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Good morning, and welcome to Paychex, Inc. Second Quarter Fiscal 2026 Earnings Call. Participating on the call today are John B. Gibson and Robert Lewis Schrader. Following the speakers' prepared remarks, there will be a Q&A session. 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 Robert Lewis Schrader, Paychex, Inc. Chief Financial Officer.

Thank you for joining us to discuss Paychex, Inc. second quarter fiscal 2026 results. Our earnings release and presentation are available on our Investor Relations website. We plan to file our Form 10-Q with the SEC within a couple of business days. 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, descriptions of these items, along with the reconciliation of the non-GAAP measures, can be found in our earnings release. I would now like to turn the call over to John B. Gibson, our President and CEO.

Thanks, Bob. I'll start with the second quarter business highlights, and then Bob will cover financial results and our outlook. And then afterwards, of course, we'll open it up for your questions. We delivered solid second quarter results, with revenue up 18% year-over-year and adjusted operating income grew 21% over the prior year driven by higher productivity as we continue to demonstrate our long-standing capability to be the best operators and begin to drive AI into our operational systems and overall DNA of the company. We are proud of the significant progress we've made in advancing our strategic priorities, including the Paycor acquisition and integration and our data and AI initiatives. We continue to make progress on the Paycor integration. As best operators, we continue to identify additional expense and now expect approximately $100 million in cost synergies for fiscal year 2026. We also remain on track to achieve the revenue synergies targets we set for this fiscal year. We continue to strengthen broker relationships through our Partner Plus program and refresh value proposition centered on delivering greater value to our partners as we continue to expand and fully integrate the Paychex Enterprise team with Paycor. Cross-sales efforts continue to gain traction with broker-referred PEO deals and with larger clients than initially anticipated. We continue to make steady progress executing our go-to-market technology and cultural integration initiatives that are critical in an acquisition of this size, scale, and complexity. Our PEO business continues to perform well, achieving market-leading mid-single-digit worksite employee growth, driven by strong demand and near-record retention. Our PEO solution empowers small businesses to offer competitive benefit packages on par with Fortune 500 companies, supporting their efforts to attract and retain talent in a tight labor market. October enrollment for our at-risk Florida MPP plan came in largely as expected, and early indications for January enrollment give us confidence in finishing the year with solid revenue growth in the PEO. Regarding the labor market, our clients' workforce levels remain relatively stable with flat same-store employment growth this quarter. Our small business employment watch index, while down from last year, has remained relatively stable throughout 2025. And our other indicators show no signs of a recession at this time. Small businesses continue to face challenges sourcing qualified talent in competitive labor markets, areas where we believe our solutions are uniquely positioned to add value. They are also looking for ways to manage costs. We remain confident in our value proposition, and demand for our HR technology and advisory solutions continues to be in line with our expectations. We are halfway through the year and pleased with the progress we've made to date. As we look at where we are today in the middle of our busy selling season, we have seen some trends that impact a few key metrics. Bob will provide more color about how we are thinking about those in the context of the balance of the year. Given the increased focus on AI, this morning, we published a presentation outlining why we believe Paychex, Inc. is well-positioned to succeed in this AI era, why we see ourselves as less exposed to AI employment risk, and how we are capitalizing on AI-driven opportunities. I encourage you to review it, but I'll share a few highlights. Starting with AI-related employee risk, we believe our portfolio is less exposed due to our client base and our business model. Over 70% of our clients' employees work in industries that are harder to displace, in blue and gray-collar industries, and the majority work at smaller businesses where staff often wear multiple hats and AI investment tends to be lower. If AI disrupts large firms disproportionately, over 70% of our clients' employees work in talent may shift to smaller businesses benefiting our clients. Meanwhile, our clients continue to face talent shortages, and AI can help improve efficiencies to address those gaps. From a business model perspective, our revenue model has a significant fixed base fee component and has for years, providing downside protection against employment fluctuations. We also differentiate from tech-only providers by combining advanced technology with HR experts who provide strategic guidance and nuanced advice, which is difficult for our competitors in AI to replicate. In terms of our differentiation, AI success hinges on data quality and data scale. With one of the largest proprietary datasets in the industry, we believe we have a powerful competitive advantage to drive superior AI performance. In December, we proudly announced our patent-pending AI-powered knowledge mesh system, which transforms unstructured data such as phone calls and emails into a connected searchable network. This innovation unlocks deep insights and enables smarter workforce management, positioning us at the forefront of AI-driven solutions. Paychex, Inc. has a strong track record of delivering pragmatic AI solutions focused on measurable outcomes such as time saved and friction removed from everyday processes. We are accelerating AI innovations that enhance efficiency and improve client outcomes while fueling our growth. We recently launched our GenAI-powered employment law and compliance platform that helps clients and Paychex, Inc. HR experts efficiently navigate thousands of constantly changing federal, state, and local laws, generating compliant documents and staying current with the regulations. Since its deployment, we have seen strong adoption and frequent utilization by our HR experts. This advancement is key to our strategy to have the leading expert-embedded technology platforms for businesses of all sizes, and we will be integrating across our three platforms: SurePayroll, Paychex Flex, and Paycor. We are proud that both Paychex Flex and Paycor platforms were recognized as leaders in Nelson Hall's 2025 HCM technology and Gen AI evaluation. This distinction highlights our strength in delivering intelligent HCM solutions that enhance client outcomes, streamline HR processes, and support our partners. We are excited to share that our first Agenic AI pilots were a success this quarter. They autonomously handled thousands of payroll calls and emails with nearly 100% accuracy, decreasing payroll processing time, and enabling our service teams to focus on higher-value strategic advisory support. We are continuing to invest in these capabilities and are actively exploring additional applications across the business. In sales, we are leveraging a new GenAI platform to drive revenue growth and improve efficiency by equipping our sales teams with instant answers, tailored scripts, objection handling, and prospecting insights. These AI-driven advancements reinforce our commitment to being the digitally driven HR leader by reinventing the HCM experience as AI-first. By leveraging our unique blend of innovative HCM technology, our unrivaled data, and deep HR expertise, we believe Paychex, Inc. is well-positioned to capitalize on the evolving AI landscape to drive growth, expand margins, and strengthen our leadership in HCM. I will now turn the call over to Bob to discuss our financial performance and outlook.

