Paycom Software, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Financial amounts below are in U.S. dollars, generally millions unless stated otherwise. Paycom provides cloud-based human capital management software on a software-as-a-service basis.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $55.3 | $36.6 | $159.5 | $106.9 |
| Operating income | $6.9 | $4.7 | $28.2 | $10.9 |
| Net income | $3.8 | $2.7 | $15.8 | $3.2 |
| Diluted EPS | $0.07 | $0.05 | $0.27 | $0.06 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $34.1 | $13.3 |
- Q3 revenue grew 51% year over year, including 51% growth in recurring revenue to $54.2 million. Nine-month revenue grew 49%, with recurring revenue of $156.4 million.
- Gross margin was approximately 84% for the nine-month period, versus 82% in 2014. Q3 gross margin was approximately 84%; Q3 operating margin was 12.5% versus 12.8%, and net margin was 7.1% versus 7.4%.
- Nine-month operating margin improved to 17.7% from 10.2%; net margin rose to 9.8% from 2.9%. Prior-year results included a $4.0 million loss on early debt repayment and higher interest expense. The 2015 nine-month period also included $0.7 million of transaction expenses excluded from the company’s Adjusted EBITDA measure.
- Sales and marketing costs rose with sales growth and hiring; research and development expense more than doubled for the nine-month period. Management attributed revenue growth principally to client additions in mature and newer sales offices, higher average revenue per client, and sales of additional applications to existing clients.
Cash, debt and liquidity
- Cash and cash equivalents were $48.5 million at September 30, 2015, up from $25.1 million at December 31, 2014. Management said existing cash was expected to cover working capital and capital expenditure needs for at least the next 12 months.
- Nine-month operating cash flow was $34.1 million. Purchases of property and equipment were $10.2 million. Reported investing cash inflow of $34.9 million primarily reflects a $44.7 million decrease in funds held for clients; financing cash outflow includes the corresponding $44.7 million decrease in the client funds obligation. Client funds and the matching obligation were each $615.9 million at quarter-end and should be distinguished from operating liquidity.
- Total debt was $26.1 million, principally a fixed-rate 4.75% bank term loan due in 2021. The company reported compliance with its loan covenants. It had no outstanding borrowings under a separate headquarters construction loan, which permits borrowing of up to $11 million, subject to its terms.
- Paycom was constructing an approximately $13.4 million headquarters building, expected to be completed by mid-2016. The company was negotiating a local incentive package of up to approximately $1.2 million, contingent on job creation and salary levels.
Material developments, outlook and risks
- Management reported 36 sales teams, versus 31 a year earlier, and five new sales offices opened during the first nine months. Annualized new recurring revenue was $31.8 million for Q3, versus $14.9 million a year earlier; this is a company-defined indicator, not recognized revenue or a contractual backlog.
- No specific financial guidance was provided. Management expected research and development expense to increase over time as it added personnel, expected gross margins to remain relatively consistent quarter to quarter, and noted that new applications could contribute more materially to revenue in the future. It also cited possible further investment in sales and marketing, acquisitions, technology and services as the business grows.
- In the NFP logo dispute, the company agreed to pay $20,000 and change its logo; the settlement terminated the court action and appeal. Rebranding expenses were included in sales and marketing costs. The filing notes other ordinary-course legal matters whose outcomes cannot be predicted.
- Secondary offerings in May and September sold shares for existing stockholders; Paycom received no proceeds. The company ceased to be a controlled company in September 2015 and expected to become a large accelerated filer and cease to be an emerging growth company effective January 1, 2016, bringing additional governance, disclosure and auditor-attestation requirements.
- Management said disclosure controls were effective at September 30, 2015. The filing identifies no material change in internal control over financial reporting during the quarter, while noting preparations for the upcoming Section 404 assessment and auditor attestation.
Investor verification points
- Check whether revenue growth, annualized new recurring revenue, and expansion of sales teams and offices continued after Q3; the KPI is an estimate and includes revenue already recognized.
- Assess expense growth—especially sales and marketing, research and development, and stock-based compensation—against revenue growth and margin trends.
- Separate client funds held from Paycom’s own cash and operating liquidity when evaluating cash flows and balance-sheet liquidity.
- Monitor headquarters construction costs, any construction-loan borrowing, the proposed local incentive, and compliance with the existing loan covenants.
- Review the effects of the NFP settlement and rebranding, remaining legal contingencies, and the additional compliance obligations associated with the company’s status changes.