Paycor (NASDAQ:PYCR) Beats Expectations in Strong Q1 But Stock Drops

Full Report / January 23, 2023
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Online payroll and human resource software provider Paycor (NASDAQ:PYCR) reported Q1 FY2023 results that beat analyst expectations, with revenue up 27.5% year on year to $118.3 million. Guidance for next quarter's revenue was $127 million at the midpoint, 2.51% above the average of analyst estimates. Paycor made a GAAP loss of $29 million, improving on its loss of $42 million, in the same quarter last year.

Paycor (PYCR) Q1 FY2023 Highlights:

  • Revenue: $118.3 million vs analyst estimates of $113.2 million (4.42% beat)
  • EPS (non-GAAP): $0.05 vs analyst estimates of $0.03 ($0.02 beat)
  • Revenue guidance for Q2 2023 is $127 million at the midpoint, above analyst estimates of $123.8 million
  • The company lifted revenue guidance for the full year, from $513 million to $531 million at the midpoint, a 3.5% increase
  • Free cash flow was negative $33.5 million, down from positive free cash flow of $12.5 million in previous quarter
  • Gross Margin (GAAP): 63.4%, up from 50.8% 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 solid over the last two years, growing from quarterly revenue of $79 million in Q1 FY2021, to $118.3 million.

Paycor Total Revenue

This quarter, Paycor's quarterly revenue was once again up a very solid 27.5% year on year. On top of that, revenue increased $7.31 million quarter on quarter, a strong improvement on the $11.6 million decrease in Q4 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Paycor is expecting revenue to grow 23.2% year on year to $127 million, improving on the 20% 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 17.5% over the next twelve months.


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 63.4% in Q1.

Paycor Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.63 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 we would like to see it start improving.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Paycor burned through $33.5 million in Q1, increasing the cash burn by 83.7% year on year.

Paycor Free Cash Flow

Paycor has generated $6.88 million in free cash flow over the last twelve months, 1.51% of revenues. This FCF margin is a result of Paycor asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Paycor's Q1 Results

With a market capitalization of $5.13 billion Paycor is among smaller companies, but its more than $98.1 million in cash and positive free cash flow over the last twelve months give us confidence that Paycor has the resources it needs to pursue a high growth business strategy.

We enjoyed Paycor's revenue forecast for the full year. And we were also excited to see that it outperformed Wall St’s revenue expectations this quarter. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company currently trades at $23.66 per share.

Is Now The Time?

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 a little slower, and analysts expect growth rates to deteriorate from there. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately gross margins show its business model is much less lucrative than the best software businesses.

Given its price to sales ratio based on the next twelve months is 9.1x, Paycor is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. 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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