IPO Report: Paycom Software (PAYC)

Paycom Software ($PAYC) is a leading provider of a comprehensive, cloud-based human capital management (HCM)  software solution headquartered in Oklahoma City, OK.

Twelve other companies are scheduled for the week of April 7, 2014. The complete IPO calendar is available at IPOpremium.

The manager and joint managers are Barclays and J.P. Morgan. The co-managers are Pacific Crest Securities, Stifel, and Canaccord Genuity.

PAYC scheduled a $126 million IPO with a market capitalization of $956 million at a price range midpoint of $19 for Friday, April 11, 2014 on the NYSE.  SEC filings

Overview

PAYC is a leading provider of a comprehensive, cloud-based human capital management (HCM) software solution delivered as SaaS.

Valuation

Glossary

Conclusion

Thirty percent of the IPO from selling shareholders.

For 2013 vs 2012 top line revenue grew 40 percent to $108 million, and 98 percent was recurring.

Net income grew 67 percent to $5.4 million.

The P/E based on 2013 results is 177.  See 'valuation below.'

The rating on PAYC is positive, based on the belief that top line revenue growth will generate profits so that the P/E is more reasonable.

Business

PAYC is a leading provider of a comprehensive, cloud-based human capital management (HCM) software solution delivered as SaaS.

PAYC provides functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement.

No customization required

PAYC’s solution requires virtually no customization and is based on a core system of records maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management, and HR management applications.

PAYC’s user-friendly software allows for easy adoption of its solution by employees, enabling self-management of their HCM activities in the cloud which reduces the administrative burden on employers and increases employee productivity.

Clients

PAYC serves a diverse client base in terms of size and industry. PAYC has over 10,000 clients, none of which constituted more than one-half of one percent of its revenues for the year ended December 31, 2013. PAYC stored data for more than 1,000,000 persons employed by its clients during the year ended December 31, 2013.

Sales

PAYC’s revenues are primarily generated through its sales force that solicits new clients and its client relations representatives, or CRRs, who sell new applications to existing clients.

PAYC has 30 sales teams located in 20 states and plans to open additional sales offices to further expand its presence in the U.S. market. In recent years, PAYC has opened three to four new sales offices in new cities per year and believes that it can increase this annual number to four to six new sales offices in the future.

Growth plan

PAYC’s continued growth depends on attracting new clients through geographic expansion, further penetration of its existing markets and the introduction of new applications to its existing client base.

PAYC also expects a portion of its growth to generally mirror improvements in the labor market. PAYC’s principal marketing programs include telemarketing and email campaigns, search engine marketing methods and national radio advertising.

During the last three years, PAYC has developed several new applications.

PAYC’s ability to continue to develop new applications and to improve existing applications will enable it to increase revenues in the future, and the number of its new applications adopted by its clients has been a significant factor in PAYC’s revenue growth over the last three years.

Dividend Policy

No dividends are planned.

Intellectual Property

PAYC has a number of registered and unregistered trademarks and will continue to evaluate the registration of additional trademarks as appropriate. PAYC does not have any patents or patent applications pending.

Seasonality

PAYC’s revenues are seasonal in nature.

Recurring revenues include revenues relating to the annual processing of payroll forms such as Form W-2 and Form 1099.

Because these forms are typically processed in the first quarter of the year, first quarter revenue and margins are generally higher than in subsequent quarters.

PAYC believes this seasonality is driven by several factors, most notably the number of its clients that use its payroll application, as compared to the other applications that PAYC offers.

As PAYC’s clients use additional applications in the future, PAYC believes that the seasonality in revenues will diminish.

Competition

PAYC compete with firms that provide HCM solutions by various means.

Many providers continue to deliver legacy enterprise software, but, as demand for greater flexibility and access to information grows, PAYC believes there will be increased competition in the delivery of HCM cloud-based solutions by other SaaS providers.

PAYC’s competitors offer HCM solutions that overlap with one, several, or all categories of applications offered by its solution.

PAYC’s talent acquisition and talent management applications compete primarily with Cornerstone OnDemand, Inc., Oracle Corporation, SAP AG and Workday, Inc.

PAYC’s payroll applications, including payroll processing, compete primarily with ADP, Ceridian Corporation, Concur Technologies, Inc., Intuit, Inc., Paychex, Inc. and The Ultimate Software Group, Inc.

PAYC’s HR management applications compete primarily with ADP, Ceridian Corporation, Oracle Corporation, Paychex, Inc., SAP AG, and Workday, Inc.

PAYC’s time and labor management applications compete primarily with ADP, Ceridian Corporation and The Ultimate Software Group, Inc.

PAYC’s larger competitors compete with PAYC across multiple segments. In addition, PAYC’s HCM solution continues to face competition from in-house payroll and HR systems and departments as well as HR systems and software sold by third-party vendors.

5% stockholders

Welsh, Carson, Anderson & Stowe X, L. P.        56.5 percent

Ernest Group, Inc.                                              13.3 percent

ChadRichison                                                    24.2 percent                       

Use of proceeds

PAYC expects to net $78 million from its IPO. Proceeds are allocated as follows:

(i) the repayment of a 10% Senior Note due 2022, or the 2022 Note, issued by PAYC to an affiliate of Welsh, Carson, Anderson & Stowe, (ii) the repayment of the 2017 Note, assumed in the Reorganization and (iii) general corporate purposes, including additions to working capital and capital expenditures.