# Paycom Software, Inc.: Form 10-Q for the period ended Jun 30, 2024

- Company: [Paycom Software, Inc.](/companies/payc.md) (CIK 1590955)
- Form: 10-Q
- Filed: 2024-08-01
- Accepted by EDGAR: Aug 1, 2024, 16:22 ET
- Period: 2024-06-30
- Accession: 0000950170-24-089322
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1590955/000095017024089322/payc-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1590955/000095017024089322/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $437.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $937.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $83.9m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2024-01-01 to 2024-06-30 | $162.5m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2024-04-01 to 2024-06-30 | $62.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2024-01-01 to 2024-06-30 | $112.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2024-04-01 to 2024-06-30 | $258.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2024-01-01 to 2024-06-30 | $393.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | $95.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | $381.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $782.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $1.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $31.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $74.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $68.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | $315.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $1.20 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $5.57 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $1.20 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $5.58 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 56,771,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 56,548,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $280.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $93.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2024-01-01 to 2024-06-30 | $42.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2024-01-01 to 2024-06-30 | $80.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-06-30 | $346.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $2.85bn | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $4.31bn | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $2.53bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $2.89bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | $1.43bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,536 characters.

*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 of our financial condition and results of operations 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, 2024, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2024 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, 2023, 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 refer to our estimated or anticipated results, other non-historical facts or 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; competition; 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; the return on investment for users of our solution; 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 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,” “intend,” “may,” “might,” “plan,” “potential,” “should,” “will,” “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, cyber-attacks 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 maintain and expand existing client relationships and add new clients, including challenges related to attracting and retaining larger clients;
- 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, product managers and skilled IT, sales, marketing and operational personnel;
- our ability to manage our rapid growth and organizational change effectively;
- the impact of adverse economic and market conditions, including those related to global health crises and geopolitical conflicts;
- fluctuations in our financial results due to factors beyond our control;
- our failure to develop and maintain our brand cost-effectively;
- our ability to expand into international markets and manage risks associated with international operations and sales;
- our reliance on relationships with third parties;
- regulatory and compliance risks related to our background checks business;
- our failure to adequately protect our intellectual property rights;
- seasonality of certain operating results and financial metrics;
- 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. 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 payroll, talent acquisition, talent management, human resources management and time and labor 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. 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, 2024. Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives 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 automation and employee usage is an important differentiator for attracting new clients and is also key to long-term client satisfaction and client retention. For example, our industry-first Beti technology automates and streamlines the payroll process by empowering employees to do their own payroll. Client adoption of new applications and, historically, client employee usage of both new and existing applications have been significant factors in our revenue growth. Nonetheless, because Beti is designed to eliminate payroll errors that lead to billable corrections and unscheduled payroll runs, we have experienced a reduction in these activities that would otherwise generate additional revenue for us.

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 continuing to leverage our sales force productivity, further penetrating markets where we currently have existing sales offices, and expanding into new markets.

The market for HCM software is highly competitive, rapidly evolving and fragmented, and we expect competition to continue to intensify as new market entrants and disruptive technologies emerge and increasingly aggressive pricing and client retention strategies persist.

Historically, our target client size range has been organizations with 50 to 10,000 employees. In 2023, we expanded our target client size range to include 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 and increased the number of applications we offer. Furthermore, with the launch of our Global HCM solution and expansion of payroll services into certain international markets, we expect that our ability to serve organizations with international employees makes our solution more attractive to larger companies, many of which have a global presence. 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. A multitude of macroeconomic pressures, such as inflation and rising interest rates, impact our clients’ hiring practices to varying degrees and, in turn, impact our revenues. Generally, we expect that changes in certain factors affecting our performance will correlate with improvement or deterioration in the labor market. For example, the performance of our pre-employment services offerings is sensitive to changes in hiring trends, and we believe it will reflect any slowdown in hiring among U.S. employers.

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, certificates of deposit and commercial paper 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. Furthermore, execution of our international expansion strategy requires considerable investment. As a result of the factors described above, we have experienced and expect to continue to experience pressure on our margins as we hire to support growth.

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.

Our revenues are seasonal in nature. Generally, we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year because payroll tax filing forms and Affordable Care Act forms are typically processed in the first quarter, and unscheduled payroll runs (such as bonuses) for our clients are typically concentrated in the fourth quarter. In addition, these seasonal fluctuations in recurring revenues impact operating income.

