Paycom Software(US:PAYC)2023-08-02 16:00markdown PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Presents Paycom's unaudited consolidated financial statements, including Balance Sheets, Income, Equity, Cash Flows, and detailed notes on accounting policies and events [Unaudited Consolidated Balance Sheets](index=3&type=section&id=Unaudited%20Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (in thousands) | Item | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :-------------- | :------------------ | | **Assets** | | | | Cash and cash equivalents | $536,545 | $400,730 | | Funds held for clients | $2,002,492 | $2,202,975 | | Total current assets | $2,708,194 | $2,764,172 | | Property and equipment, net | $444,992 | $402,448 | | Total assets | $3,951,341 | $3,902,513 | | **Liabilities & Stockholders' Equity** | | | | Client funds obligation | $2,006,154 | $2,207,706 | | Total current liabilities | $2,186,727 | $2,377,037 | | Total liabilities | $2,544,656 | $2,719,906 | | Total stockholders' equity | $1,406,685 | $1,182,607 | | Total liabilities and stockholders' equity | $3,951,341 | $3,902,513 | [Unaudited Consolidated Statements of Comprehensive Income](index=4&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Comprehensive%20Income) Consolidated Statements of Comprehensive Income Highlights (in thousands, except per share) | Item | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $401,139 | $316,924 | $852,776 | $670,443 | | Total operating expenses | $313,873 | $244,611 | $605,078 | $471,863 | | Operating income | $87,266 | $72,313 | $247,698 | $198,580 | | Income before income taxes | $92,847 | $72,837 | $258,446 | $200,301 | | Net income | $64,516 | $57,355 | $183,812 | $149,285 | | Earnings per share, basic | $1.11 | $0.99 | $3.17 | $2.57 | | Earnings per share, diluted | $1.11 | $0.99 | $3.17 | $2.57 | | Comprehensive earnings (loss) | $64,376 | $56,874 | $184,522 | $147,685 | [Unaudited Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Item | December 31, 2022 | March 31, 2023 | June 30, 2023 | | :--------------------------------- | :------------------ | :--------------- | :-------------- | | Total Stockholders' Equity | $1,182,607 | $1,334,471 | $1,406,685 | | Common Stock (Shares) | 62,518 | 62,525 | 62,640 | | Additional Paid-in Capital | $576,622 | $608,966 | $649,965 | | Retained Earnings | $1,196,968 | $1,316,264 | $1,358,059 | | Treasury Stock (Amount) | $(587,905) | $(588,531) | $(598,972) | | Net income (Q2 2023) | - | - | $64,516 | | Dividends declared (Q2 2023) | - | - | $(22,721) | [Unaudited Consolidated Statements of Cash Flows](index=6&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | % Change | | :----------------------------------------------------------------- | :--------- | :----------- | :------- | | Net cash provided by operating activities | $251,991 | $168,958 | 49% | | Net cash used in investing activities | $(83,378) | $(22,510) | 270% | | Net cash (used in) provided by financing activities | $(234,350) | $1,477,971 | -116% | | (Decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents | $(65,737) | $1,624,419 | -104% | | Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period | $2,343,358 | $3,437,110 | -31.8% | [Notes to the Unaudited Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20the%20Unaudited%20Consolidated%20Financial%20Statements) [1. ORGANIZATION AND DESCRIPTION OF BUSINESS](index=7&type=section&id=1.%20ORGANIZATION%20AND%20DESCRIPTION%20OF%20BUSINESS) - Paycom Software, Inc. is a leading provider of a comprehensive, cloud-based human capital management (HCM) solution delivered as Software-as-a-Service (SaaS)[18](index=18&type=chunk) - The solution manages the complete employment lifecycle, from recruitment to retirement, with functionality and data analytics for talent acquisition, time and labor management, payroll, talent management, and HR management applications, all based on a single database[19](index=19&type=chunk) [2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=7&type=section&id=2.