Thank you, John. I'll begin with an overview of our second quarter financial results, followed by an update on our fiscal 2026 outlook. Total revenue increased 18% over the prior year to $1.6 billion. Management Solutions revenue grew 21% to $1.2 billion, with Paycor contributing approximately 17 percentage points to the growth. Growth was primarily driven by product penetration and price realization, but was moderated primarily by softer than expected revenue per client. Operating margin was 41.7% in the quarter, driven by increased productivity and continued cost discipline. Diluted earnings per share decreased 4% to $1.10 per share, and adjusted diluted earnings per share increased 11% to $1.26 per share. Our financial position remains strong with cash, restricted cash, and total corporate investments of $1.6 billion and total borrowings of approximately $5 billion as of the end of the quarter. Operating cash flows for the quarter were $445 million, largely driven by net income. During the quarter, we returned $514 million to shareholders in the form of cash dividends and share buybacks. Our twelve-month rolling return on equity remains robust at 40%. I'll now turn to our guidance for fiscal 2026. This outlook reflects the current macro environment, which has some uncertainty. We are reaffirming our fiscal 2026 outlook with the exception of raising our earnings expectations. However, given some of the trends that we've discussed earlier, we would now expect to come in towards the low end of the ranges for management solutions, PEO and insurance, and total revenue. Interest on funds held for clients is now expected to be at the high end of the range, of the $190 million to $200 million range that we previously provided. We are also raising our earnings expectations with adjusted diluted earnings per share now expected to grow between 10-11%, up from the 9-11% we shared last quarter. Our effective income tax rate for the year is expected to be approximately 24%. All other guidance metrics remain unchanged. Let me turn to the third quarter just to provide you some color with where we would expect to come out in the third quarter. We anticipate total revenue growth of approximately 18% with an adjusted operating margin between 47-48%. Just as a reminder, Q3 is one of our larger quarters, both from a revenue and operating margin standpoint, driven by the higher margin year-end fees that get recognized during the quarter. I'll now turn the call back over to John.

Thank you, Bob. We will now open the call for your questions. Thank you.

Press 1 to ask a question. Our first question comes from Mark Steven Marcon with Baird. Your line is open.

Good morning and thanks for taking my questions. Nice to see the earnings strength. The stock's down three and a half percent right now, and you've got so many positive things to talk about. But I wanted to address initially the underlying reason, which seems to be around Paycor. When we go through the math, in terms of the contribution from Paycor, it looks like even if we adjust in the form filings from December, the growth wasn't significant. So I was wondering, this seems like it's optics and there's obviously integration challenges. But can you just initially address this, what you're seeing with regards to Paycor? And then I'd like to follow-up. Thank you.

Sure, Mark. This is Bob. Happy holidays. I'll address the first question. First of all, I think as we've talked about in the past, we're trying to give our best estimates of what the contribution to Paycor is. We've talked about how we've integrated the business, and I think when you do that math, we're giving round numbers approximately 17%. I think giving a point specific number would imply a level of specificity that just isn't there given how we've integrated the businesses. But I think when you do that math and, you know, it's 17%, a little bit north of that, a little bit south of that, as you know, you've already done kind of looking at last year. If you look at their quarter last year, that ended in December, and that is when they have a lot of their year-end processing fees. So you have to adjust, and I know you're trying to adjust for that. I'm not sure that I have your math in front of me. But our best estimate, on a pro forma basis, now you're asking us to explain how it grew versus last year when we didn't own the asset. Our best estimate during the quarter is that it grew between 8% to 9%, and it was certainly in line to, I would say, slightly better than what we saw in Q1. Yes. And Mark, I would just say this is John. I would say, look, when we looked at it against how we're measuring it, we continue to progress well against the opportunities that we identified to drive value. We're achieving the revenue synergies that we laid out for this fiscal year. For the first half. And quite frankly, we're beating the cost synergies. As you recall, our original target was at $80 million. And we've now committed to $100 million, and we have more opportunities we're pursuing. Client and revenue retention in that client base continues to exceed plan and is at their historical levels. Activity and bookings continue to accelerate through the first half of the fiscal year. As you can imagine, when we announced the deal in January, a lot of uncertainty. As you can imagine, bookings kind of dropped at that point in time. We finally own the asset in April. We've seen steady progress. Actually, we see broker bookings in the quarter. We're back to pre-acquisition quarters. Again, after dropping for the announcement. So we feel good about where we are at this point in time. As Bob said, we've integrated the businesses. We're upselling our products and services. Some of that revenue goes to other places. We're moving clients, of course, across platforms. Where potentially the client's not in the best platform position, both in terms of moving Flex clients into Paycor, moving Paycor clients into Flex. So there's a lot of movement going on. It's extremely difficult to get with precision because we're not looking at the business as Paycor as a standalone business. It is now our enterprise, a 100-plus market segment. Hope that helps.

