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Determining fair stock price using pro forma model

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PLEASE USE sec.gov/edgar to find any necessary financial statements. THANK YOU! About the Valuation Project On July 27, 2021, it was announced that Paycom Software, Inc. will acquire the naming rights for the home arena of the OKC Thunder, renaming it Paycom Center. Paycom is the only major technology company headquartered in Oklahoma. In this project, you are asked to determine the fair stock price of Paycom (Ticker: PAYC) using a pro forma model. The basic steps are similar to what we discussed in the Pro-Forma Module (Ch 5 of the textbook). However, a real company's financial statements are bound to be more complicated than the prototype examples covered in class. I made videos that demonstrate how to value the stock of Caterpillar. Please watch these videos before you start the project. While doing so, it is important to keep in mind that all companies are different, so the videos are only meant to be viewed as a broad guideline as opposed to an exact blueprint. You will have to adapt to the specific situations of Paycom. Project Requirements The project can be broken down into four main steps. 1. Download, consolidate, and conduct initial analysis First, download the financial statements of Paycom for the most recent 6 fiscal years from SEC Edgar. After you download the files, consolidate each statement into one spreadsheet. For example, you need to combine 6 years of income statements into one table and sort the years in ascending order from left to right. Do the same for balance sheets. The cash flow statements are not as important as the other two, so you only need to collect the cash flow related items you actually need. Besides the three major statements, you might also need to look at the spreadsheet related to PP&E in order to obtain information about depreciation and integrate this information into the balance sheets and income statements. In this process, a challenge is that the name of the same item could change over time and some items might appear or disappear from one statement to another. When this happens, you will need to make sure that items are lined up correctly in your consolidated tables. (In the video, I used VLOOKUP to do this, but you can certainly do this manually.) After downloading the statements, it is important to take time to study the statements carefully (At least do this for income statements and balance sheets.). In particular, you need to understand the mathematical relationships between the items. For example, some numbers are the sums of other numbers; some companies express costs as negative values while others may express them as positive values. Please be sure that you have fully digested the financial statements before moving on to the next step. 2. Simplify and format the financial statements Second, simplify the actually statements into a format that is as close to the prototype as possible. Be sure to calculate the items listed in the examples of Module 8. Then calculate the main ratios based on the simplified financial statements. The actual financial statements will contain several items that are outside the scope of our examples, therefore some discretion will be needed in handling these items. For example, you may choose to combine some relatively minor items into one; you may also calculate ratios for some of these items or keep them constant. In building the pro forma model, you can use the historical ratios in ways you see fit. For example, you may use the historical average or the most recent value. For current assets/sales and current liability/sales ratios, I suggest you use the most recent values. (Note that in the second step, you should use references to access the data obtained from Step One. Do not just copy the numbers. Also, the next steps should also refer to the cells from the previous step. This way, when you need to change one step, the rest of update automatically.) 3. Calculate the WACC Third, calculate the WACC for Paycom. Cost of equity can be calculated using CAPM formula. Please estimate the market beta of Paycom using all available monthly returns downloaded from Yahoo finance. Do not simply copy the beta published by financial websites. In applying the CAPM formula, you may use 6% as the annual market risk premium (I.e. This is the difference between the expected market return and the risk-free rate). For the risk-free rate, you may use the 3-month Treasury bill rate found on the Federal Reserve Bank's web site. The skill set needed to finish this part was covered in Module 7. 4. Build a pro forma model to determine the valuation of Paycom Finally, finish pro forma projections and stock valuation. The long-term growth rate of FCF can be estimated as the annual GDP growth rate of the U.S. or long-term government bond rates. Discuss your opinion of the current stock price in comparison with your valuation. In particular, discuss how you account for the impact of the pandemic in your forecasts and valuation. The Excel workbook you submit should include the results from these steps on separate worksheets.
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Document and Entity Information Document and Entity Information - USD ($) $ in Billions 12 Months Ended Dec. 31, 2016 Feb. 06, 2017 Jun. 30, 2016 Document And Entity Information [Abstract] Document Type 10-K Amendment Flag false Document Period End Date Dec. 31, 2016 Document Fiscal Year Focus 2,016 Document Fiscal Period Focus FY Trading Symbol PAYC Entity Registrant Name Paycom Software, Inc. Entity Central Index Key 1,590,955 Current Fiscal Year End Date --12-31 Entity Well-known Seasoned Issuer Yes Entity Current Reporting Status Yes Entity Voluntary Filers No Entity Filer Category Large Accelerated Filer Entity Common Stock, Shares Outstanding 59,491,770 Entity Public Float $ 2.1 Consolidated Balance Sheets Consolidated Balance Sheets - USD ($) $ in Thousands Dec. 31, 2016 Dec. 31, 2015 Current assets: Cash and cash equivalents $ 60,158 $ 50,714 Accounts receivable 1,339 2,354 Prepaid expenses 4,475 3,531 Inventory 675 1,093 Income tax receivable 692 6,743 Current assets before funds held for clients 67,339 64,435 Funds held for clients 858,244 696,703 Total current assets 925,583 761,138 Property and equipment, net 96,848 58,858 Deposits and other assets 1,215 1,286 Goodwill 51,889 51,889 Intangible assets, net 1,871 3,484 Deferred income tax assets, net 1,207 Total assets 1,078,613 876,655 Current liabilities: Accounts payable 3,737 4,899 Accrued commissions and bonuses 8,003 8,687 Accrued payroll and vacation 4,769 2,898 Deferred revenue 5,230 3,726 Current portion of long-term debt 1,113 886 Accrued expenses and other current liabilities 17,798 9,735 Current liabilities before client funds obligation 40,650 30,831 Client funds obligation 858,244 696,703 Total current liabilities 898,894 727,534 Deferred income tax liabilities, net 641 Long-term deferred revenue 34,481 25,310 Net long-term debt, less current portion 28,711 24,856 Total long-term liabilities 63,192 50,807 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value (100,000,000 shares authorized, 58,453,283 and 57,119,873 shares issued at December 31, 2016 and 2015, respectively; 57,331,022 and 57,119,873 shares outstanding at December 31, 2016 and 2015, respectively) 585 571 Additional paid in capital 95,452 71,135 Retained earnings 70,448 26,608 Treasury stock, at cost (1,122,261 and 0 shares at December 31, 2016 and 2015, respectively) (49,958) Total stockholders' equity 116,527 98,314 Total liabilities and stockholders' equity $ 1,078,613 $ 876,655 Consolidated Balance Sheets (Pa Consolidated Balance Sheets (Parenthetical) - $ / shares Dec. 31, 2016 Dec. 31, 2015 Statement Of Financial Position [Abstract] Common stock, par value $ 0.01 $ 0.01 Common stock, shares authorized 100,000,000 100,000,000 Common stock, shares issued 58,453,283 57,119,873 Common stock, shares outstanding 57,331,022 57,119,873 Treasury stock, shares 1,122,261 0 Consolidated Statements of Inco Consolidated Statements of Income - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 Revenues Recurring $ 323,548 $ 219,987 $ 148,207 Implementation and other 5,593 4,666 2,722 Total revenues 329,141 224,653 150,929 Cost of revenues Operating expenses 48,268 31,790 24,694 Depreciation and amortization 5,798 3,683 2,624 Total cost of revenues 54,066 35,473 27,318 Administrative expenses Sales and marketing 119,258 92,554 63,547 Research and development 20,966 8,627 4,325 General and administrative 69,046 47,826 35,501 Depreciation and amortization 7,834 5,738 4,538 Total administrative expenses 217,104 154,745 107,911 Total operating expenses 271,170 190,218 135,229 Operating income 57,971 34,435 15,700 Interest expense (1,036) (1,427) (3,421) Net loss on early repayment of debt (4,044) Other income, net 308 517 1,421 Income before income taxes 57,243 33,525 9,656 Provision for income taxes 13,403 12,580 3,993 Net income $ 43,840 $ 20,945 $ 5,663 Earnings per share, basic $ 0.76 $ 0.37 $ 0.11 Earnings per share, diluted $ 0.74 $ 0.36 $ 0.11 Weighted average shares outstanding: Basic 57,550,204 56,495,170 49,784,154 Diluted 58,968,099 57,919,700 51,857,309 Consolidated Statements of Shar Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands Total IPO [Member] Common Stock [Member] Common Stock [Member]IPO [Member] Additional Paid in Capital [Member] Additional Paid in Capital [Member]IPO [Member] (Accumulated Deficit) Retained Earnings [Member] Non-controlling Interest [Member] Treasury Stock [Member] Beginning balance, value at Dec. 31, 2013 $ 5,083 $ 457 $ 33,978 $ (29,349) $ (3) Beginning balance, shares at Dec. 31, 2013 45,708,573 Acquisition of CP IV Blocker under the 2014 Reorganization 3 $ 3 Reclassification of accumulated deficit to additional paid in capital under the 2014 Reorganization (29,349) 29,349 Incentive units converted to common and restricted stock $ 35 (35) Incentive units converted to common and restricted stock, shares 3,517,327 Issuance of common stock $ 62,856 $ 46 $ 62,810 Issuance of common stock, shares 4,606,882 Stock-based compensation 716 716 Capital impact of the 2014 Reorganization (183) (183) Net income 5,663 5,663 Ending balance, value at Dec. 31, 2014 74,138 $ 538 67,937 5,663 Ending balance, shares at Dec. 31, 2014 53,832,782 Vesting of restricted stock $ 33 (33) Vesting of restricted stock, shares 3,287,091 Stock-based compensation 3,231 3,231 Net income 20,945 20,945 Ending balance, value at Dec. 31, 2015 98,314 $ 571 71,135 26,608 Ending balance, shares at Dec. 31, 2015 57,119,873 Vesting of restricted stock $ 14 (14) Vesting of restricted stock, shares 1,333,410 Stock-based compensation 24,331 24,331 Repurchases of common stock (49,958) $ (49,958) Repurchases of common stock, shares 1,122,261 Net income 43,840 43,840 Ending balance, value at Dec. 31, 2016 $ 116,527 $ 585 $ 95,452 $ 70,448 $ (49,958) Ending balance, shares at Dec. 31, 2016 58,453,283 1,122,261 Consolidated Statements of Cash Consolidated Statements of Cash Flows - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 Cash flows from operating activities: Net income $ 43,840 $ 20,945 $ 5,663 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,632 9,421 7,162 (Gain)/loss on disposition of property and equipment (64) 15 Amortization of debt discount and debt issuance costs 124 157 133 Write off of debt discount, net 4,051 Stock-based compensation expense 22,471 3,219 712 Net change in derivative liability (1,107) Deferred income taxes, net (1,848) (1,021) 2,259 Changes in operating assets and liabilities: Accounts receivable 1,015 440 (1,089) Prepaid expenses (944) (1,579) (465) Inventory 418 (224) 267 Deposits and other assets 71 (810) (232) Accounts payable (1,571) (431) (2,386) Income taxes, net 6,051 (5,808) (122) Accrued commissions and bonuses (684) 3,607 1,482 Accrued payroll and vacation 1,871 1,316 (1,505) Deferred revenue 10,675 9,699 6,765 Accrued expenses and other current liabilities 3,896 4,026 749 Net cash provided by operating activities 98,953 42,972 22,337 Cash flows from investing activities: Increase in funds held for clients (161,541) (36,146) (204,778) Decrease (increase) in restricted cash 371 (2) Purchases of property and equipment (43,805) (16,549) (14,270) Proceeds from sale of property and equipment 295 Net cash used in investing activities (205,051) (52,324) (219,050) Cash flows from financing activities: Proceeds from issuance of long-term debt 5,000 6,538 Repurchases of common stock (35,561) Withholding taxes paid related to net share settlements (14,396) Principal payments on long-term debt (964) (1,118) (65,650) Increase in client funds obligation 161,541 36,146 204,778 Proceeds from initial public offering, net of offering costs 62,840 Payment of debt issuance costs (78) (106) (11) Net cash provided by financing activities 115,542 34,922 208,495 Net increase in cash and cash equivalents 9,444 25,570 11,782 Cash and cash equivalents Beginning of year 50,714 25,144 13,362 End of year 60,158 50,714 25,144 Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized 938 1,271 3,482 Cash paid for income taxes 9,323 19,205 2,013 Noncash investing and financing activities: Purchases of property and equipment, accrued but not paid 4,651 1,613 408 Stock-based compensation for capitalized software $ 1,784 $ 220 $ 4 Organization and Description of Organization and Description of Business 12 Months Ended Dec. 31, 2016 Accounting Policies [Abstract] Organization and Description of Business 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we”, “our”, “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. The Reorganization Software and its wholly owned subsidiary, Payroll Software Merger Sub, LLC (“Merger Sub”) were formed as Delaware entities on October 31, 2013 and December 23, 2013, respectively, in anticipation of an initial public offering (“IPO”) and were wholly owned subsidiaries of Paycom Payroll Holdings, LLC (“Holdings”) prior to December 31, 2013. On January 1, 2014, we consummated a reorganization pursuant to which (i) affiliates of Welsh, Carson, Anderson & Stowe, L.P. contributed WCAS Paycom Holdings, Inc. (“WCAS Holdings”) and WCAS CP IV Blocker, Inc. (“CP IV Blocker”), which together owned all of the Series A Preferred Units of Holdings, to Software in exchange for shares of common stock of Software, and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units of Holdings to Software in exchange for shares of common stock of Software. Immediately after these contributions, Merger Sub merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common and restricted stock of Software for their common and incentive units by operation of Delaware law, and Holdings’ ownership interest in Software was cancelled. Outstanding common units, Series B Preferred Units and WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, an aggregate of 45,708,573 shares of common stock and 8,121,101 shares of restricted stock of Software. Prior to the reorganization, WCAS Holdings held Series C Preferred Units of Holdings in the amount of $46.2 million and WCAS Holdings had a 14% note due April 3, 2017 in the amount of $46.2 million (the “2017 Note”), which was payable to Welsh, Carson, Anderson & Stowe X, L.P. (“WCAS X”). Following the exchange of the Series A Preferred Units and Series B Preferred Units for shares of common stock of Software, all outstanding Series C Preferred Units of Holdings were eliminated in an intercompany transaction between Holdings and WCAS Holdings, we assumed the 2017 Note and Software became a holding company with its principal assets being the Series B Preferred Units of Holdings and the outstanding capital stock of WCAS Holdings and CP IV Blocker. The foregoing transactions are referred to collectively as the “2014 Reorganization”. Software’s acquisition of WCAS Holdings and Holdings in the 2014 Reorganization represented transactions under common control and were required to be retrospectively applied to the financial statements for all prior periods when the financial statements were issued for a period that included the date the transactions occurred. This includes a retrospective presentation for all equity related disclosures, including share, per share, and restricted stock disclosures, which have been revised to reflect the effects of the 2014 Reorganization. Therefore, our consolidated financial statements are presented as if WCAS Holdings and Holdings were Software’s wholly owned subsidiaries in periods prior to the 2014 Reorganization. The acquisition of CP IV Blocker was not deemed to be a reorganization under common control and therefore our historical consolidated financial statements include the ownership of a minority equity interest in CP IV Blocker, which was eliminated upon the acquisition of CP IV Blocker in the 2014 Reorganization on January 1, 2014. Initial Public Offering On April 21, 2014, we completed our initial public offering (“IPO”) whereby an aggregate of 7,641,750 shares of our common stock were sold to the public (consisting of 4,606,882 shares of common stock issued and sold by us and 3,034,868 shares of common stock sold by certain selling stockholders) at a public offering price of $15.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. The total gross proceeds we received from the offering were $69.1 million. After deducting underwriting discounts and commissions and offering expenses payable by us, the aggregate net proceeds we received totaled approximately $62.8 million. We used all of the net proceeds from the IPO, together with approximately $3.3 million from existing cash, for the repayment in full of the 2017 Note and the 10% Senior Note due 2022 payable to WCAS Capital Partners IV, L.P. (“WCAS Capital IV”). Follow-On Public Offering On January 21, 2015, we closed our follow-on public offering, whereby 6,422,750 shares of our common stock were sold to the public by certain selling stockholders at a public offering price of $22.50 per share. We did not receive any proceeds from the sale of these shares. Registered Block Trade Transactions On May 20, 2015, we closed an underwritten secondary offering of 8,000,000 shares of our common stock by WCAS X, WCAS Capital IV, each of our executive officers and certain other selling stockholders at a public offering price of $36.25 per share. We did not receive any proceeds from the sale of these shares. On September 15, 2015, we closed an underwritten secondary offering of 4,500,000 shares of our common stock by WCAS X, WCAS Capital IV, each of our executive officers and certain other selling stockholders at a public offering price of $37.95 per share. On September 23, 2015, the underwriter exercised its option to purchase an additional 675,000 shares from WCAS X and WCAS Capital IV. We did not receive any proceeds from the sales of these shares. On November 18, 2015, we closed an underwritten secondary offering of 4,500,000 shares of our common stock by WCAS X, WCAS Capital IV, each of our executive officers and certain other selling stockholders at a public offering price of $42.15 per share. On November 19, 2015, the underwriter exercised its overallotment option and subsequently purchased an additional 585,697 shares from WCAS X and WCAS Capital IV. We did not receive any proceeds from the sales of these shares. Summary of Significant Accounti Summary of Significant Accounting Policies 12 Months Ended Dec. 31, 2016 Accounting Policies [Abstract] Summary of Significant Accounting Policies 2. Basis of Presentation and Principles of Consolidation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. In addition to the normal adjustments, on the consolidated statement of cash flows for the year ended December 31, 2015, we combined the accounts of “stock-based compensation expense” and “employee stock purchase plan compensation expense” in order to conform to the current period presentation. Adoption of New Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplified the accounting related to certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recognized within the income statement when share-based payment awards vest or are settled. In addition, cash flows related to excess tax benefits are not separately classified as a financing activity apart from other income tax cash flows in the statement of cash flows. This guidance also allows us to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made to taxing authorities on an employee’s behalf for withheld shares be presented as a financing activity in the statement of cash flows, and provides an accounting policy election to account for award forfeitures as they occur or continue to estimate forfeitures. We elected to early adopt the new guidance in the third quarter of 2016. As such, we are required to present any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption, although there were no such adjustments necessary in our consolidated financial statements until the quarter ended September 30, 2016. The primary impact of our adoption of ASU 2016-09 was the recognition of excess tax benefits in our provision for income taxes of $7.0 million for the year ended December 31, 2016, which otherwise would have been recognized as paid in capital. Early adoption had no impact on retained earnings as of January 1, 2016, or on the comparability of the prior period financial statements as there were no excess tax benefits recognized during 2015. We elected to continue to estimate expected forfeitures to determine the amount of stock compensation cost to be recognized in each period. The presentation requirements for cash flows related to excess benefits and for cash flows related to employee taxes paid for withheld shares had no impact on any of the periods previously presented in our consolidated statements of cash flows. We adopted on a retrospective basis the recently issued guidance by the FASB Accounting Standards Update No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires companies with debt issuance costs related to a recognized debt liability to present such issuance costs in the consolidated balance sheets as a direct deduction from the carrying amount of the debt liability. Our adoption of ASU 2015-03 resulted in a reclassification that decreased deposits and other assets by $0.1 million and decreased net long-term debt, less current portion by $0.1 million on our consolidated balance sheet as of December 31, 2015. The adoption of ASU 2015-03 had no impact on our stockholders’ equity or the results of our operations. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life for long-lived and intangible assets, the life of our client relationships, the fair market value of our equity incentive awards and the fair value of our financial instruments. These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under circumstances. As such, actual results could materially differ from these estimates. Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recorded an allowance for doubtful accounts. Inventory Our inventory consists of two types of time clocks, and related clock attachments, sold to clients as part of our time and attendance services and are stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) cost method. Time clocks are purchased as finished goods from a third party and as such we do not have any inventory classified as raw materials or work in process inventory. Rental clocks are issued to clients under month-to-month operating leases and are classified as property and equipment. We retain inventory in certain lines primarily as replacements for those clients who use the various clocks and have determined that no write-down for obsolete items was required based on inventory turnover and our historical experience during the years ended December 31, 2016, 2015 and 2014. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2016, 2015 and 2014, we incurred interest costs of $1.3 million, $1.3 million and $3.7 million, respectively. For the years ended December 31, 2016, 2015 and 2014, interest expense of $0.4 million, less than $0.1 million and $0.4 million, respectively, was capitalized. Internal Use Software Expenditures for software purchases and software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and The total capitalized payroll costs related to internal use computer software projects was $8.8 million and $4.3 million as of December 31, 2016 and 2015, respectively, which have been included in property and equipment. Amortization expense related to capitalized software costs of $3.6 million, $1.8 million and $0.9 million was charged to expense for the years ended December 31, 2016, 2015 and 2014, respectively. Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recorded. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2016. For the years ended December 31, 2016, 2015 and 2014, there were no indicators of impairment. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Long-lived assets, including intangible assets with finite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with finite lives, for the years ended December 31, 2016, 2015 and 2014. Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested and earn interest during the interval between receipt and disbursement. These investments are shown in the consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. As of April 1, 2016, the interest income earned on funds held for clients is recorded in recurring revenues. Prior to April 1, 2016, the interest income earned on these funds was recorded in other income, net in the consolidated statements of income. As of December 31, 2016, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit and classified as a current asset in the accompanying balance sheets, as these funds are held solely to satisfy the client funds obligation. As of December 31, 2015 and 2014, the funds held for clients were invested in the same investments, other than commercial paper. Stock Repurchase Plan On May 26, 2016, we announced that our Board of Directors approved a stock repurchase plan under which we were authorized to purchase (in the aggregate) up to $50.0 million of our issued and outstanding common stock, par value $0.01 per share, over a 24-month period. On February 8, 2017, we announced that our Board of Directors amended and extended this stock repurchase plan, such that we are authorized to purchase (in the aggregate) up to an additional $50.0 million of common stock through January 2019. Shares may be repurchased from time-to-time 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, and the 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 and other corporate considerations. During the year ended December 31, 2016, we repurchased an aggregate of 1,122,261 shares of our common stock at an average cost of $44.52 per share, including 302,424 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. Revenue Recognition Our total revenue is comprised of recurring revenues and implementation and other revenues. We recognize revenues in accordance with accounting standards for software and service companies when all of the following criteria have been met: • There is persuasive evidence of an arrangement; • The service has been or is being provided to the client; • Collection of the fees is reasonably assured; and • The amount of fees to be paid by the client is fixed or determinable. Recurring Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for delivery of client payroll checks and reports. Talent acquisition includes applicant tracking, candidate tracker, background checks, on-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes payroll and tax management, Paycom pay, expense management, garnishment management and GL Concierge. Talent management includes employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning. HR management includes document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and Enhanced ACA. The services related to recurring revenues are rendered during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll-period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an Automated Clearing House (“ACH”) as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. Implementation and other Implementation and other revenues represent non-refundable conversion fees which are charged to new clients to offset the expense of new client set-up and revenues from the sale of time clocks as part of our employee time and attendance services. Because these conversion fees and sale of time clocks relate to our recurring revenues, we have evaluated such arrangements under the accounting guidance that governs multiple element arrangements. For arrangements with multiple elements, we evaluate whether each element represents a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have stand-alone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have stand-alone value upon delivery, the deliverables that do not have stand-alone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting. When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a stand-alone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (“TPE”) of selling price is used to establish the selling price if it exists, and if not it would be based on our best estimate of selling price. For the years ended December 31, 2016, 2015 and 2014, we have determined that there is no stand-alone value associated with the upfront conversion fees as they do not have value to our clients on a stand-alone basis nor are they offered as an individual service; therefore, the conversion fees are deferred and recognized ratably over the estimated life of our clients, which we have estimated to be ten years. For the years ended December 31, 2016, 2015, and 2014, we have determined that the revenues from the employee time and attendance services, and the revenues from the sale of time clocks as part of our time and attendance services, have VSOE of selling price as they are sold on a stand-alone basis. Revenue is therefore recognized for the respective deliverables as they are delivered. Cost of Revenues Our costs and expenses applicable to total revenues represent total operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation and amortization costs. Advertising Costs Advertising costs are expensed the first time that advertising takes place. Advertising costs for the years ended December 31, 2016, 2015 and 2014 were $4.9 million, $3.6 million and $4.2 million, respectively. Sales Taxes We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are shown on a net basis, and as such, excluded from revenues. For the years ended December 31, 2016, 2015 and 2014, sales taxes collected and remitted were $4.3 million, $3.7 million and $3.0 million, respectively. Employee Stock-Based Compensation Time-based stock compensation awards to employees are recognized pro rata over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Market-based stock compensation awards to employees are recognized pro rata over the applicable estimated vesting period as compensation costs in the consolidated statements of income based on their fair value as of the date of the grant unless vesting occurs sooner at which time the remaining respective unrecognized compensation cost would be recognized. Employee Stock Purchase Plan An award issued under the Paycom Software, Inc., Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recorded at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period. Income Taxes Our consolidated financial statements include a provision for income taxes incurred for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We file income tax returns in the United States and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that would not meet this threshold. Our policy is to record interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. We are not aware of any open income tax examinations as of December 31, 2016. However, the tax years 2007 through 2016 remain open to examination for federal income tax purposes and by other major taxing jurisdictions. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606).” This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has since issued several additional amendments to this guidance. In April 2015, the FASB proposed a one year deferral of the effective date of the new revenue recognition standard for public and non-public entities reporting under U.S. GAAP and on July 9, 2015, the FASB approved the one year deferral. The effective date of the amended standard will begin in periods beginning after December 15, 2017 and early adoption is permitted but no earlier than for reporting periods beginning after December 31, 2016. The Company has an ongoing project to assess the impact of the standard that has been conducted with the assistance of an international accounting firm. The Company has not fully determined the impact of the new revenue recognition standard on its systems, processes and consolidated financial statements; however, we expect the new standard will have a material impact on the manner in which we account for certain costs to acquire new contracts ( i.e i.e In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” Under the new guidance, an entity should measure inventory (as defined within the scope of the guidance) at the lower of cost or net realizable value. The new guidance applies to all inventory except inventory measured using last-in, first-out (LIFO) or the retail inventory method. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predicable costs of completion, disposal and transportation. The new guidance is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Accordingly, the standard is effective for us on January 1, 2017. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this guidance require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this guidance also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition the amendments in this guidance eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The new guidance is effective for us for fiscal years, and interim periods within those years, beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” The purpose of the guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, though early adoption is permitted. Full retrospective application is prohibited. We anticipate that the adoption of this accounting standard will materially affect our consolidated balance sheets and may require changes to the system and processes that we use to account for leases. We have not yet made any decision on the timing of adoption or method of adoption with respect to the optional practical expedients. Property and Equipment Property and Equipment 12 Months Ended Dec. 31, 2016 Property Plant And Equipment [Abstract] Property and Equipment 3. Property and equipment and accumulated depreciation and amortization were as follows (dollars in thousands): Year Ended December 31, 2016 2015 Property and equipment Buildings $ 48,250 $ 28,154 Software and capitalized software costs 23,879 13,959 Computer equipment 18,987 11,346 Rental clocks 10,669 8,750 Furniture, fixtures and equipment 6,695 5,464 Leasehold improvements 680 358 Vehicles — 421 109,160 68,452 Less: accumulated depreciation and amortization (35,833 ) (24,894 ) 73,327 43,558 Land 8,993 8,993 Construction in progress 14,528 6,307 Property and equipment, net $ 96,848 $ 58,858 Included in the construction in progress balance at December 31, 2016 and 2015 is $1.1 and $0.4 million in retainage, respectively. Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases. As such, these items are transferred from inventory to property and equipment and depreciated over their useful estimated lives. Depreciation and amortization expense for property and equipment, net was $12.0 million, $7.8 million and $5.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. Goodwill and Intangible Assets, Goodwill and Intangible Assets, Net 12 Months Ended Dec. 31, 2016 Goodwill And Intangible Assets Disclosure [Abstract] Goodwill and Intangible Assets, Net 4. We had goodwill of $51.9 million as of December 31, 2016 and 2015. We performed the required impairment tests of goodwill as of June 30 for the years ended December 31, 2016, 2015 and 2014 including an assessment of whether or not indicators of impairment were present and determined there was no impairment for each of those years then ended. All of the intangible assets other than goodwill are considered to have finite lives and, as such, are subject to amortization. The components of intangible assets are as follows (dollars in thousands): December 31, 2016 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Customer relationships 0.5 $ 13,997 $ (13,297 ) $ 700 Trade name 5.5 3,194 (2,023 ) 1,171 Total $ 17,191 $ (15,320 ) $ 1,871 December 31, 2015 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Customer relationships 1.5 $ 13,997 $ (11,897 ) $ 2,100 Trade name 6.5 3,194 (1,810 ) 1,384 Total $ 17,191 $ (13,707 ) $ 3,484 The weighted average remaining useful life of the intangible assets was 3.6 years as of December 31, 2016. Amortization of intangible assets for each of the years ended December 31, 2016, 2015 and 2014 was $1.6 million. Estimated amortization expense for our existing intangible assets for the next five years and thereafter is as follows (dollars in thousands): Year Ending December 31, Amortization 2017 $ 913 2018 213 2019 213 2020 213 2021 213 Thereafter 106 Total $ 1,871 Long-Term Debt Long-Term Debt 12 Months Ended Dec. 31, 2016 Debt Disclosure [Abstract] Long-Term Debt 5. Our long-term debt consisted of the following (dollars in thousands): Year Ended December 31, 2016 2015 Term note to bank due May 30, 2021 $ 24,950 $ 25,742 Term note to bank due August 31, 2023 4,874 — Total long-term debt (including current portion) 29,824 25,742 Less: Current portion (1,113 ) (886 ) Total long-term debt, net $ 28,711 $ 24,856 As of December 31, 2016, our indebtedness consisted of (i) a term note under the 2021 Consolidated Loan due to Kirkpatrick Bank (the “2021 Consolidated Loan”), (ii) an 84-month term loan from Kirkpatrick Bank (the “2023 Term Loan”), which we obtained by converting the $5.0 million outstanding principal balance of a construction loan that was used to partially finance the construction of our third headquarters building (the “2015 Construction Loan”), and (iii) a new construction loan from Kirkpatrick Bank, which is available to finance the ongoing construction of a fourth headquarters building and new parking garage (the “2016 Construction Loan”). The 2021 Consolidated Loan matures on May 30, 2021. Under the 2021 Consolidated Loan, interest is payable monthly and accrues at a fixed rate of 4.75% per annum. The 2021 Consolidated Loan is secured by a mortgage covering our headquarters and certain personal property relating to our headquarters. The 2021 Consolidated Loan includes certain financial covenants, including maintaining a fixed charge coverage ratio of EBITDA to fixed charges (defined as current maturities of long-term debt, interest expense, rent expense and distributions) of greater than 1.2 to 1.0, which is measured on a quarterly basis. We were in compliance with all of these covenants as of December 31, 2016. We entered into the 2015 Construction Loan with Kirkpatrick Bank on May 3, 2015 and converted the outstanding principal balance into the 2023 Term Loan on August 1, 2016. The 2015 Construction Loan allowed us to borrow a maximum aggregate principal amount equal to the lesser of (i) $11.0 million or (ii) 80% of the appraised value of the constructed property. The 2023 Term Loan matures on August 31, 2023 and is secured by a mortgage covering our headquarters and certain personal property relating to our headquarters. Interest on the 2023 Term Loan is payable monthly and accrues at a fixed rate of 3.4% per annum. The 2023 Term Loan includes the same covenants as those disclosed above with respect to the 2021 Consolidated Loan. We were in compliance with all of these covenants as of December 31, 2016. We entered into the 2016 Construction Loan with Kirkpatrick Bank on August 2, 2016. As of December 31, 2016, there were no outstanding borrowings under the 2016 Construction Loan. The 2016 Construction Loan allows us to borrow a maximum aggregate principal amount equal to the lesser of (i) $28.6 million or (ii) 80% of the appraised value of the constructed properties. The 2016 Construction Loan matures on the earlier of the completion of construction or February 2, 2019, with interest accruing at the greater of (i) the prime rate, plus 50 basis points or (ii) 4.0%. At maturity, the outstanding principal balance of the 2016 Construction Loan, if any, will be automatically converted into an 84-month term loan that will accrue fixed interest at the prevailing 7/20 London Interbank Offered Rate swap interest rate in effect as of the commencement date, plus 225 basis points. As of December 31, 2016 and December 31, 2015, the carrying value of our total long-term debt, including current portion, was $29.8 million and $25.7 million, respectively, which approximated its fair value as of both dates. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities. Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2016 are as follows (dollars in thousands): Year Ending December 31, 2017 $ 1,113 2018 1,144 2019 1,198 2020 1,253 2021 21,155 Thereafter 3,961 Total $ 29,824 Employee Savings Plan Employee Savings Plan 12 Months Ended Dec. 31, 2016 Compensation Related Costs [Abstract] Employee Savings Plan and Employee Stock Purchase Plan 6. Our employees that are over the age of 21 and have completed ninety (90) days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby we make a matching contribution for our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions amounted to $3.5 million, $2.4 and $1.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to IRS limits. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2,000,000 shares. During the year ended December 31, 2016, eligible employees purchased 110,658 shares of the Company’s common stock under the ESPP. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $0.6 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively. There was no compensation expense related to the ESPP for the year ended December 31, 2014. Fair Value of Financial Instrum Fair Value of Financial Instruments 12 Months Ended Dec. 31, 2016 Fair Value Disclosures [Abstract] Fair Value of Financial Instruments 7. Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client fund obligation approximates fair value because of the short-term nature of the instruments. We did not have any financial instruments that are measured on a recurring basis for the years ended December 31, 2016, 2015 or 2014. The following table summarizes the change in fair value of our Level 3 financial instruments for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands). 2016 2015 2014 Balance, beginning of year $ — $ — $ 1,107 Issuances — — — Change in fair value of derivative liability — — (635 ) Gain on the extinguishment of derivative liability — — (472 ) Balance, end of year $ — $ — $ — Total change of the derivative liability recognized as other income, net in the consolidated statements of income was $1.1 million for the year ended December 31, 2014. Earnings Per Share Earnings Per Share 12 Months Ended Dec. 31, 2016 Earnings Per Share [Abstract] Earnings Per Share 8. Basic earnings per share (“EPS”) is based on the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed in a similar manner to basic EPS after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested. In accordance with ASC Topic 260 “Earnings Per Share”, the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The outstanding restricted shares of stock that were issued on July 8, 2015, are considered participating securities. Under the 2014 Reorganization, all the outstanding common units, Series B Preferred Units and incentive units of Holdings were exchanged for, or converted into, an aggregate of 45,708,573 shares of our common stock and 8,121,101 shares of our restricted stock as of January 1, 2014. The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted net earnings per share (dollars in thousands, except share amounts): Year Ended December 31, 2016 2015 2014 Numerator: Net income $ 43,840 $ 20,945 $ 5,663 Less: income allocable to participating securities (333 ) (270 ) — Income allocable to common shares $ 43,507 $ 20,675 $ 5,663 Add back: undistributed earnings allocable to participating securities 333 270 — Less: undistributed earnings reallocated to participating securities (333 ) (264 ) — Numerator for diluted earnings per share $ 43,507 $ 20,681 $ 5,663 Denominator: Weighted average common shares outstanding 50,315,455 50,315,455 49,002,809 Weighted average common shares repurchased (286,699 ) — — Adjustment for vested restricted stock 7,521,448 6,179,715 781,345 Shares for calculating basic earnings per share 57,550,204 56,495,170 49,784,154 Dilutive effect of unvested restricted stock 1,417,895 1,424,530 2,073,155 Shares for calculating diluted earnings per share 58,968,099 57,919,700 51,857,309 Earnings per share: Basic $ 0.76 $ 0.37 $ 0.11 Diluted $ 0.74 $ 0.36 $ 0.11 Stockholders' Equity and Stock- Stockholders' Equity and Stock-Based Compensation 12 Months Ended Dec. 31, 2016 Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] Stockholders' Equity and Stock-Based Compensation 9. On January 1, 2014, we issued restricted shares of common stock (“2014 Restricted Stock”) under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”) that were subject to either time-based vesting conditions or market-based vesting conditions. Shares of 2014 Restricted Stock with time-based vesting conditions vest based on various schedules through 2018. The market-based vesting conditions were based on our total enterprise value exceeding certain specified thresholds. Compensation expense related to the issuance of 2014 Restricted Stock with time-based vesting conditions was measured based on the fair value of the award on the grant date and is recognized over the requisite service period on a straight-line basis. Compensation expense relating to the issuance of 2014 Restricted Stock with market-based vesting conditions was measured based on the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based on the probability that the vesting conditions would be met. For 2014 Restricted Stock with market-based vesting conditions, 50% of the shares vested upon reaching a Total Enterprise Value (as defined in the applicable restricted stock award agreement, “TEV”) of $1.4 billion on December 1, 2014 and the remaining 50% of the shares vested upon reaching a TEV of $1.8 billion on March 2, 2015. Our total compensation expense related to 2014 Restricted Stock for the years ended December 31, 2016, 2015 and 2014 was $0.2 million, $0.4 million and $0.7 million, respectively. There was $0.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of 2014 Restricted Stock with time-based vesting conditions outstanding as of December 31, 2016. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.2 years as of December 31, 2016. On July 8, 2015, we issued an aggregate of 741,931 restricted shares of common stock under the LTIP (“2015 Restricted Stock”) to each of our executive officers and certain non-executive employees. On April 15, 2016, we issued an aggregate of 847,928 restricted shares of common stock under the LTIP (“April 2016 Restricted Stock”) to each of our executive officers and certain non-executive employees. On October 4, 2016, we issued an aggregate of 721,100 restricted shares of common stock under the LTIP (“October 2016 Restricted Stock”) to each of our executive officers and certain non-executive employees. On May 2, 2016 and November 10, 2016, we issued an aggregate of 5,132 and 1,269 restricted shares of common stock, respectively, under the LTIP to certain members of our Board of Directors (“2016 Director Restricted Stock” and, collectively with all shares of 2015 Restricted Stock, April 2016 Restricted Stock and October 2016 Restricted Stock, the “Post-IPO Restricted Stock”). Certain shares of Post-IPO Restricted Stock are subject to market-based vesting conditions and certain shares of Post-IPO Restricted Stock (including all shares of 2016 Director Restricted Stock) are subject to time-based vesting conditions. Shares of Post-IPO Restricted Stock subject to time-based vesting conditions will vest over periods ranging from approximately one to six years. Shares subject to market-based vesting conditions have vested when, or will vest if, the Company’s TEV equals or exceeds certain predetermined thresholds. All shares of April 2016 Restricted Stock with market-based vesting conditions vested on July 28, 2016, when the Company’s TEV reached $2.65 billion. With respect to shares of 2015 Restricted Stock with market-based vesting conditions, 50% of the shares vested on August 1, 2016, when the Company’s TEV reached $2.65 billion, and the remaining 50% of the shares will vest if the Company’s TEV equals or exceeds $3.5 billion. There was a two-trading-day gap between the vesting of April 2016 Restricted Stock and the applicable portion of the 2015 Restricted Stock when the Company’s TEV reached $2.65 billion due to differences in the number of shares outstanding at the respective grant dates, which affected the TEV calculations. With respect to shares of October 2016 Restricted Stock subject to market-based vesting conditions, 50% of the shares will vest if the Company’s TEV equals or exceeds $3.9 billion and 50% of the shares will vest if the Company’s TEV equals or exceeds $4.2 billion. Shares of October 2016 Restricted Stock subject to market-based vesting conditions will be forfeited if they do not vest within six years of the date of grant while the remaining shares of 2015 Restricted Stock subject to market-based vesting conditions are eligible for vesting indefinitely. The following table presents a summary of the grant-date fair values of Post-IPO Restricted Stock granted during the years ended December 31, 2016 and 2015 and the related assumptions: Years Ended December 31, 2016 2015 Grant-date fair value of restricted stock $23.15 - $49.34 $21.76 - $33.33 Risk-free interest rates (based on U.S. Treasury Securities from 5 to 10 years maturity) 1.28% - 1.36% 2.2% Estimated volatility 21.0% - 23.0% 26.0% Expected life (in years) 2.7 3.6 Dividend yield 0% 0% Compensation expense for the shares of Post-IPO Restricted Stock with time-based vesting conditions was measured based on the fair value of the underlying shares on the grant date (which was equal to the closing price of our common stock on such grant date) and will be recognized over the requisite service periods on a straight-line basis. Compensation expense for shares of Post-IPO Restricted Stock with market-based vesting conditions was measured based on the fair value of the underlying shares on the grant date, which ranged from $21.76 to $33.62. The fair value of each share of Post-IPO Restricted Stock with market-based vesting conditions was estimated on the grant date using a Monte Carlo simulation model. This model considers a range of assumptions related to volatility, risk-free interest rate, expected life and expected dividend yield. Expected volatilities used in the model are based on historical volatilities of comparable guideline companies until a sufficient trading history in our common stock exists. We are required to estimate forfeitures and only record compensation costs for those awards that are expected to vest. The Company recognized $9.9 million of compensation cost in connection with the vesting of 490,700 shares of April 2016 Restricted Stock on July 28, 2016 and $3.8 million of compensation cost in connection with the vesting of 234,350 shares of 2015 Restricted Stock on August 1, 2016. To satisfy tax withholding obligations with respect to the delivery of vested shares to certain employees, the Company withheld 199,128 shares of April 2016 Restricted Stock that vested on July 28, 2016 and 90,703 shares of 2015 Restricted Stock that vested on August 1, 2016, as well as 12,593 of the 37,047 shares of 2015 Restricted Stock with time-based vesting conditions that vested on July 8, 2016. All shares withheld to satisfy tax withholding obligations are held as treasury stock. Our total compensation expense related to Post-IPO Restricted Stock was $22.4 million and $2.6 million for the years ended December 31, 2016 and 2015, respectively. There was $39.6 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of Post-IPO Restricted Stock outstanding as of December 31, 2016. