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 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 months ended March 31, 2026, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2025 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2026 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, 2025, 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 millions 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, including macroeconomic factors; 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, as well as how certain applications may impact client employee usage and client satisfaction; our ability to attract and retain qualified employees and key personnel; future regulatory, judicial and legislative changes; how the performance of certain of our offerings is sensitive to changes in the labor market; our plan to add sales teams 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 using cash and/or borrowings under our senior secured revolving credit facility (the “Revolving Credit Facility”). 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 and to keep pace with emerging technologies;
•our ability to compete effectively in an evolving human capital management (“HCM”) industry;
•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 our solution fails to perform properly or our clients are not satisfied with our services;
•our dependence on our key executives;
•our ability to attract and retain qualified personnel;
•our ability to manage our growth and organizational change effectively;
•our ability to manage risks associated with our automation strategy;
•the impact of adverse economic and market conditions, including those related to fluctuations in interest rates, trade policies, labor trends, 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; 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 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.
Substantially all of our revenues are generated 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 and is typically based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. Over time, an increasing number of clients will be billed on a monthly basis for certain HCM applications and services, regardless of the client’s payroll cycle. We serve a diverse client base in terms of size and industry. Our revenues are primarily generated through our sales force that solicits new clients and our client relations representatives who sell additional applications to existing clients.
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 incorporating AI and automation across our full solution is an important differentiator for attracting new clients and key to long-term client satisfaction and client retention. Our software vision is that people should not perform payroll-related and HCM-related tasks that systems can automate. We have designed our software so users do not have to be system experts or even need training to access information. For example, our industry-first command-driven AI engine, IWant™, provides an easy, automated avenue for seeking information about employee data without having to navigate through the software.
Our continued growth depends on attracting new clients by continuing to leverage our sales force productivity, penetrating existing markets and expanding into new markets, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base. Client adoption of new applications and, historically,
client employee usage of both new and existing applications have been significant factors in our recurring revenue growth. We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase recurring revenues in the future. In addition, we plan to add sales teams in the future to further expand our market presence.
The market for HCM software is highly competitive, rapidly evolving and fragmented. We expect competition to remain intense as new market entrants and disruptive technologies emerge and aggressive pricing and client retention strategies persist. These market pressures can directly affect our recurring revenue growth and our ability to attract and retain clients. We believe our long-term focused investments in automation, client ROI achievement, and world-class service can strengthen our recurring revenue growth and annual revenue retention rate.
Our target client size is organizations with 50 to 10,000 or more employees. While we continue to serve a diversified client base ranging from small businesses to organizations with 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. We believe larger employers, such as organizations with greater than 1,000 employees, represent a substantial opportunity to increase our revenues per client, with limited incremental cost to us. 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. 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. As a result, the performance of certain of our offerings is sensitive to changes in the labor market. In addition, a multitude of macroeconomic pressures, such as inflation and changes in interest rates, impact our clients’ hiring practices to varying degrees and, in turn, impact our revenues.
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.
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. These 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, certificates of deposit, commercial paper and U.S. treasury securities 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 is impacted by changes in interest rates.
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.
Growing our business has resulted in, and may continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs (including those related to our full solution automation and AI initiatives) and general and administrative expenses, which have increased and may continue to increase our expenses. Historically, our revenue growth and geographic expansion have driven increases in (i) facility costs related to data centers, the expansion of our corporate headquarters, operations facilities and additional sales office leases and (ii) salaries and benefits and stock-based compensation expense. Automating our core business systems is creating new efficiencies that have led to reductions in headcount and, as a result, contributed to decreases in certain employee-related expenses during the three months ended March 31, 2026, as compared to the prior year period.
