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%.