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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
————————
Form 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2023
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission file number 001-40640
PAYCOR HCM, INC.
(Exact name of registrant as specified in its charter)
Delaware
83-1813909
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4811 Montgomery Road
Cincinnati, OH
45212
(Address of Principal Executive Offices)(Zip Code)
(800) 381-0053
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per share
PYCR
The NASDAQ Stock Market LLC
(Nasdaq Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
————————
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filero
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of January 31, 2024, the number of shares of the Registrant’s Common Stock outstanding was 178,030,054 shares.

1

Table of Contents
Table of Contents
Part I - FINANCIAL INFORMATION
Part II - OTHER INFORMATION
         Signatures
2

Table of Contents
Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, our objectives for future operations, and any statements of a general economic or industry specific nature, are forward-looking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely,” “outlook,” “potential,” “targets,” “contemplates,” or the negative or plural of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe, based on information currently available to our management, may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, related to our operations, financial results, financial condition, business, prospects, growth strategy, and liquidity. Accordingly, there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:

Our ability to manage our growth effectively.
The resulting effects of unauthorized access to our customers’ or their employees’ personal data as a result of a breach of our or our vendors’ securities measures, including by way of computer viruses, worms, phishing and ransomware attacks, malicious software programs, and other data security threats.
The expansion and retention of our direct sales force with qualified and productive persons and the related effects on the growth of our business.
The impact on customer expansion and retention if implementation, user experience, customer service, or performance relating to our solutions is not satisfactory.
The timing of payments made to employees and taxing authorities relative to the timing of when a customer’s electronic funds transfers are settled to our account.
Future acquisitions of other companies’ businesses, technologies, or customer portfolios.
The continued service of our key executives.
Our ability to innovate and deliver high-quality, technologically advanced products and services.
Our ability to attract and retain qualified personnel, including software developers and skilled IT, sales, marketing, and operation personnel.
The proper operation of our software.
Our relationships with third parties.
Damage, failure, or disruption of our Software-as-a-Service (“SaaS”) delivery model, data centers, or our third-party providers’ services.
Our ability to protect our intellectual and proprietary rights.
The use of open source software in our applications.
The growth of the market for cloud-based human capital management and payroll software among small and medium- sized businesses (“SMBs”).
The competitiveness of our market generally.
The ongoing effects of inflation, supply chain disruptions, labor shortages and other adverse macroeconomic conditions in the markets in which we and our customers operate.
The impact of an economic downturn or recession in the United States (“U.S.”) or global economy.
Our customers’ dependence on our solutions to comply with applicable laws.
Our ability to comply with anti-corruption, anti-bribery and similar laws.
3

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Changes in laws, regulations, or requirements applicable to our software and services.
The impact of privacy, data protection, tax and other laws and regulations.
Our ability to maintain effective internal controls over financial reporting.
The other risk factors set forth under Item 1A of Part I of our Annual Report on Form 10-K, filed with the SEC on August 28, 2023.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations and assumptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We undertake no obligation to publicly update any forward-looking statement after the date of this report, whether as a result of new information, future developments or otherwise, or to conform these statements to actual results or revised expectations, except as may be required by law.
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Table of Contents
Part I - FINANCIAL INFORMATION



Item 1. Financial Statements
Paycor HCM, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
 December 31,
2023
June 30,
2023
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$61,719 $95,233 
Accounts receivable, net44,945 30,820 
Deferred contract costs63,290 54,448 
Prepaid expenses12,861 10,448 
Other current assets9,307 2,581 
Current assets before funds held for clients192,122 193,530 
Funds held for clients1,325,163 1,049,156 
Total current assets1,517,285 1,242,686 
Property and equipment, net36,893 34,573 
Operating lease right-of-use assets15,346 16,834 
Goodwill767,193 767,738 
Intangible assets, net214,081 260,472 
Capitalized software, net61,652 53,983 
Long-term deferred contract costs177,843 162,657 
Other long-term assets2,921 2,232 
Total assets$2,793,214 $2,541,175 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$25,510 $28,350 
Accrued expenses and other current liabilities29,290 24,119 
Accrued payroll and payroll related expenses32,521 43,858 
Deferred revenue13,361 13,083 
Current liabilities before client fund obligations100,682 109,410 
Client fund obligations1,325,792 1,053,926 
Total current liabilities1,426,474 1,163,336 
Deferred income taxes12,940 18,047 
Long-term operating leases14,602 16,061 
Other long-term liabilities70,937 70,047 
Total liabilities1,524,953 1,267,491 
Commitments and contingencies (Note 13)
Stockholders' equity:
 Common stock $0.001 par value per share, 500,000,000 shares authorized, 177,634,296 shares outstanding at December 31, 2023 and 176,535,236 shares outstanding at June 30, 2023
178 177 
Treasury stock, at cost, 10,620,260 shares at December 31, 2023 and June 30, 2023
(245,074)(245,074)
 Preferred stock, $0.001 par value, 50,000,000 shares authorized, shares outstanding at December 31, 2023 and June 30, 2023
  
