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What's Ahead for Paycom After Its IPO?

By Adrian Campos – Mar 14, 2014 at 11:00AM

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Learn how the future of Paycom will look after its public offering.

Most corporations have seen massive changes in their human resources, or HR, departments during the past few years. Nowadays, thanks to software that's available through cloud companies, businesses can recruit better workers, keep track of employee performance and attendance, and efficiently manage payrolls. Some of the companies that specialize in providing cloud-based HR solutions are Automatic Data Processing (ADP 1.03%) and Workday (WDAY 0.03%).

Clearly, cloud technology -- which still has plenty of growth potential left -- is changing the way HR management is done. According to a forecast by IHS, corporations will triple their expenses in cloud technology from 2011 to 2017. Business spending on cloud technology is expected to reach $235 billion by 2017.

Aware of the increasing popularity of cloud-based HR management, Paycom Software has recently announced its intention to go public. The company plans to raise $100 million, and trade on the New York Stock Exchange under the symbol PAYC. What's in store for Paycom after its IPO?

The growth potential of Paycom
Between 2009 and 2012, Paycom grew its top line by 155%. Now, the company is going public, a move that will give it enough capital to compete against bigger contenders in the HR and payroll software market.

One of the reasons behind the success of Paycom is the company's focus on differentiating its software. The company differentiates itself by offering a single program that eliminates redundant data entry and the need to enter multiple databases. Moreover, Paycom can benefit from the fact that companies will most likely continue shifting resources from traditional IT systems to the cloud.

Human capital solutions
Improving human capital is among the major challenges that companies faced last year. Businesses are striving to find innovative ways to recruit and manage highly skilled employees.

Here is where Paycom comes in handy. With its talent acquisition software, customers can attract top talent through powerful filtering options. In addition, the company's talent management software allows clients to keep their employees engaged through rewards and fair compensation plans. However, there are other organizations in the market that provide the same kind of creative HR and payroll solutions, which can hinder Paycom's growth.

One strong contender in the market is Automatic Data Processing, a company that specializes in outsourcing services, and is also very active in the field of HR management. The company provides an integrated platform for its customers, offering a wide variety of services, from talent management to automated payroll solutions. Therefore, it is a direct competitor to Paycom.

Note that ADP, which was founded in 1949, has wide experience in the human capital solutions market. The company has seen massive top-line growth during the past two decades, and it's also a consistent profit generator. In its most recent quarter, the company's revenue came in at $2.98 billion, and net income at $377 million.

Another competitor is Workday, a well-established, on-demand human capital and financial management software vendor. Its human capital management software also unifies HR basic services, talent management, and automated payroll solutions. Note that, despite seeing revenue of roughly $128 million, Workday had a net loss of $47.53 million in its most recent quarter. It's not a consistent profit-generating company. That being said, Workday is experiencing amazing top-line growth, and could be a few quarters away from generating positive income. Workday is a clear growth stock, focusing on the long term.

Final Foolish takeaway
Paycom faces strong competition in the market for cloud-based human resources solutions. Some competitors are well-established, innovative companies. However, to a certain extent, Paycom's current emphasis in software differentiation seems enough for a public start. By raising $100 million through its public offering, the company could add new features to its software by hiring more developers, implementing an aggressive expansion strategy, or acquiring promising start-ups in the same field.

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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