Paychex (PAYX) Soars on Q1 Earnings Beat and Upbeat '18 View

Paychex Inc. PAYX commenced fiscal 2018 on an impressive note, reporting solid results for the fiscal first quarter, wherein the top and bottom lines, both, came ahead of the respective Zacks Consensus Estimate. Moreover, the company registered year-over year improvement on both the counts.

The company reported non-GAAP earnings per share of 62 cents, which beat the Zacks Consensus Estimate by a couple of cents and grew 11% year over year. The upside mainly stemmed from higher revenues and efficient cost management.

Shares of Paychex were trading up nearly 5% at the time of posting this blog. Notably, the stock has returned 10.3% in the last three months, outperforming 6.1% growth recorded by the industry.

Quarter Details

Paychex reported total revenues (including interest on funds held for clients) of $816.8 million, up 4% year over year. Excluding interest on funds held for its clients, total services revenues (Payroll service and Human Resource Services) ascended 4% year over year to $803.1 million. The Zacks Consensus Estimate was pegged at $816 million.

Payroll Service segment revenues went up 2% from the year-ago period to $457.8 million, primarily on the back of higher revenues per check and client base.

Human Resource Services segment revenues rose 7% year over year to $345.3 million, chiefly driven by strong growth in client base and worksite employees, elevated revenues from retirement, as well as online HR administration services. The growth was partially offset by tough comparisons wherein the segment’s revenues benefited from the implementation of the Affordable Care Act.

Interest on funds held for clients increased 14% on a year-over-year basis to $13.7 million, mainly benefiting from higher average interest rates earned.

Paychex’s total expenses flared up 2% from the year-ago tally to $471.8 million due to increased investments in technology and PEO business. Acquisition related expenses also contributed to this increase. However, total expenses, as a percentage of total revenues, contracted 110 basis points (bps) to 57.8%.

The company’s operating income grew 7% year over year to $345 million. In addition, Paychex’s operating margin expanded 110 bps to 42.2%, chiefly driven by lower total expenses as a percentage of revenues.

Net income came in at $227.8 million, up from $217.4 million reported in the prior-year quarter.

Balance Sheet & Cash Flow

Paychex exited the fiscal first quarter with cash, cash equivalents and corporate investments of $368.2 million compared with $323.4 million recorded at the end of the previous quarter. The company has no long-term debt. It generated operating cash flow of $343.6 million during the reported quarter.

During the quarter, Paychex paid $179.1 million as dividend and repurchased shares worth $94.1 million.

Guidance

Buoyed by splendid fiscal first-quarter results, the company raised its revenues outlook. The company now anticipates total revenues to jump 6%, up from the previous estimate of 5%. This translates to revenues of $3.34 billion, which is higher than the Zacks Consensus Estimate of $3.31 billion.

Human Resource Services revenues are now projected to grow in the range of 12-14%, up from 8-10% projected earlier.

Apart from this, the company revised its guidance for operating margin and effective tax rate. Operating margin is anticipated to be between 39% and 40% compared with the previous guidance of approximately 40%. Effective income tax rate is now projected to be in the band of 35-35.5%, down from the previous estimate of 35.5-36%.

All other guidance provided during fourth-quarter fiscal 2017 results remained unchanged. Management expects Payroll Service revenues to climb year over year in the range of 1-2%, while Interest on funds held for clients and investment income is expected to grow in the mid-to-upper-teen range.

Net income is still 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 be up in the range of 7-8%, which comes to $2.35-$2.38. The Zacks Consensus Estimate is currently pegged at $2.37.

Our Take

In the fiscal first quarter, Paychex’s earnings and revenues both surpassed the respective Zacks Consensus Estimate. Moreover, the year-over-year improvement on both counts is encouraging. Furthermore, the company’s upbeat revenue guidance for the fiscal is impressive.

Paychex’s investments in product development, technology and focus on building its sales force to support revenue growth boost our optimism. We also believe the company’s expansion initiatives, such as joint ventures and acquisitions, will likely support its 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 ADP and Insperity NSP remain key concerns.

Currently, Paychex has a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology sector is Synaptics Inc. SYNA, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has a long-term EPS growth rate of 15%.

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