10-Q 1 payc-10q_20180930.htm PAYC-10Q_20180930 payc-10q_20180930.htm

 

 

 

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 September 30, 2018

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        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. (Check one):

 

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 October 24, 2018, there were 58,613,653 shares of common stock, par value of $0.01 per share, outstanding, including 838,155 shares of restricted stock.

 

 


Paycom Software, Inc.

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

 

 

Financial Statements (Unaudited)

 

3

 

 

 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017

 

4

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

5

 

 

 

Notes to the Consolidated Financial Statements

 

6

 

Item 2.

 

 

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

 

19

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

Item 4.

 

 

Controls and Procedures

 

29

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

 

Legal Proceedings

 

30

 

Item 1A.

 

 

Risk Factors

 

30

 

Item 2.

 

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

30

 

Item 6.

 

 

Exhibits

 

31

 

Signatures

 

33

 

 

 

2


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Paycom Software, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

December 31, 2017

 

 

 

September 30, 2018

 

 

*As Adjusted

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,048

 

 

$

46,077

 

Accounts receivable

 

 

2,213

 

 

 

1,576

 

Prepaid expenses

 

 

7,934

 

 

 

4,982

 

Inventory

 

 

574

 

 

 

979

 

Income tax receivable

 

 

6,456

 

 

 

7,047

 

Derivative asset

 

 

97

 

 

 

 

Deferred contract costs

 

 

32,465

 

 

 

26,403

 

Current assets before funds held for clients

 

 

134,787

 

 

 

87,064

 

Funds held for clients

 

 

902,747

 

 

 

1,089,201

 

Total current assets

 

 

1,037,534

 

 

 

1,176,265

 

Property and equipment, net

 

 

168,397

 

 

 

147,705

 

Deposits and other assets

 

 

1,567

 

 

 

1,456

 

Goodwill

 

 

51,889

 

 

 

51,889

 

Intangible assets, net

 

 

798

 

 

 

958

 

Long-term derivative asset

 

 

679

 

 

 

 

Long-term deferred contract costs

 

 

207,322

 

 

 

171,865

 

Total assets

 

$

1,468,186

 

 

$

1,550,138

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,173

 

 

$

6,490

 

Accrued commissions and bonuses

 

 

6,454

 

 

 

9,585

 

Accrued payroll and vacation

 

 

12,937

 

 

 

7,015

 

Deferred revenue

 

 

8,409

 

 

 

6,982

 

Current portion of long-term debt

 

 

1,775

 

 

 

888

 

Accrued expenses and other current liabilities

 

 

19,654

 

 

 

19,991

 

Current liabilities before client funds obligation

 

 

55,402

 

 

 

50,951

 

Client funds obligation

 

 

902,747

 

 

 

1,089,201

 

Total current liabilities

 

 

958,149

 

 

 

1,140,152

 

Deferred income tax liabilities, net

 

 

64,206

 

 

 

49,129

 

Long-term derivative liability

 

 

 

 

 

554

 

Long-term deferred revenue

 

 

52,405

 

 

 

44,642

 

Net long-term debt, less current portion

 

 

33,049

 

 

 

34,414

 

Total long-term liabilities

 

 

149,660

 

 

 

128,739

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value (100,000,000 shares authorized, 60,698,352 and

60,149,411 shares issued at September 30, 2018 and December 31, 2017, respectively;

57,730,356 and 57,788,573 shares outstanding at September 30, 2018 and December 31, 2017, respectively)

 

 

606

 

 

 

601

 

Additional paid-in capital

 

 

198,255

 

 

 

161,809

 

Retained earnings

 

 

364,176

 

 

 

258,525

 

Treasury stock, at cost (2,967,996 and 2,360,838 shares at September 30, 2018 and

   December 31, 2017, respectively)

 

 

(202,660

)

 

 

(139,688

)

Total stockholders' equity

 

 

360,377

 

 

 

281,247

 

Total liabilities and stockholders' equity

 

$

1,468,186

 

 

$

1,550,138

 

  * Prior year amounts have been recast to reflect the adoption of ASU 2014-09.  See Note 2 for description of adjustments.

