10-Q 1 payc-10q_20160630.htm PAYC-10Q_20160630 payc-10q_20160630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One) 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

£

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 Number)

7501 W. Memorial Road

Oklahoma City, Oklahoma  73142

(Address of principal executive offices, including zip code)

(405) 722-6900

(Registrant’s telephone number, including area code)

 

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   S     No   £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  S     No  £

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

 

Large accelerated filer  S

 

Accelerated filer

£

 

 

 

 

Non-accelerated filer    £

(Do not check if a smaller reporting company)

Smaller reporting company

£

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

As of July 26, 2016, there were 59,826,777 shares of common stock, par value of $0.01 per share, outstanding, including 2,263,289 shares of restricted stock.

 

 

 


Paycom Software, Inc.

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

3

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015

4

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

5

 

 

Notes to the Consolidated Financial Statements

6

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

23

 

Item 4.

 

Controls and Procedures

24

 

 

PART II – OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

25

 

Item 1A.

 

Risk Factors

25

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

Item 5.

 

Other Information

26

 

Item 6.

 

Exhibits

26

 

Signatures

29

 

 

 

 

2


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Paycom Software, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

80,893

 

 

$

50,714

 

Accounts receivable

 

 

2,775

 

 

 

2,354

 

Prepaid expenses

 

 

4,136

 

 

 

3,531

 

Inventory

 

 

441

 

 

 

1,093

 

Income tax receivable

 

 

-

 

 

 

6,743

 

Current assets before funds held for clients

 

 

88,245

 

 

 

64,435

 

Funds held for clients

 

 

1,034,314

 

 

 

696,703

 

Total current assets

 

 

1,122,559

 

 

 

761,138

 

Property and equipment, net

 

 

76,627

 

 

 

58,858

 

Deposits and other assets

 

 

936

 

 

 

1,286

 

Goodwill

 

 

51,889

 

 

 

51,889

 

Intangible assets, net

 

 

2,677

 

 

 

3,484

 

Deferred income tax assets, net

 

 

4,295

 

 

 

-

 

Total assets

 

$

1,258,983

 

 

$

876,655

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,530

 

 

$

4,899

 

Income tax payable

 

 

5,371

 

 

 

-

 

Accrued commissions and bonuses

 

 

3,052

 

 

 

8,687

 

Accrued payroll and vacation

 

 

6,538

 

 

 

2,898

 

Deferred revenue

 

 

4,389

 

 

 

3,726

 

Current portion of long-term debt

 

 

911

 

 

 

886

 

Accrued expenses and other current liabilities

 

 

12,392

 

 

 

9,735

 

Current liabilities before client funds obligation

 

 

38,183

 

 

 

30,831

 

Client funds obligation

 

 

1,034,314

 

 

 

696,703

 

Total current liabilities

 

 

1,072,497

 

 

 

727,534

 

Deferred income tax liabilities, net

 

 

-

 

 

 

641

 

Long-term deferred revenue

 

 

29,322

 

 

 

25,310

 

Net long-term debt, less current portion

 

 

28,349

 

 

 

24,856

 

Total long-term liabilities

 

 

57,671

 

 

 

50,807

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value (100,000,000 shares authorized, 57,624,163 and 57,119,873

   shares issued at June 30, 2016 and December 31, 2015, respectively; 57,539,034 and

   57,119,873 shares outstanding at June 30, 2016 and December 31, 2015, respectively)

 

 

576

 

 

 

571

 

Additional paid in capital

 

 

76,112

 

 

 

71,135

 

Retained earnings

 

 

55,617

 

 

 

26,608

 

Treasury stock, at cost (85,129 and 0 shares at June 30, 2016 and December 31, 2015,   respectively)

 

 

(3,490

)

 

 

-

 

            Total stockholders' equity

 

 

128,815

 

 

 

98,314

 

Total liabilities and stockholders' equity

 

$

1,258,983

 

 

$

876,655

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

3


Paycom Software, Inc.

Consolidated Statements of Income

(in thousands, except per share and share amounts)

(unaudited)

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

72,492

 

 

$

47,820

 

 

$

161,396

 

 

$

102,171

 

Implementation and other

 

 

1,388

 

 

 

1,153

 

 

 

2,610

 

 

 

2,024

 

Total revenues

 

 

73,880

 

 

 

48,973

 

 

 

164,006

 

 

 

104,195

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

10,479

 

 

 

7,134

 

 

 

21,264

 

 

 

14,605

 

Depreciation and amortization

 

 

1,386

 

 

 

887

 

 

 

2,572

 

 

 

1,697

 

Total cost of revenues

 

 

11,865

 

 

 

8,021

 

 

 

23,836

 

 

 

16,302

 

Administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

24,766

 

 

 

16,741

 

