Paychex Q1
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Paychex Q1
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Paychex, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PAYX)") else Response.Write("(NASDAQ: PAYX)") end if %> UNION CITY, Ca., September 18, 1996/FOOLWIRE/ --- Paychex released their Q1 1997 results this morning. They reported consolidated net income of $17.1 million or $0.24 per share, up 34% from consolidated net income of $12.8 million or $0.18 per share for Q1 last year. Consolidated revenue reached $166 million, an increase of 34% compared to $123.5 million for Q1 last year.
Results of operations for 1995 and 1996 have been restated to reflect Paychex's recent merger with National Business Solutions Inc., which is now Paychex Business Solutions (PBS), a professional employer organization headquartered in St. Petersburg Florida. The transacton was accounted for as a pooling of interests and the Q1 results include approximately $500,000 of merger costs associated with the acquisition.
The balance sheet changes because of the consolidation resulted in assets increasing a little over $13 million from just the payroll operation and the key increases were in cash and equivalents (up $6.4 million), investments (up $1 million), accounts receivable (up $5.1 million). On the other side of the balance sheet, accrued compensation was up $6.6 million because of the worksite employees, the reserve for Worker's Comp is a new item at $2.1 million, and customer deposits was $1.2 million with equity at $2.3 million.
In the Payroll segment, for the 3 months ending August 31, 1996, operating income from Payroll Services increased 33% to $22.8 million from $17.1 million for the same quarter last year. Payroll Services revenue reached $88.9 million, an increase of 17% compared to $76.2 million reported last year. Increases in clients using TaxPay and direct deposit products and strong revenue increases from human resource services were the main reasons for these gains.
The highlight of the quarterly growth was an increase in the percentage of clients using TaxPay, from 56% to 59% of the total client base. Paychex currently serves almost 240,000 payroll clients with approximately 141,500 utilizing TaxPay, their tax filing and payment feature, and approximately 56,000 clients taking advantage of direct deposit for their employees.
Operating income from the PEO business increased 53% to $0.8 million from $0.5 million for the same period last year. PBS revenue rose to a record $77.1 million, an increase of 63% compared to $47.3 million in the same period last year due to strong increases in the number of clients and worksite employees. PBS, a professional employer organization specializes in providing small and medium size businesses with cost-effective outsourcing solutions for their employee benefits. With an outsourcing solution, PBS relieves the business owner of human resources administration, employment regulatory compliance, worker's compensation coverage, healthcare, 401(k) administration, and other employee-related responsibilities. PBS currently serves over 230 clients representing in excess of 9600 worksite employees.
They are pleased to report an excellent beginning to FY 97. Initial client reaction to the Federal Government's new electronic filing and tax payment system has generated strong TaxPay client growth during the quarter. What they've done internally is set a budget quota of selling an additional 20,000 TaxPay clients during the fiscal year over what they normally would sell. After 3 months they are well on their way and are very satisfied with where they are. In the area of promotion, to insure the higher number, is reduce the fee or made it non-existent for their clients during the first several months. They did this for two reasons, one as an incentive for clients to take TaxPay, but secondly they wanted to encourage clients to get on the service faster so they don't have to put them all on at once which would be an operational headache. The real financial benefit from all this activity is probably not going to be felt until the next fiscal year. The revenue from TaxPay comes from two sources, fee income and interest income. They are delaying the fee income and will be enjoying the interest income until January 1st. That was the original plan, but the Federal Government decided to put the start date off until July 1st. Paychex has yet to make a decision about what they are going to do relative to that 6-month time frame as far as whether they will continue to waive the fee or put it in place. They are still deciding.
In addition, they have started to offer the PEO product portfolio to their payroll clients in Florida. Initial response is very positive and they look forward to the benefits of bringing together their marketing organization and the potential of their payroll client base with the resources, capabilities, and expertise of PBS.
The payroll revenue plus the PEO revenue less PEO direct costs totalled $91,273,000, up 17.2% quarter over quarter. The PEO direct costs are up a little bit, but the company explained that they are going to bounce around depending on client mix and a lot of other factors. They think a better indicator is taking the revenue less the PEO costs that they are close to the margin of approximately $1000 per person. That prompted a question as far as historical number of employees. The company responded that last year Q1 was 6809 employees, Q2 was 6891, Q3 was 8910, and Q4 was 9192. They have 550 sales people in the payroll area and 85 sales people in HRS. They have 20 sales people in Florida selling both product areas and will increase that slightly over the year. As far as growth for the PEO business in Florida, they are planning to expand based on two factors -- one, can they handle it operationally and does it make sense from that perspective, can they train the people fast enough, etc.; and secondly they are not going to expand it so fast that it will be dilutive to earnings.
Payroll operating costs for the quarter were 28.4% of revenue versus 29.4% for Q1 last year. There was modest margin improvements in their form costs, depreciation, and delivery. The payroll SG&A was 46% this quarter versus 48.2% for Q1 last year. However, those numbers do not include general corporate expenses which they are required to segregate under segmented reporting requirements. The general corporate expenses, which normally would be included in the G&A category were $1.5 million this quarter versis $1.3 million last quarter. That would increase those total costs as a percentage of revenue to 47.7% compared to 49.9%. About 80 basis points of the margin improvement was in wages and 180 basis points was in other G&A and other Sales expense attributable to economies of scale. After accounting for general corporate expenses, the payroll operating income is 25.6% of revenue versus 22.4%, a good margin improvement.
The other income total of $1,485,000 has been in the past the interest income on the corporate investments and all but $120,000 of that income relates to the Paychex parent company.
The payroll client count at the end of the quarter was 239,600, up 11.2%. TaxPay clients totalled 141,500, up 28%. Direct deposit clients totalled 55,800, up 41%. Check-signing clients totalled 23,500, up 23%.
Their Human Resource Services division had a strong quarter. They continued to be profitable. The gain over Q1 last year, which was a loss, was just a little over $1 million. Their revenue growth was strong. The 401(k) clients now are almost 1,500. In their new PBS subsidiary, they are currently expanding in Florida and Atlanta. They are in the process of opening a second operations center in Miami Lakes, just north of Miami. They are expanding the sales and service offices in Orlando and Atlanta and will be establishing a new sales and service office in Jacksonville. All of these expansions are adjacent to or part of their existing payroll facilities in those locations. They have combined the PEO and HRS sales groups in Florida and they will both be selling the PEO product and their Human Resource Services products. They have been making initial phone calls from their telemarketing operation into their client base to set up appointments for the sales force and the initial results from that have been very positive.
Their total investment portfolio at the end of the month was almost $800 million, with $620 million of that TaxPay, $30 million direct deposit, and $135 million corporate investments. Of that, about $335 million was short term and the rest is in bonds with an average maturity of about 2.5 years. Their short term rates are around 4% and long term about 4.5%.
* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |