Good morning, and welcome to Paychex' Fourth Quarter Fiscal 2025 Earnings Call. Participating on the call today are John Gibson and Bob Schrader. [Operator Instructions] 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 Bob Schrader, Paychex' Chief Financial Officer. Robert L

Thank you for joining us to discuss Paychex fourth quarter and fiscal year 2025 performance. This morning, we released our financial results for the quarter ended May 31, 2025. You can access our earnings release and presentation on our Investor Relations website. We anticipate our Form 10-K will be filed with the SEC before the end of July. This teleconference is being webcast and will be archived on our website for approximately 90 days. Today's call includes forward-looking statements that refer to future events and involve some risks. 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. A description of these items along with a reconciliation of the non-GAAP measures can be found in our earnings release. I would now like to turn the call over to John Gibson, Paychex President and CEO.

Thanks, Bob. I will start the call today by sharing key business highlights for the fourth quarter and fiscal year, and then Bob will discuss our financial results and outlook. We will then, of course, open it up for your questions. Given that the Paycor acquisition has closed and we have completed key integration activities to bring the 2 companies together, we are now operating as 1 Paychex and not 2 different companies. Our comments today will reflect that fact. Paychex demonstrated solid performance this year against our strategic objectives, underscoring our unique ability to effectively navigate dynamic market conditions while continuing to enhance our customer experience and market position and also maintain our industry-leading operating margins. We delivered 10% revenue growth in the fourth quarter, reflecting continued execution across the business and the addition of Paycor. For full fiscal year 2025, we achieved 6% revenue growth and 6% growth in adjusted diluted earnings per share. We also delivered 60 basis points of adjusted operating income margin expansion in the face of significant ERTC headwinds. Our client retention rates increased year-over-year, underscoring the compelling value we provide as a trusted partner in our clients' growth and success. We grew the number of clients we serve to approximately 800,000 and increased the number of HR outsourcing worksite employees to 2.5 million this year. We have made significant progress on the Paycor acquisition, surpassing our expectations and setting a strong foundation for future success. Based upon our early progress on the integration and our increased understanding of the opportunities we have gained since closing, we are raising our cost synergy expectations to approximately $90 million in fiscal year '26. The actions we have already taken give us high confidence in achieving the synergies. In addition, we have identified a list of additional synergy opportunities that we are actively pursuing. We also believe that there are additional opportunities to invest for future growth, and we will strategically accelerate those investments as the year progresses. We previously outlined to you the business unit structure, leadership continuity and retention of key Paycor talent to mitigate integration risk. Customers are continuing to utilize their existing platform, minimizing the disruption to our client base. Our retention remains strong, and the reception to the combined offerings has exceeded our expectations in their early days. I'll share some of the recent integration accomplishments and focus areas for fiscal year '26. During the quarter, we defined how our HCM platforms will generally serve our market segments moving forward. Paychex Flex will focus on companies with up to 99 employees, and the Paycor platform will target the upmarket enterprise segment above 100 employees. SurePayroll will continue to serve the small business do-it-yourself marketplace. This approach provides the market with the most comprehensive, flexible and innovative HCM solutions for organizations of all sizes and needs. We also completed a comprehensive territory assessment and reassignment review across the sales teams that aligns to these market segments. We have expanded and optimized our sales coverage nationwide in the fourth quarter. Sales representatives who transition territories received comprehensive training on the complete suite of HCM solutions they can now offer. We are encouraged by how sales hiring, retention and tenure developments are trending going into the fiscal year. While all of these changes did create some internal disruption and took many of our sales resources out of the field for a portion of the fourth quarter, we believe now is the time to make these changes to best position us to win in the marketplace. With newly trained sales reps on our broad set of capabilities and solutions, realigned territories and a fully staffed sales team, we believe we are well positioned entering the new fiscal year. While we have made significant strides in integrating the teams, optimizing our go-to-market approach and capturing cost synergies, we're most enthusiastic about the opportunities for revenue synergies. While we expect to realize revenue synergies over the next several years, I'm pleased we have already secured our first Paycor customers on our ASO and PEO and are seeing promising growth in our pipeline. Notably, the PEO sale was referred by a Paycor broker, and this was even before we officially launched the product into the client base. We continue to believe the biggest opportunity is the cross-sell of Paychex retirement, ASO and PEO solutions into the Paycor base of more than 50,000 clients. We also believe there are opportunities to take Paycor's capabilities into the Paychex client base in the years ahead. We are pleased at how quickly our teams were able to complete the bulk of the backing integrations required to cross-sell into Paycor's base and realize these revenue synergies. We also remain excited about Paycor's embedded solution, which enables seamless integration of our payroll and HR technology stack into our partners' platforms. With thousands of potential partners, we are early in executing against this revenue opportunity and are actively scaling and investing in it. We believe the synergies between the companies, coupled with our mutual focus on innovation and customer-centric solutions, position us to continue to deliver strong returns and drive long-term shareholder return. A core component of our go-to-market strategy involves cultivating long-standing relationships with channel partners such as brokers, CPAs and banks, just to name a few. More than half of our new business originates from channel partner referrals. Following the acquisitions, we introduced the Paychex Partner Plus program to brokers to foster relationships and drive mutual growth. Together, we now have a broader suite of solutions to offer brokers, which can supplement their offerings to clients and the Partner Plus program provides a structured framework designed to safeguard mutual clients from competing products. To date, over 1,000 brokers are enrolled in a program and we are hearing positive feedback, which we believe indicates a strong foundation for retaining and expanding this important referral channel. The share of Paycor field bookings referred by brokers increased this past fiscal year. We are also actively gathering feedback from brokers, CPAs and banks to enhance our loyalty programs, designed to ensure we maintain the strongest partner program in the HCM industry. We also recently launched Paychex Partner Pro platform, a new portal designed to provide accountants quick access to critical data, reporting and insights for their clients using Paychex Flex. This innovative platform transforms how CPAs manage their portfolios by providing a centralized hub for accessing client payrolls and HR data, resolving issues and identifying missing information. This is empowering them to really operate with greater efficiency and proactively serve their clients. Our PEO business continues to also perform well, achieving solid worksite employee growth this quarter. Similar to what we shared with you last quarter, while the PEO business remains strong and participant levels in our health plans across the country continue to increase, enrollment in our Florida at-risk medical plan did decrease year-over-year. We also continue to see a trend among employees opting for lower-cost health plans to offset the rising health care costs. While these factors continue to pose a pass-through revenue headwind, they do not impact our earnings or our PEO value proposition. One of the benefits of the PEO model is that it empowers small businesses to truly punch above their weight and offer benefits comparable to those of Fortune 500 companies. This enables them to attract and retain top talent in today's still very competitive labor market. We remain bullish on the PEO space given our scale and capability in this segment and just how greenfield the opportunity remains, both inside and outside of our client base. Now turning to the macro environment. We are observing a mix of both optimism and uncertainty within the market and our client base. Many businesses are frozen as they wait for more clarity about a number of macro issues such as tariffs, inflations and taxes. The hard data continues to indicate that small businesses remain fundamentally healthy despite the headlines. Our small business employment watch revealed stable employment levels with moderation in hourly wage inflation in the recent months. Our data does not currently show any signs of recession. We also see our interactions in the market that the uncertainty is prompting businesses to exercise caution when making decisions and being cautious about how much they are spending on products and services. We have also seen an increase in bankruptcies and financial distress in the micro end of the market and in our client base in the fourth quarter. Many businesses, I think, on the edge of failure may have decided not to fight that new headwinds they see in front of them. We also saw losses due to increases in business combinations and mergers increase more than typical. Both are signs of businesses making strategic decisions based upon their view of the current and future environment. We will continue to monitor the hard data and trends in the market and take the appropriate steps to position Paychex to win in any market conditions. We will also continue to take the actions needed to protect our long-standing track record of financial strength even in challenging times. I am proud of what the entire team at Paychex and Paycor have accomplished together. I would like to thank our dedicated employees for their hard work and contribution in achieving these many successes. They have accomplished a lot in a very short period of time. There has been a lot of change internally and externally to navigate, and they have shown their dedication and real resiliency to deliver for our clients and for Paychex, and I am internally grateful for that. We are truly better and stronger together as One Paychex, and we believe we are better positioned than ever before to deliver on the future of HCM and help businesses succeed. I'll now turn it over to Bob to provide an update on our financial results and our outlook. Bob?

