Paychex’s Second Quarter Results Driven By Strength In HR Outsourcing

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Paychex (NASDAQ:PAYX) announced its Q2 FY 2017 earnings on Wednesday, December 21, reporting a 7% annual growth in revenues to $771 million. [1] The company has reported high single digit growth over the last few quarters, with HR outsourcing and services business growing at low teens in the same period. The second fiscal quarter mirrored that trend, with HR outsourcing and other services revenues growing at 12% year-over-year to $319 million as shown below.

Comparatively, Paychex’s core payroll processing business has grown at a steady 3-4% over the last few quarters – a trend which the company has sustained in fiscal 2017 as well. 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.

payx_q2e1

Second Quarter Performance

Paychex has been dominant in the HR outsourcing market for small and medium-sized businesses (less than 500 employees), 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 has risen in the 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. The company reported a strong growth across the various HCM service streams leading to a 12% growth in HR outsourcing and services revenues to $319 million for the quarter. [1]

 

According to the most recent data in the small business jobs index released by Paychex, the index stood at 100.38 for November, which was flat 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 its core customer base. 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 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.

 
Positive Forecast For Fiscal 2017
We forecast Paychex’s net revenues to grow by 8% for the full year to almost $3.2 billion – in line with the company’s expectations. Payroll revenues are expected to grow at around 4% to $1.8 billion while HR outsourcing revenues could be up by around 14% to over $1.3 billion. [4]
payx_q2e2
Given that the expenses in the client funds interest segment are fixed in nature, the top line growth could directly translate to an improvement in company-wide EBITDA. We forecast Paychex’s adjusted EBITDA to increase by 10% to $1.4 billion while the EBITDA margin could improve by 90 basis points through FY 2017, as shown below.

payx_q2e3

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Notes:
  1. Paychex, Inc. Reports Second Quarter Results, Paychex Press Release, December 2016 [] []
  2. Small Business Employment Growth Consistent with 2015, According to Paychex | IHS Small Business Jobs Index, Paychex Press Release, December 2016 []
  3. Paychex Q2 2017 Earnings Call Transcript, Seeking Alpha, December 2016 []
  4. Paychex Q1 2017 Earnings Call Transcript, Seeking Alpha, September 2016 []
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