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Paycom Software, Inc. Reports Third Quarter 2017 Results
[October 31, 2017]

Paycom Software, Inc. Reports Third Quarter 2017 Results


Paycom Software, Inc. ("Paycom") (NYSE: PAYC), a leading provider of comprehensive, cloud-based human capital management software, today announced its financial results for the quarter ended September 30, 2017.

"With third quarter revenues over $100 million and the launch of 10 internally built Learning Management courses, we're pleased with another strong quarter of growth and innovation," said Paycom's founder and CEO, Chad Richison. "We also returned value to our shareholders by completing our second $50 million stock repurchase plan and I am happy to announce we have approved a third stock repurchase plan, increasing it to $75 million."

Financial Highlights for the Third Quarter of 2017

Total Revenues of $101.3 million represented a 31% increase compared to total revenues of $77.3 million in the same period last year. Recurring revenues of $99.5 million also increased 31% from the comparable prior year period, and constituted 98% of total revenues.

GAAP Net Income was $14.1 million, or $0.24 per diluted share, compared to GAAP net income of $6.2 million, or $0.10 per diluted share, in the same period last year.

Adjusted EBITDA1 was $30.7 million, compared to $18.2 million in the same period last year.

Non-GAAP Net Income1 was $17.0 million, or $0.29 per diluted share, compared to $9.0 million, or $0.15 per diluted share, in the same period last year.

Cash and Cash Equivalents were $66.6 million as of September 30, 2017.

Total Debt was $34.4 million as of September 30, 2017. This debt consisted solely of borrowings related to the expansion of our corporate headquarters.

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 non-GAAP financial measures.

Financial Outlook

Paycom provides the following expected financial guidance for the quarter and year ending December 31, 2017:

Quarter Ending December 31, 2017

Total Revenues in the range of $111.5 million to $113.5 million.

Adjusted EBITDA in the range of $26 million to $28 million.

Year Ending December 31, 2017

Total Revenues in the range of $430.5 million to $432.5 million.

Adjusted EBITDA in the range of $131 million to $133 million.

We have not reconciled the Adjusted EBITDA ranges for the quarter or year ending December 31, 2017 to net income because applicable information for future periods, on which this reconciliation would be based, is not readily available due to uncertainty regarding, and the potential variability of, depreciation and amortization, interest expense, taxes, non-cash stock-based compensation expense and other items. Accordingly, a reconciliation of these Adjusted EBITDA ranges to net income is not available at this time without unreasonable effort.

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 consider and have included certain non-GAAP financial measures in this press release, including Adjusted EBITDA and non-GAAP net income. Management uses Adjusted EBITDA and non-GAAP net income 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, and non-cash stock-based compensation expense; and (ii) non-GAAP net income as net income plus non-cash stock-based compensation expense, which is adjusted for the effect of income taxes. Adjusted EBITDA and non-GAAP net income are metrics that 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, 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.

Adjusted EBITDA and non-GAAP net income are not measures of financial performance under GAAP and should not be considered a substitute for net income, which we consider to be the most directly comparable GAAP measure. Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and when assessing our operating performance, you should not consider Adjusted EBITDA or non-GAAP net income in isolation, or as a substitute for net income or other consolidated statements of income data prepared in accordance with GAAP. Adjusted EBITDA and non-GAAP net income may not be comparable to similar 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, Oct. 31, 2017, at 5:00 p.m. Eastern time to discuss its financial results. To access this call, dial (866) 270-1533 (domestic) or (412) 317-0797 (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 Nov. 7, 2017. The replay passcode is 10113050.

