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PAYCHEX INC (PAYX) Q4 2024 Earnings Summary

Executive Summary

  • Q4 FY2024 delivered 5% total revenue growth to $1,295.1M, with diluted EPS up 8% to $1.05 and adjusted diluted EPS up 15% to $1.12; operating margin was 37.2% and adjusted operating margin 40.2% .
  • Mix drivers: PEO & Insurance Solutions revenue +9% (worksite employee growth, strong insurance attachment), Management Solutions +3%; ERTC wind-down reduced growth by ~300 bps in Q4 .
  • FY2025 guidance: revenue +4.0–5.5%, adjusted EPS +5–7%, operating margin 42–43%; segment growth: MS +3–4%, PEO & Insurance +7–9%; interest on client funds $150–160M; ETR headwind incorporated; Q1 FY2025 revenue growth ≈2% due to fewer processing days and ERTC headwind >400 bps .
  • Cost optimization charge ($39.5M) in Q4 supported FY2025 margin expansion priorities (real estate, technology reprioritization toward AI, headcount optimization) .

What Went Well and What Went Wrong

  • What Went Well
    • PEO momentum: worksite employee growth near double-digits, stronger medical insurance attachment and participation; “increasing demand for HR advisory and HR outsourcing solutions” .
    • Retirement Services strength: double-digit revenue growth; milestone surpassing 120,000 401(k) clients and ~$51–52B AUA; benefiting from SECURE Act dynamics .
    • Efficiency and margin: adjusted operating income +15% in Q4; adjusted operating margin 40.2% (+330 bps YoY); disciplined expense management despite ERTC wind-down—“best operators in the business” .
  • What Went Wrong
    • ERTC wind-down pressured growth (≈300 bps Q4) and margins (high-profit contribution fading), with larger impact expected in H1 FY2025 .
    • Softer close rates and smaller average deal size; mid-market experiencing decision delays and more discounting; digital stack changes in micro segment caused conversion issues (since addressed) .
    • Q1 FY2025 setup: lower revenue growth (~2%) and operating margin (40–41%) from one fewer major processing day plus ERTC headwind >400 bps .

Financial Results

MetricQ2 2024Q3 2024Q4 2024
Total revenue ($USD Millions)$1,257.9 $1,439.3 $1,295.1
Diluted EPS ($USD)$1.08 $1.38 $1.05
Adjusted diluted EPS ($USD)$1.08 $1.38 $1.12
Operating margin (%)40.2% 45.1% 37.2%
Other income, net ($USD Millions)$11.7 $9.4 $10.0
Interest on funds held for clients ($USD Millions)$31.5 $43.9 $38.2

Segment breakdown:

Segment Revenue ($USD Millions)Q2 2024Q3 2024Q4 2024
Management Solutions$930.7 $1,049.9 $930.3
PEO and Insurance Solutions$295.7 $345.5 $326.6
Interest on funds held for clients$31.5 $43.9 $38.2
Total service revenue$1,226.4 $1,395.4 $1,256.9
Total revenue$1,257.9 $1,439.3 $1,295.1

KPIs:

KPIQ2 2024Q3 2024Q4 2024
Operating income ($USD Millions)$506.2 $649.8 $481.8
EBITDA ($USD Millions)$551.0 $694.6 $525.3
Adjusted EBITDA ($USD Millions)——$564.8
Weighted-average diluted shares (Millions)362.1 361.7 361.8
Cash dividends per common share ($USD)——$0.98

