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Paychex Posts Modest 4Q

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Paychex Inc. (PAYX - Free Report) reported fourth-quarter fiscal 2012 earnings of 34 cents per share, in line with the Zacks Consensus Estimate. The quarter’s result was 3.6% above the year-ago level. The company witnessed revenue improvement across its segments but was lackluster regarding new business creation.


Paychex reported fourth-quarter 2012 revenues of $551.5 million, up 5.5% from $522.7 million in the year-ago quarter. The quarter’s revenue was below the Zacks Consensus Estimate of $558.0 million.

Payroll Service segment revenue increased 3.5% year over year to $369.5 million. Excluding the contribution from SurePayroll, Payroll service revenue growth was 3.0%, mainly attributable to the increase in checks per payroll and a modest rise in revenue per check. Revenue generated per issued check was impacted by price increases, partially offset by discounting.

Human Resource Services segment generated $171.2 million in revenues, up 11.5% from the prior-year quarter. The improvement was partly based on the contribution from ePlan Services. Excluding ePlan, the segment revenue growth for the fourth quarter stood at 9.0%, reflecting client growth and price increases.

Operating Results

In the fourth quarter, Paychex incurred total expense of $355.6 million, up 4.6% from the year-ago quarter. The rise was mainly due to higher selling, general and administrative expenses.

Operating income was $195.9 million, up 7.2% from the year-ago period, attributable to modest revenue growth and better cost management. Operating margin was 37.5% versus 36.8% in the year-ago quarter.

Net income of $123.3 million in the reported quarter reflected a 3.7% increase from $118.9 million in the prior-year quarter. Net income per diluted share was 34 cents compared with 33 cents in the year-ago quarter. There was no one-time item during the quarter.

Balance Sheet

Paychex exited the fourth quarter with cash and cash equivalents of $108.8 million, down from $146.5 million at the end of the prior quarter. Corporate investments decreased $149.3 million sequentially to $207.5 million.

Additionally, interest on funds held for clients decreased 12.2% year over year to $10.8 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.


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.

For fiscal 2013, 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 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 25–35% upside in net investment income.

Interest on funds held for clients and investment income for fiscal 2012 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 expected 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’ fourth quarter results were mediocre, with the bottom line matching the Zacks Consensus Estimate and the top line missing. Fiscal 2013 guidance was disappointing reflecting macro uncertainties. But management’s commentary regarding continued investments in product development was a positive.

Despite new business wins in the SMB sector, stiff competition from Automated Data Processing (ADP - Free Report) and Insperity (NSP - Free Report) , and an uncertain unemployment situation will remain constant worries. However, Paychex’s zero European exposure will be helpful.

Paychex has a Zacks #3 Rank, implying a short-term Hold rating.

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