Paycom Software, Inc. Reports Third Quarter 2018 Results

10/30/2018

Third Quarter Revenues of $133.3 million, up 32% from comparable prior year period

Third Quarter GAAP Net Income of $28.8 million, or $0.49 per diluted share, up 38% from comparable prior year period, as adjusted 1

Third Quarter Adjusted EBITDA of $49.2 million, up 22% from comparable prior year period, as adjusted 1

Third Quarter Non-GAAP Net Income of $30.6 million, or $0.52 per diluted share, up 32% from comparable year period, as adjusted 1

OKLAHOMA CITY--(BUSINESS WIRE)-- 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, 2018.

“The digital transformation of the Human Capital Management industry continues to progress and organizations across virtually every industry are recognizing the power they gain in giving their employees a direct relationship with their HR and payroll software database,” said Paycom’s founder and CEO, Chad Richison. “I believe we are driving this transition for businesses and their employees and our ability to lead in this area is underscored by our strong third quarter results.”

Financial Highlights for the Third Quarter of 2018

Total Revenues of $133.3 million represented a 32% increase compared to total revenues of $101.3 in the same period last year. Recurring revenues of $130.8 million increased 31% from the comparable prior year period and constituted 98% of total revenues.

GAAP Net Income was $28.8 million, or $0.49 per diluted share, compared to GAAP net income of $20.9 million, or $0.35 per diluted share, in the same period last year, as adjusted1.

Adjusted EBITDA 2 was $49.2 million, compared to $40.4 million in the same period last year, as adjusted1.

Non-GAAP Net Income 2 was $30.6 million, or $0.52 per diluted share, compared to $23.2 million, or $0.39 per diluted share, in the same period last year, as adjusted1.

Cash and Cash Equivalents were $85.0 million as of September 30, 2018.

Total Debt was $34.8 million as of September 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 and the year ending December 31, 2018. Please note that this guidance reflects the January 1, 2018 adoption of ASU 2014-09:

Quarter Ending December 31, 2018

Total Revenues in the range of $142.5 million to $144.5 million.

Adjusted EBITDA in the range of $49.5 million to $51.5 million.

Year Ending December 31, 2018

Total Revenues in the range of $558.5 million to $560.5 million.

Adjusted EBITDA in the range of $233.0 million to $235.0 million.

We have not reconciled the Adjusted EBITDA ranges for the quarter 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, October 30, 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 November 6, 2018. The replay passcode is 10124536.

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)
 

 

September 30,

December 31, 2017

2018 *As Adjusted
Assets
Current assets:
Cash and cash equivalents $ 85,048 $ 46,077
Accounts receivable 2,213 1,576
Prepaid expenses 7,934 4,982
Inventory 574 979
Income tax receivable 6,456 7,047
Derivative asset 97
Deferred contract costs   32,465     26,403  
Current assets before funds held for clients 134,787 87,064
Funds held for clients   902,747     1,089,201  
Total current assets 1,037,534 1,176,265
Property and equipment, net 168,397 147,705
Deposits and other assets 1,567 1,456
Goodwill 51,889 51,889
Intangible assets, net 798 958
Long-term derivative asset 679
Long-term deferred contract costs   207,322     171,865  
Total assets $ 1,468,186   $ 1,550,138  
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,173 $ 6,490
Accrued commissions and bonuses 6,454 9,585
Accrued payroll and vacation 12,937 7,015
Deferred revenue 8,409 6,982
Current portion of long-term debt 1,775 888
Accrued expenses and other current liabilities   19,654     19,991  
Current liabilities before client funds obligation 55,402 50,951
Client funds obligation   902,747     1,089,201  
Total current liabilities 958,149 1,140,152
Deferred income tax liabilities, net 64,206 49,129
Long-term derivative liability 554
Long-term deferred revenue 52,405 44,642
Net long-term debt, less current portion   33,049     34,414  
Total long-term liabilities   149,660     128,739  
Commitments and contingencies (Note 12)
Stockholders' equity:

