Paycor HCM(PYCR) - 2023 Q2 - Quarterly Report

Part I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Paycor HCM, Inc. for the quarterly period ended December 31, 2022, including Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, and Cash Flows, along with accompanying notes Unaudited Condensed Consolidated Balance Sheets As of December 31, 2022, total assets were $2.67 billion, a decrease from $3.13 billion on June 30, 2022, primarily due to a reduction in funds held for clients, while total liabilities also decreased to $1.40 billion from $1.85 billion, driven by a corresponding decrease in client fund obligations, and total stockholders' equity remained relatively stable at $1.27 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 (Unaudited) | June 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $72,277 | $133,041 | | Funds held for clients | $1,183,474 | $1,715,916 | | Goodwill | $770,120 | $750,155 | | Total Assets | $2,672,872 | $3,131,317 | | Liabilities & Equity | | | | Client fund obligations | $1,187,532 | $1,719,047 | | Total Liabilities | $1,404,876 | $1,846,586 | | Total Stockholders' Equity | $1,267,996 | $1,284,731 | Unaudited Condensed Consolidated Statements of Operations For the three months ended December 31, 2022, total revenues increased 29% year-over-year to $132.9 million, driven by a 22% rise in recurring revenue and a significant increase in interest income on funds held for clients, resulting in a net loss of $27.5 million, or ($0.16) per share, compared to a net loss of $25.5 million, or ($0.15) per share, in the prior-year period, while for the six-month period, revenues grew 28% to $251.2 million, and the net loss narrowed to $56.5 million from $67.5 million year-over-year Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $132,864 | $103,067 | $251,167 | $195,799 | | Gross Profit | $86,680 | $61,985 | $161,798 | $109,106 | | Loss from Operations | $(31,569) | $(33,764) | $(64,959) | $(86,033) | | Net Loss | $(27,463) | $(25,464) | $(56,515) | $(67,500) | | Net Loss Per Share | $(0.16) | $(0.15) | $(0.32) | $(0.46) | Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended December 31, 2022, net cash used in operating activities was $18.5 million, comparable to the $18.7 million used in the prior-year period, while net cash used in investing activities increased significantly to $151.3 million from $16.0 million, primarily due to the acquisition of Talenya Ltd. and changes in the client funds portfolio, and net cash used in financing activities was $525.0 million, a major shift from the $413.3 million provided by financing activities in the prior year, which had benefited from IPO proceeds Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,498) | $(18,724) | | Net cash used in investing activities | $(151,332) | $(16,035) | | Net cash (used in) provided by financing activities | $(524,960) | $413,341 | Notes to the Unaudited Condensed Consolidated Statements The notes provide detailed explanations of the company's accounting policies and financial statement line items, including its business description as an HCM software provider for SMBs, revenue recognition policies, the acquisition of Talenya Ltd. for an initial $20 million, the adoption of the new lease accounting standard (ASC 842), and details on goodwill, intangible assets, and debt agreements - The company is a leading provider of HCM software solutions for small and medium-sized businesses (10-1,000 employees) in the U.S., delivered via a SaaS model[33] - On October 27, 2022, the company acquired Talenya Ltd., an AI-driven talent sourcing provider, for an initial cash price of $20 million, plus up to $10 million in potential earnouts, with the acquisition adding $20.7 million to goodwill[54][56] - The company adopted the new lease accounting standard (ASC 842) on July 1, 2022, resulting in the recognition of $17.5 million in lease assets and $24.6 million in lease liabilities[44][46] - In August 2022, the company entered into a 16-year partnership with the Cincinnati Bengals for the exclusive naming rights to Paycor Stadium, recorded as a $78.1 million intangible asset[69][72] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 29% year-over-year revenue increase for the quarter, driven by customer growth to approximately 30,000 and higher effective PEPM, covering key business strategies, including sales expansion and product innovation, analyzing the components of operating results, providing non-GAAP financial measures such as Adjusted Operating Income, which was $17.6 million for the quarter, and discussing liquidity, capital resources, and cash flows - The company's business model is based on recurring revenue from SaaS subscriptions, typically on a per-employee-per-month (PEPM) basis, serving approximately 30,000 customers as of December 31, 2022[98][99] - Key growth strategies include expanding the sales footprint, increasing product penetration with existing customers through bundled offerings, and ongoing product innovation, such as the recent acquisition of Talenya's sourcing technology[105][108][113] Selected Financial Results (in thousands) | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2022 | Six Months Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $132,864 | $103,067 | $251,167 | $195,799 | | Loss from Operations | $(31,569) | $(33,764) | $(64,959) | $(86,033) | | Adjusted Operating Income* | $17,643 | $10,259 | $28,056 | $13,651 | Results of Operations The analysis details the year-over-year changes for the three and six months ended December 31, 2022, showing that for the three-month period, total revenues grew 29% to $132.9 million, while cost of revenues increased 12% to $46.2 million, resulting in a 40% increase in gross profit, and operating expenses rose 23% to $118.2 million, driven by investments in sales, marketing, and R&D, and for the six-month period, revenues grew 28% to $251.2 million, and gross profit increased 48% to $161.8 million Revenue Comparison - Three Months Ended Dec 31 (in thousands) | Revenue Source | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Recurring and other revenue | $124,982 | $102,729 | $22,253 | 22% | | Interest income on funds held for clients | $7,882 | $338 | $7,544 | 2,232% | | Total revenues | $132,864 | $103,067 | $29,797 | 29% | Operating Expense Comparison - Three Months Ended Dec 31 (in thousands) | Expense Category | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $51,913 | $40,682 | $11,231 | 28% | | General and administrative | $52,461 | $44,462 | $7,999 | 18% | | Research and development | $13,875 | $10,605 | $3,270 | 31% | - For the six months ended Dec 31, 2022, total revenues increased 28% to $251.2 million from $195.8 million in the prior year period, driven by a 23% increase in recurring revenue and a 1,737% increase in interest income on client funds[153] Non-GAAP Financial Measures The company provides several non-GAAP measures to supplement its GAAP results, including Adjusted Gross Profit, Adjusted Operating Income, and Adjusted Net Income, with Adjusted Operating Income for the three months ended December 31, 2022, at $17.6 million (13.3% margin), up from $10.3 million (10.0% margin) in the prior year, and Adjusted Net Income at $13.6 million, or $0.08 per share, excluding items like amortization of intangibles and stock-based compensation Reconciliation of Loss from Operations to Adjusted Operating Income (in thousands) | Line Item | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | | :--- | :--- | :--- | | Loss from Operations | $(31,569) | $(33,764) | | Amortization of intangible assets | 24,673 | 25,362 | | Stock-based compensation expense | 20,684 | 17,215 | | Loss on lease exit | 309 | — | | Corporate adjustments | 3,546 | 1,446 | | Adjusted Operating Income | $17,643 | $10,259 | Reconciliation to Adjusted Net Income (in thousands) | Line Item | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net loss before benefit for income taxes | $(31,907) | $(33,548) | | Adjustments (Amortization, Stock Comp, etc.) | 49,633 | 44,023 | | Non-GAAP adjusted income before applicable income taxes | 17,726 | 10,475 | | Income tax effect on adjustments | (4,077) | (2,514) | | Adjusted Net Income Attributable to Paycor HCM, Inc. | $13,649 | $7,961 | Liquidity and Capital Resources As of December 31, 2022, the company's principal sources of liquidity were $72.3 million in cash and cash equivalents and a $200.0 million undrawn revolving credit facility, with management believing existing resources are sufficient to meet working capital and capital expenditure needs for at least the next twelve months, and the discussion also details the cash flow activities for the six-month period, showing an $18.5 million net cash used from operations - Principal sources of liquidity as of December 31, 2022, include $72.3 million in cash and cash equivalents and an available $200.0 million senior secured revolving credit facility[192][196] - For the six months ended December 31, 2022, net cash used in operating activities was $18.5 million, and net cash used in financing activities was $525.0 million, primarily due to a decrease in funds held to satisfy client fund obligations[200][201][203] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures relate to interest rate fluctuations and foreign currency exchange risk, with interest rate risk affecting income earned on $1.18 billion in funds held for clients and the cost of potential borrowings, while foreign currency risk is not considered significant as most sales are in U.S. dollars, and a hypothetical 10% change in foreign exchange rates or a 100-basis point change in interest rates would not have a material impact on its financial statements - The company is exposed to interest rate risk on its $1.18 billion of funds held for clients, and a 100-basis point change in interest rates would have an immaterial effect on the market value of its available-for-sale securities[216][217] - Foreign currency exchange risk is not considered significant as most sales are denominated in U.S. dollars, and a hypothetical 10% change in exchange rates would not have a material impact[214][215] - While inflation could impact costs, the company believes it has not had a direct, material impact to date, and continued interest rate hikes by the Federal Reserve could benefit interest income on client funds but would increase the cost of future borrowings[220][221] Controls and Procedures Management, with the participation of the CEO and CFO, evaluated the company's disclosure controls and procedures as of December 31, 2022, and concluded that they were effective, with no material changes to the company's internal control over financial reporting during the quarter - Based on an evaluation as of December 31, 2022, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[225] - There were no material changes to the company's internal control over financial reporting during the three months ended December 31, 2022[226] Part II - OTHER INFORMATION Legal Proceedings The company reports that it is not presently a party to any legal proceedings that it believes would have a material adverse effect on its business, financial condition, or liquidity - The company is not presently a party to any legal proceedings that would individually or in aggregate have a material adverse effect on its business[229] Risk Factors The company states that there have been no material changes from the risk factors disclosed in its Annual Report on Form 10-K filed with the SEC on August 24, 2022 - There have been no material changes from the risk factors set forth in the company's Annual Report on Form 10-K[229] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[230] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, and Inline XBRL documents