Payroll and human resources software provider, Paychex (NASDAQ:PAYX) reported Q4 FY2022 results that beat analyst expectations, with revenue up 11.1% year on year to $1.14 billion. Paychex made a GAAP profit of $296.4 million, improving on its profit of $263 million, in the same quarter last year.
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Paychex (PAYX) Q4 FY2022 Highlights:
- Revenue: $1.14 billion vs analyst estimates of $1.1 billion (3.34% beat)
- EPS (non-GAAP): $0.81 vs analyst estimates of $0.79 (2.06% beat)
- Free cash flow of $303.9 million, down 47.4% from previous quarter
- Gross Margin (GAAP): 68.5%, down from 69.3% same quarter last year
Martin Mucci, chairman and CEO, commented, “We are pleased with our fiscal 2022 results, which reflect strong business performance from our unique blend of human capital management ("HCM") solutions and the hard work and dedication of our 16,000 employees.
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 $1.02 billion, to $1.14 billion.
This quarter, Paychex's quarterly revenue was once again up 11.1% year on year. But the revenue actually decreased by $131.7 million in Q4, compared to $167.5 million increase in Q3 2022.
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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 68.5% in Q4.
That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Key Takeaways from Paychex's Q4 Results
Sporting a market capitalization of $43.2 billion, more than $1.22 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 outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see the pretty significant deterioration in gross margin and the revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Paychex. The company is flat on the results and currently trades at $120.01 per share.
Paychex may have had a tough quarter, but does that actually create an opportunity to invest 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.