categories

HOT TOPICS

NEWSLETTER

If you are considering becoming a 1M/1M premium member and would like to join our mailing list to receive ongoing information, please sign up here.

Subscribe to our Feed

Paychex Should Consider SaaS Acquisitions

Posted on Monday, Sep 29th 2008

On September 24, Paychex, Inc. (NASDAQ: PAYX), the leading payroll and personnel services provider, reported first quarter results that met earnings estimates but missed revenue estimates. In earlier coverage,  I suggested that it could be a SAAS aggregator.

Q1 revenue increased 5% to $534.1 million, driven by service revenue growth and leverage of expenses. Net income decreased 2% to $148.7 million. Diluted EPS, however, was up 3% to $0.41 due to a lower number of weighted average shares outstanding because of the completion of the stock repurchase program in December 2007. Analysts expected profit of 41 cents per share on revenue of $540 million.

As we have seen in earlier posts, available here, here, and here, the company’s results are good indicators of the health of the economy. Because of the weak economy, losses due to clients going bust have increased, payroll sales from new clients have slowed, and transaction volumes have come down. Investment income declined 75% to $3.1 million due to lower average investment balances, as a result of lower average interest rates and the funding of the stock repurchase program. Interest on funds held for clients decreased 25% to $24.2 million, due primarily to lower average interest rates earned, partially offset by higher average investment balances.  

Paychex had a strong cash balance of $519.1 million at the end of the quarter. Cash flows from operations were $214.6 million versus $253.2 million in Q1 2007, down mainly due to the stock repurchase program. Operating income grew 5% while operating income, net of certain items, increased 11% to $197.4 million. The strong cash balance could be put to very good use in acquiring a portfolio of SaaS companies that are synergistic and in need for an exit. Paychex should look into this.

By segment, Payroll Services revenue increased 5% to $378.5 million while Human Resources Services revenue increased 16% to $131.4 million.

For fiscal year 2009, Paychex expects revenue growth in the range of 6% to 8%. Net income is expected to grow between 2% and 4%. Operating income, net of certain items, is expected to grow 11% to 13%. Net investment income is expected to decline 50% to 55%. Interest on funds held for clients is expected to decline 20% to 25%. By segment, Payroll Services revenue is expected to grow between 5% and 7%. HRS revenue is expected to grow between 18% and 21%. The stock is currently trading around $33 with a market cap of $12 billion.

Chart for Paychex Inc. (PAYX)

Hacker News
() Comments

Featured Videos