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Paycom Software, Inc. Reports First Quarter 2020 Results

Paycom Software, Inc. (“Paycom”, “we,” and “our”) (NYSE: PAYC), a leading provider of comprehensive, cloud-based human capital management software, today announced its financial results for the quarter ended March 31, 2020.

“I’m proud of our excellent first quarter results and the continued success we are having onboarding new clients,” said Paycom’s founder and CEO, Chad Richison. “Our value proposition has never been stronger and we continue to see increased demand for the Paycom solution. Our Paycom family members have done a great job focusing on delivering world-class service, rapidly developing software enhancements and continuing strong new client adds as we transition through this time period.”

Financial Highlights for the First Quarter of 2020

Total Revenues of $242.4 million represented a 21% increase compared to total revenues of $199.9 million in the same period last year. Recurring revenues of $238.5 million also increased 21% from the comparable prior year period, and constituted 98% of total revenues.

GAAP Net Income was $63.0 million, or $1.08 per diluted share, compared to GAAP net income of $47.3 million, or $0.81 per diluted share, in the same period last year.

Non-GAAP Net Income(1) was $77.9 million, or $1.33 per diluted share, compared to $69.3 million, or $1.19 per diluted share, in the same period last year.

Adjusted EBITDA(1) was $117.9 million, compared to $103.3 million in the same period last year.

Cash and Cash Equivalents were $181.8 million as of March 31, 2020, compared to $133.7 million as of December 31, 2019.

Total Debt, Net was $32.2 million as of March 31, 2020, compared to $32.6 million as of December 31, 2019.

(1)Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures. Please see the discussion below under the heading “Use of Non-GAAP Financial Information” and the reconciliations at the end of this release for additional information concerning these and other non-GAAP financial measures.

Financial Outlook

Paycom is withdrawing its previously issued full-year 2020 guidance in light of macroeconomic uncertainties, particularly unemployment, arising from the current COVID-19 crisis.

“Our large market opportunity, profitable recurring business and attractive value proposition will help us mitigate the impact of headcount reductions across our client base,” said Paycom’s chief financial officer, Craig Boelte. “We continue to analyze the impact the pandemic is having on our client base and are hopeful to return to providing quarterly and full-year guidance once we have more visibility into the effects of the COVID-19 pandemic on the economy, specifically as unemployment numbers become more predictable.”

Impact of the COVID-19 Pandemic

Beginning in February 2020, we took proactive measures to ensure the safety of our employees and shore up business continuity processes in light of the increasing risks from COVID-19. We have transitioned 98% of our workforce to a work-from-home model, while simultaneously ensuring our clients continue to receive the same level of service they have come to expect from our dedicated, one-on-one customer service model. Although we currently have some insight with respect to the shorter-term effects of the COVID-19 pandemic, it is not possible at this time to estimate the full impact that the crisis could have on our business. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and clients.

  • The COVID-19 pandemic has resulted in, and may continue to result in, headcount reductions across our client base. Because we charge our clients on a per-employee basis for certain services we provide, fluctuations in headcount at our clients will impact our results of operations in future periods.
  • Significantly lower average interest rates in 2020, as well as slower growth in the average funds held for clients balance due to lower employee headcount at our clients and clients electing the Social Security tax deferral under the CARES Act, will have a negative effect on recurring revenue growth in future periods.
  • Our solution allows clients to seamlessly manage and communicate with their remote workforces. In this new work-from-home environment, our clients are recognizing the benefits of our focus on employee usage, as well as the strengths and advantages of our single database solution.
  • We have temporarily halted business-related travel. The resulting shift from in-person to video conference and teleconference sales meetings represents a unique opportunity to meet with a greater number of client prospects in a given day than through in-person meetings.

