Paychex, with annual revenue of $2 billion in fiscal 2010, recently reported its first SaaS acquisition. Competition was heating up for Paychex as Intuit and ADP continued to make SaaS acquisitions. Intuit, since acquiring PayCycle in 2009, has emerged as a strong threat to Paychex in the small business segment. Paychex has finally risen to the challenge.
Paychex’s SaaS Move
While ADP and Intuit have been expanding through acquisitions, Paychex had shied away from them. But, happily, that has changed with the new CEO, Martin Mucci. On December 9, 2010, Paychex announced that it entered into an agreement to acquire SaaS payroll provider SurePayroll, Inc. for about $115.0 million. SurePayroll’s revenue for calendar year 2010 is expected to be about $23 million.
Mucci said during the earnings call that
“SurePayroll, with their 30,000 clients provides us an entry into a new segment of the payroll online market. A segment we think is positioned to grow as the five million small businesses who calculate their payroll manually move to the web.”
Paychex has about 600,000 clients, and its target market are the 7.9 million small businesses that have fewer than 100 employees. Only 15% to 20% of this market outsources its payroll processes, which gives Paychex a huge growth opportunity. The SaaS model is a good way to sell to small businesses, and the recent SurePayroll acquisition is the right way to go about it.
On December 21, Paychex reported second quarter revenue of $512 million, up 3%. Net income increased 6% to $133.9 million or $0.37 per share. The company’s financial position remains strong with cash and total corporate investments of $690 million and no debt.
Payroll service revenue increased 1% to $354.8 million, driven by a 2.5% increase in checks per client and annual price increases. The improvement in checks per client was due mainly to an increase in corporate hiring and a higher retention rate. However, its payroll client base has declined 2.2% from November 30, 2009.
Human Resource Services (HRS) revenue increased 10% to $145.2 million as the number of client employees served and the number of clients grew in the last quarter. Human Resource Services revenue growth was impacted by the sale of Stromberg time and attendance operations in October 2009. Excluding Stromberg, Human Resource Services revenue would have increased 11% for the second quarter. Paychex said growth in its HRS revenue reflects the modest improvement in economic conditions. The recently passed Health Care Reform Act in the U.S. as well as increased hiring and retirement expenses per employee also contributed to the strong performance.
For fiscal 2011, Paychex expects Payroll Service revenues to increase in the range of 1% to 2% from last year. Human Resource Services revenues are expected to increase by 10% to 13%. Total service revenue is likely to grow 3% to 5%. Net income is expected to increase 4% to 6%. Paychex is trading around $33 with market cap of about $12 billion. It hit a 52-week high of $33.37 on January 24.
On January 26, ADP, with annual revenue of $8.9 billion, reported second quarter revenue of $2.4 billion. This represents growth of 9% with 5% organically. Net profit declined 2% to $310.1 million. ADP bought back shares for about $52 million in the quarter and ended the quarter with cash and marketable securities of $1.4 billion.
Employer Services revenue grew 7% for the first quarter, with 4% organic growth. Sales from the traditional payroll and payroll tax filing business were flat, and beyond payroll revenues grew 16% for the quarter assisted by acquisitions. ADP reported that the pays per control metric in the United States continued to grow at 2.4%, as measured on a same-store-sales basis for clients on its Auto Pay platform. Global client retention levels improved 0.8 percentage points.
Professional Employer Organization (PEO) Services’ revenues increased 15%. Average worksite employees paid by PEO Services increased 11% to approximately 221,000.
Dealer Services’ revenues increased 26% with 4% organic growth driven by the Cobalt acquisition.
ADP raised its revenue outlook for fiscal year 2011 based on the positive results in the second quarter. It now expects revenue to increase by 5% compared to its previous guidance of 3% to 5% growth. Including acquisitions, it expects revenue to grow 9%. It expects EPS to increase 5% versus its earlier guidance of 3% to 5%. The company expects pays per control to be up at least 2% for the year and client retention to be up 0.5 percentage points. It expects PEO Services to grow 15% driven by higher benefits pass through revenues, compared with its prior forecast of 13% to 15% growth. It continues to expect single high-digit growth for Employer Services. Including its Cobalt acquisition, the company expects Dealer Services to grow more than 20%. The stock is trading around $49 with market cap of about $24 billion. It hit a 52-week high of $49.73 on January 24.
ADP Continues Expansion via Acquisitions
ADP closed three acquisitions during the quarter. Two of those acquisitions were in Employer Services: MasterTax for an undisclosed sum and Byte Software for $44.5 million (€33.2 million).
Byte Software, which is the largest payroll provider in Italy, develops software systems for human resources and time management and personnel administration for small, medium, and large enterprises. With approximately 620 employees, Byte Software House provides products and services to more than 600 companies including many of the top 100 Italian companies.
MasterTax’s services range from the in-house deployment of tax filing software to the outsourcing of the payroll tax function through MasterTax Services. The company was founded in 1997 and is used by large, multinational companies as well as a wide array of payroll service providers and professional employer organizations.
In Dealer Services, ADP closed the acquisition of the Kuwait-based Professional Applications of Computer Companies (PACC), a distributor of its international Dealer Management System platform auto line in the Gulf states since 1992.
Now that Paychex has also kick-started its SaaS strategy, competition has heated up all the more in the payroll sector. It’s fast becoming an interesting space to watch.