program a matter of fact, our broker program referral program was up double digits year over year.

Ensured Levine: Both both in our in our HCM business.

Ensured Levine: So we have a longstanding history, we've been partnering with brokers for over a decade at paychex.

Ensured Levine: <unk> certainly has a focus on that.

Ensured Levine: And we have been working on a joint program again as you can imagine a lot of business is a small group given where we're at but we will be launching a major strategic partner program refresh in the coming weeks.

Ensured Levine: This is going to involve not only the broker channel, but the CPA channel.

Ensured Levine: Banks and strategic advisors, it's gonna be a combination of investments we've made in technology improved support programs and also new marketing programs that we think that all of our strategic partners.

Ensured Levine: Are going to like so this is an area of focus for us and certainly paperwork. This is a big part of our go to market and we've learned a lot of how they are approaching it and will take some of their best practices and some of our best practices and we look forward to introducing <unk> to our CPA and our banks and our other financial adviser partner.

Ensured Levine: And we look forward to partnering with their strategic partners as well.

Speaker Change: Great and then the follow up here, that's ignoring the at risk health insurance has there been any change in the demand environment relative to last quarter. Even if you kind of look at the past few weeks there with more of the I'll call. It tariff related noise anything different youre seeing in terms of I guess the demand environment in recent weeks.

Speaker Change: No I worked on the PEO side as I said.

Speaker Change: Bookings our bookings are double digit is a good pipeline going into Q4, so the underlying demand there is good.

Speaker Change: You know I would say that demand has remained consistent to our historical levels.

Speaker Change: I think when you look at Q3, and particularly January and February it was a little softer than the prior year, but if you remember right. The first half of the year, we actually had higher demand higher proposal activity. So when you look on a year to date basis.

Speaker Change: There is it's an interesting macro environment, because there's a lot of optimism and uncertainty all at the same time, so whenever I hear how people are feeling we're feeling optimistic and they're feeling uncertain I look at the data and so when I look at the data from a hiring perspective I looked at the data from an out of business I looked at the data.

Speaker Change: The increase we've seen our clients add additional sites. So additional locations is up double digits those are not indicators.

Speaker Change: That's a pending recession or a macro employment problems. So I think the other thing I would add to that it just <unk>.

Speaker Change: <unk> performance has been strong.

Speaker Change: Well all year and it was.

Speaker Change: Actually better in Q3 as you know that's an important time of year for us getting through year end and our retention of our client losses are actually down year over year and I think most everyone knows that the largest portion of our losses come from auto business in or out of business losses were down double digits in the quarter. So as it relates to kind of the stability of the macros.

Dan point things seem to be pretty stable and we're seeing strong.

Speaker Change: Improvements in retention year over year as well on that point I want to say hats off to the team too because not only were uncontrollable is down but also to all of our controllable metrics were down as well. So just just good solid execution I think it's a testament of the strength of our value proposition.

Speaker Change: Thank you and we will take our next question from Bryan Keane with Deutsche Bank. Please go ahead.

Speaker Change: Hi, guys. Congrats on the results here just wanted to ask on the <unk> acquisition.

Speaker Change: The additional cost synergies exactly where where might those be coming from which is giving you. Some confidence to now talk about some accretion and curious about how much accretion now for fiscal year 'twenty six.

Speaker Change: Yeah, Yeah, Brian I would say that.

Speaker Change: You got two public companies coming together, there's obviously redundancies I don't want to go into a high level of detail.

Speaker Change: Rest assured that both in terms of your.

Speaker Change: Vendor spend.

Speaker Change: Where we have redundancy, where we have best practices, and where we have scale where that can be leveraged quickly.

Speaker Change: These are the areas that we were very we were able to very quickly go and validate.

Speaker Change: And then I quite frankly, I think there were some additional things that we found from each other.

Speaker Change: Some things that <unk> was doing that I don't know why we werent doing it and why we haven't thought of it and I'm going to take those ideas and applied is really day too.

Speaker Change: We think those are going to drive additional synergies out of the gate and Brian obviously as it relates to the size of the increased accretion, we're not ready to kind of give that guidance yet I think what we said in early January was that we thought it was going to be neutral to slightly accretive and so you can see we're a little bit more positive on that.

