PAYX · Research
Paychex's PEO Grows 11.70% While Core Payroll Grows 4.28%, With $4.56B of Paycor Debt
Paychex Q1 fiscal 2027 revenue grew 5.88% to $1.63B. Management Solutions, the payroll and HR core, grew 4.28%, and PEO and Insurance grew 11.70%.
| Scorecard | Read |
|---|---|
| Thesis | Paychex keeps margins near 38% as Paycor integrates, and PEO growth lifts total revenue near 6% even with slower core payroll |
| What proves it wrong | Management Solutions growth falls below 3%, or operating margin slips back below 35% as integration costs persist |
| Next catalyst | Q2 fiscal 2027 results for the quarter ending Nov 30, 2026 |
| Key multiple | 14.14x EV / GAAP EBITDA of $3.03B |
| Debt | $4.56B: Series B notes $399.5M, 5-year bonds $1,488.7M, 7-year bonds $1,485.8M and 10-year bonds $1,184.0M |
| Stock pay | $88.60M from the cash flow line, 1.34% of revenue |
What Paychex sells
Paychex runs payroll, tax filing, HR and benefits for small and mid-sized businesses. It also operates a PEO, acting as co-employer, and sells insurance to clients [1].
Q1 fiscal 2027 revenue, the quarter to Aug 31, 2026, was $1,630.5M, up 5.88% from $1,540.0M [1]. Twelve-month revenue was $6.60B.
How much of Paychex is software
Paychex does not publish a software revenue line. Plainly: Management Solutions, $1,213.1M or 74.40% of Q1 revenue, is payroll, HR and tax services delivered on Paychex software.
PEO and Insurance, $367.6M or 22.55%, is a co-employment and insurance service. Interest on client funds, $49.8M or 3.05%, is float income [1].
So close to three quarters of revenue is software-delivered service. The rest is service and float.
Two growth rates
Management Solutions grew 4.28%, from $1,163.3M. PEO and Insurance grew 11.70%, from $329.1M.
Interest on client funds grew 4.62% [1].
The core payroll business is growing slowly. The PEO is doing most of the lifting.
PEO revenue includes benefits costs, so its growth carries less profit per dollar.
The filing ties PEO growth to more average worksite employees and higher insurance volumes [1]. Insurance volumes add revenue that carries claims risk.
Float and corporate cash
Average funds held for clients were $5,401.6M, flat with a year earlier. The average rate earned on them rose to 3.7% from 3.5% [1].
Interest income grew on rate, not balance.
Average corporate cash and investments fell 30% to $1,240.9M [1]. Less corporate cash means less interest earned, which is why other income fell.
Average client fund balances at Paychex are much smaller than at ADP, $5.40B against $40.4B, from each company's own filing. Rate moves matter less to Paychex's earnings in dollar terms, though they still shape its interest income each quarter.
Margins rose in the quarter
Operating income was $619.2M, up 14.26% from $541.9M. Operating margin was 37.98% against 35.19% a year earlier [1].
SG&A fell to $581.2M from $584.3M while revenue grew [1]. Cost savings from combining Paycor are showing up.
Twelve-month GAAP EBITDA is $3.03B: operating income of $2.59B plus D&A of $443.10M [1]. Q1 D&A was $109.8M.
Paychex's own adjusted figures add back Paycor acquisition costs [1]. The scorecard does not.
GAAP figures carry those costs.
The toll-gate test
A toll gate owns the record, owns the connection, prices on outcomes and spends R&D on the gate. Like ADP, Paychex passes the record and connection tests.
Pricing is the weak test. Fees track employees and checks, not outcomes for clients.
Small business clients churn more than large ones, so the record test is slightly weaker than at ADP. A business that closes takes its payroll with it.
The owner-cash staircase
Start with GAAP EBITDA of $3.03B: operating income of $2.59B plus D&A of $443.10M over the twelve months [1]. Each step down the staircase removes one thing an owner cannot spend.
Step one is operating cash flow of $2.25B, below EBITDA by $779.10M. Operating cash ran below EBITDA because of cash taxes and interest on the Paycor debt [1].
Step two subtracts stock pay of $88.60M, taken from the cash flow line. That leaves $2.16B.
Stock pay is 3.93% of operating cash flow, very low [1].
