Paycom Software 10Q 2024 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, 2024


☐	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.

(Exact name of registrant as specified in its charter)


Delaware		80-0957485
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7501 W. Memorial Road

Oklahoma City, Oklahoma

73142

(Address of principal executive offices)

(Zip Code)

(405) 722-6900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	PAYC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒	Accelerated filer	☐
Non-accelerated filer ☐	Smaller reporting company	☐
	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 23, 2024, there were 58,110,019 shares of common stock, par value of $0.01 per share, outstanding, including 1,551,322 shares of restricted stock.

Paycom Software, Inc.


	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Comprehensive Income	4
	Unaudited Consolidated Statements of Stockholders’ Equity	5
	Unaudited Consolidated Statements of Cash Flows	6
	Notes to the Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
Signatures		34

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Paycom Software, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except per share amounts)


	March 31, 2024			December 31, 2023
Assets
Current assets:
Cash and cash equivalents	$	371,325		$	294,025
Accounts receivable		19,997			16,442
Prepaid expenses		50,809			37,613
Inventory		1,807			1,383
Income tax receivable		—			18,391
Deferred contract costs		124,397			118,206
Current assets before funds held for clients		568,335			486,060
Funds held for clients		2,727,991			2,327,366
Total current assets		3,296,326			2,813,426
Property and equipment, net		520,182			498,197
Intangible assets, net		49,136			50,112
Goodwill		51,889			51,889
Long-term deferred contract costs		712,935			680,272
Other assets		102,796			103,643
Total assets	$	4,733,264		$	4,197,539
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	20,969		$	13,875
Income tax payable		17,282			—
Accrued commissions and bonuses		20,091			30,492
Accrued payroll and vacation		42,497			56,086
Deferred revenue		27,604			22,812
Accrued expenses and other current liabilities		85,438			83,302
Current liabilities before client funds obligation		213,881			206,567
Client funds obligation		2,728,431			2,328,076
Total current liabilities		2,942,312			2,534,643
Deferred income tax liabilities, net		133,454			143,750
Long-term deferred revenue		109,435			107,657
Other long-term liabilities		110,000			108,453
Total long-term liabilities		352,889			359,860
Total liabilities		3,295,201			2,894,503
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.01 par value (100,000 shares authorized, 62,719 and 62,675 shares issued at March 31, 2024 and December 31, 2023, respectively; 56,557 and 56,528 shares outstanding at March 31, 2024 and December 31, 2023, respectively)		627			627
Additional paid-in capital		634,818			724,493
Retained earnings		1,697,191			1,469,981
Accumulated other comprehensive earnings (loss)		(495	)		(1,039	)
Treasury stock, at cost (6,162 and 6,147 shares at March 31, 2024 and December 31, 2023, respectively)		(894,078	)		(891,026	)
Total stockholders’ equity		1,438,063			1,303,036
Total liabilities and stockholders’ equity	$	4,733,264		$	4,197,539

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)


	Three Months Ended March 31,
	2024			2023
Revenues
Recurring	$	491,896		$	444,421
Implementation and other		7,985			7,216
Total revenues		499,881			451,637
Cost of revenues
Operating expenses		63,670			53,085
Depreciation and amortization		14,961			12,147
Total cost of revenues		78,631			65,232
Administrative expenses
Sales and marketing		115,524			103,574
Research and development		50,509			42,669
General and administrative		(48,104	)		65,605
Depreciation and amortization		17,507			14,125
Total administrative expenses		135,436			225,973
Total operating expenses		214,067			291,205
Operating income		285,814			160,432
Interest expense		(782	)		(837	)
Other income (expense), net		5,009			6,004
Income before income taxes		290,041			165,599
Provision for income taxes		42,854			46,303
Net income	$	247,187		$	119,296
Earnings per share, basic	$	4.37		$	2.06
Earnings per share, diluted	$	4.37		$	2.06
Weighted average shares outstanding:
Basic		56,546			57,867
Diluted		56,552			57,991
Comprehensive earnings:
Net income	$	247,187		$	119,296
Unrealized net gains on available-for-sale securities		837			1,050
Tax effect		(293	)		(200	)
Other comprehensive income, net of tax		544			850
Comprehensive earnings	$	247,731		$	120,146

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(in thousands)


	Common Stock				Additional			Retained			Accumulated Other			Treasury Stock					Total
	Shares		Amount		Paid-in Capital			Earnings			Comprehensive Loss			Shares		Amount			Stockholders’ Equity
Balances at December 31, 2022		62,518	$	625	$	576,622		$	1,196,968		$	(3,703	)		4,651	$	(587,905	)	$	1,182,607
Vesting of restricted stock		7		—		—			—			—			—		—			—
Stock-based compensation		—		—		32,344			—			—			—		—			32,344
Repurchases of common stock		—		—		—			—			—			2		(626	)		(626	)
Net income		—		—		—			119,296			—			—		—			119,296
Other comprehensive earnings (loss), net of tax		—		—		—			—			850			—		—			850
Balances at March 31, 2023		62,525	$	625	$	608,966		$	1,316,264		$	(2,853	)		4,653	$	(588,531	)	$	1,334,471


	Common Stock				Additional			Retained			Accumulated Other			Treasury Stock					Total
	Shares		Amount		Paid-in Capital			Earnings			Comprehensive Loss			Shares		Amount			Stockholders’ Equity
Balances at December 31, 2023		62,675	$	627	$	724,493		$	1,469,981		$	(1,039	)		6,147	$	(891,026	)	$	1,303,036
Vesting of restricted stock		44		—		—			—			—			—		—			—
Stock-based compensation		—		—		(89,675	)		—			—			—		—			(89,675	)
Dividends declared ($0.375 per share)		—		—		—			(19,977	)		—			—		—			(19,977	)
Repurchases of common stock		—		—		—			—			—			15		(3,052	)		(3,052	)
Net income		—		—		—			247,187			—			—		—			247,187
Other comprehensive earnings (loss), net of tax		—		—		—			—			544			—		—			544
Balances at March 31, 2024		62,719	$	627	$	634,818		$	1,697,191		$	(495	)		6,162	$	(894,078	)	$	1,438,063

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Three Months Ended March 31,
	2024			2023
Cash flows from operating activities
Net income	$	247,187		$	119,296
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		32,468			26,272
Accretion of discount on available-for-sale securities		(73	)		(124	)
Non-cash marketing expense		398			418
Loss (Gain) on disposition of property and equipment		10			(13	)
Amortization of debt issuance costs		276			308
Stock-based compensation expense		(93,790	)		27,819
Deferred income taxes, net		(10,489	)		(1,650	)
Other		(100	)		78
Changes in operating assets and liabilities:
Accounts receivable		(3,555	)		5,041
Prepaid expenses		(13,888	)		(6,984	)
Inventory		182			385
Other assets		572			2,923
Deferred contract costs		(37,640	)		(38,519	)
Accounts payable		2,980			(4,645	)
Income taxes, net		35,673			24,933
Accrued commissions and bonuses		(10,401	)		(10,845	)
Accrued payroll and vacation		(13,636	)		(8,835	)
Deferred revenue		6,570			3,386
Accrued expenses and other current liabilities		5,892			6,859
Net cash provided by operating activities		148,636			146,103
Cash flows from investing activities
Purchases of investments from funds held for clients		—			(25,000	)
Proceeds from investments from funds held for clients		90,000			25,000
Purchases of property and equipment		(47,728	)		(40,618	)
Proceeds from sale of property and equipment		13			—
Net cash provided by (used in) investing activities		42,285			(40,618	)
Cash flows from financing activities
Withholding taxes paid related to net share settlements		(3,052	)		(626	)
Dividends paid		(21,209	)		—
Net change in client funds obligation		400,355			183,629
Net cash provided by financing activities		376,094			183,003
Increase in cash, cash equivalents, restricted cash and restricted cash equivalents		567,015			288,488
Cash, cash equivalents, restricted cash and restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period		2,422,760			2,409,095
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	2,989,775		$	2,697,583

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Cash Flows, continued

(in thousands)


	Three Months Ended March 31,
	2024		2023
Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents
Cash and cash equivalents	$	371,325	$	505,590
Restricted cash included in funds held for clients		2,618,450		2,191,993
Total cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	2,989,775	$	2,697,583

Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Purchases of property and equipment, accrued but not paid	$	9,070	$	6,991
Stock-based compensation for capitalized software	$	3,589	$	3,597
Right of use assets obtained in exchange for operating lease liabilities	$	5,080	$	1,933

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

ORGANIZATION AND DESCRIPTION OF BUSINESS

Paycom Software, Inc. (“Software”), together with its wholly owned subsidiaries (collectively, the “Company”), is a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we,” “our,” “us” and the “Company” refer to Software and its consolidated subsidiaries.