Additional paid-in capital2,049,501 2,011,194 
Accumulated deficit(536,340)(489,495)
Accumulated other comprehensive loss(4)(3,118)
Total stockholders' equity1,268,261 1,273,684 
Total liabilities and stockholders' equity$2,793,214 $2,541,175 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
5


Paycor HCM, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share amounts)
 Three Months Ended December 31,Six Months Ended December 31,
 2023202220232022
Revenues:
Recurring and other revenue$147,232 $124,982 $279,940 $239,151 
Interest income on funds held for clients12,309 7,882 23,189 12,016 
Total revenues159,541 132,864 303,129 251,167 
Cost of revenues55,125 46,184 106,503 89,369 
Gross profit104,416 86,680 196,626 161,798 
Operating expenses:
Sales and marketing57,753 51,913 110,531 100,108 
General and administrative56,173 52,461 104,922 100,372 
Research and development16,665 13,875 30,720 26,277 
Total operating expenses130,591 118,249 246,173 226,757 
Loss from operations(26,175)(31,569)(49,547)(64,959)
Other (expense) income:
Interest expense(1,153)(404)(2,397)(1,491)
Other(1,745)66 (814)511 
Loss before benefit for income taxes(29,073)(31,907)(52,758)(65,939)
Income tax benefit(2,824)(4,444)(5,913)(9,424)
Net loss$(26,249)$(27,463)$(46,845)$(56,515)
Basic and diluted net loss per share$(0.15)$(0.16)$(0.26)$(0.32)
Weighted average common shares outstanding:
Basic and diluted177,567,397 175,830,554177,260,396 175,671,565 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
 
6


Paycor HCM, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
Three Months Ended Six Months Ended
 December 31,December 31,
 2023202220232022
Net loss$(26,249)$(27,463)$(46,845)$(56,515)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on foreign currency translation183 116 15 (307)
Unrealized gain (loss) on available-for-sale securities, net of tax3,273 1,234 3,099 (466)
Other comprehensive income (loss), net of tax3,456 1,350 3,114 (773)
Comprehensive loss$(22,793)$(26,113)$(43,731)$(57,288)
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
7


Paycor HCM, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Three Months Ended December 31, 2022
 Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
SharesAmountSharesAmountTreasury
Stock
Balance, September 30, 2022 $ 175,643,109 $176 $(245,074)$1,947,102 $(424,441)$(3,904)$1,273,859 
Net loss— — — — — — (27,463)— (27,463)
Stock-based compensation expense— — — — — 20,684 — — 20,684 
Net settlement for taxes— — — — — (434)— — (434)
Issuance of common stock under employee stock plans— — 213,541 — — — — — — 
Other comprehensive income— — — — — — — 1,350 1,350 
Balance, December 31, 2022 $ 175,856,650 $176 $(245,074)$1,967,352 $(451,904)$(2,554)$1,267,996 
Three Months Ended December 31, 2023
 Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
 SharesAmountSharesAmountTreasury
Stock
Balance, September 30, 2023 $ 177,104,017 $177 $(245,074)$2,027,863 $(510,091)$(3,460)$1,269,415 
Net loss— — — — — — (26,249)— (26,249)
Stock-based compensation expense— — — — — 23,049 — — 23,049 
Net settlement for taxes— — — — — (1,411)— — (1,411)
Issuance of common stock under employee stock plans— — 530,279 1 — — — — 1 
Other comprehensive income— — — — — — — 3,456 3,456 
Balance, December 31, 2023 $ 177,634,296 $178 $(245,074)$2,049,501 $(536,340)$(4)$1,268,261 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
 
8


Paycor HCM, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Six Months Ended December 31, 2022
 Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
 Income
Total
Stockholders'
Equity
 SharesAmountSharesAmountTreasury
Stock
Balance, June 30, 2022 $ 174,909,539 $175 $(245,074)$1,926,800 $(395,389)$(1,781)$1,284,731 
Net loss attributable to Paycor HCM, Inc.— — — — — — (56,515)— (56,515)
Stock-based compensation expense— — — — — 37,635 — — 37,635 
Net settlement for taxes— — — — — (1,727)— — (1,727)
Issuance of common stock under employee stock plans— — 947,111 1 — 4,644 — — 4,645 
Other comprehensive loss— — — — — — — (773)(773)
Balance, December 31, 2022 $ 175,856,650 $176 $(245,074)$1,967,352 $(451,904)$(2,554)$1,267,996 
Six Months Ended December 31, 2023
 Preferred StockCommon StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
 SharesAmountSharesAmountTreasury
Stock
Balance, June 30, 2023 $ 176,535,236 $177 $(245,074)$2,011,194 $(489,495)$(3,118)$1,273,684 
Net loss— — — — — — (46,845)— (46,845)
Stock-based compensation expense— — — — — 35,964 — — 35,964 
Net settlement for taxes— — — — — (1,829)— — (1,829)
Issuance of common stock under employee stock plans— — 1,099,060 1 — 4,172 — — 4,173 
Other comprehensive income— — — — — — — 3,114 3,114 
Balance, December 31, 2023 $ 177,634,296 $178 $(245,074)$2,049,501 $(536,340)$(4)$1,268,261 
The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
9


