Paycom Software: Profitable Growth, Large TAM, And A Good Product
Summary
- PAYC is a disruptive company that is replacing established players in the payroll market and has a superior platform compared to existing solutions.
- The company's recent 4Q22 results were promising, with strong revenue growth, impressive EBITDA margins, and guidance for continued growth.
- Beti continues to gain traction and drive customer satisfaction and retention, and the company is seeing progress in attracting larger clients.
Drazen_/E+ via Getty Images
Summary
I believe Paycom Software (NYSE:PAYC) is a long after the 4Q22 results. In my opinion, PAYC is a disruptive company that is replacing established players in the enormous payroll market. PAYC competes across a wide range of Human Capital Management software, but I anticipate that its near-term expansion will come from displacing established competitors in the Payroll Outsourcing Services market. Importantly, I think the PAYC platform is superior to the existing/legacy solutions, which is typically characterized by inefficient incumbent solutions such as the integration of HR and Payroll systems using back-end software. From a growth perspective, I think it's important to note that PAYC serves a massive total addressable market, which should ensure the company's continued growth for years to come.
Earnings overview
The results for PAYC in the fourth quarter were very promising. With $371 million in revenue (growing 30% y/y), PAYC outperformed consensus $367 million. The $364 million in recurring revenues is also impressive, though growth slowed slightly from the previous quarter. Rather than the core business, I attribute the decent growth to the inclusion of float revenues within recurring revenues. However, 44% EBITDA margin was the highlight.
Guidance
Revenue was guided to be between $1.7 billion and $1.702 billion, representing growth of 24% year over year at the midpoint. At first glance, the guidance seems to imply core revenue growth slowing to the low 20% range by 2023 if we assume float revenue contributes to low to mid-single digit growth, which is certainly not the best guide. However, I would note that FY22 was a high bar to set comparisons against, so the guided % growth is not based on a like for like comparison. Furthermore, the poor macro environment would undoubtedly affect SMB (more churn), which has an effect on PAYC growth. I wouldn't put too much stock into the FY23 guide, but a worsening in FY24 would raise red flags.
Strong execution
Fourth-quarter revenue growth is further evidence of management's superior ability to execute. Despite high labor and S&M expenditures, the growth was profitable, increasing adj EBITDA to $163.9 million (well above consensus estimates). Adj. EBITDA margins of 44.2% were nearly 500 bps higher than the consensus of 39.5%. The two things we can infer from this are:
- PAYC has a lot of room to expand as the growth rate is still in the 20-30% range.
- In terms of margins, we are not even close to being at peak levels. PAYC is still in the growth and reinvestment mode, which means we are still far from the final leg of “optimizing cost structure for margins”.
Even though the top line results look good, the customer growth rate was only 8% and the NRR dropped by 100bps. While not a big thing now, it is worth mentioning as it could snowball into a red flag.
Beti continues to grow
Beti (PAYC self-service automated payroll processing system) continues to grow in popularity, according to management, which has resulted in a more effective sales model thanks to increased customer satisfaction and reduced product upkeep. Given that half of PAYC's customer base has already adopted Beti, I believe it's safe to say that it's a product that customers value and like. The high return on investment from adopting Beti is likely to be the key reason for this success, I believe. New clients can have half of their employees processing payroll themselves within two months of deployment. In addition, I think this product will aid PAYC in increasing its customer retention rate as customers are embracing more PAYC product (i.e., becoming more reliant). Indeed, as management commented, Beti clients have a much higher retention rate than the company as a whole.
New logos traction
PAYC appears to be doing very well in terms of signing up new logos, which is in contrast to the claims of other major software players (long sales cycle as underlying clients increase budget scrutiny). In particular, management has mentioned that its marketing strategy is still effective, with very strong booked sales. What's even more significant is that PAYC is seeing progress in attracting larger clients, with revenue from clients who have more than 2,000 employees growing the fastest, up 60% year-over-year. I anticipate this trend to persist, especially since the company is emphasizing acquiring new clients through its Beti product, which is becoming the first point of contact for enterprise customers.
Conclusion
I believe that PAYC is poised for long-term growth, particularly in the payroll outsourcing services market. The recent 4Q22 results were promising, with strong revenue growth and impressive EBITDA margins. The company's Beti product continues to gain traction and drive customer satisfaction and retention. Additionally, PAYC's focus on new logo adds is proving successful, particularly among larger clients. Overall, I am optimistic about PAYC's future and believe that the company's superior platform and large total addressable market will drive continued growth for years to come.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.