Paycom Software(US:PAYC)2023-02-15 16:00Part I Business 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 retirement2022 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 businesses363738 - 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 managers114116117 - 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 bonuses112113 Risk Factors 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 liabilities124128 - 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 recognition134136 - 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 obsolete131133 - 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 2023161162 - Failure to comply with complex and evolving data privacy laws (e.g., CCPA, CPRA, GDPR) could result in regulatory scrutiny, fines, and reputational harm165166167 - 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 results202 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None205 Properties 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 property206 - A new 315,000-square-foot building is under construction at the Oklahoma City headquarters206 - The company owns an operations facility in Grapevine, Texas and operates three fully redundant data centers across its Oklahoma City and Grapevine locations206 Legal Proceedings 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 financials208 Mine Safety Disclosures This item is not applicable to the company - None209 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 - Paycom has not paid any cash dividends on its common stock as of the filing of this report212 - 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, 2024216 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 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 clients244 - 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 2022257277 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 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 debt301303 - 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 facility301303 - 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 condition303 Financial Statements and Supplementary Data 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 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 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 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 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 renew363 - 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 2027400 - 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 units427435440 - 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 awards445447 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants regarding accounting and financial disclosure - None453 Controls and Procedures 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, 2022455 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework456 - 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 reporting457463 Other Information The company reports no other information for this item - None459 Part III Directors, Executive Officers and Corporate Governance 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 Statement469 Executive Compensation 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 Statement470 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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 Statement471 Certain Relationships and Related Transactions, and Director Independence 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 Statement472 Principal Accounting Fees and Services 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 Statement473 Part IV Exhibits, Financial Statement Schedules 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-K474 - Financial statement schedules have been omitted because the required information is either inapplicable or included in the consolidated financial statements and notes474 Form 10-K Summary This item is not applicable - Not applicable485