ADP Automatic Data Processing Inc

New York-based outsourcing service provider Paychex Inc. (PAYX) recently announced the takeover of online and PC-based time and attendance solutions provider, Icon Time Systems Inc. Financial details of the transaction were not divulged. Post the acquisition, Icon Time will operate as a wholly-owned subsidiary of Paychex and all its employees will be retained.

Founded in 1989, Icon Time serves small businesses with its PC-based and web-enabled time and attendance products. Icon’s experience and innovation in the time and attendance market is expected to help Paychex enrich its Payroll services products, specifically the PST 1000 time clock.

In February last year, Paychex partnered with Icon Time for the launch of the Paychex PST 1000 time clock, which immediately curtails the time spent to calculate timesheets and compile employee information. Alongside, the time clock also enhances payroll productivity and accuracy. According to company officials, the product has remained a great revenue earner till date.

Paychex has always been enthusiastic about strengthening Payroll activities. In May 2011, the company took over recordkeeping and administrative solutions provider, ePlan Services. ePlan Services’ Web-based platform complements Paychex’ existing recordkeeping business. PLANSPONSOR magazine had acknowledged Paychex as the leading recordkeeper in the U.S. With ePlan Services’ under its wing, Paychex will be able to serve financial advisers with clarity into fee structures, while the market transitions to full disclosure models to keep pace with consumer and legislative demand.

Apart from this, Paychex also solidified its Payroll Services segment with the acquisition of the online payroll solutions provider, SurePayroll Inc. in December 2010. Paychex had to shell out $115.0 million in cash for this deal.

Though the company’s initiative for boosting the Payroll Services segment is encouraging, the effort is not showing up in its results. The segment is not performing well mainly due to the lack of new business wins.

Small businesses are significant revenue sources for Paychex. But the SMB (small and medium business) sector is being hit hard by lackluster demand due to high unemployment and inflation rates. Paychex is highly dependent on the performance of the SMB sector and this is the reason the company may not see much revenue growth in the near term.

Despite the concern in the SMB sector, Paychex delivered modest second quarter results by marginally beating the Zacks Consensus Estimate on the bottom line. Moreover, we are encouraged by Paychex’ endeavour to introduce a software-as-a-service (SaaS) application that is tailor-made for Apple Inc.’s (AAPL) iPad. With this, the ace payroll, human resource and benefits outsourcing solutions provider will be able to compete against its rivals, Automated Data Processing Inc. (ADP) and Intuit Inc. (INTU), whose SaaS-based mobile solutions have already gained decent market share.

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

 
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