Online payroll and human resource software provider Paycom (NYSE:PAYC) reported Q3 FY2022 results that beat analyst expectations, with revenue up 30.4% year on year to $334.1 million. Guidance for next quarter's revenue was $367 million at the midpoint, 2.89% above the average of analyst estimates. Paycom Software made a GAAP profit of $52.1 million, improving on its profit of $30.3 million, in the same quarter last year.
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Paycom Software (PAYC) Q3 FY2022 Highlights:
- Revenue: $334.1 million vs analyst estimates of $328.2 million (1.79% beat)
- EPS (non-GAAP): $1.27 vs analyst estimates of $1.18 (7.6% beat)
- Revenue guidance for Q4 2022 is $367 million at the midpoint, above analyst estimates of $356.6 million
- Free cash flow of $43.3 million, up 134% from previous quarter
- Gross Margin (GAAP): 83.5%, down from 86.4% same quarter last year
“We delivered high quality third quarter results that further strengthened our world class fundamentals. Our very strong results reflect outstanding execution and robust demand for self-service, user-friendly solutions in payroll and human capital management,” 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.
As you can see below, Paycom Software's revenue growth has been strong over the last two years, growing from quarterly revenue of $196.5 million in Q3 FY2020, to $334.1 million.
This was a standout quarter for Paycom Software, with the quarterly revenue up 30.4% year on year, which is above the trend for the company. On top of that, revenue increased $17.2 million quarter on quarter, a strong improvement on the $36.5 million decrease in Q2 2022, and a sign of acceleration of growth, which is very nice to see indeed.
Guidance for the next quarter indicates Paycom Software is expecting revenue to grow 28.7% year on year to $367 million, in line with the 28.9% 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 22.5% 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.
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 83.5% 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 $20 billion, more than $317.1 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, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 1.91% on the results and currently trades at $350 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.