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Paycom (PAYC) Up 20.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Paycom Software (PAYC). Shares have added about 20.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Paycom due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Paycom Q3 Earnings Beat Estimates, Revenues Miss

Paycom reported mixed third-quarter fiscal 2023 results, wherein non-GAAP earnings per share surpassed the Zacks Consensus Estimate, but revenues missed the same.

The online payroll and human resource technology provider reported non-GAAP earnings of $1.77 per share in the third quarter, beating the Zacks Consensus Estimate of $1.62. The bottom line improved 39.4% from $1.27 per share reported in the year-ago quarter.

In the third quarter of 2023, Paycom reported revenues of $406.3 million, missing the consensus mark of $411 million. The top line improved 21.6% year over year. The top-line figure also fell short of management’s previous guidance of $410-$412 million, mainly due to weaker-than-anticipated service revenues and unscheduled payroll runs.

Quarter in Detail

Paycom’s Recurring revenues (representing 98.1% of the total revenues) improved 21.5% to $398.8 million in the third quarter. Our estimates for the company’s Recurring revenues were pegged at $404 million.

The company’s revenues from the Implementation and Other segment improved to $7.5 million from $6 million in the year-ago quarter and contributed 1.9% to total sales. Our estimates for the division’s revenues were pegged at $6.9 million.

Adjusted gross profits climbed 21.3% from the year-ago period to $340.2 million. However, the adjusted gross margin contracted 20 basis points (bps) on a year-over-year basis to 83.7%.

Paycom’s adjusted EBITDA increased 23.7% year over year to $165.6 million. The adjusted EBITDA margin expanded 310 bps to 40.8%.

Balance Sheet & Cash Flow

Paycom exited the third quarter with cash and cash equivalents of $484 million compared with $536.5 million recorded in the previous quarter. The company’s balance sheet comprised net long-term debt of $29 million, which remained flat sequentially.

In the third quarter of 2023, PAYC generated an operating cash flow of approximately $98.6 million, paid out $21.6 million in dividends and bought back $76.5 million worth of its common stock. During the first nine months of 2023, the company generated an operating cash flow of approximately $351 million.

The company announced its first-ever dividend policy in May 2023. PAYC intends to pay out a quarterly cash dividend of 37.5 cents per share or $1.50 per share annually. In the first nine months of 2023, the company has paid $43.4 million in dividend.

Lowered FY23 Guidance

Paycom lowered its guidance for the full-year 2023. The company now projects revenues between $1.679 billion and $1.684 billion, down from the earlier range of $1.715-$1.717 billion. The forecast range for adjusted EBITDA has been revised downward to $712-$717 million from the $722-$724 million band anticipated previously.

For the third quarter of 2023, Paycom forecasts revenues and adjusted EBITDA in the ranges of $420-$425 million and $169-$174 million, respectively.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

The consensus estimate has shifted -12.26% due to these changes.

VGM Scores

At this time, Paycom has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Paycom has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Paycom is part of the Zacks Internet - Software industry. Over the past month, Pinterest (PINS), a stock from the same industry, has gained 11.2%. The company reported its results for the quarter ended September 2023 more than a month ago.

Pinterest reported revenues of $763.2 million in the last reported quarter, representing a year-over-year change of +11.5%. EPS of $0.28 for the same period compares with $0.11 a year ago.

Pinterest is expected to post earnings of $0.50 per share for the current quarter, representing a year-over-year change of +72.4%. Over the last 30 days, the Zacks Consensus Estimate has changed +9.3%.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #1 (Strong Buy) for Pinterest. Also, the stock has a VGM Score of D.

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