Business context and reporting period
Paycom Software, Inc.’s Form 10-K covers the fiscal year ended December 31, 2015; it is an annual filing, not a standalone fourth-quarter report. Paycom provides cloud-based, subscription HCM software, with payroll processing required to use its other applications. Revenue is primarily recurring and is generated mainly in the United States.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $224.7 million | $150.9 million |
| Operating income / margin | $34.4 million / 15.3% | $15.7 million / 10.4% |
| Net income | $20.9 million | $5.7 million |
| Operating cash flow | $43.0 million | $22.3 million |
| Gross margin | Approximately 84% | Approximately 82% |
- Recurring revenue was $220.0 million, about 97.9% of total revenue, up 48%. Implementation and other revenue was $4.7 million.
- Net income per diluted share was $0.36, versus $0.11. Adjusted EBITDA, a non-GAAP measure, was $48.1 million versus $27.0 million.
- Cash and cash equivalents were $50.7 million at year-end, up from $25.1 million. Working capital, using the company’s stated definition, was $37.3 million.
- Total debt was $25.9 million, primarily a secured bank term loan bearing 4.75% interest and maturing in 2021. The company reported compliance with loan covenants. Its separate headquarters construction facility had no borrowings at year-end.
- Funds held for clients of $696.7 million were matched by a $696.7 million client funds obligation; these payroll and tax funds should not be treated as freely available corporate liquidity. Capital expenditures were $16.5 million.
Fourth-quarter results and changes versus comparable periods
Fourth-quarter 2015 revenue was $65.1 million, up from $44.0 million in Q4 2014. Net income was $5.2 million versus $2.5 million; operating income was $6.2 million versus $4.8 million. Q4 operating margin was approximately 9.6%, compared with 10.9% a year earlier. The filing attributes annual growth to new clients, maturing and newer sales offices, additional applications sold to existing clients, client employee growth, larger clients, and payroll-form and Enhanced ACA activity.
For the full year, revenue growth accelerated to 49% from 40% in 2014. Operating margin rose to 15.3% from 10.4%, and gross margin increased to approximately 84% from 82%. Sales and marketing expense rose 46%, R&D expense 99%, and general and administrative expense 35%, reflecting investment in growth and increased personnel and public-company costs. FY 2014 included a $4.0 million loss on early repayment of debt; FY 2015 did not.
Outlook, commentary, risks and unusual items
- Management expected gross margins to remain relatively consistent rather than continue improving at the prior year’s rate. It gave no clear specific revenue or earnings guidance in the provided filing text.
- Paycom planned 10 to 14 additional sales offices over the following two years and expected a new headquarters building, estimated at about $13.6 million, to be completed in mid-to-late 2016. Management said existing cash was sufficient for working capital and capital expenditures for at least 12 months.
- Enhanced ACA revenue was less than 2% of FY 2015 revenue; management estimated approximately 5% of FY 2016 revenue. The company extended, subject to conditions, implementation availability for filing 2015 ACA forms through March 18, 2016. ACA-related demand and future regulation remain uncertain.
- Revenue is seasonal: payroll tax forms typically boost first-quarter revenue and margins, while unscheduled payroll runs can raise fourth-quarter revenue. Management expected ACA filings to strengthen first-quarter seasonality from 2016.
- Key risks include intense competition and pricing pressure, client cancellations (generally allowed on 30 days’ notice), dependence on payroll and successful cross-selling, recruiting and scaling costs, cybersecurity and data privacy, service or data-center outages, regulatory changes, and exposure if client payroll funding fails to clear after Paycom has disbursed funds.
- The company settled a logo-related trademark suit in 2015 for $20,000 and agreed to change its logo. It disclosed other ordinary-course legal proceedings whose outcomes could not be predicted. No material impairment of goodwill or long-lived assets was reported.
- Secondary offerings in 2015 were sales by existing holders; Paycom received no proceeds. The company paid no cash dividends and did not expect regular dividends in the foreseeable future.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2015.
Important facts for investors to verify
- Whether client additions, retention (91% average annual revenue retention), and sales-office expansion continue to support growth without disproportionate operating expense.
- How much revenue and profit growth comes from payroll versus other applications, and whether ACA revenue meets management’s estimate.
- Underlying liquidity after excluding client funds held and obligations, and cash needs for construction, capital expenditures, and growth.
- Debt covenant headroom and the terms and funding needs of the headquarters construction loan if drawn.
- Whether cybersecurity, service continuity, regulatory compliance, and client-funding controls remain effective as transaction volumes scale.
- Potential share-supply and dilution effects, including further sales by existing holders and equity compensation.