Paycom Software, Inc. (NYSE:PAYC) Q2 2023 Earnings Call August 1, 2023 5:00 PM ET Company Participants James Samford - Head of Investor Relations Chad Richison - President and Chief Executive Officer Craig E. Boelte - Chief Financial Officer Conference Call Participants Raimo Lenschow - Barclays Samad Samana - Jefferies Brad Reback - Stifel Mark Marcon - Baird Joshua Reilly - Needham Steve Enders - Citi Siti Panigrahi - Mizuho Bryan Bergin - TD Cowen Bhavin Shah - Deutsche Bank Daniel Jester - BMO Robert Si ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (Exact name of registrant as specified in its charter) Delaware 80-0957485 (State or other jurisdiction of incorporation or organization) 7501 W. Memorial Road Oklahoma City, Oklahoma 73142 (Address of principal executive offices) (Zip Code) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION ...

Financial Data and Key Metrics - Q1 2023 revenue was $451.6 million, up 27.8% YoY [26] - Non-GAAP net income for Q1 2023 was $142.7 million, or $2.46 per diluted share, up 28.9% YoY [27] - Recurring revenue was $444.4 million, representing 98.4% of total revenue, growing 27.6% YoY [27] - Adjusted EBITDA for Q1 2023 was $220.5 million, or 48.8% of total revenue, compared to $170.1 million in Q1 2022 [42] - Cash and cash equivalents stood at $506 million, with total debt of $29 million [29] - Cash from operations increased by 24.6% to $146.1 million in Q1 2023 [29] - Average daily balance of client funds was $2.4 billion, up 10% YoY [29] Business Line Performance - BETI (Employee Self-Service Payroll) continues to drive strong client additions and is a key differentiator in the market [24] - Large organizations benefit from the single database solution, with 5% of the TAM currently addressed [25] - Global HCM product has expanded the TAM by 50%, with plans to roll out BETI internationally [25][50] Market Performance - The company is experiencing rapid growth at the upper end of its target market range [25] - Global HCM product is now available in 180 countries and 15 languages, targeting multinational clients [50][51] Company Strategy and Industry Competition - The company is focused on expanding its global footprint, with plans to build native payroll solutions in key international markets [50][51] - BETI is being developed for international markets, with 16-20 countries representing over 80% of the opportunity being prioritized [119] - The company is investing in R&D, with adjusted R&D costs of $55.2 million in Q1 2023, up from $42.9 million in the prior year [28] - The company is also investing in marketing, with adjusted sales and marketing expenses of $98.1 million in Q1 2023 [43] Management Commentary on Operating Environment and Future Outlook - Management is optimistic about the company's ability to continue delivering rapid organic revenue growth, high profit margins, and attractive cash flows [47] - The company is well-positioned to exceed its initial outlook for a solid Rule of 65 [39] - Management highlighted the strong demand for HCM solutions and the accelerating industry transformation to more efficient payroll processes [24] Other Important Information - The company announced a quarterly dividend program, with an annual rate of $1.50 per share, reflecting confidence in long-term growth opportunities [31][47] - The company has a $1.1 billion buyback authorization still in place, having returned nearly $600 million to stockholders through buybacks since 2016 [31] Q&A Session Summary Question: Global Initiative and Strategy - The company is expanding its global presence, with Global HCM now available in 180 countries and 15 languages [50][51] - BETI will be rolled out internationally, requiring operations in certain countries to process payroll [51] Question: M&A and Capital Allocation - The company is open to acquisitions, particularly for building out the payroll side internationally [53] - The dividend and buyback strategy will be balanced, with $1.1 billion still available for buybacks [131] Question: Sales and Marketing Expenses - Sales and marketing expenses increased significantly in Q1 2023 due to aggressive marketing campaigns and headcount additions [54][74] Question: Economic Outlook and Hiring - The company is seeing easier hiring conditions, especially for technical talent, compared to a tighter labor market a year ago [75] Question: Retention and Client Base - Retention rates remain strong, particularly for clients using BETI, with a retention rate better than 99% for BETI users [93] Question: Global HCM Impact on Margins - Global HCM is expected to have a similar margin profile to current clients, with some R&D costs associated with its development [64] Question: BETI Rollout and International Expansion - BETI will be rolled out in 16-20 key countries first, representing over 80% of the opportunity [119] - The company is building native payroll solutions in these countries, rather than relying on existing payroll systems [86] Question: Competitive Dynamics and Win Rates - The company is seeing strong win rates against legacy players, particularly with the value proposition of BETI [97] Question: Free Cash Flow and BETI Penetration - Free cash flow was strong in Q1 2023, with BETI penetration expected to drive further efficiency gains [171] Question: Tax Forms and Revenue Growth - Tax forms revenue is growing at a slower rate compared to other revenue streams, becoming a smaller portion of overall revenue [153] Question: Global HCM Adoption and Feedback - Some clients are already piloting Global HCM, with more expected to adopt it throughout the year [160] Question: Dividend Policy - The dividend is currently set at $1.50 annually, with potential adjustments in the future based on performance [174]