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


Paycom Software, Inc.

Consolidated Statements of Income

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

2017

 

 

 

 

2018

 

 

*As Adjusted

 

 

 

2018

 

 

*As Adjusted

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

130,830

 

 

$

99,498

 

 

$

409,324

 

 

$

313,763

 

Implementation and other

 

 

2,458

 

 

 

1,789

 

 

 

6,680

 

 

 

5,259

 

Total revenues

 

 

133,288

 

 

 

101,287

 

 

 

416,004

 

 

 

319,022

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

18,158

 

 

 

15,324

 

 

 

56,403

 

 

 

46,019

 

Depreciation and amortization

 

 

3,967

 

 

 

2,502

 

 

 

10,258

 

 

 

6,829

 

Total cost of revenues

 

 

22,125

 

 

 

17,826

 

 

 

66,661

 

 

 

52,848

 

Administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

37,183

 

 

 

27,732

 

 

 

101,182

 

 

 

80,741

 

Research and development

 

 

11,526

 

 

 

8,112

 

 

 

33,507

 

 

 

23,004

 

General and administrative

 

 

22,048

 

 

 

23,207

 

 

 

73,700

 

 

 

62,051

 

Depreciation and amortization

 

 

4,161

 

 

 

2,403

 

 

 

10,652

 

 

 

7,069

 

Total administrative expenses

 

 

74,918

 

 

 

61,454

 

 

 

219,041

 

 

 

172,865

 

Total operating expenses

 

 

97,043

 

 

 

79,280

 

 

 

285,702

 

 

 

225,713

 

Operating income

 

 

36,245

 

 

 

22,007

 

 

 

130,302

 

 

 

93,309

 

Interest expense

 

 

(384

)

 

 

(220

)

 

 

(418

)

 

 

(758

)

Other income, net

 

 

583

 

 

 

118

 

 

 

2,128

 

 

 

362

 

Income before income taxes

 

 

36,444

 

 

 

21,905

 

 

 

132,012

 

 

 

92,913

 

Provision for income taxes

 

 

7,675

 

 

 

995

 

 

 

26,361

 

 

 

18,293

 

Net income

 

$

28,769

 

 

$

20,910

 

 

$

105,651

 

 

$

74,620

 

Earnings per share, basic

 

$

0.50

 

 

$

0.36

 

 

$

1.83

 

 

$

1.29

 

Earnings per share, diluted

 

$

0.49

 

 

$

0.35

 

 

$

1.80

 

 

$

1.26

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

57,726,790

 

 

 

58,003,222

 

 

 

57,785,466

 

 

 

57,751,204

 

Diluted

 

 

58,545,061

 

 

 

58,873,502

 

 

 

58,724,228

 

 

 

58,839,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

* Prior year amounts have been recast to reflect the adoption of ASU 2014-09.  See Note 2 for description of adjustments.

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

4


 

 

Paycom Software, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

2017

 

 

 

2018

 

 

*As Adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

105,651

 

 

$

74,620

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

20,910

 

 

 

13,898

 

Accretion of discount on available-for-sale securities

 

 

(860

)

 

 

(371

)

Loss on disposition of property and equipment

 

 

 

 

 

21

 

Amortization of debt issuance costs

 

 

24

 

 

 

92

 

Stock-based compensation expense

 

 

31,508

 

 

 

29,663

 

Cash paid for derivative settlement

 

 

(168

)

 

 

 

Gain on derivative

 

 

(1,259

)

 

 

 

Deferred income taxes, net

 

 

15,077

 

 

 

9,167

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(637

)

 

 

(105

)

Prepaid expenses

 

 

(2,952

)

 

 

(1,230

)

Inventory

 

 

(56

)

 

 

(75

)

Deposits and other assets

 

 

(111

)

 

 

(126

)

Deferred contract costs

 

 

(39,881

)

 

 

(32,024

)

Accounts payable

 

 

1,789

 

 

 

(1,463

)

Income taxes, net

 

 

591

 

 

 

(8,555

)

