Paycom Software, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Paycom provides cloud-based human capital management software-as-a-service, including payroll, HR, talent, and time-management applications. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Change | Nine months 2021 | Nine months 2020 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $256.2 | $196.5 | +30.4% | $770.5 | $620.5 | +24.2% |
| Recurring revenue | $251.3 | $192.7 | +30.4% | $756.7 | $609.1 | +24.2% |
| Operating income | $43.3 | $34.0 | +27.2% | $184.9 | $149.9 | +23.4% |
| Net income | $30.4 | $27.5 | +10.5% | $147.3 | $119.1 | +23.7% |
| Diluted EPS | $0.52 | $0.47 | — | $2.53 | $2.04 | — |
- Margins: Q3 gross margin was approximately 83%, versus 84% a year earlier; nine-month gross margin was approximately 85% in both years. Operating margin was 16.9% in Q3 versus 17.4%; nine-month operating margin was 24.0% versus 24.2%.
- Cash flow: Nine-month operating cash flow was $229.6 million, up from $174.3 million. Investing cash outflow was $64.0 million, including $86.7 million of property and equipment purchases, partly offset by client-fund investment maturities. Financing cash inflow was $1.284 billion, driven principally by a $1.346 billion increase in client funds obligations.
- Liquidity and debt: Cash and cash equivalents were $230.9 million at September 30, 2021, compared with $151.7 million at December 31, 2020. Total debt was $29.6 million; no borrowings were outstanding on the $75 million revolving facility. The company reported compliance with debt covenants and believes cash and operating cash flow will cover working-capital and capital-expenditure needs for at least 12 months.
- Client funds: Funds held for clients were $2.960 billion, exactly offset by the client funds obligation. These restricted funds support client payroll and tax payments and should not be treated as unrestricted company liquidity. The large reported increase in total cash-flow balances largely reflects client-fund timing.
Material changes and management commentary
- Revenue growth reflected new clients, improved productivity in mature sales offices, and sales of additional applications to existing clients. First-quarter tax-form processing also contributed to nine-month growth.
- Management said client headcount recovery and additions from new clients more than offset pandemic-related headcount reductions during Q3. Lower interest rates reduced interest earned on client funds and weighed on recurring revenue growth.
- Expenses increased with hiring and growth. Q3 general and administrative expense rose 48%, including higher stock-based compensation; total non-cash stock-based compensation increased 49% to $29.0 million. Management expected continued investment in research and development and marketing.
- Management expects gross margins to remain relatively consistent, while noting quarter-to-quarter seasonality and hiring effects. Revenue and margins are typically higher in Q1 because of annual payroll-form processing. The filing provides no specific revenue or earnings guidance.
- COVID-19 remained a source of uncertainty, including potential effects from client employment levels and business disruption. Paycom had returned most employees to offices during Q3, with some alternating remote and onsite work; it was evaluating the potential impact of a newly issued federal vaccination-or-testing standard.
Risks, contingencies, and unusual items
- SEC matter: Following subpoenas and requests regarding certain application charges, Paycom identified fewer than 250 affected clients (about 0.5% of its client base), refunded approximately $3.0 million, and paid $0.25 million to settle two accounting-related charges concerning books and records and internal controls. The company neither admitted nor denied the SEC findings and said it instituted a preventive control.
- Capital commitments: Paycom entered a naming-rights agreement for the Oklahoma City arena, with annual payments escalating from $4.0 million in 2021 to $6.1 million in 2035. On November 3, 2021, it signed a contract for a fifth Oklahoma City headquarters building, estimated to cost $60–$70 million over approximately two years.
- Interest-rate exposure: Term loans mature in 2025 and are secured by the headquarters property. A swap mitigates part of the rate exposure; the company reported that a 100-basis-point rate change would not have materially affected results or financial condition as of quarter-end. The debt references LIBOR, whose discontinuation may require renegotiation.
- Ordinary-course legal matters remain subject to uncertainty; the filing says their resolution is not currently expected to have a material adverse effect, but acknowledges that an adverse outcome is possible. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether recurring revenue growth and client headcount trends remain strong, and how lower client-fund interest yields affect growth.
- Whether expense growth—especially stock-based compensation, hiring, marketing, and R&D—remains proportionate to revenue growth and operating margins.
- How much reported cash and cash-flow movement is attributable to restricted client funds versus unrestricted corporate resources.
- Progress and total costs for the Grapevine, Texas facility and the newly contracted Oklahoma City building, plus the long-term arena naming-rights commitment.
- Any further SEC, legal, regulatory, or control-related developments, and the company’s response to COVID-19 and evolving workplace requirements.