Will Oasis Continue To Drive Paychex’s Growth In Fiscal Q4?

by Trefis Team
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Paychex (NASDAQ: PAYX) is scheduled to report its fiscal Q4 results on Wednesday, June 26. Paychex has seen decent growth in sales and profits over recent years thanks to growth across all major human capital management (HCM) product lines as well as in professional employer organization (PEO) services. The consensus estimate for the company’s EPS for the quarter stands at $0.64, with revenues expected to be around $980 million – implying an increase of 15.4% year-on-year. Gains from the company’s acquisition of Oasis Outsourcing Group, a growing client base and an increase in retention ratio should have driven growth in Q4.

Per Trefis estimates, Paychex shares have a fair value of $75 which is roughly 10% below the current market price. We have summarized key expectations from the earnings announcement in our interactive dashboard, How Is Paychex Likely To Have Fared In Fiscal Q4?  In addition, here is more Trefis Internet & Software Services Data

A Quick Look at Paychex’s Revenue Sources

Paychex reported $3.4 billion in Total Revenues in Fiscal 2018. This included 2 revenue streams:

  • Payroll Service Revenue: $3.3 billion in FY2018 (98% of Total Revenues). This constitutes of Paychex’s traditional payroll processing and PEO services.
  • Interest on Client Funds: <$100 million in FY2018 (2% of Total Revenues). This represents the interest Paychex earns between pay periods on funds received from clients

Paychex Poised To Achieve Revenue Growth Across All Segments

  • Paychex has achieved consistent revenue growth across its major product lines over the last few quarters. Total revenue (excluding Oasis) grew by 7% in the third quarter. The company continued to witness solid demand for its PEO services, with revenues from PEO services growing at ~17% (excluding Oasis) thanks to strong growth in client worksite employees served.
  • Additionally, interest on client funds increased by 27% year-over-year to $23 million thanks to the improved interest rate environment.
  • Going forward, we expect both these revenue streams to achieve consistent growth

Oasis Will Continue To Drive Paychex’s Future Growth

  • Paychex completed the acquisition of Oasis in Q3, becoming the second-largest PEO in the U.S. in terms of number of worksite employees served. The company now serves approximately 1.4 million worksite employees through its HR Outsourcing solutions. Notably, the acquisition of Oasis boosted Paychex’s PEO growth in Q3, with Oasis contributing $72.7 million to total revenue, or approximately half the growth in the company’s consolidated total revenue. This trend is expected to continue in Q4 and through fiscal 2020.
  • Oasis is expected to have an incremental impact on total revenues in the range of $80-90 million in Q4’19, and another $355-375 million in fiscal 2020. Moreover, as the company plans to offer additional insurance services to its Oasis client base, this should boost the company’s revenues further in the near future. Going forward, we expect Oasis to play a significant role in the company’s overall growth, particularly its PEO business.

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