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total revenue growth (%)FY2025Preliminary ~5% incl ~200 bps ERTC headwind 4.0%–5.5% Maintained/formalized
Adjusted diluted EPS growth (%)FY2025—5%–7% New
Operating margin (%)FY2025Margin expansion; prelim 42%–43% 42%–43% Maintained
Management Solutions revenue growth (%)FY2025—3.0%–4.0% New
PEO & Insurance Solutions revenue growth (%)FY2025—7.0%–9.0% New
Interest on funds held for clients ($USD Millions)FY2025—$150–$160 New
Other income, net ($USD Millions)FY2025—$35–$40 New
Effective tax rate (%)FY2025—24%–25% New
Total revenue growth (%)Q1 FY2025—≈2% (ERTC + one fewer processing day >400 bps headwind) New
Operating margin (%)Q1 FY2025—40%–41% New
Quarterly dividend ($/share)Q1 FY2025$0.98 in Q4 FY2024 $0.98 declared for Aug 29, 2024 Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3)Current Period (Q4)Trend
AI/technology initiativesHundreds of AI models in pricing, retention, sales productivity; Visier partnership to deliver AI-powered analytics Reprioritized tech investments toward AI as part of cost optimization; continued focus on leveraging vast data set to drive efficiency and value Expanding use cases and investment focus
PEO momentum & insurance attachmentRe-accelerated growth; strong mid-market pipelines; improving medical attachment/participation Near double-digit worksite employee growth; strong enrollments; competitive offering across plan design Strengthening
Macro: SMB jobs & wagesModerating employment and wage inflation; seasonal hiring softer in larger client segments Stabilization in job growth and downward wage pressure; May index largest one-month job growth increase since Jan’22 Stabilizing employment; wage moderation
Pricing dynamicsValue-based pricing intact; expectation returning to normal levels ex-ERTC More discounting and smaller deal sizes in mid-market; price realization still strong but lower than expectations Slightly tougher realization; competitive sensitivity
ERTC programHeadwind in H2 FY2024; ~1% full-year revenue headwind Q4 headwind ~300 bps; FY2025 headwind front-loaded; program expiration incorporated in guidance Fading tailwind; now a headwind
Go-to-market & micro segmentStrong pipelines; digital onboarding improving Micro segment digital stack changes caused conversion issues; issues addressed; close rates softer Tactical adjustments underway
Access to capital/fintechTuck-in Alterna; expanding fintech partnerships Emphasis on capital access at payroll funding; partnerships to support SMBs Building ecosystem
Retirement ServicesSolid growth; SECURE Act tailwind; education needed Surpassed 120K 401(k) clients; >$51–52B AUA Structural tailwind continues

Management Commentary

  • “Paychex delivered solid financial results... 5% growth in total revenue, 9% growth in diluted EPS and 11% growth in adjusted diluted EPS” (John Gibson) .
  • “These initiatives [cost optimization]... allow us to reallocate resources... and continue to deliver operating margin expansion for fiscal ’25 despite the expiration of ERTC” (Robert Schrader) .
  • “We launched the Employer of Choice Playbook... combining digital HR tech and analytics with dedicated HR professionals to help clients hire and retain” (John Gibson) .
  • “AI has been a hot topic... focused on enhancing customer service, identifying at-risk clients, optimizing pricing/discounting, and driving higher sales productivity” (John Gibson) .

Q&A Highlights

  • Demand/close rates: Strong pipelines but softer close rates; micro segment integration issues impacted digital conversions; now fixed; mid-market showed decision delays and increased discounting .
  • FY2025 setup and Q1 cadence: Revenue growth ≈2% in Q1 from combined ERTC and fewer processing day headwinds (>400 bps); margins ramp through the year as ERTC headwind subsides and seasonal factors help .
  • Pricing: Value-based pricing intact but realization slightly below expectations; competitive discounting up modestly; still a contributor next year .
  • PEO drivers: Competitive plan lineup, stronger medical participation, and data-driven upgrades from ASO to PEO; higher LTV and retention in PEO model .
  • AI quantification: Benefits across sales productivity, pricing, underwriting, service; not quantified but embedded in operational improvements .

Estimates Context

  • Consensus comparison was unavailable at the time of request due to S&P Global daily request limit being exceeded; therefore no beat/miss determination versus Wall Street consensus is provided [functions.GetEstimates errors].
  • Near-term models likely reflect Q1 FY2025 revenue growth ≈2% and operating margin 40–41%, with acceleration expected as ERTC headwind tapers and seasonal effects aid margins through FY2025; management highlighted macro assumptions including potential rate cuts impacting interest-related lines .

Key Takeaways for Investors

  • Mix resilience: PEO & Insurance Solutions remains the growth engine (+9% in Q4) with strong worksite and insurance attachment; expect above-company growth rates in FY2025 for this segment .
  • Margin durability: Despite ERTC fade, adjusted operating margin expanded to 40.2% in Q4; FY2025 operating margin guided to 42–43% supported by Q4 cost optimization actions .
  • ERTC headwind context: Q4 growth was trimmed (~300 bps); the headwind is largest in early FY2025, then subsides, setting up back-half acceleration in growth and margin .
  • Q1 caution: One fewer major processing day plus ERTC impact >400 bps on revenue growth; expect muted Q1 print but improving cadence thereafter .
  • Pricing and deal quality: Competitive environment led to smaller average deal sizes and modestly higher discounting; value-pricing within the base remains intact, with product penetration a key growth lever .
  • Retirement momentum: Structural tailwinds (SECURE Act, PEP) and milestones (>120K 401(k) clients, >$51–52B AUA) reinforce cross-sell potential and stickiness .
  • Dividend continuity: Board declared $0.98 quarterly dividend, consistent with Q4 per-share dividend run-rate; payout remains a central capital return mechanism .

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