Yes. Thank you, John. I'll start with a summary of our fourth quarter and full year financial results, and then I'll share our outlook for fiscal '26. Starting with Q4. Total revenue for the quarter increased 10% to $1.4 billion. Excluding Paycor, total revenue increased 3%. Management Solutions revenue increased 12% to $1 billion for the quarter, driven primarily by the addition of Paycor as well as higher revenue per client from price realization and product penetration. Excluding Paycor, Management Solutions increased 3% in the quarter. PEO and Insurance Solutions revenue increased 4% to $340 million for the quarter, driven primarily by solid growth in the number of average PEO worksite employees. Outside of the at-risk plan headwinds that John discussed, PEO continues to perform well. Interest on funds held for clients increased 18% to $45 million for the quarter, primarily driven by the inclusion of Paycor balances. Excluding Paycor, interest on funds held for clients increased 3%. Total expenses for the quarter, excluding the acquisition of Paycor and the prior year cost optimization initiatives, increased 1%. Operating income margins for the quarter were 30.2% and adjusted operating income margins for the quarter were 40.4%, an increase of approximately 20 basis points driven by increased productivity and cost discipline, offset by the Paycor acquisition. Excluding Paycor, adjusted operating income margins expanded by approximately 110 basis points. Diluted earnings per share decreased 22% to $0.82 per share and adjusted diluted earnings per share increased 6% to $1.19 in the fourth quarter. Now let me turn to our results for the full year fiscal 2025. Total revenue grew 6% to $5.6 billion; Management Solutions revenue increased 5% to $4.1 billion; PEO and Insurance Solutions increased 6% to $1.3 billion; and interest on funds held for clients increased 10% to $162 million. Total expenses for the year, excluding the acquisition of Paycor, increased 1%. Operating margins were 39.6%, and that's on a GAAP basis. Adjusted operating margins were 42.5%. As the best operators in the business, we are constantly seeking ways to enhance operational efficiency. In fiscal year 2025, we expanded adjusted operating income margins by approximately 250 basis points, excluding the impact of Paycor and the ERTC headwinds. Diluted earnings per share decreased 2% to $4.58 a share and adjusted diluted earnings per share increased 6% to $4.98 a share. We continue to exceed the Rule of 50, demonstrating our ability to achieve consistent revenue growth with industry-leading profitability. Now let me turn to our -- an overview of our financial position. Our financial position remains strong with cash, restricted cash and total corporate investments of $1.7 billion and total borrowings now of approximately $5 billion as of May 31, 2025. Cash flow from operations was $2 billion for the fiscal year, primarily driven by net income. We returned over $1.5 billion to shareholders during the fiscal year in the form of cash dividends and share repurchases, and our annual return on equity remains robust at 42%. As we look ahead to our fiscal 2026 outlook, we assume the current fluid macro environment will persist. We believe we are better positioned than ever before to win in the digital- and AI-driven era of human capital management. Our solutions are mission-critical, and we have ample opportunity to continue driving sustainable growth and enhanced operational efficiency. Total revenue for fiscal '26 is expected to grow in the range of 16.5% to 18.5%. We expect the recent Paycor acquisition to contribute approximately 12 to 13 points of that growth. As previously mentioned, we expect revenue synergies to build over the next several years. And in fiscal '26, we expect revenue synergies to contribute 30 to 50 basis points of that growth that I just gave you. Management Solutions is expected to grow in the range of 20% to 22%. PEO and Insurance Solutions is expected to grow in the range of 6% to 8%. And we would expect revenue to accelerate in the back half of the year for PEO and insurance as we begin to anniversary the at-risk revenue growth headwinds we experienced in the back half of this fiscal year. Interest on funds held for clients is expected to be in the range of $190 million to $200 million, which includes the benefit of approximately $1.1 billion of client fund balances from Paycor. These funds are now being managed by the Paychex team and are part of the Paychex portfolio. Adjusted operating income margin is expected to be approximately 43% and our effective income tax rate is expected to be in the range of 24% to 25% and adjusted diluted earnings per share for next year is expected to grow in the range of 8.5% to 10.5%. Let me turn to the first quarter. We would anticipate total revenue growth in the first quarter to be between 16% and 17% and adjusted operating income margin to be between 40% and 41%. And of course, all that is based on our current assumptions, which are subject to change. And with that, I'll now turn the call back over to John.

