Payroll and human resources software provider, Paychex (NASDAQ:PAYX) announced better-than-expected results in the Q2 FY2023 quarter, with revenue up 7.37% year on year to $1.19 billion. Paychex made a GAAP profit of $360.3 million, improving on its profit of $332.1 million, in the same quarter last year.
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Paychex (PAYX) Q2 FY2023 Highlights:
- Revenue: $1.19 billion vs analyst estimates of $1.17 billion (1.21% beat)
- EPS (non-GAAP): $0.99 vs analyst estimates of $0.96 (3.01% beat)
- Free cash flow of $286.3 million, down 14.2% from previous quarter
- Gross Margin (GAAP): 69.8%, in line with same quarter last year
John Gibson, President and Chief Executive Officer, commented, “We posted solid financial results for the second quarter, with growth of 7% in total revenue and 9% in diluted earnings per share, driven by our strong execution and comprehensive suite of solutions.”
One of the oldest payroll service providers, Paychex provides payroll and human resource (HR) solutions.
HR software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy to use platforms.
Sales Growth
As you can see below, Paychex's revenue growth has been unremarkable over the last two years, growing from quarterly revenue of $983.7 million in Q2 FY2021, to $1.19 billion.
Paychex's quarterly revenue was only up 7.37% year on year, which might disappoint some shareholders. But the revenue actually decreased by $15.9 million in Q2, compared to $61.9 million increase in Q1 2023.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 7.29% over the next twelve months.
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Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Paychex's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 69.8% in Q2.
That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Key Takeaways from Paychex's Q2 Results
Sporting a market capitalization of $43 billion, more than $1.26 billion in cash and with positive free cash flow over the last twelve months, we're confident that Paychex has the resources it needs to pursue a high growth business strategy.
Paychex topped analysts’ revenue expectations this quarter, even if just narrowly and the company produced strong free cash flow.. On the other hand, revenue growth was quite weak and gross margin deteriorated a little. Overall, this quarter's results were mostly in line. The company is up 2.38% on the results and currently trades at $117.03 per share.
Paychex may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
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The author has no position in any of the stocks mentioned.