Paycom Software, Inc. Reports Fourth Quarter and Year-End 2018 Results

Full Year 2018 Revenues of $566.3 million, up 31% from the prior year

Full Year 2018 Cash from Operations of $184.8 million, an increase of
42% from the prior year

Fourth Quarter Revenues of $150.3 million, up 32% from the comparable
prior year period

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 and full year ended
December 31, 2018.

“2018 was one of our most successful years as we improved our retention
rate and continued to return value to our stockholders through our
repurchase program,” said Paycom’s founder and CEO, Chad Richison. “We
believe our impressive results are due in-part to our strategy to
promote usage of Paycom software among our clients’ employees. We are
excited about our prospects for continuing to win new business utilizing
this strategy through 2019 and beyond.”

Paycom’s financial results included the impact of the enactment of the
Tax Cuts and Jobs Act of 2017, which contributed to reductions in the
effective income tax rate in the quarter and year ended December 31,
2017. This reduction in the effective tax rate was due to the
remeasurement of certain deferred tax assets and liabilities, which are
based on expected future income tax rates. The remeasurement, as
adjusted for the adoption of Accounting Standards Update No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”),
resulted in a $24.9 million benefit to our provision for income taxes
for the quarter and year ended December 31, 2017. The impact of this
benefit was $0.42 per diluted share for the quarter and year ended
December 31, 2017.

Financial Highlights for the Fourth Quarter of
2018

Total Revenues of $150.3 million represented a 32% increase
compared to total revenues of $114.0 million in the same period last
year. Recurring revenues of $147.9 million increased 32% from the
comparable prior year period, and constituted 98% of total revenues.

GAAP Net Income was $31.4 million, or $0.54 per diluted share,
compared to GAAP net income of $48.9 million, or $0.83 per diluted
share, in the same period last year, as adjusted1.

Adjusted EBITDA2 was $57.5 million, compared to
$48.4 million in the same period last year, as adjusted1.

Non-GAAP Net Income2 was $35.4 million,
or $0.61 per diluted share, compared to $53.2 million, or $0.90 per
diluted share, in the same period last year, as adjusted1.

Cash and Cash Equivalents were $45.7 million as of December 31,
2018.

Total Debt was $34.4 million as of December 31, 2018.

Financial Highlights for the Full Year 2018

Total Revenues of $566.3 million represented a 31% increase
compared to total revenues of $433.0 million in the same period last
year. Recurring revenues of $557.3 million increased 31% from the
comparable prior year period, and constituted 98% of total revenues.

GAAP Net Income was $137.1 million, or $2.34 per diluted share,
compared to GAAP net income of $123.5 million, or $2.10 per diluted
share, in the same period last year, as adjusted1.

Adjusted EBITDA2 was $240.9 million, compared
to $185.7 million in the same period last year, as adjusted1.

Non-GAAP Net Income2 was $156.6 million,
or $2.67 per diluted share, compared to $132.3 million, or $2.25 per
diluted share, in the same period last year, as adjusted1.

1 Effective January 1, 2018, we adopted 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 and
other non-GAAP financial measures.

2018 Business Highlights

  • Paycom increased its annual client retention rate to 92% after posting
    six-consecutive years with a 91% client retention rate.
  • Paycom opened four new sales offices in Rochester, Salt Lake City,
    Columbus and San Diego.
  • Paycom completed construction of Building 4 on its corporate campus in
    Oklahoma City, adding 250,000 square feet of available workspace for
    its growing team.
  • Paycom introduced its redesigned Employee Self-Service Desktop and
    Mobile applications, allowing easier access for its clients’ employees
    to use Paycom.
  • Paycom ranked fifth on Fortune magazine’s 2018 100
    Fastest-Growing Companies list of domestic and foreign publicly traded
    companies.

Financial Outlook

Paycom provides the following expected financial guidance for the
quarter ending March 31, 2019 and the year ending December 31, 2019.
Please note that this guidance reflects the January 1, 2018 adoption of
ASU 2014-09:

Quarter Ending March 31, 2019

Total Revenues in the range of $194.0 million to $196.0 million.

Adjusted EBITDA in the range of $97.0 million to $99.0 million.

Year Ending December 31, 2019

Total Revenues in the range of $710.0 million to $712.0 million.

Adjusted EBITDA in the range of $288.0 million to $290.0 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 non-GAAP effective income tax rate discussed on
the teleconference call to the GAAP effective income tax rate, 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 non-GAAP effective income tax rate to the GAAP effective
income tax rate and the adjusted gross margin ranges 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), loss on early repayment of
debt, 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), loss on early repayment of debt 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 and (vi) adjusted research and
development costs as total research and development costs (including the
capitalized portion) less applicable non-cash stock-based compensation
expense (including the capitalized portion). 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, 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, February 5, 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 February 12,
2019. The replay passcode is 10127540.

