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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One) 

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

For the quarterly period ended March 31, 2022

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)

 

(Zip Code)

(405) 722-6900

(Registrant’s telephone number, including area code)

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

PAYC

 

New York Stock Exchange

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

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

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

 

Large accelerated filer 

 

Accelerated filer

 

 

 

 

Non-accelerated filer   

 

Smaller reporting company

Emerging growth company    

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

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

As of April 26, 2022, there were 60,253,999 shares of common stock, par value of $0.01 per share, outstanding, including 2,212,139 shares of restricted stock.

 

 


 

Paycom Software, Inc.

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

 

 

Financial Statements

 

3

 

 

 

Unaudited Consolidated Balance Sheets

 

3

 

 

 

Unaudited Consolidated Statements of Comprehensive Income

 

4

 

 

Unaudited Consolidated Statements of Stockholders’ Equity

 

5

 

 

 

Unaudited Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to the Unaudited Consolidated Financial Statements

 

7

 

Item 2.

 

 

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

 

20

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

Item 4.

 

 

Controls and Procedures

 

31

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

 

Legal Proceedings

 

32

 

Item 1A.

 

 

Risk Factors

 

32

 

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

Item 5.

 

 

Other Information

 

32

 

Item 6.

 

 

Exhibits

 

34

 

Signatures

 

35

 

 

 

2


 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Paycom Software, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

360,594

 

 

$

277,978

 

Accounts receivable

 

 

17,945

 

 

 

9,490

 

Prepaid expenses

 

 

28,588

 

 

 

23,729

 

Inventory

 

 

732

 

 

 

1,131

 

Income tax receivable

 

 

 

 

 

16,413

 

Deferred contract costs

 

 

82,074

 

 

 

76,724

 

Current assets before funds held for clients

 

 

489,933

 

 

 

405,465

 

Funds held for clients

 

 

3,944,363

 

 

 

1,846,573

 

Total current assets

 

 

4,434,296

 

 

 

2,252,038

 

Property and equipment, net

 

 

362,505

 

 

 

348,953

 

Intangible assets, net

 

 

56,999

 

 

 

58,028

 

Goodwill

 

 

51,889

 

 

 

51,889

 

Long-term deferred contract costs

 

 

493,530

 

 

 

461,852

 

Other assets

 

 

45,355

 

 

 

42,385

 

Total assets

 

$

5,444,574

 

 

$

3,215,145

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,192

 

 

$

5,772

 

Income tax payable

 

 

23,180

 

 

 

 

Accrued commissions and bonuses

 

 

12,048

 

 

 

22,357

 

Accrued payroll and vacation

 

 

42,838

 

 

 

34,259

 

Deferred revenue

 

 

17,135

 

 

 

16,277

 

Current portion of long-term debt

 

 

1,775

 

 

 

1,775

 

Accrued expenses and other current liabilities

 

 

57,260

 

 

 

63,397

 

Current liabilities before client funds obligation

 

 

166,428

 

 

 

143,837

 

Client funds obligation

 

 

3,946,103

 

 

 

1,846,573

 

Total current liabilities

 

 

4,112,531

 

 

 

1,990,410

 

Deferred income tax liabilities, net

 

 

134,769

 

 

 

145,504

 

Long-term deferred revenue

 

 

87,681

 

 

 

85,149

 

Net long-term debt, less current portion

 

 

26,945

 

 

 

27,380

 

Other long-term liabilities

 

 

73,628

 

 

 

72,988

 

Total long-term liabilities

 

 

323,023

 

 

 

331,021

 

Total liabilities

 

 

4,435,554

 

 

 

2,321,431

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value (100,000 shares authorized, 62,302 and 62,298 shares issued at March 31, 2022 and December 31, 2021, respectively; 58,015 and 58,012 shares outstanding at March 31, 2022 and December 31, 2021, respectively)

 

 

623

 

 

 

623

 

Additional paid-in capital

 

 

490,307

 

 

 

465,594

 

Retained earnings

 

 

1,007,509

 

 

 

915,579

 

Accumulated other comprehensive earnings (loss)

 

 

(1,119

)

 

 

 

Treasury stock, at cost (4,287 and 4,286 shares at March 31, 2022 and December 31, 2021, respectively)