 

 

53,428

 

 

 

37,970

 

Research and development

 

 

4,202

 

 

 

1,907

 

 

 

8,062

 

 

 

3,774

 

General and administrative

 

 

15,220

 

 

 

10,096

 

 

 

30,426

 

 

 

22,080

 

Depreciation and amortization

 

 

1,823

 

 

 

1,400

 

 

 

3,546

 

 

 

2,723

 

Total administrative expenses

 

 

46,011

 

 

 

30,144

 

 

 

95,462

 

 

 

66,547

 

Total operating expenses

 

 

57,876

 

 

 

38,165

 

 

 

119,298

 

 

 

82,849

 

Operating income

 

 

16,004

 

 

 

10,808

 

 

 

44,708

 

 

 

21,346

 

Interest expense

 

 

(170

)

 

 

(392

)

 

 

(481

)

 

 

(724

)

Other income, net

 

 

116

 

 

 

19

 

 

 

150

 

 

 

52

 

Income before income taxes

 

 

15,950

 

 

 

10,435

 

 

 

44,377

 

 

 

20,674

 

Provision for income taxes

 

 

5,529

 

 

 

4,489

 

 

 

15,368

 

 

 

8,733

 

Net income

 

$

10,421

 

 

$

5,946

 

 

$

29,009

 

 

$

11,941

 

Earnings per share, basic

 

$

0.18

 

 

$

0.10

 

 

$

0.50

 

 

$

0.21

 

Earnings per share, diluted

 

$

0.18

 

 

$

0.10

 

 

$

0.49

 

 

$

0.21

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

57,591,556

 

 

 

57,038,021

 

 

 

57,362,232

 

 

 

55,900,306

 

Diluted

 

 

58,697,229

 

 

 

58,369,083

 

 

 

58,707,213

 

 

 

57,469,918

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

 

4


 

Paycom Software, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

29,009

 

 

$

11,941

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,118

 

 

 

4,420

 

Amortization of debt issuance costs

 

 

63

 

 

 

85

 

Net loss on disposition of property and equipment

 

 

3

 

 

 

15

 

Stock-based compensation expense

 

 

4,817

 

 

 

289

 

Deferred income taxes, net

 

 

(4,936

)

 

 

(230

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(421

)

 

 

242

 

Prepaid expenses

 

 

(605

)

 

 

(1,260

)

Inventory

 

 

652

 

 

 

(131

)

Deposits and other assets

 

 

350

 

 

 

(373

)

Accounts payable

 

 

2,619

 

 

 

(970

)

Income taxes, net

 

 

12,114

 

 

 

2,866

 

Accrued commissions and bonuses

 

 

(5,635

)

 

 

(2,541

)

Accrued payroll and vacation

 

 

3,640

 

 

 

3,382

 

Deferred revenue

 

 

4,675

 

 

 

3,698

 

Accrued expenses and other current liabilities

 

 

2,091

 

 

 

1,346

 

Net cash provided by operating activities

 

 

54,554

 

 

 

22,779

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

(Increase) decrease in funds held for clients

 

 

(337,611

)

 

 

117,750

 

Decrease in restricted cash

 

 

-

 

 

 

371

 

Purchases of property and equipment

 

 

(24,340

)

 

 

(4,922

)

Net cash (used in) provided by investing activities

 

 

(361,951

)

 

 

113,199

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

3,903

 

 

 

-

 

Repurchases of common stock

 

 

(3,490

)

 

 

-

 

Principal payments on long-term debt

 

 

(448

)

 

 

(682

)

Increase (decrease) in client funds obligation

 

 

337,611

 

 

 

(117,750

)

Payment of debt issuance costs

 

 

-

 

 

 

(23

)

Net cash provided by (used in) financing activities

 

 

337,576

 

 

 

(118,455

)

Change in cash and cash equivalents

 

 

30,179

 

 

 

17,523

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

50,714

 

 

 

25,144

 

End of period

 

$

80,893

 

 

$

42,667

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

5


 

Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

Description of Business

Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software 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 talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications.

Registered Block Trade Transaction

On May 20, 2015, we closed an underwritten secondary offering of 8,000,000 shares of our common stock by Welsh, Carson, Anderson & Stowe, L.P., WCAS Capital Partners IV L.P., each of our executive officers and certain other selling stockholders at a public offering price of $36.25 per share.  We did not receive any proceeds from the sale of these shares.

 

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in our audited consolidated financial statements for the year ended December 31, 2015, included in the Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (“SEC”) on February 22, 2016.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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.  In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to fairly present our consolidated balance sheets as of June 30, 2016 and December 31, 2015, our consolidated statements of income for the three and six months ended June 30, 2016 and 2015 and our consolidated statements of cash flows for the six months ended June 30, 2016 and 2015.  Such adjustments are of a normal recurring nature.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K that was filed with the SEC on February 22, 2016.  The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results expected for the full fiscal year.