Part I [Business](index=6&type=section&id=Item%201.%20Business) Paycom delivers a comprehensive, cloud-based Human Capital Management (HCM) solution on a single database, serving approximately 36,600 clients with high retention and pursuing strategic market expansion - Paycom offers a comprehensive, cloud-based HCM solution on a single database platform, covering the entire employment lifecycle from recruitment to retirement[20](index=20&type=chunk)[22](index=22&type=chunk) Client and Retention Metrics (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Client Count | ~36,600 | | Revenue from any single client | < 0.5% | | 2022 Annual Revenue Retention Rate | 93% | | 2021 Annual Revenue Retention Rate | 94% | | 2020 Annual Revenue Retention Rate | 93% | - The company's growth strategy includes increasing its presence in existing markets by adding sales teams, expanding into new metropolitan areas, enlarging relationships with existing clients, and targeting larger businesses[36](index=36&type=chunk)[37](index=37&type=chunk)[38](index=38&type=chunk) - As of December 31, 2022, Paycom employed **6,349** people, with females comprising **51.2%** of all employees and **36.7%** of executive/senior-level managers[114](index=114&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) - Revenues are seasonal, with the first quarter being higher due to annual payroll tax and ACA form filings, and the fourth quarter being higher due to unscheduled payroll runs like bonuses[112](index=112&type=chunk)[113](index=113&type=chunk) [Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) The company faces material risks including data security breaches, infrastructure disruptions, intense market competition, technological obsolescence, and evolving regulatory compliance challenges - Business risks include security vulnerabilities and cyber attacks, as the solution stores sensitive client and employee data; a breach could damage reputation, lead to client loss, and result in significant liabilities[124](index=124&type=chunk)[128](index=128&type=chunk) - The HCM market is highly competitive, with rivals like Automatic Data Processing, Inc., Ceridian HCM Holding, Inc., Oracle Corporation, Workday, Inc., and others who may have greater resources and brand recognition[134](index=134&type=chunk)[136](index=136&type=chunk) - The company's success depends on its ability to innovate and adapt to technological developments, including disruptive technologies like AI and machine learning; failure to do so could render its applications obsolete[131](index=131&type=chunk)[133](index=133&type=chunk) - Changes in laws and regulations, such as the potential modification or repeal of the Affordable Care Act (ACA), could adversely affect business; ACA-related services are estimated to represent approximately **2%** of total projected revenues for 2023[161](index=161&type=chunk)[162](index=162&type=chunk) - Failure to comply with complex and evolving data privacy laws (e.g., CCPA, CPRA, GDPR) could result in regulatory scrutiny, fines, and reputational harm[165](index=165&type=chunk)[166](index=166&type=chunk)[167](index=167&type=chunk) - Adverse economic conditions, such as increased unemployment or reduced business spending, could lead to client losses, reduced headcount-based fees, and longer sales cycles, negatively impacting financial results[202](index=202&type=chunk) [Unresolved Staff Comments](index=32&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[205](index=205&type=chunk) [Properties](index=32&type=section&id=Item%202.%20Properties) Paycom's headquarters in Oklahoma City is expanding, complemented by an operations facility in Texas and leased sales offices across 28 states, housing three redundant data centers - The corporate headquarters in Oklahoma City is an approximately **500,000-square-foot** campus on over **150 acres** of Company-owned property[206](index=206&type=chunk) - A new **315,000-square-foot** building is under construction at the Oklahoma City headquarters[206](index=206&type=chunk) - The company owns an operations facility in Grapevine, Texas and operates three fully redundant data centers across its Oklahoma City and Grapevine locations[206](index=206&type=chunk) [Legal Proceedings](index=32&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings, which management expects will not materially impact its financial condition or operations - Paycom is involved in various legal proceedings in the ordinary course of business but does not expect them to have a material adverse effect on its financials[208](index=208&type=chunk) [Mine Safety Disclosures](index=32&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - None[209](index=209&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=33&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Paycom's common stock trades on the NYSE, with no cash dividends paid to date, and an active **$1.1 billion** stock repurchase plan extended through August 2024 - The company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol "PAYC"[211](index=211&type=chunk) - Paycom has not paid any cash dividends on its common