Paychex (NASDAQ:PAYX) reported its revenues for Q3 FY 2012 on March 28, with total revenues of $569.5 million, growing 7% as compared to the same quarter last year. The two divisions of Paychex; Payroll Service and Human Resource Services saw an increase of 5% and 12% respectively. Payroll Service revenue increased 5% to $386.5 million including revenue from SurePayroll. This was mainly driven by an increase in checks per payroll and a slight increase in revenue per check. Revenue per check was impacted by price increases offset by discounting. Human Resource Services revenue increased 12% to $172.0 million. The operating income increased 6% to $210.4 million while interest on funds held for clients decreased 7% to $11.0 million. This is mainly due to the yields being low for high quality securities.
Higher Growth in Checks per Payroll
The ‘checks per client’ (or the average number of employees each Paychex client has on its payroll) is an important driver of revenue for Paychex which improved by 1.8% in the third quarter. However the growth rate was higher than the 1.5% experienced during the second quarter and is expected to grow further during the remainder of the fiscal year due to better market conditions for hiring.
Higher Number of Payroll Clients
Paychecx reported that it serves about 599,000  clients as of February 29 2012 which translated to an 11% increase over the prior period quarter. This is growth is inorganic and driven mainly by the acquisition of SurePayroll Inc, and ePlan Services Inc and will likely not grow at this rate.
Focus on SaaS
SurePayroll and ePlan contributed to about 2% of the revenues for the third quarter but their software-as-a-service model will likely make them popular with the smaller clients. This focus on SaaS is also evident from the launch of it’s iPad app Paychex Online Mobile. Currently it faces competition from Automated Data Processing Inc. ADP (NASDAQ:ADP) and Intuit Inc. whose SaaS-based mobile solutions have already gained share in the market.
Likely Future Growth Drivers
Paychex reported a 25% increase in applications for its Insurance services and its revenues increased 25% to about $13.1 million. This was mainly driven by growth in its health and benefits services. They expect strong growth in this area in the near future and if this rate of growth were to sustain till the end of the Trefis forecast period, we can expect an upside of 8-10% of the current market price. We currently have a $3o price estimate for Paychex.Notes: