Paychex Earnings: Revenue Grows On Pricing, New Services

Paychex (NASDAQ:PAYX) released its second quarter fiscal year 2015 earnings results on Friday, December 19. Driven by an increase in pricing and new service offerings, the company reported 10% year-on-year growth in service revenue, tracking the top end of its guidance of 8-10% growth for the fiscal year, to reach $666 million. ^[1] Rising demand for healthcare reform products also contributed to the growth. Paychex’s net income grew 9%, driving a 9% increase in earnings per share, which reached $0.47. In its earnings release, Paychex maintained its guidance of 8-10% growth in revenue for the fiscal year 2015.

See our complete analysis of Paychex here.

Pricing Drives Payroll Revenue Growth

Paychex generally implements a pricing increase of 2-4% every year. At the beginning of this fiscal year, Paychex indicated that its pricing increase was in the middle of this range. ^[2] Paychex’s second quarter Payroll revenues benefited from this increase in pricing and grew 4%, to reach $411 million. ^[1] Client base growth also contributed to the segment’s growth. According to Paychex, they are currently within their target client base growth range of 1-3%. ^[3]

Despite the unemployment rate hitting a six-year low in October, Paychex’s checks per client growth slowed down to less than 1% in the second quarter. Paychex attributes this decline to the moderation in employment growth at small businesses in the U.S., which account for most of its Payroll client base. ^[3] Over the three months ended November, the Paychex IHS Small Business Index, an indicator of change in small business employment in the U.S., declined 0.25%. ^[4] Employment growth at small businesses has been trending downwards for the better part of this year. Paychex expects the trend to continue, because of which its checks per client growth will likely remain sluggish or flat through the second half of the fiscal year.

Human Resource Services Revenue Grows On New Service And Clients

Paychex’s Human Resource Services (HRS) revenue grew 21% for the second quarter, ^[1] as a result of a new health insurance offering, which represented around 7% of total HRS revenue. ^[3] One of the primary reasons for growth in the new health insurance product is the Patient Protection and Affordable Care Act (PPACA), which includes a regulation wherein many employers have to provide health insurance to employees. Strong growth in client base and worksite employees also contributed to the segment’s revenue growth in the second quarter.

As businesses continue to buy health insurance for their employees to remain compliant with the PPACA, we believe that Paychex’s new insurance offering will continue to grow through the fiscal year. Additionally, new products such as Paychex Flex and Paychex Time should also help drive growth in the segment.

Higher Interest Rates To Drive Interest On Funds Held For Clients

In the second quarter, Paychex’s interest on funds held for clients increased 4%, to cross $10 million. ^[1] The growth was primarily the result of a 4% increase in client funds. Considering the present low interest rate environment in the U.S., we believe that for the second half of the fiscal year, growth in interest on funds held for clients fund will remain heavily reliant on increase in average investment balance. However, from fiscal 2016 onwards, it should benefit from an increase in interest rates, as indicated by the Fed. ^[5]

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1. Paychex’s Q2 FY 2015 10-Q SEC Filing, December 19, 2014, www.sec.gov [↩] [↩] [↩] [↩]
2. Paychex (PAYX) CEO Martin Mucci on Q1 2015 Results – Earnings Call Transcript, September 24, 2014, www.seekingalpha.com [↩]
3. Paychex’s (PAYX) CEO Martin Mucci on Q2 2015 Results – Earnings Call Transcript, December 19, 2014, www.seekingalpha.com [↩] [↩] [↩]
4. The Paychex | IHS Small Business Jobs Index, www.paychex.com [↩]
5. Fed Sets Stage for Rate Hikes in 2015, December 17, 2014, www.wsj.com [↩]