PAYC Commissions

As Saul said in his recent portfolio review:

Put simply, Paycom experiences punitive up front expenses when it posts excellent quarters of growth in that it pays a huge one-time commission expense up front (hitting the expense line of its income statement) while it recognizes revenue over the lifetime of the relationship with the customer.

So what figures have folks come up with for commissions as a percentage of annualized new recurring revenue (ANNR)? It looks to me like commissions on a sale might be around half of the revenue that sale is expected to bring in the first year (I came up with 52%). But I make no claims to being correct, and would love to know what others are figuring.

This seems like a very important thing to understand to get a true picture of ongoing performance and value.


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I could be wrong but I get 16.5 million increase of ANNR and a 1.2 million increase in commissions and bonuses in the most recent quarter. Which would make commissions 7% of ANNR. How did you come up with your number?


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Which would make commissions 7% of ANNR

Thanks, Andy. I had noted a $2.6 million increase in commissions, and in double-checking that after reading your post I now realize I was looking at an earlier 10Q and not the most recent one.

But I also show that ANRR only grew by $5 million YoY ($16.5M vs $11.5M). So that’d imply about 24% commission rate given the $1.2 million increase, right?

I appreciate the correction!


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Hi Neil,
Thanks for bringing this up. I wasn’t tracking the cost of commissions because it was a cost of business and one of the keys to PAYC, at least what Payc says is important, was ANNR and number of sales teams. But I am glad you brought this up because it is interesting and until you did I didn’t even realize you could break out commissions. Thanks for the insight.

You are right on the Amount of ANNR. I was taking the complete amount of ANNR and it should be the increase. So 24% YoY would be the number right? With the new sales teams starting to Ramp up I think this would start to shrink. It will be interesting to see if that is true or if the 24% will be a constant.


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Ok, I went back and tried to break this out. Increases in commission expense as a percentage of increase in ANRR isn’t consistent quarter to quarter.

We keep saying that up-front commission expenses are hiding the value of the company, so I wanted to know how those commission expenses are actually impacting quarterly income. Here is what I came up with for the 6 quarters since their IPO, trying to add back those commission expenses as if they didn’t exist:

2015 Q2:
  Commission: ANRR up $5M, commission up $1.2M = 24%
  $6M adjusted net income, $16.5M ANRR, 42% tax rate: $2.3M extra net income = $8.3M
  58,369,083 weighted diluted shares outstanding = **$0.14 EPS**, $0.56 TTM
2015 Q1:
  Commission: ANRR up $7.6M, commission up $2.6M = 34%
  $6.7M adjusted net income, $20.2M ANRR, 42% tax rate: $4M extra net income = $10.7M
  56,562,661 weighted diluted shares outstanding = **$0.19 EPS**, $0.50 TTM
2014 Q4:
  Commission: ANRR up $6.3M, can’t find commission change. Assuming 30%.
  $2.5M adjusted net income, $20.6M ANRR, 42% tax rate: $3.6M extra net income = $6.1M
  51,857,309 weighted diluted shares outstanding = **$0.12 EPS**, $0.45 TTM
2014 Q3:
  Commission: ANRR up $5.1M, commission up $1.6M = 31%
  $2.7M adjusted net income,  $14.9M ANRR, 39% tax rate:  $2.8M extra net income = $5.6M
  52,978,051 weighted diluted shares outstanding = **$0.11 EPS**
2014 Q2:
  Commission: ANRR up $3.2M, commission up $0.9M = 28%
  $2.1M adjusted net income, $11.5M ANRR, 43% tax rate: $1.8M extra net income = $3.9M
  50,284,362 weighted diluted shares outstanding = **$0.08 EPS**
2014 Q1:
  Commission: ANRR up $3M, commission up $1.2M = 40%
  $1.6M adjusted net income, $12.6M ANRR, 42% tax rate: $5M extra net income = $6.6M
  48,371,169 weighted diluted shares outstanding = **$0.14 EPS**

So if the company paid zero commissions, they would have reported something like $0.56 Adjusted TTM EPS for this latest quarter, which would give an Adjusted P/E of just over 60 at today’s price of $33.90 (and note that the company has since done a secondary, so shares outstanding will be quite higher next quarter). There aren’t enough quarters available for me to calculate YoY TTM EPS growth, but I don’t know how reliable it’d be anyway coming off small numbers (the normal adjusted TTM EPS growth comes out to a crazy 1550% because of that very issue). But total revenue growth is running at about 46% and ANRR YoY growth in total over the past 4 quarters ran at 33%. So I think 40% growth seems like a reasonable figure going forward.

If we go with 40% growth, we get a 1YPEG of 1.5 today after backing out commissions given the 60 P/E. Now obviously 1YPEG is backward looking, and I’m assuming 40% growth going forward, so it’s not really a fair calculation. But let’s look 1 year from now to figure out where we might stand: $0.56 x 1.4 = $0.78 TTM EPS, which at today’s price would give a P/E of 43, which would give a 1YPEG of 1.08. So it will take a whole additional year just to get to “fairly valued” on a 1YPEG basis, and that’s if the company paid zero commissions at all, which obviously isn’t realistic.

So while it’s true that upfront commissions do make the usual metrics look worse than they really are, the stock still looks quite expensive on a 1YPEG basis. Of course, that’s only one data point, and given the quality of the recurring cash flows one would expect to pay a little more. The question is how much more.

Am I looking at this right? Is my math right? :wink: I’d love to hear how others are thinking about this.



Hi Neil and others - thx for bringing this up and crunching some numbers. I’ve been in technology sales/mgmt for quite a number of years and with large, publicly traded SaaS organizations.

I haven’t verified your numbers but I think the math isn’t off, it’s an assumption that we are not considering. A sales person would go through the roof if they made 24% commission on a deal, typically the ranges are 4-6%, then have escalators thereafter up to 10-12%.

As an example for this; let’s assume a salesperson sold a $100K ARR, with a three year term. The salesperson gets “credit” for the total term of 3 years or $300k. Using an average of 8%, they get paid $24k (.08x300,000). The sales person gets everything up front but the company only recognizes the annual revenue.

So the figures in annual sales makes it appear that they got paid 24% (24k of the $100k) but the sales person isn’t going to get a dime in year 2 or 3, and the company gets all of the 100k.

Hope that helps out.