Paychex (NASDAQ:PAYX) Q1: Beats On Revenue, Gross Margin Improves

Adam Hejl /
2021/09/30 8:52 am EDT

Payroll and human resources software provider, Paychex (NASDAQ:PAYX) reported strong growth in the Q1 FY2022 earnings announcement, with revenue up 16.1% year on year to $1.08 billion. Paychex made a GAAP profit of $333.6 million, improving on its profit of $211.6 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 (NASDAQ:PAYX) Q1 FY2022 Highlights:

  • Revenue: $1.08 billion vs analyst estimates of $1.04 billion (3.82% beat)
  • EPS (non-GAAP): $0.89 vs analyst estimates of $0.80 (10.8% beat)
  • Free cash flow of $355.2 million, roughly flat from previous quarter
  • Gross Margin (GAAP): 71.1%, up from 69.3% previous quarter

Martin Mucci, President and Chief Executive Officer, commented, “Fiscal 2022 is off to a strong start as we achieved double-digit growth in both revenue and earnings. These results reflected improvement in the economy, continued momentum in sales, and strong levels of client retention. Our sales performance was driven by ongoing strength in both digital and HR Outsourcing sales and solid growth in the mid-market space. Our client retention was a function of the resilience of small businesses and the value provided by our unique blend of technology solutions and expertise that help our clients navigate this challenging environment.

One of the oldest payroll service providers, Paychex (NASDAQ:PAYX) provides payroll and human resource (HR) solutions.

Paychex benefits from the long term trend of business process outsourcing, allowing businesses to focus on core competencies, along with 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.

Sales Growth

As you can see below, Paychex's revenue growth has been slow over the last year, growing from quarterly revenue of $932.2 million, to $1.08 billion.

Paychex Total Revenue

This quarter, Paychex's quarterly revenue was up 16.1% year on year, which is above average for the company. On top of that, revenue increased $53.7 million quarter on quarter, a strong improvement on the $82.5 million decrease in Q4 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 4.8% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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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, licences, technical support and other necessary running expenses was at 71.1% in Q1.

Paychex Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.71 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the lower 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 Q1 Results

Sporting a market capitalization of $38.8 billion, more than $1.14 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.

It was good to see Paychex improve their gross margin this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, revenue growth is overall a bit slower these days. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 3.38% on the results and currently trades at $111.5 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.