Paycom Software Inc (Payc)
Payc is a SaaS (Software as a Service) business model. They sell a suite of tools for companies to manage their payroll and Human resources. They are a cloud based service that allows all of the tools to be accessed through a single web page. The company IPO’d in April of 2014 and has a Market Cap today of 2.07 Billion. Their suite of tools allows businesses to manage the complete employment life cycle, from recruitment, to retirement. This is a full-service functionality, including data analytics that lowers labor costs, drives employee engagement and reduces exposure.
Chad Richison - President, CEO
Chad Richison has a Glass door 88% approval. Payc is rated 4 stars for the company. The CEO Left ADP and became the CEO and Founder of Paycom in 1998. He was a salesman for ADP. Mr, Richison owned 12,646,329 shares of the company , coming out to 22% of the company shares since the start of the year. You can find this information on the SEC site, form DEF14A. He recently sold 1,500,000 shares.
Craig Boelte – CFO
Mr. Craig E. Boelte has been the Chief Financial Officer at Paycom Software, Inc. since February 2006. Prior to joining Paycom, Mr. Boelte owned an accounting practice serving over 600 clients including Paycom. Prior to that, he spent nine years at Deloitte & Touche where he served as Senior Tax Manager.
Mr. Boelte owns 551,769 shares of the company, less than 1%.
Payc started out as a web based payroll company. Eventually they have migrated to a company that supplies many products to help teach, and access information for each employee. It is a tool now to completely supply all information, that pertains to the employment of each employee.
At this time they have 5 different modules that are all accessible from your web browser:
Candidate Tracker, Applicant Tracking, Tax Credits, Background Checks, On-boarding/off-Boarding, E-Verify.
Time and Labor Management:
Time and Attendance ,Schedule Exchange ,Time-Off Requests
Web Time Clocks ,Hardware Terminals , Labor Allocation Labor Management.
Performance Management, Compensation Budgeting, Employee Self-Service, Executive Dashboard.
Document Management, Government & Compliance, Benefits Administration, Cobra Administration, Manager Self-Service, Personnel Action Forms, Surveys.
At the end of last quarter they had 36 sales teams up from 31 a year ago. Each of these sales teams have
From 6 to 9 sales professionals. They believe that some of the Metropolitan areas can have more than one sales teams. Paycom has 29 sales offices in 50 of the largest metropolitan statistical areas in the United States and only one of these is served by multiple sales teams. They have a direct sales model and it takes 24 months for a sales team to get to a mature state where they are selling optimally. In 2014 and 2015 they opened 5 sales offices. Paycom believes they can open well over a 100 offices in the United States. The CEO stated that he believes in growth but he wants to do it responsibly on the Topline and the margins. Chad Richison (CEO) states in the U.S. there is a market of over $20 billion. Paycom’s sales model does not require a contract. The customer pays month to month. In 2014 they had a 91% retention rate and once the customer is in the system they find it very sticky. This retention rate includes companies that were acquired or ceased to operate. Paycom targets customers with employees of 50 to 2000 but they are now getting customers that are much larger. They recently won a company with 3700 employees. They generate revenue from fixed amounts charged per billing period, plus a fee per employee or transaction process, or fixed amounts charged per billing period. Their billing period varies by client based on when they pay their employees, which is either weekly, bi-weekly, semi-monthly or monthly. Payc has a seasonal aspect to it. They file tax forms for their clients and this shows up in their revenue in the first quarter. Payc has over 12000 clients and none of them constitute more than one-half percent of revenues.
According to the International Data Corporation (“IDC”), the U.S. market for HCM applications is comprised of software that automates business processes covering the entire span of an employee’s relationship with his or her employer. IDC estimates that the U.S. market, excluding payroll services, will total $7.0 billion in 2015. These applications include maintenance of HR records, recruiting applications, performance management, time and labor management tracking, compliance, compensation management and other HR functions. According to IDC, the U.S. market for payroll services will be an estimated $16.8 billion in 2015. The payroll services market includes transactional activities associated with paying employees, maintaining accounting records and administrating payroll taxes while payroll accounting applications offer the functionality to effectively track these various payments and transfers.
IDC estimates that the international market for HCM applications (excluding the United States and payroll services) will be $5.2 billion in 2015.
The rise of cloud computing has supported the SaaS delivery model. According to IDC, the global SaaS market is projected to grow from $39 billion in 2013 to $103 billion in 2018, at a compound annual growth rate (“CAGR”) of 21%.
