Paychex, Inc. (PAYX) on Q1 2021 Results - Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Paychex First Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] Thank you. I will now hand the call over to Martin Mucci, President and Chief Executive Officer to begin. Please go ahead, sir. Martin Mucci: Great, thank you and thank you for joining us for our discussion of our Paychex first quarter fiscal year 2021 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning before the market opened, we released our financial results for the first quarter ended August 31, 2020. You can access the earnings release on our Investor Relations webpage and our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet, will be archived and available on our website for approximately 90 days. I will start today’s call with an update on the business highlights for the first quarter. Efrain will review our first quarter financial results and provide an update on fiscal ‘21 and then we will open it up for your questions. Fiscal ‘21 is off to a good start. Although the impacts of COVID-19 continue to affect our results causing unfavorable year-over-year comparisons, our first quarter results finished better than originally projected as most of our key business metrics recovered at a faster rate than anticipated. Throughout the COVID-19 crisis, our business model has proven resilient. We have seen good sales momentum, excellent client retention and accelerated product development responsive to the needs of our clients. We also rapidly reduced discretionary costs, where needed to protect margins and are ahead of schedule on a number of initiatives to reduce long-term costs as well. We are pleased with our sales performance during the first quarter, which reflected new annualized revenue significantly higher than our expectations. Growth in new payroll sales units was strong year-over-year reflecting the highest fiscal quarter growth in over 5 years. Our investments over the past several years in virtual sales, digital marketing and lead generation and sales support technologies have positioned us well to succeed in this environment. With the challenges small and midsized businesses have faced during this environment, our HR value proposition has never been more clear. We have seen a surge in demand for our various HR offerings since the beginning of COVID and our Q1 sales results for our HR services division were very strong with double-digit increase over last year. We are well-positioned to continue to take advantage of this opportunity. Our client retention during the first quarter has remained at record levels. We continue to see payroll clients that have been in non-processing status begin to pay employees again. Throughout this crisis, we have been very proactive in providing information, tools and guidance to our clients. We are proud of our response supporting our clients during this crisis. We work closely with regulatory agencies to both remain informed and advocate for our clients. Our compliance in software development teams worked quickly to interpret and respond to the changing regulations and design products to assist our clients through one of the most challenging times for the business community. We have provided real-time updates and solutions compliant with new regulations. We were first to market with a PPP loan forgiveness estimator, which now produces a signature ready application. Recently, Wolters Kluwer, a leading national provider of tax and accounting expertise, selected our PPP loan forgiveness estimator to be utilized by their CCH AnswerConnect research platform subscribers. Since launching in early April, we have approximately 300,000 unique visitors to our COVID-19 Help Center. Our COVID-related training has seen strong participation, with some webinars attracting over 10,000 attendees. Along with the investments we have made in our platforms that have allowed us to adapt and maintain high levels of service delivery, our thought leadership has helped in achieving our record client satisfaction. Investments in technology combined with personalized client service that Paychex is known for, available 7/24/365 has served us well in the current environment due to the adaptability and speed over delivery. We have seen sessions during the quarter utilizing our mobile platform increase double-digits compared to the prior year period and the number of active employees on the platform continues to increase. Our clients and their employees have been taking advantage of Flex for self service, self service utilization by client employees as a percentage of total utilization is at an all-time high given the remote working environment for many of our clients and Paychex learning enrollments are also significantly benefiting from virtual training offerings that users can participate in from any location. We recently introduced new employee health and safety in the workplace features in Paychex Flex. These features include COVID-19 leave of absence tracking through HR Connect for employees who request leave to care for a family member or child attending school virtually COVID-19 screening for when employees come back to the physical work environment and a health attestation solution that allows employers to collect employee information in a variety of ways. These features combined with our HR Connect and conversations features, Iris scan clocks, pay-on-demand capabilities and other product functionality will continue to prove invaluable to our clients, whether their employees continue to work remotely or as they prepared for returning their employees to an office environment. As mentioned in June, we have accelerated certain long-term cost saving initiatives, including reducing our physical office footprint. And during the first quarter, we recognized $31 million in one-time costs related to these initiatives and we are progressing better than expected. We anticipate that we will fully realize our projected savings from these initiatives. We are proud that both the strength of our technology as well as the care we give our customers has been recognized by industry experts. Most recently, the Paychex Flex platform was recognized by Lighthouse Research and Advisory with an HR Tech Award for the Best SMB focused solution in the Core HR/Workforce category. The combination of a single device independent application with human resource services and benchmarking capabilities sets us apart from others in this category. We have also been recognized with a 2020 Tech Cares Award presented by TrustRadius, which celebrates companies that have gone above and beyond to provide their communities and clients with support during the COVID-19 pandemic. I am also very proud to note that for the 10th straight year, we have been recognized as the largest provider of 401(k) record-keeping services by the number of plans by PLANSPONSOR Magazine. We have a longstanding commitment to leveraging innovative technology solutions like Paychex Flex and best-in-class service to simplify the often complex task of saving for retirement and are proud to continue to help business owners and employees safer retirement during these challenging times. Irrespective of the pace and speed of recovery, our resilient business model, strong liquidity position and dedicated employees will allow us to come through this stronger, while continuing to provide industry leading technology solutions and outstanding service to our clients. I will now turn the call over to Efrain to review our financial results for the first quarter. Efrain? Efrain Rivera: Thanks, Marty and good morning everyone. I want to start by saying I hope that everyone is safe and your families are doing well and our best wishes go out to those who have been impacted by the by the pandemic. Let me remind everyone that today’s conference call will contain forward-looking statements you know all that stuff refer to future events, etcetera, look at the customary disclosures and then I am going to refer to non-GAAP measures such as adjusted EBITDA, same things, please refer to the press release for the reconciliation of GAAP to non-GAAP measures. Let me start by providing some of the key points for the quarter and then follow-up with greater detail in certain areas and then wrap with our fiscal 2021 outlook. First quarter results reflect the impact of economic conditions resulting from COVID-19. As Marty mentioned, for the first quarter, total revenue declined 6% to $932 million largely due to lower volume impacting revenue across our HCM solutions. During our June earnings call, I had noted the first quarter revenue was anticipated to be down high single-digits to low double-digits. Obviously looking at this, our results exceeded those expectations. Total service revenue moderated 6% to $917 million. Within service revenue, Management Solutions revenue declined 5% to $687 million and PEO and Insurance Solutions revenue decreased 7% to $230 million, when I say total service revenue moderating, I mean, declined. Interest on funds held for clients decreased 28% for the quarter to $15 million due to lower average investment balances and lower average interest rates earned. Average balances