Use of Non-GAAP Financial Information

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we present certain non-GAAP financial measures in this press release and on the related teleconference call, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, adjusted sales and marketing expenses, adjusted total administrative expenses, adjusted research and development expenses and adjusted total research and development costs. Management uses these non-GAAP financial measures as supplemental measures to review and assess the performance of our core business operations and for planning purposes. We define (i) adjusted EBITDA as net income plus interest expense, taxes, depreciation and amortization, non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap, (ii) non-GAAP net income as net income plus non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap, all of which are adjusted for the effect of income taxes, (iii) adjusted gross profit as gross profit plus applicable non-cash stock-based compensation expense, (iv) adjusted gross margin as gross profit plus applicable non-cash stock-based compensation expense, divided by total revenues, (v) each adjusted expense item as the GAAP expense amount less applicable non-cash stock-based compensation expense, (vi) adjusted total research and development costs as total research and development costs (including the capitalized portion) less applicable non-cash stock-based compensation (including the capitalized portion) and (vii) adjusted EBITDA margin as adjusted EBITDA (calculated as described in clause (i)) divided by total revenues. The non-GAAP financial measures presented in this press release and discussed on the related teleconference call provide investors with greater transparency to the information used by management in its financial and operational decision-making. We believe these metrics are useful to investors because they facilitate comparisons of our core business operations across periods on a consistent basis, as well as comparisons with the results of peer companies, many of which use similar non-GAAP financial measures to supplement results under GAAP. In addition, adjusted EBITDA is a measure that provides useful information to management about the amount of cash available for reinvestment in our business, repurchasing common stock and other purposes. Management believes that the non-GAAP measures presented in this press release and discussed on the related teleconference call, when viewed in combination with our results prepared in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our business and performance.

The non-GAAP financial measures presented in this press release and discussed on the related teleconference call are not measures of financial performance under GAAP and should not be considered a substitute for net income, gross profit, gross margin, research and development expenses, sales and marketing expenses, administrative expenses and total research and development costs. Non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these non-GAAP financial measures in isolation, or as a substitute for the consolidated statements of income data prepared in accordance with GAAP. The non-GAAP financial measures that we present may not be comparable to similarly titled measures of other companies and other companies may not calculate such measures in the same manner as we do.

Conference Call Details:

In conjunction with this announcement, Paycom will host a conference call today, April 28, 2020, at 5:00 p.m. Eastern time to discuss its financial results. To access this call, dial (866) 362-4443 (domestic) or (412) 317-5229 (international) and announce Paycom as the conference name to the operator. A live webcast as well as the replay of the conference call will be available on the Investor Relations page of Paycom’s website at investors.paycom.com. A replay of this conference call can also be accessed by dialing (877) 344-7529 (domestic) or (412) 317-0088 (international) until May 5, 2020. The replay passcode is 10141802.

About Paycom

As a leader in payroll and HR technology, Oklahoma City-based Paycom redefines the human capital management industry by allowing companies to effectively navigate a rapidly changing business environment. Its cloud-based software solution is based on a core system of record maintained in a single database for all human capital management functions, providing the functionality that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Paycom has the ability to serve businesses of all sizes and in every industry. As one of the leading human capital management providers, Paycom serves clients in all 50 states from offices across the country.

Forward-Looking Statements

Certain statements in this press release are, and certain statements on the related teleconference call may be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements that refer to Paycom’s estimated or anticipated results, other non-historical facts or future events and include, but are not limited to, statements regarding our statements regarding our business strategy; anticipated future operating results and operating expenses, cash flows, capital resources, dividends and liquidity; trends, opportunities and risks affecting our business, industry and financial results; future expansion or growth plans and potential for future growth; our ability to attract new clients to purchase our solution; our ability to retain clients and induce them to purchase additional applications; our ability to accurately forecast future revenues and appropriately plan our expenses; market acceptance of our solution and applications; our expectations regarding future revenues generated by certain applications; our ability to attract and retain qualified employees and key personnel; future regulatory, judicial and legislative changes; how certain factors affecting our performance correlate to improvement or deterioration in the labor market; our plan to open additional sales offices and our ability to effectively execute such plan; the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months; the timeline for construction of our new Texas operations facility; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to our new Texas operations facility and research and development; our plans to repurchase shares of our common stock through a stock repurchase plan; our expected income tax rate for future periods; and the impact of the novel coronavirus (COVID-19) pandemic on our business, results of operations, cash flows, financial condition and liquidity. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “will,” “would,” and similar expressions or the negative of such terms or other comparable terminology. These forward-looking statements speak only as of the date hereof and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors discussed in our filings with the Securities and Exchange Commission, including but not limited to those discussed in our most recent Annual Report on Form 10-K. We do not undertake any obligation to update or revise the forward-looking statements to reflect events or circumstances that exist after the date on which such statements were made, except to the extent required by law.

