Payroll software company Paychex (PAYX 74.91, +1.19) reported a first quarter beat this morning and gave roughly in-line guidance for fiscal 2019, but investors were perhaps expecting more as the muted response in the stock (+1.6%) has shares little changed on Tuesday.
There wasn’t much not to like out of Paychex’s first quarter results as evidenced by the top and bottom line beats. First quarter earnings per share (EPS) of $0.67 and revenue growth of about 9% to $862.8 million was enough to edge out Street expectations.
The company’s business is largely based on service revenues. Paychex derives revenues from a few different avenues within the larger “service” business:
- Paychex’s largest segment, Management Solutions, saw revenues increase 3% to $687.7 million for the first quarter. The increase was primarily driven by increases in the company’s client bases across the following HCM services: payroll; ASO; retirement services; and time and attendance solutions. Retirement services revenue also benefited from an increase in asset fee revenue earned on the asset value of participants’ funds. Management Solutions revenue was impacted by the composition of processing days in the first quarter compared to the same period last year.
- Professional employer organization (PEO) and insurance services revenue were up 39% to $158.0 million for the first quarter. Growth was mainly driven by increases in clients and client worksite employees across the PEO business. Demand for these services, along with growth within Paychex’s existing client base, resulted in double-digit growth in the number of client worksite employees served. Insurance services revenue experienced solid growth benefiting from an increase in the number of health and benefit applicants.
- Paychex also reported 25% growth on interest on funds held for clients to $17.1 million for the first quarter. The increase resulted primarily from higher average interest rates earned.
Paychex also gave comments about how the remainder of the year will shake out in each business segment. The company commented that payroll services revenues were below the low-end of the range in the first quarter, as anticipated, due to the composition of payroll processing days. Management feels that growth in payroll revenue will be at or above the high-end of the range for Q2 and Q3, while Q4 is anticipated to be within the range. In the PEO business, growth for Q2 and Q3 is anticipated to be within the range while Q4 growth is anticipated to be below the low-end of the range due to a more challenging compare caught by the strong growth in the PEO in the latter part of fiscal 2018. Paychex expects Management Solutions growth in Q2 and Q3 to be above 4% and the company anticipates that Q4 will be in-line with the full year guidance.
As to the FY19 guidance, Paychex’s held firm on its in-line outlook for the year. As a caveat, following the adoption of ASC Topic 606, Paychex provided the following additional fiscal 2019 guidance: management solutions revenue is anticipated to increase approximately 4%; and PEO and insurance services revenue is anticipated to increase in the range of 18-20%. On the conference call after the results were released management held firm on its FY19 EPS guidance for growth of about 11% to about $2.83.
Given the strong performance in Q1, investors were perhaps looking for a raise on the FY19 outlook. With peers Paylocity (PCTY 78.37, -0.48, -0.6%) and Automatic Data (ADP 150.80, +0.06, +0.0%) yet to report quarterly results investors may be gauging expectations for those companies based on PAYX’s comments.
PAYX bumped up against support this morning when the stock snuffed out a failed break lower of the 50-day simple moving average (72.58). Shares topped all-time highs just one calendar week ago, but have since given up about 1.2%.