for interest on funds held for clients declined 6% during the quarter primarily due to the impact of lower checks per client due to COVID. Expenses were up 1% to $650 million, but when you exclude the one-time costs of $31 million that Marty mentioned, we were actually down 4% driven by lower discretionary spending and cost control measures implemented in Q4. We are very proud of how we managed expenses through this entire period. Operating income increased – decreased, I am sorry, 19% to $284 million and reflected an operating margin of 30.5%. Again, that was ahead of expectations, adjusted operating income excluding the impact of one-time costs decreased 10% to $315 million reflected in adjusted operating margin of 33.8%. Other expense net for the first quarter that includes interest on long-term borrowings partially offset by corporate investment income, which as you know, is quite low and was impacted by lower rates. Our effective income tax rate was 23.4% for the first quarter compared to 23.3% for the same period last year. Both periods reflect tax benefits for stock-based comp payments that occur with the vesting of various annual stock rewards. Net income decreased 20% to $212 million, but adjusted net income decreased 11% to $228 million. For the quarter, adjusted net income includes one-time costs in the tax benefit from stock comp payments. We have pulled that out we have discuss this all the time. There is just no way to know in a given quarter whether people are going to exercise or not, we can give you guesstimate, but don’t know it ended up providing some benefits in the quarter. Diluted earnings per share declined 19% to $0.59 for the quarter, but adjusted diluted earnings per share decreased 11% to $0.63, reasons I cited above. Investments and income. As you know, our primary goal is to protect principal and optimize liquidity. We continue to invest in high credit quality securities. Long-term portfolio currently had an average yield of about 2% average duration of 3.3% or 3.3 years. Combined portfolios have earned an average rate of return of 1.3% for the quarter, down from 2% last year. I will now walk through highlights of our financial position. It remains strong with cash, restricted cash and total corporate investments of $952 million. Funds held for clients as of August 31, 2020 were $3.3 billion compared to $3.4 billion. Funds held for clients vary widely on a day-to-day basis and averaged $3.5 billion for the first quarter. Total available-for-sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $117 million as of August 31, 2020 compared with $100 million as of May 31, 2020. The increase in net gain position as you can surmise resulted from declines in interest rates. Total stockholders’ equity was $2.8 billion, reflecting $223 million in dividend paid and $29 million of shares repurchased during the quarter. Our return on equity for the past 12 months remains robust at 39%. Cash flows from operations were $215 million for the first quarter, a decrease of over 20% from the same period last year. The decrease was driven by lower net income and fluctuations in working capital. Now, let me turn to fiscal guidance – fiscal 2021 guidance for the current year, which ends as you know on May 31, 2021. The outlook reflects our current thinking regarding the speed and timing of the economic recovery. First quarter results as you can see exceeded expectation. There is uncertainty about the trajectory of recovery over the next several quarters. Our guidance assumes a steady, but gradual improvement through the rest of the fiscal year. We have provided the following updates to the guidance after seeing first quarter results. Management Solutions revenue is now expected to decline in the range of 1% to 3%. We have previously guided to a decline in the range of 1% to 4% and we will continue to update as each quarter passes. PEO and Insurance Services revenue is expected to decline in the range of 2% to 5%. Our previous guidance was a decline in the range of 2% to 7%. Interest on funds held for clients is expected to be between $55 million and $65 million. Total revenue is expected to decline in the range of 2% to 4%. We have previously guided to a decline in the range of 2% to 5%. Adjusted operating income, as a percent of total revenue, is now anticipated to be approximately 35%, up from previous guidance of 34% to 35%. Adjusted EBITDA margins for the full year fiscal 2021, is expected to be approximately 40%, up from 39% to 40%. Other expense net anticipated to be in the range of $30 million to $35 million. The effective income tax rate for fiscal 2021 is expected to be in the range of 24% to 25%. Adjusted diluted earnings per share, is expected to decline in the range of 6% to 8%. We have previously guided to a decline in the range of 6% to 10%. Turning to the second quarter, we currently anticipate Management Solutions revenue will decline in the range of 2% to 3% and PEO and Insurance Solutions revenue will decline 4% to 6%. Adjusted operating margins, excluding one-time costs, are anticipated to be in the range of 34% to 35%. An early view of the second half of the year and I just want to mention something, when all of this started, many people withdrew guidance. And we walked in and we told you what we thought. We didn’t get it completely right at first, but we communicated and updated you in the middle of the quarter to tell you where things were changing. So, we will continue. We are committed to full transparency. And we are committed to updating you on a regular basis. So, investors know exactly what we are thinking, when we think it. This is what we are thinking right now. Of course, things can change as we go through the year. But at this point, the early view of the second half of the year, we anticipate total revenue will be in the range of flat to very low single-digits. Operating margins, we anticipate to be approximately 37%. Of course, as I said, all of this is subject to current assumptions, which are subject to change. We will update you again on our second quarter call. So, we are more positive than we were at the at the June call. Obviously, everyone knows the uncertainty you are dealing with. I would say just a couple of more things to conclude my comments. Number one is I think what you saw in first quarter and Marty alluded to it, is the strength of digital solutions. Digital and virtual sales were up very, very strong in the quarter. And when I say very strong, I don’t mean 10 and I don’t mean 20, I mean, it was very strong. Obviously, any sale that dependent on face-to-face meetings was more challenging, but we have been gaining momentum there. That’s number one. Number two, HR solutions was up very strong from a sales standpoint and revenue recovery has been strong in the quarter stronger than we anticipated. So, when you look at digital-based, digital marketing and sales, we had a really good quarter. When you look at HR solutions, we had a very good quarter and that is part of what’s driving or being incrementally positive as we go through the year. And PEO, I would say this, one of the things that we have learned as the year has gone on, is that while PEO had a sharp downturn initially, we have seen a sharp recovery also. And so we are incrementally again more positive on PEO. That solution is important in the market, and we think there will be – continue to be a good demand. Now, obviously, there is still a lot of uncertainty in the environment. But as I said, on the second half, we think we are in a position to manage through it and have taken all of the right steps in the short-term and we took a lot of the right steps in the long-term to direct investments to where we were, had we not done that, we would be in a different position. This is not your father’s Paychex. With that, I will turn it back to Marty. Martin Mucci: Okay, thank you, Efrain. And we will now – operator, we will open it up for your questions. