Paycom Software, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The filing was signed November 3, 2022. Paycom provides cloud-based human capital management software, including payroll, HR, time and labor, talent management and recruiting applications. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $334.2 (+30.4%) | $256.2 | $1,004.6 (+30.4%) | $770.5 |
| Recurring revenue | $328.2 (+30.6%) | $251.3 | $987.8 (+30.6%) | $756.7 |
| Operating income | $74.3; 22.2% margin | $43.3; 16.9% | $272.8; 27.2% margin | $184.9; 24.0% |
| Net income | $52.2; 15.6% margin | $30.4; 11.9% | $201.4; 20.1% margin | $147.3; 19.1% |
| Diluted EPS | $0.90 | $0.52 | $3.46 | $2.53 |
| Gross margin | Approximately 84% | Approximately 83% | Approximately 85% | Approximately 85% |
Nine-month operating cash flow was $236.6 million, compared with $229.6 million. Investing activities used $32.0 million, including $92.0 million of property and equipment purchases, partly offset by net proceeds from client-fund investments. Financing activities used $198.9 million; cash, cash equivalents and restricted cash increased $5.7 million overall.
At September 30, cash and cash equivalents were $317.2 million. Funds held for clients were $1,749.1 million, substantially associated with a $1,754.1 million client funds obligation; these client funds are not equivalent to unrestricted corporate liquidity. Total assets were $3,314.6 million and stockholders’ equity was $1,076.4 million.
Debt was $29.0 million, with no current portion reported. The July 2022 credit agreement provides a $650 million revolving facility and a $750 million delayed-draw term facility; no term-facility borrowings were outstanding. The company reported covenant compliance. The revolving borrowing bears interest at a SOFR-based rate plus 1.25% for the outstanding loan.
Material changes versus the prior comparable period
- Revenue rose 30.4% in both the quarter and nine-month period. Management attributed growth mainly to new clients, mature sales-office productivity, sales of additional applications to existing clients, and first-quarter tax-form filing performance. Higher interest earned on client funds also supported recurring revenue.
- Operating income grew faster than revenue, and operating margin expanded year over year in both periods. Q3 administrative expenses were a smaller share of revenue, including general and administrative expenses at 18.1% versus 23.4% a year earlier.
- Nine-month net income grew 36.8%, slower than operating income growth in part as the effective tax rate increased to 26.9% from 20.8%, primarily due to lower excess tax benefits from stock-based compensation.
- Operating cash flow increased modestly. Cash-flow comparisons were affected by substantial changes in client-fund balances and timing of payroll and tax disbursements.
- Paycom repaid and replaced earlier term/revolving borrowings during 2022, ending the period with $29.0 million drawn under its new facility. It also repurchased $94.7 million of stock during the first nine months.
Outlook, commentary and risks
- The filing gives no specific revenue, earnings or margin guidance. Management said it expects gross margins to remain relatively consistent, while noting quarterly fluctuations from seasonality and hiring trends.
- Management expects continued investment in sales and marketing, research and development, personnel, facilities and technology. It plans further sales-office expansion and said marketing spending may be adjusted based on returns. Headquarters expansion was estimated to cost $60–$70 million over approximately two years.
- Revenue is seasonal: first- and fourth-quarter recurring revenue and margins generally benefit from payroll tax/ACA filings and year-end unscheduled payroll runs. Historical seasonal results may not predict future performance.
- Management cited client headcount fluctuations and uncertainty related to COVID-19. Other disclosed risks include competition, cybersecurity and privacy, regulatory changes, recruiting and retaining personnel, execution of growth, service performance and dependence on key executives.
- The company terminated its interest-rate swap in August 2022, receiving $0.5 million. The new debt is SOFR-linked; management said a 100-basis-point rate change as of September 30 would not have materially affected results or financial condition. Available-for-sale client-fund securities had $4.9 million of unrealized losses at period-end; the nine-month after-tax other comprehensive loss was $3.8 million.
- Paycom is involved in ordinary-course legal matters. It said it believed current pending matters would not have a material adverse effect, while acknowledging outcomes are uncertain. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth, client additions and cross-selling continue, and how client headcount changes affect per-employee revenue.
- How operating margins respond to planned hiring, marketing, R&D and facility spending, including the headquarters expansion.
- Unrestricted liquidity versus client funds, and future use of the revolving and delayed-draw facilities, including floating-rate exposure and covenant requirements.
- Seasonality and the quality of cash flow, particularly the impact of client-fund timing, deferred contract costs and stock repurchases.
- The treatment and potential resolution of legal contingencies, and the impact of interest rates and valuation changes on client-fund investments.