Paycor's (NASDAQ:PYCR) Q4 Sales Top Estimates But Stock Drops on Outlook

Full Report / August 16, 2023

Online payroll and human resource software provider Paycor (NASDAQ:PYCR) reported Q4 FY2023 results topping analysts' expectations, with revenue up 26.2% year on year to $140 million. However, next quarter's revenue guidance of $139 million was less impressive, coming in 2.48% below analysts' estimates. Paycor made a GAAP loss of $29.4 million, down from its loss of $23.8 million in the same quarter last year.

Paycor (PYCR) Q4 FY2023 Highlights:

  • Revenue: $140 million vs analyst estimates of $136.5 million (2.59% beat)
  • EPS (non-GAAP): $0.08 vs analyst estimates of $0.06 (30.9% beat)
  • Revenue Guidance for Q1 2024 is $139 million at the midpoint, below analyst estimates of $142.5 million
  • Management's revenue guidance for the upcoming financial year 2024 is $647 million at the midpoint, missing analyst estimates by 0.2% and implying 17.1% growth (vs 28.6% in FY2023)
  • Free Cash Flow of $30 million, down 12.4% from the previous quarter
  • Gross Margin (GAAP): 65.4%, up from 63.7% in the 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 two years, growing from $88 million in Q4 FY2021 to $140 million this quarter.

Paycor Total Revenue

This quarter, Paycor's quarterly revenue was once again up a very solid 26.2% year on year. However, the company's revenue actually decreased by $21.4 million in Q4 compared to the $28.6 million increase in Q3 2023. This situation is worth monitoring as Paycor's sales have historically followed a seasonal pattern but management is guiding for a further revenue drop in the next quarter.

Next quarter's guidance suggests that Paycor is expecting revenue to grow 17.5% year on year to $139 million, slowing down from the 27.6% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $647 million at the midpoint, growing 17.1% year on year compared to the 28.7% increase in FY2023.


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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 65.4% in Q4.

Paycor Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.65 left to spend on developing new products, sales and marketing, and general administrative overhead. Paycor's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Paycor's free cash flow came in at $30 million in Q4, up 138% year on year.

Paycor Free Cash Flow

Paycor has generated $34 million in free cash flow over the last 12 months, a decent 4.19% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from Paycor's Q4 Results

With a market capitalization of $4.05 billion, Paycor is among smaller companies, but its $95.2 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was good to see Paycor beat analysts' revenue and adjusted operating profit expectations this quarter. That really stood out as a positive in these results. On the other hand, its revenue guidance for next year suggests a significant slowdown in demand and its revenue guidance for next quarter also missed Wall Street's estimates. Additionally, next quarter's adjusted operating profit guide was also below expectations. Overall, this was a mixed quarter for Paycor, with the outlook weighing on shares. The company is down 8.18% on the results and currently trades at $21 per share.

Is Now The Time?

When considering an investment in Paycor, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. Although Paycor isn't a bad business, it probably wouldn't be one of our picks. 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, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

The market is certainly expecting long-term growth from Paycor given its price to sales ratio based on the next 12 months is 6.2x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Paycor doesn't trade at a completely unreasonable price point.

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