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Paychex (PAYX) Beats Q2 Earnings Estimates; Revenues Lag
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Paychex Inc. (PAYX - Free Report) reported mixed results for second-quarter fiscal 2017, wherein its bottom line came ahead of the Zacks Consensus Estimate but the top line missed the same. However, on a year-over-year basis, the company registered improvement on both the counts.
The company reported earnings per share of 56 cents which beat the Zacks Consensus Estimate by a penny and grew 8% year over year mainly on the back of higher revenues.
Quarter Details
Paychex reported total revenue (including interest on funds held for clients) of $771.4 million, up 7% year over year. However, it missed the Zacks Consensus Estimate of $779 million. Excluding interest on funds held for its clients, total services revenue (Payroll service and Human Resource Services) grew 7% year over year to $760 million.
Payroll Service segment revenues went up 3% from the year-ago period to $440.9 million, primarily on the back of higher revenue per check and client base. The acquisition of Advanced Partners contributed approximately 1% to the segment’s revenue growth.
Human Resource Services segment revenues rose 12% year over year to $319.1 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 2% on a year-over-year basis to $11.4 million, primarily benefiting from higher average interest rates earned.
Paychex’s total expenses increased 8% from the year-ago figure to $460.3 million due to higher wages and related expenses resulting from increased headcount in operations. Moreover, total expenses, as a percentage of total revenue, increased 40 basis points (bps) to 59.7%.
The company’s operating income grew 6% year over year to $311.1 million. However, Paychex’s operating margin contracted 40 bps to 40.3%.
Net income came in at $202.1 million or 56 cents, up from $189.2 million or 52 cents reported last year.
Paychex exited the fiscal second quarter with cash, cash equivalents and corporate investments of $293 million compared with $497.7 million at the end of the previous quarter. The company has no long-term debt. The company generated operating cash flow of $413.4 million in the first half of fiscal 2017.
During the first six months of fiscal 2017, Paychex paid $331.5 million as dividend and repurchased shares worth $166.2 million.
Guidance
Paychex reiterated its fiscal 2017 outlook. Management still expects Payroll Service revenues to increase year over year in a range of 3% to 4% while Human Resource Services revenues are expected to grow in a range of 12% to 14%. Total service revenue is expected to increase in a range of 7% to 8%. Interest on funds held for its clients and investment income are projected to grow in the mid-single digit range.
Net income is still likely to increase 7% year over year on a GAAP basis and 8% on a non-GAAP basis. Effective income tax rate is now anticipated to be 35%.
Our Take
In the fiscal second quarter, Paychex’s earnings beat the Zacks Consensus Estimate but revenues missed the same. The stock closed down approximately 1% during yesterday’s trade. However, Paychex has outperformed the Zacks Categorized Outsourcing industry on a year-to-date basis. The company has gained 16.1% year to date compared with Outsourcing industry’s average return of 14.6%.
Nonetheless, the year-over-year improvement on both counts was encouraging. Moreover, the company’s reiterated outlook for fiscal 2017 is encouraging, indicating that it is relatively well placed despite the current macroeconomic sluggishness.
Furthermore, we are encouraged by Paychex’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 the long-term growth strategy.
Product launches are expected to be the other growth drivers. 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 - Free Report) and Insperity (NSP - Free Report) remain the primary concerns.
The company, which designs, develops and supplies analog and digital semiconductor connectivity solutions, has a long-term EPS growth rate of 13.6%. The EPS estimate for the current year has been revised upward to $12.10 from $11.40 over the last 30 days.
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Paychex (PAYX) Beats Q2 Earnings Estimates; Revenues Lag
Paychex Inc. (PAYX - Free Report) reported mixed results for second-quarter fiscal 2017, wherein its bottom line came ahead of the Zacks Consensus Estimate but the top line missed the same. However, on a year-over-year basis, the company registered improvement on both the counts.
The company reported earnings per share of 56 cents which beat the Zacks Consensus Estimate by a penny and grew 8% year over year mainly on the back of higher revenues.
Quarter Details
Paychex reported total revenue (including interest on funds held for clients) of $771.4 million, up 7% year over year. However, it missed the Zacks Consensus Estimate of $779 million. Excluding interest on funds held for its clients, total services revenue (Payroll service and Human Resource Services) grew 7% year over year to $760 million.
Payroll Service segment revenues went up 3% from the year-ago period to $440.9 million, primarily on the back of higher revenue per check and client base. The acquisition of Advanced Partners contributed approximately 1% to the segment’s revenue growth.
Human Resource Services segment revenues rose 12% year over year to $319.1 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 2% on a year-over-year basis to $11.4 million, primarily benefiting from higher average interest rates earned.
Paychex’s total expenses increased 8% from the year-ago figure to $460.3 million due to higher wages and related expenses resulting from increased headcount in operations. Moreover, total expenses, as a percentage of total revenue, increased 40 basis points (bps) to 59.7%.
The company’s operating income grew 6% year over year to $311.1 million. However, Paychex’s operating margin contracted 40 bps to 40.3%.
Net income came in at $202.1 million or 56 cents, up from $189.2 million or 52 cents reported last year.
PAYCHEX INC Price, Consensus and EPS Surprise
PAYCHEX INC Price, Consensus and EPS Surprise | PAYCHEX INC Quote
Balance Sheet & Cash Flow
Paychex exited the fiscal second quarter with cash, cash equivalents and corporate investments of $293 million compared with $497.7 million at the end of the previous quarter. The company has no long-term debt. The company generated operating cash flow of $413.4 million in the first half of fiscal 2017.
During the first six months of fiscal 2017, Paychex paid $331.5 million as dividend and repurchased shares worth $166.2 million.
Guidance
Paychex reiterated its fiscal 2017 outlook. Management still expects Payroll Service revenues to increase year over year in a range of 3% to 4% while Human Resource Services revenues are expected to grow in a range of 12% to 14%. Total service revenue is expected to increase in a range of 7% to 8%. Interest on funds held for its clients and investment income are projected to grow in the mid-single digit range.
Net income is still likely to increase 7% year over year on a GAAP basis and 8% on a non-GAAP basis. Effective income tax rate is now anticipated to be 35%.
Our Take
In the fiscal second quarter, Paychex’s earnings beat the Zacks Consensus Estimate but revenues missed the same. The stock closed down approximately 1% during yesterday’s trade. However, Paychex has outperformed the Zacks Categorized Outsourcing industry on a year-to-date basis. The company has gained 16.1% year to date compared with Outsourcing industry’s average return of 14.6%.
Nonetheless, the year-over-year improvement on both counts was encouraging. Moreover, the company’s reiterated outlook for fiscal 2017 is encouraging, indicating that it is relatively well placed despite the current macroeconomic sluggishness.
Furthermore, we are encouraged by Paychex’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 the long-term growth strategy.
Product launches are expected to be the other growth drivers. 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 - Free Report) and Insperity (NSP - Free Report) remain the primary concerns.
Currently, Paychex has a Zacks Rank #4 (Sell).
A better-ranked stock worth considering in the broader technology sector is Broadcom Limited (AVGO - Free Report) which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The company, which designs, develops and supplies analog and digital semiconductor connectivity solutions, has a long-term EPS growth rate of 13.6%. The EPS estimate for the current year has been revised upward to $12.10 from $11.40 over the last 30 days.
The Best Place to Start Your Stock Search
Today, you are invited to download the full list of 220 Zacks Rank #1 ""Strong Buy"" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 ""Strong Sells"" and other private research. See these stocks free >>