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Paycom Software, Inc. Reports Second Quarter 2018 Results
[July 31, 2018]

Paycom Software, Inc. Reports Second Quarter 2018 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 June 30, 2018.

"Paycom continued its momentum, driving strong revenue and profits while also returning solid value to our stockholders with the repurchase of more than 400,000 shares in the second quarter," said Paycom's founder and CEO, Chad Richison. "We expanded our sales reach by opening two new offices and also completed construction of a fourth building at our campus headquarters in Oklahoma City."

Financial Highlights for the Second Quarter of 2018

Total Revenues of $128.8 million represented a 31% increase compared to total revenues of $98.2 million in the same period last year. Recurring revenues of $126.6 million increased 31% from the comparable prior year period and constituted 98% of total revenues.

GAAP Net Income was $35.7 million, or $0.61 per diluted share, compared to GAAP net income of $20.0 million, or $0.34 per diluted share, in the same period last year, as adjusted1.

Adjusted EBITDA2 was $53.5 million, compared to $36.6 million in the same period last year, as adjusted1.

Non-GAAP Net Income2 was $34.8 million, or $0.59 per diluted share, compared to $20.5 million, or $0.35 per diluted share, in the same period last year, as adjusted1.

Cash and Cash Equivalents were $54.6 million as of June 30, 2018.

Total Debt was $35.3 million as of June 30, 2018.

1 Effective January 1, 2018, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). All prior period amounts and disclosures have been recast to comply with the new standards, as indicated by the "as adjusted" footnote.

2 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 ending September 30, 2018 and the year ending December 31, 2018. Please note that this guidance reflects the January 1, 2018 adoption of ASU 2014-09:

Quarter Ending September 30, 2018

Total Revenues in the range of $129.0 million to $131.0 million.

Adjusted EBITDA in the range of $45.5 million to $47.5 million.

Year Ending December 31, 2018

Total Revenues in the range of $554.0 million to $556.0 million.

Adjusted EBITDA in the range of $231.0 million to $233.0 million.

We have not reconciled the Adjusted EBITDA ranges for the quarter ending September 30, 2018 or the year ending December 31, 2018 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, change in fair value of our interest rate swap 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, 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 and (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. 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, nor 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, July 31, 2018, 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 August 7, 2018. The replay passcode is 10122285.

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 our 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; our ability to attract and retain qualified personnel; 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 relocate our Texas operations to a new facility within an expected timeframe; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to our new Texas operations facility; the expected impact of the Tax Cuts and Jobs Act of 2017 and our expected income tax rate for future periods; our plans to purchase shares of our common stock through a stock repurchase plan; and the impact on our consolidated financial statements of new accounting pronouncements. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as "anticipate," "believe," "become," "continue," "could," "expect," "intend," "may," "plan," "potential," "should," "would," "will" 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, 2017. 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)
 
December 31, 2017
June 30, 2018 *As Adjusted
Assets
Current assets:
Cash and cash equivalents $ 54,630 $ 46,077
Accounts receivable 2,414 1,576
Prepaid expenses 8,025 4,982
Inventory 477 979
Income tax receivable 5,602 7,047
Derivative asset 57 -
Deferred contract costs   30,540     26,403  
Current assets before funds held for clients 101,745 87,064
Funds held for clients   900,287     1,089,201  
Total current assets 1,002,032 1,176,265
Property and equipment, net 165,370 147,705
Deposits and other assets 1,609 1,456
Goodwill 51,889 51,889
Intangible assets, net 852 958
Long-term derivative asset 435 -
Long-term deferred contract costs   196,778     171,865  
Total assets $ 1,418,965   $ 1,550,138  
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,995 $ 6,490
Accrued commissions and bonuses 4,441 9,585
Accrued payroll and vacation 8,895 7,015
Deferred revenue 7,867 6,982
Current portion of long-term debt 1,775 888
Accrued expenses and other current liabilities   18,796     19,991  
Current liabilities before client funds obligation 46,769 50,951
Client funds obligation   900,287     1,089,201  
Total current liabilities 947,056 1,140,152
Deferred income tax liabilities, net 59,363 49,129
Long-term derivative liability - 554
Long-term deferred revenue 49,322 44,642
Net long-term debt, less current portion   33,486     34,414  
Total long-term liabilities   142,171     128,739  
Commitments and contingencies
Stockholders' equity:

Common stock, $0.01 par value (100,000,000 shares authorized, 60,638,672 and 60,149,411 shares issued at June 30, 2018 and December 31, 2017, respectively; 57,701,124 and 57,788,573 shares outstanding at June 30, 2018 and December 31, 2017, respectively)

606 601
Additional paid-in capital 193,288 161,809
Retained earnings 335,407 258,525

Treasury stock, at cost (2,937,548 and 2,360,838 shares at June 30, 2018 and December 31, 2017, respectively)

  (199,563 )   (139,688 )
Total stockholders' equity   329,738     281,247  
Total liabilities and stockholders' equity $ 1,418,965   $ 1,550,138  
 

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.

         
 
Paycom Software, Inc.
Consolidated Statements of Income
(in thousands, except per share and share amounts)
(unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Revenues
Recurring $ 126,609 $ 96,351 $ 278,494 $ 214,265
Implementation and other   2,191     1,876     4,222     3,470  
Total revenues   128,800     98,227     282,716     217,735  
Cost of revenues
Operating expenses 17,677 15,609 38,245 30,695
Depreciation and amortization   3,254     2,267     6,291     4,327  
Total cost of revenues   20,931     17,876     44,536     35,022  
Administrative expenses
Sales and marketing 31,647 27,430 63,999 53,009
Research and development 10,731 8,095 21,981 14,892
General and administrative 18,995 23,594 51,652 38,844
Depreciation and amortization   3,459     2,440     6,491     4,666  
Total administrative expenses   64,832     61,559     144,123     111,411  
Total operating expenses   85,763     79,435     188,659     146,433  
Operating income 43,037 18,792 94,057 71,302
Interest expense (34 ) (281 ) (34 ) (538 )
Other income, net   515     149     1,545     244  
Income before income taxes 43,518 18,660 95,568 71,008
Provision for income taxes   7,796     (1,356 )   18,686     17,298  
Net income $ 35,722   $ 20,016   $ 76,882   $ 53,710  
Earnings per share, basic $ 0.62 $ 0.34 $ 1.33 $ 0.93
Earnings per share, diluted $ 0.61 $ 0.34 $ 1.31 $ 0.91
Weighted average shares outstanding:
Basic   57,837,312     57,898,914     57,815,290     57,623,107  
Diluted   58,720,785     58,816,442     58,766,903     58,817,181  
 

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.

   
 
Paycom Software, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended June 30,
    2017
2018 *As Adjusted
Cash flows from operating activities
Net income $ 76,882 $ 53,710
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,782 8,993
Amortization of debt issuance costs 15 59
Stock-based compensation expense 26,921 16,306
Cash paid for derivative settlement (131 ) -
Gain on derivative (1,010 ) -
Deferred income taxes, net 10,234 2,913
Changes in operating assets and liabilities:
Accounts receivable (838 ) (464 )
Prepaid expenses (3,043 ) (1,262 )
Inventory 57 434
Deposits and other assets (153 ) (111 )
Deferred contract costs (27,487 ) (22,330 )
Accounts payable 593 (319 )
Income taxes, net 1,445 (2,855 )
Accrued commissions and bonuses (5,144 ) (2,767 )
Accrued payroll and vacation 1,880 1,088
Deferred revenue 5,565 5,293
Accrued expenses and other current liabilities   1,789     (3,395 )
Net cash provided by operating activities   100,357     55,293  
Cash flows from investing activities
Net change in funds held for clients 188,914 71,229
Purchases of property and equipment   (31,873 )   (21,909 )
Net cash provided by investing activities   157,041     49,320  
Cash flows from financing activities
Proceeds from issuance of long-term debt - 5,440
Repurchases of common stock (41,689 ) (15,187 )
Withholding taxes paid related to net share settlement (18,186 ) (14,973 )
Principal payments on long-term debt - (562 )
Net change in client funds obligation (188,914 ) (71,229 )
Payment of debt issuance costs   (56 )   (143 )
Net cash used in financing activities   (248,845 )   (96,654 )
Increase in cash and cash equivalents 8,553 7,959
Cash and cash equivalents
Beginning of period   46,077     60,158  
End of period $ 54,630   $ 68,117  
 

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.