Accrued commissions and bonuses

 

 

(3,131

)

 

 

(1,221

)

Accrued payroll and vacation

 

 

5,922

 

 

 

4,327

 

Deferred revenue

 

 

9,190

 

 

 

8,656

 

Accrued expenses and other current liabilities

 

 

4,242

 

 

 

(3,225

)

Net cash provided by operating activities

 

 

145,849

 

 

 

92,049

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of short-term investments from funds held for clients

 

 

(137,561

)

 

 

(49,325

)

Proceeds from maturities of short-term investments from funds held for clients

 

 

95,500

 

 

 

111,705

 

Net change in funds held for clients' cash and cash equivalents

 

 

229,375

 

 

 

3,501

 

Purchases of property and equipment

 

 

(44,264

)

 

 

(42,926

)

Net cash provided by investing activities

 

 

143,050

 

 

 

22,955

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

5,440

 

Repurchases of common stock

 

 

(42,857

)

 

 

(19,391

)

Withholding taxes paid related to net share settlement

 

 

(20,115

)

 

 

(28,105

)

Principal payments on long-term debt

 

 

(444

)

 

 

(843

)

Net change in client funds obligation

 

 

(186,454

)

 

 

(65,510

)

Payment of debt issuance costs

 

 

(58

)

 

 

(143

)

Net cash used in financing activities

 

 

(249,928

)

 

 

(108,552

)

Increase in cash and cash equivalents

 

 

38,971

 

 

 

6,452

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

46,077

 

 

 

60,158

 

End of period

 

$

85,048

 

 

$

66,610

 

 

 

 

 

 

 

 

 

 

 * Prior year amounts have been recast to reflect the adoption of ASU 2014-09.  See Note 2 for description of adjustments.

 

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.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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.

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 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 September 30, 2018 and December 31, 2017, our consolidated statements of income for the three and nine months ended September 30, 2018 and 2017 and our consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.  These reclassifications had no impact on reported net income and did not result in any material change to operating cash flows.

 

2.

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 for the year ended December 31, 2017, included in the Form 10-K. 

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.


6


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

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:

 

 

Three Months Ended September 30, 2017

 

 

Nine Months Ended September 30, 2017

 

 

 

As previously reported

 

 

Adjustments

 

 

As Adjusted

 

 

As previously reported

 

 

Adjustments

 

 

As Adjusted

 

Administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Sales and marketing

 

$

35,542

 

 

$

(7,810

)

 

$

27,732

 

 

$

106,460

 

 

$

(25,719

)

 

$

80,741

 

     General and administrative

 

$

25,967

 

 

$

(2,760

)

 

$

23,207

 

 

$

70,450

 

 

$

(8,399

)

 

$

62,051

 

Operating income

 

$

11,437

 

 

$

10,570

 

 

$

22,007

 

 

$

59,191

 

 

$

34,118

 

 

$

93,309

 

Provision for income taxes

 

$

(2,732

)

 

$

3,727

 

 

$

995

 

 

$

4,893

 

 

$

13,400

 

 

$

18,293

 

Net income

 

$

14,067

 

 

$

6,843

 

 

$

20,910

 

 

$

53,902

 

 

$

20,718

 

 

$

74,620

 

Earnings per share, basic

 

$

0.24

 

 

$

0.12

 

 

$

0.36

 

 

$

0.93

 

 

$

0.36

 

 

$

1.29

 

Earnings per share, diluted

 

$

0.24

 

 

$

0.11

 

 

$

0.35

 

 

$

0.91

 

 

$

0.35

 

 

$

1.26

 

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

 

 

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 flows line items after giving effect to the adoption of ASU 2014-09:

 

 

Nine Months Ended September 30, 2017

 

 

 

As previously reported

 

 

Adjustments

 

 

As Adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

53,902

 

 

$

20,718

 

 

$

74,620

 

Stock-based compensation expense

 

$

31,757

 

 

$

(2,094

)

 

$

29,663

 

Deferred income taxes, net

 

$

(4,233

)

 

$

13,400

 

 

$

9,167

 

Deferred contract costs

 

$

 

 

$

(32,024

)

 

$

(32,024

)

Net cash provided by operating activities

 

$

92,049

 

 

$

 

 

$

92,049

 

 

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

7


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

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 September 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.  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.  