Speaker Change: We're fairly confident just based on the work that both teams have been working on over the last several months that this will be.

Speaker Change: Accretive to our adjusted EPS next year, and we'll come back in Q4 and size that opportunity for you.

Speaker Change: As I said I want to keep going back to the process that we've been focused on customers. We've been focused on strategic partners and what have we got to do to make sure day, one they're happy and content.

Speaker Change: And our employees.

Speaker Change: Three things we've now returning to.

Speaker Change: What we can do together because again, it's only a small group of us that can really talk about this we were until we're closed we gotta get everybody else in the game and talking about how we can make the best of this combination and so one of the things we're thinking about it.

Speaker Change: Where do we want to invest and I will tell you right now we've made the statement when we told you about the synergies that we still expected to.

To expand our investment in product and in sales growth and.

Speaker Change: And based upon what we found thus far from a cost synergy side one of the decisions, we're going to make as we're going through our budget planning season is how much more we want to invest so I would also expect to hear us talk about more investments in go to market more investments in product acceleration as well.

Speaker Change: Got it and just as a follow up thinking about the revenue.

Speaker Change: Hum.

Speaker Change: If you include pay core I think youre talking about 10% to 12%. So just trying to think about timing of that is that is that basically two thirds of a quarter contribution and then as we get our models set for next year, how much how much revenue should we be putting in.

Speaker Change: For our models for pay core or for fiscal year 'twenty six.

Speaker Change: Well I think well.

Speaker Change: Just in terms of I think what we said is we expected to close in April and then I think in my script I said in weeks. So you can probably triangulate yeah. I mean, we don't have an exact date, Brian I think as John mentioned a lot of the closing conditions have been met you know we've been focused on.

And are currently focused on finalizing the permanent financing.

Speaker Change: For the transaction in that process is well underway and we would expect it to finalize that over the next couple of weeks and be in a position to close so we've obviously given a range because we don't know that exact date.

Speaker Change: But we will announce it when it closes and then you guys will probably be able to get back into the exact impact for Q4 and update your models accordingly.

Speaker Change: Thank you and we will take our next question from Ramsey El <unk> with Barclays. Please go ahead.

Speaker Change: Hi, Thank you for taking my question this morning.

Speaker Change: In management solutions, you flagged higher revenue per client with with pricing being a driver.

Speaker Change: How should we think about pricing is perhaps a lever you might be able to pull if you see any macro deterioration I guess, what kind of headroom do you see for pricing at this point.

Speaker Change: Yeah I mean.

Speaker Change: We feel like we have strong pricing power I mean, we've always been able to within.

Speaker Change: Within a range.

Speaker Change: <unk> achieved that and I think we feel and we've done that in certainly in downturns as well. If you have the macro downturn, we may or may not go as high as maybe where we've been the last couple of years.

Speaker Change: Inflation, so we feel comfortable about that part of our growth formula that we've talked about in that 2% to 4% range I would say Q3, we did have strong price realizations.

Speaker Change: Revenue per client is a big part of our model, we get that both through the pricing and through product attachment and both of those were strong in Q3, and I would say, we did have better price realization.

Speaker Change: In Q3 related to discounting that was favorable in some of those types of things and we have our year end processing in there.

Speaker Change: Discounting that takes place there and then that came in a bit better than certainly what it was last year and so that was a nice tailwind from a growth standpoint in Q3 of course, but we feel good about where we're at from a pricing standpoint.

Speaker Change: I think one of the most important disciplines that you can have.

Speaker Change: He is being disciplined about how you grow and so as I always say is you know I can have as many clients as I want if I Wanna pay Google more than the lifetime value to attract that customer I want to.

Speaker Change: <unk> discount.

Speaker Change: To a point where or over the life of that client not gonna make.

Speaker Change: Anything on it.

Speaker Change: Not a good thing to do in an uncertain macro environment. So I certainly think there just as we are conservative we mentioned about our conservatism in underwriting in the P O and we're not going to do anything there.

Speaker Change: To drive revenue, we're also not going to take.

Speaker Change: Your business you know to me when you when you face a degree of uncertainty you've got to make sure you're watching the bottom line you look at our margin expansion of 80 basis points I don't think <unk> question that but you also got to watch what you are bringing into the top and we're watching that as well.