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) - The unaudited interim consolidated financial statements are prepared in accordance with U.S. GAAP and SEC regulations, reflecting all necessary normal recurring adjustments[21](index=21&type=chunk) - Recently adopted accounting pronouncements (ASU 2020-04 and ASU 2021-01) related to reference rate reform had no material impact on the interim consolidated financial statements due to the termination of the interest rate swap in August 2022[22](index=22&type=chunk)[23](index=23&type=chunk) - Revenues are seasonal, with higher recurring revenues expected in the first and fourth quarters due to annual payroll tax filing forms (W-2, 1099, 1095) and unscheduled payroll runs (bonuses)[25](index=25&type=chunk) [3. REVENUE](index=8&type=section&id=3.%20REVENUE) - Recurring revenues are primarily derived from various HCM applications (talent acquisition, time and labor management, payroll, talent management, HR management, Global HCM) and fees for form filings and payroll check/report delivery[31](index=31&type=chunk)[32](index=32&type=chunk) - Interest income earned on funds held for clients (collected for payroll tax submissions and employee payment services) is included in recurring revenues[35](index=35&type=chunk) - Implementation and other revenues consist of nonrefundable upfront conversion fees for new client set-up (deferred and recognized ratably over a ten-year estimated client life) and sales of time clocks[36](index=36&type=chunk)[37](index=37&type=chunk)[38](index=38&type=chunk) Deferred Revenue Related to Material Rights (in thousands) | Period | Balance, beginning of period | Recognition of revenue | Contract balance, net of revenue recognized | Balance, end of period | | :-------------------------------- | :--------------------------- | :--------------------- | :------------------------------------------ | :--------------------- | | Three Months Ended June 30, 2023 | $120,802 | $(5,507) | $8,938 | $124,233 | | Three Months Ended June 30, 2022 | $104,816 | $(4,621) | $8,685 | $108,880 | | Six Months Ended June 30, 2023 | $117,416 | $(10,593) | $17,410 | $124,233 | | Six Months Ended June 30, 2022 | $101,426 | $(8,842) | $16,296 | $108,880 | - The company expects to recognize **$11.1 million** of deferred revenue related to material rights in the remainder of 2023, **$20.3 million** in 2024, and **$92.8 million** thereafter[40](index=40&type=chunk) Contract Costs Capitalization and Amortization (in thousands) | Item | Beginning Balance (Q2 2023) | Capitalization of Costs (Q2 2023) | Amortization (Q2 2023) | Ending Balance (Q2 2023) | | :----------------------- | :-------------------------- | :------------------------ | :--------------------- | :----------------------- | | Costs to obtain a contract | $343,991 | $19,937 | $(13,442) | $350,486 | | Costs to fulfill a contract | $360,588 | $32,514 | $(12,778) | $380,324 | | | | | | | Item | Beginning Balance (YTD Q2 2023) | Capitalization of Costs (YTD Q2 2023) | Amortization (YTD Q2 2023) | Ending Balance (YTD Q2 2023) | | :----------------------- | :-------------------------- | :------------------------ | :--------------------- | :----------------------- | | Costs to obtain a contract | $325,457 | $51,434 | $(26,405) | $350,486 | | Costs to fulfill a contract | $338,895 | $66,162 | $(24,733) | $380,324 | [4. PROPERTY AND EQUIPMENT](index=11&type=section&id=4.%20PROPERTY%20AND%20EQUIPMENT) Property and Equipment, Net (in thousands) | Item | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :-------------- | :------------------ | | Software and capitalized software costs | $315,858 | $270,645 | | Buildings | $178,820 | $177,765 | | Computer equipment | $147,355 | $133,715 | | Total Property and equipment | $729,475 | $663,706 | | Less: accumulated depreciation and amortization | $(381,798) | $(331,340) | | Property and equipment, net | $444,992 | $402,448 | - Capitalized computer software development costs for internal use were **$22.9 million** for Q2 2023 (up from **$16.4 million** in Q2 2022) and **$44.2 million** for YTD Q2 2023 (up from **$31.8 million** in YTD Q2 2022)[44](index=44&type=chunk) - Depreciation and amortization expense for property and equipment was **$26.8 million** for Q2 2023 (up from **$21.6 million** in Q2 2022) and **$52.1 million** for YTD Q2 2023 (up from **$42.2 million** in YTD Q2 2022)[47](index=47&type=chunk) [5. GOODWILL AND INTANGIBLE ASSETS, NET](index=11&type=section&id=5.