Paychex Earnings Will Show Impact Of Sluggish Economy & European Woes

by Trefis Team
-13.58%
Downside
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Market
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Trefis
PAYX
Paychex
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Paychex (NASDAQ:PAYX) is set to report its Q4 earnings on June 27 and we expect weak job growth to weigh on earnings. Paychex reported Q3 total revenues of $569.5 million, growing 7% as compared to the same quarter last year. It consists of two main divisions; Payroll Service and Human Resource Services. Interest on funds held for clients are likely to decrease as well due to the yields being low for high quality securities as uncertainty in Europe leads to a flight to quality. Unemployment remains unchanged at ~8.2% and non-farm jobs added in may was ~70K, this means slowing growth in the employment space may weigh on earnings growth. [1]
See our full analysis on Paychex

Paychex’s major source of revenue is from payroll processing and its biggest client is the U.S. government. Though it has started targeting smaller clients with SaaS offerings of its payroll, this revenue stream is very small and Paychex is unlikely to benefit the growth seen in small and medium enterprises.

SurePayroll and ePlan are SaaS offerings of Paychex and it contributed to about 2% of the revenues for the third quarter. This focus on SaaS is also evident from the launch of it’s iPad application 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 with smaller clients. [2]

Likely Future Growth Drivers

Paychex is actively trying to gain market share with SMEs and this is a potential source of revenue growth in the long term. In the short term however, we expect its Insurance services to become a major driver as its revenues increased 25% to about $13.1 million last quarter mainly driven by growth in its health and benefits services. We expect it to meet its revenue guidance growth of ~7%  y-o-y.

We currently have a $29.34 Trefis Price Estimate for Paychex which is slightly below market price estimates.

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Notes:
  1. Employment Situation Summary, www.bls.gov, June 1, 2012  []
  2. Economy, jobs behind Paycheck, ADP downgrades, www.marketwatch.com, June 25, 2012 []
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