Paycom Software, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are noted below. Paycom provides cloud-based human capital management software delivered as SaaS, with payroll as the required foundation of its integrated platform.
Financial performance
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Total revenue | $841.4 million | $737.7 million | +14% |
| Recurring revenue | $825.9 million | $724.4 million | +14% |
| Gross margin | Approximately 85% | Approximately 85% | Broadly unchanged |
| Operating income | $186.1 million | $226.2 million | -18% |
| Operating margin | 22.1% | 30.6% | -8.5 percentage points |
| Net income | $143.5 million | $180.6 million | -21% |
| Diluted EPS | $2.46 | $3.09 | -20% |
| Adjusted EBITDA (non-GAAP) | $330.8 million | $317.9 million | +4% |
Revenue growth reflected new client additions, productivity gains in mature sales offices, additional applications sold to existing clients, and strong first-quarter tax-form filing activity. Operating and net income declined as expenses rose faster than revenue, including higher sales and marketing, research and development, and general and administrative costs. Stock-based compensation increased to $90.1 million from $47.3 million, partly due to accelerated vesting of market-based awards.
Fourth-quarter snapshot: Revenue was $220.9 million, operating income $36.2 million, and net income $24.4 million. Versus Q4 2019, revenue rose from $193.4 million, while operating income fell from $60.3 million and net income from $45.4 million.
Cash flow, liquidity and debt
- Operating cash flow was $227.2 million, compared with $224.3 million in 2019.
- Investing cash flow was negative $117.9 million, including property and equipment purchases of $94.1 million. Financing cash flow was negative $165.9 million, including share repurchases, employee tax-withholding payments, debt payments, and the timing of client-fund obligations.
- Cash and cash equivalents were $151.7 million at year-end, up from $133.7 million. Funds held for clients were $1.613 billion, with an equal client-funds obligation; these balances principally relate to payroll and tax payments and are not equivalent to unrestricted corporate cash.
- Debt was $30.9 million, including current maturities. A $75 million revolving facility, expandable to $125 million subject to conditions, had no borrowings outstanding. The company reported compliance with debt covenants and stated existing cash and operating cash flow should meet working-capital and capital-expenditure needs for at least 12 months.
- Capital commitments included $29.3 million of operating lease payments and $31.1 million of scheduled term-loan principal payments.
Material changes, outlook and risks
- COVID-19-related client workforce reductions and Social Security tax deferrals, together with lower interest rates, weighed on per-employee recurring revenue and interest earned on client funds. Management expected these pressures to persist while conditions continued. The company also reported increased investment in sales and marketing and research and development, which it expected to weigh on net income.
- Management remained confident in demand and its growth strategy, citing new client acquisition, application adoption, employee usage, and expansion of sales capacity. It discussed no specific numerical earnings or revenue guidance in this filing.
- The business is seasonal: first-quarter revenue and margins are generally higher due to annual payroll and ACA filings; fourth-quarter revenue may benefit from unscheduled payroll runs. Management estimated ACA application and filing revenue would represent about 3% of projected 2021 revenue if reporting requirements remained in place.
- Key risks include cybersecurity and service interruptions, privacy and regulatory compliance, competition and pricing pressure, client headcount and economic conditions, execution of growth plans, and interest-rate exposure. The company also noted potential liquidity exposure if client payroll funding fails to settle after payments have been made.
- SEC inquiry: The company disclosed an SEC inquiry, dating to subpoenas and requests received since February 2019, concerning whether some clients were charged additional amounts for applications already included in their charges. Paycom identified fewer than 250 affected clients (about 0.5% of its client base) and had refunded approximately $3.0 million. The SEC staff informed counsel that its inquiry concerned books and records and internal controls; the timing, scope, and outcome were uncertain.
- In November 2020, Paycom granted its CEO 1.61 million market-based restricted shares with stock-price vesting targets. The filing identifies the grant-date valuation as a critical audit matter. The independent auditor issued unqualified opinions on the financial statements and internal controls; no material weakness was reported.
Important facts for investors to verify
- Whether recurring revenue growth and client headcount recover as COVID-19 effects and related tax deferrals recede, and how interest income on client funds evolves.
- Whether expense growth, particularly stock-based compensation and marketing investment, moderates and operating margins improve.
- Any developments, costs, or potential consequences from the SEC inquiry and client refunds.
- Progress on the Texas operations facility, planned sales-force expansion, and related capital requirements.
- The impact of CEO and other market-based awards, including future vesting and compensation expense.