Paycor HCM, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended
 December 31,
 20232022
Cash flows from operating activities:  
Net loss$(46,845)$(56,515)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation2,997 2,396 
Amortization of intangible assets and software68,312 61,094 
Amortization of deferred contract costs29,876 21,094 
Stock-based compensation expense35,964 37,635 
Deferred tax benefit(5,937)(9,533)
Bad debt expense2,870 2,023 
Loss on sale of investments142 209 
Loss on foreign currency exchange4 376 
(Gain) loss on lease exit(29)818 
Naming rights accretion expense2,061 1,314 
Change in fair value of contingent consideration2,816  
Other44 44 
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable(17,003)(12,184)
Prepaid expenses and other assets(7,487)(3,474)
Accounts payable(3,207)5,715 
Accrued liabilities and other(10,892)(21,783)
Deferred revenue255 (202)
Deferred contract costs(53,904)(47,525)
Net cash provided by (used in) operating activities37 (18,498)
Cash flows from investing activities:
Purchases of client funds available-for-sale securities(151,939)(320,191)
Proceeds from sale and maturities of client funds available-for-sale securities103,453 214,017 
Purchase of property and equipment(2,068)(2,621)
Acquisition of intangible assets(4,133)(5,074)
Acquisition of businesses, net of cash acquired(28)(18,791)
Internally developed software costs(25,308)(18,672)
Net cash used in investing activities(80,023)(151,332)
Cash flows from financing activities:
Net change in cash and cash equivalents held to satisfy client funds obligations270,540 (527,738)
Payment of capital expenditure financing(3,689) 
Repayments of debt and finance lease obligations(536)(140)
Withholding taxes paid related to net share settlements(1,829)(1,727)
Proceeds from exercise of stock options 345 
Proceeds from employee stock purchase plan4,172 4,300 
Net cash provided by (used in) financing activities268,658 (524,960)
Impact of foreign exchange on cash and cash equivalents11 (6)
Net change in cash, cash equivalents, restricted cash and short-term investments, and funds held for clients188,683 (694,796)
Cash, cash equivalents, restricted cash and short-term investments, and funds held for clients, beginning of period879,046 1,682,923 
Cash, cash equivalents, restricted cash and short-term investments, and funds held for clients, end of period$1,067,729 $988,127 
Supplemental disclosure of non-cash investing, financing and other cash flow information:
Capital expenditures in accounts payable$39 $68 
Cash paid for interest$145 $ 
Right-of-use assets obtained in exchange for operating lease liabilities$ $6,417 
Capital lease asset obtained in exchange for capital lease liabilities$3,393 $ 
Reconciliation of cash, cash equivalents, restricted cash and short-term investments, and funds held for clients to the Consolidated Balance Sheets
Cash and cash equivalents$61,719 $72,277 
Funds held for clients1,006,010 915,850 
Total cash, cash equivalents, restricted cash and short-term investments, and funds held for clients$1,067,729 $988,127 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
10