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.1 years as of December 31, 2016. We capitalized stock-based compensation costs related to software developed for internal use of $1.8 million, $0.2 million and $4 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. The following table presents non-cash stock-based compensation expense resulting from employee restricted common stock agreements and is presented in the following line items in the accompanying consolidated statements of income for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands): Years Ended December 31, 2016 2015 2014 Operating expense $ 2,217 $ 235 $ 32 Sales and marketing 3,656 559 166 Research and development 836 104 16 General and administrative 15,837 2,112 498 Total non-cash stock-based compensation expense $ 22,546 $ 3,010 $ 712 The following table presents a summary of the activity related to restricted stock for the years ended December 31, 2016 and 2015: Year ended December 31, 2015 Number of shares Weighted average grant- date fair value (in dollars) Unvested shares of restricted stock outstanding at January 1, 2015 4,540,020 $ 0.24 2015 Restricted Stock granted 741,931 27.65 2014 Restricted Stock vested (3,287,091 ) 0.20 2015 Restricted Stock forfeited (7,805 ) 30.95 2014 Restricted Stock forfeited (7,215 ) 0.48 Unvested shares of restricted stock outstanding at December 31, 2015 1,979,840 10.45 2016 Restricted Stock granted 1,575,429 32.14 2016 Restricted Stock vested (490,700 ) 23.15 2015 Restricted Stock vested (271,397 ) 28.07 2014 Restricted Stock vested (571,313 ) 0.31 2016 Restricted Stock forfeited (25,317 ) 36.11 2015 Restricted Stock forfeited (22,449 ) 29.43 2014 Restricted Stock forfeited (6,154 ) 0.54 Unvested shares of restricted stock outstanding at December 31, 2016 2,167,939 $ 23.33 Related-Party Transactions Related-Party Transactions 12 Months Ended Dec. 31, 2016 Related Party Transactions [Abstract] Related-Party Transactions 10. We paid rent on our Dallas office space in the amounts of $0.4 million, $0.4 million and $0.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Dallas office building is owned by 417 Oakbend, LP, a Texas limited partnership. Our Chief Sales Officer owned a .01% general partnership interest and a 10.49% limited partnership interest in 417 Oakbend, LP but sold his interest in 2016. In accordance with the terms of the Registration Rights Agreement dated as of December 30, 2013, we paid $1.4 million of registration expenses and related legal fees on behalf of certain related parties in connection with the underwritten secondary offerings in May, September and November 2015. The Company’s Audit Committee approved the payment of such expenses and fees with respect to related parties. Commitments and Contingencies Commitments and Contingencies 12 Months Ended Dec. 31, 2016 Commitments And Contingencies Disclosure [Abstract] Commitments and Contingencies 11. Employment Agreements We have employment agreements with certain of our executive officers. The agreements allow for annual compensation, participation in executive benefit plans, and performance-based cash bonuses. Incentive Plan On May 2, 2016, our stockholders approved the Paycom Software, Inc. Annual Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for payment of incentive compensation that is not subject to certain federal income tax deduction limitations. Participation in the Incentive Plan is limited to certain of our employees designated by the Compensation Committee of the Board of Directors. Operating Leases and Deferred Rent We lease office space under several noncancellable operating leases with contractual terms expiring from 2017 to 2023. Minimum rent expenses are recognized over the lease term. The lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in an amount that a renewal appears, at the inception of the lease, to be reasonably assured. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rent expense and the amount payable under the lease as a liability. As of December 31, 2016 and 2015, we had $1.1 million and $0.8 million, respectively, recorded as a liability for deferred rent. Future annual minimum lease payments under noncancellable operating leases with initial or remaining terms of one year or more as of December 31, 2016 were as follows (dollars in thousands): Year Ending December 31, 2017 $ 5,953 2018 5,675 2019 4,826 2020 2,565 2021 1,101 Thereafter 1,109 Total minimum lease payments $ 21,229 Rent expense under operating leases for the years ended December 31, 2016, 2015 and 2014 was $5.6 million, $4.4 million and $3.4 million, respectively. Legal Proceedings We are involved in various legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows. Income Taxes Income Taxes 12 Months Ended Dec. 31, 2016 Income Tax Disclosure [Abstract] Income Taxes 12. The items comprising income tax expense are as follows (dollars in thousands): Year Ended December 31, 2016 2015 2014 Provision for current income taxes Federal $ 12,207 $ 11,308 $ 1,330 State 3,044 2,292 388 Total provision for current income taxes 15,251 13,600 1,718 Provision (benefit) for deferred income taxes, net Federal (1,476 ) (1,109 ) 2,114 State (372 ) 89 161 Total provision (benefit) for deferred income taxes, net (1,848 ) (1,020 ) 2,275 Total provision for income taxes $ 13,403 $ 12,580 $ 3,993 The following schedule reconciles the statutory Federal tax rate to the effective income tax rate: Year Ended December 31, 2016 2015 2014 Federal statutory tax rate 35 % 35 % 34 % Increase(decrease) resulting from: State income taxes, net of Federal income tax benefit 4 % 4 % 4 % Nondeductible expenses 1 % 3 % 4 % Research credit, Federal benefit (2 %) (1 %) 0 % Section 199 - Qualified production activities (2 %) (3 %) 0 % Stock-based compensation (12 %) 0 % 0 % Other (1 %) 0 % (1 %) Effective income tax rate 23 % 38 % 41 % Our effective income tax rate was 23% and 38% for the years ended December 31, 2016 and 2015, respectively. The lower effective income tax rate for the year ended December 31, 2016 primarily resulted from the recognition of excess tax benefits from share-based payment awards due to the Company’s adoption of ASU 2016-09. See Note 2 under Adoption of New Pronouncements Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows (dollars in thousands): Year Ended December 31, 2016 2015 Deferred income tax assets (liabilities): Stock-based compensation $ 2,658 $ 1,035 Investment in Paycom Payroll Holdings, LLC (1,487 ) (1,676 ) Net operating losses 36 — Noncurrent deferred income tax assets (liabilities), net $ 1,207 $ (641 ) In November 2015, the FASB issued ASU 2015-17 which we elected to early adopt on a retrospective basis. Previous to the issuance of ASU 2015-17, U.S. GAAP required an entity to separate deferred income tax assets and liabilities into current and noncurrent amounts. To simplify the presentation of deferred income taxes, this guidance requires that deferred tax assets and liabilities be classified as noncurrent. At December 31, 2016, we had net operating loss carryforwards for state income tax purposes of approximately $36 thousand which are available to offset future state taxable income that begin expiring in 2030. At December 31, 2016 and 2015, we had no material unrecognized tax benefits related to uncertain tax positions. We file income tax returns with the United States federal government and various state jurisdictions. Our 2007 through 2016 U.S. federal and state income tax returns remain open to examination by tax authorities, due to the usage of net operating loss carryovers. Selected Quarterly Financial Da Selected Quarterly Financial Data (unaudited) 12 Months Ended Dec. 31, 2016 Quarterly Financial Information Disclosure [Abstract] Selected Quarterly Financial Data (unaudited) 13. The following tables set forth selected quarterly statements of income data for the periods indicated (dollars in thousands, except share and per share amounts): Quarter Ended December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 Revenues $ 87,810 $ 77,325 $ 73,880 $ 90,126 Operating income 12,681 582 16,004 28,704 Net income 8,633 6,198 10,421 18,588 Earnings per share, basic $ 0.15 $ 0.11 $ 0.18 $ 0.32 Earnings per share, diluted $ 0.15 $ 0.10 $ 0.18 $ 0.31 Weighted average shares outstanding: Basic 57,652,531 57,819,734 57,591,556 57,132,909 Diluted 58,882,966 58,907,281 58,697,229 58,362,040 Quarter Ended December September 30, 2015 June 30, 2015 March 31, 2015 Revenues $ 65,118 $ 55,340 $ 48,973 $ 55,222 Operating income 6,234 6,855 10,808 10,538 Net income 5,157 3,847 5,946 5,995 Earnings per share, basic $ 0.09 $ 0.07 $ 0.10 $ 0.11 Earnings per share, diluted $ 0.09 $ 0.07 $ 0.10 $ 0.11 Weighted average shares outstanding: Basic 57,109,987 57,050,684 57,038,021 54,749,951 Diluted 58,365,587 58,367,830 58,369,083 56,562,661 Organization and Description 20 Organization and Description of Business (Policies) 12 Months Ended Dec. 31, 2016 Accounting Policies [Abstract] Description of Business Description of Business Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we”, “our”, “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. The Reorganization The Reorganization Software and its wholly owned subsidiary, Payroll Software Merger Sub, LLC (“Merger Sub”) were formed as Delaware entities on October 31, 2013 and December 23, 2013, respectively, in anticipation of an initial public offering (“IPO”) and were wholly owned subsidiaries of Paycom Payroll Holdings, LLC (“Holdings”) prior to December 31, 2013. On January 1, 2014, we consummated a reorganization pursuant to which (i) affiliates of Welsh, Carson, Anderson & Stowe, L.P. contributed WCAS Paycom Holdings, Inc. (“WCAS Holdings”) and WCAS CP IV Blocker, Inc. (“CP IV Blocker”), which together owned all of the Series A Preferred Units of Holdings, to Software in exchange for shares of common stock of Software, and (ii) the owners of outstanding Series B Preferred Units of Holdings contributed their Series B Preferred Units of Holdings to Software in exchange for shares of common stock of Software. Immediately after these contributions, Merger Sub merged with and into Holdings with Holdings surviving the merger. Upon consummation of the merger, the remaining holders of outstanding common and incentive units of Holdings received shares of common and restricted stock of Software for their common and incentive units by operation of Delaware law, and Holdings’ ownership interest in Software was cancelled. Outstanding common units, Series B Preferred Units and WCAS Holdings and CP IV Blocker were contributed to Software in exchange for, or converted into, an aggregate of 45,708,573 shares of common stock and 8,121,101 shares of restricted stock of Software. Prior to the reorganization, WCAS Holdings held Series C Preferred Units of Holdings in the amount of $46.2 million and WCAS Holdings had a 14% note due April 3, 2017 in the amount of $46.2 million (the “2017 Note”), which was payable to Welsh, Carson, Anderson & Stowe X, L.P. (“WCAS X”). Following the exchange of the Series A Preferred Units and Series B Preferred Units for shares of common stock of Software, all outstanding Series C Preferred Units of Holdings were eliminated in an intercompany transaction between Holdings and WCAS Holdings, we assumed the 2017 Note and Software became a holding company with its principal assets being the Series B Preferred Units of Holdings and the outstanding capital stock of WCAS Holdings and CP IV Blocker. The foregoing transactions are referred to collectively as the “2014 Reorganization”. Software’s acquisition of WCAS Holdings and Holdings in the 2014 Reorganization represented transactions under common control and were required to be retrospectively applied to the financial statements for all prior periods when the financial statements were issued for a period that included the date the transactions occurred. This includes a retrospective presentation for all equity related disclosures, including share, per share, and restricted stock disclosures, which have been revised to reflect the effects of the 2014 Reorganization. Therefore, our consolidated financial statements are presented as if WCAS Holdings and Holdings were Software’s wholly owned subsidiaries in periods prior to the 2014 Reorganization. The acquisition of CP IV Blocker was not deemed to be a reorganization under common control and therefore our historical consolidated financial statements include the ownership of a minority equity interest in CP IV Blocker, which was eliminated upon the acquisition of CP IV Blocker in the 2014 Reorganization on January 1, 2014. Initial Public Offering Initial Public Offering On April 21, 2014, we completed our initial public offering (“IPO”) whereby an aggregate of 7,641,750 shares of our common stock were sold to the public (consisting of 4,606,882 shares of common stock issued and sold by us and 3,034,868 shares of common stock sold by certain selling stockholders) at a public offering price of $15.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. The total gross proceeds we received from the offering were $69.1 million. After deducting underwriting discounts and commissions and offering expenses payable by us, the aggregate net proceeds we received totaled approximately $62.8 million. We used all of the net proceeds from the IPO, together with approximately $3.3 million from existing cash, for the repayment in full of the 2017 Note and the 10% Senior Note due 2022 payable to WCAS Capital Partners IV, L.P. (“WCAS Capital IV”). Follow-On Public Offering Follow-On Public Offering On January 21, 2015, we closed our follow-on public offering, whereby 6,422,750 shares of our common stock were sold to the public by certain selling stockholders at a public offering price of $22.50 per share. We did not receive any proceeds from the sale of these shares. Registered Block Trade Transactions Registered Block Trade Transactions On May 20, 2015, we closed an underwritten secondary offering of 8,000,000 shares of our common stock by WCAS X, WCAS Capital IV, each of our executive officers and certain other selling stockholders at a public offering price of $36.25 per share. We did not receive any proceeds from the sale of these shares. On September 15, 2015, we closed an underwritten secondary offering of 4,500,000 shares of our common stock by WCAS X, WCAS Capital IV, each of our executive officers and certain other selling stockholders at a public offering price of $37.95 per share. On September 23, 2015, the underwriter exercised its option to purchase an additional 675,000 shares from WCAS X and WCAS Capital IV. We did not receive any proceeds from the sales of these shares. On November 18, 2015, we closed an underwritten secondary offering of 4,500,000 shares of our common stock by WCAS X, WCAS Capital IV, each of our executive officers and certain other selling stockholders at a public offering price of $42.15 per share. On November 19, 2015, the underwriter exercised its overallotment option and subsequently purchased an additional 585,697 shares from WCAS X and WCAS Capital IV. We did not receive any proceeds from the sales of these shares. Basis of Presentation and Principles of Consolidation Basis of Presentation and Principles of Consolidation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. In addition to the normal adjustments, on the consolidated statement of cash flows for the year ended December 31, 2015, we combined the accounts of “stock-based compensation expense” and “employee stock purchase plan compensation expense” in order to conform to the current period presentation. Adoption of New Pronouncements Adoption of New Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplified the accounting related to certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recognized within the income statement when share-based payment awards vest or are settled. In addition, cash flows related to excess tax benefits are not separately classified as a financing activity apart from other income tax cash flows in the statement of cash flows. This guidance also allows us to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made to taxing authorities on an employee’s behalf for withheld shares be presented as a financing activity in the statement of cash flows, and provides an accounting policy election to account for award forfeitures as they occur or continue to estimate forfeitures. We elected to early adopt the new guidance in the third quarter of 2016. As such, we are required to present any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption, although there were no such adjustments necessary in our consolidated financial statements until the quarter ended September 30, 2016. The primary impact of our adoption of ASU 2016-09 was the recognition of excess tax benefits in our provision for income taxes of $7.0 million for the year ended December 31, 2016, which otherwise would have been recognized as paid in capital. Early adoption had no impact on retained earnings as of January 1, 2016, or on the comparability of the prior period financial statements as there were no excess tax benefits recognized during 2015. We elected to continue to estimate expected forfeitures to determine the amount of stock compensation cost to be recognized in each period. The presentation requirements for cash flows related to excess benefits and for cash flows related to employee taxes paid for withheld shares had no impact on any of the periods previously presented in our consolidated statements of cash flows. We adopted on a retrospective basis the recently issued guidance by the FASB Accounting Standards Update No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires companies with debt issuance costs related to a recognized debt liability to present such issuance costs in the consolidated balance sheets as a direct deduction from the carrying amount of the debt liability. Our adoption of ASU 2015-03 resulted in a reclassification that decreased deposits and other assets by $0.1 million and decreased net long-term debt, less current portion by $0.1 million on our consolidated balance sheet as of December 31, 2015. The adoption of ASU 2015-03 had no impact on our stockholders’ equity or the results of our operations. Use of Estimates Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life for long-lived and intangible assets, the life of our client relationships, the fair market value of our equity incentive awards and the fair value of our financial instruments. These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under circumstances. As such, actual results could materially differ from these estimates. Segment Information Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recorded an allowance for doubtful accounts. Inventory Inventory Our inventory consists of two types of time clocks, and related clock attachments, sold to clients as part of our time and attendance services and are stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) cost method. Time clocks are purchased as finished goods from a third party and as such we do not have any inventory classified as raw materials or work in process inventory. Rental clocks are issued to clients under month-to-month operating leases and are classified as property and equipment. We retain inventory in certain lines primarily as replacements for those clients who use the various clocks and have determined that no write-down for obsolete items was required based on inventory turnover and our historical experience during the years ended December 31, 2016, 2015 and 2014. Property and Equipment Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2016, 2015 and 2014, we incurred interest costs of $1.3 million, $1.3 million and $3.7 million, respectively. For the years ended December 31, 2016, 2015 and 2014, interest expense of $0.4 million, less than $0.1 million and $0.4 million, respectively, was capitalized. Internal Use Software Internal Use Software Expenditures for software purchases and software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and The total capitalized payroll costs related to internal use computer software projects was $8.8 million and $4.3 million as of December 31, 2016 and 2015, respectively, which have been included in property and equipment. Amortization expense related to capitalized software costs of $3.6 million, $1.8 million and $0.9 million was charged to expense for the years ended December 31, 2016, 2015 and 2014, respectively. Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recorded. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2016. For the years ended December 31, 2016, 2015 and 2014, there were no indicators of impairment. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Impairment of Long-Lived Assets Long-lived assets, including intangible assets with finite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with finite lives, for the years ended December 31, 2016, 2015 and 2014. Funds Held for Clients and Client Funds Obligation Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested and earn interest during the interval between receipt and disbursement. These investments are shown in the consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. As of April 1, 2016, the interest income earned on funds held for clients is recorded in recurring revenues. Prior to April 1, 2016, the interest income earned on these funds was recorded in other income, net in the consolidated statements of income. As of December 31, 2016, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit and classified as a current asset in the accompanying balance sheets, as these funds are held solely to satisfy the client funds obligation. As of December 31, 2015 and 2014, the funds held for clients were invested in the same investments, other than commercial paper. Stock Repurchase Plan Stock Repurchase Plan On May 26, 2016, we announced that our Board of Directors approved a stock repurchase plan under which we were authorized to purchase (in the aggregate) up to $50.0 million of our issued and outstanding common stock, par value $0.01 per share, over a 24-month period. On February 8, 2017, we announced that our Board of Directors amended and extended this stock repurchase plan, such that we are authorized to purchase (in the aggregate) up to an additional $50.0 million of common stock through January 2019. Shares may be repurchased from time-to-time 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, and the 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 and other corporate considerations. During the year ended December 31, 2016, we repurchased an aggregate of 1,122,261 shares of our common stock at an average cost of $44.52 per share, including 302,424 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. Revenue Recognition Revenue Recognition Our total revenue is comprised of recurring revenues and implementation and other revenues. We recognize revenues in accordance with accounting standards for software and service companies when all of the following criteria have been met: • There is persuasive evidence of an arrangement; • The service has been or is being provided to the client; • Collection of the fees is reasonably assured; and • The amount of fees to be paid by the client is fixed or determinable. Recurring Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for delivery of client payroll checks and reports. Talent acquisition includes applicant tracking, candidate tracker, background checks, on-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes payroll and tax management, Paycom pay, expense management, garnishment management and GL Concierge. Talent management includes employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning. HR management includes document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and Enhanced ACA. The services related to recurring revenues are rendered during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll-period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an Automated Clearing House (“ACH”) as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. Implementation and other Implementation and other revenues represent non-refundable conversion fees which are charged to new clients to offset the expense of new client set-up and revenues from the sale of time clocks as part of our employee time and attendance services. Because these conversion fees and sale of time clocks relate to our recurring revenues, we have evaluated such arrangements under the accounting guidance that governs multiple element arrangements. For arrangements with multiple elements, we evaluate whether each element represents a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have stand-alone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have stand-alone value upon delivery, the deliverables that do not have stand-alone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting. When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a stand-alone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (“TPE”) of selling price is used to establish the selling price if it exists, and if not it would be based on our best estimate of selling price. For the years ended December 31, 2016, 2015 and 2014, we have determined that there is no stand-alone value associated with the upfront conversion fees as they do not have value to our clients on a stand-alone basis nor are they offered as an individual service; therefore, the conversion fees are deferred and recognized ratably over the estimated life of our clients, which we have estimated to be ten years. For the years ended December 31, 2016, 2015, and 2014, we have determined that the revenues from the employee time and a
Document and Entity Information Document and Entity Information - USD ($) $ in Billions 12 Months Ended Dec. 31, 2017 Feb. 05, 2018 Jun. 30, 2017 Document And Entity Information [Abstract] Document Type 10-K Amendment Flag false Document Period End Date Dec. 31, 2017 Document Fiscal Year Focus 2,017 Document Fiscal Period Focus FY Trading Symbol PAYC Entity Registrant Name Paycom Software, Inc. Entity Central Index Key 1,590,955 Current Fiscal Year End Date --12-31 Entity Well-known Seasoned Issuer Yes Entity Current Reporting Status Yes Entity Voluntary Filers No Entity Filer Category Large Accelerated Filer Entity Common Stock, Shares Outstanding 59,182,715 Entity Public Float $ 3.3 Consolidated Balance Sheets Consolidated Balance Sheets - USD ($) $ in Thousands Dec. 31, 2017 Dec. 31, 2016 Current assets: Cash and cash equivalents $ 46,077 $ 60,158 Accounts receivable 1,576 1,339 Prepaid expenses 4,982 4,475 Inventory 979 675 Income tax receivable 7,047 692 Current assets before funds held for clients 60,661 67,339 Funds held for clients 1,089,201 858,244 Total current assets 1,149,862 925,583 Property and equipment, net 147,705 96,848 Deposits and other assets 1,456 1,215 Goodwill 51,889 51,889 Intangible assets, net 958 1,871 Deferred income tax assets, net 3,294 1,207 Total assets 1,355,164 1,078,613 Current liabilities: Accounts payable 6,490 3,737 Accrued commissions and bonuses 9,585 8,003 Accrued payroll and vacation 7,015 4,769 Deferred revenue 6,982 5,230 Current portion of long-term debt 888 1,113 Accrued expenses and other current liabilities 19,991 17,798 Current liabilities before client funds obligation 50,951 40,650 Client funds obligation 1,089,201 858,244 Total current liabilities 1,140,152 898,894 Long-term derivative liability 554 Long-term deferred revenue 44,642 34,481 Net long-term debt, less current portion 34,414 28,711 Total long-term liabilities 79,610 63,192 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value (100,000,000 shares authorized, 60,149,411 and 58,453,283 shares issued at December 31, 2017 and 2016, respectively; 57,788,573 and 57,331,022 shares outstanding at December 31, 2017 and 2016, respectively) 601 585 Additional paid in capital 137,234 95,452 Retained earnings 137,255 70,448 Treasury stock, at cost (2,360,838 and 1,122,261 shares at December 31, 2017 and 2016, respectively) (139,688) (49,958) Total stockholders' equity 135,402 116,527 Total liabilities and stockholders' equity $ 1,355,164 $ 1,078,613 Consolidated Balance Sheets (Pa Consolidated Balance Sheets (Parenthetical) - $ / shares Dec. 31, 2017 Dec. 31, 2016 Statement Of Financial Position [Abstract] Common stock, par value $ 0.01 $ 0.01 Common stock, shares authorized 100,000,000 100,000,000 Common stock, shares issued 60,149,411 58,453,283 Common stock, shares outstanding 57,788,573 57,331,022 Treasury stock, shares 2,360,838 1,122,261 Consolidated Statements of Inco Consolidated Statements of Income - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2015 Revenues Recurring $ 425,424 $ 323,548 $ 219,987 Implementation and other 7,623 5,593 4,666 Total revenues 433,047 329,141 224,653 Cost of revenues Operating expenses 62,438 48,268 31,790 Depreciation and amortization 9,590 5,798 3,683 Total cost of revenues 72,028 54,066 35,473 Administrative expenses Sales and marketing 150,512 119,258 92,554 Research and development 30,430 20,966 8,627 General and administrative 91,647 69,046 47,826 Depreciation and amortization 9,805 7,834 5,738 Total administrative expenses 282,394 217,104 154,745 Total operating expenses 354,422 271,170 190,218 Operating income 78,625 57,971 34,435 Interest expense (911) (1,036) (1,427) Other income, net (1,067) 308 517 Income before income taxes 76,647 57,243 33,525 Provision for income taxes 9,840 13,403 12,580 Net income $ 66,807 $ 43,840 $ 20,945 Earnings per share, basic $ 1.15 $ 0.76 $ 0.37 Earnings per share, diluted $ 1.13 $ 0.74 $ 0.36 Weighted average shares outstanding: Basic 57,839,155 57,550,204 56,495,170 Diluted 58,790,019 58,968,099 57,919,700 Consolidated Statements of Shar Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands Total Common Stock [Member] Additional Paid in Capital [Member] Retained Earnings [Member] Treasury Stock [Member] Beginning balance, value at Dec. 31, 2014 $ 74,138 $ 538 $ 67,937 $ 5,663 Beginning balance, shares at Dec. 31, 2014 53,832,782 Vesting of restricted stock $ 33 (33) Vesting of restricted stock, shares 3,287,091 Stock-based compensation 3,231 3,231 Net income 20,945 20,945 Ending balance, value at Dec. 31, 2015 98,314 $ 571 71,135 26,608 Ending balance, shares at Dec. 31, 2015 57,119,873 Vesting of restricted stock $ 14 (14) Vesting of restricted stock, shares 1,333,410 Stock-based compensation 24,331 24,331 Repurchases of common stock (49,958) $ (49,958) Repurchases of common stock, shares 1,122,261 Net income 43,840 43,840 Ending balance, value at Dec. 31, 2016 116,527 $ 585 95,452 70,448 $ (49,958) Ending balance, shares at Dec. 31, 2016 58,453,283 1,122,261 Vesting of restricted stock $ 16 (16) Vesting of restricted stock, shares 1,696,128 Stock-based compensation 41,798 41,798 Repurchases of common stock (89,730) $ (89,730) Repurchases of common stock, shares 1,238,577 Net income 66,807 66,807 Ending balance, value at Dec. 31, 2017 $ 135,402 $ 601 $ 137,234 $ 137,255 $ (139,688) Ending balance, shares at Dec. 31, 2017 60,149,411 2,360,838 Consolidated Statements of Cash Consolidated Statements of Cash Flows - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2015 Cash flows from operating activities: Net income $ 66,807 $ 43,840 $ 20,945 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,395 13,632 9,421 (Gain)/loss on disposition of property and equipment 21 (64) 15 Amortization of debt discount and debt issuance costs 117 124 157 Stock-based compensation expense 38,542 22,471 3,219 Loss on early repayment of debt 923 Cash paid for derivative settlement (24) Loss on derivative 673 Deferred income taxes, net (2,087) (1,848) (1,021) Changes in operating assets and liabilities: Accounts receivable (237) 1,015 440 Prepaid expenses (507) (944) (1,579) Inventory 462 418 (224) Deposits and other assets (241) 71 (810) Accounts payable 79 (1,571) (431) Income taxes, net (6,355) 6,051 (5,808) Accrued commissions and bonuses 1,582 (684) 3,607 Accrued payroll and vacation 2,246 1,871 1,316 Deferred revenue 11,913 10,675 9,699 Accrued expenses and other current liabilities (2,709) 3,896 4,026 Net cash provided by operating activities 130,600 98,953 42,972 Cash flows from investing activities: Net change in funds held for clients (230,957) (161,541) (36,146) Decrease in restricted cash 371 Purchases of property and equipment (59,389) (43,805) (16,549) Proceeds from sale of property and equipment 295 Net cash used in investing activities (290,346) (205,051) (52,324) Cash flows from financing activities: Proceeds from issuance of long-term debt 40,940 5,000 Repurchases of common stock (56,880) (35,561) Withholding taxes paid related to net share settlements (32,850) (14,396) Principal payments on long-term debt (35,335) (964) (1,118) Net change in client funds obligation 230,957 161,541 36,146 Debt extinguishment costs (823) Payment of debt issuance costs (344) (78) (106) Net cash provided by financing activities 145,665 115,542 34,922 Net change in cash and cash equivalents (14,081) 9,444 25,570 Cash and cash equivalents Beginning of year 60,158 50,714 25,144 End of year 46,077 60,158 50,714 Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized 791 938 1,271 Cash paid for income taxes 18,332 9,323 19,205 Noncash investing and financing activities: Purchases of property and equipment, accrued but not paid 6,686 4,651 1,613 Stock-based compensation for capitalized software $ 3,285 $ 1,784 $ 220 Organization and Description of Organization and Description of Business 12 Months Ended Dec. 31, 2017 Accounting Policies [Abstract] Organization and Description of Business 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we”, “our”, “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. Summary of Significant Accounti Summary of Significant Accounting Policies 12 Months Ended Dec. 31, 2017 Accounting Policies [Abstract] Summary of Significant Accounting Policies 2. Basis of Presentation and Principles of Consolidation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Adoption of New Pronouncements In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” to simplify the subsequent measurement of goodwill. Under this new guidance, Step 2 of the goodwill impairment test is eliminated, including elimination of the requirement to perform Step 2 for any reporting unit with a zero or negative carrying amount that failed a qualitative assessment. This standard should be applied on a prospective basis with the nature of and reason for the change in accounting principle disclosed upon transition. The standard is effective in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance for the annual goodwill impairment test we performed as of June 30, 2017. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life for long-lived and intangible assets, the life of our client relationships, the fair market value of our equity incentive awards and the fair value of our financial instruments. These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under circumstances. As such, actual results could materially differ from these estimates. Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recorded an allowance for doubtful accounts. Inventory Our inventory consists of two types of time clocks, and related clock attachments, sold to clients as part of our time and attendance services and are stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) cost method. Time clocks are purchased as finished goods from a third party and as such we do not have any inventory classified as raw materials or work in process inventory. Rental clocks are issued to clients under month-to-month operating leases and are classified as property and equipment. We retain inventory in certain lines primarily as replacements for those clients who use the various clocks and have determined that no write-down for obsolete items was required based on inventory turnover and our historical experience during the years ended December 31, 2017, 2016 and 2015. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2017, 2016 and 2015, we incurred interest costs of $1.7 million, $1.3 million and $1.3 million, respectively. For the years ended December 31, 2017, 2016 and 2015, interest expense of $0.8 million, $0.4 million and less than $0.1 million, respectively, was capitalized. Internal Use Software Expenditures for software purchases and software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and The total capitalized payroll costs related to internal use computer software projects was $15.8 million and $8.8 million during the years ended December 31, 2017 and 2016, respectively, which have been included in property and equipment. Amortization expense related to capitalized software costs of $7.0 million, $3.6 million and $1.8 million was charged to expense for the years ended December 31, 2017, 2016 and 2015, respectively. Derivatives We do not hold derivative instruments for trading or speculative purposes. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recorded. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2017. For the years ended December 31, 2017, 2016 and 2015, there were no indicators of impairment. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Long-lived assets, including intangible assets with finite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with finite lives, for the years ended December 31, 2017, 2016 and 2015. Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested and earn interest during the interval between receipt and disbursement. These investments are shown in the consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. Beginning April 1, 2016, the interest income earned on funds held for clients is recorded in recurring revenues. Prior to April 1, 2016, the interest income earned on these funds was recorded in other income, net in the consolidated statements of income. As of December 31, 2017 and 2016, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit and classified as a current asset in the accompanying balance sheets, as these funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan On February 8, 2017, we announced that our Board of Directors amended and extended our stock repurchase plan originally announced on May 26, 2016, such that we were authorized to purchase (in the aggregate) up to an additional $50.0 million of common stock through January 2019. On October 30, 2017, our Board of Directors again amended and extended the stock repurchase plan, such that we are authorized to purchase (in the aggregate) up to an additional $75 million of common stock over a 24-month period. The stock repurchase plan will expire on October 30, 2019. Shares may be repurchased from time-to-time 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, and the 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, the net-downs associated with the vesting of restricted stock and other corporate considerations. During the year ended December 31, 2017, we repurchased an aggregate of 1,238,577 shares of our common stock at an average cost of $72.45 per share, including 464,302 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. During the year ended December 31, 2016, we repurchased an aggregate of 1,112,261 shares of our common stock at an average cost of $44.52, including 302,424 shares withheld to satisfy withholding obligations for certain employees upon the vesting of restricted common stock. Revenue Recognition Our total revenue is comprised of recurring revenues and implementation and other revenues. We recognize revenues in accordance with accounting standards for software and service companies when all of the following criteria have been met: • There is persuasive evidence of an arrangement; • The service has been or is being provided to the client; • Collection of the fees is reasonably assured; and • The amount of fees to be paid by the client is fixed or determinable. Recurring Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes applicant tracking, candidate tracker, background checks, on-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes payroll and tax management, Paycom pay, expense management, garnishment management and GL Concierge. Talent management includes employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content. HR management includes document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced ACA. The services related to recurring revenues are rendered during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll-period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an Automated Clearing House (“ACH”) as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. Implementation and other Implementation and other revenues represent non-refundable conversion fees which are charged to new clients to offset the expense of new client set-up and revenues from the sale of time clocks as part of our employee time and attendance services. Because these conversion fees and sale of time clocks relate to our recurring revenues, we have evaluated such arrangements under the accounting guidance that governs multiple element arrangements. For arrangements with multiple elements, we evaluate whether each element represents a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have stand-alone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have stand-alone value upon delivery, the deliverables that do not have stand-alone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting. When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a stand-alone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (“TPE”) of selling price is used to establish the selling price if it exists, and if not it would be based on our best estimate of selling price. For the years ended December 31, 2017, 2016 and 2015, we have determined that there is no stand-alone value associated with the upfront conversion fees as they do not have value to our clients on a stand-alone basis nor are they offered as an individual service; therefore, the conversion fees are deferred and recognized ratably over the estimated life of our clients, which we have estimated to be ten years. For the years ended December 31, 2017, 2016, and 2015, we have determined that the revenues from the employee time and attendance services, and the revenues from the sale of time clocks as part of our time and attendance services, have VSOE of selling price as they are sold on a stand-alone basis. Revenue is therefore recognized for the respective deliverables as they are delivered. Cost of Revenues Our costs and expenses applicable to total revenues represent operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation and amortization costs. Advertising Costs Advertising costs are expensed the first time that advertising takes place. Advertising costs for the years ended December 31, 2017, 2016 and 2015 were $7.9 million, $4.9 million and $3.6 million, respectively. Sales Taxes We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are shown on a net basis, and as such, excluded from revenues. For the years ended December 31, 2017, 2016 and 2015, sales taxes collected and remitted were $5.0 million, $4.3 million and $3.7 million, respectively. Employee Stock-Based Compensation Time-based stock compensation awards to employees are recognized pro rata over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Market-based stock compensation awards to employees are recognized pro rata over the applicable estimated vesting period as compensation costs in the consolidated statements of income based on their fair value as of the date of the grant unless vesting occurs sooner at which time the remaining respective unrecognized compensation cost would be recognized. Employee Stock Purchase Plan An award issued under the Paycom Software, Inc., Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recorded at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period. Income Taxes Our consolidated financial statements include a provision for income taxes incurred for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Act”). Further information on the tax impacts of the Tax Act is included in Note 13 below. We file income tax returns in the United States and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that would not meet this threshold. Our policy is to record interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. We are not aware of any open income tax examinations as of December 31, 2017. However, the tax years 2007 through 2017 remain open to examination for federal income tax purposes and by other major taxing jurisdictions. Seasonality Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. Recent Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 also includes ASC 340-40 which codifies the guidance on other assets and deferred costs relating to contracts with customers. ASC 340-40 specifies the accounting for costs an entity incurs to obtain and fulfill a contract to provide goods and services to customers. The FASB has since issued several additional amendments to ASU 2014-09. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the new revenue recognition standard for public and non-public entities reporting under U.S. GAAP. The amended standard is effective for us beginning January 1, 2018. As of the date of this report, we have finalized our accounting assessment of the new standard, and we are nearly complete in determining the impacts of the disclosure requirements of the new standard. Additionally, we are in the process of updating our control framework for new internal controls, as well as changes to existing controls, as it relates to the new standard. We will be in a position to begin reporting under the new standard beginning with the first quarter of 2018. Furthermore, we determined to adopt the requirements of the new standard in the first quarter of 2018 utilizing the full retrospective method of transition. When compared to current U.S. GAAP, we have concluded that the provisions of the new standard do not materially impact the timing or amount of revenue recognized. As anticipated, the primary impact of adopting the new standard was on the manner in which we account for certain costs to obtain new contracts ( i.e i.e Furthermore, we concluded that the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the customer related to the customer’s option to renew. Further, management determined that the standalone selling price of the customer’s option to renew equals the amount of the nonrefundable upfront fee. As a result, there is no impact to revenues upon adoption of the new standard, as the nonrefundable upfront fee will continue to be deferred and recognized ratably over the ten-year estimated customer life, consistent with our current accounting policy. The following table presents a recast of selected consolidated statement of operations line items, after giving effect to the adoption of ASU No. 2014-09 (dollars in thousands, except per share amounts): Year Ended December 31, 2017 2016 Costs and expenses: Sales and marketing $ 110,846 $ 85,361 General and administrative $ 80,228 $ 59,174 Operating income $ 129,710 $ 101,740 Net income $ 123,486 $ 70,421 Earnings per share, basic $ 2.13 $ 1.21 Earnings per share, diluted $ 2.10 $ 1.19 The following table presents a recast of selected consolidated balance sheet line items, after giving effect to the adoption of ASU No. 2014-09 (dollars in thousands): December 31, 2017 Assets: Deferred contract costs $ 26,403 Long-term deferred contract costs $ 171,865 In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” The purpose of the guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, though early adoption is permitted. Full retrospective application is prohibited. We are in the preliminary stages of gathering data and assessing the impact of the new lease standard, however, we anticipate that the adoption of this accounting standard will materially affect our consolidated balance sheets and may require changes to the system and processes that we use to account for leases. We have not yet made any decision on the timing of adoption or method of adoption with respect to the optional practical expedients. Property and Equipment Property and Equipment 12 Months Ended Dec. 31, 2017 Property Plant And Equipment [Abstract] Property and Equipment 3. Property and equipment and accumulated depreciation and amortization were as follows (dollars in thousands): December 31, 2017 2016 Property and equipment Buildings $ 60,441 $ 48,250 Software and capitalized software costs 41,996 23,879 Computer equipment 27,928 18,987 Rental clocks 13,131 10,669 Furniture, fixtures and equipment 7,528 6,695 Leasehold improvements 767 680 151,791 109,160 Less: accumulated depreciation and amortization (53,525 ) (35,833 ) 98,266 73,327 Construction in progress 40,446 14,528 Land 8,993 8,993 Property and equipment, net $ 147,705 $ 96,848 Included in the construction in progress balance at December 31, 2017 and 2016 is $2.0 and $1.1 million in retainage, respectively. Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases. As such, these items are transferred from inventory to property and equipment and depreciated over their useful estimated lives. Depreciation and amortization expense for property and equipment, net was $18.5 million, $12.0 million and $7.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. Goodwill and Intangible Assets, Goodwill and Intangible Assets, Net 12 Months Ended Dec. 31, 2017 Goodwill And Intangible Assets Disclosure [Abstract] Goodwill and Intangible Assets, Net 4. We had goodwill of $51.9 million as of December 31, 2017 and 2016. We performed the required impairment tests of goodwill as of June 30 for the years ended December 31, 2017, 2016 and 2015 including an assessment of whether or not indicators of impairment were present and determined there was no impairment for each of those years then ended. All of the intangible assets other than goodwill are considered to have finite lives and, as such, are subject to amortization. The components of intangible assets are as follows (dollars in thousands): December 31, 2017 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Trade name 4.5 3,194 (2,236 ) 958 Total $ 3,194 $ (2,236 ) $ 958 December 31, 2016 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Customer relationships 0.5 $ 13,997 $ (13,297 ) $ 700 Trade name 5.5 3,194 (2,023 ) 1,171 Total $ 17,191 $ (15,320 ) $ 1,871 Amortization of intangible assets the years ended December 31, 2017, 2016 and 2015 was $0.9 million, $1.6 million and $1.6 million, respectively. Estimated amortization expense for our existing intangible assets for the next five years and thereafter is as follows (dollars in thousands): Year Ending December 31, Amortization 2018 $ 213 2019 213 2020 213 2021 213 2022 106 Total $ 958 Long-Term Debt Long-Term Debt 12 Months Ended Dec. 31, 2017 Debt Disclosure [Abstract] Long-Term Debt 5. Our long-term debt consisted of the following (dollars in thousands): December 31, 2017 2016 Net term note to bank due September 7, 2025 $ 35,302 $ — Net term note to bank due May 30, 2021 — 24,950 Net term note to bank due August 31, 2023 — 4,874 Total long-term debt (including current portion) 35,302 29,824 Less: Current portion (888 ) (1,113 ) Total long-term debt, net $ 34,414 $ 28,711 On December 7, 2017 (the “Effective Date”), we entered into a senior secured term credit agreement (the “New Credit Agreement”), pursuant to which JPMorgan Chase Bank N.A., Bank of America, N.A. and Kirkpatrick Bank (collectively, the “Lenders”) have agreed to make certain term loans to us (the “Term Loans”) in an aggregate principal amount of $60.0 million on or prior to September 7, 2018. As of December 31, 2017, our indebtedness consisted solely of Term Loans made under the New Credit Agreement. Unamortized debt issuance costs of $0.2 million and $0.1 million as of December 31, 2017 and 2016, respectively, are presented as a direct deduction from the carrying amount of the debt liability. On the Effective Date, in connection with our entry into the New Credit Agreement, we terminated and prepaid all obligations outstanding under (i) the Consolidated, Amended and Restated Loan Agreement with Kirkpatrick Bank dated December 15, 2011, as amended from time to time, (ii) the Loan Agreement with Kirkpatrick Bank dated May 13, 2015, as amended from time to time, and (iii) the Loan Agreement with Kirkpatrick Bank dated August 2, 2016 (collectively, the “Existing Credit Agreements”), including applicable interest and prepayment penalties. In conjunction with the termination and prepayment of the Existing Credit Agreements, we incurred debt extinguishment costs of $0.8 million for the year ended December 31, 2017, which is included in Other income, net in the consolidated statements of income. The principal and accrued interest outstanding, together with remaining borrowing capacity under these terminated agreements, was approximately $57.6 million in the aggregate as of the Effective Date. Proceeds of the Term Loans made on the Effective Date were used to refinance existing indebtedness associated with these terminated agreements. After giving effect to the Term Loans made on the Effective Date, and as of December 31, 2017, there was $24.5 million of borrowing capacity remaining under the New Credit Agreement. Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our headquarters property. Term loans made after the Effective Date may be used to finance hard and soft costs related to the completion of construction of our fourth headquarters building and any landscaping, groundwork, parking lots and roads reasonably incidental thereto. The Term Loans mature on September 7, 2025. The Term Loans bear interest, at our option, at either (a) a prime rate plus 1.0% or (b) an adjusted LIBOR rate for the interest period in effect for such Term Loan plus 1.5%. Under the New Credit Agreement, the Company is subject to two material financial covenants, which require the Company to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. As of December 31, 2017, the Company was in compliance with these covenants. As of December 31, 2017 and December 31, 2016, the carrying value of our total long-term debt approximated its fair value. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities. Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2017 are as follows (dollars in thousands): Year Ending December 31, 2018 $ 888 2019 1,775 2020 1,775 2021 1,775 2022 1,775 Thereafter 27,512 Total $ 35,500 Derivative Instruments Derivative Instruments 12 Months Ended Dec. 31, 2017 Derivative Instruments And Hedging Activities Disclosure [Abstract] Derivative Instruments 6. In December 2017, the Company entered into a floating-to-fixed interest rate swap agreement to limit the exposure to interest rate risk related to the Term Loans. The Company does not hold derivative instruments for trading or speculative purposes. The interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is based on a one-month LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million. Under the terms of the interest rate swap agreement, the Company will receive quarterly variable interest payments based on the LIBOR rate and will pay interest at a fixed rate. The swap agreement has a maturity date of September 7, 2025. Under ASC Topic 815, Derivatives and Hedging Fair Value of Financial Instrum Fair Value of Financial Instruments 12 Months Ended Dec. 31, 2017 Fair Value Disclosures [Abstract] Fair Value of Financial Instruments 7. Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client fund obligation approximates fair value because of the short-term nature of the instruments. As discussed in Note 6 above, during the year ended December 31, 2017, we entered into an interest rate swap. The interest rate swap is measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs that approximate fair value. We did not have any financial instruments that are measured on a recurring basis for the years ended 2016 or 2015. The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: • Level 1 – Observable inputs such as quoted prices in active markets • Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active • Level 3 – Unobservable inputs in which there is little or no market data Included in the following table are the Company’s major categories of assets (liabilities) measured at fair value on a recurring basis as of December 31, 2017 (dollars in thousands): December 31, 2017 Level 1 Level 2 Level 3 Total Interest rate swap $ — $ (649 ) $ — $ (649 ) Total $ — $ (649 ) $ — $ (649 ) See Note 5 for further information on the fair value of debt . Employee Savings Plan Employee Savings Plan 12 Months Ended Dec. 31, 2017 Compensation Related Costs [Abstract] Employee Savings Plan and Employee Stock Purchase Plan 8. Our employees that are over the age of 18 and have completed ninety (90) days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby we make a matching contribution for our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions amounted to $4.1 million, $3.5 and $2.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to IRS limits. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2,000,000 shares. During the year ended December 31, 2017, eligible employees purchased 76,728 shares of the Company’s common stock under the ESPP. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $0.8 million, $0.6 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. Earnings Per Share Earnings Per Share 12 Months Ended Dec. 31, 2017 Earnings Per Share [Abstract] Earnings Per Share 9. Basic earnings per share (“EPS”) is based on the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed in a similar manner to basic EPS after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested. In accordance with ASC Topic 260 “Earnings Per Share”, the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The outstanding restricted shares of stock that were issued on July 8, 2015, are considered participating securities. The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted net earnings per share (dollars in thousands, except per share amounts): Year Ended December 31, 2017 2016 2015 Numerator: Net income $ 66,807 $ 43,840 $ 20,945 Less: income allocable to participating securities (171 ) (333 ) (270 ) Income allocable to common shares $ 66,636 $ 43,507 $ 20,675 Add back: undistributed earnings allocable to participating securities 171 333 270 Less: undistributed earnings reallocated to participating securities (168 ) (333 ) (264 ) Numerator for diluted earnings per share $ 66,639 $ 43,507 $ 20,681 Denominator: Weighted average common shares outstanding 50,315,455 50,315,455 50,315,455 Weighted average common shares repurchased (1,526,930 ) (286,699 ) — Adjustment for vested restricted stock 9,050,630 7,521,448 6,179,715 Shares for calculating basic earnings per share 57,839,155 57,550,204 56,495,170 Dilutive effect of unvested restricted stock 950,864 1,417,895 1,424,530 Shares for calculating diluted earnings per share 58,790,019 58,968,099 57,919,700 Earnings per share: Basic $ 1.15 $ 0.76 $ 0.37 Diluted $ 1.13 $ 0.74 $ 0.36 Stockholders' Equity and Stock- Stockholders' Equity and Stock-Based Compensation 12 Months Ended Dec. 31, 2017 Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] Stockholders' Equity and Stock-Based Compensation 10. We have historically issued shares of restricted stock under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”) that are subject to either time-based vesting conditions or market-based vesting conditions. The market-based vesting conditions are based on our total enterprise value (“TEV”) exceeding certain specified thresholds. Compensation expense related to the issuance of shares with time-based vesting conditions is measured based on the fair value of the award on the grant date and recognized over the requisite service period on a straight-line basis. Compensation expense related to the issuance of shares with market-based vesting conditions is measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based upon the probability that the vesting condition will be met. The following table presents a summary of the grant-date fair values of restricted stock granted during the years ended December 31, 2017, 2016 and 2015 and the related assumptions: Year Ended December 31, 2017 2016 2015 Grant-date fair value of restricted stock $46.78 - $60.67 $23.15 - $49.34 $21.76 - $33.33 Risk-free interest rates 1.85% 1.28% - 1.36% 2.2% Estimated volatility 23.0% 21.0% - 23.0% 26.0% Expected life (in years) 2.3 2.7 3.6 The following table summarizes restricted stock awards activity for the year ended December 31, 2017: Time-Based Restricted Stock Awards Market-Based Restricted Stock Awards Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Unvested shares of restricted stock outstanding at December 31, 2016 1,429,514 $ 20.56 738,425 $ 28.68 Granted 309,526 $ 60.00 314,021 $ 48.63 Vested (681,699 ) $ 6.67 (1,014,429 ) $ 34.44 Forfeited (168,661 ) $ 35.20 (38,017 ) $ 39.87 Unvested shares of restricted stock outstanding at December 31, 2017 888,680 $ 42.17 - $ - On April 26, 2017, we issued an aggregate of 613,677 shares of restricted stock under the LTIP to our executive officers and certain other employees, consisting of a combination of shares subject to market-based vesting conditions and shares subject to time-based vesting conditions. Shares subject to market-based vesting conditions were scheduled to vest 50% if the Company’s TEV (as defined in the applicable award agreement) equaled or exceeded $4.15 billion and the remaining 50% were scheduled to vest if the Company’s TEV equaled or exceeded $4.45 billion. Shares subject to market-based vesting conditions would be forfeited if they did not vest within six years of the date of grant. Shares subject to time-based vesting conditions were issued with vesting periods ranging from 2 to 5 years. On May 1, 2017, we issued an aggregate of 9,870 shares of restricted stock under the LTIP to members of our board of directors. Such shares of restricted stock cliff-vest on the seventh (7 th st The following table summarizes market-based restricted stock vesting activity during the year ended December 31, 2017, the associated compensation cost recognized in connection with the vesting event and the number of shares withheld to satisfy tax withholding obligations: Vesting Condition Date Vested Number of Shares Vested Compensation Cost Recognized Upon Vesting (in millions) Shares Withheld for Taxes 1 Market-based (TEV = $3.5 billion) May 13, 2017 229,075 $2.9 91,274 Market-based (TEV = $3.9 billion) June 20, 2017 248,250 $5.2 103,907 Market-based (TEV = $4.15 billion) August 25, 2017 153,764 $5.5 65,309 Market-based (TEV = $4.2 billion) September 7, 2017 244,850 $4.2 102,548 Market-based (TEV = $4.45 billion) October 13, 2017 138,490 $4.3 57,916 1 Our total compensation expense related to restricted stock was $38.5 million and $22.5 million for the years ended December 31, 2017 and 2016, respectively. There was $30.3 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of restricted stock outstanding as of December 31, 2017. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.1 years as of December 31, 2017. We capitalized stock-based compensation costs related to software developed for internal use of $3.3 million, $1.8 million and $0.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The following table presents non-cash stock-based compensation expense resulting from restricted stock awards, which is included in the following line items in the accompanying consolidated statements of income for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands): Year Ended December 31, 2017 2016 2015 Operating expense $ 3,950 $ 2,217 $ 235 Sales and marketing 6,086 3,656 559 Research and development 1,912 836 104 General and administrative 26,565 15,837 2,112 Total non-cash stock-based compensation expense $ 38,513 $ 22,546 $ 3,010 Related-Party Transactions Related-Party Transactions 12 Months Ended Dec. 31, 2017 Related Party Transactions [Abstract] Related-Party Transactions 11. Our Chief Sales Officer owned a .01% general partnership interest and a 10.49% limited partnership interest in 417 Oakbend, LP, a Texas limited partnership, until April 2016. For the period under his ownership during 2016, we paid rent on our Dallas office space to 417 Oakbend, LP in the amount of $0.1 million. We paid rent on our Dallas office space in the amount of $0.4 million for the year ended December 31, 2015. Commitments and Contingencies Commitments and Contingencies 12 Months Ended Dec. 31, 2017 Commitments And Contingencies Disclosure [Abstract] Commitments and Contingencies 12. Employment Agreements We have employment agreements with certain of our executive officers. The agreements allow for annual compensation, participation in executive benefit plans, and performance-based cash bonuses. Incentive Plan On May 2, 2016, our stockholders approved the Paycom Software, Inc. Annual Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for payment of incentive compensation that is not subject to certain federal income tax deduction limitations. Participation in the Incentive Plan is limited to certain of our employees designated by the Compensation Committee of the Board of Directors. Operating Leases and Deferred Rent We lease office space under several noncancellable operating leases with contractual terms expiring from 2018 to 2024. Minimum rent expenses are recognized over the lease term. The lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in an amount that a renewal appears, at the inception of the lease, to be reasonably assured. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rent expense and the amount payable under the lease as a liability. As of December 31, 2017 and 2016, we had $1.3 million and $1.1 million, respectively, recorded as a liability for deferred rent. Future annual minimum lease payments under noncancellable operating leases with initial or remaining terms of one year or more as of December 31, 2017 were as follows (dollars in thousands): Year Ending December 31, 2018 $ 6,833 2019 6,005 2020 3,494 2021 2,149 2022 1,626 Thereafter 852 Total minimum lease payments $ 20,959 Rent expense under operating leases for the years ended December 31, 2017, 2016 and 2015 was $6.1 million, $5.6 million and $4.4 million, respectively. Legal Proceedings We are involved in various legal proceedings in the ordinary course of business. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows. We do not currently believe we are subject to material exposure with respect to any loss contingencies. Income Taxes Income Taxes 12 Months Ended Dec. 31, 2017 Income Tax Disclosure [Abstract] Income Taxes 13. The items comprising income tax expense are as follows (dollars in thousands): Year Ended December 31, 2017 2016 2015 Provision for current income taxes Federal $ 10,136 $ 12,207 $ 11,308 State 1,791 3,044 2,292 Total provision for current income taxes 11,927 15,251 13,600 Provision (benefit) for deferred income taxes, net Federal 199 (1,476 ) (1,109 ) State (2,286 ) (372 ) 89 Total benefit for deferred income taxes, net (2,087 ) (1,848 ) (1,020 ) Total provision for income taxes $ 9,840 $ 13,403 $ 12,580 The following schedule reconciles the statutory Federal tax rate to the effective income tax rate: Year Ended December 31, 2017 2016 2015 Federal statutory tax rate 35 % 35 % 35 % Increase (decrease) resulting from: State income taxes, net of Federal income tax benefit 4 % 4 % 4 % Nondeductible expenses 1 % 1 % 3 % Research credit, Federal benefit (3 %) (2 %) (1 %) Section 199 - Qualified production activities (2 %) (2 %) (3 %) Stock-based compensation (21 %) (12 %) 0 % Return to provision (1 %) 0 % 0 % Remeasurement of deferred tax assets 1 % 0 % 0 % Other (1 %) (1 %) 0 % Effective income tax rate 13 % 23 % 38 % Our effective income tax rate was 13% and 23% for the years ended December 31, 2017 and 2016, respectively. The lower effective income tax rate for the year ended December 31, 2017 primarily resulted from the recognition of excess tax benefits from share-based payment awards. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows (dollars in thousands): December 31, 2017 2016 Deferred income tax assets (liabilities): Stock-based compensation $ 1,446 $ 2,658 Investment in Paycom Payroll Holdings, LLC 101 (1,487 ) Net operating losses 1,677 36 Federal tax credits 70 — Noncurrent deferred income tax assets, net $ 3,294 $ 1,207 The Tax Act was enacted on December 22, 2017. The Tax Act reduces the US federal corporate tax rate from 35% to 21% effective January 1, 2018. We remeasured certain deferred tax assets and liabilities based on the rate at which they are expected to be realized or settled in the future, which is generally 21%. The amount recorded related to the remeasurement of our deferred tax balance was $0.4 million of income tax expense. At December 31, 2017, we had net operating loss carryforwards for state income tax purposes of approximately $1.7 million that are available to offset future state taxable income that begin expiring in 2030. At December 31, 2017 and 2016, we had no material unrecognized tax benefits related to uncertain tax positions. We file income tax returns with the United States federal government and various state jurisdictions. Our 2007 through 2017 U.S. federal and state income tax returns remain open to examination by tax authorities, due to the usage of net operating loss carryovers. Selected Quarterly Financial Da Selected Quarterly Financial Data (unaudited) 12 Months Ended Dec. 31, 2017 Quarterly Financial Information Disclosure [Abstract] Selected Quarterly Financial Data (unaudited) 14. The following tables set forth selected quarterly statements of income data for the periods indicated (dollars in thousands, except share and per share amounts): Quarter Ended December September 30, 2017 June 30, 2017 March 31, 2017 Revenues $ 114,025 $ 101,287 $ 98,227 $ 119,508 Operating income $ 19,434 $ 11,437 $ 9,089 $ 38,665 Net income $ 12,905 $ 14,067 $ 14,221 $ 25,614 Earnings per share, basic $ 0.22 $ 0.24 $ 0.24 $ 0.44 Earnings per share, diluted $ 0.22 $ 0.24 $ 0.24 $ 0.43 Weighted average shares outstanding: Basic 58,100,141 58,003,222 57,898,914 57,307,187 Diluted 58,850,271 58,873,502 58,816,442 58,525,980 Quarter Ended December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 Revenues $ 87,810 $ 77,325 $ 73,880 $ 90,126 Operating income $ 12,681 $ 582 $ 16,004 $ 28,704 Net income $ 8,633 $ 6,198 $ 10,421 $ 18,588 Earnings per share, basic $ 0.15 $ 0.11 $ 0.18 $ 0.32 Earnings per share, diluted $ 0.15 $ 0.10 $ 0.18 $ 0.31 Weighted average shares outstanding: Basic 57,652,531 57,819,734 57,591,556 57,132,909 Diluted 58,882,966 58,907,281 58,697,229 58,362,040 Subsequent Events Subsequent Events 12 Months Ended Dec. 31, 2017 Subsequent Events [Abstract] Subsequent Events 15. SUBSEQUENT EVENTS On January 26, 2018, we issued an aggregate of 510,473 restricted shares of common stock to our executive officers and certain non-executive, non-sales employees under the LTIP, consisting of 283,674 shares subject to market-based vesting conditions (“Market-Based Shares”) and 226,799 shares subject to time-based vesting conditions (“Time-Based Shares”). Market-Based Shares will vest 50% on the first date that the Company’s TEV (calculated as defined in the applicable restricted stock award agreement) equals or exceeds $5.9 billion and 50% on the first date that the Company’s TEV equals or exceeds $6.2 billion, in each case provided that (i) such date occurs on or before the sixth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company or a subsidiary on the applicable vesting date. Time-Based Shares granted to non-executive employees will vest 25% on a specified initial vesting date and 25% on each of the first three anniversaries of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company or a subsidiary on the applicable vesting date. Time-Based Shares granted to executive officers will vest in three equal annual tranches beginning on a specified initial vesting date and thereafter on the first and second anniversaries of such date, provided that the executive officer is employed by, or providing services to, the Company or a subsidiary on the applicable vesting date. On February 12, 2018 we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provides for a senior secured revolving credit facility (the “Facility”) in the aggregate principal amount of $50.0 million, which may be increased to up to $100.0 million. The Facility is scheduled to mature on February 12, 2020. Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%. Material financial covenants under the Revolving Credit Agreement are substantially similar to the covenants in the New Credit Agreement described in Note 5 above. As of the filing of this Form 10-K, we have not made any draws under the Facility. On February 13, 2018, we announced that our Board of Directors amended and extended the stock repurchase plan, such that we are authorized to purchase up to an additional $100.0 million of common stock. The stock repurchase plan will expire on February 12, 2020. Summary of Significant Accoun22 Summary of Significant Accounting Policies (Policies) 12 Months Ended Dec. 31, 2017 Accounting Policies [Abstract] Description of Business Description of Business Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we”, “our”, “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment life cycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. Basis of Presentation and Principles of Consolidation Basis of Presentation and Principles of Consolidation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Adoption of New Pronouncements Adoption of New Pronouncements In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” to simplify the subsequent measurement of goodwill. Under this new guidance, Step 2 of the goodwill impairment test is eliminated, including elimination of the requirement to perform Step 2 for any reporting unit with a zero or negative carrying amount that failed a qualitative assessment. This standard should be applied on a prospective basis with the nature of and reason for the change in accounting principle disclosed upon transition. The standard is effective in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance for the annual goodwill impairment test we performed as of June 30, 2017. Use of Estimates Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life for long-lived and intangible assets, the life of our client relationships, the fair market value of our equity incentive awards and the fair value of our financial instruments. These estimates are based on historical experience where applicable and other assumptions that management believes are reasonable under circumstances. As such, actual results could materially differ from these estimates. Segment Information Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recorded an allowance for doubtful accounts. Inventory Inventory Our inventory consists of two types of time clocks, and related clock attachments, sold to clients as part of our time and attendance services and are stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) cost method. Time clocks are purchased as finished goods from a third party and as such we do not have any inventory classified as raw materials or work in process inventory. Rental clocks are issued to clients under month-to-month operating leases and are classified as property and equipment. We retain inventory in certain lines primarily as replacements for those clients who use the various clocks and have determined that no write-down for obsolete items was required based on inventory turnover and our historical experience during the years ended December 31, 2017, 2016 and 2015. Property and Equipment Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2017, 2016 and 2015, we incurred interest costs of $1.7 million, $1.3 million and $1.3 million, respectively. For the years ended December 31, 2017, 2016 and 2015, interest expense of $0.8 million, $0.4 million and less than $0.1 million, respectively, was capitalized. Internal Use Software Internal Use Software Expenditures for software purchases and software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and The total capitalized payroll costs related to internal use computer software projects was $15.8 million and $8.8 million during the years ended December 31, 2017 and 2016, respectively, which have been included in property and equipment. Amortization expense related to capitalized software costs of $7.0 million, $3.6 million and $1.8 million was charged to expense for the years ended December 31, 2017, 2016 and 2015, respectively. Derivatives Derivatives We do not hold derivative instruments for trading or speculative purposes. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recorded. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2017. For the years ended December 31, 2017, 2016 and 2015, there were no indicators of impairment. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Impairment of Long-Lived Assets Long-lived assets, including intangible assets with finite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with finite lives, for the years ended December 31, 2017, 2016 and 2015. Funds Held for Clients and Client Funds Obligation Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested and earn interest during the interval between receipt and disbursement. These investments are shown in the consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. Beginning April 1, 2016, the interest income earned on funds held for clients is recorded in recurring revenues. Prior to April 1, 2016, the interest income earned on these funds was recorded in other income, net in the consolidated statements of income. As of December 31, 2017 and 2016, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit and classified as a current asset in the accompanying balance sheets, as these funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan Stock Repurchase Plan On February 8, 2017, we announced that our Board of Directors amended and extended our stock repurchase plan originally announced on May 26, 2016, such that we were authorized to purchase (in the aggregate) up to an additional $50.0 million of common stock through January 2019. On October 30, 2017, our Board of Directors again amended and extended the stock repurchase plan, such that we are authorized to purchase (in the aggregate) up to an additional $75 million of common stock over a 24-month period. The stock repurchase plan will expire on October 30, 2019. Shares may be repurchased from time-to-time 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, and the 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, the net-downs associated with the vesting of restricted stock and other corporate considerations. During the year ended December 31, 2017, we repurchased an aggregate of 1,238,577 shares of our common stock at an average cost of $72.45 per share, including 464,302 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. During the year ended December 31, 2016, we repurchased an aggregate of 1,112,261 shares of our common stock at an average cost of $44.52, including 302,424 shares withheld to satisfy withholding obligations for certain employees upon the vesting of restricted common stock. Revenue Recognition Revenue Recognition Our total revenue is comprised of recurring revenues and implementation and other revenues. We recognize revenues in accordance with accounting standards for software and service companies when all of the following criteria have been met: • There is persuasive evidence of an arrangement; • The service has been or is being provided to the client; • Collection of the fees is reasonably assured; and • The amount of fees to be paid by the client is fixed or determinable. Recurring Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes applicant tracking, candidate tracker, background checks, on-boarding, e-verify and tax credit services. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes payroll and tax management, Paycom pay, expense management, garnishment management and GL Concierge. Talent management includes employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content. HR management includes document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced ACA. The services related to recurring revenues are rendered during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll-period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an Automated Clearing House (“ACH”) as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. Implementation and other Implementation and other revenues represent non-refundable conversion fees which are charged to new clients to offset the expense of new client set-up and revenues from the sale of time clocks as part of our employee time and attendance services. Because these conversion fees and sale of time clocks relate to our recurring revenues, we have evaluated such arrangements under the accounting guidance that governs multiple element arrangements. For arrangements with multiple elements, we evaluate whether each element represents a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have stand-alone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables does not have stand-alone value upon delivery, the deliverables that do not have stand-alone value are generally combined with the final deliverable within the arrangement and treated as a single unit of accounting. When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a stand-alone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (“TPE”) of selling price is used to establish the selling price if it exists, and if not it would be based on our best estimate of selling price. For the years ended December 31, 2017, 2016 and 2015, we have determined that there is no stand-alone value associated with the upfront conversion fees as they do not have value to our clients on a stand-alone basis nor are they offered as an individual service; therefore, the conversion fees are deferred and recognized ratably over the estimated life of our clients, which we have estimated to be ten years. For the years ended December 31, 2017, 2016, and 2015, we have determined that the revenues from the employee time and attendance services, and the revenues from the sale of time clocks as part of our time and attendance services, have VSOE of selling price as they are sold on a stand-alone basis. Revenue is therefore recognized for the respective deliverables as they are delivered. Cost of Revenues Cost of Revenues Our costs and expenses applicable to total revenues represent operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation and amortization costs. Advertising Costs Advertising Costs Advertising costs are expensed the first time that advertising takes place. Advertising costs for the years ended December 31, 2017, 2016 and 2015 were $7.9 million, $4.9 million and $3.6 million, respectively. Sales Taxes Sales Taxes We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are shown on a net basis, and as such, excluded from revenues. For the years ended December 31, 2017, 2016 and 2015, sales taxes collected and remitted were $5.0 million, $4.3 million and $3.7 million, respectively. Employee Stock-Based Compensation Employee Stock-Based Compensation Time-based stock compensation awards to employees are recognized pro rata over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Market-based stock compensation awards to employees are recognized pro rata over the applicable estimated vesting period as compensation costs in the consolidated statements of income based on their fair value as of the date of the grant unless vesting occurs sooner at which time the remaining respective unrecognized compensation cost would be recognized. Employee Stock Purchase Plan Employee Stock Purchase Plan An award issued under the Paycom Software, Inc., Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recorded at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period. Income Taxes Income Taxes Our consolidated financial statements include a provision for income taxes incurred for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Act”). Further information on the tax impacts of the Tax Act is included in Note 13 below. We file income tax returns in the United States and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that would not meet this threshold. Our policy is to record interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. We are not aware of any open income tax examinations as of December 31, 2017. However, the tax years 2007 through 2017 remain open to examination for federal income tax purposes and by other major taxing jurisdictions. Seasonality Seasonality Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. Recent Accounting Pronouncements Recent Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 also includes ASC 340-40 which codifies the guidance on other assets and deferred costs relating to contracts with customers. ASC 340-40 specifies the accounting for costs an entity incurs to obtain and fulfill a contract to provide goods and services to customers. The FASB has since issued several additional amendments to ASU 2014-09. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the new revenue recognition standard for public and non-public entities reporting under U.S. GAAP. The amended standard is effective for us beginning January 1, 2018. As of the date of this report, we have finalized our accounting assessment of the new standard, and we are nearly complete in determining the impacts of the disclosure requirements of the new standard. Additionally, we are in the process of updating our control framework for new internal controls, as well as changes to existing controls, as it relates to the new standard. We will be in a position to begin reporting under the new standard beginning with the first quarter of 2018. Furthermore, we determined to adopt the requirements of the new standard in the first quarter of 2018 utilizing the full retrospective method of transition. When compared to current U.S. GAAP, we have concluded that the provisions of the new standard do not materially impact the timing or amount of revenue recognized. As anticipated, the primary impact of adopting the new standard was on the manner in which we account for certain costs to obtain new contracts ( i.e i.e Furthermore, we concluded that the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the customer related to the customer’s option to renew. Further, management determined that the standalone selling price of the customer’s option to renew equals the amount of the nonrefundable upfront fee. As a result, there is no impact to revenues upon adoption of the new standard, as the nonrefundable upfront fee will continue to be deferred and recognized ratably over the ten-year estimated customer life, consistent with our current accounting policy. The following table presents a recast of selected consolidated statement of operations line items, after giving effect to the adoption of ASU No. 2014-09 (dollars in thousands, except per share amounts): Year Ended December 31, 2017 2016 Costs and expenses: Sales and marketing $ 110,846 $ 85,361 General and administrative $ 80,228 $ 59,174 Operating income $ 129,710 $ 101,740 Net income $ 123,486 $ 70,421 Earnings per share, basic $ 2.13 $ 1.21 Earnings per share, diluted $ 2.10 $ 1.19 The following table presents a recast of selected consolidated balance sheet line items, after giving effect to the adoption of ASU No. 2014-09 (dollars in thousands): December 31, 2017 Assets: Deferred contract costs $ 26,403 Long-term deferred contract costs $ 171,865 In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” The purpose of the guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, though early adoption is permitted. Full retrospective application is prohibited. We are in the preliminary stages of gathering data and assessing the impact of the new lease standard, however, we anticipate that the adoption of this accounting standard will materially affect our consolidated balance sheets and may require changes to the system and processes that we use to account for leases. We have not yet made any decision on the timing of adoption or method of adoption with respect to the optional practical expedients. Summary of Significant Accoun23 Summary of Significant Accounting Policies (Tables) 12 Months Ended Dec. 31, 2017 Accounting Policies [Abstract] Estimated Useful Lives Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Vehicles 3 years Summary of Reflection of New Adopted Standards in Selected Consolidated Statements Line Items The following table presents a recast of selected consolidated statement of operations line items, after giving effect to the adoption of ASU No. 2014-09 (dollars in thousands, except per share amounts): Year Ended December 31, 2017 2016 Costs and expenses: Sales and marketing $ 110,846 $ 85,361 General and administrative $ 80,228 $ 59,174 Operating income $ 129,710 $ 101,740 Net income $ 123,486 $ 70,421 Earnings per share, basic $ 2.13 $ 1.21 Earnings per share, diluted $ 2.10 $ 1.19 The following table presents a recast of selected consolidated balance sheet line items, after giving effect to the adoption of ASU No. 2014-09 (dollars in thousands): December 31, 2017 Assets: Deferred contract costs $ 26,403 Long-term deferred contract costs $ 171,865 Property and Equipment (Tables) Property and Equipment (Tables) 12 Months Ended Dec. 31, 2017 Property Plant And Equipment [Abstract] Schedule of Property and Equipment and Associated Accumulated Depreciation and Amortization Property and equipment and accumulated depreciation and amortization were as follows (dollars in thousands): December 31, 2017 2016 Property and equipment Buildings $ 60,441 $ 48,250 Software and capitalized software costs 41,996 23,879 Computer equipment 27,928 18,987 Rental clocks 13,131 10,669 Furniture, fixtures and equipment 7,528 6,695 Leasehold improvements 767 680 151,791 109,160 Less: accumulated depreciation and amortization (53,525 ) (35,833 ) 98,266 73,327 Construction in progress 40,446 14,528 Land 8,993 8,993 Property and equipment, net $ 147,705 $ 96,848 Goodwill and Intangible Asset25 Goodwill and Intangible Assets, Net (Tables) 12 Months Ended Dec. 31, 2017 Goodwill And Intangible Assets Disclosure [Abstract] Components of Intangible Assets All of the intangible assets other than goodwill are considered to have finite lives and, as such, are subject to amortization. The components of intangible assets are as follows (dollars in thousands): December 31, 2017 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Trade name 4.5 3,194 (2,236 ) 958 Total $ 3,194 $ (2,236 ) $ 958 December 31, 2016 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Customer relationships 0.5 $ 13,997 $ (13,297 ) $ 700 Trade name 5.5 3,194 (2,023 ) 1,171 Total $ 17,191 $ (15,320 ) $ 1,871 Schedule of Estimated Amortization Expense of Intangible Assets Estimated amortization expense for our existing intangible assets for the next five years and thereafter is as follows (dollars in thousands): Year Ending December 31, Amortization 2018 $ 213 2019 213 2020 213 2021 213 2022 106 Total $ 958 Long-Term Debt (Tables) Long-Term Debt (Tables) 12 Months Ended Dec. 31, 2017 Debt Disclosure [Abstract] Schedule of Long-Term Debt Our long-term debt consisted of the following (dollars in thousands): December 31, 2017 2016 Net term note to bank due September 7, 2025 $ 35,302 $ — Net term note to bank due May 30, 2021 — 24,950 Net term note to bank due August 31, 2023 — 4,874 Total long-term debt (including current portion) 35,302 29,824 Less: Current portion (888 ) (1,113 ) Total long-term debt, net $ 34,414 $ 28,711 Aggregate Future Maturities of Long-Term Debt Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2017 are as follows (dollars in thousands): Year Ending December 31, 2018 $ 888 2019 1,775 2020 1,775 2021 1,775 2022 1,775 Thereafter 27,512 Total $ 35,500 Fair Value of Financial Instr27 Fair Value of Financial Instruments (Tables) 12 Months Ended Dec. 31, 2017 Fair Value Disclosures [Abstract] Schedule of Major Categories of Assets / (Liabilities) Measured at Fair Value on Recurring Basis Included in the following table are the Company’s major categories of assets (liabilities) measured at fair value on a recurring basis as of December 31, 2017 (dollars in thousands): December 31, 2017 Level 1 Level 2 Level 3 Total Interest rate swap $ — $ (649 ) $ — $ (649 ) Total $ — $ (649 ) $ — $ (649 ) Earnings Per Share (Tables) Earnings Per Share (Tables) 12 Months Ended Dec. 31, 2017 Earnings Per Share [Abstract] Computation of Basic and Diluted Net Earnings Per Share The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted net earnings per share (dollars in thousands, except per share amounts): Year Ended December 31, 2017 2016 2015 Numerator: Net income $ 66,807 $ 43,840 $ 20,945 Less: income allocable to participating securities (171 ) (333 ) (270 ) Income allocable to common shares $ 66,636 $ 43,507 $ 20,675 Add back: undistributed earnings allocable to participating securities 171 333 270 Less: undistributed earnings reallocated to participating securities (168 ) (333 ) (264 ) Numerator for diluted earnings per share $ 66,639 $ 43,507 $ 20,681 Denominator: Weighted average common shares outstanding 50,315,455 50,315,455 50,315,455 Weighted average common shares repurchased (1,526,930 ) (286,699 ) — Adjustment for vested restricted stock 9,050,630 7,521,448 6,179,715 Shares for calculating basic earnings per share 57,839,155 57,550,204 56,495,170 Dilutive effect of unvested restricted stock 950,864 1,417,895 1,424,530 Shares for calculating diluted earnings per share 58,790,019 58,968,099 57,919,700 Earnings per share: Basic $ 1.15 $ 0.76 $ 0.37 Diluted $ 1.13 $ 0.74 $ 0.36 Stockholders' Equity and Stoc29 Stockholders' Equity and Stock-Based Compensation (Tables) 12 Months Ended Dec. 31, 2017 Summary of Nonvested Restricted Stock Awards Activity The following table summarizes restricted stock awards activity for the year ended December 31, 2017: Time-Based Restricted Stock Awards Market-Based Restricted Stock Awards Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Unvested shares of restricted stock outstanding at December 31, 2016 1,429,514 $ 20.56 738,425 $ 28.68 Granted 309,526 $ 60.00 314,021 $ 48.63 Vested (681,699 ) $ 6.67 (1,014,429 ) $ 34.44 Forfeited (168,661 ) $ 35.20 (38,017 ) $ 39.87 Unvested shares of restricted stock outstanding at December 31, 2017 888,680 $ 42.17 - $ - Non-cash Stock-based Compensation Resulting From Restricted Stock Awards The following table presents non-cash stock-based compensation expense resulting from restricted stock awards, which is included in the following line items in the accompanying consolidated statements of income for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands): Year Ended December 31, 2017 2016 2015 Operating expense $ 3,950 $ 2,217 $ 235 Sales and marketing 6,086 3,656 559 Research and development 1,912 836 104 General and administrative 26,565 15,837 2,112 Total non-cash stock-based compensation expense $ 38,513 $ 22,546 $ 3,