%20GOODWILL%20AND%20INTANGIBLE%20ASSETS%2C%20NET) - Goodwill remained stable at **$51.9 million** as of June 30, 2023, with no impairment indicators[48](index=48&type=chunk) - The company has a naming rights intangible asset for the Oklahoma City arena, valued at **$52.1 million** net as of June 30, 2023, being amortized over **13.3 years**[49](index=49&type=chunk)[50](index=50&type=chunk) - Amortization of intangible assets was **$1.0 million** for Q2 2023 and **$2.0 million** for YTD Q2 2023, with estimated future annual amortization of **$3.9 million** from 2024-2028[50](index=50&type=chunk) [6. LONG-TERM DEBT](index=12&type=section&id=6.%20LONG-TERM%20DEBT) - Long-term debt as of June 30, 2023, and December 31, 2022, was **$29.0 million**, consisting of the July 2022 Revolving Credit Facility[51](index=51&type=chunk) - The July 2022 Revolving Credit Facility, initially **$650.0 million**, was increased to **$1.0 billion** on July 28, 2023, and the **$750.0 million** Term Loan Facility was terminated without any draws[58](index=58&type=chunk)[60](index=60&type=chunk) - The company is required to maintain a consolidated interest ratio of not less than **3.0 to 1.0** and a consolidated leverage ratio of not greater than **3.75 to 1.0**, and was in compliance as of June 30, 2023[62](index=62&type=chunk) [7. DERIVATIVE INSTRUMENTS](index=14&type=section&id=7.%20DERIVATIVE%20INSTRUMENTS) - The floating-to-fixed interest rate swap, used to limit exposure to variable interest rates on the 2017 Term Loans, was terminated on August 24, 2022, resulting in a cash receipt of **$0.5 million**[65](index=65&type=chunk)[66](index=66&type=chunk) - The adoption of ASU 2020-04 and ASU 2021-01 related to reference rate reform had no material impact on the interim consolidated financial statements due to the termination of the interest rate swap[22](index=22&type=chunk)[23](index=23&type=chunk) [8. CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS](index=15&type=section&id=8.%20CORPORATE%20INVESTMENTS%20AND%20FUNDS%20HELD%20FOR%20CLIENTS) Cash, Cash Equivalents, and Investments (in thousands) | Type of issue | Amortized cost (June 30, 2023) | Fair value (June 30, 2023) | | :--------------------------------- | :----------------------------- | :------------------------- | | Cash and cash equivalents | $536,545 | $536,545 | | Funds held for clients' cash and cash equivalents | $1,806,813 | $1,806,813 | | Certificates of deposit | $25,000 | $25,000 | | U.S. treasury securities | $174,621 | $170,679 | | Total investments | $2,542,979 | $2,539,037 | Unrealized Losses on Available-for-Sale Securities (June 30, 2023, in thousands) | Type of issue | Gross unrealized losses (less than 12 months) | Fair value (less than 12 months) | Gross unrealized losses (more than 12 months) | Fair value (more than 12 months) | Total Gross unrealized losses | Total Fair value | | :---------------------- | :-------------------------------------------- | :------------------------------- | :-------------------------------------------- | :------------------------------- | :---------------------------- | :--------------- | | U.S. treasury securities | $(1,361) | $58,482 | $(2,581) | $112,197 | $(3,942) | $170,679 | - The company believes unrealized losses on U.S. treasury securities are due to interest rate changes, not credit risk, and expects to collect principal and interest[70](index=70&type=chunk) [9. FAIR VALUE OF FINANCIAL INSTRUMENTS](index=16&type=section&id=9.%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) - The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, and client funds obligation approximates fair value due to their short-term nature[72](index=72&type=chunk) Assets Measured at Fair Value on a Recurring Basis (June 30, 2023, in thousands) | Assets | Level 1 | Level 2 | Level 3 | Total | | :---------------------- | :------ | :-------- | :------ | :-------- | | Certificates of deposit | $— | $25,000 | $— | $25,000 | | U.S. treasury securities | $— | $170,679 | $— | $170,679 | [10. EMPLOYEE SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN](index=17&type=section&id=10.%20EMPLOYEE%20SAVINGS%20PLAN%20AND%20EMPLOYEE%20STOCK%20PURCHASE%20PLAN) - 401(k) matching contributions were **$3.8 million** for Q2 2023 (up from **$3.1 million** in Q2 2022) and **$7.8 million** for YTD Q2 2023 (up from **$6.6 million** in YTD Q2 2022)[78](index=78&type=chunk) - Under the ESPP, eligible employees purchased 35,628 shares in YTD Q2 2023 (up from 31,350 in YTD Q2 2022), with compensation expense of **$1.8 million** for YTD Q2 2023 (up from **$1.4 million** in YTD Q2 2022)[79](index=79&type=chunk) [11. EARNINGS PER SHARE](index=17&type=section&id=11.