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Ramsey El-Assal of Barclays. Ramsey El-Assal: Hi, guys. Thanks for taking my question. I wanted to ask Efrain about your – or Marty as well, the last comments you had on digital and just get your view in terms of how you mentioned it’s not your father’s Paychex, how permanent do you think some of the shifts are in your business when it comes to things like digital versus analog from, I guess a product standpoint as well as a sales technology standpoint, is this more of a blip or is this something do you think will kind of fundamentally change the fabric as we go forward? Martin Mucci: Yes, I will start and then I will let Efrain jump in on anything that I miss or comments that he has. Look, I think it’s permanent. I also think, as I think everyone has seen things have accelerated quite dramatically with the environment of work-from-home employees and so a lot of things are the mobile adoption, the use of the look for paperless, everything being paperless from recruiting, to on-boarding, to training, to any change that employee makes is all, we could see all that coming in, had invested in it, as many had, but it has really accelerated with the remote workforces and I think it’s definitely permanent even if employees come back to the office, many will return to the office or a similar environment. And I think that’s never going to change. I think people are just used to it. Also the way they are buying, which is much more virtual, as Efrain commented, the results have been very strong from a we are a self-service basically, where they are going online and doing the search for us, which we have invested in looking at demos, which we have invested in and then buying themselves online through SurePayroll or Flex have both been very strong as Efrain mentioned. And I do think it’s because we have invested well in a product that is simple to use, easy to sign up for and that’s working very well. So, I think it’s very permanent, all the way through from paperless, to remote, to the mobility app and everything else in between. So, we feel very well-positioned from a permanent going forward standpoint. Efrain Rivera: Yes. What I would add is its one thing to say, hey, we had great digital sales progress in the quarter. And by that I mean, not only SurePayroll where we can, as Marty mentioned, you can search and onboard yourself in payroll without having anyone involved in the process. That was something we did several years ago, but also our virtual selling efforts that are powered by our digital marketing efforts have been really, really strong too. But all of that needs to be tied together with a digital service model. And I think as Marty was mentioning, we have made a lot of investments on that side. You heard his comments about the number of employees who are actually utilizing our platform to do, to connect and update their information. And so sometimes we hear this narrative like somehow, the only people in the market that can do that are certain competitors and it’s just interesting let me put it that way. It isn’t true, but it’s interesting. And we have been making quietly many of the same changes and you can’t compete now in the market. 10 years ago, if you weren’t SaaS, you weren’t, we are going to be left behind and now if you are not pivoting to digital, you are going to be left behind too and we understand that. Martin Mucci: I am sorry, Efrain, I would say the other stat that’s been so interesting, as we have talked about our Flex Assistant, which is basically a chatbot that answers questions coming in from clients. 50% of the questions are now being answered by the chatbot and it’s the use of that is just incredible. And it has saved us a lot from a service perspective, from a people perspective, and what they can focus on. So, our team is always available as I said, the only one that’s available 7/24/365 from a personal service if you need it and now those people are freed up more than ever for the more value-added questions. So, we feel like the investments we have made are really paying off and it’s accelerated and will be permanent as a result of this pandemic environment. Ramsey El-Assal: Great. That’s terrific. One more for me, I wanted to ask another question about how the business is sort of evolving in the context of the pandemic, can you speak to kind of the relative importance of cross-selling to existing customers versus signing up new ones in terms of your kind of your growth algorithm now, is the model more reliant today on expanding to the wallet share of existing clients or is it sort of business as usual, how would you kind of characterize that balance? Martin Mucci: I would say it’s fairly business as usual. I mean, we are selling into the base well. I think the clients, the more satisfied the clients are with the existing services they have, obviously the more open they are to talking to us. We have expanded our product set quite dramatically and we have new technology advancements that are coming out all the time and we have quite a package of services that will help in the pandemic. I think one of the things that during this pandemic is that COVID Help Center is really driven a lot of clients in to see how valuable. You know when clients need you most is when they see the greatest value and they have really seen great value in what we have offered and what they have been able to access from information. You know when you think about the payroll report that we produced, the same day that the loans were available, we were the first to put out the payroll report that’s been accessed and downloaded over a 0.5 million times now. And now the loan forgiveness estimator, no one has got a better estimator and now signature-ready application to be able to get your loan forgiven, those kinds of things have added a lot of value to clients and therefore our client retention has never been stronger. No one is leaving to go to any competitor that are using those kind of tools because they found them so valuable. So, I think the process of selling additional features are being helped by that and I think certain things, we even saw a big drop in the fourth quarter of last year in retirement sales, because people weren’t focused on retirement, then has come back strong in the first quarter. So, people who were payroll clients or a payroll in HR are now look for retirement and retirement actually increased year-over-year from a sales and revenue perspective. So, I think the ability to sell other services has really improved through the pandemic because of the value we have offered. Ramsey El-Assal: That’s terrific. I appreciate your answers. Thanks so much for taking the question. Martin Mucci: Alright. Thanks. Operator: Our next question comes from the line of David Togut of Evercore ISI. David Togut: Thank you. Good morning, Marty and Efrain. I appreciate you are giving guidance in environment, where many companies are not. I am wondering if you could flesh out your thinking a little bit more, Efrain on FY ‘21, you are pointing to the top half of your previous guidance ranges, but it seems like a lot of the metrics that you have called out in terms of record 5-year growth and new payroll sales, double-digit growth in HR sales, highest client retention ever, might actually point to a stronger result for FY ‘21? Are there – are you are you just uncertain if we get another wave of fiscal stimulus or maybe a little more detail around how you are thinking about outcomes for FY ‘21? And then maybe why not – maybe why not a little stronger given all the leading indicators are really off the charts? Efrain Rivera: Hi, not quite off the chart, that would be good. But yes, so David, I think just a few things on that, one is we feel pretty good that first half is going to be better than what we expected. It was big. So, you don’t win a game in the first half, but it certainly is good to be up several touchdowns before the before the half end. So, we think first half is going to be strong. Having said that, a lot of it depends as you suggest on the back half of the year and fourth quarter is going to be very important. Through Q3, we see results being still muted, because that’s a big quarter and we are comparing against a quarter before all of the pandemic effects occurred. So there is a note of caution and what we have if we could – if we projected the lines we see now we would have different guidance, but we don’t do that, because it’s not – it’s not a accurate or it’s not a forecast we would be very comfortable providing, but we think a lot of the metrics are pointing in the right direction. And certainly from where we were in the June timeframe, things look better. We are not anticipating another stimulus. If it comes, that would be great. We think that as Marty said in other interviews, we think the stimulus did help. It provided a cushion for the blow for a lot of small and medium-sized businesses, but we are not assuming that it’s better. And we don’t assume that there is going to be a dramatic improvement in unemployment over the next several quarters. So, that dictates some caution in terms of what we provide, but the environment is better than or we started the year better than we than we anticipated with recovery in a number of areas coming faster than we thought. David Togut: Got it. Just as a quick follow-up, are there any constraints on your ability to implement these record new sales in the payroll services business, I mean, what’s the timeline to implement the strong new book of business? Martin Mucci: Well, I think what selling season will be is coming up actually starting in the mid-market of this month, I think probably the only thing that’s going to be the most challenging is getting two clients, some clients are still delaying decisions, particularly in that mid-market to be a little bit careful. We are making sales. We are getting out now to meet with clients if they want to meet. This has all been done really remotely for the last two quarters. And so to have the sales that we have even in a remote selling environment has been pretty impressive and I think we have honed kind of new skills on being able to do that. So, I think probably the biggest challenge to hitting results would be continuing, those results would just be getting access to the client and the client being comfortable to make a decision based on their business and whether they