Paychex (NASDAQ:PAYX) Misses Q2 Sales Targets

Petr Huřťák /
2023/12/21 8:37 am EST

Payroll and human resources software provider, Paychex (NASDAQ:PAYX) missed analysts' expectations in Q2 FY2024, with revenue up 5.7% year on year to $1.26 billion. It made a non-GAAP profit of $1.08 per share, improving from its profit of $0.99 per share in the same quarter last year.

Key Takeaways from Paychex's Q2 Results

This was a weaker quarter for Paychex, as revenue and operating profit both missed. The stock is flat after reporting and currently trades at $126.97 per share.

Is now the time to buy Paychex? Find out by accessing our full research report, it's free.

Paychex (PAYX) Q2 FY2024 Highlights:

  • Market Capitalization: $46.19 billion
  • Revenue: $1.26 billion vs analyst estimates of $1.27 billion (0.7% miss)
  • EPS (non-GAAP): $1.08 vs analyst estimates of $1.07 (small beat)
  • Free Cash Flow of $307.8 million, down 50.1% from the previous quarter
  • Gross Margin (GAAP): 71.1%, up from 69.8% in the same quarter last year

President and Chief Executive Officer , John Gibson commented, “We are pleased with our results for the second quarter and the first half of fiscal 2024, with total revenue growth of 6% and diluted earnings per share and adjusted diluted earnings per share growth through the first half of the fiscal year of 10%. The macro-economic environment remains stable for small and mid-sized businesses, who continue to face challenges in both the cost of and access to growth capital; and finding quality talent in the current labor market. Our Small Business Employment Watch continues to show moderation in both job growth and wage inflation.”

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 two years, growing from $1.11 billion in Q2 FY2022 to $1.26 billion this quarter.

Paychex Total Revenue

Paychex's quarterly revenue was only up 5.7% year on year, which might disappoint some shareholders. On top of that, the company's revenue actually decreased by $28.1 million in Q2 compared to the $56.4 million increase in Q1 2024. Taking a closer look we can a similar revenue decline in the same quarter last year, which could suggest that the business has seasonal elements. Regardless, this situation is worth monitoring as management is guiding for a further revenue drop in the next quarter.

Looking ahead, analysts covering the company were expecting sales to grow 6.7% over the next 12 months before the earnings results announcement.

Our recent pick has been a big winner, and the stock is up more than 2,000% since the IPO a decade ago. If you didn’t buy then, you have another chance today. The business is much less risky now than it was in the years after going public. The company is a clear market leader in a huge, growing $200 billion market. Its $7 billion of revenue only scratches the surface. Its products are mission critical. Virtually no customers ever left the company. You can find it on our platform for free.

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 $307.8 million in Q2, up 7.5% year on year.

Paychex Free Cash Flow

Paychex has generated $1.86 billion in free cash flow over the last 12 months, an eye-popping 35.9% 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.

Paychex may not have had the best quarter, but does that 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.

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