Paycor HCM, Inc. and Subsidiaries
Notes to the Unaudited Condensed Consolidated Financial Statements
(all amounts in thousands, except share and per share data)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
Paycor HCM, Inc. (“Paycor HCM” or “the Company”) is a leading provider of human capital management (“HCM”) software located primarily in the United States (“U.S.”). Paycor’s solutions target small and medium-sized businesses with tens to thousands of employees. Solutions provided include payroll, human resources (“HR”) services, talent acquisition, talent management, workforce management, benefits administration, reporting and analytics, and other payroll-related services. Services are generally provided in a Software-as-a-Service (“SaaS”) delivery model utilizing a cloud-based platform.
Paycor HCM is a holding company with no material operating assets or operations that was formed on August 24, 2018 to effect the acquisition of Paycor, Inc. and its subsidiaries (“Paycor”) by certain investment funds (the “Apax Funds”) advised by Apax Partners LLP, a leading global private equity advisory firm (“Apax Partners”). On September 7, 2018, Paycor HCM, through its subsidiary companies, entered into the Agreement and Plan of Merger to acquire Paycor (the “Apax Acquisition”). The Apax Acquisition closed on November 2, 2018. As a result of the Apax Acquisition, Paycor became an indirect controlled subsidiary of Paycor HCM.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation and consolidation
The accompanying interim unaudited condensed consolidated financial statements of the Company were prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim reporting. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended June 30, 2023 in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 28, 2023. The unaudited condensed consolidated financial statements for interim periods do not include all disclosures required by U.S. GAAP for annual financial statements and are not necessarily indicative of results for any future interim periods and the full fiscal year ending June 30, 2024. Adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the unaudited condensed consolidated financial position, results of operations and cash flows at the dates and for the periods presented have been included. All intercompany transactions and balances have been eliminated in consolidation.
 Use of estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the evaluation of potential impairment of goodwill and intangible assets and the valuation of stock-based compensation.
The Company’s results of operations and financial condition can also be affected by economic, political, legislative, regulatory and legal actions, including but not limited to health epidemics and pandemics and their resulting economic impact. Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, and government fiscal policies can have a significant effect on the Company’s results of operations and financial condition. While the Company maintains reserves for anticipated liabilities and carries various levels of insurance, the Company could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings.
Accounts receivable, net
Accounts receivable balances are shown on the unaudited condensed consolidated balance sheets net of the allowance for doubtful accounts of $9,852 and $7,032 as of December 31, 2023 and June 30, 2023, respectively. The allowance for doubtful accounts considers factors such as historical experience, credit quality, age of the accounts receivable balance and current and forecasted economic conditions that may affect a client’s ability to pay. The Company performs ongoing credit evaluations and generally requires no collateral from clients. Management reviews individual accounts as they become past due to determine collectability. The allowance for doubtful accounts is adjusted periodically based on management’s consideration of past due accounts. Individual accounts are charged against the allowance when all reasonable collection efforts have been exhausted.
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Sales and marketing
Sales and marketing expenses consist of costs associated with the Company’s direct sales and marketing staff, including employee-related costs, marketing, advertising and promotion expenses, and other related costs. Advertising and promotion costs are expensed as incurred. Advertising and promotion expense totaled approximately $8,440 and $7,483 for the three months ended December 31, 2023 and 2022, respectively. Advertising and promotion expense totaled approximately $16,271 and $13,401 for the six months ended December 31, 2023 and 2022, respectively.
Stock-based compensation
The Company recognizes all employee and director stock-based compensation as a cost in the unaudited condensed consolidated financial statements. Equity-classified awards are measured at the grant date fair value of the award and expense is recognized, net of actual forfeitures, on a straight-line basis over the requisite service period for the award.

The Company establishes the grant date fair value of restricted stock units (“RSUs”) based on the fair value of the Company's underlying common stock. The Company estimates the grant date fair value of stock options, including common stock purchased as a part of the Company's Employee Stock Purchase Plan ("ESPP"), using the Black-Scholes option pricing model, which requires management to make assumptions with respect to the fair value of the Company's award on the grant date, including the expected term of the award, the expected volatility of the Company's stock calculated based on a period of time generally commensurate with the expected term of the award, the expected risk-free rate of return, and expected dividend yields of the Company's stock. The Company recognized stock-based compensation cost for the three months ended December 31, 2023 and 2022 of $23,049 and $20,684, respectively. The Company recognized stock-based compensation cost for the six months ended December 31, 2023 and 2022 of $35,964 and $37,635, respectively.
3. REVENUE:
The following table disaggregates revenue from contracts by recurring fees and implementation services and other, which the Company believes depicts the nature, amount and timing of its revenue:
 Three Months Ended December 31,Six Months Ended December 31,
 2023202220232022
Recurring fees$143,330 $121,873 $272,511 $232,935 
Implementation services and other3,902 3,109 7,429 6,216 
Recurring and other revenue$147,232 $124,982 $279,940 $239,151 
Deferred revenue
The Company recognizes deferred revenue for nonrefundable upfront fees as well as for subscription services related to certain ancillary products invoiced prior to the satisfaction of the performance obligation.
The nonrefundable upfront fees related to implementation services are typically included on the client’s first invoice. Implementation fees are deferred and recognized as revenue over an estimated 24-month period to which the material right exists, which is the period the client is expected to benefit from not having to pay an additional nonrefundable implementation fee upon renewal of the service.
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The following table summarizes the changes in deferred revenue related to the nonrefundable upfront fees and recurring subscription services:
 Three Months Ended December 31,Six Months Ended December 31,
2023202220232022
Balance, beginning of period$18,712 $16,490 $18,697 $17,046 
Deferred revenue acquired 293  293 
Deferral of revenue5,165 5,637 10,053 9,907 
Revenue recognized(4,950)(5,394)(9,794)(10,103)
Impact of foreign exchange25 11 (4)(106)
Balance, end of period$18,952 $17,037 $18,952 $17,037 
Deferred revenue is recorded within deferred revenue and other long-term liabilities on the unaudited condensed consolidated balance sheets. The Company will recognize deferred revenue of $7,650 in fiscal year 2024, $9,240 in fiscal year 2025, and $2,062 in fiscal year 2026.