are ready, but right now, we feel good in the small business in particular, in the small business market. I think that’s continuing to expand. So not only do I think we have taken a little share, but we have also seen the pie get larger, because more businesses, small businesses in particular that have not outsourced before, we are seeing them outsource payroll for the – payroll at least, if not payroll and HR for the first time. And so that market, I think is growing as well given kind of the complexities of the environment and so forth and they are seeing the value of being with a payroll provider, for example, to help them get the loans, to help them get the loans forgiven, to work through all of the complicated regulations that are changing and so forth. David Togut: Understood. Thank you very much. Martin Mucci: Okay, David. Operator: Our next question comes from the line of Jason Kupferberg of Bank of America. Jason Kupferberg: Hey, thanks, guys. Good morning. I just wanted to start with a clarification. Efrain, just on the second half outlook, did you say that revenue should be flat to up total reps? Efrain Rivera: Yes, flat to up very low single-digits. Jason Kupferberg: Okay, okay. Now, last quarter, were we talking up low single, I know, it’s not much of a difference, but I just wanted to see if I have that nuance, right and is this just kind of a timing thing where the recovery happened a little sooner. So, the year is a little bit more balanced than you might have thought otherwise? Efrain Rivera: When you say last quarter, Jason, what are you referring to up sequentially or the previous quarter… Jason Kupferberg: No, last quarter when you gave us guidance and you broke down the first half and the second half, I thought at that point in time, the second half was expected to be up low single-digits. Efrain Rivera: No, I didn’t say low single-digits for second half that wouldn’t have been correct. So, I would have to look at what I said, but no, we haven’t said that, no, no. And Jason, just to provide some clarification, we still expect at this point, third quarter is going to be down versus the prior quarter with growth and then growth more significant growth in fourth quarter. No, I don’t think, we might have said, but I won’t speculate on what we said the transcript will say what we said. But if we said something that indicated we were going to be positive in the back half that our second half, that wouldn’t have been correct. Jason Kupferberg: Okay, okay. Fair enough. And just a question on the margin front, how should we think about the long-term implications obviously for your cost structure, real estate, sales force customer support, etcetera, I mean, is there anyway to quantify that at this point or at some point in the not too distant future, perhaps? Efrain Rivera: Probably in the not too distant future, not this second. But I think the question you are asking if I can ask a question or answer a question you are not asking, look, there is a range of initiatives that Marty was mentioning the speed with which we did the footprint rationalization, it doesn’t take – it doesn’t take too much to, too many assumptions to think that we can’t continue to evolve that model so that you need less space than you currently do and address costs in that way. So, we will look at that. We are not ready to commit to what that number looks like at this point, but we have had good experience thus far. And I think the acceleration of our other digital efforts suggests that we can at least control costs in that area and maybe get more efficient as we go along. But we will talk more about that in future calls. Jason Kupferberg: And maybe just one last one on the back of the strong sales performance you just saw, can you just talk about the trends you are seeing in terms of new business creation and your overall win rates? Martin Mucci: Yes, sure. I mean, we are certainly seeing as I think just generally in the economy, new business startups are up 20% year-over-year. It’s pretty incredible and I think what we are seeing – what you see and we see it on new businesses is people are shifting. So people are getting out of some businesses, shifting to others or evolving their business and others are seeing opportunities in this environment that they didn’t see before. So new business startups are really growing, and I think we are getting a good share of those, because of the investments we have made, where it’s easy to sign up, it’s a very full featured product, whether you go to Sure or whether you need Flex. And so I think, new business startups and that is our helping. And then I think existing businesses, as I mentioned that are now outsourcing, that we are doing payroll and HR themselves have found that it’s time to outsource to someone like Paychex that can deliver great value to them and really protect them – help protect them in an environment that is changing so rapidly with all of the regulations and the benefits and what employees are looking for, from them as well. Jason Kupferberg: Alright. Well, thanks for the comments, guys. Martin Mucci: Okay, thank you. Operator: Our next question comes from the line of Steven Wald of Morgan Stanley. Steven Wald: Hey, good morning. Thanks for providing all the continued guidance through all this. We do appreciate it. I was hoping to start off just by sharpening the pencils on a few items that you guys have been talking around specifically, I think – I don’t think I missed it, but an actual retention number for the quarter, I think you said 83% last quarter, but it included an adjustment for businesses that were suspended. And then if you could maybe walk us through how you are thinking about year end – fiscal year end unemployment rate assumptions and business failure rates from here? Martin Mucci: Yes, I would say, on the client retention, we really give it once a year, but we are still at the highest levels of retention we had. So even – and I would say that of those – Steven, the numbers that we said that were suspended were probably down three quarters of those from the peak. So, we still have some that have suspended their service, but it’s getting down to a very low number. Now more of those go lost after year end, we are watching that. What we have seen – really a pretty dramatic decrease from the peak, down to probably a quarter of what we saw. So yes, it could still impact client retention, but it’s a much smaller number than what it was and we will have to see as we get through calendar year end, whether they are kind of hanging on for either more stimulus or to be able to get through year end. But at this point, we have seen a real improvement in that. And I am sorry, what was your other question? Efrain Rivera: The other question is on unemployment. Martin Mucci: Unemployment, it’s hard to say, you know, really that’s just a prediction as to where we are. We have seen what half the jobs come back that that were lost. We definitely see the progress slowing as you see employees come back and being paid. So, we are seeing – we saw much better improvement in the first quarter than we had expected as we have talked about and that is slowing. It’s still progressing and positive. But the number – it would be hard to predict kind of where we think that’s going to be. I think it’s going to continue to improve, but at a slower rate than we had. And then I think the hardest prediction is really kind of after the election, what does that do to things. I think that’s why we are a little more cautious in the second half of the year is just saying, hey, we have a pretty good sense of – obviously of second quarter, but when you see third and fourth, it’s a little bit harder to predict. Efrain Rivera: Yes, we are not pegging our forecast to 7% or 6% or 5% or 4.5% unemployment by Q4. Part the reason for that is the business is more complex than – excuse me than simply what’s happening with worksite employees or with checks per client. We obviously – as Marty said expect it to be – to improve and frankly, the unemployment numbers have been better than we were anticipating originally when we put our plan together. What’s it need to be in Q4 to hit the numbers, I don’t think that’s really – we are not pegging our forecast in that way. So we are looking at a lot of other factors that really have to do with, not only what’s happening on HCM sales, but what’s happening in the rest of the base, which is more than 50% of our revenue. Martin Mucci: Yes. The other thing that’s important to note is we are very diversified in our client base. So, even as this happened, we didn’t – even though leisure and hospitality in particular took a huge hit as restaurants closed and then reopened partially and so forth. We certainly have plenty of clients in that leisure and hospitality kind of sector, but we are also very spread around into other sectors. And construction and everything around construction has continued to perform quite well from a jobs perspective, particularly in the south and so forth. So we are quite spread out. And so we don’t see if there is any one industry that’s really taken a hit where that doesn’t necessarily reflect in our results. Steven Wald: Completely understood and appreciate the color on all that. Maybe just one quick follow-up, as you were talking about sort of the diversification, I believe the one area where there was maybe like any concentration among your client base was in the PEO space, where it’s more concentrated. I think you mentioned previously in discussions, Florida, Texas, California, just curious what you are seeing on the ground there relative to how you think about the national footprint and whether that sort of just nets out in the wash on the PEO side or if there is any particular areas of strength from obviously a lot of headlines about migration of investment dollars towards low tax states or any of those things, just thoughts on conditions on the ground in those areas? Efrain Rivera: Yes, What we have seen, if you look at it from a worksite employee standpoint in those states is we have seen a pretty sharp recovery certainly in several of those states. I would say California is more volatile of the larger PEO states just as they battled flare-ups with COVID. But we have seen a pretty significant rebound in a lot of those states, not to where they were before pre-COVID, but certainly starting to get up towards those levels. And I think that PEO itself, both if you look at it from a revenue standpoint and the amount of worksite employees that were processing and also on a sales standpoint, we are seeing good results on both ends of that equation, which suggests what the environment is normalizing. Martin Mucci: Yes, Florida as Efrain said that everybody is still down, but Florida is the strongest on our small business index that we track on a monthly basis. Florida has been number one, South has been strong again construction, both residential and commercial has continued to be strong there. So, where we certainly had more concentration in those states, they have been stronger states and insurance rates on top of that have been good. So, the increases in insurance have been pretty, pretty low. So, I think they will continue to have – we should have continue to have good retention as we go through open enrollment for insurance plans and everything this quarter. Steven Wald: Great. Thanks for taking my questions. Martin Mucci: Okay. Efrain Rivera: You’re welcome. Operator: Our next question comes from the line of Bryan Keane of Deutsche Bank. Bryan Keane: Hi, guys. Good morning. Wanted to ask about the change to virtual and e-com, how does it change the revenue per client first? And then secondly, how does it change the margin structure, is there a higher margin inherent in that? Martin Mucci: Interesting. So, I think Bryan, it’s a function of size of clients, so the smaller the client, obviously, the lower the revenue. So, if you are driving a lot of smaller clients tend to be the ones that are – that use a lot of the e-commerce solutions. So, you get less revenue in that standpoint. On the other hand, from a margin standpoint, sometimes it’s better because there is lower cost to serve. So there is a little bit of a wash, you got to overcome a bit of the sales, the revenue impact, but longer term, it’s still a pretty positive, a positive development. I didn’t catch the second part of that question. And then margin, I just mentioned it margin can be as good or sometimes even better. Bryan Keane: No, that’s helpful. That’s what I would have figured, but wanted to confirm. And then Marty, on your comment, sales performance is accelerating with year-over-year growth in number of clients sold. And I think you talked about a record number of units sold, maybe the highest in 5 years. I was just trying to get a sense of where that was in the trough? How much was client growth down maybe in the trough and then how much is it growing now on a year-over-year basis, just hoping to quantify that impact? Efrain Rivera: Just want to clarify something, Bryan. When Marty said that unit growth was the highest it’s been in 5 years, he is not comparing it in terms of sequential improvement if it was sequential improvement, the number would be even more amazing. But what we are comparing is against the same quarter last year pre-COVID, what we are saying is that our unit growth in the quarter was very high. So, with that, I will let Marty answer the rest of it. Martin Mucci: Yes, because when you’re top of the trough tonight, I think that’s where Efrain picked up, where you are talking about last quarter. We are comparing year-over-year. So, year-over-year first quarter, it’s been the best sales unit growth that we have seen in probably 5 years or maybe even a little bit more. So if that’s what you were asking. So, it’s not compared to how low it got in the fourth quarter, it’s compared to last year first quarter. So we have seen a real pickup in demand as I said, Bryan, from those who didn’t outsource before new business starts and I think taking some share as well and then the client retention being so strong overall has really helped. We don’t talk about net client growth except once a year, but it’s needless to say, when you put that together, you got nice growth. Efrain Rivera: I would say just our digital marketing efforts over the last couple of years have really, really picked up and really been terrific and I think it’s really fueling a lot of those results. Bryan Keane: And going forward, do you think Efrain that it’s – is it still the 1% to 3% client growth or maybe does this model change a little bit with these kind of new business starts in this e-com model? Efrain Rivera: Yes, it’s still early. I want to – well, part of me wants to be, draw a line with several points and then kind of extrapolate out. Yes, I want to be cautious about that. There is an element here that we are in an environment where that favors digital solutions. I mean, that’s not a surprise. And Marty answered earlier when he was asked that question, how permanent or durable is it? Certainly, you got to think that there is a portion of this that’s durable and will continue and that you have got to bake that into your model and that there is demand there, which is what Marty was saying. I mean, one of the things that we have seen is that we have seen some indicators that – some of that demand is coming from companies that didn’t outsource. We also happen to be in an environment, which is counterintuitive where a business formation is better than anyone expected, so very different in some ways from ‘07/08. So we will have to get a couple of more quarters under our belt to get a sense of whether this starts to change that equation a bit. Bryan Keane: Great. Thanks for taking the questions. Efrain Rivera: Okay, Bryan. Thanks. Operator: Our next question comes from the line of Andrew Nicholas of William Blair. Andrew Nicholas: Hi, good morning. I was just hoping you could speak to trends on the workers’ comp side of late. Have you seen any stabilization rates there or will that continue to be a headwind throughout the rest of the year? Efrain Rivera: I think it will be a bit of a headwind from a revenue standpoint, Andrew, but rates seem to be stabilizing and actually we have seen in some cases been ticking up slightly. So, we think we may have – we maybe getting towards the bottom of the trough so to speak. That has some impacts obviously on PEO in addition to our insurance broker workers’ comp sales. It seems like we are getting closer to the bottom there. Andrew Nicholas: Got it. Good to hear. Good to hear. And then just a follow-up, I was hoping you could speak a little bit to the M&A opportunity right now, are you still open to doing deals, I would assume so and where do you expect to find those opportunities? And then relatedly, if you have any commentary on kind of what pricing is looking like in those areas that would be helpful? Efrain Rivera: Yes. We are still very open to that and have continued to stay in contact with opportunities and with the banker community and so forth as to what’s available, very interested of course in all the lines of our current business, in particular, so PEO businesses and payroll of course and others. I think, it’s opening up a little bit. I would say valuations are still right up there. I wouldn’t say there was any discounting going on because of COVID. I think it’s difficult – it’s a little bit still difficult to do due diligence and things like that given limited travel and access. But I think we would be able to work through those if we found the right business. So, yes, we are very open to M&A. Obviously we are very liquid and have a good solid cash position and if we find a good acquisition, we are certainly ready and able to execute on that. Andrew Nicholas: Great, thank you. Martin Mucci: Okay. Operator: Our next question comes from the line of Bryan Bergin of Cowen. Bryan Bergin: Hi, good morning. Thank you. I wanted to ask on Management Solutions, I want to understand the mix of your better than expected performance here in 1Q related to the changes in check volume contribution versus some of the new addition momentum you are talking about versus the increased retirement and other services. So, can you just help us understand the mix of the factors that contributed here in 1Q? Efrain Rivera: Yes, I would