Paychex (NASDAQ: PAYX) is set to report Q2 FY ’13 earnings on Wednesday, December 19 after the market close. During the previous quarter the company posted total revenues of $568 million, an increase of 3% compared to the same quarter last year.  This was a slower growth rate than what the company achieved during Q4 2012, and was driven by slow employment growth in the country.
We think that during the this quarter’s earnings announcement, we could see somewhat of a jump in the company’s revenues. The US economy added 161,000 jobs in September and 171,000 jobs in October, which should provide a boost to the number of employees on Paychex’s client payrolls.  In addition to this metric, we will also be looking at growth in new clients and progress on the company’s new product lines focused on small and medium businesses.
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According to our estimates, Payroll Services make up almost 75% of the company’s value. During the last quarter, revenues for this division grew primarily due to a 2% increase in checks per payroll, and a modest increase in revenues per check. Since the division’s revenues are correlated with the overall jobs situation, we expect that the addition of jobs to the US economy as a whole will continue to increase checks per payroll during the third quarter.
We will be watching this metric closely because of its importance to Paychex’s valuation. For example, if Paychex only reaches 16 instead of 19 employees per payroll client (our current forecast) by 2019, we could see approximately 10% downside to our price estimate.
Growth in New Clients from New Software
We think that one of the ways Paychex can drive growth in new clients is by simplifying the payroll process for them. To do this, the company creating new products for small and medium business which allow them to use its payroll processing services with SaaS-based mobile solutions, such as Paychex Online mobile. If the company is successful in creating new products and attracting new clients, the increase in the number of payroll clients could partially offset any downside if the employment picture worsens. Therefore, we will also be closely monitoring any new product announcements that the company might make along with its earnings announcement.
We currently have a $33 price estimate for Paychex, which is approximately the same as the current market price.