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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One) 

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

For the quarterly period ended March 31, 2019

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

For the transition period from ______ to ______

Commission File Number: 001-36393

 

Paycom Software, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0957485

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

7501 W. Memorial Road

Oklahoma City, Oklahoma 73142

(Address of principal executive offices, including zip code)

(405) 722-6900

(Registrant’s telephone number, including area code)

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

 

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. (Check one):

 

Large accelerated filer 

 

Accelerated filer

 

 

 

 

Non-accelerated filer   

 

Smaller reporting company

Emerging growth company    

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

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

As of April 25, 2019, there were 58,507,395 shares of common stock, par value of $0.01 per share, outstanding, including 996,755 shares of restricted stock.

 

 


Paycom Software, Inc.

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1.

 

 

Financial Statements

 

3

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

Consolidated Statements of Income

 

4

 

 

Consolidated Statements of Stockholders’ Equity

 

5

 

 

 

Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to the Consolidated Financial Statements

 

7

 

Item 2.

 

 

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

 

19

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

Item 4.

 

 

Controls and Procedures

 

28

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1.

 

 

Legal Proceedings

 

29

 

Item 1A.

 

 

Risk Factors

 

29

 

Item 2.

 

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

29

 

Item 6.

 

 

Exhibits

 

30

 

Signatures

 

32

 

 

 

2


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Paycom Software, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

91,307

 

 

$

45,718

 

Accounts receivable

 

 

3,835

 

 

 

3,414

 

Prepaid expenses

 

 

9,156

 

 

 

7,658

 

Inventory

 

 

910

 

 

 

797

 

Income tax receivable

 

 

 

 

 

3,962

 

Deferred contract costs

 

 

38,811

 

 

 

35,286

 

Current assets before funds held for clients

 

 

144,019

 

 

 

96,835

 

Funds held for clients

 

 

1,405,465

 

 

 

967,787

 

Total current assets

 

 

1,549,484

 

 

 

1,064,622

 

Property and equipment, net

 

 

187,511

 

 

 

176,962

 

Goodwill

 

 

51,889

 

 

 

51,889

 

Long-term deferred contract costs

 

 

247,135

 

 

 

225,459

 

Other assets

 

 

26,809

 

 

 

2,994

 

Total assets

 

$

2,062,828

 

 

$

1,521,926

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,081

 

 

$

6,288

 

Income tax payable

 

 

3,526

 

 

 

 

Accrued commissions and bonuses

 

 

4,553

 

 

 

10,671

 

Accrued payroll and vacation

 

 

14,506

 

 

 

10,741

 

Deferred revenue

 

 

9,672

 

 

 

8,980

 

Current portion of long-term debt

 

 

1,775

 

 

 

1,775

 

Accrued expenses and other current liabilities

 

 

40,132

 

 

 

22,440

 

Current liabilities before client funds obligation

 

 

78,245

 

 

 

60,895

 

Client funds obligation

 

 

1,405,465

 

 

 

967,787

 

Total current liabilities

 

 

1,483,710

 

 

 

1,028,682

 

Deferred income tax liabilities, net

 

 

73,928

 

 

 

70,206

 

Long-term deferred revenue

 

 

57,839

 

 

 

55,671

 

Net long-term debt, less current portion

 

 

32,179

 

 

 

32,614

 

Other long-term liabilities

 

 

16,619

 

 

 

 

Total long-term liabilities

 

 

180,565

 

 

 

158,491

 

Total liabilities

 

 

1,664,275

 

 

 

1,187,173

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value (100,000,000 shares authorized, 61,027,123 and

  60,746,715 shares issued at March 31, 2019 and December 31, 2018, respectively;

  57,447,346 and 57,276,992 shares outstanding at March 31, 2019 and December 31, 2018,

  respectively)

 

 

609

 

 

 

607

 

Additional paid-in capital

 

 

239,865

 

 

 

203,680

 

Retained earnings

 

 

442,872

 

 

 

395,590

 

Treasury stock, at cost (3,579,777 and 3,469,723 shares at March 31, 2019 and

   December 31, 2018, respectively)

 

 

(284,793

)

 

 

(265,124

)

Total stockholders' equity

 

 

398,553

 

 

 

334,753

 

Total liabilities and stockholders' equity

 

$

2,062,828

 

 

$

1,521,926

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


 

Paycom Software, Inc.