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

[Operator Instructions] We'll take our first question from Mark Marcon with Baird.

I'm wondering, can you talk a little bit more about some of the distractions just in terms of putting together the sales forces, how long you actually ended up taking them out of the field and in production and how that ended up impacting the fourth quarter? That's the first question. And then how much do you expect that to spill over into the first quarter? You're guiding to potentially a lower top end of the range than your full year guidance. So I'm wondering if there's some residual effects from that. And then can you talk a little bit about the areas that you're really excited about with regards to the revenue synergies and the cross-sales? You mentioned the initial success on the ASO, but obviously, that's really early. How do you think that's going to build over the course of the year beyond the comments about the 30 to 50 bps, but just like where it's happening and what you think it's going to end up doing from a longer-term perspective?

Yes, Mark, thanks for the question. Yes, I would say relative to the sales transformation that we did and go-to-market changes that we made, as you know, we started planning how we were going to approach this when we announced the deal back in January and have done a lot of work and did a lot of work in preparation and waiting for the close. All of the changes that we wanted to make, we made in the fourth quarter. And we made a strategic decision that given the distractions that were already out there with Liberation Day and everything else in the marketplace, that now was the time to go ahead and move as quickly as we could to get everything done. We certainly could have done it at a different pace that would have dragged it potentially into the first quarter of this fiscal year, but we made an election to get all of it out of the way. So we've made all of the changes, the teams are in place. They're in their new territories. We've completed all the training. We had our kickoff of the first week of June, and they're in the field actively selling the broad set of products and the services that we have. I think that probably what I'm most excited about is the early acceptance and the willingness of the Paycor client base to sit down and have conversations with us about the opportunities. And a week after the actual announcement of the sale before we had actually began the go-to-market, we got our first PEO referral. We had went down. They had, had a client -- planned client symposium down in Orlando because of the date of the closing, was able to go down in the following week and picked up our first competitive deal, actually, a takeaway from a competitor, a client that was in California. And then after we launched the ASO within a week, we had a 900-employee client sign up for our ASO, our base ASO product to help them support their growth plans. And what I'm most excited, that client is already committed to actually upgrade into our HR Pro package in August because of the support we've given them. So excited there. I also think there's a lot of opportunity from a technology perspective that we continue to discover. And so like I said, I feel like we're in good shape, and we're well positioned going into this fiscal year.

Mark, can I just add a couple of comments to that? Just on the spillover, I think, as John mentioned, I think we made a strategic decision to get a lot of that disruption behind us. So we would not expect there to be a lot of spillover in Q1 as it relates to kind of the comment on Q1 being a little bit lower than the full year guide. A lot of that is going to be -- there's two things driving that. One is going to be on the PEO and insurance side. We would expect the growth in PEO and insurance to be better in the back half than the front half as we anniversary some of those MPP headwinds. And then just as it relates to the disruption in Q4, I would say, yes, there was some disruption there. I don't think that weighed heavily on the financial results that we just released. Obviously, the numbers were a bit lower than consensus. And I'd tell you, as John and I sat here last quarter and gave the Q4 guide of 10% to 12%, we had a high degree of confidence that we were going to be closing the Paycor deal probably within the next week. And when we got into the next week, we did not anticipate that the investment-grade bond market would essentially be shut down as a result of Liberation Day. And so we ended up closing on the deal. We had a very successful bond offering. But that whole process pushed out, I'd say, a little over a week later than what we had anticipated. And had we closed the deal when we thought we were going to when we provided the guide, we would have been right in the midpoint of that 10% to 12% range. So I just wanted to add that additional color to your question.

We'll next go to Bryan Bergin with TD Cowen.

I just want to follow up here, maybe a little bit on the last point you made, Bob, on a 4Q growth bridge from 3Q and maybe the factors going forward. So as we look at the 3% or so organic Management Solutions growth in 4Q, can you just help bridge some of that deceleration from that 4.8%, I believe, in 3Q? Just talk about some of the changes, whether it's underlying demand, checks, retention, pricing. Obviously, you talked about the sales dynamics there, and that sounds transitory, but just trying to think about as we go forward here, what's kind of transitory versus lasting within Management Solutions?

