Key Takeaways From Paychex’s Earnings
Paychex (NASDAQ:PAYX) announced its Q1 FY 2017 earnings on September 28, reporting a 9% annual growth in revenues to $786 million. [1] Revenue growth was consistent with the trend over the last couple of years, with the company reporting high single digit or low double digit growth in each of the last twelve quarters. Much of the growth was attributable to strength in its HR outsourcing and services business, which has grown at over 15% over the last few years. Comparatively, Paychex’s core payroll processing business has grown at a steady 3-4% in the same period. It is interesting to note that competing HR management and payroll processing firm ADP (NASDAQ:ADP) has also witnessed a similar trend in its payroll processing and HR outsourcing businesses over the last few years.
We have a $55 price estimate for Paychex, which is roughly in line with the company’s market price. Paychex’s stock price has fluctuated between $47 and $61 in the last year.
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First Quarter Performance
Paychex reported a 15% growth in HR outsourcing and services revenues to $323 million for the quarter. The company has cemented its dominant position in the HR outsourcing market for small and medium-sized businesses, leading to strong revenue growth over the last few quarters. In the last few years the number of insurance clients and retirement services clients serviced by Paychex have grown at a steady 4-6%. Comparatively, the total number of HR outsourcing clients serviced by Paychex have risen at low single digits. At the end of fiscal year 2016 (ended May), the total number of HR outsourcing clients serviced by Paychex stood at 35,000 while insurance clients and retirement services clients stood at 150,000 and 74,000, respectively.
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. [2] This is a healthy sign for Paychex as the total number of clients served by these companies is likely to continue to increase, especially because small and medium businesses form the core customer base of Paychex. We forecast the total number of clients to continue to increase at 4-5% over the next few years.
Comparatively, 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. [3] We expect the trend to continue, with payroll processing clients served forecast to increase by around 2% for the year to 613,000 clients.
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- Paychex, Inc. Reports First Quarter Results, Paychex Press Release, September 2016 [↩]
- Small Business Jobs Index Continues Solid Pace of Employment Gains, Paychex Press Release, September 2016 [↩]
- Paychex Q1 2017 Earnings Call Transcript, Seeking Alpha, September 2016 [↩] [↩]