### Results of Operations

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

| Revenues | Three Months Ended June 30, 2024 |  | 2023 |  | % Change | Six Months Ended June 30, 2024 |  | 2023 |  | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Recurring | $430,400 | 98.4% | $394,522 | 98.4% | 9.1% | $922,296 | 98.4% | $838,943 | 98.4% | 9.9% |
| Implementation and other | 7,112 | 1.6% | 6,617 | 1.6% | 7.5% | 15,097 | 1.6% | 13,833 | 1.6% | 9.1% |
| Total revenues | 437,512 | 100.0% | 401,139 | 100.0% | 9.1% | 937,393 | 100.0% | 852,776 | 100.0% | 9.9% |
| **Cost of revenues** |  |  |  |  |  |  |  |  |  |  |
| Operating expenses | 67,451 | 15.4% | 54,617 | 13.6% | 23.5% | 131,121 | 14.0% | 107,702 | 12.6% | 21.7% |
| Depreciation and amortization | 16,433 | 3.8% | 12,811 | 3.2% | 28.3% | 31,394 | 3.3% | 24,958 | 3.0% | 25.8% |
| Total cost of revenues | 83,884 | 19.2% | 67,428 | 16.8% | 24.4% | 162,515 | 17.3% | 132,660 | 15.6% | 22.5% |
| **Administrative expenses** |  |  |  |  |  |  |  |  |  |  |
| Sales and marketing | 106,864 | 24.4% | 106,435 | 26.5% | 0.4% | 222,388 | 23.7% | 210,009 | 24.6% | 5.9% |
| Research and development | 62,371 | 14.3% | 49,118 | 12.2% | 27.0% | 112,880 | 12.0% | 91,787 | 10.8% | 23.0% |
| General and administrative | 70,072 | 16.0% | 75,965 | 18.9% | -7.8% | 21,968 | 2.3% | 141,570 | 16.6% | -84.5% |
| Depreciation and amortization | 19,181 | 4.4% | 14,927 | 3.8% | 28.5% | 36,688 | 4.0% | 29,052 | 3.4% | 26.3% |
| Total administrative expenses | 258,488 | 59.1% | 246,445 | 61.4% | 4.9% | 393,924 | 42.0% | 472,418 | 55.4% | -16.6% |
| Total operating expenses | 342,372 | 78.3% | 313,873 | 78.2% | 9.1% | 556,439 | 59.4% | 605,078 | 71.0% | -8.0% |
| Operating income | 95,140 | 21.7% | 87,266 | 21.8% | 9.0% | 380,954 | 40.7% | 247,698 | 29.0% | 53.8% |
| Interest expense | (782) | -0.2% | (602) | -0.2% | 29.9% | (1,564) | -0.2% | (1,439) | -0.2% | 8.7% |
| Other income (expense), net | 4,787 | 1.1% | 6,183 | 1.5% | -22.6% | 9,796 | 1.0% | 12,187 | 1.5% | -19.6% |
| Income before income taxes | 99,145 | 22.6% | 92,847 | 23.1% | 6.8% | 389,186 | 41.5% | 258,446 | 30.3% | 50.6% |
| Provision for income taxes | 31,175 | 7.1% | 28,331 | 7.0% | 10.0% | 74,029 | 7.9% | 74,634 | 8.7% | -0.8% |
| Net income | $67,970 | 15.5% | $64,516 | 16.1% | 5.4% | $315,157 | 33.6% | $183,812 | 21.6% | 71.5% |

### Revenues

The increase in recurring revenues for the three and six months ended June 30, 2024 compared to the same periods in 2023 was primarily the result of the addition of new clients in our target market range, increased revenue per client, the realization of pricing strategies and the impact of new product and service offerings. We believe that a decrease in the sale of additional applications to existing clients adversely affected the magnitude of the period-over-period increase in revenues. Increased interest rates and a higher average funds held for clients balance during the three and six months ended June 30, 2024 as compared to the same periods in 2023, resulted in increased interest earned on funds held for clients, which had a positive impact on recurring revenue. The average daily balance of funds held for clients was $2.5 billion and $2.3 billion for the six months ended June 30, 2024 and 2023, respectively.

The increase in implementation and other revenues for the three and six months ended June 30, 2024 compared to the same periods in 2023 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 10-year estimated life of our clients.

### Expenses

### Cost of Revenues

During the three months ended June 30, 2024, operating expenses increased from the comparable prior year period by $12.8 million, primarily due to a $8.6 million increase in employee-related expenses attributable to growth in the number of operating personnel, a $1.6 million increase in shipping and supplies fees and a $1.2 million increase in automated clearing house fees related to increased revenues. Depreciation and amortization expense increased $3.6 million from the comparable prior year period, primarily due to the development of additional technology, purchases of other related fixed assets, and the impact of our corporate headquarters expansion that was placed into service in April 2024.