Ultimate Software, ADP, Ceridian Paychecks, ERP vendors,
Recurring revenue is what all SaaS lives off of. Paycom has a retention rate of 91% so as you can imagine if they can keep it at that rate they will be very profitable. This retention rate also shows that Payc has a very solid product.
Annualized new recurring revenue (ANRR). While we do not enter into long-term contractual commitments with our clients, we monitor annualized new recurring revenue as we believe it is an indicator of potential revenue for future periods. Annualized new recurring revenue is an estimate based on the annualized amount of the first full month of revenue attributable to new clients that were added or existing clients that purchased additional applications during the period presented. Annualized new recurring revenue only includes revenues from clients who have used our solution for at least one month during the period. Since annualized new recurring revenue is only recorded after a client uses our solution for one month, it includes revenue that has been recognized in historical periods.
We monitor our sales professionals by the number of sales teams at period end and each team is comprised of approximately six to nine sales professionals. Certain larger metropolitan areas can support more than one sales team. We believe that the number of sales teams is an indicator of potential revenue for future periods
Payc has a subscription based model where they can add more modules onto their product to get larger revenues and make their product stickier. They just brought two more modules on line in the last quarter. One is Learning Management System or LMS. This is a powerful and flexible training system that is completely unified with the payroll and existing applications. Paycom also introduced a module that checks for compliance of the Affordable Care Act or ACA. This helps companies make sure they are compliant with all facets of the ACA. Once a company gets within the system it is harder for them to leave. Also with the company starting to grow they could have a long runway ahead of them. I like that they are bringing their sales teams up profitably. While it takes two years for a sales team to reach maturity where they bring optimal profits to the company we can see right now that the company has a nice rate of growth.
**Revenue:** 2013: $27.6 $23.9 $25.8 $30.3 = $107.6 2014: $36.5 $33.3 $36.6 $44.0 = $150.4 2015: $54.4
**EPS:** 2013: .05 .01 .00 .00 = .06 2014: .03 .04 .05 .06 = .18 2015: .12
**FCF** 2012 $5,003 2013 $3,297 $6,067 $5,853 -$192 2014 -$3,429 -$3,385 $1,353 $8,067 2015 $10,634
1YPEG = .23
YOY Growth rate 575% Price $35.40 EPS .27
Q1 2015 Payc.
Payc has been improving their balance sheet. This quarter they have 35.7 million in cash with $862 thousand in debt. The cash has gone up from $25.5 million a year ago but debt has risen slightly from $855 thousand. The debt is the short term payment on their new corporate office in Oklahoma City, OK.
Payc Revenue was up from $36,985 to $55,222 an increase of 49%. Their portion of recurring revenue was $54,351 up from $36,454. Cost of Revenues was 7,471 which is 15% of Revenue down from YOY at 18.7% of Revenue. Sales and marketing was $21,229 up 35% YOY but as a percentage of Revenue down 4%. R and D was at $1,867 up 112% YoY but as a percentage of Revenue it was up 1%. General and Administrative was at $11,984 up 29% YoY but down 3.4% as a percentage of revenue. Total administrative expenses were up 35% YoY but as a percentage of Revenue it was actually down 6.9%. Adjusted earnings was at .12 up from .03 an increase of 300%, sequentially it was up 100%. EPS annually was up 575%. From $.04 to $.27. This strong growth of Revenue and Earnings allows the company to grow very fast. It also allows them to bring on more sales staff which is their biggest cost due to training, staffing, and the opening of new sales offices. Since it takes 24 months to bring on a new sales team to full operation these results were brought on with minimal help from the 10 sales teams, 5 brought on in 2014 and the other 5 brought on in 2015. When these 10 sales team come on line this should help to grow revenues and earning even further. Their ANRR for this quarter was $20.2 million up from $12.2 million. While this was up 65.5% we have to remember annualized this should be around 42.2%. They received a big boost this quarter from the income taxes they do for their customers.
Cash flow Statement
Free Cash Flow is growing very fast the last 3 quarters. They now have $10.4 million in fcf this quarter. Their stock based compensation is very low with only $254,000 dollars in stock based compensation. I thought that was really low so I went back and looked at their 10K and on the 10k for last year they had $712,000 in stock based compensation with Revenues of 150.9 million.