Paycom (NYSE:PAYC) Posts Q1 Sales In Line With Estimates But Stock Drops On Weak Q2 Guidance

Full Report / May 01, 2024

Online payroll and human resource software provider Paycom (NYSE:PAYC) reported results in line with analysts' expectations in Q1 CY2024, with revenue up 10.7% year on year to $499.9 million. On the other hand, next quarter's revenue guidance of $436 million was less impressive, coming in 1.4% below analysts' estimates. It made a non-GAAP profit of $2.59 per share, improving from its profit of $2.46 per share in the same quarter last year.

Paycom (PAYC) Q1 CY2024 Highlights:

  • Revenue: $499.9 million vs analyst estimates of $496.2 million (small beat)
  • EPS (non-GAAP): $2.59 vs analyst estimates of $2.47 (4.9% beat)
  • Revenue Guidance for Q2 CY2024 is $436 million at the midpoint, below analyst estimates of $442.1 million
  • The company reconfirmed its revenue guidance for the full year of $1.87 billion at the midpoint
  • Gross Margin (GAAP): 84.3%, down from 88.2% in the same quarter last year
  • Free Cash Flow of $100.9 million, up 30.1% from the previous quarter
  • Market Capitalization: $10.74 billion

Founded in 1998 as one of the first online payroll companies, Paycom (NYSE:PAYC) provides software for small and medium-sized businesses (SMBs) to manage their payroll and HR needs in one place.

Human Capital Management (HCM) software is meant to streamline mundane, but vital, business functions like keeping attendance, running payroll, and keeping compliant with shifting Federal and local government taxes and labor laws. For many small and medium sized businesses, these are often handled by their accountant which is an unnecessarily expensive use of resources, or QuickBooks style spreadsheets which don’t have sufficient functionality.

Using a single database or system of records, Paycom is a cost effective solution that allows SMBs to simplify the management of all their HR operations throughout an employee’s lifecycle, from when they first apply for a job, to onboarding and managing performance reviews, all the way through collecting retirement benefits.

Paycom has useful functionality that differentiates it from rivals, in part because the company regularly iterates its platform based on customer feedback. One example is that HR managers can automatically share open positions to career sites, which funnels qualified applicants back to the company to easily schedule interviews and conduct background checks. Another is the ability for businesses to conduct self evaluations based on analytics that pull together performance reviews and other HR data from across the company.

HR Software

Modern HR software has two powerful benefits: cost savings and ease of use. For cost savings, businesses large and small much prefer the flexibility of cloud-based, web-browser-delivered software paid for on a subscription basis rather than the hassle and complexity of purchasing and managing on-premise enterprise software. On the usability side, the consumerization of business software creates seamless experiences whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy-to-use platform.

Other providers of HR solutions for small and medium-sized businesses include Paychex (NASDAQ:PAYX), ADP (NASDAQ:ADP), Asure, (NYSE:ASUR) and Paylocity (NASDAQ:PCTY).

Sales Growth

As you can see below, Paycom's revenue growth has been strong over the last three years, growing from $272.2 million in Q1 2021 to $499.9 million this quarter.

Paycom Total Revenue

This quarter, Paycom's quarterly revenue was once again up 10.7% year on year. We can see that Paycom's revenue increased by $65.29 million quarter on quarter, which is a solid improvement from the $28.29 million increase in Q4 CY2023. Shareholders should applaud the re-acceleration of growth.

Next quarter's guidance suggests that Paycom is expecting revenue to grow 8.7% year on year to $436 million, slowing down from the 26.6% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.9% over the next 12 months before the earnings results announcement.


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'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 84.3% in Q1.

Paycom Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.84 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite its decline over the last year, Paycom'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.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Paycom's free cash flow came in at $100.9 million in Q1, roughly the same as last year.

Paycom Free Cash Flow

Paycom has generated $287.9 million in free cash flow over the last 12 months, a solid 16.5% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from Paycom's Q1 Results

It was good to see Paycom beat analysts' billings expectations this quarter. On the other hand, its revenue guidance for next quarter missed analysts' expectations and its gross margin decreased. Overall, this was a mixed quarter for Paycom. The company is down 9.3% on the results and currently trades at $169 per share.

Is Now The Time?

Paycom may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Paycom is a solid business. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last three years. On top of that, its impressive gross margins indicate excellent business economics and its efficient customer acquisition hints at the potential for strong profitability.

Given its price-to-sales ratio of 5.5x based on the next 12 months, the market is certainly expecting long-term growth from Paycom. There are definitely a lot of things to like about Paycom, and looking at the tech landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $204 right before these results (compared to the current share price of $169), implying they see short-term upside potential in Paycom.

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