Oasis Drives Top-Line Growth For Paychex In Q3

Paychex (NASDAQ: PAYX) reported its Q3 earnings on March 27, with the company narrowly beating consensus top-line and bottom-line estimates. Paychex reported its first-ever quarter of more than $1 billion in revenue, driven by solid growth across product lines, in particular comprehensive HR outsourcing services, retirement services, insurance and time and attendance solutions. Total revenue growth was 14% for the third quarter, with management solutions revenue growing 4%, and PEO and insurance services revenues growing 65%, reflecting the inclusion of the Oasis Outsourcing Group acquisition. However, the company’s earnings declined 11% year-over-year to $0.90 per share for the three months ended February 28, 2019. Meanwhile, the company remained on track to end the fiscal year with a retention ratio in line with its historic all-time high of approximately 83%.

Q3 was a particularly a strong quarter for Paychex’s professional employer organization services, as PEO and insurance service revenue increased by 65% q-o-q to $246 million. This growth was driven by the continued strong demand for combined PEO services and worksite employees, resulting in double-digit growth in client worksite employees served (excluding Oasis). Excluding the anticipated impact related to the acquisition of Oasis, Paychex reaffirmed its earlier guidance for fiscal 2019, as total revenue – including interest on funds held for clients – is expected to increase in the range of 6-7%, GAAP EPS is expected to increase about 4% and adjusted EPS is forecast to increase in the range of 11-12%. We currently have a price estimate of $75 per share for Paychex, which is slightly below 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 Summarizing Paychex’s Q3 Results and FY 2019 outlook. 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 Takeaways From Paychex’s Q3 Financial Performance Are Summarized Below:

Oasis Acquisition To Augment Paychex’s Future Growth

Paychex completed the acquisition of Oasis in Q3, becoming the second-largest PEO in the U.S. by number of worksite employees served, serving approximately 1.4 million worksite employees through HR Outsourcing solutions. The acquisition of Oasis boosted Paychex’s PEO growth in Q3, with Oasis contributing $72.7 million to total revenue, or approximately one-half of the growth in consolidated total revenue. Oasis is expected to have an incremental impact to total revenue in the range of $80 million to $90 million in Q4’19, and another $355 to $375 million in fiscal 2020. The company’s management stated that Oasis has been a great fit for its PEO growth strategy, adding to its scale, expanding relationships with new insurance partners, creating up-sell opportunities into the existing Oasis customer base, and augmenting the company’s talent with an addition of an experienced leadership team. Going forward, we expect Oasis to play a significant role in the company’s overall growth, particularly its PEO business.

Organic Revenues Continue To Grow Across Segments

Paychex continued to achieve consistent revenue growth across its major product lines. Total revenue (excluding Oasis) grew by 7% in the third quarter, and the company continued to witness solid demand for its PEO services, with revenues from PEO services growing at approximately 17% excluding Oasis. Furthermore, interest on client funds increased by 27% year-over-year to $23 million on higher average interest rates earned, partially offset by the impact of a 2% decline in average invested balances. Going forward, we expect the company to continue to achieve sustainable organic growth as the fundamentals for all of its revenue-generating segments remain strong.

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