Paychex Presents In-line Q3 Earnings Report

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Mar 26, 2015
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Paychex Inc. (PAYX, Financial) recently revealed its third quarter results for fiscal 2015. The company reported 8% year-over-year growth in revenues to $704.3 million for the quarter, beating the consensus estimate of $702 million. The company’s Q3 earnings of 46 cents a share was in line with estimates and represented a 4.5% growth compared to the year-ago quarter, driven primarily by Paychex’s improved top-line performance. However, following the results, Paychex shares fell over 4% to $49.17 during after-hours trading to close at $49.20.

Growth Across Segments Boosts Revenues

Paychex logged net income of $169.4 million or 46 cents a share for the third quarter of fiscal 2015, compared to $160.1 million or 44 cents a share reported in the prior-year quarter. The company also reported a 10% year-over-year increase in overall expenses to $440 million during the quarter, representing an increase of 100 basis points or 62% of revenue. Consequently, the company’s operating margin shrank 100 basis points to 37.5%, although operating income increased to $264.3 million, up 5% compared to the prior-year quarter.

The company registered growth across all segments for the quarter, with the Human Resource Services segments leading the way with a 19% year-over-year growth to $269.8 million. The company attributed the exceptional growth to robust growth in worksite employees and client base as well as higher revenues from its online HR administration and retirement services. At the same time, Paychex also logged growth of 2% at its Payroll Service segment, with revenues touching $423.8 million on the back of an improved client base and higher per-check revenues. The company also holds funds for its clients, the interest on which increased 2% year-over-year to $10.7 million for the quarter. With increased client base as well as wage inflation, the segment benefited from a growth of 3% in average investment balances.

During the first three quarters of fiscal 2015, Paychex repurchased around $70.4 million worth of common stocks and paid $414.4 million dividends. The company competes with businesses such as Automatic Data Processing Inc. (ADP, Financial), Insperity Inc. (NSP, Financial) and TriNet Group Inc. (TNET, Financial) in the Staffing & Outsourcing Services marketplace.

Outlook for Fiscal 2015

Paychex also reiterated its previous guidance for fiscal 2015 saying that the company expects 8-10% growth in revenues and 6%-8% growth in net income. Segment wise, the company projected 3-5% year-over-year growth in revenues from Payroll Services, while revenues from the Human Resource Services segment are projected to increase in the 16-19% range. Investment income and interest on funds held for clients are expected to remain flat for the fiscal, owing to lower interest rates.

Final Thoughts

Paychex’s third quarter earnings were in line with the consensus estimates, while revenues surpassed expectations. Moreover, the company reiterated its guidance for fiscal 2015, indicating Paychex’s confidence in taking on the current macroeconomic slowdown. Experts also foresee the company’s expansion plans, including acquisitions and joint ventures, and new product launches to support growth in the long-term. However, low interest rates as well as competition from market rivals remain headwinds. Experts project average annual earnings growth rate of 9% over the next five year for the company. The Paychex stock currently carries a ‘hold’ guidance.