4 reasons to invest in Paycom software and 1 reason not to

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With increased revenue retention and new products to offer customers, Paycom (PAYC 3.43% ) had a good quarter. In this music video from “The Earnings Show” on Motley Fool Live, recorded on February 11Fool contributors Trevor Jennenewine and Brian Withers discuss the HR software company’s promising outlook for investors.

Trevor Jennewin: Some highlights with the business district. They have over 33,875 customers now, an increase of 9%. Management noted that this was about 5% of its total addressable market. There is still a lot of room for this business. Perhaps even more impressively, the company’s revenue retention rate reached 94%, up from 93% last year, which is particularly impressive.

This company mainly serves small and medium-sized businesses. They’ve recently expanded their target from 5,000 employee companies to 10,000 employee companies, but they’ve really started in that small to medium business segment and there’s a lot of turnover there. To maintain 94% revenue retention, that’s a big number.

During the call, management said they started seeing that number increase over the last six years or so when they started introducing the self-service feature. One of the attractions of Paycom is that there are many self-service features with the platform so employees can come in and manage their own benefits, request time off, take care of other compliance using this self-service application. It reduces the burden on HR admins, they have less work to do, it helps the business run a little more efficiently.

One of the most recent products of this same line is BETI. BETI is the industry’s first self-service payroll platform. Employees can actually come in, review their payroll before it’s run. And it really serves two purposes. HR does less work up front and because employees are more likely to catch errors or notice discrepancies than an administrator. It also reduces the number of corrections to be made after payroll processing.

Management noted that this product is rapidly gaining traction. In fact, it was recognized at an HR technology conference as the best HR product of the year. It’s great to see a new product gain traction quickly. All Paycom customers use their payroll software, so it’s good to see it as a solid core product.

Also in the past five months, the company has opened five new sales offices and this is an important part of the company’s growth strategy. It’s good to see the execution on that front, but as I mentioned, the company currently has around 5% of its addressable market. There is plenty of room to grow, management continues to plan, to open a new sales office. They continue to open new sales offices and this will be an integral part of their strategy in the future.

As to whether I had any concerns about the quarter, maybe the impact of inflation, as I mentioned earlier the company works with small and medium-sized businesses and those businesses might be a bit more sensitive to supply chain disruptions, or they might see more of a reduction in consumer spending due to inflation. Since Payroll generates some of its money based on a per-person business model, any decrease in hiring could be a headwind for Paycom.

But all things considered it was a strong quarter Brian I think the market accepted the stock went up it added about a billion dollars to its market cap in the last two days still not beating the market for the past 12 months, but I like this business. I think they have shown good results.

Brian Wither: Just for people who are wondering what BETI means, it’s a better transaction interface for employees. This then allows employees to do a lot of things on their own without having to go through an HR professional. The stock has been all over the place and I think it kind of serves the small business community that’s been impacted by COVID and the omicron wave or whatever. I know you are a shareholder, looking at where the company is today, is this a good time to add?

Jennewin: You know what? I’m not going to make any predictions about next year, but if I look five years, 10 years later, I think this company is a long-term market leader.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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