Adoption of New Pronouncements

We adopted on a retrospective basis the recently issued guidance by the Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires companies with debt issuance costs related to a recognized debt liability to present such issuance costs in the consolidated balance sheets as a direct deduction from the carrying amount of the debt liability.  Our adoption of ASU 2015-03 resulted in a reclassification which decreased deposits and other assets by $0.1 million and decreased net long-term debt, less current portion by $0.1 million on our consolidated balance sheet as of December 31, 2015. The adoption of ASU 2015-03 had no impact on our stockholders’ equity or the results of our operations.

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, 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. As such, actual results could materially differ from these estimates.

 

6


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

Employee Stock Purchase Plan

An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recorded at the fair value of the award.  Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period.

Funds Held for Clients and Client Funds Obligation

As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local 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 federal, state and local employment taxes earn interest during the interval between receipt and disbursement, as we invest these funds in demand deposits, money market funds, certificates of deposit and commercial paper.

These investments are shown in the consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation.  The liability is recorded in the accompanying 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 balance sheet date.

During the quarter ended June 30, 2016 we elected to change our accounting policy for recording interest income earned on funds held for clients.  Prior to April 1, 2016, interest income earned in the period between receipt and disbursement of client funds was recorded to other income, net.  As a result of this change in accounting policy, we will recognize interest income on collected, but not yet remitted funds held for clients, in recurring revenues as earned.  We have concluded that this change in accounting principle is preferable as the collection, holding, and remittance of these funds are critical components of providing our services.  The effect of the change in accounting policy was immaterial in all periods and as such, we have not retrospectively adjusted prior period reported results.  

As of June 30, 2016, the funds held for clients were invested in demand deposits, certificates of deposit, money market funds and commercial paper and classified as a current asset in the accompanying balance sheets as these funds are held solely to satisfy the client funds obligation.  As of December 31, 2015, the funds held for clients funds were invested in the same investments, other than commercial paper.

Stock Repurchase Plan

As announced on May 26, 2016, our Board of Directors approved a stock repurchase plan under which we are authorized to purchase (in the aggregate) up to $50.0 million of our issued and outstanding common stock, par value $0.01 per share, over a 24-month period.  Shares may be repurchased from time-to-time 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, and the repurchase plan may be suspended or discontinued at any time.  The actual timing, number and value of shares repurchased will depend on a number of factors, including the market price of our common stock, general market and economic conditions and other corporate considerations.  For the three and six months ended June 30, 2016, we repurchased an aggregate of 85,129 shares of our common stock under our repurchase plan at an average cost of $41.00 per share.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued authoritative guidance which included a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In April 2015, the FASB proposed a one year deferral of the effective date of the new revenue recognition standard for public and non-public entities reporting under U.S. GAAP and on July 9, 2015, the FASB approved the one year deferral.  The effective date of the amended standard will begin in periods beginning after December 15, 2017.  We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In July 2015, the FASB issued authoritative guidance which simplifies the measurement of inventory.  Under the new guidance, an entity should measure inventory (as defined within the scope of the guidance) at the lower of cost or net realizable value.  The new guidance applies to all inventory except inventory measured using last-in, first-out (LIFO) or the retail inventory method.  Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation.  The new guidance is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  Accordingly, the standard is effective for us on January 1, 2017.  We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

 

7


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

In January 2016, the FASB issued authoritative guidance for the accounting for financial instruments. The amendments in this guidance require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this guidance also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this guidance eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The new guidance is effective for us for fiscal years, and interim periods within those years, beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In February 2016, the FASB issued authoritative guidance for the accounting for leases.  The purpose of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements.  The new guidance is effective for us for fiscal years, and interim periods within those years, beginning after December 15, 2018, though early adoption is permitted.  We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In March 2016, as part of its initiative to reduce complexity in accounting standards, the FASB issued authoritative guidance for the accounting for stock compensation. The new guidance involves several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows   The new guidance is effective for us for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted.  We are currently evaluating the impact that the standard will have on our consolidated financial statements.

 

3.