say probably the largest change, Bryan, was really a function of where we started, where we ended up in terms of average client base in the quarter. So, if you think about businesses like ours that are more established, you’ve got a number of different factors that are weighing on the revenue, what’s your rate of retention. We said that that was high, actually probably higher than we anticipated or planned. So, that was a positive. You had sales while sales revenue was better than we planned it still wasn’t quite what it was overall pre-COVID. So, that had some better impact. But that wasn’t a big driver. The bigger drivers, what was happening within the client base in terms of the number of clients, so we break that down. It’s not just number of clients, but the employees those clients had. So the employees that the clients that were roughly about what we expected, we just had more clients in the base than we had on average than we had anticipated who were processing. So, remember, we’re putting plans back together in May, June. We’re trying to anticipate in an environment where states like California and New York, which are important revenue states, were largely starting to, or were in the process of being – continuing to be shut down. It turns out that those factors have moderated. So, what we are seeing when you look at a panorama across the country is moderate improving statistics in most geographies where we’re looking at in across most industries, as Marty mentioned earlier, when you put that together, we start – if you will, from a little bit higher – a higher step on the rung or the ladder than we anticipated when the plan was put together. And another way to think about it, if you flip that analogy over or you change the analogy, it was definitely less worse than we anticipated as we started the year. We – the impact of COVID, which was very severe in April, had us all thinking what does this end up looking like. Well, those pundits who thought that the recovery would be sharp were actually more in the right than wrong. And now the recovery from here, we signaled that it’s gradual. We’re still seeing signs of a gradual recovery. Nothing is changing our mind at this point to say that we don’t continue to progress from where we are, however, at a point where the trough wasn’t quite as severe as we thought in the first quarter. Bryan Bergin: Okay, that’s helpful. And then I wanted to ask a question on the sales force. So, can you just give us a sense of the mix of the sales force that has returned here too in-person meetings, really I guess currently versus in 1Q really feet on the street model versus the virtual sales force and then how should we think about this mix longer term as things normalize? Martin Mucci: Yes, I think we are – we have picked up more virtual this year. So, it’s still probably of the total. It might be 25% to 30%. I think that will continue to grow, particularly I think this is, as I mentioned earlier in the call, Bryan, I think that is accelerated. I think more client prospects, client prospects are able to do things over a Zoom call or over a Webex call, feel comfortable going through the demo digitally over and online and be able to make their decision. So, I think that’s going to accelerate. I think it also is – it’s more productive and efficient if they can be virtual. However, we are opening up, kind of as we speak, across the country with being able to go visit as well. We are doing it based on kind of state-by-state or city-by-city and whether the local management feels that the rules are there that they can visit, that the client is – the prospect is comfortable and the rep is comfortable. But that’s starting to open up much more now. But I think you will see more virtual, more growth in virtual sales, meaning telephonic. We’ve been in it for many years, and you also have more self-service as well – as both Efrain and I have mentioned – that on the low end, the smaller sized clients, much more is being done without ever talking to a rep at all because of the investments we’ve made at both Sure and SurePayroll’s products and Flex’s product that you can go online and basically search, find it, demo it and buy it pretty much without talking to anybody, but you can always reach someone if you needed. So, virtual is going to be more of a way of the future, but we’re still always going to have furthermore complex sales, the experienced reps that are there in person and with the sales engineering team demoing the product and so forth. Efrain Rivera: Yes. And I just want to reiterate what Marty said. While in the past you would have thought about – okay, sales equates to how many sales people you have and where are they. That’s only one factor in the equation. If you have end-to-end e-commerce, the ability to sell without any salespeople, which was a something we invested in the last couple of years, then you’re not constrained by the amount of people that you have in the field and we have seen the benefit of that in this quarter. Bryan Bergin: Just a follow-up there, what’s the top end of employer size that you are seeing do it by themselves to that e-commerce model? Martin Mucci: I think, well, it depends on the – it’s not always employer size. It could be employee size. It could be complexity. If you are pretty straightforward, it could be up into the 20 employees, but typically, I’d say it’s under 10 Bryan. But if it’s a straightforward business it could be more employees than that, but it’s – I think it’s typically under 10 employees. Bryan Bergin: Thanks, guys. Martin Mucci: Okay. Operator: Our next question comes from the line of Kartik Mehta of Northcoast Research. Kartik Mehta: Hey, good morning, Marty and Efrain. Efrain, I wanted to ask a little bit about the guidance, and I’m wondering if you have factored in any price increases into it. I know last year or last fiscal year you decided against it because of the situation we’re in. I’m just wondering for fiscal ‘21 what you anticipate? Efrain Rivera: Yes. So, the short answer is yes, there are price increases selective, I would say, that we are implementing. One of the reasons why we feel comfortable doing that is in part customer feedback, in part the fact that our operations people did such a stellar job that our NPS scores are again – I mean, we could keep going on and on about things that are record highs. But our NPS scores at this point through the pandemic are at record high, and that’s the strength of our model. The strength of our model really plays well for this environment. And so, we think that there is opportunity for selective price increases. We obviously delayed through the first part of the year because we didn’t think it was appropriate and we knew there were clients that were just hanging on and just struggling to get through the environment that we’re facing. We think that many, many of our clients have stabilized, as evidenced by the increase in or the decrease in non-processing clients. And the level of service, we’ve gotten great feedback on. And we think that many of our clients will be okay with modest price increase. So, we will do that as we go through the year. Kartik Mehta: And then just a second question on health insurance premiums, your expectations going into next year and what do you think that will – how that will impact the PEO business, if at all? Martin Mucci: I think Kartik, as I mentioned I think it’s going to be pretty favorable. Generally, I think a high single-digit kind of increases depending on the client, of course, but generally I think if you looked crossed. And I think that’s going to be very favorable for gaining new insurance clients. I think we performed very well. Our risk and underwriting team has done very well and therefore, I think, we’re going to benefit from better rates, better rate changes. And I think also the overall environment is certainly helping us as well. So, I think that should bode well for better sales, even better sales from an insurance perspective for both PEO and the agency, the insurance agency itself. Kartik Mehta: Hey, thank you very much. Appreciate it. Martin Mucci: Okay, Kartik. Thanks. Operator: Our next question comes from the line of Pete Christiansen of Citi. Pete Christiansen: Good morning. Thank you for the question and nice trends. I had two quick questions. So, I was wondering if you could characterize your win rates that you are seeing lately in terms of where are you winning these new accounts? Are you seeing it from self-processors or other competitors? Any discernible trends there would be helpful to understand and whether or not you believe you are seeing early signs of some share shift? Martin Mucci: Yes, I think – well, it’s a little bit of both. We have mentioned, I think we are seeing those who have been self-processing, doing things themselves, and the complexity of the changes and the need for help at a critical time kind of in their business survival or growth, they have looked to outsource for the first time. So, I think, as I said, I think the pie has gotten larger. I think more are outsourcing. And that’s been pretty steady over the years. And now that’s – it feels like that changed and we are