 Deferred contract costs
The following table presents the deferred contract costs balance and related amortization expense for these deferred contract costs.
 As of and for the Three Months Ended December 31, 2023
 Beginning Balance
Capitalization of Costs
Amortization
Ending Balance
Costs to obtain a contract$97,749 $10,152 $(6,666)$101,235 
Costs to fulfill a contract132,076 16,666 (8,844)139,898 
Total$229,825 $26,818 $(15,510)$241,133 
 As of and for the Three Months Ended December 31, 2022
 Beginning Balance
Capitalization of Costs
Amortization
Ending Balance
Costs to obtain a contract$76,894 $10,397 $(4,868)$82,423 
Costs to fulfill a contract98,322 15,358 (6,198)107,482 
Total$175,216 $25,755 $(11,066)$189,905 
 As of and for the Six Months Ended December 31, 2023
 Beginning Balance
Capitalization of Costs
Amortization
Ending Balance
Costs to obtain a contract$93,317 $20,805 $(12,887)$101,235 
Costs to fulfill a contract123,788 33,099 (16,989)139,898 
Total$217,105 $53,904 $(29,876)$241,133 
 As of and for the Six Months Ended December 31, 2022
 Beginning Balance
Capitalization of Costs
Amortization
Ending Balance
Costs to obtain a contract$72,342 $19,390 $(9,309)$82,423 
Costs to fulfill a contract91,132 28,135 (11,785)107,482 
Total$163,474 $47,525 $(21,094)$189,905 
Deferred contract costs are recorded within deferred contract costs and long-term deferred contract costs on the unaudited condensed consolidated balance sheets. Amortization of costs to fulfill a contract and costs to obtain a contract are recorded in
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cost of revenues and sales and marketing expense in the unaudited condensed consolidated statements of operations, respectively. The Company regularly reviews its deferred costs for impairment and did not recognize an impairment loss during any period presented.
4. BUSINESS COMBINATION AND ASSET ACQUISITION:
Acquisition of Verb, Inc.

On May 2, 2023, the Company acquired 100% of the equity interests of Verb, Inc., a modern behavioral science-based microlearning solution to develop frontline leaders and their teams (the “Verb Acquisition”), for an initial cash purchase price of $6,000, plus up to a maximum of $2,000 in additional cash payments based on the achievement of an established earnout. The acquisition was funded with cash on hand.

The acquisition was accounted for as a business combination. The preliminary purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair value of the total consideration transferred at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, none of which is deductible for tax purposes. Goodwill consists primarily of the synergistic benefits and growth opportunities. The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the Verb Acquisition. The benefits include acquiring a software technology tailored to small and medium-sized businesses that can be integrated into the current suite of the Company’s products. The preliminary purchase price for the Verb Acquisition was allocated to individual assets acquired and liabilities assumed as follows:
May 2, 2023
Fair value of total consideration$5,677 
Cash acquired(295)
Net purchase price$5,382 
Assets acquired:
Accounts receivable$144 
Other current assets119 
Property and equipment22 
Technology intangible assets2,680 
Other non-current assets586 
Total identifiable assets acquired3,551 
Liabilities assumed:
Accounts payable(49)
Accrued expenses(151)
Deferred revenue(749)
Total identifiable liabilities assumed(949)
Goodwill2,780 
Fair value of total consideration transferred$5,382 
The technology intangible assets acquired have a weighted average useful life of 3 years.

The fair value of the contingent consideration was measured at the acquisition date based on management’s estimate of future payments and recorded as a liability within other long-term liabilities on the unaudited condensed consolidated balance sheets.

Acquisition of Talenya Ltd.

On October 27, 2022, the Company acquired 100% of the equity interests of Talenya Ltd., an Israeli-based provider of an artificial intelligence-driven solution for talent sourcing and recruiting employees (the “Talenya Acquisition”), for an initial
14


cash purchase price of $20,000, plus up to a maximum of $10,000 in additional cash payments based on the achievement of established earnouts over a two-year period. The acquisition was funded with cash on hand.

The acquisition was accounted for as a business combination. The preliminary purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair value of the total consideration transferred at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, none of which is deductible for tax purposes. Goodwill consists primarily of the synergistic benefits and growth opportunities. The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the Talenya Acquisition. The benefits include acquiring a software technology tailored to small and medium-sized businesses that can be integrated into the current suite of the Company’s products. The final purchase price for the Talenya Acquisition was allocated to individual assets acquired and liabilities assumed as follows:
October 27, 2022
Fair value of total consideration$23,240 
Cash acquired(172)
Net purchase price$23,068 
Assets acquired:
Accounts receivable$217 
Other current assets34 
Property and equipment13 
Technology intangible assets6,760 
Other non-current assets2,222 
Total identifiable assets acquired9,246 
Liabilities assumed:
Accounts payable(211)
Accrued expenses(294)
Deferred revenue(300)
Total identifiable liabilities assumed(805)
Goodwill14,627 
Fair value of total consideration transferred$23,068 
The technology intangible assets acquired have a weighted average useful life of 7 years.