stock as of the filing of this report[212](index=212&type=chunk) - In August 2022, the Board of Directors increased the availability under the stock repurchase plan to **$1.1 billion** and extended the expiration date to August 15, 2024[216](index=216&type=chunk) Share Repurchases in Q4 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - 31, 2022 | 25 | $329.14 | | Nov 1 - 30, 2022 | 442 | $329.75 | | Dec 1 - 31, 2022 | 0 | $— | | **Total** | **467** | **N/A** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In FY2022, Paycom achieved **30.3%** revenue growth to **$1.375 billion** and **43.6%** net income growth to **$281.4 million**, supported by strong liquidity and strategic investments in sales and product innovation Key Performance Indicators (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Clients | 36,561 | 33,875 | 30,994 | | Sales teams | 55 | 51 | 50 | | Annual revenue retention rate | 93% | 94% | 93% | Consolidated Results of Operations (FY 2022 vs. FY 2021) | Metric | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,375.2 | $1,055.5 | 30.3% | | Operating Income | $378.7 | $253.6 | 49.3% | | Net Income | $281.4 | $196.0 | 43.6% | - The **30.3%** increase in total revenues was primarily driven by the addition of new clients, efficiency gains in mature sales offices, and the sale of additional applications to existing clients[244](index=244&type=chunk) - The company's principal sources of liquidity are operating cash flow (**$365.1 million** in 2022) and a **$650.0 million** senior secured revolving credit facility established in July 2022[257](index=257&type=chunk)[277](index=277&type=chunk) Reconciliation of Net Income to Adjusted EBITDA | Metric | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net income | $281.4 | $196.0 | | Interest expense | $2.5 | $— | | Provision for income taxes | $108.2 | $60.0 | | Depreciation and amortization | $92.7 | $67.2 | | Non-cash stock-based compensation | $94.9 | $97.5 | | **Adjusted EBITDA** | **$579.7** | **$419.3** | [Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate sensitivity on its **$400.7 million** cash and equivalents and **$29.0 million** variable-rate debt, with a 100-basis-point change deemed immaterial - The company's main market risk is interest rate sensitivity on its cash equivalents and variable-rate debt[301](index=301&type=chunk)[303](index=303&type=chunk) - As of December 31, 2022, the company had **$400.7 million** in cash and cash equivalents and **$29.0 million** of outstanding debt under a variable-rate revolving credit facility[301](index=301&type=chunk)[303](index=303&type=chunk) - A hypothetical **100 basis point** increase or decrease in interest rates would not have a material effect on the company's operating results or financial condition[303](index=303&type=chunk) [Financial Statements and Supplementary Data](index=49&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for FY2020-2022, including balance sheets, income statements, cash flows, and detailed notes, along with the independent auditor's report [Consolidated Balance Sheets](index=52&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2022, total assets reached **$3.90 billion** (up from **$3.22 billion** in 2021), driven by client funds and cash, with total liabilities at **$2.72 billion** and equity at **$1.18 billion** Consolidated Balance Sheet Highlights (as of Dec 31) | Account (in millions) | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | **Total Assets** | **$3,902.5** | **$3,215.1** | | Cash and cash equivalents | $400.7 | $278.0 | | Funds held for clients | $2,203.0 | $1,846.6 | | **Total Liabilities** | **$2,719.9** | **$2,321.4** | | Client funds obligation | $2,207.7 | $1,846.6 | | **Total Stockholders' Equity** | **$1,182.6** | **$893.7** | [Consolidated Statements of Comprehensive Income](index=53&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) For FY2022, total revenues grew **30.3%** to **$1.375 billion**, operating income reached **$378.7 million**, and net income increased to **$281.4 million**, or **$4.84** per diluted share Consolidated Income Statement Highlights (Year Ended Dec 31) | Account (in millions) | 2022 (in millions) | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | :--- | | Total Revenues | $1,375.2 | $1,055.5 | $841.4 | | Operating Income | $378.7 | $253.6 | $186.1 | | Net Income | $281.4 | $196.0 | $143.5 | | Diluted EPS | $4.84 | $3.37 | $2.46 | [Consolidated Statements of Cash Flows](index=55&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) In FY2022, operating cash flow increased to **$365.1 million**, investing cash outflow significantly decreased to **$23.3 million**, and financing cash inflow was **$254.6 million**, driven by client funds and stock repurchases Consolidated Cash Flow Highlights (Year Ended Dec 31) | Activity (in millions) | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $365.1 | $319.4 | | Net cash used in investing activities | ($23.3) | ($257.7) | | Net cash provided by financing activities | $254.6 | $165.7 | [Notes to the Consolidated Financial Statements](index=57&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, including revenue recognition and debt structure with new **$650 million** and **$750 million** credit facilities, alongside information on leases, goodwill, stock-based compensation, and income taxes - Nonrefundable upfront implementation fees are deferred and recognized ratably over the estimated **ten-year** client life, as they represent a material right for the client to renew[363](index=363&type=chunk) - In July 2022, the company entered into a new credit agreement providing for a **$650 million** revolving credit facility and a **$750 million** delayed draw term loan facility, both maturing in July 2027[400](index=400&type=chunk) - The company issues time-based, market-based, and performance-based restricted stock and stock units; as of December 31, 2022, there was **$217.4 million** of unrecognized compensation cost for restricted stock awards and **$13.2 million** for restricted stock units[427](index=427&type=chunk)[435](index=435&type=chunk)[440](index=440&type=chunk) - The effective income tax rate for 2022 was **28%**, up from **23%** in 2021, primarily due to a decrease in excess tax benefits from vested stock awards[445](index=445&type=chunk)[447](index=447&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=75&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes or disagreements with its accountants regarding accounting and financial disclosure - None[453](index=453&type=chunk) [Controls and Procedures](index=75&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a finding affirmed by Grant Thornton LLP, with no material changes reported - Management, with the participation of the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[455](index=455&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[456](index=456&type=chunk) - The independent registered public accounting firm, Grant Thornton LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[457](index=457&type=chunk)[463](index=463&type=chunk) [Other Information](index=75&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[459](index=459&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=77&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information for this item is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference from the company's Definitive Proxy Statement[469](index=469&type=chunk) [Executive Compensation](index=77&type=section&id=Item%2011.%20Executive%20Compensation) Information for this item is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference from the company's Definitive Proxy Statement[470](index=470&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=77&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information for this item is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference from the company's Definitive Proxy Statement[471](index=471&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=77&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information for this item is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference from the company's Definitive Proxy Statement[472](index=472&type=chunk) [Principal Accounting Fees and Services](index=77&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information for this item is incorporated by reference from the company's 2023 Definitive Proxy Statement - Information is incorporated by reference from the company's Definitive Proxy Statement[473](index=473&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=78&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, noting the omission of schedules where information is inapplicable or included elsewhere - This section contains the list of financial statements and exhibits filed with the Form 10-K[474](index=474&type=chunk) - Financial statement schedules have been omitted because the required information is either inapplicable or included in the consolidated financial statements and notes[474](index=474&type=chunk) [Form 10-K Summary](index=82&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable - Not applicable[485](index=485&type=chunk)

Financial Data and Key Metrics Changes - The company reported fourth quarter revenue of approximately $371 million, up 30% year-over-year, bringing full year 2022 revenue to $1.375 billion, also up 30% year-over-year [2][28] - Fourth quarter adjusted EBITDA was $164 million, representing an adjusted EBITDA margin of 44%, with full year adjusted EBITDA at $580 million, representing an adjusted EBITDA margin of 42% [2][45] - GAAP net income for the fourth quarter was $80 million or $1.38 per diluted share, compared to $48.7 million or $0.84 per diluted share in the prior year [12][30] Business Line Data and Key Metrics Changes - The fastest-growing revenue segment came from clients with more than 2,000 employees, with revenue from this segment up 60% year-over-year [11][58] - Recurring revenue for the fourth quarter was $364 million, representing 98% of total revenues and growing 30% from the prior year [66] - Total adjusted gross profit for the fourth quarter was $312.5 million, with an adjusted gross margin of 84.3% [44] Market Data and Key Metrics Changes - The company ended 2022 with approximately 36,600 clients, representing an 8% growth compared to 2021 [66] - The total number of employee records increased by 14% year-over-year in 2022 to 6.5 million [66] Company Strategy and Development Direction - The company plans to continue investing in talent, marketing, innovation, customer service, and geographic expansion to meet strong demand [4] - The focus remains on employee experience and client ROI, with expectations for rapid profitable growth in 2023 [24][27] - The company is positioned to benefit from the trend of larger organizations simplifying their HCM needs, with