         
 
Paycom Software, Inc.
Reconciliations of GAAP to non-GAAP Financial Measures
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Net income to Adjusted EBITDA:
Net income $ 35,722 $ 20,016 $ 76,882 $ 53,710
Interest expense 34 281 34 538
Provision for income taxes 7,796 (1,356 ) 18,686 17,298
Depreciation and amortization   6,713     4,707     12,782     8,993  
EBITDA 50,265 23,648 108,384 80,539
Non-cash stock-based compensation expense 3,538 12,903 26,976 16,309
Change in fair value of interest rate swap   (324 )   -     (1,141 )   -  
Adjusted EBITDA $ 53,479   $ 36,551   $ 134,219   $ 96,848  
 
 
Three Months Ended June 30, Six Months Ended June 30,
2017 2017
2018 *As Adjusted 2018 *As Adjusted
Net income to non-GAAP net income:
Net income $ 35,722 $ 20,016 $ 76,882 $ 53,710
Non-cash stock-based compensation expense 3,538 12,903 26,976 16,309
Change in fair value of interest rate swap (324 ) - (1,141 ) -
Income tax effect on non-GAAP adjustment   (4,126 )   (12,434 )   (12,139 )   (14,059 )
Non-GAAP net income $ 34,810   $ 20,485   $ 90,578   $ 55,960  
 
Weighted average shares outstanding:
Basic 57,837,312 57,898,914 57,815,290 57,623,107
Diluted 58,720,785 58,816,442 58,766,903 58,817,181
 
Earnings per share basic $ 0.62 $ 0.34 $ 1.33 $ 0.93
Earnings per share diluted $ 0.61 $ 0.34 $ 1.31 $ 0.91
Non-GAAP net income per share, basic $ 0.60 $ 0.35 $ 1.57 $ 0.97
Non-GAAP net income per share, diluted $ 0.59 $ 0.35 $ 1.54 $ 0.95
 
 
Three Months Ended June 30, Six Months Ended June 30,
2017 2017
2018 *As Adjusted 2018 *As Adjusted
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic $ 0.62 $ 0.34 $ 1.33 $ 0.93
Non-cash stock-based compensation expense 0.06 0.22 0.47 0.28
Change in fair value of interest rate swap (0.01 ) - (0.02 ) -
Income tax effect on non-GAAP adjustment   (0.07 )   (0.21 )   (0.21 )   (0.24 )
Non-GAAP net income per share, basic $ 0.60   $ 0.35   $ 1.57   $ 0.97  
 

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.

         
 
Three Months Ended June 30, Six Months Ended June 30,
    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted $ 0.61 $ 0.34 $ 1.31 $ 0.91
Non-cash stock-based compensation expense 0.06 0.22 0.46 0.28
Change in fair value of interest rate swap (0.01 ) - (0.02 ) -
Income tax effect on non-GAAP adjustment   (0.07 )   (0.21 )   (0.21 )   (0.24 )
Non-GAAP net income per share, diluted $ 0.59   $ 0.35   $ 1.54   $ 0.95  
 
 
Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Adjusted gross profit:
Total revenues $ 128,800 $ 98,227 $ 282,716 $ 217,735
Less: Total cost of revenues   (20,931 )   (17,876 )   (44,536 )   (35,022 )
Total gross profit 107,869 80,351 238,180 182,713
Plus: Non-cash stock-based compensation expense   391     1,220     3,259     1,711  
Total adjusted gross profit $ 108,260   $ 81,571   $ 241,439   $ 184,424  
Total gross profit % 83.7 % 81.8 % 84.2 % 83.9 %
Total adjusted gross profit % 84.1 % 83.0 % 85.4 % 84.7 %
 
