Paycom Software, Inc. Q2 FY2021 earnings

Paycom Software reported second quarter revenue of $242.1 million, up 33.3% from $181.6 million in the prior-year quarter. GAAP net income rose 82.9% to $52.3 million, or $0.90 per diluted share, from $28.6 million, or $0.49 per diluted share. Operating income was $47.1 million, up 77.2% from $26.6 million, and the operating margin was 19.4%, up from 14.6%. Adjusted EBITDA, a non-GAAP measure, reached $87.0 million and represented 35.9% of total revenues, compared with $61.2 million a year earlier. Non-GAAP net income was $56.5 million, or $0.97 per diluted share, versus $35.9 million, or $0.62 per diluted share.

Recurring revenues of $237.6 million rose 33.5% from the comparable prior-year period and accounted for 98.1% of total revenues. Management attributed the increase to new client additions, productivity gains in mature sales offices, and additional applications sold into the existing client base. Client headcount is the variable that matters most here. Paycom charges clients on a per-employee basis for some services, so staffing changes at clients move recurring revenue directly. Headcount reductions tied to the pandemic hurt the business, but the company said additions from new clients and modestly improved headcount levels at existing clients more than offset that drag during the second quarter.

The product story centers on employee usage. Paycom argues that a single database for all human capital management functions gives clients an edge over the disparate systems some competitors offer, and founder and CEO Chad Richison pointed to Beti, a tool that lets employees run their own payroll. Demand stayed high through the quarter even as the pandemic dragged on.

Cash generation improved sharply. Operating cash flow was $57.0 million for the quarter, up 123.6% from $25.5 million a year earlier, and $146.4 million for the six months ended June 30, 2021, up 36.2%. Capital expenditures were $37.4 million in the quarter and $62.7 million for the first half, up 39.9% and 19.6% respectively. That spending supports construction of the new Texas operations facility in Grapevine and continued technology investment. Deferred revenue was $92.5 million at June 30, 2021, up 14.3% from a year earlier. Cash and cash equivalents totaled $202.4 million as of June 30, 2021, compared with $151.7 million as of December 31, 2020. Total debt, net was $30.0 million as of June 30, 2021, versus $30.9 million as of December 31, 2020.

Guidance points to continued growth, and it covers both the next quarter and the full fiscal year. For the quarter ending September 30, 2021, Paycom forecasts adjusted EBITDA of $87 million to $89 million. For the full year ending December 31, 2021, adjusted EBITDA is guided to $410 million to $412 million. Revenue guidance was issued for both periods as well. The company does not reconcile those forward-looking adjusted EBITDA ranges to net income, citing uncertainty around depreciation and amortization, interest expense, taxes, stock-based compensation expense, and the change in fair value of the interest rate swap.

Risks cluster around the pandemic and the labor market. As of June 30, 2021, 90% of employees were working remotely and all sales meetings were virtual. Paycom argues virtual selling lets its sales force meet more prospects in a day than in-person meetings would, but it also expects client headcount fluctuations to keep affecting recurring revenue until employment levels recover. Significantly lower average interest rates trimmed interest earned on funds held for clients and weighed on recurring revenue growth for both the quarter and the first six months. Management also flagged security vulnerabilities, cyberattacks and network disruptions, data privacy compliance, competition, dependence on key executives, and seasonality, noting that first quarter revenue and margins are generally higher than in later quarters. The effective income tax rate was 17.9% for the six months ended June 30, 2021, down from 20.4% a year earlier, mostly on higher excess tax benefits from stock-based compensation. In May 2021 the board authorized up to $300.0 million of stock repurchases, leaving $299.5 million available at June 30, 2021. During the first six months of 2021 the company repurchased 94,997 shares at an average cost of $340.59 per share.