Paychex Should Follow In Intuit’s Footsteps

Last week, the leading payroll processing company, Paychex (NASDAQ:PAYX) reported fourth quarter and fiscal year 2009 results that missed analyst estimates as the weak economy and rising unemployment — according to the most recent report from the Bureau of Labor Statistics, new unemployment claims were higher than expected — finally take a toll. Let’s take a closer look.

Q4 revenue declined 4% to $495.9 million and net income declined 16% to $113.8 million or $0.32 per share. Analysts expected earnings of $0.33 on revenue of $510.5 million. Q3 coverage is available here.

Payroll Services revenue decreased 5% to $347.9 million while Human Resource Services revenue increased 9% to $132.9 million. Fourth quarter results were more affected than previous quarters by the weak economy: checks per client declined 5.2% in the quarter, versus 4.3% in Q3 and 2.9% for the full year.

For the full fiscal year 2009, revenue increased 1% to $2.1 billion while net income declined 7% to $533.5 million or $1.48 per share. The company ended the year with cash and total corporate investments of $575 million and no debt. It paid dividends of $447.7 million in the year.
Payroll Service revenue increased 1% to $1.5 billion for 2009. However, there was a 17% increase in clients lost due to companies going out of business. Paychex’s client base decreased by 3.1%, checks per client by 2.9% and new client sales by 19%.

Human Resource Services (HRS) revenue increased 11% to $523.6 million for 2009. However, HRS revenue growth continued to be affected by declines in retirement services and comprehensive human resource outsourcing services revenue.

As the Federal fund rates dropped to near zero levels, interest on funds held for clients decreased 43% to $75.5 million. However, Paychex said in its earnings call that it has managed its clients’ funds of upto $4 billion with no losses of principal.

Intuit, the leading accounting and tax software maker, recently acquired PayCycle for $170 million. In my recent post on Paychex, I said the company should do a SaaS roll-up from the more than 600 SaaS startups. In 2009 Paychex strengthened its software-as-a-service solution for its MMS (major market services) clients and added Paychex Time and Labor Online, an Internet-based, application, to its time and attendance system product suite. It needs to do more: the company’s revenues should pick up as the economy eventually improves, but it cannot afford to miss acquisitions in areas such as talent management.

Paychex expects 2010 earnings to decline 10% to 12% on a revenue decline of 1% to 4%. Analysts expected earnings of $1.46 a share, down 3%, on revenue of $2.09 billion, flat with the previous year.

Following its disappointing results and bleak outlook, Citigroup and S&P Equity Research cut their price targets for Paychex. The stock is currently trading around $26 with a market cap of about $9 billion.