Paycom Software, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited, with comparisons to Q1 2020 unless otherwise noted. Paycom provides cloud-based human capital management software-as-a-service. The company notes that Q1 is seasonally strong, in part because payroll tax forms are generally processed during the quarter.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $272.2 million | $242.4 million | +12% |
| Recurring revenue | $267.8 million | $238.5 million | +12% |
| Operating income | $94.5 million | $89.3 million | +6% |
| Net income | $64.6 million | $63.0 million | +3% |
| Diluted EPS | $1.11 | $1.08 | +3% |
| Gross margin | Approximately 87% | Approximately 88% | Down about 1 percentage point |
| Operating margin | 34.7% | 36.8% | Down 2.1 percentage points |
| Net margin | 23.7% | 26.0% | Down 2.3 percentage points |
| Adjusted EBITDA (non-GAAP) | $133.0 million | $117.9 million | +13% |
| Non-GAAP net income | $85.9 million | $77.9 million | +10% |
Revenue growth reflected new clients, improved productivity in mature sales offices, additional applications sold to existing clients, and tax-form filing activity. Growth was partly offset by client headcount reductions associated with COVID-19 and lower interest rates reducing interest earned on client funds. Operating expenses rose 16%, including higher sales and marketing, research and development, and general and administrative costs. Stock-based compensation expense increased 49% to $23.6 million. The effective tax rate was 32.1%, versus 28.7%, primarily due to higher nondeductible expenses.
Cash flow, balance sheet and liquidity
- Operating cash flow was $89.5 million, up 9% from $82.0 million.
- Investing activities provided $7.5 million, compared with $183.6 million used in Q1 2020; the change mainly reflected lower purchases and higher maturities of investments made with client funds. Purchases of property and equipment were $25.3 million.
- Financing activities provided $685.4 million, primarily because client funds obligations increased by $686.2 million. This reflects timing of client payroll and tax receipts and disbursements, not ordinary operating liquidity.
- At March 31, cash and cash equivalents were $215.1 million, compared with $151.7 million at year-end 2020. Funds held for clients were $2.300 billion and were matched by a $2.300 billion client funds obligation; these client funds are not available as general corporate liquidity.
- Debt was $30.5 million, including $1.8 million current and $28.7 million long-term, net of issuance costs. No revolving-facility borrowings were outstanding; the facility provided $75 million of capacity. The company reported covenant compliance.
- Management said cash and cash equivalents plus operating cash generation should cover working-capital and capital-expenditure needs for at least the next 12 months.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects gross margins to remain relatively consistent over time, while noting quarterly seasonality. It expects continued investment in sales and marketing and research and development, and expects R&D expense to rise as the business grows.
- Management said demand remained high and expressed confidence in the business and product offerings. Remote selling enabled sales staff to meet more prospects virtually; 95% of employees were working remotely at quarter-end.
- COVID-19-related client workforce reductions can weigh on per-employee revenue until employment recovers. Management also cited pandemic uncertainty and lower interest rates as potential drags on recurring revenue growth.
- The SEC inquiry, disclosed as ongoing since 2019, concerns books and records and internal controls related to certain application charges. Paycom identified fewer than 250 affected clients (about 0.5% of its client base at year-end 2020) and had refunded approximately $3.0 million. The company cannot predict the inquiry’s timing, scope or outcome.
- In a separate matter, a court dismissed Paycom Payroll’s defamation and interference claims against the Oklahoma Council for Public Affairs; the appeal was pending. Potential attorneys’ fees, costs and sanctions were not estimable.
- The company cited risks including cybersecurity and privacy, regulation, competition, hiring and retention, growth management, client headcount trends, and dependence on continued product development. It reported no material change to the risk factors in its 2020 Form 10-K.
- On April 2, 2021, Jeffrey York moved from Chief Sales Officer to Leadership Strategist, and Holly Faurot was appointed Chief Sales Officer. The quarter also included a $0.7 million gain from the interest-rate swap’s change in fair value; the comparable 2020 period had a $1.6 million loss.
Important facts for investors to verify
- Whether recurring-revenue growth and client additions continue despite pandemic-related headcount pressure and lower client-fund interest income.
- Whether expense growth, especially stock-based compensation and sales and marketing, moderates or continues to pressure operating margins.
- How much reported cash-flow movement reflects client-fund timing rather than cash generated for corporate use.
- Any developments in the SEC inquiry, including its potential scope, resolution and implications for internal controls.
- Progress on the pending Oklahoma appeal and any eventual fees, costs or sanctions.
- How seasonal Q1 strength affects comparisons with later quarters; the filing cautions that Q1 results are not necessarily indicative of full-year results.