%20EARNINGS%20PER%20SHARE) Earnings Per Share Reconciliation (in thousands, except per share amounts) | Item | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $64,516 | $57,355 | $183,812 | $149,285 | | Basic weighted average shares outstanding | 57,920 | 57,969 | 57,895 | 57,992 | | Diluted weighted average shares outstanding | 58,033 | 58,067 | 58,050 | 58,186 | | Earnings per share, basic | $1.11 | $0.99 | $3.17 | $2.57 | | Earnings per share, diluted | $1.11 | $0.99 | $3.17 | $2.57 | [12. STOCK-BASED COMPENSATION](index=18&type=section&id=12.%20STOCK-BASED%20COMPENSATION) - In May 2023, stockholders approved the 2023 Long-Term Incentive Plan (LTIP) with a maximum of **3.6 million** shares for equity-based awards[83](index=83&type=chunk) - During YTD Q2 2023, 538,113 restricted shares were issued, comprising 87,618 Market-Based Shares (vesting based on VWAP targets of **$404** and **$466**) and 450,495 Time-Based Shares (vesting over 3-4 years)[84](index=84&type=chunk) Restricted Stock Awards Activity (Six Months Ended June 30, 2023, in thousands) | Item | Time-Based Restricted Stock Awards (Shares) | Market-Based Restricted Stock Awards (Shares) | | :-------------------------------------------------- | :------------------------------------------ | :-------------------------------------------- | | Unvested shares outstanding at December 31, 2022 | 479.1 | 1,677.0 | | Granted | 450.5 | 87.6 | | Vested | (116.1) | — | | Forfeited | (43.6) | (11.7) | | Unvested shares outstanding at June 30, 2023 | 769.9 | 1,752.9 | - Total stock-based compensation expense was **$35.3 million** for Q2 2023 (up from **$24.3 million** in Q2 2022) and **$63.2 million** for YTD Q2 2023 (up from **$46.3 million** in YTD Q2 2022)[93](index=93&type=chunk) - Unrecognized compensation cost for restricted stock awards was **$301.3 million** with a weighted average recognition period of **2.69 years**, and for restricted stock units was **$15.7 million** with a **1.0-year** recognition period as of June 30, 2023[95](index=95&type=chunk) - In May 2023, the Board adopted a dividend policy, and all unvested restricted stock, RSUs, and PSUs are entitled to dividend equivalents upon vesting[96](index=96&type=chunk) [13. COMMITMENTS AND CONTINGENCIES](index=20&type=section&id=13.%20COMMITMENTS%20AND%20CONTINGENCIES) - The company is involved in various legal proceedings in the ordinary course of business, but believes their resolution will not have a material adverse effect on its business, financial condition, results of operations, or cash flows[97](index=97&type=chunk) [14. INCOME TAXES](index=20&type=section&id=14.%20INCOME%20TAXES) - The effective income tax rate increased to **28.9%** for YTD Q2 2023, up from **25.5%** for YTD Q2 2022, primarily due to a decrease in excess tax benefits from stock-based compensation and a reduction of research and development credits[98](index=98&type=chunk) [15. SUBSEQUENT EVENTS](index=21&type=section&id=15.%20SUBSEQUENT%20EVENTS) - On July 28, 2023, the Revolving Credit Facility was increased from **$650.0 million** to **$1.0 billion**, and the Term Loan Facility was terminated without any draws[100](index=100&type=chunk) - The company intends to form Paycom Client Trust to hold client payroll funds and Paycom National Trust Bank, NA to serve as its trustee[100](index=100&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion of Paycom's financial condition, operational results, liquidity, growth strategies, and non-GAAP measures for the period [Overview](index=23&type=section&id=Overview) - Paycom is a leading provider of a comprehensive, cloud-based Human Capital Management (HCM) solution, managing the entire employment lifecycle from recruitment to retirement[107](index=107&type=chunk) - Revenues are generated from fixed amounts per billing period plus a fee per employee or transaction, with no long-term contractual commitments required from clients[108](index=108&type=chunk) - Growth strategy focuses on attracting new clients, increasing client employee usage across the solution, and introducing new applications to the existing client base, supported by expanding sales offices and marketing efforts[109](index=109&type=chunk)[110](index=110&type=chunk) [Growth Outlook, Opportunities and Challenges](index=24&type=section&id=Growth%20Outlook%2C%20Opportunities%20and%20Challenges) - The payroll