Online payroll and human resource software provider Paycom (NYSE:PAYC) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 30.3% year on year to $256.1 million. The company expects that next quarter's revenue would be around $275.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Paycom Software made a GAAP profit of $30.3 million, improving on its profit of $27.4 million, in the same quarter last year.
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Paycom Software (PAYC) Q3 FY2021 Highlights:
- Revenue: $256.1 million vs analyst estimates of $250.3 million (2.34% beat)
- EPS (non-GAAP): $0.92 vs analyst estimates of $0.90 (1.94% beat)
- Revenue guidance for Q4 2021 is $275.5 million at the midpoint, above analyst estimates of $272.9 million
- Free cash flow of $59.2 million, up from $19.5 million in previous quarter
- Gross Margin (GAAP): 83.3%, down from 87.6% same quarter last year
“We delivered very strong third quarter results, which is a reflection of the investments we’ve made in product innovation, sales and marketing, and providing world-class service,” 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.
Paycom benefits from 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.
Sales Growth
As you can see below, Paycom Software's revenue growth has been strong over the last year, growing from quarterly revenue of $196.5 million, to $256.1 million.
This was a standout quarter for Paycom Software, with the quarterly revenue up an absolutely stunning 30.3% year on year, which is above average for the company. On top of that, revenue increased $14 million quarter on quarter, a strong improvement on the $30 million decrease in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.
Analysts covering the company are expecting the revenues to grow 22.8% over the next twelve months, although estimates are likely to change post earnings.
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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, licences, technical support and other necessary running expenses was at 83.3% in Q3.
That means that for every $1 in revenue the company had $0.83 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 Q3 Results
With a market capitalization of $31.6 billion, more than $230.9 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. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin and guidance for next quarter was just in line with estimates. Overall, it seems to us that this was an OK quarter for Paycom Software. The company is down 5.09% on the results and currently trades at $525 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.