COMPANY NAME

INDUSTRY/ VERTICALS

investment theme

Paycom

HR Technology, Software, Cloud, Human Capital Management

(1) Software Disrupting Legacy Industries

(2) Vertical Software

(3) Cloud 

PAYCOM STORY

AVORY BRIEF (5 MIN)

Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time.

This is not a recommendation of the purchase or sale of any securities mentioned. 

 

ELEVATOR PITCH (30 SECONDS)

Recently named one of the 100 Fastest-Growing Companies in the world by Fortune, Paycom continues transforming business as a leading provider of human capital management technology. The industry is wide and mission-critical as every company needs to management employees. Paycom started as a pure payroll vendor with a single database. Since then, Paycom has used its single database approach to move into new segments of managing employees. This has led to strong customer retention (93%), and 20+% revenue growth.

MANAGEMENT

Focused management with a history of execution. 

FOUNDER LED

Yes

BUSINESS MODEL

Paycom targets companies with 50-5000 employees. Subscription model with upsell opportunity. 

QUALITY

High margin, mission-critical, strong cash flow, limited liabilities.

GROWTH PROFILE

+20% organic growth over the next 5-7 years based on new customers and new products.

VALUE

High return on invested capital business. Strong long term growth profile relative to value. 

ECONOMIC MOAT

High switching costs, along with industry which requires trust. 

MANAGEMENT HIGHLIGHTS

FOUNDER LED FOR 20+ YEARS

Randall Lipps: Chief Executive Officer

Chad Richison has served as President and Chief Executive Officer since he founded Paycom in 1998. Mr. Richison began his career in sales at ADP.

Craig Boelte: Chief Financial Officer

Craig E. Boelte has served as our Chief Financial Officer since February 2006. Before joining, Mr. Boelte owned an accounting practice that served Paycom. Prior to that, Mr. Boelte spent nine years at Deloitte & Touche where he served as Senior Tax Manager. Mr. Boelte has over 30 years of experience in the workforce management and HR industry.

 
 

Company overview

MARKET LEADER IN MEDICATION MANAGEMENT SOLUTIONS

Omnicell became a publicly-traded company in August 2001, and today the company’s award-winning solutions are used in over 5,000 hospitals throughout the world and in over 40,000 institutional and retail pharmacies. The company provides a suite of solutions that help monitor, manage, and distribute medications across care settings. Many of you have likely seen their products inside hospitals and care facilities without realizing it. 

 

PRODUCT PORTFOLIO

NEW PRODUCTS THAT MATTER

Omnicell's products have historically been hardware driven. The various devices appear on the bottom left of the image below. These devices include IV workflow solutions, their XT cabinets, and their XR2 automated robot for large scale pharmacies. We expect more devices and use cases over time as they expand the portfolio. In addition to more devices, they have emphasized a single data platform by which health systems can use the data recorded in the machines for more accurate insights into inventory, diversion, med use, compliance, and overall population health. We believe that the combination of hardware, software, and market share creates a unique data advantage for Omnicell. 

The solutions above are driven by the need to protect people and systems from the safety burdens of medication management, along with the financial burden. 

BUSINESS MODEL

PROBLEM

Each year the health system is hit with excessive costs related to medication management issues. The image above highlights this. In addition, today 75% of work within a pharmacy is non-clinical. 

SOLUTION 

By going down the path of creating an automated, or partially automated pharmacy, systems can reduce the cost burden of inventory, diversion, theft, and medication errors. 

PARTNERS

Omnicell is mission-critical to health systems. They provide off-site and onsite advisory services. They also work with group purchasing organizations. 

TARGET CUSTOMER

They target health facilities such as hospitals and retail pharmacies. With the increase in mental health issues across the globe, they are now targeting these specialized facilities. 

VALUE PROPOSITION

The ability to provide an all in one solution that scales. 

SELLING MOTION 

They sell direct and through group purchase organizations. Sales cycles tend to last 12-24 months.

COST STRUCTURE

They run 48-52% gross margins and 15% EBITDA.

REVENUE DRIVERS

37% of their revenue is reoccurring and the rest comes through devices sales. The main drivers of revenue over the next several years will be from XT cabinet upgrades. These are roughly 7-year cycles and 23% of units have been upgraded. In addition, they expect to sell XR2 robots and IV solutions. 

 
 

NOTABLE CUSTOMERS

MOVING UP MARKET Avg ~300

 

GO TO MARKET STRATEGY

PLATFORM ENHANCES SALES

Omnicell has three main advantages that influence its sales motion. They are already inside over 40,000 retail pharmacies and 50% of hospital systems. Therefore, when they develop a new offering they have reliable upsell opportunities. Omnicell benefits from product market need. Medication management is a priority for hospital systems. This provides Omnicell a seat at the strategic planning table for old and new systems. Lastly, and just as important is their TCO or total cost of ownership for customers. As shown below, these strategic partnerships lead to increased adoption which improves economies of scale. As they increase their product platform, each additional sale should require less spend.

 

MARKET OPPORTUNITY

NICHE + LEADER = LARGE SHARE

Omnicell remains a leader within the medication dispensing market. This market is around $1B in annual spending. Their newer XR2 solution is a greenfield opportunity and Omnicell is the most complete solution. In addition, they have a large share of the retail pharmacy market. Combined, this is around a $4-6B market opportunity, with the ability to grab about half of it. Management has guided to $1.5B in revenue by 2024, and we think there is an opportunity to move past that through market share gains along with new products. 

 

COMPETITION

ESTABLISHED COMPETITORS

Omniecell mainly competes with Becton Dickinson "BD" Pyxis MedStation. They also compete with ARxIUM MedSelect, along with vendors big and small. They have integrations with many of the electronic health software vendors such as EPIC or Cerner. Omnicell has taken a partnership approach as opposed to a walled garden approach to competition. 

ECONOMIC MOAT

Intellectual Property: Omnicell is not first to every market, but they have done a fine job at innovating and acquiring when needed to round out their offering. They have know-how in cabinets along with brand trust for medication management. This is crucial to a highly regulated industry.

Switching Costs: In most cases, Omnicell cabinets will be distributed across systems. In addition, they now have IV and Central Pharmacy solutions. A fully adopted solution would be difficult to replace from a competitive standpoint. Also, the setup time is generally 12-18 months which will not be reversed easily by practitioners. 

Network Effects: The company does not have network effects at the moment. However, they are developing a deeply integrated analytical platform which we believe could become a data hub for medication analytics. As their network of adoption increases, we believe that each location would benefit independently based on the sum of all the data ingested. 

Low-Cost Production: As they continue to scale their offering they will receive increased efficiency driven by scale. We do not see this as a moat, but rather an observation. 

 
 

METRICS

ORGANIC GROWTH WITH MARGIN EXPANSION ON THE HORIZON

Omnicell has become a reliable organic grower with a path towards $1.5B in annual revenue along with widening margins. They plan to roll out an analytics software platform that we saw during their investor day. It looks promising if executed, and is not factored into our views at the moment. The company remains well-capitalized after taking on debt years back to fund acquisitions, however, they are now in a net cash position. 

Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time. This is not a recommendation of the purchase or sale of any securities mentioned.