Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Summary

  • Difficult IPO for this HRM provider.
  • Paycom tried to sell itself as a cloud business.
  • Investors are best to avoid this recent offering.

Paycom Software (NYSE:PAYC) made its public debut on the 15th of April. Shares of the provider of cloud-based human capital management solutions witnessed a disappointing offering amidst a very difficult public offering climate for technology and cloud-related names.

Investors are best advised to stay away and avoid paying steep multiples for the company.

The Public Offering

Paycom delivers human capital management software solutions on the back of the preferred Software-as-a-Service (SAAS) business model. Its solutions include data analytics allowing companies to manage an employee's lifecycle from the moment of hiring until retirement. In one core system, all key human capital functions are gathered and can be provided at attractive prices.

Paycom sold some 6.6 million shares for $15 a piece, thereby raising roughly $100 million in gross proceeds. Roughly 4.6 million shares were offered by Paycom itself, which raised some $70 million for the company, while the remainder of the shares were offered by selling shareholders.

At first, bankers and the firm hoped to place shares in the $18-$20 region, but the final price was set far below the low end of the range. While this actually induced a nice opening jump at the start of trading, gains quickly faded as the stock approached the offer level again.

Some 13% of the total shares outstanding were offered in the public offering. At Wednesday's closing price of $15.62 per share, the firm is valued at $786 million.

The major banks that brought the company public were Barclays, JPMorgan, Pacific Crest Securities, Stifel and Canaccord Genuity.

Valuation

Paycom believes that many organizations will move from legacy providers toward online and cloud offerings of flexible and low-cost HCM offerings. International Data Corporation believes that the market for payroll services and HCM applications in the US alone will total $22.5 billion in 2014, creating quite a sizable opportunity.

The company actually has quite a large base of customers, some 10,000 at the moment, which are serviced by roughly 840 employees. None of these make up for more than half of one percent of total revenues, while three-year retention percentages of 91% are decent as well.

For the year of 2013, Paycom generated revenues of $107.6 million, which is up by 40.1% on the year before. The company posted a $1.2 million net profit, which compares to a loss of $0.6 million before. Note that Paycom paid out $6.5 million to preferred distribution holders in 2013, something which it no longer has to do going forward.

Paycom operates with little over $13 million in cash before the offering, while total debt stands at $34 million. The $70 million in gross proceeds will result in a net cash position of around $50 million, and make a modest boost to the bottom line given that stated interest rates ranged from 10 to 14% on existing debt.

Given the modest net cash position, the valuation of net operating assets comes down to roughly $720 million, which is the equivalent of 6.7 times annual revenues. Earnings could improve to roughly $10 million given the reduction of leverage and lack of preferred payments to unitholders for still an expensive price-earnings ratio.

Investment Thesis

The offering of Paycom has not been a success. The company priced the offering at $15 per share, some 21.1% below the midpoint of the preliminary offering range. A modest first-day jump to $15.35 did not ease the pain for existing shareholders very much, and marks a very disappointing public offering.

To Paycom's credit, the business is profitable and is showing solid revenue growth. Yet, while the company claims to be a cloud or technology business, this simply does not appear to be the case. With roughly 840 employees, average revenues per worker come down to just $127,000, suggesting it is much more of a traditional business, while it appears eager to present itself as a technology name.

Worse, the field in which Paycom is operating is becoming the target of larger companies with vast more resources. This includes the likes of Workday (NYSE:WDAY), SAP and Oracle (NYSE:ORCL), among many others. Another worry is the difficult structure of holding companies.

Enough reasons for me to pass on this offering, as Paycom is trying to present itself as a cloud or technology business, while in reality, it is much more a human resource company trading at an elevated valuation.

Source: Paycom: Human Resource Provider Trying To Sell Itself As A Cloud Business