Paycom's (PAYC) Q3 Earnings to Gain From SaaS HCM Solutions

Paycom Software, Inc.PAYC is set to report third-quarter 2017 earnings results on Oct 31.

In the last reported quarter, the company posted a positive earnings surprise of 30%. The company surpassed earnings estimates in the trailing four quarters, generating an average beat of 32.1%.

Let's see how things are shaping up prior to this announcement.

Expect What?

The Zacks Consensus Estimate for the quarter is pegged at 19 cents, reflecting a year-over-year increase of 26.7%. The Zacks Consensus Estimate for sales of $100 million indicates around 29.9% growth from the prior-year quarter.

Factors at Play

Paycom Software provides cloud-based human capital management (HCM) software solution delivered as Software-as-a-Service (SaaS) with functionality and data analytics to manage the complete employment lifecycle, from recruitment to retirement. We expect higher recurring revenues and higher traction in cloud-based offerings to drive Paycom Software's business across all segments in the to-be-reported quarter. Moreover, higher adoption of the company's Affordable Care Act ("ACA") dashboard application acts as a tailwind.

Q2 Earnings Highlight

The company reported stellar second-quarter 2016 results, where both top and bottom line surpassed the Zacks Consensus Estimate. It also provided an encouraging third quarter and fiscal 2017 revenue guidance. Moreover, both the top line and the bottom line increased on a year-over-year basis.

For third-quarter fiscal 2017, Paycom Software expects revenues in a range of $99-$101 million. The Zacks Consensus Estimate was pegged at $99.5 million. The company also updated fiscal 2017 guidance. It now anticipates revenues in the range of $429.5-$431.5 million (previously $426-$428 million). The Zacks Consensus Estimate was pegged at $429.2 million.

Aided by these factors, in the last one year, its shares have surged 57.5%, outperforming the industry 's gain of 16.5%.

HCM & Cloud-Based Solutions: Key Catalysts

The company's sustained focus on investing in SaaS technology and mobile applications has been driving revenues. We believe that Paycom Software's cloud-based solution has greater demand across a wide section of verticals. Larger companies have greater and more complex HCM needs: consequently Paycom Software's solution is evolving to serve them.

Growth of cloud computing has supported the company's SaaS delivery model. We believe that with SaaS-based applications, Paycom Software is well-positioned to lead the market for advanced human capital management and payroll software solutions. These factors are likely to positively impact the to-be-reported quarter.

Recurring Revenues & Client Base: Other Positive Factors

Revenue growth seems to be steady and was positively impacted by higher recurring revenues and higher traction in cloud-based offerings. In the last reported quarter recurring revenuesincreased 33% year over year. Its solid business model, diversified products and services, and strategic acquisitions have boosted top-line growth.

The Zacks Consensus Estimates for recurring revenues is pegged at $99 million.

Furthermore, Paycom is winning market share over the most critical client demand area of HCM, which in turn, supports growth. The HCM solution includes talent acquisition, time and labor management, payroll, talent management as well as human resources ("HR") management applications. These offerings have been increasingly helping clients manage both permanent and temporary workforce. Notably continuous focus on client retention, on the basis of high client satisfaction, has aided the company to maintain its average annual revenue retention rate of 91% for all the said three years.

We believe that, Paycom Software is likely to boost revenues by successfully cross-selling newer products to the existing client base, going forward.

Why a Likely Positive Surprise?

Our proven model shows that Paycom Software is likely to beat earnings because it has the right combination of two important ingredients.

Zacks ESP : Paycom Software's Earnings ESP is +4.46%. This is because the company's Most Accurate estimate is 20 cents, while the Zacks Consensus Estimate is pegged lower at 19 cents. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Paycom Software currently has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 has a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Paycom Software's Zacks Rank #3 and +4.46% ESP makes us reasonably optimistic of an earnings beat.

Other Stocks with Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

NVIDIA Corporation NVDA has an Earnings ESP of +0.53% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Applied Materials, Inc. AMAT has an Earnings ESP of +0.37% and a Zacks Rank #1.

Intel Corporation INTC has an Earnings ESP of +0.08% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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