Paycom Software, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report; the supplied filing does not provide a clear standalone fourth-quarter income statement or cash-flow set of figures.
Business context
Paycom provides cloud-based, software-as-a-service human capital management (HCM) applications spanning payroll, HR, time and labor, talent acquisition and talent management. It operates as one reportable segment. At year-end it reported 36,561 clients (19,081 by parent-company grouping), 55 sales teams and a 93% annual revenue retention rate, down from 94% in 2021.
Financial performance
Amounts below are in millions of dollars except per-share data. Percentages are of revenue.
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Revenue | $1,375.2 | $1,055.5 | +30.3% |
| Recurring revenue | $1,351.9 | $1,036.7 | +30.4% |
| Gross margin | Approximately 85% | Approximately 85% | Relatively stable |
| Operating income / margin | $378.7 / 27.5% | $253.6 / 24.1% | +49.3% |
| Net income / margin | $281.4 / 20.5% | $196.0 / 18.6% | +43.6% |
| Diluted EPS | $4.84 | $3.37 | +43.6% |
| Adjusted EBITDA (non-GAAP) | $579.7 | $419.3 | +38.3% |
| Cash from operating activities | $365.1 | $319.4 | +14% |
| Cash and cash equivalents | $400.7 | $278.0 | +$122.8 |
Growth reflected new-client additions, productivity in mature sales offices, sales of additional applications to existing clients, tax-form filing activity and increased interest earned on client funds as rates and average balances rose. Operating expenses increased 24.3%, slower than revenue growth, supporting higher operating and net margins. The effective tax rate rose to 28% from 23%, primarily due to lower excess tax benefits from vested shares.
Cash, debt and liquidity
Operating cash flow was $365.1 million. Investing activities used $23.3 million, including $132.7 million of property and equipment purchases; financing activities provided $254.6 million. The filing notes that investing and financing cash flows are significantly affected by client-fund balances and timing, so total cash-flow movements should not be read as ordinary operating liquidity alone.
At year-end, Paycom held $2.203 billion in funds for clients and recorded a $2.208 billion client-funds obligation. These funds are principally held for payroll and tax disbursements and are not equivalent to freely available corporate cash. Debt was $29.0 million outstanding under a $650 million revolving facility; no term-loan borrowings were outstanding under the separate $750 million delayed-draw facility. Both facilities mature in 2027 and are subject to covenants. Paycom reported covenant compliance and said cash, operating cash flow and available liquidity should cover operations and capital needs for at least 12 months.
The company authorized up to $1.1 billion of repurchases through August 15, 2024. During 2022 it repurchased 364,667 shares at an average $273.74 per share; cash-flow statements report $94.7 million of common-stock repurchases. No cash dividends had been paid as of the filing.
Changes, outlook and notable items
- Revenue growth accelerated in dollars, while retention edged down one percentage point. Sales teams increased from 51 to 55.
- Management expects gross margin to remain relatively consistent, while investing in sales capacity, research and development, marketing and facilities. It expects growth to depend on new-client wins, employee use of its applications and adoption of additional applications.
- Paycom began construction of a 315,000-square-foot headquarters building; estimated project cost is $70 million to $75 million, with completion expected in the first half of 2024.
- Management estimated that Enhanced ACA and ACA form-filing revenues would represent approximately 2% of projected 2023 revenue if employer reporting requirements remain in place. Changes to the ACA could reduce this revenue.
- Recurring revenue is seasonal: first-quarter tax-form filings and fourth-quarter unscheduled payrolls, such as bonuses, typically provide a lift.
- Paycom terminated its interest-rate swap in August 2022, receiving $0.5 million on settlement. Other income also reflected an insurance settlement and higher interest income.
- Auditors issued unqualified opinions on the financial statements and internal controls. The critical audit matter was the estimated ten-year client relationship life used to amortize deferred implementation revenue and contract costs.
Key risks and contingencies
Principal risks include cybersecurity incidents, data privacy and regulatory compliance, service or data-center interruptions, intense competition and pricing pressure, employee and client growth execution, and economic or labor-market weakness affecting client headcount and per-employee revenue. Most client contracts can be terminated on 30 days’ notice. The company also disclosed ordinary-course legal proceedings and employee-related matters; it believes current pending matters will not have a material adverse effect, but says outcomes are uncertain.
Investor verification checklist
- Confirm standalone Q4 results in the relevant quarterly filing or earnings release; this annual filing’s cited results are full-year figures.
- Assess how much revenue and earnings growth came from client and employee growth, application adoption, and interest earned on client funds.
- Review retention trends, client headcount exposure and the effect of month-to-month termination rights.
- Distinguish corporate cash from restricted client funds, and check revolver borrowings, interest costs and covenant headroom.
- Evaluate the sustainability of margins amid planned hiring, marketing, R&D and headquarters spending, and verify subsequent progress against the construction schedule.
- Monitor ACA-related revenue exposure, privacy and cybersecurity developments, and any material updates to litigation or other contingencies.