Paycom Software, Inc. - Quarter Report: 2023 June (Form 10-Q)

10-Q

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 June 30, 2023


☐	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 July 25, 2023, there were 60,467,053 shares of common stock, par value of $0.01 per share, outstanding, including 2,517,963 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	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
Signatures		38

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Paycom Software, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except per share amounts)


	June 30, 2023			December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	536,545		$	400,730
Accounts receivable		16,193			22,843
Prepaid expenses		43,093			34,056
Inventory		874			1,607
Income tax receivable		1,938			5,583
Deferred contract costs		107,059			96,378
Current assets before funds held for clients		705,702			561,197
Funds held for clients		2,002,492			2,202,975
Total current assets		2,708,194			2,764,172
Property and equipment, net		444,992			402,448
Intangible assets, net		52,064			54,017
Goodwill		51,889			51,889
Long-term deferred contract costs		623,751			567,974
Other assets		70,451			62,013
Total assets	$	3,951,341		$	3,902,513
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8,485		$	16,054
Accrued commissions and bonuses		21,879			28,439
Accrued payroll and vacation		49,977			45,023
Deferred revenue		21,343			19,825
Accrued expenses and other current liabilities		78,889			59,990
Current liabilities before client funds obligation		180,573			169,331
Client funds obligation		2,006,154			2,207,706
Total current liabilities		2,186,727			2,377,037
Deferred income tax liabilities, net		142,956			141,033
Long-term deferred revenue		102,890			97,591
Long-term debt		29,000			29,000
Other long-term liabilities		83,083			75,245
Total long-term liabilities		357,929			342,869
Total liabilities		2,544,656			2,719,906
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value (100,000 shares authorized, 62,640 and 62,518 shares issued at June 30, 2023 and December 31, 2022, respectively; 57,949 and 57,867 shares outstanding at June 30, 2023 and December 31, 2022, respectively)		626			625
Additional paid-in capital		649,965			576,622
Retained earnings		1,358,059			1,196,968
Accumulated other comprehensive earnings (loss)		(2,993	)		(3,703	)
Treasury stock, at cost (4,691 and 4,651 shares at June 30, 2023 and December 31, 2022, respectively)		(598,972	)		(587,905	)
Total stockholders’ equity		1,406,685			1,182,607
Total liabilities and stockholders’ equity	$	3,951,341		$	3,902,513

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenues
Recurring	$	394,522		$	311,534		$	838,943		$	659,698
Implementation and other		6,617			5,390			13,833			10,745
Total revenues		401,139			316,924			852,776			670,443
Cost of revenues
Operating expenses		54,617			39,604			107,702			78,096
Depreciation and amortization		12,811			10,478			24,958			20,470
Total cost of revenues		67,428			50,082			132,660			98,566
Administrative expenses
Sales and marketing		106,435			87,724			210,009			162,720
Research and development		49,118			36,803			91,787			68,408
General and administrative		75,965			57,912			141,570			118,416
Depreciation and amortization		14,927			12,090			29,052			23,753
Total administrative expenses		246,445			194,529			472,418			373,297
Total operating expenses		313,873			244,611			605,078			471,863
Operating income		87,266			72,313			247,698			198,580
Interest expense		(602	)		(354	)		(1,439	)		(569	)
Other income (expense), net		6,183			878			12,187			2,290
Income before income taxes		92,847			72,837			258,446			200,301
Provision for income taxes		28,331			15,482			74,634			51,016
Net income	$	64,516		$	57,355		$	183,812		$	149,285
Earnings per share, basic	$	1.11		$	0.99		$	3.17		$	2.57
Earnings per share, diluted	$	1.11		$	0.99		$	3.17		$	2.57
Weighted average shares outstanding:
Basic		57,920			57,969			57,895			57,992
Diluted		58,033			58,067			58,050			58,186
Comprehensive earnings (loss):
Net income	$	64,516		$	57,355		$	183,812		$	149,285
Unrealized net gains (losses) on available-for-sale securities		(235	)		(654	)		815			(2,176	)
Tax effect		95			173			(105	)		576
Other comprehensive income (loss), net of tax		(140	)		(481	)		710			(1,600	)
Comprehensive earnings (loss)	$	64,376		$	56,874		$	184,522		$	147,685

See accompanying notes to the unaudited consolidated financial statements.

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, 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
Vesting of restricted stock		212		2		(2	)		—			—			—		—			—
Stock-based compensation		—		—		27,472			—			—			—		—			27,472
Repurchases of common stock		—		—		—			—			—			363		(99,227	)		(99,227	)
Net income		—		—		—			57,355			—			—		—			57,355
Other comprehensive earnings (loss), net of tax		—		—		—			—			(481	)		—		—			(481	)
Balances at June 30, 2022		62,514	$	625	$	517,777		$	1,064,864		$	(1,600	)		4,650	$	(587,527	)	$	994,139


	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, 2022		62,518	$	625	$	576,622		$	1,196,968		$	(3,703	)		4,651	$	(587,905	)	$	1,182,607
Vesting of restricted stock		7		—		—			—			—			—		—			—
Stock-based compensation		—		—		32,344			—			—			—		—			32,344
Repurchases of common stock		—		—		—			—			—			2		(626	)		(626	)
Net income		—		—		—			119,296			—			—		—			119,296
Other comprehensive earnings (loss), net of tax		—		—		—			—			850			—		—			850
Balances at March 31, 2023		62,525	$	625	$	608,966		$	1,316,264		$	(2,853	)		4,653	$	(588,531	)	$	1,334,471
Vesting of restricted stock		115		1		(1	)		—			—			—		—			—
Stock-based compensation		—		—		41,000			—			—			—		—			41,000
Repurchases of common stock		—		—		—			—			—			38		(10,441	)		(10,441	)
Dividends declared ($0.375 per share)		—		—		—			(22,721	)		—			—		—			(22,721	)
Net income		—		—		—			64,516			—			—		—			64,516
Other comprehensive earnings (loss), net of tax		—		—		—			—			(140	)		—		—			(140	)
Balances at June 30, 2023		62,640	$	626	$	649,965		$	1,358,059		$	(2,993	)		4,691	$	(598,972	)	$	1,406,685

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities
Net income	$	183,812		$	149,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		54,010			44,223
Accretion of discount on available-for-sale securities		(253	)		(637	)
Non-cash marketing expense		839			876
Gain on disposition of property and equipment		(21	)		—
Amortization of debt issuance costs		620			167
Stock-based compensation expense		63,185			46,323
Cash paid for derivative settlement		—			(300	)
Gain on derivative		—			(1,368	)
Deferred income taxes, net		1,706			(9,646	)
Other		111			—
Changes in operating assets and liabilities:
Accounts receivable		6,650			(10,588	)
Prepaid expenses		(10,597	)		(14,050	)
Inventory		336			(1,166	)
Other assets		(9,057	)		(5,308	)
Deferred contract costs		(62,489	)		(57,746	)
Accounts payable		(10,277	)		7,655
Income taxes, net		3,645			16,193
Accrued commissions and bonuses		(6,560	)		(7,559	)
Accrued payroll and vacation		4,954			7,543
Deferred revenue		6,817			7,454
Accrued expenses and other current liabilities		24,560			(2,393	)
Net cash provided by operating activities		251,991			168,958
Cash flows from investing activities
Purchases of investments from funds held for clients		(25,000	)		(233,789	)
Proceeds from investments from funds held for clients		25,000			279,000
Purchases of property and equipment		(83,422	)		(67,721	)
Proceeds from sale of property and equipment		44			—
Net cash used in investing activities		(83,378	)		(22,510	)
Cash flows from financing activities
Proceeds from the issuance of debt		—			29,000
Repurchases of common stock		—			(94,652	)
Withholding taxes paid related to net share settlements		(11,067	)		(4,793	)
Payments on long-term debt		—			(29,287	)
Dividends paid		(21,731	)		—
Net change in client funds obligation		(201,552	)		1,579,000
Payment of debt issuance costs		—			(1,297	)
Net cash (used in) provided by financing activities		(234,350	)		1,477,971
(Decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents		(65,737	)		1,624,419
Cash, cash equivalents, restricted cash and restricted cash equivalents
Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period		2,409,095			1,812,691
Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	2,343,358		$	3,437,110


	Six Months Ended June 30,
	2023			2022
Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents
Cash and cash equivalents	$	536,545		$	279,039
Restricted cash included in funds held for clients		1,806,813			3,158,071
Total cash, cash equivalents, restricted cash and restricted cash equivalents, end of period	$	2,343,358		$	3,437,110

Supplemental disclosures of cash flow information:
Non-cash investing and financing activities:
Purchases of property and equipment, accrued but not paid	$	11,968		$	3,831
Stock-based compensation for capitalized software	$	7,752		$	4,180
Right of use assets obtained in exchange for operating lease liabilities	$	16,341		$	7,940

See accompanying notes to the unaudited consolidated financial statements.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

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.

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, 2022 (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 16, 2023.

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 and six months ended June 30, 2023 are not necessarily indicative of the results expected for the full year.

Recently Adopted 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. Prior to August 24, 2022, our floating-to-fixed interest rate swap was outstanding to offset the rate variability associated with our outstanding indebtedness. As discussed in Note 7, the interest rate swap was terminated on August 24, 2022. As a result, the adoption of ASU 2020-04 had no material impact on our unaudited interim consolidated financial statements.

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. As discussed in Note 7, the interest rate swap was terminated on August 24, 2022. As a result, the adoption of ASU 2021-01 had no 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.

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 associated 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 June 30, 2023 and December 31, 2022, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity 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 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 August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock. As of June 30, 2023, there was $1.1 billion 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 August 15, 2024.