Speaker Change: Okay.

Speaker Change: It's a good segue to my next question, which is basically you flagged investments in AI and automation in terms of helping drive some of the margin expansion this quarter.

Speaker Change: What's the runway at this point for further benefits from from AI and automation is this sort of a new input to your kind of margin algorithm will that have a similar impact next year or has that has the lowest hanging fruit has been already picked how would you characterize it.

Speaker Change: Well we've been using.

Speaker Change: Again, we've been using AI models for almost a decade across the company.

Speaker Change: Jump them to make better decisions and risks some things, we just talked about discounting.

Speaker Change: It is an AI driven we continue to refine and invest in those models and with the newer technologies around that in terms of.

Speaker Change: The quality of decision making that.

Speaker Change: Models that can be built on an expert in this but we got several around not too far from it but.

Speaker Change: That's what we're learning we're learning as we're finding these models and they're really driving better decisions that we're making at the point of sale at the point of service good thing on retention or intercepting issues, using AI and getting in front of them before it becomes a client loss of a client to satisfy or that's been huge we've just really started that.

Speaker Change: In the last year really over the last I think it's probably now we're into the ninth month.

Speaker Change: Really recording all of the interactions that we're having in any mode of communication between both our service and sales teams with just getting the volume to really be and just beginning to train those models.

Speaker Change: It to their full potential and then more models and more ideas are coming out I think we talked about on the script. We were just piloting. This HR co pilot, that's really a productivity and it's only a productivity improvement for our HR generalists that are serving the clients. It's also allowing them to provide better more robust and.

Speaker Change: <unk> took a client so it's enhancing the value with the same time and then we're now beginning to look at AI as a way to make money in terms of what we're doing to provide insight to the clients and products and in talking to the <unk> as well from a product roadmap perspective, I'm impressed with several things that they've got going on.

Speaker Change: And I really think together under Ryan's leadership of the joint product team I really think we wouldn't see a lot of acceleration of exciting things coming out of that.

Speaker Change: Out of that in your head.

Speaker Change: Thank you and we will take our next question from James Faucette with Morgan Stanley. Please go ahead.

Speaker Change: Great. Thank you so much I wanted to dig in really quickly on a couple of product related questions.

James Faucette: First just wondering if you could share any details about early adoption metrics around flexing gauge since its launch in and how should we be thinking about where that will fit in the portfolio.

Speaker Change: Okay.

Speaker Change: Yeah. So it's a so so flex engages the adoption of that as well as you can imagine because that's more of an upmarket product for up for us and what I'm really excited about is I think when you look at the at the at the talent and workforce management capabilities that <unk> brings to the table in addition to <unk>.

Speaker Change: Engage I think that's one of the areas that I think we've got some tremendous opportunities.

Speaker Change: I would say that they actually have a little better attachment than we do and so I think it gives us an aspiration of what's possible in terms of.

Speaker Change: Engaging our upmarket clients to adopt these.

Speaker Change: These capabilities.

Speaker Change: Got it got it got it and second question I wanted to ask was also a product related question on the recruiting co pilot kind of an interesting extension of some of the things that <unk> been developing over time.

Speaker Change: What are the specific metrics youre using to measure its effectiveness in helping.

Speaker Change: Clients find qualified candidates and can you maybe describe where that fits within the sales cycle wheel for you right now and where you'd like to get to be eventually.

Speaker Change: Yes.

Speaker Change: So the co pilot that we've launched is a tool that has this database of over 20 million.

Speaker Change: Workers that you basically say what youre looking for and it tells me here's the people, whether they're active or not active Lee in the job search so that you're not just looking for job seekers, who are looking at the entire job market to do that and so we're using that across all of our sales teams as part of our as part of our.

Speaker Change: Higher sales play we're also having our customer success.

Speaker Change: Individuals who manage account relationships.

Speaker Change: Upmarket, we also have our HR generalist talking to our clients who are trying to find qualified employees about using the product.

Speaker Change: What I would say we've seen early we're looking at the adoption. We're looking at the use of the product how many times are they using and how many placements were being done there.

Speaker Change: What I would tell you there's an interesting learning on that is we still have work to do to adopt whether or not an AI technology tool is what the entire market is looking for if I have a recruiter in a large company if I have an HR person who's the one actively recruiter they love this tool, but if you're an owner.

