Paychex Inc. (PAYX) stock fell more than 7% Wednesday after the company reported fiscal first-quarter 2027 results.

Revenue of $1.631 billion topped the $1.627 billion estimate. Adjusted earnings of $1.34 per share also beat the $1.32 estimate.

Paychex maintained its full-year outlook. However, management said it expects second-quarter revenue growth of about 4%.

PEO Growth Drives Favorable Mix Shift

GAAP diluted earnings rose 14% to $1.21 per share, while revenue increased 6% year over year.

Management Solutions revenue rose 4% to $1.213 billion, driven by price increases and stronger product penetration.

PEO and Insurance Solutions revenue jumped 12% to $367.6 million. Higher average worksite employee levels and insurance volumes supported the increase.

CFO Bob Schrader said Management Solutions came in "slightly below our expectations," while PEO results exceeded expectations.

ASO-to-PEO upgrades also topped the company's plan. Referrals from Paychex's human capital management sales team into PEO increased nearly 50% from a year earlier.

CEO John Gibson said the company's go-to-market execution exceeded expectations. ASO-to-PEO conversions were twice the company's expectations, while PEO worksite employee growth reached the high-single-digit range.

AI Investment Supports Productivity

Paychex also highlighted growing use of artificial intelligence across its operations.

A WISE pilot involving more than 50,000 businesses prevented about 90% of targeted payroll errors. Automated payroll processing increased nearly 20% from January through August.

The company has deployed more than 2,000 AI agents and features. Paychex said its fiscal 2027 AI investment is running at five times last year's level, while more than 10,000 employees are using AI tools.

Margins Expand As Cash Flow Declines

Operating income rose 14% to $619.2 million. Adjusted operating income increased 9% to $684.7 million.

Adjusted operating margin expanded to 42% from 40.7% a year earlier.

Operating cash flow fell to $413.5 million from $718.4 million. Free cash flow declined to $357.4 million from $662.5 million.

Management attributed the decline in operating cash flow to the timing of client and corporate tax payments.

Paychex ended the quarter with $989.2 million in cash, restricted cash and corporate investments. The company had $4.558 billion in debt and paid $424.1 million in dividends.

Paychex Maintains Fiscal 2027 Outlook

Paychex maintained its fiscal 2027 adjusted earnings growth outlook of 7% to 9% and revenue growth guidance of 5% to 6%.

The company raised its PEO and Insurance Solutions revenue growth outlook to 7% to 8%.

Based on the company's guidance, fiscal 2027 adjusted earnings imply about $5.90 to $6.01 per share, compared with the $5.96 analyst estimate.

Revenue guidance implies about $6.838 billion to $6.903 billion, compared with the $6.867 billion estimate.

For the second quarter, management expects revenue growth of about 4% and an adjusted operating margin near 40%.

Paychex also said it remains cautious ahead of key PEO enrollment periods in October and January.

PAYX Price Action: Paychex shares were down 7.13% at $106.36 at the time of publication Wednesday, according to market data.