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Bull of the Day: Paycom Software (PAYC)

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Paycom Software (PAYC - Free Report) is a $9 billion provider of a cloud-based human capital management solutions delivered in the model of the decade, SaaS, or Software-as-a-Service.
 
Much like bigger peers Automatic Data Processing (ADP - Free Report) and Paychex (PAYX - Free Report) , Paycom provides functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Its HCM (human capital management) solution offers a suite of applications in the areas of talent acquisition, time and labor management, and payroll. 
 
In early August, Paycom Software reported impressive second-quarter 2018 results, surpassing the Zacks Consensus Estimate on both the top and bottom lines, and ahead of the company's guided range.
 
Non-GAAP earnings per share came in at 59 cents, 20% above consensus. Reported earnings increased from the adjusted figure of 26 cents in the year-ago quarter.
 
Quarter Details
 
Paycom Software reported revenues of $128.8 million, which increased 31% from the year-ago quarter. Revenues surpassed the Zacks Consensus Estimate of $124 million.
 
The year-over-over increase can be attributed to new business wins and product development initiatives. Robust adoption of enhanced HCM software solutions is a key driver.
 
Moreover, revenues were impacted positively by a 31% year-over-year increase in recurring revenues, which comprised around 98% of total revenues.
 
Management believes that Paycom’s mobile app, which meets all the functionality offered by employee self-service desktop application, positions it well for continued growth.
 
The company also introduced various enhancements to its overall product offering as part of its monthly updates in the second quarter that were rolled out to its entire client base.
 
For more on the innovations in software that are accelerating productivity, industry disruption and wealth creation, see my recent video and article...
 
 
Paycom Margins
 
Adjusted gross profit increased 32.7% from the year-ago period to $108.3 million. The company’s adjusted gross margin expanded 110 basis points (bps) on a year-over-year basis to 84.1%, primarily due to a higher revenue base.
 
As a percentage of revenues, total adjusted administration expenses and sales and marketing expenses of 47.9% and 23.4% declined 290 and 330 bps, respectively. Paycom Software’s adjusted EBITDA increased 46.2% year over year to $53.5 million.
 
Balance Sheet & Cash Flow
 
Paycom Software exited the second quarter with cash and cash equivalents of $54.6 million compared with $68.1 million in the previous quarter.
 
The company’s balance sheet comprises long-term debt of $33.5 million compared with $35.3 million in the previous quarter.
 
Net cash provided by operating activities in the first six months of 2018 was $100.4 million. The company repurchased more than 400k shares in the quarter.
 
Paycom Guidance Ignites the Stock
 
For third-quarter 2018, Paycom Software expects revenues in the range of $129-$131 million. Adjusted EBITDA is expected to be in the range of $45.5-$47.5 million.
 
Gross margin is anticipated to be under pressure due to the timing of new hires.
 
Paycom Software raised its guidance for fiscal 2018. The company now anticipates revenues in the range of $554-$556 million, up from the previous expectation of $545-$547 million. Adjusted EBITDA is expected to be in the range of $231-$233 million, up from previous guidance of $220-$222 million.
 
The company will be ramping up investments in sales and marketing initiatives as well as in research and development in the second half of the year.
 
But the refreshed outlook has the company on pace to produce 28% sales growth and a 102% EPS advance this year. Analysts also adjusted their estimates higher for next year, projecting 23% top line growth and a nearly 22% EPS markup.
 
Not only did this guidance compel analysts to raise their estimates and make PAYC a Zacks #1 Rank (Strong Buy), but it compelled investors to buy all the shares they could in August, rallying the stock over 40%.
 
Keep your eye on this young upstart in the big world of SaaSy employer services.
 
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