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, HR management, and Global HCM 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, Vault, Everyday™, 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, Client Action

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

Center, Enhanced ACA and Clue® applications. With Global HCM, a number of our HCM applications and tools are available in 15 languages and dialects and are accessible to users in more than 180 countries.

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 generally 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.

Interest income on funds held for clients is earned on funds that are collected from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. The interest earned on these funds is included in recurring revenues in the consolidated statements of comprehensive income, as the collection, holding, and remittance of these funds are essential components of providing these services.

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 Time and Attendance application. 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.

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 rights for the three and six months ending June 30, 2023 and 2022 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Balance, beginning of period	$	120,802		$	104,816		$	117,416		$	101,426
Recognition of revenue included in beginning of period balance		(5,507	)		(4,621	)		(10,593	)		(8,842	)
Contract balance, net of revenue recognized during the period		8,938			8,685			17,410			16,296
Balance, end of period	$	124,233		$	108,880		$	124,233		$	108,880

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

We expect to recognize $11.1 million of deferred revenue related to material right performance obligations in the remainder of 2023, $20.3 million of such deferred revenue in 2024, and $92.8 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 June 30, 2023
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	343,991	$	19,937	$	(13,442	)	$	350,486
Costs to fulfill a contract	$	360,588	$	32,514	$	(12,778	)	$	380,324

	As of and for the Three Months Ended June 30, 2022
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	290,523	$	16,595	$	(11,132	)	$	295,986
Costs to fulfill a contract	$	285,081	$	26,819	$	(9,881	)	$	302,019


	As of and for the Six Months Ended June 30, 2023
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	325,457	$	51,434	$	(26,405	)	$	350,486
Costs to fulfill a contract	$	338,895	$	66,162	$	(24,733	)	$	380,324

	As of and for the Six Months Ended June 30, 2022
	Beginning		Capitalization					Ending
	Balance		of Costs		Amortization			Balance
Costs to obtain a contract	$	272,919	$	44,881	$	(21,814	)	$	295,986
Costs to fulfill a contract	$	265,657	$	55,449	$	(19,087	)	$	302,019

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

PROPERTY AND EQUIPMENT

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


	June 30, 2023			December 31, 2022
Property and equipment
Software and capitalized software costs	$	315,858		$	270,645
Buildings		178,820			177,765
Computer equipment		147,355			133,715
Rental clocks		38,960			35,846
Furniture, fixtures and equipment		30,632			28,414
Other		17,850			17,321
		729,475			663,706
Less: accumulated depreciation and amortization		(381,798	)		(331,340	)
		347,677			332,366
Construction in progress		63,519			36,286
Land		33,796			33,796
Property and equipment, net	$	444,992		$	402,448

We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40. For the three and six months ended June 30, 2023, we capitalized $22.9 million and $44.2 million, respectively, of computer software development costs related to software developed for internal use. For the three and six months ended June 30, 2022, we capitalized $16.4 million and $31.8 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.

We capitalize interest incurred for indebtedness related to construction in progress. For the three and six months ended June 30, 2023, we incurred interest costs of $1.5 million and $2.9 million, respectively, of which we capitalized $0.9 million and $1.4 million, respectively. For the three and six months ended June 30, 2022, we incurred interest costs of $0.6 million and $0.9 million, respectively, of which we capitalized $0.2 million and $0.3 million, respectively. Included in the construction in progress balance at June 30, 2023 and December 31, 2022 is $3.3 million and $2.0 million in retainage, respectively.

Depreciation and amortization expense for property and equipment was $26.8 million and $52.1 million, for the three and six months ended June 30, 2023, respectively. Depreciation and amortization expense for property and equipment was $21.6 million and $42.2 million for the three and six months ended June 30, 2022, respectively.

GOODWILL AND INTANGIBLE ASSETS, NET

As of both June 30, 2023 and December 31, 2022, goodwill was $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We performed a qualitative impairment test of our goodwill and concluded that, as of June 30, 2023, it was more likely than not that the fair value exceeded the carrying value and therefore goodwill was not impaired. As of June 30, 2023 and December 31, 2022, there were no indicators of impairment.

In connection with our marketing initiatives, we purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. We also made a $1.5 million one-time payment in July 2021 to cover sponsorship rights leading up to the 2021-2022 season. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. The cost of the naming rights has been recorded as an intangible asset with an offsetting liability as of the date of the contract. The intangible asset is being amortized over the life of the agreement on a straight line basis that commenced in June 2021. The difference between the present value of the offsetting liability and actual cash payments is being relieved through sales and marketing expense using the effective interest method over the life of the agreement.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization. The following tables present the components of intangible assets within our consolidated balance sheets:


	June 30, 2023
	Weighted Average Remaining			Accumulated
	Useful Life	Gross		Amortization			Net
	(Years)
Intangibles:
Naming rights	13.3	$	60,199	$	(8,135	)	$	52,064
Total		$	60,199	$	(8,135	)	$	52,064


	December 31, 2022
	Weighted Average Remaining			Accumulated
	Useful Life	Gross		Amortization			Net
	(Years)
Intangibles:
Naming rights	13.8	$	60,199	$	(6,182	)	$	54,017
Total		$	60,199	$	(6,182	)	$	54,017

Amortization of intangible assets for the three and six months ended June 30, 2023 and 2022 was $1.0 million and $2.0 million, respectively. We estimate the aggregate amortization expense will be $2.0 million for the remainder of 2023 and $3.9 million for each of 2024, 2025, 2026, 2027 and 2028.

LONG-TERM DEBT

Long-term debt consisted of the following:


	June 30, 2023		December 31, 2022
July 2022 Revolving Credit Facility due July 29, 2027	$	29,000	$	29,000
Total long-term debt	$	29,000	$	29,000

On December 7, 2017, we entered into a senior secured term credit agreement (as amended from time to time, the “2017 Term Credit Agreement”), pursuant to which JPMorgan Chase Bank, N.A., Bank of America, N.A. and Kirkpatrick Bank made certain term loans to us (the “2017 Term Loans”). Our obligations under the 2017 Term Loans were secured by a mortgage and first priority security interest in our corporate headquarters property. The 2017 Term Loans were due to mature on September 7, 2025 and bore interest, at our option, at either (a) a prime rate plus 1.0% or (b) an adjusted LIBOR rate for the interest period in effect for such 2017 Term Loan plus 1.5%.

As discussed below, the 2017 Term Loans were repaid in full on May 4, 2022 and the 2017 Term Credit Agreement was terminated. At the time of payoff, unamortized debt issuance costs totaling $0.1 million were written off.

On May 4, 2022 (the “May 2022 Facility Closing Date”), Paycom Payroll, LLC (the “Borrower”), Software, and certain other subsidiaries of Software (collectively, the “Guarantors,” and collectively with the Borrower, the “Loan Parties”), entered into a credit agreement (as amended from time to time, the “May 2022 Revolving Credit Agreement”) with Bank of America, N.A., as a lender, swingline lender and letters of credit issuer, the lenders from time to time party thereto and Bank of America, N.A., as the administrative agent.

The May 2022 Revolving Credit Agreement provided for a senior secured revolving credit facility (the “May 2022 Facility”) in the initial aggregate principal amount of up to $250.0 million, and the ability to request an incremental facility of up to an additional $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The May 2022 Facility included a $25.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. On June 7, 2022, the aggregate commitments under the May 2022 Revolving Credit Agreement were increased from $250.0 million to $350.0 million. Our obligations under the May 2022 Facility were secured by a senior security interest in all personal property of the Loan Parties. The May 2022 Facility was scheduled to mature on May 4, 2027.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

On the May 2022 Facility Closing Date, we borrowed $29.0 million under the May 2022 Facility to repay the 2017 Term Loans, along with accrued interest, expenses and fees. The loan on the May 2022 Facility Closing Date bore interest at the BSBY rate plus 1.125%. In connection with the repayment of the 2017 Term Loans, the 2017 Term Credit Agreement was terminated on May 4, 2022.

As discussed below, the May 2022 Facility was repaid in full on July 29, 2022 and the May 2022 Revolving Credit Agreement was terminated.

On July 29, 2022 (the “July 2022 Facility Closing Date”), the Borrower, Software, and certain other subsidiaries of Software entered into a new credit agreement (the “July 2022 Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “July 2022 Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent.

The July 2022 Credit Agreement initially provided for a senior secured revolving credit facility (the “July 2022 Revolving Credit Facility”) in the aggregate principal amount of up to $650.0 million, and the ability to request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The July 2022 Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit. The July 2022 Credit Agreement also initially provided for a senior secured delayed draw term loan (the “July 2022 Term Loan Facility”) in the aggregate amount of up to $750.0 million. As discussed in Note 15, on July 28, 2023, the aggregate revolving commitments under the July 2022 Revolving Credit Facility were increased to $1.0 billion, the July 2022 Term Loan Facility was terminated and the July 2022 Credit Agreement was amended in contemplation of the formation and future operating activities of Paycom Client Trust (the “Client Trust”) and Paycom National Trust Bank, NA (the “Trust Bank”). The Company intends to form the Client Trust to hold client payroll and related funds and the Trust Bank to serve as trustee of the Client Trust. All loans under the July 2022 Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”). Unamortized debt issuance costs of $5.1 million as of June 30, 2023 are included in "Other assets" on our consolidated balance sheets.

