Paychex Inc.
(PAYX) reported second-quarter fiscal 2012 earnings of 39 cents per
share, beating the Zacks Consensus Estimate by a penny. The
quarter’s results indicate slow recovery in the small and medium
business (SMB) sector. Paychex is highly dependent on the
performance of the SMB sector. The sector is being hit hard by
lackluster demand due to high unemployment and inflation rates.
Shares decreased 1.62% in after-market trade.
Revenues
Paychex reported second-quarter
2012 revenues of $545.7 million, up 6.6% from $512.0 million
reported in the year-ago quarter. The upside can be attributed to
year-over-year growth in both checks processed per client and the
HR services client base.
Payroll Service segment revenue
increased 4.8% from the year-ago quarter to $371.7 million,
attributable to the contribution from SurePayroll Inc., acquired in
February. Excluding the SurePayroll contribution, Payroll revenue
would have grown only 3.0%.
Continued increase in checks
processed per client as well as revenue per checks also aided the
growth. But the growth was not at par with the historical trend.
Moreover, the increase in new unit sales was sluggish, due to the
limited number of new companies commencing business during the
quarter.
The Human Resource Services segment
generated $163.3 million in revenues, up 12.5% from the prior-year
quarter. The improvement was partly based on the contribution from
ePlan Services, which was acquired in May. Excluding ePlan, Human
Resource Services’ revenue growth would have been 10.0%.
The number of client employees
served and the number of clients grew during the quarter,
contributing to the improvement. Moreover, demand for a new
product, HR Essentials, also added to the segment’s revenue
growth.
Operating
Results
In the second quarter, Paychex
incurred total operating expense of $327.8 million, up 6.4% from
the year-ago quarter. The rise was mainly due to
acquisition-related costs as well as the company’s continued
efforts to train sales personnel, provide better customer service
and enhance technological infrastructure.
Operating income was $217.9
million, up 6.9% from the year-ago period, attributable to modest
revenue growth and better cost management. Operating margin grew
640 basis points year over year to 41.7%.
Net income of $140.4 million in the
reported quarter reflected a 4.9% increase from $133.9 million in
the prior-year quarter. Net income per diluted share was 39 cents
compared with 37 cents in the year-ago quarter. There was no
one-time item during the quarter.
Balance Sheet & Cash
Flow
Paychex exited the second quarter
with cash and cash equivalents of $96.1 million, down from $113.1
million at the end of the prior quarter. Corporate investments
decreased $57.0 million sequentially to $315.0 million.
Additionally, interest on funds
held for clients decreased 10.8% year over year to $10.7 million as
a result of lower average interest rates earned, partially offset
by an increase in average investment balances. Paychex has no
long-term debt.
Cash from operations was $110.0
million compared to $187.2 million in the prior quarter. Capital
expenditures were $23.9 million compared to $20.2 million in the
prior quarter.
Guidance
Keeping in view the current market
and economic conditions, Paychex believes that checks per client
will moderate through fiscal 2012, impacting quarterly comparisons
for both Payroll Service and Human Resource Services revenues.
Moreover, the favorability in
expenses realized in the second quarter may not be realized
throughout fiscal 2012 due to the planned investments in its
business. Hence, Paychex reaffirmed its full-year guidance.
For fiscal 2012, Paychex expects a
5–7% increase in Payroll Service revenues compared to the year-ago
quarter. Human Resource Services revenues are expected to increase
in the range of 12.0% to 15.0%.
Total service revenue is likely to
grow in the range of 7% to 9%. The company expects a 12–14% decline
in interest on funds held for clients and a roughly 2% increase 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 continue, increasing
investment income.
Net operating income is expected in
the range of 35–36% of total service revenue. The effective tax
rate is expected to be in line with the second quarter and net
margin is projected at between 5% and 7%.
The guidance for fiscal 2012
includes anticipated results from Paychex’ recent acquisition of
SurePayroll Inc. and its ePlan Services. The acquisitions are
expected to have an approximately 2% positive impact on revenue,
nonetheless resulting in earnings dilution of around 1 cent per
share due to amortization on acquired intangible assets and some
one-time acquisition costs.
Our Take
Paychex’ second quarter results
were modest, with the bottom line exceeding the Zacks Consensus
Estimate by mere a penny. We are also positive on management’s
positive commentary regarding continued investments in product
development and synergies from the recent acquisition. We also
believe that cost control will remain a catalyst for Paychex, going
forward.
Though new business wins in the SMB
sector and stiff competition from Automated Data Processing
Inc. (ADP) and Administaff Inc. will remain a constant
worry, we believe that Paychex can benefit from the improvement in
the U.S. employment situation and zero European exposure.
Paychex has a Zacks # 2 Rank,
implying a short-term Buy recommendation.
AUTOMATIC DATA (ADP): Free Stock Analysis Report
PAYCHEX INC (PAYX): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Automatic Data Processing (NASDAQ:ADP)
Historical Stock Chart
From Jun 2024 to Jul 2024
Automatic Data Processing (NASDAQ:ADP)
Historical Stock Chart
From Jul 2023 to Jul 2024