Paychex Inc. (PAYX - Snapshot Report) , specializing in payment processing services, is scheduled to announce its second-quarter fiscal 2013 results on December 19 after the closing bell. We notice that the analysts have maintained their estimates at this point.
First Quarter Overview
Paychex delivered modest first-quarter 2013 results, with earnings of 42 cents per share inching past the Zacks Consensus Estimate by a penny.
Revenues grew 2.7% year over year, backed by increases of 7.4% in Human Resource Service revenue and 0.9% in Payroll Service revenue. The revenue improvement was supported by modest client growth and price increases but was partially offset by the discount offered, unfavorable mix and lower contribution from the professional employer organization.
Higher operating expenses resulted in an 80 basis points drop in operating margin to 45.5%.
Regarding its fiscal 2013 guidance, Paychex seems a bit cautious. Given the current market and economic conditions, Paychex believes that checks per client will likely moderate through fiscal 2013. However, this will be partially offset by modest client growth and improved revenue per check. Also, Human Resources organic revenue growth will follow the historical trend.
Agreement of Analysts
In the last 30 days, none out of the 20 estimates for the second quarter were revised. However, one of the 23 estimates for fiscal 2013 moved higher in the past 30 days. The limited movement, since Paychex’s first quarter results, suggests a lack of driving events.
However, some analysts prefer to remain cautious based on management’s commentary regarding the sluggishness in new small-business formation. Moreover, a few analysts believe that aggressive pricing from Automatic Data Processing Inc. (ADP - Analyst Report) is stealing customers away from Paychex.
The time between when the company receives payments from its clients and pays it out to employees typically earns some interest for Paychex. Now, with the government contemplating lower interest rates, this quick income stream of the company will also be restricted.
However, some analysts are positive about Paychex’s efforts to be technologically advanced by launching mobility apps for Apple Inc.’s (AAPL) iPad and Android tablets, which allows users to use the apps both on personal computers as well as laptops. In addition, Paychex launched smartphone applications targeting both employers and employees who are always on the move.
Magnitude of Estimate Revisions
There was no change in the Zacks Consensus Estimate for the second quarter and fiscal 2013 in the past 30 days. However, the estimates moved down by a penny to 40 cents for the second quarter in the past 90 days. The estimate for fiscal 2013 remained unchanged at $1.61 in the past 90 days.
Though the job markets have fared well in the month of November, industry experts believe that the trend is unlikely to continue. The unstable job market coupled with macro uncertainties could lead to a tough 2013 for Paychex.
However, we believe that the company is prudent in making acquisitions that could support revenue growth in the coming quarters. Last week, Paychex acquired expense management business (“ExpenseWire”) of Rearden Commerce Inc. for an undisclosed sum. Expense Management is an integral part of Paychex’s HR Services segment. Hence, we believe that the addition of new capabilities would attract professional employer organizations, thus generating revenue growth.
Earlier this year, Paychex acquired online and PC-based time and attendance solutions provider, Icon Time Systems Inc. for an undisclosed amount. The acquisition has supported growth within Paychex’s Payroll Service segment.
The company’s initiative for boosting revenue growth through acquisitions is encouraging. Also, the improving trend in small and medium business (SMB) IT spending could pave the way for Paychex in the coming quarters. However, low hiring in the SMB sector (leading to lower checks per client) and lack of new business wins has come in the way of solid revenue growth.
We also remain concerned regarding stiff competition from Automatic Data Processing Inc. and Intuit Inc. (INTU - Snapshot Report) .
Currently, Paychex has a Zacks #4 Rank, (Sell), while both Intuit and ADP have Zacks #3 Rank (Hold).