Document and Entity Information Document and Entity Information - USD ($) $ in Billions 12 Months Ended Dec. 31, 2018 Feb. 05, 2019 Jun. 30, 2018 Document And Entity Information [Abstract] Document Type 10-K Amendment Flag false Document Period End Date Dec. 31, 2018 Document Fiscal Year Focus 2,018 Document Fiscal Period Focus FY Trading Symbol PAYC Entity Registrant Name Paycom Software, Inc. Entity Central Index Key 1,590,955 Current Fiscal Year End Date --12-31 Entity Well-known Seasoned Issuer Yes Entity Current Reporting Status Yes Entity Voluntary Filers No Entity Filer Category Large Accelerated Filer Entity Small Business false Entity Emerging Growth Company false Entity Shell Company false Entity Common Stock, Shares Outstanding 58,599,531 Entity Public Float $ 4.9 Consolidated Balance Sheets Consolidated Balance Sheets - USD ($) $ in Thousands Dec. 31, 2018 Dec. 31, 2017 Current assets: Cash and cash equivalents $ 45,718 $ 46,077 [1] Accounts receivable 3,414 1,576 [1] Prepaid expenses 7,658 4,982 [1] Inventory 797 979 [1] Income tax receivable 3,962 7,047 [1] Deferred contract costs 35,286 26,403 [1] Current assets before funds held for clients 96,835 87,064 [1] Funds held for clients 967,787 1,089,201 [1] Total current assets 1,064,622 1,176,265 [1] Property and equipment, net 176,962 147,705 [1] Deposits and other assets 2,249 1,456 [1] Goodwill 51,889 51,889 [1] Intangible assets, net 745 958 [1] Long-term deferred contract costs 225,459 171,865 [1] Total assets 1,521,926 1,550,138 [1] Current liabilities: Accounts payable 6,288 6,490 [1] Accrued commissions and bonuses 10,671 9,585 [1] Accrued payroll and vacation 10,741 7,015 [1] Deferred revenue 8,980 6,982 [1] Current portion of long-term debt 1,775 888 [1] Accrued expenses and other current liabilities 22,440 19,991 [1] Current liabilities before client funds obligation 60,895 50,951 [1] Client funds obligation 967,787 1,089,201 [1] Total current liabilities 1,028,682 1,140,152 [1] Deferred income tax liabilities, net 70,206 49,129 [1] Long-term derivative liability [1] 554 Long-term deferred revenue 55,671 44,642 [1] Net long-term debt, less current portion 32,614 34,414 [1] Total long-term liabilities 158,491 128,739 [1] Total liabilities 1,187,173 1,268,891 [1] Commitments and contingencies (Note 12) [1] Stockholders' equity: Common stock, $0.01 par value (100,000,000 shares authorized, 60,746,715 and 60,149,411 shares issued at December 31, 2018 and 2017, respectively; 57,276,992 and 57,788,573 shares outstanding at December 31, 2018 and 2017, respectively) 607 601 [1] Additional paid in capital 203,680 161,809 [1] Retained earnings 395,590 258,525 [1] Treasury stock, at cost (3,469,723 and 2,360,838 shares at December 31, 2018 and 2017, respectively) (265,124) (139,688) [1] Total stockholders' equity [1] 334,753 281,247 Total liabilities and stockholders' equity $ 1,521,926 $ 1,550,138 [1] [1] Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. Consolidated Balance Sheets (Pa Consolidated Balance Sheets (Parenthetical) - $ / shares Dec. 31, 2018 Dec. 31, 2017 Statement Of Financial Position [Abstract] Common stock, par value $ 0.01 $ 0.01 Common stock, shares authorized 100,000,000 100,000,000 Common stock, shares issued 60,746,715 60,149,411 Common stock, shares outstanding 57,276,992 57,788,573 Treasury stock, shares 3,469,723 2,360,838 Consolidated Statements of Inco Consolidated Statements of Income - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Revenues Total revenues $ 566,336 $ 433,047 [1] $ 329,141 [1] Cost of revenues Operating expenses 76,231 62,438 [1] 48,268 [1] Depreciation and amortization 14,532 9,590 [1] 5,798 [1] Total cost of revenues 90,763 72,028 [1] 54,066 [1] Administrative expenses Sales and marketing 143,881 110,846 [1] 85,361 [1] Research and development 46,247 30,430 [1] 20,966 [1] General and administrative 96,605 80,228 [1] 59,174 [1] Depreciation and amortization 15,125 9,805 [1] 7,834 [1] Total administrative expenses 301,858 231,309 [1] 173,335 [1] Total operating expenses 392,621 303,337 [1] 227,401 [1] Operating income 173,715 129,710 [1] 101,740 [1] Interest expense (766) (911) [1] (1,036) [1] Other income, net 1,762 (1,067) [1] 308 [1] Income before income taxes 174,711 127,732 [1] 101,012 [1] Provision for income taxes 37,646 4,246 [1] 30,591 [1] Net income [1] $ 137,065 $ 123,486 $ 70,421 Earnings per share, basic $ 2.37 $ 2.13 [1] $ 1.21 [1] Earnings per share, diluted $ 2.34 $ 2.10 [1] $ 1.19 [1] Weighted average shares outstanding: Basic 57,711,315 57,839,155 [1] 57,550,204 [1] Diluted 58,582,486 58,790,019 [1] 58,968,099 [1] Recurring [Member] Revenues Total revenues $ 557,255 $ 425,424 [1] $ 323,548 [1] Implementation and Other [Member] Revenues Total revenues $ 9,081 $ 7,623 [1] $ 5,593 [1] [1] Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. Consolidated Statements of Shar Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands Total Common Stock [Member] Additional Paid in Capital [Member] Retained Earnings [Member] Treasury Stock [Member] Cumulative-effect adjustment to Additional paid in capital and Retained earnings related to the adoption of ASU No. 2016-09 (see Note 2) [1] $ 62,585 $ 24,575 $ 38,010 Beginning balance, value at Dec. 31, 2015 98,314 [1] $ 571 71,135 [1] 26,608 [1] Beginning balance, shares at Dec. 31, 2015 57,119,873 Vesting of restricted stock $ 14 (14) [1] Vesting of restricted stock, shares 1,333,410 Stock-based compensation [1] 24,331 24,331 Repurchases of common stock (49,958) [1] $ (49,958) Repurchases of common stock, shares 1,122,261 Net income [1] 70,421 70,421 Ending balance, value at Dec. 31, 2016 205,693 [1] $ 585 120,027 [1] 135,039 [1] $ (49,958) Ending balance, shares at Dec. 31, 2016 58,453,283 1,122,261 Vesting of restricted stock $ 16 (16) [1] Vesting of restricted stock, shares 1,696,128 Stock-based compensation [1] 41,798 41,798 Repurchases of common stock (89,730) [1] $ (89,730) Repurchases of common stock, shares 1,238,577 Net income [1] 123,486 123,486 Ending balance, value at Dec. 31, 2017 281,247 [1] $ 601 161,809 [1] 258,525 [1] $ (139,688) Ending balance, shares at Dec. 31, 2017 60,149,411 2,360,838 Vesting of restricted stock $ 6 (6) [1] Vesting of restricted stock, shares 597,304 Stock-based compensation [1] 41,877 41,877 Repurchases of common stock (125,436) [1] $ (125,436) Repurchases of common stock, shares 1,108,885 Net income [1] 137,065 137,065 Ending balance, value at Dec. 31, 2018 $ 334,753 [1] $ 607 $ 203,680 [1] $ 395,590 [1] $ (265,124) Ending balance, shares at Dec. 31, 2018 60,746,715 3,469,723 [1] Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. Consolidated Statements of Cash Consolidated Statements of Cash Flows - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2018 Dec. 31, 2017 Dec. 31, 2016 Cash flows from operating activities: Net income $ 137,065 $ 123,486 [1] $ 70,421 [1] Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,657 19,395 [1] 13,632 [1] Accretion of discount on available-for-sale securities (1,112) (451) [1] (135) [1] (Gain)/loss on disposition of property and equipment [1] 21 (64) Amortization of debt discount and debt issuance costs 32 117 [1] 124 [1] Stock-based compensation expense 36,576 36,076 [1] 20,721 [1] Loss on early repayment of debt [1] 923 Cash paid for derivative settlement (188) (24) [1] (Gain)/loss on derivative (479) 673 [1] Deferred income taxes, net 21,077 (7,681) [1] 15,340 [1] Changes in operating assets and liabilities: Accounts receivable (1,838) (237) [1] 1,015 [1] Prepaid expenses (2,676) (507) [1] (944) [1] Inventory (306) 462 [1] 418 [1] Deposits and other assets (762) (241) [1] 71 [1] Deferred contract costs (60,730) (48,619) [1] (42,019) [1] Accounts payable 1,079 79 [1] (1,571) [1] Income taxes, net 3,085 (6,355) [1] 6,051 [1] Accrued commissions and bonuses 1,086 1,582 [1] (684) [1] Accrued payroll and vacation 3,726 2,246 [1] 1,871 [1] Deferred revenue 13,027 11,913 [1] 10,675 [1] Accrued expenses and other current liabilities 6,498 (2,709) [1] 3,896 [1] Net cash provided by operating activities 184,817 130,149 [1] 98,818 [1] Cash flows from investing activities: Purchase of short-term investments from funds held for clients (145,011) (66,235) [1] (113,792) [1] Proceeds from maturities of short-term investments from funds held for clients 155,500 141,205 [1] 16,135 [1] Net change in funds held for clients 112,037 (305,476) [1] (63,749) [1] Purchases of property and equipment (59,906) (59,389) [1] (43,805) [1] Proceeds from sale of property and equipment [1] 295 Net cash provided by (used in) investing activities 62,620 (289,895) [1] (204,916) [1] Cash flows from financing activities: Proceeds from issuance of long-term debt [1] 40,940 5,000 Repurchases of common stock (105,188) (56,880) [1] (35,561) [1] Withholding taxes paid related to net share settlements (20,248) (32,850) [1] (14,396) [1] Principal payments on long-term debt (888) (35,335) [1] (964) [1] Net change in client funds obligation (121,414) 230,957 [1] 161,541 [1] Debt extinguishment costs [1] (823) Payment of debt issuance costs (58) (344) [1] (78) [1] Net cash provided by (used in) financing activities (247,796) 145,665 [1] 115,542 [1] Net change in cash and cash equivalents (359) (14,081) [1] 9,444 [1] Cash and cash equivalents Beginning of year [1] 46,077 60,158 50,714 End of year 45,718 46,077 [1] 60,158 [1] Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized 708 791 [1] 938 [1] Cash paid for income taxes 13,511 18,332 [1] 9,323 [1] Noncash investing and financing activities: Purchases of property and equipment, accrued but not paid 1,759 6,686 [1] 4,651 [1] Stock-based compensation for capitalized software $ 3,722 $ 3,285 [1] $ 1,784 [1] [1] Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. Organization and Description of Organization and Description of Business 12 Months Ended Dec. 31, 2018 Accounting Policies [Abstract] Organization and Description of Business 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we”, “our”, “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. Summary of Significant Accounti Summary of Significant Accounting Policies 12 Months Ended Dec. 31, 2018 Accounting Policies [Abstract] Summary of Significant Accounting Policies 2. Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed in Note 2. All amounts and disclosures set forth in this Form 10-K have been updated to comply with this new standard, as indicated by the “as adjusted” footnote in applicable tables within the notes to the consolidated financial statements. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on reported net income and did not result in any material change to operating cash flows. Adoption of New Pronouncements In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 also includes Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs – Contracts with Customers” (“ASC 340-40”), which codifies the guidance on other assets and deferred costs relating to Impact on Previously Reported Results The provisions of ASU 2014-09 do not materially impact the timing or amount of revenue we recognize. The primary impact of adopting the new standard is the manner in which we account for certain costs to obtain new contracts (i.e., selling and commission costs) and costs to fulfill contracts (i.e., costs related to upfront implementation activities performed), which we had previously expensed as incurred. We also determined that the nonrefundable upfront fee charged to our clients, coupled with the option to renew, represents an implied performance obligation in the form of a material right. However, as these fees are deferred and recognized ratably over the ten-year estimated client life, consistent with our prior accounting policy, there is no change in revenue recognition. The following table presents a recast of selected consolidated statement of income line items after giving effect to the adoption of ASU 2014-09: Year Ended December 31, 2017 Year Ended December 31, 2016 As previously reported Adjustments As Adjusted As previously reported Adjustments As Adjusted (in thousands, except per share amounts) Administrative expenses Sales and marketing $ 150,512 $ (39,666 ) $ 110,846 $ 119,258 $ (33,897 ) $ 85,361 General and administrative $ 91,647 $ (11,419 ) $ 80,228 $ 69,046 $ (9,872 ) $ 59,174 Operating income $ 78,625 $ 51,085 $ 129,710 $ 57,971 $ 43,769 $ 101,740 Provision for income taxes $ 9,840 $ (5,594 ) $ 4,246 $ 13,403 $ 17,188 $ 30,591 Net income $ 66,807 $ 56,679 $ 123,486 $ 43,840 $ 26,581 $ 70,421 Earnings per share, basic $ 1.15 $ 0.98 $ 2.13 $ 0.76 $ 0.45 $ 1.21 Earnings per share, diluted $ 1.13 $ 0.97 $ 2.10 $ 0.74 $ 0.45 $ 1.19 The following table presents a recast of selected consolidated balance sheet line items after giving effect to the adoption of ASU 2014-09: December 31, 2017 As previously reported Adjustments As Adjusted (in thousands) Assets Deferred contract costs $ — $ 26,403 $ 26,403 Deferred income tax assets, net $ 3,294 $ (3,294 ) $ — Long-term deferred contract costs $ — $ 171,865 $ 171,865 Liabilities and Stockholders' Equity Deferred income tax liabilities, net $ — $ 49,129 $ 49,129 Additional paid in capital $ 137,234 $ 24,575 $ 161,809 Retained earnings $ 137,255 $ 121,270 $ 258,525 Total stockholders' equity $ 135,402 $ 145,845 $ 281,247 The following table presents a recast of selected consolidated statement of cash flows line items after giving effect to the adoption of ASU 2014-09: Year Ended December 31, 2017 Year Ended December 31, 2016 As previously reported Adjustments As Adjusted As previously reported Adjustments As Adjusted (in thousands) Cash flows from operating activities Net income $ 66,807 $ 56,679 $ 123,486 $ 43,840 $ 26,581 $ 70,421 Stock-based compensation expense 38,542 (2,466 ) 36,076 22,471 (1,750 ) 20,721 Deferred income taxes, net (2,087 ) (5,594 ) (7,681 ) (1,848 ) 17,188 15,340 Deferred contract costs — (48,619 ) (48,619 ) — (42,019 ) (42,019 ) Net cash provided by operating activities $ 130,149 $ — $ 130,149 $ 98,818 $ — $ 98,818 Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Inventory Our inventory consists of two types of time clocks, and related clock attachments, sold to clients as part of our time and attendance services. Inventory is stated at the lower of cost or market with cost determined using the first-in first-out (FIFO) cost method. Time clocks are purchased as finished goods from a third party and as such we do not have any inventory classified as raw materials or work in process inventory. Rental clocks are issued to clients under month-to-month operating leases and are classified as property and equipment. The Company’s inventory obsolescence reserve was $0 as of December 31, 2018, 2017 and 2016, respectively. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2018, 2017 and 2016, we incurred interest costs of $1.6 million, $1.7 million and $1.3 million, respectively. For the years ended December 31, 2018, 2017 and 2016, interest costs of $0.8 million, $0.8 million and $0.4 million, respectively, were capitalized. Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and The total capitalized payroll costs related to internal use computer software projects was $22.0 million and $15.8 million during the years ended December 31, 2018 and 2017, respectively, are included in property and equipment. Amortization expense of capitalized software costs were $12.5 million, $7.0 million and $3.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. The Company has not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recognized. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2018. For the years ended December 31, 2018, 2017 and 2016, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2018, 2017 and 2016. Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. As of December 31, 2018 and 2017, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item on the balance sheet. These available-for-sale securities are recorded on the balance sheet at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. On February 13, 2018, we announced that our Board of Directors authorized the repurchase of up to an additional $100.0 million of common stock. Most recently, on November 20, 2018, we announced that our Board of Directors authorized the repurchase of up to an additional $150.0 million of our common stock. As of December 31, 2018, there was $162.0 million available for repurchases. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations. During the year ended December 31, 2018, we repurchased an aggregate of 1,108,885 shares of our common stock at an average cost of $113.12 per share, including 186,165 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. During the year ended December 31, 2017, we repurchased an aggregate of 1,238,577 shares of our common stock at an average cost of $72.45 per share, including 464,302 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales tax and other applicable taxes are excluded from revenues. The following table disaggregates revenue by recurring and implementation and other revenues, which represent the major categories of revenues: Year Ended December 31, 2018 2017 2016 (in thousands) Revenues Recurring $ 557,255 $ 425,424 $ 323,548 Implementation and other 9,081 7,623 5,593 Total revenues $ 566,336 $ 433,047 $ 329,141 Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications. The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups. Implementation and Other Revenues Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations. Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period (i.e. the ten-year estimated client life). Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks. Contract Balances The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. We have elected to apply the practical expedient not to disclose the value of unsatisfied performance obligations for contracts that are less than one year in length. For these contracts, we determined that the core, non-material right, performance obligations are generally satisfied in full by the end of each reporting period as most of our contracts with clients start at the beginning of a calendar month. However, this expedient cannot be applied to initial 30-day contracts with a client that also contain an implied performance obligation in the form of a material right as the material right performance obligation is being recognized over the expected client life which exceeds one year. For the material right performance obligation, as discussed above, we defer the amounts allocated and recognize them ratably over the estimated client life of ten years. Finally, we have also elected to apply the transition expedient that allows for all reporting periods presented before the date of initial application to exclude disclosure of the amounts of transaction price allocated to the remaining unsatisfied performance obligations. Accordingly, the table below is only for the year ended December 31, 2018. Changes in deferred revenue related to material right performance obligations were as follows: Year Ended December 31, 2018 (in thousands) Balance, beginning of period $ 51,624 Deferral of revenue 20,925 Recognition of unearned revenue (7,898 ) Balance, end of period $ 64,651 We expect to recognize $9.0 million of deferred revenue related to material right performance obligations in 2019 and 2020, and $46.7 million of such deferred revenue thereafter. Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We have determined that certain selling and commission costs meet the capitalization criteria under ASC 340-40, which prior to the adoption of ASU 2014-09 were expensed as incurred. We also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations. The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach, and are capitalized and amortized over the expected period of benefit, which we have determined to be the estimated client relationship of ten years. The expected period of benefit has been determined to be the estimated life of the client relationship primarily because we incur no new costs to obtain, or costs to fulfill, a contract upon renewal of such contract. Additional commission costs may be incurred when an existing client purchases additional applications; however, these commission costs relate solely to the additional applications purchased and are not related to contract renewal. Furthermore, additional fulfillment costs associated with existing clients purchasing additional applications are minimized by our seamless single-database platform. These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and costs to fulfill a contract are included in the “sales and marketing” and “general and administrative” line items in the accompanying consolidated statements of income. The following table presents the asset balance and related amortization expense for these contract costs: As of and for the Year Ended December 31, 2018 Beginning Capitalization Amortization Ending Balance of Costs Balance (in thousands) Costs to obtain a contract $ 126,207 $ 51,858 $ (19,076 ) $ 158,989 Costs to fulfill a contract $ 72,061 $ 41,224 $ (11,529 ) $ 101,756 Cost of Revenues Our costs and expenses applicable to total revenues represent operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation and amortization costs. Advertising Costs Advertising costs are expensed the first time that advertising takes place. Advertising costs for the years ended December 31, 2018, 2017 and 2016 were $16.8 million, $7.9 million and $4.9 million, respectively. Sales Taxes We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are recognized on a net basis, and therefore, excluded from revenues. For the years ended December 31, 2018, 2017 and 2016, sales taxes collected and remitted were $6.5 million, $5.0 million and $4.3 million, respectively. Employee Stock-Based Compensation Time-based stock compensation awards to employees are recognized on a pro-rata basis over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Market-based stock compensation awards to employees are recognized on a pro-rata basis over the applicable estimated vesting period as compensation costs in the consolidated statements of income based on their fair value as of the date of the grant unless vesting occurs sooner at which time the remaining respective unrecognized compensation cost is recognized. Employee Stock Purchase Plan An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recognized at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period. Income Taxes Our consolidated financial statements include a provision for income taxes incurred for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We file income tax returns in the United States and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that do not meet this threshold. Our policy is to recognize interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. We have one open income tax examination as of December 31, 2018 with the state of Virginia. However, we do not expect the result of the examination to impact income tax expense. We file income tax returns with the United States federal government and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2015. Seasonality Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. Recently Issued Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The purpose of this new guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet as well as providing additional disclosure requirements related to leasing arrangements. The new guidance is effective for us beginning January 1, 2019, which we plan to adopt using the modified retrospective method and the transition relief guidance provided by the FASB in ASU 2018-11. Under this adoption method, we will not restate comparative prior periods and we will carry forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms. Based on our current portfolio of leases, approximately $21.6 million of lease assets and liabilities will be recognized on our balance sheet upon adoption, primarily relating to operating leases for real estate. Under the transition relief guidance, we have elected the lease vs. non-lease components practical expedient relating to the asset class of real estate, the short-term lease exemption practical expedient and the package of practical expedients. The Company has determined that it will not elect the practical expedient related to hindsight. In connection with the adoption of this standard, the Company is updating its control framework for any new internal controls related to leases that will be required, as well as any changes to existing controls, effective with the January 1, 2019 adoption. Property and Equipment Property and Equipment 12 Months Ended Dec. 31, 2018 Property Plant And Equipment [Abstract] Property and Equipment 3. Property and equipment and accumulated depreciation and amortization were as follows: December 31, 2018 2017 (in thousands) Property and equipment Buildings $ 101,421 $ 60,441 Software and capitalized software costs 66,634 41,996 Computer equipment 39,492 27,928 Rental clocks 16,950 13,131 Furniture, fixtures and equipment 16,474 7,528 Leasehold improvements 1,274 767 Vehicles 74 — 242,319 151,791 Less: accumulated depreciation and amortization (82,969 ) (53,525 ) 159,350 98,266 Construction in progress 8,589 40,446 Land 9,023 8,993 Property and equipment, net $ 176,962 $ 147,705 We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40. For the years ended December 31, 2018 and 2017, we capitalized $22.0 million and $15.8 million, respectively, of computer software development costs related to software developed for internal use. Included in the construction in progress balance at December 31, 2018 and 2017 is $0.1 and $2.0 million in retainage, respectively. Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases. We capitalize interest incurred for indebtedness related to construction in progress. For the years ended December 31, 2018, 2017 and 2016, we incurred costs of $1.6 million, $1.7 million and $1.3 million, respectively. For the years ended December 31, 2018, 2017 and 2016, interest cost of $0.8 million, $0.8 million and $0.4 million, respectively, was capitalized. Depreciation and amortization expense for property and equipment, net was $29.4 million, $18.5 million and $12.0 million for the years ended December 31, 2018, 2017 and 2016, respectively. Goodwill and Intangible Assets, Goodwill and Intangible Assets, Net 12 Months Ended Dec. 31, 2018 Goodwill And Intangible Assets Disclosure [Abstract] Goodwill and Intangible Assets, Net 4. Goodwill represents the excess of acquired cost over our net tangible and identified intangible assets. As of both December 31, 2018 and 2017, goodwill totaled $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of either June 30, 2018 or 2017. As of December 31, 2018 and 2017, there were no indicators of impairment. All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization. The components of intangible assets are as follows: December 31, 2018 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) (dollars in thousands) Intangibles: Trade name 3.5 $ 3,194 $ (2,449 ) $ 745 Total $ 3,194 $ (2,449 ) $ 745 December 31, 2017 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) (dollars in thousands) Intangibles: Trade name 4.5 $ 3,194 $ (2,236 ) $ 958 Total $ 3,194 $ (2,236 ) $ 958 Amortization of intangible assets the years ended December 31, 2018, 2017 and 2016 was $0.2 million, $0.9 million and $1.6 million, respectively. Estimated amortization expense for our existing intangible assets for the next five years and thereafter is as follows (in thousands): Year Ending December 31, Amortization 2019 $ 213 2020 213 2021 213 2022 106 Total $ 745 Long-Term Debt Long-Term Debt 12 Months Ended Dec. 31, 2018 Debt Disclosure [Abstract] Long-Term Debt 5. Our long-term debt consisted of the following: December 31, 2018 2017 (in thousands) Net term note to bank due September 7, 2025 $ 34,389 $ 35,302 Total long-term debt (including current portion) 34,389 35,302 Less: Current portion (1,775 ) (888 ) Total long-term debt, net $ 32,614 $ 34,414 On December 7, 2017, we entered into a senior secured term credit agreement (the “Term Credit Agreement”), pursuant to which JPMorgan Chase Bank N.A., Bank of America, N.A. and Kirkpatrick Bank have agreed to make certain term loans to us (the “Term Loans”) in an aggregate principal amount of $60.0 million on or prior to September 7, 2018 (the “Term Loan Draw Expiration Date”). On September 12, 2018, we entered into the First Amendment to the Term Credit Agreement dated effective as of September 7, 2018, which extended the Term Loan Draw Expiration Date to March 7, 2019. As of December 31, 2018, our indebtedness of $34.6 million consisted solely of Term Loans made under the Term Credit Agreement. Unamortized debt issuance costs of $0.2 million and $0.2 million as of December 31, 2018 and 2017, respectively, are presented as a direct deduction from the carrying amount of the debt liability. After giving effect to the Term Loans made on December 7, 2017, there was $24.5 million of borrowing capacity remaining under the Term Credit Agreement as of December 31, 2018. Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our headquarters property. Term Loans made after December 7, 2017 may be used to finance hard and soft costs related to the completion of construction of our fourth headquarters building and any landscaping, groundwork, parking lots and roads reasonably incidental thereto. The Term Loans mature on September 7, 2025 and bear interest, at our option, at either (a) a prime rate plus 1.0% or (b) an adjusted LIBOR rate for the interest period in effect for such Term Loan plus 1.5%. Under the Term Credit Agreement, we are subject to two material financial covenants, which require us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. As of December 31, 2018, we were in compliance with these covenants. On February 12, 2018, we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provides for a senior secured revolving credit facility (the “Facility”) in the aggregate principal amount of $50.0 million, which may be increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Facility includes a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. The Facility is scheduled to mature on February 12, 2020. Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%. The proceeds of the loans and letters of credit under the Facility are to be used only for our general business purposes and working capital. Letters of credit are to be issued only to support our business operations. As of December 31, 2018, we did not have any borrowings outstanding under the Facility. Under the Revolving Credit Agreement, we are required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. Additionally, the Revolving Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make certain investments, dispose of assets, enter into certain transactions, including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions for a facility of the size and type of the Facility. As of December 31, 2018, we were in compliance with all covenants related to the Revolving Credit Agreement. As of December 31, 2018 and 2017, the carrying value of our total long-term debt approximated its fair value as of such date. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities. Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2018 are as follows (in thousands): Year Ending December 31, 2019 $ 1,775 2020 1,775 2021 1,775 2022 1,775 2023 1,775 Thereafter 25,738 Total $ 34,613 Derivative Instruments Derivative Instruments 12 Months Ended Dec. 31, 2018 Derivative Instruments And Hedging Activities Disclosure [Abstract] Derivative Instruments 6. In December 2017, we entered into a floating-to-fixed interest rate swap agreement to limit the exposure to floating interest rate risk related to the Term Loans. We do not hold derivative instruments for trading or speculative purposes. The interest rate swap agreement effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We account for our derivatives under ASC Topic 815, “Derivatives and Hedging,” and recognize all derivative instruments on the consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. See Note 7, “Fair Value of Financial Instruments”. We have elected not to designate our interest rate swap as a hedge; therefore, changes in the fair value of the derivative instrument are being recognized in our consolidated statements of income within Other income, net. The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is based on a one-month LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million. Under the terms of the interest rate swap agreement, we will receive quarterly variable interest payments based on the LIBOR rate and will pay interest at a fixed rate. The interest rate swap agreement has a maturity date of September 7, 2025. For the years ended December 31, 2018 and 2017, we recognized a gain of $0.7 million and loss of $0.6 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income, net in the consolidated statements of income. Fair Value of Financial Instrum Fair Value of Financial Instruments 12 Months Ended Dec. 31, 2018 Fair Value Disclosures [Abstract] Fair Value of Financial Instruments 7. Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client fund obligation approximates fair value because of the short-term nature of the instruments. See Note 5 for discussion of the fair value of our debt. As discussed in Note 2, we invest the funds held for clients in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit, and classify as cash and cash equivalents within the funds held for clients line item in the consolidated balance sheets. Short-term investments in commercial paper and certificates of deposit with a maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item. These available-for-sale securities are recorded on the balance sheet at fair value, which approximates the amortized cost of the securities. As of December 31, 2018 and 2017, all available-for-sale securities and certificates of deposit were due in one year or less. As discussed in Note 6, during the year ended December 31, 2017, we entered into an interest rate swap. The interest rate swap is measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs recognized at fair value. The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: • Level 1 – Observable inputs such as quoted prices in active markets • Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active • Level 3 – Unobservable inputs in which there is little or no market data Included in the following table are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017: December 31, 2018 Level 1 Level 2 Level 3 Total Assets: (in thousands) Commercial paper $ — $ 21,041 $ — $ 21,041 Certificates of deposit $ — $ 6,000 $ — $ 6,000 Interest rate swap $ — $ 17 $ — $ 17 December 31, 2017 Level 1 Level 2 Level 3 Total Assets: (in thousands) Commercial paper $ — $ 14,918 $ — $ 14,918 Certificates of deposit $ — $ 21,500 $ — $ 21,500 Liabilities: Interest rate swap $ — $ 649 $ — $ 649 Employee Savings Plan and Emplo Employee Savings Plan and Employee Stock Purchase Plan 12 Months Ended Dec. 31, 2018 Compensation Related Costs [Abstract] Employee Savings Plan and Employee Stock Purchase Plan 8. Employees over the age of 18 and have completed ninety days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby the Company matches the contribution of our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions amounted to $5.3 million, $4.1 and $3.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares the Company purchases in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2,000,000 shares. During the years ended December 31, 2018, 2017 and 2016, eligible employees purchased 59,041, 76,728 and 110,658 shares, respectively, of the Company’s common stock under the ESPP. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $1.3 million, $0.8 million and $0.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. Earnings Per Share Earnings Per Share 12 Months Ended Dec. 31, 2018 Earnings Per Share [Abstract] Earnings Per Share 9. Basic earnings per share is based on the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested. In accordance with ASC Topic 260, “Earnings Per Share,” the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The unvested shares of restricted stock granted in 2015 are considered participating securities, while all other unvested shares of restricted stock are not considered participating securities. The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share (in thousands, except share and per share amounts): Year Ended December 31, 2018 2017 *As Adjusted 2016 *As Adjusted Numerator: Net income $ 137,065 $ 123,486 $ 70,421 Less: income allocable to participating securities (159 ) (315 ) (535 ) Income allocable to common shares $ 136,906 $ 123,171 $ 69,886 Add back: undistributed earnings allocable to participating securities 159 315 535 Less: undistributed earnings reallocated to participating securities (156 ) (310 ) (535 ) Numerator for diluted earnings per share $ 136,909 $ 123,176 $ 69,886 Denominator: Basic weighted average shares outstanding 57,711,315 57,839,155 57,550,204 Dilutive effect of unvested restricted stock 871,171 950,864 1,417,895 Diluted weighted average shares outstanding 58,582,486 58,790,019 58,968,099 Earnings per share: Basic $ 2.37 $ 2.13 $ 1.21 Diluted $ 2.34 $ 2.10 $ 1.19 * Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. Stockholders' Equity and Stock- Stockholders' Equity and Stock-Based Compensation 12 Months Ended Dec. 31, 2018 Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] Stockholders' Equity and Stock-Based Compensation 10. We have historically issued shares of restricted stock under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”) that are subject to either time-based vesting conditions or market-based vesting conditions. The market-based vesting conditions are based on the Company’s total enterprise value (“TEV”) exceeding certain specified thresholds. Compensation expense related to the issuance of shares with time-based vesting conditions (“Time-Based Shares”) is measured based on the fair value of the award on the grant date and recognized over the requisite service period on a straight-line basis. Compensation expense related to the issuance of shares with market-based vesting conditions (“Market-Based Shares”) is measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based upon the probability that the vesting condition will be met. The following table presents a summary of the grant-date fair values of restricted stock granted during the years ended December 31, 2018, 2017 and 2016 and the related assumptions: Year Ended December 31, 2018 2017 2016 Grant-date fair value of restricted stock $81.14 - $122.83 $46.78 - $60.67 $23.15 - $49.34 Risk-free interest rate 2.54% 1.85% 1.28% - 1.36% Estimated volatility 25.0% 23.0% 21.0% - 23.0% Expected life (in years) 2.0 2.3 2.7 The following table summarizes restricted stock awards activity for the year ended December 31, 2018: Time-Based Shares Market-Based Shares Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Unvested shares of restricted stock outstanding at December 31, 2017 888,680 $ 42.17 — $ — Granted 337,050 99.76 284,118 82.84 Vested (314,224 ) 34.14 (283,080 ) 82.84 Forfeited (105,037 ) 56.26 (1,038 ) 82.64 Unvested shares of restricted stock outstanding at December 31, 2018 806,469 $ 67.54 — $ — During the year ended December 31, 2018, we issued an aggregate of 621,168 shares of restricted stock to our executive officers, certain non-executive employees and non-employee directors under the LTIP, consisting of 284,118 Market-Based Shares and 337,050 Time-Based Shares. The Market-Based Shares were scheduled to vest 50% on the first date that the Company’s TEV (calculated as defined in the applicable restricted stock award agreement) equaled or exceeded $5.9 billion and 50% on the first date that the Company’s TEV equaled or exceeded $6.2 billion, in each case provided that (i) such date occurred on or before the sixth anniversary of the grant date and (ii) the recipient was employed by, or providing services to, the Company or a subsidiary on the applicable vesting date. As shown in the table below, all Market-Based Shares issued on January 26, 2018 vested during the year ended December 31, 2018. The following table summarizes vesting activity for Market-Based Shares during the year ended December 31, 2018, the associated compensation cost recognized in connection with the vesting event and the number of shares withheld to satisfy tax withholding obligations: Vesting Condition Date Vested Number of Shares Vested Compensation Cost Recognized Upon Vesting Shares Withheld for Taxes 1 Market-based (TEV = $5.9 billion) March 14, 2018 141,599 $9.7 million 54,000 Market-based (TEV = $6.2 billion) March 23, 2018 141,481 $10.1 million 54,909 1 The vesting conditions for Time-Based Shares issued in 2018 vary based on the category of the recipient. The Time-Based Shares issued to executive officers and non-executive sales employees in 2018 will vest in three equal annual tranches beginning on a specified initial vesting date and thereafter on the first and second anniversaries of such date, provided that the executive officer or non-executive sales employee is employed by, or providing services to, the Company on the applicable vesting date. Time-Based Shares issued to certain non-executive, non-sales employees during 2018 will vest 25% on a specified initial vesting date and 25% on each of the first three anniversaries of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. Time-based shares issued to non-employee members of our Board of Directors will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date. Our total compensation expense related to restricted stock was $36.4 million, $36.0 million and $20.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. There was $41.4 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested shares of restricted stock outstanding as of December 31, 2018. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.8 years as of December 31, 2018. We capitalized stock-based compensation costs related to software developed for internal use of $3.7 million, $3.3 million and $1.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. The following table presents non-cash stock-based compensation expense resulting from restricted stock awards, which is included in the following line items in the accompanying consolidated statements of income for the years ended December 31, 2018, 2017 and 2016: Year Ended December 31, 2018 2017 *As Adjusted 2016 *As Adjusted (in thousands) Operating expense $ 4,041 $ 3,950 $ 2,217 Sales and marketing 7,510 5,023 3,028 Research and development 3,013 1,912 836 General and administrative 21,847 25,162 14,715 Total non-cash stock-based compensation expense $ 36,411 $ 36,047 $ 20,796 Related-Party Transactions Related-Party Transactions 12 Months Ended Dec. 31, 2018 Related Party Transactions [Abstract] Related-Party Transactions 11. Our Chief Sales Officer owned a .01% general partnership interest and a 10.49% limited partnership interest in 417 Oakbend, LP, a Texas limited partnership, until April 2016. For the period under his ownership during 2016, we paid rent on our Dallas office space to 417 Oakbend, LP in the amount of $0.1 million. Commitments and Contingencies Commitments and Contingencies 12 Months Ended Dec. 31, 2018 Commitments And Contingencies Disclosure [Abstract] Commitments and Contingencies 12. Employment Agreements We have employment agreements with certain of our executive officers. The agreements allow for annual compensation, participation in executive benefit plans, and performance-based cash bonuses. Incentive Plan On May 2, 2016, our stockholders approved the Paycom Software, Inc. Annual Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for payment of incentive compensation that is not subject to certain federal income tax deduction limitations. Participation in the Incentive Plan is limited to certain of our employees designated by the Compensation Committee of the Board of Directors. Operating Leases and Deferred Rent Our leases primarily consist of several noncancellable operating leases for office space with contractual terms expiring from 2019 to 2024. Minimum rent expenses are recognized over the lease term. The lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on the Company in an amount that a renewal appears, at the inception of the lease, to be reasonably assured. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related rent expense on a straight-line basis and record the difference between the recognized rent expense and the amount payable under the lease as a liability. We had $1.4 million and $1.3 million as of December 31, 2018 and 2017, respectively, recognized as a liability for deferred rent. Future annual minimum lease payments under noncancellable operating leases with initial or remaining terms of one year or more as of December 31, 2018 were as follows (in thousands): Year Ending December 31, 2019 $ 8,315 2020 6,900 2021 5,224 2022 4,478 2023 2,839 Thereafter 502 Total minimum lease payments $ 28,258 Rent expense under operating leases for the years ended December 31, 2018, 2017 and 2016 was $7.6 million, $6.1 million and $5.6 million, respectively. Legal Proceedings We are involved in various legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows. Income Taxes Income Taxes 12 Months Ended Dec. 31, 2018 Income Tax Disclosure [Abstract] Income Taxes 13. The items comprising income tax expense are as follows: Year Ended December 31, 2018 2017 *As Adjusted 2016 *As Adjusted (in thousands) Provision for current income taxes Federal $ 12,414 $ 10,136 $ 12,207 State 4,155 1,791 3,044 Total provision for current income taxes 16,569 11,927 15,251 Provision (benefit) for deferred income taxes, net Federal 14,365 (3,865 ) 12,708 State 6,712 (3,816 ) 2,632 Total benefit for deferred income taxes, net 21,077 (7,681 ) 15,340 Total provision for income taxes $ 37,646 $ 4,246 $ 30,591 * Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. The following schedule reconciles the statutory Federal tax rate to the effective income tax rate: Year Ended December 31, 2018 2017 *As Adjusted 2016 *As Adjusted Federal statutory tax rate 21 % 35 % 35 % Increase (decrease) resulting from: State income taxes, net of Federal income tax benefit 6 % 4 % 4 % Nondeductible expenses 1 % 0 % 0 % Research credit, Federal benefit (2 %) (2 %) (1 %) Section 199 - Qualified production activities 0 % (1 %) (1 %) Stock-based compensation (4 %) (13 %) (7 %) Remeasurement of deferred tax liabilities 0 % (20 %) 0 % Effective income tax rate 22 % 3 % 30 % * Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. Our effective income tax rate was 22% and 3% for the years ended December 31, 2018 and 2017, respectively. The lower effective income tax rate for the year ended December 31, 2017 primarily resulted from the remeasurement of our deferred tax balance due to the Tax Act and the reduction in the excess tax benefits recognized related to stock-based compensation. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows: December 31, 2018 2017 *As Adjusted (in thousands) Deferred income tax assets (liabilities): Stock-based compensation $ 1,529 $ 945 Investment in Paycom Payroll Holdings, LLC (73,020 ) (51,821 ) Net operating losses 935 1,677 Federal tax credits 350 70 Noncurrent deferred income tax liabilities, net $ (70,206 ) $ (49,129 ) * Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. At December 31, 2018, we had net operating loss carryforwards for state income tax purposes of approximately $0.9 million which are available to offset future state taxable income that begin expiring in 2030. At December 31, 2018 and 2017, we had no material unrecognized tax benefits related to uncertain tax positions. We file income tax returns with the United States federal government and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2015. Selected Quarterly Financial Da Selected Quarterly Financial Data (unaudited) 12 Months Ended Dec. 31, 2018 Quarterly Financial Information Disclosure [Abstract] Selected Quarterly Financial Data (unaudited) 14. The following tables set forth selected quarterly statements of income data for the periods indicated (in thousands, except share and per share amounts): Quarter Ended March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018 Revenues $ 153,916 $ 128,800 $ 133,288 $ 150,332 Operating income $ 51,020 $ 43,037 $ 36,245 $ 43,413 Net income $ 41,160 $ 35,722 $ 28,769 $ 31,414 Earnings per share, basic $ 0.71 $ 0.62 $ 0.50 $ 0.55 Earnings per share, diluted $ 0.70 $ 0.61 $ 0.49 $ 0.54 Weighted average shares outstanding: Basic 57,793,023 57,837,312 57,726,790 57,491,280 Diluted 58,738,732 58,720,785 58,545,061 58,238,231 Quarter Ended March 31, 2017 *As Adjusted June 30, 2017 *As Adjusted September 30, 2017 *As Adjusted December 31, 2017 *As Adjusted Revenues $ 119,508 $ 98,227 $ 101,287 $ 114,025 Operating income $ 52,510 $ 18,792 $ 22,007 $ 36,401 Net income $ 33,694 $ 20,016 $ 20,910 $ 48,866 Earnings per share, basic $ 0.58 $ 0.34 $ 0.36 $ 0.84 Earnings per share, diluted $ 0.57 $ 0.34 $ 0.35 $ 0.83 Weighted average shares outstanding: Basic 57,307,187 57,898,914 58,003,222 58,100,141 Diluted 58,525,980 58,816,442 58,873,502 58,850,271 * Prior year amounts have been recast to reflect the adoption of ASU 2014-09. See Note 2 for description of adjustments. Subsequent Events Subsequent Events 12 Months Ended Dec. 31, 2018 Subsequent Events [Abstract] Subsequent Events 15. SUBSEQUENT EVENTS On January 17, 2019, we issued an aggregate of 512,069 restricted shares of common stock to our executive officers, certain non-executive, non-sales employees and non-executive sales management employees under the LTIP, consisting of 280,960 Market-Based Shares and 231,109 Time-Based Shares. Market-Based Shares will vest 50% on the first date that the Company’s TEV (calculated as defined in the applicable restricted stock award agreement) equals or exceeds $8.65 billion and 50% on the first date that the Company’s TEV equals or exceeds $9.35 billion, in each case provided that (i) such date occurs on or before the sixth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date. Time-Based Shares granted to non-executive employees will vest 25% on a specified initial vesting date and 25% on each of the first three anniversaries of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company or a subsidiary on the applicable vesting date. Time-Based Shares granted to executive officers and sales management employees will vest in three equal annual tranches beginning on a specified initial vesting date and thereafter on the first and second anniversaries of such date, provided that the executive officer or sales management employee is employed by, or providing services to, the Company on the applicable vesting date. On February 13, 2019, the Company recognized $14.9 million of compensation cost in connection with the vesting of 140,218 of the Market-Based Shares issued on January 17, 2019. Summary of Significant Accoun_2 Summary of Significant Accounting Policies (Policies) 12 Months Ended Dec. 31, 2018 Accounting Policies [Abstract] Basis of Presentation Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed in Note 2. All amounts and disclosures set forth in this Form 10-K have been updated to comply with this new standard, as indicated by the “as adjusted” footnote in applicable tables within the notes to the consolidated financial statements. Reclassifications Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on reported net income and did not result in any material change to operating cash flows. Adoption of New Pronouncements Adoption of New Pronouncements In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This authoritative guidance includes a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 also includes Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs – Contracts with Customers” (“ASC 340-40”), which codifies the guidance on other assets and deferred costs relating to Impact on Previously Reported Results The provisions of ASU 2014-09 do not materially impact the timing or amount of revenue we recognize. The primary impact of adopting the new standard is the manner in which we account for certain costs to obtain new contracts (i.e., selling and commission costs) and costs to fulfill contracts (i.e., costs related to upfront implementation activities performed), which we had previously expensed as incurred. We also determined that the nonrefundable upfront fee charged to our clients, coupled with the option to renew, represents an implied performance obligation in the form of a material right. However, as these fees are deferred and recognized ratably over the ten-year estimated client life, consistent with our prior accounting policy, there is no change in revenue recognition. The following table presents a recast of selected consolidated statement of income line items after giving effect to the adoption of ASU 2014-09: Year Ended December 31, 2017 Year Ended December 31, 2016 As previously reported Adjustments As Adjusted As previously reported Adjustments As Adjusted (in thousands, except per share amounts) Administrative expenses Sales and marketing $ 150,512 $ (39,666 ) $ 110,846 $ 119,258 $ (33,897 ) $ 85,361 General and administrative $ 91,647 $ (11,419 ) $ 80,228 $ 69,046 $ (9,872 ) $ 59,174 Operating income $ 78,625 $ 51,085 $ 129,710 $ 57,971 $ 43,769 $ 101,740 Provision for income taxes $ 9,840 $ (5,594 ) $ 4,246 $ 13,403 $ 17,188 $ 30,591 Net income $ 66,807 $ 56,679 $ 123,486 $ 43,840 $ 26,581 $ 70,421 Earnings per share, basic $ 1.15 $ 0.98 $ 2.13 $ 0.76 $ 0.45 $ 1.21 Earnings per share, diluted $ 1.13 $ 0.97 $ 2.10 $ 0.74 $ 0.45 $ 1.19 The following table presents a recast of selected consolidated balance sheet line items after giving effect to the adoption of ASU 2014-09: December 31, 2017 As previously reported Adjustments As Adjusted (in thousands) Assets Deferred contract costs $ — $ 26,403 $ 26,403 Deferred income tax assets, net $ 3,294 $ (3,294 ) $ — Long-term deferred contract costs $ — $ 171,865 $ 171,865 Liabilities and Stockholders' Equity Deferred income tax liabilities, net $ — $ 49,129 $ 49,129 Additional paid in capital $ 137,234 $ 24,575 $ 161,809 Retained earnings $ 137,255 $ 121,270 $ 258,525 Total stockholders' equity $ 135,402 $ 145,845 $ 281,247 The following table presents a recast of selected consolidated statement of cash flows line items after giving effect to the adoption of ASU 2014-09: Year Ended December 31, 2017 Year Ended December 31, 2016 As previously reported Adjustments As Adjusted As previously reported Adjustments As Adjusted (in thousands) Cash flows from operating activities Net income $ 66,807 $ 56,679 $ 123,486 $ 43,840 $ 26,581 $ 70,421 Stock-based compensation expense 38,542 (2,466 ) 36,076 22,471 (1,750 ) 20,721 Deferred income taxes, net (2,087 ) (5,594 ) (7,681 ) (1,848 ) 17,188 15,340 Deferred contract costs — (48,619 ) (48,619 ) — (42,019 ) (42,019 ) Net cash provided by operating activities $ 130,149 $ — $ 130,149 $ 98,818 $ — $ 98,818 Use of Estimates Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Segment Information Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Inventory Inventory Our inventory consists of two types of time clocks, and related clock attachments, sold to clients as part of our time and attendance services. Inventory is stated at the lower of cost or market with cost determined using the first-in first-out (FIFO) cost method. Time clocks are purchased as finished goods from a third party and as such we do not have any inventory classified as raw materials or work in process inventory. Rental clocks are issued to clients under month-to-month operating leases and are classified as property and equipment. The Company’s inventory obsolescence reserve was $0 as of December 31, 2018, 2017 and 2016, respectively. Property and Equipment Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2018, 2017 and 2016, we incurred interest costs of $1.6 million, $1.7 million and $1.3 million, respectively. For the years ended December 31, 2018, 2017 and 2016, interest costs of $0.8 million, $0.8 million and $0.4 million, respectively, were capitalized. Internal Use Software Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and The total capitalized payroll costs related to internal use computer software projects was $22.0 million and $15.8 million during the years ended December 31, 2018 and 2017, respectively, are included in property and equipment. Amortization expense of capitalized software costs were $12.5 million, $7.0 million and $3.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. Derivatives Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. The Company has not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recognized. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date and determined there was no impairment as of June 30, 2018. For the years ended December 31, 2018, 2017 and 2016, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2018, 2017 and 2016. Funds Held for Clients and Client Funds Obligation Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. As of December 31, 2018 and 2017, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item on the balance sheet. These available-for-sale securities are recorded on the balance sheet at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. On February 13, 2018, we announced that our Board of Directors authorized the repurchase of up to an additional $100.0 million of common stock. Most recently, on November 20, 2018, we announced that our Board of Directors authorized the repurchase of up to an additional $150.0 million of our common stock. As of December 31, 2018, there was $162.0 million available for repurchases. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations. During the year ended December 31, 2018, we repurchased an aggregate of 1,108,885 shares of our common stock at an average cost of $113.12 per share, including 186,165 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. During the year ended December 31, 2017, we repurchased an aggregate of 1,238,577 shares of our common stock at an average cost of $72.45 per share, including 464,302 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted common stock. Revenue Recognition Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales tax and other applicable taxes are excluded from revenues. The following table disaggregates revenue by recurring and implementation and other revenues, which represent the major categories of revenues: Year Ended December 31, 2018 2017 2016 (in thousands) Revenues Recurring $ 557,255 $ 425,424 $ 323,548 Implementation and other 9,081 7,623 5,593 Total revenues $ 566,336 $ 433,047 $ 329,141 Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications. The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups. Implementation and Other Revenues Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations. Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period (i.e. the ten-year estimated client life). Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks. Contract Balances Contract Balances The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. We have elected to apply the practical expedient not to disclose the value of unsatisfied performance obligations for contracts that are less than one year in length. For these contracts, we determined that the core, non-material right, performance obligations are generally satisfied in full by the end of each reporting period as most of our contracts with clients start at the beginning of a calendar month. However, this expedient cannot be applied to initial 30-day contracts with a client that also contain an implied performance obligation in the form of a material right as the material right performance obligation is being recognized over the expected client life which exceeds one year. For the material right performance obligation, as discussed above, we defer the amounts allocated and recognize them ratably over the estimated client life of ten years. Fin
