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Paychex' Earnings & Rev Miss Est in 4Q

Zacks Equity Research

Paychex Inc. (PAYX) reported fourth-quarter fiscal 2013 earnings of 34 cents per share, missing the Zacks Consensus Estimate by 8.1%. The quarter’s result was roughly flat year over year.


Paychex reported fourth-quarter 2013 revenues of $585.3 million, up 6.1% from $551.5 million in the year-ago quarter. The quarter’s revenues were below the Zacks Consensus Estimate of $588.0 million.

Payroll Service segment revenues increased 3.5% year over year to $382.6 million. Checks per payroll grew roughly 0.9% from the year-ago quarter. Revenue per check grew modestly as a result of price increases, partially offset by discounting. Client retention rate was satisfactory.

The Human Resource Services segment generated $192.7 million in revenues, up 12.6% from the prior-year quarter. The improvement was mainly attributable to small market client growth and price increases, partially offset by lower contribution from professional employer organization.

Operating Results

In the fourth quarter, Paychex incurred total expenses of $373.5 million, up 5.0% from the year-ago quarter. The rise was mainly due to higher selling, general and administrative expenses as well as continuous investments in product development and supporting technology.

Operating income was $211.8 million, up 8.1% from the year-ago period, attributable to modest revenue growth supported by better cost management and capacity utilization. Operating margin was 40.5% versus 39.5% in the year-ago quarter.

Net income of $123.5 million or 34 cents per share was roughly flat year over year. There was no one-time item during the quarter. During the quarter, Paychex recorded higher tax provision for the settlement of a state income tax matter.

Balance Sheet & Cash Flow

Paychex exited the fourth quarter with cash and cash equivalents of $107.3 million, up from $100.4 million at the end of the prior quarter. Corporate investments were $398.2 million compared with $470.2 million in the prior quarter.

Additionally, interest on funds held for clients decreased 7.4% year over year to $10.0 million as a result of lower average interest rates earned, partly offset by an increase in average investment balances. Paychex has no long-term debt.


Paychex believes that Payroll Services revenue growth will be supported by modest growth in client base and improved revenue per check. Human Resources organic revenue growth is expected to follow the historical trend.

For fiscal 2014, Paychex expects a 3–4% increase in Payroll Service revenues from the year-ago quarter. Human Resource Services revenues are expected to increase in the range of 9.0% to 10.0%.

Total service revenue will likely grow in the range of 5% to 6%. The company expects a 9–7% decline in interest on funds held for clients and 0–5% upside in net investment income.

Interest on funds held for clients and investment income for fiscal 2014 are expected to be impacted by the low interest rate environment. However, investment of cash generated from operations is expected to persist, thus increasing investment income.

Net operating income as a percentage of service revenues is expected to be 38.0% for fiscal 2014. The effective income tax rate for fiscal 2014 is expected in the range of 36%-37%. Net income is expected to grow in the range of 8% to 9%.

Our Take

Paychex’ fourth quarter results were disappointing with both the bottom and top lines missing the Zacks Consensus Estimate. Revenue growth is being adversely affected by inadequate hiring by small and medium businesses. Paychex also provided fiscal 2014 guidance, which we believe is in line with the continuing macro uncertainties.

We are encouraged by management’s commentary regarding continued investments in product development and focus toward building sales force to support revenue growth. We also believe that the recent acquisition of HR Services Inc. and new product launches would provide additional support.

Despite strict interest rates and stiff competition from Automated Data Processing (ADP) and Insperity, Paychex’ zero European exposure will be beneficial for the company.

Currently, Paychex has a Zacks Rank # 2 (Buy). Investors should also look into similar stocks that are performing better than Paychex. Portfolio Recovery Associates Inc. (PRAA) and Sykes Enterprises Inc. (SYKE) both have a Zacks Rank #1 (Strong Buy) and are worth buying.

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