very happy that we have won, we think, a large number of those because of the product set and – not to mention as Efrain has mentioned many times – our lead generation and digital, the offering in the demo, etcetera., and the mobility app. And then I think also we have seen a net gain from some competitors this quarter, based something we track on our largest competitor. we see some gain there. I wouldn’t say it’s huge, but I would say definitely a net positive gain from what we have sold from a competitor or taking in from a competitor versus lost, we saw a net gain. So, we are definitely gaining some market share there, at least as well as probably some of the smaller regional payroll providers in particular that just can’t keep up with the need to support them from a payroll – a paycheck protection loan program, be able to give them the information they need for the loans that I said we had available to them pre-populated and then the Loan Estimator and for the forgiveness. I mean, we have a signature-ready application. All you have to do is go in and fill in rent, utilities or anything else that’s non-payroll, the payroll data is already pre-populated. You can either sign electronically or print and just file that to get your loan forgiven. When you see those kind of technology advancements that we offer as opposed to particularly a regional company and even some of the national ones, it’s a very different value proposition. So, in a time of extra need, I think you are seeing a shift toward more outsourcing. Pete Christiansen: That’s helpful. And then I just had a quick one on, at least there’s been some data that’s coming out at least at the enterprise level, suggesting that companies that haven’t been impacted directly by the pandemic are just now beginning to shed some jobs. And I was wondering if you are seeing any trends or any particular areas within the small business community that indicates that that trend is possibly creeping into small business? Martin Mucci: I would – I think small business took the biggest hit in Q4 – in what was our Q4, I mean that kind of March-April timeframe. And they have now – I think they are hurting and they need another stimulus. We are not counting on it based on what we have seen, but they certainly could use it. I think the most recent survey was over 80% of small businesses in particular who took the loans have used them up now and they are looking for a second stimulus to kind of help them through. And then we are not sure what the impact is going to be particularly in the Northeast as restaurants have to bring more diners inside and then have capacity constraints. So, I – there still could be some fallout. But I think small to mid-size business is probably hopefully took their biggest hit already and we are not necessarily seeing more layoffs there. They were also much more careful about bringing them back. We haven’t seen a total return of the employees that have come back and they are probably down double-digits right now from where they were pre-COVID. Small businesses meaning, I haven’t – I have started to bring people that I furloughed or laid off back, but I haven’t brought everybody back yet. And so, I think we already saw that. I don’t think we are seeing necessarily another drop off, unless there is no stimulus and people just say, hey, I can’t survive anymore. But most of our data has shown a pretty good come back, progressively continuing to improve. Pete Christiansen: That’s really helpful commentary, Marty. Thank you so much, gentlemen. Nice trends. Martin Mucci: Alright. You are welcome. Thanks. Operator: Our next question comes from the line of Lisa Ellis of MoffettNathanson. Lisa Ellis: Hi. Good morning, guys. First question is related to the PEO. I just want to understand a bit better what’s going on in the PEO. I think, Efrain, you mentioned you first saw a sharp downturn and then now a sharp upturn. Can you just elaborate were you referring to sales or performance of the existing business or both of those? Efrain Rivera: Yes. Sorry about that, Lisa. Actually, it’s probably both. But when I was making that comment really was a sharp decline in the number of worksite employees. So, even before we saw checks – check volume in checks and employees decline in the HCM business, we were seeing that in the PEO business where they shed employees more quickly. And then PEO had a more sharp upturn as conditions started to get better. Now, part of that could be what that – for example, states like Florida felt the impact in hospitality, accommodations, leisure. So, they were feeling it at first and then they started to come back and started hiring back, but – but that’s what I was referring to, and obviously it also impacted sales and now we are talking back in the March-April timeframe. Lisa Ellis: Yes, okay. And so, on the sales side, are you finding – like, how are sales doing in the PEO? Are you finding that – I mean I know that’s typically a reasonably complex sale, but I would imagine there is a lot of demand for it in the current environment. Are you finding that you are able – that the sales are rebounding and you are able to sell the PEO in the – even if it’s remote in the current environment? Martin Mucci: Yes, Lisa. They have recovered even stronger, our ASO business. Our reps sell both PEO and ASO, meaning not the co-employment. And – but the need for HR kind of across the board has really taken off. So, they are – we are really strong on the ASO side and coming back on the PEO side as well. I think what Efrain said the strongest strength in the PEO has been the recovery of the worksite employees coming back on the payroll. On the sales side, PEO has done fine but the ASO has been even stronger. Now, our reps can sell both. So, I think whatever the need of the client has and if it’s not as much of an insurance need or they are not as interested in insurance right now, but the needs airs toward HR, which I think we have seen, then that may lead to an ASO sale, which sometimes is a little bit quicker because you don’t have to go through the underwriting and so forth. So, I think PEO has come back, but ASO has been much stronger. And overall, it’s been because it’s driven by an HR need, a human resource administration and need to handle all of – whether it’s furloughs, layoffs, COVID, leaves of absence for family etcetera., that’s where the biggest demand has been is how do I handle all of this stuff, and we have really seen that. And of course, we have those strong HRG’s, the HR generalist, 600 of them across the country. We have been able to sell the value of that HR person that’s helping those clients quite dramatically here in the last quarter. Lisa Ellis: Okay. And then I will – for my last one, I will ask the inevitable election question, because by the time we talk to you guys next quarter it will be over. So, what policies or agenda items are you keeping the most close eye on, as we get closer to the election? Martin Mucci: Well, it’s interesting because I think one generally has obviously been better – it appears better for business when you look at the last few years, because of the growth in businesses and so forth. And the other side could probably bring a lot more regulations and more opportunities with depending on the healthcare and so forth that comes out in the regulation. So, if it’s heavier regulations, there’s going to be a lot of opportunity there. If the administration changes that would give us great opportunity. If the administration stays in place with try to be less regulations but I would say more confusing regulation that gives us an opportunity as well. So, we really see kind of not trying to play the middle of the line here, but we do see opportunities on both sides, whatever happens with the election. Probably, it tends to be a little bit more on the regulation side if a Democrat gets in there but – and it will just be change which will make some businesses outsource more because they are worried about the changes. But either way, I think we see opportunities coming from it. We are watching the level of insurance and healthcare regulations, any impacts on 401(k) in retirement and what that impact there. And then on payroll and HR, it really is just the level of regulations and so forth. Either way, I think there is going to be plenty for us to do and plenty of opportunity to be frank with you. Lisa Ellis: Terrific. Thanks, guys. Good stuff. Martin Mucci: Okay. Thanks, Lisa. Operator: Our next question comes from the line of Jeff Silber of BMO Capital. Jeff Silber: Thanks so much. I know it’s late. I will just keep it to one. You talked about accelerating some of the cost initiatives. Can you tell us of the $31 million booked, how is that separated between OpEx spends and SG&A and what kind of cost savings should we expect on both those line items from these initiatives? Thanks. Efrain Rivera: Hey, Jeff, rather than get into, I am laughing, because I talked to the controller and most of it’s going to end up in G&A, but we will just footnote it in the slide, so you can update your models. Jeff Silber: Okay, great. And in terms of the cost
PAYX Ratings Summary
PAYX Quant Ranking
Related Analysis

