Paycom Software, Inc.

Previous wording

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, 2025, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2024 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2025 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, 2024, 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.

Current wording

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 nine months ended September 30, 2025, (ii) the audited consolidated financial statements and notes thereto for the year ended December 31, 2024 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2025 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, 2024, 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.

Previous wording

Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs (including those related our full solution automation and AI initiatives) and general and administrative expenses, which have increased and will continue to increase our expenses. Historically, our revenue growth and geographic expansion have driven increases in (i) salaries and benefits, (ii) stock-based compensation expense and (iii) facility costs related to the expansion of our corporate headquarters, data centers, operations facilities and additional sales office leases. We are leveraging automation and other internal efficiencies to offset this historical trend in an effort to expand our margins.

Current wording

Growing our business has resulted in, and will continue to result in, substantial investments in sales professionals, operating expenses, system development and programming costs (including those related our full solution automation and AI initiatives) and general and administrative expenses, which have increased and will 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, which we collectively refer to as employee-related expenses. 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 and nine months ended September 30, 2025.

Previous wording

The increase in recurring and other revenues for the three and six months ended June 30, 2025 compared to the same periods in 2024 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 impact of pricing strategies. Client attrition, particularly among smaller clients, partially offset the favorable impact of these revenue drivers. Client-driven acceleration of payroll processing at the end of 2024 due to the timing within the work week of the January 1, 2025 public holiday adversely affected the magnitude of the period-over-period increase in recurring and other revenue recognized for the six months ended June 30, 2025, as compared to the prior year period.

Current wording

The increase in recurring and other revenues for the three and nine months ended September 30, 2025 compared to the same periods in 2024 was the result of the addition of new clients, increased revenue from sales of additional applications and services to existing clients, increased usage of existing products and services, and the impact of pricing strategies. Client attrition, particularly among smaller clients, partially offset the favorable impact of these revenue drivers. Client-driven acceleration of payroll processing at the end of 2024 due to the timing within the work week of the January 1, 2025 public holiday adversely affected the magnitude of the period-over-period increase in recurring and other revenue recognized for the nine months ended September 30, 2025, as compared to the prior year period.

Previous wording

The impact of lower interest rates during the three and six months ended June 30, 2025 compared to the same periods in 2024 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 and six months ended June 30, 2025 as compared to the same period in 2024. The average daily balance of funds held for clients was $2.8 billion and $2.5 billion for the six months ended June 30, 2025 and 2024, respectively.

Current wording

The impact of lower interest rates during the three and nine months ended September 30, 2025 compared to the same periods in 2024 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 and nine months ended September 30, 2025 as compared to the same period in 2024. The average daily balance of funds held for clients was $2.7 billion and $2.4 billion for the nine months ended September 30, 2025 and 2024, respectively.

Previous wording

During the three months ended June 30, 2025, operating expenses increased from the comparable prior year period by $0.9 million, primarily due to an increase in banking-related fees. Depreciation and amortization expense increased $2.7 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.

Current wording

During the three months ended September 30, 2025, operating expenses decreased from the comparable prior year period by $6.7 million, primarily due to a $5.2 million decrease in employee-related expenses and a $1.1 million decrease in shipping and supplies fees. Depreciation and amortization expense increased $3.8 million 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 an increase in the estimated useful lives of servers and network equipment.

Previous wording

During the six months ended June 30, 2025, operating expenses increased from the comparable prior year period by $3.7 million, primarily due to a $1.8 million increase in banking-related fees, a $0.9 million increase in shipping and supplies fees, and $0.7 million increase in employee-related expenses. Depreciation and amortization expense increased $6.0 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.

Current wording

During the nine months ended September 30, 2025, operating expenses decreased from the comparable prior year period by $3.1 million, primarily due to a $4.5 million decrease in employee-related expenses, which was partially offset by a $1.1 million increase in banking-related fees. Depreciation and amortization expense increased $9.9 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, which was partially offset by an increase in the estimated useful lives of servers and network equipment.