Speaker Change: You may not want to do the tool and do the work so you're almost now saying have almost got to put a solution together, what's great about that as we do that all the time this concept of being able to take service and technology and put together a solution that is something we're continuing to work on and we're going to have to continue to look at so what I would say the adoption.

Speaker Change: Usage of it is going well upmarket I would've expected given the demand and the challenges of smaller businesses that we would have seen a bigger adoption of it at this stage and so I think we just got more to do on the product there.

Speaker Change: Okay.

Speaker Change: Thank you and we will take our next question from Ashish Chopra with RBC capital markets. Please go ahead.

Ashish Chopra: Hey, Good morning, guys Statistical Cheung Hershey's departure I. Appreciate you taking our question it depends on a follow up question there.

Ashish Chopra: On competitive landscape. If you guys could comment on that and really curious on you know those kind of something about product adoption, if thats been kind of a benefit from.

Ashish Chopra: From your standpoint, there as well and then just as a quick follow up maybe if you have any updates on your capital allocation strategy.

Bob Schrader: Well I'll, let Bob take the capital allocation.

Bob Schrader: That's what I would probably say in both the topics might not much has changed.

Bob Schrader: Yeah.

Bob Schrader: The competitive market is a competitive market ive not seen any major shifts.

Bob Schrader: In the competitive market.

Bob Schrader: At all at this point in time, so when I look at the balance of trade I look at all of the indicators.

Bob Schrader: That is a market that's what I would say.

Bob Schrader: Yeah.

Bob Schrader: Certainly no change to our capital allocation strategy continuing.

Bob Schrader: Look to invest in the business I think we were very clear when we announced the transaction we are committed to the dividend.

Bob Schrader: Our payout ratio the other part of it is M&A.

Bob Schrader: We're currently executing on on that part of the capital allocation strategy I would say I wouldn't expect anything of significance.

Bob Schrader: Going forward in the near term, we're certainly focused on integrating pay quarter, making this.

Bob Schrader: A successful transit transaction and really getting the synergies out of it that that we expect to and so that's really our area of focus and overall no change in philosophy around capital allocation.

Speaker Change: Got it thank you guys.

Speaker Change: Thank you and we will take our next question from Kartik Mehta with Northcoast Research. Please go ahead.

Kartik Mehta: Hey, good morning, John and Bob just wanted to get your perspective on the PEO business I know you've talked a lot about it and I understand maybe the reason for that.

Kartik Mehta: On reducing your guidance, but just if you look at the business Holistically do you think theres been any change fundamental change in the business.

Kartik Mehta: Would affect kind of the medium term growth for this business either new competition or business is looking at it differently or do you think this is just a.

Kartik Mehta: Normally and related to kind of benefits and cost benefits.

Kartik Mehta: Okay.

Kartik Mehta: Hey, Kartik that Didnt talk to you.

Kartik Mehta: I think that is.

Kartik Mehta: This is a very unique situation to a specific program we have in Florida that that's really what it is I I don't actually when I look at from a demand perspective in terms of the number of people that are shopping for health.

Kartik Mehta: I think it's actually an improvement in the environment.

Kartik Mehta: There is a health inflation problem and so what you have now is people every time they get the renewal notice.

Kartik Mehta: Are faced with the situation that they either have to dramatically change their plan design, which AK can many times give less benefit from the same dollar trade off so youre seeing increased shop that youre seeing increased shopping there because every time you get a renewal.

Kartik Mehta: Then you feel like you can afford.

Kartik Mehta: He was an employer are beginning the shop that in the PEO and the nature of the Po creates a an opportunity to.

Kartik Mehta: Scale people together and create a powerful value proposition.

Kartik Mehta: So I actually think that the demand is just that the.

Kartik Mehta: Macro environment is going to drive.

Kartik Mehta: Increased demand in shopping for competitive health offerings. Now. The question is where are you going to put them in the case for us in Florida is not true for all of our competitors in Florida right. We have a series of options. One I can put you on the specialty Patrick pass through program, but I'm going to underwrite.

Kartik Mehta: You and I'm going to look at that or I can put you on a stand alone plan through our agency from inexperience with an employer perspective, or an employee perspective from a technology.

