Online payroll and human resource software provider Paycom (NYSE:PAYC) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 30% year on year to $370.6 million. Guidance for next quarter's revenue was $444 million at the midpoint, which is 1.67% above the analyst consensus. Paycom Software made a GAAP profit of $80 million, improving on its profit of $48.7 million, in the same quarter last year.
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Paycom Software (PAYC) Q4 FY2022 Highlights:
- Revenue: $370.6 million vs analyst estimates of $366.7 million (1.06% beat)
- EPS (non-GAAP): $1.73 vs analyst estimates of $1.49 (16.3% beat)
- Revenue guidance for Q1 2023 is $444 million at the midpoint, above analyst estimates of $436.7 million
- Management's revenue guidance for upcoming financial year 2023 is $1.7 billion at the midpoint, in line with analyst expectations and predicting 23.7% growth (vs 30.3% in FY2022)
- Free cash flow of $87.8 million, up 102% from previous quarter
- Gross Margin (GAAP): 84.1%, down from 86.7% same quarter last year
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 two years, growing from quarterly revenue of $220.9 million in Q4 FY2020, to $370.6 million.
This was a standout quarter for Paycom Software, with the quarterly revenue up 30% year on year, which is above the trend for the company. On top of that, revenue increased $36.4 million quarter on quarter, a very strong improvement on the $17.2 million increase in Q3 2022, and a sign of re-acceleration of growth.
Guidance for the next quarter indicates Paycom Software is expecting revenue to grow 25.6% year on year to $444 million, slowing down from the 29.9% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $1.7 billion at the midpoint, growing 23.7% compared to 30.3% increase in FY2022.
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 Q4.
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 Q4 Results
Sporting a market capitalization of $19.1 billion, more than $400.7 million in cash and with positive free cash flow over the last twelve months, we're confident that Paycom Software has the resources it needs to pursue a high growth business strategy.
It was good to see Paycom Software deliver strong revenue growth this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin and the revenue guidance for next year indicated the growth will be slowing down. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 1.73% on the results and currently trades at $338.8 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.