Paychex: Payroll Growth Slows, HR Business Thrives

Wide-moat

As we have said in previous quarters, given the recent strength in employment, we would expect Paychex’s payroll revenue to be growing at a faster rate. In comparison, Paychex’s closest peer, ADP, increased employer service revenue by 4%. Paychex blames some of this on having fewer processing days in the quarter, which would have some impact, but we would still expect growth to be higher. The longer this occurs, the more we worry that Paychex is seeing competition intensifying for its smaller customers. These concerns aren’t abated by the company’s inability to increase its investment balances held for payroll clients. During the quarter, funds held for clients declined 2% from the previous year. This certainly could be related to timing, but balances are still more than 2.5% lower than two years ago. Should this continue, we’ll have to alter our expectations for growth in client balances, which we anticipate will grow by 3% in fiscal 2019.

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