Paycor HCM: A Product That Fits The HCM Needs Of SMEs Today (NASDAQ:PYCR)

Human resources

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Summary

I recommend a buy rating on Paycor HCM (NASDAQ:PYCR). Over the years, this SaaS company has focused on SMBs, offering solutions to help them achieve regulatory compliance, optimize their human capital management [HCM] and payroll processes, enhance employee engagement, and secure their employees’ data. With its innovative cloud system and advanced analytics, PYCR offers a full suite of HCM solutions to address the issue of today’s SMBs being forced to settle for inadequate solutions. Despite the company’s associated risks related to recruiting more salespeople, competition, and over-indexed SMBs, it has good potential to maintain its revenue growth. I expect In FY24, PYCR could be worth $6.5 billion or a stock price of $36.99.

Company overview

PYCR is a SaaS company that offers solutions for small and medium-sized enterprises. Paycor’s set of solutions helps businesses meet regulatory requirements, speed up HCM and payroll processes, and improve the employee experience. It also acts as a central, encrypted hub for all employee records.

Times have changed

Over the past three decades, changes in workforce demographics, employee expectations, and technological advancements have caused corresponding shifts in the responsibilities of corporate leaders, employees, and human resource management practices. Consequently, human resource management has evolved from a payroll-centric cost center into a highly strategic role with a laser focus on talent management as a key aspect of corporate competitiveness. This shift in strategy has been reinforced by the widespread COVID-19 pandemic. Company efforts to keep remote workers happy and productive have placed a high priority on the human resources department. As a result of these changing needs, HCM tools have become more strategic platforms that show company insights and give top-level management the power to make decisions based on data.

In addition, we can see that SMBs are hampered by the ever-changing regulatory structures. Companies must comply with a plethora of state and municipal tax laws, as well as industry-specific employment regulations. Consequently, businesses demand HCM systems that help them maintain a strong compliance foundation and simplify reacting to complicated legal developments, such as the advent of new types of employee leave filing.

Existing solutions cannot serve the needs of companies today

Existing HCM systems usually offer either “incomplete product suites” that deliver only a chunk of the capabilities SMBs need or “full suites” with limited functionality that are capable of addressing only the most fundamental use cases. Many times, these systems lack modern safety and compliance measures and instead rely on outdated technology like batch processing engines. Users of these platforms that aren’t well-made often have no choice but to use more third-party solutions or go back to managing processes by hand.

To make things worse, existing HCM suites often consist of a collection of disparate, standalone applications that only work somewhat well together. This fragmentation makes it challenging for SMBs to standardize on a single system of record for employee data and prevents real-time synchronization of data across numerous HCM apps. Because of this, SMBs often have big compliance problems, like late payroll, low employee engagement, not enough reporting, and bad data security, because they have to use manual processes that are not only redundant but also prone to mistakes to track and handle employee data.

The other problem that comes with a disparate set of solutions is integration with third-party systems. The majority of the currently available HCM solutions are constructed on rigid, closed technological frameworks that are not meant to interact with third-party software. Because of the inflexibility of these systems, it’s often required for SMBs to manually extract and import data in order to complete routine operations, making it difficult to link HCM solutions with other critical systems of record such as ERP and POS apps. Because of this, businesses can’t build digital ecosystems that can change to meet the needs of their growing businesses.

Last but not least, it’s difficult to use. Many of the available solutions have outdated and restrictive user interfaces that lack the consumer-friendly intuitiveness of modern SaaS systems. Both employees and managers may need extensive training before they can make effective use of such solutions. Another issue with many of the currently available HCM suites is that, because of inconsistent functionality and user experience, they frequently require a new login for each application, regardless of the device being used. Thus, HR professionals and team leaders frequently resort to tedious manual methods to carry out routine HR duties and aid in vexing employee issues.

PYCR offers a comprehensive suite of HCM solutions

I believe PYCR’s HCM suite provides functionality that’s top-notch in the market. This enables business leaders to differentiate their approach to people management to better realize their organization’s strategic objectives. Paycor’s HCM solutions center around the following important components:

  1. Core HCM and Payroll. Payroll processing is propelled by a swift and precise calculating engine that responds to real-time updates. Leaders can save time and effort by using workflows and approval systems that are modern and well-designed. These systems can streamline and automate processes, which saves time and effort.
  2. Workforce Management. Real-time payroll synchronization and a number of other features, such as flexible time entry, overtime calculation, and scheduling, help leaders keep costs in check and increase output.
  3. Benefits Administration. With this cutting-edge decision support, business owners can make it easier to manage and spend their company’s benefits by making it easier for carriers to connect and by letting them set up complex plans.
  4. Talent Management. Through a system of integrated compensation and performance management that includes sophisticated goal management and one-on-one meetings between employees and their managers, leaders are given the tools they need to encourage professional growth and company-wide alignment.
  5. Employee Engagement. Managers can deal with problems like high turnover and low morale by using AI-powered surveys and interactive learning tools. These tools use natural language processing to find insights from feedback that are meaningful and easy to understand.

