Online payroll and human resource software provider Paycom (NYSE:PAYC) reported Q1 FY2023 results topping analyst expectations, with revenue up 27.8% year on year to $451.6 million. Guidance for next quarter's revenue was $398 million at the midpoint, which is 1.2% above the analyst consensus. Paycom Software made a GAAP profit of $119.3 million, improving on its profit of $91.9 million, in the same quarter last year.
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Paycom Software (PAYC) Q1 FY2023 Highlights:
- Revenue: $451.6 million vs analyst estimates of $444 million (1.72% beat)
- EPS (non-GAAP): $2.46 vs analyst estimates of $2.36 (4.2% beat)
- Revenue guidance for Q2 2023 is $398 million at the midpoint, above analyst estimates of $393.3 million
- The company reconfirmed revenue guidance for the full year, at $1.71 billion at the midpoint
- Free cash flow of $105.5 million, up 20.1% from previous quarter
- Gross Margin (GAAP): 85.6%, down from 89.1% same quarter last year
“Results for the first quarter of 2023 were excellent, with robust revenue growth from new clients and expanding margins, as demand for automation and our easy-to-use HCM solutions continues to increase,” said Paycom’s founder, chairman and CEO, Chad Richison.
Founded in 1998 as one of the first online payroll companies. Today, Paycom (NYSE:PAYC) provides software for small and medium-sized businesses (SMBs) to manage their payroll and HR needs in one place.
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, Paycom Software's revenue growth has been very strong over the last two years, growing from quarterly revenue of $272.2 million in Q1 FY2021, to $451.6 million.
This quarter, Paycom Software's quarterly revenue was once again up a very solid 27.8% year on year. On top of that, revenue increased $81 million quarter on quarter, a very strong improvement on the $36.4 million increase in Q4 2022, which shows re-acceleration of growth, and is great to see.
Guidance for the next quarter indicates Paycom Software is expecting revenue to grow 25.6% year on year to $398 million, slowing down from the 30.9% 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 21.9% over the next twelve months.
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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. Paycom Software'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 85.6% in Q1.
That means that for every $1 in revenue the company had $0.86 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a great gross margin, that allows companies like Paycom Software to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Key Takeaways from Paycom Software's Q1 Results
With a market capitalization of $17.2 billion, more than $505.6 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
It was good to see Paycom Software deliver strong revenue growth this quarter. Additionally, adjusted EBITDA and free cash flow also beat. We were also glad that the revenue and adjusted EBITDA guidance for the next quarter exceeded analysts' expectations. On the other hand, the deterioration in gross margin was a minor negative. Zooming out, we think this was a solid quarter, showing the company is staying on target. The company is flat on the results and currently trades at $289.99 per share.
Should you invest in Paycom Software right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
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The author has no position in any of the stocks mentioned.