HR Outsourcing Is Key To Paychex’s Future Growth

by Trefis Team
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    Quick Take

  • Paychex reported Q2 FY 2013 earnings on December 19.
  • The company reported total revenues of $559 million, growth of 5% year-over-year.
  • Payroll Service revenue rose 1% while HR outsourcing revenues grew 12% year-over-year.
  • According to management, business closures due to Hurricane Sandy contributed to a Payroll Service revenue decline of 0.5%.

Paychex (NASDAQ:PAYX) reported results for Q2 FY 2013 on December 19, posting total revenues of $559 million, an increase of 5% year-over-year. [1] This is a faster y-o-y growth rate than what the company achieve during Q1 FY 2013, but the slow growth in the company’s Payroll Services division show that the weak job situation is still affecting its growth prospects. For example, Payroll Service revenue increased only 1% during the quarter while revenues for its HR Outsourcing division grew 12%. Going forward, we will be closely watching Payroll Service revenue growth, especially in the context of the improving jobs situation in the United States, and also how well Paychex is able to leverage its payroll client base when selling its HR outsourcing services.

See our complete analysis of Paychex Here

Payroll Services

According to our estimates, Paychex’s Payroll Services division makes up approximately 70% of the firm’s value. Revenues for this division experience slow growth (1% y-o-y) because some of Paychex’s clients were affected by Hurricane Sandy, which ate into about 0.5% of payroll services revenue growth.

However, because of the fact that the hurricane was likely a one-off event, we think that this division could see improved growth over the next year. The US economy has successfully added over 100 thousand jobs in each of the last three months, and we expect this trend to continue if the US fiscal cliff situation is resolved. [2] If individuals in the US economy continue to find jobs in similar numbers going forward we could see the total employee count on Paychex’s payrolls increase, which would cause upside to our price estimate going forward.

HR Outsourcing

This division continues to be a primary growth driver for Paychex’s revenues as it posted year-over-year revenue growth of 12%. The increase was primarily driven by an increase in the number of clients and the number of employees per client. Additionally, revenues for retirement services also increased due to growth in the average asset value in client employee funds.

Overall, we think that the growth in this division is good news for Paychex as it provides diversification to the company’s revenue streams. Providing services such as retirement and insurance outsourcing gives Paychex a product line which it can sell to existing users who only use the company’s payroll services. We will be watching this division closely over the coming quarters, as it will be key to Paychex’s growth.

We currently have a $33 price estimate for Paychex, which is approximately the same as the current market price.

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Notes:
  1. 8-K, SEC []
  2. November Jobs Report: U.S. Economy Adds 146,000 Jobs As Unemployment Rate Drops, HuffPost Business []
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  • commented 2 years ago
  • tags: PAYX ADP LNKD MWW
  • Well its quite informative!! HR Outsourcing industry continues to boom as employers look for ways to improve efficiency, cut overhead and consolidate vendors.
    Source:www.hrbponline.com
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  • commented 2 years ago
  • tags: PAYX ADP LNKD MWW
  • However, outsourcing your HR comes with several more advantages than just making payroll simpler. It allows you to offer better and more extensive benefits packages to your employees. It also provides stability and continuity of processes in the event of high employee turnover or managerial upheaval. Lastly, outsourcing enables you to pick and choose which HR processes to outsource and keep in-house, providing you with more the same control and flexibility you might have with a standard hr outsourcing program, and much more.