Human capital management provider Paychex (NASDAQ:PAYX) released buoyant fiscal first-quarter 2020 results on Wednesday, and added to stock gains that have now reached 26% year to date. Investors were pleased with the balance between the company's acquired revenue boost (via the acquisition of Oasis Outsourcing in December 2018) and brisk organic revenue growth.
In Paychex's earnings conference call, management discussed several innovations it intends to use to keep core management services customers -- its bread-and-butter payroll and human resource clientele -- engaged. Below, let's look briefly at three innovations mentioned by CEO Martin Mucci on Wednesday's call, and their potential impacts on the business.
Paying employees faster
We are excited to be introducing pay-on-demand and real-time payments. By the end of calendar year 2019, Paychex clients can allow employees to access a portion of [their earned] pay before the scheduled check date. With many Americans living paycheck to paycheck, this advancement in technology allows financial flexibility when needed.
Payroll providers like Paychex and competitor ADP roll out a continuous stream of minor enhancements each year in order to boost their value propositions to customers. But Paychex's new accelerated payments initiative actually seems like a meaningful offering that will help build loyalty and attract new customers.
While pay-on-demand (which allows employees to access a portion of paycheck funds in advance of a scheduled deposit) is an enticing convenience, real-time payments is a technology that companies can promote as a benefit to current and prospective employees. Real-time payments, which Paychex will make available in early 2020, bypass traditional ACH payments and associated processing times, and essentially place funds instantly in employee accounts once a payroll is approved.
This may also have the beneficial effect of slightly increasing Paychex's funds held on behalf of clients (on which it earns interest), as companies utilizing real-time payments will need to have their payrolls funded slightly in advance of current deposit schedules that are oriented around the slower ACH system.
Progress on artificial intelligence enhancements
Through machine learning, our chatbot continually expands its knowledge base and provides a more robust data set to leverage and formulate answers to frequently asked questions. During the past quarter, we approached a quarter of a million sessions interacting with the Flex Assistant. The bot is able to address approximately 200 commonly asked questions, and that number is growing.
Management sees Flex Assitant, Paychex's chatbot, as a tool that can be used to cut the cost of customer service while improving customer satisfaction. For those who run into problems on a chatbot query, the company offers one-click access to a live agent on a 24-hour, 7-days-a-week basis. Agents can personalize their service based on a customer's employee's past interactions with Flex Assistant.
There's also a significant longer-term advantage to Paychex's investment in artificial intelligence (AI)-driven customer-facing technology. Mucci stated on the call that Paychex is a "rich and reliable depository of data gathered from interactions with clients." At a run rate of nearly 1 million interactions per year, Flex Assistant is not only optimizing its behavior and its ability to correctly answer customers' employees' questions, it's also exponentially increasing the amount of data Paychex has on customer behavior. The company will be able to reap benefits by analyzing these innumerable interactions, and glean insights that will suggest new products and services having a high probability of success.
A cybersecurity offering for payroll clients
We are singularly focused on continued innovation to meet not only our customers but also their employees' evolving needs, simplify HR complexities, and offer solutions to help them thrive and grow. Also we're offering cyber [services] -- cyberattacks are [a] growing threat to businesses of all sizes.
Before we get too carried away here, I should note that Paychex isn't getting into the cybersecurity business in addition to implementing AI customer service solutions. Rather, the company is now offering its clientele cybersecurity liability insurance via its Paychex Insurance Agency and a third-party insurance carrier.
Mucci observed that such insurance is vital for smaller businesses, and that 60% of enterprises with less than 1,000 employees fail in the brief period of six months following a cyberattack due to lack of sufficient financial resources.
This insurance offering, while thematically a technological innovation, is more of a financial innovation, as it demonstrates Paychex's savvy ability to develop new revenue streams and sell add-on products to payroll and benefits administration customers. This also speaks to the efficiency of Paychex's business model, in that buyers of its payroll services tend to be long-term customers with whom it interfaces on a weekly basis. So opportunities to upsell abound. Cybersecurity liability insurance is but one of the latest examples of a growing portfolio of new revenue opportunities Paychex will enjoy in the coming quarters.