Paycom Software, Inc.

Consolidated Balance Sheets

(in thousands, except per share amounts)

March 31, 2020

December 31, 2019

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

181,827

$

133,667

Accounts receivable

8,059

9,298

Prepaid expenses

17,853

13,561

Inventory

930

1,158

Income tax receivable

4,020

Deferred contract costs

50,513

46,618

Current assets before funds held for clients

259,182

208,322

Funds held for clients

1,392,379

1,662,778

Total current assets

1,651,561

1,871,100

Property and equipment, net

254,423

238,458

Goodwill

51,889

51,889

Long-term deferred contract costs

316,768

292,134

Other assets

35,084

33,336

Total assets

$

2,309,725

$

2,486,917

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

5,694

$

5,051

Income tax payable

15,953

Accrued commissions and bonuses

5,662

12,343

Accrued payroll and vacation

21,159

14,870

Deferred revenue

11,660

11,105

Current portion of long-term debt

1,775

1,775

Accrued expenses and other current liabilities

43,633

45,600

Current liabilities before client funds obligation

105,536

90,744

Client funds obligation

1,392,379

1,662,778

Total current liabilities

1,497,915

1,753,522

Deferred income tax liabilities, net

92,609

91,217

Long-term deferred revenue

66,795

65,139

Net long-term debt, less current portion

30,423

30,858

Other long-term liabilities

22,195

19,553

Total long-term liabilities

212,022

206,767

Total liabilities

1,709,937

1,960,289

Commitments and contingencies

Stockholders' equity:

Common stock, $0.01 par value (100,000 shares authorized, 61,352 and 61,350 shares issued at March 31, 2020 and December 31, 2019, respectively; 57,622 and 57,660 shares outstanding at March 31, 2020 and December 31, 2019, respectively)

614

613

Additional paid-in capital

275,813

257,501

Retained earnings

639,181

576,166

Treasury stock, at cost (3,730 and 3,689 shares at March 31, 2020 and December 31, 2019, respectively)

(315,820

)

(307,652

)

Total stockholders' equity

599,788

526,628

Total liabilities and stockholders' equity

$

2,309,725

$

2,486,917

Paycom Software, Inc.

Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)

Three Months Ended March 31,

2020

2019

Revenues

Recurring

$

238,495

$

196,864

Implementation and other

3,873

3,079

Total revenues

242,368

199,943

Cost of revenues

Operating expenses

24,116

24,776

Depreciation and amortization

5,930

4,542

Total cost of revenues

30,046

29,318

Administrative expenses

Sales and marketing

55,018

39,645

Research and development

21,621

18,489

General and administrative

40,134

45,198

Depreciation and amortization

6,285

4,805

Total administrative expenses

123,058

108,137

Total operating expenses

153,104

137,455

Operating income

89,264

62,488

Interest expense

(16

)

(276

)

Other income (expense), net

(930

)

(100

)

Income before income taxes

88,318

62,112

Provision for income taxes

25,303

14,830

Net income

$

63,015

$

47,282

Earnings per share, basic

$

1.09

$

0.82

Earnings per share, diluted

$

1.08

$

0.81

Weighted average shares outstanding:

