Paychex (NASDAQ:PAYX) Q3 Sales Beat Estimates, Gross Margin Improves

Radek Strnad /
2022/03/30 8:45 am EDT
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Payroll and human resources software provider, Paychex (NASDAQ:PAYX) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 14.7% year on year to $1.27 billion. Paychex made a GAAP profit of $430.7 million, improving on its profit of $350.5 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 FY2022 Highlights:

  • Revenue: $1.27 billion vs analyst estimates of $1.21 billion (4.64% beat)
  • EPS (non-GAAP): $1.15 vs analyst estimates of $1.05 (9.85% beat)
  • Free cash flow of $578.2 million, up from $135.6 million in previous quarter
  • Gross Margin (GAAP): 72.3%, up from 70.4% same quarter last year

Martin Mucci, Chairman and Chief Executive Officer, commented, “Our strong results for the third quarter, including double-digit growth in both revenue and earnings are a result of progress against key initiatives. We had a strong calendar year end and selling season, delivering a record quarter for new sales revenue and maintaining high levels of client retention. Our value proposition continues to resonate in the market with our unique blend of innovative Paychex Flex® technology and breadth of solutions to help small and mid-sized businesses.”

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 mediocre over the last year, growing from quarterly revenue of $1.11 billion, to $1.27 billion.

Paychex Total Revenue

This quarter, Paychex's quarterly revenue was once again up 14.7% year on year. We can see that the company increased revenue by $167.5 million quarter on quarter. That's a solid improvement on the $25.6 million increase in Q2 2022, so shareholders should appreciate the acceleration of growth.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 5.25% over the next twelve months.

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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, licenses, technical support and other necessary running expenses was at 72.3% in Q3.

Paychex Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.72 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 Q3 Results

With a market capitalization of $47.8 billion, more than $1.35 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We enjoyed seeing Paychex improve their gross margin materially this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, revenue growth is overall a bit slower these days. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 3.1% on the results and currently trades at $136.72 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.