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Paycom Software (NYSE:PAYC) Q3: Beats On Revenue, Provides Optimistic Full Year Guidance


Full Report / November 01, 2022
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Online payroll and human resource software provider Paycom (NYSE:PAYC) announced better-than-expected results in the Q3 FY2022 quarter, 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.

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

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.

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 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.

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 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.

Paycom Software Total Revenue

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.

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 83.5% in Q3.

Paycom Software Gross Margin (GAAP)

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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Paycom Software's free cash flow came in at $43.3 million in Q3, down 26.7% year on year.

Paycom Software Free Cash Flow

Paycom Software has generated $200.3 million in free cash flow over the last twelve months, a solid 15.5% of revenues. This strong FCF margin is a result of Paycom Software asset lite business model and provides it plenty of cash to invest in the business.

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.

Is Now The Time?

When considering Paycom Software, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Paycom Software is a great business. While we would expect growth rates to moderate from here, its revenue growth has been solid, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

Paycom Software's price to sales ratio based on the next twelve months of 12.6x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, Paycom Software's qualities stand out and we still like it at this price.

The Wall St analysts covering the company had a one year price target of $393.1 per share right before these results, implying that they saw upside in buying Paycom Software even in the short term.

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