Results of Operations
The following table sets forth selected consolidated statements of income data and such data as a percentage of total revenues for each of the periods indicated, as well as period-over-period changes with respect to each line item:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2026 |
|
|
2025 |
|
|
% Change |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring and other |
|
$ |
544.0 |
|
|
|
95.1 |
% |
|
$ |
500.0 |
|
|
|
94.2 |
% |
|
8.8% |
Interest on funds held for clients |
|
|
27.8 |
|
|
|
4.9 |
% |
|
|
30.5 |
|
|
|
5.8 |
% |
|
-8.9% |
Total revenues |
|
|
571.9 |
|
|
|
100.0 |
% |
|
|
530.5 |
|
|
|
100.0 |
% |
|
7.8% |
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
62.9 |
|
|
|
11.0 |
% |
|
|
66.3 |
|
|
|
12.5 |
% |
|
-5.1% |
Depreciation and amortization |
|
|
24.4 |
|
|
|
4.3 |
% |
|
|
18.3 |
|
|
|
3.5 |
% |
|
33.3% |
Total cost of revenues |
|
|
87.3 |
|
|
|
15.3 |
% |
|
|
84.6 |
|
|
|
15.9 |
% |
|
3.2% |
Administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
117.6 |
|
|
|
20.6 |
% |
|
|
110.9 |
|
|
|
20.9 |
% |
|
6.1% |
Research and development |
|
|
60.7 |
|
|
|
10.6 |
% |
|
|
62.3 |
|
|
|
11.7 |
% |
|
-2.5% |
General and administrative |
|
|
69.4 |
|
|
|
12.1 |
% |
|
|
66.0 |
|
|
|
12.4 |
% |
|
5.3% |
Depreciation and amortization |
|
|
26.7 |
|
|
|
4.7 |
% |
|
|
21.6 |
|
|
|
4.1 |
% |
|
23.2% |
Total administrative expenses |
|
|
274.3 |
|
|
|
48.0 |
% |
|
|
260.8 |
|
|
|
49.1 |
% |
|
5.2% |
Total operating expenses |
|
|
361.7 |
|
|
|
63.2 |
% |
|
|
345.4 |
|
|
|
65.1 |
% |
|
4.7% |
Operating income |
|
|
210.2 |
|
|
|
36.8 |
% |
|
|
185.1 |
|
|
|
34.9 |
% |
|
13.5% |
Interest expense |
|
|
(4.0 |
) |
|
|
-0.7 |
% |
|
|
(0.8 |
) |
|
|
-0.1 |
% |
|
416.3% |
Other income, net |
|
|
9.1 |
|
|
|
1.6 |
% |
|
|
6.0 |
|
|
|
1.1 |
% |
|
54.0% |
Income before income taxes |
|
|
215.3 |
|
|
|
37.6 |
% |
|
|
190.3 |
|
|
|
35.9 |
% |
|
13.1% |
Provision for income taxes |
|
|
59.5 |
|
|
|
10.4 |
% |
|
|
50.9 |
|
|
|
9.6 |
% |
|
16.9% |
Net income |
|
$ |
155.7 |
|
|
|
27.2 |
% |
|
$ |
139.4 |
|
|
|
26.3 |
% |
|
11.8% |
Revenues
Recurring and Other Revenues
The increase in recurring and other revenues for the three months ended March 31, 2026 compared to the three months ended March 31, 2025 was the result of the addition of new clients, increased revenue from sales of additional applications and services to existing clients, additions and increased usage of existing products and services, and the realization of pricing strategies. Client attrition, particularly among smaller clients, partially offset the favorable impact of these revenue drivers.
Interest on Funds Held for Clients
The impact of lower interest rates during the three months ended March 31, 2026 compared to the three months ended March 31, 2025 was partially offset by an increase in average funds held for client balances, but nonetheless resulted in decreased interest earned on funds held for clients for the three months ended March 31, 2026 as compared to the same period in 2025. The average daily balance of funds held for clients was $3.1 billion and $2.9 billion for the three months ended March 31, 2026 and 2025, respectively.
