) increased 3.39% in after-hours trade after the company reported
third-quarter 2014 earnings of 44 cents per share beating the
Zacks Consensus Estimate by a couple of cents. On a
year-over-year basis, reported earnings per share increased
Paychex reported total revenue (including Interest on funds
held for clients) of $636.5 million for the quarter which not
only increased 7.3% from the year-ago period but also came ahead
of the Zacks Consensus Estimate of $627.0 million.
Excluding Interest on funds held for clients, which was down
3.7% on a year-over-year basis, total services revenues (Payroll
service and Human Resource Services) increased 7.5% from the
year-ago quarter to $626.0 million. Interest on funds held for
clients was down due to lower average interest rates earned and
lower net realized gains, which more than offset the increase in
average investment balances.
Payroll Service segment revenues increased 5.1% from the
year-ago period to $413.9 million primarily driven by higher
checks per payroll and revenue per check. Checks per payroll
increased 1.0% from the year-ago quarter. The company witnessed
modest growth in revenue per check on the back of price increases
and higher adoption of Paychex's products.
Buoyed by growth in client base in the retirement services, HR
Solutions and eServices products, Paychex's Human Resource
Services segment generated revenues of $212.1 million, which
increased 12.4% from the year-ago quarter.
Paychex's total expenses increased 4.8% from the year-ago
quarter to $385.8 million, primarily due to compensation-related
expenses. Moreover, higher expenses related to investment in
product development and supporting technology and higher
sales-related costs were responsible for the rise in expenses.
Nonetheless, total expenses as a percentage of total revenue
decreased 147 basis points (bps) on a year-over-year basis due to
higher revenue base.
Paychex reported operating income of $250.7 million, up 11.4%
from the year-ago period, attributable to modest revenue growth
supported by better cost management and capacity utilization.
Operating margin was 39.4% versus 37.9% in the year-ago
Excluding Interest on funds held for clients, Paychex's
operating income came in at $240.2 million or 38.4% of total
services revenue which increased from $214.1 million or 36.8% of
total services revenue.
Net income for Paychex increased 10.8% from the year-ago
quarter to $160.1 million or 44 cents per share while net margins
expanded 77 bps on a year-over-year basis.
Balance Sheet & Cash Flow
Paychex exited the quarter with cash and cash equivalents of
$271.3 million versus $213.0 million at the end of the previous
quarter. Corporate investments were $314.4 million compared with
$250.4 million in the previous quarter. Paychex has no long-term
During the third quarter, Paychex repurchased 1.1 million
shares for approximately $43.9 million. Year-to-date, the company
generated operating cash flow of $705.8 million.
Paychex reiterated its outlook for 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 10.0% to 11.0%.
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 affected by 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 in the range of 36-37%.
Management expects net income to increase in the range of 9% to
10% (previous guidance was 8% to 9%).
Paychex reported better-than-expected third-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 amid the current
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 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 competition from
Automatic Data Processing
) remain the possible headwinds for the company.
Currently, Paychex has a Zacks Rank #2 (Buy). Investors can
), which carries a Zacks Rank #1 (Strong Buy).
AUTOMATIC DATA (ADP): Free Stock Analysis
LEXMARK INTL (LXK): Free Stock Analysis
INSPERITY INC (NSP): Free Stock Analysis
PAYCHEX INC (PAYX): Free Stock Analysis
To read this article on Zacks.com click here.