Common stock, $0.01 par value (100,000,000 shares authorized, 60,698,352 and 60,149,411 shares issued at September 30, 2018 and December 31, 2017, respectively; 57,730,356 and 57,788,573 shares outstanding at September 30, 2018 and December 31, 2017, respectively)

606 601
Additional paid-in capital 198,255 161,809
Retained earnings 364,176 258,525

Treasury stock, at cost (2,967,996 and 2,360,838 shares at September 30, 2018 and December 31, 2017, respectively)

  (202,660 )   (139,688 )
Total stockholders' equity   360,377     281,247  
Total liabilities and stockholders' equity $ 1,468,186   $ 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

Nine Months Ended

September 30,

September 30,

    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Revenues
Recurring $ 130,830 $ 99,498 $ 409,324 $ 313,763
Implementation and other   2,458     1,789     6,680     5,259  
Total revenues   133,288     101,287     416,004     319,022  
Cost of revenues
Operating expenses 18,158 15,324 56,403 46,019
Depreciation and amortization   3,967     2,502     10,258     6,829  
Total cost of revenues   22,125     17,826     66,661     52,848  
Administrative expenses
Sales and marketing 37,183 27,732 101,182 80,741
Research and development 11,526 8,112 33,507 23,004
General and administrative 22,048 23,207 73,700 62,051
Depreciation and amortization   4,161     2,403     10,652     7,069  
Total administrative expenses   74,918     61,454     219,041     172,865  
Total operating expenses   97,043     79,280     285,702     225,713  
Operating income 36,245 22,007 130,302 93,309
Interest expense (384 ) (220 ) (418 ) (758 )
Other income, net   583     118     2,128     362  
Income before income taxes 36,444 21,905 132,012 92,913
Provision for income taxes   7,675     995     26,361     18,293  
Net income $ 28,769   $ 20,910   $ 105,651   $ 74,620  
Earnings per share, basic $ 0.50 $ 0.36 $ 1.83 $ 1.29
Earnings per share, diluted $ 0.49 $ 0.35 $ 1.80 $ 1.26
Weighted average shares outstanding:
Basic   57,726,790     58,003,222     57,785,466     57,751,204  
Diluted   58,545,061     58,873,502     58,724,228     58,839,771  

* 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)
 

Nine Months Ended

September 30,

    2017
2018 *As Adjusted
Cash flows from operating activities
Net income $ 105,651 $ 74,620
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 20,910 13,898
Accretion of discount on available-for-sale securities (860 ) (371 )
Loss on disposition of property and equipment 21
Amortization of debt issuance costs 24 92
Stock-based compensation expense 31,508 29,663
Cash paid for derivative settlement (168 )
Gain on derivative (1,259 )
Deferred income taxes, net 15,077 9,167
Changes in operating assets and liabilities:
Accounts receivable (637 ) (105 )
Prepaid expenses (2,952 ) (1,230 )
Inventory (56 ) (75 )
Deposits and other assets (111 ) (126 )
Deferred contract costs (39,881 ) (32,024 )
Accounts payable 1,789 (1,463 )
Income taxes, net 591 (8,555 )
Accrued commissions and bonuses (3,131 ) (1,221 )
Accrued payroll and vacation 5,922 4,327
Deferred revenue 9,190 8,656
Accrued expenses and other current liabilities   4,242     (3,225 )
Net cash provided by operating activities   145,849     92,049  
Cash flows from investing activities
Purchase of short-term investments from funds held for clients (137,561 ) (49,325 )
Proceeds from maturities of short-term investments from funds held for clients 95,500 111,705
Net change in funds held for clients' cash and cash equivalents 229,375 3,501
Purchases of property and equipment   (44,264 )   (42,926 )
Net cash provided by investing activities   143,050     22,955  
Cash flows from financing activities
Proceeds from issuance of long-term debt 5,440
Repurchases of common stock (42,857 ) (19,391 )
Withholding taxes paid related to net share settlement (20,115 ) (28,105 )
Principal payments on long-term debt (444 ) (843 )
Net change in client funds obligation (186,454 ) (65,510 )
Payment of debt issuance costs   (58 )   (143 )
Net cash used in financing activities   (249,928 )   (108,552 )
Increase in cash and cash equivalents 38,971 6,452
Cash and cash equivalents
Beginning of period   46,077     60,158  
End of period $ 85,048   $ 66,610  

