Paychex Q1 FY26 slides: Revenue surges 17% on Paycor acquisition, stock dips

Introduction & Market Context

Paychex, Inc. (NASDAQ:PAYX) released its first quarter fiscal 2026 financial results on September 30, 2025, showcasing strong revenue growth primarily driven by its recent Paycor acquisition. Despite the positive headline numbers, the stock traded down 2.86% in premarket trading at $124.86, continuing a pattern of investor caution that began with the previous quarter’s results.

The human capital management (HCM) company, which serves approximately 800,000 clients and manages about 2.5 million worksite employees, reported significant growth in adjusted metrics while facing integration costs that impacted GAAP results. With a market capitalization exceeding $46 billion as of late September, Paychex continues to position itself as an industry leader in HR outsourcing solutions.

Quarterly Performance Highlights

Paychex reported substantial year-over-year growth in its first quarter, with total revenue increasing by 17% to $1.54 billion compared to $1.32 billion in the same period last year. Adjusted operating income grew by 15% to $627 million, while adjusted diluted earnings per share rose 5% to $1.22.

As shown in the following chart of quarterly financial performance:

The revenue growth was primarily driven by the Paycor acquisition, which contributed approximately 17% of the overall revenue increase. Management Solutions revenue saw the most significant growth, rising 21% to $1.16 billion, while PEO and Insurance Solutions revenue increased by a more modest 3% to $329 million.

The company’s revenue breakdown and key growth drivers are illustrated in this detailed analysis:

Despite the strong adjusted results, GAAP metrics painted a different picture. Operating income decreased by 1% to $541.9 million, net income fell by 10% to $383.8 million, and diluted EPS declined by 10% to $1.06. These decreases reflect the significant acquisition-related costs of $84.8 million during the quarter.

Detailed Financial Analysis

The company’s comprehensive financial results for the first quarter show the contrast between GAAP and non-GAAP metrics, highlighting the impact of acquisition-related costs:

Paychex maintained a strong financial position with $1.72 billion in cash, restricted cash, and total corporate investments as of August 31, 2025, slightly up from $1.71 billion at the end of the previous fiscal year. The company’s net debt position improved marginally to $3.25 billion from $3.26 billion, with a net leverage ratio of 1.2x, down from 1.3x.

The following financial highlights demonstrate Paychex’s solid financial foundation:

Operating cash flow increased significantly to $718.4 million from $546.1 million in the same period last year, while free cash flow grew to $662.5 million from $510.5 million. This strong cash generation supported the company’s shareholder returns, with $389.1 million paid in dividends and $160 million used for share repurchases during the quarter.

The company’s investment portfolio continued to generate solid returns, with an average rate of return of 3.7% on combined funds:

Strategic Initiatives & Paycor Integration

Paychex highlighted several business achievements during the first quarter, emphasizing the strategic benefits of the Paycor acquisition and operational execution across key metrics:

The integration of Paycor represents a significant strategic move for Paychex, unifying two leading SaaS HCM platforms and providing cross-selling opportunities. Management noted they are on track to achieve targeted revenue and cost synergies from the acquisition.

The company also highlighted its continued industry recognition, including being named to Fortune’s America’s Most Innovative Companies list for the third consecutive year and being recognized as one of the World’s Most Ethical Companies by Ethisphere for the 17th time since 2007:

Looking at historical performance, Paychex has demonstrated consistent growth over the past five years, with total revenue increasing at a 7% CAGR from fiscal 2021 to fiscal 2025, while adjusted diluted EPS grew at an 11% CAGR during the same period:

Forward-Looking Statements

For fiscal year 2026, Paychex maintained its revenue growth outlook of 16.5-18.5% but slightly increased its adjusted diluted EPS growth projection to 9-11%, up from the previous guidance of 8.5-10.5% provided in June:

Management Solutions revenue is expected to grow 20-22%, while PEO and Insurance Solutions revenue is projected to increase 6-8%. Interest on funds held for clients is anticipated to be between $190 million and $200 million, and adjusted operating income as a percentage of total revenue is expected to be approximately 43%.

The company’s maintained revenue guidance and slightly increased EPS outlook suggest management remains confident in its ability to execute its strategy despite integration challenges. However, the market’s reaction indicates investors may be taking a more cautious view, particularly as the company navigates the complex process of integrating Paycor while maintaining its industry-leading margins.

As Paychex continues to execute its growth strategy and realize synergies from the Paycor acquisition, investors will be closely watching whether the company can deliver on its ambitious fiscal 2026 targets while successfully managing integration costs and maintaining its strong financial position.

Full presentation:

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