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 the Company's estimated or anticipated results, other non-historical facts or future events and include, but are not limited to, 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; the impact of future regulatory, judicial, or 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; our ability to expand our corporate headquarters within an expected timeframe; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to research and development; our expected income tax rate for future periods; our plans to purchase shares of our common stock through a stock repurchase plan; and the anticipated impact of recent hurricanes on our operating results in future periods. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as "anticipate," "believe," "could," "expect," "may," "might," "plan," "possible," "potential," "project," "should," "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 Annual Report on Form 10-K for the year ended December 31, 2016. 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 share amounts)
(unaudited)
         
September 30, December 31,
2017 2016
Assets
Current assets:
Cash and cash equivalents $ 66,610 $ 60,158
Accounts receivable 1,444 1,339
Prepaid expenses 5,705 4,475
Inventory 750 675
Income tax receivable   9,247     692  
Current assets before funds held for clients 83,756 67,339
Funds held for clients   792,734     858,244  
Total current assets 876,490 925,583
Property and equipment, net 133,765 96,848
Deposits and other assets 1,341 1,215
Goodwill 51,889 51,889
Intangible assets, net 1,011 1,871
Deferred income tax assets, net   5,440     1,207  
Total assets $ 1,069,936   $ 1,078,613  
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,505 $ 3,737
Accrued commissions and bonuses 6,782 8,003
Accrued payroll and vacation 9,096 4,769
Deferred revenue 6,526 5,230
Current portion of long-term debt 1,152 1,113
Accrued expenses and other current liabilities   18,817     17,798  
Current liabilities before client funds obligation 44,878 40,650
Client funds obligation   792,734     858,244  
Total current liabilities 837,612 898,894
Long-term deferred revenue 41,841 34,481
Net long-term debt, less current portion   33,218     28,711  
Total long-term liabilities   75,059     63,192  
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value (100,000,000 shares authorized, 59,953,932 and 58,453,283

shares issued at September 30, 2017 and December 31, 2016, respectively; 58,131,606 and

57,331,022 shares outstanding at September 30, 2017 and December 31, 2016, respectively)

599 585
Additional paid-in capital 129,770 95,452
Retained earnings 124,350 70,448
Treasury stock, at cost (1,822,326 and 1,122,261 shares at September 30, 2017 and

December 31, 2016, respectively)

  (97,454 )   (49,958 )
Total stockholders' equity   157,265     116,527  
Total liabilities and stockholders' equity $ 1,069,936   $ 1,078,613  
 

 
Paycom Software, Inc.
Consolidated Statements of Income
(in thousands, except per share and share amounts)
(unaudited)
                 
Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Revenues
Recurring $ 99,498 $ 75,857 $ 313,763 $ 237,253
Implementation and other   1,789     1,468     5,259     4,078  
Total revenues   101,287     77,325     319,022     241,331  
Cost of revenues
Operating expenses 15,324 13,227 46,019 34,491
Depreciation and amortization   2,502     1,521     6,829     4,093  
Total cost of revenues   17,826     14,748     52,848     38,584  
Administrative expenses
Sales and marketing 35,542 29,274 106,460 82,702
Research and development 8,112 6,232 23,004 14,294
General and administrative 25,967 24,457 70,450 54,883
Depreciation and amortization   2,403     2,032     7,069     5,578  
Total administrative expenses   72,024     61,995     206,983     157,457  
Total operating expenses   89,850     76,743     259,831     196,041  
Operating income 11,437 582 59,191 45,290
Interest expense (220 ) (252 ) (758 ) (733 )
Other income (expense), net   118     (213 )   362     (63 )
Income before income taxes 11,335 117 58,795 44,494
Provision for income taxes   (2,732 )   (6,081 )   4,893     9,287  
Net income $ 14,067   $ 6,198   $ 53,902   $ 35,207  
Earnings per share, basic $ 0.24 $ 0.11 $ 0.93 $ 0.61
Earnings per share, diluted $ 0.24 $ 0.10 $ 0.91 $ 0.59
Weighted average shares outstanding:
Basic   58,003,222     57,819,734     57,751,204     57,515,846  
Diluted   58,873,502     58,907,281     58,839,771     58,793,479  
 
         
Paycom Software, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
2017 2016
Cash flows from operating activities
Net income $ 53,902 $ 35,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 13,898 9,671
Amortization of debt issuance costs 92 96
Net loss on disposition of property and equipment 21 230
Stock-based compensation expense 31,757 18,742
Deferred income taxes, net (4,233 ) (1,500 )
Changes in operating assets and liabilities:
Accounts receivable (105 ) 875
Prepaid expenses (1,230 ) (460 )
Inventory (75 ) 963
Deposits and other assets (126 ) 276
Accounts payable (1,463 ) (3,658 )
Income taxes, net (8,555 ) 2,427
Accrued commissions and bonuses (1,221 ) (3,306 )
Accrued payroll and vacation 4,327 3,782
Deferred revenue 8,656 7,849
Accrued expenses and other current liabilities   (3,225 )   3,241  
Net cash provided by operating activities   92,420     74,435  
Cash flows from investing activities
Net change in funds held for clients 65,510 103,662
Purchases of property and equipment   (42,926 )   (32,130 )
Net cash provided by investing activities   22,584     71,532  
Cash flows from financing activities
Proceeds from issuance of long-term debt 5,440 5,000
Repurchases of common stock (19,391 ) (8,379 )
Withholding taxes paid related to net share settlement (28,105 ) (14,396 )
Principal payments on long-term debt (843 ) (702 )
Net change in client funds obligation (65,510 ) (103,662 )
Payment of debt issuance costs   (143 )   (46 )
Net cash used in financing activities   (108,552 )   (122,185 )
Increase in cash and cash equivalents 6,452 23,782
Cash and cash equivalents
Beginning of period   60,158     50,714  
End of period $ 66,610   $ 74,496  
 
                 
Paycom Software, Inc.
Reconciliation of GAAP to non-GAAP Financial Measures
(in thousands, except share and per share amounts)
(unaudited)
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Net income to Adjusted EBITDA:
Net income $ 14,067 $ 6,198 $ 53,902 $ 35,207
Interest expense 220 252 758 733
Provision for income taxes (2,732 ) (6,081 ) 4,893 9,287
Depreciation and amortization   4,905     3,553     13,898     9,671  
EBITDA 16,460 3,922 73,451 54,898
Non-cash stock-based compensation expense   14,227     14,235     31,754     18,857  
Adjusted EBITDA $ 30,687   $ 18,157   $ 105,205   $ 73,755  
 
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Net income to non-GAAP net income:
Net income $ 14,067 $ 6,198 $ 53,902 $ 35,207
Non-cash stock-based compensation expense 14,227 14,235 31,754 18,857
Income tax effect on non-GAAP adjustment   (11,296 )   (11,472 )   (25,775 )   (13,234 )
Non-GAAP net income $ 16,998   $ 8,961   $ 59,881   $ 40,830  
Weighted average shares outstanding:
Basic 58,003,222 57,819,734 57,751,204 57,515,846
Diluted 58,873,502 58,907,281 58,839,771 58,793,479
Earnings per share, basic $ 0.24 $ 0.11 $ 0.93 $ 0.61
Earnings per share, diluted $ 0.24 $ 0.10 $ 0.91 $ 0.59
Non-GAAP net income per share, basic $ 0.29 $ 0.15 $ 1.04 $ 0.71
Non-GAAP net income per share, diluted $ 0.29 $ 0.15 $ 1.02 $ 0.69
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic $ 0.24 $ 0.11 $ 0.93 $ 0.61
Non-cash stock-based compensation expense 0.24 0.24 0.55 0.33
Income tax effect on non-GAAP adjustment   (0.19 )   (0.20 )   (0.44 )   (0.23 )
Non-GAAP net income per share, basic $ 0.29   $ 0.15   $ 1.04   $ 0.71  
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted $ 0.24 $ 0.10 $ 0.91 $ 0.59
Non-cash stock-based compensation expense 0.24 0.24 0.54 0.32
Income tax effect on non-GAAP adjustment   (0.19 )   (0.19 )   (0.43 )   (0.22 )
Non-GAAP net income per share, diluted $ 0.29   $ 0.15   $ 1.02   $ 0.69  
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Adjusted gross profit:
Total revenues $ 101,287 $ 77,325 $ 319,022 $ 241,331
Less: Total cost of revenues   (17,826 )   (14,748 )   (52,848 )   (38,584 )
Total gross profit 83,461 62,577 266,174 202,747
Plus: Non-cash stock-based compensation expense   1,488     1,311     3,199     1,725  
Total adjusted gross profit $ 84,949 $ 63,888 $ 269,373 $ 204,472
Total gross profit % 82 % 81 % 83 % 84 %
Total adjusted gross profit % 84 % 83 % 84 % 85 %
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Adjusted sales and marketing expenses:
Sales and marketing expenses $ 35,542 $ 29,274 $ 106,460 $ 82,702
Less: Non-cash stock-based compensation expense   (2,019 )   (1,654 )   (4,511 )   (2,723 )
Total adjusted sales and marketing expenses $ 33,523   $ 27,620   $ 101,949   $ 79,979  
 