Basic

57,655

57,357

Diluted

58,440

58,316

Paycom Software, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended March 31,

2020

2019

Cash flows from operating activities

Net income

$

63,015

$

47,282

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

12,215

9,347

Accretion of discount on available-for-sale securities

(467

)

(165

)

Amortization of debt issuance costs

9

9

Stock-based compensation expense

15,811

31,071

Cash paid for derivative settlement

(69

)

(1

)

Loss on derivative

1,644

540

Deferred income taxes, net

1,392

3,722

Changes in operating assets and liabilities:

Accounts receivable

1,239

(421

)

Prepaid expenses

(4,292

)

(1,498

)

Inventory

254

(11

)

Other assets

(1,801

)

(702

)

Deferred contract costs

(27,630

)

(23,414

)

Accounts payable

408

(1,251

)

Income taxes, net

19,973

7,488

Accrued commissions and bonuses

(6,681

)

(6,118

)

Accrued payroll and vacation

6,289

3,765

Deferred revenue

2,211

2,860

Accrued expenses and other current liabilities

(1,490

)

7,923

Net cash provided by operating activities

82,030

80,426

Cash flows from investing activities

Purchase of short-term investments from funds held for clients

(177,903

)

(16,800

)

Proceeds from maturities of short-term investments from funds held for clients

20,000

14,500

Purchases of property and equipment

(25,726

)

(14,889

)

Net cash used in investing activities

(183,629

)

(17,189

)

Cash flows from financing activities

Repurchases of common stock

(7,998

)

Withholding taxes paid related to net share settlements

(170

)

(19,669

)

Payments on long-term debt

(444

)

(444

)

Net change in client funds obligation

(270,399

)

437,678

Net cash (used in) provided by financing activities

(279,011

)

417,565

(Decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents

(380,610

)

480,802

Cash, cash equivalents, restricted cash and restricted cash equivalents

Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period

1,641,854

986,464

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

$

1,261,244

$

1,467,266

Three Months Ended March 31,

2020

2019

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents

Cash and cash equivalents

$

181,827

$

91,307

Restricted cash included in funds held for clients

1,079,417

1,375,959

Total cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

$

1,261,244

$

1,467,266

Supplemental disclosures of cash flow information:

Non-cash investing and financing activities:

Purchases of property and equipment, accrued but not paid

$

8,251

$

3,384

Stock-based compensation for capitalized software

$

1,601

$

3,329

Paycom Software, Inc.

Reconciliations of GAAP to Non-GAAP Financial Measures

(in thousands, except per share amounts)

(unaudited)

Three Months Ended March 31,

2020

2019

Net income to adjusted EBITDA:

Net income

$

63,015

$

47,282

Interest expense

16

276

Provision for income taxes

25,303

14,830

Depreciation and amortization

12,215

9,347

EBITDA

100,549

71,735

Non-cash stock-based compensation expense

15,811

31,071

Change in fair value of interest rate swap

1,575

539

Adjusted EBITDA

$

117,935

$

103,345

Net income margin

26.0

%

23.6

%

Adjusted EBITDA margin

48.7

%

51.7

%

Three Months Ended March 31,

2020

2019

Net income to non-GAAP net income:

Net income

$

63,015

$

47,282

Non-cash stock-based compensation expense

15,811

31,071

Change in fair value of interest rate swap

1,575

539

Income tax effect on non-GAAP adjustments

(2,473

)

(9,642

)

Non-GAAP net income

$

77,928

$

69,250

Earnings per share, basic

$

1.09

$

0.82

Earnings per share, diluted

$

1.08

$

0.81

Non-GAAP net income per share, basic

$

1.35

$

1.21

Non-GAAP net income per share, diluted

$

1.33

$

1.19

Weighted average shares outstanding:

Basic

57,655

57,357

Diluted

58,440

58,316

Three Months Ended March 31,

2020

2019

Earnings per share to non-GAAP net income per share, basic:

