Paychex Beats, Revenue Improves - Analyst Blog

By Zacks Equity Research,

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Paychex Inc. ( PAYX ) reported third-quarter fiscal 2012 earnings of 37 cents per share, beating the Zacks Consensus Estimate of 34 cents. The company witnessed revenue improvement across all its segments and displayed a good operating performance.


Paychex reported third-quarter 2012 revenues of $569.5 million, up 7.2% from $531.3 million in the year-ago quarter. The year-over-year upside can be attributed to growth in Payroll service revenue and Human Resource service revenue.

Payroll Service segment revenue increased 5.5% year over year to $386.5 million. Excluding the contribution from SurePayroll, Payroll service revenue growth was 4.0%, mainly attributable to the increase in checks per payroll and a modest rise in revenue per check. Revenue generated per issued check was impacted by price increases, partially offset by discounting.

Human Resource Services segment generated $172.0 million in revenues, up 12.3% from the prior-year quarter. The improvement was partly based on the contribution from ePlan Services. Excluding ePlan, the segment revenue growth for the third quarter stood at 10%, reflecting client growth and price increases.

Operating Results

In the third quarter, Paychex incurred total expense of $359.1 million, up 8.0% from the year-ago quarter. The rise was mainly due to higher selling, general and administrative expenses.

Operating income was $210.4 million, up 5.8% from the year-ago period, attributable to modest revenue growth and better cost management. Operating margin was 36.9% versus 37.4% in the year-ago quarter.

Net income of $135.4 million in the reported quarter reflected a 3.7% increase from $130.6 million in the prior-year quarter. Net income per diluted share was 37 cents compared with 36 cents in the year-ago quarter. There was no one-time item during the quarter.

Balance Sheet

Paychex exited the third quarter with cash and cash equivalents of $146.5 million, down from $96.1 million at the end of the prior quarter. Corporate investments decreased $41.0 million sequentially to $356.8 million.

Additionally, interest on funds held for clients decreased 7.0% year over year to $11.0 million, as a result of lower average interest rates earned, partly offset by a 7% increase in average investment balances. Paychex has no long-term debt.


Keeping in view the current market and economic conditions, Paychex believes that checks per client will moderate for the remainder of fiscal 2012, thereby impacting quarterly comparisons for both Payroll Service and Human Resource Services revenues.

Moreover, Paychex reaffirmed its full-year guidance.

For fiscal 2012, Paychex expects a 5-7% increase in Payroll Service revenues compared with the year-ago quarter. Human Resource Services revenues are expected to increase in the range of 12.0% to 15.0%.

Total service revenue will likely grow in the range of 7% to 9%. The company expects a 12-14% decline in interest on funds held for clients and a roughly 2% upside in net investment income.

Interest on funds held for clients and investment income for fiscal 2012 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 income.

Net operating income is expected in the range of 36% to 37% for fiscal 2012. The effective income tax rate for fiscal 2012 is expected to be similar to the rate experienced for the nine months ended February 29, 2012.

Our Take

Paychex' third quarter results were modest, with the bottom line exceeding the Zacks Consensus Estimate. We are also positive on management's positive commentary regarding continued investments in product development and synergies from the recent acquisition. The company has managed cost well along with improving revenue.

Though new business wins in the SMB sector and stiff competition from Automated Data Processing Inc. ( ADP ) and Administaff Inc. will remain a constant worry, we believe that Paychex can benefit from the improvement in the U.S. employment situation and zero European exposure.

Paychex has a Zacks # 3 Rank, implying a short-term Hold rating.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: ADP , PAYX

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