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Paycom Software (NYSE:PAYC) Exceeds Q2 Expectations, Provides Optimistic Full Year Guidance


Kayode Omotosho /
2022/08/02 4:22 pm EDT
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Online payroll and human resource software provider Paycom (NYSE:PAYC) reported Q2 FY2022 results beating Wall St's expectations, with revenue up 30.8% year on year to $316.9 million. Guidance for next quarter's revenue was $328 million at the midpoint, 2.71% above the average of analyst estimates. Paycom Software made a GAAP profit of $57.3 million, improving on its profit of $52.2 million, in the same quarter last year.

Is now the time to buy Paycom Software? Access our full analysis of the earnings results here, it's free.

Paycom Software (PAYC) Q2 FY2022 Highlights:

  • Revenue: $316.9 million vs analyst estimates of $308.5 million (2.7% beat)
  • EPS (non-GAAP): $1.26 vs analyst estimates of $1.12 (12.4% beat)
  • Revenue guidance for Q3 2022 is $328 million at the midpoint, above analyst estimates of $319.3 million
  • The company lifted revenue guidance for the full year, from $1.33 billion to $1.35 billion at the midpoint, a 1.57% increase
  • Free cash flow of $18.4 million, down 77.6% from previous quarter
  • Gross Margin (GAAP): 84.1%, in line with same quarter last year

“Our very strong second quarter results further illustrate the quality of the fundamentals of our business and the strong demand for our solutions,” said Paycom’s founder 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 strong over the last year, growing from quarterly revenue of $242.1 million, to $316.9 million.

Paycom Software Total Revenue

And unsurprisingly, this was another great quarter for Paycom Software with revenue up 30.8% year on year. But the revenue actually decreased by $36.5 million in Q2, compared to $68.5 million increase in Q1 2022. However, Paycom Software's sales do seem to have a seasonal pattern to them, and since management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.

Guidance for the next quarter indicates Paycom Software is expecting revenue to grow 28% year on year to $328 million, Ahead of the earnings results the analysts covering the company were estimating sales to grow 22.7% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

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 84.1% in Q2.

Paycom Software Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.84 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop that 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 Q2 Results

With a market capitalization of $19.2 billion, more than $279 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.

Paycom Software' revenue guidance for the next quarter looks quite a bit better than what the analysts were expecting. And we were also glad to see good revenue growth. On the other hand, there was a deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 1.69% on the results and currently trades at $344 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.

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 70% 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.