Paychex (NYSE: PAYX) reported results for FY 2013 on June 26, posting total revenues of $2.3 billion an increase of 5% year-over-year.  The company reported a 4% revenue growth in payroll processing division during the fourth quarter up from 1% growth witnessed in the first nine months of the year as hiring activities picked up owing to stronger economy performance. Human resources outsourcing division continued its double digit growth momentum growing 13% in fourth quarter and 10% for the full fiscal year.
According to our estimates, Paychex’s Payroll Services division makes up approximately 62% of the firm’s value. Revenues for this division experienced slow growth (2% y-o-y) because some of the company’s clients were affected by Hurricane Sandy as is evident by moderate growth of 1.6% in checks per payroll, down from 2% growth in the previous year. 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.
However, the company has been able to sequentially raising its prices, resulting in higher revenue per check processed. The company also added about 1% new clients during the year adding to the overall growth of the payroll processing division. A lower unemployment rate during the year as compared to the previous year helped Paychex in gaining these clients. As per the U.S. Bureau of Labor Statistics, unemployment rate in the economy reduced from 8.2% in May 2012 to 7.6% in May 2013. 
This division continues to be a primary growth driver for Paychex’s revenues as it posted year-over-year revenue growth of 10%. 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, as it will be the key to the company’s growth.
We have updated our $34 price estimate for Paychex after the company filed its earnings with the SEC.Notes:
- 8-K, SEC [↩]
- Employment Situation Summary Table A. Household data, seasonally adjusted, U.S. Bureau of Labor Statistics [↩]