"We are on track to achieve targeted Paycor revenue synergies and exceed our initial cost synergy expectations. Our fiscal year 2026 cost synergy target remains approximately $90 million." - John Gibson
Paychex delivered a robust start to fiscal year 2026, with total revenue up 17% year over year to $1.50 billion, led by Management Solutions (MS) growing 21% on the back of Paycor integration and higher revenue per client. PEO and Insurance Solutions grew 3%, aided by rising average worksite employees. The company reaffirmed its outlook and raised adjusted EPS guidance to grow 9%–11%, citing stronger confidence in cost and revenue synergies from the Paycor deal. Management highlighted a multi-year opportunity to monetize Paycor’s client base through cross-sell (ASO, PEO, retirement), supported by AI-enabled tools and enhanced partner channels. The quarter featured strong working capital generation and meaningful free cash flow, with $718 million of cash flow from operations and a free cash flow of $662.5 million. The beta of the quarter remains the Paycor integration and AI-driven product enhancements, with margin expansion targeted at roughly 43% adjusted operating margin for the year. Near-term risks include at-risk revenue headwinds in the early 2026 period (notably in the PEO/MPP mix in Florida) and the usual integration execution risk as the two organizations operate as one Paychex. Overall, the setup remains favorable for long-term value creation through revenue synergies, cross-selling, and AI-enabled differentiation in a resilient small-business environment.
Key Performance Indicators
Revenue
1.54B
QoQ: 2.05% | YoY:18.91%
Gross Profit
1.13B
73.13% margin
QoQ: 0.41% | YoY:22.43%
Operating Income
541.90M
QoQ: -21.67% | YoY:12.47%
Net Income
383.80M
QoQ: -26.09% | YoY:1.03%
EPS
1.07
QoQ: -25.69% | YoY:0.94%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $1.54B, up 18.9% YoY; QoQ growth 2.1% per reported metrics.
Gross profit: $1.126B, up 22.4% YoY; gross margin 73.13%.
EBITDA: $541.9M; EBITDA margin 35.18%; Adjusted operating income margin 40.7%.
Revenue and profitability metrics underpin the core investment thesis for PAYX in QQ1 2026:
- Revenue: $1.54B, up 18.9% YoY; QoQ growth 2.1% per reported metrics.
- Gross profit: $1.126B, up 22.4% YoY; gross margin 73.13%.
- EBITDA: $541.9M; EBITDA margin 35.18%; Adjusted operating income margin 40.7%.
- Operating income: $541.9M; operating margin 35.19%.
- Net income: $383.8M; net margin 24.92%.
- Diluted EPS: $1.60 (GAAP); Adjusted diluted EPS: $1.22 (+5% YoY).
- Management Solutions (MS) revenue: $1.2B (+21% YoY), driven by Paycor and higher product penetration; Paycor contributed ~17% to MS growth.
- PEO & Insurance Solutions revenue: $329M (+3% YoY); worksite employee growth cited as evidence of ongoing PEO momentum.
- Cash flow: Operating cash flow $718.4M; free cash flow $662.5M. Cash at end of period $1.6346B; net debt reported as negative (cash greater than borrowings).
- Leverage and liquidity: Total borrowings ~ $5.0B; cash and investments ~ $1.7B; net cash position supported by robust cash generation.
- Guidance: FY2026 total revenue growth 16.5%–18.5%; adjusted operating margin around 43%; adjusted EPS growth 9%–11%; revenue synergies 30–50 bps; Q2 revenue growth ~18% and adj. operating margin ~41%.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
1.54B
18.91%
2.05%
Gross Profit
1.13B
22.43%
0.41%
Operating Income
541.90M
12.47%
-21.67%
Net Income
383.80M
1.03%
-26.09%
EPS
1.07
0.94%
-25.69%
Key Financial Ratios
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management insights and quotes by themes:
- Strategy and integrations: John Gibson emphasized that Paycor integration remains on track with cost synergies near $90 million for FY2026 and that revenue synergies are ramping, including cross-sell into Paycor’s ~50,000 clients. He noted: “We are on track to achieve targeted Paycor revenue synergies and exceed our initial cost synergy expectations. Our fiscal year 2026 cost synergy target remains approximately $90 million.”