That does. And just as a follow-up, just two quick ones. Quick commentary just with regards to I know we're halfway through the selling season, but what are you seeing so far? And then secondly, just on the cost side, clearly doing a great job. And I'm particularly excited about what you're talking about with regards to the Agenic pilots that have handled things with 100% accuracy. What does that make you how does that make you feel with regards to the longer-term cost synergies that you could end up getting from some of these efforts? Thank you. And happy holidays.

Thank you, Laurie. Let me segment. Let's start with the let's start let's start kind of maybe with demand. I mean, I think we feel good about our competitive position. I and staffing going into now, as you know, in the lower end of the market. We're into the we're not even into the selling season yet. Q2 was in line with our expectations in past Q2s. I think demand for our solution remains consistent with historical levels, really no surprises there. Our activity is actually up pretty significantly. What I would tell you is what I see is I see a lot of shoppers out there. You know, again, we know that people are very cost-conscious right now. And I would say, you know, prospects and clients are looking for value in managing their costs very carefully. And you know, that's what we see in the market. Feel good about where we are. In terms of where we are at this point in the selling season and feel good about our setup going into the remaining of the selling season. Look. On the cost side, look. You know, we take great pride as a company in our DNA of being the best operators. You know, I think we have been working with I don't know whatever AI was called before it was AI. You know, we've been doing that. That's built in. Certainly, the revolution that's occurring in the speed of the advancement we're getting our hands on these tools. We've now deployed AI to every one of our 19,000 employees. And we have a process by which we're encouraging them to build their own AI models to help them each and every day. So I think we're just scratching the surface of what the potential is. What I would tell you is, at least strategically for us, we're going to continue to balance what we've always done, which we're going to continue to grow the business, invest in growth and innovation the top line of the business. As we do that, we're going to continue to look for ways to expand margins proportionally to that. And then we're going to invest, and we're going to continue to invest in our back office. One of the great opportunities that I see for us with AI and some of the things that we're doing with our patent-pending mesh network is we're really putting our service providers in a position now where they can be true advisers. And I think what we've learned in our advisory side of the business is when we have an advisory relationship with the client, lifetime value goes up, retention goes up, our ability to upsell goes up. So I think you'll see that as we display some of the transactional work, gonna do a lot. We're gonna invest a lot in really repositioning our people to be more proactive and be proactive advisers for our clients and look for ways that we can use our data assets and information we have to provide higher value to our clients. We think if we do that, we're gonna improve the lifetime value of the customers. And I think we're gonna create a competitive moat that's gonna be very challenging for others to, to ask. I encourage all of our competitors to add a thousand HR their business model next week.

Great. Thanks a lot, and happy holidays.

Thanks, Mark. Happy holidays.

We'll take our next question from Bryan C. Bergin with TD Cowen. Your line is open.

Hey, guys. Good morning. Happy holidays. We'll start on the fiscal 2026 growth guide here. So just wanted to dig in on your comment there, Bob, on the greater comfort at the low end of the range now. And you noted penetration and price realization have been driving growth so far, but I guess softer than expected revenue per client. So could you just talk about that a bit more?

Yeah. I mean, it's really, across the board and it isn't in any one specific business. I mean, obviously, when we look at those two items that you highlighted, price realization and product penetration drive revenue growth and our revenue per client growth. And that had been strong. It just was a bit softer than what we assumed in the plan. I'd probably call out a few areas. We are seeing a little bit smaller deal sizes, and John can comment on that. We've seen a little bit less attachment upfront at the point of sale. Obviously, those things impact revenue per client. And then I would tell you on our HR outsourcing solution, which is one of our highest value solutions, you know, volumes have been in line or better than our expectations, but it has been at a little bit softer rate than we assumed when we put together our plan. And so, you know, as we sit here, and services that we could sell. I thought we were well-positioned. What I would tell you is I think prospects and clients are looking for value. And they're managing their costs very, very closely. So when I look at, you know, sitting a rep into the field and they have three bundles, you know, good, better, best to sell, and we're making some predictions about historic how people have picked those various bundles. What I would say is I think people are being careful on what they're adding. So we were generally adding two modules additional, or three modules. Maybe we're adding two today. The good thing is we're getting the clients. Now we gotta go back. And as we've had a track record of doing is going back into our base and upselling them as times go forward. So that's just what we see in the market right now. Like I said, a lot of activity the proposal activity, and the meeting activities are solid. I just think there's a lot of shoppers out there. That's what I'd say.