Document and Entity Information Document and Entity Information - USD ($) $ in Billions 12 Months Ended Dec. 31, 2019 Feb. 04, 2020 Jun. 30, 2019 Cover [Abstract] Document Type 10-K Amendment Flag false Document Period End Date Dec. 31, 2019 Document Fiscal Year Focus 2019 Document Fiscal Period Focus FY Trading Symbol PAYC Entity Registrant Name Paycom Software, Inc. Entity Central Index Key 0001590955 Current Fiscal Year End Date --12-31 Entity Well-known Seasoned Issuer Yes Entity Current Reporting Status Yes Entity Voluntary Filers No Entity Filer Category Large Accelerated Filer Entity Small Business false Entity Emerging Growth Company false Entity Shell Company false Entity Common Stock, Shares Outstanding 58,846,011 Entity Public Float $ 11.1 Title of 12(b) Security Common Stock, $0.01 par value Security Exchange Name NYSE Entity File Number 001-36393 Entity Tax Identification Number 80-0957485 Entity Address, Address Line One 7501 W. Memorial Road Entity Address, City or Town Oklahoma City Entity Address, State or Province OK Entity Incorporation, State or Country Code DE Entity Address, Postal Zip Code 73142 City Area Code 405 Local Phone Number 722-6900 Entity Interactive Data Current Yes Document Annual Report true Document Transition Report false Documents Incorporated by Reference Portions of the registrant’s Definitive Proxy Statement on Schedule 14A to be furnished to stockholders in connection with its 2020 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K. Consolidated Balance Sheets Consolidated Balance Sheets - USD ($) $ in Thousands Dec. 31, 2019 Dec. 31, 2018 Current assets: Cash and cash equivalents $ 133,667 $ 45,718 [1] Accounts receivable 9,298 3,414 Prepaid expenses 13,561 7,658 Inventory 1,158 797 Income tax receivable 4,020 3,962 Deferred contract costs 46,618 35,286 Current assets before funds held for clients 208,322 96,835 Funds held for clients 1,662,778 967,787 Total current assets 1,871,100 1,064,622 Property and equipment, net 238,458 176,962 Goodwill 51,889 51,889 Long-term deferred contract costs 292,134 225,459 Other assets 33,336 2,994 Total assets 2,486,917 1,521,926 Current liabilities: Accounts payable 5,051 6,288 Accrued commissions and bonuses 12,343 10,671 Accrued payroll and vacation 14,870 10,741 Deferred revenue 11,105 8,980 Current portion of long-term debt 1,775 1,775 Accrued expenses and other current liabilities 45,600 22,440 Current liabilities before client funds obligation 90,744 60,895 Client funds obligation 1,662,778 967,787 Total current liabilities 1,753,522 1,028,682 Deferred income tax liabilities, net 91,217 70,206 Long-term deferred revenue 65,139 55,671 Net long-term debt, less current portion 30,858 32,614 Other long-term liabilities 19,553 Total long-term liabilities 206,767 158,491 Total liabilities 1,960,289 1,187,173 Commitments and contingencies (Note 12) Stockholders' equity: Common stock, $0.01 par value (100,000 shares authorized, 61,350 and 60,747 shares issued at December 31, 2019 and 2018, respectively; 57,660 and 57,277 shares outstanding at December 31, 2019 and 2018, respectively) 613 607 Additional paid in capital 257,501 203,680 Retained earnings 576,166 395,590 Treasury stock, at cost (3,689 and 3,470 shares at December 31, 2019 and 2018, respectively) (307,652) (265,124) Total stockholders' equity 526,628 334,753 Total liabilities and stockholders' equity $ 2,486,917 $ 1,521,926 [1] Amounts have been adjusted to reflect the adoption of Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” See Note 2 for a summary of reclassifications and adjustments. Consolidated Balance Sheets (Pa Consolidated Balance Sheets (Parenthetical) - $ / shares Dec. 31, 2019 Dec. 31, 2018 Statement Of Financial Position [Abstract] Common stock, par value $ 0.01 $ 0.01 Common stock, shares authorized 100,000,000 100,000,000 Common stock, shares issued 61,350,000 60,747,000 Common stock, shares outstanding 57,660,000 57,277,000 Treasury stock, shares 3,689,000 3,470,000 Consolidated Statements of Inco Consolidated Statements of Income - USD ($) shares in Thousands, $ in Thousands 12 Months Ended Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Revenues Total revenues $ 737,671 $ 566,336 $ 433,047 Cost of revenues Operating expenses 89,336 76,231 62,438 Depreciation and amortization 20,411 14,532 9,590 Total cost of revenues 109,747 90,763 72,028 Administrative expenses Sales and marketing 179,286 143,881 110,846 Research and development 73,080 46,247 30,430 General and administrative 127,534 96,605 80,228 Depreciation and amortization 21,800 15,125 9,805 Total administrative expenses 401,700 301,858 231,309 Total operating expenses 511,447 392,621 303,337 Operating income 226,224 173,715 129,710 Interest expense (940) (766) (911) Other income (expense), net 803 1,762 (1,067) Income before income taxes 226,087 174,711 127,732 Provision for income taxes 45,511 37,646 4,246 Net income $ 180,576 $ 137,065 $ 123,486 Earnings per share, basic $ 3.14 $ 2.37 $ 2.13 Earnings per share, diluted $ 3.09 $ 2.34 $ 2.10 Weighted average shares outstanding: Basic 57,561 57,711 57,839 Diluted 58,395 58,582 58,790 Recurring [Member] Revenues Total revenues $ 724,428 $ 557,255 $ 425,424 Implementation and Other [Member] Revenues Total revenues $ 13,243 $ 9,081 $ 7,623 Consolidated Statements of Shar Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands Total Common Stock [Member] Additional Paid in Capital [Member] Retained Earnings [Member] Treasury Stock [Member] Beginning balance, value at Dec. 31, 2016 $ 205,693 $ 585 $ 120,027 $ 135,039 $ (49,958) Beginning balance, shares at Dec. 31, 2016 58,453,000 1,122,000 Vesting of restricted stock $ 16 (16) Vesting of restricted stock, shares 1,696,000 Stock-based compensation 41,798 41,798 Repurchases of common stock (89,730) $ (89,730) Repurchases of common stock, shares 1,239,000 Net income 123,486 123,486 Ending balance, value at Dec. 31, 2017 281,247 $ 601 161,809 258,525 $ (139,688) Ending balance, shares at Dec. 31, 2017 60,149,000 2,361,000 Vesting of restricted stock $ 6 (6) Vesting of restricted stock, shares 598,000 Stock-based compensation 41,877 41,877 Repurchases of common stock (125,436) $ (125,436) Repurchases of common stock, shares 1,109,000 Net income 137,065 137,065 Ending balance, value at Dec. 31, 2018 334,753 $ 607 203,680 395,590 $ (265,124) Ending balance, shares at Dec. 31, 2018 60,747,000 3,470,000 Vesting of restricted stock $ 6 (6) Vesting of restricted stock, shares 603,000 Stock-based compensation 53,827 53,827 Repurchases of common stock (42,528) $ (42,528) Repurchases of common stock, shares 219,000 Net income 180,576 180,576 Ending balance, value at Dec. 31, 2019 $ 526,628 $ 613 $ 257,501 $ 576,166 $ (307,652) Ending balance, shares at Dec. 31, 2019 61,350,000 3,689,000 Consolidated Statements of Cash Consolidated Statements of Cash Flows - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 Cash flows from operating activities: Net income $ 180,576 $ 137,065 [1] $ 123,486 [1] Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 42,211 29,657 [1] 19,395 [1] Accretion of discount on available-for-sale securities (940) (1,112) [1] (451) [1] Loss on disposition of property and equipment [1] 21 Amortization of debt discount and debt issuance costs 35 32 [1] 117 [1] Stock-based compensation expense 47,268 36,576 [1] 36,076 [1] Loss on early repayment of debt [1] 923 Cash paid for derivative settlement (81) (188) [1] (24) [1] (Gain)/loss on derivative 1,456 (479) [1] 673 [1] Deferred income taxes, net 21,011 21,077 [1] (7,681) [1] Changes in operating assets and liabilities: Accounts receivable (5,884) (1,838) [1] (237) [1] Prepaid expenses (5,903) (2,676) [1] (507) [1] Inventory (403) (306) [1] 462 [1] Other assets (3,555) (762) [1] (241) [1] Deferred contract costs (76,204) (60,730) [1] (48,619) [1] Accounts payable (221) 1,079 [1] 79 [1] Income taxes, net (58) 3,085 [1] (6,355) [1] Accrued commissions and bonuses 1,672 1,086 [1] 1,582 [1] Accrued payroll and vacation 4,129 3,726 [1] 2,246 [1] Deferred revenue 11,593 13,027 [1] 11,913 [1] Accrued expenses and other current liabilities 7,561 6,498 [1] (2,709) [1] Net cash provided by operating activities 224,263 184,817 [1] 130,149 [1] Cash flows from investing activities: Purchase of short-term investments from funds held for clients (195,811) (145,011) [1] (66,235) [1] Proceeds from maturities of short-term investments from funds held for clients 69,200 155,500 [1] 141,205 [1] Purchases of property and equipment (92,934) (59,906) [1] (59,389) [1] Net cash provided by (used in) investing activities (219,545) (49,417) [1] 15,581 [1] Cash flows from financing activities: Proceeds from issuance of long-term debt [1] 40,940 Repurchases of common stock [1] (105,188) (56,880) Withholding taxes paid related to net share settlements (42,528) (20,248) [1] (32,850) [1] Payments on long-term debt (1,775) (888) [1] (35,335) [1] Net change in client funds obligation 694,991 (121,414) [1] 230,957 [1] Debt extinguishment costs [1] (823) Payment of debt issuance costs (16) (58) [1] (344) [1] Net cash provided by (used in) financing activities 650,672 (247,796) [1] 145,665 [1] Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents 655,390 (112,396) [1] 291,395 [1] Cash, cash equivalents, restricted cash and restricted cash equivalents Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period [1] 986,464 1,098,860 807,465 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period 1,641,854 986,464 [1] 1,098,860 [1] Cash and cash equivalents 133,667 45,718 [1] 46,077 [1] Restricted cash included in funds held for clients 1,508,187 940,746 [1] 1,052,783 [1] Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized 891 708 [1] 791 [1] Cash paid for income taxes 24,566 13,511 [1] 18,332 [1] Noncash investing and financing activities: Purchases of property and equipment, accrued but not paid 7,451 1,759 [1] 6,686 [1] Stock-based compensation for capitalized software $ 4,757 $ 3,722 [1] $ 3,285 [1] [1] Amounts have been adjusted to reflect the adoption of Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” See Note 2 for a summary of reclassifications and adjustments. Organization and Description of Organization and Description of Business 12 Months Ended Dec. 31, 2019 Accounting Policies [Abstract] Organization and Description of Business 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Paycom Software, Inc. (“Software”) and its wholly owned subsidiaries (collectively, the “Company”) is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we”, “our”, “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. Summary of Significant Accounti Summary of Significant Accounting Policies 12 Months Ended Dec. 31, 2019 Accounting Policies [Abstract] Summary of Significant Accounting Policies 2. Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Reclassifications Certain prior period amounts have been reclassified in connection with the adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Restricted Cash” (“ASU 2016-18”) as discussed below. In addition, in the consolidated balance sheets, we combined the line items “Intangible assets, net” and “Other assets” in the prior period in order to conform to the current period presentation. Adoption of New Pronouncements In January 2019, we adopted ASU No. 2016-02, “Leases (Topic 842)” using the modified retrospective approach. Under this adoption method, we have not restated comparative prior periods and have carried forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms. See Note 5 for a discussion of our adoption of this standard. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. In addition, the amendments provide that disclosure requirements related to the analysis of stockholders' equity are expanded for interim financial statements. An analysis of the changes in each caption of stockholders' equity presented in the balance sheet is provided in the consolidated statement of stockholders’ equity. During the three months ended June 30, 2019, we adopted ASU 2016-18, which was effective on January 1, 2018. This guidance requires that the consolidated statements of cash flows explain the change during the reporting period of the totals of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. Accordingly, we applied the guidance using the retrospective transition method to each period presented, which adjusted the consolidated statements of cash flows to include restricted cash held to satisfy client funds obligations, as a component of cash, cash equivalents, restricted cash and restricted cash equivalents. Impact on Previously Reported Results As noted above, we adopted ASU 2016-18 during the three months ending June 30, 2019. We assessed the materiality of this presentation on prior periods’ consolidated financial statements in accordance with the SEC Staff Accounting Bulletin No. 99, “Materiality”, codified in Accounting Standards Codification (“ASC”) Topic 250, “Accounting Changes and Error Corrections.” Based on this assessment, we concluded that the correction is not material to any previously issued interim financial statements. The correction had no impact on our consolidated statements of income or consolidated balance sheets in previously issued consolidated financial statements. We will conform presentation of previously reported consolidated statements of cash flows information in future filings. The following table presents the consolidated statements of cash flows line items after giving effect to the adoption of ASU 2016-18: Year Ended December 31, 2018 Year Ended December 31, 2017 As Previously Reported ASU 2016-18 Adjustments As Adjusted As Previously Reported ASU 2016-18 Adjustments As Adjusted Cash flows from operating activities Net cash provided by operating activities $ 184,817 $ — $ 184,817 $ 130,149 $ — $ 130,149 Cash flows from investing activities Purchase of short-term investments from funds held for clients (145,011 ) — (145,011 ) (66,235 ) — (66,235 ) Proceeds from maturities of short-term investments from funds held for clients 155,500 — 155,500 141,205 — 141,205 Net change in funds held for clients 112,037 (112,037 ) - (305,476 ) 305,476 - Purchases of property and equipment (59,906 ) — (59,906 ) (59,389 ) — (59,389 ) Net cash provided by (used in) investing activities 62,620 (112,037 ) (49,417 ) (289,895 ) 305,476 15,581 Cash flows from financing activities Net cash used in financing activities (247,796 ) — (247,796 ) 145,665 — 145,665 Total increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents (359 ) (112,037 ) (112,396 ) (14,081 ) 305,476 291,395 Cash, cash equivalents, restricted cash and restricted cash equivalents Beginning of period 46,077 1,052,783 1,098,860 60,158 747,307 807,465 End of period $ 45,718 $ 940,746 $ 986,464 $ 46,077 $ 1,052,783 $ 1,098,860 Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer, in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Land improvements 15 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2019, 2018 and 2017, we incurred interest costs of $1.6 million, $1.6 million and $1.7 million, respectively. For the years ended December 31, 2019, 2018 and 2017, interest costs of $0.6 million, $0.8 million and $0.8 million, respectively, were capitalized. Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and three-year The total capitalized payroll costs related to internal use computer software projects were $30.4 million and $22.0 million during the years ended December 31, 2019 and 2018, respectively, and are included in property and equipment. Amortization expense of capitalized software costs were $19.0 million, $12.5 million and $7.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. The Company has not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recognized. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date. We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of June 30, 2019. For the years ended December 31, 2019, 2018 and 2017, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2019, 2018 and 2017. Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. As of December 31, 2019 and 2018, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item on the balance sheet. These available-for-sale securities are recorded on the balance sheet at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in November 2018, our Board of Directors authorized the repurchase of up to $150.0 million of our common stock. As of December 31, 2019 there was $119.4 million available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations. The current stock repurchase plan will expire on November 19, 2020. During the year ended December 31, 2019, we repurchased an aggregate of 219,764 shares of our common stock at an average cost of $193.51 per share to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. During the year ended December 31, 2018, we repurchased an aggregate of 1,108,885 shares of our common stock at an average cost of $113.12 per share, including 186,165 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales and other applicable taxes are excluded from revenues. Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications. The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups. Implementation and Other Revenues Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations. Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period ( i.e. Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks. Contract Balances The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. Changes in deferred revenue related to material right performance obligations for the years ended December 31, 2019 and 2018 were as follows: Year Ended December 31, 2019 2018 Balance, beginning of period $ 64,651 $ 51,624 Deferral of revenue 23,288 20,925 Recognition of unearned revenue (11,695 ) (7,898 ) Balance, end of period $ 76,244 $ 64,651 We expect to recognize $11.1 million of deferred revenue related to material right performance obligations in 2020, $11.0 million in 2021, and $54.1 million of such deferred revenue thereafter Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations. The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach, and are capitalized and amortized over the expected period of benefit, which we have determined to be the estimated client relationship of ten years. The expected period of benefit has been determined to be the estimated life of the client relationship primarily because we incur no new costs to obtain, or costs to fulfill, a contract upon renewal of such contract. Additional commission costs may be incurred when an existing client purchases additional applications; however, these commission costs relate solely to the additional applications purchased and are not related to contract renewal. Furthermore, additional fulfillment costs associated with existing clients purchasing additional applications are minimized by our seamless single-database platform. These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and costs to fulfill a contract are included in the “sales and marketing” and “general and administrative” line items in the accompanying consolidated statements of income. The following table presents the asset balance and related amortization expense for these contract costs: As of and for the Year Ended December 31, 2019 Beginning Capitalization Ending Balance of Costs Amortization Balance Costs to obtain a contract $ 158,989 $ 60,669 $ (24,694 ) $ 194,964 Costs to fulfill a contract $ 101,756 $ 58,303 $ (16,271 ) $ 143,788 As of and for the Year Ended December 31, 2018 Beginning Capitalization Ending Balance of Costs Amortization Balance Costs to obtain a contract $ 126,207 $ 51,858 $ (19,076 ) $ 158,989 Costs to fulfill a contract $ 72,061 $ 41,224 $ (11,529 ) $ 101,756 Cost of Revenues Our costs and expenses applicable to total revenues represent operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation and amortization costs. Advertising Costs Advertising costs are expensed the first time that advertising takes place. Advertising costs for the years ended December 31, 2019, 2018 and 2017 were $25.9 million, $16.8 million and $7.9 million, respectively. Sales Taxes We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are recognized on a net basis, and therefore, excluded from revenues. For the years ended December 31, 2019, 2018 and 2017, sales taxes collected were $8.3 million, $6.5 million and $5.0 million, respectively. Employee Stock-Based Compensation Time-based stock compensation awards to employees are recognized on a straight-line basis over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Market-based stock compensation awards to employees are recognized on a straight-line basis over the applicable estimated vesting period as compensation costs in the consolidated statements of income based on their fair value as of the date of the grant unless vesting occurs sooner at which time the remaining respective unrecognized compensation cost is recognized. Employee Stock Purchase Plan An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recognized at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period. Income Taxes Our consolidated financial statements include a provision for income taxes incurred for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We file income tax returns in the United States and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that do not meet this threshold. Our policy is to recognize interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. We file income tax returns with the United States federal government and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2016. Seasonality Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. Recently Issued Accounting Pronouncements In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact that this guidance will have on our financial position and results of operations, if any. In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance will not have a material impact on the consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits. This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance will not have a material impact on the consolidated financial statements. Property and Equipment Property and Equipment 12 Months Ended Dec. 31, 2019 Property Plant And Equipment [Abstract] Property and Equipment 3. Property and equipment and accumulated depreciation and amortization were as follows: December 31, 2019 2018 Property and equipment Buildings $ 101,707 $ 101,421 Software and capitalized software costs 99,125 66,634 Computer equipment 56,879 39,492 Rental clocks 20,836 16,950 Furniture, fixtures and equipment 18,311 16,474 Other 6,242 1,348 303,100 242,319 Less: accumulated depreciation and amortization (124,950 ) (82,969 ) 178,150 159,350 Construction in progress 31,274 8,589 Land 29,034 9,023 Property and equipment, net $ 238,458 $ 176,962 We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40. For the years ended December 31, 2019 and 2018, we capitalized $30.4 million and $22.0 million, respectively, of computer software development costs related to software developed for internal use. Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases. We capitalize interest incurred for indebtedness related to construction in progress. For the years ended December 31, 2019, 2018 and 2017, we incurred interest costs of $1.6 million, $1.6 million and $1.7 million, respectively. For the years ended December 31, 2019, 2018 and 2017, interest cost of $0.6 million, $0.8 million and $0.8 million, respectively, was capitalized. Included in the construction in progress balance at December 31, 2019 and 2018 is $2.2 million and $0.1 million in retainage, respectively. Depreciation and amortization expense for property and equipment, net was $42.0 million, $29.4 million and $18.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Goodwill and Intangible Assets, Goodwill and Intangible Assets, Net 12 Months Ended Dec. 31, 2019 Goodwill And Intangible Assets Disclosure [Abstract] Goodwill and Intangible Assets, Net 4. As of both December 31, 2019 and 2018, goodwill totaled $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of either June 30, 2019 or 2018. As of December 31, 2019 and 2018, there were no indicators of impairment. All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization. The components of intangible assets are as follows: December 31, 2019 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Trade name 2.5 $ 3,194 (2,662 ) 532 Total $ 3,194 $ (2,662 ) $ 532 December 31, 2018 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Trade name 3.5 $ 3,194 $ (2,449 ) $ 745 Total $ 3,194 $ (2,449 ) $ 745 Amortization of intangible assets for the years ended December 31, 2019, 2018 and 2017 was $0.2 million, $0.2 million and $0.9 million, respectively. The estimated amortization expense for our existing intangible assets for the remaining applicable period is as follows: Year Ending December 31, Amortization 2020 213 2021 213 2022 106 Total $ 532 Leases Leases 12 Months Ended Dec. 31, 2019 Leases [Abstract] Leases 5. LEASES In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The purpose of this new guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities in the consolidated balance sheets as well as providing additional disclosure requirements related to leasing arrangements. The new guidance was effective for us beginning January 1, 2019, which we adopted using a modified retrospective method and the transition relief guidance provided by the FASB in ASU 2018-11 “Leases: Targeted Improvement”. Under this adoption method, we have not restated comparative prior periods and have carried forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms. Based on our portfolio of leases at January 1, 2019, $21.6 million of lease assets and liabilities were recognized in our consolidated balance sheets, which related to operating leases for real estate. Under the transition relief guidance, we have elected the lease vs. non-lease components practical expedient relating to the asset class of real estate, the short-term lease exemption practical expedient and the package of practical expedients. In connection with the adoption of this standard, we updated our control framework and implemented changes to our existing controls to account for leases. The Company’s leases primarily consist of noncancellable operating leases for office space with contractual terms expiring from 2020 to 2025. All of our leases are operating leases and, as a lessee, we have not entered into any sublease agreements. The lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in an amount that appears, at the inception of the lease, to be reasonably assured. While some of our leases include an option to extend the lease up to five years, it is not reasonably certain that any such options will be exercised due, in part, to the dynamic nature of our sales force and rate of growth. Some of our leases contain termination options that are not reasonably certain to be exercised. However, if a termination option is exercised, we remeasure the lease asset in the consolidated balance sheets using the updated lease period. None of our leases contain residual value guarantees, substantial restrictions or covenants. Lease assets of $27.1 million as of December 31, 2019 were included in Other assets in our consolidated balance sheets, which included a $1.5 million reduction to Other assets for deferred rent. When a lease contains a predetermined fixed escalation of the minimum rent, we recognize the related lease expense on a straight-line basis and record the difference between the lease expense and the amount payable under the lease as an adjustment to the right-of-use asset. Short-term lease liabilities of $10.3 million as of December 31, 2019 were included in Accrued expenses and other current liabilities in our consolidated balance sheets. In addition, long-term lease liabilities of $18.4 million as of December 31, 2019 were recognized in Other long-term liabilities in our consolidated balance sheets. Rent expense under operating leases for the years ended December 31, 2019, 2018 and 2017 was $10.1 million, $7.6 million and $6.1 million, respectively. Cash paid for amounts relating to our operating leases was $11.8 million for the year ended December 31, 2019. Because no implicit discount rates for our leases could be readily determined, we elected to use an estimated incremental borrowing rate to determine the present value of our leases. The weighted average discount rate related to our portfolio of leases at December 31, 2019 was 3.9%. The average remaining lease term for our leases was 2.8 years as of December 31, 2019. The undiscounted cash flows for the future annual maturities of our operating lease liabilities and the reconciliation of those total undiscounted cash flows to our lease liabilities as of December 31, 2019 were as follows: 2020 $ 10,462 2021 7,375 2022 6,071 2023 4,474 2024 2,063 Thereafter 301 Total undiscounted cash flows $ 30,746 Present value discount (2,061 ) Lease liabilities $ 28,685 The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced. As of December 31, 2019, the present value of the operating lease liabilities that had not yet commenced was $4.0 million. Long-Term Debt Long-Term Debt 12 Months Ended Dec. 31, 2019 Debt Disclosure [Abstract] Long-Term Debt 6 . Our long-term debt consisted of the following: December 31, 2019 2018 Net term note to bank due September 7, 2025 $ 32,633 $ 34,389 Total long-term debt (including current portion) 32,633 34,389 Less: Current portion (1,775 ) (1,775 ) Total long-term debt, net $ 30,858 $ 32,614 On December 7, 2017, we entered into a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”), pursuant to which JPMorgan Chase Bank, N.A., Bank of America, N.A. and Kirkpatrick Bank made certain term loans to us (the “Term Loans”). Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our headquarters property. The Term Loans mature on September 7, 2025 and bear interest, at our option, at either (a) a prime rate plus 1.0% or (b) an adjusted LIBOR rate for the interest period in effect for such Term Loan plus 1.5%. As of December 31, 2019, our indebtedness of $30.9 million consisted solely of Term Loans made under the Term Credit Agreement. Unamortized debt issuance costs of $0.2 million as of both December 31, 2019 and 2018, are presented as a direct deduction from the carrying amount of the debt liability. Under the Term Credit Agreement, we are subject to two material financial covenants, which require us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. As of December 31, 2019, we were in compliance with these covenants. On February 12, 2018, we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provided for a senior secured revolving credit facility (the “Facility”) in the aggregate principal amount of $50.0 million (the “Revolving Commitment”), which could be increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Facility includes a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. The Facility was scheduled to mature on February 12, 2020. On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, Wells Fargo Bank, N.A., was added as a lender and the Revolving Commitment was increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions. The scheduled maturity date of the Facility was extended to April 15, 2022. Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%. The proceeds of the loans and letters of credit under the Facility are to be used only for our general business purposes and working capital. Letters of credit are to be issued only to support our business operations. As of December 31, 2019, we did not have any borrowings outstanding under the Facility. Under the Revolving Credit Agreement, we are required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. Additionally, the Revolving Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make certain investments, dispose of assets, enter into certain transactions, including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions for a facility of the size and type of the Facility. As of December 31, 2019, we were in compliance with all covenants related to the Revolving Credit Agreement. As of December 31, 2019 and 2018, the carrying value of our total long-term debt approximated its fair value as of such date. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities. Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2019 are as follows: Year Ending December 31, 2020 $ 1,775 2021 1,775 2022 1,775 2023 1,775 2024 1,775 Thereafter 23,963 Total $ 32,838 Derivative Instruments Derivative Instruments 12 Months Ended Dec. 31, 2019 Derivative Instruments And Hedging Activities Disclosure [Abstract] Derivative Instruments 7 . In December 2017, we entered into a floating-to-fixed interest rate swap agreement to limit the exposure to floating interest rate risk related to the Term Loans. We do not hold derivative instruments for trading or speculative purposes. The interest rate swap agreement effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We account for our derivatives under ASC Topic 815, “Derivatives and Hedging,” and recognize all derivative instruments on the consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. See Note 8, “Fair Value of Financial Instruments”. We have elected not to designate our interest rate swap as a hedge; therefore, changes in the fair value of the derivative instrument are being recognized in our consolidated statements of income within Other income (expense), net. The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is based on a one-month LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million. Under the terms of the interest rate swap agreement, we will receive quarterly variable interest payments based on the LIBOR rate and will pay interest at a fixed rate. The interest rate swap agreement has a maturity date of September 7, 2025. For the years ended December 31, 2019 and 2018, we recognized a loss of $1.4 million and gain of $0.7 million, respectively, for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income. Fair Value of Financial Instrum Fair Value of Financial Instruments 12 Months Ended Dec. 31, 2019 Fair Value Disclosures [Abstract] Fair Value of Financial Instruments 8 . Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client fund obligation approximates fair value because of the short-term nature of the instruments. See Note 6 for discussion of the fair value of our debt. As discussed in Note 2, we invest the funds held for clients in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit, and classify these items as cash and cash equivalents within the funds held for clients line item in the consolidated balance sheets. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item. These available-for-sale securities are recognized in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. As of December 31, 2019 and 2018, all available-for-sale securities and certificates of deposit were due in one year or less. As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap. The interest rate swap is measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs recognized at fair value. The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: • Level 1 – Observable inputs such as quoted prices in active markets • Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active • Level 3 – Unobservable inputs in which there is little or no market data Included in the following table are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018: December 31, 2019 Level 1 Level 2 Level 3 Total Assets: Commercial paper $ — $ 79,591 $ — $ 79,591 Certificates of deposit $ — $ 75,000 $ — $ 75,000 Liabilities: Interest rate swap $ — $ 1,358 $ — $ 1,358 December 31, 2018 Level 1 Level 2 Level 3 Total Assets: Commercial paper $ — $ 21,041 $ — $ 21,041 Certificates of deposit $ — $ 6,000 $ — $ 6,000 Interest rate swap $ — $ 17 $ — $ 17 Employee Savings Plan and Emplo Employee Savings Plan and Employee Stock Purchase Plan 12 Months Ended Dec. 31, 2019 Compensation Related Costs [Abstract] Employee Savings Plan and Employee Stock Purchase Plan 9 . Employees over the age of 18 who have completed ninety days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby the Company matches the contribution of our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions amounted to $6.7 million, $5.3 and $4.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum of $25,000. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares. During the years ended December 31, 2019, 2018 and 2017, eligible employees purchased 46,662, 59,041 and 76,728 shares, respectively, of the Company’s common stock under the ESPP. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $1.6 million, $1.3 million and $0.8 million for the years ended Earnings Per Share Earnings Per Share 12 Months Ended Dec. 31, 2019 Earnings Per Share [Abstract] Earnings Per Share 10 . Basic earnings per share is based on the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested. In accordance with ASC Topic 260, “Earnings Per Share,” the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The unvested shares of restricted stock granted in 2015 are considered participating securities, while all other unvested shares of restricted stock are not considered participating securities. The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share: Year Ended December 31, 2019 2018 2017 Numerator: Net income $ 180,576 $ 137,065 $ 123,486 Less: income allocable to participating securities (81 ) (159 ) (315 ) Income allocable to common shares $ 180,495 $ 136,906 $ 123,171 Add back: undistributed earnings allocable to participating securities 81 159 315 Less: undistributed earnings reallocated to participating securities (80 ) (156 ) (310 ) Numerator for diluted earnings per share $ 180,496 $ 136,909 $ 123,176 Denominator: Basic weighted average shares outstanding 57,561 57,711 57,839 Dilutive effect of unvested restricted stock 834 871 951 Diluted weighted average shares outstanding 58,395 58,582 58,790 Earnings per share: Basic $ 3.14 $ 2.37 $ 2.13 Diluted $ 3.09 $ 2.34 $ 2.10 Stockholders' Equity and Stock- Stockholders' Equity and Stock-Based Compensation 12 Months Ended Dec. 31, 2019 Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] Stockholders' Equity and Stock-Based Compensation 1 1 . We have historically issued shares of restricted stock under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”) that are subject to either time-based vesting conditions or market-based vesting conditions. The market-based vesting conditions are based on the Company’s total enterprise value (“TEV”) exceeding certain specified thresholds. Compensation expense related to the issuance of shares with time-based vesting conditions (“Time-Based Shares”) is measured based on the fair value of the award on the grant date and recognized over the requisite service period on a straight-line basis. Compensation expense related to the issuance of shares with market-based vesting conditions (“Market-Based Shares”) is measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based upon the probability that the vesting condition will be met. The following table presents a summary of the grant-date fair values of restricted stock granted during the years ended December 31, 2019, 2018 and 2017 and the related assumptions: Year Ended December 31, 2019 2018 2017 Grant-date fair value of restricted stock $99.07 - $269.04 $81.14 - $122.83 $46.78 - $60.67 Risk-free interest rate 2.62% 2.54% 1.85% Estimated volatility 30.0% 25.0% 23.0% Expected life (in years) 1.7 2.0 2.3 The following table summarizes restricted stock awards activity for the year ended December 31, 2019: Time-Based Restricted Stock Awards Market-Based Restricted Stock Awards Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Unvested shares of restricted stock outstanding at December 31, 2018 806.5 $ 67.54 — $ — Granted 351.6 155.25 281.0 102.76 Vested (322.6 ) 64.12 (280.4 ) 102.76 Forfeited (92.9 ) 88.51 (0.6 ) 102.57 Unvested shares of restricted stock outstanding at December 31, 2019 742.6 $ 107.93 — $ — In January 2019, we issued an aggregate of 520,069 restricted shares of common stock to our executive officers, certain non-executive, non-sales employees and non-executive sales management employees under the LTIP, consisting of 280,960 Market-Based Shares and 239,109 Time-Based Shares. Market-Based Shares vested 50% on the first date that the Company’s TEV (calculated as defined in the applicable restricted stock award agreement) equaled or exceeded $8.65 billion and 50% on the first date that the Company’s TEV equaled or exceeded $9.35 billion, in each case provided that (i) such date occurred on or before the sixth anniversary of the grant date and (ii) the recipient was employed by, or providing services to, the Company on the applicable vesting date. As shown in the table below, all Market-Based Shares issued in January 2019 have vested. The following table summarizes vesting activity for Market-Based Shares during the year ended December 31, 2019, the associated compensation cost recognized in connection with each vesting event and the number of shares withheld to satisfy tax withholding obligations: Vesting Condition Date Vested Number of Shares Vested Compensation Cost Recognized Upon Vesting Shares Withheld for Taxes (1) Market-based (TEV = $8.65 billion) February 13, 2019 140.2 $14,900 54.5 Market-based (TEV = $9.35 billion) February 22, 2019 140.2 $13,900 55.5 ( 1 ) Time-Based Shares granted issued to certain non-executive employees in January 2019 will vest on a specified initial vesting date and 25% on each of the first three anniversaries of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. Time-Based Shares granted to executive officers, sales management employees and certain non-executive employees will generally vest over periods ranging from two to four years beginning on a specified initial vesting date and thereafter on the anniversaries of such date, provided that the executive officer or employee is employed by, or providing services to, the Company on the applicable vesting date. On April 29, 2019, we issued an aggregate of 6,816 restricted shares of common stock under the LTIP to the non-employee members of our Board of Directors. Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date. During 2019, we issued an aggregate of 105,755 restricted shares of common stock to certain non-executive employees under the LTIP consisting of Time-Based Shares that will vest in annual tranches over periods ranging from two to four years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. Our total compensation expense related to restricted stock was $47.3 million, $36.4 million and $36.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. There was $57.8 million of unrecognized compensation cost related to unvested shares of restricted stock outstanding as of December 31, 2019. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.2 years as of December 31, 2019. We capitalized stock-based compensation costs related to software developed for internal use of $4.8 million, $3.7 million and $3.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. The following table presents non-cash stock-based compensation expense resulting from restricted stock awards, which is included in the following line items in the accompanying consolidated statements of income for the years ended December 31, 2019, 2018 and 2017: Year Ended December 31, 2019 2018 2017 Operating expense $ 4,376 $ 4,041 $ 3,950 Sales and marketing 7,955 7,510 5,023 Research and development 5,428 3,013 1,912 General and administrative 29,509 21,847 25,162 Total non-cash stock-based compensation expense $ 47,268 $ 36,411 $ 36,047 Commitments and Contingencies Commitments and Contingencies 12 Months Ended Dec. 31, 2019 Commitments And Contingencies Disclosure [Abstract] Commitments and Contingencies 1 2 . Employment Agreements We have employment agreements with certain of our executive officers. The agreements allow for annual compensation, participation in executive benefit plans, and performance-based cash bonuses. Legal Proceedings From time to time, we are involved in various disputes, claims, suits, investigations and legal proceedings arising in the ordinary course of business. We believe that the resolution of current pending legal matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows. Nonetheless, we cannot predict the outcome of these proceedings, as legal matters are subject to inherent uncertainties, and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations or cash flows. Income Taxes Income Taxes 12 Months Ended Dec. 31, 2019 Income Tax Disclosure [Abstract] Income Taxes 13. The items comprising income tax expense are as follows: Year Ended December 31, 2019 2018 2017 Provision for current income taxes Federal $ 17,812 $ 12,414 $ 10,136 State 6,688 4,155 1,791 Total provision for current income taxes 24,500 16,569 11,927 Provision (benefit) for deferred income taxes, net Federal 16,209 14,365 (3,865 ) State 4,802 6,712 (3,816 ) Total benefit for deferred income taxes, net 21,011 21,077 (7,681 ) Total provision for income taxes $ 45,511 $ 37,646 $ 4,246 The following schedule reconciles the statutory Federal tax rate to the effective income tax rate: Year Ended December 31, 2019 2018 2017 Federal statutory tax rate 21 % 21% 35% Increase (decrease) resulting from: State income taxes, net of Federal income tax benefit 6 % 6% 4% Nondeductible expenses 3 % 1% 0% Research credit, Federal benefit (3 %) (2%) (2%) Section 199 - Qualified production activities 0 % 0% (1%) Stock-based compensation (7 %) (4%) (13%) Remeasurement of deferred tax liabilities 0 % 0% (20%) Effective income tax rate 20 % 22% 3% Our effective income tax rate was 20% and 22% for the years ended December 31, 2019 and 2018, respectively. The lower effective income tax rate for the year ended December 31, 2019 primarily resulted from an increase in excess tax benefits from stock-based compensation related to vesting events, which was partially offset by changes in tax legislation that increased non-deductible expenses. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows: December 31, 2019 2018 Deferred income tax assets (liabilities): Stock-based compensation $ 994 $ 1,529 Investment in Paycom Payroll Holdings, LLC (92,743 ) (73,020 ) Net operating losses 532 935 Federal tax credits — 350 Noncurrent deferred income tax liabilities, net $ (91,217 ) $ (70,206 ) At December 31, 2019, we had net operating loss carryforwards for state income tax purposes of approximately $0.5 million which are available to offset future state taxable income that begin expiring in 2030. At December 31, 2019 and 2018, we had no material unrecognized tax benefits related to uncertain tax positions. We file income tax returns with the United States federal government and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2016. Selected Quarterly Financial Da Selected Quarterly Financial Data (unaudited) 12 Months Ended Dec. 31, 2019 Quarterly Financial Information Disclosure [Abstract] Selected Quarterly Financial Data (unaudited) 14. The following tables set forth selected quarterly statements of income data for the periods indicated: Quarter Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 Revenues $ 199,943 $ 169,313 $ 175,006 $ 193,409 Operating income $ 62,488 $ 52,886 $ 50,556 $ 60,294 Net income $ 47,282 $ 48,762 $ 39,152 $ 45,380 Earnings per share, basic $ 0.82 $ 0.85 $ 0.68 $ 0.79 Earnings per share, diluted $ 0.81 $ 0.83 $ 0.67 $ 0.78 Weighted average shares outstanding: Basic 57,357 57,569 57,654 57,659 Diluted 58,316 58,410 58,383 58,378 Quarter Ended March 31, 2018 June 30, 2018 September 30, 2018 December 31, 2018 Revenues $ 153,916 $ 128,800 $ 133,288 $ 150,332 Operating income $ 51,020 $ 43,037 $ 36,245 $ 43,413 Net income $ 41,160 $ 35,722 $ 28,769 $ 31,414 Earnings per share, basic $ 0.71 $ 0.62 $ 0.50 $ 0.55 Earnings per share, diluted $ 0.70 $ 0.61 $ 0.49 $ 0.54 Weighted average shares outstanding: Basic 57,793 57,837 57,727 57,491 Diluted 58,739 58,721 58,545 58,238 Subsequent Events Subsequent Events 12 Months Ended Dec. 31, 2019 Subsequent Events [Abstract] Subsequent Events 15. SUBSEQUENT EVENTS On January 30, 2020, we issued an aggregate of 444,896 restricted shares of common stock to our executive officers and certain non-executive employees under the LTIP, consisting of 360,948 Market-Based Shares and 83,948 Time-Based Shares. Market-Based Shares for executive officers will vest 50% on the first date, if any, that the Company’s TEV (calculated as defined in the applicable restricted stock award agreement) equals or exceeds $23.75 billion and 50% on the first date, if any, that the Company’s TEV equals or exceeds $27.7 billion, in each case provided that (i) such date occurs on or before the sixth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date. Market-Based Shares for non-executive employees will vest 50% on the first date, if any, that the Company’s TEV equals or exceeds $19.8 billion and 50% on the first date, if any, that the Company’s TEV equals or exceeds $22.15 billion, in each case provided that (i) such date occurs on or before the sixth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date. Time-Based Shares granted to non-executive employees will vest 25% on a specified initial vesting date and 25% on each of the first three anniversaries of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. Summary of Significant Accoun_2 Summary of Significant Accounting Policies (Policies) 12 Months Ended Dec. 31, 2019 Accounting Policies [Abstract] Basis of Presentation Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Reclassifications Reclassifications Certain prior period amounts have been reclassified in connection with the adoption of Accounting Standards Update (“ASU”) No. 2016-18, “Restricted Cash” (“ASU 2016-18”) as discussed below. In addition, in the consolidated balance sheets, we combined the line items “Intangible assets, net” and “Other assets” in the prior period in order to conform to the current period presentation. Adoption of New Pronouncements Adoption of New Pronouncements In January 2019, we adopted ASU No. 2016-02, “Leases (Topic 842)” using the modified retrospective approach. Under this adoption method, we have not restated comparative prior periods and have carried forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms. See Note 5 for a discussion of our adoption of this standard. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. In addition, the amendments provide that disclosure requirements related to the analysis of stockholders' equity are expanded for interim financial statements. An analysis of the changes in each caption of stockholders' equity presented in the balance sheet is provided in the consolidated statement of stockholders’ equity. During the three months ended June 30, 2019, we adopted ASU 2016-18, which was effective on January 1, 2018. This guidance requires that the consolidated statements of cash flows explain the change during the reporting period of the totals of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. Accordingly, we applied the guidance using the retrospective transition method to each period presented, which adjusted the consolidated statements of cash flows to include restricted cash held to satisfy client funds obligations, as a component of cash, cash equivalents, restricted cash and restricted cash equivalents. Impact on Previously Reported Results As noted above, we adopted ASU 2016-18 during the three months ending June 30, 2019. We assessed the materiality of this presentation on prior periods’ consolidated financial statements in accordance with the SEC Staff Accounting Bulletin No. 99, “Materiality”, codified in Accounting Standards Codification (“ASC”) Topic 250, “Accounting Changes and Error Corrections.” Based on this assessment, we concluded that the correction is not material to any previously issued interim financial statements. The correction had no impact on our consolidated statements of income or consolidated balance sheets in previously issued consolidated financial statements. We will conform presentation of previously reported consolidated statements of cash flows information in future filings. The following table presents the consolidated statements of cash flows line items after giving effect to the adoption of ASU 2016-18: Year Ended December 31, 2018 Year Ended December 31, 2017 As Previously Reported ASU 2016-18 Adjustments As Adjusted As Previously Reported ASU 2016-18 Adjustments As Adjusted Cash flows from operating activities Net cash provided by operating activities $ 184,817 $ — $ 184,817 $ 130,149 $ — $ 130,149 Cash flows from investing activities Purchase of short-term investments from funds held for clients (145,011 ) — (145,011 ) (66,235 ) — (66,235 ) Proceeds from maturities of short-term investments from funds held for clients 155,500 — 155,500 141,205 — 141,205 Net change in funds held for clients 112,037 (112,037 ) - (305,476 ) 305,476 - Purchases of property and equipment (59,906 ) — (59,906 ) (59,389 ) — (59,389 ) Net cash provided by (used in) investing activities 62,620 (112,037 ) (49,417 ) (289,895 ) 305,476 15,581 Cash flows from financing activities Net cash used in financing activities (247,796 ) — (247,796 ) 145,665 — 145,665 Total increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents (359 ) (112,037 ) (112,396 ) (14,081 ) 305,476 291,395 Cash, cash equivalents, restricted cash and restricted cash equivalents Beginning of period 46,077 1,052,783 1,098,860 60,158 747,307 807,465 End of period $ 45,718 $ 940,746 $ 986,464 $ 46,077 $ 1,052,783 $ 1,098,860 Use of Estimates Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Segment Information Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer, in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Property and Equipment Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Land improvements 15 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2019, 2018 and 2017, we incurred interest costs of $1.6 million, $1.6 million and $1.7 million, respectively. For the years ended December 31, 2019, 2018 and 2017, interest costs of $0.6 million, $0.8 million and $0.8 million, respectively, were capitalized. Internal Use Software Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and three-year The total capitalized payroll costs related to internal use computer software projects were $30.4 million and $22.0 million during the years ended December 31, 2019 and 2018, respectively, and are included in property and equipment. Amortization expense of capitalized software costs were $19.0 million, $12.5 million and $7.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Derivatives Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. The Company has not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets Goodwill is not amortized, but is instead tested for impairment annually, or earlier if, at the reporting unit level, an indicator of impairment arises. The estimates and assumptions about future results of operations and cash flows made in connection with the impairment testing could differ from future actual results of operations and cash flows. If impairment exists, a write-down to fair value is recognized. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date. We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of June 30, 2019. For the years ended December 31, 2019, 2018 and 2017, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2019, 2018 and 2017. Funds Held for Clients and Client Funds Obligation Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the balance sheet date. As of December 31, 2019 and 2018, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item on the balance sheet. These available-for-sale securities are recorded on the balance sheet at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in November 2018, our Board of Directors authorized the repurchase of up to $150.0 million of our common stock. As of December 31, 2019 there was $119.4 million available for repurchases under our stock repurchase plan. Our stock repurchase plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased depends on a number of factors, including the market price of our common stock, general market and economic conditions, shares withheld for taxes associated with the vesting of restricted stock and other corporate considerations. The current stock repurchase plan will expire on November 19, 2020. During the year ended December 31, 2019, we repurchased an aggregate of 219,764 shares of our common stock at an average cost of $193.51 per share to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. During the year ended December 31, 2018, we repurchased an aggregate of 1,108,885 shares of our common stock at an average cost of $113.12 per share, including 186,165 shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Revenue Recognition Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales and other applicable taxes are excluded from revenues. Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications. The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups. Implementation and Other Revenues Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations. Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period ( i.e. Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks. Contract Balances Contract Balances The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. Changes in deferred revenue related to material right performance obligations for the years ended December 31, 2019 and 2018 were as follows: Year Ended December 31, 2019 2018 Balance, beginning of period $ 64,651 $ 51,624 Deferral of revenue 23,288 20,925 Recognition of unearned revenue (11,695 ) (7,898 ) Balance, end of period $ 76,244 $ 64,651 We expect to recognize $11.1 million of deferred revenue related to material right performance obligations in 2020, $11.0 million in 2021, and $54.1 million of such deferred revenue thereafter Assets Recognized From Costs To Obtain And Costs To Fulfill Revenue Contracts Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future perform
Document and Entity Information Document and Entity Information - USD ($) $ in Billions 12 Months Ended Dec. 31, 2020 Feb. 09, 2021 Jun. 30, 2020 Cover [Abstract] Document Type 10-K Amendment Flag false Document Period End Date Dec. 31, 2020 Document Fiscal Year Focus 2020 Document Fiscal Period Focus FY Trading Symbol PAYC Entity Registrant Name Paycom Software, Inc. Entity Central Index Key 0001590955 Current Fiscal Year End Date --12-31 Entity Well-known Seasoned Issuer Yes Entity Current Reporting Status Yes Entity Voluntary Filers No Entity Filer Category Large Accelerated Filer Entity Small Business false Entity Emerging Growth Company false ICFR Auditor Attestation Flag true Entity Shell Company false Entity Common Stock, Shares Outstanding 60,188,541 Entity Public Float $ 14.2 Title of 12(b) Security Common Stock, $0.01 par value Security Exchange Name NYSE Entity File Number 001-36393 Entity Tax Identification Number 80-0957485 Entity Address, Address Line One 7501 W. Memorial Road Entity Address, City or Town Oklahoma City Entity Address, State or Province OK Entity Incorporation, State or Country Code DE Entity Address, Postal Zip Code 73142 City Area Code 405 Local Phone Number 722-6900 Entity Interactive Data Current Yes Document Annual Report true Document Transition Report false Documents Incorporated by Reference Portions of the registrant’s Definitive Proxy Statement on Schedule 14A to be furnished to stockholders in connection with its 2021 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K. Consolidated Balance Sheets Consolidated Balance Sheets - USD ($) $ in Thousands Dec. 31, 2020 Dec. 31, 2019 Current assets: Cash and cash equivalents $ 151,710 $ 133,667 Accounts receivable 9,130 9,298 Prepaid expenses 17,854 13,561 Inventory 1,151 1,158 Income tax receivable 10,447 4,020 Deferred contract costs 60,819 46,618 Current assets before funds held for clients 251,111 208,322 Funds held for clients 1,613,494 1,662,778 Total current assets 1,864,605 1,871,100 Property and equipment, net 285,218 238,458 Goodwill 51,889 51,889 Long-term deferred contract costs 371,357 292,134 Other assets 34,843 33,336 Total assets 2,607,912 2,486,917 Current liabilities: Accounts payable 6,787 5,051 Accrued commissions and bonuses 13,703 12,343 Accrued payroll and vacation 24,529 14,870 Deferred revenue 13,567 11,105 Current portion of long-term debt 1,775 1,775 Accrued expenses and other current liabilities 44,175 45,600 Current liabilities before client funds obligation 104,536 90,744 Client funds obligation 1,613,494 1,662,778 Total current liabilities 1,718,030 1,753,522 Deferred income tax liabilities, net 112,598 91,217 Long-term deferred revenue 73,259 65,139 Net long-term debt, less current portion 29,119 30,858 Other long-term liabilities 19,263 19,553 Total long-term liabilities 234,239 206,767 Total liabilities 1,952,269 1,960,289 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value (100,000 shares authorized, 61,861 and 61,350 shares issued at December 31, 2020 and December 31, 2019, respectively; 57,739 and 57,660 shares outstanding at December 31, 2020 and December 31, 2019, respectively) 618 613 Additional paid-in capital 357,908 257,501 Retained earnings 719,619 576,166 Treasury stock, at cost (4,122 and 3,689 shares at December 31, 2020 and December 31, 2019, respectively) (422,502) (307,652) Total stockholders' equity 655,643 526,628 Total liabilities and stockholders' equity $ 2,607,912 $ 2,486,917 Consolidated Balance Sheets (Pa Consolidated Balance Sheets (Parenthetical) - $ / shares Dec. 31, 2020 Dec. 31, 2019 Statement Of Financial Position [Abstract] Common stock, par value $ 0.01 $ 0.01 Common stock, shares authorized 100,000,000 100,000,000 Common stock, shares issued 61,861,000 61,350,000 Common stock, shares outstanding 57,739,000 57,660,000 Treasury stock, shares 4,122,000 3,689,000 Consolidated Statements of Inco Consolidated Statements of Income - USD ($) shares in Thousands, $ in Thousands 12 Months Ended Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018 Revenues Total revenues $ 841,434 $ 737,671 $ 566,336 Cost of revenues Operating expenses 97,778 89,336 76,231 Depreciation and amortization 25,768 20,411 14,532 Total cost of revenues 123,546 109,747 90,763 Administrative expenses Sales and marketing 235,716 179,286 143,881 Research and development 90,244 73,080 46,247 General and administrative 178,200 127,534 96,605 Depreciation and amortization 27,605 21,800 15,125 Total administrative expenses 531,765 401,700 301,858 Total operating expenses 655,311 511,447 392,621 Operating income 186,123 226,224 173,715 Interest expense (19) (940) (766) Other income (expense), net (168) 803 1,762 Income before income taxes 185,936 226,087 174,711 Provision for income taxes 42,483 45,511 37,646 Net income $ 143,453 $ 180,576 $ 137,065 Earnings per share, basic $ 2.49 $ 3.14 $ 2.37 Earnings per share, diluted $ 2.46 $ 3.09 $ 2.34 Weighted average shares outstanding: Basic 57,620 57,561 57,711 Diluted 58,285 58,395 58,582 Recurring [Member] Revenues Total revenues $ 825,856 $ 724,428 $ 557,255 Implementation and Other [Member] Revenues Total revenues $ 15,578 $ 13,243 $ 9,081 Consolidated Statements of Shar Consolidated Statements of Shareholders' Equity - USD ($) $ in Thousands Total Common Stock [Member] Additional Paid in Capital [Member] Retained Earnings [Member] Treasury Stock [Member] Beginning balance, value at Dec. 31, 2017 $ 281,247 $ 601 $ 161,809 $ 258,525 $ (139,688) Beginning balance, shares at Dec. 31, 2017 60,149,000 2,361,000 Vesting of restricted stock $ 6 (6) Vesting of restricted stock, shares 598,000 Stock-based compensation 41,877 41,877 Repurchases of common stock (125,436) $ (125,436) Repurchases of common stock, shares 1,109,000 Net income 137,065 137,065 Ending balance, value at Dec. 31, 2018 334,753 $ 607 203,680 395,590 $ (265,124) Ending balance, shares at Dec. 31, 2018 60,747,000 3,470,000 Vesting of restricted stock $ 6 (6) Vesting of restricted stock, shares 603,000 Stock-based compensation 53,827 53,827 Repurchases of common stock (42,528) $ (42,528) Repurchases of common stock, shares 219,000 Net income 180,576 180,576 Ending balance, value at Dec. 31, 2019 526,628 $ 613 257,501 576,166 $ (307,652) Ending balance, shares at Dec. 31, 2019 61,350,000 3,689,000 Vesting of restricted stock $ 5 (5) Vesting of restricted stock, shares 511,000 Stock-based compensation 100,412 100,412 Repurchases of common stock (114,850) $ (114,850) Repurchases of common stock, shares 433,000 Net income 143,453 143,453 Ending balance, value at Dec. 31, 2020 $ 655,643 $ 618 $ 357,908 $ 719,619 $ (422,502) Ending balance, shares at Dec. 31, 2020 61,861,000 4,122,000 Consolidated Statements of Cash Consolidated Statements of Cash Flows - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018 Cash flows from operating activities Net income $ 143,453 $ 180,576 $ 137,065 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 53,373 42,211 29,657 Accretion of discount on available-for-sale securities (1,563) (940) (1,112) Amortization of debt issuance costs 36 35 32 Stock-based compensation expense 90,108 47,268 36,576 Cash paid for derivative settlement (613) (81) (188) (Gain)/loss on derivative 1,993 1,456 (479) Deferred income taxes, net 21,381 21,011 21,077 Changes in operating assets and liabilities: Accounts receivable 168 (5,884) (1,838) Prepaid expenses (4,293) (5,903) (2,676) Inventory (41) (403) (306) Other assets (1,720) (3,555) (762) Deferred contract costs (89,776) (76,204) (60,730) Accounts payable 1,529 (221) 1,079 Income taxes, net (6,427) (58) 3,085 Accrued commissions and bonuses 1,360 1,672 1,086 Accrued payroll and vacation 9,659 4,129 3,726 Deferred revenue 10,582 11,593 13,027 Accrued expenses and other current liabilities (2,002) 7,561 6,498 Net cash provided by operating activities 227,207 224,263 184,817 Cash flows from investing activities Purchase of short-term investments from funds held for clients (332,756) (195,811) (145,011) Proceeds from maturities of short-term investments from funds held for clients 308,981 69,200 155,500 Purchases of property and equipment (94,102) (92,934) (59,906) Net cash used in investing activities (117,877) (219,545) (49,417) Cash flows from financing activities Repurchases of common stock (52,040) (105,188) Withholding taxes paid related to net share settlements (62,811) (42,528) (20,248) Payments on long-term debt (1,775) (1,775) (888) Net change in client funds obligation (49,283) 694,991 (121,414) Payment of debt issuance costs (16) (58) Net cash provided by (used in) financing activities (165,909) 650,672 (247,796) Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents (56,579) 655,390 (112,396) Cash, cash equivalents, restricted cash and restricted cash equivalents Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 1,641,854 986,464 1,098,860 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period 1,585,275 1,641,854 986,464 Cash and cash equivalents 151,710 133,667 45,718 Restricted cash included in funds held for clients 1,433,565 1,508,187 940,746 Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized 891 708 Cash paid for income taxes 27,530 24,566 13,511 Non-cash investing and financing activities: Purchases of property and equipment, accrued but not paid 837 7,451 1,759 Stock-based compensation for capitalized software 6,655 4,757 $ 3,722 Right of use assets obtained in exchange for operating lease liabilities [1] $ 9,693 $ 14,000 [1] Amounts presented reflect the adoption of ASU No. 2016-02, “Leases (Topic 842)”, which we adopted in January 2019. See Note 2 for additional information. Organization and Description of Organization and Description of Business 12 Months Ended Dec. 31, 2020 Accounting Policies [Abstract] Organization and Description of Business 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Paycom Software, Inc. (“Software”) and its wholly-owned subsidiaries (collectively, the “Company”) is a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we,” “our,” “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. Summary of Significant Accounti Summary of Significant Accounting Policies 12 Months Ended Dec. 31, 2020 Accounting Policies [Abstract] Summary of Significant Accounting Policies 2. Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Adoption of New Pronouncements In January 2020, we adopted Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The adoption of this guidance did not have a material impact on our consolidated financial statements. In January 2020, we adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits. The adoption of this guidance did not have a material impact on our consolidated financial statements. In January 2019, we adopted ASU No. 2016-02, “Leases (Topic 842)” using the modified retrospective approach. Under this adoption method, we have not restated comparative prior periods and have carried forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms. See Note 5 for a discussion of our adoption of this standard. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. In addition, the amendments provide that disclosure requirements related to the analysis of stockholders’ equity are expanded for interim financial statements. An analysis of the changes in each caption of stockholders’ equity presented in the balance sheet is provided in the consolidated statement of stockholders’ equity. During the three months ended June 30, 2019, we adopted ASU 2016-18, which was effective on January 1, 2018. This guidance requires that the consolidated statements of cash flows explain the change during the reporting period of the totals of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. Accordingly, we applied the guidance using the retrospective transition method to each period presented, which adjusted the consolidated statements of cash flows to include restricted cash held to satisfy client funds obligations, as a component of cash, cash equivalents, restricted cash and restricted cash equivalents. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer, in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Land improvements 15 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2020, 2019 and 2018, we incurred interest costs of $1.5 million, $1.6 million and $1.6 million, respectively. For the years ended December 31, 2020, 2019 and 2018, interest costs of $1.5 million, $0.6 million and $0.8 million, respectively, were capitalized. Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and amortized over a three-year period on a straight-line basis. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. We also expense internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities. The total capitalized payroll costs related to internal use computer software projects were $43.8 million and $30.4 million during the years ended December 31, 2020 and 2019, respectively, and are included in property and equipment. Amortization expense of capitalized software costs were $27.1 million, $19.0 million and $12.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. We have not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill is not amortized, but we are required to test the carrying value of goodwill for impairment at least annually, or earlier if, at the reporting unit level, an indicator of impairment arises. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date. A review of goodwill may be initiated before or after conducting the annual analysis if events or changes in circumstances indicate the carrying value of goodwill may no longer be recoverable. The Company performed a qualitative assessment to determine if it is more-likely-than-not that the fair value of the reporting units had declined below its carrying value. In the qualitative assessment, we consider the macroeconomic conditions, including any deterioration of general economic conditions, industry and market conditions, including any deterioration in the environment where the reporting unit operates, changes in the products/services and regulator and political developments; cost of doing business; overall financial performance; other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation. Based on our assessment, there was no impairment recorded as of June 30, 2020. For the years ended December 31, 2020, 2019 and 2018, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2020, 2019 and 2018. Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date. As of December 31, 2020 and December 31, 2019, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets. These available-for-sale securities are recorded in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in March 2020, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock. As of December 31, 2020 there was $135.3 million available for repurchases under our stock repurchase plan. The current stock repurchase plan will expire on March 12, 2022. During the year ended December 31, 2020, we repurchased an aggregate of 432,897 265.31 188,466 During the year ended December 31, 2019, we repurchased an aggregate of 219,764 shares of our common stock at an average cost of $193.51 per share to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales taxes and other applicable taxes are excluded from revenues. Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, benefit enrollment services, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications. The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups. Implementation and Other Revenues Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations. Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent servi ces transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period ( i.e. , ten-year estimated client life). Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks. Contract Balances The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. Changes in deferred revenue related to material right performance obligations for the years ended December 31, 2020 and 2019 were as follows: Year Ended December 31, 2020 2019 Balance, beginning of period $ 76,244 $ 64,651 Deferral of revenue 29,005 23,288 Recognition of unearned revenue (18,423 ) (11,695 ) Balance, end of period $ 86,826 $ 76,244 We expect to recognize $13.6 million of deferred revenue related to material right performance obligations in 2021, $13.1 million in 2022, and $60.1 million of such deferred revenue thereafter Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations. The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach, and are capitalized and amortized over the expected period of benefit, which we have determined to be the estimated client relationship of ten years. The expected period of benefit has been determined to be the estimated life of the client relationship primarily because we incur no new costs to obtain, or costs to fulfill, a contract upon renewal of such contract. Additional commission costs may be incurred when an existing client purchases additional applications; however, these commission costs relate solely to the additional applications purchased and are not related to contract renewal. Furthermore, additional fulfillment costs associated with existing clients purchasing additional applications are minimized by our seamless single-database platform. These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and costs to fulfill a contract are included in the “sales and marketing” and “general and administrative” line items in the accompanying consolidated statements of income. The following table s present the asset balance s and related amortization expense for these contract costs: As of and for the Year Ended December 31, 2020 Beginning Capitalization Ending Balance of Costs Amortization Balance Costs to obtain a contract $ 194,964 $ 68,149 $ (30,530 ) $ 232,583 Costs to fulfill a contract $ 143,788 $ 78,477 $ (22,672 ) $ 199,593 As of and for the Year Ended December 31, 2019 Beginning Capitalization Ending Balance of Costs Amortization Balance Costs to obtain a contract $ 158,989 $ 60,669 $ (24,694 ) $ 194,964 Costs to fulfill a contract $ 101,756 $ 58,303 $ (16,271 ) $ 143,788 Cost of Revenues Our costs and expenses applicable to total revenues represent operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation and amortization costs. Advertising Costs Advertising costs are expensed the first time that advertising takes place. Advertising costs for the years ended December 31, 2020, 2019 and 2018 were $66.9 million, $25.9 million and $16.8 million, respectively. Sales Taxes We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are recognized on a net basis, and therefore, excluded from revenues. For the years ended December 31, 2020, 2019 and 2018, sales taxes collected were $9.7 million, $8.3 million and $6.5 million, respectively. Employee Stock-Based Compensation Time-based stock compensation awards to employees are recognized on a straight-line basis over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Market-based stock compensation awards to employees are recognized on a straight-line basis over the applicable estimated vesting period as compensation costs in the consolidated statements of income based on their fair value as of the date of the grant unless vesting occurs sooner at which time the remaining respective unrecognized compensation cost is recognized. Employee Stock Purchase Plan An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recognized at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period. Income Taxes Our consolidated financial statements include a provision for income taxes incurred for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We file income tax returns with the United States federal government and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that do not meet this threshold. Our policy is to recognize interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 201 7 . Seasonality Our revenues are seasonal in nature. Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. As payroll forms are typically processed in the first quarter of the year, first quarter revenues and margins are generally higher than in subsequent quarters. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. Recently Issued Accounting Pronouncements In March 2020, the Financial Accounting Standard Board issued ASU No. 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Our interest-bearing notes bear interest at our option, at either (a) a prime rate plus 1.0% or (b) fluctuating interest rates based on LIBOR. If LIBOR ceases to exist, we may need to renegotiate our loan documents and we cannot predict what alternative index would be negotiated with our lenders. ASU 2020-04 is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. We are currently assessing the impact that this guidance will have on our financial position and results of operations, if any. In December 2019, the Financial Accounting Standards Board issued ASU No. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. We do not believe that the adoption of this guidance will have a material impact on our financial position and results of operations. Property and Equipment Property and Equipment 12 Months Ended Dec. 31, 2020 Property Plant And Equipment [Abstract] Property and Equipment 3. Property and equipment and accumulated depreciation and amortization were as follows: December 31, 2020 December 31, 2019 Property and equipment Software and capitalized software costs $ 144,190 $ 99,125 Buildings 115,772 101,707 Computer equipment 68,181 56,879 Rental clocks 25,474 20,836 Furniture, fixtures and equipment 19,829 18,311 Other 7,016 6,242 380,462 303,100 Less: accumulated depreciation and amortization (178,111 ) (124,950 ) 202,351 178,150 Construction in progress 53,833 31,274 Land 29,034 29,034 Property and equipment, net $ 285,218 $ 238,458 We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40. For the years ended December 31, 2020 and 2019, we capitalized $43.8 million and $30.4 million, respectively, of computer software development costs related to software developed for internal use. Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases. As such, these items are transferred from inventory to property and equipment and depreciated over their estimated useful lives. We capitalize interest incurred for indebtedness related to construction in progress. For the years ended December 31, 2020, 2019 and 2018, we incurred interest costs of $1.5 million, $1.6 million and $1.6 million, respectively. For the years ended December 31, 2020, 2019 and 2018, interest cost of $1.5 million, $0.6 million and $0.8 million, respectively, was capitalized. Included in the construction in progress balance at December 31, 2020 and 2019 is $3.5 million and $2.2 million in retainage, respectively. Depreciation and amortization expense for property and equipment, net was $53.2 million, $42.0 million and $29.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Goodwill and Intangible Assets, Goodwill and Intangible Assets, Net 12 Months Ended Dec. 31, 2020 Goodwill And Intangible Assets Disclosure [Abstract] Goodwill and Intangible Assets, Net 4. As of both December 31, 2020 and 2019, goodwill totaled $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of either June 30, 2020 or 2019. As of December 31, 2020 and 2019, there were no indicators of impairment. All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization. The following tables provide the components of intangible assets, which are included in Other assets in our consolidated balance sheets: December 31, 2020 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Trade name 1.5 $ 3,194 $ (2,875 ) $ 319 Total $ 3,194 $ (2,875 ) $ 319 December 31, 2019 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Trade name 2.5 $ 3,194 $ (2,662 ) $ 532 Total $ 3,194 $ (2,662 ) $ 532 Amortization of intangible assets for the years ended December 31, 2020, 2019 and 2018 was $0.2 million, $0.2 million and $0.2 million, respectively. The estimated remaining amortization expense of our intangible assets is $0.2 million in 2021 and $0.1 million in 2022. Leases Leases 12 Months Ended Dec. 31, 2020 Leases [Abstract] Leases 5. LEASES In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The purpose of this new guidance is to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities in the consolidated balance sheets as well as providing additional disclosure requirements related to leasing arrangements. The new guidance was effective for us beginning January 1, 2019, which we adopted using a modified retrospective method and the transition relief guidance provided by the FASB in ASU 2018-11 “Leases: Targeted Improvement”. Under this adoption method, we have not restated comparative prior periods and have carried forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms. Based on our portfolio of leases at January 1, 2019, $21.6 million of lease assets and liabilities were recognized in our consolidated balance sheets, which related to operating leases for real estate. Under the transition relief guidance, we have elected the lease vs. non-lease components practical expedient relating to the asset class of real estate, the short-term lease exemption practical expedient and the package of practical expedients. In connection with the adoption of this standard, we updated our control framework and implemented changes to our existing controls to account for leases. The Company’s leases primarily consist of noncancellable operating leases for office space with contractual terms expiring from 2021 to 2025. All of our leases are operating leases and, as a lessee, we have not entered into any sublease agreements. The lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in an amount that appears, at the inception of the lease, to be reasonably assured. While some of our leases include an option to extend the lease up to five years, it is not reasonably certain that any such options will be exercised due, in part, to the dynamic nature of our sales force and rate of growth. Some of our leases contain termination options that are not reasonably certain to be exercised. However, if a termination option is exercised, we remeasure the lease asset in the consolidated balance sheets using the updated lease period. None of our leases contain residual value guarantees, substantial restrictions or covenants. The table below presents the lease assets and liabilities as of December 31, 2020 and December 31, 2019. Balance Sheet location December 31, 2020 December 31, 2019 Other assets (1) $ 26,481 $ 27,146 Lease liabilities: Accrued expenses and other current liabilities $ 10,906 $ 10,265 Other long-term liabilities $ 16,990 $ 18,420 (1) Balance as of December 31, 2019 includes a $1.5 million reduction to Other assets for deferred rent. Rent expense under operating leases for the years ended December 31, 2020, 2019 and 2018 was $11.3 million, $10.1 million and $7.6 million, respectively. Cash paid for amounts relating to our operating leases was $12.6 million for the year ended December 31, 2020. Because no implicit discount rates for our leases could be readily determined, we elected to use an estimated incremental borrowing rate to determine the present value of our leases. The weighted average discount rate related to our portfolio of leases at December 31, 2020 was 3.3%. The average remaining lease term for our leases was 2.6 years as of December 31, 2020. The undiscounted cash flows for the future annual maturities of our operating lease liabilities and the reconciliation of those total undiscounted cash flows to our lease liabilities as of December 31, 2020 were as follows: 2021 $ 11,204 2022 7,734 2023 5,970 2024 3,452 2025 941 Thereafter — Total undiscounted cash flows $ 29,301 Present value discount (1,405 ) Lease liabilities $ 27,896 The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced. As of December 31, 2020, we did not have any operating lease liabilities that had not yet commenced. Long-Term Debt, Net Long-Term Debt, Net 12 Months Ended Dec. 31, 2020 Debt Disclosure [Abstract] Long-Term Debt, Net 6 . Long-term debt consisted of the following: December 31, 2020 December 31, 2019 Net term note to bank due September 7, 2025 $ 30,894 $ 32,633 Total long-term debt, net (including current portion) 30,894 32,633 Less: Current portion (1,775 ) (1,775 ) Total long-term debt, net $ 29,119 $ 30,858 On December 7, 2017, we entered into a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”), pursuant to which JPMorgan Chase Bank, N.A., Bank of America, N.A. and Kirkpatrick Bank made certain term loans to us (the “Term Loans”). Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our corporate headquarters property. The Term Loans mature on September 7, 2025 and bear interest, at our option, at either (a) a prime rate plus 1.0% or (b) an adjusted LIBOR rate for the interest period in effect for such Term Loan plus 1.5%. As of December 31, 2020, our indebtedness of $29.1 million consisted solely of Term Loans made under the Term Credit Agreement. Unamortized debt issuance costs of $0.2 million as of both December 31, 2020 and 2019, are presented as a direct deduction from the carrying amount of the debt liability. Under the Term Credit Agreement, we are subject to two material financial covenants, which require us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. As of December 31, 2020, we were in compliance with these covenants. On February 12, 2018, we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provided for a senior secured revolving credit facility (the “Facility”) in the aggregate principal amount of $50.0 million (the “Revolving Commitment”), which could be increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Facility includes a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. The Facility was scheduled to mature on February 12, 2020. On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, Wells Fargo Bank, N.A., was added as a lender and the Revolving Commitment was increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions. The scheduled maturity date of the Facility was extended to April 15, 2022. Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%. The proceeds of the loans and letters of credit under the Facility are to be used only for our general business purposes and working capital. Letters of credit are to be issued only to support our business operations. As of December 31, 2020, we did not have any borrowings outstanding under the Facility. Under the Revolving Credit Agreement, we are required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. Additionally, the Revolving Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make certain investments, dispose of assets, enter into certain transactions, including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions for a facility of the size and type of the Facility. As of December 31, 2020, we were in compliance with all covenants related to the Revolving Credit Agreement. As of December 31, 2020 and 2019, the carrying value of our total long-term debt approximated its fair value as of such date. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities. Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2020 are as follows: Year Ending December 31, 2021 $ 1,775 2022 1,775 2023 1,775 2024 1,775 2025 23,963 Thereafter — Total $ 31,063 Derivative Instruments Derivative Instruments 12 Months Ended Dec. 31, 2020 Derivative Instruments And Hedging Activities Disclosure [Abstract] Derivative Instruments 7 . In December 2017, we entered into a floating-to-fixed interest rate swap agreement to limit the exposure to floating interest rate risk related to the Term Loans. We do not hold derivative instruments for trading or speculative purposes. The interest rate swap agreement effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We account for our derivatives under ASC Topic 815, “Derivatives and Hedging,” and recognize all derivative instruments in the consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. See Note 8, “Fair Value of Financial Instruments”. We have elected not to designate our interest rate swap as a hedge; therefore, changes in the fair value of the derivative instrument are recognized in our consolidated statements of income within Other income (expense), net. The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is based on a one-month LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million. Under the terms of the interest rate swap agreement, we will receive quarterly variable interest payments based on the LIBOR rate and will pay interest at a fixed rate. The interest rate swap agreement has a maturity date of September 7, 2025. For the years ended December 31, 2020 and 2019, we recognized losses of $1.4 million for the change in fair value of the interest rate swap, which is included in Other income (expense), net in the consolidated statements of income. Fair Value of Financial Instrum Fair Value of Financial Instruments 12 Months Ended Dec. 31, 2020 Fair Value Disclosures [Abstract] Fair Value of Financial Instruments 8 . Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client funds obligation approximates fair value due to the short-term nature of the instruments. See Note 6 for discussion of the fair value of our debt. As discussed in Note 2, we invest the funds held for clients in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit, and classify these items as cash and cash equivalents within the funds held for clients line item in the consolidated balance sheets. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item. These available-for-sale securities are recognized in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap. The interest rate swap is measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs recognized at fair value. The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: • Level 1 – Observable inputs such as quoted prices in active markets • Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active • Level 3 – Unobservable inputs in which there is little or no market data Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019: December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Commercial paper $ — $ 99,929 $ — $ 99,929 Certificates of deposit $ — $ 80,000 $ — $ 80,000 Liabilities: Interest rate swap $ — $ 2,738 $ — $ 2,738 December 31, 2019 Level 1 Level 2 Level 3 Total Assets: Commercial paper $ — $ 79,591 $ — $ 79,591 Certificates of deposit $ — $ 75,000 $ — $ 75,000 Liabilities: Interest rate swap $ — $ 1,358 $ — $ 1,358 Employee Savings Plan and Emplo Employee Savings Plan and Employee Stock Purchase Plan 12 Months Ended Dec. 31, 2020 Compensation Related Costs [Abstract] Employee Savings Plan and Employee Stock Purchase Plan 9 . Employees over the age of 18 who have completed ninety days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby the Company matches the contribution of our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions were $8.6 million, $6.7 million and $5.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum of $25,000. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares. During the years ended December 31, 2020, 2019 and 2018, eligible employees purchased 51,407, 46,662 and 59,041 shares, respectively, of the Company’s common stock under the ESPP. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $2.3 million, $1.6 million and $1.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Earnings Per Share Earnings Per Share 12 Months Ended Dec. 31, 2020 Earnings Per Share [Abstract] Earnings Per Share 10 . Basic earnings per share is based on the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested. In accordance with ASC Topic 260, “Earnings Per Share,” the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The unvested shares of restricted stock granted in 2015 are considered participating securities, while all other unvested shares of restricted stock are not considered participating securities. As of December 31, 2020, all shares of restricted stock granted in 2015 have vested. The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share: Year Ended December 31, 2020 2019 2018 Numerator: Net income $ 143,453 $ 180,576 $ 137,065 Less: income allocable to participating securities — (81 ) (159 ) Income allocable to common shares $ 143,453 $ 180,495 $ 136,906 Add back: undistributed earnings allocable to participating securities $ — $ 81 $ 159 Less: undistributed earnings reallocated to participating securities — (80 ) (156 ) Numerator for diluted earnings per share $ 143,453 $ 180,496 $ 136,909 Denominator: Basic weighted average shares outstanding 57,620 57,561 57,711 Dilutive effect of unvested restricted stock 665 834 871 Diluted weighted average shares outstanding 58,285 58,395 58,582 Earnings per share: Basic $ 2.49 $ 3.14 $ 2.37 Diluted $ 2.46 $ 3.09 $ 2.34 Stock-Based Compensation Stock-Based Compensation 12 Months Ended Dec. 31, 2020 Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] Stock-Based Compensation 1 1 . We have historically issued shares of restricted stock under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”) that are subject to either time-based vesting conditions or market-based vesting conditions. The market-based vesting conditions are based on the Company’s total enterprise value (“TEV”) or volume weighted average stock price exceeding certain specified thresholds. Compensation expense related to the issuance of shares with time-based vesting conditions (“Time-Based Shares”) is measured based on the fair value of the award on the grant date and recognized over the requisite service period on a straight-line basis. Compensation expense related to the issuance of shares with market-based vesting conditions (“Market-Based Shares”) is measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based upon the probability that the vesting conditions will be met. The following table presents a summary of the grant-date fair values of restricted stock granted during the years ended December 31, 2020, 2019 and 2018 and the related assumptions: Year Ended December 31, 2020 2019 2018 Grant-date fair value of restricted stock $99.56 - $377.68 $99.07 - $269.04 $81.14 - $122.83 Risk-free interest rate 0.52% - 1.44% 2.62% 2.54% Estimated volatility 30.0% - 32.0% 30.0% 25.0% Expected life (in years) 4.4 1.7 2.0 The following table summarizes restricted stock awards activity for the year ended December 31, 2020: Time-Based Market-Based Restricted Stock Awards Restricted Stock Awards Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Unvested shares of restricted stock outstanding at December 31, 2019 742.6 $ 107.93 — $ — Granted 157.2 $ 283.66 1,970.9 $ 129.17 Vested (292.5 ) $ 98.38 (218.5 ) $ 233.09 Forfeited (47.5 ) $ 176.10 (3.9 ) $ 250.30 Unvested shares of restricted stock outstanding at December 31, 2020 559.8 $ 156.48 1,748.5 $ 115.91 In addition to the issuances discussed in more detail below, during the twelve months ended December 31, 2020, we issued an aggregate of 512,160 restricted shares of common stock to our executive officers and certain non-executive employees under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (the “LTIP”), consisting of 360,948 Market-Based Shares and 151,212 Time-Based Shares. Market-Based Shares for executive officers vested 50% on the first date that the Company’s total enterprise value (calculated as defined in the applicable restricted stock award agreement) (“TEV”) equaled or exceeded $23.75 billion and will vest 50% on the first date, if any, that the Company’s TEV equals or exceeds $27.7 billion, provided that (i) such date occurs on or before the sixth anniversary of the gr ant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date. The following table summarizes vesting activity for Market-Based Shares during the year ended December 31, 2020, the associated compensation cost recognized in connection with each vesting event and the number of shares withheld to satisfy tax withholding obligations: Vesting Condition Date Vested Number of Shares Vested Compensation Cost Recognized Upon Vesting Shares Withheld for Taxes 1 Market-based (TEV = $19.8 billion) October 22, 2020 40.1 $ — 13.7 Market-based (TEV = $22.15 billion) November 24, 2020 39.9 $ 2,284 13.5 Market-based (TEV = $23.75 billion) December 14, 2020 138.5 $ 11,949 60.3 ( 1 ) Time-Based Shares granted to non-executive employees during 2020 will vest over periods ranging from three to four years, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. We did not grant any Time-Based Shares to executive officers during 2020. On April 27, 2020, we issued an aggregate of 5,970 restricted shares of common stock under the LTIP to the non-employee members of our Board of Directors. Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date. On November 23, 2020, we granted 1,610,000 Market-Based Shares to the Company’s founder and chief executive officer, Chad Richison, pursuant to the LTIP. These Market-Based Shares are eligible for vesting in two equal tranches. The first tranche vests if, within six years of the date of grant, the Company’s stock price (determined based on the arithmetic average of the volume weighted average price of a share of the Company’s common stock over 20 consecutive trading days (the “VWAP Value”)) equals or exceeds $1,000 per share. The second tranche vests if, within ten years of the date of grant, the Company’s VWAP Value equals or exceeds $1,750 per share. All awarded shares that vest must be held by Mr. Richison until the earlier of the (i) fifth anniversary date of the grant and (ii) one year after the vesting date. Our total compensation expense related to restricted stock was $90.1 million, $47.3 million and $36.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. There was $247.1 million of unrecognized compensation cost related to unvested shares of restricted stock outstanding as of December 31, 2020. The unrecognized compensation cost is expected to be recognized over a weighted average period of 4.1 years as of December 31, 2020. We capitalized stock-based compensation costs related to software developed for internal use of $6.7 million, $4.8 million and $3.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. The following table presents non-cash stock-based compensation expense resulting from restricted stock awards, which is included in the following line items in the accompanying consolidated statements of income: Year Ended December 31, 2020 2019 2018 Operating expenses $ 5,185 $ 4,376 $ 4,041 Sales and marketing 14,376 7,955 7,510 Research and development 9,107 5,428 3,013 General and administrative 61,440 29,509 21,847 Total non-cash stock-based compensation expense $ 90,108 $ 47,268 $ 36,411 Commitments and Contingencies Commitments and Contingencies 12 Months Ended Dec. 31, 2020 Commitments And Contingencies Disclosure [Abstract] Commitments and Contingencies 1 2 . Employment Agreements We have employment agreements with certain of our executive officers. The agreements allow for annual compensation, participation in executive benefit plans, and performance-based cash bonuses. Legal Proceedings As previously disclosed, since February 2019, we have received subpoenas and requests from the SEC focused on whether certain of our clients were charged, and paid, an additional amount for one or more applications for which the clients were already being charged. In connection with this matter, we identified less than 250 affected clients, representing approximately 0.5% of our client base as of December 31, 2020. Since December 2019, we have been in the process of notifying clients affected by such charges between approximately 2011 and September 2020 and have refunded approximately $3.0 million, in the aggregate, to such clients as of the date of this report. This issue did not have a material impact on our financial results for any prior period. The SEC staff has informed our legal counsel that its inquiry concerns our books and records and internal controls. We cannot predict the timing, scope or outcome of this matter. We are involved in various legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows. Income Taxes Income Taxes 12 Months Ended Dec. 31, 2020 Income Tax Disclosure [Abstract] Income Taxes 13. The items comprising income tax expense are as follows: Year Ended December 31, 2020 2019 2018 Provision for current income taxes Federal $ 14,680 $ 17,812 $ 12,414 State 6,422 6,688 4,155 Total provision for current income taxes 21,102 24,500 16,569 Provision for deferred income taxes Federal 15,204 16,209 14,365 State 6,177 4,802 6,712 Total provision for deferred income taxes 21,381 21,011 21,077 Total provision for income taxes $ 42,483 $ 45,511 $ 37,646 The following schedule reconciles the statutory Federal tax rate to the effective income tax rate: Year Ended December 31, 2020 2019 2018 Federal statutory tax rate 21 % 21 % 21 % Increase (decrease) resulting from: State income taxes, net of Federal income tax benefit 8 % 6 % 6 % Nondeductible expenses 6 % 3 % 1 % Research credit, Federal benefit (3 %) (3 %) (2 %) Stock-based compensation (9 %) (7 %) (4 %) Effective income tax rate 23 % 20 % 22 % Our effective income tax rate was 23% and 20% for the years ended December 31, 2020 and 2019, respectively. The higher effective income tax rate for the year ended December 31, 2020 primarily resulted from the increase in state income taxes and non-deductible expenses. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows: December 31, 2020 2019 Deferred income tax assets (liabilities): Stock-based compensation $ 1,219 $ 994 Investment in Paycom Payroll Holdings, LLC (114,514 ) (92,743 ) Net operating losses 697 532 Noncurrent deferred income tax liabilities, net $ (112,598 ) $ (91,217 ) At December 31, 2020, we had net operating loss carryforwards for state income tax purposes of approximately $0.7 million which are available to offset future state taxable income that begin expiring in 2030. At December 31, 2020 and 2019, we had no material unrecognized tax benefits related to uncertain tax positions. We file income tax returns with the United States federal government and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2017. Selected Quarterly Financial Da Selected Quarterly Financial Data (unaudited) 12 Months Ended Dec. 31, 2020 Quarterly Financial Information Disclosure [Abstract] Selected Quarterly Financial Data (unaudited) 14. The following tables set forth selected quarterly statements of income data for the periods indicated: Quarter Ended March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 Revenues $ 242,368 $ 181,587 $ 196,532 $ 220,947 Operating income $ 89,264 $ 26,576 $ 34,036 $ 36,247 Net income $ 63,015 $ 28,589 $ 27,482 $ 24,367 Earnings per share, basic $ 1.09 $ 0.50 $ 0.48 $ 0.42 Earnings per share, diluted $ 1.08 $ 0.49 $ 0.47 $ 0.42 Weighted average shares outstanding: Basic 57,655 57,568 57,603 57,653 Diluted 58,440 58,237 58,171 58,214 Quarter Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 Revenues $ 199,943 $ 169,313 $ 175,006 $ 193,409 Operating income $ 62,488 $ 52,886 $ 50,556 $ 60,294 Net income $ 47,282 $ 48,762 $ 39,152 $ 45,380 Earnings per share, basic $ 0.82 $ 0.85 $ 0.68 $ 0.79 Earnings per share, diluted $ 0.81 $ 0.83 $ 0.67 $ 0.78 Weighted average shares outstanding: Basic 57,357 57,569 57,654 57,659 Diluted 58,316 58,410 58,383 58,378 Subsequent Events Subsequent Events 12 Months Ended Dec. 31, 2020 Subsequent Events [Abstract] Subsequent Events 15. On February 5, 2021, we issued an aggregate of 143,593 restricted shares of common stock to certain non-executive employees under the LTIP, consisting of 42,816 Market-Based Shares and 100,777 Time-Based Shares. Market-Based Shares for nonexecutive employees will vest 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $520 per share and 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $600 per share, in each case provided that (i) such date occurs on or before the eighth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date. Time-Based Shares granted to non-executive employees will vest 21% on a specified initial vesting date, 21% on the first anniversary of such initial vesting date, 25% on the second anniversary of such initial vesting date, and 33% on the on the third anniversary of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. On February 10, 2021, the Compensation Committee of the Board of Directors (the “Compensation Committee”) adopted a form of Restricted Stock Unit Award Agreement – Performance Based Vesting (the “PSU Award Agreement”) under the LTIP. Each performance-based restricted stock unit (“PSU”) granted under the LTIP represents a notional share of the Company’s common stock. On February 10, 2021, the Compensation Committee also authorized the granting of PSUs (the “PSU Awards”) to certain executive officers pursuant to the LTIP, representing an aggregate of 52,470 target units that may increase to an aggregate of 131,176 awarded units based upon the Company’s performance over two separate performance periods. The PSU Awards will vest based on the Company’s performance over two performance periods: (i) a two-year performance period commencing on January 1, 2021 and ending on December 31, 2022 (the “Two-Year Performance Period”); and (ii) a three-year performance period commencing on January 1, 2021 and ending on December 31, 2023 (the “Three-Year Performance Period”). Up to 25% of the PSUs will be eligible to vest no later than March 1, 2023, for the Two-Year Performance Period, and up to 75% of the PSUs will be eligible to vest no later than February 29, 2024, for the Three-Year Performance Period, provided that the grantee remains employed by or providing services to the Company on the applicable vesting date. The number of PSUs that will vest and be converted into shares of common stock will depend on the Company’s “Relative Total Stockholder Return” (“Relative TSR”), expressed as a percentile ranking of the Company’s “Total Stockholder Return” (“TSR”) as compared to the Company’s peer group set forth in the PSU Award Agreement. The payout percentage determining the number of PSUs to be vested will be interpolated for Relative TSR performance between the 30th percentile and the 60th percentile and between the 60th percentile and the 90th percentile (based on whole percentages). For the avoidance of doubt, there will be no payout and no vested PSUs if the Relative TSR performance level set forth above is less than the 30th percentile of the peer group and the maximum payout percentage is 250% of the target units (thus, there is no interpolation for performance above the 90th percentile). For purposes of the PSU Awards, TSR is determined by dividing (i) the sum of (A) the average daily volume weighted average price (or “VWAP” as defined in the PSU Award Agreement) of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the final 60 trading day period of the applicable performance period, less (ii) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020, plus (iii) the sum of all dividends which are paid by the Company (or the member of the peer group) to its stockholders, assuming such dividends are reinvested in the applicable company through the applicable performance period, by (ii) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020. The Company’s peer group includes 34 publicly traded companies, which are reflective of the S&P 500 Software & Services index and were selected by the Compensation Committee. Summary of Significant Accoun_2 Summary of Significant Accounting Policies (Policies) 12 Months Ended Dec. 31, 2020 Accounting Policies [Abstract] Basis of Presentation Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Recently Adopted / Issued Accounting Pronouncements Adoption of New Pronouncements In January 2020, we adopted Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The adoption of this guidance did not have a material impact on our consolidated financial statements. In January 2020, we adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits. The adoption of this guidance did not have a material impact on our consolidated financial statements. In January 2019, we adopted ASU No. 2016-02, “Leases (Topic 842)” using the modified retrospective approach. Under this adoption method, we have not restated comparative prior periods and have carried forward the assessment of whether our contracts are or contain leases, the classification of our leases and the remaining lease terms. See Note 5 for a discussion of our adoption of this standard. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. In addition, the amendments provide that disclosure requirements related to the analysis of stockholders’ equity are expanded for interim financial statements. An analysis of the changes in each caption of stockholders’ equity presented in the balance sheet is provided in the consolidated statement of stockholders’ equity. During the three months ended June 30, 2019, we adopted ASU 2016-18, which was effective on January 1, 2018. This guidance requires that the consolidated statements of cash flows explain the change during the reporting period of the totals of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. Accordingly, we applied the guidance using the retrospective transition method to each period presented, which adjusted the consolidated statements of cash flows to include restricted cash held to satisfy client funds obligations, as a component of cash, cash equivalents, restricted cash and restricted cash equivalents. Recently Issued Accounting Pronouncements In March 2020, the Financial Accounting Standard Board issued ASU No. 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Our interest-bearing notes bear interest at our option, at either (a) a prime rate plus 1.0% or (b) fluctuating interest rates based on LIBOR. If LIBOR ceases to exist, we may need to renegotiate our loan documents and we cannot predict what alternative index would be negotiated with our lenders. ASU 2020-04 is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. We are currently assessing the impact that this guidance will have on our financial position and results of operations, if any. In December 2019, the Financial Accounting Standards Board issued ASU No. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income tax in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. We do not believe that the adoption of this guidance will have a material impact on our financial position and results of operations. Use of Estimates Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Segment Information Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer, in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets consists primarily of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Property and Equipment Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Land improvements 15 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2020, 2019 and 2018, we incurred interest costs of $1.5 million, $1.6 million and $1.6 million, respectively. For the years ended December 31, 2020, 2019 and 2018, interest costs of $1.5 million, $0.6 million and $0.8 million, respectively, were capitalized. Internal Use Software Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and amortized over a three-year period on a straight-line basis. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. We also expense internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities. The total capitalized payroll costs related to internal use computer software projects were $43.8 million and $30.4 million during the years ended December 31, 2020 and 2019, respectively, and are included in property and equipment. Amortization expense of capitalized software costs were $27.1 million, $19.0 million and $12.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Derivatives Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. We have not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets Goodwill is not amortized, but we are required to test the carrying value of goodwill for impairment at least annually, or earlier if, at the reporting unit level, an indicator of impairment arises. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date. A review of goodwill may be initiated before or after conducting the annual analysis if events or changes in circumstances indicate the carrying value of goodwill may no longer be recoverable. The Company performed a qualitative assessment to determine if it is more-likely-than-not that the fair value of the reporting units had declined below its carrying value. In the qualitative assessment, we consider the macroeconomic conditions, including any deterioration of general economic conditions, industry and market conditions, including any deterioration in the environment where the reporting unit operates, changes in the products/services and regulator and political developments; cost of doing business; overall financial performance; other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation. Based on our assessment, there was no impairment recorded as of June 30, 2020. For the years ended December 31, 2020, 2019 and 2018, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2020, 2019 and 2018. Funds Held for Clients and Client Funds Obligation Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date. As of December 31, 2020 and December 31, 2019, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets. These available-for-sale securities are recorded in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Stock Repurchase Plan Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in March 2020, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock. As of December 31, 2020 there was $135.3 million available for repurchases under our stock repurchase plan. The current stock repurchase plan will expire on March 12, 2022. During the year ended December 31, 2020, we repurchased an aggregate of 432,897 265.31 188,466 During the year ended December 31, 2019, we repurchased an aggregate of 219,764 shares of our common stock at an average cost of $193.51 per share to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Revenue Recognition Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales taxes and other applicable taxes are excluded from revenues. Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our applicant tracking, candidate tracker, background check, on-boarding, e-verify and tax credit services applications. Time and labor management includes time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting and geofencing/geotracking. Payroll includes our payroll and tax management, Paycom Pay, expense management, garnishment management and GL Concierge applications. Talent management includes our employee self-service, compensation budgeting, performance management, executive dashboard and Paycom learning and course content applications. HR management includes our document and task management, government and compliance, benefits administration, benefit enrollment services, COBRA administration, personnel action forms, surveys and enhanced Affordable Care Act applications. The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups. Implementation and Other Revenues Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations. Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent servi ces transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period ( i.e. , ten-year estimated client life). Revenu
Document and Entity Information Document and Entity Information - USD ($) $ in Billions 12 Months Ended Dec. 31, 2021 Feb. 08, 2022 Jun. 30, 2021 Cover [Abstract] Document Type 10-K Amendment Flag false Document Period End Date Dec. 31, 2021 Document Fiscal Year Focus 2021 Document Fiscal Period Focus FY Trading Symbol PAYC Entity Registrant Name Paycom Software, Inc. Entity Central Index Key 0001590955 Current Fiscal Year End Date --12-31 Entity Well-known Seasoned Issuer Yes Entity Current Reporting Status Yes Entity Voluntary Filers No Entity Filer Category Large Accelerated Filer Entity Small Business false Entity Emerging Growth Company false ICFR Auditor Attestation Flag true Entity Shell Company false Entity Common Stock, Shares Outstanding 60,213,519 Entity Public Float $ 18.6 Title of 12(b) Security Common Stock, $0.01 par value Security Exchange Name NYSE Entity File Number 001-36393 Entity Tax Identification Number 80-0957485 Entity Address, Address Line One 7501 W. Memorial Road Entity Address, City or Town Oklahoma City Entity Address, State or Province OK Entity Incorporation, State or Country Code DE Entity Address, Postal Zip Code 73142 City Area Code 405 Local Phone Number 722-6900 Entity Interactive Data Current Yes Document Annual Report true Document Transition Report false Auditor Firm ID 248 Auditor Name GRANT THORNTON LLP Auditor Location Oklahoma City, Oklahoma Documents Incorporated by Reference Portions of the registrant’s Definitive Proxy Statement on Schedule 14A to be furnished to stockholders in connection with its 2022 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10-14 of this Annual Report on Form 10-K. Consolidated Balance Sheets Consolidated Balance Sheets - USD ($) $ in Thousands Dec. 31, 2021 Dec. 31, 2020 Current assets: Cash and cash equivalents $ 277,978 $ 151,710 Accounts receivable 9,490 9,130 Prepaid expenses 23,729 17,854 Inventory 1,131 1,151 Income tax receivable 16,413 10,447 Deferred contract costs 76,724 60,819 Current assets before funds held for clients 405,465 251,111 Funds held for clients 1,846,573 1,613,494 Total current assets 2,252,038 1,864,605 Property and equipment, net 348,953 285,218 Intangible assets, net 58,028 319 Goodwill 51,889 51,889 Long-term deferred contract costs 461,852 371,357 Other assets 42,385 34,524 Total assets 3,215,145 2,607,912 Current liabilities: Accounts payable 5,772 6,787 Accrued commissions and bonuses 22,357 13,703 Accrued payroll and vacation 34,259 24,529 Deferred revenue 16,277 13,567 Current portion of long-term debt 1,775 1,775 Accrued expenses and other current liabilities 63,397 44,175 Current liabilities before client funds obligation 143,837 104,536 Client funds obligation 1,846,573 1,613,494 Total current liabilities 1,990,410 1,718,030 Deferred income tax liabilities, net 145,504 112,598 Long-term deferred revenue 85,149 73,259 Net long-term debt, less current portion 27,380 29,119 Other long-term liabilities 72,988 19,263 Total long-term liabilities 331,021 234,239 Total liabilities 2,321,431 1,952,269 Commitments and contingencies Stockholders’ equity: Common stock, $0.01 par value (100,000 shares authorized, 62,298 and 61,861 shares issued at December 31, 2021 and December 31, 2020, respectively; 58,012 and 57,739 shares outstanding at December 31, 2021 and December 31, 2020, respectively) 623 618 Additional paid-in capital 465,594 357,908 Retained earnings 915,579 719,619 Treasury stock, at cost (4,286 and 4,122 shares at December 31, 2021 and December 31, 2020, respectively) (488,082) (422,502) Total stockholders’ equity 893,714 655,643 Total liabilities and stockholders’ equity $ 3,215,145 $ 2,607,912 Consolidated Balance Sheets (Pa Consolidated Balance Sheets (Parenthetical) - $ / shares Dec. 31, 2021 Dec. 31, 2020 Statement Of Financial Position [Abstract] Common stock, par value $ 0.01 $ 0.01 Common stock, shares authorized 100,000,000 100,000,000 Common stock, shares issued 62,298,000 61,861,000 Common stock, shares outstanding 58,012,000 57,739,000 Treasury stock, shares 4,286,000 4,122,000 Consolidated Statements of Inco Consolidated Statements of Income - USD ($) shares in Thousands, $ in Thousands 12 Months Ended Dec. 31, 2021 Dec. 31, 2020 Dec. 31, 2019 Revenues Total revenues $ 1,055,524 $ 841,434 $ 737,671 Cost of revenues Operating expenses 130,475 97,778 89,336 Depreciation and amortization 31,411 25,768 20,411 Total cost of revenues 161,886 123,546 109,747 Administrative expenses Sales and marketing 275,994 235,716 179,286 Research and development 118,426 90,244 73,080 General and administrative 209,840 178,200 127,534 Depreciation and amortization 35,811 27,605 21,800 Total administrative expenses 640,071 531,765 401,700 Total operating expenses 801,957 655,311 511,447 Operating income 253,567 186,123 226,224 Interest expense (19) (940) Other income (expense), net 2,395 (168) 803 Income before income taxes 255,962 185,936 226,087 Provision for income taxes 60,002 42,483 45,511 Net income $ 195,960 $ 143,453 $ 180,576 Earnings per share, basic $ 3.39 $ 2.49 $ 3.14 Earnings per share, diluted $ 3.37 $ 2.46 $ 3.09 Weighted average shares outstanding: Basic 57,885 57,620 57,561 Diluted 58,191 58,285 58,395 Recurring [Member] Revenues Total revenues $ 1,036,691 $ 825,856 $ 724,428 Implementation and Other [Member] Revenues Total revenues $ 18,833 $ 15,578 $ 13,243 Consolidated Statements of Shar Consolidated Statements of Shareholders' Equity - USD ($) shares in Thousands, $ in Thousands Total Common Stock [Member] Additional Paid in Capital [Member] Retained Earnings [Member] Treasury Stock [Member] Beginning balance, value at Dec. 31, 2018 $ 334,753 $ 607 $ 203,680 $ 395,590 $ (265,124) Beginning balance, shares at Dec. 31, 2018 60,747 3,470 Vesting of restricted stock $ 6 (6) Vesting of restricted stock, shares 603 Stock-based compensation 53,827 53,827 Repurchases of common stock (42,528) $ (42,528) Repurchases of common stock, shares 219 Net income 180,576 180,576 Ending balance, value at Dec. 31, 2019 526,628 $ 613 257,501 576,166 $ (307,652) Ending balance, shares at Dec. 31, 2019 61,350 3,689 Vesting of restricted stock $ 5 (5) Vesting of restricted stock, shares 511 Stock-based compensation 100,412 100,412 Repurchases of common stock (114,850) $ (114,850) Repurchases of common stock, shares 433 Net income 143,453 143,453 Ending balance, value at Dec. 31, 2020 655,643 $ 618 357,908 719,619 $ (422,502) Ending balance, shares at Dec. 31, 2020 61,861 4,122 Vesting of restricted stock $ 5 (5) Vesting of restricted stock, shares 437 Stock-based compensation 107,691 107,691 Repurchases of common stock (65,580) $ (65,580) Repurchases of common stock, shares 164 Net income 195,960 195,960 Ending balance, value at Dec. 31, 2021 $ 893,714 $ 623 $ 465,594 $ 915,579 $ (488,082) Ending balance, shares at Dec. 31, 2021 62,298 4,286 Consolidated Statements of Cash Consolidated Statements of Cash Flows - USD ($) $ in Thousands 12 Months Ended Dec. 31, 2021 Dec. 31, 2020 Dec. 31, 2019 Cash flows from operating activities Net income $ 195,960 $ 143,453 $ 180,576 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 67,222 53,373 42,211 Accretion of discount on available-for-sale securities (452) (1,563) (940) Non-cash marketing expense 1,051 Loss on disposition of property and equipment 146 Amortization of debt issuance costs 36 36 35 Stock-based compensation expense 97,506 90,108 47,268 Cash paid for derivative settlement (741) (613) (81) (Gain)/loss on derivative (662) 1,993 1,456 Deferred income taxes, net 32,906 21,381 21,011 Changes in operating assets and liabilities: Accounts receivable (360) 168 (5,884) Prepaid expenses (5,875) (4,293) (5,903) Inventory 481 (41) (403) Other assets (7,862) (1,720) (3,555) Deferred contract costs (103,356) (89,776) (76,204) Accounts payable (660) 1,529 (221) Income taxes, net (5,966) (6,427) (58) Accrued commissions and bonuses 8,654 1,360 1,672 Accrued payroll and vacation 9,730 9,659 4,129 Deferred revenue 14,600 10,582 11,593 Accrued expenses and other current liabilities 17,004 (2,002) 7,561 Net cash provided by operating activities 319,362 227,207 224,263 Cash flows from investing activities Purchases of short-term investments from funds held for clients (398,819) (332,756) (195,811) Proceeds from maturities of short-term investments from funds held for clients 267,341 308,981 69,200 Purchases of intangible assets (5,500) Purchases of property and equipment (120,692) (94,102) (92,934) Net cash used in investing activities (257,670) (117,877) (219,545) Cash flows from financing activities Repurchases of common stock (52,040) Withholding taxes paid related to net share settlements (65,580) (62,811) (42,528) Payments on long-term debt (1,775) (1,775) (1,775) Net change in client funds obligation 233,079 (49,283) 694,991 Payment of debt issuance costs (16) Net cash provided by (used in) financing activities 165,724 (165,909) 650,672 Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents 227,416 (56,579) 655,390 Cash, cash equivalents, restricted cash and restricted cash equivalents Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 1,585,275 1,641,854 986,464 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period 1,812,691 1,585,275 1,641,854 Cash and cash equivalents 277,978 151,710 133,667 Restricted cash included in funds held for clients 1,534,713 1,433,565 1,508,187 Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized 2 891 Cash paid for income taxes 33,068 27,530 24,566 Non-cash investing and financing activities: Purchases of property and equipment, accrued but not paid 7,581 837 7,451 Stock-based compensation for capitalized software 7,141 6,655 4,757 Right of use assets obtained in exchange for operating lease liabilities $ 14,141 $ 9,693 $ 14,000 Organization and Description of Organization and Description of Business 12 Months Ended Dec. 31, 2021 Accounting Policies [Abstract] Organization and Description of Business 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Paycom Software, Inc. (“Software”) and its wholly-owned subsidiaries (collectively, the “Company”) is a leading provider of a comprehensive, cloud-based human capital management (“HCM”) solution delivered as Software-as-a-Service. Unless we state otherwise or the context otherwise requires, the terms “we,” “our,” “us” and the “Company” refer to Software and its consolidated subsidiaries. We provide functionality and data analytics that businesses need to manage the complete employment lifecycle from recruitment to retirement. Our solution requires virtually no customization and is based on a core system of record maintained in a single database for all HCM functions, including talent acquisition, time and labor management, payroll, talent management and human resources (“HR”) management applications. Summary of Significant Accounti Summary of Significant Accounting Policies 12 Months Ended Dec. 31, 2021 Accounting Policies [Abstract] Summary of Significant Accounting Policies 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Adoption of New Accounting Pronouncements In January 2021 In January 2020, we adopted ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”) utilizing the prospective transition method. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The adoption of this guidance did not have a material impact on our consolidated financial statements. In January 2020, we adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits. The adoption of ASU 2018-13 removed or modified disclosure requirements retrospectively to all periods presented, whereas any new requirements have been applied prospectively from the adoption date. The adoption of this guidance did not have a material impact on our consolidated financial statements. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Prior Period Reclassifications Certain immaterial prior period amounts have been reclassified to conform to the current period presentation. Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer, in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets generally consists of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Land improvements 15 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2021, 2020 and 2019, we incurred interest costs of $1.4 million, $1.5 million and $1.6 million, respectively. For the years ended December 31, 2021, 2020 and 2019, interest costs of $1.4 million, $1.5 million and $0.6 million, respectively, were capitalized. Leases Our leases primarily consist of noncancellable operating leases for office space. We recognize a right-of-use asset and operating lease liability on the lease commencement date based on the present value of the lease payments over the lease term. Operating lease liabilities are measured by discounting future lease payments at an estimated incremental borrowing rate. Right-of-use assets are amortized over the lease term and include adjustments related to prepaid rent. Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and on such projects. Expenditures for software purchases and software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. We also expense internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities. The total capitalized payroll costs related to internal use computer software projects were $52.9 million and $43.8 million during the years ended December 31, 2021 and 2020, respectively, and are included in property and equipment. Amortization expense of capitalized software costs were $36.5 million, $27.1 million and $19.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. We have not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in Other income (expense), net in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill is not amortized, but we are required to test the carrying value of goodwill for impairment at least annually, or earlier if, at the reporting unit level, an indicator of impairment arises. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date. A review of goodwill may be initiated before or after conducting the annual analysis if events or changes in circumstances indicate the carrying value of goodwill may no longer be recoverable. The Company performed a qualitative assessment to determine if it is more-likely-than-not that the fair value of the reporting unit had declined below its carrying value. In the qualitative assessment, we consider the macroeconomic conditions, including any deterioration of general economic conditions, industry and market conditions, including any deterioration in the environment where the reporting unit operates, changes in the products/services and regulator and political developments; cost of doing business; overall financial performance; other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation. Based on our assessment, there was no impairment recorded as of June 30, 2021. For the years ended December 31, 2021, 2020 and 2019, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2021, 2020 and 2019. Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date. As of December 31, 2021 and December 31, 2020, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets. These available-for-sale securities are recorded in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Additionally, the funds held for clients is classified as restricted cash and restricted cash equivalents and presented within the reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents on the consolidated statements of cash flows . Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in May 2021, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock. As of December 31, 2021 there was $266.3 million available for repurchases under our stock repurchase plan. The current stock repurchase plan will expire on May 13, 2023. During the year ended December 31, 2021, we repurchased an aggregate of shares of our common stock at an average cost of $ per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. During the year ended December 31, 2020, we repurchased an aggregate of shares of our common stock at an average cost of $ per share, including shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales taxes and other applicable taxes are excluded from revenues. Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our Applicant Tracking, Candidate Tracker, Enhanced Background Checks, Onboarding, E-Verify and Tax Credit Services applications. Time and labor management includes Time and Attendance, Scheduling/Schedule exchange, Time-Off Requests, Labor Allocation, Labor Management Reports/Push Reporting, Geofencing/Geotracking and Microfence tools and applications. Payroll includes Beti, Payroll and Tax Management, Paycom Pay, Expense Management, Mileage Tracker/FAVR, Garnishment Administration and GL Concierge applications. Talent management includes our Employee Self-Service, Compensation Budgeting, Performance Management, Position Management, My Analytics and Paycom Learning and Content Subscriptions applications. HR management includes our Manager on-the-Go, Direct Data Exchange, Ask Here, Documents and Checklists, Government and Compliance, Benefits Administration/Benefits to Carrier, Benefit Enrollment Service, COBRA Administration, Personnel Action Forms and Performance Discussion Forms, Surveys, Enhanced ACA and Clue applications The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with these revenues is one month due to the fact that both we and the client have the unilateral right to terminate a wholly unperformed contract without compensating the other party by providing 30 days’ notice of termination. Our payroll application is the foundation of our solution, and all of our clients are required to utilize this application in order to access our other applications. For clients who purchase multiple applications, due to the short-term nature of our contracts, we do not believe it is meaningful to separately assess and identify whether or not each application potentially represents its own, individual, performance obligation as the revenue generated from each application is recognized within the same month as the revenue from the core payroll application. Similarly, we do not believe it is meaningful to individually determine the standalone selling price for each application. We consider the total price charged to a client in a given period to be indicative of the standalone selling price, as the total amount charged is within a reasonable range of prices typically charged for our goods and services for comparable classes of client groups, which we periodically assess for price adjustments. Implementation and Other Revenues Implementation and other revenues consist of nonrefundable upfront conversion fees which are charged to new clients to offset the expense of new client set-up as well as revenues from the sale of time clocks as part of our employee time and attendance services. Although these revenues are related to our recurring revenues, they represent distinct performance obligations. Implementation activities primarily represent administrative activities that allow us to fulfill future performance obligations for our clients and do not represent services transferred to the client. However, the nonrefundable upfront fee charged to our clients results in an implied performance obligation in the form of a material right to the client related to the client’s option to renew at the end of each 30-day contract period. Further, given that all other services within the contract are sold at a total price indicative of the standalone selling price, coupled with the fact that the upfront fees are consistent with upfront fees charged in similar contracts that we have with clients, the standalone selling price of the client’s option to renew the contract approximates the dollar amount of the nonrefundable upfront fee. The nonrefundable upfront fee is typically included on the client’s first invoice, and is deferred and recognized ratably over the estimated renewal period ( i.e. Revenues from the sale of time clocks are recognized when control is transferred to the client upon delivery of the product. We estimate the standalone selling price for the time clocks by maximizing the use of observable inputs such as our specific pricing practices for time clocks. Contract Balances The timing of revenue recognition for recurring services is consistent with the invoicing of clients as they both occur during the respective client payroll period for which the services are provided. Therefore, we do not recognize a contract asset or liability resulting from the timing of revenue recognition and invoicing. Changes in deferred revenue related to material right performance obligations for the years ended December 31, 2021 and 2020 were as follows: Year Ended December 31, 2021 2020 Balance, beginning of period $ 86,826 $ 76,244 Deferral of revenue 38,580 29,005 Recognition of unearned revenue (23,980 ) (18,423 ) Balance, end of period $ 101,426 $ 86,826 We expect to recognize $16.1 million of deferred revenue related to material right performance obligations in 2022, $15.6 million in 2023, and $69.7 million of such deferred revenue thereafter Assets Recognized from the Costs to Obtain and Costs to Fulfill Revenue Contracts We recognize an asset for the incremental costs of obtaining a contract with a client if we expect the amortization period to be longer than one year. We also recognize an asset for the costs to fulfill a contract with a client if such costs are specifically identifiable, generate or enhance resources used to satisfy future performance obligations, and are expected to be recovered. We have determined that substantially all costs related to implementation activities are administrative in nature and also meet the capitalization criteria under ASC 340-40. These capitalized costs to fulfill principally relate to upfront direct costs that are expected to be recovered through margin and that enhance our ability to satisfy future performance obligations. The assets related to both costs to obtain, and costs to fulfill, contracts with clients are accounted for utilizing a portfolio approach, and are capitalized and amortized over the expected period of benefit, which we have determined to be the estimated client relationship of ten years. The expected period of benefit has been determined to be the estimated life of the client relationship primarily because we incur no new costs to obtain, or costs to fulfill, a contract upon renewal of such contract. Additional commission costs may be incurred when an existing client purchases additional applications; however, these commission costs relate solely to the additional applications purchased and are not related to contract renewal. Furthermore, additional fulfillment costs associated with existing clients purchasing additional applications are minimized by our seamless single-database platform. These assets are presented as deferred contract costs in the accompanying consolidated balance sheets. Amortization expense related to costs to obtain and costs to fulfill a contract are included in the “sales and marketing” and “general and administrative” line items in the accompanying consolidated statements of income. The following tables present the asset balances and related amortization expense for these contract costs: As of and for the Year Ended December 31, 2021 Beginning Capitalization Ending Balance of Costs Amortization Balance Costs to obtain a contract $ 232,583 $ 77,644 $ (37,308 ) $ 272,919 Costs to fulfill a contract $ 199,593 $ 96,728 $ (30,664 ) $ 265,657 As of and for the Year Ended December 31, 2020 Beginning Capitalization Ending Balance of Costs Amortization Balance Costs to obtain a contract $ 194,964 $ 68,149 $ (30,530 ) $ 232,583 Costs to fulfill a contract $ 143,788 $ 78,477 $ (22,672 ) $ 199,593 Cost of Revenues Our costs and expenses applicable to total revenues represent operating expenses and systems support and technology costs, including labor and related expenses, bank fees, shipping fees and costs of paper stock, envelopes, etc. In addition, costs included to derive gross margins are comprised of support labor and related expenses, related hardware costs and applicable depreciation and amortization costs. Advertising Costs Advertising costs are expensed the first time that advertising takes place. Advertising costs for the years ended December 31, 2021, 2020 and 2019 were $71.6 million, $66.9 million and $25.9 million, respectively. Sales Taxes We collect and remit sales tax on sales of time and attendance clocks and on payroll services in certain states. These taxes are recognized on a net basis, and therefore, excluded from revenues. For the years ended December 31, 2021, 2020 and 2019, sales taxes collected were $11.9 million, $9.7 million and $8.3 million, respectively. Employee Stock-Based Compensation Time-based stock compensation awards to employees are recognized on a straight-line basis over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Market-based stock compensation awards to employees are recognized on a straight-line basis over the applicable estimated vesting period as compensation costs in the consolidated statements of income based on their fair value as of the date of the grant unless vesting occurs sooner at which time the remaining respective unrecognized compensation cost is recognized. Performance-based restricted stock compensation awards are recognized on a straight-line basis over the applicable vesting period as compensation costs in the consolidated statements of income based on their fair values measured as of the date of grant. Forfeitures related to our stock-based compensation awards are recognized as they occur. Employee Stock Purchase Plan An award issued under the Paycom Software, Inc. Employee Stock Purchase Plan (the “ESPP”) is classified as a share-based liability and recognized at the fair value of the award. Expense is recognized, net of estimated forfeitures, on a straight-line basis over the requisite service period. Income Taxes Our consolidated financial statements include a provision for income taxes incurred for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We file income tax returns with the United States federal government and various state jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing our tax returns and disallow the recognition of tax positions not deemed to meet a “more-likely-than-not” threshold of being sustained by the applicable tax authority. We do not believe there are any tax positions taken within the consolidated financial statements that do not meet this threshold. Our policy is to recognize interest and penalties, if any, related to uncertain tax positions as a component of general and administrative expenses. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2018. Seasonality Our revenues are seasonal in nature and generally we expect our first and fourth quarter recurring revenues to be higher than other quarters during the year. Recurring revenues include revenues relating to the annual processing of payroll tax filing forms and ACA form filing requirements, such as Form W-2, Form 1099, and Form 1095 and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. As payroll tax forms are typically processed in the first quarter of the year, first quarter recurring revenues and margins are positively impacted. In addition, unscheduled payroll runs at the end of the year (such as bonuses) often result in increased recurring revenues in the fourth quarter. These seasonal fluctuations in revenues can also have an impact on gross profits. Historical results impacted by these seasonal trends should not be considered a reliable indicator of our future results of operations. Recently Issued Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Our interest-bearing notes bear interest at our option, at either (a) a prime rate plus 1.0% or (b) fluctuating interest rates based on a one-month USD LIBOR rate. Once the one-month USD LIBOR rate ceases to exist, we will have to renegotiate our loan documents and cannot predict what alternative index would be negotiated with our lenders. ASU 2020-04 is currently effective and we plan to adopt and apply ASU 2020-04 prospectively to contract modifications made on or before December 31, 2022. We are currently assessing the impact that this guidance will have on our consolidated financial statements. In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848) Scope” (“ASU 2021-01”), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that are affected by the discounting transition. ASU 2021-01 amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 is currently effective and upon adoption may be applied to contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. We are currently assessing the impact that this guidance will have on our consolidated financial statements. Property and Equipment Property and Equipment 12 Months Ended Dec. 31, 2021 Property Plant And Equipment [Abstract] Property and Equipment 3. PROPERTY AND EQUIPMENT Property and equipment and accumulated depreciation and amortization were as follows: December 31, 2021 December 31, 2020 Property and equipment Software and capitalized software costs $ 199,470 $ 144,190 Buildings 172,807 115,772 Computer equipment 102,509 68,181 Rental clocks 30,313 25,474 Furniture, fixtures and equipment 24,971 19,829 Other 16,397 7,016 546,467 380,462 Less: accumulated depreciation and amortization (242,652 ) (178,111 ) 303,815 202,351 Construction in progress 11,342 53,833 Land 33,796 29,034 Property and equipment, net $ 348,953 $ 285,218 We capitalize computer software development costs related to software developed for internal use in accordance with ASC 350-40. For the years ended December 31, 2021 and 2020, we capitalized $52.9 million and $43.8 million, respectively, of computer software development costs related to software developed for internal use. Rental clocks included in property and equipment, net represent time clocks issued to clients under month-to-month operating leases. As such, these items are transferred from inventory to property and equipment and depreciated over their estimated useful lives. We capitalize interest incurred for indebtedness related to construction in progress. For the years ended December 31, 2021, 2020 and 2019, we incurred interest costs of $1.4 million, $1.5 million and $1.6 million, respectively. For the years ended December 31, 2021, 2020 and 2019, interest cost of $1.4 million, $1.5 million and $0.6 million, respectively, was capitalized. Included in the construction in progress balance at December 31, 2021 and 2020 is $0.1 million and $3.5 million in retainage, respectively. Depreciation and amortization expense for property and equipment, net was $64.7 million, $53.2 million and $42.