 

 

(488,300

)

 

 

(488,082

)

Total stockholders’ equity

 

 

1,009,020

 

 

 

893,714

 

Total liabilities and stockholders’ equity

 

$

5,444,574

 

 

$

3,215,145

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


 

 

Paycom Software, Inc.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2022

 

 

 

2021

 

Revenues

 

 

 

 

 

 

 

 

Recurring

 

$

348,164

 

 

$

267,774

 

Implementation and other

 

 

5,355

 

 

 

4,424

 

Total revenues

 

 

353,519

 

 

 

272,198

 

Cost of revenues

 

 

 

 

 

 

 

 

Operating expenses

 

 

38,492

 

 

 

29,073

 

Depreciation and amortization

 

 

9,992

 

 

 

7,200

 

Total cost of revenues

 

 

48,484

 

 

 

36,273

 

Administrative expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

74,996

 

 

 

62,761

 

Research and development

 

 

31,605

 

 

 

24,711

 

General and administrative

 

 

60,504

 

 

 

46,191

 

Depreciation and amortization

 

 

11,663

 

 

 

7,716

 

Total administrative expenses

 

 

178,768

 

 

 

141,379

 

Total operating expenses

 

 

227,252

 

 

 

177,652

 

Operating income

 

 

126,267

 

 

 

94,546

 

Interest expense

 

 

(215

)

 

 

 

Other income (expense), net

 

 

1,412

 

 

 

629

 

Income before income taxes

 

 

127,464

 

 

 

95,175

 

Provision for income taxes

 

 

35,534

 

 

 

30,559

 

Net income

 

$

91,930

 

 

$

64,616

 

Earnings per share, basic

 

$

1.58

 

 

$

1.12

 

Earnings per share, diluted

 

$

1.58

 

 

$

1.11

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

58,014

 

 

 

57,740

 

Diluted

 

 

58,219

 

 

 

58,394

 

Comprehensive earnings (loss):

 

 

 

 

 

 

 

 

Net income

 

$

91,930

 

 

$

64,616

 

Unrealized net gains (losses) on available-for-sale securities

 

 

(1,522

)

 

 

 

Tax effect

 

 

403

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

(1,119

)

 

 

 

Comprehensive earnings (loss)

 

$

90,811

 

 

$

64,616

 

 

 

See accompanying notes to the unaudited consolidated financial statements.


4


 

Paycom Software, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(in thousands)

 

 

 

Common Stock

 

 

Additional

 

 

Retained

 

 

Accumulated Other

 

 

Treasury Stock

 

 

Total

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Earnings

 

 

Comprehensive Loss

 

 

Shares

 

 

Amount

 

 

Stockholders’ Equity

 

Balances at December 31, 2020

 

61,861

 

 

$

618

 

 

$

357,908

 

 

$

719,619

 

 

$

 

 

 

4,122

 

 

$

(422,502

)

 

$

655,643

 

Vesting of restricted stock

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

25,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,594

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

(377

)

 

 

(377

)

Net income

 

 

 

 

 

 

 

 

 

 

64,616

 

 

 

 

 

 

 

 

 

 

 

 

64,616

 

Balances at March 31, 2021

 

61,864

 

 

$

618

 

 

$

383,502

 

 

$

784,235

 

 

$

 

 

 

4,123

 

 

$

(422,879

)

 

$

745,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Retained

 

 

Accumulated Other

 

 

Treasury Stock

 

 

Total

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Earnings

 

 

Comprehensive Loss

 

 

Shares

 

 

Amount

 

 

Stockholders’ Equity

 

Balances at December 31, 2021

 

62,298

 

 

$

623

 

 

$

465,594

 

 

$

915,579

 

 

$

 

 

 

4,286

 

 

$

(488,082

)

 

$

893,714

 

Vesting of restricted stock

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

24,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,713

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

(218

)

 

 

(218

)

Net income

 

 

 

 

 

 

 

 

 

 

91,930

 

 

 

 

 

 

 

 

 

 

 

 

91,930

 

Other comprehensive earnings (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,119

)

 

 

 

 

 

 

 

 

(1,119

)