The borrowings under the July 2022 Credit Agreement bear interest at a rate per annum equal to (i) the Alternate Base Rate (“ABR”) plus an applicable margin (“ABR Loans”) or (ii) (x) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (the “Adjusted Term SOFR Rate”) or (y) the daily SOFR plus 0.10%, in each case plus an applicable margin (“SOFR Rate Loans”). ABR is calculated as the highest of (i) the rate of interest last quoted by The Wall Street Journal in the United States as the prime rate in effect, (ii) the federal funds rate plus 0.5% and (iii) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%; provided that, if the ABR as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00%. The applicable margin for ABR Loans is (i) 0.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 1.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. The applicable margin for SOFR Rate Loans is (i) 1.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 1.5% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 1.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 2.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the July 2022 Revolving Credit Facility and a quarterly ticking fee on the daily amount of the undrawn portion of the July 2022 Term Loan Facility, in each case at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are also required to pay customary letter of credit fees upon drawing any letter of credit.

The July 2022 Revolving Credit Facility provides for no scheduled principal amortization prior to the Scheduled Maturity Date. Subject to certain conditions set forth in the July 2022 Credit Agreement, we may borrow, prepay and reborrow under the July 2022 Revolving Credit Facility and terminate or reduce the July 2022 Lenders’ commitments at any time prior to the Scheduled Maturity Date.

We did not make any draws under the July 2022 Term Loan Facility prior to its termination on July 28, 2023.

The proceeds of the loans and letters of credit under the July 2022 Credit Agreement are to be used for ongoing working capital and general corporate purposes, permitted acquisitions, share repurchases and refinancing the May 2022 Facility. On the July 2022 Facility Closing Date, we borrowed $29.0 million under the July 2022 Revolving Credit Facility to repay the outstanding indebtedness under the May 2022 Facility, along with accrued interest, expenses and fees. The loan bears interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%. In connection with the repayment of the May 2022 Facility, the May 2022 Revolving Credit Agreement was terminated on July 29, 2022.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

Under the July 2022 Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.75 to 1.0, stepping down to 3.0 to 1.0 at intervals thereafter. Additionally, the July 2022 Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make investments, dispose of assets, enter into certain transactions, including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions. As of June 30, 2023, we were in compliance with these covenants. Our obligations under the July 2022 Credit Agreement are secured by a senior security interest in all personal property of the Loan Parties.

The events of default under the July 2022 Credit Agreement include, among others, payment defaults, breaches of covenants, defaults under the related loan documents, material misrepresentations, cross defaults with certain other material indebtedness, bankruptcy and insolvency events, judgment defaults, certain events related to plans subject to the Employee Retirement Income Security Act of 1974, as amended, invalidity of the July 2022 Credit Agreement or the related loan documents and change in control events. The occurrence of an event of default could result in the acceleration of our obligations under the July 2022 Credit Agreement, the requirement to post cash collateral with respect to letters of credit, the termination of the July 2022 Lenders’ commitments and a 2.0% increase in the rate of interest.

As of June 30, 2023 and December 31, 2022, the carrying value of our total long-term debt approximated its fair value as of such date. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities.

DERIVATIVE INSTRUMENTS

In December 2017, we entered into a floating-to-fixed interest rate swap agreement to limit the exposure to floating interest rate risk related to the 2017 Term Loans. We do not hold derivative instruments for trading or speculative purposes. The interest rate swap agreement effectively converted a portion of the variable interest rate payments to fixed interest rate payments. We account for our derivatives under ASC Topic 815, “Derivatives and Hedging,” and recognize all derivative instruments in the consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. See Note 9, “Fair Value of Financial Instruments”. We have elected not to designate our interest rate swap as a hedge; therefore, changes in the fair value of the derivative instrument were recognized in our consolidated statements of comprehensive income within Other income (expense), net.

The objective of the interest rate swap was to reduce the variability in the forecasted interest payments of the 2017 Term Loans, which was based on a one-month USD LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million. Under the terms of the interest rate swap agreement, we received quarterly variable interest payments based on the LIBOR rate and paid interest at a fixed rate. As further discussed in Note 6, on May 4, 2022, we repaid the 2017 Term Loans and terminated the 2017 Term Credit Agreement. In connection with the repayment of the 2017 Term Loans, we borrowed funds under the May 2022 Facility. The interest rate swap agreement had a maturity date of September 7, 2025. On August 24, 2022, we terminated the interest rate swap by settling the contract, which resulted in a cash receipt of $0.5 million. The realized gain from the settlement of the interest rate swap contract is included in Other income (expense), net in the consolidated statements of comprehensive income.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

CORPORATE INVESTMENTS AND FUNDS HELD FOR CLIENTS

The tables below present our cash and cash equivalents, the funds held for clients’ cash and cash equivalents as well as the investments that were included within funds held for clients on the consolidated balance sheets:


	June 30, 2023
Type of issue	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Cash and cash equivalents	$	536,545	$	—	$	—		$	536,545
Funds held for clients’ cash and cash equivalents		1,806,813		—		—			1,806,813
Available-for-sale securities (1):
Certificates of deposit		25,000		—		—			25,000
U.S. treasury securities		174,621		—		(3,942	)		170,679
Total investments	$	2,542,979	$	—	$	(3,942	)	$	2,539,037


	December 31, 2022
Type of issue	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Cash and cash equivalents	$	400,730	$	—	$	—		$	400,730
Funds held for clients’ cash and cash equivalents		2,008,365		—		—			2,008,365
Available-for-sale securities (1):
Certificates of deposit		25,000		—		—			25,000
U.S. treasury securities		174,367		—		(4,757	)		169,610
Total investments	$	2,608,462	$	—	$	(4,757	)	$	2,603,705

(1)

All available-for-sale securities were included within the funds held for clients.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of June 30, 2023, are as follows:


	June 30, 2023
	Securities in unrealized loss position for less than twelve months					Securities in unrealized loss position for more than twelve months					Total
Type of issue	Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value
U.S. treasury securities	$	(1,361	)	$	58,482	$	(2,581	)	$	112,197	$	(3,942	)	$	170,679
Total	$	(1,361	)	$	58,482	$	(2,581	)	$	112,197	$	(3,942	)	$	170,679

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2022, are as follows:


	December 31, 2022
	Securities in unrealized loss position for less than twelve months					Securities in unrealized loss position for more than twelve months				Total
Type of issue	Gross unrealized losses			Fair value		Gross unrealized losses		Fair value		Gross unrealized losses			Fair value
U.S. treasury securities	$	(4,757	)	$	169,610	$	—	$	—	$	(4,757	)	$	169,610
Total	$	(4,757	)	$	169,610	$	—	$	—	$	(4,757	)	$	169,610

We did not make any reclassification adjustments out of accumulated other comprehensive income for realized gains or losses on the sale or maturity of available-for-sale securities for the six months ended June 30, 2023 or 2022. There were no realized gains or losses on the sale of available-for-sale securities for the six months ended June 30, 2023 or 2022.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

We regularly review the composition of our investment portfolio and did not recognize any credit impairment losses during the six months ended June 30, 2023 or during the six months ended June 30, 2022. The Company believes it is probable that the principal and interest will be collected in accordance with contractual terms and that the unrealized losses on these securities were due to changes in interest rates and were not due to increased credit risk. The U.S. treasury securities held a rating of AAA as of June 30, 2023.

Expected maturities of available-for-sale securities at June 30, 2023 are as follows:


Expected maturity	Amortized cost		Fair value
One year or less	$	164,663	$	161,545
One year to five years	$	34,958	$	34,134
Total available-for-sale securities	$	199,621	$	195,679

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client funds obligation approximates fair value due to the short-term nature of the instruments. See Note 6 for discussion of the fair value of our debt.

As discussed in Note 2, we typically invest the funds held for clients in money market funds, demand deposit accounts, commercial paper with a maturity of less than three months and certificates of deposit, and classify these items as cash and cash equivalents within the funds held for clients line item in the consolidated balance sheets. Short-term investments in commercial paper and certificates of deposit with an original maturity of greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item. These available-for-sale securities are recognized 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) within comprehensive earnings (loss) in our consolidated statements of comprehensive income. See Note 8 for additional information.

We also invest funds held for clients in U.S. treasury securities with initial maturity durations greater than one year. These U.S. treasury securities are classified as available-for-sale securities and included within the funds held for clients line item. The unrealized gains and losses associated with these available-for-sale securities are included within comprehensive earnings (loss) in our consolidated statements of comprehensive income. See Note 8 for additional information.

As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap. While outstanding, the interest rate swap was measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs recognized at fair value. We terminated the interest rate swap on August 24, 2022.

The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1 – Observable inputs such as quoted prices in active markets

•

Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active

•

Level 3 – Unobservable inputs in which there is little or no market data

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022:


	June 30, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Certificates of deposit	$	—	$	25,000	$	—	$	25,000
U.S. treasury securities	$	—	$	170,679	$	—	$	170,679


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
Certificates of deposit	$	—	$	25,000	$	—	$	25,000
U.S. treasury securities	$	—	$	169,610	$	—	$	169,610

10.

EMPLOYEE SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN

Employees over the age of 18 who have completed ninety days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby the Company matches the contribution of our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions were $3.8 million and $7.8 million for the three and six months ended June 30, 2023, respectively. Matching contributions were $3.1 million and $6.6 million for the three and six months ended June 30, 2022, respectively.

The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per-employee maximum of $25,000. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares. Eligible employees purchased 35,628 and 31,350 shares of the Company’s common stock under the ESPP during the six months ended June 30, 2023 and 2022, respectively. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $0.9 million and $1.8 million for the three and six months ended June 30, 2023, respectively. Our compensation expense related to the ESPP was $0.8 million and $1.4 million for the three and six months ended June 30, 2022, respectively.

11.

EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested.

In accordance with ASC Topic 260, “Earnings Per Share,” the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. For the time periods in the table below, we did not have any participating securities.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net income	$	64,516	$	57,355	$	183,812	$	149,285
Denominator:
Basic weighted average shares outstanding		57,920		57,969		57,895		57,992
Dilutive effect of unvested restricted stock		113		98		155		194
Diluted weighted average shares outstanding		58,033		58,067		58,050		58,186
Earnings per share:
Basic	$	1.11	$	0.99	$	3.17	$	2.57
Diluted	$	1.11	$	0.99	$	3.17	$	2.57

12.

