Payroll and human resources leader Paychex's (NASDAQ:PAYX) swiftly expanding professional employer organization (PEO) services tend to capture investors' attention, and indeed, in the company's fiscal second-quarter 2020 report released Wednesday morning, PEO growth outpaced that of the rest of the business. However, Paychex's core management solutions services, which comprise about 73% of total company sales, displayed their own healthy acceleration this period, leading management to positively recast full-year earnings guidance for the second time in as many quarters. As we delve into details of the last three months, note that all comparative numbers that follow refer to the prior-year period.

Paychex: A bird's-eye view of the numbers

Metric Q2 2020 Q2 2019 Change
Revenue $990.7 million $858.9 million 15.3%
Net income $258.7 million $235.8 million 9.7%
Diluted earnings per share $0.72 $0.65 10.7%

Data source: Paychex.  

Essential details from the report

  • The contribution of PEO specialist Oasis Outsourcing Group, which Paychex purchased in December 2018, equaled 9 percentage points of revenue growth. Thus, the organization achieved fairly brisk organic revenue growth of 6.3%.
  • Paychex's largest revenue stream, its management solutions segment, advanced sales by 6% to $726.7 million. Oasis contributed less than 1 percentage point to this total. Similar to last quarter, the company pointed to both a growing client base and higher revenue per client (via recent price increases) as primary drivers of the progress. 
  • The PEO and insurance services business, though smaller in size than management services, continued to realize top-line momentum. Segment revenue leaped 57% to $244.1 million; the Oasis acquisition contributed 47 percentage points of this growth. 
  • EBITDA (earnings before interest, taxes, depreciation, and amortization) rose by 16% to $398.8 million. 
  • Operating margin slipped by 120 basis points to 34.5%, as both selling, general, and administrative (SG&A) expenses and operating expenses rose as a percentage of revenue versus the prior-year quarter.
  • The company enjoyed a 9% increase in its interest on funds held for clients, to $19.9 million for the quarter. Management attributed the appreciable uptick in interest revenue to higher realized gains, heftier average balances, and higher interest rates.
Two professional women shaking hands in a contemporary, relaxed office setting.

Image source: Getty Images.

Management's thoughts on the quarter

In Paychex's earnings press release, CEO Martin Mucci highlighted the balance between business segments, while enumerating the specific areas in management solutions that saw outsize performance during the quarter. Mucci also discussed the product innovation and technology enhancements that Paychex is using to attract new companies while shoring up its current customer base:

During the second quarter, we delivered solid growth across our major business lines. In particular, our human resource ("HR") outsourcing services, time and attendance solutions, and retirement services performed well.

We are heavily focused on continued innovation to meet our customers' and their employees' evolving needs, simplifying HR complexities and offering solutions to help them thrive and grow. We are investing in innovative technology in the areas of flexible payments, integrations, data analytics, and artificial intelligence, while still maintaining our commitment to personalized service. Our state-of-the-art technology and exceptional service distinguish us in the market as we deliver a more personalized and technology-enhanced experience for our clients and their employees.

Adjustments to the 2020 outlook

For the second quarter in a row, the business administration technology provider revised elements of its fiscal 2020 outlook -- most of them in a positive direction. The company lifted management solutions' projected year-over-year revenue improvement from 5% to a range of 5%-5.5%. PEO and insurance services' top line is now chalked in to grow 25%-30%, against a prior estimate of 30% -- signaling potentially slower expansion than management previously expected. Similarly, interest on funds held for clients is now expected to land at 4% year-over-year growth, in comparison to an earlier range of 4%-8% growth. Finally, management bumped up its diluted earnings-per-share forecast from a 9% improvement against fiscal 2019 to a new range of 9%-10%. Paychex shares were flat at midday during Wednesday's trading session.

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