Consolidated Statements of Income

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

Recurring

 

$

196,864

 

 

$

151,885

 

Implementation and other

 

 

3,079

 

 

 

2,031

 

Total revenues

 

 

199,943

 

 

 

153,916

 

Cost of revenues

 

 

 

 

 

 

 

 

Operating expenses

 

 

24,776

 

 

 

20,568

 

Depreciation and amortization

 

 

4,542

 

 

 

3,037

 

Total cost of revenues

 

 

29,318

 

 

 

23,605

 

Administrative expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

39,645

 

 

 

32,352

 

Research and development

 

 

18,489

 

 

 

11,250

 

General and administrative

 

 

45,198

 

 

 

32,657

 

Depreciation and amortization

 

 

4,805

 

 

 

3,032

 

Total administrative expenses

 

 

108,137

 

 

 

79,291

 

Total operating expenses

 

 

137,455

 

 

 

102,896

 

Operating income

 

 

62,488

 

 

 

51,020

 

Interest expense

 

 

(276

)

 

 

 

Other income, net

 

 

(100

)

 

 

1,030

 

Income before income taxes

 

 

62,112

 

 

 

52,050

 

Provision for income taxes

 

 

14,830

 

 

 

10,890

 

Net income

 

$

47,282

 

 

$

41,160

 

Earnings per share, basic

 

$

0.82

 

 

$

0.71

 

Earnings per share, diluted

 

$

0.81

 

 

$

0.70

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

57,357,490

 

 

 

57,793,023

 

Diluted

 

 

58,316,154

 

 

 

58,738,732

 

 

 

 

 

 

 

 

 

 

  

See accompanying notes to the unaudited consolidated financial statements.


4


 

Paycom Software, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)

 

 

 

Common Stock

 

 

Additional

 

 

Retained

 

 

Treasury Stock

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

 

60,149,411

 

 

$

601

 

 

$

161,809

 

 

$

258,525

 

 

 

2,360,838

 

 

$

(139,688

)

 

$

281,247

 

Vesting of restricted stock

 

 

297,291

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

27,496

 

 

 

 

 

 

 

 

 

 

 

 

27,496

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

169,146

 

 

 

(16,870

)

 

 

(16,870

)

Net income

 

 

 

 

 

 

 

 

 

 

 

41,160

 

 

 

 

 

 

 

 

 

41,160

 

Balances at March 31, 2018

 

 

60,446,702

 

 

$

604

 

 

$

189,302

 

 

$

299,685

 

 

 

2,529,984

 

 

$

(156,558

)

 

$

333,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Retained

 

 

Treasury Stock

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Earnings

 

 

Shares

 

 

Amount

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2018

 

 

60,746,715

 

 

$

607

 

 

$

203,680

 

 

$

395,590

 

 

 

3,469,723

 

 

$

(265,124

)

 

$

334,753

 

Vesting of restricted stock

 

 

280,408

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

36,187

 

 

 

 

 

 

 

 

 

 

 

 

36,187

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110,054

 

 

 

(19,669

)

 

 

(19,669

)

Net income

 

 

 

 

 

 

 

 

 

 

 

47,282

 

 

 

 

 

 

 

 

 

47,282

 

Balances at March 31, 2019

 

 

61,027,123

 

 

$

609

 

 

$

239,865

 

 

$

442,872

 

 

 

3,579,777

 

 

$

(284,793

)

 

$

398,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


 

Paycom Software, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

47,282

 

 

$

41,160

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,347

 

 

 

6,069

 

Accretion of discounts on available-for-sale securities

 

 

(165

)

 

 

(177

)

Amortization of debt issuance costs

 

 

9

 

 

 

6

 

Stock-based compensation expense

 

 

31,071

 

 

 

23,222

 

Cash paid for derivative settlement

 

 

(1

)

 

 

(79

)

(Gain)/loss on derivative

 

 

540

 

 

 

(738

)

Deferred income taxes, net

 

 

3,722

 

 

 

4,272

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(421

)

 

 

(774

)

Prepaid expenses

 

 

(1,498

)

 

 

(2,019

)

Inventory

 

 

(11

)

 

 

(193

)

Other assets

 

 

(702

)

 

 

(565

)

Deferred contract costs

 

 

(23,414

)

 

 

(17,712

)

Accounts payable

 

 

(1,251

)

 

 

(710

)

Income taxes, net

 

 

7,488

 

