Paychex Earnings Preview: Strong Demand For HR Services To Drive Results

by Trefis Team
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Paychex (NASDAQ:PAYX) is scheduled to announce its Q1 FY 2018 earnings before the markets open on October 3. [1] The company’s top line growth over the last few years has been driven by the double digit jump in its HR outsourcing and services business. In fiscal 2017, the company’s HR outsourcing revenues grew by 12.4% to $1.3 billion, while its core payroll processing business increased at a steady rate of 3% to $1.8 billion. Based on Paychex’s performance in the last few quarters, we expect its HR outsourcing business to continue to grow at a strong pace and drive revenue growth in the current quarter.

We have a price estimate of $57 per share for Paychex, which slightly below its current market price.

See Our Complete Analysis For Paychex Here

HR Outsourcing To Drive Top Line Growth

Due to the increased demand for HR outsourcing services in the small and medium-sized businesses, Paychex has seen a sharp rise in its PEO services business over the last few years. The company’s HR outsourcing clients have grown from 23,000 in 2012 to 37,000 in 2017, growing at a rate of 10% annually. The company foresees continued demand for its HR outsourcing services in fiscal 2018, and expects its PEO revenues to grow in the range of 8% to 10%. Consequently, we anticipate majority of Paychex’s revenue growth in the first quarter to be driven by its HR outsourcing and services business.

In order to further enhance its HR outsourcing reach, Paychex announced the acquisition of HR Outsourcing Holdings Inc. (HROI) for an undisclosed sum last month. Since both companies are targeting small and mid-sized businesses, the deal will strengthen Paychex’s leadership position in the HR outsourcing market, while allowing it to offer better HR solutions and capture newer markets. Although this deal will not have a direct impact on Paychex’s Q1 2018 results, it is likely to boost its top line as well as bottom line in the coming years.

Payroll Processing Will Continue To Show Steady Growth

While Paychex’s PEO services business has driven much of the top line growth in the last few years, payroll processing continues to be its core business, contributing the largest portion of its top line. The segment’s revenue has grown steadily at a rate of more than 3% annually over the last five years. However, in its last quarter’s earnings release, the company highlighted that the demand for its payroll services is likely to be weaker in fiscal 2018. As opposed to growth of 3-4% in recent years, Paychex anticipates its payroll processing revenues to increase by only 1% to 2% during the current fiscal year. Consequently, we expect payroll revenues to grow at a slower pace in the current quarter.

 

Interest On Client Funds

Interest on client funds contributes a fairly limited portion of Paychex’s top line. This is largely because of the low interest rates prevailing over recent years. However, over the last few quarters, the U.S. economy has seen significant improvement (in terms of employment rate and economic stability), which has led to frequent rate hikes in the last two years. With a positive outlook for interest rates, Paychex expects its interest on client funds to grow between 15% to 20% during fiscal 2018. Keeping in mind the rate hikes in the first half of the financial year 2017, we expect the division’s revenue to grow during the current quarter as well as the coming quarters.

 

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Notes:
  1. Paychex, Inc. Schedules First Quarter Fiscal 2018 Earnings Release Conference Call For October 3, 2017, Paychex Press Release, September 2017 []
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