Paychex Earnings: Resilient SMB Market and Healthy Product Attach Underpin Strong Start to Fiscal 24

Wide-moat Paychex PAYX reported strong first-quarter fiscal 2024 results, with top-line growth exceeding our expectations and profitability broadly in line. Following the result, we have marginally lifted our full-year forecasts to the upper end of guidance, but our longer-term forecasts and $120 fair value estimate are unchanged. Paychex’s longstanding and well-respected CFO, Efrain Rivera, will retire in October 2023 and be succeeded by Vice President of Finance and Investor Relations Bob Schrader. We expect no material shift to the firm’s strategy or capital allocation on the back of this leadership change. At current prices, Paychex shares screen as fairly valued relative to our valuation.

Revenue in the first quarter increased a healthy 7% year over year, underpinned by new client wins and worksite employee growth, and higher revenue per client on like-for-like price increases and greater product attach. Paychex continues to enjoy regulatory tailwinds driving demand for retirement solutions and ongoing uptake of employee retention tax credit services. The firm is also reaping benefits from investment in expanding and promoting its insurance product suite, and a resilient SMB market with modest hiring activity and healthy client retention.

Paychex achieved improved profitability year over year during the quarter on greater contribution from ultra-high-margin interest income and improved operating leverage on a larger client base. This supported a 60-basis-point operating margin expansion to an impressive 41.7%, partly offset by higher employee compensation and continued investment in product innovation and marketing.