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Goodwill and Intangible Assets, Goodwill and Intangible Assets, Net 12 Months Ended Dec. 31, 2021 Goodwill And Intangible Assets Disclosure [Abstract] Goodwill and Intangible Assets, Net 4. GOODWILL AND INTANGIBLE ASSETS, NET As of both December 31, 2021 and 2020, goodwill totaled $51.9 million. We have selected June 30 as our annual goodwill impairment testing date. We have elected to perform a qualitative analysis of the fair value of our goodwill and determined there was no impairment as of either June 30, 2021 or 2020. As of December 31, 2021 and 2020, there were no indicators of impairment. In connection with our marketing initiatives, we have 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 have committed to make payments escalating annually from $ million in 2021 to $ million in 2035. We also made a $ million one-time payment in July 2021 to cover sponsorship rights leading up to the 2021-2022 season. Upon the conclusion of the initial term, the agreement may be extended upon the mutual agreement of both parties for an additional five-year period. The cost of the naming rights has been recorded as an intangible asset with an offsetting liability as of the date of the contract. The intangible asset is being amortized over the life of the agreement on a straight line basis that commenced in June 2021. The difference between the present value of the offsetting liability and actual cash payments is being relieved through sales and marketing expense using the effective interest method over the life of the agreement All of our intangible assets other than goodwill are considered to have definite lives and, as such, are subject to amortization. The following table presents the components of intangible assets within our consolidated balance sheets: December 31, 2021 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Naming rights 14.8 $ 60,199 $ (2,278 ) $ 57,921 Trade name 0.5 3,194 (3,087 ) 107 Total $ 63,393 $ (5,365 ) $ 58,028 December 31, 2020 Weighted Average Remaining Accumulated Useful Life Gross Amortization Net (Years) Intangibles: Trade name 1.5 $ 3,194 $ (2,875 ) $ 319 Total $ 3,194 $ (2,875 ) $ 319 Amortization of intangible assets for the years ended December 31, 2021, 2020 and 2019 was $2.5 million, $0.2 million and $0.2 million, respectively. We estimate the aggregate amortization expense will be $4.0 million in 2022, and $3.9 million for each of 2023, 2024, 2025 and 2026, respectively. Leases Leases 12 Months Ended Dec. 31, 2021 Leases [Abstract] Leases 5. LEASES The Company’s leases primarily consist of noncancellable operating leases for office space with contractual terms expiring from 2022 to 2027. All of our leases are operating leases and, as a lessee, we have not entered into any sublease agreements. The lease term is defined as the fixed noncancellable term of the lease plus all periods, if any, for which failure to renew the lease imposes a penalty on us in an amount that appears, at the inception of the lease, to be reasonably assured. While some of our leases include an option to extend the lease up to five years, it is not reasonably certain that any such options will be exercised due, in part, to the dynamic nature of our sales force and rate of growth. Some of our leases contain termination options that are not reasonably certain to be exercised. If a renewal or termination option is exercised, we remeasure the lease asset in the consolidated balance sheets using the updated lease period. None of our leases contain residual value guarantees, substantial restrictions or covenants. The table below presents the lease assets and liabilities as of December 31, 2021 and December 31, 2020. Balance Sheet location December 31, 2021 December 31, 2020 Other assets $ 29,841 $ 26,481 Lease liabilities: Accrued expenses and other current liabilities $ 10,853 $ 10,906 Other long-term liabilities $ 20,059 $ 16,990 Rent expense under operating leases for the years ended December 31, 2021, 2020 and 2019 was $11.9 million, $11.3 million and $10.1 million, respectively. Cash paid for amounts relating to our operating leases was $13.3 million for the year ended December 31, 2021. Because no implicit discount rates for our leases could be readily determined, we elected to use an estimated incremental borrowing rate to determine the present value of our leases. The weighted average discount rate related to our portfolio of leases at December 31, 2021 was 3.3%. The average remaining lease term for our leases was 2.8 years as of December 31, 2021. The undiscounted cash flows for the future annual maturities of our operating lease liabilities and the reconciliation of those total undiscounted cash flows to our lease liabilities as of December 31, 2021 were as follows: 2022 $ 11,069 2023 9,160 2024 5,954 2025 3,082 2026 1,490 Thereafter 2,204 Total undiscounted cash flows $ 32,959 Present value discount (2,047 ) Lease liabilities $ 30,912 The table above does not include any legally binding minimum lease payments for leases signed but not yet commenced. As of December 31, 2021, the present value of the operating lease liabilities that had not yet commenced was $1.9 million. Long-Term Debt, Net Long-Term Debt, Net 12 Months Ended Dec. 31, 2021 Debt Disclosure [Abstract] Long-Term Debt, Net 6 . LONG-TERM DEBT, NET Long-term debt consisted of the following: December 31, 2021 December 31, 2020 Net term note to bank due September 7, 2025 $ 29,155 $ 30,894 Total long-term debt, net (including current portion) 29,155 30,894 Less: Current portion (1,775 ) (1,775 ) Total long-term debt, net $ 27,380 $ 29,119 On December 7, 2017, we entered into a senior secured term credit agreement (as amended from time to time, the “Term Credit Agreement”), pursuant to which JPMorgan Chase Bank, N.A., Bank of America, N.A. and Kirkpatrick Bank made certain term loans to us ( the “Term Loans”). Our obligations under the Term Loans are secured by a mortgage and first priority security interest in our corporate headqu arters property. The Term Loans mature on September 7, 2025 and bear interest, at our option, at either (a) a prime rate plus 1.0 % or (b) an adjusted LIBOR rate for the interest period in effect for such Term Loan plus 1.5 %. As of December 31, 20 2 1 , our long-term indebtedness consisted solely of the Term Loans made under the Term Credit Agreement. Unamortized debt issuance costs of $ 0.1 million and $ 0.2 million as of December 31, 20 2 1 and 20 20 , respectively, are presented as a direct deduction from the carrying amount of the debt liability. Under the Term Credit Agreement, we are subject to two material financial covenants, which require us to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. As of December 31, 2021, we were in compliance with these covenants. On February 12, 2018, we entered into a senior secured revolving credit agreement (the “Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A. and Bank of America, N.A. that provided for a senior secured revolving credit facility (the “Facility”) in the aggregate principal amount of $50.0 million (the “Revolving Commitment”), which could be increased to up to $100.0 million, subject to obtaining additional lender commitments and certain approvals and satisfying certain other conditions. The Facility includes a $5.0 million sublimit for swingline loans and a $2.5 million sublimit for letters of credit. The Facility was scheduled to mature on February 12, 2020. On April 15, 2019, we entered into the First Amendment to Revolving Credit Agreement (the “First Amendment”). Pursuant to the First Amendment, Wells Fargo Bank, N.A., was added as a lender and the Revolving Commitment was increased to $75.0 million, which may be further increased to $125.0 million subject to obtaining additional lender commitments and certain approvals and satisfying other conditions. The scheduled maturity date of the Facility was extended to April 15, 2022. Borrowings under the Facility will generally bear interest at a prime rate plus 1.0% or, at our option, an adjusted LIBOR rate for the interest period in effect for such borrowing plus 1.5%. The proceeds of the loans and letters of credit under the Facility are to be used only for our general business purposes and working capital. Letters of credit are to be issued only to support our business operations. As of December 31, 2021, we did not have any borrowings outstanding under the Facility. Under the Revolving Credit Agreement, we are required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0 and a funded indebtedness to EBITDA ratio of not greater than 2.0 to 1.0. Additionally, the Revolving Credit Agreement contains customary affirmative and negative covenants, including covenants limiting our ability to, among other things, grant liens, incur debt, effect certain mergers, make certain investments, dispose of assets, enter into certain transactions, including swap agreements and sale and leaseback transactions, pay dividends or distributions on our capital stock, and enter into transactions with affiliates, in each case subject to customary exceptions for a facility of the size and type of the Facility. As of December 31, 2021, we were in compliance with all covenants related to the Revolving Credit Agreement. As of December 31, 2021 and 2020, the carrying value of our total long-term debt approximated its fair value as of such date. The fair value of our long-term debt is estimated based on the borrowing rates currently available to us for bank loans with similar terms and maturities. Aggregate future maturities of long-term debt for the next five years and thereafter (including current portion) as of December 31, 2021 are as follows: Year Ending December 31, 2022 $ 1,775 2023 1,775 2024 1,775 2025 23,963 2026 — Thereafter — Total $ 29,288 Derivative Instruments Derivative Instruments 12 Months Ended Dec. 31, 2021 Derivative Instruments And Hedging Activities Disclosure [Abstract] Derivative Instruments 7 . DERIVATIVE INSTRUMENTS In December 2017, we entered into a floating-to-fixed interest rate swap agreement to limit the exposure to floating interest rate risk related to the Term Loans. We do not hold derivative instruments for trading or speculative purposes. The interest rate swap agreement effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We account for our derivatives under ASC Topic 815, “Derivatives and Hedging,” and recognize all derivative instruments in the consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. See Note 8 , “Fair Va lue of Financial Instruments”. We have elected not to designate our interest rate swap as a hedge; therefore, changes in the fair value of the derivative instrument are recognized in our consolidated statements of income within Other income (expense) , net. The objective of the interest rate swap is to reduce the variability in the forecasted interest payments of the Term Loans, which is based on a one-month USD LIBOR rate versus a fixed interest rate of 2.54% on a notional value of $35.5 million. Under the terms of the interest rate swap agreement, we will receive quarterly variable interest payments based on the LIBOR rate and will pay interest at a fixed rate. The interest rate swap agreement has a maturity date of September 7, 2025. For the year ended December 31, 2021, we recorded a gain of $1.4 million for the change in fair value of the interest rate swap and for the year ended December 31, 2020, we recorded a loss of $1.4 million for the change in fair value of the interest rate swap. The change in the fair value of the interest rate swap is included in Other income (expense), net in the consolidated statements of income. Fair Value of Financial Instrum Fair Value of Financial Instruments 12 Months Ended Dec. 31, 2021 Fair Value Disclosures [Abstract] Fair Value of Financial Instruments 8 . FAIR VALUE OF FINANCIAL INSTRUMENTS Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients, client funds obligation and long-term debt. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, funds held for clients and client funds obligation approximates fair value due to the short-term nature of the instruments. See Note 6 for discussion of the fair value of our debt. As discussed in Note 2, we invest the funds held for clients in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit, and classify these items as cash and cash equivalents within the funds held for clients line item in the consolidated balance sheets. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item. These available-for-sale securities are recognized in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. All of our available-for-sale securities had expected maturity dates of twelve months or less at December 31, 2021. As discussed in Note 7, during the year ended December 31, 2017, we entered into an interest rate swap. The interest rate swap is measured on a recurring basis based on quoted prices for similar financial instruments and other observable inputs recognized at fair value. The accounting standard for fair value measurements establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: • Level 1 – Observable inputs such as quoted prices in active markets • Level 2 – Inputs other than quoted prices in active markets for identical assets or liabilities that are observable either directly or indirectly or quoted prices that are not active • Level 3 – Unobservable inputs in which there is little or no market data Included in the following tables are the Company’s major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020: December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Commercial paper $ — $ 311,679 $ — $ 311,679 Certificates of deposit $ — $ — $ — $ — Liabilities: Interest rate swap $ — $ 1,335 $ — $ 1,335 December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Commercial paper $ — $ 99,929 $ — $ 99,929 Certificates of deposit $ — $ 80,000 $ — $ 80,000 Liabilities: Interest rate swap $ — $ 2,738 $ — $ 2,738 Employee Savings Plan and Emplo Employee Savings Plan and Employee Stock Purchase Plan 12 Months Ended Dec. 31, 2021 Compensation Related Costs [Abstract] Employee Savings Plan and Employee Stock Purchase Plan 9 . EMPLOYEE SAVINGS PLAN AND EMPLOYEE STOCK PURCHASE PLAN Employees over the age of 18 who have completed ninety days of service are eligible to participate in our 401(k) plan. We have made a Qualified Automatic Contribution Arrangement (“QACA”) election, whereby the Company matches the contribution of our employees equal to 100% of the first 1% of salary deferrals and 50% of salary deferrals between 2% and 6%, up to a maximum matching contribution of 3.5% of an employee’s salary each plan year. We are allowed to make additional discretionary matching contributions and discretionary profit sharing contributions. Employees are 100% vested in amounts attributable to salary deferrals and rollover contributions. The QACA matching contributions as well as the discretionary matching and profit sharing contributions vest 100% after two years of employment from the date of hire. Matching contributions were $11.6 million, $8.6 million and $6.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. The ESPP has overlapping offering periods, with each offering period lasting approximately 24 months. At the beginning of each offering period, eligible employees may elect to contribute, through payroll deductions, up to 10% of their compensation, subject to an annual per employee maximum of $25,000. Eligible employees purchase shares of the Company’s common stock at a price equal to 85% of the fair market value of the shares on the exercise date. The maximum number of shares that may be purchased by a participant during each offering period is 2,000 shares, subject to limits specified by the Internal Revenue Service. The shares reserved for purposes of the ESPP are shares we purchase in the open market. The maximum aggregate number of shares of the Company’s common stock that may be purchased by all participants under the ESPP is 2.0 million shares. During the years ended December 31, 2021, 2020 and 2019, eligible employees purchased 40,699, 51,407 and 46,662 shares, respectively, of the Company’s common stock under the ESPP. Compensation expense related to the ESPP is recognized on a straight-line basis over the requisite service period. Our compensation expense related to the ESPP was $2.7 million, $2.3 million and $1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Earnings Per Share Earnings Per Share 12 Months Ended Dec. 31, 2021 Earnings Per Share [Abstract] Earnings Per Share 10 . EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to basic earnings per share after assuming the issuance of shares of common stock for all potentially dilutive shares of restricted stock whether or not they are vested. In accordance with ASC Topic 260, “Earnings Per Share,” the two-class method determines earnings for each class of common stock and participating securities according to an earnings allocation formula that adjusts the income available to common stockholders for dividends or dividend equivalents and participation rights in undistributed earnings. Certain unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The unvested shares of restricted stock granted in 2015 are considered participating securities, while all other unvested shares of restricted stock are not considered participating securities. As of December 31, 2020, all shares of restricted stock granted in 2015 have vested. The following is a reconciliation of net income and the shares of common stock used in the computation of basic and diluted earnings per share: Year Ended December 31, 2021 2020 2019 Numerator: Net income $ 195,960 $ 143,453 $ 180,576 Less: income allocable to participating securities — — (81 ) Income allocable to common shares $ 195,960 $ 143,453 $ 180,495 Add back: undistributed earnings allocable to participating securities $ — $ — $ 81 Less: undistributed earnings reallocated to participating securities — — (80 ) Numerator for diluted earnings per share $ 195,960 $ 143,453 $ 180,496 Denominator: Basic weighted average shares outstanding 57,885 57,620 57,561 Dilutive effect of unvested restricted stock 306 665 834 Diluted weighted average shares outstanding 58,191 58,285 58,395 Earnings per share: Basic $ 3.39 $ 2.49 $ 3.14 Diluted $ 3.37 $ 2.46 $ 3.09 Stock-Based Compensation Stock-Based Compensation 12 Months Ended Dec. 31, 2021 Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] Stock-Based Compensation 1 1 . STOCK-BASED COMPENSATION Restricted Stock Awards We have historically issued shares of restricted stock under the Paycom Software, Inc. 2014 Long-Term Incentive Plan (as amended, the “LTIP”) that are subject to either time-based vesting conditions (“Time-Based Shares”) or market-based vesting conditions (“Market-Based Shares”). The maximum number of shares that may be delivered pursuant to awards under the LTIP is 13,350,881 shares. The market-based vesting conditions are based on the Company’s total enterprise value (“TEV”) or volume weighted average stock price exceeding certain specified thresholds. Compensation expense related to the issuance of Time-Based Shares is measured based on the fair value of the award on the grant date and recognized over the requisite service period on a straight-line basis. Compensation expense related to the issuance of Market-Based Shares is measured based upon the fair value of the award on the grant date and recognized on a straight-line basis over the vesting period based upon the probability that the vesting conditions will be met. During the year ended December 31, 2021, we issued an aggregate of % on October 30, 2021, which was the first date that the arithmetic average of the Company’s volume weighted average price on each of the twenty consecutive trading days immediately preceding such date (the “VWAP Value”) equaled or exceeded $ % will vest on the first date, if any, that the Company’s VWAP Value equals or exceeds $ per share, in each case provided that (i) such date occurs on or before the eighth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement. The Time-Based Shares granted to employees generally vest over periods ranging from , provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement. Of the 138,051 Time-Based Shares mentioned above, on May 3, 2021, we issued an aggregate of 3,558 Time-Based Shares to the non-employee members of our Board of Directors. Such shares of restricted stock will cliff-vest on the seventh day following the first anniversary of the date of grant, provided that such director is providing services to the Company through the applicable vesting date, and subject to the terms and conditions of the LTIP and the applicable restricted stock award agreement . The following table presents a summary of the grant-date fair values of restricted stock granted during the years ended December 31, 2021, 2020 and 2019 and the related assumptions: Year Ended December 31, 2021 2020 2019 Grant-date fair value of restricted stock $315.95 - $521.17 $99.56 - $377.68 $99.07 - $269.04 Risk-free interest rate 0.95% 0.52% - 1.44% 2.62% Estimated volatility 33.0% 30.0% - 32.0% 30.0% Expected life (in years) 2.3 4.4 1.7 The following table summarizes restricted stock awards activity for the year ended December 31, 2021: Time-Based Market-Based Restricted Stock Awards Restricted Stock Awards Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Unvested shares of restricted stock outstanding at December 31, 2020 559.8 $ 156.48 1,748.5 $ 115.91 Granted 138.1 $ 426.76 42.9 $ 331.35 Vested (280.4 ) $ 132.24 (157.2 ) $ 208.55 Forfeited (47.9 ) $ 279.12 (5.9 ) $ 330.35 Unvested shares of restricted stock outstanding at December 31, 2021 369.6 $ 259.94 1,628.3 $ 111.87 The following table summarizes vesting activity for Market-Based Shares during the year ended December 31, 2021, the associated compensation cost recognized in connection with each vesting event and the number of shares withheld to satisfy tax withholding obligations: Vesting Condition Date Vested Number of Shares Vested Compensation Cost Recognized Upon Vesting Shares Withheld for Taxes 1 Market-based (TEV = $27.7 billion) September 11, 2021 138.5 $ 5,973 60.3 VWAP Value exceeded $520 per share October 30, 2021 18.7 $ 2,197 6.6 ( 1 ) The following table presents the aggregate fair value of awards that vested during the indicated period. 2021 2020 2019 Time-Based Restricted Stock Awards $ 97,242 $ 76,653 $ 66,769 Market-Based Restricted Stock Awards $ 76,153 $ 90,122 $ 50,262 Performance-Based Restricted Stock Units In February 2021, the Compensation Committee authorized the granting of performance-based restricted stock units (“PSUs”) to certain executive officers pursuant to the LTIP (the “2021 PSU Awards”). Each PSU granted under the LTIP represents a notional share of the Company’s common stock. The 2021 PSU Awards represented an aggregate of 52,470 target units that may increase to an aggregate of 131,176 awarded units based upon the Company’s performance over two separate performance periods. The 2021 PSU Awards will vest based on the Company’s performance over two separate performance periods: (i) a two-year performance period commencing on January 1, 2021 and ending on December 31, 2022 (the “Two-Year Performance Period”); and (ii) a three-year performance period commencing on January 1, 2021 and ending on December 31, 2023 (the “Th ree-Year Performance Period”). Up to 25 % of the PSUs will be eligible to vest no later than March 1, 2023 , for the Two-Year Performance Period, and up to 75 % of the PSUs will be eligible to vest no later than February 29, 2024 , for the Three-Year Performance Period, provided that the grantee remains employed by or providing services to the Company o n the applicable vesting date, and subject to the terms and conditions of the LTIP and the Restricted Stock Unit Award Agreement – Performance Based Vesting (the “PSU Award Agreement”). The number of PSUs that will vest and be converted into shares of common stock will depend on the Company’s “Relative Total Stockholder Return” (“Relative TSR”), expressed as a percentile ranking of the Company’s “Total Stockholder Return” (“TSR”) as compared to the Company’s peer group set forth in the PSU Award Agreement . For purposes of the 2021 PSU Awards, TSR is determined by dividing (i) the sum of (A) the average daily volume weighted average price (or “VWAP” as defined in the PSU Award Agreement) of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the final 60 trading day period of the applicable performance period, less (B) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020, plus (C) the sum of all dividends which are paid by the Company (or the member of the peer group) to its stockholders, assuming such dividends are reinvested in the applicable company through the applicable performance period, by (ii) the average VWAP of a share of the Company’s common stock or the common stock of a peer company, as applicable, during the 60 trading day period ending on December 31, 2020. The Company’s peer group includes 34 publicly traded companies, which are reflective of the S&P 500 Software & Services index and were selected by the Compensation Committee On April 2, 2021, Jeffrey D. York resigned from his position as Chief Sales Officer of the Company and accepted a new role as Leadership Strategist of the Company. In connection with the change in Mr. York’s role, the Company and Mr. York entered into a letter agreement that, among other things, (i) amended that certain Amended and Restated Executive Employment Agreement, dated March 9, 2020, by and between the Company and Mr. York, to, among other things, reflect the change in Mr. York’s role, eliminate certain executive-level benefits and remove the termination and severance provisions, and (ii) forfeited and released the 2021 PSU Award granted to Mr. York on February 10, 2021. On April 2, 2021, the Board of Directors appointed Holly Faurot to succeed Mr. York as Chief Sales Officer of the Company. In connection with her appointment, Mrs. Faurot was granted an award of PSUs pursuant to the LTIP. Consistent with the 2021 PSU Awards granted to certain other executive officers of the Company on February 10, 2021, Mrs. Faurot received 5,445 target PSUs, subject to the terms and conditions of the LTIP and the PSU Award Agreement. The following table presents a summary of the grant-date fair values of PSUs granted during the year ended December 31, 2021 and the related assumptions: Year Ended December 31, 2021 Grant-date fair value of PSUs $382.78 - $587.97 Risk-free interest rate 0.11% - 0.34% Estimated volatility 50.3% - 51.2% Expected life (in years) 2.6 The following table summarizes the PSU activity for the year ended December 31, 2021: PSUs Units Weighted Average Grant Date Fair Value Unvested PSUs outstanding at December 31, 2020 — $ — Granted 57.9 $ 564.68 Forfeited (20.8 ) $ 579.30 Unvested PSUs outstanding at December 31, 2021 (1) 37.1 $ 556.50 (1) The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested restricted stock awards and unvested PSU awards as of December 31, 2021: Restricted Stock Awards PSUs Unrecognized compensation cost $ 204,364 $ 13,596 Weighted average period for recognition (years) 3.7 1.8 The following table presents our total non-cash stock-based compensation expense resulting from restricted stock awards and PSU awards, in the aggregate, which is included in the following line items in the accompanying consolidated statements of income: Year Ended December 31, 2021 2020 2019 Operating expenses $ 4,570 $ 5,185 $ 4,376 Sales and marketing 13,801 14,376 7,955 Research and development 7,527 9,107 5,428 General and administrative 71,608 61,440 29,509 Total non-cash stock-based compensation expense $ 97,506 $ 90,108 $ 47,268 We capitalized stock-based compensation costs related to software developed for internal use of $7.1 million, $6.7 million and $4.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. Commitments and Contingencies Commitments and Contingencies 12 Months Ended Dec. 31, 2021 Commitments And Contingencies Disclosure [Abstract] Commitments and Contingencies 1 2 . COMMITMENTS AND CONTINGENCIES Employment Agreements We have employment agreements with certain of our executive officers. The agreements allow for annual compensation, participation in executive benefit plans, and performance-based cash bonuses. Legal Proceedings As previously disclosed, starting in February 2019, we received subpoenas and requests from the SEC focused on whether certain of our clients were charged, and paid, an additional amount for one or more applications for which the clients were already being charged. In connection with this matter, we identified fewer than 250 affected clients, representing approximately 0.5% of our client base as of December 31, 2020. We made diligent efforts to notify the affected clients and reached substantially all that were affected by such charges between approximately 2011 and September 2020. We have refunded approximately $3.0 million, in the aggregate, to such clients. We have also instituted a control aimed at preventing this situation from reoccurring. This issue did not have a material impact on our financial results for any prior period. In connection with this matter, we paid a total of $0.25 million to the SEC to settle two accounting-related charges concerning our books and records and internal controls. We neither admitted nor denied the SEC’s findings with respect to these charges. We are involved in various legal proceedings in the ordinary course of business. Although we cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows. Income Taxes Income Taxes 12 Months Ended Dec. 31, 2021 Income Tax Disclosure [Abstract] Income Taxes 13. INCOME TAXES The items comprising income tax expense are as follows: Year Ended December 31, 2021 2020 2019 Provision for current income taxes Federal $ 17,557 $ 14,680 $ 17,812 State 9,539 6,422 6,688 Total provision for current income taxes 27,096 21,102 24,500 Provision for deferred income taxes Federal 26,579 15,204 16,209 State 6,327 6,177 4,802 Total provision for deferred income taxes 32,906 21,381 21,011 Total provision for income taxes $ 60,002 $ 42,483 $ 45,511 The following schedule reconciles the statutory Federal tax rate to the effective income tax rate: Year Ended December 31, 2021 2020 2019 Federal statutory tax rate 21 % 21 % 21 % Increase (decrease) resulting from: State income taxes, net of Federal income tax benefit 8 % 8 % 6 % Nondeductible expenses 6 % 6 % 3 % Research credit, Federal benefit (3 %) (3 %) (3 %) Stock-based compensation (7 %) (9 %) (7 %) Remeasurement of state deferred tax liabilities (2 %) 0 % 0 % Effective income tax rate 23 % 23 % 20 % Our effective income tax rate was 23% and 23% for the years ended December 31, 2021 and 2020, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities were as follows: December 31, 2021 2020 Deferred income tax assets (liabilities): Stock-based compensation $ 1,541 $ 1,219 Investment in Paycom Payroll Holdings, LLC (147,659 ) (114,514 ) Net operating losses 614 697 Noncurrent deferred income tax liabilities, net $ (145,504 ) $ (112,598 ) At December 31, 2021, we had net operating loss carryforwards for state income tax purposes of approximately $0.6 million which are available to offset future state taxable income that begin expiring in 2029. At December 31, 2021 and 2020, we had no material unrecognized tax benefits related to uncertain tax positions. We file income tax returns with the United States federal government and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2018. Subsequent Events Subsequent Events 12 Months Ended Dec. 31, 2021 Subsequent Events [Abstract] Subsequent Events 1 4 . SUBSEQUENT EVENTS On February 2, 2022, we issued an aggregate of 206,375 restricted shares of common stock to certain non-executive employees under the LTIP, consisting of 59,424 Market-Based Shares and 146,951 Time-Based Shares. Market-Based Shares for non-executive employees will vest 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $484 per share and 50% on the first date, if any, that the Company’s VWAP Value equals or exceeds $559 per share, in each case provided that (i) such date occurs on or before the eighth anniversary of the grant date and (ii) the recipient is employed by, or providing services to, the Company on the applicable vesting date. Of the 146,951 Time-Based Shares granted to non-executive employees, 138,618 will vest 21% on a specified initial vesting date, 21% on the first anniversary of such initial vesting date, 25% on the second anniversary of such initial vesting date, and 33% on the on the third anniversary of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. The remaining 8,333 Time-Based Shares will vest 25% on a specified initial vesting date and 25% on each of the first three anniversaries of such initial vesting date, provided that the recipient is employed by, or providing services to, the Company on the applicable vesting date. On February 7, 2022, the Compensation Committee also authorized the granting of PSUs (the “2022 PSU Awards”) to certain executive officers pursuant to the LTIP, representing an aggregate of 51,494 target units that may increase to an aggregate of 128,735 awarded units based upon the Company’s performance over two separate performance periods. The terms of the 2022 PSU Awards are substantially the same as the terms of the 2021 PSU Awards, except that the two-year performance period commences January 1, 2022 and ends December 31, 2023 and the three-year performance period commences January 1, 2022 and ends December 31, 2024. Up to 25% of the PSUs will be eligible to vest no later than February 29, 2024, for the two-year performance period, and up to 75% of the PSUs will be eligible to vest no later than March 1, 2025, for the three-year performance period, provided that the grantee remains employed by or providing services to the Company on the applicable vesting date. The number of PSUs that will vest and be converted into shares of common stock will depend on the Company’s Relative TSR, expressed as a percentile ranking of the Company’s TSR as compared to the Company’s peer group set forth in the PSU Award Agreement. The Company’s peer group includes 35 publicly traded companies, which are reflective of the S&P 500 Software & Services index and were selected by the Compensation Committee. The calculation of TSR for purposes of the 2022 PSU Awards is the same as for the 2021 PSU Awards, except that references to the average VWAP during the 60 trading day period ending December 31, 2020 are replaced with the average VWAP during the 60 trading day period ending December 31, 2021. Summary of Significant Accoun_2 Summary of Significant Accounting Policies (Policies) 12 Months Ended Dec. 31, 2021 Accounting Policies [Abstract] Basis of Presentation Basis of Presentation Our consolidated financial statements include the financial results of Software and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary for the fair presentation for the periods presented. Such adjustments are of a normal recurring nature. Recently Adopted / Issued Accounting Pronouncements Adoption of New Accounting Pronouncements In January 2021 In January 2020, we adopted ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2018-15”) utilizing the prospective transition method. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The adoption of this guidance did not have a material impact on our consolidated financial statements. In January 2020, we adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU No. 2018-13 modifies the disclosure requirements in Topic 820, “Fair Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements,” including consideration of costs and benefits. The adoption of ASU 2018-13 removed or modified disclosure requirements retrospectively to all periods presented, whereas any new requirements have been applied prospectively from the adoption date. The adoption of this guidance did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Our interest-bearing notes bear interest at our option, at either (a) a prime rate plus 1.0% or (b) fluctuating interest rates based on a one-month USD LIBOR rate. Once the one-month USD LIBOR rate ceases to exist, we will have to renegotiate our loan documents and cannot predict what alternative index would be negotiated with our lenders. ASU 2020-04 is currently effective and we plan to adopt and apply ASU 2020-04 prospectively to contract modifications made on or before December 31, 2022. We are currently assessing the impact that this guidance will have on our consolidated financial statements. In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848) Scope” (“ASU 2021-01”), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that are affected by the discounting transition. ASU 2021-01 amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 is currently effective and upon adoption may be applied to contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. We are currently assessing the impact that this guidance will have on our consolidated financial statements. Use of Estimates Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include income taxes, loss contingencies, the useful life of property and equipment and intangible assets, the life of our client relationships, the fair value of our stock-based awards and the fair value of our financial instruments, intangible assets and goodwill. These estimates are based on historical experience, where applicable, and other assumptions that management believes are reasonable under the circumstances. Actual results could materially differ from these estimates. Prior Period Reclassifications Prior Period Reclassifications Certain immaterial prior period amounts have been reclassified to conform to the current period presentation. Segment Information Segment Information We operate in a single operating segment and a single reporting segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is also the chief executive officer, in deciding how to allocate resources and assessing performance. Our chief executive officer allocates resources and assesses performance based upon financial information at the consolidated level. As we operate in one operating segment, all required financial segment information is presented in the consolidated financial statements. Cash Equivalents Cash Equivalents We consider all highly liquid instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. We maintain cash and cash equivalents in demand deposit accounts, money market funds, and certificates of deposit, which may not be federally insured. The fair value of our cash and cash equivalents approximates carrying value. We have not experienced any losses in such accounts and do not believe there is exposure to any significant credit risk on such accounts. Accounts Receivable Accounts Receivable We generally collect revenues from our clients through an automatic deduction from the clients’ bank accounts at the time payroll processing occurs. Accounts receivable on our consolidated balance sheets generally consists of revenue fees related to the last business day of the year, which are collected on the following business day. As accounts receivable are collected via automatic deduction on the following business day, the Company has not recognized an allowance for doubtful accounts. Property and Equipment Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight line method over the estimated useful lives of the assets as follows: Furniture, fixtures and equipment 5 years Computer equipment 3 years Software and capitalized software 3 years Buildings 30 years Leasehold improvements 3 - 5 years Rental clocks 5 years Land improvements 15 years Vehicles 3 years Our leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Costs incurred during construction of long-lived assets are recorded as construction in progress and are not depreciated until the asset is placed in service. We capitalize interest costs incurred related to construction in progress. For the years ended December 31, 2021, 2020 and 2019, we incurred interest costs of $1.4 million, $1.5 million and $1.6 million, respectively. For the years ended December 31, 2021, 2020 and 2019, interest costs of $1.4 million, $1.5 million and $0.6 million, respectively, were capitalized. Leases Leases Our leases primarily consist of noncancellable operating leases for office space. We recognize a right-of-use asset and operating lease liability on the lease commencement date based on the present value of the lease payments over the lease term. Operating lease liabilities are measured by discounting future lease payments at an estimated incremental borrowing rate. Right-of-use assets are amortized over the lease term and include adjustments related to prepaid rent. Internal Use Software Internal Use Software Capitalized costs include external direct costs of materials and services associated with developing or obtaining internal use computer software and on such projects. Expenditures for software purchases and software developed or obtained for internal use are capitalized and amortized over a three-year period on a straight-line basis. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensed as incurred. We also expense internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities. The total capitalized payroll costs related to internal use computer software projects were $52.9 million and $43.8 million during the years ended December 31, 2021 and 2020, respectively, and are included in property and equipment. Amortization expense of capitalized software costs were $36.5 million, $27.1 million and $19.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Derivatives Derivatives In December 2017, we entered into a floating-to-fixed rate swap agreement to limit the exposure to interest rate risk related to our debt. Our interest rate swap effectively converts a portion of the variable interest rate payments to fixed interest rate payments. We do not hold derivative instruments for trading or speculative purposes. We have not elected to designate the interest rate swap as a hedge. Changes in the fair value of the derivative are recognized in Other income (expense), net in our consolidated statements of income. Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets Goodwill is not amortized, but we are required to test the carrying value of goodwill for impairment at least annually, or earlier if, at the reporting unit level, an indicator of impairment arises. Our business is largely homogeneous and, as a result, goodwill is associated with one reporting unit. We have selected June 30 as our annual goodwill impairment testing date. A review of goodwill may be initiated before or after conducting the annual analysis if events or changes in circumstances indicate the carrying value of goodwill may no longer be recoverable. The Company performed a qualitative assessment to determine if it is more-likely-than-not that the fair value of the reporting unit had declined below its carrying value. In the qualitative assessment, we consider the macroeconomic conditions, including any deterioration of general economic conditions, industry and market conditions, including any deterioration in the environment where the reporting unit operates, changes in the products/services and regulator and political developments; cost of doing business; overall financial performance; other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation. Based on our assessment, there was no impairment recorded as of June 30, 2021. For the years ended December 31, 2021, 2020 and 2019, there were no indicators of impairment. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Impairment of Long-Lived Assets Impairment of Long-Lived Assets Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the years ended December 31, 2021, 2020 and 2019. Funds Held for Clients and Client Funds Obligation Funds Held for Clients and Client Funds Obligation As part of our payroll and tax filing application, we (i) collect client funds to satisfy their respective federal, state and local employment tax obligations, (ii) remit such funds to the appropriate taxing authorities and accounts designated by our clients, and (iii) manage client tax filings and any related correspondence with taxing authorities. Amounts collected by us from clients for their federal, state and local employment taxes are invested by us, and we earn interest on these funds during the interval between receipt and disbursement. These investments are shown in our consolidated balance sheets as funds held for clients, and the offsetting liability for the tax filings is shown as client funds obligation. The liability is recorded in the accompanying consolidated balance sheets at the time we obtain the funds from clients. The client funds obligation represents liabilities that will be repaid within one year of the consolidated balance sheet date. As of December 31, 2021 and December 31, 2020, the funds held for clients were invested in money market funds, demand deposit accounts, commercial paper with a maturity duration less than three months and certificates of deposit. Short-term investments in commercial paper and certificates of deposit with an original maturity duration greater than three months are classified as available-for-sale securities, and are also included within the funds held for clients line item in the consolidated balance sheets. These available-for-sale securities are recorded in the consolidated balance sheets at fair value, which approximates the amortized cost of the securities. Funds held for clients are classified as a current asset in the consolidated balance sheets because the funds are held solely to satisfy the client funds obligation. Additionally, the funds held for clients is classified as restricted cash and restricted cash equivalents and presented within the reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents on the consolidated statements of cash flows . Stock Repurchase Plan Stock Repurchase Plan In May 2016, our Board of Directors authorized a stock repurchase plan allowing for the repurchase of shares of our common stock in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs. Since the initial authorization of the stock repurchase plan, our Board of Directors has amended and extended and authorized new stock repurchase plans from time to time. Most recently, in May 2021, our Board of Directors authorized the repurchase of up to $300.0 million of our common stock. As of December 31, 2021 there was $266.3 million available for repurchases under our stock repurchase plan. The current stock repurchase plan will expire on May 13, 2023. During the year ended December 31, 2021, we repurchased an aggregate of shares of our common stock at an average cost of $ per share, all of which were shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. During the year ended December 31, 2020, we repurchased an aggregate of shares of our common stock at an average cost of $ per share, including shares withheld to satisfy tax withholding obligations for certain employees upon the vesting of restricted stock. Revenue Recognition Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our clients in an amount that reflects the consideration we expect to be entitled to for those goods or services. Substantially all of our revenues are comprised of revenue from contracts with clients. Sales taxes and other applicable taxes are excluded from revenues. Recurring Revenues Recurring revenues are derived primarily from our talent acquisition, time and labor management, payroll, talent management and HR management applications as well as fees charged for form filings and delivery of client payroll checks and reports. Talent acquisition includes our Applicant Tracking, Candidate Tracker, Enhanced Background Checks, Onboarding, E-Verify and Tax Credit Services applications. Time and labor management includes Time and Attendance, Scheduling/Schedule exchange, Time-Off Requests, Labor Allocation, Labor Management Reports/Push Reporting, Geofencing/Geotracking and Microfence tools and applications. Payroll includes Beti, Payroll and Tax Management, Paycom Pay, Expense Management, Mileage Tracker/FAVR, Garnishment Administration and GL Concierge applications. Talent management includes our Employee Self-Service, Compensation Budgeting, Performance Management, Position Management, My Analytics and Paycom Learning and Content Subscriptions applications. HR management includes our Manager on-the-Go, Direct Data Exchange, Ask Here, Documents and Checklists, Government and Compliance, Benefits Administration/Benefits to Carrier, Benefit Enrollment Service, COBRA Administration, Personnel Action Forms and Performance Discussion Forms, Surveys, Enhanced ACA and Clue applications The performance obligations related to recurring revenues are satisfied during each client’s payroll period, with the agreed-upon fee being charged and collected as part of our processing of the client’s payroll. Recurring revenues are recognized at the conclusion of processing of each client’s payroll period, when each respective payroll client is billed. Collectability is reasonably assured as the fees are collected through an automated clearing house as part of the client’s payroll cycle or through direct wire transfer, which minimizes the default risk. The contract period for substantially all contracts associated with t
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