Balances at March 31, 2022

 

62,302

 

 

$

623

 

 

$

490,307

 

 

$

1,007,509

 

 

$

(1,119

)

 

 

4,287

 

 

$

(488,300

)

 

$

1,009,020

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 


5


 

 

Paycom Software, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

91,930

 

 

$

64,616

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,655

 

 

 

14,916

 

Accretion of discount on available-for-sale securities

 

 

(303

)

 

 

(77

)

Non-cash marketing expense

 

 

437

 

 

 

 

Loss on disposition of property and equipment

 

 

 

 

 

132

 

Amortization of debt issuance costs

 

 

9

 

 

 

9

 

Stock-based compensation expense

 

 

22,055

 

 

 

23,581

 

Cash paid for derivative settlement

 

 

(174

)

 

 

(232

)

(Gain)/loss on derivative

 

 

(1,089

)

 

 

(424

)

Deferred income taxes, net

 

 

(10,332

)

 

 

2,738

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,455

)

 

 

(10,662

)

Prepaid expenses

 

 

(4,859

)

 

 

(6,255

)

Inventory

 

 

124

 

 

 

(125

)

Other assets

 

 

(2,970

)

 

 

559

 

Deferred contract costs

 

 

(36,261

)

 

 

(26,575

)

Accounts payable

 

 

5,406

 

 

 

803

 

Income taxes, net

 

 

39,593

 

 

 

23,424

 

Accrued commissions and bonuses

 

 

(10,309

)

 

 

(6,922

)

Accrued payroll and vacation

 

 

8,579

 

 

 

8,105

 

Deferred revenue

 

 

3,390

 

 

 

2,167

 

Accrued expenses and other current liabilities

 

 

(1,195

)

 

 

(321

)

Net cash provided by operating activities

 

 

117,231

 

 

 

89,457

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of investments from funds held for clients

 

 

(169,152

)

 

 

(47,215

)

Proceeds from investments from funds held for clients

 

 

136,000

 

 

 

80,000

 

Purchases of property and equipment

 

 

(34,474

)

 

 

(25,330

)

Net cash provided by (used in) investing activities

 

 

(67,626

)

 

 

7,455

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Withholding taxes paid related to net share settlements

 

 

(218

)

 

 

(377

)

Payments on long-term debt

 

 

(444

)

 

 

(444

)

Net change in client funds obligation

 

 

2,099,530

 

 

 

686,190

 

Net cash provided by (used in) financing activities

 

 

2,098,868

 

 

 

685,369

 

Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

2,148,473

 

 

 

782,281

 

Cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

 

 

 

 

 

 

Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period

 

 

1,812,691

 

 

 

1,585,275

 

Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

 

$

3,961,164

 

 

$

2,367,556

 

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

360,594

 

 

$

215,093

 

Restricted cash included in funds held for clients

 

 

3,600,570

 

 

 

2,152,463

 

Total cash, cash equivalents, restricted cash and restricted cash equivalents, end of period

 

$

3,961,164

 

 

$

2,367,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment, accrued but not paid

 

$

5,394

 

 

$

6,217

 

Stock-based compensation for capitalized software

 

$

1,891

 

 

$

1,456

 

Right of use assets obtained in exchange for operating lease liabilities

 

$

4,146

 

 

$

541

 

 

 

See accompanying notes to the unaudited consolidated financial statements. 

 

6


Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

 

 

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

 

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 included in the Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 17, 2022.  

 

Basis of Presentation

The accompanying unaudited interim consolidated financial statements and notes 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 unaudited consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes presented in the Form 10-K. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the full year.

 

Recently Adopted Accounting Pronouncements

In January 2021, we adopted Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes” (“ASU 2019-12”) utilizing the prospective transition method. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The adoption of this guidance did not have a material impact on our unaudited interim consolidated financial statements.

Use of Estimates

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

Seasonality

Our revenues are seasonal in nature and generally we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year. Recurring revenues include revenues relating to the annual processing of payroll tax filing forms and ACA form filing requirements, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. As payroll tax forms are typically processed in the first quarter of the year, first quarter recurring revenues and margins are positively impacted. In addition, unscheduled payroll runs at the end of the year often result in increased recurring revenues in the fourth quarter. 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.