application is the foundation of the solution, and revenue mix is evolving with the introduction of new non-payroll applications like Beti technology, which empowers employees to do their own payroll[113](index=113&type=chunk) - The target client size range has expanded to include enterprise organizations with more than 10,000 employees, representing a substantial opportunity to increase revenues per client with limited incremental cost[114](index=114&type=chunk) - Interest earned on funds held for clients is expected to increase with client base expansion and new applications, but is sensitive to changes in interest rates[115](index=115&type=chunk) - The business is seasonal, with higher recurring revenues in the first and fourth quarters due to payroll tax form processing and unscheduled payroll runs[118](index=118&type=chunk) - Gross margins were approximately **83%** for Q2 2023 and **84%** for YTD Q2 2023, expected to remain relatively consistent[119](index=119&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) The company experienced significant revenue growth for both the three and six months ended June 30, 2023, driven by new clients, sales office productivity, and increased interest income. Operating expenses also rose due to employee-related costs and marketing investments, while the effective tax rate increased Consolidated Statements of Income Data (as % of Total Revenues) | Item | Q2 2023 (% of Total Revenues) | Q2 2022 (% of Total Revenues) | YTD Q2 2023 (% of Total Revenues) | YTD Q2 2022 (% of Total Revenues) | | :--------------------------------- | :---------------------------- | :---------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | 100.0% | 100.0% | 100.0% | 100.0% | | Total cost of revenues | 16.8% | 15.8% | 15.6% | 14.7% | | Total administrative expenses | 61.4% | 61.4% | 55.4% | 55.6% | | Total operating expenses | 78.2% | 77.2% | 71.0% | 70.3% | | Operating income | 21.8% | 22.8% | 29.0% | 29.7% | | Income before income taxes | 23.1% | 23.0% | 30.3% | 29.9% | | Net income | 16.1% | 18.1% | 21.6% | 22.3% | [Revenues](index=25&type=section&id=Revenues) - Total revenues increased by **26.6%** for Q2 2023 and **27.2%** for YTD Q2 2023, driven by new clients, productivity gains in mature sales offices, additional application sales, and increased interest earned on client funds due to rising interest rates[120](index=120&type=chunk)[121](index=121&type=chunk) - Recurring revenues grew by **26.6%** for Q2 2023 and **27.2%** for YTD Q2 2023[120](index=120&type=chunk) - Implementation and other revenues increased by **22.8%** for Q2 2023 and **28.7%** for YTD Q2 2023, primarily due to higher non-refundable upfront conversion fees from new clients[120](index=120&type=chunk)[122](index=122&type=chunk) [Expenses](index=27&type=section&id=Expenses) - Operating expenses increased by **$15.0 million** for Q2 2023 and **$29.6 million** for YTD Q2 2023, mainly due to growth in employee-related expenses, shipping, supplies, and automated clearing house fees[125](index=125&type=chunk)[126](index=126&type=chunk) - Sales and marketing expenses rose by **$18.7 million** for Q2 2023 and **$47.3 million** for YTD Q2 2023, driven by increased employee-related expenses (commissions/bonuses) and marketing/advertising spending[127](index=127&type=chunk)[128](index=128&type=chunk) - Research and development expenses increased by **$12.3 million** for Q2 2023 and **$23.4 million** for YTD Q2 2023, primarily due to higher employee-related expenses[129](index=129&type=chunk) Capitalized vs. Expensed R&D Costs (in thousands) | Item | Q2 2023 | Q2 2022 | % Change | YTD Q2 2023 | YTD Q2 2022 | % Change | | :------------------------------------ | :-------- | :-------- | :------- | :---------- | :---------- | :------- | | Capitalized portion of R&D | $22,878 | $16,440 | 39% | $44,231 | $31,840 | 39% | | Expensed portion of R&D | $49,118 | $36,803 | 33% | $91,787 | $68,408 | 34% | | Total research and development costs | $71,996 | $53,243 | 35% | $136,018 | $100,248 | 36% | - General and administrative expenses increased by **$18.1 million** for Q2 2023 and **$23.2 million** for YTD Q2 2023, mainly due to higher employee-related expenses and accounting/legal fees[132](index=132&type=chunk)[133](index=133&type=chunk) [Non-Cash Stock-Based Compensation Expense](index=28&type=section&id=Non-Cash%20Stock-Based%20Compensation%20Expense) Non-Cash