 

 

4,013

 

Accrued commissions and bonuses

 

 

(6,118

)

 

 

(6,980

)

Accrued payroll and vacation

 

 

3,765

 

 

 

4,307

 

Deferred revenue

 

 

2,860

 

 

 

2,153

 

Accrued expenses and other current liabilities

 

 

7,923

 

 

 

2,232

 

Net cash provided by operating activities

 

 

80,426

 

 

 

57,487

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of short-term investments from funds held for clients

 

 

(16,800

)

 

 

(67,632

)

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

 

 

14,500

 

 

 

22,500

 

Net change in funds held for clients

 

 

(435,213

)

 

 

39,350

 

Purchases of property and equipment

 

 

(14,889

)

 

 

(18,708

)

Net cash used in investing activities

 

 

(452,402

)

 

 

(24,490

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

 

 

 

(4,999

)

Withholding taxes paid related to net share settlement

 

 

(19,669

)

 

 

(11,871

)

Payments on long-term debt

 

 

(444

)

 

 

 

Net change in client funds obligation

 

 

437,678

 

 

 

5,959

 

Payment of debt issuance costs

 

 

 

 

 

(42

)

Net cash provided by (used in) financing activities

 

 

417,565

 

 

 

(10,953

)

Increase in cash and cash equivalents

 

 

45,589

 

 

 

22,044

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

45,718

 

 

 

46,077

 

End of period

 

$

91,307

 

 

$

68,121

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

6


 

Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in “Note 2. Summary of Significant Accounting Policies” in the notes to our audited consolidated financial statements for the year ended December 31, 2018, included in the Form 10-K.

 

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial statements that permit reduced disclosure for interim periods.  In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary for the fair presentation of our consolidated balance sheets as of March 31, 2019 and December 31, 2018, our consolidated statements of income for the three months ended March 31, 2019 and 2018, our consolidated statements of stockholders’ equity for the three months ended March 31, 2019 and 2018 and our consolidated statements of cash flows for the three months ended March 31, 2019 and 2018.  Such adjustments are of a normal recurring nature.  The information in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the SEC on February 14, 2019 (the “Form 10-K”).  The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full year.

 

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.  These reclassifications had no impact on reported net income and did not result in any material change to operating cash flows.  In addition to these adjustments, in the consolidated balance sheets, we combined the line items “Intangible assets, net” and “Other assets” in the prior period in order to conform to the current period presentation.

Recently Adopted New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).”  The purpose of this new guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities in the consolidated balance sheets as well as providing additional disclosure requirements related to leasing arrangements. The new guidance was effective for us beginning January 1, 2019, which we adopted using a modified retrospective method and the transition relief guidance provided by the FASB in ASU 2018-11.  Under this adoption method, we have not restated comparative prior periods and have carried forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms.  Based on our portfolio of leases at January 1, 2019, $21.6 million of lease assets and liabilities were recognized in our consolidated balance sheets, which related to operating leases for real estate.  Under the transition relief guidance, we have elected the lease vs. non-lease components practical expedient relating to the asset class of real estate, the short-term lease exemption practical expedient and the package of practical expedients.  In connection with the adoption of this standard, we updated our control framework and implemented changes to existing controls to account for leases.  See “Note 6. Leases” for additional information.  

 

7


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

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.  Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients.  As payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters.  These seasonal fluctuations in revenues can also have an impact on gross profits.  Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations.

Employee Stock Purchase Plan

An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recognized at the fair value of the award.  Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period.

Funds Held for Clients and Client Funds Obligation

As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities.  Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement.

These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recognized in the accompanying consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date.  As of March 31, 2019 and December 31, 2018, 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 duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets.  These available-for-sale securities are recognized in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities.  Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation.  

Stock Repurchase Plan

In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs.  Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time.  On February 13, 2018, we announced that our Board of Directors authorized the repurchase of up to an additional $100.0 million of common stock.  Most recently, on November 20, 2018, we announced that our Board of Directors authorized the repurchase of up to an additional $150.0 million of our common stock.  As of March 31, 2019, there was $142.3 million available for repurchases.  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 November 19, 2020.

During the three months ended March 31, 2019, we repurchased an aggregate of 110,054 shares of our common stock at an average cost of $178.72 per share to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock.  

