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Paychex Inc. (PAYX - Snapshot Report) reported second-quarter fiscal 2013 earnings of 41 cents per share, matching the Zacks Consensus Estimate. The quarter’s result was 4.9% above the year-ago level.

Revenues

Paychex reported second-quarter 2013 revenues of $569.4 million, up 4.3% from $545.7 million in the year-ago quarter. The quarter’s revenue was below the Zacks Consensus Estimate of $574.0 million.

Payroll Service segment revenue increased 1.4% year over year to $377.0 million. Client disruptions from Hurricane Sandy led to modest Payroll growth. Checks per payroll grew 1.2% from the year-ago quarter.

Human Resource Services segment generated $182.4 million in revenues, up 11.7% from the prior-year quarter. The improvement was mainly attributable to client growth and price increases, partially offset by lower contribution from professional employer organization and unfavorable product mix.

Operating Results

In the second quarter, Paychex incurred total expenses of $339.4 million, up 3.5% from the year-ago quarter. The rise was mainly due to higher selling, general and administrative expenses.

Operating income was $230.0 million, up 5.6% from the year-ago period, attributable to modest revenue growth supported by better cost management. Operating margin was 44.0% versus 43.9% in the year-ago quarter.

Net income of $147.9 million in the reported quarter reflected a 5.3% increase from $140.4 million in the prior-year quarter. Net income per diluted share was 41 cents compared with 39 cents in the year-ago quarter. There was no one-time item during the quarter.

Balance Sheet

Paychex exited the second quarter with cash and cash equivalents of $122.6 million, down from $149.0 million at the end of the prior quarter. Corporate investments decreased 26.2% sequentially to $178.6 million.

Additionally, interest on funds held for clients decreased 6.5% 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.

Guidance

Keeping in view the current market and economic conditions, Paychex believes that checks per client will moderate for fiscal 2013, which will be partially offset by modest client growth and improved revenue per check. Also, Human Resources organic revenue growth will follow the historical trend. Financial guidelines were maintained for fiscal 2013.

For fiscal 2013, Paychex expects a 2–3% 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 11.0%.

Total service revenue will likely grow in the range of 5% to 6%. The company expects a 6–8% 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 2013 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 revenue is estimated at 37.0% for fiscal 2013. The effective income tax rate is expected to be 36.0%. Net income is expected to grow in the range of 5% to 7%.

Our Take

Paychex’ second quarter results were modest, with the bottom line matching the Zacks Consensus Estimate and the top line missing the same. Fiscal 2013 guidance was disappointing reflecting 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.

But lingering unemployment situation, strict interest rates and stiff competition from Automated Data Processing (ADP - Snapshot Report) and Insperity (NSP - Snapshot Report) keep us concerned. However, Paychex’ zero European exposure will be beneficial for the company.

Currently, Paychex has a Zacks # 3 Rank (Hold).

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