Businesses as we know them today were born sometime during the end of the Middle Ages in Europe. As Kings and Lords made way for industrialists and capitalists as employers of workers, a new type of structure emerged.
Rather than working for a feudal lord in exchange for the right to live on the land that they provided, workers now worked for factory owners and industry in exchange for a wage. But with the removal of the Kings and Lords there was the need for a new kind of structure. That was the reason for the emergence of the corporation as we know it.
Fast forward a few hundred years and the corporation is the sole structure for large businesses and multinationals across the world. And with the these large companies with employees that number from the dozens to the tens of thousands, there was the need for a whole range of new services and industries to form.
One of these was the field of human resource management. While human resources as we know it did not emerge until after World War II, it has emerged rapidly to become one of the most important branches of business as managers and business owners realized the importance of their employees to their success.
Serving this vital component of corporations has been the business of Paycom Software Incorporated (PAYC). Their track record has seen their share price rise from their recent IPO price of around $15 to recent highs almost double that of above $29.42 on November 28th, 2014.
So is Paycom (PAYC) set to continue to win attention and share price gains from the market?
Understanding the Business
The field of human resource (HR) management has developed rapidly from basic administration support for managers to a much broader field. In the modern workplace, HR serves the function of identifying talent for interview right through to benefits when workers leave or retire.
Paycom operates in several segments. Talent acquisition is the short-listing of available candidates and tracking their progress through interview stages. This is necessary because there are thousands of qualified applicants for a range of jobs in almost every industry. Many companies struggle with how to manage this process effectively and Paycom serves that need.
When employees are engaged there comes the need to manage their workdays, schedules, equipment and reporting including leave. Paycom also provides solutions to businesses of all sizes for this need.
Payroll functions are also part of the companies services, as are talent management procedures including software that powers employee self-service functions and a “dashboard” that makes life easier for managers.
There are also a range of programs that simplify the first function of HR, administrative support for matters to do with employees, including staff surveys, document management, corporate governance needs and forms.
Metrics and Measures
The activities of Paycom (PAYC) are diverse and have been developed over a long time frame. Although the company is only new to the stock exchange, it has been in existence since 1998, and therefore was well placed to be at the forefront of the technological change that has driven the huge changes in the HR industry and functions evolved and moved to the cloud.
The most recently announced numbers for the company were testament to the long history and accounts of the company. Total revenues for the third quarter were solid at $36.6 million, which represented an increase of an impressive 41.7% from the previous corresponding quarter in 2013.
Of that, the vast majority of that revenue was recurring at $35.9 million which was also an increase of over 42%. Having such a high proportion of recurring revenue is a massive positive for the company, as it means that earnings are very stable.
Net income was also strong as a proportion of revenue, with the total running at $6.6 million, compared to $3.8 million the previous year. The company also had a strong cash position with over $18 million in the bank, which leaves strong funding available to grow future sales through lead generation.
The Investment Case
The investment case for Paycom (PAYC) is dependent on several factors. The first is the continued ability for management to invest effectively in securing new clients. This must be measured against what it costs to attract those clients, winning new work typically involves expenses in the initial bidding and implementation phase.
The other major factor is the health of the US economy as a whole. Paycom primarily serves small and medium sized businesses. This means that it’s solutions are more affordable than giant companies like SAP and Oracle, but also that it’s target market has less to spend. If economic conditions for small and medium sized business become difficult as they were for several years, then Paycom’s target customers will spend less and Paycom’s revenues and profits will suffer.
Offsetting those risks are the fact that Paycom’s revenues are very “sticky”. This means that once a customer has started to use Paycom’s products and solutions, they are unlikely to switch to another provider, because it takes time to learn new systems and costs money to switch.
Paycom (PAYC) is a business that is tied to the strength of the USeconomy, which has showed signs of improvement in recent months. It has a highly scalable product, and its products deliver recurring revenues to Paycom, which results in a highly attractive business model with strong tailwinds at the current time.