STOCK-BASED COMPENSATION

Restricted Stock Awards

In May 2023, the stockholders of the Company approved the Paycom Software, Inc. 2023 Long-Term Incentive Plan (the “2023 LTIP”), which provides for the granting of equity-based awards to the Company’s employees, contractors and outside directors. Subject to certain adjustments, the maximum number of shares of common stock that may be delivered pursuant to awards under the 2023 LTIP is 3,600,000, subject to increase by any awards under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (as amended, the "2014 LTIP") (i) that are outstanding on or after May 1, 2023, and that, on or after such date, are forfeited, expire or are canceled (but excluding the restricted stock award granted to Mr. Richison on November 23, 2020); and (ii) any shares subject to awards relating to common stock under the 2014 LTIP that are settled in cash on or after May 1, 2023.

During the six months ended June 30, 2023, we issued an aggregate of 538,113 restricted shares of common stock under the 2014 LTIP and the 2023 LTIP, consisting of 87,618 shares subject to market-based vesting conditions (“Market-Based Shares”) and 450,495 shares subject to time-based vesting conditions (“Time-Based Shares”). Market-Based Shares will vest 50% on the first date, if any, that the arithmetic average of the Company’s volume weighted average price on each of the twenty consecutive trading days immediately preceding such date (the “VWAP Value”) equals or exceeds $404 per share and 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $466 per share, in each case provided that (i) such date occurs on or before the eighth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the 2014 LTIP or the 2023 LTIP, as applicable, and the applicable restricted stock award agreement. The Time-Based Shares granted to non-executive employees will vest over periods ranging from three to four years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the 2014 LTIP or the 2023 LTIP, as applicable, and the applicable restricted stock award agreement.

The Time-Based Shares mentioned above include an aggregate of 5,523 Time-Based Shares issued to the non-employee members of the Board of Directors in May 2023 under the 2023 LTIP. Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date, and subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock award agreement.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

The following table summarizes restricted stock awards activity for the six months ended June 30, 2023:


	Time-Based					Market-Based
	Restricted Stock Awards					Restricted Stock Awards
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Unvested shares of restricted stock outstanding at December 31, 2022		479.1		$	315.04		1,677.0		$	116.36
Granted		450.5		$	315.11		87.6		$	316.12
Vested		(116.1	)	$	292.74		—		$	—
Forfeited		(43.6	)	$	329.10		(11.7	)	$	298.39
Unvested shares of restricted stock outstanding at June 30, 2023		769.9		$	317.65		1,752.9		$	125.12

Restricted Stock Units

In February 2023, we issued, in the aggregate, 5,232 shares of common stock upon the vesting of performance-based restricted stock units ("PSUs") awarded to certain executive officers in February 2021. The number of shares delivered upon vesting of the PSUs was determined based on the Company’s achievement of a Relative Total Stockholder Return ("Relative TSR") performance goal, which compared the Company’s Total Stockholder Return ("TSR") to the TSR of a peer group for the two-year performance period that commenced on January 1, 2021 and ended on December 31, 2022.

For purposes of the PSU awards, TSR was determined by dividing (i) the sum of (A) the average VWAP of a share of the Company's common stock or the common stock of a peer company, as applicable, during the final 60 trading day period of the applicable performance period, less (ii) the average VWAP of a share of the Company's common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020, plus (iii) the sum of all dividends which are paid by the Company (or the member of the peer group) to its stockholders, assuming such dividends are reinvested in the applicable company through the applicable performance period, by (ii) the average VWAP of a share of the Company's common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020. For purposes of the PSU awards granted in 2021, the Company’s peer group includes 34 publicly traded companies, which were reflective of the S&P 500 Software & Services index on the grant date.

On April 3, 2023, the Company announced the resignation of Justin Long from the position of Vice President of Operations of the Company, effective March 28, 2023. In connection with Mr. Long's resignation, the Company, Paycom Payroll, LLC and Mr. Long entered into a Severance and Release Agreement (the “Severance Agreement”), which became effective on April 8, 2023, pursuant to which 1,505 Time-Based Shares previously granted to Mr. Long accelerated in vesting.

On May 2, 2023, the Company issued the following awards to executive officers under the 2023 LTIP: (i) an aggregate of 39,131 PSUs; (ii) an aggregate of 8,695 time-based restricted stock units (“RSUs”); and (iii) an aggregate of 142,000 Time-Based Shares. The number of shares deliverable upon vesting of such PSUs will be determined based on achievement of pre-established performance goals. The performance goals vary for each executive officer but are based on the Company’s revenue, adjusted EBITDA, the daily volume weighted average price of the Company’s common stock and annual revenue retention rate, in each case for the one-year performance period from January 1, 2023 to December 31, 2023. The PSUs will be eligible to vest following the performance period, but no later than February 29, 2024, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock unit award agreement. The RSUs will vest in three equal annual tranches over a period of approximately two and a half years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock unit award agreement. The Time-Based Shares will vest in four annual tranches over a period of approximately three and a half years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the 2023 LTIP and the applicable restricted stock award agreement.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

The following table summarizes PSU and RSU activity for the six months ended June 30, 2023:


	Time RSUs				PSUs
	Units		Weighted Average Grant Date Fair Value Per Unit		Units			Weighted Average Grant Date Fair Value Per Unit
Unvested restricted stock units outstanding at December 31, 2022		0.5	$	377.01		77.8		$	409.13
Granted		8.7	$	297.55		39.1		$	244.39
Vested		—	$	—		(5.2	)	$	526.66
Forfeited		—	$	—		(3.5	)	$	526.66
Unvested restricted stock units outstanding at June 30, 2023 (1)		9.2	$	301.87		108.2		$	340.08

(1)

A maximum of 211,806 shares could be delivered upon settlement of PSUs based upon the Company's achievement of the applicable performance goals over the applicable performance periods.

For the three and six months ended June 30, 2023, our total stock-based compensation expense was $35.3 million and $63.2 million, respectively. For the three and six months ended June 30, 2022, our total stock-based compensation expense was $24.3 million and $46.3 million, respectively.

The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested restricted stock awards and unvested restricted stock units awards as of June 30, 2023.


	Restricted Stock		Restricted Stock
	Awards		Units
Unrecognized compensation cost	$	301,287	$	15,650
Weighted average period for recognition (years)	2.69			1.0

We capitalized stock-based compensation costs related to software developed for internal use of $4.2 million and $7.8 million for the three and six months ended June 30, 2023, respectively. We capitalized stock-based compensation costs related to software developed for internal use of $2.3 million and $4.2 million for the three and six months ended June 30, 2022, respectively.

In May 2023, our Board of Directors adopted a dividend policy under which we intend to pay quarterly cash dividends on our common stock. All unvested shares of restricted stock, RSUs and PSUs currently outstanding are entitled to receive dividend equivalents, provided that such dividend equivalents are withheld by the Company and distributed to the applicable holder upon the release of restrictions on such shares of restricted stock, RSUs or PSUs (i.e., upon vesting).

13.

COMMITMENTS AND CONTINGENCIES

We are involved in various legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

14.

INCOME TAXES

The Company's effective income tax rate was 28.9% and 25.5% for the six months ended June 30, 2023 and 2022, respectively. The increase in effective tax rate for the six months ended June 30, 2023 is related to a decrease of excess tax benefits from stock-based compensation and a reduction of research and development credits.

Paycom Software, Inc.

Notes to the Unaudited Consolidated Financial Statements

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

15.

SUBSEQUENT EVENTS

On July 28, 2023, the Borrower, Software, and certain other subsidiaries of Software entered into Amendment No. 2 to Credit Agreement (“Amendment No. 2”) with the July 2022 Lenders, pursuant to which, among other things, (i) the aggregate revolving commitments under the July 2022 Revolving Credit Facility were increased from $650.0 million to $1.0 billion, (ii) the July 2022 Term Loan Facility was terminated and (iii) the July 2022 Credit Agreement was amended in contemplation of the formation and future operating activities of the Client Trust and the Trust Bank. The Company intends to form the Client Trust to hold client payroll and related funds and the Trust Bank to serve as trustee of the Client Trust. The Company did not make any draws under the July 2022 Term Loan Facility prior to its termination. Pursuant to the July 2022 Credit Agreement, as amended by Amendment No. 2, the Company may request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and six months ended June 30, 2023, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2023 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K. Except for certain information as of December 31, 2022, all amounts herein are unaudited. Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Paycom Software, Inc. and its consolidated subsidiaries. All amounts presented in tables, other than per share amounts, are in thousands unless otherwise noted.

Special Note Regarding Forward-Looking Statements

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements that look to future events and include, but are not limited to, statements regarding our business strategy; anticipated future operating results and operating expenses, cash flows, capital resources, dividends and liquidity; trends, opportunities and risks affecting our business, industry and financial results; future expansion or growth plans and potential for future growth, including internationally; our ability to attract new clients to purchase our solution; our ability to retain clients and induce them to purchase additional applications; our ability to accurately forecast future revenues and appropriately plan our expenses; market acceptance of our solution and applications; our expectations regarding future revenues generated by certain applications; our ability to attract and retain qualified employees and key personnel; future regulatory, judicial and legislative changes; how certain factors affecting our performance correlate to improvement or deterioration in the labor market; our plan to open additional sales offices and our ability to effectively execute such plan; the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months; our plans regarding our capital expenditures and investment activity as our business grows, including with respect to research and development and the expansion of our corporate headquarters and other facilities; our plans to pay cash dividends; and our plans to repurchase shares of our common stock through a stock repurchase plan. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “will,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “would,” and similar expressions or the negative of such terms or other comparable terminology.

