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Payroll and human capital management (HCM) company Paychex (PAYX) delivered solid 3Q25 results that were mostly in-line with expectations while reaffirming FY25 EPS and revenue guidance. Near-record revenue retention and improved profitability through automation and technology investments were key aspects underlying the steady performance. The company's healthy earnings, which grew by 8% yr/yr to $1.49, also come on the heels of strong earnings reports from competitors Workday (WDAY) on February 25 and Automatic Data (ADP) on January 29, providing more evidence that the U.S. employment situation remains resilient in the face of numerous macroeconomic challenges.

• Revenue in the Management Solutions segment, which houses its payroll processing and HCM businesses and accounts for approximately 75% of its total revenue, increased by 5% yr/yr to $1.10 bln. While PAYX experienced lower revenue in ancillary services due to the expiration of the Employee Retention Tax Credit Program, that headwind was more than offset by client growth in the HCM and HR outsourcing businesses. Additionally, enhanced digital capabilities, such as AI and machine learning for automated payroll processing and self-service mobile and cloud platforms, improved PAYX's offerings.
• Growth was a little stronger in the Professional Employer Organization (PEO) and Insurance Solutions segment with revenue up 6% yr/yr to $365.4 mln. The growth was driven by a combination of higher average PEO worksite employees and growth in PEO insurance revenues. Rising demand for HR outsourcing, particularly among SMBs, remains a bullish trend for this segment. Due to complex regulatory requirements, an increasing number of SMBs are seeking outsourced HR, compliance, and payroll services.
• PAYX's investments in automation and technology are paying off, as illustrated by the 180-bps expansion in adjusted operating margin to 46.9%. A couple examples of PAYX's advancements include the use of automated customer onboarding to streamline enrollments, and the implementation of cloud-based infrastructure to reduce IT maintenance and operational costs.
• The positive reaction in the stock is also likely tied to PAYX's updated commentary and financial projections for its recent acquisition of Paycor (PYCR). The acquisition is now expected to close in April so PAYX will see contributions imminently. Strategically, the addition of PYCR will expand the company's cross-selling opportunities and distribution channels, while improving its AI capabilities. What's catching investors' attention, though, is the disclosure that the acquisition will contribute 10-12% revenue growth in 4Q25 and will be accretive to EPS starting in FY26.

PAYX delivered solid results, driven by strong client retention, increased product adoption, and margin expansion from continued investments in automation and digital solutions. The upcoming closing of the PYCR acquisition is expected to enhance long-term revenue synergies and drive over $80.0 mln in cost savings in year one, providing the stock with a meaningful growth catalyst.