Expenses
Cost of Revenues
During the three months ended March 31, 2026, operating expenses decreased from the comparable prior year period by $3.4 million, primarily due to a $4.6 million decrease in employee-related expenses, partially offset by increases in banking-related fees and shipping and supplies fees. Depreciation and amortization expense increased $6.1 million from the comparable prior year period, primarily due to the development of additional technology and purchases of other related fixed assets, partially offset by the impact of an increase in the estimated useful lives of servers and network equipment implemented in the third quarter of 2025.
Administrative Expenses
Sales and Marketing
During the three months ended March 31, 2026, sales and marketing expenses increased from the comparable prior year period by $6.7 million, primarily due to a $7.1 million increase in marketing and advertising expense and a $3.0 million increase in other expenses, partially offset by a decrease in employee-related expenses.
Research and Development
During the three months ended March 31, 2026, research and development expenses decreased from the comparable prior year period primarily due to a decrease in employee-related expenses.
As a result of reduced headcount, we expect research and development employee-related expenses to be lower in 2026 as compared to 2025. 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 months ended March 31, 2026 and 2025:
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2026 |
|
|
2025 |
|
|
% Change |
Capitalized portion of research and development |
|
$ |
25.3 |
|
|
$ |
33.7 |
|
|
-25% |
Expensed portion of research and development |
|
|
60.7 |
|
|
|
62.3 |
|
|
-3% |
Total research and development costs |
|
$ |
86.0 |
|
|
$ |
96.0 |
|
|
-10% |
General and Administrative
During the three months ended March 31, 2026, general and administrative expenses increased $3.5 million from the comparable prior year period due to a $4.1 million increase in technology and communications expense and a $3.8 million increase in other expenses, partially offset by a $4.0 million decrease in employee-related expenses and a $0.4 million decrease 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:
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|
|
Three Months Ended March 31, |
|
|
|
|
2026 |
|
|
2025 |
|
|
% Change |
Operating expenses |
|
$ |
2.2 |
|
|
$ |
3.0 |
|
|
-26% |
Sales and marketing |
|
|
4.1 |
|
|
|
5.9 |
|
|
-30% |
Research and development |
|
|
(0.1 |
) |
|
|
6.9 |
|
|
-101% |
General and administrative |
|
|
7.8 |
|
|
|
6.4 |
|
|
23% |
Total non-cash stock-based compensation expense |
|
$ |
14.1 |
|
|
$ |
22.2 |
|
|
-37% |
Depreciation and Amortization
During the three months ended March 31, 2026, depreciation and amortization expense increased from the comparable prior year period primarily due to the development of additional technology and purchases of other related fixed assets, which was partially offset by the impact of an increase in the estimated useful lives of servers and network equipment implemented in the third quarter of 2025.
Interest Expense
The increase in interest expense for the three months ended March 31, 2026, as compared to the prior year period, was primarily due to the timing and amount of borrowings outstanding under the Revolving Credit Facility.
Other Income, net
Other income, net increased for the three months ended March 31, 2026 compared to the prior year period, primarily due to a $9.0 million gain resulting from the July 2025 amendment to the naming rights agreement. See Note 5 “Goodwill and Intangible Assets, Net.” This increase was partially offset by a $2.9 million loss on the disposition of property and equipment. In addition, lower interest income earned on corporate funds, driven by lower average interest rates, partially offset the increase in other income, net. For the three months ended March 31, 2026 and 2025, interest income earned on corporate funds was $1.9 million and $4.7 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 27.7% and 26.8% for the three months ended March 31, 2026 and 2025, respectively. The higher effective tax rate for the three months ended March 31, 2026 was primarily attributable to a decreased research and development credit for the quarter ended March 31, 2026.
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 $2.125 billion Revolving Credit Facility, which can be accessed as needed to supplement our operating cash flow and cash balances. As of March 31, 2026, we had $675.0 million of outstanding borrowings under the Revolving Credit Facility, and we used these borrowings to fund stock repurchases.
