7 Quotes That Reveal Paycom Software's Growth Secrets

By Andy GouldMarketsFool.com

Paycom Software (NYSE: PAYC), which sells cloud-based workforce management and payroll software, is in the midst of an impressive growth streak, having increased its annual revenue by more than 40% for each of the past four years. But the market is a forward-looking animal, and discussions about whether that kind of growth is sustainable invariably turn to Paycom's moat -- or, rather, its lack of one. How is this tiny company continuing to gain market share at the expense of deep-pocketed industry giants like ADP and Paychex?

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The short answer is that I don't think there's any single thing Paycom offers that its customers can't get from another company. Paycom simply offers the smaller-sized businesses it targets (between 50 and 2,000 employees, generally) a very attractive combination of product, service, and pricing. That said, several quotes from the company's most recent earnings call illustrate a few things that are helping Paycom win clients and keep its competitors at bay.

Image source: Paycom Software.

One database to rule (and manage) them all

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Paycom's software solution is one integrated application that runs on a single cloud-based database. This eliminates the headaches created by using different software for diverse functions including payroll, time entry and tracking, recruiting, performance reviews, and compliance with government regulations.

Chad Richison, Paycom CEO, provided these examples on the company's first-quarter conference call:

A service model that includes on-site training

Richison also noted that clients are drawn to Paycom's level of customer service, which includes having reps on site to help with employee training:

Continued heavy investments in R&D fuel the top line

Paycom's not resting on its laurels, with Richison noting in a recent investor presentation that the company has increased its R&D budget 100% year over year for each of the past three years. And on the conference call, Richison stated:

A different breed of salesforce

Interestingly, Paycom has a strategy of not hiring its salespeople from within the industry, which so far has been very effective. If I had to guess why, perhaps Paycom's smaller clients just feel more comfortable talking to these "outsider" types than industry sales vets. Richison noted:

Can Paycom keep winning?

Moat or no moat, Paycom looks poised to gain an even stronger foothold with small- and medium-sized businesses, recently affirming its annual top-line growth goal of 30%. Despite all of its success, the company says it hasn't seen the competitive environment change a whole lot. This would seem to indicate that -- at least for the moment -- Paycom's smaller company niche still offers a lot of upside from here.

Responding to whether the company is seeing its peers compete more aggressively for Paycom's target customers, Richison stated:

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Andy Gould owns shares of Paycom Software. Andy Gould has the following options: short May 2017 $50 puts on 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.