only about 5% of the total addressable market currently penetrated [11] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the momentum heading into 2023, with guidance for total revenues in the range of $1.7 billion to $1.702 billion, representing approximately 24% year-over-year growth [47] - The company anticipates adjusted EBITDA in the range of $700 million to $702 million for 2023, with an adjusted EBITDA margin of approximately 41% [47] - Management noted that the marketing strategy has been effective, driving high-quality demo leads and improving operating leverage [40] Other Important Information - The company repurchased approximately 365,000 shares for nearly $100 million in 2022, with $1.1 billion remaining in the buyback program [46][81] - The average daily balance of funds held on behalf of clients was approximately $2.1 billion in the fourth quarter of 2022 [31] Q&A Session Summary Question: What is the outlook for end demand given market nervousness? - Management indicated that they continue to see strong demand and that renewals came in at 93% [33] Question: Did the company buy back any stock in the quarter? - Management confirmed that no stock was bought back in the quarter, but $100 million was repurchased for the full year [81] Question: How is the company addressing the growth from existing clients versus new clients? - Management stated that growth is primarily driven by new logo adds, with a healthy upsell to current clients [17][60] Question: What is the expected impact of W2 revenue in Q1? - Management expects normalization in trends for W2 revenue due to improved hiring patterns [61] Question: How does the company view the retention rate among smaller clients? - Management noted that smaller clients are experiencing more churn, but retention remains strong at 93% overall [72][90] Question: What is the company's strategy regarding upmarket opportunities? - Management indicated a strategic focus on larger clients, with continued investments to support this shift [134]

PART I – FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements show strong 9-month revenue and net income growth, with balance sheet expansion [Unaudited Consolidated Balance Sheets](index=3&type=section&id=Unaudited%20Consolidated%20Balance%20Sheets) Total assets grew to $3.31 billion, liabilities decreased, and stockholders' equity increased to $1.08 billion by September 30, 2022 Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Total Assets** | **$3,314,570** | **$3,215,145** | | Total current assets | $2,228,362 | $2,252,038 | | **Total Liabilities** | **$2,238,190** | **$2,321,431** | | Client funds obligation | $1,754,095 | $1,846,573 | | **Total Stockholders' Equity** | **$1,076,380** | **$893,714** | [Unaudited Consolidated Statements of Comprehensive Income](index=4&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Comprehensive%20Income) Q3 and 9-month revenues grew 30.4% to $334.2 million and $1.005 billion respectively, with significant net income increases Financial Performance (in thousands, except per share amounts) | Metric | Q3 2022 | Q3 2021 | % Change | Nine Months 2022 | Nine Months 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Total Revenues** | **$334,167** | **$256,194** | **30.4%** | **$1,004,610** | **$770,538** | **30.4%** | | Recurring Revenues | $328,150 | $251,306 | 30.6% | $987,848 | $756,665 | 30.6% | | **Operating Income** | **$74,265** | **$43,305** | **71.5%** | **$272,845** | **$184,941** | **47.5%** | | **Net Income** | **$52,153** | **$30,379** | **71.7%** | **$201,438** | **$147,273** | **36.8%** | | **Diluted EPS** | **$0.90** | **$0.52** | **73.1%** | **$3.46** | **$2.53** | **36.8%** | [Unaudited Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased to $1.08 billion, driven by net income, partially offset by treasury stock repurchases - Total stockholders' equity grew to **$1,076.4 million** at September 30, 2022, from **$893.7 million** at December 31, 2021[15](index=15&type=chunk) - The increase was primarily driven by **$201.4 million** in net income for the nine-month period[15](index=15&type=chunk) - The company repurchased common stock, increasing the treasury stock balance from **$(488.1) million** to **$(587.8) million** during the first nine months of 2022[15](index=15&type=chunk) [Unaudited Consolidated Statements of Cash Flows](index=6&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow increased slightly, while investing and financing activities used cash, primarily for debt and share repurchases Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $236,647 | $229,637 | | Net cash used in investing activities | $(32,028) | $(63,978) | | Net cash (used in) provided by financing activities | $(198,871) | $1,283,999 | [Notes to the Unaudited Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20the%20Unaudited%20Consolidated%20Financial%20Statements) Notes detail revenue recognition, a new $1.1 billion stock repurchase plan, debt refinancing, and an increased effective tax rate - In August 2022, the Board of Directors authorized a new stock repurchase plan for up to **$1.1 billion** of common stock, expiring August 15, 2024[30](index=30&type=chunk) - The company entered into a new credit agreement in July 2022, providing a **$650 million** revolving credit facility and a **$750 million** delayed draw term loan facility, and used it to repay and terminate a prior