Paycom Software, Inc. Reports Second Quarter 2019 Results

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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, 2019.

“The digital transformation of our industry is rapidly changing the relationship employees have with their human capital management systems and Paycom is leading the way with innovative, consumer-friendly solutions,” said Paycom’s founder and CEO, Chad Richison. “Our strong results in the second quarter reflect the powerful impact that innovations like Direct Data Exchange^TM and our employee usage initiatives are having on our growth. With the momentum we are carrying into the second half, I am very pleased we can again raise our outlook for the year.”

Financial Highlights for the Second Quarter of 2019

Total Revenues of $169.3 million represented a 31% increase compared to total revenues of $128.8 million in the same period last year. Recurring revenues of $166.0 million also increased 31% from the comparable prior year period, and constituted 98% of total revenues.

GAAP Net Income was $48.8 million, or $0.83 per diluted share, compared to GAAP net income of $35.7 million, or $0.61 per diluted share, in the same period last year.

Non-GAAP Net Income¹was $43.7 million, or $0.75 per diluted share, compared to $34.8 million, or $0.59 per diluted share, in the same period last year.

Adjusted EBITDA¹ was $69.4 million, compared to $53.5 million in the same period last year.

Cash and Cash Equivalents were $94.8 million as of June 30, 2019, compared to $45.7 million as of December 31, 2018.

Total Debt, Net was $33.5 million as of June 30, 2019, compared to $34.4 million as of December 31, 2018.

¹Adjusted 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 provides the following expected financial guidance for the quarter ending September 30, 2019 and the year ending December 31, 2019:

Quarter Ending September 30, 2019

Total Revenues in the range of $170.0 million to $172.0 million.

Adjusted EBITDA in the range of $61.0 million to $63.0 million.

Year Ending December 31, 2019

Total Revenues in the range of $728.0 million to $730.0 million.

Adjusted EBITDA in the range of $306.0 million to $308.0 million.

We have not reconciled the forward-looking adjusted EBITDA ranges presented above and discussed on the teleconference call to net income, nor the forward-looking adjusted EBITDA margins discussed on the teleconference call to a comparable GAAP measure, because applicable information for future periods, on which these reconciliations 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. Further, we have not reconciled the forward-looking adjusted gross margin range discussed on the teleconference call to GAAP gross margin 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, cost of revenues, including non-cash stock-based compensation expense. Accordingly, reconciliations of these adjusted EBITDA ranges to net income, the adjusted EBITDA margins to a comparable GAAP measure and the adjusted gross margin range to gross margin are 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 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 administrative expenses, adjusted research and development expenses and adjusted 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 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 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 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 30, 2019, 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 6, 2019. The replay passcode is 10132893.

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 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; the timeline for construction of our new Texas operations facility; new job creation at our new Texas operations facility; our plans regarding our capital expenditures and investment activity as our business grows; our expected income tax rate for future periods; and our plans to purchase shares of our common stock through a stock repurchase plan. 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 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)

	June 30, 2019			December 31, 2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	94,814		$	45,718
Accounts receivable		2,850			3,414
Prepaid expenses		11,264			7,658
Inventory		767			797
Income tax receivable		10,615			3,962
Deferred contract costs		40,868			35,286
Current assets before funds held for clients		161,178			96,835
Funds held for clients		1,126,808			967,787
Total current assets		1,287,986			1,064,622
Property and equipment, net		196,371			176,962
Goodwill		51,889			51,889
Long-term deferred contract costs		259,241			225,459
Other assets		30,705			2,994
Total assets	$	1,826,192		$	1,521,926
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,622		$	6,288
Accrued commissions and bonuses		7,901			10,671
Accrued payroll and vacation		11,560			10,741
Deferred revenue		10,082			8,980
Current portion of long-term debt		1,775			1,775
Accrued expenses and other current liabilities		39,530			22,440
Current liabilities before client funds obligation		74,470			60,895
Client funds obligation		1,126,808			967,787
Total current liabilities		1,201,278			1,028,682
Deferred income tax liabilities, net		79,642			70,206
Long-term deferred revenue		59,922			55,671
Net long-term debt, less current portion		31,727			32,614
Other long-term liabilities		18,861			—
Total long-term liabilities		190,152			158,491
Total liabilities		1,391,430			1,187,173
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value (100,000 shares authorized, 61,302 and 60,747 shares issued at June 30, 2019 and December 31, 2018, respectively; 57,629 and 57,277 shares outstanding at June 30, 2019 and December 31, 2018, respectively)		612			607
Additional paid-in capital		246,069			203,680
Retained earnings		491,634			395,590
Treasury stock, at cost (3,672 and 3,470 shares at June 30, 2019 and December 31, 2018, respectively)		(303,553	)		(265,124	)
Total stockholders’ equity		434,762			334,753
Total liabilities and stockholders’ equity	$	1,826,192		$	1,521,926

