Paychex (PAYX) Q4 Earnings Top Estimates On Solid Revenues

Paychex Inc. (NASDAQ:PAYX) reported better-than-expected results for fourth-quarter fiscal 2017, wherein the top and bottom lines, both, came ahead of the respective Zacks Consensus Estimate. Moreover, on a year-over-year basis, the company registered improvement on both the counts.

The company reported non-GAAP earnings per share of 54 cents, which beat the Zacks Consensus Estimate by a penny and grew 10% year over year, mainly on the back of higher revenues.

Quarter Details

Paychex reported total revenue (including interest on funds held for clients) of $798.6 million, up 6% year over year. Excluding interest on funds held for its clients, total services revenue (Payroll service and Human Resource Services) ascended 6% year over year to $784.6 million. The Zacks Consensus Estimate was pegged at $798 million.

Payroll Service segment revenues went up 2% from the year-ago period to $440.9 million, primarily on the back of higher revenue per check and client base. Also, the acquisition of Advanced Partners contributed 1% to payroll service revenue growth.

Human Resource Services segment revenues rose 10% year over year to $343.7 million, chiefly driven by solid growth in client base and worksite employees, increased revenues from retirement, as well as online HR administration services.

Interest on funds held for clients increased 14% on a year-over-year basis to $14 million, primarily benefiting from higher average interest rates earned.

Paychex’s total expenses flared up 5% from the year-ago tally to $499.7 million due to higher wages and related expenses resulting from increased headcount in operations. However, total expenses, as a percentage of total revenue, contracted 80 basis points (bps) to 62.6%.

The company’s operating income grew 8% year over year to $298.9 million. In addition, Paychex’s operating margin expanded 80 bps to 37.4%.

Net income came in at $195.3 million, up from $178.1 million reported in the prior-year quarter.

Balance Sheet & Cash Flow

Paychex exited the fiscal fourth quarter with cash, cash equivalents and corporate investments of $323.4 million compared with $403.9 million recorded at the end of the previous quarter. The company has no long-term debt. It generated operating cash flow of $960.4 million during fiscal 2017.

During the fiscal, Paychex paid $662.3 million as dividend and repurchased shares worth $166.2 million.

Guidance

Paychex provided its outlook for fiscal 2018. Management expects Payroll Service revenues to increase year over year in the range of 1–2%, while Human Resource Services revenues are anticipated to grow in a range of 8–10%. Interest on funds held for its clients and investment income are now projected to grow in the mid-to-upper-teen range.

Total revenue is estimated to increase by nearly 5%. This translates to revenues of $3.309 billion, which is lower than the Zacks Consensus Estimate of $3.36 billion.

Operating margin is anticipated to be approximately 40%. Net income is likely to advance 5% year over year on a GAAP basis and 7% on a non-GAAP basis.

Non-GAAP earnings per share are estimated to increase in the range of 7% to 8% which comes to $2.35 – $2.38. The earnings per share guidance range is however, lower than the Zacks Consensus Estimate of $2.40.

Effective income tax rate is now projected to be in the band of 35.5–36%.

Our Take

In the fiscal fourth quarter, Paychex’s earnings and revenues both surpassed the respective Zacks Consensus Estimate. Moreover, the year-over-year improvement on both counts was encouraging.

However, the company provided disappointing revenue and earnings guidance for fiscal 2017. The stock was down nearly 2.5% at the time of posting this blog. Notably, Paychex has outperformed the Zacks Categorized Outsourcing industry on a year-to-date basis. The company has lost 3.7% year to date compared with the Outsourcing industry’s loss of 4.9%.

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

Product launches are likely to be the other growth drivers. Also, Paychex’s focus on small- and mid-sized businesses looking for HR solutions could provide growth opportunities.

However, unfavorable interest rates and competition from Automatic Data Processing (NASDAQ:ADP) and Insperity (NYSE:NSP) remain the primary concerns.

Currently, Paychex has a Zacks Rank #2 (Buy).

Another top-ranked stock in the broader technology sector is Broadcom Limited (NASDAQ:AVGO) , which sports a Zacks Rank #1 (Strong Buy). You can seethe complete list of today’s Zacks #1 Rank stocks here.

The company, which designs, develops and supplies analog and digital semiconductor connectivity solutions, has a long-term EPS growth rate of 13.6%. The EPS estimate for the current fiscal has been revised upward to $13.78 from $12.89, over the last 30 days.

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