PROPERTY AND EQUIPMENT, NET

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

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Property and equipment

 

 

 

 

 

 

 

 

Buildings

 

$

30,214

 

 

$

28,154

 

Software and capitalized software costs

 

 

18,205

 

 

 

13,959

 

Computer equipment

 

 

15,070

 

 

 

11,346

 

Rental clocks

 

 

9,447

 

 

 

8,750

 

Furniture, fixtures and equipment

 

 

6,067

 

 

 

5,464

 

Vehicles

 

 

421

 

 

 

421

 

Leasehold improvements

 

 

363

 

 

 

358

 

 

 

 

79,787

 

 

 

68,452

 

Less: accumulated depreciation and amortization

 

 

(29,985

)

 

 

(24,894

)

 

 

 

49,802

 

 

 

43,558

 

Land

 

 

8,993

 

 

 

8,993

 

Construction in progress

 

 

17,832

 

 

 

6,307

 

Property and equipment, net

 

$

76,627

 

 

$

58,858

 

In 2015, we began the construction of a third building/processing center and additional parking at our headquarters.  Included in the construction in progress balance at June 30, 2016 and December 31, 2015 is $0.8 million and $0.4 million in retainage, respectively.

Depreciation and amortization expense for property and equipment, net, was $2.8 million and $5.3 million for the three and six months ended June 30, 2016, respectively.  Depreciation and amortization expense for property and equipment, net was $1.9 million and $3.6 million for the three and six months ended June 30, 2015, respectively.

We capitalize interest incurred for indebtedness related to construction of our principal executive offices.  For the three and six months ended June 30, 2016, we incurred interest costs of $0.2 million and $0.5 million, respectively.  We capitalized interest costs

 

8


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

for the three and six months ended June 30, 2016 of $0.2 million and $0.2 million, respectively.  For the three and six months ended June 30, 2015, we incurred interest costs of $0.3 million and $0.6 million, respectively, none of which was capitalized.

We capitalize computer software development costs related to software developed for internal use in accordance with Accounting Standards Codification (“ASC”) Topic 350-40.  During the three and six months ended June 30, 2016, we capitalized $2.0 million and $3.7 million of computer software development costs related to software developed for internal use, respectively.  During the three and six months ended June 30, 2015, we capitalized $0.8 million and $1.6 million of computer software development costs related to software developed for internal use, respectively.

 

4.

GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill represents the excess of cost over our net tangible and identified intangible assets.  We had goodwill of $51.9 million as of June 30, 2016 and December 31, 2015. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2016. For the year ended December 31, 2015, there were no indicators of impairment.

All of our intangible assets are considered to have finite lives and, as such, are subject to amortization. The components of intangible assets were as follows:

 

 

June 30, 2016

 

 

 

Weighted Average Remaining

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Useful Life

 

 

Gross

 

 

Amortization

 

 

Net

 

 

 

(Years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

1.0

 

 

$

13,997

 

 

$

(12,597

)

 

$

1,400

 

Trade name

 

 

6.0

 

 

 

3,194

 

 

 

(1,917

)

 

 

1,277

 

Total

 

 

 

 

 

$

17,191

 

 

$

(14,514

)

 

$

2,677

 

 

 

 

December 31, 2015

 

 

 

Weighted Average Remaining

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Useful Life

 

Gross

 

 

Amortization

 

 

Net

 

 

 

(Years)

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

1.5

 

$

13,997

 

 

$

(11,897

)

 

$

2,100

 

Trade name

 

6.5

 

 

3,194

 

 

 

(1,810

)

 

 

1,384

 

Total

 

 

 

$

17,191

 

 

$

(13,707

)

 

$

3,484

 

 

The weighted average remaining useful life of our intangible assets was 3.4 years as of June 30, 2016.  Amortization of intangible assets for each of the three and six months ended June 30, 2016 and 2015 was $0.4 million and $0.8 million, respectively.  

    

 

5.

LONG-TERM DEBT, NET

As of the dates indicated, our long-term debt consisted of the following:

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

Net term note to bank due May 30, 2021

 

$

25,357

 

 

$

25,742

 

Construction loan

 

 

3,903

 

 

 

-

 

Total long-term debt (including current portion)

 

 

29,260

 

 

 

25,742

 

Less: Current portion

 

 

(911

)

 

 

(886

)

Total long-term debt, net

 

$

28,349

 

 

$

24,856

 

 

As of June 30, 2016, our outstanding indebtedness consisted of a term note under the 2021 Consolidated Loan due to Kirkpatrick Bank (the “2021 Consolidated Loan”).  The 2021 Consolidated Loan matures on May 30, 2021.  Under the 2021

 

9


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

Consolidated Loan, interest is payable monthly and accrues at a fixed rate of 4.75% per annum.  The 2021 Consolidated Loan is secured by a mortgage covering our headquarters and certain personal property relating to our headquarters.

The 2021 Consolidated Loan includes certain financial covenants, including maintaining a fixed charge coverage ratio of EBITDA to fixed charges (defined as current maturities of long-term debt, interest expense, rent expense and distributions), as defined in the agreement, of greater than 1.2 to 1.0, which is measured on a quarterly basis. We were in compliance with all of the covenants as of June 30, 2016.

