Paychex, Inc. :PAYX-US: Earnings Analysis: Q1, 2017 By the Numbers : September 30, 2016

Paychex, Inc. reports financial results for the quarter ended August 31, 2016.

We analyze the earnings along side the following peers of Paychex, Inc. – Intuit Inc. (INTU-US) that have also reported for this period.


  • Summary numbers: Revenues of USD 450.90 million, Net Earnings of USD 217.40 million.
  • Gross margins narrowed from 71.55% to 50.08% compared to the same period last year, operating (EBITDA) margins now 4.01% from 44.69%.
  • Year-on-year change in operating cash flow of 5.89% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-08-31 2015-11-30 2016-02-29 2016-05-31 2016-08-31
Relevant Numbers (Quarterly)
Revenues (mil) 723 722.4 752.6 753.9 450.9
Revenue Growth (%YOY) 8.44 6.82 6.86 8.91 -37.63
Earnings (mil) 209.1 189.2 180.4 178.1 217.4
Earnings Growth (%YOY) 22.07 9.36 6.49 10.48 3.97
Net Margin (%) 28.92 26.19 23.97 23.62 48.21
EPS 0.58 0.52 0.5 0.49 0.6
Return on Equity (%) 46.77 41.48 38.67 37.64 44.6
Return on Assets (%) 13.42 12.61 11.03 10.55 13.87

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Market Share Versus Profits

Revenues History
Earnings History

PAYX-US‘s change in revenue this period compared to the same period last year of -37.63% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that PAYX-US is holding onto its market share. Also, for comparison purposes, revenues changed by -40.19% and earnings by 22.07% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 50.08% to 71.55% for the same period last year, while operating margins (EBITDA margins) went from 4.01% to 44.69% over the same time frame.

Gross Margin Versus EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

PAYX-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 111.56 days, compared to last year’s level of 67.46 days.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

PAYX-US‘s change in operating cash flow of 5.89% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth


The company’s operating (EBIT) margins contracted from 40.95% to -2.57%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from 41.15% to 71.97%.

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

Access our Ratings and Scores for Paychex, Inc.

Company Profile

Paychex, Inc. engages in the provision of payroll, human resource, insurance, and benefits outsourcing solutions for small and medium sized businesses. The company offers payroll processing, payroll tax administration services, employee payment services, regulatory compliance services, Paychex HR Solutions, retirement services administration, insurance services, and eServices and other human resource services and products. The company was founded by Blase Thomas Golisano in 1971 and is headquartered in Rochester, NY.

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