Paycom Software, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Paycom provides cloud-based human capital management software as a service. Comparisons are with Q1 2022 unless stated otherwise. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $451.6 | $353.5 | +27.8% |
| Recurring revenue | $444.4 | $348.2 | +27.6% |
| Gross profit / margin | $386.4 / 85.6% | $305.0 / 86.3% | Margin down 0.7 percentage points |
| Operating income / margin | $160.4 / 35.6% | $126.3 / 35.8% | Income +27.1% |
| Net income / margin | $119.3 / 26.4% | $91.9 / 26.0% | Income +29.8% |
| Diluted EPS | $2.06 | $1.58 | +30.4% |
| Adjusted EBITDA (non-GAAP) | $220.5 | $170.1 | +29.6% |
| Operating cash flow | $146.1 | $117.2 | +24.6% |
Revenue growth reflected new clients, productivity gains in mature sales offices, sales of additional applications to existing clients, tax-form filing activity, and higher interest income on client funds. Recurring revenue was 98.4% of total revenue. Interest income on corporate funds also increased, contributing to other income of $6.0 million, versus $1.4 million.
Operating expenses grew 28.1% to $291.2 million. Sales and marketing rose 38.1% to $103.6 million, research and development rose 35.0% to $42.7 million, and cost-of-revenue operating expenses increased 37.9% to $53.1 million. Management attributed much of the expense growth to employee-related costs; marketing and advertising spending also increased. Stock-based compensation was $27.8 million, up 26.1%.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $505.6 million at March 31, up from $400.7 million at year-end. This excludes client funds held for payroll and tax obligations.
- Funds held for clients were $2,387.8 million, substantially offset by a $2,391.3 million client funds obligation. These restricted client balances are not ordinary corporate liquidity.
- Long-term debt was $29.0 million, unchanged from year-end. Paycom reported $650 million available under its revolving facility and a $750 million delayed-draw term loan facility with no term-loan borrowings. The facilities mature July 29, 2027; the company was in covenant compliance.
- Operating cash flow was $146.1 million. Investing cash outflow was $40.6 million, primarily property and equipment purchases; financing cash inflow was $183.0 million, largely reflecting the net change in client funds obligations. Cash, cash equivalents, restricted cash and restricted cash equivalents totaled $2,697.6 million at quarter-end, including client funds.
- Property and equipment purchases were $40.6 million. Headquarters expansion construction is estimated at $70–$75 million, with completion expected in the first half of 2024.
Changes, outlook and other notable items
- Management said Q1 and Q4 recurring revenue and margins are generally seasonally higher, reflecting payroll tax and ACA form filings and unscheduled payroll runs; Q1 results are not necessarily indicative of full-year performance.
- Management expects gross margins to remain relatively consistent over time, while noting quarterly fluctuations. It expects research and development expense to rise in absolute dollars and as a share of revenue, with the rate of increase expected to moderate over time. The filing gives no specific revenue or earnings guidance.
- Management stated existing cash, operating cash flows and available liquidity should be sufficient for operations, capital expenditures, dividends and opportunistic repurchases for at least 12 months. Capital needs may increase with growth investments.
- In May 2023, after quarter-end, Paycom announced an intended quarterly dividend of $0.375 per share, or $1.50 annually, subject to board approval and future discretion. The board may modify, suspend or cancel the policy.
- The company repurchased 1,923 shares during Q1, all withheld to cover employee tax obligations; no open-market repurchases were reported. The $1.1 billion plan authorization remained available at March 31, 2023.
- Available-for-sale U.S. Treasury securities held for clients had $3.7 million of unrealized losses at March 31. Management attributed the losses to interest-rate changes, reported no credit impairment losses, and said it expected principal and interest collection.
- Ordinary-course legal proceedings carry inherent uncertainty; the company said it believed current matters would not materially adversely affect it, but noted outcomes could potentially have a material effect. Other disclosed risks include cybersecurity and data privacy, regulation, competition, hiring and retention, growth management, economic conditions, and seasonality.
- After quarter-end, Vice President of Operations Justin Long resigned effective March 28, 2023; a severance agreement accelerated vesting of 1,505 time-based shares. Stockholders approved a new 2023 Long-Term Incentive Plan on May 1, and executive awards were granted the following day.
Most important facts for investors to verify
- Whether recurring revenue growth and client additions, application sales and client employee usage continue beyond the seasonally strong first quarter.
- How expense growth—especially sales and marketing, R&D and stock-based compensation—affects margins and earnings.
- The composition and availability of reported cash, distinguishing corporate cash from restricted client funds, and the use of credit facilities.
- Actual headquarters expansion costs and timing, and the board’s decisions on dividend declarations and share repurchases.
- Any material developments in legal matters, cybersecurity or privacy risks, and interest-rate exposure.