Stock story –
Payroll and workforce software provider Paychex (NASDAQ:) met Wall Street’s revenue expectations in the fourth quarter of CY2024, with revenue up 4.7% year over year to $1.32 billion. Non-GAAP earnings of $1.14 per share were 1.5% above analyst consensus estimates.
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Paychex (PAYX) Q4 CY2024 Highlights:
- Gain: $1.32 billion vs. analyst estimates of $1.31 billion (4.7% YoY growth, in line)
- Custom EPS: $1.14 vs. analyst estimates of $1.12 (1.5% better)
- Adjusted EBITDA: $579.1 million vs. analyst estimates of $578.5 million (44% margin, in line)
- “Our business guidance for fiscal year 2025 remains unchanged from what we previously provided in the first quarter”
- Operating margin: 40.9%, in line with the same quarter last year
- Free cash flow margin: 18.8%, compared to 38.7% in the previous quarter
- Market capitalization: $48.9 billion
President and Chief Executive Officer John Gibson commented: “We are pleased to report strong financial results for the second quarter of fiscal 2025, with a 5% increase in total revenue. Excluding the impact of the expiration of the Employee Retention Tax Credit (“ERTC”) program, sales growth was 7% for the quarter.
Company Overview Paychex (NASDAQ:PAYX), one of the oldest service providers in the industry, offers payroll and HR software solutions to its customers.
HR Software (ETR:)
Modern HR software has two powerful benefits: cost savings and ease of use. To save costs, businesses of all sizes much prefer the flexibility of cloud-based software delivered through a web browser and paid for on a subscription basis, rather than the hassle and complexity of purchasing and managing business software on-premises. In terms of usability, the consumerization of enterprise software creates seamless experiences that merge multiple standalone processes, such as payroll and compliance, into a single, easy-to-use platform.
Sales growth
Examining a company’s long-term performance can provide clues about its quality. Any company can perform well for a quarter or two, but the best ones grow consistently over the long term. Over the past three years, Paychex grew its revenue at a weak compound annual growth rate of 7.4%. This was below our standard for the software sector and is a poor basis for our analysis.
This quarter, Paychex grew its revenue 4.7% year over year, and revenue of $1.32 billion was in line with Wall Street estimates.
Looking ahead, sell-side analysts expect revenue to grow 5.5% over the next twelve months, a slight slowdown compared to the past three years. This projection does not make us enthusiastic and implies that the products and services will experience some headwinds in demand.
Software is eating the world and there is virtually no industry left untouched by it. That’s driving increasing demand for tools that help software developers do their work, whether it’s monitoring critical cloud infrastructure, integrating audio and video functionality, or ensuring smooth content streaming. .
Cash is king
If you’ve been following StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that ultimately cash is king and you can’t use accounting profits to pay the bills.
Paychex has demonstrated stellar profitability, allowing it to reinvest, return capital to investors and stay ahead of the competition, while still maintaining an adequate cushion. The company’s free cash flow margin was among the best in the software sector, averaging 29.2% over the past year.
Paychex’s free cash flow was $248 million in the fourth quarter, representing a margin of 18.8%. The company’s cash profitability deteriorated as it was 2.7 percentage points lower than the same quarter last year, prompting us to pay more attention. Short-term fluctuations are generally not a big deal as investment needs can be seasonal, but we will keep an eye on whether the trend continues into future quarters.
Analysts predict that Paychex’s cash conversion will improve in the coming year. Their consensus estimates imply that the free cash flow margin of 29.2% over the past twelve months will increase to 35.1%, giving the country more flexibility for investments, share buybacks and dividends.
Key takeaways from Paychex’s fourth quarter results
Turnover remained in line and earnings per share fell slightly. The full year outlook was maintained. Zooming out, we think this was a nice quarter with few surprises, which can certainly be a good thing. The stock rose 3.8% to $141.25 immediately after the results.