Paychex Stock Falls 5% After Quarterly Revenue Misses Estimates

Paychex (NASDAQ:PAYX) shares dropped over 5% intra-day today after the company announced its latest quarterly earnings, falling short of the consensus revenue forecast.

The company reported second-quarter earnings of $1.08 per share, slightly better than the analyst estimate of $1.07. However, its revenue, which increased by 6% year-over-year, totaled $1.26 billion, just below the expected $1.27 billion.

Despite these figures, Paychex noted that the macroeconomic environment remains generally stable for small and mid-sized businesses. They acknowledged challenges related to the cost and accessibility of growth capital, as well as difficulties in recruiting quality talent. The company's Small Business Employment Watch indicates a moderation in both job growth and wage inflation.

Looking forward to the fiscal year ending May 31, 2024, Paychex expects its PEO and Insurance Solutions revenue to grow by 7% to 9%. Other income is projected to be in the range of $35 million to $40 million. The company also anticipates adjusted earnings per share growth of 10% to 11% for the year.

Paychex Reports Q2 EPS Beat, Revenues In Line

Paychex (NASDAQ:PAYX) reported its Q2 results, with EPS of $0.99 coming in better than the Street estimate of $0.95. Revenue was $1.19 billion, in line with Street expectations.

For fiscal 2023, the company expects total revenue to grow approximately 8%, Management Solutions revenue to grow in the range of 7%-8%, and PEO and Insurance Solutions revenue to grow in the range of 5%-7%.

According to management, the near-term outlook is somewhat cautious due to moderating employment trends and steady wage growth. However, there is still strong demand for the company's Managed Solutions and small to medium-sized businesses are continuing to rely on the company, despite macroeconomic uncertainty.

The company is focusing on retaining clients and increasing value and penetration in HR outsourcing, HCM software, and retirement solutions. On the other hand, there has been a decrease in demand for PEO and Insurance Solutions as employers and employees are reducing the additional coverage offered or purchased for their medical plans.

Paychex Shares Down 3% Despite Q2 Beat & Raised Guidance

Paychex (NASDAQ:PAYX) shares were trading more than 3% lower Thursday afternoon despite the company’s reported Q2 results, with EPS of $1.03 coming in better than the Street estimate of $0.97. Revenue grew 11.4% year-over-year to $1.21 billion, beating the Street estimate of $1.18 billion.

Despite continued investor concern surrounding macro and the health of SMBs, the company raised its fiscal 2023 EPS guidance growth to approximately 11-12% year-over-year (vs. 9-10% prior).

Margins and revenue growth are set to decline sequentially in Q2/23 before recovering in the second half of the year.

Paychex Reported Strong Q2 Beat & Raised 2022 Outlook

Paychex, Inc. (NASDAQ:PAYX) reported its Q2 results, with EPS coming in at $0.91, beating the consensus estimate of $0.80. Quarterly revenue grew 13% year-over-year to $1.09 billion, above the consensus estimate of $1.05 billion.

The beat was helped by full employment levels, SMB formation strength, effective monetization initiatives (cross-selling insurance, back office as well as professional services) as well as a more favorable float income outcome.

The company provided its full 2022-year outlook, expecting EPS growth of 18-20% (up from prior guidance of 12-14%) and total revenue growth of 10-11% (up from prior guidance of 8%).

Paychex Price Target Raised at Wedbush Following Strong Q1 Results

Analysts at Wedbush raised their price target on Paychex, Inc. (NASDAQ:PAYX) to $125 from $105 following strong Q1 results, which drove the share price more than 4% higher on Thursday.

The company delivered strong Q1 results and better-than-expected full 2022-year guidance, reflecting normalized new SMB formation levels, tracking above pre-pandemic levels.

Quarterly revenue came in at $1.08 billion, better than the Street estimate of $1.04 billion, and EPS came in at $0.89, compared to the Street estimates of $0.80.

The company’s management highlighted strong results driven by favorable compares, an improved economic environment, and good execution. Margins benefited from pandemic related expense adjustments, including delayed hiring and increased efficiencies from technology investments.