 
Three Months Ended June 30, Six Months Ended June 30,
2017 2017
2018 *As Adjusted 2018 *As Adjusted
Adjusted sales and marketing expenses:
Sales and marketing expenses $ 31,647 $ 27,430 $ 63,999 $ 53,009
Less: Non-cash stock-based compensation expense   (1,449 )   (1,205 )   (3,356 )   (2,015 )
Total adjusted sales and marketing expenses $ 30,198   $ 26,225   $ 60,643   $ 50,994  
 
Total revenues $ 128,800 $ 98,227 $ 282,716 $ 217,735
Total adjusted sales and marketing expenses as a % of revenues 23.4 % 26.7 % 21.5 % 23.4 %
 
 
Three Months Ended June 30, Six Months Ended June 30,
2017 2017
2018 *As Adjusted 2018 *As Adjusted
Adjusted administrative expenses:
Administrative expenses $ 64,832 $ 61,559 $ 144,123 $ 111,411
Less: Non-cash stock-based compensation expense   (3,147 )   (11,683 )   (23,717 )   (14,598 )
Total adjusted administrative expenses $ 61,685   $ 49,876   $ 120,406   $ 96,813  
 
Total revenues $ 128,800 $ 98,227 $ 282,716 $ 217,735
Total adjusted administrative expenses as a % of revenues 47.9 % 50.8 % 42.6 % 44.5 %
 

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.

         
 
Three Months Ended June 30, Six Months Ended June 30,
2018     2017 2018     2017
Adjusted research and development expenses:
Research and development expenses $ 10,731 $ 8,095 $ 21,981 $ 14,892
Less: Non-cash stock-based compensation expense   (267 )   (621 )   (2,514 )   (780 )
Total adjusted research and development expenses $ 10,464   $ 7,474   $ 19,467   $ 14,112  
 
Total revenues $ 128,800 $ 98,227 $ 282,716 $ 217,735
Total adjusted research and development expenses as a % of revenues 8.1 % 7.6 % 6.9 % 6.5 %
 
         
Three Months Ended June 30, Six Months Ended June 30,
2018     2017 2018     2017
Total research and development costs:
Capitalized research and development costs $ 4,570 $ 3,507 $ 11,208 $ 6,383
Research and development expenses   10,731     8,095     21,981     14,892  
Total research and development costs $ 15,301 $ 11,602 $ 33,189 $ 21,275
 
Total revenues $ 128,800 $ 98,227 $ 282,716 $ 217,735
Total research and development costs as a % of revenues 11.9 % 11.8 % 11.7 % 9.8 %
 
Total adjusted research and development costs:
Total research and development costs $ 15,301 $ 11,602 $ 33,189 $ 21,275
Less: Capitalized non-cash stock-based compensation (406 ) (968 ) (2,945 ) (1,317 )
Less: Non-cash stock-based compensation expense   (267 )   (621 )   (2,514 )   (780 )
Total adjusted research and development costs $ 14,628 $ 10,013 $ 27,730 $ 19,178
 
Total revenues $ 128,800 $ 98,227 $ 282,716 $ 217,735
Total adjusted research and development costs as a % of revenues 11.4 % 10.2 % 9.8 % 8.8 %
 
       
Paycom Software, Inc.
Breakout of Non-Cash Stock-Based Compensation Expense
(in thousands)
(unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Non-cash stock-based compensation expense:
Operating expenses $ 391 $ 1,220 $ 3,259 $ 1,711
Sales and marketing 1,449 1,205 3,356 2,015
Research and development 267 621 2,514 780
General and administrative   1,431   9,857   17,847   11,803
Total non-cash stock-based compensation expense $ 3,538 $ 12,903 $ 26,976 $ 16,309
 

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.


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