As small and mid-size businesses grow, they tend to offer additional HR benefits to help attract and retain talented employees. This creates challenges for HR teams and employees alike as new benefits often require the adoption of additional software products that usually do not communicate with legacy systems.
Paycom Software's (PAYC 2.85%) solution to this problem is to combine payroll processing and other HR functions into a single system. The company's cloud-based software has proven to be a hit with customers, allowing Paycom to steal market share away from legacy payroll processing companies like Paychex and Automatic Data Processing for years.
Coming into Tuesday's third-quarter earnings report, Wall Street was expecting that Paycom would continue its winning ways and drive double-digit growth in its top and bottom lines. Let's put the company's actual results under a microscope to see how it performed in the period.
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Paycom Software Q3 : The raw numbers
| Metric | Q3 2016 | Q3 2015 | Change (YOY) |
|---|---|---|---|
| Revenue | $77.3 million | $55.3 million | 40% |
| Non-GAAP net income | $9.0 million | $4.7 million | 68% |
| Non- GAAP EPS | $0.15 | $0.08 | 88% |
Data source: Paycom Software. YOY = year over year.
What happened with Paycom this quarter?
- Recurring revenue, which continues to constitute 98% of total revenue, came in at $75.9 million for the quarter, up 40% year over year. Implementation and other revenue grew by 33% to $1.5 million.
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the period were $18.2 million, up 69% when compared to the year-ago quarter.
- On a GAAP basis, net income was $6.2 million, or $0.10 per diluted share. That compares favorably to the $3.8 million in net income, or $0.07 per diluted share, that was reported in the same period last year.
- Paycom ended the quarter with $74.5 million in cash while total debt stood at $30.1 million.
For comparison, management had previously guided for third-quarter revenue to be in the range of $75 million to $77 million and for adjusted EBITDA to land between $13 million and $15 million, so the reported figures represent a beat on both metrics. The company's numbers also bested Wall Street's expectations for the period.
What management had to say
Paycom founder and CEO Chad Richinson was quite happy with his company's quarterly performance, noting that the "Paycom solution continues to remain top-of-mind with C-suite and HR leaders across the country."
He also stated, "We continue to drive value for our clients -- with our best-in-class, single-database payroll and human capital management solution -- and also for our shareholders by repurchasing over 525,000 shares over the past five months under our stock repurchase plan."
Looking forward
Management believes that the strong growth rates will continue into the fourth quarter. The company is guiding for total revenue to be in the range of $85 million to $87 million, the midpoint of which represents growth of 32% year over year. That's right in line with analysts' expectations.
Paycom also believes that its business will continue to scale, calling for adjusted EBITDA to land between $14 million and $16 million. That represents 43% growth over the year-ago period at the midpoint.
Despite posting strong quarterly results and issuing an upbeat forecast, shares of Paycom were down by 17% at 1:30 p.m. Wednesday. While it is hard to pinpoint the exact reason for the decline, it is possible that some traders felt that the company's valuation was getting out of hand. Prior to this earnings release, shares of Paycom had rallied more than 30% year to date, pushing its trailing price-to-earnings ratio above 80. Perhaps some traders went into profit-taking mode given the company's strong year-to-date performance.
Regardless of the short-term price movement, Paycom's third-quarter results clearly show that its single-database offering continues to resonate with customers. As long as the company can continue to win market share and grow revenue and profits at above-average rates, then its future is likely to remain bright.