Kartik Mehta: And enrollment it's exactly the same it doesn't matter you just know you got insurance from Blue Cross Blue Shield of Florida doesn't matter, whether it was in the specialty program oriented toward your own Standalone plan so well.

Kartik Mehta: What we saw and what we have seen.

Kartik Mehta: Across the country is we've seen an increase in the attachment of.

Kartik Mehta: Insurance in the PEO, we see an increase in participants what people are selecting employers are selecting our lower cost plans, sometimes due to planned design and then when theyre offering.

Kartik Mehta: Variety of plans to their employees their employees, who may have been on the premium plan last year are going to the gold plant if that makes sense. So that's the dynamic we see going on it's more of a trade off inside the client versus a macro change.

Speaker Change: Yeah, Kirk I would just add.

Speaker Change: We're very bullish on the opportunity just in general I think if you look at the value proposition that P O. It checks a lot of boxes.

Speaker Change: You've heard US talk about our purpose is to help small businesses succeed and I think that PEO value proposition really checks a lot of the boxes that small.

Speaker Change: Small businesses are challenges that they're facing.

John Gibson: When you look at the performance of that business, John and I and the team were focused on Worksite employee growth at the end of the day, we're trying to sell more and lose lose less and drive worksite employee growth and that continues to be strong we see strong demand we see strong retention.

John Gibson: If you look at the PEO business alone. If you were to pull that apart we don't pull it apart for you, but if you were to look at that by itself in the front half of the year. There was a double digit growing business and it's still growing strong.

John Gibson: Despite some of the pass through revenue headwinds that we're going to face as we go forward that have no impact to net service revenue or the bottom line.

John Gibson: I think in general we're very bullish on the opportunity there will be some pass through revenue headwind until we kind of anniversary that as we get more towards the end of this calendar year, but feel good about the opportunity there I mean kartik.

John Gibson: Look our growth.

John Gibson: Excite employees is outpacing the competitive benchmarks that IC and <unk>.

John Gibson: We're facing the same headwinds that many of them have reported in terms of not the type of hiring inside the base that you would expect and we commented a little bit earlier about the decrease in average client size. So in spite of in spite of not adding clients hire as many people as you expected and in spite of having slightly smaller clients than you historically have seen.

John Gibson: You are still growing at better than competitive rates and in terms of worksite employees.

Bob: That's helpful Bob.

Speaker Change: Bob just one clarification I think on the pass throughs.

Speaker Change: We're accretive this quarter right.

Speaker Change: For revenue standpoint, but not going to be as accretive as you anticipate and is that a fair way to.

Speaker Change: Make sure I understand there's growth in pants that yes, there's growth in pass through revenues and.

Speaker Change: But it's been lower than what we anticipated and will be a headwind as we move forward.

Speaker Change: Yeah.

Tencent Huang: Thank you and we will take our next question from Tencent Huang with Jpmorgan. Please go ahead.

Tencent Huang: Hey, good morning, Thanks for all the details as always it's very complete here just thinking about everything you've said.

Speaker Change: Yeah pay core of course, they've got good retention, we got the update on macro as you.

Tencent Huang: Thinking around sales head count.

Speaker Change: <unk> changed at all whether it's in the aggregate or across the different sub units just curious what you're what you're thinking here because youre getting some productivity it sounds like in general.

Tencent Huang: So so I think when we when we.

Tencent Huang: Announced the acquisition, we made a statement that that we would that our that our initial thesis.

Tencent Huang: Was that we would.

Tencent Huang: And invest and expand.

Tencent Huang: Our go to market and our sales head count and that was part of it and that you should expect that we would increase the percentage increase in sales head count out into the future. So when we modeled and thought about this this was all part of our broader strategy that we believe there wasn't up more up market opportunity for us to.

Tencent Huang: To play and I'm looking at investments. So now what we're doing is we're trying to step back and based upon what we've learned.

Tencent Huang: And ask ourselves how much <unk>.

Tencent Huang: Investment do we want to make and given where we now are on the cost synergies, making the tradeoff of whether or not we want to even accelerate more than what we had originally planned so that'll be the that'll be the topic that once we've closed the acquisition and we've done a.

Tencent Huang: Our budget planning.