The fair value of the contingent consideration was measured at the acquisition date based on management’s estimate of future payments and recorded as a liability within accrued expenses and other current liabilities and other long-term liabilities on the unaudited condensed consolidated balance sheets.

The Company incurred transaction costs of approximately $ and $1,174 related to the Talenya Acquisition for the three months ended December 31, 2023 and 2022, respectively, and $ and $1,174 related to the Talenya Acquisition for the six months ended December 31, 2023 and 2022, respectively. These costs were expensed as incurred in general and administrative expenses within the accompanying unaudited condensed consolidated statements of operations.

Asset Acquisitions

The Company periodically acquires customer relationships from other HCM providers. The asset purchase agreements usually provide for an initial payment as well as contingent payments to the seller based on revenue generated by the acquired clients over a defined timeframe. Contingent payments made under such agreements for the three months ended December 31, 2023 and 2022 were $3,596 and $, respectively. Contingent payments made under such agreements for the six months ended December 31, 2023 and 2022 were $3,596 and $4,259, respectively.

The acquired customer relationships are recorded within intangible assets on the unaudited condensed consolidated balance sheets and are being amortized on a straight-line basis over three years. As of December 31, 2023, the weighted average remaining amortization period for these intangible assets was approximately 0.9 years. The contingent payments were
15


recognized when each contingency was resolved and the consideration was paid or became payable as an increase to the acquired intangible asset, amortized on a straight-line basis over the remaining period of the initial acquired intangible asset.
5. FUNDS HELD FOR CLIENTS:
Funds held for clients are as follows:
 December 31, 2023
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Demand deposit accounts and other cash equivalents$1,006,010 $ $ $1,006,010 
U.S. Treasury and direct obligations of U.S. government agencies86,840 7 (4)86,843 
Corporate bonds213,445 18 (29)213,434 
Commercial paper612   612 
Other securities18,268 1 (5)18,264 
$1,325,175 $26 $(38)$1,325,163 
 
 June 30, 2023
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Demand deposit accounts and other cash equivalents$783,813 $ $ $783,813 
U.S. Treasury and direct obligations of U.S. government agencies72,173  (776)71,397 
Corporate bonds172,570 91 (3,049)169,612 
Commercial paper2,977  (3)2,974 
Other securities21,776 2 (418)21,360 
 $1,053,309 $93 $(4,246)$1,049,156 
Other securities are primarily comprised of municipal obligations and certificates of deposit.
Proceeds from sales and maturities of investment securities for the three months December 31, 2023 and 2022 were approximately $79,801 and $70,910, respectively. Proceeds from sales and maturities of investment securities for the six months ended December 31, 2023 and 2022 were approximately $103,453 and $214,017, respectively.
The Company is exposed to interest rate risk as rate volatility will cause fluctuations in the earnings potential of future investments. The Company does not utilize derivative financial instruments to manage interest rate risk.
The Company reviews its investments on an ongoing basis to determine if any allowance for credit loss is warranted due to changes in credit risk or other potential valuation concerns. The Company has no material individual securities that have been in a continuous unrealized loss position greater than twelve months. The Company believes unrealized losses, to the extent they exist, generally result from changes in interest rates rather than credit risk, and therefore does not believe the related investments need to be assessed to determine whether an allowance for the credit loss is warranted. Additionally, the Company believes it will recover its cost basis in the securities with unrealized losses and has the ability to hold the securities until they recover in value and had no intent to sell them at December 31, 2023.
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Expected maturities as of December 31, 2023 for client fund assets are as follows:
Due within fiscal year 2024
$1,058,834 
Due within fiscal year 2025
80,096 
Due within fiscal year 2026
112,546 
Due within fiscal year 2027
50,062 
Due within fiscal year 2028
21,397 
Thereafter2,228 
Total$1,325,163 
 