Stock-Based Compensation Expense (in thousands) | Item | Q2 2023 | Q2 2022 | % Change | YTD Q2 2023 | YTD Q2 2022 | % Change | | :------------------------------------ | :-------- | :-------- | :------- | :---------- | :---------- | :------- | | Operating expenses | $3,353 | $1,347 | 149% | $5,738 | $2,329 | 146% | | Sales and marketing | $6,040 | $5,029 | 20% | $11,516 | $7,906 | 46% | | Research and development | $6,639 | $2,857 | 132% | $11,897 | $5,076 | 134% | | General and administrative | $19,334 | $15,035 | 29% | $34,034 | $31,012 | 10% | | Total non-cash stock-based compensation expense | $35,366 | $24,268 | 46% | $63,185 | $46,323 | 36% | [Depreciation and Amortization](index=28&type=section&id=Depreciation%20and%20Amortization) - Depreciation and amortization expense increased for both Q2 2023 and YTD Q2 2023 compared to prior year periods, primarily due to the development of additional technology and purchases of other fixed assets[135](index=135&type=chunk) [Interest Expense](index=28&type=section&id=Interest%20Expense) - Interest expense increased for both Q2 2023 and YTD Q2 2023 compared to prior year periods, attributed to the timing of entering into the Credit Agreement on July 29, 2022[136](index=136&type=chunk) [Other Income (Expense), net](index=28&type=section&id=Other%20Income%20%28Expense%29%2C%20net) - Other income (expense), net, significantly increased to **$6.2 million** for Q2 2023 and **$11.4 million** for YTD Q2 2023, primarily due to income earned on corporate funds[137](index=137&type=chunk) [Provision for Income Taxes](index=28&type=section&id=Provision%20for%20Income%20Taxes) - The effective income tax rate increased to **28.9%** for YTD Q2 2023 (from **25.5%** in YTD Q2 2022) due to a decrease in excess tax benefits from stock-based compensation and reduced research and development credits[138](index=138&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) - Principal sources of capital and liquidity are operating cash flow, cash and cash equivalents, and a **$1.0 billion** senior secured revolving credit facility, with **$29.0 million** outstanding as of June 30, 2023[139](index=139&type=chunk) - The company believes existing cash, operating cash flow, and available liquidity will be sufficient to maintain operations, fund capital expenditures, pay dividends, and repurchase shares for at least the next 12 months[140](index=140&type=chunk) - The Board of Directors authorized a stock repurchase plan of up to **$1.1 billion**, with **$1.1 billion** remaining available as of June 30, 2023, expiring August 15, 2024[147](index=147&type=chunk) - In May 2023, the Board adopted a dividend policy, declaring a quarterly cash dividend of **$0.375** per share, paid on June 12, 2023, and another declared on July 31, 2023[149](index=149&type=chunk) [Cash Flow Analysis](index=30&type=section&id=Cash%20Flow%20Analysis) Summary of Consolidated Statements of Cash Flows (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | % Change | | :----------------------------------------------------------------- | :--------- | :----------- | :------- | | Net cash provided by operating activities | $251,991 | $168,958 | 49% | | Net cash used in investing activities | $(83,378) | $(22,510) | 270% | | Net cash (used in) provided by financing activities | $(234,350) | $1,477,971 | -116% | | Change in cash, cash equivalents, restricted cash and restricted cash equivalents | $(65,737) | $1,624,419 | -104% | - Operating cash flows for YTD Q2 2023 were positively impacted by business growth, primarily from client payments and interest on client funds, offset by personnel-related expenditures[158](index=158&type=chunk) - Cash used in investing activities for YTD Q2 2023 increased due to a **$254.0 million** decrease in proceeds from investments from client funds and a **$15.7 million** increase in property and equipment purchases, partially offset by a **$208.8 million** decrease in purchases of investments from client funds[159](index=159&type=chunk) - Cash used in financing activities for YTD Q2 2023 increased significantly due to a **$1,780.6 million** change related to client funds obligation, a **$29.0 million** decrease in debt proceeds, a **$21.7 million** dividend payment, and a **$6.3 million** increase in withholding taxes for share settlements[160](index=160&type=chunk) [Contractual