Paycom Software, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Financial statements are unaudited. Paycom provides cloud-based human capital management software on a software-as-a-service basis.
Financial performance and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $353.5 | $272.2 | +29.9% |
| Recurring revenue | $348.2 | $267.8 | +30.0% |
| Operating income | $126.3 | $94.5 | +33.6% |
| Net income | $91.9 | $64.6 | +42.3% |
| Diluted EPS | $1.58 | $1.11 | Up |
| Operating cash flow | $117.2 | $89.5 | +31% |
- Gross margin was approximately 86%, compared with 87% a year earlier. Operating margin increased to 35.8% from 34.7%; net margin increased to 26.0% from 23.7%.
- Cash and cash equivalents were $360.6 million at quarter-end. Funds held for clients were $3.944 billion, largely offset by a $3.946 billion client funds obligation; client funds are held to meet payroll and tax obligations and are not equivalent to unrestricted company liquidity.
- Quarter-end debt was $28.7 million, including current and long-term portions. The company had no borrowings under its then-existing revolving facility at March 31. Stockholders’ equity was $1.009 billion.
- Investing activities used $67.6 million, including $34.5 million of property and equipment purchases and net purchases of client-fund investments. Financing cash flow included a $2.100 billion increase in client funds obligation, making reported cash movements sensitive to payroll-cycle timing.
Changes versus the prior comparable period
- Revenue growth reflected new clients, sales-office productivity, additional applications sold to existing clients, tax-form filing activity, and higher average client funds and related interest income. New-client additions and improved headcount at pre-pandemic clients more than offset continuing pandemic-related headcount pressure.
- Operating expenses rose 27.9%, slower than revenue growth. Administrative expenses increased 26.4%; general and administrative costs included higher employee-related expenses, including $5.7 million associated with additional paid time off and benefits.
- The effective tax rate declined to 27.9% from 32.1%, primarily because of lower nondeductible expenses.
- Available-for-sale securities held for clients had $1.522 million of unrealized losses, recorded in other comprehensive loss; the filing reported no credit impairment losses.
Outlook, commentary, and risks
- No specific revenue or earnings guidance for the full year is provided in the supplied filing text. Management said existing cash, operating cash flow, and available liquidity should cover operations, capital expenditures, and opportunistic repurchases for at least 12 months; it expects gross margins to remain relatively consistent, while noting quarterly variation.
- Management expects first- and fourth-quarter recurring revenue and margins generally to benefit from payroll-tax and ACA form processing and, in Q4, unscheduled payroll runs. It cautioned that seasonal results are not a reliable indicator of future periods.
- Management expects research and development spending to increase as the business grows, with the rate of increase expected to decline over time as scale benefits develop. Marketing investment may remain significant; the company also plans further sales-office expansion. Headquarters expansion was estimated to cost $60–$70 million over approximately two years.
- Key risks identified include cybersecurity and privacy incidents, regulatory changes, competition, execution of growth and product development, recruiting and retaining personnel, client headcount changes and COVID-19 effects, and seasonality. The filing reports ordinary-course legal proceedings; outcomes are uncertain, though management did not expect current matters to have a material adverse effect.
- Subsequent events: The 2018 revolving facility matured April 15, 2022. On May 4, Paycom entered a new $250 million secured revolving facility, with an option to request up to $100 million more, and borrowed $29 million to repay its term loans. The new facility matures May 4, 2027, has financial covenants, and uses variable-rate borrowing; the existing interest-rate swap remains outstanding. The COO departed April 14, with the EVP of Operations assuming his responsibilities.
Most important facts for investors to verify
- Whether recurring-revenue growth and client additions persist after accounting for first-quarter seasonality, client employee counts, and tax-form processing.
- How much of reported cash and cash-flow movement is restricted client money; assess liquidity using company funds separately from funds held for clients.
- The terms, outstanding balance, interest costs, collateral, and covenant headroom under the new revolving facility, including the effect of variable rates and the swap.
- Whether rising employee, sales, R&D, marketing, and facility costs affect margins as growth continues; monitor stock-based compensation and capitalized software costs.
- Progress and total spending on the headquarters expansion, and any material developments in legal proceedings, cybersecurity, privacy, or regulatory risks.