 On May 13, 2015, we entered into a loan agreement with Kirkpatrick Bank to finance the expansion of our headquarters (the “Construction Loan”).  The Construction Loan allows for the borrowing of a maximum aggregate principal amount equal to the lesser of (i) $11.0 million or (ii) 80% of the appraised value of the constructed property.  The Construction Loan matures on the earlier of the completion of construction or November 13, 2016, with variable interest accruing at the greater of (i) the prime rate, plus 50 basis points or (ii) 4.0%.  At June 30, 2016, the interest rate on the Construction Loan was 4.0%.  At maturity, the outstanding principal balance of the Construction Loan, if any, will be automatically converted to a 78-month term loan.  The term loan will accrue fixed interest at the prevailing 7/20 London Interbank Offered Rate swap interest rate that is in effect as of the commencement date, plus 225 basis points.  

As of June 30, 2016 and December 31, 2015, the carrying value of our total long-term debt, including current portion, was $29.3 million and $25.7 million, respectively, which approximated its fair value as of both dates. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities.  

6.

EMPLOYEE SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN

Our employees that are over the age of 21 and have completed ninety (90) days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby we make a matching contribution for 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 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 will be 100% vested after two years of employment from the date of hire. The discretionary contributions vest 100% after two years of employment from the date of hire. Matching contributions amounted to $0.6 million and $1.6 million for the three and six months ended June 30, 2016, respectively.  Matching contributions amounted to $0.5 million and $1.2 million for the three and six months ended June 30, 2015, respectively.

The ESPP allows, at the beginning of each offering period, eligible employees to elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum, to purchase shares of the Company’s common stock at a price of 85% of the fair market value of the shares on the exercise date.  Each offering period of the ESPP lasts six months and the maximum number of shares that may be acquired by a participant during each offering period is 2,000 shares. The shares reserved for purposes of the ESPP are shares we purchase in the open market.  The maximum number of shares of the Company’s common stock that may be acquired by participants under the ESPP is 2,000,000 shares.  During the six months ended June 30, 2016, eligible employees purchased 72,665 shares of the Company’s common stock under the ESPP.  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 $0.2 million and $0.3 million for the three and six months ended June 30, 2016.   Our compensation expense related to the ESPP was $0.1 million for both the three and six months ended June 30, 2015.

 

7.

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 because of the short-term nature of the instruments.

We did not have any financial instruments that were measured on a recurring basis at either June 30, 2016 or December 31, 2015. 

 

8.

EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares of common stock outstanding for 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 shares of restricted stock whether or not they are vested.

 

10


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

In accordance with ASC Topic 260 “Earnings Per Share”, the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings.  Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method.  The outstanding shares of 2015 Restricted Stock (as defined in Note 9) are considered participating securities, while the outstanding shares of 2016 Restricted Stock (as defined in Note 9) are not considered participating securities.

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

 

 

Six Months Ended

 

 

 

June 30, 2016

 

 

June 30, 2015

 

 

June 30, 2016

 

 

June 30, 2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,421

 

 

$

5,946

 

 

$

29,009

 

 

$

11,941

 

Less:  income allocable to participating securities

 

 

(129

)

 

 

-

 

 

 

(360

)

 

 

-

 

Income allocable to common shares

 

$

10,292

 

 

$

5,946

 

 

$

28,649

 

 

$

11,941

 

Add back:  undistributed earnings allocable to participating securities

 

$

129

 

 

$

-

 

 

$

360

 

 

$

-

 

Less:  undistributed earnings reallocated to participating securities

 

 

(126

)

 

 

-

 

 

 

(360

)

 

 

-

 

Numerator for diluted earnings per share

 

$

10,295

 

 

$

5,946

 

 

$

28,649

 

 

$

11,941

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

50,315,455

 

 

 

50,315,455

 

 

 

50,315,455

 

 

 

50,315,455

 

Weighted average common shares repurchased

 

 

(19,969

)

 

 

-

 

 

 

(9,985

)

 

 

-

 

Adjustment for  vested restricted stock

 

 

7,296,070

 

 

 

6,722,566

 

 

 

7,056,762

 

 

 

5,584,851

 

Shares for calculating basic earnings per share

 

 

57,591,556

 

 

 

57,038,021

 

 

 

57,362,232

 

 

 

55,900,306

 

Dilutive effect of unvested restricted stock

 

 

1,105,673

 

 

 

1,331,062

 

 

 

1,344,981

 

 

 

1,569,612

 

Shares for calculating diluted earnings per share

 

 

58,697,229

 

 

 

58,369,083

 

 

 

58,707,213

 

 

 

57,469,918

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.10

 

 

$

0.50

 

 

$

0.21

 

Diluted

 

$

0.18

 

 

$

0.10

 

 

$

0.49

 

 

$

0.21

 

 

 

9.

STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

On January 1, 2014, we issued restricted shares of common stock (“2014 Restricted Stock”) under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”) that were subject to either time-based vesting conditions or market-based vesting conditions.  Shares of 2014 Restricted Stock with time-based vesting conditions vest based on various schedules through 2018.  The market-based vesting conditions were based on our total enterprise value exceeding certain specified thresholds.  Compensation expense related to the issuance of 2014 Restricted Stock with time-based vesting conditions was measured based on the fair value of the award on the grant date and is recognized over the requisite service period on a straight-line basis.  Compensation expense relating to the issuance of 2014 Restricted Stock with market-based vesting conditions was measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based on the probability that the vesting conditions would be met.  For 2014 Restricted Stock with market-based vesting conditions, 50% of the shares vested upon reaching a total enterprise value of $1.4 billion on December 1, 2014 and the remaining 50% of the shares vested upon reaching a total enterprise value of $1.8 billion on March 2, 2015.  Our total compensation expense related to 2014 Restricted Stock was less than $0.1 million and $0.1 million for the three and six months ended June 30, 2016, respectively.  Our total compensation expense related to 2014 Restricted Stock was $0.3 million for both the three and six months ended June 30, 2015.

There was $0.2 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of 2014 Restricted Stock with time-based vesting conditions outstanding as of June 30, 2016.  The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.5 years as of June 30, 2016.

On July 8, 2015, we issued an aggregate of 741,931 restricted shares of common stock under the LTIP (“2015 Restricted Stock”) to each of our executive officers and certain non-executive employees.  On April 15, 2016, we issued an aggregate of 847,928

 

11


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

restricted shares of common stock under the LTIP to each of our executive officers and certain non-executive employees, and on May 2, 2016, we issued an aggregate of 5,132 restricted shares of common stock under the LTIP to certain members of our Board of Directors (“2016 Restricted Stock” and, collectively with all shares of 2015 Restricted Stock, the “Post-IPO Restricted Stock”).  Certain shares of Post-IPO Restricted Stock are subject to market-based vesting conditions and certain shares of Post-IPO Restricted Stock are subject to time-based vesting conditions.  Shares subject to market-based vesting conditions will vest if the Company’s Total Enterprise Value (as defined in the applicable restricted stock award agreement) equals or exceeds certain predetermined thresholds.  Shares of 2016 Restricted Stock subject to market-based vesting conditions must vest within six years of the date of grant or the shares will be forfeited, while shares of 2015 Restricted Stock subject to market-based vesting conditions are eligible for vesting indefinitely.  Shares of Post-IPO Restricted Stock subject to time-based vesting conditions will vest over periods of three or five years.

The fair value of each share of Post-IPO Restricted Stock with market-based vesting conditions was estimated on the grant date using a Monte Carlo simulation model.  This model considers a range of assumptions related to volatility, risk-free interest rate, expected life and expected dividend yield.  Expected volatilities used in the model are based on historical volatilities of comparable guideline companies until a sufficient trading history in our common stock exists.  We are required to estimate forfeitures and only record compensation costs for those awards that are expected to vest.  With respect to shares of 2015 Restricted Stock with market-based vesting conditions, 50% of the shares will vest if our Total Enterprise Value equals or exceeds $2.65 billion and the remaining 50% of the shares will vest if our Total Enterprise Value equals or exceeds $3.5 billion, while all shares of 2016 Restricted Stock with market-based vesting conditions will vest if our Total Enterprise Value equals or exceeds $2.65 billion.

Compensation expense for the shares of Post-IPO Restricted Stock with time-based vesting conditions was measured based on the fair value of the underlying shares on the grant date (which was equal to the closing price of our common stock on such grant date) and will be recognized over the requisite service periods on a straight-line basis.  Compensation expense for shares of Post-IPO Restricted Stock with market-based vesting conditions was measured based on the fair value of the underlying shares on the grant date, which ranged from $21.76 to $27.40 depending on the Total Enterprise Value threshold and the date of the grant.  Compensation expense for the shares of Post-IPO Restricted Stock with market-based vesting conditions will be recognized on a straight-line basis over the requisite service period, which ranges from 1.8 to 4.2 years.  Our total compensation expense related to Post-IPO Restricted Stock was $3.3 million and $4.6 million for the three and six months ended June 30, 2016, respectively.  There was $34.0 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of Post-IPO Restricted Stock outstanding as of June 30, 2016.  The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.8 years as of June 30, 2016.

We capitalized stock based compensation costs related to software developed for internal use of $0.3 million and $0.4 million for the three and six months ended June 30, 2016, respectively.  We capitalized stock based compensation costs related to software developed for internal use of less than $0.1 million for both the three and six months ended June 30, 2015.

 

10.

