Paychex's Strategic Move Into Cloud-Based Accounting

Paychex (NASDAQ: PAYX  ) recently announced the launch of Paychex Accounting Online, a cloud-based accounting application allowing business owners, employees, and accountants to collaborate online. The new application was developed in partnership with Kashoo, a cloud-based accounting service provider. Paychex Accounting Online will compete directly with a large number of cloud-based accounting products, including the Intuit (NASDAQ: INTU  ) QuickBooks Online.

A possible catalyst for growing sales and revenue
It's no secret that Paychex needs to increase sales and revenue. Paychex reported $597.9 million in revenue for the first quarter of fiscal 2014, which is only a 5% increase from $568.1 million reported in the first quarter of fiscal 2013.

Paychex plans to use the new cloud-based accounting application as a method for upselling payroll and human resource services to business customers. Paychex's Andy Childs, Vice President of Marketing, said:

By leveraging Kashoo's years of experience and industry expertise, we are able to offer new businesses a simple, easily accessible cloud accounting application they need now, and then support those businesses as they start to grow and hire with our full suite of payroll and HR solutions.

Stagnant growth is currently plaguing Paychex's payroll services. The company reported that payroll services grew revenue by only 2% year over year to $395.2 million in the first quarter of fiscal 2014. The company's human resource services fared better by growing revenue by 11% year over year to $202.7 million in the first quarter of fiscal 2014.

The Paychex Online Accounting application could prove to be a catalyst to increase the company's sales and revenue. Investors should pay attention to subscription growth rates and how effectively the company is able to upsell subscribers to payroll and human resource services.

QuickBooks Online shows amazing growth
Intuit has reported incredible growth for the company's QuickBooks Online application. As of the first quarter of 2014, Intuit has grown the QuickBooks Online subscriber base by an amazing 29% to 500,000 subscribers.

The company is currently offering QuickBooks Online services to subscribers in over 100 different countries. Subscribers outside of the U.S. have grown 80% to 37,000 subscribers as of the first quarter of 2014.

As an investor, Intuit is an attractive company: Intuit recently reported revenue of $622 million in the first quarter of 2014, which is an 11% increase over revenue of $562 million in the first quarter of 2013. The company expects to grow revenue by 8 to 12% in 2014.

Intuit reported a loss of $0.06 per share in the first quarter of 2014. The company explained that strategic investments in data and small business marketing are the culprit for expenses that exceeded revenue. Although these investments have temporarily stunted profitability, they are expected to help grow the business through the remainder of 2014.

Investors should look for Intuit to continue growing sales through QuickBooks Online in addition to the company's core software products. Keep tabs on the company's profitability to determine whether or not the company can follow through with expectations of double-digit earnings per share in 2014.

The ADP factor
Automatic Data Processing
(NASDAQ: ADP  ) is a company that could successfully develop, market, and compete with Paychex's Accounting Online application. The advantage to ADP would be to offer its customers a one-stop solution for accounting and payroll. ADP would be able to successfully launch a new accounting application by leveraging the company's 620,000 clients across 125 countries.

ADP recently reported a profitable first quarter of 2014 with $0.68 earnings per share. The company is well positioned to reinvest profits into new technologies such as a cloud-based accounting application.

As an investor, ADP is a solid company: ADP recently reported revenue of $2.8 billion in the first quarter of 2014, which is an 8% increase over revenue of $2.6 billion in the first quarter of 2013. The company is currently meeting expectations of growing revenue by approximately 7% in 2014.

Investors should look for ADP to continue growth in both revenue and profits. Keep an eye on how Paychex rolls out the Accounting Online application and how ADP reacts to any success demonstrated by Paychex. A successful launch by Paychex might spark ADP's interest in developing a cloud-based accounting application.

The bottom line
The launch of Paychex Accounting Online is a good strategic move for Paychex and should allow the company to capitalize on the growing demand for cloud-based accounting solutions. Cloud-based accounting could help Paychex expand revenue through a growing subscriber base and upselling the company's payroll and human resource services.

Investors should keep an eye on how Paychex promotes and implements the new service. Carefully monitor Paychex's subscription growth rates and compare them to subscriptions reported by Intuit for the QuickBooks Online service. This will help investors gauge how effectively Paychex is marketing the new online service.

It's also important to watch how Paychex Accounting Online differentiates itself from QuickBooks Online. Intuit's QuickBooks is a trusted brand in the accounting community and Paychex will have to convince customers that the company's product offers a better end solution.

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