) reported earnings per share of 44 cents in the first quarter of
2014, which scraped past the Zacks Consensus Estimate of 43 cents
per share. On a year-over-year basis, the reported earnings per
share increased 5.5%.
Paychex reported total revenue (including Interest on funds
held for clients) of $607.9 million for the quarter which not
only increased 5.1% from the year-ago period but also came
marginally ahead of the Zacks Consensus Estimate of $607.0
million. Excluding Interest on funds held for clients (down 1.0%
from the year-ago quarter), revenues comprising Payroll service
and Human Resource Services increased 5.3% from the year-ago
quarter to $597.9 million.
Payroll Service segment revenues increased 2.4% from the
year-ago period to $395.2 million primarily driven by higher
checks per payroll and revenue per check. Checks per payroll
increased 1.6% from the year-ago quarter. The company witnessed
modest growth in revenue per check positively impacted by price
increases, which was partially offset by discounting. Management
said that during the period, the client retention rate remained
Buoyed by the growth in client base in the retirement
services, HR Solutions and eServices products, Paychex's Human
Resource Services segment generated revenues of $202.7 million,
which increased 11.3% from the year-ago quarter. Moreover, price
increases positively impacted segment revenues for the
Paychex has been expanding its Payroll and Human Resource
Services in the South American countries leveraging a joint
venture in Brazil. Moreover, the company has acquired a payroll
provider in Germany to gain traction in the country. Management
expects these initiatives to drive growth for Paychex in the long
Paychex's total expenses increased 3.7% from the year-ago
quarter to $352.8 million, primarily due to compensation-related
expenses. Moreover, higher expenses related to investment in
product development and supporting technology and higher
sales-related costs played its part in the rise in expenses.
Nonetheless, total expenses as a percentage of total revenue
decreased 80 basis points (bps) on a year-over-year basis due to
higher revenue base.
Paychex reported operating income of $255.8 million, up 7.2%
from the year-ago period, attributable to modest revenue growth
supported by better cost management and capacity utilization.
Operating margin was 42.0% versus 41.2% in the year-ago
Excluding Interest on funds held for clients, Paychex's
operating income came in at $245.1 million or 41.0% of total
services revenue which increased from $227.9 million or 40.1% of
total services revenue.
Net income for Paychex increased 6.3% from the year-ago
quarter to $162.8 million or 44 cents per share.
Balance Sheet & Cash Flow
Paychex exited the quarter with cash and cash equivalents of
$111.6 million versus $107.3 million at the end of the previous
quarter. Corporate investments were $447.6 million compared with
$398.2 million in the previous quarter.
Additionally, Interest on funds held for clients decreased
1.0% year over year to $10.0 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 reiterated its outlook for the fiscal 2014. Management
expects 3%-4% increase in Payroll Service revenues from the
year-ago period. Human Resource Services revenues are expected to
increase in the range of 9.0% to 10.0%.
Total service revenue is expected to increase in the range of
5%-6%. Interest on funds held for clients and investment income
for fiscal 2014 are expected to be impacted by the low interest
rate. However, investment of cash generated from operations is
expected to persist, thus increasing investment income.
Net operating income as a percentage of service revenues is
expected to be 38.0% for fiscal 2014. The effective income tax
rate for fiscal 2014 is expected to be in the range of 36%-37%.
Net income is expected to grow 8% to 9%.
Paychex reported better-than-expected first-quarter results
primarily boosted by modest revenue growth and margin expansion.
Moreover, Paychex's reiteration of its fiscal 2014 outlook
signifies that it is relatively well-paced in contrast to the
current macroeconomic sluggishness.
Moreover, we remain encouraged by management's positive
commentary regarding continued investments in product development
and focus on building its sales force to support revenue growth.
We also believe that the company's expansionary initiatives
through joint ventures and acquisitions should bode well for its
long-term growth strategy.
Product launches are also expected to provide additional
support. Moreover, Paychex's focus on small and mid-sized
businesses looking for HR solutions could provide the company
However, unfavorable interest rates and stiff competition from
Automatic Data Processing
) remain the possible headwinds for the company.
Currently, Paychex has a Zacks Rank # 3 (Hold). Investors can
), which carries a Zacks Rank #1 (Strong Buy).
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