Tencent Huang: Process, which is currently scheduled in the first part of April I'll leave it at that.

Tencent Huang: Is that what will make the determination, but I think you should expect to.

Tencent Huang: You're seeing us.

Tencent Huang: Increasing our sales coverage model going into fiscal year 'twenty.

Tencent Huang: And beyond.

Speaker Change: Got it so I recall those statements I didn't know if you know relative to PEO and so some of those things where we're at and then if there was any major change there from them from a magnitude perspective, it sounds like well, we're waiting to hear back when we get back on the call together again.

Tencent Huang: Yeah on the.

Speaker Change: On the just on the.

Speaker Change: Taking a lot of questions. So thank you for that I'm, just thinking about I know Ramsey asked about AI and I asked about productivity, but it feels like the productivity in general better than you're.

Speaker Change: Better than you expected is there anything you're beyond that youre getting more productivity here before thinking about paperboard does it feel like you're running at a different a different speed from operating expense standpoint tell me if I'm wrong, but please thank you.

Speaker Change: Yeah.

Speaker Change: Well I'd say I think with I think insurance is always operated at a different speed than our competitors when it comes to margins.

Speaker Change: I just think its part of what it was kind of in our DNA to do.

Speaker Change: And I do think that technology is a big play of that and giving us that AI or whatever but I look at our clients and our employees adoption of technology and their preference to leverage our technology tools.

Speaker Change: To do more things self service and do a throw away which reduces your overall.

Speaker Change: Service costs that certainly is a it is a factor in that.

Speaker Change: I look at every interaction we have on a particular transaction by the way in which the client or employee completes that transaction and when I start seeing more and more people using our AI driven chat versus a call versus the that difference in the mode of the way that client was solved.

Speaker Change: When I look at the transactional survey and see that those clients are happier when they do it that way.

Speaker Change: And we've just really just began to scratch the surface I think of how we can apply AI.

Speaker Change: Into our applications to drive.

Speaker Change: The customer service experience as I mentioned in the HR business right now our pilots are really around <unk>.

Speaker Change: Our HR generalist more productive.

Speaker Change: But again you can certainly see a day, where a lot of that is AI based in AI driven stuff.

Speaker Change: Yeah. The other thing I would add to that and as you know we had a major headwind coming into this year with the expiration of the RTC and was not only a revenue headwind. It was a it was a huge earnings and margin headwind and so we talked about this I think on the.

Speaker Change: The call coming into this year, when we gave guidance in the margin expansion that we going back the last fiscal year 2024, we were really working at our cost structure, because we knew that we were going to face. This headwind. So theres a lot of work around the cost structure last year and then as you guys know when we get to end of Q4, we announced that cost savings.

Speaker Change: And at the end of Q4 that helped drive.

Speaker Change: Margin expansion and so as John said, it's not just the yeah. It's the back office digital transformation. It's certainly the the the adoption of digital tools and self service on that part of our clients and our employees. There's some global globalization opportunity there and so forth. So you know I know there was a question asked earlier about like what's the.

Speaker Change: The opportunity going going forward, we still feel.

Speaker Change: That you know a lot of these technologies and the things that we're working on.

Speaker Change: From a client and employee standpoint will provide us runway to to do what we always do which is which is balancing margin expansion and earnings growth with investment and that's what John and I are going to go through and I think the great News is we feel like we have a lot of opportunity for us to be able to continue to invest in the business.

Speaker Change: To drive that sustainable topline growth.

Speaker Change: And at the same time deliver.

Speaker Change: Strong margin expansion and earnings growth that our investors have.

<unk> gotten used to over many years.

Speaker Change: Thank you and we will take our next question from Samad Samana with Jefferies. Please go ahead.

Samad Samana: Hi, Good morning, and thank you for taking my questions, maybe I apologize if I missed this I know you got asked about the potential pay core contribution for next year, but Bob but I wanted to ask was if I think about the <unk> number and I know theres a lot of them are involved in it because we don't know the timing of the close yet.

Samad Samana: What about the implied management solutions growth rate for <unk>, excluding <unk> or is that a fair way to think about what the starting point for growth.

Samad Samana: MS solutions should be for next year.

Samad Samana: Given that <unk> is a quarter that doesn't have T. C N N.

