Paychex released its third quarter fiscal year 2015 earnings results on Wednesday, March 25. Driven by strong growth in its Human Resource Services segment, the company reported 8% year-on-year growth in service revenue, tracking the lower end of its guidance of 8-10% growth for the fiscal year, to reach $693.6 million. Rising demand for healthcare reform products and HR outsourcing led to double-digit growth in the HRS segment. The Payroll segment was sluggish as a result of a shift in the timing of revenues.
Paychex's net income grew 6%, driving a 5% increase in earnings per share, which reached $0.46. In its earnings release, Paychex maintained its guidance of 8-10% growth in service revenue for the fiscal year 2015.
See our complete analysis of Paychex here.
Human Resource Services Revenue Grows On New Service And Clients
Paychex's HRS revenue grew 19% in the third quarter, as a result of a new health insurance offering, which contributed 5 percentage points to the revenue growth. One of the primary reasons for growth in the new health insurance product is the Patient Protection and Affordable Care Act, which includes a regulation wherein many employers are required to provide health insurance to employees. According to recent research by Automatic Data Processing, half of the large employers (1,000+ employees) in the U.S. were unprepared to comply with the regulations of the PPACA at the beginning of 2014. As businesses continue to buy health insurance for their employees to remain compliant with the PPACA, we believe that Paychex's new insurance offering will continue to grow through the fiscal year.
Strong growth in the client base and worksite employees also contributed to the segment's revenue growth in the third quarter. We believe that Paychex is likely to see continued growth in its HRS client base since more and more companies are looking to outsource their HR functions. Outsourcing allows these companies to focus on their core businesses and also generally benefit from reduced operating costs. Additionally, companies such as Paychex are better equipped to deal with the complexities of various regulations. This trend is expected to help the global HR Outsourcing industry to grow at an average rate of 12.3% through 2018.
Pricing Drives Payroll Revenue Growth
Paychex's third quarter Payroll revenues grew 2% to reach $423.8 million, suffering from a shift in revenues into the fourth quarter. [4] The shift in timing should not impact the segment's full year results, however, as revenue growth in the fourth quarter should be at the higher end of its full year guidance of 3-5% growth.
Payroll revenue benefited from an increase in revenue per check as a result of pricing improvements. At the beginning of this fiscal year, Paychex indicated that its pricing increase was in the middle of the range of 2-4%.
Higher Interest Rates To Drive Interest On Funds Held For Clients
In the third quarter, Paychex's interest on funds held for clients increased 2%, to reach $10.7 million. The growth was primarily the result of a 3% increase in client funds. Considering the current low interest rate environment in the U.S., we believe that growth in interest earned will remain heavily reliant on increases in average funds in the fiscal fourth quarter as well.
Interest rates might increase in mid or late 2015, however. In its last meeting, the Fed mentioned that it would be patient with interest rate hikes, indicating that it was likely to increase interest rates in the current year. However, the strong dollar does present concerns, which may result in a lower than expected rate hike.
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