Paychex Ends Fiscal 2019 On A Strong Note, But Will It Sustain Momentum In Fiscal 2020?

by Trefis Team
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Paychex (NASDAQ: PAYX) delivered a mixed performance for its fiscal fourth quarter recently. The company reported adjusted earnings of 63 cents per share, which missed the consensus estimate of 65 cents. However, total revenues increased by 16% y-o-y to $980.5 million – marginally beating the consensus estimate. Moreover, for full-year 2019, total revenues increased 12% to $3.8 billion while adjusted EPS grew by 4% to $2.86. It must be remembered here that a bulk of the revenue growth can be attributed to Paychex’s acquisition of Oasis late last year. That said, the company continued to witness strong momentum in its human resource (HR) solutions administrative services division with double-digit worksite employee growth, and solid sales performance in professional employer organization (PEO), retirement, and insurance services.

Per Trefis estimates, Paychex shares have a fair value of $80 which is slightly below the current market price. We have summarized key takeaways from the earnings announcement in our interactive dashboard, How Did Paychex Fare In Fiscal Q4 And What Can We Expect From Full-Year 2020? In addition, here is more Trefis Internet & Software Services Data

A Quick Look at Paychex’s Revenue Sources

Paychex reported $3.8 billion in Total Revenues in Fiscal 2019. This included 2 revenue streams:

  • Payroll Service Revenue: $3.7 billion in FY2019 (98% of Total Revenues). This constitutes of Paychex’s traditional payroll processing and PEO services.
  • Interest on Client Funds: <$100 million in FY2019 (2% of Total Revenues). This represents the interest Paychex earns between pay periods on funds received from clients

Paychex Continues To Achieve Organic Growth

  • Paychex has achieved consistent revenue growth across its major product lines over the last few quarters. Total revenue (excluding Oasis) grew by 5% in the fourth quarter. The company continued to witness solid demand for its PEO services, with revenues from PEO services growing at ~10% (excluding Oasis) thanks to strong growth in clients and client work site employees. Moreover, the company recorded solid client retention and customer satisfaction.
  • In addition, interest on client funds increased by 25% year-over-year to $22 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 last December, becoming the second-largest PEO in the U.S. in terms of number of worksite employees served (after ADP). The company now serves approximately 1.5 million worksite employees through its HR Outsourcing solutions. Notably, the acquisition of Oasis boosted Paychex’s PEO growth in FY 2019, with Oasis contributing $163.7 million to total revenue, or approximately half the growth in the company’s consolidated total revenue. This trend is expected to continue through fiscal 2020.
  • Oasis is expected to have an incremental impact on total revenues in the range of $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. The management indicated they were beginning to realize the strategic benefits of the acquisition through the expansion of relationships with insurance partners and opportunities to upsell within the existing Oasis base.

Fiscal 2020 Outlook

  • Paychex’s organic business combined with its new acquisition has positioned the company well for fiscal 2020. As a result, we expect Paychex’s revenue to increase by about 11% to $4.2 billion. Higher revenue would most likely be driven by growth across the company’s major product lines, particularly its PEO business.
  • However, net income margin is expected to stay around 27.6% as strong growth in revenues is likely to be offset by accelerated investments in sales, technology and operations as well as some one-time acquisition, integration and amortization costs associated with the Oasis acquisition.
  • Based on our forecast, Paychex’s adjusted EPS for fiscal 2020 is likely to be around $3.19. Using this figure with our estimated P/E ratio of 25x, this works out to a price estimate of $80 for Paychex’s shares, which is slightly below the current market price.

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