) is set to announce the results of its fourth quarter fiscal year
2014 (fiscal year ends on May 31) on July 1, after market closes.
In the third quarter, its revenue grew 7.3% to reach $636.5 million
driven by strong performance across its Payroll and HR Outsourcing
segments, which offset a decline in interest earned on funds held
for clients. Paychex's net income increased 10.7% to reach $160.1
During the three months form Paychex's fourth quarter, March,
April and May, the unemployment rate for the U.S. has remained well
below 7.3%, the average for 2013. In March, the unemployment rate
was 6.7% and in April and May it was 6.3%. Additionally,
191,000, 220,000 and 179,000 jobs were added in March, April and
May respectively. Some of the decline in the unemployment rate came
from workers dropping out of the labor force. We believe that
Paychex will have benefited from the addition of jobs and
improvement in the employment situation in the U.S. and this will
reflect in its fourth quarter revenues. However, sequential decline
in margins may impact its bottom line.
See our complete analysis of Paychex here.
Payroll Processing division to benefit from growth in
checks per client
Check per client indicates the average number of employees
Paychex's Payroll service caters to for a client. A decrease in
unemployment rate indicates that clients are hiring more employees.
This in turn increases Paychex's checks per client. With increase
in checks per client, the segment's revenue also increases.
In the third quarter, Paychex's Payroll Processing division
posted revenue growth of 5% driven by 1% increase in checks per
client. Improving employment conditions in the U.S. have helped
increase Paychex's check per client for 16 consecutive quarters. We
believe that this trend will continue in the fourth quarter as
well. Combined with price increases, this should lead to mid single
digit growth in the segment's fourth quarter revenue.
Operating Margins May Decline Sequentially
Operating margin is a ratio which measures the proportion of
revenues left after accounting for operating expenses. It is an
indicator of the company's operating efficiency and a higher ratio
indicates higher efficiency. Paychex's annual operating margins
have historically remained close to 38%.
As per Paychex's management, the company's quarterly operating
margin trends downwards through the year. This is also evident from
the operating margin for each quarter. In the first quarter of
fiscal 2014, the operating margin was 41%. This declined to 39.7%
in the second quarter and then 39.4% in the third quarter. We
expect the trend to continue into the fourth quarter driven by
various technology investments to expand their
Software-as-a-Service portfolio and seasonal sales related
HR Outsourcing division will bolster Paychex's
The HR Outsourcing division has historically shown strong growth
as a value-added service to the company's existing payroll
processing clients. In the third quarter, HR service revenue grew
12.4% to $212.1 million due to an increase in its client base for
online HR administration products, retirement services and HR
solutions. Growth in average asset value of participant's funds,
insurance premiums and number of health and benefits applicants
also contributed to the segment's revenue. In the fourth quarter,
we expect to see low teens growth in the segment driven by the
declining unemployment rates.
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