 


7


Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

 

 

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 consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date. As of March 31, 2022 and December 31, 2021, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. Additionally, as of March 31, 2022, the funds held for clients were invested in U.S. treasury securities with an original maturity duration of greater than one year. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets. U.S. treasury securities with an original maturity duration of greater than one year are also classified as available-for-sale securities and included within the funds held for clients line item in the consolidated balance sheets. These available-for-sale securities are recorded in the consolidated balance sheets at fair value, with the difference between the amortized cost and fair value of these available-for-sale securities recorded as unrealized net gains (losses) on available-for-sale securities and are included within comprehensive earnings (loss) in the consolidated statements of comprehensive income. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Additionally, the funds held for clients is classified as restricted cash and restricted cash equivalents and presented within the reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents on the consolidated statements of cash flows.  

Stock Repurchase Plan

In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in May 2021, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock. As of March 31, 2022, there was $266.1 million available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations. The current stock repurchase plan will expire on May 13, 2023.

During the three months ended March 31, 2022, we repurchased an aggregate of 594 shares of our common stock at an average cost of $366.49 per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.  

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. As of March 31, 2022, our interest-bearing notes bore interest, at our option, at either (a) a prime rate plus 1.0% or (b) fluctuating interest rates based on a one-month USD LIBOR rate. When the one-month USD LIBOR rate ceased to exist, we would have had to renegotiate our loan documents. ASU 2020-04 is currently effective and we plan to adopt and apply ASU 2020-04 prospectively to contract modifications made on or before December 31, 2022. As of March 31, 2022, there were no contract modifications that would have been impacted by ASU 2020-04.

In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848) Scope” (“ASU 2021-01”), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that are affected by the discounting transition. ASU 2021-01 amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 is currently effective and upon adoption may be applied to contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim

8


Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

 

period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. As of March 31, 2022, there were no contract modifications that would have been impacted by ASU 2021-01.

 

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 taxes and other applicable taxes are excluded from revenues.  

 

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, Enhanced Background Checks™, Onboarding, 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®, Geofencing/Geotracking and Microfence™ tools and applications. Payroll includes Beti®, Payroll and Tax Management, Paycom Pay®, Expense Management, Mileage Tracker/FAVR, Garnishment Administration and GL Concierge applications. Talent management includes our Employee Self-Service®, Compensation Budgeting, Performance Management, Position Management, My Analytics and Paycom Learning and Content Subscriptions applications. HR management includes our Manager on-the-Go®, Direct Data Exchange®, Ask Here, Documents and Checklists, Government and Compliance, Benefits Administration/Benefits to Carrier, Benefit Enrollment Service, COBRA Administration, Personnel Action Forms and Performance Discussion Forms, Surveys, Enhanced ACA and Clue™ 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, which we periodically assess for price adjustments.

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.

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 the contract 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., ten-year estimated client life).

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

 

9


Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

 

 

Contract Balances

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

Changes in deferred revenue related to material right performance obligations as of March 31, 2022 and 2021 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Balance, beginning of period

 

$

101,426

 

 

$

86,826

 

Deferral of revenue

 

 

9,188

 

 

 

6,962

 

Recognition of unearned revenue

 

 

(5,798

)

 

 

(4,795

)

Balance, end of period

 

$

104,816

 

 

$

88,993

 

 

We expect to recognize $12.9 million of deferred revenue related to material right performance obligations in the remainder of 2022, $16.3 million of such deferred revenue in 2023, and $75.6 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 also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations.  

The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach, and are capitalized and amortized ratably over the expected period of benefit, which we have determined to be the estimated 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 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 comprehensive income.

 

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

 

 

 

As of and for the Three Months Ended March 31, 2022

 

 

 

Beginning

 

 

Capitalization

 

 

 

 

 

 

Ending

 

 

 

Balance

 

 

of Costs

 

 

Amortization

 

 

Balance

 

Costs to obtain a contract

 

$

272,919

 

 

$

28,286

 

 

$

(10,682

)

 

$

290,523

 

Costs to fulfill a contract

 

$

265,657

 

 

$

28,630

 

 

$

(9,206

)

 

$