- AI and product innovation: Gibson highlighted AI-driven capabilities (AI Insights, HR guidance tool, Agenic AI) and the broader AI rollout across the organization to boost efficiency and client value; “Paychex leads the digital and AI-driven transformation of human capital management. We deliver pragmatic AI solutions that drive measurable value for our clients and our business.”
- PEO momentum and Florida headwinds: The team described mid-single-digit worksite employee growth in PEO and acknowledged Florida enrollment headwinds as a near-term drag that will anniversary later in the year; Schrade commented on PEO strength and PEO/agency mix dynamics, with Florida being the primary regional challenge in the near term.
- Demand environment and cross-sell: John noted demand remained stable with solid RPO bookings; Bob added that Paycor recurring revenue grew in line with expectations and is expected to be double-digit for the full year. The Q&A underscored that cross-sell momentum is building with notable wins (e.g., multi-thousand-employee ASO deal) and pipeline expansion via Paycor client engagements.
- Capital allocation and shareholder returns: The company returned $549 million to shareholders in the quarter (dividends and buybacks) and maintained a strong ROE (12-month rolling ROE at 40%.).
We are on track to achieve targeted Paycor revenue synergies and exceed our initial cost synergy expectations. Our fiscal year 2026 cost synergy target remains approximately $90 million.
— John Gibson
Paychex leads the digital and AI-driven transformation of human capital management. We deliver pragmatic AI solutions that drive measurable value for our clients and our business.
— John Gibson
Forward Guidance
Forward-looking analysis and execution trajectory:
- Revenue trajectory: FY2026 revenue growth guidance of 16.5%–18.5% remains intact, with revenue synergies contributing 30–50 basis points per annum. The company expects MS to grow 20%–22% and PEO/Insurance Solutions to grow 6%–8%.
- Margin and profitability: Adjusted operating margin targeted around 43% for the year, with Q2 guidance implying ~41% adj. operating margin. The mix shift from Paycor integration and ongoing synergy realization supports margin expansion, though near-term headwinds from Florida enrollment and at-risk revenue may temper the pace.
- Earnings: Adjusted EPS growth targeted at 9%–11% for the year; the uplift relative to prior guidance reflects higher confidence in synergy capture and operating leverage post-integration.
- Line-item dynamics: Interest income guidance remains $190–$200 million; tax rate guidance at 24%–25%.
- What investors should monitor: (1) Paycor revenue synergy realization and cross-sell velocity into Paycor’s client base; (2) the trajectory of PEO enrollment in Florida and other states with MPP; (3) progress on AI-enabled product adoption and its impact on client retention and new-client acquisition; (4) the pace of cost-flow-through from synergies into the bottom line; (5) channel partner performance (Brokers, CPAs) and Bill Pay adoption to broaden payments ecosystem.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
PAYX Focus
73.13%
N/A
N/A
N/A
RHI
36.90%
2.88%
1.32%
79.13%
MAN
1.00%
4.04%
0.27%
120.93%
UPWK
78.30%
20.10%
6.35%
11.69%
NSP
16.60%
3.65%
42.90%
16.62%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Investment thesis and outlook for PAYX rests on a favorable mix of near-term momentum and long-run value creation through integration-driven synergies and AI-enabled product leadership. The QQ1 2026 results demonstrate solid revenue growth (17%), a robust margin trajectory (adjusted OI margin ~40.7% with a path to ~43% for the year), and strong cash generation. The Paycor integration is advancing, with net revenue synergy progress confirmed by management and a pipeline of cross-sell opportunities that could meaningfully lift MS and overall revenue cadence into the back half of FY2026. AI-enabled capabilities (AI Insights, HR guidance, Agenic AI) are positioned to enhance client outcomes, support pricing power, and improve efficiency across the organization, reinforcing a differentiated value proposition for SMBs and mid-market clients. The financial position remains healthy, with a substantial cash position and a negative net debt, enabling continued investments in growth initiatives and disciplined capital returns. Primary risks include near-term Florida PEO headwinds and broader macro sensitivity to SMB capex decisions, but execution in the Paycor integration and revenue synergies should unlock incremental upside in earnings and cash flows. Relative to direct peers in HR/payroll and HCM outsourcing, PAYX offers a compelling combination of scale, integration leverage, and AI-driven differentiation, supporting a constructive long-term investment stance for PAYX holders.