We provide functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including payroll, talent acquisition, talent management, human resources (“HR”) management and time and labor management applications.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in the notes to our audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2023 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 15, 2024.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC regarding interim financial statements that permit reduced disclosure for interim periods. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s results for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes presented in the Form 10-K. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results expected for the full year.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates.

Seasonality

Our revenues are seasonal in nature. Generally, we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year because payroll tax filing forms and Affordable Care Act forms are typically processed in the first quarter and unscheduled payroll runs (such as bonuses) for our clients are typically concentrated in the fourth quarter. In addition, these seasonal fluctuations in recurring revenues impact operating income.

Funds Held for Clients and Client Funds Obligation

As part of our payroll and tax filing services, we (i) collect client funds to satisfy their respective employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement.

These investments are shown in our consolidated balance sheets as funds held for clients, and the associated liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date. We typically invest funds held for clients in money market funds, demand deposit accounts, certificates of deposit, commercial paper and U.S. treasury securities. Short-term investments in instruments with an original maturity of less than three months are classified as cash and cash equivalents within funds held for clients in the consolidated balance sheets. Investments in instruments with an original maturity greater than three months are classified as available-for-sale securities and are also included within funds held for clients in the consolidated balance sheets.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

These available-for-sale securities are recorded at fair value, with the difference between the amortized cost and fair value of these available-for-sale securities recorded as unrealized net gains (losses) on available-for-sale securities, and are included within comprehensive earnings (loss) in the consolidated statements of comprehensive income. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Additionally, the funds held for clients is classified as restricted cash and restricted cash equivalents and presented within the reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents on the consolidated statements of cash flows.

The Company reports the cash flows related to the purchases of investments from funds held for clients and related to the proceeds from the maturities of investments from funds held for clients on a gross basis in the cash flows from investing activities section of the consolidated statements of cash flows. Additionally, the Company reports cash flows related to cash received from and paid on behalf of clients on a net basis within the net change in client funds obligation in the cash flows from financing activities section of the consolidated statements of cash flows.

Stock Repurchase Plan

In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock. As of March 31, 2024, there was $796.0 million available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of equity incentive awards and other corporate considerations. The current stock repurchase plan will expire on August 15, 2024.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 requires incremental disclosures in annual and interim periods related reportable segments, and segment expenses but does not change the definition of a segment, the method for determining segments, or the criteria for aggregating operating segments into reportable segments. This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We are assessing the impact of this ASU on our consolidated financial statements and disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation, as well as information on income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are assessing the impact of this ASU on our consolidated financial statements and disclosures.

REVENUE

Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are from contracts with clients. Sales taxes and other applicable taxes are excluded from revenues.

Recurring Revenues

Recurring revenues are derived primarily from our payroll, talent acquisition, talent management, HR management and time and labor management applications as well as fees charged for form ﬁlings and delivery of client payroll checks and reports. Payroll includes Beti®, Payroll and Tax Management, Vault, Everyday™, Paycom Pay®, Client Action Center™, Expense Management, Mileage Tracker/FAVR, Garnishment Administration and GL Concierge applications. Talent acquisition includes our Applicant Tracking, Candidate Tracker, Enhanced Background Checks®, Onboarding, E-Verify® and Tax Credits applications. Talent management includes our Employee Self-Service®, Compensation Budgeting, Performance Management, Position Management, My Analytics and Paycom Learning applications. HR management includes our Manager on-the-Go®, Direct Data Exchange®, Ask Here, Documents and Checklists, Government and Compliance, Beneﬁts Administration/Benefits to Carrier, Benefit Enrollment Service, COBRA Administration, Personnel Action Forms and Performance Discussion Forms, Surveys, Enhanced ACA and Clue®

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

applications. Time and labor management includes Time and Attendance, Scheduling, Time-Off Requests with GONE®, Labor Allocation, Labor Management Reports/Push Reporting®, Geofencing/Geotracking and Microfence® tools and applications. In addition, with Global HCM™, a number of our HCM applications and tools are available in 15 languages and dialects and are accessible to users in more than 180 countries.

The performance obligations related to recurring revenues are generally satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are generally collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk.

The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client typically have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups, which we periodically assess for price adjustments.

Interest income on funds held for clients is earned on funds that are collected from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. The interest earned on these funds is included in recurring revenues in the consolidated statements of comprehensive income as the collection, holding, and remittance of these funds are essential components of providing these services.

Implementation and Other Revenues

Implementation and other revenues consist of nonrefundable upfront conversion fees, which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our Time and Attendance application. Although these revenues are related to our recurring revenues, they represent distinct performance obligations.

Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically collected upon contract inception and is deferred and recognized ratably over the estimated renewal period (i.e., 10-year estimated client life).

Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks.

Contract Balances

The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing.

Changes in deferred revenue related to material rights for the three months ended March 31, 2024 and 2023 were as follows:


	Three Months Ended March 31,
	2024			2023
Balance, beginning of period	$	130,469		$	117,416
Recognition of revenue included in beginning of period balance		(5,723	)		(5,086	)
Contract balance, net of revenue recognized during the period		12,293			8,472
Balance, end of period	$	137,039		$	120,802

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

We expect to recognize $22.1 million of deferred revenue related to material rights in the remainder of 2024, $22.1 million in 2025, and $92.8 million thereafter.

Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts

We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations.

The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach and are capitalized and amortized ratably over the expected period of benefit, which we have determined to be the estimated life of the client relationship of 10 years. The expected period of benefit has been determined to be the estimated life of the client relationship primarily because we incur no new costs to obtain, or costs to fulfill, a contract upon renewal of such contract. Additional commission costs may be incurred when an existing client purchases additional applications; however, these commission costs relate solely to the additional applications purchased and are not related to contract renewal. Furthermore, additional fulfillment costs associated with existing clients purchasing additional applications are minimized by our seamless single-database platform. These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and costs to fulfill a contract is included in sales and marketing expenses and general and administrative expenses in the accompanying consolidated statements of comprehensive income.

The following tables present the asset balances and related amortization expense for these contract costs:


	As of and for the Three Months Ended March 31, 2024
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	378,467	$	33,843	$	(15,380	)	$	396,930
Costs to fulfill a contract	$	420,011	$	35,557	$	(15,166	)	$	440,402

	As of and for the Three Months Ended March 31, 2023
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	325,457	$	31,497	$	(12,963	)	$	343,991
Costs to fulfill a contract	$	338,895	$	33,649	$	(11,956	)	$	360,588

PROPERTY AND EQUIPMENT

Property and equipment and accumulated depreciation and amortization were as follows:


	March 31, 2024			December 31, 2023
Property and equipment
Software and capitalized software development costs	$	401,431		$	371,665
Buildings		179,933			179,874
Computer equipment		172,081			164,856
Rental clocks		43,755			42,364
Furniture, fixtures and equipment		32,657			32,413
Other		18,508			18,500
		848,365			809,672
Less: accumulated depreciation and amortization		(468,352	)		(437,291	)
		380,013			372,381
Construction in progress		106,373			92,020
Land		33,796			33,796
Property and equipment, net	$	520,182		$	498,197

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

We capitalize software development costs related to software developed or obtained for internal use in accordance with ASC 350-40. For the three months ended March 31, 2024 and 2023, we capitalized $29.8 million and $21.4 million, respectively, of software development costs related to software developed or obtained for internal use.

Rental clocks included in property and equipment, net in the consolidated balance sheets, represent time clocks issued to clients under month-to-month operating leases. As such, these items are transferred from inventory to property and equipment and depreciated over their estimated useful lives.

Prior to the repayment of our debt on November 21, 2023, we capitalized interest costs incurred for indebtedness related to construction in progress. For the three months ended March 31, 2024 and 2023, we incurred interest costs of $0.8 million and $1.4 million, respectively, of which we capitalized $0.0 million and $0.5 million, respectively. Included in the construction in progress balance at March 31, 2024 and December 31, 2023 is $2.0 million and $4.2 million in retainage, respectively.