Okay. Understood. Thank you. Thank you for that detail. And my thoughts is on Paycor. So the 8% to 9% that you mentioned earlier, is that adjusted to remove out the December form filings? Just any context around that, please.

Yeah. Yes. Absolutely. Again, as I mentioned, Bryan, it's an estimate. At best, but I assume that most of you guys would go back to their Q2 and look at what the recurring revenue my team did that and we're like, doesn't make sense. And then we realized that, hey. December, you know, we didn't own the asset last year, but we realized that they had all their form filing in December. And so when we adjust that and compare apples to apples, and adjust it to our fiscal quarter and you do that math, that's where you get to the 8% to 9% pro forma growth.

Okay. Thank you. Happy holidays.

Yep. Happy holidays.

We'll move next to Bryan Keane with Citi. Your line is open.

Just to follow-up on Paycor, is it still a low double-digit grower? Or should we be modeling more in this eight to 9% growth territory for this fiscal year?

Yeah. I think we generally said, Bryan, we expect it to be double digits. I would tell you that the revenue per client comments that we made related to, maybe being a bit softer than our expectations. It was interesting. It was really across the board to every line of our business. We saw that. And same thing with Paycor. I do think we saw some similar trends with maybe not as much attachment upfront than what we assumed. As well as maybe a little bit lower average deal size. So hey, we'll see where it plays out as we get through the balance of the year, but I would still expect it to be, if not low double digits, high single-digit grower. As we move forward.

Yeah. I got it. Again, Bryan, again, just probably for everybody because this is where I continually want to make sure everybody understands how we're managing the business, and I understand why you're asking the question, why you're asking it. And Bob and the team are trying to model two different companies at the same time. You know, we've integrated the business, and we have integrated businesses and we're going into the 50,000 Paycor clients, and we're beginning to upsell them. So remember, we upsell something ASO or insurance or whatever we upsell. That revenue is gonna show up somewhere else in the P&L. We're also they had a lot of customers in the lower end of the market. Those clients may have been better off on our Flex platform in terms of what they were looking for, or we had clients in the upper end that were on Flex platform that were in our P&L that we're moving over to Paycor because that's a better technology fit for them. You've got all this geography moving that's going on, so it's very difficult. I think for us, too as we continue to get into this, into the cross-sell movements, that we get into the customer success movements that we're doing, that, again, we just really gotta begin to look at Paycor as our enterprise segment for Paychex, Inc. going forward. We're gonna continue to try to do everything we can to guide you guys and give you the information as best we can. But I wanted to at least give Bob and his team some air coverage and some of the challenges that we're creating for them we're saying we're gonna go do this and it's the right thing to do for the customer, and it's the right thing to do for the shareholders too.

No, that's helpful. And then just to follow-up on managed services. So the smaller deal sizes, the less attachment and then the softer rates in HR, are those all macro driven, or is anything fundamental happening there, competition, causing some of that softness?

Yeah. There's nothing competitive that I'm seeing. It's all macro, but what's interesting is when you go remember, we've got market segments set up. So we've got various market segments based upon client size. So we start there. We got multiple bundles for each of those segments. That each of the sales forces go. What's interesting, you go to retirement. And we go out in the retirement market. And, typically, we see an average client size of x. And lo and behold, the average size is lower. Okay? Now you go over into our under 10. Segment. Go out there. We're selling the volume. We have an average number of, we have number of client size. We also have a regular distribution of our three packages they can sell. Normal, in that market. Average size is lower. And we're seeing more clients pick the lower lower end bundle. They're still buying but they're buying the lower bundle. They're not buying as many in the middle bundle. Then you go to the mid segment. And you see some of these similar trends that are going across each of the segments, and you just begin to realize that there is a macro. What I think you're seeing is what I said, which is I think there's a lot of people shopping. And I think a lot of businesses are trying to manage their costs. It's not that they don't want to have the bell and whistle, but at the end of the day, they may only be able to afford the bell. And what we gotta do is just continue to try to see if we can sell them the whistle. Down the road.

Okay. Very helpful. Happy holidays.

Happy holidays. Same to you, Bryan.

We'll move next to Tien-Tsin Huang with JPMorgan. Your line is open.

Hey, thanks so much. I'm just curious, like given the smaller deal size commentary you just shared there, any consideration or thought to changing your pricing and packaging of bundles? Maybe there's an opportunity here to sell more at a more value or at a lower price. Curious if this is the new normal, how you might adjust is really what I'm trying to get at here.

Yeah. Well, Tien-Tsin, I would say between SurePayroll, Paychex Flex, and Paycor, and the various bundles and options that we have, I think we have everything we need in our arsenal to position the client. I would say there's more work, and we're still working through this from a go-to-market strategy. We don't have reps selling across all the platforms like probably we will someday, but that will take time to do. But my point is I think we have everything that we need. I actually view that our pricing is an advantage to us particularly some of the commentary that I hear out there. You have a lot of fixed fee components to our pricing model. We think that's advantaged given the employment situation. So we feel good about where our pricing is. We do have an initiative and effort underway across the three platforms to look at that strategically, but that's something that's going to take time both for us to model and for us to execute. But we feel right now that between the three platforms, and the various bundles and offerings that we have, that we have something pretty much for everyone. And so I feel good about where we are.

