Key Takeaways From Paychex Inc.’s Q3 Earnings

by Trefis Team
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Paychex (NASDAQ: PAYX) posted decent performance in its third quarter earnings. Net sales of the company increased by 9% y-o-y to $866.5 Mn during Q3. This increase in revenue was driven by growth across all major human capital management (“HCM”) product lines. In particular, comprehensive human resource (“HR”) outsourcing solutions, retirement services, insurance services, and their time and attendance solutions have performed well. Their service delivery also remained strong as they continued to experience favorable client retention results. The company also benefited from the Tax Act enacted in December 2017, the most comprehensive tax reform legislation approved in more than two decades. The benefits of tax reform and the products and solutions they provided to clients continue to strengthen and enhance their market-leading position. The acquisition of HRHR Outsourcing Holdings, Inc. (“HROI”), completed during August 2017, and Lessor Group, a market leading provider of payroll and HCM software solutions, also contributed to the total revenue growth for the third quarter.

Looking ahead based upon current market, economic, and interest rate conditions, for fiscal 2018 the company has forecast sales to grow by 7% y-o-y to and adjusted earnings  of the company are expected to increase in the range of 15% to 16% per share, including the impact of the Tax Act and the acquisition of Lessor.

Please refer to our dashboard analysis on Paychex.

 

Below are key trends that enabled Paychex to post top line growth :

Segment-Wise Performance – The company posted broad-based growth across all its key segments. Payroll service revenue saw a 2% increase reaching $455.0 million for the Q3. The increase was primarily driven by growth in revenue per check, which improved as a result of price increases, net of discounts. Human Resource Services (“HRS”) revenue increased by 17% y-o-y to $393.4 million for the third quarter driven by increases in client bases across the following HCM services: comprehensive HR outsourcing services, including HROI; retirement services; time and attendance; and insurance services.  Interest on funds held for clients increased by 37% y-o-y to $18.1 million for the third quarter. This increase resulted from higher average interest rates earned.

Expansion in International markets  – Growth prospects in International markets remained strong for Paychex. The company’s operations in new geographies have been benefiting post acquisition of Lessor Group as the company continues to expand.

Acquisition of Lessor Group fueled strong returns – The company benefited from the recent acquisition of Lessor Group (“Lessor”), a market leading provider of payroll and HCM software solutions headquartered in Denmark and serving clients in Northern Europe. The combination of Lessor’s payroll and HCM software products with full service business process outsourcing capabilities provided a complete technology-enabled services platform in the markets they serve.  With their continued international market expansion they are welcoming all of the Lessor employees to the Paychex family of products.

 

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