Payroll and human resources software provider, Paychex (NASDAQ:PAYX) reported results ahead of analyst expectations in the Q3 FY2023 quarter, with revenue up 8.23% year on year to $1.38 billion. Paychex made a GAAP profit of $467.4 million, improving on its profit of $430.7 million, in the same quarter last year.
Is now the time to buy Paychex? Access our full analysis of the earnings results here, it's free.
Paychex (PAYX) Q3 FY2023 Highlights:
- Revenue: $1.38 billion vs analyst estimates of $1.35 billion (2.4% beat)
- EPS (non-GAAP): $1.29 vs analyst estimates of $1.24 (4% beat)
- Free cash flow of $573.1 million, up 100% from previous quarter
- Gross Margin (GAAP): 73%, in line with same quarter last year
John Gibson, President and Chief Executive Officer, commented, “The third fiscal quarter reflected continued growth with 8% in total revenue and double digit adjusted diluted earnings per share. Solid execution throughout our calendar year-end and selling season resulted in growth in new sales and strong retention. "
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 $1.11 billion in Q3 FY2021, to $1.38 billion.
Paychex's quarterly revenue was only up 8.23% year on year, which might disappoint some shareholders. On top of that, revenue increased $190.7 million quarter on quarter, a strong improvement on the $15.9 million decrease in Q2 2023, and a sign of acceleration of growth, which is very nice to see indeed.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 6.17% 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 73% in Q3.
That means that for every $1 in revenue the company had $0.73 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.
Key Takeaways from Paychex's Q3 Results
Sporting a market capitalization of $39.3 billion, more than $1.56 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.
We were very impressed by Paychex’s outperformance on revenue and EPS this quarter, with both the Management Solutions and PEO and Insurance Solutions segments beating on revenue. There was also improvement in gross margin and FCF generation was healthy this quarter. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 5.56% on the results and currently trades at $115 per share.
Should you invest in Paychex 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.