Yeah. No. It does seem like opportunity, which is why I thought I'd ask the question. Thank you for that. Just on the just my just on PEO that did come in better, similar question. Is the insurance rate a bigger selling point here? I'm just trying to understand it. If you're reading it that way and there's an opportunity to lean harder on the PEO front given this macro situation that we're in, perhaps prospects are valuing the insurance offering more in this push towards value. Your thoughts?

Well, look. The PEO is performing extremely well, on all aspects of it. Demand, retention, really across the board. Like I said, the numbers would be even more impressive for the PEO and insurance market if we didn't have the insurance agency dragging down, and we're making some changes there, to improve that performance. But you know, we've never been a cheap insurance value proposition. And nor do we intend to be. I will tell you that a lot of clients are shopping. Health care inflation is a real issue. It probably feeds some of the macro comments I just said in terms of if you're a business and you're facing high health care costs, now you gotta come up and figure that out. What we did see in our enrollment is we've not seen clients dropping health care at the rate we saw last year, which is a positive. Thus far. So that's pretty much through and done. We kinda know that. But that puts a lot of pressure when you're getting 10 to 15% increases. So I think we're doing very well externally. I do think that when you look out in the PEO market, there's a lot of very high rate increases going out there. We may be a bit of a benefactor from some of that. Coming into the market. But, again, cheap benefits is not our value proposition. Never has been, never will.

Yep. No. Thanks so much for the details.

We'll take our next from Andrew Owen Nicholas with William Blair. Your line is open.

Hi, good morning. Thanks for taking my questions. Wanted to talk a bit about the upsell motion to PEO specifically. Kind of a two-parter here. One on just overall Paycor client receptivity to PEO. And then also, kind of in this environment, and you just spoke to some of the unique dynamics with health care inflation. Is the percentage of worksite employees going into the PEO business from your kind of HRMS segment evolved at all? Is there a bigger percentage coming from existing clients than previously, or is that remained relatively steady in this environment? Thank you.

Yes. Ed, it's remained consistent in and the PEO is one of our stronger outside the base organization. So it's five fifty-fifty, I would imagine. Somewhere around there. Maybe a little sometimes it tilts a little more outside the base, sometimes it tilts a more inside the base, but it's not it's not an inside the base play. Your question on the Paycor side, we've actually been very pleased with the receptivity of the PEO. Remember, our PEO did partner with brokers, insurance brokers already, so that was the one area of our business where we already had a broker relationship program. Brokers, insurance brokers tend to use the PEO as one of the alternatives that they position to their clients where it makes sense. And we've actually been very pleased with the early progress. And what we've been most pleased with is the size. Been very surprised at the size of deals that we've been able to both get on our ASO HR outsourcing, but also on the PEO side. So we are working jointly within the Paycor client base, working with our customer success leaders as well as with our brokers. To make sure that they know that we have this option, and it's a great option for them to consider if their client is facing, you know, a rate that they that maybe we can do better at in the PEO.

That's helpful. Thank you. And then switching gears, really appreciate the AI investor presentation that you put out, including some of the examples of wins and benefits. Is there any way to quantify? Or maybe it's not in the numbers yet, but kind of the impact on cost efficiency it sounds like, you know, you're doing things using Agenetic AI to streamline payroll without people. Is that something that is already impacting headcount? You'd expect to impact headcount in the future, or is it more having those same individuals do more with their current hourly availability or capacity?

Yeah. Look, I think that we have been using predecessors of AI and early models of AI for decades. Since I've been with the company, it's been big of what we're doing. You don't get to our margins. If you compare our margins to other players, unless you're using every tool in your arsenal, to be able to drive margins. Now what we're going to do with that margin, because I think this is important, our point of view is what's gonna continue to differentiate us is we're going to have experts and advisers embedded into our technology. We're going to more proactively engage our customers in the small and mid-end with our people. And so when we're using these tools, we're making our people more productive. And then we're driving more advisory conversations and relationship-building conversations with our customers. That's our goal. Now over time, do I think we can grow our business without adding as much headcount as we historically have? Absolutely. I think that's well with and we've done that for the last decade. If you go back, if you looked at the number of service people we had when we had 400,000 clients, versus what we now have with 800,000 clients. I think you would say that we've done that very effectively. And I think that's a model that we will continue to work on.

Thank you very much.

Yep. Thank you.

We'll move next to James Eugene Faucette with Morgan Stanley. Your line is open.

Thanks so much. A couple of follow-up questions for me. First, on the incremental realized gains on the investment portfolio from Paycor, are those gains included in the guide moving forward? And were they contemplated when you put together your forecast for the second quarter?

