Paycom Software, Inc. Q1 FY2021 earnings

Paycom Software reported first quarter fiscal 2021 revenue of $272.2 million, up 12.3% from the prior-year quarter. The company attributed the increase to new clients, productivity gains in mature sales offices, sales of additional applications to existing clients, and its tax forms filing business. Those gains were partly offset by client headcount reductions tied to the COVID-19 pandemic and by significantly lower average interest rates on funds held for clients. Net income was $64.6 million, up 2.5% from the prior-year quarter. Diluted earnings per share were $1.11, up $0.03. Non-GAAP net income was $85.9 million, or $1.47 per diluted share, compared with $77.9 million, or $1.33 per diluted share, in the same period last year. Adjusted EBITDA was $133.0 million, which represented 48.9% of total revenues.

Operating income was $94.55 million, up 5.9% from the prior-year quarter. Operating margin was 34.7%, down 2.1 percentage points. Deferred revenue was $88.99 million, up 13.4%. Operating cash flow was $89.46 million, up 9.1%. Capital expenditures were $25.33 million, down 1.5%. The company kept spending on sales and marketing and on research and development, and general and administrative costs rose, largely on higher non-cash stock-based compensation.

Paycom leaned into its remote setup during the quarter. As of March 31, 2021, 95% of employees were working remotely. Management argued that virtual sales meetings let each salesperson meet more prospects in a day than in-person meetings did. The pitch to clients rests on a single database solution and on employee usage of the platform. Paycom believes it holds less than 5% market share and targets clients with 50 to 5,000 employees. Work continued on the new Texas operations facility in Grapevine.

Guidance for the quarter ending June 30, 2021 calls for adjusted EBITDA of $80 million to $82 million. For the full year ending December 31, 2021, Paycom guided adjusted EBITDA to $400 million to $402 million. The company also gave revenue guidance for both periods, but said it cannot reconcile forward-looking adjusted EBITDA to net income without unreasonable effort because depreciation, amortization, interest expense, taxes, stock-based compensation, and the change in fair value of its interest rate swap are uncertain. It also refers to a Rule of 60 metric on its conference call.

Risks remain centered on the pandemic and the labor market. Paycom said client headcount reductions negatively affected recurring revenue in the first quarter of 2021, and it expects that pressure to continue until employment levels among its client base return to pre-pandemic levels. Lower average interest rates reduced interest earned on funds held for clients and hurt recurring revenue growth. Seasonality is another factor: first quarter revenues and margins are generally higher because annual payroll forms are processed then. The company also flagged competition, cybersecurity and data privacy breaches, regulatory changes, reliance on key executives, and the difficulty of hiring and retaining qualified personnel. As of March 31, 2021, $134.9 million remained available under its stock repurchase plan. During the quarter, Paycom repurchased 919 shares at an average cost of $410.07 per share, all withheld to cover taxes on vesting restricted stock, which resulted in $0.4 million of cash used.