RELATED-PARTY TRANSACTIONS

For each of the three- and six- month periods ended June 30, 2016 and 2015, we paid rent on our Dallas office space in the amounts of $0.1 million and $0.2 million, respectively. The Dallas office building is owned by 417 Oakbend, LP, a Texas limited partnership. Our Chief Sales Officer owns a .01% general partnership interest and a 10.49% limited partnership interest in 417 Oakbend, LP.

In accordance with the terms of the Registration Rights Agreement dated as of December 30, 2013, we paid registration and related expenses incurred by certain parties and others in the aggregate amount of $0.5 million in connection with the registration of shares of common stock in an underwritten secondary offering in May 2015.

 

11.

COMMITMENTS AND CONTINGENCIES

Employment Agreements

We have employment agreements with certain of our executive officers. The agreements allow for annual compensation, participation in executive benefit plans, and performance-based cash bonuses.

 

12


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

Legal Proceedings

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.

Operating Leases and Deferred Rent

We lease office space under several noncancellable operating leases with contractual terms expiring from 2016 to 2021. Minimum rent expenses are recognized over the lease term. The lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in an amount that a renewal appears, at the inception of the lease, to be reasonably assured. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rent expense and the amount payable under the lease as a liability. As of June 30, 2016 and December 31, 2015, we had $1.0 million and $0.8 million, respectively, recorded as a liability for deferred rent.

Rent expense under operating leases for the three and six months ended June 30, 2016 was $1.4 million and $2.7 million, respectively.  Rent expense under operating leases for the three and six months ended June 30, 2015 was $1.1 million and $2.2 million, respectively.

 

12.

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.  Significant management judgment is required in estimating operating income in order to determine our effective income tax rate.  The estimated effective income tax rate was 34.66% and 34.63% for the three and six months ended June 30, 2016, respectively.  The estimated effective income tax rate was 43.02% and 42.24% for the three and six months ended June 30, 2015, respectively.  The lower effective income tax rate for the three and six months ended June 30, 2016 is primarily a result of the Section 199 qualified production activities deduction and the research and development tax credit.

 

13.

SUBSEQUENT EVENTS

In connection with the vesting on July 28, 2016 of approximately 491,000 shares of 2016 Restricted Stock subject to market-based vesting conditions, the Company recognized approximately $12.0 million of compensation cost. In connection with the vesting on August 1, 2016 of approximately 235,000 shares of 2015 Restricted Stock subject to market-based vesting conditions, the Company recognized approximately $3.8 million of compensation cost. A portion of the shares that vested on July 28, 2016 and August 1, 2016, as well as a portion of the approximately 37,000 shares of 2015 Restricted Stock subject to time-based vesting conditions that vested on July 8, 2016, were withheld to satisfy tax withholding obligations for certain employees. All shares withheld to satisfy tax withholding obligations are held as treasury stock.

On August 1, 2016, the Company converted the $5.0 million outstanding principal balance of the Construction Loan to a 78-month term loan with interest accruing at a fixed rate of 3.44% per annum. On August 2, 2016, the Company also entered into a new construction loan (the “2016 Construction Loan”) with Kirkpatrick Bank to finance additional expansion of its headquarters.  The 2016 Construction Loan allows for the borrowing of a maximum aggregate principal amount equal to the lesser of (i) $28.6 million or (ii) 80% of the appraised value of the constructed properties. The 2016 Construction Loan matures on the earlier of the completion of construction or 30 months from August 2, 2016, with interest accruing at the greater of (i) the prime rate, plus 50 basis points or (ii) 4.0%. At maturity, the outstanding principal balance of the 2016 Construction Loan, if any, will be automatically converted to an 84-month term loan, which will accrue fixed interest at the prevailing 7/20 London Interbank Offered Rate swap interest rate that is in effect as of the commencement date, plus 225 basis points.  

 

 

 

 

13


 

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 a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and six months ended June 30, 2016, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2015 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2016 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, 2015, 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, other than share and per share amounts, are presented in thousands unless otherwise noted.

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 the Company’s 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; trends, opportunities and risks affecting our business, industry and financial results; future expansion or growth plans and potential for future growth; 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 revenue generated by certain applications, including Enhanced ACA; the impact of future regulatory, judicial or 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 ability to create additional jobs at our corporate headquarters; our ability to expand our corporate headquarters within an expected timeframe; our expectation of increasing our capital expenditures and investment activity as our business grows; our plans to purchase shares of our common stock through a stock repurchase plan; and how the vesting of restricted stock affects the number of shares used for calculating earnings per share.  In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “should,” “would,” “might,” “plan,” “expect,” “potential,” “possible,” “project,” and similar expressions or the negative of such terms or other comparable terminology. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q, Part I, Item 1A, “Risk Factors” of the Form 10-K and in our other reports filed with the Securities and Exchange Commission. 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 comprehensive, cloud-based human capital management (“HCM”) software 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 talent acquisition, time and labor management, payroll, talent management and human resources 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 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 six months ended June 30, 2016.