Obligations](index=31&type=section&id=Contractual%20Obligations) - Principal commitments include long-term debt, office space leases, and the naming rights agreement[161](index=161&type=chunk) - No material changes to contractual obligations since the Form 10-K, except for the Credit Agreement Amendment discussed in Note 15[161](index=161&type=chunk) [Critical Accounting Policies and Estimates](index=31&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - No material changes to the critical accounting policies and estimates disclosed in the Form 10-K[163](index=163&type=chunk) [Adoption of Accounting Pronouncements](index=31&type=section&id=Adoption%20of%20Accounting%20Pronouncements) - Discussion of recently adopted accounting pronouncements is provided in Note 2 of this Form 10-Q[164](index=164&type=chunk) [Non-GAAP Financial Measures](index=31&type=section&id=Non-GAAP%20Financial%20Measures) - Management uses adjusted EBITDA and non-GAAP net income as supplemental measures to assess core business performance and for planning, providing greater transparency for investors[165](index=165&type=chunk) Net Income to Adjusted EBITDA Reconciliation (in thousands) | Item | Q2 2023 | Q2 2022 | YTD Q2 2023 | YTD Q2 2022 | | :--------------------------------- | :-------- | :-------- | :---------- | :---------- | | Net income | $64,516 | $57,355 | $183,812 | $149,285 | | Interest expense | $602 | $354 | $1,439 | $569 | | Provision for income taxes | $28,331 | $15,482 | $74,634 | $51,016 | | Depreciation and amortization | $27,738 | $22,568 | $54,010 | $44,223 | | EBITDA | $121,187 | $95,759 | $313,895 | $245,093 | | Non-cash stock-based compensation expense | $35,366 | $24,268 | $63,185 | $46,323 | | Change in fair value of interest rate swap | $— | $(405) | $— | $(1,668) | | Adjusted EBITDA | $156,553 | $119,622 | $377,080 | $289,748 | Net Income to Non-GAAP Net Income Reconciliation (in thousands) | Item | Q2 2023 | Q2 2022 | YTD Q2 2023 | YTD Q2 2022 | | :--------------------------------- | :-------- | :-------- | :---------- | :---------- | | Net income | $64,516 | $57,355 | $183,812 | $149,285 | | Non-cash stock-based compensation expense | $35,366 | $24,268 | $63,185 | $46,323 | | Change in fair value of interest rate swap | $— | $(405) | $— | $(1,668) | | Income tax effect on non-GAAP adjustments | $(5,620) | $(8,224) | $(10,084) | $(10,298) | | Non-GAAP net income | $94,262 | $72,994 | $236,913 | $183,642 | Non-GAAP Net Income Per Share Reconciliation | Item | Q2 2023 Basic | Q2 2022 Basic | YTD Q2 2023 Basic | YTD Q2 2022 Basic | | :--------------------------------- | :------------ | :------------ | :---------------- | :---------------- | | Earnings per share, basic | $1.11 | $0.99 | $3.17 | $2.57 | | Non-cash stock-based compensation expense | $0.61 | $0.42 | $1.09 | $0.80 | | Change in fair value of interest rate swap | $— | $(0.01) | $— | $(0.03) | | Income tax effect on non-GAAP adjustments | $(0.09) | $(0.14) | $(0.17) | $(0.17) | | Non-GAAP net income per share, basic | $1.63 | $1.26 | $4.09 | $3.17 | | | | | | | | Item | Q2 2023 Diluted | Q2 2022 Diluted | YTD Q2 2023 Diluted | YTD Q2 2022 Diluted | | :--------------------------------- | :-------------- | :-------------- | :------------------ | :------------------ | | Earnings per share, diluted | $1.11 | $0.99 | $3.17 | $2.57 | | Non-cash stock-based compensation expense | $0.61 | $0.42 | $1.09 | $0.80 | | Change in fair value of interest rate swap | $— | $(0.01) | $— | $(0.03) | | Income tax effect on non-GAAP adjustments | $(0.10) | $(0.14) | $(0.18) | $(0.18) | | Non-GAAP net income per share, diluted | $1.62 | $1.26 | $4.08 | $3.16 | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=32&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Assesses the company's exposure to market risks, primarily interest rate sensitivity, concluding no material impact from rate changes [Interest Rate Sensitivity](index=32&type=section&id=Interest%20Rate%20Sensitivity) - Cash and cash equivalents totaled **$536.5 million** as of June 30, 2023, primarily invested in demand deposit accounts and money market funds, with capital preservation and liquidity as primary objectives[169](index=169&type=chunk) - The company had **$29.0 million** of indebtedness outstanding under the Revolving Credit Facility, bearing interest at the Adjusted Term SOFR Rate plus **1.25%**[171](index=171&type=chunk) - An increase or decrease of **100 basis points** in interest rates would not have a material effect on the company's operating results or financial condition as of June 30, 2023[171](index=171&type=chunk) [Item 4. Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) Evaluates the effectiveness of disclosure controls and procedures, confirming their efficacy with no material changes in internal control [Evaluation of Disclosure Controls and Procedures](index=32&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023, ensuring timely and accurate reporting of required information[172](index=172&type=chunk) [Changes in Internal Control over Financial Reporting](index=32&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - There have been no material changes in internal control over financial reporting during the quarter ended June 30, 2023[174](index=174&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) Details ongoing legal proceedings, with management believing their resolution will not materially impact the company's financial position - The company is involved in various legal proceedings arising in the ordinary course of business[177](index=177&type=chunk) - Management believes the resolution of current pending legal matters will not have a material adverse effect on the company's business, financial condition, results of operations, or cash flows[177](index=177&type=chunk) [Item 1A. Risk Factors](index=35&type=page&id=Item%201A.%20Risk%20Factors) Updates risk factors, highlighting increased risks from security breaches, international expansion, and the discretionary nature of dividends - Security vulnerabilities, cyberattacks, and network disruptions, including data breaches and privacy leaks, pose significant risks, potentially damaging reputation, causing client loss, and incurring substantial liabilities[179](index=179&type=chunk)[180](index=180&type=chunk)[181](index=181&type=chunk)[182](index=182&type=chunk) - Expansion into international markets subjects the business to various risks, including conflicting laws, regulatory approvals, staffing difficulties, financial risks (e.g., foreign currency fluctuations), geopolitical instability, and compliance challenges[183](index=183&type=chunk)[184](index=184&type=chunk) - The payment of dividends and their rate are solely at the discretion of the Board of Directors and are subject to financial results and statutory surplus, meaning future dividends are not guaranteed and the policy may be modified or canceled[185](index=185&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Details common stock repurchases, primarily for tax obligations, and outlines the remaining authorization under the stock repurchase plan Common Stock Repurchases (Six Months Ended June 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------- | :------------------------------------------------------------------------------------ | | April 1 - 30, 2023 | 10,268 | $288.92 | 10,268 | $1,096,040,000 | | May 1 - 31, 2023 | 27,386 | $272.94 | 27,386 | $1,088,565,000 | | June 1 - 30, 2023 | — | — | — | $1,088,565,000 | | **Total** | **37,654** | | **37,654** | | - The repurchased shares primarily consisted of shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock[188](index=188&type=chunk) - As of June 30, 2023, there was **$1.1 billion** available for repurchases under the stock repurchase plan, which is set to expire on August 15, 2024[147](index=147&type=chunk)[188](index=188&type=chunk) [Item 6. Exhibits](index=38&type=section&id=Item%206.%20Exhibits) Lists all exhibits filed with the Form 10-Q, including corporate governance, incentive plans, credit agreements, and certifications - The exhibits include corporate documents (e.g., Amended and Restated Certificate of Incorporation, Bylaws), incentive plans (e.g., 2023 Long-Term Incentive Plan), credit agreements (e.g., Amendment No. 1 and No. 2 to Credit Agreement), and certifications (e.g., CEO and CFO certifications pursuant to Sarbanes-Oxley Act)[190](index=190&type=chunk)[192](index=192&type=chunk) [SIGNATURES](index=41&type=section&id=SIGNATURES) Confirms the Quarterly Report on Form 10-Q was signed by the CEO and CFO on August 3, 2023 - The report was signed by Chad Richison, President and Chief Executive Officer, and Craig E. Boelte, Chief Financial Officer[198](index=198&type=chunk) - The signing date for the report was August 3, 2023[198](index=198&type=chunk)