Paychex (PAYX) Reports In-Line Q4 Earnings, Revenues Beat

Paychex Inc. (NASDAQ:PAYX) reported strong results for fourth-quarter fiscal 2016 wherein the bottom line matched the Zacks Consensus Estimate while the top line beat. Nevertheless, the company marked a year over year improvement on both counts.

Earnings of 49 cents per share came in line with the Zacks Consensus Estimate and grew 11.4% year over year mainly on the back of higher revenues.

Quarter Details

Paychex reported total revenue (including Interest on funds held for clients) of $753.9 million, up 9% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $751 million. Excluding interest on funds held for its clients, total services revenue (Payroll service and Human Resource Services) grew 9% year over year to $741.6 million.

Payroll Service segment revenues went up 5% from the year-ago period to $430.4 million, primarily on the back of higher revenue per check and client base. The acquisition of Advanced Partners contributed approximately 1% to the segment’s revenue growth.

Human Resource Services segment revenues rose 14% year over year to $311.2 million mainly driven by solid growth in client base and worksite employees, increased revenues from retirement and online HR administration services.

Interest on funds held for clients increased 14% on a year over year basis to $12.3 million primarily benefiting from higher average interest rates earned.

Paychex’s total expenses increased 8% from the year-ago figure to $477.6 million due to 6% rise in compensation-related expenditure. However, total expenses, as a percentage of total revenue, decreased 30 basis points (bps) to 62.3%.

Consequently, Paychex’s operating margin expanded 30 bps to 36.6%. In dollar terms, reported operating income increased 10% year over year to $276.3 million.

Net income came in at $178.1 million or 49 cents, up from $161.2 million or 44 cents reported last year.

Balance Sheet & Cash Flow

Paychex exited fiscal fourth quarter with cash, cash equivalents and corporate investments of $352.1 million compared with $327.2 million at the end of the previous quarter. The company has no long-term debt. The company generated operating cash flow of $1.018 billion in fiscal 2016.

During the fiscal, Paychex repurchased approximately $107.9 million common stocks and paid $606.5 million as dividend.

Guidance

Paychex issued the fiscal 2017 outlook. Management expects 4% year over year increase in Payroll Service revenues. Human Resource Services revenues are likely to grow in the range of 12–14%.

Total service revenue is likely to increase 7–8%. Interest on funds held for its clients and investment income are projected to grow in the mid-single-digit range.

Operating income as a percentage of revenues is likely to be 38%. Effective income tax rate is anticipated to be in the range of 35.5% to 36%. Net income is likely to increase 8% year over year.

Our Take

Paychex reported strong fourth-quarter results with earnings coming in line with the Zacks Consensus Estimate while revenues surpassing the same. Moreover, the company issued an optimistic fiscal 2017 guidance, signifying that it is relatively well placed despite the current macroeconomic sluggishness.

Furthermore, 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 expansionary initiatives, such as joint ventures and acquisitions, support the long-term growth strategy.

Product launches are expected to be the other growth drivers. Moreover, 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 #3 (Hold). A better-ranked stock worth considering in the broader technology sector is FormFactor Inc. (NASDAQ:FORM) carrying a Zacks Rank #2 (Buy).