ADP (NYSE:ADP) is the No. 1 U.S. payroll processor, but that hasn't stopped the industry's No. 2 player, Paychex (NASDAQ:PAYX), from enjoying considerable growth in recent periods.
After Paychex reported its Q3 2005 financials yesterday, its stock price shot up 6% to $33.01. For the quarter, the company generated net profits of $92.8 million, or $0.24 per diluted share, up from $80.5 million, or $0.21 per diluted share, year-over-year. Revenue for the latest quarter increased 9% to $373.9 million.
Paychex's core offering is software to process payroll. The relatively low operating leverage in a business of Paychex's sort means substantial amounts of free cash flow. With the available capital, Paychex has been able to expand into ancillary services -- including 401(k) plan record-keeping, workers' compensation administration, and direct deposit -- for its extensive payroll client base of roughly 505,000. Paychex customers want add-on services, and they're getting them. More than 30 clients with 1,000 or more employees, for example, are already using the company's HROnline, a portal for human resources to track vacation pay, sick days, 401(k) changes, and the like.
As for the outlook, Paychex expects revenues to grow 9% to 11% in fiscal 2005 and net income to rise by 17% to 19%.
Paychex says it will continue to do what's been working: focusing on strengthening its core products, which has helped it to raise prices; adding new ancillary products; and finding ways to add customers. And as Paychex indicated in its conference call, meeting its goals could mean buying some companies, and that shouldn't be a big problem, given Paychex's healthy free cash flows.
Fool contributor Tom Taulli does not own shares of companies mentioned in this article.