Forward-looking statements are neither historical facts nor assurances of future performance, and are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

•

the possibility of security vulnerabilities, cyberattacks and network disruptions, including breaches of data security and privacy leaks, data loss, and business interruptions;

•

changes in laws, government regulations and policies and interpretations thereof;

•

our compliance with data privacy laws and regulations;

•

our ability to develop enhancements and new applications, keep pace with technological developments and respond to future disruptive technologies;

•

our ability to compete effectively;

•

our ability to manage our rapid growth and organizational change effectively;

•

fluctuations in our financial results due to factors beyond our control;

•

the possibility that clients may not be satisfied with our deployment or technical support services, or that our solution fails to perform properly;

•

our dependence on our key executives;

•

our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing and operational personnel;

•

the impact of adverse economic and market conditions, including those related to the COVID-19 pandemic and geopolitical conflicts;

•

our failure to develop and maintain our brand cost-effectively;

•

seasonality of certain operating results and financial metrics;

•

our failure to adequately protect our intellectual property rights;

•

our ability to manage risks associated with international operations and sales;

•

our reliance on relationships with third parties;

•

the possibility that the Affordable Care Act may be modified, repealed or declared unconstitutional; and

•

the other factors set forth in Part I, Item 1A, “Risk Factors” of the Form 10-K and our other reports filed with the SEC.

Forward-looking statements are based only on information currently available to us and speak only as of the date of this Form 10-Q and are subject to business and economic risks. We do not undertake any obligation to update or revise the forward-looking statements to reflect events that occur or circumstances that exist after the date on which such statements were made, except to the extent required by law.

Overview

We are a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. 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 management applications. Our user-friendly software allows for easy adoption of our solution by employees, enabling self-management of their HCM activities in the cloud, which reduces the administrative burden on employers and increases employee productivity.

We generate revenues from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed and (ii) fixed amounts charged per billing period. We do not require clients to enter into long-term contractual commitments with us. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We serve a diverse client base in terms of size and industry. None of our clients constituted more than one-half of one percent of our revenues for the six months ended June 30, 2023. Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives ("CRRs") who sell new applications to existing clients.

Our continued growth depends on attracting new clients through further penetration of our existing markets and geographic expansion into new markets, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base. We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future, and the number of our new applications adopted by our clients has been a significant factor in our revenue growth. We plan to open additional sales offices in the future to further expand our market presence.

Our principal marketing efforts include national and local advertising campaigns, email campaigns, social and digital media campaigns, search engine marketing methods, sponsorships, tradeshows, print advertising and outbound marketing including personalized direct mail campaigns. In addition, we generate leads and build recognition of our brand and thought leadership with relevant and informative content, such as white papers, blogs, podcast episodes and webinars.

Throughout our history, we have built strong relationships with our clients. As the HCM needs of our clients evolve, we believe that we are well-positioned to expand the HCM spending of our clients and we believe this opportunity is significant. To be successful, we must continue to demonstrate the operational and economic benefits of our solution, as well as effectively hire, train, motivate and retain qualified personnel.

Growth Outlook, Opportunities and Challenges

As a result of our significant revenue growth and geographic expansion, we are presented with a variety of opportunities and challenges. 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. Consequently, we have historically generated the majority of our revenues from our payroll applications, although our revenue mix has evolved and will continue to evolve as we develop and add new non-payroll applications to our solution. We believe our strategy of focusing on increased employee usage is key to long-term client satisfaction and client retention. Client adoption of new applications and client employee usage of both new and existing applications have been significant factors in our revenue growth, and we expect the continuation of this trajectory will depend, in part, on the introduction of applications to our existing client base that encourage and promote more employee usage. For example, in 2021, we launched our industry-first Beti technology, which further automates and streamlines the payroll process by empowering employees to do their own payroll. Moreover, in order to increase revenues and continue to improve our operating results, we must also attract new clients. We intend to obtain new clients by (i) continuing to leverage our sales force productivity within markets where we currently have existing sales offices, (ii) expanding our presence in metropolitan areas where we currently have an existing sales office through adding sales teams or offices, thereby increasing the number of sales professionals within such markets, and (iii) opening sales offices in new metropolitan areas.

Historically, our target client size range has been organizations with 50 to 10,000 employees. We recently expanded our target client size range to include enterprise organizations with more than 10,000 employees. While we continue to serve a diversified client base ranging in size from one employee to many thousands of employees, the average size of our clients has grown significantly as we have organically grown our operations, increased the number of applications we offer and gained traction with larger companies. We believe larger employers represent a substantial opportunity to increase our revenues per client, with limited incremental cost to us. Because we charge our clients on a per employee basis for certain services we provide, any increase or decrease in the number of employees of our clients will have a positive or negative impact, respectively, on our results of operations. Generally, we expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market.

We collect funds from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. Those collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, U.S. treasury securities, commercial paper and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. As we introduce new applications, expand our client base and renew and expand relationships with existing clients, we expect our average funds held for clients balance and, accordingly, interest earned on funds held for clients, will increase; however, the amount of interest we earn can be positively or negatively impacted by changes in interest rates.

Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs and general and administrative expenses, which have increased and will continue to increase our expenses. Specifically, our revenue growth and geographic expansion drive increases in our employee headcount, which in turn precipitates increases in (i) salaries and benefits, (ii) stock-based compensation expense and (iii) facility costs related to the expansion of our corporate headquarters and operations facilities and additional sales office leases.

We believe the challenges of managing the ever-changing complexity of payroll and human resources will continue to drive companies to turn to outsourced providers for help with their HCM needs. The HCM industry historically has been driven, in part, by legislation and regulatory action, including COBRA, changes to the minimum wage laws or overtime rules, and legislation from federal, state or municipal taxation authorities.

For the three months ended June 30, 2023 and 2022, our total gross margins were approximately 83% and 84%, respectively. For the six months ended June 30, 2023 and 2022, our total gross margins were approximately 84% and 85%, respectively. Although our gross margins may fluctuate from quarter to quarter due to seasonality and hiring trends, we expect that our gross margins will remain relatively consistent in future periods.

Results of Operations

The following table sets forth certain consolidated statements of income data and such data as a percentage of total revenues for the periods presented:


	Three Months Ended June 30,											Six Months Ended June 30,
	2023					2022					% Change	2023					2022					% Change
Revenues
Recurring	$	394,522		98.4	%	$	311,534		98.3	%	26.6%	$	838,943		98.4	%	$	659,698		98.4	%	27.2%
Implementation and other		6,617		1.6	%		5,390		1.7	%	22.8%		13,833		1.6	%		10,745		1.6	%	28.7%
Total revenues		401,139		100.0	%		316,924		100.0	%	26.6%		852,776		100.0	%		670,443		100.0	%	27.2%
Cost of revenues
Operating expenses		54,617		13.6	%		39,604		12.5	%	37.9%		107,702		12.6	%		78,096		11.6	%	37.9%
Depreciation and amortization		12,811		3.2	%		10,478		3.3	%	22.3%		24,958		3.0	%		20,470		3.1	%	21.9%
Total cost of revenues		67,428		16.8	%		50,082		15.8	%	34.6%		132,660		15.6	%		98,566		14.7	%	34.6%
Administrative expenses
Sales and marketing		106,435		26.5	%		87,724		27.7	%	21.3%		210,009		24.6	%		162,720		24.3	%	29.1%
Research and development		49,118		12.2	%		36,803		11.6	%	33.5%		91,787		10.8	%		68,408		10.2	%	34.2%
General and administrative		75,965		18.9	%		57,912		18.3	%	31.2%		141,570		16.6	%		118,416		17.6	%	19.6%
Depreciation and amortization		14,927		3.8	%		12,090		3.8	%	23.5%		29,052		3.4	%		23,753		3.5	%	22.3%
Total administrative expenses		246,445		61.4	%		194,529		61.4	%	26.7%		472,418		55.4	%		373,297		55.6	%	26.6%
Total operating expenses		313,873		78.2	%		244,611		77.2	%	28.3%		605,078		71.0	%		471,863		70.3	%	28.2%
Operating income		87,266		21.8	%		72,313		22.8	%	20.7%		247,698		29.0	%		198,580		29.7	%	24.7%
Interest expense		(602	)	-0.2	%		(354	)	-0.1	%	70.1%		(1,439	)	-0.2	%		(569	)	-0.1	%	152.9%
Other income (expense), net		6,183		1.5	%		878		0.3	%	604.2%		12,187		1.5	%		2,290		0.3	%	432.2%
Income before income taxes		92,847		23.1	%		72,837		23.0	%	27.5%		258,446		30.3	%		200,301		29.9	%	29.0%
Provision for income taxes		28,331		7.0	%		15,482		4.9	%	83.0%		74,634		8.7	%		51,016		7.6	%	46.3%
Net income	$	64,516		16.1	%	$	57,355		18.1	%	12.5%	$	183,812		21.6	%	$	149,285		22.3	%	23.1%

Revenues

The increase in total revenues for the three and six months ended June 30, 2023 compared to the same periods in 2022 was primarily the result of the addition of new clients and productivity and efficiency gains in mature sales offices, which are offices that have been open for at least 24 months, and the sale of additional applications to our existing clients. In addition, the performance of our tax forms filing business in the first quarter contributed to the increase in total revenues for the six months ended June 30, 2023 as compared to the same period in 2022. Because we charge our clients on a per-employee basis for certain services we provide, the drivers of revenue for the three and six months ended June 30, 2023 described above were impacted by the headcount fluctuations within our client base. Additionally, rising interest rates and a higher average funds held for clients balance during the three and six months ended June 30, 2023 as compared to the same periods in 2022, resulted in increased interest earned on funds held for clients, which had a positive impact on recurring revenue.

