Can Paychex Become a SaaS Aggregator?

I wrote about Paychex (NASDAQ:PAYX) more than two years back when I started my blog, in a post called Microsoft’s Two Should-Be Acquisition Candidates. Since then, Paychex has grown steadily and its market cap has appreciated from $12.3 Billion to $15.62 Billion. I will look at it in more detail in this post.

Paychex is a leading provider of payroll and benefits outsourcing solutions in the SME market with annual revenue of $1.9 billion and net income of $514 million in fiscal 2007. Its biggest rival is ADP, which I will cover soon. Based in New York, the company has more than 100 offices with 11,700 employees and 561,000 payroll clients. Paychex takes care of a vital but simple business process for its clients, and has thus positioned itself as an essential piece of the workflow at numerous companies.

Paychex offers human resource outsourcing services through its core products, Paychex Premier Human Resources and Professional Employer Organization [PEO]. It offers payroll services through its two core product lines, Core Payroll and Major Market Services [MMS].

Core Payroll services are also offered through Paychex Online. The site offers interactive, self-service products including Paychex Online Payroll, Internet Time Sheet, and Paychex Online Reports.

MMS is for companies with complex needs. Most MMS clients use the Preview software for passing on the payroll information. Preview software and the database for payroll and HR reside on the clients’ end. Paychex handles the software maintenance and also provides associated products and services. Paychex also offers an Internet-based human resource management system, HR Online, for managing payroll, reports, and employee records and benefits.

In September 2007, Paychex acquired Hawthorne Benefit Technologies and BeneTrac, its online employee benefits management and administration system.

On the financial front, Paychex reported a y-o-y increase of 10% in revenue to $507.1 million for Q1 fiscal 2008. Net income was $151.1 million, or $0.40 diluted earnings per share. Payroll service revenue increased 8% y-o-y to $361.5 million mainly due to client base growth, higher check volume, and price increases. Human Resource Services revenue saw a 20% y-o-y increase to $113.3 million due to increase in client base in retirement services, comprehensive human resource outsourcing services, and workers’ compensation insurance client base. Its regular quarterly dividend increased 43% to $0.30 per share from $0.21 per share.

Following the announcement of the $1 billion repurchase plan in July, Paychex repurchased 11.2 million shares for a total of $500 million through September 26, 2007. It expects to complete the repurchase plan in 2007. Its stock is trading around $42 after hitting a 52-week high of $47.14 in early August.

There are a number of Software-As-A-Service (SaaS) companies that could, conceivably, find their exits in the arms of Paychex. This includes on-demand payroll vendor PayCycle, Benefits vendor Benefitstreet, expense management vendor Concur, or talent management vendor SuccessFactors. This would require, however, that PayChex starts to think of itself as a SaaS company, as opposed to a BPO company, which has been its primary positioning thus far.

It would be really interesting to watch whether BPO vendors can make this switch to SaaS. If they do, the software industry will experience quite a big change!