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Paycom (PAYC) Up 31.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Paycom Software (PAYC). Shares have added about 31.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Paycom due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Paycom Software Q3 Results Surpass Estimates

Paycom Software’s third-quarter 2019 non-GAAP earnings per share came in at 70 cents, which surpassed the Zacks Consensus Estimate of 69 cents and also grew 34% year over year.

Further, the company generated revenues of $175 million, surging 31% from the year-earlier period and also outpaced the Zacks Consensus Estimate of $172 million.

Robust new business wins and the company’s high-margin recurring revenue business drove results.

Strong sales growth can be attributed to its employee usage strategy, sales efforts and investments. The first-quarter launch of differentiated product offering, Direct Data Exchange, for all Paycom Software clients is boosting customer additions.

Moreover, the company’s top line received a 31% year-over-year positive impact in recurring revenues, which comprises 98% of the total revenue base.

The better-than-expected earnings coupled with management’s bullish guidance for the full year are expected to buoy investor confidence in the stock.

Margins

Adjusted gross profit jumped 33.7% from the year-ago period to $148.6 million. The company’s adjusted gross margin expanded 170 basis points (bps) on a year-over-year basis to 85.3%.

As a percentage of revenues, total adjusted sales and marketing expenses, administrative expenses, and research and development expenses increased 30 bps to 26.7%, 80 bps to 53.9% and 180 bps to 10.3%, respectively.

Paycom Software’s adjusted EBITDA rose 35.3% year over year to $66.6 million. Adjusted EBITDA margin of 38% expanded 110 bps year over year.

Balance Sheet & Cash Flow

Paycom Software exited the third quarter with cash and cash equivalents of $108.1 million compared with $94.8 million in the sequential quarter.

The company’s balance sheet comprises long-term debt of $33.1 million compared with $33.5 million sequentially.

Net cash provided by operating activities in the nine months ending Sep 30, 2019 was $176.4 million compared with $145.8 million in the year-ago period.

Guidance

For fourth-quarter 2019, Paycom Software expects revenues in the range of $188.5-$190.5 million. Adjusted EBITDA is estimated in the band of $72-$74 million.

Paycom Software raised forecasts for the full year. The company envisions revenues within $733-$735 million, up from $728-$730 million predicted earlier. The mid-point of the guided range implies 30% improvement from the year-ago reported figure.

Adjusted EBITDA is anticipated in the bracket of $311-$313 million, up from the earlier guidance of $306-$308 million. The company projects adjusted gross margin within 84-85% compared with 83-85% envisioned earlier.

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Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Paycom has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Paycom has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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