What: Shares of Paycom Software (NYSE:PAYC) rose as much as 18% on Wednesday morning before settling down to a 14.5% gain as of 1:20 p.m. The provider of online services for managing a company's human resources posted third-quarter results on Tuesday night, just edging past Wall Street's earnings target but crushing the revenue consensus.
So what: In the third quarter, Paycom's sales increased by 51% year over year to land at $55.3 million. Adjusted earnings rose 60% higher, to $0.08 per diluted share. Analysts would have settled for earnings near $0.07 per share on roughly $51.5 million in top-line revenues.
Now what: The fantastic revenue performance looks all the more impressive when you consider that 98% of the company's sales are tied to long-term contracts. Repeatable sales actually increased by 113% year over year, outpacing the growth of non-contract revenues. In other words, this is not just a single quarter of great sales but the formation of a solid, repeatable revenue base for the next several years.
"We believe this robust performance was due to the ongoing market embrace of our powerful, yet easy to use cloud-based solution as well as our top-notch sales organization that continues to mature and hit its stride," said Paycom CEO Chad Richison in a conference call with analysts. As you might expect from a company focused on managing and growing payrolls, Paycom's own sales and marketing budget increased 60% year over year.
Paycom's strong report also lit fires under the company's rivals. Direct competitor Paylocity (NASDAQ:PCTY) rose more than 4%, just ahead of its own earnings report on Thursday night. Even much larger and more diversified rivals took notice. Automatic Data Processing (NASDAQ:ADP) is a $40 billion giant that reported its own quarterly results just last week, but that stock bucked Wednesday's negative market trends with a modest 0.5% gain on no significant news besides the Paycom report.
Zooming out a bit, you'll find that ADP shares have largely tracked the S&P 500 over the last year, while cloud-based specialists Paylocity and Paycom gained 44% and 158%, respectively. It's pretty clear where the market winds are blowing, and Paycom's actual results explain where that rocket fuel is coming from.