PAYC

PAYC is now down 23% this month. I have seen the discussion which posits that fewer government regulations (which might be expected under Trump) hurts PAYC sales. I want to know if others think this is correct. I’m torn, because while there might be a boon to PAYC in tough regulatory times, the CRM model is a train that won’t be easily stopped regardless of regulatory or other “secret sauce,” so it’s just a matter of whether their product is better than their competitors. Are there other things that differentiate their product?

Bear

so it’s just a matter of whether their product is better than their competitors

Hi Bear, As I understand it, their product IS better than their competitors. Because they started as a payroll company and added everything to it, it is completely integrated and very easy to use.

Here’s a short quote from Bert’s many page deep-dive write-up:

The competitive moat for this company starts with ease of use. That includes both maintaining a single database and having no integration issues when implementing all of the apps in an HCM bundle. And of course Paycom does payroll processing. I doubt whether Paycom has functional uniqueness or superior performance in any of the solutions that it offers. Their offering is optimized for a very narrow slice of a very big market. Ease of use, minimal support requirements and price are going to be the salient factors in the mid-market.

Paycom is a minor factor within the market it sells to. It isn’t that companies like WDAY couldn’t do what Paycom does. But the fact is the economics aren’t there, and one simply can’t imagine Workday getting involved with payroll processing for mid-sized enterprises. It isn’t part of WDAY’s strategy. And obviously ADP, if it chose to do so, could develop a specific offering that encompassed the functionality that Paycom has built and which was targeted specifically at the mid-market. But doing so is not in the ADP wheelhouse either. ADP’s revenues are running at $11 billion annually. PAYC has forecast annual revenues of about $320 million. The numbers for ADP building a solution specifically to compete with PAYC just do not add up…

How can it be 100% SaaS and still make money? And how much money do they make?

Stock-based comp is negligible. In 2015, stock-based comp was $3 million or just 1.5% of revenue. In Q1 2016 the ratio remained at 1.5%.

It achieved an operating margin of 31% last quarter, way up from 19% the year before. A significant amount of the growth in operating margin was related to the jump in revenues they enjoyed, partially due to filing ACA forms on behalf of its customers. That being said, operating margins were still 15.4% for all of 2015 and seem likely to rise by a couple of percent this year.
There are two primary factors that have allowed Paycom to attain significant profitability even at a very low level of scale. I expect that these factors are likely to persist over the foreseeable future.

First is that the company’s sales and marketing expense is far smaller than is typical for SaaS vendors. In the last reported quarter, S&M expense was 32% of revenues. For the full year of 2015, which is probably a better data source for this exercise, S&M spend was 41%. Most other more traditional SaaS vendors will have S&M expense significantly above 50%. And PAYC stock-based comp is all of 1.5% of revenues…

The reasons for such a vast disparity in expense levels relate to what is being sold, who it is being sold to, and how it is sold. Selling payroll processing is a relatively straightforward process. It is about price and user satisfaction. The deliverable is a payroll check or mainly these days a direct deposit. Sales cycles are far shorter than they are for enterprise software. Pre-sales activities are far less burdensome…

And by the way, 98% of revenue was recurring last quarter. And these are some pretty amazing statistics from the last report:

Total Revenues - $77 million up 40%
Recurring revenues - $76 million up 40% as well, and was 98% of total revenues.
Adjusted Gross Margin - 83% of revenue.
Adjusted EBITDA - up 68.5% and 23% of revenue.
Adjusted Net Income - up 91% .
Adjusted earnings - up 87%.

Saul

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I’d hold on to PAYC. I think the market way-overreacted on that one. Trump is a big talker but will deliver very little. Any change to current regulations will require companies to adjust and they will need PAYC to implement the adjustment… :slight_smile:

I think PAYC is somehow involved with ObamaCare compliance and that’s another source of concern, but like I said, this is over-blown. Remember last year when PAYC went down to $22?

As long as we have Congress, they will continue to tinker with the rules. they all love big Government, Democrats and Republicans alike.

This one is a keeper.

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I don’t know why PATC is down.

But I do know that regulations are not going away, or even being substantially reduced. At best they will be made less destructive to running a business.

If Obamacare goes away, whatever replaces it will have new regulations requiring new software updates

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Thanks all. Keep the opinions coming! Glad we’re all on the same page. Saul, to quote you quoting Bert:

And obviously ADP, if it chose to do so, could develop a specific offering that encompassed the functionality that Paycom has built and which was targeted specifically at the mid-market. But doing so is not in the ADP wheelhouse either. ADP’s revenues are running at $11 billion annually. PAYC has forecast annual revenues of about $320 million. The numbers for ADP building a solution specifically to compete with PAYC just do not add up…

I have first hand experience with ADP and I can say that it’s a dinosaur. Their customer service was terrible – not well trained and very cumbersome to deal with. That’s one reason I personally see the PAYC opportunity as vast.

Paycom is a minor factor within the market it sells to.

Is he saying that they aren’t going for the big clients? Either way, does anybody have a good idea of their TAM? I’d imagine there’s plenty of runway…just don’t have the numbers.

Bear

Answered my own question, it was in Bert’s article:

The company’s CEO during the course of last quarter’s conference call has called out a $25 billion TAM for the markets it addresses.

Here’s the link: http://seekingalpha.com/article/3974089-paycom-stealth-disru…

Bear

No, I do not think this is a correct thesis. Any change in HR regulations whether adding or removing regs should be good for business. Every customer will need an update. And, it’s extremely doubtful that HR will become so unregulated that their s/e won’t be needed at all. HR regs cover a LOT of ground: Privacy, financial, personal, sexual harassment, OSHA and related, on and on . . .

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I agree that further changes in HR regs will be yet another boon for PAYC, but had the valuation run up too far anyway at a PE of 60+ ?

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I agree that further changes in HR regs will be yet another boon for PAYC, but had the valuation run up too far anyway at a PE of 60+ ?

fireblade909,

  1. P/E may not be the best way to value a company growing like this because:

a. EPS is growing faster than revenue (80% vs 40% last Q)
b. the company is still very small and has a long runway
c. you have to be able to compare (I use P/S ratio to do so) to similar size companies with similar business models that don’t yet have positive EPS. On this basis, PAYC isn’t as expensive as many companies that have less earnings (or no earnings at all).

  1. Even when using P/E, you have to remember that the market pays up for safety, and subscription models have a lot of safety built in. CRM is a lot bigger and growing slower on all fronts, but their P/E is over 80!

  2. You said in another post (http://discussion.fool.com/is-the-movement-so-insane-when-we-hav…) that they were “seemingly losing momentum.” Perhaps it seems that way, but one quarter of “only” 40% revenue growth doesn’t particularly worry me, especially when it’s not their most exciting quarter seasonally anyway. And their EPS was almost double last year’s. I think we’ll have to wait and see. But even should revenue growth slow to say, 30%, I don’t believe this company would start to look expensive compared to peers.

For these reasons, I don’t think the valuation had run up too far, and I think the current price is a buying opportunity.

Bear

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… with some hindsight on your reply, seems like late November was indeed a good buying opportunity on PAYC … My interest is still peeked +15% later however …

My interest is still peeked

Sorry. From the grammatically correct pet peeve department…

One’s interest is not peeked. It is piqued.

I see that constantly and just look to correct it.

Back to your regularly scheduled programming.

Regards,
A.J.

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My interest is compounded
I hope it hasn’t peaked.

JT

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Sorry. From the grammatically correct pet peeve department…

One’s interest is not peeked. It is piqued.

Thanks. That spelling felt wrong but I posted that in a hurry as the phone was wringing (sic)

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