During the six months ended June 30, 2024, operating expenses increased from the comparable prior year period by $23.4 million, primarily due to a $16.7 million increase in employee-related expenses attributable to growth in the number of operating personnel, a $2.6 million increase in automated clearing house fees and a $2.5 million increase in shipping and supplies fees related to increased revenues. Depreciation and amortization expense increased $6.4 million from the comparable prior year period, primarily due to the development of additional technology, purchases of other related fixed assets, and the impact of our corporate headquarters expansion that was not in service in the prior year period.

### Administrative Expenses

#### Sales and Marketing

During the three months ended June 30, 2024, sales and marketing expenses increased from the comparable prior year period by $0.4 million due to a $9.6 million increase in employee-related expenses, including commissions and bonuses, which was partially offset by a $9.2 million decrease in marketing and advertising expense.

During the six months ended June 30, 2024, sales and marketing expenses increased from the comparable prior year period by $12.4 million due to a $18.4 million increase in employee-related expenses, including commissions and bonuses, which was partially offset by a $6.0 million decrease in marketing and advertising expense.

#### Research and Development

During the three and six months ended June 30, 2024, research and development expenses increased from the comparable prior year periods due to increases in employee-related expenses of $13.3 million and $21.1 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, 2024 and 2023:

|  | Three Months Ended June 30, 2024 | 2023 | % Change | Six Months Ended June 30, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Capitalized portion of research and development | $31,186 | $22,878 | 36% | $61,032 | $44,231 | 38% |
| Expensed portion of research and development | 62,371 | 49,118 | 27% | 112,880 | 91,787 | 23% |
| Total research and development costs | $93,557 | $71,996 | 30% | $173,912 | $136,018 | 28% |

#### General and Administrative

During the three months ended June 30, 2024, general and administrative expenses decreased $5.9 million from the comparable prior year period due to a decrease in employee-related expenses of $3.4 million and a $2.5 million decrease in accounting and legal expenses.

During the six months ended June 30, 2024, general and administrative expenses decreased $119.6 million from the comparable prior year period due to a $117.5 million reversal of previously recognized stock-based compensation expense related to the forfeiture of a restricted stock award (the “2020 CEO Performance Award”) upon Chad Richison’s transition to Co-Chief Executive Officer and a $1.7 million decrease in accounting and legal expenses, which was partially offset by a $0.4 million increase in other employee-related 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, 2024 | 2023 | % Change | Six Months Ended June 30, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating expenses | $4,163 | $3,353 | 24% | $7,154 | $5,738 | 25% |
| Sales and marketing | 4,802 | 6,040 | -20% | 10,296 | 11,516 | -11% |
| Research and development | 7,775 | 6,639 | 17% | 13,145 | 11,897 | 10% |
| General and administrative | 7,380 | 19,334 | -62% | (100,265) | 34,034 | -395% |
| Total non-cash stock-based compensation expense | $24,120 | $35,366 | -32% | $(69,670) | $63,185 | -210% |

### Depreciation and Amortization

During the three and six months ended June 30, 2024, depreciation and amortization expense increased from the comparable prior year periods primarily due to the development of additional technology, purchases of other related fixed assets, and the impact of our corporate headquarters expansion that was placed into service in April 2024.

### Interest Expense

The increases in interest expense for the three and six months ended June 30, 2024, as compared to the prior year periods, were primarily due to the timing of our expansion project at our corporate headquarters, which resulted in a higher capitalization rate of interest in the comparable prior year periods.

### Other Income (Expense), net

The decreases in other income (expense), net for the three and six months ended June 30, 2024, as compared to the prior year periods, were primarily attributable to decreases in interest earned on our corporate funds due to lower cash balances. For the three and six months ended June 30, 2024, we earned interest on our corporate funds of $4.8 million and $9.0 million, respectively. For the three and six months ended June 30, 2023, we earned interest on our corporate funds of $6.2 million and $11.4 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 19.0% and 28.9% for the six months ended June 30, 2024 and 2023, respectively. The lower effective tax rate for the six months ended June 30, 2024 was primarily attributable to the tax benefit related to the forfeiture of the 2020 CEO Performance Award in February 2024.

