What To Watch For In Paychex’s Q3

by Trefis Team
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Paychex (NASDAQ: PAYX) is scheduled to report its Q3 earnings on Wednesday, March 27. We expect the company to post EPS of approximately $0.74 and revenues of approximately $920 million, reflecting an increase of 6.3% from the year-ago quarter. Paychex has seen decent growth in sales and steady profits in the past several years, driven by growth across all major human capital management (“HCM”) product lines and professional employer organization (“PEO”) services. In Q2, the company’s total revenue grew by 7%, management solutions revenue grew a solid 5%, and PEO and insurance services revenues grew a strong 15% compared to the prior year quarter.

The company’s acquisition of Oasis Outsourcing Group, the largest privately held PEO in the U.S, along with a growing client base and increasing retention ratio are likely to drive overall growth in Q3. We currently have a price estimate of $77 per share for Paychex, which is similar to the current market price. We have summarized our full year expectations for Paychex, based on the company’s guidance and our own estimates, on our interactive dashboard on Paychex’s Expected Q3 Results. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Information Technology company data here.

Key Indicators Likely To Impact Paychex’s Financial Performance:

Paychex Continues To Achieve Inorganic Growth

The acquisition of Oasis is anticipated to add $155M to $175M in total revenue for fiscal 2019, with approximately 45% of this incremental revenue expected to occur in Q3. With this acquisition, Paychex will become the second largest PEO in the U.S. by number of worksite employees served, serving more than 1.4 million worksite employees through various HR outsourcing services. The company also acquired HROI, PEO, and Lessor Group in FY2018. All of these acquisitions are likely to drive top-line growth for the company in the coming years.

Revenues To Grow Across Segments

Paychex’s Service revenue and revenue from interest on funds held for clients are likely to achieve consistent growth and drive future revenue and profitability for the company in the foreseeable future. Service revenue will continue to be the major driver of top line growth. Interest on funds held for clients grew by 31% in Q2, and is likely to further grow by 20% to 25% in fiscal 2019. Going forward, we expect the company to achieve sustainable growth as fundamentals for all of its revenue generating segments remain strong.

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