Reviewing Paycom's Q4 Report

Paycom (PAYC) recently reported its fourth quarter and fiscal year 2023 results.

By and large, things continue to look strong for this payroll and HR services provider. Revenues grew 30% for both the quarter and the full year, with 98% of sales categorized as "recurring". Total client count increased 8%, while managed employee headcount grew 14%, a good example of how Paycom grows with its clients. Operating margins came in at 27.5%, a very good figure and well over last year's 24.0% figure.

Management highlighted two trends for future growth, which we also noted in our initial review of the company. The first is BETI, an employee self-service payroll solution that cuts down dramatically on payroll errors. Considering the average company has a 20% payroll inaccuracy rate that can cost over $300 per error, this is a strong value proposition on both the financial and employee satisfaction fronts.

The second is a nice development - an increase in larger customers. Paycom noted that the fastest growing customer cohort is clients with more than 2,000 employees. I like this development - larger companies are less likely to go out of business than SMBs, and the bureaucratic nature of these organizations make switching vendors a slower process. A larger average client has allowed Paycom to increase its revenue retention rate from 91% to 93%, and could see even more gains going forward.

One thing to watch is a higher tax rate - Paycom's came in at nearly 28% last year, well above the 20-23% that had been the norm. This also impacted free cash flow, which converted at just 20% of revenues, below the 5 year average and my expectation of 24%.

I did make a few downward adjustments to the model to account for this, but it doesn't affect the fair value estimate for PAYC, which remains $321. The stock trades right about at fair value currently. It will remain on the Watch List.