Payment processor and human resources services provider Paychex (Nasdaq: PAYX) recently posted higher-than-expected profits in its second quarter. The company benefited from better revenue per check. Given the high unemployment rate in the U.S., results that exceeded expectations are a welcome development. However, the company remains cautious about the slow economy.
Let's dig deeper.
Economy matters
Paychex provides human resources and benefit services to small- and medium-sized businesses. Owing to a weak global economy, these businesses have been facing tough times. Paychex acts as a performance barometer for such smaller companies. The company has expressed concerns regarding its future sales due to weakness in its customer base. Growth in checks per client is expected to be moderate in 2012.
However, things may not be as bad as they appear. The company earns nearly 70% of its income from its payroll service business. By the year's end in May, revenue from this business is expected to grow at an average rate of around 6%. Moreover, revenue from human resource services is expected to grow at an even steeper rate of 12% to 15%.
The quarterly roundup
Revenue increased to $545.7 million, a 7% rise compared to the prior-year quarter, as the number of checks per client increased. Net income surged to $140.4 million, a 5% increase compared to last year.
Revenue benefited from price increases and lower discounting with clients. Smaller HR services helped the numbers by expanding the company's client base by 12% as it added clients and existing clients' employee counts increased.
Rival Insperity (NYSE: NSP) also posted a robust 32% growth in its earnings per share. The second-quarter results of competitor Automatic Data Processing (Nasdaq: ADP) are expected next month.
Paychex also expanded its software-as-a-service offerings by introducing a new single sign-on page for online users and an iPad application.
The Foolish bottom line
Paychex posted good numbers despite a sluggish economy. At the moment, the company remains threatened by the poor performance of small- and medium-sized companies. However, hiring is picking up. The number of jobless claims is declining. That's all good news for this payroll service provider.
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Fool contributor Navjot Kaur does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Paychex and Automatic Data Processing. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
