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Paycor (NASDAQ:PYCR) Posts Better-Than-Expected Sales In Q3, Provides Optimistic Full Year Guidance


Full Report / May 30, 2022
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Online payroll and human resource software provider Paycor (NASDAQ:PYCR) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 22.7% year on year to $122.5 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $103.5 million at the midpoint, 3.15% above what analysts were expecting. Paycor made a GAAP loss of $16.6 million, down on its loss of $12 million, in the same quarter last year.

Paycor (PYCR) Q3 FY2022 Highlights:

  • Revenue: $122.5 million vs analyst estimates of $117.6 million (4.21% beat)
  • EPS (non-GAAP): $0.11 vs analyst estimates of $0.09 (19.5% beat)
  • Revenue guidance for Q4 2022 is $103.5 million at the midpoint, above analyst estimates of $100.3 million
  • Free cash flow of $21.4 million, up from negative free cash flow of $16.1 million in previous quarter
  • Gross Margin (GAAP): 66.4%, up from 58.7% same quarter last year

Found in 1990 in Cincinnati, Ohio Paycor (NASDAQ: PYCR), provides software for small businesses to manage their payroll and HR needs in one place.

Human Capital Management (HCM) software is meant to streamline mundane, but vital, business functions like keeping attendance, running payroll, and keeping compliant with shifting Federal and local government taxes and labor laws. For many small and medium sized businesses, these are often handled by their accountant which is an unnecessarily expensive use of resources, or QuickBooks style spreadsheets which don’t have sufficient functionality.

Using a single database or system of records, Paycor is a cost effective solution that allows small and medium businesses to simplify the management of all their HR operations throughout an employee’s lifecycle, from when they first apply for a job, to onboarding and managing performance reviews, all the way through collecting retirement benefits.

What sets Paycor apart from other cloud-based HCM software providers is its go-to-market model of partnering with local benefits brokers who work with small businesses. It has also traditionally avoided large cities in the US, instead focusing on the Midwest and Southeast.

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.

Other providers of HR solutions for small businesses include Paycom (NYSE:PAYC), Paychex (NASDAQ:PAYX), ADP (NASDAQ:ADP), Asure (NYSE:ASUR) and Paylocity (NASDAQ:PCTY).

Sales Growth

As you can see below, Paycor's revenue growth has been strong over the last year, growing from quarterly revenue of $99.8 million, to $122.5 million.

Paycor Total Revenue

This quarter, Paycor's quarterly revenue was once again up a very solid 22.7% year on year. On top of that, revenue increased $19.5 million quarter on quarter, a very strong improvement on the $10.3 million increase in Q2 2022, which shows re-acceleration of growth, and is great to see.

Guidance for the next quarter indicates Paycor is expecting revenue to grow 17.5% year on year to $103.5 million, slowing down from the 19.9% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 13.7% over the next twelve months.

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. Paycor'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 66.4% in Q3.

Paycor Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Paycor's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Paycor’s balance sheet, but we note that with a market capitalization of $3.72 billion and more than $134 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We enjoyed the positive outlook Paycor provided for the next quarter’s revenue. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 4.97% on the results and currently trades at $22.38 per share.

Is Now The Time?

Updated: May 30, 2022, 4:1 AM ET

Paycor may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Paycor we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, the downside is that its gross margins show its business model is much less lucrative than the best software businesses and its cash burn raises the question if it can sustainably maintain its growth.

Paycor's price to sales ratio based on the next twelve months is 9.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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