Yeah. I mean, it's definitely in the full year high. It already happened in Q2, and it was contemplated. Maybe I'll just provide a little more color on it, James. I mean, this was part of our integration plan, taking over the client fund portfolio at Paycor. You know, given, you know, they were largely invested short and, you know, just given our liquidity and financial strength. You know, our main priority when we took it over was, you know, understand the cash flow needs of it, but really wanted to allocate that long, to lock in those balances before interest rates went down. And so that was part of what we did in Q1. When and that was our main priority. And when we looked at, you know, they did have a long-term portion, but their long-term portion, I would say, skewed more on the front end of the curve. And so when we put the two portfolios together and I started looking at the treasury team started looking at the duration of our long-term portfolio, it was getting well below what we typically target. Typically, we're in around three years on average duration, and we were getting closer to two. So this was an opportunity that was identified early on. We didn't get to execute it on it in Q1. We knew we were gonna execute on it in Q2. I had some sense of what the impact was going to be. Didn't know exactly what it was gonna be. It was probably a little bit higher than I thought it was gonna be. As you know, interest rates move every day, but it was certainly part of the plan and I think a big win, you know, now that we've taken over the balances. And I would tell you, we now have a more balanced laddering of the securities the curve when we look at our long-term portfolio.

Great. And then I wanna just check-in on kind of some of the go-to-market changes you've made. You've talked about territory resets and broker program launches. What are you seeing there, and how are you feeling about your ability to deliver efficacy and when do you expect to see the full benefit in bookings momentum? Thanks.

Yeah, James. I'll handle that one. As you know, we did a lot of that disruptive work, right after the acquisition was announced. We talked about that in prior piece, was we tried to move very quickly. We reestablished a lot of new teams, new territories. Reset that. So a lot of that was done right after the acquisition after acquisition was in that April April, May time frame going into the fiscal year. As you can imagine, that was disruptive. And so what we've been focused on is really, you know, continuing to just drive execution there, continuing to support the team. So we feel good about where we are. That hard lifting is kind of behind us. We've kind of got the model set up. We've got the go-to-market message. We have the Partner Plus program out there for the brokers. Everybody knows what their list is. Everybody knows what they should be doing. Everybody knows what they're selling. And we're continuing to see activity and bookings accelerate to first half of the year. So, you know, again, these things take time. This is very complex as you can imagine, particularly when you do this much go-to-market disruption. But I'm very pleased that, like I said, every quarter since we've done this, we've seen improvements. Our the broker network and the Paycor side is still contributing. 50% of the bookings, and we continue to see that up. And we actually saw in the second quarter got back to booking numbers from brokers that were similar to what it was before the acquisition was announced. So I'm pleased with the progress, and I feel very good about where we are from a staffing perspective going into the remainder of the selling season.

Great. Thanks, guys.

Thanks, James.

We'll take our next question from Samad Saleem Samana with Jefferies. Your line is open.

Hi, good morning. Thanks for taking my questions. Maybe first, Bob, just on the question about the guidance and nudging toward the low end, you mentioned in that that, I guess, you got feedback from investors that maybe there is risk in the back comment that about guidance and that's partly what drove the recalibration. I guess I just want to understand is it the underlying variables in the model that made you think the lower end is better for us or is it more about to be at because of what you're seeing in the business? Derisking the numbers because we all thought it might be tough to hit? Just maybe help us understand the mechanics and the variables and the adjustments were to bring that lower end, which implies that back half production down.

Yep. And maybe I misspoke, Samad, there. I mean, certainly, that did not factor into what we did with the guide. I think we felt, like, the guide you know, when we came out with it in Q1 and last quarter, felt comfortable with it. I was just making the point that in addition, we'd heard that you guys thought we were too aggressive in the back half but that's not really what drove the guide down. It's really again, I would tell you through the first half of the year that it's largely played out, you know, an execution and certainly from a macro standpoint. Where we expected it. It's the couple of things that we highlighted on the management solutions side. Is strong revenue per client, just a little bit softer than what we had in our plan. And we talked about some of those reasons. And then on the PEO side, the PEO has exceeded our expectations through the first six months of the year. We had another quarter of double-digit demand. We had near record levels of retention. We continue to see strong worksite employee growth. And when you look at the PEO and Insurance category, this is what I was telling everyone was gonna happen because you start getting easier compares as you move into the back half of the year and we anniversary those enrollments that we have where we had the headwind last year, sequentially PEO and Insurance went from 3% in Q1 to 6%. And that's despite some of the challenges that we continue to see on the agency. John mentioned, we're working on that, but the agency has a headwind. We continue to see some challenges with worker comp worker comp rates and lower health and benefit volumes. The PEO grew high single digits in the quarter. So it's really the combination of what we're seeing on the agency side on the PEO and insurance business and then the revenue per client comments that we made on Management Solutions, that's really what's steering us to the lower end of the ranges. I was just also commenting that you guys were already kind of there from a consensus standpoint. And had shared that feedback that you thought we were too aggressive, but that certainly didn't play into our thinking. Although, I do appreciate your feedback, Samad.

Appreciate that, and thank you for that color. And then maybe just one follow-up. I know it's been covered about what you're seeing in terms of maybe new bookings and average revenue per customer there. But in terms of pricing inside the install base on renewals, are you seeing any either is it kind of a similar consistent pricing environment where traditional price increases are going through? Are you moderating price increases on renewal, maybe just help us understand what's going on inside the existing book of business, both in maybe management solutions at the

No. We continue to drive the value proposition and value in the customer base we continue to get the realization that we expected. In our plan. Which I would also say is higher than what we were getting prior to the pandemic. We've added a lot of product to that. So we've added some things to the bundle to support our clients in understanding why the price is the price, but we've added additional product capabilities, and we've been able to sustain that in the payroll business. So

Understood. Happy holidays, guys. Thank you again.

