Is HR Services The Sole Driver Of Paychex’s Revenue Growth?

Paychex’s (NASDAQ: PAYX) revenue has grown from $3.15 billion in 2017 to $3.77 billion in 2019, on the back of falling unemployment rates, and increased migration toward software services for employee management, which has led to more outsourcing. A growth in small and mid-scale businesses, which is where Paychex’s expertise lies, has also helped Paychex grow.
We expect this growth to continue, driving total revenue to around $4.4 billion by 2021, with growth being mainly driven by the HR services segment, which is expected to grow from $1.8 billion in 2019 to $2.3 billion in 2021.

Takeaway

• Paychex’s HR services division, which offers complete HR services to its clients, is expected to contribute $2.13 billion to total revenue in 2020, making up 51% of Paychex’s $4.15 billion revenue estimate.
• The payroll processing division, which mainly offers paycheck processing and tax filing services, comes in at a close second, making up around 47% of 2020’s revenue estimate, expected to bring in $1.94 billion.
• Paychex’s HR services business is expected to add a total of $1 billion between 2017 and 2021, which is 83% of the $1.2 billion growth in revenue for Paychex over this period.
• This strong revenue growth has been key to Paychex’s 60% price appreciation since December 2017, further helped by growing margins.
• In our interactive dashboard Paychex Revenue: How Does Paychex Make Money?, we discuss Paychex’s business model, followed by sections that review past performance and 2021 expectations for Paychex’s revenue drivers, including client base, employees per client, payroll fee trends, and competitive comparisons with ADP and Workday.

A look at Paychex’s segments and their contribution to total revenue

(A) Revenue from HR services to grow by $520 million in the next 2 years, with its share of total revenue to be about 53% by 2021

• This segment deals with complete HR outsourcing, with Paychex employees employed at the client worksite.
• Average client revenue has jumped from $4,770 per client in 2017 to $5,650 in 2019, and is expected to cross $6,000 by 2021.
• Combined with a growth in HR services clients, this could drive HR revenue up to $2.33 billion by 2021, from $1.81 billion in 2019.

(B) Revenue from payroll processing to grow by around $120 million over the next 2 years, and make up about 45% of total revenue in 2021

• Revenue from this segment comes mainly from the clients who use Paychex’s services only for paycheck processing and tax filing for their employees.
• With a growth in average number of employees per client, there has been a slight drop in the fee per client employee, and we expect this metric to remain below $160 in 2021.
• Over the past 2 years revenue from this segment has grown by around $100 million, and a growth in the number of payroll clients could drive revenue up to $2 billion by 2021.

(C) Revenue from interest earned on client funds to drop by around 10% by 2021, and make up 2% of the total revenue estimate for 2021

• This segment includes interest revenue earned by investing client funds between employee payout periods.
• A growth in interest rates has helped drive up revenue from around $50 million in 2017 to a little over $80 million in 2019.
• However, we expect interest rates to drop to around 1.8% for the next 2 years, which could lead to a 10% drop in revenue from this segment.

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