Company Reports

We maintain our $260 fair value estimate and Very High Morningstar Uncertainty Rating for narrow-moat Paycom following the release of first-quarter results that track our full-year expectations. Despite comfortably beating FactSet consensus earnings estimates, Paycom shares tanked more than 10% intraday after the release. We believe there is general investor unease about the firm’s growth prospects, given revenue cannibalization woes. This was amplified by vague management commentary on strategic initiatives to drive greater product adoption and fend off client attrition. While operating uncertainty is elevated, we believe Paycom's unchanged near-term guidance is achievable, and we view the shares as attractive on a risk-adjusted basis relative to our valuation.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its Beti self-service payroll module.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

Narrow-moat Paycom reported a mixed fourth quarter and full-year fiscal 2024 result, which met our top-line and profitability expectations. However, amid a strategic reset including a deemphasis on flagship self-service payroll solution Beti, we have lowered our long-term profitability assumptions and our fair value estimate to $260 from $295. Following difficulty converting remaining clients to Beti, nonrecurring service revenue cannibalization headwinds and deteriorating revenue retention, we expect Paycom to ramp up product innovation and sales investment to expand the suite of automation solutions and reaccelerate topline growth. This shift in focus comes alongside an announced leadership change, with Chief Operating Officer Chris Thomas commencing as Co-CEO alongside Paycom founder Chad Richison.

We lower our fair value estimate for Paycom to $295 from $370 per share following the release of mixed third-quarter results and underwhelming preliminary guidance for fiscal 2024. Paycom is facing ongoing difficulty converting the remaining third of existing clients to the firm’s flagship self-service payroll solution, Beti, while simultaneously facing headwinds from nonrecurring service revenue cannibalization. Following the result, we have lowered our long-term revenue per client assumptions, dragging on both top-line growth and profitability expectations. While the outlook has soured for Paycom, we continue to believe the business benefits from high customer switching costs underpinning our narrow moat rating, and we view the firm as well placed to take a further share of the expansive payroll and HCM market. Despite a sharp fall post-release as low as $166, Paycom shares remain attractive relative to our updated fair value estimate.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

We lower our fair value estimate for narrow-moat Paycom to $370 from $388 per share following the release of mixed second-quarter results. While top-line growth and updated fiscal 2023 guidance broadly tracks our forecasts, the near-term profitability outlook disappointed due to slower-than-expected conversion to Paycom's flagship self-service payroll solution, Beti. We suspect constrained budgets and elongated approval processes at existing clients amid uncertain macroeconomic conditions is hindering Paycom's conversion efforts despite an attractive value proposition. However, in our view, the market is overacting to these cyclical headwinds, with shares falling sharply post-release, creating an opportunity for investors to purchase Paycom shares at a discount to our updated valuation.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

We maintain our $388 fair value estimate for narrow-moat Paycom following a strong start to fiscal 2023. The firm posted another impressive quarter with new client wins, greater module attachment, and a continued shift upmarket driving revenue growth of 28% year on year. Paycom continues to benefit from a greater contribution from ultra-high margin interest income revenue, however, this was offset by elevated investment in product innovation and marketing to attract new clients and support global expansion, resulting in broadly flat operating margins year on year.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

Narrow-moat Paycom rounded out 2022 with consistent sales momentum as the firm’s laser focus on automation continues to attract clients and drive higher module attachment. Following a consistent shift upmarket, we raise both our 2023 and longer-term revenue growth forecasts to reflect higher than previously expected revenue per client growth. For 2023, we now expect growth at the low end of guidance at about 23%, versus 20% previously, primarily driven by new clients wins. However, we expect increased exposure to larger clients who typically wield significant bargaining power to limit margin upside. As a result, we trim our profitability outlook, and now expect operating margins of 29.6% in 2027, down from our prior estimate of 34.1%. Our trimmed profitability outlook is offset by time value of money, resulting in an unchanged fair value estimate of $388 per share. At current prices, shares trade at an attractive 17% discount to our valuation.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the recent rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the recent rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

Despite challenging macroeconomic conditions, narrow-moat Paycom remains on track to report healthy fiscal 2022 growth. The company reported continued momentum in the third quarter of fiscal 2022, with a combination of strong sales and further skew upmarket driving robust revenue growth of 30% year on year. A greater contribution from ultrahigh margin interest income revenue and greater operating leverage on a larger client base supported impressive year-on-year adjusted EBITDA margin expansion of 270 basis points to 37.7%, partly offset by investment in internal labor to support a growing client base.

Narrow-moat Paycom enjoyed continued momentum in the second quarter of fiscal 2022, with a combination of strong sales execution and a further skew upmarket driving a robust 31% year-on-year increase in revenue. Paycom’s employee self-service centric offering continues to attract new clients, and greater module uptake has supported higher revenue per client and year-on-year adjusted EBITDA margin expansion of 180 basis points during the quarter. While labor markets have remained resilient to date, we have adjusted our macroeconomic forecasts to factor in a near-term slowdown before a recovery in 2024. However, the minor dilutive impact of this update is offset by time value of money, and we maintain our $388 fair value estimate. At current prices, shares trade at an attractive 8% discount to our valuation.

Paycom's unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the recent rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.

Paycom enjoyed robust first-quarter fiscal-year 2022 results, underpinned by healthy client growth driving a 30% increase in year-on-year recurring revenue and a modest uptick in seasonal form filing revenue. It appears that Paycom’s investment in extensive and ongoing broad-based marketing campaigns is bearing fruit and supporting impressive growth. We believe greater uptake of features including self-service payroll, a continued shift upmarket, and normalizing seasonal revenue supported higher revenue per client, steady to improved revenue retention, and operating margin improvement of 100 basis points year on year to about 36%. While the result was broadly in line with our expectations, we increase both our revenue and adjusted EBITDA forecasts by about 1% each for fiscal 2022, marginally above updated guidance. However, this is immaterial to our valuation. Despite rallying after the result, Paycom shares currently trade at an attractive 22% discount to our unchanged $388 fair value estimate.

Paycom's unified platform appeals to midsize and enterprise clients who prefer an all-in-one payroll and HCM solution. The company's platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivises clients to contain their HCM solutions within its unified platform by offering add on modules including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complimentary analytics tools for clients and the recent roll out self-service payroll module, BETI.

Paycom delivered robust fiscal 2021 results underpinned by a bounceback in labor markets, strong sales execution following an extensive marketing campaign, and record revenue retention. Top-line growth was aided by a continued shift upmarket to larger clients and by taking greater share of wallet through higher module uptake. Paycom continued to invest for growth through research and development expenditure and hiring service personnel, which limited operating margin expansion over the period. But the company’s results were in line with our expectations, and our medium-term forecasts are broadly unchanged. We marginally lift our fair value estimate by 3% to $388 per share due to time value of money. Despite shares rallying after the result, Paycom screens as undervalued relative to our updated valuation.