Paycom Software, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues
Recurring	$	165,998		$	126,609		$	362,862		$	278,494
Implementation and other		3,315			2,191			6,394			4,222
Total revenues		169,313			128,800			369,256			282,716
Cost of revenues
Operating expenses		20,289			17,677			45,065			38,245
Depreciation and amortization		4,950			3,254			9,492			6,291
Total cost of revenues		25,239			20,931			54,557			44,536
Administrative expenses
Sales and marketing		41,575			31,647			81,220			63,999
Research and development		16,775			10,731			35,264			21,981
General and administrative		27,460			18,995			72,658			51,652
Depreciation and amortization		5,378			3,459			10,183			6,491
Total administrative expenses		91,188			64,832			199,325			144,123
Total operating expenses		116,427			85,763			253,882			188,659
Operating income		52,886			43,037			115,374			94,057
Interest expense		(258	)		(34	)		(534	)		(34	)
Other income (expense), net		(263	)		515			(363	)		1,545
Income before income taxes		52,365			43,518			114,477			95,568
Provision for income taxes		3,603			7,796			18,433			18,686
Net income	$	48,762		$	35,722		$	96,044		$	76,882
Earnings per share, basic	$	0.85		$	0.62		$	1.67		$	1.33
Earnings per share, diluted	$	0.83		$	0.61		$	1.64		$	1.31
Weighted average shares outstanding:
Basic		57,569			57,837			57,464			57,815
Diluted		58,410			58,721			58,396			58,767

Paycom Software, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

	Six Months Ended June 30,
	2019			2018⁽¹⁾
Cash flows from operating activities
Net income	$	96,044		$	76,882
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,675			12,782
Accretion of discounts on available-for-sale securities		(367	)		(493	)
Amortization of debt issuance costs		17			15
Stock-based compensation expense		36,668			26,921
Cash paid for derivative settlement		(3	)		(131	)
(Gain)/loss on derivative		1,376			(1,010	)
Deferred income taxes, net		9,436			10,234
Changes in operating assets and liabilities:
Accounts receivable		564			(838	)
Prepaid expenses		(3,607	)		(3,043	)
Inventory		(248	)		57
Other assets		(2,479	)		(153	)
Deferred contract costs		(37,591	)		(27,487	)
Accounts payable		(1,284	)		593
Income taxes, net		(6,654	)		1,445
Accrued commissions and bonuses		(2,771	)		(5,144	)
Accrued payroll and vacation		819			1,880
Deferred revenue		5,353			5,565
Accrued expenses and other current liabilities		7,820			1,789
Net cash provided by operating activities		122,768			99,864
Cash flows from investing activities
Purchase of short-term investments from funds held for clients		(46,425	)		(100,902	)
Proceeds from maturities of short-term investments from funds held for clients		34,200			71,500
Purchases of property and equipment		(34,705	)		(31,873	)
Net cash used in investing activities		(46,930	)		(61,275	)
Cash flows from financing activities
Repurchases of common stock		—			(41,689	)
Withholding taxes paid related to net share settlement		(38,429	)		(18,186	)
Payments on long-term debt		(888	)		—
Net change in client funds obligation		159,021			(188,914	)
Payment of debt issuance costs		(16	)		(56	)
Net cash provided by (used in) financing activities		119,688			(248,845	)
Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents		195,526			(210,256	)
Cash, cash equivalents, restricted cash and restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period		986,464			1,098,860
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	1,181,990		$	888,604
Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents
Cash and cash equivalents		94,814			54,630
Restricted cash included in funds held for clients		1,087,176			833,974
Total cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	1,181,990		$	888,604

¹Amounts have been adjusted to reflect the adoption of Accounting Standards Update No. 2016-18.

Paycom Software, Inc.
Reconciliations of GAAP to Non-GAAP Financial Measures
(in thousands, except per share amounts)
(unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Net income to adjusted EBITDA:
Net income	$	48,762	$	35,722		$	96,044	$	76,882
Interest expense		258		34			534		34
Provision for income taxes		3,603		7,796			18,433		18,686
Depreciation and amortization		10,328		6,713			19,675		12,782
EBITDA		62,951		50,265			134,686		108,384
Non-cash stock-based compensation expense		5,597		3,538			36,668		26,976
Change in fair value of interest rate swap		833		(324	)		1,372		(1,141	)
Adjusted EBITDA	$	69,381	$	53,479		$	172,726	$	134,219

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income to non-GAAP net income:
Net income	$	48,762		$	35,722		$	96,044		$	76,882
Non-cash stock-based compensation expense		5,597			3,538			36,668			26,976
Change in fair value of interest rate swap		833			(324	)		1,372			(1,141	)
Income tax effect on non-GAAP adjustments		(11,457	)		(4,126	)		(21,099	)		(12,139	)
Non-GAAP net income	$	43,735		$	34,810		$	112,985		$	90,578

Weighted average shares outstanding:
Basic		57,569			57,837			57,464			57,815
Diluted		58,410			58,721			58,396			58,767

