Paycom Software, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; compared with the corresponding 2020 periods. Unaudited. Dollars are in millions unless otherwise stated.
Business context
Paycom provides cloud-based human capital management software, including payroll, HR, time and labor, and talent applications. Recurring services accounted for 98.1% of Q2 revenue. Most customer contracts are month-to-month, and fees for certain services vary with employee counts and payroll activity.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $242.1 (+33.3%) | $181.6 | $514.3 (+21.3%) | $424.0 |
| Recurring revenue | $237.6 (+33.5%) | $178.0 | $505.4 (+21.4%) | $416.4 |
| Operating income | $47.1 (+77.2%); 19.4% margin | $26.6; 14.6% margin | $141.6 (+22.3%); 27.6% margin | $115.8; 27.3% margin |
| Net income | $52.3 (+82.9%); 21.6% margin | $28.6; 15.7% margin | $116.9 (+27.6%); 22.7% margin | $91.6; 21.6% margin |
| Diluted EPS | $0.90 | $0.49 | $2.01 | $1.57 |
| Gross margin | Approximately 85% | Approximately 84% | Approximately 86% | Approximately 86% |
Q2 tax benefit was $5.0 million, versus a $1.9 million benefit a year earlier; the six-month effective tax rate was 17.9%, compared with 20.4%. Six-month adjusted EBITDA, a non-GAAP measure, was $220.0 million versus $179.1 million.
Cash flow, liquidity and debt
- Six-month operating cash flow was $146.4 million, up from $107.5 million. Purchases of property and equipment were $62.7 million; operating cash flow less those purchases was $83.7 million.
- Cash and cash equivalents were $202.4 million at June 30, 2021, compared with $151.7 million at December 31, 2020. Funds held for clients of $2,025.4 million were matched by a $2,025.4 million client funds obligation and are not equivalent to unrestricted company cash.
- Total debt was $30.0 million; no revolving credit facility borrowings were outstanding. The facility provided $75 million of capacity, and the company reported compliance with debt covenants.
- Cash, cash equivalents and restricted cash increased $475.3 million during the half, substantially reflecting a $411.9 million increase in the client funds obligation and timing of client payroll-related receipts and payments.
Changes, outlook and risks
- Management attributed revenue growth to new clients, mature sales-office productivity, and sales of additional applications to existing clients. New-client and existing-client headcount gains more than offset pandemic-related client headcount reductions during Q2.
- Lower average interest rates reduced interest earned on client funds and weighed on recurring revenue growth. Management said adverse macroeconomic factors could continue to affect recurring revenue.
- There was no specific numeric revenue or earnings guidance in the filing. Management expects relatively consistent gross margins, while noting quarterly seasonality; first-quarter revenue and margins are generally higher due to payroll-form processing.
- Management planned continued significant investment in marketing and expected research and development expense to rise as the platform and product offerings expand. As of June 30, 90% of employees were working remotely; the company had begun a limited return to offices.
- COVID-19, labor-market and client headcount changes, interest rates, competition, cybersecurity and privacy, employee retention, and the ability to manage growth were identified as risks. Management said the full future impact of the pandemic remained uncertain.
- A naming-rights agreement added a $60.2 million intangible asset and long-term payment commitments, escalating from $4.0 million to $6.1 million annually through 2035. The company also disclosed an SEC matter involving fewer than 250 affected clients: approximately $3.0 million in refunds and a $0.25 million settlement of two accounting-related charges, without admitting or denying the findings.
- An appeal is pending in the company’s defamation and tortious-interference case against the Oklahoma Council for Public Affairs. Potential attorneys’ fees, costs and sanctions could not be reasonably estimated at the filing date.
Important facts for investors to verify
- Whether recurring-revenue growth and client employee counts persist as pandemic-related effects and labor-market conditions evolve.
- How lower interest rates affect revenue earned on client funds, and how much of reported cash is restricted for client obligations.
- Whether expense growth, including stock-based compensation of $47.4 million for the first half, remains proportionate to revenue growth.
- Future capital spending, facility construction costs, and the duration and cost of the arena naming-rights commitment.
- Developments in the SEC matter and pending legal proceedings, including any material financial or control implications.