Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2018

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 Securities and Exchange Commission (“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 for the fair presentation of our consolidated balance sheets as of June 30, 2018 and December 31, 2017, our consolidated statements of income for the three and six months ended June 30, 2018 and 2017 and our consolidated statements of cash flows for the six months ended June 30, 2018 and 2017. Such adjustments are of a normal recurring nature. The information in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the SEC on February 14, 2018 (the “Form 10-K”). The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results expected for the full year.

Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards, as indicated by the “as adjusted” footnote.

Recently Adopted New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This authoritative guidance includes 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. ASU 2014-09 also includes Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs – Contracts with Customers” (“ASC 340-40”), which codifies the guidance on other assets and deferred costs relating to contracts with customers. ASC 340-40 specifies the accounting for costs an entity incurs to obtain and fulfill a contract to provide goods and services to customers. We adopted the amended standard on January 1, 2018, utilizing the full retrospective method of transition, which required us to recast each prior period presented and included a cumulative adjustment to increase stockholders’ equity by $103.4 million as of January 1, 2016. We have also updated our control framework for new internal controls and made changes to existing controls related to the new standard, including certain reconciliation controls, management review controls and contract review controls.

Impact on Previously Reported Results

The provisions of ASU 2014-09 do not materially impact the timing or amount of revenue we recognize. The primary impact of adopting the new standard is the manner in which we account for certain costs to obtain new contracts (i.e., selling and commission costs) and costs to fulfill contracts (i.e., costs related to upfront implementation activities performed), which we had previously expensed as incurred. We also determined that the nonrefundable upfront fee charged to our clients, coupled with the option to renew, represents an implied performance obligation in the form of a material right. However, as these fees are deferred and recognized ratably over the ten-year estimated client life, consistent with our prior accounting policy, there is no change in revenue recognition. See Note 3 for further details.

The following table presents a recast of selected unaudited consolidated statement of income line items after giving effect to the adoption of ASU 2014-09 (dollars in thousands, except per share amounts):

	Three Months Ended June 30, 2017									Six Months Ended June 30, 2017
	As previously reported			Adjustments			As Adjusted			As previously reported		Adjustments			As Adjusted
Administrative expenses
Sales and marketing	$	34,070		$	(6,640	)	$	27,430		$	70,918	$	(17,909	)	$	53,009
General and administrative	$	26,657		$	(3,063	)	$	23,594		$	44,483	$	(5,639	)	$	38,844
Operating income	$	9,089		$	9,703		$	18,792		$	47,754	$	23,548		$	71,302
Provision for income taxes	$	(5,264	)	$	3,908		$	(1,356	)	$	7,625	$	9,673		$	17,298
Net income	$	14,221		$	5,795		$	20,016		$	39,835	$	13,875		$	53,710
Earnings per share, basic	$	0.24		$	0.10		$	0.34		$	0.69	$	0.24		$	0.93
Earnings per share, diluted	$	0.24		$	0.10		$	0.34		$	0.67	$	0.24		$	0.91

The following table presents a recast of selected unaudited consolidated balance sheet line items after giving effect to the adoption of ASU 2014-09 (in thousands):

	December 31, 2017
	As previously reported			Adjustments			As Adjusted
Assets
Deferred contract costs	$	—	$		26,403		$	26,403
Deferred income tax assets, net	$	3,294	$		(3,294	)	$	—
Long-term deferred contract costs	$	—	$		171,865		$	171,865
Liabilities and Stockholders' Equity
Deferred income tax liabilities, net	$	—	$		49,129		$	49,129
Additional paid-in capital	$	137,234	$		24,575		$	161,809
Retained earnings	$	137,255	$		121,270		$	258,525

The following table presents a recast of selected unaudited consolidated statement of cash flow line items after giving effect to the adoption of ASU 2014-09 (in thousands):

	Six Months Ended June 30, 2017
	As previously reported			Adjustments			As Adjusted
Cash flows from operating activities
Net income	$	39,835		$	13,875		$	53,710
Stock-based compensation expense	$	17,524		$	(1,218	)	$	16,306
Deferred income taxes, net	$	(6,760	)	$	9,673		$	2,913
Deferred contract costs	$	—		$	(22,330	)	$	(22,330	)
Net cash provided by operating activities	$	55,293		$	—		$	55,293

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.

Seasonality

Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations.

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 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 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. As of June 30, 2018 and December 31, 2017, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. These investments are shown in the consolidated balance sheets as funds held for clients and are classified as a current asset because the funds are held solely to satisfy the client funds obligation.

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 the stock repurchase plan from time to time. Most recently, on February 13, 2018, we announced that our Board of Directors authorized the repurchase of up to an additional $100.0 million of common stock. 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 restricted stock and other corporate considerations.

During the six months ended June 30, 2018, we repurchased an aggregate of 576,710 shares of our common stock at an average cost of $103.82 per share, including 166,473 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. As of June 30, 2018, there was $77.5 million available for repurchases. The stock repurchase plan will expire on February 12, 2020.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The purpose of this new guidance is to increase the 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 beginning January 1, 2019. We are continuing to evaluate our population of leases and plan for the adoption and implementation of the new standard, including evaluating practical expedient and accounting policy elections and determining the impact to our systems and processes that we use to account for leases. We are also in the process of completing our assessment of the impact to our consolidated financial statements; however, we anticipate that most of our operating lease commitments will be subject to the new guidance, resulting in an overall increase in the total assets and liabilities reported on our consolidated balance sheets.