Paychex (PAYX) Q1 Earnings & Revenues Beat Estimates - Analyst Blog

Paychex Inc. (PAYX) reported first-quarter fiscal 2015 earnings of 47 cents per share, which beat the Zacks Consensus Estimate by a penny. On a year-over-year basis, reported earnings per share increased 5.8%.
 

Quarter Details

Paychex reported total revenue (including Interest on funds held for clients) of $666.8 million for the quarter, which not only increased 8.8% from the year-ago period but also came ahead of the Zacks Consensus Estimate of $659 million.

Excluding interest on funds held for clients, which was up 2% on a year-over-year basis, total services revenues (Payroll service and Human Resource Services) increased 8.9% from the year-ago quarter to $656.6 million. Interest on funds held for clients was up attributable to lower average interest rates earned, which partially offset an increase of 3% in average investment balances.

Payroll Service segment revenues increased 4.5% from the year-ago period to $412.8 million, primarily driven by higher checks per payroll, revenue per check and client base.

Buoyed by growth in client base in retirement services, HR Solutions and eServices products, Paychex's Human Resource Services segment generated revenues of $243.8 million, which increased 17.3% from the year-ago quarter. Also, PEO (professional employer organization) showed strong growth during the quarter, which helped the year-over-year increase in revenues.

Paychex's total expenses increased 11.5% from the year-ago quarter to $399.3 million, primarily due to compensation-related expenses. Moreover, higher expenses related to investments in product development and supporting technology and higher sales-related costs were also responsible for the rise in expenses. Moreover, total expenses as a percentage of total revenue increased 149 basis points (bps) on a year-over-year basis.

Paychex reported operating income of $267.5 million, up 4.9% from the year-ago period, attributable to a higher revenue base. Operating margin decreased to 40.1% compared with 41.6% in the year-ago quarter, primarily due to higher operating expenses.

Excluding interest on funds held for clients, Paychex's operating income came in at $257.3 million or 39.2% of total services revenue compared to $245.1 million or 40.6% of total services revenue reported in the year-ago period.  

Net income came in at $171.3 million or 47 cents, which improved from $162.8 million or 44 cents reported in the year-ago quarter.

Balance Sheet & Cash Flow

Paychex exited the quarter with cash and cash equivalents of $462.6 million versus $152.5 million at the end of the previous quarter. Corporate investments were $96.7 million compared with $398.7 million in the previous quarter. Paychex has no long-term debt.

During the first quarter, Paychex repurchased 0.9 million shares for approximately $37.5 million. During the quarter, the company paid a dividend of $138.3 million. The company generated operating cash flow of $263.1 million during the quarter.

Guidance

For fiscal 2015, management expects 3%–5% increase in Payroll Service revenues from the year-ago period. Human Resource Services revenues are expected to increase in the range of 16% to 19%.

Total service revenue is expected to increase in the range of 8%–10%. Interest on funds held for clients and investment income for fiscal 2015 are expected to be flat, primarily affected by low interest rate. Net income for fiscal 2015 is expected to be in the range of 6-8%.

Net operating income as a percentage of service revenues is expected to be in the range of 37% to 38% for fiscal 2015. The effective income tax rate for fiscal 2015 is expected to be constant with the fiscal 2014 guidance (in the range of 36%–37%).

Our Take

Paychex reported better-than-expected first-quarter results. Moreover, both revenues and earnings increased on a year-over-year basis, primarily boosted by growth across all segments. Paychex provided a modest outlook for fiscal 2015, which signifies that it is relatively well-placed amid the current macroeconomic sluggishness.

Moreover, we remain encouraged by the company's investments in product development and focus on building its sales force to support revenue growth. We also believe that the company's expansionary initiatives such as joint ventures and acquisitions support its long-term growth strategy.

Product launches are also expected to provide additional support. Moreover, Paychex's focus on small and mid-sized businesses looking for HR solutions could provide the company with opportunities.

However, unfavorable interest rates and competition from Automatic Data Processing (ADP) and Insperity (NSP) remain the possible headwinds for the company.

Currently, Paychex has a Zacks Rank #2 (Buy). Investors can also consider Micron Technology Inc. (MU), which carries a Zacks Rank #1 (Strong Buy).