Previous wording

During the three months ended June 30, 2025, sales and marketing expenses increased from the comparable prior year period by $9.1 million due to a $8.2 million increase in marketing and advertising expense and a $0.9 million increase in employee-related expenses.

Current wording

During the three months ended September 30, 2025, sales and marketing expenses increased from the comparable prior year period by $21.2 million due to a $17.1 million increase in marketing and advertising expense and a $4.1 million increase in employee-related expenses.

Previous wording

During the six months ended June 30, 2025, sales and marketing expenses increased from the comparable prior year period by $4.5 million due to a $2.8 million increase in marketing and advertising expense and a $1.7 million increase in employee-related expenses.

Current wording

During the nine months ended September 30, 2025, sales and marketing expenses increased from the comparable prior year period by $25.7 million due to a $19.9 million increase in marketing and advertising expense and a $5.8 million increase in employee-related expenses.

Previous wording

During the three and six months ended June 30, 2025, research and development expenses increased from the comparable prior year periods due to increases in employee-related expenses of $12.4 million and $24.2 million, respectively.

Current wording

During the three and nine months ended September 30, 2025, research and development expenses increased from the comparable prior year periods due to increases in employee-related expenses of $11.1 million and $35.3 million, respectively.

Previous wording

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, 2025 and 2024:

Current wording

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 nine months ended September 30, 2025 and 2024:

Previous wording

During the three months ended June 30, 2025, general and administrative expenses increased $0.1 million from the comparable prior year period primarily due to an increase in employee-related expenses.

Current wording

During the three months ended September 30, 2025, general and administrative expenses increased $1.3 million from the comparable prior year period primarily due to an increase in accounting and legal expenses.

Previous wording

During the six months ended June 30, 2025, general and administrative expenses increased $113.9 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 upon Chad Richison’s transition to Co-Chief Executive Officer in February 2024, which was partially offset by a $2.6 million decrease in other employee-related expenses and a $0.9 million decrease in accounting and legal expenses.

Current wording

During the nine months ended September 30, 2025, general and administrative expenses increased $115.2 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 upon Chad Richison’s transition to Co-Chief Executive Officer in February 2024, which was partially offset by a $2.5 million decrease in other employee-related expenses.

Previous wording

During the three and six months ended June 30, 2025, 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.

Current wording

During the nine months ended September 30, 2025, 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, which was partially offset by an increase in the estimated useful lives of servers and network equipment.

Previous wording

The increase in other income (expense), net for the three and six months ended June 30, 2025, as compared to the prior year periods, was primarily attributable to increases in interest earned on our corporate funds due to higher operating cash balances. For the three and six months ended June 30, 2025, we earned interest on our corporate funds of $5.5 million and $10.3 million, respectively. 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.

Current wording

The increase in other income (expense), net for the three and nine months ended September 30, 2025, as compared to the prior year periods, was primarily attributable to a $35.6 million gain which resulted from the July 2025 amendment to the naming rights agreement. See Note 5 “Goodwill and Intangible Assets, Net”. Additionally, increases in interest earned on our corporate funds due to higher operating cash balances contributed to the increase. For the three and nine months ended September 30, 2025, we earned interest on our corporate funds of $5.1 million and $15.4 million, respectively. For the three and nine months ended September 30, 2024, we earned interest on our corporate funds of $4.2 million and $13.3 million, respectively.

Previous wording

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 25.6% and 19.0% for the six months ended June 30, 2025 and 2024, respectively. The higher effective tax rate for the six months ended June 30, 2025 was primarily attributable to the tax benefit related to the forfeiture of a restricted stock award upon Chad Richison’s transition to Co-Chief Executive Officer in February 2024.

Current wording

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 26.2% and 21.9% for the nine months ended September 30, 2025 and 2024, respectively. The higher effective tax rate for the nine months ended September 30, 2025 was primarily attributable to the tax benefit related to the forfeiture of a restricted stock award upon Chad Richison’s transition to Co-Chief Executive Officer in February 2024.

Previous wording

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 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. As of June 30, 2025, there was $1.44 billion available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of equity incentive awards and other corporate considerations.

Current wording

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 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. As of September 30, 2025, there was $1.22 billion available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of equity incentive awards and other corporate considerations.