The increase in implementation and other revenues for the three and six months ended June 30, 2023 from the same periods in 2022 was primarily the result of the increased non-refundable upfront conversion fees collected from the addition of new clients. These fees are deferred and recognized ratably over the ten-year estimated life of our clients.

Expenses

Cost of Revenues

During the three months ended June 30, 2023, operating expenses increased from the comparable prior year period by $15.0 million, primarily due to a $13.0 million increase in employee-related expenses attributable to growth in the number of operating personnel, a $1.0 million increase in shipping and supplies fees and a $0.7 million increase in automated clearing house fees in connection with increased revenues. Depreciation and amortization expense increased $2.3 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

During the six months ended June 30, 2023, operating expenses increased from the comparable prior year period by $29.6 million, primarily due to a $25.5 million increase in employee-related expenses attributable to growth in the number of operating personnel, a $2.6 million increase in shipping and supplies fees and a $0.7 million increase in automated clearing house fees in connection with increased revenues. Depreciation and amortization expense increased $4.5 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other fixed assets.

Administrative Expenses

Sales and Marketing

During the three months ended June 30, 2023, sales and marketing expenses increased from the comparable prior year period by $18.7 million due to a $12.4 million increase in employee-related expenses, including commissions and bonuses, and a $6.3 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program.

During the six months ended June 30, 2023, sales and marketing expenses increased from the comparable prior year period by $47.3 million due to a $33.9 million increase in employee-related expenses, including commissions and bonuses, and a $13.4 million increase in marketing and advertising expense attributable to increased spending across most components of our marketing program.

Research and Development

During the three and six months ended June 30, 2023, research and development expenses increased from the comparable prior year period due to increases in employee-related expenses of $12.3 million and $23.4 million, respectively.

As we continue the ongoing development of our platform and product offerings, we generally expect research and development expenses (exclusive of stock-based compensation) to continue to increase, particularly as we hire more personnel to support our growth. While we expect this trend to continue on an absolute dollar basis and as a percentage of total revenues, we also anticipate the rate of increase to decline over time as we leverage our growth and realize additional economies of scale. As is customary for our business, we also expect fluctuations in research and development expense as a percentage of revenue on a quarter-to-quarter basis due to seasonal revenue trends, the introduction of new products, the amount and timing of research and development costs that may be capitalized and the timing of onboarding new hires and restricted stock vesting events.

Expenditures for software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. The nature of the development projects underway during a particular period directly impacts the timing and extent of these capitalized expenditures and can affect the amount of research and development expenses in such period. The table below sets forth the amounts of capitalized and expensed research and development costs for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022		% Change	2023		2022		% Change
Capitalized portion of research and development	$	22,878	$	16,440	39%	$	44,231	$	31,840	39%
Expensed portion of research and development		49,118		36,803	33%		91,787		68,408	34%
Total research and development costs	$	71,996	$	53,243	35%	$	136,018	$	100,248	36%

General and Administrative

During the three months ended June 30, 2023, general and administrative expenses increased $18.1 million from the comparable prior year period due to a $14.9 million increase in employee-related expenses and a $3.2 million increase in accounting and legal expenses.

During the six months ended June 30, 2023, general and administrative expenses increased $23.2 million from the comparable prior year period due to a $18.8 million increase in employee-related expenses and a $4.4 million increase in accounting and legal expenses.

Non-Cash Stock-Based Compensation Expense

The following table presents the non-cash stock-based compensation expense that is included within the specified line items in our consolidated statements of comprehensive income:


	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022		% Change	2023		2022		% Change
Non-cash stock-based compensation expense
Operating expenses	$	3,353	$	1,347	149%	$	5,738	$	2,329	146%
Sales and marketing		6,040		5,029	20%		11,516		7,906	46%
Research and development		6,639		2,857	132%		11,897		5,076	134%
General and administrative		19,334		15,035	29%		34,034		31,012	10%
Total non-cash stock-based compensation expense	$	35,366	$	24,268	46%	$	63,185	$	46,323	36%

Depreciation and Amortization

During the three and six months ended June 30, 2023, depreciation and amortization expense increased from the comparable prior year periods primarily due to the development of additional technology and purchases of other related fixed assets.

Interest Expense

The increases in interest expense for the three and six months ended June 30, 2023, as compared to the comparable prior year periods, were due to the timing of our entrance into the Credit Agreement (as defined below) on July 29, 2022.

Other Income (Expense), net

The increases in other income (expense), net for the three and six months ended June 30, 2023 were primarily due to income earned on our corporate funds of $6.2 million and $11.4 million, respectively. For the three and six months ended June 30, 2022, we earned income on our corporate funds of $0.5 million and $0.6 million, respectively.

Provision for Income Taxes

The provision for income taxes is based on a current estimate of the annual effective income tax rate adjusted to reflect the impact of discrete items. Our effective income tax rate was 28.9% and 25.5% for the six months ended June 30, 2023 and 2022, respectively. The increase in effective tax rate for the six months ended June 30, 2023 was related to a decrease in excess tax benefits from stock-based compensation and a reduction of research and development credits.

Liquidity and Capital Resources

Our principal sources of capital and liquidity are our operating cash flow and cash and cash equivalents. Our cash and cash equivalents consist primarily of demand deposit accounts, money market funds and certificates of deposit. Additionally, we maintain a $1.0 billion senior secured revolving credit facility (the “Revolving Credit Facility”), which can be accessed as needed to supplement our operating cash flow and cash balances. As of June 30, 2023, we have $29.0 million of outstanding borrowings under the Revolving Credit Facility.

We have historically funded our operations from cash flows generated from operations, cash from the sale of equity securities and debt financing. Although we have funded most of the costs for construction projects at our corporate headquarters and other facilities from available cash, we have incurred indebtedness for a portion of these costs. We are funding the current building expansion at our Oklahoma City headquarters from available cash. Further, to date, all cash dividends and purchases under our stock repurchase plans have been funded from available cash. We believe our existing cash and cash equivalents, cash generated from operations and available sources of liquidity will be sufficient to maintain operations, make necessary capital expenditures, pay dividends and opportunistically repurchase shares for at least the next 12 months. In addition, based on our strong profitability and continued growth, we expect to meet our longer-term liquidity needs with cash flows from operations and, as needed, financing arrangements.

Credit Agreement. On July 29, 2022 (the “July 2022 Facility Closing Date”), we entered into a new credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, swingline lender and issuing bank, the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “Lenders”), and JPMorgan Chase Bank, N.A., as the administrative agent. The Credit Agreement initially provided for the Revolving Credit Facility in the aggregate principal amount of up to $650.0 million, and the ability to request an incremental facility of up to an additional $500.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Credit Agreement includes a $25.0 million sublimit for swingline loans and a $6.5 million sublimit for letters of credit. The Credit Agreement also initially provided for the $750.0 million

senior secured delayed draw term loan facility (the “Term Loan Facility”). All loans under the Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”).

The borrowings under the Credit Agreement bear interest at a rate per annum equal to (i) the Alternate Base Rate (“ABR”) plus an applicable margin (“ABR Loans”) or (ii) (x) the term Secured Overnight Financing Rate (“SOFR”) plus 0.10% (the “Adjusted Term SOFR Rate”) or (y) the daily SOFR plus 0.10%, in each case plus an applicable margin (“SOFR Rate Loans”). ABR is calculated as the highest of (i) the rate of interest last quoted by The Wall Street Journal in the United States as the prime rate in effect, (ii) the federal funds rate plus 0.5% and (iii) the Adjusted Term SOFR Rate for a one-month interest period plus 1.00%; provided that, if the ABR as determined pursuant to the foregoing would be less than 1.00%, such rate shall be deemed to be 1.00%. The applicable margin for ABR Loans is (i) 0.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.50% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 1.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. The applicable margin for SOFR Rate Loans is (i) 1.25% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 1.5% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 1.75% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 2.00% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are required to pay a quarterly commitment fee on the daily amount of the undrawn portion of the revolving commitments under the Revolving Credit Facility and a quarterly ticking fee on the daily amount of the undrawn portion of the Term Loan Facility, in each case at a rate per annum of (i) 0.20% if the Company’s consolidated leverage ratio is less than 1.0 to 1.0; (ii) 0.225% if the Company’s consolidated leverage ratio is greater than or equal to 1.0 to 1.0 but less than 2.0 to 1.0; (iii) 0.25% if the Company’s consolidated leverage ratio is greater than or equal to 2.0 to 1.0 but less than 3.0 to 1.0; or (iv) 0.275% if the Company’s consolidated leverage ratio is greater than or equal to 3.0 to 1.0. We are also required to pay customary letter of credit fees upon drawing any letter of credit.

Under the Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.75 to 1.0, stepping down to 3.0 to 1.0 at intervals thereafter.

On the July 2022 Facility Closing Date, we borrowed $29.0 million under the Revolving Credit Facility to repay the outstanding indebtedness under our prior credit facility, along with accrued interest, expenses and fees. The loan bears interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%.

On July 28, 2023, we entered into an amendment to the Credit Agreement (the “Credit Agreement Amendment”), pursuant to which the aggregate revolving commitments thereunder were increased from $650.0 million to $1.0 billion, the Term Loan Facility was terminated and the Credit Agreement was amended in contemplation of the formation and future operating activities of Paycom Client Trust (the “Client Trust”) and Paycom National Trust Bank, NA (the “Trust Bank”). We intend to form the Client Trust to hold client payroll and related funds and the Trust Bank to serve as trustee of the Client Trust. We did not make any draws under the Term Loan Facility prior to its termination.

