What happened

After reporting second-quarter financial results that outpaced industry watchers' predictions on the top and bottom lines, shares in Paycom Software (NYSE:PAYC) rallied an eye-popping 46% in August, according to S&P Global Market Intelligence.

So what

For decades, Paychex (NASDAQ:PAYX) and Automatic Data Processing (NASDAQ:ADP) dominated the market for employer payroll services. However, employers are increasingly embracing cloud-based software solutions that streamline the entire human resources industry, and that's allowing younger companies, including Paycom Software, to chip away market share.

A child on a rocket soaring into the sky.

IMAGE SOURCE: GETTY IMAGES.

In Q2, Paycom Software's sales grew 31% to $128.8 million, and its non-GAAP EPS clocked in at $0.59, up 69% from the same quarter in 2017. The top- and bottom-line figures were better than Wall Street analysts anticipated.

Exiting the quarter, the company's management is modeling for revenue of between $554.0 million and $556.0 million, which represents 28% year-over-year growth from 2017 at the midpoint. 

Now what

Paycom's software is sold on a subscription basis, so each additional client served represents an annuity stream of future profit-friendly revenue. Although the company has grown rapidly over the past few years, it only operates offices in about 70% of the nation's most important markets, so there's reason to think that additional expansion will help support revenue and sales growth in the coming years. 

In addition to upside from signing on new employers for its solution, the company's financials can also benefit from strong labor markets that result in more employees served and the sale of new software modules that make its solution more useful to existing customers.

The market for human resource solutions is worth billions in sales annually, so as long as the economy continues to support employment growth, Paycom Software should be able to generate market-friendly returns for its investors.

 

Todd Campbell owns shares of Paycom Software. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Paycom Software. The Motley Fool has a disclosure policy.