Product is cloud native which improves adaptability

The PYCR platform is built on top of cutting-edge cloud technology and an advanced API-led interoperability engine. I must say it’s been evident that Paycor HCM gives clients a consolidated view of their workforce data through a unified user and data experience platform, enabling visibility and access to people’s data across applications for real-time business insights. This unified data architecture streamlines and automates manual processes that used to take a lot of time and were prone to mistakes. This gives management more time and resources to focus on more important, long-term tasks that will increase the value of the company in the long run.

Thanks to the adaptability, scalability, and extensibility of PYCR’s SaaS platform, I believe it’s able to add new products and features without disrupting the seamless user experience it provides to its clients. Since Paycor HCM is deployed as a single-instance multi-tenant, it can provide seamless upgrades on a regular basis without disrupting the user experience. PYCR’s platform is also highly adaptable, which means it can be easily integrated with a wide range of technologies both inside and outside of the HCM ecosystem. For example, the platform can be linked to benefits platforms to help PYCR’s broker partnerships, and it can also be linked to industry-specific ERP systems.

Unique analytic abilities

I must point out that to help SMBs, PYCR offers customized product configurations, pre-built synchronizations with popular third-party solutions, and support from experts with domain knowledge in the customer’s industry. The HCM platform is very adaptable and can be tailored to meet the needs of a wide range of industries. Users can use the industry-specific features of PYCR because the company has its own implementation program and an active user community.

Additionally, PYCR offers a full suite of proprietary analytics features that provide real-time insight into an organization’s human resource data. The robust analytics in Paycor HCM make it possible for SMBs to efficiently and affordably benchmark, understand, and report on their workforce by transforming data into trends and predictions. The PYCR platform gives SMBs the predictive analytics and extensive benchmarking tools they need to make decisions based on data that will improve the way they manage their human resources.

Further growth by expanding coverage

I think there’s a great chance for PYCR to keep growing its customer base. Tier 1 markets are home to 33% of the U.S. population, yet only 28% of the population is covered by PYCR sales. The potential for expanding the company’s sales reach and client base in Tier 1 regions is significant. In earlier times, the Great Lakes and the Southeastern United States were the primary sources of revenue for PYCR. Over the next two years, PYCR plans to increase its sales coverage in existing areas and enter new markets to attract and retain more customers. Because of how strong its go-to-market engine is, I have high confidence that PYCR can grow quickly and successfully in these markets.

TAM

1Q23 earnings presentation

Valuation

I believe the current valuation does not reflect PYCR’s potential value. I expect PYCR to make $800 million in sales in FY25, giving it a market cap range of $6.5 billion and a stock price of $36.99 in FY24, assuming PYCR trades within at 8x forward revenue

Assumptions:

  1. Sales will meet management’s projections in FY23 and the same growth will sustain for the near future.
  2. PYCR to trade at the same valuation where it is trading today, despite having traded down from 12x at the start of the year.

Valuation

Own estimates

Risk

Failure to hire more sales rep

PYCR relies heavily on its direct sales team to offer its products and implementation services. Paycor HCM’s major customer base consists of SMBs, and the success of the company depends primarily on its ability to attract and retain new SMB users. It takes a lot of effort, money, and time to find and hire competent people and then train them to utilize the company’s software. It may be more challenging than PYCR expects to find and train salespeople to market its products in regions where it has little to no prior experience doing so.

PYCR’s future sales growth will depend on how well its direct sales force does and how well its sales activities can adapt to the changing markets for its products.

Over-indexed to SMBs

I believe SMBs pose a significant risk because they often have a weak financial position and could fail in a downturn. Therefore, many of PYCR’s customers would likely leave during a recession.

Competition

There’s a lot of variety, fierce competition, and constant shifts in the HCM and payroll solutions market. It’s possible that PYCR’s rivals will introduce features to the market that are either more effective or more popular with users. PYCR may struggle to compete with established and emerging rivals. The future rivalry could heat up when new technology and companies enter the market. (Examples of competitors are: (ADP), Paychex (PAYX), Paycom (PAYC), and Paylocity (PCTY)).

Conclusion

Suppose the business continues to trade within 8x forward revenue; I believe PYCR is worth $37 in FY24. As reviewed, Paycor’s comprehensive HCM solutions for SMBs are designed to fill the void left by the inadequacy of currently available solutions offered by other companies.

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