Paycom Software, Inc. — FY2021 Form 10-K
Business context and reporting period. Paycom provides cloud-based, subscription-style human capital management software, including payroll, HR, time and labor, talent acquisition and talent management applications, through a single database platform. This summary covers the fiscal year ended December 31, 2021; the filing reports annual results, not standalone Q4 results. Paycom operated as one reporting segment and served approximately 33,875 clients. No client represented more than 0.5% of revenue.
Financial results and liquidity
| Metric | FY2021 | FY2020 | Change or context |
|---|---|---|---|
| Total revenue | $1,055.5 million | $841.4 million | Up 25.4% |
| Recurring revenue | $1,036.7 million | $825.9 million | Up 25.5%; 98.2% of revenue |
| Gross margin | Approximately 85% | Approximately 85% | Management reported margins were approximately 85% in 2019–2021 |
| Operating income / margin | $253.6 million / 24.1% | $186.1 million / 22.1% | Operating income up 36.2% |
| Net income / margin | $196.0 million / 18.6% | $143.5 million / 17.0% | Net income up 36.6% |
| Diluted EPS | $3.37 | $2.46 | Non-GAAP diluted EPS was $4.48 and $3.49, respectively |
| Operating cash flow | $319.4 million | $227.2 million | Up 41% |
| Investing cash flow | $(257.7) million | $(117.9) million | Higher client-fund investments and capital spending |
| Cash and cash equivalents | $278.0 million | $151.7 million | At December 31 |
| Long-term debt, including current portion | $29.2 million | $30.9 million | Term loans; no revolver borrowings at year-end |
At year-end, $1.847 billion of funds held for clients was matched by an equal client-funds obligation. These funds are held to pay employee wages and taxes and should not be treated as unrestricted company liquidity. Cash, cash equivalents and restricted cash totaled $1.813 billion, including restricted client funds. The $75 million revolving facility was undrawn at year-end and was scheduled to mature April 15, 2022; it could be increased to $125 million subject to conditions. Management said available cash, operating cash flow and liquidity sources were expected to support operations and capital needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue growth reflected new clients, sales productivity in mature offices, additional applications sold to existing clients and first-quarter tax-form filings. Client additions and modestly improving headcount at pre-pandemic clients more than offset pandemic-related headcount losses.
- Operating income and net income grew faster than revenue, and operating and net margins increased. Total operating expenses rose 22.4%, slower than revenue growth.
- Research and development expense rose 31.2% to $118.4 million; sales and marketing rose 17.1% to $276.0 million; general and administrative expense rose 17.8% to $209.8 million. Non-cash stock-based compensation increased to $97.5 million from $90.1 million.
- Lower average interest rates reduced interest earned on client funds and weighed on recurring revenue growth. A $1.4 million gain on the interest-rate swap contributed to other income, versus a $1.4 million loss in 2020.
- Capital expenditures and other property and equipment purchases were $120.7 million, versus $94.1 million in 2020. Investing cash outflow also reflected increased purchases of short-term investments made with client funds.
- Annual revenue retention improved to 94% from 93%. Client count increased to 33,875 from 30,994.
Outlook, commentary, risks and unusual items
- Outlook: The filing does not provide clear numerical FY2022 revenue or earnings guidance. Management expected revenue growth to be supported by new-client acquisition, additional application adoption, employee usage and expansion of sales capacity. It planned continued investment in sales, marketing and research and development, and expected gross margin to remain relatively consistent. Management reported a 25% total-revenue compound annual growth rate from 2018 through 2021.
- COVID-19 and labor-market exposure: Per-employee fees make revenue sensitive to client hiring and workforce reductions. Lower interest rates also reduced income on funds held for clients. Management cited strong demand and confidence in the business but could not estimate the pandemic’s full future impact. Most employees had returned to offices by year-end; sales were expected to combine virtual and in-person meetings.
- Seasonality: First-quarter revenue benefits from annual payroll and ACA form filings; fourth-quarter revenue benefits from unscheduled payroll runs such as bonuses. This can make quarterly comparisons less indicative of underlying trends.
- Business and regulatory risks: Key exposures include cyberattacks, data privacy and security compliance, service interruptions, competition and pricing pressure, employee and sales-force hiring, rapid growth, client satisfaction, changing employment and tax regulations, and the possibility of clients reducing headcount. Substantially all client contracts can be terminated on 30 days’ notice.
- Liquidity and commitments: Term debt is secured by the Oklahoma City headquarters and subject to financial and other covenants; Paycom reported compliance at year-end. A headquarters building project was estimated at $60–$70 million over approximately two years. Arena naming-rights payments escalate from $4.0 million in 2021 to $6.1 million in 2035. The 2021 share-withholding cash outflow for employee tax obligations was $65.6 million; the company reported no open-market repurchases in 2021.
- Unusual regulatory matter: An SEC inquiry concerned certain application charges to fewer than 250 clients, approximately 0.5% of the client base at December 31, 2020. Paycom refunded approximately $3.0 million and paid $0.25 million to settle two accounting-related charges concerning books and records and internal controls, without admitting or denying the SEC’s findings. The company said the issue had not materially affected prior-period results and that it instituted a control to prevent recurrence.
- Reporting and contingencies: Management and the auditor concluded internal control over financial reporting was effective, and the auditor issued unqualified opinions on the financial statements and controls. Paycom reported ordinary-course legal matters and said their resolution was not expected to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether client additions, employee counts and application adoption sustain recurring-revenue growth and the 94% retention rate.
- How much of reported cash flow and balance-sheet assets are attributable to client funds, and the timing and availability of unrestricted liquidity.
- The status and terms of the revolving credit facility after its scheduled April 2022 maturity, and continued compliance with debt covenants.
- Whether expense growth, particularly R&D, sales and marketing, and stock-based compensation, remains consistent with revenue growth and margin trends.
- The effect of interest rates, labor-market conditions, COVID-19 developments and seasonality on recurring revenue and client-fund interest income.
- Progress, final cost and timing of the headquarters construction project, along with the remaining naming-rights and other contractual commitments.
- Any updates to the SEC matter, other legal proceedings, data-security incidents or privacy-law obligations.