facility[62](index=62&type=chunk)[63](index=63&type=chunk)[68](index=68&type=chunk) - The company's effective income tax rate was **26.9%** for the nine months ended September 30, 2022, up from **20.8%** in the prior year, primarily due to a decrease in excess tax benefits from stock-based compensation[103](index=103&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes revenue growth to client expansion and higher interest, detailing increased operating expenses and strong liquidity [Results of Operations](index=24&type=section&id=Results%20of%20Operations) Q3 revenues grew 30.4% to $334.2 million, with operating income up 71.5%, driven by client growth and increased operating expenses Q3 2022 vs Q3 2021 Performance (in thousands) | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $334,167 | $256,194 | 30.4% | | Total Operating Expenses | $259,902 | $212,889 | 22.1% | | Operating Income | $74,265 | $43,305 | 71.5% | | Net Income | $52,153 | $30,379 | 71.7% | - Revenue growth was primarily the result of adding new clients, productivity gains in mature sales offices, and selling additional applications to existing clients. Higher interest rates on funds held for clients also contributed positively[127](index=127&type=chunk) - Sales and marketing expenses for the nine months of 2022 increased by **$53.3 million** YoY due to higher employee-related costs (**$41.1M**) and increased advertising spend (**$12.2M**)[132](index=132&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is strong, supported by operating cash flow, a new credit facility, and a $1.1 billion stock repurchase authorization - Principal liquidity sources are operating cash flow, cash equivalents, and a new credit agreement from July 2022 providing a **$650M** revolving credit facility and a **$750M** delayed draw term loan facility[143](index=143&type=chunk)[150](index=150&type=chunk) - In August 2022, the Board authorized a new stock repurchase plan for up to **$1.1 billion**. As of September 30, 2022, the full **$1.1 billion** was available for repurchases[156](index=156&type=chunk) - For the nine months ended September 30, 2022, the company repurchased **364,200** shares at an average cost of **$273.67** per share[157](index=157&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20Financial%20Measures) Adjusted EBITDA and Non-GAAP Net Income show strong growth, reflecting core business performance for Q3 and 9-month periods Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Period | Net Income | Adjusted EBITDA | % Change (YoY) | | :--- | :--- | :--- | :--- | | **Q3 2022** | **$52,153** | **$126,026** | **40.5%** | | Q3 2021 | $30,379 | $89,703 | N/A | | **Nine Months 2022** | **$201,438** | **$415,774** | **34.2%** | | Nine Months 2021 | $147,273 | $309,715 | N/A | Reconciliation of Net Income to Non-GAAP Net Income (in thousands) | Period | Net Income | Non-GAAP Net Income | % Change (YoY) | | :--- | :--- | :--- | :--- | | **Q3 2022** | **$52,153** | **$73,431** | **37.0%** | | Q3 2021 | $30,379 | $53,586 | N/A | | **Nine Months 2022** | **$201,438** | **$257,073** | **31.2%** | | Nine Months 2021 | $147,273 | $195,976 | N/A | [Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Primary market risk is interest rate sensitivity on cash and variable-rate debt; a 100 basis point change is not material - Primary market risk is interest rate sensitivity on cash equivalents (**$317.2M**) and variable-rate debt (**$29.0M**)[178](index=178&type=chunk)[181](index=181&type=chunk) - The company terminated its floating-to-fixed interest rate swap agreement on August 24, 2022[180](index=180&type=chunk) - A hypothetical **100** basis point change in interest rates is not expected to have a material effect on operating results or financial condition[181](index=181&type=chunk) [Controls and Procedures](index=33&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of September 30, 2022, with no material internal control changes - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022[182](index=182&type=chunk) - There were no material changes in the company's internal control over financial reporting during the quarter ended September 30, 2022[184](index=184&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings not expected to materially affect financial condition or operations - The company states that pending legal matters arise in the ordinary course of business and are not expected to have a material adverse effect on its business or financials[187](index=187&type=chunk) [Risk Factors](index=34&type=page&id=Item%201A.%20Risk%20Factors) No material changes to risk factors previously disclosed in the Form 10-K filed on February 17, 2022 - There have been no material changes from the risk factors disclosed in the Form 10-K filed on February 17, 2022[188](index=188&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=34&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Details Q3 2022 common stock repurchases of 631 shares and the $1.1 billion stock repurchase plan authorization Share Repurchases (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1 - 31, 2022 | 30 | $330.49 | | August 1 - 31, 2022 | 193 | $367.62 | | September 1 - 30, 2022 | 408 | $351.58 | | **Total** | **631** | **N/A** | - On August 15, 2022, the Board of Directors increased the availability under the stock repurchase plan to **$1.1 billion** and extended its expiration to August 15, 2024[191](index=191&type=chunk) [Other Information](index=34&type=section&id=Item%205.