Stock Repurchase Plan and Withholding Shares to Cover Taxes. 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 August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock. As of June 30, 2023, there was $1.1 billion 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 August 15, 2024.

During the six months ended June 30, 2023, we repurchased an aggregate of 39,577 shares of our common stock at an average cost of $279.64 per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Our payment of the taxes on behalf of those employees resulted in an aggregate cash expenditure of $11.1 million and, as such, we generally subtract the amounts attributable to such withheld shares from the aggregate amount available for future purchases under our stock repurchase plan.

Dividends on Common Stock. In May 2023, our Board of Directors adopted a dividend policy under which we intend to pay quarterly cash dividends on our common stock. On May 15, 2023, our Board of Directors declared a quarterly cash dividend of $0.375 per share of common stock, which was paid on June 12, 2023 to stockholders of record at the close of business on May 30, 2023. On July 31, 2023, our Board of Directors declared a quarterly cash dividend of $0.375 per share of common stock payable on September 11, 2023 to stockholders of record at the close of business on August 28, 2023.

The declaration, timing and amount of each quarterly cash dividend are subject to the approval of the Board of Directors, including a determination that the dividend policy and the declaration of dividends thereunder are in the best interests of our

stockholders and are in compliance with applicable law. The Board of Directors retains the power to modify, suspend, or cancel the dividend policy in any manner and at any time that it may deem necessary or appropriate.

Cash Flow Analysis

Our cash flows from operating activities have historically been significantly impacted by profitability, implementation revenues received but deferred, our investment in sales and marketing to drive growth, and research and development. Our ability to meet future liquidity needs will be driven by our operating performance and the extent of continued investment in our operations. Failure to generate sufficient revenues and related cash flows could have a material adverse effect on our ability to meet our liquidity needs and achieve our business objectives.

As our business grows, we expect our capital expenditures and our investment activity to continue to increase. For example, we estimate that the total cost of the current expansion project at our corporate headquarters will be between $70 and $75 million. Capital expenditures related to this expansion began in the fourth quarter of 2021 and we expect construction to be completed in the first quarter of 2024. In addition, we purchased the naming rights to the downtown Oklahoma City arena that is home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make payments escalating annually from $4.0 million in 2021 to $6.1 million in 2035. The payments are due in the fourth quarter of each year. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services. Actual future capital requirements will depend on many factors, including our future revenues, cash from operating activities and the level of expenditures in all areas of our business.

As part of our payroll and payroll tax filing services, we collect funds from our clients for federal, state and local employment taxes, which we remit to the appropriate tax agencies. We typically invest these funds in money market funds, demand deposit accounts, commercial paper, U.S. treasury securities and certificates of deposit from which we earn interest income during the period between their receipt and disbursement.

Our cash flows from investing and financing activities are influenced by the amount of funds held for clients, which can vary significantly from quarter to quarter. The balance of the funds we hold depends on our clients’ payroll calendars, and therefore such balance changes from period to period in accordance with the timing of each payroll cycle.

Our cash flows from financing activities are also affected by the extent to which we use available cash to purchase shares of common stock under our stock repurchase plan as well as restricted stock vesting events that result in net share settlements and the Company paying withholding taxes on behalf of certain employees. Additionally, we intend to continue to pay a quarterly cash dividend, subject to the discretion of the Board of Directors.

The following table summarizes the consolidated statements of cash flows for the six months ended June 30, 2023 and 2022:


	Six Months Ended June 30,
	2023			2022			% Change
Net cash provided by (used in):
Operating activities	$	251,991		$	168,958		49%
Investing activities		(83,378	)		(22,510	)	270%
Financing activities		(234,350	)		1,477,971		-116%
Change in cash, cash equivalents, restricted cash and restricted cash equivalents	$	(65,737	)	$	1,624,419		-104%

Operating Activities

Cash provided by operating activities for the six months ended June 30, 2023 primarily consisted of payments received from our clients and interest earned on funds held for clients. Cash used in operating activities primarily consisted of personnel-related expenditures to support the growth and infrastructure of our business. These payments included costs of operations, advertising and other sales and marketing efforts, IT infrastructure development, product research and development and security and administrative costs. Compared to the six months ended June 30, 2022, our operating cash flows for the six months ended June 30, 2023 were positively impacted by the growth of our business.

Investing Activities

Cash flows used in investing activities for the six months ended June 30, 2023 increased from the comparable prior year period due to a $254.0 million decrease in proceeds from investments from funds held for clients and a $15.7 million increase in purchases of property and equipment, which were partially offset by a $208.8 million decrease in purchases of investments from funds held for clients.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2023 increased from the comparable prior year period primarily due to the impact of a $1,780.6 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf, a decrease in proceeds from the issuance of debt of $29.0 million, the payment of a $21.7 million dividend and a $6.3 million increase in withholding taxes paid related to net share settlements. The increase in cash flows used in financing activities was partially offset by a $94.7 million decrease in repurchases of common stock, a $29.3 million decrease in payments of long-term debt, and a $1.3 million decrease in payment of debt issuance costs.

Contractual Obligations

Our principal commitments primarily consist of long-term debt, leases for office space and the naming rights agreement. Except as described above with respect to the Credit Agreement Amendment, there have been no material changes to our contractual obligations disclosed in the contractual obligations section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K that was filed with the SEC on February 16, 2023. For additional information regarding our naming rights agreement, leases, long-term debt and our commitments and contingencies, see “Note 4. Goodwill and Intangible Assets, Net”, “Note 5. Leases”, “Note 6. Long-Term Debt, Net” and “Note 13. Commitments and Contingencies” in the Form 10-K and “Note 5. Goodwill and Intangible Assets, Net”, “Note 6. Long-Term Debt”, and “Note 13. Commitments and Contingencies” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions to ensure that management believes them to be reasonable under the then-current facts and circumstances. Actual amounts and results may materially differ from these estimates made by management under different assumptions and conditions.

Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are discussed in the critical accounting policies and estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K. There have been no material changes to the critical accounting policies disclosed in the Form 10-K.

Adoption of Accounting Pronouncements

Discussion of our recently adopted accounting pronouncements can be found in Note 2 in this Form 10-Q.

Non-GAAP Financial Measures

Management uses adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess the performance of our core business operations and for planning purposes. We define (i) adjusted EBITDA as net income plus interest expense, taxes, depreciation and amortization, non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap and (ii) non-GAAP net income as net income plus non-cash stock-based compensation expense, certain transaction expenses that are not core to our operations (if any) and the change in fair value of our interest rate swap, all of which are adjusted for the effect of income taxes. Adjusted EBITDA and non-GAAP net income are metrics that provide investors with greater transparency to the information used by management in its financial and operational decision-making. We believe these metrics are useful to investors because they facilitate comparisons of our core business operations across periods on a consistent basis, as well as comparisons with the results of peer companies, many of which use similar non-GAAP financial measures to supplement results under U.S. GAAP. In addition, adjusted EBITDA is a measure that provides useful information to management about the amount of cash available for reinvestment in our business, repurchasing common stock and other purposes. Management believes that the non-GAAP measures presented in this Form 10-Q, when viewed in combination with our results prepared in accordance with U.S. GAAP, provide a more complete understanding of the factors and trends affecting our business and performance.

Adjusted EBITDA and non-GAAP net income are not measures of financial performance under U.S. GAAP, and should not be considered a substitute for net income, which we consider to be the most directly comparable U.S. GAAP measure. Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and when assessing our operating performance, you should not consider adjusted EBITDA or non-GAAP net income in isolation, or as a substitute for net income or other consolidated statements of comprehensive income data prepared in accordance with U.S. GAAP. Adjusted EBITDA and non-GAAP net income may not be comparable to similarly titled measures of other companies and other companies may not calculate such measures in the same manner as we do.

The following tables reconcile net income to adjusted EBITDA, net income to non-GAAP net income and earnings per share to non-GAAP net income per share on a basic and diluted basis:


	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023		2022
Net income to adjusted EBITDA:
Net income	$	64,516	$	57,355		$	183,812	$	149,285
Interest expense		602		354			1,439		569
Provision for income taxes		28,331		15,482			74,634		51,016
Depreciation and amortization		27,738		22,568			54,010		44,223
EBITDA		121,187		95,759			313,895		245,093
Non-cash stock-based compensation expense		35,366		24,268			63,185		46,323
Change in fair value of interest rate swap		—		(405	)		—		(1,668	)
Adjusted EBITDA	$	156,553	$	119,622		$	377,080	$	289,748


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net income to non-GAAP net income:
Net income	$	64,516		$	57,355		$	183,812		$	149,285
Non-cash stock-based compensation expense		35,366			24,268			63,185			46,323
Change in fair value of interest rate swap		—			(405	)		—			(1,668	)
Income tax effect on non-GAAP adjustments		(5,620	)		(8,224	)		(10,084	)		(10,298	)
Non-GAAP net income	$	94,262		$	72,994		$	236,913		$	183,642

Weighted average shares outstanding:
Basic		57,920			57,969			57,895			57,992
Diluted		58,033			58,067			58,050			58,186

Earnings per share, basic	$	1.11		$	0.99		$	3.17		$	2.57
Earnings per share, diluted	$	1.11		$	0.99		$	3.17		$	2.57
Non-GAAP net income per share, basic	$	1.63		$	1.26		$	4.09		$	3.17
Non-GAAP net income per share, diluted	$	1.62		$	1.26		$	4.08		$	3.16


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Earnings per share to non-GAAP net income per share, basic:
Earnings per share, basic	$	1.11		$	0.99		$	3.17		$	2.57
Non-cash stock-based compensation expense		0.61			0.42			1.09			0.80
Change in fair value of interest rate swap		—			(0.01	)		—			(0.03	)
Income tax effect on non-GAAP adjustments		(0.09	)		(0.14	)		(0.17	)		(0.17	)
Non-GAAP net income per share, basic	$	1.63		$	1.26		$	4.09		$	3.17


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Earnings per share to non-GAAP net income per share, diluted:
Earnings per share, diluted	$	1.11		$	0.99		$	3.17		$	2.57
Non-cash stock-based compensation expense		0.61			0.42			1.09			0.80
Change in fair value of interest rate swap		—			(0.01	)		—			(0.03	)
Income tax effect on non-GAAP adjustments		(0.10	)		(0.14	)		(0.18	)		(0.18	)
Non-GAAP net income per share, diluted	$	1.62		$	1.26		$	4.08		$	3.16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

We had cash and cash equivalents totaling $536.5 million as of June 30, 2023. These amounts are invested primarily in demand deposit accounts and money market funds. We consider all highly liquid debt instruments purchased with a maturity of three months or less and SEC-registered money market mutual funds to be cash equivalents. The primary objectives of our investing activities are capital preservation, meeting our liquidity needs and, with respect to investing client funds, generating interest income while maintaining the safety of principal. We do not enter into investments for trading or speculative purposes.

