) reported third-quarter fiscal 2013 earnings of 40 cents per
share, beating the Zacks Consensus Estimate by a penny. The
quarter's result was 6.3% above the year-ago level.
AUTOMATIC DATA (ADP): Free Stock Analysis
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Paychex reported third-quarter 2013 revenues of $593.3 million,
up 4.2% from $569.5 million in the year-ago quarter. The
quarter's revenues were slightly above the Zacks Consensus
Estimate of $593.0 million.
Payroll Service segment revenues increased 1.9% year over year to
$393.7 million. Checks per payroll grew roughly 2.3% from the
year-ago quarter. Revenue per check grew modestly as a result of
price increases, partially offset by discounting.
The Human Resource Services segment generated $188.7 million in
revenues, up 9.7% from the prior-year quarter. The improvement
was mainly attributable to client growth and price increases,
partially offset by lower contribution from professional employer
organization and unfavorable product mix.
In the third quarter, Paychex incurred total expenses of $368.3
million, up 2.6% from the year-ago quarter. The rise was mainly
due to higher selling, general and administrative expenses as
well as continuous investments in product development and
Operating income was $225.0 million, up 6.9% from the year-ago
period, attributable to modest revenue growth supported by better
cost management and capacity utilization. Operating margin was
43.0% versus 42.4% in the year-ago quarter.
Net income of $144.5 million in the reported quarter reflected a
6.7% increase from $135.4 million in the prior-year quarter.
Earnings per share were 40 cents compared with 37 cents in the
year-ago quarter. There was no one-time item during the quarter.
Balance Sheet & Cash Flow
Paychex exited the third quarter with cash and cash equivalents
of $100.4 million, down from $122.6 million at the end of the
prior quarter. Corporate investments were $470.2 million compared
with $178.6 million in the prior quarter.
Additionally, interest on funds held for clients decreased 0.9%
year over year to $10.9 million as a result of lower average
interest rates earned, partly offset by an increase in average
investment balances. Paychex has no long-term debt.
Paychex believes that Payroll Services revenue growth will be
supported by modest growth in client base and improved revenue
per check. Human Resources organic revenue growth is expected to
follow the historical trend. Financial guidelines were maintained
for fiscal 2013.
For fiscal 2013, Paychex expects a 2%-3% increase in Payroll
Service revenues from the year-ago quarter. Human Resource
Services revenues are expected to increase in the range of 9.0%
Total service revenue will likely grow in the range of 5% to 6%.
The company expects an 8%-6% decline in interest on funds held
for clients and nil-5% upside in net investment income.
Interest on funds held for clients and investment income for
fiscal 2013 are expected to be impacted by the low interest rate
environment. However, investment of cash generated from
operations is expected to persist, thus increasing investment
Net operating income as a percentage of service revenues is
expected in the range of 37.0%-38.0% for fiscal 2013. Net income
is expected to grow in the range of 5% to 7%.
Paychex' third-quarter results were decent, with both the bottom
and top lines surpassing the Zacks Consensus Estimates. Though
Paychex mentioned that revenue growth could be stronger during
the fourth quarter, the guidance for fiscal 2013 was maintained.
We believe that the conservative guidance was mainly due to macro
We are encouraged by management's commentary regarding continued
investments in product development and focus toward building
sales force to support revenue growth.
However, lingering unemployment situation, strict interest rates
and stiff competition from
Automated Data Processing
) and Insperity (NSP) keep us concerned. However, Paychex' zero
European exposure will be beneficial for the company.
Currently, Paychex has a Zacks Rank # 4 (Sell). Investors should
also look into similar stocks that are performing better than
) has a Zacks Rank #1 (Strong Buy) and
Broadridge Financial Solutions Inc.
) has a Zacks Rank #2 (Buy).