%20Other%20Information) Amended bylaws adopted October 31, 2022, update procedures for stockholder meetings and director nominations, aligning with new rules - On October 31, 2022, the company's Board of Directors adopted amended and restated bylaws[191](index=191&type=chunk) - Key changes include updated procedures for stockholder meetings, director nominations, and enhanced disclosure requirements for stockholders submitting proposals, including an undertaking to comply with Rule 14a-19[191](index=191&type=chunk)[193](index=193&type=chunk) [Exhibits](index=36&type=section&id=Item%206.%20Exhibits) Lists filed exhibits, including amended bylaws, the July 2022 Credit Agreement, and CEO/CFO certifications - Lists filed exhibits, including the Amended and Restated Bylaws (Exhibit **3.2**), the July 2022 Credit Agreement (Exhibit **10.1**), and CEO/CFO certifications (Exhibits **31.1**, **31.2**, **32.1**)[194](index=194&type=chunk)

Financial Data and Key Metrics Changes - The company reported Q3 2022 revenue of approximately $334 million, representing a 30% year-over-year growth, driven by strong recurring revenue growth from new business sales [8][13] - Recurring revenue for Q3 was $328.2 million, accounting for 98% of total revenues and growing 31% year-over-year [13] - Adjusted EBITDA for Q3 was $126 million, or 37.7% of total revenues, compared to $89.7 million or 35% in the prior year, reflecting a 270 basis points year-over-year margin expansion [15] - GAAP net income for Q3 was $52.2 million, or $0.90 per diluted share, compared to $30.4 million, or $0.52 per diluted share in the prior year [16] - The company ended the quarter with cash and cash equivalents of approximately $317 million and total debt of $29 million [17] Business Line Data and Key Metrics Changes - The focus on high-quality revenue growth has resulted in strong adjusted gross profit of $280.5 million for Q3, with an adjusted gross margin of 83.9% [13] - Adjusted sales and marketing expenses were $85.8 million, or 25.7% of revenues, slightly down from 25.9% in the prior year [14] Market Data and Key Metrics Changes - The company has a total addressable market (TAM) where it currently holds only 5%, indicating significant growth potential as it competes against larger competitors [24] - The demand for self-service solutions, particularly the BETI payroll system, continues to grow, with nearly half of the clients adopting it [9][55] Company Strategy and Development Direction - The company is focused on a differentiated product strategy centered around employee experience and self-service payroll, which is expected to drive future growth [11][20] - The go-to-market strategy includes 54 outside sales teams and a strong marketing campaign to enhance brand awareness and lead generation [9][10] Management's Comments on Operating Environment and Future Outlook - Management noted that the hiring market remains tight, but there has been some softening, which has not significantly impacted the company's performance [24] - The company raised its full-year 2022 revenue guidance to a range of $1.371 billion to $1.373 billion, reflecting confidence in continued growth [18] Other Important Information - The company is experiencing strong organic lead referrals from employees, which is enhancing its market penetration [10] - The management emphasized the importance of employee self-service in payroll, which is becoming a key differentiator in the market [9][55] Q&A Session All Questions and Answers Question: Market conditions and demand - The management discussed the current hiring market, indicating a slight softening but still strong demand for their services, with significant opportunities for efficiency improvements [24] Question: Operating cash flow - Management explained that the lower operating cash flow was primarily due to timing issues and additional tax payments in Q3 [26] Question: Fourth quarter guidance - The management expressed confidence in a strong seasonal uplift for Q4, driven by new client conversions and rate increases [29] Question: Hiring and retention changes - Management reported no noticeable changes in hiring or retention at customer companies, indicating stability in their client base [32] Question: Competitive landscape - The management noted that they continue to face the same competitors as they move upmarket, with no significant changes in the competitive landscape [49] Question: Marketing effectiveness - Management highlighted the success of their brand marketing program, which has shifted focus to emphasize employee self-service payroll [51] Question: BETI adoption and performance - Management reported that about 50% of current clients are using BETI, with increasing adoption rates as clients become more familiar with the product [55] Question: Module pricing and inflation - Management confirmed that BETI pricing is nominal compared to other modules, and any future pricing adjustments would be based on the ROI delivered to clients [58] Question: New logo growth - Management indicated that new logos were the primary source of upside in their performance, reflecting the effectiveness of their differentiated strategy [85]

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q For the transition period from ______ to ______ Commission File Number: 001-36393 Paycom Software, Inc. (Exact name of registrant as specified in its charter) Delaware 80-0957485 (State or ot ...

