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Paychex (PAYX) Beats on Q1 Earnings; Updates FY17 View

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Paychex Inc. (PAYX - Free Report) reported impressive results for first-quarter fiscal 2017, wherein its top and bottom lines both came ahead of the Zacks Consensus Estimate and improved year over year.

The company reported earnings per share ("EPS") of 60 cents which surpassed the Zacks Consensus Estimate of 57 cents and grew 3% year over year mainly on the back of higher revenues.

Quarter Details

Paychex reported total revenue (including interest on funds held for clients) of $785.5 million, up 9% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $782 million. Excluding interest on funds held for its clients, total services revenue (Payroll service and Human Resource Services) grew 9% year over year to $773.5 million.

Payroll Service segment revenues went up 4% from the year-ago period to $450.9 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 15% year over year to $322.6 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 11% on a year-over-year basis to $12 million, primarily benefiting from higher average interest rates earned.

Paychex’s total expenses increased 8% from the year-ago figure to $462.5 million due to 6% rise in compensation-related expenditure. However, total expenses, as a percentage of total revenue, decreased 10 basis points (bps) to 58.9%.

Consequently, Paychex’s operating margin expanded 10 bps to 41.1%. In dollar terms, reported operating income increased 9% year over year to $323 million.

Net income came in at $217.4 million or 60 cents, up from $209.1 million or 58 cents reported last year.

PAYCHEX INC Price, Consensus and EPS Surprise

Balance Sheet & Cash Flow

Paychex exited fiscal first quarter 2017 with cash, cash equivalents and corporate investments of $497.7 million compared with $352.1 million at the end of the previous quarter. The company has no long-term debt. The company generated operating cash flow of $294.7 million in the first quarter of fiscal 2017.

During the quarter, Paychex paid $166.3 million as dividend.


Paychex updated some aspects of its fiscal 2017 outlook. Management now expects Payroll Service revenues to increase year over year in the range of 3% to 4%. Earlier, it projected  growth of 4%.

Net income is now likely to increase 7% year over year, down from earlier guidance of 8%. Effective income tax rate is now anticipated to be 35%. The previous forecast was in the range of 35.5% to 36%.

Other aspects of the earlier guidance remain unchanged. The company continues to anticipate Human Resource Services revenues growth in the range of 12–14%. Total service revenue is likely to increase 7%–8%. Interest on funds held for its clients and investment income are projected to grow in the mid-single-digit range.

Our Take

In the fiscal first quarter of 2017, both earnings and revenues beat the respective Zacks Consensus Estimate. Moreover, the company’s updated outlook for fiscal 2017 remains more or less 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 its 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 #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked stock worth considering in the broader technology sector is Broadcom Limited (AVGO - Free Report) . It sports a Zacks Rank #1 and has a long-term EPS growth rate of 15.03%.

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