Payroll, human resources, and professional employer organization (PEO) giant Paychex (NASDAQ:PAYX) enjoyed the contribution of significant acquired revenue as well as brisk organic growth in the initial quarter of its new fiscal 2020 year. The corporate services specialist released its scorecard on Wednesday, and shareholders responded in generally enthusiastic fashion, bidding up shares by 2% on the trading session.
Let's home in on the relevant details from the past three months and also walk through management's positive revision to the organization's full-year outlook. Note that all comparative numbers that follow refer to the prior-year period.
Paychex: an overview of headline numbers
|Metric||Q1 2020||Q1 2019||Change|
|Revenue||$992.0 million||$862.8 million||15%|
|Net income||$264.2 million||$243.6 million||8.5%|
|Diluted earnings per share||$0.73||$0.67||9%|
Significant details from the first-quarter report
- Management relayed that PEO provider Oasis Outsourcing Group, which Paychex acquired in December 2018, contributed "a little less than ten percent" to overall top-line growth this quarter. Thus, core or "organic" growth came in at just over 5%, a credible expansion rate for Paychex's underlying businesses.
- Management solutions revenue expanded by 5% to $725 million. Sales improved through additions to the segment's client base as well as rising revenue per client stemming from recent price increases.
- PEO and insurance services revenue jumped 56% to $247 million, propelled by Oasis sales, an uptick in the PEO client base, and growing employee numbers at PEO client sites. The insurance business saw weaker revenue as a dip in state insurance fund rates impacted the workers' compensation market.
- Higher average interest rates pushed interest on funds held for clients higher by 20% to $20.5 million. Total funds held for clients increased by 1% over the prior-year quarter-end, to $3.74 billion.
- Operating income advancd by 9.1% to $349.1 million. However, operating margin declined by 190 basis points to 35.2%, as operating expense growth of 23% outstripped the total revenue growth rate. Selling, general, and administrative (SG&A) expense expanded by 15%, in tandem with the overall top line.
- The company repurchased approximately $172 million worth of its own shares in the first quarter.
Technology enhancement is a focus area in fiscal 2020
Earlier this year, I discussed Paychex's continual investment in its mature management solutions segment, which contains core services such as payroll and benefits administration and accounts for about 73% of total company revenue. In particular, Paychex is focused on automating services and ramping up technology capabilities as a means to improve customer service -- and boost profit margins. In the organization's earnings press release, CEO Martin Mucci provided examples of the types of product advancements the company believes will maintain the loyalty of its most important client base:
We are committed to offering advanced solutions to help our clients thrive and meet their evolving business needs. During the quarter, we provided a set of enhancements to our solutions that will streamline payroll processes and support business owners and HR professionals as they work to optimize operations, comply with regulations, and drive productivity.
We are excited to be introducing several new solutions at the 2019 HR Technology Conference & Exposition, which is currently taking place in Las Vegas. This includes wearable technology for tracking time worked, pay-on-demand, the next generation of the Paychex Flex intelligence engine, and an API integration network. Our investments in technology focus on meeting the evolving needs of our clients and their employees by providing a more flexible, personalized work experience.
Management tweaks guidance
Paychex increased its expectations on certain fiscal 2020 outlook items on Wednesday, reflecting management's confidence following a decent start to the year. Management solutions revenue is expected to expand by 5% this year, versus a forecast for 4% year-over-year growth provided in June. The company specified that PEO and insurance services revenue should grow roughly 30% in fiscal 2020. Previously, management had provided a range of between 30% and 35%.
As for earnings, Paychex pushed its growth expectation for both net income and earnings per share (EPS) to 9% in fiscal 2020, versus a previous projection of 8% growth. Adjusted net income and adjusted EPS are also now anticipated to advance by 9%, versus a prior range of 8%-9%. While the company's outlook revisions are fairly modest, they were nonetheless welcomed by investors, who realize that it's still early in the fiscal year. Ample time for further outlook fine-tuning remains if Paychex continues to see appreciable core growth in the coming quarters.