Yes. So a few things. Maybe I'll talk a little bit about Q4 -- Q3 to Q4 and then just looking at that Q4 rate alone. Certainly, I would say checks were a bit softer in Q4. We expected that. I would say they did come in a little bit softer in Q4 than what we expected. We've done some work around that. A lot of that looks to be more of a mix issue, maybe a little bit smaller client size. You continue to have the MPP enrollment headwind in Q4, that was a bit more than it was in Q3. On the retirement asset side, we've talked a lot about the strength of our retirement business this year. It's been a mid-teen grower. And I would tell you, we're still a strong grower in Q4, certainly close to double digits, but it wasn't growing at the same rate it did in the first 3 quarters because of where the market was. I mean the S&P was down about 6% on average in Q4 versus Q3, so we didn't have as much growth there. And so those are probably some of the bigger ones. And I talked to you guys before that we had a little bit stronger price realization in Q3 with some of our year-end processing. So that kind of bridges you from Q4 to Q3. When we take a step back and we look at the 3%, I think there's a couple of things that we need to kind of adjust for. One, Q4 was a tougher compare. When we look at kind of the timing of our annual price increase, that moves around. It's not the exact same time every year. It moves from different months. And if we went back and looked at last year, we actually picked up, I would say, a little bit of extra based on the timing of the price increase last year relative to where it was the year before. This year was an apples-to-apples comparison, so the price increase timing this year is the same as last year. So we didn't get that benefit. It ends up being a headwind and then we have the MPP enrollment. And so when you adjust those things in Q4, you basically get a Q4 exit rate that is right spot in the range of what was implied in the guidance that I just provided on a full year basis for the organic business. So we feel comfortable about the guide. And when you adjust for Q4, that exit rate is in line with what we're expecting from an organic standpoint next year.

Okay. That's helpful. And then as we think about kind of 2026 and beyond and your client, your go-to-market focus, can you comment on plans as it relates to trying to reaccelerate organic net client growth versus kind of cross-selling emphasis now in the base of clients you've acquired? You mentioned strong client retention year-over-year. But when we just do some of the math on the client count year-over-year and make some assumptions on the Paycor component, just curious how you're thinking about reaccelerating organic Paychex client growth.

Yes, Brian. I don't -- I think that we're going to continue to focus on our growth formula as a company, which includes 1% to 3% organic client growth across the combined businesses. We're going to continue to focus on driving product penetration. We think that's continued -- a big opportunity. And I think that will be a bigger part of the opportunity as we go forward and look at our midterm guidance where we see a lot of opportunity. And we're going to continue to exercise the pricing strength that we have, the value, the ability for us to pass value on to our customers as well. Those have been kind of the key components of our growth strategy. I don't think anything has really changed there. I would say that, and I've said it multiple times, we're going to continue to be disciplined about growth. That client number can be whatever you want it to be if you're willing to spend more than the lifetime value of the customer to acquire the customer. And we're not going to go crazy with promotions. We're not going to give away toasters and other gadgets to try to accelerate a number that you're going to add a client that you have to service and take care of and you're never going to make profit on it. So we continue to look at that in the marketplace. We're going to continue to be aggressive in driving client growth, but we're going to continue to also be Paychex, which we're looking for profitable growth in areas where we can add value to our customers over the long term, have a long-term relationship. So I hope that helps. I think look, it's -- the demand is out there. We feel good about where we're positioned. I think the way we've positioned the go-to market is going to give us a competitive advantage across each of the segments now that we're now focused on. When I look at the investments that we're making, one of the things that's probably not really here is not only have we committed to exceeding the cost synergies that we discussed before, but we've actually identified other opportunities, particularly in back-office efficiencies that we have over what Paycor had that we think we can take, but we're also going to continue to invest. So some of the things we did in the quarter. We've made a decision we're fully investing in the Paycor road map. We're fully investing in the Flex road map this year. We're going to actually invest more in the SurePayroll platform. You'll be hearing more about that as the year. So we've looked at opportunities when we put the investments together. We're investing and accelerating some investments in the Paycor embedded product, which we think has a lot of opportunities in our partner network as well. So embedded in this is some additional investments that we'll be capitalizing on in '26 as well. So it just gives you a little more color on how we're thinking about '26.

And next, we'll go to Samad Samana with Jefferies.

Maybe the first one, just on Paycor and some of the assumptions and admittedly, I'm doing some back-of-the-envelope math on the fly here. But the 12% to 13% contribution for fiscal '26 implies kind of around $700 million at the midpoint for Management Solutions contribution. And then if I think about what Paycor was on track to do in terms of recurring revenue when it was still public, let's call it, a shade under $700 million. So it's not implying a lot of growth for Paycor in fiscal '26. And I'm trying to understand, are you assuming -- is that conservatism? Is there some assumption around churn? And again, I understand I'm doing the numbers on the fly, but just help us reconcile what Paycor was growing versus what you're assuming for Paycor's growth.

Yes. I mean we're still assuming that Paychex is going to -- or Paycor is going to be a strong double-digit grower business. I mean certainly, there's an element of conservatism, I would say, overall, in the guide, Samad. We're in the beginning of the year, and we want to make sure that we can put forward guidance that we're going to be able to come out and deliver. So there's certainly some conservatism over there, but we would expect -- I don't have the exact math in front of me, but certainly, Paycor would be a double- digit grower next year in this plan.

Understood. And then as I think about the integration of the sales teams, any insights you can provide on maybe what percentage of Paycor's sales and marketing organization you guys were able to retain versus are you thinking more about hiring on that side? Or just help us understand how you're thinking about what those changes now look like between the 2 organizations? And maybe where there is some pruning and where there will be additions going forward?

