Paychex Inc. PAYX reported decent fourth-quarter fiscal 2015 results wherein the bottom line came in line with the Zacks Consensus Estimate, while the top line surpassed. Moreover, on a year-over-year basis, both revenues and earnings improved.
The company’s quarterly earnings of 44 cents per share were in line with the Zacks Consensus Estimate but increased 10% from the year-ago quarter mainly backed by improved top-line performance.
Quarter Details
Paychex reported total revenue (including Interest on funds held for clients) of $692.2 million which increased 8% from the year-ago quarter and beat the Zacks Consensus Estimate of $657 million. Excluding interest on funds held for clients, total services revenue (Payroll service and Human Resource Services) grew 8% from the year-ago quarter to $681.4 million.
Payroll Service segment revenues went up 4% from the year-ago period to $409 million, primarily on the back of higher revenue per check and client base.
Human Resource Services segment revenues increased 16% year over year to $272.4 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 5% on a year-over-year basis to $10.8 million primarily benefiting from higher average interest rates.
Paychex’s total expenses increased 7% from the year-ago quarter to $440 million due to 14% rise in compensation-related expenses. However, total expenses, as a percentage of total revenue, decreased 60 basis points (bps) on a year-over-year basis to 63.7%.
Consequently, Paychex’s operating margin expanded 60 bps to 36.3%. Moreover, in dollar terms, reported operating income increased 10% year over year to $251.6 million.
Excluding interest on funds held for clients, Paychex’s operating income came in at $240.8 million or 35.3% of total services revenue compared with $218.1 million or 34.7% in the year-ago period.
Net income came in at $161.2 million or 44 cents, which improved from $145.9 million or 40 cents reported a year ago.
Balance Sheet & Cash Flow
Paychex exited the quarter with cash and cash equivalents of $170 million. Corporate investments were $366.6 million versus $355.5 million at the end of third-quarter fiscal 2015. The company has no long-term debt. The company generated operating cash flow of $895.2 million in fiscal 2015.
During the fiscal, Paychex repurchased approximately $182.4 million worth of common stocks and paid dividends worth $551.8 million.
Guidance
Paychex provided guidance for fiscal 2016. Management expects 4–5% increase in Payroll Service revenues from the year-ago period. Human Resource Services revenues are expected to increase in the range of 10–13%.
Total service revenue is expected to increase 7–8%. Interest on funds held for clients and investment income are expected to remain flat. Net income is likely to be in the range of 8–9%.
Net operating income, as a percentage of service revenues, is expected to be 38% for fiscal 2016. The effective income tax rate for the fiscal year is expected to be same as fiscal 2015.
Our Take
Paychex reported decent fourth-quarter results wherein the bottom line came in line with the Zacks Consensus Estimate while the top line beat the same. Moreover, on a year-over-year basis, both revenues and earnings increased. The company provided encouraging fiscal 2016 outlook, which signifies that it is relatively well-placed despite the current macroeconomic sluggishness.
Moreover, we are encouraged by the company’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 its long-term growth strategy.
Product launches are expected to provide additional support. 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 ADP and Insperity NSP remain the headwinds.
Currently, Paychex has a Zacks Rank #3 (Hold). A better-ranked stock in the outsourcing industry is Convergys Corporation CVG sporting a Zacks Rank #1 (Strong Buy).
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