Depreciation and amortization expense for property and equipment was $31.5 million and $25.3 million for the three months ended March 31, 2024 and 2023, respectively.

GOODWILL AND INTANGIBLE ASSETS, NET

As of both March 31, 2024 and December 31, 2023, goodwill was $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We performed a qualitative impairment test of our goodwill and concluded that, as of June 30, 2023, it was more likely than not that the fair value exceeded the carrying value and therefore goodwill was not impaired. As of March 31, 2024 and December 31, 2023, there were no indicators of impairment.

In connection with our marketing initiatives, we purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. We also made a $1.5 million one-time payment in July 2021 to cover sponsorship rights leading up to the 2021-2022 season. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. The cost of the naming rights has been recorded as an intangible asset with an offsetting liability as of the date of the contract. The intangible asset is being amortized over the life of the agreement on a straight line basis that commenced in June 2021. The difference between the present value of the offsetting liability and actual cash payments is being relieved through sales and marketing expense using the effective interest method over the life of the agreement.

All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization. The following tables present the components of intangible assets within our consolidated balance sheets:


	March 31, 2024
	Weighted Average Remaining			Accumulated
	Useful Life	Gross		Amortization			Net
	(Years)
Intangibles:
Naming rights	12.6	$	60,199	$	(11,063	)	$	49,136
Total		$	60,199	$	(11,063	)	$	49,136


	December 31, 2023
	Weighted Average Remaining			Accumulated
	Useful Life	Gross		Amortization			Net
	(Years)
Intangibles:
Naming rights	12.8	$	60,199	$	(10,087	)	$	50,112
Total		$	60,199	$	(10,087	)	$	50,112

Amortization of intangible assets for the three months ended March 31, 2024 and 2023 was $1.0 million. We estimate the aggregate amortization expense will be $2.9 million for the remainder of 2024 and $3.9 million for each of 2025, 2026, 2027, 2028 and 2029.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

LONG-TERM DEBT

On July 29, 2022 (the “Facility Closing Date”), Paycom Payroll, LLC, Software, and certain other subsidiaries of Software (collectively, the “Loan Parties”) entered into a credit agreement (as amended from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent.

The Credit Agreement initially provided for a senior secured revolving credit facility (the “Revolving Credit Facility”) in the aggregate principal amount of up to $650.0 million, and the ability to request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit. The Credit Agreement also initially provided for a senior secured delayed draw term loan (the “Term Loan Facility”) in the aggregate amount of up to $750.0 million. All loans under the Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”). Unamortized debt issuance costs of $3.7 million as of March 31, 2024 are included in other assets on our consolidated balance sheets.

On the Facility Closing Date, we borrowed $29.0 million under the Revolving Credit Facility to repay the outstanding indebtedness under our prior credit facility, along with accrued interest, expenses and fees. The loan bore interest at the Adjusted Term SOFR Rate (as defined below) for the interest period in effect plus 1.25%.

On July 28, 2023, the Loan Parties entered into Amendment No. 2 to Credit Agreement with the Lenders, pursuant to which, among other things, (i) the aggregate revolving commitments under the Revolving Credit Facility were increased from $650.0 million to $1.0 billion, (ii) the Term Loan Facility was terminated and (iii) the Credit Agreement was amended in contemplation of the formation and future operating activities of the Paycom Client Trust (the “Client Trust”) and Paycom National Trust Bank, NA (the “Trust Bank”). The Company intends to form the Client Trust to hold client payroll and related funds and the Trust Bank to serve as trustee of the Client Trust. We did not make any draws under the Term Loan Facility prior to its termination on July 28, 2023. At the time of termination, unamortized debt issuance costs totaling $1.2 million were written off and recognized as a loss on extinguishment of debt, which was included in other income, net in the consolidated statements of comprehensive income.

On November 21, 2023, we fully repaid the outstanding indebtedness under the Revolving Credit Facility. As of March 31, 2024, there was no debt outstanding under the Revolving Credit Facility.

Borrowings under the Credit Agreement bear interest at a rate per annum equal to (i) the Alternate Base Rate (“ABR”) plus an applicable margin (“ABR Loans”) or (ii) (x) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (the “Adjusted Term SOFR Rate”) or (y) the daily SOFR plus 0.10%, in each case plus an applicable margin (“SOFR Rate Loans”). ABR is calculated as the highest of (i) the rate of interest last quoted by The Wall Street Journal in the United States as the prime rate in effect, (ii) the federal funds rate plus 0.5% and (iii) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%; provided that, if the ABR as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00%. The applicable margin for ABR Loans is (i) 0.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 1.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. The applicable margin for SOFR Rate Loans is (i) 1.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 1.5% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 1.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 2.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. Subject to certain conditions set forth in the Credit Agreement, we may borrow, prepay and reborrow under the Revolving Credit Facility and terminate or reduce the Lenders’ commitments at any time prior to the Scheduled Maturity Date. We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

Under the Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest coverage ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.5 to 1.0, stepping down to 3.25 to 1.0 as of December 31, 2024 and 3.0 to 1.0 as of December 31, 2025, and thereafter. Additionally, the Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make investments, dispose of assets, enter into certain transactions, including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions. As of March 31, 2024, we were in compliance with these covenants. Our obligations under the Credit Agreement are secured by a senior security interest in all personal property of the Loan Parties.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS

The tables below present our cash and cash equivalents, the funds held for clients cash and cash equivalents as well as the investments that were included within funds held for clients on the consolidated balance sheets:


	March 31, 2024
Type of issue	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Cash and cash equivalents	$	371,325	$	—	$	—		$	371,325
Funds held for clients cash and cash equivalents		2,618,450		—		—			2,618,450
Available-for-sale securities(1):
U.S. treasury securities		109,960		—		(419	)		109,541
Total investments	$	3,099,735	$	—	$	(419	)	$	3,099,316



	December 31, 2023
Type of issue	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Cash and cash equivalents	$	294,025	$	—	$	—		$	294,025
Funds held for clients cash and cash equivalents		2,128,735		—		—			2,128,735
Available-for-sale securities(1):
Certificates of deposit		25,000		—		—			25,000
U.S. treasury securities		174,887		—		(1,256	)		173,631
Total investments	$	2,622,647	$	—	$	(1,256	)	$	2,621,391

(1)

All available-for-sale securities were included within the funds held for clients.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of March 31, 2024, are as follows:


	March 31, 2024
	Securities in unrealized loss position for less than 12 months				Securities in unrealized loss position for greater than 12 months					Total
Type of issue	Gross unrealized losses		Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value
U.S. treasury securities	$	—	$	—	$	(419	)	$	109,541	$	(419	)	$	109,541
Total	$	—	$	—	$	(419	)	$	109,541	$	(419	)	$	109,541

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2023, are as follows:


	December 31, 2023
	Securities in unrealized loss position for less than 12 months				Securities in unrealized loss position for greater than 12 months					Total
Type of issue	Gross unrealized losses		Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value
U.S. treasury securities	$	—	$	—	$	(1,256	)	$	173,631	$	(1,256	)	$	173,631
Total	$	—	$	—	$	(1,256	)	$	173,631	$	(1,256	)	$	173,631

We did not make any reclassification adjustments out of accumulated other comprehensive income for realized gains or losses on the sale or maturity of available-for-sale securities for the three months ended March 31, 2024 or 2023. There were no realized gains or losses on the sale of available-for-sale securities for the three months ended March 31, 2024 or 2023.

We regularly review the composition of our investment portfolio and did not recognize any credit impairment losses during the three months ended March 31, 2024 or 2023. The Company believes it is probable that the principal and interest will be collected in accordance with contractual terms and that the unrealized losses on these securities were due to changes in interest rates and were not due to increased credit risk. The U.S. treasury securities held a rating of AA+ as of March 31, 2024.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

Expected maturities of available-for-sale securities at March 31, 2024 are as follows:


Expected maturity	Amortized cost		Fair value
One year or less	$	109,960	$	109,541
One year to five years	$	—	$	—
Total available-for-sale securities	$	109,960	$	109,541

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client funds obligation approximates fair value. See Note 6 for discussion of the fair value of our debt.

Our corporate investments consist primarily of money market funds and demand deposit accounts and are classified as cash and cash equivalents on the consolidated balance sheets.

