Payroll and human resources software provider, Paychex (NASDAQ:PAYX) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 12.6% year on year to $1.1 billion. Paychex made a GAAP profit of $332.1 million, improving on its profit of $272.4 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) Q2 FY2022 Highlights:
- Revenue: $1.1 billion vs analyst estimates of $1.06 billion (4.61% beat)
- EPS (non-GAAP): $0.91 vs analyst estimates of $0.80 (14.1% beat)
- Free cash flow of $135.6 million, down 61.8% from previous quarter
- Gross Margin (GAAP): 70%, up from 67.4% same quarter last year
Martin Mucci, Chairman and Chief Executive Officer, commented, “We posted strong financial results for the second quarter of fiscal 2022, with growth of 13% in total revenue and 21% in diluted earnings per share. Results were driven by growth in employees within our client base and continued strong sales growth and client retention.
One of the oldest payroll service providers, Paychex 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.
As you can see below, Paychex's revenue growth has been slow over the last year, growing from quarterly revenue of $983.7 million, to $1.1 billion.
This quarter, Paychex's quarterly revenue was up 12.6% year on year, which is above average for the company. But the growth did slow down compared to last quarter, as the revenue increased by just $25.6 million in Q2, compared to $53.7 million in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Analysts covering the company are expecting the revenues to grow 4.04% over the next twelve months, although estimates are likely to change post earnings.
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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 70% in Q2.
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. Despite the recent drop this is still 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 Q2 Results
Sporting a market capitalization of $44.6 billion, more than $1.01 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, revenue growth is overall a bit slower these days and gross margin deteriorated a little. Overall, this quarter's results could have been better. The company is up 6.26% on the results and currently trades at $134.37 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.