Paychex posted a stronger-than-expected set of Q4 FY'22 earnings. While revenue rose by almost 11% year-over-year to $1.14 billion, Non-GAAP earnings stood at $0.81 per share. Growth was driven by an expanding base of payroll clients and strong demand for HR Solutions, given the tight U.S. labor market. For FY'2023, the company has guided revenue growth in the range of 7% to 8%, while noting that adjusted operating margins could come in at between 40% to 41%;
The unemployment rate has consistently declined from the highs of 14.8% in April 2020, to 6.7% in November 2020, to just 3.6% in May 2022. This has resulted in an increase in worksite employees for the company, along with a stable customer retention rate. The company had a total of 730,000 payroll clients in the U.S. as of May 2022, up from around 670,000 in 2019.
Note: Paychex's FY'22 ended on May 31, 2022.
Below are key drivers of Paychex's value that present opportunities for upside or downside to the current Trefis price estimate for Paychex:
Paychex is a leading provider of human capital management (HCM) solutions including payroll processing, talent management, and employee benefits functions to small and medium-sized businesses. The company classifies its services across two segments, Management Solutions, and Professional Employer Organization. The Management Solutions segment provides all human capital management services including payroll processing, tax administration, HR solutions, and retirement services.
The PEO segment provides a comprehensive employment administration solution where employees working for a client are co-employed by Paychex and the client (worksite employees).
The number of payroll clients is an important driver of Paychex revenues. As of May 2022, Paychex had over 730,000 Payroll clients.
In addition to Payroll Processing, Paychex offers HR Outsourcing, whereby Paychex takes over the HR operations of clients. About two million worksite employees are served through the company's HR outsourcing services.
The U.S. job market has pick up in recent years, with unemployment rates declining from levels of almost 8% in 2012 to under 4% as of May 2022. Declining unemployment rates are beneficial to Paychex since it could lead to an increase in its checks per payroll metric. This metric indicates the number of employees per client that Paychex caters to and an increase in this number will have a positive impact on Paychex's revenue.
Jobs in the small and medium businesses in the U.S. have grown over the last decade, driven by a recovery in the U.S. economy post the financial crisis. Paychex's core payroll services are targeted at small and medium-sized (less than 50 employees) businesses. Growth in jobs at these businesses will help drive Paychex's clients and revenues.
Small businesses are the most vulnerable in economic recessions and have high bankruptcy risk. Paychex is more exposed to the risks of small businesses than its primary competitor ADP.