Paycom Software, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Paycom provides cloud-based human capital management software, including payroll, HR, time and labor, and talent applications. Financial statements are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $316.9 million | $242.1 million | $670.4 million | $514.3 million |
| Recurring revenue | $311.5 million | $237.6 million | $659.7 million | $505.4 million |
| Operating income | $72.3 million | $47.1 million | $198.6 million | $141.6 million |
| Net income | $57.4 million | $52.3 million | $149.3 million | $116.9 million |
| Diluted EPS | $0.99 | $0.90 | $2.57 | $2.01 |
| Operating cash flow | Not presented separately | Not presented separately | $169.0 million | $146.4 million |
Q2 revenue increased 30.9% year over year; net income increased 9.7%. For the first half, revenue increased 30.3% and net income increased 27.7%. Reported gross margin was approximately 84% in Q2 and 85% for the first half, versus 85% and 86%, respectively, in 2021. Q2 operating margin was 22.8% versus 19.4%; first-half operating margin was 29.7% versus 27.6%. Q2 net margin was 18.1% versus 21.6%; first-half net margin was 22.3% versus 22.7%.
At June 30, cash and cash equivalents were $279.0 million. Funds held for clients were $3.423 billion, with a corresponding client funds obligation of $3.426 billion; these client-related balances are not general-purpose liquidity. Total assets were $4.892 billion and stockholders’ equity was $994.1 million. Debt was $29.0 million, with no current portion reported. First-half capital expenditures were $67.7 million.
Material changes and management commentary
- Management attributed revenue growth to new clients, greater productivity in mature sales offices, additional applications sold to existing clients, and first-quarter tax-form filing activity. Higher client-fund balances and interest rates also increased interest revenue.
- Operating expenses rose with hiring, sales and marketing investment, research and development, and technology and facility costs. First-half sales and marketing expense increased 24.5%; research and development increased 29.2%.
- Net income growth in Q2 was lower than operating income growth; the prior-year quarter included a $5.0 million income tax benefit, compared with a $15.5 million tax provision in Q2 2022. The first-half effective tax rate was 25.5%, versus 17.9% in 2021, primarily because of lower excess tax benefits from stock-based compensation.
- First-half repurchases totaled 363,569 shares at an average $273.52 per share, including shares withheld for employee tax obligations. In June, the company authorized a $550 million repurchase plan, available through June 7, 2024.
- Management said it expects gross margins to remain relatively consistent, while acknowledging quarterly variation from seasonality and hiring. It expects sales and marketing investment to continue and R&D spending to rise in absolute dollars; no specific revenue or earnings guidance was provided.
Liquidity, debt, risks and unusual items
- Operating cash flow was $169.0 million for the first half. The reported $1.478 billion of financing cash flow was largely driven by a $1.579 billion increase in client funds obligation and should not be read as recurring financing capacity.
- On July 29, 2022, after quarter-end, Paycom replaced its May facility with a new credit agreement: a $650 million revolving facility and a delayed-draw term loan facility of up to $750 million. It borrowed $29 million under the term facility to repay the prior $29 million borrowing. As of August 3, no revolver borrowings and $29 million of term borrowings were outstanding.
- The new facility has a July 2027 maturity, variable SOFR- or base-rate borrowing costs, and financial covenants, including a minimum interest coverage ratio and maximum leverage ratio. Management stated existing cash, operating cash flows and available liquidity should cover operations and capital needs for at least 12 months.
- Key risks identified include cybersecurity and privacy incidents, service interruptions or performance issues, competition, rapid growth and hiring demands, regulatory changes, labor-market and client-headcount fluctuations, seasonality, and uncertainty related to COVID-19. The company noted ordinary-course legal proceedings; outcomes are uncertain, although management did not expect current matters to have a material adverse effect.
- Unrealized losses on available-for-sale securities were $2.2 million before tax at June 30, recorded in other comprehensive loss. The interest-rate swap generated a $1.7 million first-half fair-value gain. The swap remains outstanding following repayment of the original term loans and is intended to offset interest-rate variability.
Important facts for investors to verify
- Whether revenue growth, client additions, employee usage and cross-selling of applications continue, particularly if labor-market conditions weaken.
- How much of reported cash and cash flow is freely available after excluding restricted client funds and related obligations.
- The cost and utilization of the July 2022 credit facilities, compliance with covenants, and exposure to variable interest rates.
- Whether rising operating costs, capital investment, stock-based compensation and repurchases affect margins and per-share results.
- Any developments in legal matters, cybersecurity or privacy risks, and the company’s seasonal revenue and margin patterns.