Step three subtracts all capex of $235.10M, including capitalized software. Owner cash is $1.93B, or 29.20% of revenue and 63.61% of EBITDA.
Capex includes property and equipment plus capitalized software [1].
| Step | Twelve months | What the gap is |
|---|---|---|
| GAAP EBITDA | $3.03B | Operating income plus D&A |
| Operating cash flow | $2.25B | Working capital, cash taxes, interest and non-cash items |
| After stock pay | $2.16B | Stock pay treated as a real cost |
| After all capex | $1.93B | What an owner could take out |
Balance sheet and debt
Borrowings total $4,558.0M: Series B notes of $399.5M, 5-year bonds of $1,488.7M, 7-year bonds of $1,485.8M and 10-year bonds of $1,184.0M [1]. The bonds were issued to fund the Paycor purchase.
Q1 interest expense was $65.1M against $68.2M a year earlier [1].
Cash was $600.9M at Aug 31, 2026 [1]. Client fund obligations of $4,440.7M are excluded from debt.
Paychex paid $424.1M of dividends in Q1 and made no buybacks [1]. Dividends are the main use of cash while debt is high.
The cover-page share count is 355,980,473 [1].
What the multiple measures
EV is $42.85B: equity value at the Oct 27, 2026 close on 355.98M cover-page shares, plus debt of $4.56B at carrying value, less cash and equivalents of $600.90M.
On GAAP EBITDA of $3.03B that is 14.14x. On operating cash flow of $2.25B it is 19.03x.
Owner cash of $1.93B is 4.50% of EV.
Net debt is $3.96B, or 1.31x GAAP EBITDA.
What gets overlooked
Other income fell to $10.9M from $23.8M [1]. Lower corporate cash after the acquisition earns less interest.
Unrealized losses on client fund securities were $92.4M at Aug 31, 2026 against $52.5M at May 31, 2026 [1]. They do not hit income unless sold, but they show rate sensitivity.
PEO growth is the strongest line, and PEO is the most sensitive to health insurance costs.
How Paychex differs from ADP
Paychex and ADP offer the same core services: payroll, HR, PEO and float income on client funds. Our reading is that Paychex leans toward smaller employers than ADP.
Smaller clients tend to churn more, because small businesses close more often. That is a general view, not a figure from either filing.
In our reading, Paycor moves Paychex toward larger clients and more software, where it meets other HR software vendors. The integration will show whether Paychex can keep its margin there.
The debt taken on for Paycor changes the balance sheet. Paychex used to carry little debt, and now interest cost competes with dividends for cash.
Paying down the notes would bring leverage back toward its old level.
Peers
The peer set is ADP and Workday: payroll and HR providers.
Peer figures come from each company's latest periodic filing [2][3]. Figures are derived from filed statements, and nothing here is a price view.
Paychex has the lowest EV to EBITDA in the group. Its stock pay share of revenue is close to ADP's and far below Workday's.
The comparison with ADP is the most useful. Both run payroll and PEO businesses, both earn float, and both price per employee.
After Paycor, Paychex carries more debt relative to EBITDA, as the peer table shows.
Bull, base and bear
| Case | What happens | What the filings would show |
|---|---|---|
| Bull | Paycor cross-selling lifts Management Solutions above 6% | Revenue growth near 7% and margin above 38% |
| Base | Core grows 4% and PEO near 10% | Revenue growth near 6% |
| Bear | Small business failures rise and PEO insurance costs jump | Revenue growth near 3% and margin below 36% |
The base case is the current pattern: slow core, faster PEO, stable margins.
The bear case is a small business downturn. Paychex's clients are more exposed than ADP's.
The bull case needs Paycor's mid-market clients to purchase more Paychex products.
What to watch
Watch Management Solutions growth in Q2 [1].
Watch debt reduction. No buybacks in Q1 suggests cash is going to dividends and debt.
Watch operating margin. The 37.98% level needs Paycor savings to continue.
Watch PEO insurance costs. Higher insurance volumes lift revenue, but a bad claims year would hit margin quickly.
Watch the acquisition-cost line. Paychex adds back Paycor amortization and integration costs in its own adjusted figures, and the gap between GAAP and adjusted earnings shows how much integration work is left.
Watch the Series B notes of $399.5M. They are the smallest tranche and the most likely to be repaid first.
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