Paycom Software Inc. (PAYC), Large Cap AI Study of the Week

July 23, 2024

Weekly AI Pick from the S&P 500

Company Overview

Paycom Software, Inc. is a leading provider of a comprehensive, cloud-based human capital management (HCM) solution delivered as Software-as-a-Service (SaaS). The company’s HCM solution supports various functions such as talent acquisition, payroll, and HR management through a single core system, enhancing data integrity and reducing administrative burdens. Founded in 1998 and publicly traded since 2014, Paycom focuses on innovative, in-house developed SaaS solutions that offer real-time analytics and business intelligence while minimizing compliance risks. The company has a strong client base of approximately 36,800 clients with a high annual revenue retention rate of 90-91%. Paycom emphasizes a user-friendly experience with specialized support, mobile app capabilities, and unique tools like Direct Data Exchange® and Beti® to enhance HR management and employee self-service.

Paycom leverages a secure cloud-based architecture that allows for remote implementation and updates, minimizing client investment in hardware and personnel. Their scalable solution serves a diverse client base, including organizations with over 10,000 employees, with pricing adapted based on employee headcount and applications used. The company’s growth strategy includes increasing domestic sales capacity, expanding internationally, targeting larger clients, and capturing small business demand. Paycom continually enhances its HCM suite, which includes applications for talent acquisition, time and labor management, payroll, talent management, and HR management, available in multiple languages and countries. Notable tools include the E-Verify application for employment verification, tax credits application for processing federal tax credits, and the Beti platform for employee-managed payroll. Newer offerings such as the Vault Visa Payroll Card and Everyday daily payroll service provide financial flexibility and convenience to employees, giving employers competitive hiring advantages. Paycom’s new ventures like Paycom Learning, which includes a vast library of eLearning content and a proprietary course creation tool, are expected to drive future revenue and growth. Despite competition from firms like ADP, Oracle, and Workday, Paycom leverages a robust marketing strategy and a geographically organized sales force to attract and retain clients, aiming to expand its market presence and revenue.

By the Numbers

Annual 10-K Report Summary:

• Compound annual growth rate (CAGR) from 2020 to 2023: 23%
• Gross margins in 2023: 84% (down from 85% in 2021 and 2022)
• Number of clients as of December 31, 2023: 36,820 (up from 36,561 in 2022)
• Clients based on parent company groupings in 2023: 19,481 (up from 19,081 in 2022)
• Total revenues for 2023: $1,693,674,000 (up 23.2% from $1,375,218,000 in 2022)
• Operating income for 2023: $451,322,000 (up 19.2% from the previous year)
• Net income for 2023: $340,788,000 (up 21.1% from the previous year)
• Average interest earned on funds held for clients in 2023: $2.2 million (up from $2.0 million in 2022)
• Operating expenses increase in 2023: $53.9 million
• Sales and marketing expenses increase in 2023: $71.1 million
• Research and development expenses increase in 2023: $50.6 million
• General and administrative expenses increase in 2023: $49.0 million
• Shares repurchased in 2023: 1,495,752 at approximately $200.93 per share
• Remaining share repurchase authorization as of 2023: $799.1 million
• Projected cost for corporate headquarters expansion: $87-$90 million

Quarterly 10-Q Report Summary:

• Revenue for Q1 2024: $499,881 (up 10.7% year-over-year)
• Operating income growth for Q1 2024: 78%
• Net income for Q1 2024: $247.2 million (up 107.2% from $119.3 million in Q1 2023)
• Average daily balances of client funds in Q1 2024: $2.6 billion (up from $2.4 billion in 2023)
• Operating expenses increase in Q1 2024: $10.6 million
• Research and development costs in Q1 2024: $80.4 million (up 26%)
• Stock-based compensation reversal in Q1 2024: $117.5 million
• Effective income tax rate for Q1 2024: 14.8% (down from 28.0% in Q1 2023)
• Revolving Credit Facility: Up to $1.0 billion maturing on July 29, 2027
• Stock repurchase authorization as of August 2022: Up to $1.1 billion
• Remaining share repurchase authorization as of Q1 2024: $796.0 million
• Shares repurchased in Q1 2024: 15,681 at an average of $194.62 per share
• Total cash dividends paid in Q1 2024: $21,209,000 ($0.375 per share)
• Cash flows from operating activities in Q1 2024: $148.6 million (up 2% year-over-year)
• Change in cash and equivalents in Q1 2024: $567 million (up 97%)
• Adjusted EBITDA for Q1 2024: $229.5 million (up from $220.5 million in Q1 2023)