### 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 and money market funds. 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, 2024, we did not have any 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. We are funding our ongoing capital expenditures from available cash. Further, to date, all cash dividends and purchases under our stock repurchase plan 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, we entered into a credit agreement (as amended from time to time, 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 provides for the Revolving Credit Facility in the aggregate principal amount of up to $1.0 billion. All loans under the Credit Agreement will mature on July 29, 2027 (the “Scheduled Maturity Date”). Subject to certain conditions set forth in the Credit Agreement, we may borrow, prepay and reborrow under the Revolving Credit Facility and terminate or reduce the Lenders’ commitments at any time prior to the Scheduled Maturity Date.

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 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.

Under the Credit Agreement, we are required to maintain as of the end of each fiscal quarter a consolidated interest coverage ratio of not less than 3.0 to 1.0 and a consolidated leverage ratio of not greater than 3.5 to 1.0, stepping down to 3.25 to 1.0 as of December 31, 2024 and 3.0 to 1.0 as of December 31, 2025 and thereafter.

*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. In August 2022, our Board of Directors authorized the repurchase of up to $1.1 billion of our common stock over a two-year period expiring on August 15, 2024. As of June 30, 2024, there was $705.9 million available for repurchases under our stock repurchase plan. On July 29, 2024, our Board of Directors increased and extended the stock repurchase plan, such that $1.5 billion is available for repurchases between July 29, 2024 and August 15, 2026. 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 equity incentive awards and other corporate considerations.

During the six months ended June 30, 2024, we repurchased an aggregate of 589,424 shares of our common stock at an average cost of $158.06 per share, including 68,482 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of equity incentive awards. Our payment of the taxes on behalf of those employees resulted in an aggregate cash expenditure of $12.4 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.

The following table summarizes dividend activity during 2024.

| Declaration Date | Record Date | Payment Date | Per Share Dividend | Total Cash Dividends Paid (in thousands)(1) |
| --- | --- | --- | ---: | ---: |
| April 29, 2024 | May 28, 2024 | June 10, 2024 | $0.375 | $21,191 |
| February 5, 2024 | March 4, 2024 | March 18, 2024 | $0.375 | $21,209 |

(1) All unvested equity incentive awards currently outstanding are entitled to receive dividends or dividend equivalents, provided that such dividends or dividend equivalents are withheld by the Company and distributed to the applicable holder upon vesting of the award. Dividends declared, as reported in the consolidated statements of stockholders’ equity, includes dividends and dividend equivalents payable to holders of unvested equity incentive awards and, as a result, exceeds the amount of total cash dividends paid presented in this column.

On July 29, 2024, our Board of Directors declared a quarterly cash dividend of $0.375 per share of common stock payable on September 9, 2024 to stockholders of record at the close of business on August 26, 2024.

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 related to research and development and other strategic expansion activities to continue to increase. We completed an expansion of our corporate headquarters, which was placed into service in the second quarter of 2024. We anticipate that our capital expenditures in the second half of 2024 will be generally consistent with the comparable period in the prior year. 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. 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.

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

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 equity incentive award 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, 2024 and 2023:

| Net cash provided by (used in): | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Operating activities | $280,732 | $251,991 |
| Investing activities | 71,678 | (83,378) |
| Financing activities | (160,449) | (234,350) |
| Change in cash, cash equivalents, restricted cash and restricted cash equivalents | $191,961 | $(65,737) |

#### Operating Activities

Cash provided by operating activities for the six months ended June 30, 2024 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, 2023, our operating cash flows for the six months ended June 30, 2024 were positively impacted by the growth of our business.

#### Investing Activities

Cash provided by investing activities for the six months ended June 30, 2024 increased from the comparable prior year period due to a $140.0 million increase in proceeds from investments from funds held for clients and a $25.0 million decrease in purchases of investments from funds held for clients, which were partially offset by a $9.9 million increase in purchases of property and equipment.

#### Financing Activities

Cash used in financing activities for the six months ended June 30, 2024 decreased from the comparable prior year period primarily due to the impact of a $176.7 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. The decrease in cash used in financing activities was partially offset by a $80.8 million increase in repurchases of common stock, a $20.7 million increase in dividends paid and a $1.3 million increase in withholding taxes paid related to net share settlements.

### Contractual Obligations

Our principal commitments primarily consist of leases for office space and the naming rights agreement. For additional information regarding our naming rights agreement, leases, and our commitments and contingencies, see “Note 4. Goodwill and Intangible Assets, Net”, “Note 5. Leases” and “Note 13. Commitments and Contingencies” in the Form 10-K and “Note 5. Goodwill and Intangible Assets, Net” and “Note 12. 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 accounting principles generally accepted in the United States (“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.

