Payroll and human resources software provider, Paychex (NASDAQ:PAYX) reported results in line with analysts' expectations in Q1 FY2024, with revenue up 6.62% year on year to $1.29 billion. Turning to EPS, Paychex made a non-GAAP profit of $1.14 per share, improving from its profit of $1.03 per share in the same quarter last year.

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John Gibson, President and CEO, commented, “We are off to a strong start for fiscal 2024 with 7% growth in total revenue and 11% for adjusted diluted earnings per share. Demand for our solutions remains strong as businesses continue to look to us for the technology and expertise to navigate today's rapidly changing business environment. In addition, by harnessing the power of Artificial Intelligence and leveraging our vast data sets, we are delivering more actionable insights to our clients, helping them make informed decisions on how to address today’s growing workforce and compliance challenges.”

One of the oldest payroll service providers, Paychex provides payroll and human resource (HR) solutions.

HR Software

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 $1.08 billion in Q1 FY2022 to $1.29 billion this quarter.

Paychex's quarterly revenue was only up 6.62% year on year, which might disappoint some shareholders. However, its revenue increased $56.4 million quarter on quarter, a strong improvement from the $151.4 million decrease in Q4 2023. This is a sign of acceleration of growth and very nice to see indeed.

Looking ahead, analysts covering the company were expecting sales to grow 6.41% over the next 12 months before the earnings results announcement.

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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. Paychex'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 72% in Q1.

That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite improving significantly since the last quarter, Paychex's gross margin is still lower than that of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.

Key Takeaways from Paychex's Q1 Results

Sporting a market capitalization of $40.7 billion, more than $1.69 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Paychex is attractively positioned to invest in growth.

It was great to see Paychex improve its gross margin this quarter. That really stood out as a positive in these results. The company also beat analysts' adjusted EBITDA and EPS estimates. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 1.13% after reporting and currently trades at $114 per share.

So should you invest in Paychex right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.