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Paychex shares approach all-time highs after top and bottom line beat

AInvestTuesday, Oct 1, 2024 1:10 pm ET
2min read

Paychex (PAYX) reported its fiscal Q1 2025 earnings, beating analyst estimates with adjusted EPS of $1.16, slightly above the $1.14 consensus. Revenue grew 2.5% year-over-year to $1.32 billion, also exceeding the FactSet consensus of $1.31 billion. Key metrics showed continued strength, with gross margin holding steady at 71.2% and EBITDA margin at 44.4%, both in line with last year’s results. Despite the modest growth, management highlighted a solid start to the fiscal year, driven by resilience in its core payroll and HR services.

The company reaffirmed its guidance for FY25, projecting EPS between $4.96 and $5.05, consistent with analyst expectations of $4.97. Full-year revenue is expected to range between $5.49 billion and $5.57 billion, aligning with the consensus of $5.52 billion. Paychex also provided updated guidance for interest on funds held for clients, raising expectations to $145 million to $155 million, reflecting higher interest rates and stronger returns.

Despite facing headwinds from the expiration of the Employee Retention Tax Credit (ERTC) program and one fewer processing day in the quarter, Paychex delivered solid results. The Management Solutions segment, which accounts for the bulk of revenue, grew 1% year-over-year to $961.7 million, while the Professional Employer Organization and Insurance Solutions segment jumped 7% to $319.3 million, benefiting from growth in worksite employees.

Looking ahead to Q2, Paychex expects revenue growth to accelerate to 4-5%, driven by easing headwinds from the ERTC expiration. Management also noted continued opportunities in the small and medium-sized business (SMB) space, with companies increasingly outsourcing payroll and HR functions. Paychex is enhancing its tools with generative AI, aiming to further differentiate its offerings and improve efficiency for clients.

CEO John Gibson remarked that the labor market is gradually normalizing to pre-pandemic levels, with wage inflation beginning to moderate, which is positive news for SMBs that are more vulnerable to economic shifts. These developments provide a stable backdrop for Paychex’s continued growth as businesses seek to streamline operations and navigate an evolving labor market.

Overall, Paychex’s Q1 results reflected steady performance amidst macroeconomic challenges, with management confident in achieving its full-year guidance. The company’s focus on operational efficiency, coupled with ongoing demand for its payroll and HR services, positions it well for continued growth in the SMB market.

Paychex continues to anticipate modest tailwinds from interest income and cost-saving initiatives, providing solid financial footing as the fiscal year progresses.

Shares of PAYX are up 5% in reaction to the news, notable as the company reported in a tough tape as Iran/Israel tensions flare. PAYX rallied to $141.32, just shy of the all-time high of $141.92 set back in April 2022. This sets up as a key resistance level for investors to watch.

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