In many ways, Paycom Software (NYSE: PAYC) has been a perfect stock for investors -- putting up impressive top-line growth numbers while increasing margins and free cash flow over the last several years. With its all-in-one cloud-based solution that combines payroll along with multiple HR tasks, Paycom continues to make significant inroads with companies in its 50-to-2,000-employee target, primarily by stealing market share from ADP (NASDAQ: ADP).
During multiple conference appearances in November and December, Paycom CEO Chad Richison and CFO Craig Bolte provided new insights on the company's total addressable market and margin trends, its sales force, and why Paycom is staying laser-focused on its mid-market niche.
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The 50-to-2,000-employee market is a gold mine
Paycom's licensing agreements generally include a per-employee fee. That fact, coupled with some new business wins in the 2,000-to-8,000-employee range, has led many (including me) to speculate that Paycom may be trying to expand its sales efforts into larger companies. Richison, however, explained at a Dec. 5 tech summit that this is not the case.
At a conference the next day, Richison provided more detail around how much opportunity still exists in the smaller-size companies Paycom targets.
With so much untapped potential remaining in the market where its value proposition is the strongest, there's simply no need at this point for Paycom to pursue larger (or smaller) companies that would result in lower win rates.
A sales force singularly focused on new business
Paycom's current client base uses, on average, about one-third of Paycom's available software modules. So there's still a significant opportunity to cross-sell existing modules to current customers. However, Richison has a simple reason why the reps in the field don't waste their time on incremental dollars from existing clients:
After a big run-up, margins may still have room to expand
Paycom's adjusted EBITDA margin has risen dramatically in recent years -- from 16.7% in 2012 to 28.7% in 2016 -- and the company's latest guidance implies an adjusted EBITDA margin of around 31% for full-year 2017. CFO Craig Bolte said at a conference in November:
Perhaps I'm over-focusing on a couple of words, but I think the fact that Bolte said "medium-term margin targets" in the above quote is telling. On previous conference calls, those adjusted EBITDA margin targets have been referred to as "long-term." To me, Bolte's comments clearly imply that there's another level Paycom believes it can achieve beyond the 30% to 33% target they've set.
The grandest of ambitions
Richison hasn't been afraid in the past to talk about big goals. He's mentioned the potential for 120 total U.S. sales offices (which currently number 45). He's discussed the company's ambitions of $1 billion in annual sales. In Paycom's most recent conference appearance, in early December, however, Richison spoke about the company's boldest objective yet -- to replace ADP as the industry leader.
Admittedly, that goal seems like the tallest of orders, given that ADP is more than 10 times Paycom's size by market cap, and reported $11.7 billion in revenue last year compared to Paycom's $329.1 million. But based solely on the success Paycom has had at ADP's expense over the last several years, I wouldn't want to bet against the company.
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Andy Gould owns shares of Paycom Software. The Motley Fool owns shares of and recommends Paycom Software. The Motley Fool recommends Automatic Data Processing. The Motley Fool has a disclosure policy.
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