* 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

Nine Months Ended

September 30,

September 30,

    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Net income to Adjusted EBITDA:
Net income $ 28,769 $ 20,910 $ 105,651 $ 74,620
Interest expense 384 220 418 758
Provision for income taxes 7,675 995 26,361 18,293
Depreciation and amortization   8,128     4,905   20,910     13,898
EBITDA 44,956 27,030 153,340 107,569
Non-cash stock-based compensation expense 4,509 13,351 31,485 29,660
Change in fair value of interest rate swap   (285 )     (1,427 )  
Adjusted EBITDA $ 49,180   $ 40,381 $ 183,398   $ 137,229
 
         

Three Months Ended

Nine Months Ended

September 30,

September 30,

    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Net income to non-GAAP net income:
Net income $ 28,769 $ 20,910 $ 105,651 $ 74,620
Non-cash stock-based compensation expense 4,509 13,351 31,485 29,660
Change in fair value of interest rate swap (285 ) (1,427 )
Income tax effect on non-GAAP adjustment   (2,374 )   (11,081 )   (14,512 )   (25,140 )
Non-GAAP net income $ 30,619   $ 23,180   $ 121,197   $ 79,140  
 
Weighted average shares outstanding:
Basic 57,726,790 58,003,222 57,785,466 57,751,204
Diluted 58,545,061 58,873,502 58,724,228 58,839,771
 
Earnings per share basic $ 0.50 $ 0.36 $ 1.83 $ 1.29
Earnings per share diluted $ 0.49 $ 0.35 $ 1.80 $ 1.26
Non-GAAP net income per share, basic $ 0.53 $ 0.40 $ 2.10 $ 1.37
Non-GAAP net income per share, diluted $ 0.52 $ 0.39 $ 2.06 $ 1.35
 
         

Three Months Ended

Nine Months Ended

September 30,

September 30,

    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic $ 0.50 $ 0.36 $ 1.83 $ 1.29
Non-cash stock-based compensation expense 0.08 0.23 0.54 0.51
Change in fair value of interest rate swap (0.01 ) (0.02 )
Income tax effect on non-GAAP adjustment   (0.04 )   (0.19 )   (0.25 )   (0.43 )
Non-GAAP net income per share, basic $ 0.53   $ 0.40   $ 2.10   $ 1.37  

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

         
 
Three Months Ended Nine Months Ended
September 30, September 30,
    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted $ 0.49 $ 0.35 $ 1.80 $ 1.26
Non-cash stock-based compensation expense 0.08 0.23 0.54 0.50
Change in fair value of interest rate swap (0.01 ) (0.03 )
Income tax effect on non-GAAP adjustment   (0.04 )   (0.19 )   (0.25 )   (0.41 )
Non-GAAP net income per share, diluted $ 0.52   $ 0.39   $ 2.06   $ 1.35  
 
         
Three Months Ended Nine Months Ended
September 30, September 30,
2018     2017 2018     2017
Adjusted gross profit:
Total revenues $ 133,288 $ 101,287 $ 416,004 $ 319,022
Less: Total cost of revenues   (22,125 )   (17,826 )   (66,661 )   (52,848 )
Total gross profit 111,163 83,461 349,343 266,174
Plus: Non-cash stock-based compensation expense   332     1,488     3,591     3,199  
Total adjusted gross profit $ 111,495   $ 84,949   $ 352,934   $ 269,373  
Total gross profit % 83.4 % 82.4 % 84.0 % 83.4 %
Total adjusted gross profit % 83.6 % 83.9 % 84.8 % 84.4 %
 