Previous wording

During the six months ended June 30, 2025, we repurchased an aggregate of 152,704 shares of our common stock at an average cost of $247.55 per share, all of which were 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 $37.8 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.

Current wording

During the nine months ended September 30, 2025, we repurchased an aggregate of 1,176,494 shares of our common stock at an average cost of $222.05 per share, including 172,642 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 $42.4 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. In October 2025, we repurchased an additional 501,094 shares of our common stock at an average cost of $199.86 per share, including 659 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of equity incentive awards.

Previous wording

We completed an expansion of our corporate headquarters, which was placed into service in the second quarter of 2024. As our business grows, we expect our capital expenditures related to research and development, data centers, and other strategic expansion activities to increase. Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, acquisitions, technology and services. Our planned investments in infrastructure to support IWant and our other AI and automation initiatives will result in a significant increase in capital expenditures in the third quarter of 2025 and, to a lesser extent, the fourth quarter of 2025. 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. The amendment did not otherwise impact our obligation to make the previously disclosed annual sponsorship fee payments for the remainder of the amended agreement term.

Current wording

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. The amendment did not otherwise impact our obligation to make the previously disclosed annual sponsorship fee payments for the remainder of the amended agreement term.

Previous wording

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. We are currently evaluating the impact of various OBBBA provisions on our business and financial results. While we will continue to assess potential implications and await guidance from relevant authorities, we expect reductions in our future cash tax remittances will benefit cash flows beginning in the third quarter of 2025 and continuing into future periods.

Current wording

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 third quarter of 2025, and we anticipate that continued reductions will positively impact cash flows in the fourth quarter of 2025 and in future periods.

Previous wording

The following table summarizes the consolidated statements of cash flows for the six months ended June 30, 2025 and 2024:

Current wording

The following table summarizes the consolidated statements of cash flows for the nine months ended September 30, 2025 and 2024:

Previous wording

Cash provided by operating activities for the six months ended June 30, 2025 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 and six months ended June 30, 2024, our operating cash flows for the three and six months ended June 30, 2025 were positively impacted by changes in working capital.

Current wording

Cash provided by operating activities for the nine months ended September 30, 2025 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 and nine months ended September 30, 2024, our operating cash flows for the three and nine months ended September 30, 2025 were positively impacted by changes in working capital.

Previous wording

Cash used in investing activities for the six months ended June 30, 2025 increased from the comparable prior year period due to a $465.8 million increase in purchases of investments from funds held for clients, a $165.0 million decrease in proceeds from investments from funds held for clients, and a $6.1 million increase in purchases of property and equipment.

Current wording

Cash used in investing activities for the nine months ended September 30, 2025 increased from the comparable prior year period due to a $687.0 million increase in purchases of investments from funds held for clients and a $55.8 million increase in purchases of property and equipment, which were partially offset by a $50.0 million increase in proceeds from investments from funds held for clients, and a $0.1 increase in proceeds from sale of property and equipment.

Previous wording

Cash used in financing activities for the six months ended June 30, 2025 increased from the comparable prior year period due to the impact of a $2,023.9 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf, a $25.4 million increase in withholding taxes paid related to net share settlements, and a $0.5 million increase in dividends paid. The increase in cash used in financing activities was partially offset by an $80.8 million decrease in repurchases of common stock.

Current wording

Cash used in financing activities for the nine months ended September 30, 2025 increased from the comparable prior year period due to the impact of a $957.4 million change related to the client funds obligation, which is due to the timing of receipts from our clients and payments made to our clients’ employees and applicable taxing authorities on their behalf, a $96.1 million increase in repurchases of common stock, a $28.0 million increase in withholding taxes paid related to net share settlements, and a $0.5 million increase in dividends paid. The increase in cash used in financing activities was partially offset by an $3.0 million increase in proceeds from the employee stock purchase plan.

Previous wording

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.

Current wording

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.

Previous wording

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 (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), 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.

Current wording

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 and certain transaction expenses that are not core to our operations (if any), 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 and certain transaction expenses that are not core to our operations (if any), 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.