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.  We have 42 sales teams located in 24 states and plan to open additional sales offices to further expand our presence in the U.S. market.  During the six months ended June 30, 2016, we opened six sales offices, with one new sales office located in each of Chicago, Cleveland, Pasadena, Sacramento, San Antonio and Stamford.  Our continued growth depends on attracting new clients through geographic expansion, further penetration of our existing markets and the introduction of new applications to our existing client base.  We also expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market. Our principal marketing strategy utilizes email, direct mail, tradeshows, digital

 

14


 

marketing and advertising to generate sales leads.  In addition, we generate leads and build recognition of our brand and thought leadership with relevant and informative content, such as white papers and webinars.

Recent Developments

As announced on May 26, 2016, our Board of Directors approved a stock repurchase plan under which we are authorized to purchase (in the aggregate) up to $50.0 million of our issued and outstanding common stock, par value of $0.01 per share, over a 24-month period.  Shares may be repurchased from time-to-time 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, and the repurchase plan may be suspended or discontinued at any time.  The actual timing, number and value of shares repurchased will be determined by a committee of the Board of Directors at its discretion and will depend on a number of factors, including the market price of our common stock, general market and economic conditions and other corporate considerations.  For the three and six months ended June 30, 2016, we repurchased an aggregate of 85,129 shares of our common stock under our repurchase plan at an average cost of $41.00 per share.  

Trends and Opportunities

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. As a result of our evolving revenue mix, coupled with the unique client benefits that our solution provides (e.g., enabling our clients to scale the number of HCM applications that they use on an as-needed basis), we are presented with a variety of opportunities and challenges.

We generate revenues from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed or (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 they pay their employees, which is typically weekly, bi-weekly, semi-monthly or monthly.

For the six months ended June 30, 2016 and 2015, our gross margins were approximately 85% and 84%, respectively. Historically, our total gross margin gradually improved over time as (i) our gross margin for our other HCM applications was higher than our gross margin for payroll processing, (ii) we added additional clients, (iii) our existing clients deployed additional HCM applications and (iv) we reduced our cost of revenues as a percentage of total revenues.  We do not expect our gross margins to continue to grow at the same rate as they have, but rather to remain relatively consistent from quarter to quarter.

 

15


 

Results of Operations

Three months ended June 30, 2016 as compared to the three months ended June 30, 2015.

The following tables set forth consolidated statements of income data and such data as a percentage of total revenues for the periods presented:

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

2016

 

 

 

2015

 

 

% Change

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

72,492

 

 

$

47,820

 

 

 

52

%

Implementation and other

 

 

1,388

 

 

 

1,153

 

 

 

20

%

Total revenues

 

 

73,880

 

 

 

48,973

 

 

 

51

%

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

10,479

 

 

 

7,134

 

 

 

47

%

Depreciation and amortization

 

 

1,386

 

 

 

887

 

 

 

56

%

Total cost of revenues

 

 

11,865

 

 

 

8,021

 

 

 

48

%

Administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

24,766

 

 

 

16,741

 

 

 

48

%

Research and development

 

 

4,202

 

 

 

1,907

 

 

 

120

%

General and administrative

 

 

15,220

 

 

 

10,096

 

 

 

51

%

Depreciation and amortization

 

 

1,823

 

 

 

1,400

 

 

 

30

%

Total administrative expenses

 

 

46,011

 

 

 

30,144

 

 

 

53

%

Total operating expenses

 

 

57,876

 

 

 

38,165

 

 

 

52

%

Operating income

 

 

16,004

 

 

 

10,808

 

 

 

48

%

Interest expense

 

 

(170

)

 

 

(392

)

 

 

-57

%

Other income, net

 

 

116

 

 

 

19

 

 

 

511

%

Income before income taxes

 

 

15,950

 

 

 

10,435

 

 

 

53

%

Provision for income taxes

 

 

5,529

 

 

 

4,489

 

 

 

23

%

Net income

 

$

10,421

 

 

$

5,946

 

 

 

75

%

 

 

 

Three Months Ended June 30,

 

 

 

 

2016

 

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Recurring

 

 

98.1

%

 

 

97.6

%

Implementation and other

 

 

1.9

%

 

 

2.4

%

Total revenues

 

 

100.0

%

 

 

100.0

%

Cost of revenues

 

 

 

 

 

 

 

 

Operating expenses

 

 

14.2

%

 

 

14.6

%

Depreciation and amortization

 

 

1.9

%

 

 

1.8

%

Total cost of revenues

 

 

16.1

%