### 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 any loss on the extinguishment of debt 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 any loss on the extinguishment of debt, 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, paying dividends, 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:

| Net income to adjusted EBITDA: | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $67,970 | $64,516 | $315,157 | $183,812 |
| Interest expense | 782 | 602 | 1,564 | 1,439 |
| Provision for income taxes | 31,175 | 28,331 | 74,029 | 74,634 |
| Depreciation and amortization | 35,614 | 27,738 | 68,082 | 54,010 |
| EBITDA | 135,541 | 121,187 | 458,832 | 313,895 |
| Non-cash stock-based compensation expense | 24,120 | 35,366 | (69,670) | 63,185 |
| Adjusted EBITDA | $159,661 | $156,553 | $389,162 | $377,080 |

| Net income to non-GAAP net income: | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $67,970 | $64,516 | $315,157 | $183,812 |
| Non-cash stock-based compensation expense | 24,120 | 35,366 | (69,670) | 63,185 |
| Income tax effect on non-GAAP adjustments | (255) | (5,620) | (7,004) | (10,084) |
| Non-GAAP net income | $91,835 | $94,262 | $238,483 | $236,913 |
| Weighted average shares outstanding: |  |  |  |  |
| Basic | 56,451 | 57,920 | 56,499 | 57,895 |
| Diluted | 56,771 | 58,033 | 56,548 | 58,050 |
| Earnings per share, basic | $1.20 | $1.11 | $5.58 | $3.17 |
| Earnings per share, diluted | $1.20 | $1.11 | $5.57 | $3.17 |
| Non-GAAP net income per share, basic | $1.63 | $1.63 | $4.22 | $4.09 |
| Non-GAAP net income per share, diluted | $1.62 | $1.62 | $4.22 | $4.08 |

29

| Earnings per share to non-GAAP net income per share, basic: | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per share, basic | $1.20 | $1.11 | $5.58 | $3.17 |
| Non-cash stock-based compensation expense | 0.43 | 0.61 | (1.23) | 1.09 |
| Income tax effect on non-GAAP adjustments | — | (0.09) | (0.13) | (0.17) |
| Non-GAAP net income per share, basic | $1.63 | $1.63 | $4.22 | $4.09 |

| Earnings per share to non-GAAP net income per share, diluted: | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Earnings per share, diluted | $1.20 | $1.11 | $5.57 | $3.17 |
| Non-cash stock-based compensation expense | 0.42 | 0.61 | (1.23) | 1.09 |
| Income tax effect on non-GAAP adjustments | — | (0.10) | (0.12) | (0.18) |
| Non-GAAP net income per share, diluted | $1.62 | $1.62 | $4.22 | $4.08 |

30

## Market risk

As filed, 2,869 characters.

### Interest Rate Sensitivity

As of June 30, 2024, we had corporate cash and cash equivalents totaling $346.5 million and funds held for clients cash and cash equivalents totaling $2.3 billion. These amounts are invested primarily in demand deposit accounts and money market funds. We consider all highly liquid debt instruments with an original maturity of three months or less and SEC-registered money market mutual funds to be cash equivalents. Additionally, we had available-for-sale securities totaling $34.9 million included within funds held for clients on the consolidated balance sheets as of June 30, 2024. Our available-for-sale securities consisted of U.S. treasury securities with an original maturity greater than one year. 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 investments 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. We classify all debt securities as available-for-sale and, as a result, no gains or losses are recognized due to changes in interest rates until such securities are sold or decreases in fair value are determined to be nonrecoverable. To date, we have not recorded any credit impairment losses on our portfolio.

As of June 30, 2024, a hypothetical increase or decrease in interest rates of 100 basis points would result in an approximately $24.6 million increase or decrease, respectively, in interest earned on funds held for clients over the ensuing 12-month period. Interest earned on funds held for clients is included in recurring revenues in the consolidated statements of comprehensive income. There are no incremental costs of revenue associated with changes in interest earned on funds held for clients.

An immediate increase in interest rates of 100 basis points would have resulted in a $0.1 million reduction in the aggregate market value of our fixed rate securities as of June 30, 2024. An immediate decrease in interest rates of 100 basis points would have resulted in a $0.1 million increase in the aggregate market value of our fixed rate securities as of June 30, 2024. These estimates are based on a sensitivity model that measures market value changes when changes in interest rates occur.

## Controls and procedures

As filed, 1,696 characters.

### 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 our Chief Financial Officer, evaluated, as of June 30, 2024, 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 our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2024 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 our 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, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### PART II

### OTHER INFORMATION

## Risk factors

As filed, 151 characters.

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 15, 2024.

Filed Aug 1, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-089322. Last ingested by Listed: Nov 2, 2026, 19:54 ET. No prices; not investment advice.