We fund our operations primarily from cash flows generated from operations. Historically, we have funded all ongoing capital expenditures, cash dividends and stock repurchases from available cash. During the first quarter of 2026, we borrowed $675.0 million under the Revolving Credit Facility to support our stock repurchase program. We may determine that it is appropriate to fund future stock repurchases or other capital requirements in the future from a combination of available cash and additional borrowings under the Revolving Credit Facility. 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, service debt, 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. To the extent we elect to finance our long-term liquidity needs, we believe that the potential financing capital available to us in the future will be sufficient.
Credit Agreement. We are party to a credit agreement (as amended from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as a lender, the administrative agent, the swingline lender and the issuing bank, and the lenders from time to time party thereto (collectively with JPMorgan Chase Bank, N.A., the “Lenders”). On April 23, 2026, the Credit Agreement was amended and restated and the aggregate commitments under the Revolving Credit Facility were increased to $2.125 billion. See Note 15 “Subsequent Events.” All loans under the Credit Agreement will mature on April 23, 2031 (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.
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) (a) the term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin (the “Term SOFR Rate”) or (b) in the event that the Term SOFR rate is unavailable, the daily SOFR, 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 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) 1.50% 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) 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 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. In addition, certain Restricted Payments (as defined in the Credit Agreement), including dividend payments and share repurchases, are permitted if certain conditions are met. Restricted Payments that do not exceed $50.0 million in any fiscal year are permitted. In addition, Restricted Payments are permitted if immediately before and after giving pro forma effect to such Restricted Payment, our consolidated leverage ratio on a pro forma basis is less than 3.0 to 1.0.
Stock Repurchase Plan and Withholding Shares to Cover Taxes. In August 2022, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of up to $1.1 billion of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions (including accelerated share repurchases) or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. The stock repurchase plan was set to expire on August 15, 2024. In July 2024, our Board of Directors increased and extended the stock repurchase plan, such that $1.5 billion is available for repurchases through August 15, 2026. On March 5, 2026, the Board of Directors authorized the repurchase of up to an additional $200.0 million of shares of our common stock. On March 12, 2026, the Board of Directors replenished the stock repurchase plan such that the aggregate value of shares of common stock that could be repurchased under the stock repurchase plan was $750.0 million, and as of March 31, 2026, there was $750.0 million available for repurchases under the stock repurchase plan. On May 4, 2026, our Board of Directors approved a new stock repurchase plan authorizing the Company to repurchase up to $2.0 billion of shares of common stock. The new stock repurchase plan replaced the prior authorization and has no expiration date. 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 three months ended March 31, 2026, we repurchased an aggregate of 8,375,443 shares of our common stock at an average cost of $126.61 per share, including 47,844 shares withheld to satisfy tax withholding obligations for certain individuals upon the vesting of equity incentive awards. Our payment of the taxes on behalf of those individuals resulted in an aggregate cash expenditure of $6.1 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.
The following table summarizes quarterly dividends paid during 2026:
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Per Share Dividend |
|
|
Total Cash Dividends Paid (in millions)(1) |
|
February 10, 2026 |
|
March 9, 2026 |
|
March 23, 2026 |
|
$ |
0.375 |
|
|
$ |
17.5 |
|
(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 May 4, 2026, our Board of Directors declared a quarterly cash dividend of $0.375 per share of common stock payable on June 8, 2026 to stockholders of record at the close of business on May 26, 2026.
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, are in compliance with applicable law and are permitted under the Credit Agreement. 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.
Our capital expenditures will fluctuate based on our strategic initiatives. 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 currently home to the Oklahoma City Thunder National Basketball Association franchise. Under the terms of the naming rights agreement, we committed to make escalating annual sponsorship fee payments from 2021 to 2035. The payments are due in the fourth quarter of each year. In July 2025, the naming rights agreement was amended to provide, among other things, that the agreement and our obligation to make the previously disclosed annual sponsorship fee payments thereunder will terminate on the earlier of (i) September 30, 2028 or (ii) the date of the last event hosted or presented at the current arena (subject to earlier termination in certain limited circumstances), with a reduction in the sponsorship fee if the term of the agreement ends prior to September 30, 2028 and in certain other limited circumstances. As a result of the July 2025 amendment to the naming rights agreement, the Company recognized a $35.6 million gain during the quarter ended September 30, 2025 with respect to the released portion of the liability. In March 2026, a contingency specified in the July 2025 amendment was met, resulting in a reduction in the annual sponsorship fee for the remainder of the amended agreement term. As a result, the Company recognized a $9.0 million gain during the three months ended March 31, 2026, which is included in other income, net in the consolidated statements of comprehensive income.
