Paychex Posts Strong Growth On Pricing Increase And New Service Offerings

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Paychex (NASDAQ:PAYX) released its first quarter (ended August 31,2014) fiscal year 2015 earnings results on Wednesday, September 24, 2014. The company reported a 9% year-on-year growth in service revenue, which is at the mid of its guidance of 8-10% growth for the fiscal year. [1] Increase in revenue per check and new service offerings at its Payroll and Human Resource (HR) segments respectively, helped drive the revenue growth. Net income grew 5%, driving a 7% increase in earnings per share, which reached $0.47 per share. In its earnings release, Paychex reaffirmed its guidance of 8-10% growth in revenue for the fiscal year 2015.

See our complete analysis of Paychex here.

Payroll services revenue grows on pricing; checks per client sluggish

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Paychex’s Payroll segment grew 4.5% during the quarter primarily due to an increase in its pricing and client base. [1] Paychex generally follows a pricing increase of 2-4%, which until the previous quarter was closer to the lower end of the range. However, in its first quarter earnings call, Paychex had indicated that it has been able to climb up to the middle of this range. This suggests that most of the revenue growth for Paychex’s Payroll in the first quarter is attributable to the increase in pricing.

Checks per client growth has slowed down considerably, from 1.6% in the first quarter of fiscal year 2014 to 1% in the first quarter of fiscal year 2015. This is primarily the result of moderation in the U.S job environment. Though still in the positive, job additions declined 15.6% quarter-on quarter during the quarter ended August 31, 2014. [2] The quarter also saw a 2% year-on-year increase in the number of people dropping out of the labor force, which led to a decline in the unemployment ratio, falsely indicating an improving job environment. Additionally, the employment ratio remained static at 59%, which shows that despite job additions, the overall employment in the country has not improved.

Despite indications that suggest that the job market may turn around, such as the declining number of U.S. jobless claims, [3] there still remains uncertainty regarding which direction the U.S. job environment will move. We believe that is the reason why despite growing at the higher end of their revenue guidance of 3-5% for its Payroll services segment, Paychex has decided not to revise its guidance upwards.

New service offerings and client base growth drive HR services revenue

Launched in the second half of the fiscal year 2014, Paychex’s minimum premium plan healthcare option for PEO (Professional Employer Organization) clients and worksite employees helped drive growth in Paychex’s HR services revenue, which grew 17.3% during the quarter. [4] Its new Software-as-a-Service based products have also been essential to its revenue growth.

In October 2013, Paychex announced a new SaaS platform which integrated all of its payroll and HR services and provides a one-stop solution for its clients. [5] The platform offers payroll, HR benefits, time and attendance, training and performance management services through a single interface backed by a centralized database. Paychex recently acquired nettime solutions in order to add an online based time and attendance solution to its product portfolio. (Read our article here) These products should continue to bolster revenues and help improve margins.

Other important highlights

Apart from the strong growth in both its segments, there were some other notable points about Paychex’s earnings meet, namely, the indication of further acquisitions and a change in its sales model.

  • Paychex’s Chief Financial Officer, Efrain Rivera, during the earnings meet said, “But the other thing is we have a good pipeline of acquisition opportunities. [6] Though he did not divulge any information regarding the nature of these acquisitions, it does bode well for the company considering that Paychex’s past acquisitions have been performing well.
  • In the past, Paychex’s sales strategy has involved pushing its products one by one to its clients. For example, they would initially approach a company with its payroll services. After a month or two, they would again approach the client with health insurance and 401(k) administration services. However, Paychex has changed this approach to a rather upfront selling strategy wherein they offer a bundle services to their client. For example, they now approach a company with their payroll, HR outsourcing and 401(k) services at the same time. According to Paychex, this strategy has yielded good results. We believe that the primary advantage of this strategy is that it reduces the overall sales effort for Paychex to sell these products. For their clients, it means a one-stop solution to their payroll and HR needs. This should help improving Paychex’s revenue and margins.

We shall soon be updating our $40.95 price estimate for Paychex after incorporating this quarter’s results in our model.

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Notes:
  1. Paychex’s Q1 FY 2015 10-Q SEC Filing, September 24, 2014, www.sec.gov [] []
  2. Employment Situation Summary, www.bls.gov []
  3. U.S. jobless claims data point to firming labor market, September 18, 2014, www.reuters.com []
  4. Paychex’s Q1 FY 2015 News Release, September 24, 2014, www.paychex.com []
  5. Paychex Cloud-Based Platform Combines Technology and Service for Streamlined Workforce Management, October 2013, www.marketwatch.com []
  6. Paychex (PAYX) CEO Martin Mucci on Q1 2015 Results – Earnings Call Transcript, September 24, 2014, www.seekingalpha.com []