Yes. So let me take that. And again, I'll step back. We stepped back and looked jointly across the entire go-to-market from a sales and market perspective. We had segmentation already built into our go-to-market strategy, salespeople that we're focused in different segments as did Paycor. And what we wanted to do is we wanted to build the best team in the industry, and we want to support that team with the best tools and the best marketing support. So in the quarter, this is what's important. And as Bob said, it was delayed. So there was a lot of conversation about how much could we get done in a short period of time. We combined both marketing organizations and built a world-class marketing organization HCM, combined Paycor and Paycom. We then -- and Paycor. We put together each one of our market teams, relooked at the territories to make sure we were maximizing where we thought territories where we could have the greatest opportunity going to '26. And we took the best of Paychex and the best of Paycor and put them together. At the same time, we increased the head count in sales. So we're fully staffed, and we intend to continue to invest in sales. As we talked about as part of the thesis here, we anticipate growing the sales force at a rate that's higher than historically Paychex has. So in the course of a very short period of time, about 6 weeks, we had all the plans put in place. We went through the change management, went through the training. So we now have segmented sales teams in new territories with new marketing support ready to go. So quite a bit has been accomplished in a short period of time.

Next, we'll go to Tien-Tsin Huang with JPMorgan.

Just want to clarify the impact of the sales disruption and then the comments on the higher bankruptcy and the mergers on the very low end. It sounded like those relatively small and perhaps you would have hit the high end of your guide if it wasn't for the delay in closing of Paycor. I just wanted to make sure I caught all of that.

I think you got it about right. And what I would say relative to the bankruptcies and kind of financial distress type of losses, I would not call those. Again, it's very micro end of it. When we lapped the selling season, we improved retention, client retention year-over- year. So we had a good year of retention. We probably would have been talking about much, much stronger numbers if we hadn't seen what we saw in the fourth quarter. I would also say it's not unusual. And what I say by that, when you have some sort of external shock event, you go back to the financial crisis, you go back to other models that we would look like. When something externally shocks the system, people that were on the edge of saying, do I want to stick it out, sometimes throw in the towel. That's just my view of what you see because it's interesting when you see these type of external shocks where there's a high degree of uncertainty and the outlook in the future, you see an acceleration or pull forward. You also saw that in general bankruptcies. I think if you go back and look at what happened in the fourth quarter, those were up as well through all the government reports as well. But again, very micro and not significant impact to revenue because it's on the lower end of the -- of our client base. And then as I said, even with that slight acceleration in the fourth quarter, we still ended with better retention than we had the year prior, which was very strong, as you know.

Yes, for sure. That makes sense. That's good color, John. Just on the -- just quickly then, just now that you've owned the asset and the cost synergies that you're talking about here, where was that last little bit of cost synergy coming from? I'm just curious if we're trying to collect a list of things that you've talked about in the past. What's been the final piece of the synergies? Where is that coming from?

Yes, Tien-Tsin, I wouldn't say there's anything specific to call out. Obviously, when we started looking at it, we were conservative. We knew the areas that we were going after. I would say that those areas are the same. We were just able to capture some of that sooner than what we expected, and it's really just kind of the math that gives you a bigger number than what we originally thought it was going to be. And then I would say, as John mentioned in the prepared remarks, we've identified a number of other areas that we're still looking at kicking the tires on, and we think there's additional opportunities as we move forward. We'll update you guys as we move through the year. We're hoping to beat that target, but at the same time, we're going to look to potentially balance that with reinvestment in the business. As we've talked about, this is a growth story for us. We didn't do this deal for the cost synergies. We did this to provide an enhanced runway for the -- of growth for the company as we move forward, and we think that we've done that. And so we're going to balance that additional cost synergies with investments as we move forward.

Next, we'll go to James Faucette with Morgan Stanley.

I want to go quickly to your capital allocation plans. And now that you've got the deal closed with Paycor, how should we think about mix between return to investors via incremental buybacks versus reduction in debt leverage, et cetera, and just how you're prioritizing that right now?

Yes. I would say no significant changes in our capital allocation strategy. I think we've been pretty transparent on that. Certainly, we feel like we're well positioned to continue to maintain our dividend policy. Certainly, our #1 focus is investing into the business. We're going to continue to do that. And to the extent that we have excess cash, our primary way to return that to shareholders is through dividend versus share buybacks. I see no change in our philosophy there. We do, do some share buybacks, and that's primarily just to offset dilution. And so I wouldn't say any significant change there. We would expect to have the ability to -- it's certainly an area of focus for me. Not that this transaction creates a lot of leverage for the company, but we -- certainly more leveraged than what we've historically had. And so we'll certainly look to deleverage, and I think that will come fairly quickly, really coming from 2 main areas. One, obviously, the incremental EBITDA that we're going to be able to generate from this transaction through the synergies. And then we do not have -- if you look at the balance sheet, you'll see there is a current portion of long-term debt. We do have some of our long-term debt coming due within the next 12 months, and we would look to pay that down. So the combination of those 2 things over the next 12 months will deleverage the balance sheet.

Great. And then I wanted to ask just back on the macro. I understand kind of how you're characterizing the increases in kind of micro businesses, bankruptcies and some strategic decision-making. Is that a trend that you've seen persist so far in the beginning of your fiscal year? And is that at all -- like it seems like it's small, but I just want to make sure if it is persisting, if it's impacting the way that you're formulating your outlook at all?