Samad Samana: Against the comps.

Samad Samana: Yeah.

Samad Samana: I mean, it's a good question.

Samad Samana: At that point on it because I'm, just we're not giving guidance.

Samad Samana: Guidance on next year, and I'm, certainly not ready to go through.

Samad Samana: The split.

Samad Samana: Between the categories for next year, So we'll provide.

Samad Samana: <unk> more color around that when we get to the end of.

Samad Samana: Next quarter, I mean management solutions <unk> has been strong we think theres a lot of opportunity there both from a client based product attachment pricing in <unk>.

Samad Samana: I think we'll be able to produce a growth number next year ex pay core that would be in line with with what people would be expecting.

Samad Samana: And I'll leave it at that and plant until we have the chance to get through our plan review and provide you some more details on it.

Samad Samana: I'm going to I'm not sure.

Samad Samana: And we will keep Pat Henry I'm going to keep hammering. This though because I think this is important because it is good.

Samad Samana: Quite frankly, I feel like it's almost like not fair to Bob and the team and what we're what I'm asking what we're asking them to do from a reporting perspective, because we're looking at integrating.

Samad Samana: The business and integrating parts of paychex in the PE core and painful in the pay is going to be very hard to peel. It back because when I take and I say upmarket whenever I decided to just find that out and I put resources together and I begin to adopt best practices.

Samad Samana: Is that number going to be so I just again just from a perspective of the thing I want to make sure everybody understands is that we are putting a plan together that day. One this becomes one paychex.

Samad Samana: And we're trying to figure out where we wanted to do no harm. We're wanting were wanting both standalone businesses to grow faster on a on a standalone basis, but the only way we're going to do that is by putting them together and that's going to create reporting issues that I'm sure we're going to be talking about well into the future. So I just Wanna get Bob.

Samad Samana: It seem a little bit of air cover just in terms of where we are in the process and the planning process and tried to get you guys to appreciate the complexities of how we're wanting to put this together so we maximize the benefit of the acquisition right because if I just had it stand alone and we left it alone.

Samad Samana: That would not be a smart thing to do and there's no way one plus one equals three if you do that so again I'm just trying to get my Bob and the team a little bit of air cover because I couldn't find it.

Samad Samana: Questions about this though.

Samad Samana: Yeah understood.

Samad Samana: [laughter], we fully appreciate and understand there's a lot of complexity as the moving parts and we're.

Samad Samana: We're getting asked the question by a lot of investors. So this is why we're trying to push it back to Bob.

Samad Samana:

Samad Samana: Yes.

Samad Samana: [laughter] maybe.

Samad Samana: Maybe if I think about it.

Samad Samana: The expenses in the quarter and maybe this is sort of a similar vein, but was there anything from a if I exclude the acquisition related expenses was 1% growth is it's pretty low obviously, its a big reflection of the productivity of the organization and in your own efforts, but anything in terms of timing of operating expenses or any expenses that you may have.

Samad Samana: Otherwise you avoided in anticipation of closing the deal and again with a full appreciation. This is less of a forward looking element in understanding the specific quarter. If there was anything that impacted expenses outside of the sort of the M&A side in terms of timing.

Samad Samana: So I would just say I would say business as usual I mean, the quarter from an expense standpoint was in line with.

Samad Samana: Our plan in our forecast.

Samad Samana: Obviously, you highlighted that there's some onetime expenses in there related to the acquisition outside of that there was nothing unusual nothing has shifted from one quarter to the next pretty pretty much in line with what we were thinking.

Speaker Change: Thank you and we will take our next question from Scott Wurtzel with Wolfe Research. Please go ahead.

Scott Wurtzel: Hey, good morning, guys. Thanks for squeezing me in I'll, just ask one question just going back to be.

Scott Wurtzel: Segment and I'm wondering when we think about the trends in the quarters and now your updated guide for fiscal 'twenty five if we can maybe kind of split out the <unk>.

Speaker Change: Softer trends between the MPC in Florida, and Oh, it's great off to lower cost house.

Scott Wurtzel: Benefits, how would you think about sort of that split impacting the growth in the business right now.

Scott Wurtzel: Is it safe to say it one more time is got the I think both of them are affecting the MPP. So its the lower I think there's a few issues you have lower attachment.