On July 4, 2025, H.R. 1, the “One Big Beautiful Bill Act” (the “OBBBA”) was signed into law, bringing significant amendments to the U.S. tax code. The OBBBA allows an immediate deduction for domestic research and development expenditures and reinstates 100% bonus depreciation. Our cash tax remittances decreased in the second half of 2025, and we anticipate that continued reductions will positively impact cash flows in future periods.
As part of our payroll and payroll tax filing services, we collect funds from our clients for employment taxes and payroll obligations, which we remit to the appropriate tax agencies and accounts designated by our clients. 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. As a result, the balance changes from period to period in alignment with the timing of each payroll cycle.
Our cash flows from financing activities are 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 individuals. Our cash flows from financing activities are also impacted by borrowings. 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 three months ended March 31, 2026 and 2025:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2026 |
|
|
2025 |
|
|
% Change |
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
213.8 |
|
|
$ |
182.5 |
|
|
17% |
Investing activities |
|
|
(30.8 |
) |
|
|
(379.9 |
) |
|
-92% |
Financing activities |
|
|
(2,911.8 |
) |
|
|
(1,452.3 |
) |
|
100% |
Decrease in cash, cash equivalents, restricted cash and restricted cash equivalents |
|
$ |
(2,728.8 |
) |
|
$ |
(1,649.7 |
) |
|
65% |
Operating Activities
Cash provided by operating activities for the three months ended March 31, 2026 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, information technology infrastructure development, product research and development and security and administrative costs. Compared to the three months ended March 31, 2025, our operating cash flows for the three months ended March 31, 2026 were negatively impacted by changes in working capital.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2026 decreased from the comparable prior year period due to a $175.6 million decrease in purchases of investments from funds held for clients, a $167.0 million increase in proceeds from investments from funds held for clients, and a $6.5 million decrease in purchases of property and equipment.
Financing Activities
Cash used in financing activities for the three months ended March 31, 2026 increased from the comparable prior year period due to the impact of a $1,086.3 million change related to the client funds obligation, which reflects the timing of receipts
from our clients and payments made on their behalf to employees and applicable taxing authorities, $1,054.3 million increase in repurchases of common stock, and a $0.9 million increase in withholding taxes paid related to net share settlements. These increases were partially offset by $675.0 million of borrowings under the Revolving Credit Facility, a $3.6 million increase in proceeds from the employee stock purchase plan, and a $3.4 million decrease in dividends paid.
Contractual Obligations
Our principal commitments primarily consist of long-term debt, 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 12 “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. Estimates made in accordance with U.S. GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition are described below. 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.
