HR Software-maker Paycom (PAYC, Financial) is looking to continue its hot streak into 2018. Management recently gave revised guidance on their quarterly call, revising up all expectations, including revenue to $550 million. Paycom’s all-in-one package looks like it is attracting the kinds of customers it needs to be reaching, growing at a rapid pace.
We previously wrote on Paycom a few months back. Much of what we said, including our projection for further growth, stands.
Paycom makes software for businesses looking for all their HR 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. Customers utilize their products for a number of things, including maintaining their employees. Paycom continues to attract swaths of new customers monthly. Good news!
Good first quarter continues the growth story
In our previous research note on Paycom, we highlighted the company’s substantial financial success and revenue growth. First quarter 2018 continued to live up to that story.
Why are we revisiting Paycom only three months after covering it before? Because the company is doing even better than anticipated, and the first quarter provided very encouraging signs for the future. For instance, picking just one metric, sales growth outpaced management’s guidance and expectations by 30%. That is very significant. In light of the recent news, another look at this swift-growing stock seemed more than warranted.
Further, Paycom continued its strong performance with recurring business. Business from recurring customers amounts to more than 90% of total revenue, and this was certainly true for the first quarter of the year as well. Other encouraging signs from Paycom year-to-date include a significant stock buyback (giving further value to shareholders) and further nationwide expansion of offices.
Using a year-over-year comparison, one can see how Paycom is exciting to investors with a growth-stock orientation. Revenue jumped up 30%, from $120 million to $154 million, a continued solid growth figure for Paycom, which it has consistently hit over the last several years.
Even more impressive, though, is Ebitda (a favorite among investors interested in real earnings rather than the sometimes ephemeral metric of sales). There was certainly nothing ephemeral about Paycom’s first quarter earnings, which jumped 35%, from $60 million to $81 million. Not a bad figure when considering that Paycom is largely an internet-based company, which tend to wrack up large deficits and produce little in the way of tangible earnings.
Looking at non-GAAP figures as well generates a positive outlook. One can see massive growth in non-GAAP net income from $36 million to $56 million, a more than 50% jump in just one year. That is further illustrated in a strong bump in earnings per share, an important metric to keep track of when following a growth stock, since such companies can engage in considerable dilution to fund losses during the scaling and growth cycle.
Looking to the future
Now, Paycom continues to grow with new customers, but most significantly is generating very solid earnings from existing customers. We see no reason why this trend will not continue into the summer and beyond for Paycom. Management seems to understand the company’s vision and place in the world, and has made solid strategic plans for growing the business moving forward.
In terms of “value,” we caution a bit as Paycom would not be considered much of a value stock, trading around a 90x price-earnings multiple. But, the company is the real deal and is producing solid financial returns quite consistently.
The question remains: Can Paycom grow beyond its existing clients and light a flame under new customer growth? That truly is the most vital question, since that growth will be the source of much of Paycom’s future earnings – and value. That aspect is certainly not a done deal, but there are reasons to be fairly optimistic.
The verdict
In our last research note, we struck a somewhat guarded tone, pointing out a number of pressures Paycom could face as it continues to grow. While we remain cautious, especially when considering the inflated price-earnings ratio, we are more comfortable recommending Paycom as a potential investment play.
The company’s financials are on fire, growth is swift and steady, and its offerings continue to impress both new and returning customers. Indeed, we have directly experienced businesses that have switched to Paycom’s software and HR platform in the last six months from other platforms.
Paycom is attracting the kinds of customers it needs to be attracting and continues to build value. It is growing in a market without a clear ceiling, and there is every indication that there remains a lot of room left to grow.
Disclosure: I/We own no stocks discussed in this article.
This article was co-authored by Clyde Wm. Engle Jr., an investment analyst with Almington Capital.