As discussed in Note 2, we typically invest the funds held for clients in money market funds, demand deposit accounts, certificates of deposit, commercial paper and U.S. treasury securities. Short-term investments in instruments with an original maturity of less than three months are classified as cash and cash equivalents within funds held for clients in the consolidated balance sheets. Investments in instruments with an original maturity greater than three months are classified as available-for-sale securities and are also included within funds held for clients in the consolidated balance sheets. These available-for-sale securities are recognized at fair value, with the difference between the amortized cost and fair value of these available-for-sale securities recorded as unrealized net gains (losses) within comprehensive earnings (loss) in our consolidated statements of comprehensive income. See Note 7 for additional information.

The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1 – Observable inputs such as quoted prices in active markets

•

Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active

•

Level 3 – Unobservable inputs in which there is little or no market data

Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023:


	March 31, 2024
	Level 1		Level 2		Level 3		Total
Assets:
U.S. treasury securities	$	—	$	109,541	$	—	$	109,541


	December 31, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Certificates of deposit	$	—	$	25,000	$	—	$	25,000
U.S. treasury securities	$	—	$	173,631	$	—	$	173,631

EMPLOYEE SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN

Employees over the age of 18 who have completed 30 days of service are eligible to participate in our employee savings plan (401(k) plan). We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby the Company matches the contribution of our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions were $4.6 million and $4.0 million for the three months ended March 31, 2024 and 2023, respectively.

The Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per-employee maximum of $25,000. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares. Eligible employees purchased 37,629 and 26,587 shares of the Company’s common stock under the ESPP during the three months ended March 31, 2024 and 2023, respectively. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $0.9 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively.

10.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive equity incentive awards.

The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share:


	Three Months Ended March 31,
	2024		2023
Numerator:
Net income	$	247,187	$	119,296
Denominator:
Basic weighted average shares outstanding		56,546		57,867
Dilutive effect of unvested restricted stock and restricted stock units		6		124
Diluted weighted average shares outstanding		56,552		57,991
Earnings per share:
Basic	$	4.37	$	2.06
Diluted	$	4.37	$	2.06

11.

STOCK-BASED COMPENSATION

Restricted Stock Awards

During the three months ended March 31, 2024, we issued an aggregate of 638,447 restricted shares of common stock under the Paycom Software, Inc. 2023 Long-Term Incentive Plan (the “2023 LTIP”), consisting of 187,078 shares subject to market-based vesting conditions (“Market-Based Shares”) and 451,369 shares subject to time-based or no vesting conditions (“Time-Based Shares”). Generally, Market-Based Shares will vest 50% on the first date, if any, that the arithmetic average of the Company’s volume weighted average price on each of the twenty consecutive trading days immediately preceding such date (the “VWAP Value”) equals or exceeds $222 per share and 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $251 per share, in each case provided that (i) such date occurs on or before the eighth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock award agreement. Generally, the Time-Based Shares granted to non-executive employees will vest over approximately four years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock award agreement. The Time-Based Shares include 4,104 shares of common stock granted to Chris G. Thomas in connection with his appointment as Co-Chief Executive Officer of the Company effective February 7, 2024.

In connection with the Co-Chief Executive Officer transition, the Company and Chad Richison entered into a letter agreement pursuant to which, among other things, Mr. Richison acknowledged and agreed that the change in his position from Chief Executive Officer to Co-Chief Executive Officer triggered the forfeiture of 1,610,000 shares of restricted stock granted to him on November 23, 2020 (the “2020 CEO Performance Award”) in accordance with the terms of the award. As a result, on February 7, 2024, 1,610,000

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

shares of restricted stock were forfeited to the Company and $117.5 million of previously recognized compensation costs that were recorded in reporting periods prior to 2024 were reversed to additional paid-in capital in the consolidated balance sheets and to general and administrative expenses in the consolidated statements of comprehensive income.

The following table summarizes restricted stock awards activity for the three months ended March 31, 2024:


	Time-Based					Market-Based
	Restricted Stock Awards					Restricted Stock Awards
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Unvested shares of restricted stock outstanding at December 31, 2023		904.0		$	293.74		1,745.5		$	124.38
Granted		451.4		$	185.46		187.1		$	167.48
Vested		(36.7	)	$	265.98		—		$	—
Forfeited		(37.8	)	$	290.52		(1,620.3	)	$	110.53
Unvested shares of restricted stock outstanding at March 31, 2024		1,280.9		$	256.48		312.3		$	222.04

Restricted Stock Units

During the three months ended March 31, 2024, we issued the following restricted stock unit awards to certain of our executive officers, in each case subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock unit award agreement: (i) an aggregate of 41,230 performance-based restricted stock units (“PSUs”), with the number of shares deliverable upon vesting of such PSUs to be determined based on achievement of a pre-established revenue performance goal for the one-year performance period from January 1, 2024 to December 31, 2024; (ii) an aggregate of 26,230 time-based restricted stock units (“RSUs”) vesting in three equal annual tranches over a period of approximately three years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date; and (iii) 17,209 RSUs, with 24% vesting in February 2025, 24% vesting in February 2026 and 52% vesting in February 2027, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. The PSUs will be eligible to vest no later than 60 days following the end of the performance period, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date.

During the three months ended March 31, 2024, 75,464 PSUs (consisting of PSUs granted to certain executive officers in 2021, 2022 and 2023) were eligible to vest based on the Company’s performance during a performance period ended December 31, 2023. On February 5, 2024, we issued 4,472 shares of common stock upon the vesting of PSUs awarded to Mr. Boelte in May 2023. The number of shares delivered upon vesting of such PSUs was determined based on the Company’s achievement of an adjusted EBITDA performance goal. With respect to all other PSUs eligible to vest based on the Company’s performance during a performance period ended December 31, 2023, the relevant performance goals were not achieved and, as a result, none of such PSUs vested and all were forfeited.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

The following table summarizes PSU and RSU activity for the three months ended March 31, 2024:


	RSUs					PSUs
	Units			Weighted Average Grant Date Fair Value Per Unit		Units			Weighted Average Grant Date Fair Value Per Unit
Unvested restricted stock units outstanding at December 31, 2023		9.2		$	300.74		37.2		$	308.05
Granted		43.4		$	190.41		41.2		$	189.95
Vested		(2.9	)	$	297.55		(4.4	)	$	288.77
Forfeited		—		$	—		—		$	—
Unvested restricted stock units outstanding at March 31, 2024(1)		49.7		$	204.52		74.0		$	243.38

(1)

A maximum of 123,078 shares could be delivered upon settlement of PSUs based upon the Company’s achievement of the applicable performance goals over the applicable performance periods.

For the three months ended March 31, 2024, the Company recognized stock-based compensation expense, inclusive of forfeitures, that totaled a net benefit of $93.8 million. For the three months ended March 31, 2023, our total stock-based compensation expense was $27.8 million.

The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested restricted stock awards and unvested restricted stock unit awards (including RSUs and PSUs) as of March 31, 2024.


	Restricted Stock		Restricted Stock
	Awards		Units
Unrecognized compensation cost	$	270,863	$	10,581
Weighted average period for recognition (years)		2.8		1.5

We capitalized stock-based compensation costs related to software developed for internal use of $3.6 million for the three months ended March 31, 2024 and 2023, respectively.

In May 2023, our Board of Directors adopted a dividend policy under which we intend to pay quarterly cash dividends on our common stock. All unvested shares of restricted stock, RSUs and PSUs currently outstanding are entitled to receive dividends or dividend equivalents, provided that such dividends or dividend equivalents are withheld by the Company and distributed to the applicable holder upon the release of restrictions on such shares of restricted stock, RSUs or PSUs (i.e., upon vesting).

12.

COMMITMENTS AND CONTINGENCIES

We are involved in various legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

13.

INCOME TAXES

The Company’s effective income tax rate was 14.8% and 28.0% for the three months ended March 31, 2024 and 2023, respectively. The lower effective tax rate for the three months ended March 31, 2024 was primarily attributable to the tax benefit related to the forfeiture of the 2020 CEO Performance Award in February 2024.

14.

