Declining Unemployment, Strong Job Additions To Drive Paychex’s Revenues

Paychex (NASDAQ:PAYX), a leading payroll and human resource management company, is set to release its second quarter fiscal 2015 earnings on Friday, December 19 before the market opens. We expect to see an increase in Paychex’s checks per client driven by the decline in the unemployment rate to a six-year low. Also, as the deadline for compliance with the Affordable Care Act regulation approaches, Paychex should see an increase in its client base.

In the first quarter, the company reported a 9% year-on-year increase in service revenue, which was at the midpoint of its guidance of 8-10% growth for the fiscal year. ^[1] An increase in revenue per check and new service offerings at its Payroll and Human Resource (HR) segments 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 fiscal 2015. This guidance includes the impact of classification of PEO direct costs as operating expenses.

See our complete analysis of Paychex here.

Job Additions, Declining Unemployment To Drive Checks Per Client

According to the December release of the Employment Situation Summary by the U.S. Bureau of Labor Statistics, the unemployment rate remained at a six year low of 5.8% in November. ^[2] It was recorded at 5.9% in September and 5.8% in October. The unemployment rate has shown significant improvement since the recession in 2008, supported by a large number of job additions. More than 200,000 jobs have been added each month in the U.S. for ten consecutive months as of November. November job additions, which stood at 321,000 against expectations of 230,000, were the highest in almost three years.

The strong job additions and declining unemployment rate are good signs for Paychex’s checks per client, which indicates the average number of employees Paychex serves for a client. Growth in Paychex’s checks per client slowed down to 1% year-on-year in the previous quarter. ^[1] However, with the strong job environment in the three months ended November, its checks per client should show a significant increase.

PPACA Requirements Could Drive Growth In Client Base

With the deadline of adherence to provisions of the PPACA approaching, the adoption of Paychex’s products catering to the regulation should help increase its clients. Separate surveys conducted by Automatic Data Processing (NASDAQ: ADP) and Paychex revealed that only around half of the small, mid and large sized businesses in the U.S. are aware of the impact of the ACA and are prepared for them. ^{[3] [4]} This leaves a huge market of potential clients who are looking for solutions that will help maintain compliance with the provisions.

Payroll Revenue Could Grow On Pricing Increase

Paychex’s Payroll segment grew 4.5% in the first quarter, primarily due to an increase in its pricing. ^[1] Paychex generally follows a pricing increase of 2-4%, which until the previous fiscal year 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. Paychex’s second quarter Payroll revenues will likely benefit from this increase in pricing.

Looking Out For Acquisitions

During the first quarter earnings call, Paychex’s Chief Financial Officer said “we have a good pipeline of acquisition opportunities.” ^[5] Though he did not divulge any information regarding the nature or timeline of these acquisitions, we will be looking out for any announcements in the coming weeks. Considering that Paychex has a solid history of acquisition performances and integration, any future acquisitions could bring significant value to Paychex’s product portfolio.

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1. Paychex’s Q1 FY 2015 10-Q SEC Filing, September 24, 2014, www.sec.gov [↩] [↩] [↩]
2. Employment Situation Summary, www.bls.gov [↩]
3. Health Care Reform Is The Big HR Compliance Challenge, www.adp.com [↩]
4. Roughly Half of Small Business Owners Understand, are Prepared for Changes Under the Affordable Care Act, April 24 2014, www.paychex.com [↩]
5. Paychex (PAYX) CEO Martin Mucci on Q1 2015 Results – Earnings Call Transcript, September 24, 2014, www.seekingalpha.com [↩]