Paychex (PAYX, Financial) experienced its second sales miss in Q3 (Feb) and has adjusted its FY24 (May) revenue growth projection to below what analysts had anticipated, triggering a sell-off that saw shares dip to early November levels before making a notable recovery. The shortfall was largely attributed to the potential end of the Employee Retention Tax Credit (ERTC) service due to legislative changes, impacting the comparison with the previous year's figures. Excluding the ERTC effect, PAYX's revenue actually surpassed expectations. Nevertheless, the uncertainty surrounding the ERTC program led PAYX to lower its FY24 revenue growth forecast to 5-6% year-over-year, down from the previously expected 6-7%.
Challenges such as rising interest rates, a tight labor market, and persistent inflation have posed additional hurdles for PAYX, exacerbating the company's cautious FY24 outlook. These factors have impacted small and medium-sized businesses (SMBs), PAYX's core clientele, more severely than initially anticipated.
- PAYX reported positive growth in Q3, with a 4.2% year-over-year increase in revenue to $1.44 billion and a 7.0% rise in adjusted EPS to $1.38. Without the negative ERTC impact, revenue growth would have been 7.0%, showing improvement from Q2's 5.7%.
- The company observed a moderation in job growth, attributed to a shrinking pool of qualified workers and employers' reluctance to hire underqualified candidates amidst wage inflation. This issue has led to increased hiring variability across all customer segments and industries.
- Despite these challenges, demand for PAYX's HR technology remains strong, with a notable uptick in new client volumes and a resurgence in interest in its Professional Employer Organization (PEO) offering, which saw an 8% revenue increase in Q3. This trend is expected to positively impact the company's long-term prospects.
Following the initial downturn, PAYX shares have rallied impressively. The initial panic was sparked by the revised FY24 revenue guidance. However, a closer look reveals that the main concern was the potential discontinuation of the ERTC service due to pending legislative review, rather than a fundamental demand issue. This reassessment has led investors to regain confidence in PAYX, recognizing the company's prudent stance in the face of legislative uncertainty and broader economic challenges.
