Paychex Earnings: Strong HR Outsourcing Growth And Improving Interest Rates Boost Results

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Paychex (NASDAQ:PAYX) announced its Q1 FY 2018 results on October 3, reporting a 4% annual rise in its revenues to $816.8 million.((Paychex, Inc. Reports First Quarter Results, Paychex Press Release, October 2017)) While the majority of the top-line growth was driven by strong demand for HR outsourcing solutions, its core payroll processing services continued to deliver a steady growth of 2% during the quarter. Besides, the company posted adjusted earnings of 62 cents per share (diluted), beating consensus expectations by a small margin. Consequently, the company’s stock rose 3.6% post the announcement of the first quarter earnings. Going forward, we expect the acquisition of HR Outsourcing Inc. (HROI) to strengthen Paychex’s presence in the HR outsourcing market and augment its future growth.

See Our Complete Analysis For Paychex Here

HR Outsourcing Continues To Boost Top-Line

As has been the case in the earlier quarters, Paychex’s HR outsourcing solutions continued to drive its revenue growth even in this quarter. The company’s HR outsourcing revenue rose by 7% y-o-y to $345.3 million in the first quarter of fiscal year 2018, backed by the growing client base across all major HCM services. However, the growth in this quarter was lower than the double digit growth delivered by the division in the previous quarters, largely because of the tailwinds related to the Affordable Care Act sales experienced in the year ago quarter.

Going forward, the company expects the division’s growth rate to rebound to 13%-16% in the second quarter due to continued demand for HR services. In addition to this, Paychex’s recent acquisition of HROI is likely to solidify its presence in the HR services markets, particularly for small and mid-sized businesses, and boost its top-line as well as bottom-line in the coming quarters. Consequently, the company has revised its guidance for fiscal year 2018 as shown in the table below:

Rate Hike Leads To Higher Interest Revenues

As anticipated by Paychex, its interest on funds held for clients grew in double digits in the first quarter driven by the improving interest rates. Interest on client funds grew by 14% y-o-y to $14 million as a result of a 25-basis-point rate hike by the Fed in the month of June. Based on the current interest rates, Paychex estimates its interest on funds held for clients to grow in the mid-to-upper teens for the fiscal year 2018. However, if the Fed increases the interest rates further in December, as predicted by the market, then the company is likely to enjoy higher interest revenue in the current year.

 

New Products To Improve Customer Satisfaction

Just a day prior to releasing its first quarter earnings, Paychex announced its plans to embed two new products – Paychex Flex Onboarding Essentials and a do-it-yourself (DIY) handbook builder – into two of its existing mid-level HCM offerings.((Paychex Introduces New HCM Solutions To Help Clients Drive Efficiency At No Additional Cost, PR Newswire)) While the Flex Onboarding Essentials tool will enable Paychex’s existing clients to ensure paperless and efficient onboarding of their new hires, the DIY handbook builder will allow them to create customized handbooks to guide their employees and ensure compliance of their policies. With these new products, Paychex aims to cater to two of the biggest pain points of its clients without charging any additional cost. Although these new products will not have a direct impact on Paychex’s revenue or earnings, they could go a long way in enhancing its customer satisfaction and brand value, which will be beneficial for the company in the long term.

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