Paychex: SaaS Roll-Up, Please

On March 25, Paychex, Inc (NASDAQ:PAYX) reported third quarter results that met analyst estimates. However, the company cut its fiscal-year revenue forecast for a third time and said it expects the economy to continue to be difficult through 2009 and into fiscal 2010. I have been tracking the performance of this leading payroll and personnel services provider to get an insight into the health of the economy. Previous coverage is available here and here.

Q3 revenue was down 1% to $528.6 million. Net income decreased 8% to $130.8 million or $0.36 per share as losses in investment income offset gains in other areas. Analysts expected earnings of $0.36 per share on revenue of $536.9 million.

Paychex continued to be affected by the difficult economy and a key indicator of the economy, check per client, declined 4.3% in the quarter versus a 2.4% decline in the first nine months of fiscal 2009. However, on the brighter side for Paychex, its cash and corporate investments increased more than $100 million to $570 million.

The turmoil in the financial markets and low interest rates have adversely affected the company’s income on funds held for clients. For Q3, interest on funds held for clients declined 56% to $16.4 million and investment income decreased 70% to $1.1 million, primarily due to lower average interest rates earned offset by higher average investment balances.

Payroll service revenue increased 2% to $381.2 million on price increases and growth in ancillary payroll services. Human Resource Services (HRS) revenue grew 9% to $131.0 million on an increased number of clients. However, HRS revenue growth continued to be affected by weakening economic conditions that led to a decline in retirement services and comprehensive human resource outsourcing services revenue. Retirement services revenue growth declined by $3.0 million in the quarter due to the decline in market values. Comprehensive human resource outsourcing services revenue growth was hurt by a lower number of employees per client that led to a decline of $2.9 million in this segment’s revenue.

Year-to-date, total revenue increased 3% to $1.6 billion and net income decreased 5% to $419.7 million. Payroll services revenue increased 4% to $1.1 billion and HRS revenue increased 12% to $390.7 million.

Paychex revised its outlook for the full fiscal year 2009 ending May 31, 2009 for the third time. It assumes that the weak economic conditions will continue through the rest of the fiscal year. Total revenue growth is expected to be in the range of 0 to 2%. Net income is expected to decline 7 to 5%. Interest on funds held for clients is expected to continue to decline, but in the range of 45% to 40%, and net investment income is expected to decline between 75% and 70%. The stock is currently trading around $26 with a market cap of about $9 billion.

Paychex still has the currency to do a SaaS roll-up as I have mentioned before several times. Some 600+ SaaS startups are toiling hard out there, and many of them have been gaining traction. It would not be at all difficult to pull a great portfolio together for Paychex, a healthy, well-performing company with a solid market cap.