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; our ability to
relocate our Texas operations facility within an expected timeframe; 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
and Quarterly Report on Form 10-Q. 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,
2018     2017 *As Adjusted
Assets
Current assets:
Cash and cash equivalents $ 45,718 $ 46,077
Accounts receivable 3,414 1,576
Prepaid expenses 7,658 4,982
Inventory 797 979
Income tax receivable 3,962 7,047
Deferred contract costs   35,286     26,403  
Current assets before funds held for clients 96,835 87,064
Funds held for clients   967,787     1,089,201  
Total current assets 1,064,622 1,176,265
Property and equipment, net 176,962 147,705
Deposits and other assets 2,249 1,456
Goodwill 51,889 51,889
Intangible assets, net 745 958
Long-term deferred contract costs   225,459     171,865  
Total assets $ 1,521,926   $ 1,550,138  
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 6,288 $ 6,490
Accrued commissions and bonuses 10,671 9,585
Accrued payroll and vacation 10,741 7,015
Deferred revenue 8,980 6,982
Current portion of long-term debt 1,775 888
Accrued expenses and other current liabilities   22,440     19,991  
Current liabilities before client funds obligation 60,895 50,951
Client funds obligation   967,787     1,089,201  
Total current liabilities   1,028,682     1,140,152  
Deferred income tax liabilities, net 70,206 49,129
Long-term derivative liability 554
Long-term deferred revenue 55,671 44,642
Net long-term debt, less current portion   32,614     34,414  
Total long-term liabilities   158,491     128,739  
Total liabilities   1,187,173     1,268,891  
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.01 par value (100,000,000 shares authorized,
60,746,715 and 60,149,411 shares issued at December 31, 2018 and
2017, respectively; 57,276,992 and 57,788,573 shares outstanding at
December 31, 2018 and 2017, respectively)
607 601
Additional paid in capital 203,680 161,809
Retained earnings 395,590 258,525
Treasury stock, at cost (3,469,723 and 2,360,838 shares at December
31, 2018 and 2017, respectively)
  (265,124 )   (139,688 )
Total stockholders’ equity   334,753     281,247  
Total liabilities and stockholders’ equity $ 1,521,926   $ 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 December 31, Year Ended December 31,
2018     2017* As Adjusted 2018     2017 *As Adjusted
Revenues
Recurring $ 147,931 $ 111,661 $ 557,255 $ 425,424
Implementation and other   2,401     2,364     9,081     7,623  
Total revenues   150,332     114,025     566,336     433,047  
Cost of revenues
Operating expenses 19,828 16,419 76,231 62,438
Depreciation and amortization   4,274     2,761     14,532     9,590  
Total cost of revenues   24,102     19,180     90,763     72,028  
Administrative expenses
Sales and marketing 42,699 30,105 143,881 110,846
Research and development 12,740 7,426 46,247 30,430
General and administrative 22,905 18,177 96,605 80,228
Depreciation and amortization   4,473     2,736     15,125     9,805  
Total administrative expenses   82,817     58,444     301,858     231,309  
Total operating expenses   106,919     77,624     392,621     303,337  
Operating income 43,413 36,401 173,715 129,710
Interest expense (348 ) (153 ) (766 ) (911 )
Other income, net   (366 )   (1,429 )   1,762     (1,067 )
Income before income taxes 42,699 34,819 174,711 127,732
Provision for income taxes   11,285     (14,047 )   37,646     4,246  
Net income $ 31,414   $ 48,866   $ 137,065   $ 123,486  
 
Earnings per share, basic $ 0.55 $ 0.84 $ 2.37 $ 2.13
Earnings per share, diluted $ 0.54 $ 0.83 $ 2.34 $ 2.10
Weighted average shares outstanding:
Basic 57,491,280 58,100,141 57,711,315 57,839,155
Diluted 58,238,231 58,850,271 58,582,486 58,790,019
 

* 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)
 
Year Ended December 31,
2018     2017 *As Adjusted
Cash flows from operating activities:
Net income $ 137,065 $ 123,486
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 29,657 19,395
Accretion of discount on available-for-sale securities (1,112 ) (451 )
(Gain)/loss on disposition of property and equipment 21
Amortization of debt discount and debt issuance costs 32 117
Stock-based compensation expense 36,576 36,076
Loss on early repayment of debt 923
Cash paid for derivative settlement (188 ) (24 )
(Gain)/loss on derivative (479 ) 673
Deferred income taxes, net 21,077 (7,681 )
Changes in operating assets and liabilities:
Accounts receivable (1,838 ) (237 )
Prepaid expenses (2,676 ) (507 )
Inventory (306 ) 462
Deposits and other assets (762 ) (241 )
Deferred contract costs (60,730 ) (48,619 )
Accounts payable 1,079 79
Income taxes, net 3,085 (6,355 )
Accrued commissions and bonuses 1,086 1,582
Accrued payroll and vacation 3,726 2,246
Deferred revenue 13,027 11,913
Accrued expenses and other current liabilities   6,498     (2,709 )
Net cash provided by operating activities   184,817     130,149  
Cash flows from investing activities:
Purchase of short-term investments from funds held for clients (145,011 ) (66,235 )
Proceeds from maturities of short-term investments from funds held
for clients
155,500 141,205
Net change in funds held for clients 112,037 (305,476 )
Purchases of property and equipment (59,906 ) (59,389 )
Proceeds from sale of property and equipment        
Net cash provided by (used in) investing activities   62,620     (289,895 )
Cash flows from financing activities:
Proceeds from issuance of long-term debt 40,940
Repurchases of common stock (105,188 ) (56,880 )
Withholding taxes paid related to net share settlements (20,248 ) (32,850 )
Principal payments on long-term debt (888 ) (35,335 )
Net change in client funds obligation (121,414 ) 230,957
Debt extinguishment costs (823 )
Payment of debt issuance costs   (58 )   (344 )
Net cash provided by (used in) financing activities   (247,796 )   145,665  
Net change in cash and cash equivalents (359 ) (14,081 )
Cash and cash equivalents
Beginning of year   46,077     60,158  
End of year $ 45,718   $ 46,077  
 