SUBSEQUENT EVENTS

Sales Leadership Transition

In connection with her promotion to Executive Vice President of Sales, the Company granted to Amy Walker an award of 4,000 target PSUs (the “Walker Award”), effective April 4, 2024. The Walker Award is subject to the terms and conditions of the 2023 LTIP and an award agreement that provides for performance-based vesting based on achievement of revenue performance goals for the performance period that began January 1, 2024 and ends December 31, 2024. Pursuant to the applicable award agreement, 75% of

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share and per unit amounts)

the Walker Award will vest if the threshold performance level is achieved, 100% of the Walker Award will vest if the target performance level is achieved and 125% of the Walker Award will vest if the maximum performance level is achieved.

Holly Faurot, the Company’s former Chief Sales Officer, transitioned to a non-employee consulting role. In connection with this transition, Ms. Faurot entered into an Independent Consultant and Services Agreement with Software’s wholly owned subsidiary, Paycom Payroll, LLC, and a Release and Award Cancellation and Acceleration Agreement (the “Release Agreement”) with Software, each dated April 4, 2024.

Pursuant to the Release Agreement, Ms. Faurot agreed to, among other things, the cancellation of (i) 30,370 unvested shares of restricted stock, (ii) 5,902 unvested RSUs and (iii) 10,782 unvested PSUs. As consideration for the cancellation of the specified unvested equity incentive awards and a release of claims, the Company accelerated vesting of 3,000 shares of time-based restricted stock previously granted to Ms. Faurot under the 2023 LTIP, effective April 4, 2024.

Director Equity Compensation

On April 29, 2024, the Company issued an aggregate of 7,296 restricted shares of common stock to the non-employee members of the Board of Directors under the 2023 LTIP. Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date, and subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock award agreement.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three months ended March 31, 2024, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2024 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K. Except for certain information as of December 31, 2023, all amounts herein are unaudited. Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Paycom Software, Inc. and its consolidated subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.

Special Note Regarding Forward-Looking Statements

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements that refer to our estimated or anticipated results, other non-historical facts or future events and include, but are not limited to, statements regarding our business strategy; anticipated future operating results and operating expenses, cash flows, capital resources, dividends and liquidity; competition; trends, opportunities and risks affecting our business, industry and financial results; future expansion or growth plans and potential for future growth, including internationally; our ability to attract new clients to purchase our solution; our ability to retain clients and induce them to purchase additional applications; our ability to accurately forecast future revenues and appropriately plan our expenses; market acceptance of our solution and applications; our expectations regarding future revenues generated by certain applications; the return on investment for users of our solution; our ability to attract and retain qualified employees and key personnel; future regulatory, judicial and legislative changes; how certain factors affecting our performance correlate to improvement or deterioration in the labor market; our plan to open additional sales offices and our ability to effectively execute such plan; the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to research and development and the expansion of our corporate headquarters and other facilities; our plans to pay cash dividends; and our plans to repurchase shares of our common stock through a stock repurchase plan. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “will,” “would,” and similar expressions or the negative of such terms or other comparable terminology.

Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

•

the possibility of security vulnerabilities, cyber-attacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions;

•

changes in laws, government regulations and policies and interpretations thereof;

•

our compliance with data privacy laws and regulations;

•

our ability to develop enhancements and new applications, keep pace with technological developments and respond to future disruptive technologies;

•

our ability to compete effectively;

•

our ability to maintain and expand existing client relationships and add new clients, including challenges related to attracting and retaining larger clients;

•

the possibility that clients may not be satisfied with our deployment or technical support services, or that our solution fails to perform properly;

•

our dependence on our key executives;

•

our ability to attract and retain qualified personnel, including software developers, product managers and skilled IT, sales, marketing and operational personnel;

•

our ability to manage our rapid growth and organizational change effectively;

•

the impact of adverse economic and market conditions, including those related to global health crises and geopolitical conflicts;

•

fluctuations in our financial results due to factors beyond our control;

•

our failure to develop and maintain our brand cost-effectively;

•

our ability to expand into international markets and manage risks associated with international operations and sales;

•

our reliance on relationships with third parties;

•

regulatory and compliance risks related to our background checks business;

•

our failure to adequately protect our intellectual property rights;

•

seasonality of certain operating results and financial metrics;

•

the possibility that the Affordable Care Act may be modified, repealed or declared unconstitutional; and

•

the other factors set forth in Part I, Item 1A, “Risk Factors” of the Form 10-K and our other reports filed with the SEC.

Forward-looking statements are based only on information currently available to us and speak only as of the date of this Form 10-Q. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.

Overview

We are a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including payroll, talent acquisition, talent management, human resources management and time and labor management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.

We generate revenues from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed and (ii) fixed amounts charged per billing period. We do not require clients to enter into long-term contractual commitments with us. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We serve a diverse client base in terms of size and industry. None of our clients constituted more than one-half of one percent of our revenues for the three months ended March 31, 2024. Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives who sell new applications to existing clients.

Our continued growth depends on attracting new clients through further penetration of our existing markets and geographic expansion into new markets, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base. We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth. We plan to open additional sales offices in the future to further expand our market presence.

Our principal marketing efforts include national and local advertising campaigns, email campaigns, social and digital media campaigns, search engine marketing methods, sponsorships, tradeshows, print advertising and outbound marketing including personalized direct mail campaigns. In addition, we generate leads and build recognition of our brand and thought leadership with relevant and informative content, such as white papers, blogs, podcast episodes and webinars.

Throughout our history, we have built strong relationships with our clients. As the HCM needs of our clients evolve, we believe that we are well-positioned to expand the HCM spending of our clients and we believe this opportunity is significant. To be successful, we must continue to demonstrate the operational and economic benefits of our solution, as well as effectively hire, train, motivate and retain qualified personnel.

Growth Outlook, Opportunities and Challenges

As a result of our significant revenue growth and geographic expansion, we are presented with a variety of opportunities and challenges. Our payroll application is the foundation of our solution and all of our clients are required to utilize this application in order to access our other applications. Consequently, we have historically generated the majority of our revenues from our payroll applications, although our revenue mix has evolved and will continue to evolve as we develop and add new non-payroll applications to our solution. We believe our strategy of focusing on increased employee usage is an important differentiator for attracting new clients and is also key to long-term client satisfaction and client retention. For example, in 2021, we launched our industry-first Beti technology, which further automates and streamlines the payroll process by empowering employees to do their own payroll. Client adoption of new applications and, historically, client employee usage of both new and existing applications have been significant factors in our revenue growth. Nonetheless, because Beti is designed to eliminate payroll errors that lead to billable corrections and unscheduled payroll runs, we have experienced and expect to continue to experience a reduction in these activities that would otherwise generate additional revenue for us.

In order to increase revenues and continue to improve our operating results, we must also attract new clients. We intend to obtain new clients by (i) continuing to leverage our sales force productivity within markets where we currently have existing sales offices, (ii) expanding our presence in markets where we currently have an existing sales office through adding sales teams or offices, thereby increasing the number of sales professionals within such markets, and (iii) opening sales offices in new markets.

The market for HCM software is highly competitive, rapidly evolving and fragmented, and we expect competition to continue to intensify as new market entrants and disruptive technologies emerge and increasingly aggressive pricing and client retention strategies persist.

Historically, our target client size range has been organizations with 50 to 10,000 employees. In 2023, we expanded our target client size range to include organizations with more than 10,000 employees. While we continue to serve a diversified client base ranging in size from one employee to many thousands of employees, the average size of our clients has grown significantly as we have organically grown our operations and increased the number of applications we offer. Furthermore, with the launch of our Global HCM solution and expansion of payroll services into certain international markets, we expect that our ability to serve organizations with international employees makes our solution more attractive to larger companies, many of which have a global presence. We believe larger employers represent a substantial opportunity to increase our revenues per client, with limited incremental cost to us. Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees of our clients will have a positive or negative impact, respectively, on our results of operations. A multitude of macroeconomic pressures, such as inflation and rising interest rates, impact our clients’ hiring practices to varying degrees and, in turn, impact our revenues. Generally, we expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market. For example, the performance of our pre-employment services offerings is sensitive to changes in hiring trends and we believe it will reflect the current slowdown in hiring among U.S. employers.

We collect funds from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. Those collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, U.S. treasury securities, certificates of deposit and commercial paper until they are paid to the applicable tax or regulatory agencies or to client employees. As we introduce new applications, expand our client base and renew and expand relationships with existing clients, we expect our average funds held for clients balance and, accordingly, interest earned on funds held for clients, will increase; however, the amount of interest we earn can be positively or negatively impacted by changes in interest rates.

Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs and general and administrative expenses, which have increased and will continue to increase our expenses. Specifically, our revenue growth and geographic expansion drive increases in our employee headcount, which in turn precipitates increases in (i) salaries and benefits, (ii) stock-based compensation expense and (iii) facility costs related to the expansion of our corporate headquarters and operations facilities and additional sales office leases. Furthermore, execution of our international expansion strategy requires considerable investment. As a result, we have experienced and expect to continue to experience pressure on our margins as we hire to support growth.

We believe the challenges of managing the ever-changing complexity of payroll and human resources will continue to drive companies to turn to outsourced providers for help with their HCM needs. The HCM industry historically has been driven, in part, by legislation and regulatory action, including COBRA, changes to the minimum wage laws or overtime rules, and legislation from federal, state or municipal taxation authorities.

Results of Operations

The following table sets forth certain consolidated statements of comprehensive income data and such data as a percentage of total revenues for the periods presented:


	Three Months Ended March 31,
	2024					2023					% Change
Revenues
Recurring	$	491,896		98.4	%	$	444,421		98.4	%	10.7%
Implementation and other		7,985		1.6	%		7,216		1.6	%	10.7%
Total revenues		499,881		100.0	%		451,637		100.0	%	10.7%
Cost of revenues
Operating expenses		63,670		12.7	%		53,085		11.8	%	19.9%
Depreciation and amortization		14,961		3.0	%		12,147		2.6	%	23.2%
Total cost of revenues		78,631		15.7	%		65,232		14.4	%	20.5%
Administrative expenses
Sales and marketing		115,524		23.1	%		103,574		22.9	%	11.5%
Research and development		50,509		10.1	%		42,669		9.4	%	18.4%
General and administrative		(48,104	)	-9.6	%		65,605		14.5	%	-173.3%
Depreciation and amortization		17,507		3.5	%		14,125		3.2	%	23.9%
Total administrative expenses		135,436		27.1	%		225,973		50.0	%	-40.1%
Total operating expenses		214,067		42.8	%		291,205		64.4	%	-26.5%
Operating income		285,814		57.2	%		160,432		35.6	%	78.2%
Interest expense		(782	)	-0.2	%		(837	)	-0.2	%	-6.6%
Other income (expense), net		5,009		1.0	%		6,004		1.3	%	-16.6%
Income before income taxes		290,041		58.0	%		165,599		36.7	%	75.1%
Provision for income taxes		42,854		8.6	%		46,303		10.3	%	-7.4%
Net income	$	247,187		49.4	%	$	119,296		26.4	%	107.2%

Revenues

The increase in recurring revenues for the three months ended March, 31 2024 compared to the same period in 2023 was primarily the result of the addition of new clients in our target market range, increased revenue per client, and the realization of pricing strategies. We believe that a decrease in the sale of additional applications to existing clients, as well as the continuing impact of Beti-driven reductions in billable corrections and unscheduled payroll runs, adversely affected the magnitude of the period-over-period increase in revenues. Increased interest rates and a higher average funds held for clients balance during the three months ended March 31, 2024 as compared to the same period in 2023, resulted in increased interest earned on funds held for clients, which had a positive impact on recurring revenue. The average daily balance of funds held for clients was $2.6 billion and $2.4 billion for the three months ended March 31, 2024 and 2023, respectively.

The increase in implementation and other revenues for the three months ended March 31, 2024 from the same period in 2023 was primarily the result of the increased non-refundable upfront conversion fees collected from the addition of new clients. These fees are deferred and recognized ratably over the 10-year estimated life of our clients.

Expenses

Cost of Revenues

During the three months ended March 31, 2024, operating expenses increased from the comparable prior year period by $10.6 million, primarily due to a $8.0 million increase in employee-related expenses attributable to growth in the number of operating personnel, a $1.4 million increase in automated clearing house fees related to increased revenues and a $0.9 million increase in shipping and supplies fees. Depreciation and amortization expense increased $2.8 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other related fixed assets.

Administrative Expenses

Sales and Marketing

During the three months ended March 31, 2024, sales and marketing expenses increased from the comparable prior year period by $12.0 million due to a $8.8 million increase in employee-related expenses, including commissions and bonuses, and a $3.2 million increase in marketing and advertising expense attributable to increased spending across many components of our marketing program.

Research and Development

During the three months ended March 31, 2024, research and development expenses increased from the comparable prior year period due to increases in employee-related expenses of $7.8 million.

As we continue the ongoing development of our platform and product offerings, we generally expect research and development expenses (exclusive of stock-based compensation) to continue to increase, particularly as we hire more personnel to support our growth. While we expect this trend to continue on an absolute dollar basis and as a percentage of total revenues, we also anticipate the rate of increase to decline over time as we leverage our growth and realize additional economies of scale. As is customary for our business, we also expect fluctuations in research and development expense as a percentage of revenue on a quarter-to-quarter basis due to seasonal revenue trends, the introduction of new products, the amount and timing of research and development costs that may be capitalized and the timing of onboarding new hires and restricted stock vesting events.

Expenditures for software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. The nature of the development projects underway during a particular period, such as our international expansion, directly impacts the timing and extent of these capitalized expenditures and can affect the amount of research and development expenses in such period. The table below sets forth the amounts of capitalized and expensed research and development costs for the three months ended March 31, 2024 and 2023:


	Three Months Ended March 31,
	2024		2023		% Change
Capitalized portion of research and development	$	29,846	$	21,353	40%
Expensed portion of research and development		50,509		42,669	18%
Total research and development costs	$	80,355	$	64,022	26%

General and Administrative

During the three months ended March 31, 2024, general and administrative expenses decreased $113.7 million from the comparable prior year period due to a $117.5 million reversal of previously recognized stock-based compensation expense related to the forfeiture of a restricted stock award (the “2020 CEO Performance Award”) upon Chad Richison’s transition to Co-Chief Executive Officer, which was partially offset by a $3.0 million increase in other employee-related expenses and a $0.8 million increase in accounting and legal expenses. See Note 11 for additional information.

Non-Cash Stock-Based Compensation Expense

The following table presents the non-cash stock-based compensation expense that is included within the specified line items in our consolidated statements of comprehensive income:


	Three Months Ended March 31,
	2024			2023		% Change
Operating expenses	$	2,991		$	2,385	25%
Sales and marketing		5,494			5,476	0%
Research and development		5,370			5,258	2%
General and administrative		(107,645	)		14,700	-832%
Total non-cash stock-based compensation expense	$	(93,790	)	$	27,819	-437%

Depreciation and Amortization

During the three months ended March 31, 2024, depreciation and amortization expense increased from the comparable prior year period primarily due to the development of additional technology and purchases of other related fixed assets.

Interest Expense

The decrease in interest expense for the three months ended March 31, 2024, as compared to the prior year period, was primarily attributed to the repayment of our outstanding debt on November 21, 2023 and the cessation of fees associated with a term loan facility that was terminated on July 8, 2023.

Other Income (Expense), net

The decrease in other income (expense), net for the three months ended March 31, 2024 was primarily attributed to interest earned on our corporate funds. For the three months ended March 31, 2024 and 2023, we earned interest on our corporate funds of $4.3 million and $5.2 million, respectively.

Provision for Income Taxes

The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. Our effective income tax rate was 14.8% and 28.0% for the three months ended March 31, 2024 and 2023, respectively. The lower effective tax rate for the three months ended March 31, 2024 was primarily attributable to the tax benefit related to the forfeiture of the 2020 CEO Performance Award in February 2024.

Liquidity and Capital Resources

Our principal sources of capital and liquidity are our operating cash flow and cash and cash equivalents. Our cash and cash equivalents consist primarily of demand deposit accounts and money market funds. Additionally, we maintain a $1.0 billion senior secured revolving credit facility (the “Revolving Credit Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances. As of March 31, 2024, we did not have any outstanding borrowings under the Revolving Credit Facility.

We have historically funded our operations from cash flows generated from operations, cash from the sale of equity securities and debt financing. We are funding our current building expansion projects from available cash. Further, to date, all cash dividends and purchases under our stock repurchase plan have been funded from available cash. We believe our existing cash and cash equivalents, cash generated from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures, pay dividends and opportunistically repurchase shares for at least the next 12 months. In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from operations and, as needed, financing arrangements.

