Growth in Payroll And HR Services Boost Paychex’s Earnings

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Paychex (NASDAQ:PAYX), a payroll processing company, released its third quarter fiscal 2014 results (fiscal year ends May 31) posting growth in revenue and net income. Its revenue grew 7.3% to reach $636.5 million driven by strong performance across its Payroll and HR Outsourcing segments, which offset a decline in interest earned on funds held for clients. [1] Paychex’s net income increased 10.7% to reach $160.1 million.

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Operating margin is a ratio which measures the proportion of revenues left after accounting for operating expenses and is an indicator of the company’s operating efficiency. Paychex’s operating margin declined marginally from 39.7% in the second quarter to 39.4% in the third quarter. However, on a year-over-year basis, the third quarter operating margin grew 1.8%.

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Expenses grew 4.7% primarily due to higher wage expenses on account of higher investment in product development, supporting technology and new sales initiatives. Paychex has been investing in its Software-as-a-service solutions and mobile apps to enable ease of access for its clients and client employees. These services help the client or client employee access and edit all their payroll related information over mobile. The service also somewhat eliminates the need for an on-site HR professional. These solutions have seen an increasing demand across Paychex’s client base.

During its third quarter meet, the company reiterated its full year guidance of 5%-6% increase in revenues with 3%-4% increase in Payroll services revenue and 10%-11% increase in HR services revenue. Guidance for operating margin was also unchanged at 38%. Paychex increased its expectations for the full year net income growth from 8-9% to 9-10%.

Payroll Services Revenue Grows Driven By Increase In Checks Per Client

Paychex’s Payroll service segment posted revenue growth of 5% to reach $413.9 million driven by an increase in checks per client. [1] Checks per client indicate the average number of employees Paychex’s Payroll service caters to for a client. Improving employment conditions in the U.S. have helped increase Paychex’s check per client for the 16th consecutive quarter, however, the growth has somewhat moderated. Compared to the 1.6% in the previous quarter, checks per client grew only 1% in the third quarter. Revenue per check increased due to increase in price for services offered and an increase in client base.

The segment also benefited from one additional operating day compared to the previous year, contributing 0.5%-1% to the segment’s third quarter revenue growth. One less operating day in the fourth quarter will lead to a decline in revenue of around the same range. Paychex expects its Payroll service revenue to grow around 3% in the fourth quarter.

Growth In Client Base Boosts HR Service Revenue

During the third quarter, HR service revenue grew 12.4% to $212.1 million due to an increase in its client base for online HR administration products, retirement services and HR solutions. [1] Growth in average asset value of participant’s funds also bolstered retirement services revenue. Additionally, insurance services revenue reflected higher premiums in workers’ compensation insurance services, and an increase in the number of health and benefits applicants. Within the HR solutions, Professional Employer Organization HR Service and Administrative Services Organization HR Service performed well.

Growth in the HR service division can vary quarter to quarter since it is highly dependent on variables that fluctuate very often such as basis points in the financial markets which impact funds invested and worker compensation claims. However, the division has historically shown strong growth as a value-added service to the company’s existing payroll processing clients. Paychex expects its HR service revenue to grow at around 10% in the fourth quarter.

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Notes:
  1. Paychex Q3 2014, March 26, 2014, www.paychex.com [] [] []