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1 Fintech That Reported an Excellent Second Quarter

By Matthew Frankel, CFP® and Brian Feroldi – Aug 17, 2021 at 6:57AM

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This isn't exactly a household name, but this fintech just reported some strong numbers.

Fintech company Paycom (PAYC -1.83%) isn't exactly a household name, but it reported some impressive second-quarter earnings. In this Fool Live video clip, recorded on Aug. 5, Fool.com contributor Brian Feroldi discusses the numbers and why investors might want to put Paycom on their radar. 

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Brian Feroldi: For those that don't know, Paycom is a company that is focused on human capital management. But their name really says what their real core purpose is. They are involved in payroll. This is a company that came public about five or six years ago with a heavy focus on the payroll market and over time, they have expanded their software platform to do basically anything that touches a human being at a company. You can use it to hire, to fire, to onboard. You can use it for training, for engagement, for employee development. You can use it to automate a whole bunch of AR functions. You can do time and labor management, etc.

This is a founder-led business that has just been taking market share in the payroll industry, essentially since it was founded. Again, if you look at this company's long-term returns, they came public in 2015, 26-bagger and counting, not bad and pick any of the time frame that you like and this company has just spanked the market. Including even over the last year when you figure that a payroll company would be just getting killed with what's happening with unemployment. The reason for this really has to do with how fast they've grown their revenue.

They've grown extremely quickly. When they came public, their trailing-12-month revenue was up about $100 million. Now it's $871. Again, if you look at the COVID blip, their growth rate slowed but now it's reaccelerating. If we look what happened in the first quarter, here's what management said was going to happen in Q2. They said we're going to do revenue of $231-$233 million and adjusted EBITDA -- not a metric I like, but it's something -- they said they're going to do $80 million in that. Look at their actual results, they came away with $242 million in revenue, so that was up 33% over the prior year. That was one of the company's fastest growth rates in more than five years.

A big part of that is it was off of a very easy comparison period, but still, the company is growing pretty rapidly. Net income on a GAAP basis? Yes, a GAAP basis. This is a software company that is GAAP net income profitable was $52 million. That's a 22% net GAAP margin, and that was $0.90 per share. If you look at what Wall Street was expecting, that $0.97 per share. That was much higher than Wall Street was expecting on both the top and the bottom line.

Basically, it was a fantastic quarter from growth. One of the reasons that I became a shareholder of Paycom years ago, has to do with this. This company does not pay out a ton of stock-based compensation to grow. I think a reason for that is that it's based in Oklahoma where they're not competing for talent in Silicon Valley or Washington or any of those other places. This company's share count declined, year over year, declined. They are buying back stock and growing at an extremely rapid rate while doing so, profitably. Kudos for them.

Basically, every number from the quarter looked great, they have a ton of cash on the balance sheet. They have very little debt. In fact, their debt is mostly tied to their recently rolled-out corporate campus, which they built about two years ago. During the quarter they rolled this new thing that they call Beti, B-E-T-I. It is essentially a payroll function that puts the payroll processing and information into the employees' hands. It gives the employee complete control over how much they pay in taxes, they can get an exact sense of what the exact amount of their paycheck is going to be. They can see when it's going to hit their account. It basically takes a lot of the HR functions and gives it over to the employee. This is something that they just recently rolled out, and they believe that it is having a huge effect on the market. They called out in the conference call that it is "The most revolutionary payroll product I have ever seen." Said one VP of HR. Might be an exaggeration, but still, I like seeing things like this.

Paycom has a history of rolling out products like this that make it a platform not only stickier but also they convinced their existing customers to upgrade and add more features over time. CEO Chad Richison, who is the founder, by the way, and owns a huge slug of stock, he is really excited about this thing and he talked it up quite a bit on the call. The other thing they noted on the call, that was interesting, is that they now are going to continue moving upstream even more than they have been. When this company came out, it was basically targeting employers that had, say, 50-1,000 employees in total. About two years ago, they started to move upstream to say, all right, we are now targeting firms that have up to 5,000 employees because they felt that they could compete with the likes of ADP essentially. On his call, he said that's going to be expanding even further to companies that have 10,000 employees and more. If you're scuffing at the idea that they can do so, this company, again, has been taking market share in the payroll processing market since it was founded.

The execution of this company has been just really fantastic. One of the thing that they noted during the quarter is they signed a 15-year agreement to name the rights where the Oklahoma Thunder play. You're now going to go to Paycom's Center in Oklahoma city if you go and visit. I view that as most likely to be a waste of money but if they have some money to throw around and spend, then it's possible that that could pay off. I don't know if that's going to, I have big-time questions when I see companies doing like this. But for what it's worth, they believe that they can do so. Now, when it came to guidance for the year ahead, they expect another quarter of really strong growth in the quarter ahead and they actually raised guidance for the year to a new range. It was a quarter that featured fastest revenue growth in the company in the last five years. Market beating on the top to and bottom line, profitable, share count declined, new product offering, and they raised guidance. It was good. That's Paycom, PAYC.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Paycom Software. The Motley Fool has a disclosure policy.

Stocks Mentioned

Paycom Software Stock Quote
Paycom Software
PAYC
$339.87 (-1.83%) $-6.35
Automatic Data Processing Stock Quote
Automatic Data Processing
ADP
$269.90 (0.73%) $1.95

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