Credit Agreement. On July 29, 2022, we entered into a credit agreement (as amended from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent. The Credit Agreement provides for the Revolving Credit Facility in the aggregate principal amount of up to $1.0 billion. All loans under the Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”). Subject to certain conditions set forth in the Credit Agreement, we may borrow, prepay and reborrow under the Revolving Credit Facility and terminate or reduce the Lenders’ commitments at any time prior to the Scheduled Maturity Date.

We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0.

Stock Repurchase Plan and Withholding Shares to Cover Taxes. In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock. As of March 31, 2024, there was $796.0 million available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of equity incentive awards and other corporate considerations. The current stock repurchase plan will expire on August 15, 2024.

During the three months ended March 31, 2024, we repurchased an aggregate of 15,681 shares of our common stock at an average cost of $194.62 per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of equity incentive awards. Our payment of the taxes on behalf of those employees resulted in an aggregate cash expenditure of $3.1 million and, as such, we generally subtract the amounts attributable to such withheld shares from the aggregate amount available for future purchases under our stock repurchase plan.

Dividends on Common Stock. In May 2023, our Board of Directors adopted a dividend policy under which we intend to pay quarterly cash dividends on our common stock.

The following table summarizes dividend activity during 2024.

Declaration Date

Record Date

Payment Date

Per Share Dividend

Total Cash Dividends Paid (in thousands)(1)

February 5, 2024

March 4, 2024

March 18, 2024

0.375

21,209

(1)

All unvested equity incentive awards currently outstanding are entitled to receive dividends or dividend equivalents, provided that such dividends or dividend equivalents are withheld by the Company and distributed to the applicable holder upon vesting of the award. Dividends declared, as reported in the consolidated statements of stockholders’ equity, includes dividends and dividend equivalents payable to holders of unvested equity incentive awards and, as a result, exceeds the amount of total cash dividends paid presented in this column.

On April 29, 2024, our Board of Directors declared a quarterly cash dividend of $0.375 per share of common stock payable on June 10, 2024 to stockholders of record at the close of business on May 28, 2024.

The declaration, timing and amount of each quarterly cash dividend are subject to the approval of the Board of Directors, including a determination that the dividend policy and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with applicable law. The Board of Directors retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that it may deem necessary or appropriate.

Cash Flow Analysis

Our cash flows from operating activities have historically been significantly impacted by profitability, implementation revenues received but deferred, our investment in sales and marketing to drive growth, and research and development. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

As our business grows, we expect our capital expenditures related to research and development and other strategic expansion activities to continue to increase. Since our current campus expansion project at our corporate headquarters is nearing completion and is expected to be placed into service in the second quarter of 2024, we anticipate that our construction related capital expenditures in the second half of 2024 will be less than those incurred during the comparable period in the prior year. Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services. Actual future capital requirements will depend on many factors, including our future revenues, cash from operating activities and the level of expenditures in all areas of our business. In addition, we purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. The payments are due in the fourth quarter of each year. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period.

As part of our payroll and payroll tax filing services, we collect funds from our clients for employment taxes, which we remit to the appropriate tax agencies. We typically invest these funds in money market funds, demand deposit accounts, certificates of deposit, commercial paper and U.S. treasury securities from which we earn interest income during the period between receipt and disbursement of such funds.

Our cash flows from investing and financing activities are influenced by the amount of funds held for clients, which can vary significantly from quarter to quarter. The balance of the funds we hold depends on our clients’ payroll calendars, and therefore such balance changes from period to period in accordance with the timing of each payroll cycle.

Our cash flows from financing activities are also affected by the extent to which we use available cash to purchase shares of common stock under our stock repurchase plan as well as equity incentive award vesting events that result in net share settlements and the Company paying withholding taxes on behalf of certain employees. Additionally, we intend to continue to pay a quarterly cash dividend, subject to the discretion of the Board of Directors.

The following table summarizes the consolidated statements of cash flows for the three months ended March 31, 2024 and 2023:


	Three Months Ended March 31,
	2024		2023			% Change
Net cash provided by (used in):
Operating activities	$	148,636	$	146,103		2%
Investing activities		42,285		(40,618	)	-204%
Financing activities		376,094		183,003		106%
Change in cash, cash equivalents, restricted cash and restricted cash equivalents	$	567,015	$	288,488		97%

Operating Activities

Cash provided by operating activities for the three months ended March 31, 2024 primarily consisted of payments received from our clients and interest earned on funds held for clients. Cash used in operating activities primarily consisted of personnel-related expenditures to support the growth and infrastructure of our business. These payments included costs of operations, advertising and other sales and marketing efforts, IT infrastructure development, product research and development and security and administrative costs. Compared to the three months ended March 31, 2023, our operating cash flows for the three months ended March 31, 2024 were positively impacted by the growth of our business.

Investing Activities

Cash flows provided by investing activities for the three months ended March 31, 2024 increased from the comparable prior year period due to a $65.0 million increase in proceeds from investments from funds held for clients and a $25.0 million decrease in purchases of investments from funds held for clients, which were partially offset by a $7.1 million increase in purchases of property and equipment.

Financing Activities

Cash provided by financing activities for the three months ended March 31, 2024 increased from the comparable prior year period primarily due to the impact of a $216.7 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf. The increase in cash flows provided by financing activities was partially offset by the payment of $21.2 million in cash dividends and a $2.4 million increase in withholding taxes paid related to net share settlements.

Contractual Obligations

Our principal commitments primarily consist of leases for office space and the naming rights agreement. For additional information regarding our naming rights agreement, leases, and our commitments and contingencies, see “Note 4. Goodwill and Intangible Assets, Net”, “Note 5. Leases” and “Note 13. Commitments and Contingencies” in the Form 10-K and “Note 5. Goodwill and Intangible Assets, Net” and “Note 12. Commitments and Contingencies” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions to ensure that management believes them to be reasonable under the then-current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions.

Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are discussed in the critical accounting policies and estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. There have been no material changes to the critical accounting policies disclosed in the Form 10-K.

Non-GAAP Financial Measures

Management uses adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess the performance of our core business operations and for planning purposes. We define (i) adjusted EBITDA as net income plus interest expense, taxes, depreciation and amortization, non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and any loss on the extinguishment of debt and (ii) non-GAAP net income as net income plus non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and any loss on the extinguishment of debt, all of which are adjusted for the effect of income taxes. Adjusted EBITDA and non-GAAP net income are metrics that provide investors with greater transparency to the information used by management in its financial and operational decision-making. We believe these metrics are useful to investors because they facilitate comparisons of our core business operations across periods on a consistent basis, as well as comparisons with the results of peer companies, many of which use similar non-GAAP financial measures to supplement results under U.S. GAAP. In addition, adjusted EBITDA is a measure that provides useful information to management about the amount of cash available for reinvestment in our business, paying dividends, repurchasing common stock and other purposes. Management believes that the non-GAAP measures presented in this Form 10-Q, when viewed in combination with our results prepared in accordance with U.S. GAAP, provide a more complete understanding of the factors and trends affecting our business and performance.

Adjusted EBITDA and non-GAAP net income are not measures of financial performance under U.S. GAAP, and should not be considered a substitute for net income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and when assessing our operating performance, you should not consider adjusted EBITDA or non-GAAP net income in isolation, or as a substitute for net income or other consolidated statements of comprehensive income data prepared in accordance with U.S. GAAP. Adjusted EBITDA and non-GAAP net income may not be comparable to similarly titled measures of other companies and other companies may not calculate such measures in the same manner as we do.