No, I would say not at all. In fact, as we talked about in the third quarter, we were well ahead of our expectations in terms of both client and revenue retention. And as I said, I think when you went into the Liberation Day kind of happens. And if you look at that period of time, there's 6 to 8 weeks after that, that's where we saw some of this activity that was going on. So again, we've seen these type of shock type of things before. Again, I'm speculating on some of the psychology of what's in a business owner's head. But again, you're talking about sole proprietary, you're talking the lower end of the market is kind of where we saw this issue. We did see some of the, what I would call, a combination, what I call business combinations, more in the upper end of the mid- market. And again, a lot of that just has to do with, I think, people when they're looking at the macro, looking for opportunities to scale and get larger to be able to be prepared for any future. But we're not -- you go back and look at the hard data in terms of our index. We continue to see moderate growth in small business hiring. I think, as Bob pointed out, we probably saw slower growth than we would have expected in the mid-market, but it wasn't astronomical. It wasn't recessionary and we've really not seen any signs of recession. I would say there's just -- as we all -- anywhere you turn on, you can talk to anybody, there's a high degree of uncertainty, and I think a lot of people are frozen right now. And I think what we need to see is more clarity coming out on what's going to happen with the tax bill, what's going to happen relative to tariffs and how that's going to sell. Hopefully, the world conflicts begin to settle down as well. And eventually, we'll probably start turning our focus to the Fed and seeing what the Fed is going to do on interest rates.

And next, we're going to go to Andrew Nicholas with William Blair.

Just wanted to ask a few on synergies. I guess first, in terms of top line synergies, can you speak to maybe what's embedded in your outlook for '26? It sounds like you've already had some indications of cross-sell opportunity and cross-sell success into the PEO and ASO model. Is that something that you're assuming continues in '26? Is there anything that you could kind of quantify there? Or would momentum there be upside to what you've guided?

Yes. Andrew, you maybe you missed it in the prepared remarks. And when I gave the outlook, we said we would expect revenue synergies that contribute 30 to 50 basis points of growth next year. Obviously, I mean, that's where we see the -- I would say, the value creation opportunity here with this transaction is the ability to cross-sell into their client base and vice versa. As you guys know, if you look at our model and John talked about our growth formula, a significant amount of our growth has come from our ability to monetize our client base and really selling those higher-value solutions, ASO, PEO, retirement services into our client base. And when we sit here even prior to the acquisition, we see a pretty long runway because within our own client base because a lot of those products are relatively underpenetrated within our own client base. And then on day 1 of this transaction, we just added 50,000 clients into the top of our payroll funnel, if you will. And these are, on average, larger clients. that really are more likely to have some of the needs that some of these solutions meet like ASO and PEO in retirement. So that we're really excited about that opportunity. Obviously, that takes time. You're not going to get all that on day 1. We're being conservative. That builds, I would say, over a few years. I'd say we're being a little bit conservative in what we think we can achieve in year 1, but that's not stopping us from going -- having our foot on the pedal and really going after that opportunity as quickly as we can. And as John mentioned, we've had some early success just in the first few weeks of owning the asset with not a lot of efforts. So we're excited about that opportunity longer term.

Perfect. And yes, I missed that in the prepared remarks, so I appreciate it. And then maybe relatedly, just in terms of cadence of cost synergy realization, you've updated the number, $90 million in fiscal '26. Is there anything you could say about how much of that is front-end loaded? Or is there a steady ramp in terms of realized cost synergies throughout fiscal '26 that [ we would model ]?

Yes. I would say that -- yes, sorry. I would say that most of the actions required to realize those cost synergies have been taken as it shows up in the P&L that builds throughout the year because you have some transition resources that are here for a period of time. And some of those benefits build as you move through the year, but the actual actions to realize those have already been taken. And that's why we have a high degree of confidence in raising the number. And again, we're not stopping. We see other opportunities. There's probably some procurement opportunities that we didn't -- that we haven't kicked the tires on hard enough. There's other areas that we're going to now go after now that we've gotten the initial actions behind us.

Yes. And I just want to put it in the context of a decision that we made, which I think is the right decision for the long term and the short term. One of the things that became very clear to us early on was how well our teams were working together to solve problems and look for opportunities. So even when we started the early stages of the planning, I was feeling better and better about how the cultural fit was happening, how the teams were coming together and working together. And as you know, we made -- in the prior quarter call, we talked about some of the additions to our leadership team that we brought on board. That gave us a calculated risk we had to make relative to our ability to lead the organization through how much change, how fast, right? That's a key point. And the real feeling was, particularly when you added on top of that a high degree of external disruption and unknowns, we felt it important to bring clarity to our clients, to our partners, to our employees about what was going to happen. So we accelerated both, making sure we made employees know what it meant to them, letting clients know they don't have to migrate, letting our partners know that this is going to be a win-win for them as well. And we've really focused on doing as much of this as fast as we could so we don't have additional distractions going into the fiscal year. So when I look at it, what the team accomplished in the fourth quarter was a lot and we executed the synergy plans, exceeding the expectations. We made decisions to fully invest in both the Paycor, the Flex road map. We made a decision to invest in the SurePayroll platform. More about that later. We expanded the sales teams. We reset the territories across all the market segments. We launched a new sales technology stack and the new market data and AI tool to all the sales teams. We launched the Paychex Partner Pro platform. We launched our Partner Plus platform program for the brokers. So then -- and we integrated all the marketing organizations, all that in about 6 to 8 weeks, and we delivered these results. And now we're sitting here going into '26 better positioned than we ever are. And we don't -- now we're talking about procurement. We're talking about vendor negotiations. We're talking about other things that are going to be less disruptive to the company. So that was a decision that we thought we could pull off because of the synergy we were filling amongst the leadership between the 2 organizations and the commitment that we had from both the Paycor leadership and the Paychex leadership to lead the teams through that kind of change at that kind of pace. So I'm extremely proud and appreciative of all the hard work that everyone in the organization has done. And hopefully, you guys understand that was a lot to get done in a short period of time.