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 nine months ended September 30, 2018, we repurchased an aggregate of 607,158 shares of our common stock at an average cost of $103.72 per share, including 185,116 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.  As of September 30, 2018, there was $74.4 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, which we plan to adopt using a modified retrospective method and the transition relief guidance provided by the FASB in ASU 2018-11.  Under this adoption method, we will not restate comparative prior periods and we will carry forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms.  Based on our current portfolio of leases, we estimate approximately $20.0 million of lease assets and liabilities will be recognized on our balance

8


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

sheet upon adoption, primarily relating to operating leases for real estate. This estimate is subject to change prior to the effective date of adoption based on factors including, but not limited to, entering into new leases or modifying existing leases and changes in applicable discount rates.  In addition, we are in the process of completing our evaluation of available practical expedients and the impact of this new guidance on our systems, processes and controls that we use to account for leases.  

 

3.

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 comprised of revenue from contracts with clients. Sales and other applicable taxes are excluded from revenues. The following table, consistent with our consolidated statements of income, disaggregates revenue by recurring and implementation and other revenues, which we believe represent the major categories of revenues:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

130,830

 

 

$

99,498

 

 

$

409,324

 

 

$

313,763

 

Implementation and other

 

 

2,458

 

 

 

1,789

 

 

 

6,680

 

 

 

5,259

 

Total revenues

 

$

133,288

 

 

$

101,287

 

 

$

416,004

 

 

$

319,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring Revenues

Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications.

The performance obligations related to recurring revenues are 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 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 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.  

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 employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations.

9


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

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 30-day 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 approximates the dollar amount of the nonrefundable upfront fee.  The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period (i.e. the ten-year estimated client life).

Revenue from the sale of time clocks is recognized when control is transferred to the client upon delivery of the product. We estimated 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. We have elected to apply the practical expedient not to disclose the value of unsatisfied performance obligations for contracts that are less than one year in length. However, this expedient cannot be applied to initial 30-day contracts with a client that also contain an implied performance obligation in the form of a material right as the material right performance obligation is being recognized over the expected client life which exceeds one year.  For these contracts, we determined that the core, non-material right, performance obligations are generally satisfied in full by the end of each reporting period as most of our contracts with clients start at the beginning of a calendar month.  For the material right performance obligation, as discussed above, we defer the amounts allocated and recognize them ratably over the estimated client life of ten years.  Finally, we have also elected to apply the transition expedient that allows for all reporting periods presented before the date of initial application to exclude disclosure of the amounts of transaction price allocated to the remaining unsatisfied performance obligations.  Accordingly, the table below is only for the three and nine months ended September 30, 2018.

Changes in deferred revenue related to material right performance obligations were as follows:  

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2018

 

Balance, beginning of period

 

$

57,189

 

 

$

51,624

 

Deferral of revenue

 

 

5,643

 

 

 

14,902

 

Recognition of unearned revenue

 

 

(2,018

)

 

 

(5,712

)

Balance, end of period

 

$

60,814

 

 

$

60,814

 

 

 

 

 

 

 

 

 

 

 

We expect to recognize $2.0 million of deferred revenue related to material right performance obligations in the remainder of 2018, $8.2 million of such deferred revenue in 2019, and $50.6 million of such deferred revenue 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 have determined that certain selling and commission costs meet the capitalization criteria under ASC 340-40, which prior to the adoption of ASU 2014-09 we had previously expensed as incurred. 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 over the expected period of benefit, which we have determined to be the estimated client relationship of ten 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

10


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

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 are included in the “sales and marketing” and “general and administrative” line items in the accompanying consolidated statements of income.