Scott Wurtzel: Certainly from an underwriting standpoint, we're seeing more medical plan in Florida, you've seen a larger increase in those plants going to the agency versus our at risk plan and that's just us being conservative in our underwriting and and then there's the buy down people buying down to lower cost options.

Scott Wurtzel: That's almost two times as the.

Scott Wurtzel: The number of people buying down and what we've seen historically so it's a combination of all three of those things I don't have the exact split.

Scott Wurtzel: And each one of them, but all three of those combined is what's really leading to lower MPP enrollment in pass through revenues.

Scott Wurtzel: In the P M.

Scott Wurtzel: That capture your question.

Speaker Change: Yeah, Yeah, No I was just wondering if there was any way to kind of quantify the split between those factors, but that's that's helpful.

Scott Wurtzel: Okay.

Jason Kupferberg: Thank you and we will take our next question from Jason Kupferberg with Bank of America. Please go ahead.

Jason Kupferberg: Thank you guys. Good morning, So I'm just trying to think about management solutions growth for Q4, I mean, if we look at Q3 I guess, we're calculating out about a one 5% headwind on the segment from E. R. T. C. So that would put you I think just a hair above 6% excluding E. R. T C.

Jason Kupferberg: Well that math is right is that a reasonable number to think about for Q4 and just to confirm I think you guys said.

Jason Kupferberg: The Q4 guide assumes no change in the macro I know there's been some data points out there just around declines in small business confidence.

Just wanted to square all that thank you.

Jason Kupferberg: Yeah.

Speaker Change: We have not given specific guidance on those splits for for Q4.

Speaker Change: Jason I would say you know your Q3 math it.

Speaker Change: Seems about right and as I mentioned I do think there was a little bit of a.

Speaker Change: A tailwind in Q3 from a price realization standpoint, certainly we saw a lot better discounting on some of our year end <unk>.

Speaker Change: The thing that we have that it hit in Q3, and so that served as a little bit of a tailwind in Q3 that that certainly wouldn't repeat in Q4, I'd say from a Q4 standpoint.

Speaker Change: There is a lot of uncertainty right now John mentioned checks per client I think overall have been stable. They were up modestly in the first half of the year they were down modestly.

Speaker Change: In Q3 and flat on a year to date basis, and so we're assuming that some of the trends that we saw in Q3 continue in Q4, and then I think the other potential impact that management solution is asset balances.

Speaker Change: Ben.

Speaker Change: 401, K business has been a double digit grower for us all year.

Speaker Change: And we've gotten a nice lift from the market performance and you know you you've all seen what the market has done recently, so we would expect that to be a little bit of a headwind. So those are kinds of things that would balance out some of the farmer's math that you're doing there.

Speaker Change: Okay. That's good color just as a follow up on the pay core side any rough sizing you can give us on the expected revenue synergies I mean, I know, there's a lot of cross sell opportunity, but just wanted to see if we're in a position to put any numbers around it or when we get that next quarter.

Speaker Change: That'd be next quarter as I said is that really the next phase of what we've got to get into and.

Speaker Change: You can imagine trying to.

Speaker Change: We've been trying to focus on our clients and their customers. The mutual customers are our strategic partners and making sure we got programs to care for them and take care of the employees and employee impacts.

Speaker Change: As we go through the integration and we are now.

Speaker Change: Beginning to pivot and we'll pivot.

Speaker Change: Towards working on on the growth side of that in the coming years.

Jason Kupferberg: Thanks, Jason.

Speaker Change: Thank you, Okay I think.

Jason Kupferberg: I think Madison are we it sounds questions.

Speaker Change: That concludes our question and answer period I would now like to turn the call back over to John Gibson for closing remarks.

John Gibson: Okay well at this point, we'll close the call as I said at the start of this these are exciting times at paychex.

Speaker Change: And appreciate your interest in it.

Speaker Change: And in the company if youre interested in replaying. The webcast of this conference call it'll be archived for approximately 90 days and again. Thank you for your interest in Paychex and have a great day.

Speaker Change: Thank you that concludes today's third quarter 2025, Paychex earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.

Speaker Change: Okay.

Okay.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].

Speaker Change: Uh huh.

Speaker Change: [music].

Speaker Change: Uh huh.