The COVID-19 pandemic hit many companies hard, and that’s especially true for those who rely on the health of small businesses like Paycom (NYSE:PAYC). In this Fool Live video clip, recorded on Feb. 11, Fool.com contributor Brian Withers discusses the fintech company’s most recent quarter and how the pandemic has affected the company’s growth.
Brian Withers: Paycom until this year was posting 30% year-over-year gains. Really solid grower. It’s been a big winner for lots of Fools, but the revenue growth slowed down. It didn’t go negative but it’s slowed considerably from the 30s down to the 20s. Last quarter was 12%. This quarter actually, they just reported Q4. Sequentially, it went up. That could be encouraging.
Their client growth year-over-year, up 17%. So new customers, that’s great. Gross margins continued to stay stable so that the product that they deliver is very profitable one for them but we’ll see some costs on the impact the bottom line, I’ll show you that later. They’re projecting next year things will improve, they’ll get back to 20% growth but it’s more back-end loaded and they’ll hit $1 billion dollars in revenue for the first time.
As Brian mentioned. Similar to HealthEquity (NASDAQ:HQY), Paycom gets a portion of its revenue through just the number of employees that are using the Paycom system. Paycom is in HR. They started in pay obviously and getting employees paid and now they have a full functioning HR system that helps companies manage employees from hiring all the way through the lifecycle determination and beyond.
Their admin expenses which I’ll show you in detail went up and so obviously the net income went down. Here’s a bunch of numbers for the company. I put in last year’s Q4, last quarter so you could see sequential changes which is important as we go through coronavirus and we see how companies are doing quarter-to-quarter and then you can also see the year-over-year change. Quarter-over-quarter, they went up 12%. Year-over-year is 14%. Gross profit, similar deals. Gross margin stayed the same.
Operating income, really took a hit, as well as the net income and I’ll show you why in a little bit. Cash flows from operations barely improved and this is an interesting one. It just kind of got mentioned in the conference call.
Part of the reason this happened was before the coronavirus, they started building a second campus in Dallas. Their headquarters is Oklahoma city but they’re building a campus that could eventually house 1,000 people and they are having to put in cash, that’s a cash outlay for them and for capital expenses as well and so that was a drag on their cash flow and it just seemed like this is exactly the wrong thing to do at exactly the wrong time. It’ll be interesting to see how they come back to the office. They’re totally virtual right now, so it’ll be interesting when that building comes up, how they’re going to utilize their new facility. Net percent, I meant to change this. This is cash flow percent of full year revenue, so that cash flow has declined, that percentage has declined.
Cash is in good shape, debt’s in good shape. Their annual retention rate, this is for clients, stayed flat and their client count went up about 17%. Here’s the part that I’m a little worried about. You look at the revenue growth of 14% year-over-year in the quarter and the similar rate for the full year, so this is the quarter and this is the full year, these expenses are up considerably, sales and marketing up 22%, R&D up almost 40%.
I don’t mind the R&D expenses as much, but if your marketing is increasing, and look at this for the full year, 30%, and you’ve only dropped to the bottom line 14 and you’re projecting 20% growth next year, they talked a lot about getting the most customer demos they’ve ever had and being a very effective marketing efforts for this money but I don’t know that I’ve seen it in the growth rates. They also don’t share billings numbers or remaining performance obligations, so you can’t really see how many customers are signing up for contracts. When you’re growing at 30+ percent year-over-year, not having that transparency doesn’t matter, but when you start to slow down, these are things that as an investor I want to see.
The G&A, I don’t really understand what that is and why that’s up so much. None of the analysts poked on this on the call. I’m disappointed that this is up 32%. I appreciate investing in a downturn, but this is going to drag on their profits next year. Total revenues next year, this is Q1, up 11.5-12% and they are looking at 20 percent for the full year. This could get better. It all really depends on the economy and how quickly companies come back. They mentioned that they are seeing a headwind of $2 million in recurring revenue a week because of their customers and the loss on their employee base. A company in a little bit of a turnaround, saw the management team long term winter, I think, but this next year it’s going to be challenging for them.
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