Paycom (NYSE:PAYC) Reports Sales Below Analyst Estimates In Q3 Earnings, Stock Drops 24.3%

Max Juang /
2023/10/31 4:15 pm EDT

Online payroll and human resource software provider Paycom (NYSE:PAYC) fell short of analysts' expectations in Q3 FY2023, with revenue up 21.6% year on year to $406.3 million. Next quarter's outlook also missed expectations with revenue guided to $422.5 million at the midpoint, or 6.59% below analysts' estimates. Turning to EPS, Paycom made a non-GAAP profit of $1.77 per share, improving from its profit of $1.27 per share in the same quarter last year.

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Paycom (PAYC) Q3 FY2023 Highlights:

  • Revenue: $406.3 million vs analyst estimates of $411.1 million (1.16% miss)
  • EPS (non-GAAP): $1.77 vs analyst estimates of $1.61 (10.2% beat)
  • Revenue Guidance for Q4 2023 is $422.5 million at the midpoint, below analyst estimates of $452.3 million
  • Free Cash Flow of $46.3 million, down 26.6% from the previous quarter
  • Gross Margin (GAAP): 83%, down from 86.8% in the same quarter last year

“Our third quarter fundamentals were strong with solid revenue and earnings growth,” said Paycom’s founder, chairman and CEO, Chad Richison. “Our innovations have transformed the payroll and HCM industry for 25 years, and we’re excited to deliver even stronger value to our clients for years to come”.

Founded in 1998 as one of the first online payroll companies, Paycom (NYSE:PAYC) provides software for small and medium-sized businesses (SMBs) to manage their payroll and HR needs in one place.

HR Software

Modern HR software has two powerful benefits: cost savings and ease of use. For cost savings, businesses large and small much prefer the flexibility of cloud-based, web-browser-delivered software paid for on a subscription basis rather than the hassle and complexity of purchasing and managing on-premise enterprise software. On the usability side, the consumerization of business software creates seamless experiences whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy-to-use platform.

Sales Growth

As you can see below, Paycom's revenue growth has been strong over the last two years, growing from $256.2 million in Q3 FY2021 to $406.3 million this quarter.

Paycom Total Revenue

Even though Paycom fell short of analysts' revenue estimates, its quarterly revenue still grew a very solid 21.6% year on year. On top of that, its revenue increased $5.16 million quarter on quarter, a strong improvement from the $50.5 million decrease in Q2 2023. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter's guidance suggests that Paycom is expecting revenue to grow 14% year on year to $422.5 million, slowing down from the 30% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 21.4% over the next 12 months before the earnings results announcement.

Our recent pick has been a big winner, and the stock is up more than 2,000% since the IPO a decade ago. If you didn’t buy then, you have another chance today. The business is much less risky now than it was in the years after going public. The company is a clear market leader in a huge, growing $200 billion market. Its $7 billion of revenue only scratches the surface. Its products are mission critical. Virtually no customers ever left the company. See it here.


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. Paycom'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 83% in Q3.

Paycom Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite its recent drop, Paycom still has an excellent gross margin that allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Key Takeaways from Paycom's Q3 Results

Sporting a market capitalization of $13.9 billion, more than $484 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Paycom is attractively positioned to invest in growth.

We struggled to find many strong positives in these results. Its EPS and adjusted EBITDA did beat analysts' expectations, but its full-year revenue and adjusted EBITDA guidance, which are more important because markets are forward-looking, were below estimates. Overall, the results could have been better. The company is down 23.6% on the results and currently trades at $187 per share.

Paycom may have had a tough quarter, but does that actually create an opportunity to invest 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.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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