Next, we'll go to Ashish Sabadra with RBC Capital Markets.

I was just wondering if you can comment on checks per client, how that trended in 4Q, but also what your expectations are for fiscal year '26? And have you seen any impact from some of the things going on, on the immigration crackdown.

Yes. I mean checks -- as I mentioned, Ashish, checks per client definitely trended a little bit softer in Q4. I mean if we go back and kind of look at the year, checks per client were actually up a little bit in the first half of the year. We started to see that come down a little bit in Q3. And we factored some of that into the forecast, but Q4 ended up being a little bit softer than we expected. And we have kind of factored that into our guidance and our plan for next year. So we have checks per client down, I would say, next year in the plan. And so we've kind of -- we've seen some of those trends, and we factored that into the guide.

That's helpful color. And maybe just a bookkeeping question. How should we think about the restructuring expenses impacting cash flow next year? Or is there a way to think about free cash flow growth in fiscal year '26?

Yes. I mean a lot of the restructuring stuff, to be honest with you, is behind us. We got a lot of that behind us, a lot of the onetime costs related to the transaction. All that is behind us. When you look at kind of the adjustments going forward, they're mostly noncash related. You have the amortization of the intangibles and you have some of the rollover equity. That's what you're going to see mainly going forward. So it really shouldn't have an impact to free cash flow, and we'll get back to a point where we see free cash flows growing in line with our earnings.

Next, we're going to go to Kartik Mehta with Northcoast Research.

John, I know you talked a little bit about pricing and adding value, obviously, for clients. And pre-COVID, we were at a certain level for price. And obviously, a little bit after COVID, you're able to get better pricing than you were historically. As we move forward, where do you think you are on that price kind of realization? Do you think it's higher than it was pre-COVID? Or are you -- do you think you'll be at the same level?

Yes, Kartik, what I would say is that I think of it as value, our ability to, as you talked about, bring in a client. Likely in this competitive environment, you're providing them a discount or some sort of incentive to make the move. And then the question is how good a job do you do that when that discount kind of expires because it's generally promotional, how much of that discount can you get back to retail price? And then how much can you upsell to that client long term? And that goes back to the conversation we had before in terms of the science of picking the type of client you bring in. If you bring in a client on the cheap that you're never going to make money on and all they want is cheap, they're going to be hard to sell anything to. And then you're not going to be able to raise prices, you're not going to be able to sell them anything extra. And so then you're just stuck with a client that you're losing money on and you can't really monetize. We've been very scientific in terms of our risk profiling, our profiling and marketing to understand that. And so when I look at what we realize in terms of generating value in our client base, we're doing better than we were doing before the pandemic. And you look back historically, we're still in the higher end of the range that we have historically done as part of our growth formula. It goes back to what Bob said, we continue to believe in the midterm that both value realization and the ability to drive product penetration will continue to be a significant part of our growth formula in the years ahead.

And just, Bob, on float, as you move forward in FY '26, anything different you're going to do on float? There's a conversation about rates going down, conversation about rates going up. And it seems all very confusing, obviously. But I'm wondering if you're changing your strategy at all on the float portfolio.

I mean we're constantly looking at it, Kartik. Obviously, we do have some short-term rate decreases assumed in the plan, pretty much aligned with the Fed dot plot. But the client funds portfolio is largely invested long. We did just recently take over Paycor's client fund that was a little over $1 billion. And they were probably just the opposite of us. They were largely invested short. And I just -- given our financial strength and our liquidity, we're able to put those funds to work and probably lock in some of those balances to rates where they are currently. And so I wouldn't say anything significantly different just kind of taking over their funds, managing that in line with how we manage our funds. And then the yield curve is relatively flat. We are reinvesting at a rate higher than what things are, securities are currently rolling off the portfolio, and we'll kind of look at -- the team looks at kind of the shape of the yield curve at that point in time when things roll off and make decisions on how to optimize yield there. But I wouldn't say anything significantly different there.

Next, we're going to go to Jason Kupferberg with Bank of America.

Can you just clarify what the organic outlook for Management Solutions specifically is in F '26? I mean based on the Paycor numbers you gave, I'm calculating around 4% to 5% organic. So I just wanted to check on that. And if you can also comment on whether or not the revenue synergies are a part of the organic guide.

Yes. So a couple of comments related to that, Jason. John talked about in the prepared remarks on how we've segmented this business. And so we already had an upmarket business. And so we spent Q4 kind of combining these businesses. We moved Paychex people and clients over to Paycor and vice versa. And it is going to be extremely difficult going forward for us to kind of separate what's Paycor versus Paychex. It was -- what I wanted to do in the guide is to give you a sense on a total revenue basis. And again, most of Paycor falls within Management Solutions or it all does. But I wanted to give you a sense of what it was in total. And I was able to do that, to be frank, because we were in the -- we are in the process of building a stand-alone plan. So I kind of knew what my stand-alone plan look like. And so it's easier for us to say, "Hey, we had a stand-alone plan. Here's our new plan. Here's the additional contribution that you're getting from Paycor." John and I have had a lot of discussions on how we're going to do this going forward as we move throughout the year. And I got to be honest, I haven't really come up with a methodology yet. We'll try to give you guys some sense of what the inorganic contribution is. But it's going to be -- as these businesses get further integrated, it's going to be a lot harder to separate that out. The numbers that you came up with don't seem to be too far off what the organic piece would be on the Management Solutions. And then I would tell you, the revenue synergies are kind of spread a little bit across both because there's opportunities both ways.