Key Investment Factors
Growth Potential
Tactical growth levers include (a) cross-selling Paychex solutions into Paycor’s ~50k clients, (b) upmarket expansion of ASO and retirement services enabled by Paychex platform breadth, (c) expanding Bill Pay into accounts payable and future AR capabilities, and (d) leveraging AI-driven insights (AI Insights, HR guidance) to improve client outcomes and pricing power. Long-term upside includes expanding PEO penetration in new markets beyond core states, continuous product upgrades, and potential international expansion (US, Europe, India) via cloud-based HCM offerings.
Profitability Risk
Key risks include (a) execution risk of full Paycor integration and realization of anticipated revenue and cost synergies; (b) near-term PEO headwinds from the Florida plan and other at-risk revenue dynamics; (c) competitive pricing pressure in the PEO/ASO space and potential underpricing by peers; (d) macroeconomic volatility affecting SMB hiring and payroll spend; (e) regulatory shifts impacting employment-related services and healthcare costs; (f) integration/data privacy considerations tied to AI-based tooling.
Financial Position
Liquidity and capital structure remain robust, with operating cash flow of $718M and free cash flow of $662.5M in Q1. Cash and cash equivalents stood at $809M with total borrowings around $5B; however, the company reported a net cash position due to substantial cash generation, yielding a negative net debt of approximately $-737.6M. The balance sheet reflects strong asset liquidity ($16.66B total assets) and a solid equity base ($3.97B). ROE remains elevated (12-month rolling at ~40%), underscoring efficient capital deployment and shareholder value creation.
SWOT Analysis
Strengths
Integrated Paychex platform with Paycor expansion, enabling upmarket cross-sell (ASO, PEO, retirement) to Paycor’s ~50,000 clients.
Healthy cash flow generation and strong liquidity (CFO $718M; FCF $662.5M; net cash position supports growth investments and shareholder returns).
High client retention and mid-single-digit PEO worksite employee growth, with record retention and double-digit PEO bookings.
AI-driven product enhancements (AI Insights, HR guidance tool) and ongoing automation (Agenic AI) enhancing efficiency and client value.
Strong revenue growth led by MS (+21%), diversified by PEO/Insurance (+3%), with improving margin profile (adjusted OI margin guidance ~43%).
Weaknesses
Near-term Florida PEO enrollment headwinds creating temporary headwinds in PEO growth and mix.
Agency growth and rate-headwinds (workers’ comp) potentially tempering category-wide momentum.
Integration complexity with Paycor introduces execution risk and potential short-term mix volatility.
Reliance on SMB market; macro weakness could dampen SMB hiring and HR outsourcing spend.
Opportunities
Broaden cross-sell into Paycor’s client base leveraging propensity models and improved go-to-market synergy.
Bill Pay expansion to accounts payable and later accounts receivable to deepen embedded payments in HCM stack.
Continued AI-driven differentiation to improve pricing, upsell opportunities, and client advisory capabilities.
International expansion (US, Europe, India) leveraging cloud-based HCM solutions.
Expanded broker/CPA channel programs (Partner Plus, CPA Partner Pro) to accelerate referrals and client acquisitions.
Threats
Macro uncertainty and SMB budget constraints could compress demand or delay decision cycles.
Aggressive competitive dynamics in the PEO/ASO space could pressure pricing and win rates.
Regulatory changes (tax, healthcare, work visas) could impact client payroll/HR spend and compliance costs.
Execution risk from large-acquisition integration could delay realized synergies.