Earnings per share, basic

$

1.09

$

0.82

Non-cash stock-based compensation expense

0.27

0.54

Change in fair value of interest rate swap

0.03

0.01

Income tax effect on non-GAAP adjustments

(0.04

)

(0.16

)

Non-GAAP net income per share, basic

$

1.35

$

1.21

Three Months Ended March 31,

2020

2019

Earnings per share to non-GAAP net income per share, diluted:

Earnings per share, diluted

$

1.08

$

0.81

Non-cash stock-based compensation expense

0.27

0.53

Change in fair value of interest rate swap

0.03

0.01

Income tax effect on non-GAAP adjustments

(0.05

)

(0.16

)

Non-GAAP net income per share, diluted

$

1.33

$

1.19

Three Months Ended March 31,

2020

2019

Adjusted gross profit:

Total revenues

$

242,368

$

199,943

Less: Total cost of revenues

(30,046

)

(29,318

)

Total gross profit

212,322

170,625

Plus: Non-cash stock-based compensation expense

1,198

2,896

Total adjusted gross profit

$

213,520

$

173,521

Gross margin

87.6

%

85.3

%

Adjusted gross margin

88.1

%

86.8

%

Three Months Ended March 31,

2020

2019

Adjusted sales and marketing expenses:

Sales and marketing expenses

$

55,018

$

39,645

Less: Non-cash stock-based compensation expense

(3,165

)

(2,583

)

Adjusted sales and marketing expenses

$

51,853

$

37,062

Total revenues

$

242,368

$

199,943

Sales and marketing expenses as a % of revenues

22.7

%

19.8

%

Adjusted sales and marketing expenses as a % of revenues

21.4

%

18.5

%

Three Months Ended March 31,

2020

2019

Adjusted total administrative expenses:

Total administrative expenses

$

123,058

$

108,137

Less: Non-cash stock-based compensation expense

(14,613

)

(28,175

)

Adjusted total administrative expenses

$

108,445

$

79,962

Total revenues

$

242,368

$

199,943

Total administrative expenses as a % of revenues

50.8

%

54.1

%

Adjusted total administrative expenses as a % of revenues

44.7

%

40.0

%

Three Months Ended March 31

2020

2019

Adjusted research and development expenses:

Research and development expenses

$

21,621

$

18,489

Less: Non-cash stock-based compensation expense

(2,171

)

(3,046

)

Adjusted research and development expenses

$

19,450

$

15,443

Total revenues

$

242,368

$

199,943

Research and development expenses as a % of revenues

8.9

%

9.2

%

Adjusted research and development expenses as a % of revenues

8.0

%

7.7

%

Three Months Ended March 31,

2020

2019

Total research and development costs:

Capitalized research and development costs

$

9,746

$

8,940

Research and development expenses

21,621

18,489

Total research and development costs

$

31,367

$

27,429

Total revenues

$

242,368

$

199,943

Total research and development costs as a % of revenues

12.9

%

13.7

%

Adjusted total research and development costs:

Total research and development costs

$

31,367

$

27,429

Less: Capitalized non-cash stock-based compensation

(1,601

)

(3,329

)

Less: Non-cash stock-based compensation expense

(2,171

)

(3,046

)

Adjusted total research and development costs

$

27,595

$

21,054

Total revenues

$

242,368

$

199,943

Adjusted total research and development costs as a % of revenues

11.4

%

10.5

%

Paycom Software, Inc.

Components of Non-Cash Stock-Based Compensation Expense

(in thousands)

(unaudited)

Three Months Ended March 31,

2020

2019

Non-cash stock-based compensation expense:

Operating expenses

$

1,198

$

2,896

Sales and marketing

3,165

2,583

Research and development

2,171

3,046

General and administrative

9,277

22,546

Total non-cash stock-based compensation expense

$

15,811

$

31,071

Contacts:

Paycom Software, Inc.
Investor Relations Contact:
James Samford, 800-580-4505
investors@paycom.com

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