Paycom Software (PAYC - Free Report) reported solid fourth-quarter 2017 results wherein the top and the bottom lines came ahead of the respective Zacks Consensus Estimate and also improved year over year.
The company’s non-GAAP earnings per share came in at 29 cents per share, which beat the Zacks Consensus Estimate of 23 cents. Also, reported earnings increased from 18 cents earned in the year-ago quarter.
Notably, shares of Paycom Software have surged a whopping 90.7% in the past year, outperforming the industry‘s increase of just 21.2%.
Paycom Software reported revenues of $114.03 million, which increased 30% from the year-ago quarter. Revenues also surpassed the Zacks Consensus Estimate of $113 million. The year-over-over increase can be attributed to the addition of clients, new business wins and product development initiatives.
Moreover, revenues were impacted positively by a 29.4% year-over-year increase in recurring revenues and approximately 56% increase in implementation and other revenues.
The company’s adjusted gross margin increased 90 basis points (bps) on a year-over-year basis to 83.8%, primarily due to a higher revenue base.
Paycom Software’s adjusted EBITDA increased 54% year over year to $31.8 million. As a percentage of revenues, total administration expenses decreased to 60.9% from 64.3% reported in the year-ago period.
Non-GAAP net income came in at $16.8 million compared with $10.8 million reported in the year-ago quarter.
Balance Sheet & Cash Flow
Paycom Software exited the fourth quarter with cash and cash equivalents of $46.1 million compared with $66.6 million in the previous quarter. Accounts receivables were $1.6 million compared with $1.4 million reported in the previous quarter.
The company’s balance sheet comprises long-term debt of $34.4 million compared with $33.2 million reported in the previous quarter.
It generated cash flow from operations of $130.6 million in fiscal 2017.
Full Year Results
Paycom generated revenues of $433 million in 2017, showcasing an increase of 32% from the prior year. Recurring revenues, which constituted 98% of the total figure, increased 31% on a year-over-year basis.
Adjusted EBITDA came in at $137.0 million compared with $94.5 million in 2016.
Non-GAAP net income per share increased 49.4% from the previous year to $1.30.
Impact of Tax Cuts and Jobs Act
Notably, a cut in the federal corporate tax rate from 35% to 21% led Paycom to “revalue and write down certain deferred tax assets at December 31, 2017”. Management believes this one-time write down was essential "to reflect the expected recovery of those assets under lower future tax rates." Following the tax reforms, the company’s fourth-quarter net income witnessed a reduction of $0.4 million.
Shift to ASC 606 Accounting Standard
Paycom stated that it has adopted ASC 606, effective January 1, 2018. Following the implementation of the new standards, the company would experience certain changes in expenses, specifically costs related to commissions paid to sales representatives.
Previously, the company recognized commission related expenses in the quarter in which a contract was signed. Per the new standards, the commission expense will be recognized ratably over the period till which the contract is valid. This will lower sales and marketing expenses, which will boost margins.
For first-quarter fiscal 2018, Paycom Software expects revenues in a range of $150-$152 million. The Zacks Consensus Estimate is pegged at $150.9 million. Adjusted EBITDA is expected to be approximately in the range of $74-$76 million.
Paycom Software also provided guidance for fiscal 2018. The company anticipates revenues in the range of $541-$543 million. The Zacks Consensus Estimate is pegged at $543.19 million. Adjusted EBITDA is expected to be in the range of $213-$215 million.
Paycom Software’s better-than-expected results were backed by client additions. The company’s “client retention rate,” which has been hovering around 91% for almost six years in a row, is also a major positive.
The company received positive feedback on its first national television commercial and the launch of its application on Apple (AAPL - Free Report) and Google (GOOGL - Free Report) Play Store. The company opened three new sales offices in Milwaukee, Richmond and Long Island and with the announcement of the opening of a new sales office in Salt Lake City during the conference call, its sales team count is now 46.
Management was particularly optimistic about the operations of its sales force, with senior sales people outperforming expectations. The company is optimistic about the increase in the number of companies becoming aware of the benefits of new age human resource technologies. This will result in accelerated adoption of the company’s cloud-based human capital management (HCM) software solution delivered as Software-as-a-Service (SaaS) with functionality and data analytics to manage the complete employment lifecycle, from recruitment to retirement.
Zacks Rank and Stock to Consider
Paycom Software carries a Zacks Rank #3 (Hold).
A better-ranked stock in the broader technology sector is Micron Technology, Inc. (MU - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term EPS growth rate for Micron is projected to be 10%.
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