Online payroll and human resource software provider Paycom (NYSE:PAYC) reported Q3 FY2021 results that beat analyst expectations, with revenue up 30.3% year on year to $256.1 million. The company expects that next quarter's revenue would be around $275.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Paycom Software made a GAAP profit of $30.3 million, improving on its profit of $27.4 million, in the same quarter last year.
Paycom Software (PAYC) Q3 FY2021 Highlights:
- Revenue: $256.1 million vs analyst estimates of $250.3 million (2.34% beat)
- EPS (non-GAAP): $0.92 vs analyst estimates of $0.90 (1.94% beat)
- Revenue guidance for Q4 2021 is $275.5 million at the midpoint, above analyst estimates of $272.9 million
- Free cash flow of $59.2 million, up from $19.5 million in previous quarter
- Gross Margin (GAAP): 83.3%, down from 87.6% 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.
Paycom benefits from 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.
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).
As you can see below, Paycom Software's revenue growth has been strong over the last year, growing from quarterly revenue of $196.5 million, to $256.1 million.
This was a standout quarter for Paycom Software, with the quarterly revenue up an absolutely stunning 30.3% year on year, which is above average for the company. On top of that, revenue increased $14 million quarter on quarter, a strong improvement on the $30 million decrease in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.
Analysts covering the company are expecting the revenues to grow 22.8% over the next twelve months, although estimates are likely to change post earnings.
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, licences, technical support and other necessary running expenses was at 83.3% 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 $31.6 billion, more than $230.9 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.
It was good to see Paycom Software deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, it seems to us that this was a decent quarter, in line with expectations. The company is down 4.18% on the results and currently trades at $530 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. Its revenue growth has been a little slower, and analysts believe that rate will remain roughly steady. But on a positive note, its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.
The market is certainly expecting long term growth from Paycom Software given its price to sales ratio based on the next twelve months is 26.4. But looking at the tech landscape today, Paycom Software's qualities stand out and we still like it at this price.
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