Paycom Software (PAYC) Incurs Loss In Q3, Revenues Beat

Paycom Software, Inc. (NYSE:PAYC) reported not-so-encouraging third-quarter 2016 results.

The company’s adjusted loss per share (including stock-based compensation) came in at 1 cent per share, which compared unfavorably with the Zacks Consensus Estimate of a breakeven. Also, reported earnings decreased from 7 cents earned in the year-ago quarter.

Quarter Details

Paycom Software reported revenues of $77.3 million, which increased 39.7% from the year-ago quarter. Revenues beat the Zacks Consensus Estimate of $77 million by a whisker. The year-over-over increase was driven by the addition of new clients and product development Initiatives coupled with better-than-expected performance from Paycom's single database architecture.

Moreover, revenues were impacted positively by a 40% increase in recurring revenues and a whopping 32.6% increase in implementation and other revenues on a year-over-year basis.

The company’s adjusted gross margin (including stock-based compensation) decreased 297 basis points (bps) on a year-over-year basis to 80.9%, primarily due to higher cost of sale.

Paycom Software’s adjusted operating margin (including stock-based compensation) decreased from 12.4% reported in the year-ago quarter to 0.7%, primarily due to higher operating expenses as a percentage of revenues. As a percentage of revenues, expenses increased to 80.2% during the quarter from 71.5% reported in the year-ago period.

Balance Sheet & Cash Flow

Paycom Software exited the third quarter with cash and cash equivalents of $74.5 million compared with $80.9 million in the previous quarter. Receivables were $1.5 million compared with $2.8 million in the previous quarter.

Paycom Software’s balance sheet comprises long-term debt of $29 million compared with $28.3 million reported in the previous quarter. The company reported cash flow from operations of $74.4 million during the nine-months ended Sep 30, 2016.

During the quarter, the company repurchased 402,626 shares under the $50 million share repurchase program.

Guidance

For the fourth quarter of fiscal 2016, Paycom Software expects revenues in a range of $85 million to $87 million. The Zacks Consensus Estimate is pegged at $86 million. Adjusted EBITDA is expected to be approximately in a range of $14 million to $16 million.

Paycom Software raised its fiscal 2016 guidance. The company now expects revenues in a range of $326.5 million to $328.5 million (previous guidance $325 million to $327 million). The Zacks Consensus Estimate is pegged at $327 million. Adjusted EBITDA is expected to be approximately in a range of $88 million to $90 million (previous guidance $83 million to $85 million).

PAYCOM SOFTWARE Price, Consensus and EPS Surprise

PAYCOM SOFTWARE Price, Consensus and EPS Surprise | PAYCOM SOFTWARE Quote

Our Take

Paycom Software reported not-so-encouraging third-quarter 2016 results, with the top line beating the Zacks Consensus Estimate by a slight margin and the bottom line posting a loss, which compared unfavorably with the consensus mark. However, revenues increased on a year-over-year basis. Also, the company provided an encouraging fourth-quarter revenue guidance and raised its fiscal 2016 guidance.

Revenue growth seems to be steady and was positively impacted by higher recurring revenues and higher traction in cloud-based offerings. Better-than-expected demand for advanced human capital management and payroll software solutions during the reported quarter were the other positives.

We believe that the higher adoption of Paycom Software’s Affordable Care Act (“ACA”) dashboard application that tracks employee count, employee status and health care plan affordability will act as a tailwind for the company in the long run. Also, Paycom Software might witness long-term growth by successfully cross-selling newer products to the existing client base, which will boost revenues, going forward.

Nevertheless, competition from companies like Paylocity Holding Corporation (NASDAQ:PCTY) , Intuit Inc. (NASDAQ:INTU) and Paychex (NASDAQ:PAYX), Inc. remains a headwind.

Currently, Paycom Software has a Zacks Rank #3 (Hold). A better-ranked stock is Cirrus Logic Inc. (NASDAQ:CRUS) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

Cirrus Logic has a long-term expected earnings per share growth rate of 12.93%

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