- Revenue Growth Revenue surged 18% YoY to $1.6 billion, with Management Solutions contributing $1.2 billion (21% growth), driven by Paycor's 17% point contribution.
- Adjusted Operating Margin Operating margin expanded to 41.7%, reflecting productivity gains and cost discipline, alongside 21% adjusted operating income growth.
- EPS Performance Adjusted diluted EPS rose 11% to $1.26, while GAAP EPS fell 4% to $1.10 due to tax impacts and integration costs.
- Paycor Integration $100 million in fiscal 2026 cost synergies expected from Paycor, adding $10 billion to total addressable market and driving double-digit growth potential.
- AI Adoption AI-driven payroll processing achieved 100% accuracy, cutting processing time and enabling higher-value client advisory services, with plans to monetize AI-enhanced product features.
Segment Performance
The PEO segment performed well, with demand and retention being strong, although health care inflation is a challenge. Revenue grew high single digits with double-digit demand and near-record retention. The company sees opportunities in its PEO offering, particularly with Paycor clients, and has been pleased with early progress. The Management Solutions segment's organic growth rate is expected to improve from the current 4% levels in the second half of the year, with modest acceleration towards a 5% range over time.
Guidance and Outlook
The company raised its earnings expectations for fiscal 2026, with adjusted diluted earnings per share now expected to grow between 10-11%. However, given some trends, the company expects to come in towards the low end of the ranges for management solutions, PEO, and insurance, and total revenue. Revenue growth guidance for Q3 is 18%, with expected acceleration on the PEO side. The company expects Paycor to grow in double digits, possibly in the low double-digit range.
AI Advancements and Integration
Paychex has been investing in AI, with its Agenic AI pilots handling thousands of payroll calls and emails with nearly 100% accuracy, decreasing payroll processing time, and enabling service teams to focus on higher-value strategic advisory support. The company believes it is well-positioned to succeed in the AI era, with a strong track record of delivering pragmatic AI solutions focused on measurable outcomes. The integration of Paycor has added $10 billion to the company's total addressable market, providing a promising runway for growth.
Valuation
With a P/E Ratio of 25.31 and an EV/EBITDA of 17.97, the market seems to be pricing in a certain level of growth and profitability. The company's ROE of 39.66% and ROIC of 17.96% indicate a strong ability to generate returns on equity and invested capital. Analysts estimate next year's revenue growth at 16.9%, which is slightly lower than the current year's growth rate but still indicates a strong growth trajectory.