Online payroll and human resource software provider Paycom (NYSE:PAYC) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 26.6% year on year to $401.1 million. The company also expects next quarter's revenue to be around $411 million, roughly in line with analysts' estimates. Paycom Software made a GAAP profit of $64.5 million, improving from its profit of $57.4 million in the same quarter last year.
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Paycom Software (PAYC) Q2 FY2023 Highlights:
- Revenue: $401.1 million vs analyst estimates of $398.3 million (small beat)
- EPS (non-GAAP): $1.62 vs analyst estimates of $1.60 (1.34% beat)
- Revenue Guidance for Q3 2023 is $411 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year of $1.72 billion at the midpoint
- Free Cash Flow of $63.1 million, down 40.2% from the previous quarter
- Gross Margin (GAAP): 83.2%, down from 87.5% in the same quarter last year
“We delivered another strong quarter, which was highlighted by strong revenue growth and margin expansion as demand for our differentiated HR and payroll solution 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.
As you can see below, Paycom Software's revenue growth has been over the last two years, growing from $242.1 million in Q2 FY2021 to $401.1 million this quarter.
This quarter, Paycom Software's quarterly revenue was once again up a very solid 26.6% year on year. However, the company's revenue actually decreased by $50.5 million in Q2 compared to the $81 million increase in Q1 2023. Regardless, we aren't too concerned because Paycom Software's sales seem to follow a seasonal pattern and management is guiding for revenue to rebound in the coming quarter.
Next quarter's guidance suggests that Paycom Software is expecting revenue to grow 23% year on year to $411 million, slowing down from the 30.4% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 21.5% over the next 12 months.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 83.2% in Q2.
That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite its decline over the last year, Paycom Software's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Key Takeaways from Paycom Software's Q2 Results
Sporting a market capitalization of $21.3 billion, more than $536.5 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Paycom Software is attractively positioned to invest in growth.
There were not many surprised in Paycom's results, revenue came in line with what analysts were expecting and free cash flow was decent. On the other hand, its deteriorating gross margin was a negative. Overall, this was an ok quarter for Paycom Software. But the market was likely expecting more and the company is down 5.6% on the results and currently trades at $350 per share.
Paycom Software may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research 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 50% 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 in this report.