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, less any gain on modification of the naming rights agreement, 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, less any gain on modification of the naming rights agreement, 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:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2026 |
|
|
2025 |
|
Net income to adjusted EBITDA: |
|
|
|
|
|
|
Net income |
|
$ |
155.7 |
|
|
$ |
139.4 |
|
Interest expense |
|
|
4.0 |
|
|
|
0.8 |
|
Provision for income taxes |
|
|
59.5 |
|
|
|
50.9 |
|
Depreciation and amortization |
|
|
51.1 |
|
|
|
39.9 |
|
EBITDA |
|
|
270.4 |
|
|
|
231.0 |
|
Non-cash stock-based compensation expense |
|
|
14.1 |
|
|
|
22.2 |
|
Gain on modification of naming rights agreement |
|
|
(9.0 |
) |
|
|
— |
|
Adjusted EBITDA |
|
$ |
275.4 |
|
|
$ |
253.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2026 |
|
|
2025 |
|
Net income to non-GAAP net income: |
|
|
|
|
|
|
Net income |
|
$ |
155.7 |
|
|
$ |
139.4 |
|
Non-cash stock-based compensation expense |
|
|
14.1 |
|
|
|
22.2 |
|
Gain on modification of naming rights agreement |
|
|
(9.0 |
) |
|
|
— |
|
Income tax effect on non-GAAP adjustments |
|
|
0.5 |
|
|
|
(3.9 |
) |
Non-GAAP net income |
|
$ |
161.3 |
|
|
$ |
157.7 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
Basic |
|
|
51.1 |
|
|
|
56.0 |
|
Diluted |
|
|
51.2 |
|
|
|
56.3 |
|
|
|
|
|
|
|
|
Earnings per share, basic |
|
$ |
3.05 |
|
|
$ |
2.49 |
|
Earnings per share, diluted |
|
$ |
3.04 |
|
|
$ |
2.48 |
|
Non-GAAP net income per share, basic |
|
$ |
3.16 |
|
|
$ |
2.82 |
|
Non-GAAP net income per share, diluted |
|
$ |
3.15 |
|
|
$ |
2.80 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2026 |
|
|
2025 |
|
Earnings per share to non-GAAP net income per share, basic: |
|
|
|
|
|
|
Earnings per share, basic |
|
$ |
3.05 |
|
|
$ |
2.49 |
|
Non-cash stock-based compensation expense |
|
|
0.28 |
|
|
|
0.40 |
|
Gain on modification of naming rights agreement |
|
|
(0.18 |
) |
|
|
— |
|
Income tax effect on non-GAAP adjustments |
|
|
0.01 |
|
|
|
(0.07 |
) |
Non-GAAP net income per share, basic |
|
$ |
3.16 |
|
|
$ |
2.82 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2026 |
|
|
2025 |
|
Earnings per share to non-GAAP net income per share, diluted: |
|
|
|
|
|
|
Earnings per share, diluted |
|
$ |
3.04 |
|
|
$ |
2.48 |
|
Non-cash stock-based compensation expense |
|
|
0.27 |
|
|
|
0.39 |
|
Gain on modification of naming rights agreement |
|
|
(0.18 |
) |
|
|
— |
|
Income tax effect on non-GAAP adjustments |
|
|
0.01 |
|
|
|
(0.07 |
) |
Non-GAAP net income per share, diluted |
|
$ |
3.15 |
|
|
$ |
2.80 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
As of March 31, 2026, we had corporate cash and cash equivalents totaling $153.9 million and funds held for clients cash and cash equivalents totaling $2.2 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 $374.8 million included within funds held for clients on the consolidated balance sheets as of March 31, 2026. Our available-for-sale securities consisted of U.S. treasury securities with original maturities of two years or less and a certificate of deposit. 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 with an original maturity greater than three months 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 March 31, 2026, a hypothetical increase or decrease in interest rates of 100 basis points would result in an approximately $26.1 million increase or decrease, respectively, in interest earned on funds held for clients over the ensuing 12-month period. 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 $1.8 million reduction in the aggregate market value of our available-for-sale securities as of March 31, 2026. An immediate decrease in interest rates of 100 basis points would have resulted in a $1.8 million increase in the aggregate market value of our available-for-sale securities as of March 31, 2026. These estimates are based on a sensitivity model that measures market value changes when changes in interest rates occur.
As of March 31, 2026, we had $675.0 million of indebtedness outstanding under the Revolving Credit Facility. Our borrowings under the Revolving Credit Facility bear interest at a floating rate based on a variable reference rate for the interest period in effect, and as a result, we may be exposed to increased interest rate risk. As of March 31, 2026, a hypothetical 100 basis point change in the applicable reference rates would result in a $5.6 million change in our interest expense over the ensuing 12-month period. Please refer to Note 6 “Long-Term Debt” for additional information.
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 our Chief Financial Officer, evaluated, as of March 31, 2026, 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 March 31, 2026 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 March 31, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
