Paycom Software (NYSE: PAYC) reported its second-quarter earnings on August 2. In what's become a recurring theme for the provider of cloud-based human capital management (HCM) software, the company not only beat lofty analyst expectations but raised its forward guidance as well. With Paycom's growth streak showing no signs of slowing down, shares continue to trade near their all-time highs.
Top-line growth keeps racing ahead
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Paycom's revenue growth continues to amaze, increasing 33% to $98.2 million. That result soared above the high end of the company's own guidance for $94.5 million to $96.5 million, and also beat average analyst estimates of $95.7 million.
Similar to last quarter, what makes this particularly impressive is that Paycom was lapping a huge 51% revenue increase from last year -- making the year-over-year comparison that much tougher. Even so, with two consecutive quarters of 33% revenue growth now in the books, Paycom is well on its way to beating its own long-term target for 30% annual revenue growth in 2017.
This strong performance compelled management to raise its full year 2017 revenue guidance for the second quarter in a row -- up to a range of $429.5 million to $431.5 million, which reflects 31% annual growth at the midpoint. Those kinds of numbers point to continuing strong demand for Paycom's all-in-one HCM solutions. CEO Chad Richison said (transcription by Seeking Alpha):
Margins look great, too
Paycom uses adjusted EBITDA margin as one of its key profitability measures. As it has scaled up, the company has increased its adjusted EBITDA margin in recent years, from 16.7% in 2012 to 28.7% in 2016. Management believes it can eventually boost this number further, setting a long-term margin target of 30% to 33%.
This year, however, Paycom is making large investments in R&D, marketing, and its sales team, prioritizing top-line growth at the expense of short-term margins and earnings. Because of these additional expenses, Paycom was expecting second-quarter adjusted EBITDA margin of just 24%.
However, the company blew away those expectations with a Q2 adjusted EBITDA margin of 28.3% Though expenses will continue to rise during the year, it was encouraged enough by these results to raise its full-year adjusted EBITDA guidance (also for the second quarter in a row) to a range of $122.5 million to $124.5 million, which represents an adjusted EBITDA margin of 28.6% at the midpoint. This latest guidance is remarkable because it means that Paycom should essentially be able to match its record margin figure from last year, even as it funds the investments necessary to turbocharge its growth. This also tells me that Paycom may be a lot closer to its long-term margin target of 30%+ than originally thought.
Keeping larger wins close to the vest
One abrupt change investors learned about on the conference call was that Paycom will no longer be disclosing wins with bigger companies of more than 2,000 employees. While Paycom generally targets companies with between 50 and 2,000 employees, CEO Chad Richison has been highlighting a handful of larger customers -- generally in the 2,000 to 8,000 employee range -- on each quarter's earnings call. Investors were eager to hear about these new client wins because Paycom's licensing agreements generally include a per-employee fee, making bigger companies like these even more lucrative.
On the call, Richison stated that he initially did this to prove that Paycom's solution was scalable to all sizes of companies, that the company did have additional client wins in the 2,000+ range this quarter, and that the point has now been drilled home. As for why this practice will not continue, it boils down to client confidentiality. Richison said:
Even without the color commentary around what drove some of those bigger clients to move their business from legacy providers like ADP to Paycom's HCM solution, it's easy to see this is a business firing on all cylinders. And investors continue to expect great things, with the stock now trading at a forward P/E ratio of around 60. Eventually, every company hits a disappointing quarter, but for the moment, Paycom appears to have mastered the game of underpromising and over-delivering. With no apparent weakness in the business, it's hard not to be bullish on the company's continued success.
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Andy Gould owns shares of Paycom Software. Andy Gould has the following options: short August 2017 $60 puts on Paycom Software. The Motley Fool owns shares of and recommends Paycom Software. The Motley Fool has a disclosure policy.