HR Services Continue To Boost Paychex’s Earnings

Paychex (NYSE:PAYX) reported its earnings for the first quarter of FY 2014 on September 30. The company posted total service revenues of $598 million, an increase of 5% year-on-year, in line with its guidance for FY 2014. Net income rose to $163 million, registering a 6% y-o-y increase as expenses grew (4%) slower than revenues. Interest on client funds declined by 1% due to lower average interest rates earned, partially offset by growth in average investment balances. The company maintained its outlook for FY 2014, with a guidance of 5%-6% for total revenue growth and 8%-9% for net income. ^[1]

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Expanding Payroll Services Business To Enhance Client Base

Payroll services make up approximately 62% of our price estimate for Paychex. Payroll services grew 2% y-o-y to $395 million in Q1 2014. The growth was driven by the rise in checks per payroll (1.6%) and revenue per check. Average investment balances increased by 7% due to expiration of certain payroll tax cuts, which led to growth in checks per payroll and client base. Revenue per check grew on the back of price increases partially offset by discounts.

Paychex is focused on growing through expansion into new markets and geographies. The company recently forayed into the South American market via a joint venture in Brazil, which has around 5 million small businesses. It also acquired a payroll provider in Germany to boost its market share. These expansion initiatives should help Paychex grow its client base in the future.

HR Services Offers Scope For Up-Selling To Existing Customers

Human resource services, the company’s other division, led the growth in the quarter with a 11% y-o-y increase in revenue to $203 million. This remarkable performance was attributable to client base growth in retirement services, Paychex HR solutions and eServices products. We think that the growth in this division is good news as it diversifies Paychex’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 its payroll services.

We are in the process of updating our $35 price estimate for Paychex.

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1. Paychex, Inc. Reports First Quarter Results, Paychex Investor Relations, September 30, 2013 [↩]