 

8


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

Recently Issued Accounting Pronouncements 

Management has reviewed all the recently issued, but not yet effective, accounting pronouncements, and does not believe any of these pronouncements will have a material impact to the Company.  

 

3.

REVENUE

Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales and other applicable taxes are excluded from revenues.  

 

Recurring Revenues

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

The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk.

The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications.  For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application.  Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application.  We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups.  

Implementation and Other Revenues

Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations.

Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client.  However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee.  The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period (i.e., ten-year estimated client life).

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

9


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

Contract Balances

The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. We have elected to apply the practical expedient not to disclose the value of unsatisfied performance obligations for contracts that are less than one year in length. However, this expedient cannot be applied to initial 30-day contracts with a client that also contain an implied performance obligation in the form of a material right as the material right performance obligation is being recognized over the expected client life which exceeds one year.  For these 30-day contracts, we determined that the core, non-material right, performance obligations are generally satisfied in full by the end of each reporting period as most of our contracts with clients start at the beginning of a calendar month.  For the material right performance obligation, as discussed above, we defer the amounts allocated and recognize them ratably over the estimated client life of ten years.

Changes in deferred revenue related to material right performance obligations as of March 31, 2019 and 2018 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Balance, beginning of period

 

$

64,651

 

 

$

51,624

 

Deferral of revenue

 

 

5,561

 

 

 

3,943

 

Recognition of unearned revenue

 

 

(2,701

)

 

 

(1,790

)

Balance, end of period

 

$

67,511

 

 

$

53,777

 

 

 

 

 

 

 

 

 

 

 

We expect to recognize $7.3 million of deferred revenue related to material right performance obligations in the remainder of 2019, $9.5 million of such deferred revenue in 2020, and $50.7 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 Accounting Standards Codification (“ASC”) 340-40.  These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations.  

The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach, and are capitalized and amortized over the expected period of benefit, which we have determined to be the estimated client relationship of ten years.  The expected period of benefit has been determined to be the estimated life of the client relationship primarily because we incur no new costs to obtain, or costs to fulfill, a contract upon renewal of such contract.  Additional commission costs may be incurred when an existing client purchases additional applications; however, these commission costs relate solely to the additional applications purchased and are not related to contract renewal.  Furthermore, additional fulfillment costs associated with existing clients purchasing additional applications are minimized by our seamless single-database platform.  These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and costs to fulfill a contract are included in the “sales and marketing” and “general and administrative” line items in the accompanying consolidated statements of income.

 

 

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

 

 

 

As of and for the Three Months Ended March 31, 2019

 

 

 

Beginning

 

 

Capitalization

 

 

 

 

 

 

Ending

 

 

 

Balance

 

 

of Costs

 

 

Amortization

 

 

Balance

 

Costs to obtain a contract

 

$

158,989

 

 

$

19,387

 

 

$

(5,721

)

 

$

172,655

 

Costs to fulfill a contract

 

$

101,756

 

 

$

15,005

 

 

$

(3,470

)

 

$

113,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10


Paycom Software, Inc.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

As of and for the Three Months Ended March 31, 2018

 

 

 

Beginning

 

 

Capitalization

 

 

 

 

 

 

Ending

 

 

 

Balance

 

 

of Costs

 

 

Amortization

 

 

Balance

 

Costs to obtain a contract

 

$

126,207

 

 

$

15,122

 

 

$

(4,418

)

 

$

136,911

 

Costs to fulfill a contract

 

$

72,061

 

 

$

11,043

 

 

$

(2,515

)

 

$

80,589

 

 

 

4.

PROPERTY AND EQUIPMENT

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Property and equipment

 

 

 

 

 

 

 

 

Buildings

 

$

101,541

 

 

$

101,421

 

Software and capitalized software costs

 

 

76,153

 

 

 

66,634

 

Computer equipment

 

 

45,362

 

 

 

39,492

 

Rental clocks

 

 

17,788

 

 

 

16,950

 

Furniture, fixtures and equipment

 

 

16,869

 

 

 

16,474

 

Leasehold improvements

 

 

1,344

 

 

 

1,274

 

Vehicles

 

 

74

 

 

 

74

 

 

 

 

259,131

 

 

 

242,319

 

Less: accumulated depreciation and amortization

 

 

(92,247

)

 

 

(82,969

)

 

 

 

166,884

 

 

 

159,350

 

Construction in progress

 

 

11,604

 

 

 

8,589

 

Land

 

 

9,023