Paycom Software, Inc. — Q2 2015 Form 10-Q
Business and period. Paycom provides cloud-based human capital management software, including payroll, HR, time and labor, and talent applications. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods. Amounts are in millions except per-share data.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $49.0 | $33.3 | $104.2 | $70.3 |
| Recurring revenue | $47.8 | $32.7 | $102.2 | $69.1 |
| Operating income | $10.8 | $3.1 | $21.3 | $6.2 |
| Net income (loss) | $5.9 | $(0.6) | $11.9 | $0.5 |
| Diluted EPS | $0.10 | $(0.01) | $0.21 | $0.01 |
- Q2 revenue increased 47% year over year; six-month revenue increased 48%. Management attributed growth primarily to client additions in mature sales offices, with contributions from newer offices, sales of additional applications, higher average revenue per client, and increased tax-form filings.
- Six-month gross margin was approximately 84%, versus 81% in 2014. Q2 operating margin was 22.1%, versus 9.3%; six-month operating margin was 20.5%, versus 8.9%. Management said it expects gross margins to be more consistent rather than continue growing at the prior accelerated rate.
- Operating costs grew: six-month sales and marketing rose 29%, R&D 107%, and general and administrative 27%. Management cited expanded staffing, sales commissions and bonuses, office costs, and higher accounting, compliance, and insurance expenses.
- Cash and cash equivalents were $42.7 at June 30, versus $25.1 at December 31, 2014. Funds held for clients of $542.8 were matched by an equal client-funds obligation and are not equivalent to unrestricted company cash.
- Long-term debt was $26.3, down from $27.0 at year-end, under a fixed-rate 4.75% loan due in 2021. The company reported compliance with its covenants. It had no borrowings under its new construction loan at quarter-end; that facility permits up to $11.0, subject to collateral limits.
- The cash flow statement reports six-month operating cash flow of $22.8, investing cash flow of $113.2, and financing cash outflow of $118.5. Investing and financing flows largely reflect corresponding decreases in client funds and the client-funds obligation. Capital expenditures were $4.9.
Changes, outlook, and risks
- Growth included expansion to 36 sales teams from 31 a year earlier; five sales offices opened during the first half. Annualized new recurring revenue was $36.6 for the six-month period, up from $24.1.
- Management said existing cash should meet working-capital and capital-expenditure needs for at least 12 months. It expects continued investment as the business grows and anticipated borrowing approximately $11 million within 18 months for a headquarters expansion, expected to be completed by mid-2016.
- No specific revenue or earnings guidance was provided. Management said growth may generally mirror labor-market improvement and expects gradual increases in R&D expense.
- A logo-related suit by National Financial Partners was resolved after quarter-end: the company agreed to pay $20,000 and change its logo within 60 days; judgment was entered July 6, 2015, and the appeal was terminated July 8. Other ordinary-course legal proceedings remain, with outcomes uncertain.
- The company expects to lose emerging-growth-company status and become a large accelerated filer on January 1, 2016, bringing additional disclosure and auditor-attestation requirements. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- Secondary offerings in January and May sold shares held by stockholders; Paycom received no proceeds. The filing reports no share repurchases during the period.
Important facts for investors to verify
- Cash-flow figures are inconsistent within the filing: the cash-flow statement reports operating cash flow of $22.779 million and investing cash flow of $113.199 million, while the MD&A summary table reports $23.680 million and $112.298 million, respectively. Confirm the correct presentation.
- Assess revenue durability and sales productivity alongside the expansion in sales teams, and monitor whether rising operating expenses temper margin gains.
- Verify the timing, cost, and financing of the headquarters project, including anticipated construction-loan draws and the status of the potential local incentive package.
- Track implementation of the logo change and any material developments in the remaining legal proceedings.
- Consider the effect of the upcoming large-accelerated-filer requirements and review future disclosures on controls and compliance costs.