Thanks.

We'll take our next question from Will Chi on for Ashish Sabadra with RBC Capital Markets. Your line is open.

Appreciate you guys taking our question. Maybe just on the AI presentation report, on Slide 15, as you guys are thinking about the go-to-market strategy and the monetization there, do these AI products lend themselves to more pricing power than some of the non-AI products, improving kind of revenue per client? Or, given the current environment where there's some choice of cost, is it helping offset some of that with the productivity improvement that you're able to show to clients? And just in general, from a timing perspective, did you see any uplift from these products as a start hitting more clients or there's more traction gain from an adoption perspective?

It's a broad question. I would say that AI is going to help us in multiple ways improve the value proposition for clients, in terms of our ability to do more for them probably at less cost, the ability for us to provide them more insights. When I look at what we're planning to do across each one of the three over the course of the next year, in terms of redoing the customer experience, and making it more AI forward, I think our clients are going to love that. And I think that's going to help us not only keep our existing clients, but I think it's going to allow us to attract new clients as well. The productization of AI, I think, is still to be determined. And I think there are areas where we will add that into the bundles as a way to enhance and support the price increases that we've just talked about and driving additional value. And then I think there are other components of AI that will have such value to the customer that I think the customer will be willing to pay for that. Think of our retention insights where our clients that are using that, our compensation insights that we're providing. Again, where else can you get if you're a small medium-sized business owner, relative to that information to tell you whether or not you're paying your chef the right amount or the wrong amount. And we have over 250 million data points. Those are compensation surveys. Every large company in America can buy them. Small business owners have never had access to that kind of information. That's something we think is valuable. We think they'll pay more for it. So again, I think AI is going to be very interesting as we try to productize it. We're going to try to improve the customer experience. We're going to try to add more value to our products and differentiate ourselves because very few players are going to have the depth of insights and information from our data that we can provide. Inside the technology. And then at the end, I think there's going to be additional products and services that we're going to be able to charge incremental for because they're going to provide more value or simply things are have never been available to small, medium-sized businesses. And that's one of the great things I think Paychex, Inc. has done historically is we democratize these things that are only for big businesses. Right? That's why that it's our 401k business. When you look at our insurance business, it's in the low end of the low end of the customer segment where not a lot of people don't want to go or they don't know how to go and do it profitably. We're going to continue to look for ways that we can drive AI into our products for all of our customers.

Thank you, guys. Happy holidays.

Happy holidays.

We'll take our next question from Kartik Mehta with Northcoast Research. Your line is open.

Hey, good morning, John and Bob. Hey, John. You know, you've talked about customers being a little bit more price conscious, especially around where the economy is. But then you also said you feel good about getting the price realization that you were originally anticipated. I'm wondering, you know, just trying to make sense of those comments if customers are being more cost-conscious. Will they not push back on pricing, or are you doing something different? To make sure that doesn't happen?

Well, I think you gotta separate the world. Right? I think once you're a customer of ours, we're gonna do everything we can to make sure that you love us and that we're providing additional value and support to you to the point where you're saying, yeah. This is worth what I had. And quite frankly, then you've got the whole prospect area. What I would say, usually, go out into the market what we see. People are shopping. They want a lot of things. They're not willing to pay they're not willing to pay, or they're only gonna pay a certain amount. For what they're going to do. And what we're seeing is they're picking the lower the lower bundles or they're not attaching as many things. It's not that we're not getting attachment. Let's be very clear. We're getting the attachment. We're just not getting the attachment at the rate that we had put in the plan which was, which is what we assumed. Know if that answers your question or not.

No. That helps that helps. Hey, Bob. Just a question for you on your buyback. Seems like the buyback was higher this quarter than you've done in the past. In the past, your strategy has been, let's do enough to offset dilution. But seems like this time is a little bit more. I'm wondering, is that a change in strategy, a one-quarter event, or is this something you can continue doing?

Yeah. Good question, Kartik. You I mean, we had an existing authorization out there. We had capacity on it. And as you mentioned, I think our philosophy hasn't necessarily changed. We typically try to maintain a flat share account and buy back shares. The offset dilution. You know, that being said, I think if you go back six months ago when we kind of closed out last year and provided our outlook for this year. I think as we sit here today, I don't think John and I believe that our future growth opportunities are any less today than they were six months ago. And, you know, six months ago, the stock was in the in the January. And so, hey. We're gonna continue to focus on the fundamentals. I know we're gonna continue to manage the business to try to continue to be a high-quality compounder. And my hope is over time, that comes back into favor. And opportunistically, I looked at where the value was and pulled forward some future purchases. And really no change in philosophy, just more opportunistic Kartik.

Perfect. Thanks, Bob. I appreciate it. Hope you and John have a great holiday.

Hey. Good luck on Sunday. Go Bills.

We'll talk about that later.

We'll move next to Scott Darren Wurtzel with Wolfe Research. Your line is open.

Hey. Good morning, guys, and thanks for taking my questions here. Bob, just had a question on the sort of 3Q guide and calling for total revenue growth of 18%. If I kind of do some back of the envelope math and assume some degree of acceleration on the PEO side of the business as you lap the MPP headwinds. You know, it implies not really too much change on the MS side, and I'm just trying to kind of square that with some of show up in fiscal 3Q. So any, you know, color you can give on the different moving parts there would be super helpful.

