Paychex Earnings Preview: HR Outsourcing, Interest on Client Funds To Drive Growth

Paychex (NASDAQ:PAYX)is scheduled to announce its Q1 FY 2017 earnings before markets open on Wednesday, September 28. ^[1] Paychex’s net revenues have grown at high single digits over the last few years, with much of the growth coming from its HR outsourcing and services business. HR outsourcing revenues have grown at over 15% over the last few years, while its core payroll processing business has grown at a steady 3-4% in the same period. Paychex has cemented its dominant position in the HR outsourcing market for small and medium-sized businesses as a result. We forecast the growth spree in Paychex’s HR outsourcing business to continue to drive top-line growth in fiscal 2017, while Paychex’s net revenues could increase by 8% through fiscal year 2017 (ended May).

The total number of payroll processing clients served by Paychex has increased at a 1-2% in the last few years, complemented by a 2-4% price increase. ^[2] This trend could continue, with payroll processing clients served expected to increase by around 2% for the year to 613,000 clients.

 

Comparatively, the number of HR services clients has increased at a much faster pace over the last couple of years, driven by the Affordable Care Act (PPACA), which includes a regulation wherein many employers are required to provide health insurance to employees. Additionally, the growth in small businesses has witnessed a consistent increase in 2016 thus far. According to the most recent data in the small business jobs index released by Paychex, the index stood at 100.70 for August, which was up by 0.22% over the previous year. ^[3] The index has averaged 100.71 in 2016 thus far, which is an improvement after a weak end to 2015. This is a healthy sign for HR management firms such as ADP (NASDAQ:ADP) and Paychex as the total number of clients served by these companies is likely to continue to increase.

The third key area of growth for Paychex in the coming quarters could be the interest earned on client assets. Over the last few years, interest rates have stayed extremely low, due to which the net client assets under management at Paychex grew from around $3.7 billion through FY 2013 to $4.1 billion in FY 2016. This figure can further improve to $4.2 billion in FY 2017 and continue to grow at around 3% in the coming years due to the hike in interest rates. Moreover, the yield on client funds could improve to around 1.8% in FY 2017, up from around 1.1% over the last few years, resulting in a significant revenue growth from this division.

 

Given that the expenses in this segment are fixed in nature, the top line growth could directly translate to an improvement in the company-wide EBITDA margin. We forecast Paychex’s EBITDA margin to improve by 60 basis points through FY 2017 as show below.

Have more questions about Paychex (NASDAQ:PAYX)? See the links below:

• What’s Paychex’s Fundamental Value Based On Expected 2016 Results?
• What’s Paychex’s Revenue & Earnings Composition?
• How Has Paychex’s Revenue & EBITDA Composition Changed In The Last Five Years?
• Where Will Paychex’s Revenue Growth Come From In The Next Five Years?
• How Do Paychex And ADP Compare On Core Payroll Processing Business?

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