Paycom Software, Inc. Reports Third Quarter 2018 Results

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 adjusted¹

Third Quarter Adjusted EBITDA of $49.2 million, up 22% from comparable prior year period, as adjusted¹

Third Quarter Non-GAAP Net Income of $30.6 million, or $0.52 per diluted share, up 32% from comparable year period, as adjusted¹

Paycom Software, Inc. ("Paycom") 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 EBITDA² was $49.2 million, compared to $40.4 million in the same period last year, as adjusted¹.

Non-GAAP Net Income² 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20181030006014/en/