Why Paycom Software Inc. Jumped on Wednesday

By Anders BylundFool.com

Source: Paycom.

What: Shares of Paycom Software rose as much as 18% on Wednesday morning before settling down to a 14.5% gain as of 1:20 p.m. The provider of online services for managing a company's human resources posted third-quarter results on Tuesday night, just edging past Wall Street's earnings target but crushing the revenue consensus.

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So what: In the third quarter, Paycom's sales increased by 51% year over year to land at $55.3 million. Adjusted earnings rose 60% higher, to $0.08 per diluted share. Analysts would have settled for earnings near $0.07 per share on roughly $51.5 million in top-line revenues.

Now what: The fantastic revenue performance looks all the more impressive when you consider that 98% of the company's sales are tied to long-term contracts. Repeatable sales actually increased by 113% year over year, outpacing the growth of non-contract revenues. In other words, this is not just a single quarter of great sales but the formation of a solid, repeatable revenue base for the next several years.

"We believe this robust performance was due to the ongoing market embrace of our powerful, yet easy to use cloud-based solution as well as our top-notch sales organization that continues to mature and hit its stride," said Paycom CEO Chad Richison in a conference call with analysts. As you might expect from a company focused on managing and growing payrolls, Paycom's own sales and marketing budget increased 60% year over year.

Paycom's strong report also lit fires under the company's rivals. Direct competitor Paylocity rose more than 4%, just ahead of its own earnings report on Thursday night. Even much larger and more diversified rivals took notice. Automatic Data Processing is a $40 billion giant that reported its own quarterly results just last week, but that stock bucked Wednesday's negative market trends with a modest 0.5% gain on no significant news besides the Paycom report.

Zooming out a bit, you'll find that ADP shares have largely tracked the S&P 500 over the last year, while cloud-based specialists Paylocity and Paycom gained 44% and 158%, respectively. It's pretty clear where the market winds are blowing, and Paycom's actual results explain where that rocket fuel is coming from.

The article Why Paycom Software Inc. Jumped on Wednesday originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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