Our cash equivalents are subject to market risk due to changes in interest rates. The market value of fixed rate securities may be adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

As of June 30, 2023, we had $29.0 million of indebtedness outstanding under the Revolving Credit Facility. Our borrowings under the Revolving Credit Facility bear interest at the Adjusted Term SOFR Rate for the interest period in effect plus 1.25%, and as a result, we may be exposed to increased interest rate risk. As of June 30, 2023, an increase or decrease in interest rates of 100 basis points would not have had a material effect on our operating results or financial condition.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our chief executive officer and chief financial officer, evaluated, as of June 30, 2023, the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2023 to ensure that information required to be disclosed by us in this Form 10-Q is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, can only provide reasonable assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various disputes, claims, suits, investigations and legal proceedings arising in the ordinary course of business. We believe that the resolution of current pending legal matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows. Nonetheless, we cannot predict the outcome of these proceedings, as legal matters are subject to inherent uncertainties, and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes from the information set forth in “Item 1A. Risk Factors” in the Form 10-K filed with the SEC on February 16, 2023.

If our security measures are breached, or unauthorized access to our clients’ or their employees’ sensitive data is otherwise obtained, our solution may not be perceived as being secure, clients may reduce the use of or stop using our solution, our ability to attract new clients may be harmed and we may incur significant liabilities.

Our solution involves the collection, storage and transmission of clients’ and their employees’ confidential and proprietary information, including personal identifying information, as well as financial and payroll data. HCM software is often targeted in cyber attacks, including computer viruses, worms, phishing attacks, malicious software programs and other information security breaches, which could result in unauthorized access to or release, gathering, monitoring, misuse, loss or destruction of our or our clients’ sensitive data or otherwise disrupt our or our clients’ business operations. If cybercriminals are able to circumvent our security measures, or if we are unable to detect an intrusion into our systems and contain such intrusion in a reasonable amount of time, our or our clients’ sensitive data may be compromised. Further, certain of our employees have access to sensitive information about our clients’ employees. While we conduct background checks of our employees and limit access to systems and data, it is possible that one or more of these individuals may circumvent these controls, resulting in a security breach.

In certain limited circumstances, we utilize relationships with third parties to aid in data management and transaction processing. Certain third parties with which we do business have been subject to cyber attacks, one of which resulted in unauthorized access to data of certain Company clients and their employees as well as Company data and employee records. These third parties may be sources of cybersecurity or other technological risks in the future, including operational errors, system interruptions or breaches, unauthorized disclosure of confidential information and misuse of intellectual property.

Although we have security measures in place to protect client information and prevent data loss and other security breaches, these measures could be breached as a result of third-party action, employee error, third-party or employee malfeasance or otherwise. Globally, cybersecurity attacks are increasing in number and the attackers are increasingly organized and well financed, or at times supported by state actors. In addition, geopolitical tensions or conflicts, such as Russia’s invasion of Ukraine or increasing tension with China, may create a heightened risk of cybersecurity attacks. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently, we may not be able to anticipate these techniques and implement adequate preventative or protective measures. While we currently maintain a cyber liability insurance policy, cyber liability insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our cyber liability insurance policy may not cover all claims made against us, and defending a suit, regardless of its merit, could be costly and divert management’s attention from our business and operations.

Any actual or perceived breach of our security could damage our reputation, cause existing clients to discontinue the use of our solution, prevent us from attracting new clients, or subject us to third-party lawsuits, regulatory fines or other actions or liabilities, any of which could adversely affect our business, operating results or financial condition.

As we enhance our solution to serve clients located outside of the United States, our business will be subject to risks associated with international operations.

An element of our growth strategy is to expand our operations and client base. We have recently begun to expand our operations into markets outside of the United States. Doing business internationally involves a number of risks, including but not limited to:

•

multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits, and licenses;

•

failure to obtain and maintain regulatory approvals for the use of our products in various countries;

•

complexities and difficulties in obtaining protection and enforcing our intellectual property;

•

difficulties in staffing and managing foreign operations;

•

limits in our ability to penetrate international markets;

•

financial risks, such as the impact of local and regional financial crises on demand for our products and exposure to foreign currency exchange rate fluctuations;

•

natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions;

•

certain expenses including, among others, expenses for travel, translation and insurance; and

•

regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, its books and records provisions or its anti-bribery provisions.

Our expansion into international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that differ from those in the United States. Because of our inexperience with international operations, we cannot ensure that our expansion into international markets will be successful, and the impact of such expansion may adversely affect our business, operating results or financial condition.

We may not continue to pay dividends or to pay dividends at the same rate as announced in May 2023.

Our payment of dividends, as well as the rate at which we pay dividends, are solely at the discretion of our Board of Directors. Further, dividend payments, if any, are subject to our financial results and the availability of statutory surplus. These factors could result in a change to our recently adopted dividend policy.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The number of shares of common stock repurchased by us during the six months ended June 30, 2023 is set forth below.


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1 - 30, 2023(2)		10,268	$	288.92		10,268	$	1,096,040,000
May 1 - 31, 2023(2)		27,386	$	272.94		27,386	$	1,088,565,000
June 1 - 30, 2023(2)		—	$	—		—	$	1,088,565,000
Total		37,654				37,654

(1)

Pursuant to a stock repurchase plan announced on November 20, 2018, we were authorized to purchase (in the aggregate) up to $150.0 million of our common stock in open market purchases, privately negotiated transactions or by other means. On May 13, 2021, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $300.0 million and extended the expiration date to May 13, 2023. On June 7, 2022, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $550.0 million and extended the expiration date to June 7, 2024. On August 15, 2022, we announced that our Board of Directors increased the availability under the existing stock repurchase plan to $1.1 billion and extended the expiration date to August 15, 2024.

(2)

Consists of shares withheld to satisfy tax withholding for certain employees upon the vesting of restricted stock.

Item 6. Exhibits

The following exhibits are incorporated herein by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K):


Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of Paycom Software, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Amendment No. 1 to the Registration Statement on Form S-1/A dated March 31, 2014, filed with the SEC on March 31, 2014).

3.2		Amended and Restated Bylaws of Paycom Software, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 21, 2023, filed with the SEC on April 24, 2023).

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 1 to the Registration Statement on Form S-1/A dated March 31, 2014, filed with the SEC on March 31, 2014).

10.1+		Paycom Software, Inc. 2023 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 dated May 1, 2023, filed with the SEC on May 1, 2023).

10.2+		Form of Restricted Stock Unit Award Agreement - Performance-Based Vesting (Boelte) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 4, 2023).

10.3+		Form of Restricted Stock Unit Award Agreement - Performance-Based Vesting (Faurot) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 4, 2023).

10.4+		Form of Restricted Stock Unit Award Agreement - Performance-Based Vesting (Smith/Thomas) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 4, 2023).

10.5+		Form of Restricted Stock Unit Award Agreement - Time-Based Vesting (Executive) (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 4, 2023).

10.6+		Form of Restricted Stock Award Agreement - Time-Based Vesting (Executive) (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 4, 2023).

10.7*		Amendment No. 1 to Credit Agreement, dated May 17, 2023, by and among Paycom Software, Inc., Paycom Payroll, LLC, certain other subsidiaries of Paycom Software, Inc. as guarantors, JPMorgan Chase Bank, N.A., as a lender, swingline lender, and issuing bank, the lenders party thereto, and JPMorgan Chase Bank, N.A. as the administrative agent.

10.8		Amendment No. 2 to Credit Agreement, dated July 28, 2023, by and among Paycom Software, Inc., Paycom Payroll, LLC, certain other subsidiaries of Paycom Software, Inc. as guarantors, JPMorgan Chase Bank, N.A., as a lender, swingline lender, and issuing bank, the lenders party thereto, and JPMorgan Chase Bank, N.A. as the administrative agent. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 28, 2023, filed with the SEC on August 1, 2023).

31.1*		Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of the Chief Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.INS		Inline XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema Document.

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.


Exhibit No.		Description


101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

+ Management contract or compensatory plan or arrangement.

* Filed herewith.

** The certifications attached as Exhibit 32.1 are not deemed “filed” with the SEC and are not to be incorporated by reference into any filing of Paycom Software, Inc. under the Securities Act whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		PAYCOM SOFTWARE, INC.

Date: August 3, 2023	By:	/s/ Chad Richison
		Chad Richison
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 3, 2023	By:	/s/ Craig E. Boelte
		Craig E. Boelte
		Chief Financial Officer
		(Principal Accounting Officer and Principal Financial Officer)