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Paychex (NASDAQ:PAYX) Surprises With Q1 Sales, Gross Margin Improves


Jack Winthrop /
2022/09/28 8:36 am EDT
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Payroll and human resources software provider, Paychex (NASDAQ:PAYX) reported Q1 FY2023 results topping analyst expectations, with revenue up 11.3% year on year to $1.2 billion. Paychex made a GAAP profit of $379.2 million, improving on its profit of $333.6 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 (PAYX) Q1 FY2023 Highlights:

  • Revenue: $1.2 billion vs analyst estimates of $1.16 billion (3.5% beat)
  • EPS (non-GAAP): $1.03 vs analyst estimates of $0.97 (6.11% beat)
  • Free cash flow of $333.7 million, roughly flat from previous quarter
  • Gross Margin (GAAP): 70.9%, in line with same quarter last year

Martin Mucci, Chairman and CEO, commented, “We are off to a good start for fiscal 2023, achieving double-digit growth in revenue and earnings. The value proposition of our Human Capital Management ("HCM") technology and Paychex HR suite continues to resonate in the market, with notable strength in our mid-market, retirement, and HR solutions 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 unremarkable over the last two years, growing from quarterly revenue of $932.2 million, to $1.2 billion.

Paychex Total Revenue

This quarter, Paychex's quarterly revenue was once again up 11.3% year on year. On top of that, revenue increased $61.9 million quarter on quarter, a strong improvement on the $131.7 million decrease in Q4 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 6.69% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

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 70.9% in Q1.

Paychex Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.70 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 $40.8 billion, more than $1.23 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.

We enjoyed seeing Paychex’s improve their gross margin materially this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 3.3% on the results and currently trades at $117 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.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.