6. PROPERTY AND EQUIPMENT, NET:
A summary of the Company’s property and equipment, net is as follows:
 December 31,
2023
June 30,
2023
Land$3,680 $3,680 
Land improvements910 910 
Building and improvements22,845 22,845 
Computer, equipment and software22,799 18,702 
Furniture and fixtures2,251 2,250 
Office equipment2,907 2,880 
Leasehold improvements5,215 4,114 
60,607 55,381 
Accumulated depreciation and amortization(23,714)(20,808)
Property and equipment, net$36,893 $34,573 
Depreciation and amortization of property and equipment was approximately $1,486 and $1,196 for the three months ended December 31, 2023 and 2022, respectively. Depreciation and amortization of property and equipment was approximately $2,997 and $2,396 for the six months ended December 31, 2023 and 2022, respectively.
7. CAPITALIZED SOFTWARE, NET:
A summary of the Company’s capitalized software, net is as follows:
 December 31,
2023
June 30,
2023
Capitalized software$151,015 $125,707 
Accumulated amortization(89,363)(71,724)
Capitalized software, net$61,652 $53,983 
Amortization expense for capitalized software was approximately $9,166 and $6,745 for the three months ended December 31, 2023 and 2022, respectively. Amortization expense for capitalized software was approximately $17,639 and $13,151 for the six months ended December 31, 2023 and 2022, respectively.
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The following is a schedule of future amortization expense as of December 31, 2023:
2024 (remaining six months)$17,263 
202527,330 
202615,374 
20271,685 
 $61,652 
8. GOODWILL AND INTANGIBLE ASSETS:
Changes in the carrying amount of goodwill are presented below:
Balance at June 30, 2023$767,738 
Verb Acquisition(551)
Foreign currency translation6 
Balance at December 31, 2023$767,193 
On August 7, 2022, the Company entered into a 16-year partnership with the Cincinnati Bengals of the National Football League that grants the Company exclusive naming rights to Paycor Stadium (the “Naming Rights”), home to the Cincinnati Bengals since 2000. Contractual payments under the naming rights agreement (the “Naming Rights Agreement”) began in August 2022 and end in 2038.

The Naming Rights have been recorded within intangible assets on the unaudited condensed consolidated balance sheet in an amount equal to the present value of the future contractual cash flows with an offsetting liability for payments to be made in the future. The intangible asset reflects the Naming Rights to the Bengals stadium including co-branding and shared promotion, along with the right for the Company to place its logo on and around the stadium.

The discount between the offsetting liability and overall payment obligation is amortized to interest expense over the term of the Naming Rights Agreement using the effective interest method. The intangible asset is being amortized over the life of the Naming Rights Agreement on a straight-line basis through sales and marketing expense. The liability is included within accrued expenses and other current liabilities and other long-term liabilities on the unaudited condensed consolidated balance sheets.

Components of intangible assets were as follows:
 December 31,
2023
June 30,
2023
Cost:
  Technology$152,391 $151,855 
  Customer relationships466,199 462,452 
  Trade name105,670 105,670 
  Naming rights66,698 66,698 
Total cost$790,958 $786,675 
Accumulated amortization:
  Technology$(143,317)$(141,309)
  Customer relationships(391,150)(348,123)
  Trade name(36,411)(32,889)
  Naming rights(5,999)(3,882)
Total accumulated amortization$(576,877)$(526,203)
Intangible assets, net$214,081 $260,472 

Amortization expense for intangible assets was approximately $24,963 and $24,673 for the three months ended December 31, 2023 and 2022, respectively. Amortization expense for intangible assets was approximately $50,673 and $47,943 for the six months ended December 31, 2023 and 2022, respectively.
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The following is a schedule of future amortization expense as of December 31, 2023:
2024 (remaining six months)$46,797 
202544,591 
202617,623 
202712,332 
202812,244 
Thereafter80,494 
$214,081 
9. DEBT AGREEMENTS AND LETTERS OF CREDIT:
Credit Agreement
Paycor, Inc. is party to a credit agreement (as amended, the “Credit Agreement”) with PNC Bank, National Association (“PNC”), Fifth Third, National Association, and other lenders, providing a $200,000 senior secured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility includes an “accordion feature” that allows the Company, under certain circumstances, to increase the size of the Revolving Credit Facility by an additional principal amount of up to $200,000, with a resulting maximum principal amount of $400,000, subject to the participating lenders electing to increase their commitments or new lenders being added to the Credit Agreement. The Revolving Credit Facility will mature on June 11, 2026.