The following tables reconcile net income to adjusted EBITDA, net income to non-GAAP net income and earnings per share to non-GAAP net income per share on a basic and diluted basis:


	Three Months Ended March 31,
	2024			2023
Net income to adjusted EBITDA:
Net income	$	247,187		$	119,296
Interest expense		782			837
Provision for income taxes		42,854			46,303
Depreciation and amortization		32,468			26,272
EBITDA		323,291			192,708
Non-cash stock-based compensation expense		(93,790	)		27,819
Adjusted EBITDA	$	229,501		$	220,527


	Three Months Ended March 31,
	2024			2023
Net income to non-GAAP net income:
Net income	$	247,187		$	119,296
Non-cash stock-based compensation expense		(93,790	)		27,819
Income tax effect on non-GAAP adjustments		(6,749	)		(4,464	)
Non-GAAP net income	$	146,648		$	142,651

Weighted average shares outstanding:
Basic		56,546			57,867
Diluted		56,552			57,991

Earnings per share, basic	$	4.37		$	2.06
Earnings per share, diluted	$	4.37		$	2.06
Non-GAAP net income per share, basic	$	2.59		$	2.47
Non-GAAP net income per share, diluted	$	2.59		$	2.46


	Three Months Ended March 31,
	2024			2023
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic	$	4.37		$	2.06
Non-cash stock-based compensation expense		(1.66	)		0.48
Income tax effect on non-GAAP adjustments		(0.12	)		(0.07	)
Non-GAAP net income per share, basic	$	2.59		$	2.47


	Three Months Ended March 31,
	2024			2023
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted	$	4.37		$	2.06
Non-cash stock-based compensation expense		(1.66	)		0.48
Income tax effect on non-GAAP adjustments		(0.12	)		(0.08	)
Non-GAAP net income per share, diluted	$	2.59		$	2.46

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

As of March 31, 2024, we had corporate cash and cash equivalents totaling $371.3 million and funds held for clients cash and cash equivalents totaling $2.6 billion. These amounts are invested primarily in demand deposit accounts and money market funds. We consider all highly liquid debt instruments with an original maturity of three months or less and SEC-registered money market mutual funds to be cash equivalents. Additionally, we had available-for-sale securities totaling $109.5 million included within funds held for clients on the consolidated balance sheets as of March 31, 2024. Our available-for-sale securities consisted of U.S. treasury securities with an original maturity greater than one year. The primary objectives of our investing activities are capital preservation, meeting our liquidity needs and, with respect to investing client funds, generating interest income while maintaining the safety of principal. We do not enter into investments for trading or speculative purposes.

Our investments are subject to market risk due to changes in interest rates. The market value of fixed rate securities may be adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. We classify all debt securities as available-for-sale and, as a result, no gains or losses are recognized due to changes in interest rates until such securities are sold or decreases in fair value are determined to be nonrecoverable. To date, we have not recorded any credit impairment losses on our portfolio.

As of March 31, 2024, a hypothetical increase or decrease in interest rates of 100 basis points would result in an approximately $24.1 million increase or decrease, respectively, in interest earned on funds held for clients over the ensuing 12-month period. Interest earned on funds held for clients is included in recurring revenues in the consolidated statements of comprehensive income. There are no incremental costs of revenue associated with changes in interest earned on funds held for clients.

An immediate increase in interest rates of 100 basis points would have resulted in a $0.2 million reduction in the aggregate market value of our fixed rate securities as of March 31, 2024. An immediate decrease in interest rates of 100 basis points would have resulted in a $0.2 million increase in the aggregate market value of our fixed rate securities as of March 31, 2024. These estimates are based on a sensitivity model that measures market value changes when changes in interest rates occur.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Co-Chief Executive Officers and our Chief Financial Officer, evaluated, as of March 31, 2024, the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on that evaluation, our Co-Chief Executive Officers and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024 to ensure that information required to be disclosed by us in this Form 10-Q is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Co-Chief Executive Officers and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, can only provide reasonable assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various disputes, claims, suits, investigations and legal proceedings arising in the ordinary course of business. “Item 3. Legal Proceedings” of the Form 10-K includes a discussion of legal proceedings. There have been no material changes from the information set forth in “Item 3. Legal Proceedings” of the Form 10-K. We believe that the resolution of current pending legal matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows. Nonetheless, we cannot predict the outcome of these proceedings, as legal matters are subject to inherent uncertainties, and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes from the information set forth in “Item 1A. Risk Factors” in the Form 10-K filed with the SEC on February 15, 2024.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The number of shares of common stock repurchased by us during the three months ended March 31, 2024 is set forth below.


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
January 1 - 31, 2024		—	$	—		—	$	799,088,000
February 1 - 29, 2024(2)		15,466	$	194.76		15,466	$	796,076,000
March 1 - 31, 2024(2)		215	$	184.75		215	$	796,036,000
Total		15,681				15,681

(1)

Pursuant to a stock repurchase plan announced on November 20, 2018, we were authorized to purchase (in the aggregate) up to $150.0 million of our common stock in open market purchases, privately negotiated transactions or by other means. On May 13, 2021, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $300.0 million and extended the expiration date to May 13, 2023. On June 7, 2022, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $550.0 million and extended the expiration date to June 7, 2024. On August 15, 2022, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $1.1 billion and extended the expiration date to August 15, 2024.

(2)

Consists of shares withheld to satisfy tax withholding for certain employees upon the vesting of equity incentive awards.

Item 5. Other Information

Rule 10b5-1 Trading Arrangements

On February 16, 2024, Chad Richison, Co-Chief Executive Officer, President and Chairman of the Board of Directors, and an entity affiliated with Mr. Richison together adopted a Rule 10b5-1 trading arrangement (the “Richison 10b5-1 Plan”) that is intended to satisfy the affirmative defense of Rule 10b5-1(c) of the Exchange Act. The Richison 10b5-1 Plan provides for the sale of up to 487,500 shares of common stock on behalf of Mr. Richison and up to 487,500 shares of common stock on behalf of the affiliated entity, in each case during the period beginning on the later of (i) May 17, 2024, and (ii) the third trading day following disclosure of the Company’s financial results on Form 10-Q for the quarter ended March 31, 2024, and ending November 13, 2024, subject to earlier termination in accordance with the terms of the Richison 10b5-1 Plan and applicable laws, rules and regulations.

Item 6. Exhibits

The following exhibits are incorporated herein by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K):


Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of Paycom Software, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Amendment No. 1 to the Registration Statement on Form S-1/A dated March 31, 2014, filed with the SEC on March 31, 2014).

3.2		Amended and Restated Bylaws of Paycom Software, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated February 7, 2024, filed with the SEC on February 7, 2024).

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 1 to the Registration Statement on Form S-1/A dated March 31, 2014, filed with the SEC on March 31, 2014).

10.1+		Form of Restricted Stock Unit Award Agreement – Performance-Based Vesting (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 7, 2024, filed with the SEC on February 7, 2024).

10.2+		Form of Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated February 7, 2024, filed with the SEC on February 7, 2024).

10.3+		Letter Agreement, by and between Paycom Software, Inc. and Christopher G. Thomas, dated February 7, 2024 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated February 7, 2024, filed with the SEC on February 7, 2024).

10.4+		Letter Agreement, by and between Paycom Software, Inc. and Chad Richison, dated February 7, 2024 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated February 7, 2024, filed with the SEC on February 7, 2024).

10.5+		Form of Restricted Stock Unit Award Agreement – Performance-Based Vesting (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 1, 2024, filed with the SEC on April 5, 2024).

10.6+		Letter Agreement, by and between Paycom Software, Inc. and Amy Walker, dated April 4, 2024 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated April 1, 2024, filed with the SEC on April 5, 2024).

10.7+		Independent Consultant and Services Agreement, by and between Paycom Payroll, LLC and Holly Faurot, dated April 4, 2024 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated April 1, 2024, filed with the SEC on April 5, 2024).

10.8+		Release and Award Cancellation and Acceleration Agreement, by and between Paycom Software, Inc. and Holly Faurot, dated April 4, 2024 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated April 1, 2024, filed with the SEC on April 5, 2024).

31.1*		Certification of the Co-Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Co-Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.3*		Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of the Co-Chief Executive Officers and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.INS		Inline XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema With Embedded Linkbases Document.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

+ Management contract or compensatory plan or arrangement.

* Filed herewith.

** The certifications attached as Exhibit 32.1 are not deemed “filed” with the SEC and are not to be incorporated by reference into any filing of Paycom Software, Inc. under the Securities Act whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PAYCOM SOFTWARE, INC.

Date: May 2, 2024	By:	/s/ Chad Richison
		Chad Richison
		President and Co-Chief Executive Officer
		(Co-Principal Executive Officer)

Date: May 2, 2024	By:	/s/ Christopher G. Thomas
		Christopher G. Thomas
		Co-Chief Executive Officer
		(Co-Principal Executive Officer)

Date: May 2, 2024	By:	/s/ Craig E. Boelte
		Craig E. Boelte
		Chief Financial Officer
		(Principal Accounting Officer and Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Paycom Software (PAYC) 10-Q2024 Q1 Quarterly report

Content analysis