Paycom Software, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; the supplied filing text does not provide a clear set of standalone fourth-quarter results. Paycom sells cloud-based human capital management software on a SaaS basis, primarily through recurring payroll and related service fees.
Key financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $1.694 billion | $1.375 billion | +23.2% |
| Recurring revenue | $1.665 billion | $1.352 billion | +23.2% |
| Operating income / margin | $451.3 million / 26.6% | $378.7 million / 27.5% | Income +19.2% |
| Net income / margin | $340.8 million / 20.1% | $281.4 million / 20.5% | Income +21.1% |
| Diluted EPS | $5.88 | $4.84 | +21.5% |
| Gross margin | Approximately 84% | Approximately 85% | Down about 1 percentage point |
| Cash from operating activities | $485.0 million | $365.1 million | +33% |
Operating expenses rose 24.7%, faster than revenue, contributing to lower operating and net margins. Research and development expense increased 34.1%; sales and marketing and general and administrative expenses each increased 20.5%. Non-GAAP adjusted EBITDA was $719.3 million versus $579.7 million; non-GAAP net income was $449.5 million versus $357.2 million. These company-defined non-GAAP measures are supplemental, not substitutes for GAAP results.
Liquidity, debt and capital allocation
- Year-end corporate cash and cash equivalents were $294.0 million, down from $400.7 million. Funds held for clients were $2.327 billion, matched by a $2.328 billion client funds obligation; these client balances are not equivalent to unrestricted corporate liquidity.
- Paycom repaid its $29.0 million revolving-credit borrowing in November 2023 and ended the year with no debt outstanding. Its senior secured revolving facility was increased to $1.0 billion; availability is subject to the agreement’s terms and covenants.
- Investing cash outflow was $196.7 million, including $192.6 million of property and equipment purchases. Financing cash outflow was $274.7 million, including $286.6 million of share repurchases and $64.8 million of dividends, partly offset by client-fund timing.
- The Board initiated a quarterly dividend policy in 2023; three dividends of $0.375 per share were paid. The filing says the policy may be changed or suspended. At year-end, $799.1 million remained under the repurchase authorization, which was set to expire August 15, 2024.
Material changes and management commentary
- Revenue growth reflected new clients and improved sales-office productivity, along with stronger tax-form filing performance and higher interest income on client funds. Management also cited lower revenue from additional applications sold to existing clients, lower retention among smaller clients, and fewer billable payroll corrections and unscheduled payroll runs as Beti reduces payroll errors.
- Annual revenue retention was 90%, versus 91% in 2022 and 94% in 2021. Paycom changed the calculation in 2023, including excluding interest earned on client funds and changing when a client is deemed lost; prior periods were recast. Management says the metric may also reflect clients that were acquired or ceased operations.
- Management intends to expand sales capacity and international reach, target larger clients, add applications, and invest in product development and infrastructure. It expanded its target market to include employers with more than 10,000 employees. Paycom reported 36,820 clients and 55 sales teams at year-end.
- Management expects gross margin to remain relatively consistent, though quarterly results may vary with seasonality and hiring trends. Expenses are expected to continue increasing as the business grows. The filing does not provide a clear numerical 2024 revenue or earnings guidance target.
- Paycom expects first- and fourth-quarter revenues to benefit seasonally from annual tax and ACA filings and year-end bonus payrolls. If ACA reporting requirements remain in place, the company estimates its Enhanced ACA application and ACA forms business will represent about 2% of projected 2024 revenue.
- The Oklahoma City headquarters expansion was estimated to cost $87 million to $90 million, with completion expected in the first quarter of 2024. Paycom also has escalating arena naming-rights payments, reaching $6.1 million annually in 2035.
Risks, contingencies and unusual items
- Cybersecurity and service continuity are material risks given the sensitive payroll and personal data Paycom processes. The filing describes a prior MOVEit third-party vendor incident and related client data exposure. A class action against a subsidiary alleges damages arising from that incident; Paycom intends to defend the claim.
- Paycom and certain executives faced securities class actions alleging misleading statements during a disputed 2023 class period; a stockholder derivative action was also filed. The company says it believes pending matters will not materially adversely affect it, but acknowledges outcomes are uncertain and could be material.
- Revenue retention, competition and pricing, hiring and labor-market trends, larger-client sales cycles, international expansion, privacy and employment regulation, and third-party and banking relationships could affect results. Interest earned on client funds is also sensitive to rates: a hypothetical 100-basis-point rate change was estimated to alter the next 12 months’ client-fund interest income by approximately $19.2 million.
- Other income included $23.5 million of income on corporate funds; the company recorded a $1.2 million loss on extinguishment of debt. Stock-based compensation expense rose 37% to $129.8 million.
- Subsequent to year-end, Christopher Thomas was appointed Co-CEO on February 7, 2024. The same day, Chad Richison’s 1.61 million-share 2020 CEO performance award was forfeited following his change in role. Most 2023 performance-based awards eligible to vest were forfeited in February 2024 because performance goals were not achieved; 4,472 shares vested for CFO Craig Boelte.
Important facts for investors to verify
- Track whether revenue growth, client retention and cross-selling improve, accounting for the 2023 retention-rate methodology change and Beti’s effect on billable corrections and payroll runs.
- Assess expense growth, particularly R&D, stock-based compensation and sales and marketing, against revenue growth and margin trends.
- Distinguish unrestricted corporate cash from client funds and monitor operating cash flow, capital spending, repurchases, dividends and compliance with revolving-facility covenants.
- Follow developments in the MOVEit-related and securities litigation, and any disclosure of cybersecurity, service availability, privacy or regulatory incidents.
- Check execution and returns from the headquarters expansion, larger-client strategy and international payroll expansion; confirm the impact of seasonality and ACA reporting on quarterly comparisons.