Paycom Software (PAYC, Financial) has become something of a star in the HR software sector, seeing consistent growth of late. The company makes software for businesses looking for all their human resources needs to be met. Not just the maker of payroll software, Paycom offers a full suite of HR-related products that currently serves many thousands of companies across the U.S.
The good news for Paycom is that users respond with overwhelmingly positive reviews as to the ease and friendliness of the products. They are working! The question now is: Can it continue to thrive?
Paycom’s current offerings
Paycom currently has almost 20,000 active customers which use a variety of its products. Most popular is the basic package, which includes Paycom’s payroll software and services. Other product offerings allow for integrating large amounts of employee information, including health care management, tax management and expense management. Further offerings include more advanced HR software and 401k management and reporting tools. Taken as a whole, Paycom offers a uniquely broad and user-friendly experience for its customers, integrating its products across all product lines.
The open question is, can Paycom further develop its products to keep pace with 21st century HR needs? And, how will Paycom keep pace with its nearest (and largest) competitors?
Recurring customers have been the key
Paycom went public four years ago and has seen consistent revenue growth ever since. We see Paycom’s strengths as solid financial performance, recurring customer sales and participation, and future opportunities. Nearly 100% of revenue growth last quarter came from recurring customers, a positive sign for that growth demographic.
However, for the growth story to really continue, Paycom must also focus on generating revenue from new customers – something that has been lagging lately. That is the major weakness as competition from larger entities, including Microsoft, Oracle and Paychex. Paycom certainly has its unique, sellable factors, but increasing competition could squeeze revenue and margin growth.
Keeping those numbers growing
Paycom’s most positive attribute is its consistently very good financial performance. Over the last four years as a public company, Paycom has seen revenue growth substantially increase year-over-year and has returned large profits to its shareholders.
Each of the last four quarters has seen a significant positive earnings surprise, with the last two quarters turning in a 167% and 60% surprise, respectively. With an average surprise of over 80% per quarter, Paycom is clearly greatly outperforming the Street’s expectations.
Revenue has drastically increased over the last three years, from $225 million in 2015 to $433 million in 2017. While revenue growth has tapered off slightly, the upward trajectory looks poised to continue well into 2018 and possibly beyond.
Profit has also increased substantially, more than doubling from the $44 million posted in 2016 to $67 million last year. Profits are looking to be up almost 50% in the coming year as well, continuing a trend that saw an almost 400% increase from 2014 to 2015.
The power of customer retention
The second greatest strength within Paycom’s business is its ability to retain customers. With an over 90% customer retention, Paycom is leading the race among its competitors in this category. The high retention rate speaks volumes to Paycom’s offerings and its continued diversification and focus on absolute customer satisfaction.
Another positive is Paycom’s internal focus and investments in its own salesforce and management, building offices across the U.S. over the last several years. This gives them the advantage of building on-the-ground sales teams as well as being able to facilitate customer satisfaction locally. Its office total now exceeds 40, including a new office in Milwaukee.
Verdict
Paycom’s stock isn’t going to take off like a rocket tomorrow. And with a price-to-earnings ratio of 97, the stock is not particularly undervalued. Investors should not expect a massive rise over the short term. But Paycom’s financials remain consistently strong and can offer potential value for an investor with a long-term time horizon.
While growth can be great, so too is competition from industry giants. The road ahead is far from clear, but Paycom looks steady at the wheel for the time being. Keep an eye on this one.
Disclosure: I/We own no stocks mentioned in this article.
