Paychex Inc. (PAYX - Snapshot Report) reported mixed results for second-quarter fiscal 2016 wherein the bottom line beat the Zacks Consensus Estimate but top line missed the same. Nevertheless, the company marked year-over-year improvement on both the counts.

Earnings of 52 cents per share surpassed the Zacks Consensus Estimate by a penny and jumped 10.6% from the year-ago quarter mainly backed by higher revenues.

Paychex Inc. (PAYX - Snapshot Report) EPS BNRI & Surprise Percent - Last 5 Quarters | FindTheCompany

Quarter Details

Paychex reported total revenue (including Interest on funds held for clients) of $722.million, up 7% year over year. However, it missed the Zacks Consensus Estimate of $724 million. Excluding interest on funds held for clients, total services revenue (Payroll service and Human Resource Services) grew 7% year over year to $711.3 million.

Payroll Service segment revenues went up 4% from the year-ago period to $427.4 million, primarily on the back of higher revenue per check and client base.

Human Resource Services segment revenues rose 11% year over year to $283.9 million mainly driven by solid growth in client base and worksite employees, increased revenues from retirement and online HR administration services.

Interest on funds held for clients increased 8% on a year-over-year basis to $11.1 million primarily benefiting from a 1% rise in average investment balances backed by growth in client base.

Paychex’s total expenses increased 5% from the year-ago figure to $428.2 million due to 6% rise in compensation-related expenditure. However, total expenses, as a percentage of total revenue, decreased 70 basis points (bps) to 59.3%.

Consequently, Paychex’s operating margin expanded 70 bps to 40.7%. Moreover, in dollar terms, reported operating income increased 9% year over year to $294.2 million.

Excluding interest on funds held for clients, Paychex’s operating income came in at $283.1 million or 39.8% of total services revenue compared with $259.8 million or 39% a year ago.

Net income came in at $189.2 million or 52 cents, up from $173 million or 47 cents reported last year.

Balance Sheet & Cash Flow

Paychex exited the second quarter with cash, cash equivalents and corporate investments of $476.4 million compared with $537.7 million at the end of the previous quarter. The company has no long-term debt. The company generated operating cash flow of $419.9 million in the first half of fiscal 2016.

During the first six months of fiscal 2016, Paychex repurchased approximately $62.9 million common stocks and paid $303.6 million as dividend.

Guidance

Paychex reiterated the fiscal 2016 outlook. Management continues to expect 4–5% year-over-year increase in Payroll Service revenues. Human Resource Services revenues are expected to grow in the range of 10–13%.

Total service revenue is likely to increase 7–8%. Interest on funds held for clients and investment income are expected to remain flat. Net income is likely to be within 8–9%.

Our Take

Paychex reported mixed second-quarter results with earnings beating the Zacks Consensus Estimate but revenues missing the same. Nonetheless, the company reiterated the optimistic fiscal 2016 guidance, signifying that it is relatively well-placed despite the current macroeconomic sluggishness.

Moreover, we are encouraged by Paychex’s investments in product development and focus on building its sales force to support revenue growth. We also believe that the company’s expansionary initiatives, such as joint ventures and acquisitions, support its long-term growth strategy.

Product launches are expected to be the added growth drivers. Moreover, Paychex’s focus on small and mid-sized businesses looking for HR solutions could provide growth opportunities.

However, unfavorable interest rates and competition from Automatic Data Processing (ADP - Analyst Report) and Insperity (NSP - Snapshot Report) remain the headwinds.

Currently, Paychex has a Zacks Rank #3 (Hold). A better-ranked stock worth considering in the outsourcing industry is Genpact Limited (G - Snapshot Report) carrying a Zacks Rank #2 (Buy).