Paychex achieved record or near record levels in service revenue, client retention, and customer satisfaction scores. It has seen consistent growth in checks per payroll in fiscal year 2012. Its payroll client base increased when including SurePayroll and was flat when excluding SurePayroll. This is an improvement from the decline in client base over the past 3 years. To grow the client base, Paychex would need more business formation.
In fiscal 2012, Paychex
introduced its online mobile applications. It now has apps for the
iPad and Android tablets, and released smartphone applications
applications last month. In Q3, Paychex unveiled its Business
Insurance Payment Service and our Paychex Advisor Select 401(k)
offering. In December,
it acquired Icon Time Systems, Inc. a provider of time and attendance
solutions for small- to medium-sized businesses, with which Paychex
already had a successful relationship.
Checks per payroll, an estimate of the average number of checks issued per payroll run, increased 2% for fiscal 2012, which is lower than the prior year. Paychex anticipates a lower growth rate in fiscal year 2013, which will impact its quarterly comparisons in our service revenue. SurePayroll is not included in the checks per payroll statistic. Paychex is seeing moderation in checks per payroll, and although it was better than expected last year, it is being cautious in assuming it will continue to be better than expected.
SurePayroll is continuing to grow and is run by the same management team as when Paychex purchased it a year and a half ago. Paychex is working on integrating the backend. Growth in SurePayroll was around the mid-teens. None of Paychex's existing customers are moving to SurePayroll.
There is lower revenue per
employee with HR Essentials because it is a more basic product that
provides telephonic support for human resources. HR Essentials is
different from ASO or
PEO, which has a hands-on, dedicated person to the customer's
business. HR Essentials breaks clients into HR outsourcing without
paying the full amount or having a full dedicated person to them.
Paychex has modified its compensation plans for its sales representatives to make it more direct and easy to understand, and to make them more focused on revenue and revenue growth. The company has also given tablets to its sales associates and has made changes in training.
Prices increases for fiscal year 2013 were modest. Paychex does not expect a lot of changes in discounting from fiscal year 2012.
Paychex has only a tiny bit of business in Europe and it is profitable.
Paychex believes the new health care regulations will be a positive for it. There will now be a mandate for small businesses to provide health care insurance. The small businesses will be looking to experts to help them with all the requirements and how to get tax credits. Paychex can seamlessly interface the insurance with the payroll data. Although the increase of regulations from the health care plan could help in getting more business, it does have the downside of slowing new business formation. The impact on Paychex from the health care plan is currently hard to quantify.
Evaluation of markets.
Paychex believes the economy improved modestly as fiscal year 2012 progressed. Hiring has increaed and has not moderated as Paychex believed it would. However, the environment for new business formation is still challenged. Paychex is not seeing much in sales from new businesses. Current clients are also not opening new locations. There is an improvement in the number of businesses going out of business.
Paychex's modeling shows that fiscal year 2013 will look similar to fiscal year 2012. It sees economy slowing inching up.
Financials
Total service revenue grew 7% in fiscal year 2012 to the highest level in Paychex's history. Acquisitions contributed 2% to growth. Paychex expects total service revenue to increase by 5 to 6 percent in fiscal year 2013. Its prior acquisitions will have minimal impact on these growth rates. For the long term, Paychex sees its revenue growth in the high single-digits.
Payroll service revenue
increased 4% for Q4 and 5% for the full year fiscal 2012. Organic
growth in payroll service revenue was 3% and 4%, respectively. The
revenue increase was the result of increases in checks per payroll
and modest increases in revenue per check. Paychex anticipates
payroll service revenue will increase 3 to 4 percent in fiscal year
2013.
HR Solutions (HRS) revenue increased 12% for Q4 and 13% for the fiscal year 2012. HRS revenue growth was 9% and 11%, respectively. Thegrowth in HRS revenue was a result of growth in clients and price increases. The HR Solutions revenue growth rate was impacted by continued softness in Paychex's PEO and lower revenue per employee in its HR Essentials products. The PEO business fluctuates with changes in health care rates and workers' compensation clients experience. Health care insurance rates impact renewal rates for the business. Paychex projects HRS revenue to increase by 9 to 11 percent in fiscal year 2013. Although Paychex does not make quarterly projections, it notes that due to a difficult comparison with very strong results in Q1 2012, which included the launch of its HR Essentials product, growth rates in Q1 for payroll and HRS will be below the low end of the range of our 2013 full year guidance.
During fiscal 2012, health and benefits services revenue increased 24 percent with a 23 percent increase in the number of applicants.
Combined interest on funds held for clients and investment income increased 8% for Q4 and 7% for the fiscal year 2012. The company lengthened the duration of its portfolio to get a little better yield. If rates remained the same, Paychex would anticipate a 3 to 5 percent contraction in the portfolio. Right now, there is a lot of volatility on interest rates. Paychex believes the growth in the float for fiscal year 2013 is probably 4 to 5 percent.
Operating income increased 9% for Q4 and 10% for fiscal year 2012.
Operating margin was 37.1 percent for fiscal 2012 and 34.2 percent for Q4. Paychex expects operating margin to drop in the second half of the year due to expenses to support calendar year end operations and sales activity and planned spending on its innovation activities. Paxchex's increased expenses fall within its objective of growing expenses 100 basis points below sales.
Paychex expects net income to increase between 5% to 7% in fiscal year 2013. It anticipates of $.01 impact of an increase its core payroll sales force by 3 to 4 percent in fiscal year 2013 and the full year impact of an additional 401(k) match that implemented toward the end of fiscal 2012. Paychex does not expect to see an effect on revenues from the increase in the sales force until fiscal year 2014.
Cash and total corporate investments were $790 million as of May 31, 2012, versus $671 million a year ago.
Paychex paid $460 million of dividends during fiscal year 2012, which was 84% of its net income. In October 2011, it increased its quarterly shareholder dividend by 3% to $0.32 per share.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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