Financial Data and Key Metrics Changes - The company reported Q2 2022 revenue of approximately $317 million, representing a 31% year-over-year increase, driven by strong recurring revenue from new business sales [9][17] - Recurring revenue for Q2 was $311.5 million, accounting for 98% of total revenues and also growing 31% year-over-year [18] - Adjusted EBITDA for Q2 was $119.6 million, or 37.7% of total revenues, compared to $87 million or 35.9% in the prior year [21] - GAAP net income for Q2 was $57.4 million, or $0.99 per diluted share, up from $52.3 million or $0.90 per diluted share in the prior year [22] - The company ended the quarter with cash and cash equivalents of approximately $279 million and total debt of $29 million [23] Business Line Data and Key Metrics Changes - The company continues to see strong demand for self-service payroll and automation solutions, particularly through its product Beti, which has been adopted by over 13,000 clients, nearly 40% of the client base [12][70] - The marketing efforts have resulted in strong demo leads and brand recognition, particularly from larger clients, contributing to higher average revenue per client [13] Market Data and Key Metrics Changes - The company estimates it has roughly half of the country covered geographically but only about 5% of a large and growing Total Addressable Market (TAM), indicating significant growth potential [14][28] - The average daily balance of funds held on behalf of clients was approximately $2 billion in Q2 2022 [23] Company Strategy and Development Direction - The company is focused on increasing employee usage of its platform, particularly through Beti, which is seen as the future of payroll [10][12] - The strategy includes aggressive marketing and sales efforts to penetrate deeper into target geographies and expand market share [14][28] - The company raised its full-year 2022 revenue guidance to a range of $1.354 billion to $1.356 billion, reflecting strong demand trends [26] Management's Comments on Operating Environment and Future Outlook - Management noted that while hiring has become somewhat easier, it remains an employee's market with many jobs unfilled [31] - The company does not anticipate significant changes in demand due to macroeconomic factors, as it has historically weathered various economic cycles [42][78] - Management expressed confidence in the company's ability to continue growing, even in the face of potential economic challenges [78] Other Important Information - The company repurchased approximately 360,000 shares for a total of roughly $100 million during Q2 2022, with a remaining buyback authorization of $550 million [25] - The company plans to continue investing aggressively in marketing and advertising through the remainder of 2022 [20] Q&A Session Summary Question: What changes are being seen in end demand or customer behavior? - Management indicated that there are no significant changes in demand, and the employment market remains competitive [31] Question: How do interest rate changes impact future numbers? - For every 25 basis points increase in the Fed funds rate, the company expects about $5 million in annualized interest income [32] Question: Are deal cycles and close rates changing? - Management reported that close rates are improving, with more interest in initial calls leading to second calls [36] Question: What is the impact of employment levels on overall growth? - Historically, normal fluctuations in unemployment have not significantly impacted the company, except during the pandemic [42] Question: How are larger clients impacting lead generation? - The average size of new clients is increasing, and many leads are coming from employees of companies that have previously used the company's services [47] Question: What is the growth composition from existing clients versus new clients? - The majority of revenue growth comes from new client wins, although there are opportunities to upsell existing clients [88]

FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2022 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number: 001-36393 Paycom Software, Inc. (Registrant's telephone number, including area code) Securities registered pursuant to ...