Paychex Q4 Results Reveal Improved Sales and Operating Environment

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Paychex reported accelerating improvement for the fiscal fourth quarter. All service operations experienced solid top-line expansion, as the confluence of a healing small business market, improved sales execution, and record client retention helped spur the firm’s strong performance. Year over year, total revenue grew 6.1% with operating margin expanding 67 basis points to 36.19%.

Service revenue–revenue excluding float income– increased 6.4% with service operating margins expanding a solid 84 basis points to 35.08%. The improvement of these metrics outpaced results for both the fiscal third quarter and total year. Over the quarter the firm increased its tax provision, which lowered its quarterly earnings per share by $0.04 (to a net $0.34) in what management stated was for “the settlement of a state income tax matter.”

The recent moderate growth trend for the firm’s core payroll operations picked up as payroll services produced a 3.6% top-line increase. The recent recalibration of its sales organization seems to be paying off nicely for Paychex. Additionally, a more favorable employment and small business market have added to the payroll processor’s efforts. Barring another steep economic downturn we expect these trends to continue into fiscal 2014. Revenue and profit growth for Paychex’s core payroll division was driven by a 1.0% increase in checks per client and moderate pricing increases.

Historically Paychex has been able to push though 3%-5% pricing increases annually; however, to drive new sales growth over the past fiscal year, the firm has had to offer initial discounts. We believe these pricing concessions will slowly moderate over the coming quarters as the firm’s negotiating leverage returns to normalized levels and as the new sales structure becomes more efficient.

The firm’s ancillary services division continues to post impressive results with revenue increasing a robust 12.6% for the quarter. All major service lines reported healthy gains as the firm was able to drive its cross-sales at a decent clip. We believe this service line will continue to be a cornerstone for both top- and bottom-line growth over the foreseeable future.

 

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