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

 

 

 

As of and for the Three Months Ended September 30, 2018

 

 

 

Beginning

 

 

Capitalization

 

 

 

 

 

 

Ending

 

 

 

Balance

 

 

of Costs

 

 

Amortization

 

 

Balance

 

Costs to obtain a contract

 

$

140,119

 

 

$

10,595

 

 

$

(4,855

)

 

$

145,859

 

Costs to fulfill a contract

 

$

87,199

 

 

$

9,730

 

 

$

(3,001

)

 

$

93,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Nine Months Ended September 30, 2018

 

 

 

Beginning

 

 

Capitalization

 

 

 

 

 

 

Ending

 

 

 

Balance

 

 

of Costs

 

 

Amortization

 

 

Balance

 

Costs to obtain a contract

 

$

126,207

 

 

$

33,565

 

 

$

(13,913

)

 

$

145,859

 

Costs to fulfill a contract

 

$

72,061

 

 

$

30,156

 

 

$

(8,289

)

 

$

93,928

 

 

 

4.

PROPERTY AND EQUIPMENT, NET

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Property and equipment

 

 

 

 

 

 

 

 

Buildings

 

$

101,334

 

 

$

60,441

 

Software and capitalized software costs

 

 

60,619

 

 

 

41,996

 

Computer equipment

 

 

36,781

 

 

 

27,928

 

Rental clocks

 

 

15,442

 

 

 

13,131

 

Furniture, fixtures and equipment

 

 

15,955

 

 

 

7,528

 

Leasehold improvements

 

 

1,171

 

 

 

767

 

Vehicles

 

 

74

 

 

 

 

 

 

 

231,376

 

 

 

151,791

 

Less: accumulated depreciation and amortization

 

 

(74,275

)

 

 

(53,525

)

 

 

 

157,101

 

 

 

98,266

 

Construction in progress

 

 

2,273

 

 

 

40,446

 

Land

 

 

9,023

 

 

 

8,993

 

Property and equipment, net

 

$

168,397

 

 

$

147,705

 

 

 

 

 

 

 

 

 

 

 

We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40.  For the three and nine months ended September 30, 2018, we capitalized $5.2 million and $16.4 million, respectively, of computer software development costs related to software developed for internal use.  For the three and nine months ended September 30, 2017, we capitalized $4.7 million and $11.0 million, respectively, of computer software development costs related to software developed for internal use. 

Rental clocks included in property and equipment, net 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.

11


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

Included in the construction in progress balance at September 30, 2018 and December 31, 2017 is less than $0.1 million and $2.0 million in retainage, respectively.

We capitalize interest incurred for indebtedness related to construction of our fourth headquarters building.  For the three and nine months ended September 30, 2018, we incurred interest costs of $0.4 million and $1.2 million, respectively, of which we capitalized less than $0.1 million and $0.8 million, respectively.  For the three and nine months ended September 30, 2017, we incurred interest costs of $0.4 million and $1.2 million, respectively, of which we capitalized $0.3 million and $0.5 million, respectively.

Depreciation and amortization expense for property and equipment, was $8.1 million and $20.8 million, respectively, for the three and nine months ended September 30, 2018.  Depreciation and amortization expense for property and equipment, net was $4.8 million and $13.0 million, respectively, for the three and nine months ended September 30, 2017.

5.

GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill represents the excess of cost over our net tangible and identified intangible assets.  As of both September 30, 2018 and December 31, 2017, we had goodwill of $51.9 million.  We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2018.  As of September 30, 2018 and December 31, 2017, there were no indicators of impairment.

All of our intangible assets other than goodwill are considered to have finite lives and, as such, are subject to amortization. The following tables provide the components of intangible assets:

 

 

September 30, 2018

 

 

 

Weighted Average Remaining

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Useful Life

 

 

Gross

 

 

Amortization

 

 

Net

 

 

 

(Years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade name

 

 

3.8

 

 

$

3,194

 

 

$

(2,396

)

 

$

798

 

Total

 

 

 

 

 

$

3,194

 

 

$

(2,396

)

 

$

798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Weighted Average Remaining

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Useful Life

 

Gross

 

 

Amortization

 

 

Net

 

 

 

(Years)

 

 

 

 

 

 

 

 

 

 

 

 

Intangibles: