Paychex's (NASDAQ:PAYX) Q4 Earnings Results: Revenue In Line With Expectations But Gross Margin Drops

Kayode Omotosho /
2023/06/29 8:37 am EDT

Payroll and human resources software provider, Paychex (NASDAQ:PAYX) reported results in line with analyst expectations in Q4 FY2023 quarter, with revenue up 7.45% year on year to $1.23 billion. Paychex made a GAAP profit of $350.4 million, improving on its profit of $296.4 million, in the same quarter last year.

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Paychex (PAYX) Q4 FY2023 Highlights:

  • Revenue: $1.23 billion vs analyst estimates of $1.22 billion (small beat)
  • EPS (non-GAAP): $0.97 vs analyst estimates of $0.97 (small beat)
  • Revenue guidance for fiscal year 2024: is $5.3 billion at the midpoint, slightly above analyst estimates
  • Operating profit guidance for fiscal year 2024: is $2.2 billion at the midpoint, slightly above analyst estimates
  • Free cash flow of $363.3 million, down 36.6% from previous quarter
  • Gross Margin (GAAP): 69.9%, up from 68.5% same quarter last year

John Gibson, President and Chief Executive Officer, commented, “We achieved a significant milestone of over $5 billion in total revenue. Our results for fiscal 2023 were strong with 9% growth in total revenue and 13% growth in adjusted diluted earnings per share. These results were due to the hard work and dedication of over 16,000 employees and the investments we have made in our human capital management ("HCM") technology and Human Resources ("HR") advisory solutions and the trust our clients have placed in us.

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 $1.03 billion in Q4 FY2021, to $1.23 billion.

Paychex Total Revenue

Paychex's quarterly revenue was only up 7.45% year on year, which might disappoint some shareholders. But the revenue actually decreased by $151.4 million in Q4, compared to $190.7 million increase in Q3 2023. Paychex's sales do seem to have a seasonal pattern to them, however the management is guiding for a further drop in revenue in the next quarter, so we think it is worth keeping an eye on the situation.

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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 69.9% in Q4.

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. 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 Q4 Results

Sporting a market capitalization of $39.9 billion, more than $1.6 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.

Guidance was the bright spot in the quarter, as the company's outlook for fiscal 2024 revenue (6-7% year on year growth) and operating profit (41-42% margin) were slightly ahead of expectations. Additionally, revenue and adjusted EPS in the quarter were also slightly ahead. On the other hand, it was less good to see deterioration in gross margin. Overall, this quarter's results were mixed, but the better-than-expected outlook should be a tailwind to the market's reaction. The company is up 1.99% on the results and currently trades at $113 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.

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.