What to expect from Paychex (NASDAQ: PAYX) Q2 earnings

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Paychex Inc. (NASDAQ: PAYX) is set to report its second-quarter 2020 earnings results on Wednesday, December 18, before the market opens. The top line will be benefited by management solutions, PEO and Insurance Services, as well as interest on funds held for clients.

The company is likely to incur costs and expenses associated with the Oasis Outsourcing Group that was acquired back in December 2018. The margins will be moderated by business mix due to PEO business growth and accelerated investments in sales, technology, and operations during the quarter.

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The growth in the PEO and Insurance revenues are expected to be in the range of 56-60% for the second quarter and at the low end of the 11-14% range for the second half of the year. The growth in the segment could be partially impacted by the change in the classification of an immaterial Oasis revenue stream out of PEO and Insurance services into Management Solutions.

As of August 31, 2019, the company’s financial position remained strong with cash, restricted cash and total corporate investments of $695.3 million. Total short-term and long-term borrowings were $853 million. Paychex believes its investment strategy continues to focus on protecting principal and optimizing liquidity.

Analysts expect the company’s earnings to increase by 4.60% to $0.68 per share and revenue will jump by 15% to $987.65 million for the second quarter. The company has surprised investors by beating analysts’ expectations thrice in the past four quarters. The majority of the analysts recommended a “hold” rating with an average price target of $83.59.

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For the first quarter, Paychex posted an 8% increase in earnings driven by client base growth, higher revenue per check, and growth in clients and client worksite employees across its combined existing PEO business. The top line increased by 15% year-over-year helped by growth in its three segments.

For fiscal 2020, the company expects revenue growth in the range of 10-11% and adjusted earnings growth of about 9%. The operating margin is still projected to be about 36%. The management solutions revenue is anticipated to grow by about 5% and PEO and Insurance Services revenue is predicted to grow by about 30%. Interest on funds held for clients is expected to grow in the range of 4-8%.

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