Total revenues $ 101,287 $ 77,325 $ 319,022 $ 241,331
Total adjusted sales and marketing expenses as a % of revenues 33.1 % 35.7 % 32.0 % 33.1 %
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Adjusted administrative expenses:
Administrative expenses $ 72,024 $ 61,995 $ 206,983 $ 157,457
Less: Non-cash stock-based compensation expense   (12,739 )   (12,924 )   (28,555 )   (17,132 )
Total adjusted administrative expenses $ 59,285   $ 49,071   $ 178,428   $ 140,325  
 
Total revenues $ 101,287 $ 77,325 $ 319,022 $ 241,331
Total adjusted administrative expenses as a % of revenues 58.5 % 63.5 % 55.9 % 58.1 %
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Adjusted research and development expenses:
Research and development expenses $ 8,112 $ 6,232 $ 23,004 $ 14,294
Less: Non-cash stock-based compensation expense   (734 )   (496 )   (1,514 )   (676 )
Total adjusted research and development expenses $ 7,378   $ 5,736   $ 21,490   $ 13,618  
 
Total revenues $ 101,287 $ 77,325 $ 319,022 $ 241,331
Total adjusted research and development expenses as a % of revenues 7.3 % 7.4 % 6.7 % 5.6 %
 
 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Total research and development costs:
Capitalized research and development costs $ 4,665 $ 2,898 $ 11,048 $ 6,605
Research and development expenses   8,112     6,232     23,004     14,294  
Total research and development costs $ 12,777   $ 9,130   $ 34,052   $ 20,899  
 
Total revenues $ 101,287 $ 77,325 $ 319,022 $ 241,331
Total research and development costs as a % of revenues 12.6 % 11.8 % 10.7 % 8.7 %
 
Total adjusted research and development costs:
Total research and development costs $ 12,777 $ 9,130 $ 34,052 $ 20,899
Less: Capitalized non-cash stock-based compensation (1,262 ) (1,074 ) (2,579 ) (1,434 )
Less: Non-cash stock-based compensation expense   (734 )   (496 )   (1,514 )   (676 )
Total adjusted research and development costs $ 10,781   $ 7,560   $ 29,959   $ 18,789  
 
Total revenues $ 101,287 $ 77,325 $ 319,022 $ 241,331
Total adjusted research and development costs as a % of revenues 10.6 % 9.8 % 9.4 % 7.8 %
 
 
Paycom Software, Inc.
Breakout of Non-Cash Stock-Based Compensation Expense
(in thousands)
(unaudited)
                 
Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Non-cash stock-based compensation expense:
Operating expenses $ 1,488 $ 1,311 $ 3,199 $ 1,725
Sales and marketing 2,019 1,654 4,511 2,723
Research and development 734 496 1,514 676
General and administrative   9,986   10,774   22,530   13,733
Total non-cash stock-based compensation expense $ 14,227 $ 14,235 $ 31,754 $ 18,857


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