Paycom (NYSE:PAYC) Misses Q3 Sales Targets, Stock Drops 23.6%

Full Report / October 31, 2023

Online payroll and human resource software provider Paycom (NYSE:PAYC) fell short of analysts' expectations in Q3 FY2023, with revenue up 21.6% year on year to $406.3 million. Next quarter's outlook also missed expectations with revenue guided to $422.5 million at the midpoint, or 6.59% below analysts' estimates. Turning to EPS, Paycom made a non-GAAP profit of $1.77 per share, improving from its profit of $1.27 per share in the same quarter last year.

Paycom (PAYC) Q3 FY2023 Highlights:

  • Revenue: $406.3 million vs analyst estimates of $411.1 million (1.16% miss)
  • EPS (non-GAAP): $1.77 vs analyst estimates of $1.61 (10.2% beat)
  • Revenue Guidance for Q4 2023 is $422.5 million at the midpoint, below analyst estimates of $452.3 million
  • Free Cash Flow of $46.3 million, down 26.6% from the previous quarter
  • Gross Margin (GAAP): 83%, down from 86.8% in the same quarter last year

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 two years, growing from $256.2 million in Q3 FY2021 to $406.3 million this quarter.

Paycom Total Revenue

Even though Paycom fell short of analysts' revenue estimates, its quarterly revenue still grew a very solid 21.6% year on year. On top of that, its revenue increased $5.16 million quarter on quarter, a strong improvement from the $50.5 million decrease in Q2 2023. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter's guidance suggests that Paycom is expecting revenue to grow 14% year on year to $422.5 million, slowing down from the 30% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 21.4% 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 83% in Q3.

Paycom Gross Margin (GAAP)

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 recent drop, Paycom still has an excellent gross margin that 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 $46.3 million in Q3, up 6.74% year on year.

Paycom Free Cash Flow

Paycom has generated $302.7 million in free cash flow over the last 12 months, an impressive 18.5% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.

Key Takeaways from Paycom's Q3 Results

With a market capitalization of $13.9 billion, a $484 million cash balance, and positive free cash flow over the last 12 months, we're confident that Paycom has the resources needed to pursue a high-growth business strategy.

We struggled to find many strong positives in these results. Its EPS and adjusted EBITDA did beat analysts' expectations, but its full-year revenue and adjusted EBITDA guidance, which are more important because markets are forward-looking, were below estimates. Overall, the results could have been better. The company is down 23.6% on the results and currently trades at $187 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.

There are several reasons why we think Paycom is a great business. While we'd expect growth rates to moderate from here, its revenue growth has been solid over the last two years. Additionally, its impressive gross margins indicate excellent business economics, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

The market is certainly expecting long-term growth from Paycom given its price to sales ratio based on the next 12 months is 7.2x. And looking at the tech landscape today, Paycom's qualities stand out, we think that the multiple is justified and we still like it at this price.

Wall Street analysts covering the company had a one-year price target of $360.4 per share right before these results, implying that they saw upside in buying Paycom even in the short term.

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