Paycom’s Q3 results and Q4 guidance was generally in-line with expectations, with revenue produced per sales person in a mature office increasing 2% Q/Q versus our expectations of 4% Q/Q after accounting for seasonality. EBITDA beat on a greater portion of R&D being capitalized than normal and lower than expected G&A expense due to improving efficiency. The company has joined the 30/30 party (30% Y/Y sales growth and 30% EBITDA margins) with an invitation list of one.
Q3/17 Results and Q4/17, 2017 and 2018 Forecasts
Source: Perspectec and Company Reports
Conservative Guidance: As was the case in each of Paycom’s prior quarters since coming public, both revenue and EBITDA beat guidance. However the extent of the beats are what investors care about.
Q3/17 sales of $101.3M beat guidance by 1% (range of $99M and $101M). Since becoming public, Paycom has beat revenue guidance by an average of 6% while the last few quarters the beats have been 2% or 3%. Slightly disappointing but nothing really noteworthy.
Q3/17 adjusted EBITDA was $30.7M versus guidance of $21M and $23M, a 39% beat at the mid-point. Since its IPO Paycom has beat guidance mid-point EBITDA by an average of 32%, and this number is even more impressive considering the average beat the last four quarters has been 24%.
Based on Paycom’s history of conservative guidance, we are again expecting sales and adjusted EBITDA to exceed management guidance. For Q4/17, we forecast revenue to be $117.1M vs. guidance of $111.5M and $113.5 M (an anticipated 4% beat). We forecast adjusted EBITDA to be $30.1M vs. guidance of $26M and $28M (an 11% beat).
Amended Share Repurchase Plan: On October 30, 2017, the Board amended its $50 million plan to $75 million, which is set to expire on October 30, 2019. With a recent history of fully utilizing their allocated buyback, we have modeled $75 million to be fully re-purchased by the end of 2019. The CFO stated on the Q3 conference call that he expects share repurchases to be $7 million in Q4.
New developments on products/services: During Q3/17, Paycom launched 10 learning courses to clients who have their Learning Management System (LMS) module. Course topics include violence, harassment, and ethics. The CEO believes that these courses will encourage further usage of its LMS module. This product is something that ADP already offers and it gives customers who may not have wanted to make the switch to Paycom less of a reason to stay with ADP.
Slightly Raising Sales in 2017 and 2018 : We continue our sales forecast methodology and expect 2018 to be $528.4 million (21% growth) and $623.9 million (18% growth).
Consistent Margins: Sales and marketing is the key expense category that has the potential to swing EBITDA margins materially. We expect sales & marketing as a percentage of sales to be slightly higher in Q4/17 vs the prior year because Paycom launched its national TV ad campaign with a digital strategy focused on the company’s integrated HCM system during the end of Q3/17. During Q4/16, sales & marketing was $36.6M (41.6% of sales), and we expect Q4/17 to be $52.1M (44.5% of sales). Costs continue to be managed well, and we still expect gross margin to be within the low 80% range until the end of 2019. We also trend G&A as a percentage of revenue higher over time as has been the case historically while R&D we keep steady as a percentage of revenue. Overall we are forecasting EBITDA margins to move from an estimated 31% (up from 29%) in 2017 to 29% (up from 28%) in 2018.
Risk Analysis: The Affordable Care Act (Obamacare) is expected to account for 5% of sales in 2017 through filings that medium and large sized businesses have to provide to the IRS. Trump has not signed any additional executive orders on this since our initating coverage piece. We will continue to monitor for risks and any changes.
Detailed Financials
Source: Perspectec
Relative SaaS Valuation
Source: Perspectec
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For the purposes of complying with NYSE, NASDAQ and all Self-Regulatory Organizations, Perspectec Inc. has assigned the following rating system BUY, HOLD/NEUTRAL, SELL for the securities which are the views expressed by an analyst, Independent contractor, and or an employee of Perspectec Inc. The information and opinions in these reports were prepared by Perspectec Inc. or an analyst, independent contractor. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Perspectec Inc. makes no representation as to its accuracy or completeness.