Again, I just want to -- Again, I just think it's important to understand -- yes, I just think it's important to understand that we now have Paycor positioned as our 100-plus market segment and platform. And so all the resources we had at Paychex involved in supporting our enterprise business are now part of that business segment in that business unit. And so what you're going to continue to see is, right, the ability to kind of look at it as 2 separate. And the same thing, there was downmarket business that Paycor did, and we've moved that over into the Paychex market segment. So again, going forward, that's one of the reasons why we wanted to bring clarity to our organization internally as quickly as we could and not drag this out into multiple fiscal years. And we wanted that -- we thought we had the opportunity with when the deal closed to get all of this work done so that we could start the fiscal year '26 with everyone being very clear about what they're focused on, what they need to do. So just part of -- it's going to be one of the challenges here.

Yes. And just, I guess, as a follow-up, so it sounds like we are talking about some acceleration on the organic part of Management Solutions in F '26 off of the 3% you just had in Q4. Maybe you can just kind of unpack the visibility and the pieces of that. And maybe just talk a little bit more about -- I think you said you're assuming a steady macro, but you've seen some hiccups in client decision-making. Like are you assuming that the worst is over in that regard and you see some normalization/improvement in underlying client decision-making?

Let me talk about the numbers, and maybe John can get into the macro a little bit. I think when you look at the Management Solutions guide, the front half and back half are very similar. Actually, the back half is a tad lower, particularly in Q4 once we anniversary the Paycor acquisition. One of the comments I made earlier, Jason, was -- and we do this, and I know you guys do this, you look at the exit rate as a proxy of what the organic growth rate is. And the point I was trying to make and probably didn't do a good job of explaining it is like that 3%, at least from a total revenue or whether you look at Management Solutions, you need to factor in that we had a tough compare to Q4 last year. We had changed some timing related to our price increase last year relative to where it was the year before, and we actually had a little bit of a pickup in pricing last year. And so when you adjust for that, both on a Management Solutions and if I get the total revenue, some of the MPP enrollment, you're getting to an exit rate in Q4. I know it's a 3%, but it's really not a 3% because we have these headwinds. And when you adjust for that, the exit rate is right in kind of the middle of the implied guide that I gave you on the organic business. So we feel comfortable about that. I know the numbers are a little bit confusing. The numbers have been really confusing in the last couple of years with the ERTC, without ERTC. But those are two headwinds from a growth standpoint in Q4 that you need to adjust for if you're really trying to get an apples-to-apples comparison and what that means as we exit the year and move into fiscal '26.

Yes. And I would just add on -- yes, I'd just add on the macro side. When you look at the data that we have, which I think is directionally very accurate, in our Small Business Index focused on the under 50 segment, we're seeing and continue to see moderate growth in small businesses, and we don't see any signs of recession. When I look at the fourth quarter, what I would say is given the GDP that we had, stability there on the micro side, some people dropping out, maybe throwing in the towel. In the upper market 50- plus, for the GDP numbers we saw and you run our models, you would have said there was more hiring going to happen there than maybe what we saw. So there's a little softness, but there's no like real signs of challenge. Now what do I assume in the future of the macro environment? Are we going to have a budget bill or not? Probably more like we are next quarter than last quarter. Are we going to have a situation where 20% to 40% tariffs are being thrown out every quarter? I don't know. That's what happened on Liberation. There's been a lot of things hit the market that drive uncertainty in the fourth quarter. I think we all have been living through that, including global conflicts. Our assumptions is those were unique to that quarter and that we're going to have a more consistent macro environment that we saw in the first 3 quarters, which was, again, moderate growth in small businesses and a little bit more stable, what I would say environment for businesses to be able to make decisions about future investments in capital, including what do I know about taxes next year? What do I know about where we're going to be with tariffs? So I think we're assuming that some of that is going to get worked out. That's what we've been told out of Washington, and we'll wait to see what happens.

And finally, we'll go to Scott Wurtzel with Wolfe Research.

I wanted to ask on the PEO side. I know there's a lot of moving parts with the MPP plan and then also thinking about the cross-sell opportunity. But wondering if you can talk about some of the kind of core Paychex PEO trends you saw in the quarter? And how you're thinking about that as we move into fiscal '26 and think about that acceleration in the back half of the year once we lap the MPP headwinds?

I can start, and John can add on. I mean I think if you look at the PEO in Q4, I mean, we're very happy with the performance. I think the demand continued to be strong. I mean demand from a sales standpoint was strong double digits in the quarter. We had record worksite employee retention for Q4. So we feel good. I think you see that reflected in the worksite employee number that we provided for the year. That obviously includes our ASO business as well. But those are the areas that we're focused on, both ASO and PEO, those are our higher-value solutions. And at the end of the day, we're focused on driving worksite employee growth, and I think we delivered that this year in some of the positive, I'll say, outside of the at-risk kind of noise and headwinds that we've talked about, the underlying operating performance of that business all year has been strong and Q4, in particular, was strong both from a demand and retention standpoint.

Yes. And I'd echo everything Bob said. And look, on an aggregate basis, the value proposition that the PEO brings to the marketplace has never been in more need. There is a health inflation issue out there, and we have solutions to solve that problem. And when you look at it on the aggregate basis, we increased the number of people participating in our PEO health plans across the country and continue to see strong demand for the product and service with the exception of Florida. And because Florida is a unique animal, as we've talked about before, it has an oversized impact on revenue, but again, not on the really operating performance of the business or the profitability of the company.

And at this time, I'd like to turn the call back over to John Gibson for any final or closing remarks.

Okay, Margot, thank you very much. At this point, we will close the call. If you're interested in a replay, the webcast of this conference call will be archived approximately 90 days. Once again, thanks, everyone, for your interest in Paychex, and hope you have a great day and a great 4th of July. Thanks, Margot.

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.