Earnings per share, basic	$	0.85		$	0.62		$	1.67		$	1.33
Earnings per share, diluted	$	0.83		$	0.61		$	1.64		$	1.31
Non-GAAP net income per share, basic	$	0.76		$	0.60		$	1.97		$	1.57
Non-GAAP net income per share, diluted	$	0.75		$	0.59		$	1.93		$	1.54

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic	$	0.85		$	0.62		$	1.67		$	1.33
Non-cash stock-based compensation expense		0.10			0.06			0.64			0.47
Change in fair value of interest rate swap		0.01			(0.01	)		0.02			(0.02	)
Income tax effect on non-GAAP adjustments		(0.20	)		(0.07	)		(0.36	)		(0.21	)
Non-GAAP net income per share, basic	$	0.76		$	0.60		$	1.97		$	1.57

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted	$	0.83		$	0.61		$	1.64		$	1.31
Non-cash stock-based compensation expense		0.10			0.06			0.63			0.46
Change in fair value of interest rate swap		0.01			(0.01	)		0.02			(0.02	)
Income tax effect on non-GAAP adjustments		(0.19	)		(0.07	)		(0.36	)		(0.21	)
Non-GAAP net income per share, diluted	$	0.75		$	0.59		$	1.93		$	1.54

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Adjusted gross profit:
Total revenues	$	169,313		$	128,800		$	369,256		$	282,716
Less: Total cost of revenues		(25,239	)		(20,931	)		(54,557	)		(44,536	)
Total gross profit		144,074			107,869			314,699			238,180
Plus: Non-cash stock-based compensation expense		309			391			3,205			3,259
Total adjusted gross profit	$	144,383		$	108,260		$	317,904		$	241,439
Total gross margin		85.1	%		83.7	%		85.2	%		84.2	%
Total adjusted gross margin		85.3	%		84.1	%		86.1	%		85.4	%

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Adjusted sales and marketing expenses:
Sales and marketing expenses	$	41,575		$	31,647		$	81,220		$	63,999
Less: Non-cash stock-based compensation expense		(2,526	)		(1,449	)		(5,109	)		(3,356	)
Total adjusted sales and marketing expenses	$	39,049		$	30,198		$	76,111		$	60,643

Total revenues	$	169,313		$	128,800		$	369,256		$	282,716
Total adjusted sales and marketing expenses as a % of revenues		23.1	%		23.4	%		20.6	%		21.5	%

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Adjusted administrative expenses:
Administrative expenses	$	91,188		$	64,832		$	199,325		$	144,123
Less: Non-cash stock-based compensation expense		(5,288	)		(3,147	)		(33,463	)		(23,717	)
Total adjusted administrative expenses	$	85,900		$	61,685		$	165,862		$	120,406

Total revenues	$	169,313		$	128,800		$	369,256		$	282,716
Total adjusted administrative expenses as a % of revenues		50.7	%		47.9	%		44.9	%		42.6	%

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Adjusted research and development expenses:
Research and development expenses	$	16,775		$	10,731		$	35,264		$	21,981
Less: Non-cash stock-based compensation expense		(505	)		(267	)		(3,551	)		(2,514	)
Total adjusted research and development expenses	$	16,270		$	10,464		$	31,713		$	19,467

Total revenues	$	169,313		$	128,800		$	369,256		$	282,716
Total adjusted research and development expenses as a % of revenues		9.6	%		8.1	%		8.6	%		6.9	%

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Total research and development costs:
Capitalized research and development costs	$	6,697		$	4,570		$	15,637		$	11,208
Research and development expenses		16,775			10,731			35,264			21,981
Total research and development costs	$	23,472		$	15,301		$	50,901		$	33,189

Total revenues	$	169,313		$	128,800		$	369,256		$	282,716
Total research and development costs as a % of revenues		13.9	%		11.9	%		13.8	%		11.7	%

Total adjusted research and development costs:
Total research and development costs	$	23,472		$	15,301		$	50,901		$	33,189
Less: Capitalized non-cash stock-based compensation		(624	)		(406	)		(3,953	)		(2,945	)
Less: Non-cash stock-based compensation expense		(505	)		(267	)		(3,551	)		(2,514	)
Total adjusted research and development costs	$	22,343		$	14,628		$	43,397		$	27,730

Total revenues	$	169,313		$	128,800		$	369,256		$	282,716
Total adjusted research and development costs as a % of revenues		13.2	%		11.4	%		11.8	%		9.8	%

Paycom Software, Inc.
Breakout of Non-Cash Stock-Based Compensation Expense
(in thousands)
(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Non-cash stock-based compensation expense:
Operating expenses	$	309	$	391	$	3,205	$	3,259
Sales and marketing		2,526		1,449		5,109		3,356
Research and development		505		267		3,551		2,514
General and administrative		2,257		1,431		24,803		17,847
Total non-cash stock-based compensation expense	$	5,597	$	3,538	$	36,668	$	26,976

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