Yeah. I mean, again, I don't want to get into the habit of giving timing around, you know, Paycor form filing revenue that they quarterly guidance. We try to give you color and obviously I try to set myself up so I can at least be in line with the numbers. So we expect the business, as you mentioned, you're going to see acceleration like we did this quarter with the PEO, in insurance. We're gonna anniversary, you know, the annual enrollment in January and some of the headwinds from last year. We're going to continue to make progress on Paycor integration, the synergy realization where we had success, you know, that revenue is going to start flowing into the back half of the year. So you know, I'm, you know, sitting here in the middle of the year, we still have selling season. There's probably an element of conservatism in there, but we would expect the business to continue to accelerate.

Got it. That's helpful. And then just on the AI side, I know you guys mentioned having sort of, like, an AI-powered sales engine. Just wondering how you know, how much that's deployed across your Salesforce, and any noticeable productivity gains that you're seeing off of that? Thanks.

Yes, Scott. I would say that we launched it maybe it's been sixty days ago, into a pilot group. And, it took actually, it went rogue on us is what happens. Once we were gonna do a pilot and then people started hearing about started demanding it. So it's early on. We'll certainly use it during selling season. It's a pretty powerful tool in we're pretty much fully deployed at this point in time within the Paychex, Inc. Salesforce. We're still doing some additional integration work on the Paycor side in inside their go-to-market systems. But the sales teams are loving it at this point in time.

Okay. Thanks, guys.

Yep.

We'll take our next question from Jason Alan Kupferberg with Wells Fargo. Your line is open.

Good morning, guys. Thanks. So I'm wondering just in the Management Solutions segment, if you expect the organic growth rate to improve off the current 4% levels just as we move into the second half? And then just any thoughts on a realistic organic growth rate for the MS business once you lap Paycor?

Yeah. I mean, we definitely expect it to get better in the back half of the year, Jason. I mean, I don't wanna give a longer-term growth until we, you know, get through this year with the integration. And, obviously, synergy realization plays into that. But, you know, we expect some modest acceleration to the organic growth rate in Management Solutions, probably moving closer towards the, you know, 5% range, over time, but that definitely there is some acceleration there in the back half of the year.

Understood. Understood. And then I wanna just ask a follow-up on PEO. I know we've talked about it already out on the call, but you're at 4.5% year to date and you'll need to do, I guess, seven and a half percent in the second half to get to the lower end of the six to eight range that you're pointing us to. And obviously, we know the lapping of the comps etcetera. But, you know, maybe if you can just talk through any other factors driving the acceleration and just some commentary on your visibility to kind of get three points of acceleration from first half to second half?

It's a good question. I would start with pointing to the three points of acceleration that happened this quarter relative to last quarter. And again, some of that is, I know there's been some confusion around it and concern and, you know, a lot of it you know, there's strong execution there for sure. As I mentioned, you know, we had double-digit demand and really strong retention again this quarter. But some of it is just the easier compare, Jason, as you move into the half of the year. So we just anniversaried in October the annual enrollment. Last year, there were some headwinds from that. You know, that's probably only 25% of the M enrollment is in October. The rest of it is in January. So you're going to have another lapping or anniversarying of the enrollment. And the headwind from last year. So the comps are just gonna get better. So it's a combination of the comps getting better and we continue to see strong execution in the business. As I mentioned, I mean, that 6% number was weighted down from some of the challenges that we see in the agency. PEO grew high single digits in the quarter. So we feel really good about where we are, with the PEO and as we move into the back half of the year.

Okay. Understood. Enjoy the holidays. Thanks.

Happy holidays.

Thank you. At this time, there are no further questions in queue. I will now turn the meeting back to the presenters for any additional or closing remarks.

Thank you, Coy. Listen, appreciate everybody, being with us here Friday before the holiday. So, just to summarize, we delivered a solid double-digit revenue and adjusted operating income growth this quarter. I'm very proud of the team and all the hard work that's went in. This has been a challenging year. For both the Paychex, Inc. team and the Paycor team. You know, coming together, working together, you know, there as you can imagine, going through integrations like this are always challenging. From an emotional side and a cultural side and a people side. You have to make some tough decisions. Everyone has to deal with change. And I've just been so proud, of the team. Not only the Paychex, Inc. team, but the Paycor team. As you know, we've had great employee retention there, and we've brought on some great talent. Into the organization. And there's no question to me, that we're better together. And I think as we continue to come together, as an organization, around a one paycheck strategy that we're executing. I really think there's tons of opportunity. And that's why Bob said before, this combination added $10 billion of total addressable market. And so we like the runway in front of us. We like the team we have. And we're committed to executing as we go into 2026. So we're very proud of the significant progress we've made. Our latest AI advancements, very proud of the innovation is being driven across all the platforms. I really think it's going to further differentiate us and position Paychex, Inc. for growth. Margin expansion, which we're known for, and really leadership in the human capital management industry as we enter this new AI era. That we're all entering. So thank you for your continued support and interest in Paychex, Inc. and I hope everyone has a happy Hanukkah and a happy holidays.