Paychex Inc. (PAYX) reported first-quarter
fiscal 2012 earnings of 41 cents per share, fairly ahead the Zacks
Consensus Estimate of 38 cents. Though the quarter’s results
indicate an improving client retention rate and higher checks per
client, lower sale of new units remains an overhang. Shares
increased 1.91% in after-market trade.
Revenues
Paychex reported first-quarter 2012 revenues of $563.1 million,
up 8.6% from $518.3 million reported in the year-ago quarter. The
upside can be attributed to year-over-year growth in both checks
processed per client and the HR services client base.
Payroll Service segment revenue increased 6.0% from the year-ago
quarter to $382.3 million, attributable to the contribution from
SurePayroll Inc., acquired in February. Excluding the SurePayroll
contribution, Payroll revenue would have grown only 4.0%.
Continued growth in checks processed per client as well as
revenue per checks also aided the growth. However, the increase in
new unit sales was sluggish, due to the limited number of new
companies commencing business during the quarter.
The Human Resource Services segment generated $169.7 million in
revenues, up 16.6% from the prior-year quarter. The improvement was
partly due to the contribution from ePlan Services, which was
acquired in May. Excluding ePlan, Human Resource Services’ revenue
growth would have been 14%.
The number of client employees served and the number of clients
grew during the quarter, contributing to the improvement. Moreover,
demand for a new product, HR Essentials, also added to the
segment’s revenue growth.
Operating Results
In the first quarter, Paychex incurred total operating expense
of $333.4 million, up 5.0% from the year-ago quarter. The increase
was mainly due to acquisition-related costs as well as the
company’s continued efforts to train sales personnel, provide
better customer service and enhance technological
infrastructure.
Operating income was $229.7 million, up 14.4% from the year-ago
period, attributable to modest revenue growth and better cost
management. Operating margin grew 340 basis points year over year
to 43.9%.
Net income of $148.9 million in the reported quarter reflected a
12.9% increase from $131.9 million in the prior-year quarter. Net
income per diluted share was 41 cents compared with 36 cents in the
year-ago quarter. There was no one-time item during the
quarter.
Balance Sheet & Cash Flow
Paychex exited the first quarter with cash and cash equivalents
of $113.1 million, down from $119.0 million at the end of the prior
quarter. The lower cash balance was due to cash used up in
investing and financing activities. Corporate investments increased
$27.0 million sequentially to $372.0 million.
Additionally, interest on funds held for clients decreased 8.3%
year over year to $11.1 million as a result of lower average
interest rates earned, partially offset by an increase in average
investment balances. Paychex has no long-term debt.
Cash from operations was $187.2 million compared to $162.4
million in the prior quarter. Capital expenditures were $20.2
million compared to $21.5 million in the prior quarter.
Guidance
Keeping in view the current market and economic condition,
Paychex believes that checks per client will moderate through
fiscal 2012, impacting quarterly comparisons for both Payroll
Service and Human Resource Services revenues.
Moreover, the favorability in expenses realized in the first
quarter may not be realized throughout fiscal 2012 due to the
planned investments in its business. Hence, Paychex reaffirmed its
full-year guidance.
For fiscal 2012, Paychex expects a 5–7% increase in Payroll
Service revenues compared to the year-ago quarter. Human Resource
Services revenues are expected to increase in the range of 12.0% to
15.0%.
Total service revenue is likely to grow in the range of 7% to
9%. The company expects a 12–14% decline in interest on funds held
for clients and a roughly 2% increase in net investment income.
Interest on funds held for clients and investment income for
fiscal 2012 are expected to be impacted by the low interest rate
environment. However, investment of cash generated from operations
is expected to continue, so investment income will increase.
Net operating income is expected in the range of 35–36% of total
service revenue. The effective tax rate is expected to be in line
with the first quarter and net margin is projected at between 5%
and 7%.
The guidance for fiscal 2012 includes anticipated results from
Paychex’ recent acquisition of SurePayroll Inc. and its ePlan
Services. The acquisitions are expected to have approximately a 2%
positive impact on revenue, nonetheless resulting in earnings
dilution of around 1 cent per share due to amortization on acquired
intangible assets and some one-time acquisition costs.
Our Take
Paychex’ first quarter results were encouraging, with the bottom
line exceeding the Zacks Consensus Estimate. We are also positive
on management’s positive commentary regarding continued investments
in product development and synergies from the recent acquisition.
We also believe that cost control will remain a catalyst for
Paychex, going forward.
The market is losing confidence on the growth of the small and
medium business (SMB) group. The sector is being hit hard by
lackluster demand due to high unemployment and inflation rates.
Outsourcing companies like Paychex are highly dependent on the
performance of the SMB sector and this is the reason why the
company may not see much revenue growth.
Moreover, we are slightly concerned about growing competition in
the outsourcing space from big players such as Automated
Data Processing Inc. (ADP) and Administaff Inc., as well
as limited margin expansion due to continuous investments in
diverse fields.
Paychex has a Zacks # 3 Rank, implying a short-term Hold
recommendation.
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