Paychex sees employment growth for clients slow more than expected

By Tomi Kilgore

HR-outsourcing company tops quarterly profit views but misses on revenue and cuts the full-year growth outlook

Paychex Inc. reported Tuesday fiscal third-quarter revenue that came up a bit shy of expectations and cut its full-year growth outlook, as the human-resources-outsourcing company said its clients did less hiring than expected.

The company said the wind-down of its Employee Retention Tax Credit service, which Paychex said officially puts it in the "post-pandemic era," also weighed on its results and outlook.

"Continued moderation of employment growth within our client base and slightly lower realized rates, all combined to create [a] larger headwind than what we had anticipated in the quarter," said Chief Executive John Gibson, according to a FactSet transcript of the post-earnings call with analysts.

The stock (PAYX) had dropped as much as 5.7% in the first minute after the opening bell at 9:30 a.m. Eastern, but has since bounced, and was up 0.2% in morning trading.

Paychex reported before the open that net income for the quarter to Feb. 29 rose to $498.6 million, or $1.38 a share, from $467.4 million, or $1.29 a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share of $1.38 topped the FactSet consensus of $1.37.

Revenue grew 4.2% to $1.44 billion, just shy of the FactSet consensus of $1.46 billion.

Management Solutions revenue rose 2% to $1 billion, amid a growth in the number of clients, while Professional Employer Organization and Insurance Solutions revenue jumped 8% to $345.5 million as PEO worksite employees increased.

Looking ahead, the company expects fiscal 2024 revenue growth in the 5% to 6% range, compared with previous guidance in the 6%-to-7% range. The current FactSet consensus for full-year revenue of $5.33 billion implies 6.4% growth.

"The macroeconomic and labor market remains challenging for small and midsized businesses, a tight job market for qualified workers reduced access to affordable growth capital and inflationary pressures continue to be headwinds for small businesses," Gibson said. "Our small business employment watch continues to show moderation in both job growth and wage inflation."

The stock has gained 2.4% year to date, while the S&P 500 index SPX has advanced 8.9%.

-Tomi Kilgore

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04-02-24 1129ET

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