Paycor (NASDAQ:PYCR) Q2: Strong Sales, Provides Optimistic Full Year Guidance

Full Report / February 08, 2023
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Online payroll and human resource software provider Paycor (NASDAQ:PYCR) reported results ahead of analyst expectations in the Q2 FY2023 quarter, with revenue up 28.9% year on year to $132.9 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $156 million at the midpoint, 3.68% above what analysts were expecting. Paycor made a GAAP loss of $27.5 million, down on its loss of $25.5 million, in the same quarter last year.

Paycor (PYCR) Q2 FY2023 Highlights:

  • Revenue: $132.9 million vs analyst estimates of $127.3 million (4.34% beat)
  • EPS (non-GAAP): $0.08 vs analyst estimates of $0.06 (37.6% beat)
  • Revenue guidance for Q3 2023 is $156 million at the midpoint, above analyst estimates of $150.5 million
  • The company lifted revenue guidance for the full year, from $531 million to $542 million at the midpoint, a 2.07% increase
  • Free cash flow was negative $6.26 million, compared to negative free cash flow of $33.5 million in previous quarter
  • Gross Margin (GAAP): 65.2%, up from 60.1% 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 quarterly revenue of $85.9 million in Q2 FY2021, to $132.9 million.

Paycor Total Revenue

This quarter, Paycor's quarterly revenue was once again up a very solid 28.9% year on year. On top of that, revenue increased $14.6 million quarter on quarter, a very strong improvement on the $7.31 million increase in Q1 2023, which shows re-acceleration of growth, and is great to see.

Guidance for the next quarter indicates Paycor is expecting revenue to grow 27.2% year on year to $156 million, improving on the 22.8% 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 19.3% 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 65.2% in Q2.

Paycor Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.65 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.

Cash Is King

If you have followed 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 $6.26 million in Q2, increasing the cash burn by 194% year on year.

Paycor Free Cash Flow

Paycor has generated $2.75 million in free cash flow over the last twelve months, 0.57% 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 Q2 Results

With a market capitalization of $4.49 billion Paycor is among smaller companies, but its more than $72.3 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 the positive outlook Paycor provided for the next quarter’s revenue. And we were also glad to see the improvement in gross margin. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 2% on the results and currently trades at $25.04 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. Although Paycor is not 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 twelve months is 7.5x. 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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