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Paycom (PAYC) Up 3.9% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Paycom Software (PAYC - Free Report) . Shares have added about 3.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Paycom due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Paycom Software Reports Q2 Results

Paycom Software third-quarter 2018 non-GAAP earnings per share came in at 52 cents per share, which matched the Zacks Consensus Estimate and increased 79.3% from the year-ago quarter.

Paycom Software reported revenues of $133.3 million, which increased 31.6% from the year-ago quarter and surpassed the Zacks Consensus Estimate of $130.5 million.

The year-over-over increase can be attributed to new business wins and improvement in sales productivity. Robust adoption of enhanced HCM software solutions across industries and geographies 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.

The company is gaining foothold among larger companies. As a result of this, the company is expanding its proactive sales effort to target companies with 50-5000 employees against its earlier target of 50-2000 employees.

Margins
 

Adjusted gross profit increased 31.2% from the year-ago period to $111.5 million. The company’s adjusted gross margin contracted 30 basis points (bps) on a year-over-year basis to 83.6%, primarily due to increase in spend on sales and marketing.
 
As a percentage of revenues, total adjusted administration expenses, sales and marketing expenses, and research and development expenses of 26.4%, 53.1% and 8.5% expanded 60 bps, 410 bps and 120 bps, respectively.

Paycom Software’s adjusted EBITDA increased 22% year over year to $49.2 million.
 
Balance Sheet & Cash Flow

Paycom Software exited the third quarter with cash and cash equivalents of $85 million compared with $54.6 million in the previous quarter.

The company’s balance sheet comprises long-term debt of $34.8 million compared with $33.5 million in the previous quarter.

Net cash provided by operating activities in the quarter was $45.5 million.

The company repurchased more than 30K shares in the quarter.
 
Guidance
 
For fourth-quarter 2018, Paycom Software expects revenues in the range of $142.5-$144.5 million. Adjusted EBITDA is expected to be in the range of $49.5-$51.5 million.

The company expects sales and marketing expense to remain at a higher level in the fourth quarter due to the company’s national advertising campaign, which will keep margins under pressure.

Paycom Software raised its guidance for the full year. The company now anticipates revenues in the range of $558.5-$560.5 million, up from the previous expectation of $554-$556 million. Adjusted EBITDA is expected to be in the range of $233-$235 million, up from the previous guidance of $231-$233 million.

The company anticipates adjusted gross margin within the range of 84% to 85%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Paycom has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Paycom has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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