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

 
   
Paycom Software, Inc.
Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
 
Year Ended December 31,
2018     2017 *As Adjusted
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 708 $ 791
Cash paid for income taxes $ 13,511 $ 18,332
Noncash investing and financing activities:
Purchases of property and equipment, accrued but not paid $ 1,759 $ 6,686
Stock-based compensation for capitalized software $ 3,722 $ 3,285
 

* 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 December 31, Year Ended December 31,
2018     2017 *As Adjusted 2018     2017 *As Adjusted
Net income to Adjusted EBITDA:
Net income $ 31,414 $ 48,866 $ 137,065 $ 123,486
Interest expense 348 153 766 911
Provision for income taxes 11,285 (14,047 ) 37,646 4,246
Depreciation and amortization expense   8,747   5,497     29,657     19,395
EBITDA 51,794 40,469 205,134 148,038
Non-cash stock-based compensation expense 4,926 6,387 36,411 36,047
Loss on early repayment of debt 923 923
Change in fair value of interest rate swap   760   649     (667 )   649
Adjusted EBITDA $ 57,480 $ 48,428   $ 240,878   $ 185,657
 
         
Three Months Ended December 31, Year Ended December 31,
2018     2017 *As Adjusted 2018     2017 *As Adjusted
Net income to non-GAAP net income
Net income $ 31,414 $ 48,866 $ 137,065 $ 123,486
Non-cash stock-based compensation expense 4,926 6,387 36,411 36,047
Loss on early repayment of debt 923 923
Change in fair value of interest rate swap 760 649 (667 ) 649
Income tax effect on non-GAAP adjustments   (1,685 )   (3,655 )   (16,197 )   (28,795 )
Non-GAAP net income $ 35,415   $ 53,170   $ 156,612   $ 132,310  
 
Earnings per share, basic $ 0.55 $ 0.84 $ 2.37 $ 2.13
Earnings per share, diluted $ 0.54 $ 0.83 $ 2.34 $ 2.10
Non-GAAP net income per share, basic $ 0.62 $ 0.92 $ 2.71 $ 2.29
Non-GAAP net income per share, diluted $ 0.61 $ 0.90 $ 2.67 $ 2.25
 
Weighted average shares outstanding:
Basic 57,491,280 58,100,141 57,711,315 57,839,155
Diluted 58,238,231 58,850,271 58,582,486 58,790,019
 

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

 
         
Three Months Ended December 31, Year Ended December 31,
2018     2017 *As Adjusted 2018     2017 *As Adjusted
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic $ 0.55 $ 0.84 $ 2.37 $ 2.13
Non-cash stock-based compensation expense 0.09 0.11 0.63 0.62
Loss on early repayment of debt 0.02 0.02
Change in fair value of interest rate swap 0.01 0.01 (0.01 ) 0.01
Income tax effect on non-GAAP adjustments   (0.03 )   (0.06 )   (0.28 )   (0.49 )
Non-GAAP net income per share, basic $ 0.62   $ 0.92   $ 2.71   $ 2.29  
 
 
Three Months Ended December 31, Year Ended December 31,
2018 2017 *As Adjusted 2018 2017 *As Adjusted
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted $ 0.54 $ 0.83 $ 2.34 $ 2.10
Non-cash stock-based compensation expense 0.08 0.11 0.62 0.61
Loss on early repayment of debt 0.01 0.02
Change in fair value of interest rate swap 0.01 0.01 (0.01 ) 0.01
Income tax effect on non-GAAP adjustments   (0.02 )   (0.06 )   (0.28 )   (0.49 )
Non-GAAP net income per share, diluted $ 0.61   $ 0.90   $ 2.67   $ 2.25  
 

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

 

Contacts

Paycom Software, Inc.
Investor Relations Contact:
David
Niederman, 855-603-1620 investors@paycom.com

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