 
Three Months Ended Nine Months Ended
September 30, September 30,
2017 2017
2018 *As Adjusted 2018 *As Adjusted
Adjusted sales and marketing expenses:
Sales and marketing expenses $ 37,183 $ 27,732 $ 101,182 $ 80,741
Less: Non-cash stock-based compensation expense   (1,976 )   (1,616 )   (5,332 )   (3,631 )
Total adjusted sales and marketing expenses $ 35,207   $ 26,116   $ 95,850   $ 77,110  
 
Total revenues $ 133,288 $ 101,287 $ 416,004 $ 319,022
Total adjusted sales and marketing expenses as a % of revenues 26.4 % 25.8 % 23.0 % 24.2 %
 
         
Three Months Ended Nine Months Ended
September 30, September 30,
    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Adjusted administrative expenses:
Administrative expenses $ 74,918 $ 61,454 $ 219,041 $ 172,865
Less: Non-cash stock-based compensation expense   (4,177 )   (11,863 )   (27,894 )   (26,461 )
Total adjusted administrative expenses $ 70,741   $ 49,591   $ 191,147   $ 146,404  
 
Total revenues $ 133,288 $ 101,287 $ 416,004 $ 319,022
Total adjusted administrative expenses as a % of revenues 53.1 % 49.0 % 45.9 % 45.9 %

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

         
 
Three Months Ended Nine Months Ended
September 30, September 30,
2018     2017 2018     2017
Adjusted research and development expenses:
Research and development expenses $ 11,526 $ 8,112 $ 33,507 $ 23,004
Less: Non-cash stock-based compensation expense   (248 )   (734 )   (2,762 )   (1,514 )
Total adjusted research and development expenses $ 11,278   $ 7,378   $ 30,745   $ 21,490  
 
Total revenues $ 133,288 $ 101,287 $ 416,004 $ 319,022
Total adjusted research and development expenses as a % of revenues 8.5 % 7.3 % 7.4 % 6.7 %
 
         
Three Months Ended Nine Months Ended
September 30, September 30,
2018     2017 2018     2017
Total research and development costs:
Capitalized research and development costs $ 5,211 $ 4,665 $ 16,419 $ 11,048
Research and development expenses   11,526     8,112     33,507     23,004  
Total research and development costs $ 16,737 $ 12,777 $ 49,926 $ 34,052
 
Total revenues $ 133,288 $ 101,287 $ 416,004 $ 319,022
Total research and development costs as a % of revenues 12.6 % 12.6 % 12.0 % 10.7 %
 
Total adjusted research and development costs:
Total research and development costs $ 16,737 $ 12,777 $ 49,926 $ 34,052
Less: Capitalized non-cash stock-based compensation (384 ) (1,262 ) (3,329 ) (2,579 )
Less: Non-cash stock-based compensation expense   (248 )   (734 )   (2,762 )   (1,514 )
Total adjusted research and development costs $ 16,105 $ 10,781 $ 43,835 $ 29,959
 
Total revenues $ 133,288 $ 101,287 $ 416,004 $ 319,022
Total adjusted research and development costs as a % of revenues 12.1 % 10.6 % 10.5 % 9.4 %
 
       
Paycom Software, Inc.
Breakout of Non-Cash Stock-Based Compensation Expense
(in thousands)
(unaudited)
 
Three Months Ended Nine Months Ended
September 30, September 30,
    2017     2017
2018 *As Adjusted 2018 *As Adjusted
Non-cash stock-based compensation expense:
Operating expenses $ 332 $ 1,488 $ 3,591 $ 3,199
Sales and marketing 1,976 1,616 5,332 3,631
Research and development 248 734 2,762 1,514
General and administrative   1,953   9,513   19,800   21,316
Total non-cash stock-based compensation expense $ 4,509 $ 13,351 $ 31,485 $ 29,660

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

Paycom Software, Inc.
Media:
Kathy Oden-Hall, 800-580-4505
EVP and CMO
media@paycom.com
or
Investor Relations:
David Niederman, 855-603-1620
investors@paycom.com

Source: Paycom Software, Inc.