Key Takeaways From Paychex’s Q1 FY’19 Earnings

by Trefis Team
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Paychex (NASDAQ: PAYX) posted a strong performance for Q1 2019 announced on Oct 2. Net sales of the company increased by 9% y-o-y to $862.8 million, driven by growth across all major human capital management (“HCM”) product lines and professional employer organization (“PEO”) services. In particular, the company’s comprehensive human resource (“HR”) outsourcing solutions, retirement services, insurance services, and time and attendance solutions performed well. The service delivery also remained strong as the company continued to experience favorable client retention results. The benefits of tax reform and the enhanced product solutions continued to strengthen the company’s market-leading position. The acquisitions of HROI, PEO, and Lessor Group in FY2018  also contributed to the total revenue growth for the company and the management remains enthusiastic about the growth opportunities these are likely to offer.

Based upon current market, economic, and interest rate conditions, the company forecasts its sales to grow by 6 to 7% y-o-y and adjusted earnings by around 11% per share, including the impact of the US Tax Act. Separately, the company expects its PEO and insurance services segment to register 18%-20% growth whereas their Management solutions segment is anticipated to register 4% growth in FY’19.
We have a price estimate of $66 per share for the company, which is in line with the current market price. View our interactive dashboard – Paychex’s Q1 Earnings. Below are key trends that enabled Paychex to post top line growth:
 

Segment-Wise Performance – Previously, Paychex had classified revenue as Payroll service revenue or Human Resource Services (“HRS”) revenue. However, with the adoption of Accounting Standards Codification Topic 606,  the company now classifies service revenue as Management Solutions revenue, PEO, and Insurance services revenue.

The company posted growth across all these arms, where Management Solutions revenue saw a 3% increase reaching $687.7 million for the quarter. This growth was driven by an increase in client base across HCM services – payroll, ASO, retirement services, and time and attendance solutions. PEO and insurance service revenue increased by 39% y-o-y to $158.0 million driven by growing clients and client worksite employees across their PEO business. Interest on funds held for clients increased by 25% y-o-y to $17.1 million as a result of higher average interest rates earned.

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

Recent acquisition of  HROI, PEO, and Lessor Group fueled strong returns – During fiscal 2018, Paychex acquired HR Outsourcing Holdings, Inc. (“HROI”), a national professional employer organization (“PEO”), and the 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 company’s core markets. With continued international market expansion, Paychex is welcoming all of the Lessor employees to its portfolio of products. The integration of these acquisitions will have a positive contribution to Paychex’s growth.

 

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