Paycom Software (PAYC) Q1 Earnings & Revenues Beat Estimates

Paycom Software, Inc. (NYSE:PAYC) reported better-than-expected first-quarter 2017 results.

The company’s adjusted income per share (including stock-based compensation) came in at 44 cents per share, which beat the Zacks Consensus Estimate of 37 cents. Also, reported earnings increased from 31 cents in the year-ago quarter.

Further, Paycom Software’s stock price history reveals that the company did not disappoint in a long time. In fact, in the last one year, shares of Paycom Software increased a whopping 50.9%, outperforming the Zacks Categorized Internet-Software industry, which gained only 18.8%.

Quarter Details

Paycom Software’s revenues came in at $119.5 million, increasing 32.6% from the year-ago quarter. Revenues also beat the Zacks Consensus Estimate of $116 million. 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 32.6% increase in recurring revenues and 30.4% incresae in implementation and other revenues on a year-over-year basis.

The company’s adjusted gross margin (including stock-based compensation) declined 107 basis points (bps) on a year-over-year basis to 85.6%, primarily due to higher cost of sale.

Paycom Software’s adjusted operating margin (including stock-based compensation) increased from 31.8% reported in the year-ago quarter to 32.3%, primarily due to lower operating expenses as a percentage of revenues and higher revenue base. As a percentage of revenues, expenses decreased to 53.3% during the quarter from 54.9% reported in the year-ago period.

Adjusted net income (including stock-based compensation) came in at $25.6 million compared with $18.6 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

Paycom Software exited the first quarter with cash and cash equivalents of $92.9 million compared with $60.2 million in the previous quarter. Receivables were $1.8 million compared with $1.5 million in the previous quarter.

Paycom Software’s balance sheet comprises long-term debt of $30.4 million compared with $28.7 million reported in the last quarter. The company reported cash flow from operations of $40.2 million during the quarter.

During the quarter, the company extended the early $50 million share repurchase program.

Guidance

In second-quarter fiscal 2017, Paycom Software expects revenues in the range of $94.5–$96.5 million. The Zacks Consensus Estimate is pegged at $94 million. Adjusted EBITDA is expected to be approximately in the range of $22–$24 million.

Paycom Software updated it fiscal 2017 guidance. The company now expects revenues in the range of $426–$428 million (previously $422–$424 million). The Zacks Consensus Estimate is pegged at $422 million. Adjusted EBITDA is expected to be approximately in a range of $117–$119 million (previously $113– $115 million).

Our Take

Paycom Softwarereported outstanding first-quarter 2016 results and provided an encouraging second-quarter and fiscal 2017 revenue guidance. Also, both the top and the bottom line increased on a year-over-year basis.

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.

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 #2 (Buy). Another better-ranked stock in the technology sector is Western Digital Corporation (NASDAQ:WDC) , carrying the same Zacks Rank. You can see the complete list of today’s Zacks #1 Rank stocks here

Western Digital has a long-term EPS growth rate of 4.75%.

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