Paychex (NASDAQ:PAYX) Misses Q1 Revenue Estimates, Stock Drops

Petr Huřťák /
2024/04/02 8:37 am EDT

Payroll and human resources software provider, Paychex (NASDAQ:PAYX) missed analysts' expectations in Q1 CY2024, with revenue up 4.2% year on year to $1.44 billion. It made a non-GAAP profit of $1.38 per share, improving from its profit of $1.29 per share in the same quarter last year.

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Paychex (PAYX) Q1 CY2024 Highlights:

  • Revenue: $1.44 billion vs analyst estimates of $1.46 billion (1.2% miss)
  • EPS (non-GAAP): $1.38 vs analyst estimates of $1.37 (small beat)
  • Full year revenue guidance: 5-6% growth year on year, midpoint of guide is a miss vs. expectations of 6.2% year on year growth
  • Full year EPS (non-GAAP) guidance: 10-11% year on year, midpoint of guide in line with expectations of 10.3% year on year growth
  • Gross Margin (GAAP): 73.6%, in line with the same quarter last year
  • Free Cash Flow of $631 million, up 105% from the previous quarter
  • Market Capitalization: $43.76 billion

President and Chief Executive Officer , John Gibson said, "Total revenue growth in the third fiscal quarter reflected a lower contribution from our Employee Retention Tax Credit ("ERTC") Service as compared with the prior year period.

One of the oldest service providers in the industry, Paychex (NASDAQ:PAYX) offers its customers payroll and HR software solutions.

HR Software

Modern HR software has two powerful benefits: cost savings and ease of use. For cost savings, businesses large and small much prefer the flexibility of cloud-based, web-browser-delivered software paid for on a subscription basis rather than the hassle and complexity of purchasing and managing on-premise enterprise software. On the usability side, the consumerization of business software creates seamless experiences whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy-to-use platform.

Sales Growth

As you can see below, Paychex's revenue growth has been unremarkable over the last three years, growing from $1.11 billion in Q3 2021 to $1.44 billion this quarter.

Paychex Total Revenue

Paychex's quarterly revenue was only up 4.2% year on year, which might disappoint some shareholders. However, its revenue increased $181.4 million quarter on quarter, a strong improvement from the $28.1 million decrease in Q4 CY2023. This is a sign of acceleration of growth and very nice to see indeed.

Looking ahead, analysts covering the company were expecting sales to grow 6.8% over the next 12 months before the earnings results announcement.

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Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Paychex's free cash flow came in at $631 million in Q1, up 10.1% year on year.

Paychex Free Cash Flow

Paychex has generated $1.92 billion in free cash flow over the last 12 months, an eye-popping 36.8% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Paychex's Q1 Results

Revenue unfortunately missed analysts' expectations, although EPS beat. With regards to the full year, revenue guidance missed expectations. Guidance for full year EPS was maintained from last quarter, which is roughly in line with expectations. Overall, this was a mediocre quarter for Paychex. The company is down 5.8% on the results and currently trades at $114.5 per share.

Paychex may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.