Thursday, June 24, 2010

Paychex Reports Flat Revenue

Paychex Inc. (PAYX: 26.97 -0.45 -1.64%) reported fourth quarter 2010 earnings of 32 cents per share, beating the Zacks Consensus Estimate by a penny.  
Revenue for the quarter came in at $496.2 million, almost flat with $495.9 million in the comparable period last year. The slight recovery was due to 1.1% growth in checks processed per client and a marginal recovery noticed in the retirement services client growth compared with the year-ago quarter.  
As per revenue segments, Payroll Services clocked revenues of $341.3 million in the fourth quarter, down 2.0% from the year-earlier quarter as a result of the weak economic environment, which in turn adversely impacted the company’s client base. Human Resource Services generated $141.2 million, up 6.0% from the prior-year quarter.  
Operating Results 
In the fourth quarter, the company incurred a total expense of $322.6 million, almost flat with the year-ago quarter. Operating income was $173.6 million, almost flat with the year-ago period.  
Net income of $115.5 million in the reported quarter advanced from the $113.8 million in the year-ago quarter. Net income per diluted share remained flat year over year at 32 cents.
Balance Sheet 
Paychex exited the fourth quarter with cash and cash equivalents of $284.3 million, up from $279.3 million in the prior quarter. Moreover, during the fourth quarter, interest on funds held for clients decreased 9.3% year over year to $13.7 million. During the quarter, Paychex paid dividend of $448.6 million.  
Fiscal 2010 Highlights
Paychex reported total revenue of $2.0 billion for fiscal 2010, which was down 4% year over year mainly due to the cumulative effect of client loss and lower check volume. Earnings dropped 11% as a result of litigation expense recorded in the third quarter of 2010.  
For fiscal year 2011, Paychex expects Payroll Services revenue to remain flat year over year and Human Resource Services revenue to increase in the range of 10.0% to 13.0%. Interest on funds held for clients is expected to decrease in the range of 12% to 17%, while net investment income is expected to increase in the range of 24% to 27%. Moreover, net income is expected to improve marginally over fiscal 2010.  
Conference Call 
The conference call for the fourth quarter will be held today at 10.30 am (ET). A detailed report on the quarter and fiscal year earnings followed by highlights of the conference call will be published soon.  
We remain concerned about the decreasing customer count and challenging conditions in the U.S. small businesses owing to higher employee turnover and constrained credit conditions. Since small businesses contribute largely to total revenue, we remain unclear about when Paychex could return to its normal double-digit revenue growth.  
We look forward to a positive contribution by Paychex’s Human Resource Services segment, as there has been a steady increase in clients over the past few quarters.  
On the other hand, we are a bit concerned about escalating competition in the outsourcing space from big players like Automated Data Processing Inc. (ADP: 40.71 -0.35 -0.85%) and Administaff Inc. (ASF: 23.82 +0.34 +1.45%) and limited margin expansion in the near team, due to continuous investment in diverse fields. 

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