Paychex Disappoints in Q4 - Analyst Blog
June 23 2011 - 12:51PM
Zacks
Paychex Inc. (PAYX) reported fourth-quarter
fiscal 2011 earnings of 33 cents per share, which came in line with
the Zacks Consensus Estimate. Though the quarter’s results indicate
an improving client retention rate and higher checks per client,
lower sale of new units remains an overhang.
Revenues
Paychex reported fourth-quarter 2011 revenues of $522.7 million,
which missed the Zacks Consensus Estimate of $542.0 million, but
increased 5.3% from $496.2 million reported in the year-ago
quarter. The revenue 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 4.6% from the year-ago
quarter to $356.9 million, attributable to the contribution from
SurePayroll Inc., acquired in February. Excluding the SurePayroll
contribution, Payroll revenue would have grown only 3.0%.
Continued growth in checks processed per client as well as
revenue per checks also added to the growth. However, 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 $153.5 million in
revenues, up 8.7% from the prior-year quarter. The improvement was
partly due to the contribution from ePlan Services, which was
acquired in May. The number of client employees served and the
number of clients grew during the quarter, contributing to the
increase. Moreover, demand for a new product, HR Essentials, also
added to the segment’s revenue growth.
Operating Results
In the fourth quarter, Paychex incurred total operating expense
of $339.9 million, up 5.4% from the year-ago quarter. The increase
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.
However, the increase was partially offset by a higher utilization
rate and lower headcount.
Operating income was $182.8 million, up 5.3% from the year-ago
period, attributable to modest revenue growth and better cost
management. Operating margin remained flat year over year at
35.0%.
Net income of $118.9 million in the reported quarter reflected a
2.9% increase from $115.5 million in the prior-year quarter. Net
income per diluted share was 33 cents compared with 32 cents in the
year-ago quarter. There was no one-time item during the
quarter.
Balance Sheet & Cash Flow
Paychex exited the fourth quarter with cash and cash equivalents
of $119.0 million, down from $236.0 million at the end of the prior
quarter. The lower cash balance was due to cash used up in
investing and financing activities. Corporate investments increased
$111.3 million sequentially to $345.0 million.
Additionally, interest on funds held for clients decreased 10.2%
year over year to $12.3 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 $162.4 million compared to $335.5
million in the prior quarter. Capital expenditures were $21.5
million compared to $34.9 million in the prior quarter.
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, so investment income will increase.
Net operating income is expected in the range of 35–36% of total
service revenue. The effective tax rate is expected to be roughly
35% and net margin is projected at between 5% and 7%.
The guidance for fiscal 2012 includes anticipated results from
Paychex’s recent acquisition of SurePayroll Inc. and its ePlan
Services. The acquisitions are expected to have approximately a 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
The fourth quarter has been lackluster over the past few years,
relative to the other three quarters. Although results matched the
company’s guidance in the fourth quarter of 2011, we are
disappointed with the top line, which was well below our
estimates.
However, we remain positive on management’s positive commentary
regarding continued investments in product development and
synergies from the recent acquisitions. We also believe that cost
control measures will remain catalysts for Paychex, going
forward.
We remain concerned about lower interest rates, lackluster new
business formation and growing competition in the outsourcing space
from big players such as Automated Data Processing
Inc. (ADP) and Administaff Inc.
(ASF).
Currently, Paychex has a Zacks #4 Rank, implying a short-term
Sell recommendation.
AUTOMATIC DATA (ADP): Free Stock Analysis Report
PAYCHEX INC (PAYX): Free Stock Analysis Report
Zacks Investment Research
Administaff (NYSE:ASF)
Historical Stock Chart
From Apr 2024 to May 2024
Administaff (NYSE:ASF)
Historical Stock Chart
From May 2023 to May 2024