Is Paycom Software Inc (PAYC) a Better Cloud HR Software Stock? PCTY, TNET & WDAY

Small cap Paycom Software Inc (NYSE: PAYC) is the latest cloud HR software stock to debut in an IPO, meaning its worth taking a closer look at along with the performance of potential peers like Paylocity Holding Corp (NASDAQ: PCTY), TriNet Group Inc (NYSE: TNET) and Workday Inc (NYSE: WDAY). I should note that I recently wrote about TriNet Group Inc (see: Small Cap TriNet Group Inc (TNET): The Best of the Recent HR Software IPOs? PCTY & WDAY) right after it debuted with Paylocity Holding Corp also having its IPO a few trading days earlier.

What is Paycom Software Inc? 

Launched in 1998 and based in Oklahoma City, small cap Paycom Software offers a cloud-based software solution based on a core system of record maintained in a single database for all human capital management functions, providing the functionality that businesses need to manage the complete employment lifecycle, from recruitment to retirement. The company serves businesses of all sizes and in every industry with clients in all 50 states from offices across the country.

As for potential cloud HR software stock peers, Paylocity Holding Corp's multi-tenant software platform is highly configurable and includes a unified suite of payroll and HCM applications (such as time and labor tracking, benefits and talent management) for medium-sized organizations; TriNet Group provides bundled HR products, strategic services and software that simplify HR and are tailored by industry with bundled HR products covering the core services of payroll, benefits, risk & compliance, an HR team and a cloud platform for small to mid-sized businesses; and Workday Inc is a leading provider of enterprise cloud-based applications for human capital management, payroll, financial management, time tracking, procurement and employee expense

What You Need to Know or Be Warned About Paycom Software Inc

On Tuesday, Paycom Software had an IPO of 6,645,000 shares priced at $15.00 per share with an aggregate of 4,606,882 shares being sold by the company and 2,038,118 of these shares being sold by certain named selling stockholders plus the underwriters have a 30-day option to purchase up to 996,750 additional shares of common stock. The IPO was actually priced 21% below the $19 midpoint of the company's forecasted price range with shares closing at $15.35 for a decidedly subdued offering.

Looking over Paycom Software's prospectus, the company has reported revenues of $107,601k (2013), $76,810k (2012) and $57,206k (2011) that are mostly derived from payroll and tax management applications referred to as payroll processing along with net income of $7,711k (2013), $4,238k (2012) and $1,430k (2013), but it should be noted: 

We sell our solution directly through our internally trained, client-focused and highly skilled sales force based in offices across the United States. We have over 10,000 clients, none of which constituted more than one-half of one percent of our revenues for the year ended December 31, 2013. We believe that as a result of our focus on client retention, we enjoy high client satisfaction as evidenced by an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013.

At the end of last year, Paycom Software had $13,273k in cash to cover $21,090k in "long-term debt, including current portion" and $14,682k in "long-term debt due to related party" for a balance sheet that's worth further investigation. However, the prospectus noted the following uses for the cash raised in the IPO:

Amount (in millions)
Use of Net Proceeds
Contribution agreement payments(1)		$	0.1
Repayment of the 2022 Note(2)			18.8
Repayment of the 2017 Note(3)			46.1
General corporate purposes
Total net proceeds		$

 

With that in mind, the following paragraph about Paycom Software's competition is worth noting: 

Many providers continue to deliver legacy enterprise software, but as demand for greater flexibility and access to information grows, we believe there will be increased competition in the delivery of HCM cloud-based solutions by other SaaS providers. Our competitors offer HCM solutions that overlap with one, several or all categories of applications offered by our solution. Our talent acquisition and talent management applications compete primarily with Cornerstone OnDemand, Inc., Oracle Corporation, SAP AG and Workday, Inc. Our payroll applications, including payroll processing, compete primarily with Automatic Data Processing, Inc., or ADP, Ceridian Corporation, Concur Technologies, Inc., Intuit, Inc., Paychex, Inc. and The Ultimate Software Group, Inc. Our HR management applications compete primarily with ADP, Ceridian Corporation, Oracle Corporation, Paychex, Inc., SAP AG, and Workday, Inc. Our time and labor management applications compete primarily with ADP, Ceridian Corporation and The Ultimate Software Group, Inc. All of our larger competitors compete with us across multiple application categories.

In other words, there is plenty of competition in this space. 

Share Performance: Paycom Software Inc vs. PCTY, TNET & WDAY

On Wednesday, small cap Paycom Software rose 1.76% to $15.62 (PAYC has a 52 week trading range of $15.15 to $17.92 a share) for a market cap of $786.21 million. Here is a look at what performance charts are available for cloud HR software peers Paylocity Holding Corp, TriNet Group and Workday:

As you can see from the above charts, Workday was a very good performer – up until a few months when both Paylocity Holding Corp and TriNet Group debuted.

Finally, here are the available technical charts for TriNet Group and Workday:

The Bottom Line. Now might not be the right time to get into any fresh IPO. However and if you are looking for something interesting in the cloud or HR software space, Paycom Software could be worth a closer look.