The Company had no outstanding borrowings under the Revolving Credit Facility as of December 31, 2023 and June 30, 2023. Additionally, the Company had no outstanding letters of credit as of December 31, 2023 and June 30, 2023.
10. FAIR VALUE MEASUREMENTS:
U.S. GAAP defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach are used to measure fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company can access.
Level 2 inputs are inputs (other than quoted prices included within Level 1) that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability and rely on management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.
The fair value of certain assets, such as nonfinancial assets, primarily long-lived assets, goodwill, intangible assets and certain other assets, are recognized or disclosed in connection with impairment evaluations. All non-recurring valuations use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy.
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable approximated fair value as of December 31, 2023 and June 30, 2023, because of the relatively short maturity of these instruments.
The following table presents information on the Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and June 30, 2023:
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December 31, 2023
Level 1
Level 2
Level 3
Total
Funds held for clients—cash and cash equivalents:
Demand deposit accounts and other cash equivalents$1,006,010 $ $ $1,006,010 
Funds held for clients—available-for-sale:
  U.S. Treasury and direct obligations of U.S. government agencies 86,843  86,843 
Corporate bonds 213,434  213,434 
Commercial paper 612  612 
Other securities 18,264  18,264 
$1,006,010 $319,153 $ $1,325,163 
June 30, 2023
Level 1
Level 2
Level 3
Total
Funds held for clients—cash and cash equivalents:
Demand deposit accounts and other cash equivalents$783,813 $ $ $783,813 
Funds held for clients—available-for-sale:
  U.S. Treasury and direct obligations of U.S. government agencies 71,397  71,397 
Corporate bonds 169,612  169,612 
Commercial paper 2,974  2,974 
Other securities 21,360  21,360 
$783,813 $265,343 $ $1,049,156 
Available-for-sale securities included in Level 1 are valued using closing prices for identical instruments that are traded on active exchanges. Available-for-sale securities included in Level 2 are valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability.
11. CAPITAL STOCK:
The Company’s Second Amended and Restated Certificate of Incorporation authorized the issuance of up to 500,000,000 shares of common stock with a par value of $0.001 per share and 50,000,000 shares of preferred stock with a par value of $0.001 per share. As of December 31, 2023 and June 30, 2023, there were 177,634,296 and 176,535,236 shares of common stock outstanding, respectively, and no preferred stock outstanding.

On December 6, 2023, our principal stockholder, Pride Aggregator, LP (“Pride Aggregator”), which is the investment vehicle controlled by certain funds advised by Apax Partners LLP, completed a secondary underwritten public offering of 5,000,000 shares of the Company’s common stock. The Company did not receive any proceeds from this sale.
12. NET LOSS PER SHARE:
Basic net loss per share is calculated by dividing net loss by the weighted average shares of common stock outstanding during the period.
Diluted net loss per share is computed by dividing net loss adjusted as necessary for the impact of potentially dilutive securities, by the weighted average shares outstanding during the period and the impact of securities that would have a dilutive effect. Potentially dilutive securities during the three and six months ended December 31, 2023 and 2022 included RSUs, stock options and ESPP purchase rights. Due to the net loss for the three and six months ended December 31, 2023 and 2022, any potentially dilutive securities were excluded from the denominator in calculating diluted net loss per share because including them would have had an anti-dilutive effect. Additionally, the Company excluded the impact of stock-based compensation awards held by certain employees consisting of membership interest units in Pride Aggregator for the three and six months ended December 31, 2023 and 2022, respectively.
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 Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share:
Three Months Ended December 31,Six Months Ended December 31,
(in thousands, except per share data)2023202220232022
Net loss
$(26,249)$(27,463)$(46,845)$(56,515)
Weighted average outstanding shares:
Basic and diluted177,567,397 175,830,554 177,260,396 175,671,565 
Basic and diluted net loss per share$(0.15)$(0.16)$(0.26)$(0.32)
13. COMMITMENTS AND CONTINGENCIES:
The Company is subject to various claims, litigation, and regulatory compliance matters in the normal course of business. When a loss is considered probable and reasonably estimable, the Company records a liability in the amount of its best estimate for the ultimate loss. The resolution of these claims, litigation and regulatory compliance matters, individually or in the aggregate, is not expected to have a material adverse impact on the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows. These matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis summarizes the significant factors affecting our unaudited condensed consolidated operating results, financial condition, liquidity, and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report as well as management’s discussion and analysis and audited consolidated financial statements included in our most recent Annual Report on Form 10-K. This discussion and analysis reflects our historical results of operations and financial position. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements because of various factors, including those discussed elsewhere in this report, particularly “Note Regarding Forward-Looking Statements” and Item 1A. “Risk Factors” in our most recent Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission (“SEC”).

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” and “our” and similar references refer to the Company and its consolidated subsidiaries.

Overview
We are a leading provider of human capital management (“HCM”) software. Our solutions target small and medium-sized businesses with tens to thousands of employees. Our unified, cloud-native platform is designed to empower leaders to build winning teams by modernizing people management. Our Software-as-a-Service (“SaaS”) HCM solution automates routine management tasks so frontline leaders can focus on the key elements that drive business performance and employee engagement, such as goal setting, coaching and talent development. Our comprehensive suite of solutions enables organizations to streamline administrative workflows and achieve regulatory compliance while serving as the single, secure system of record for employee data. Our modern, extensible platform is augmented by industry-specific domain expertise and offers award-winning ease-of-use with an intuitive user experience and deep third-party integrations. As of December 31, 2023, approximately 30,700 customers across all 50 states trusted us to empower their leaders to build winning teams.

Our Business Model

Our revenue is almost entirely recurring in nature and largely attributable to the sale of SaaS subscriptions to our cloud-native HCM software platform. We typically generate revenue from customers on a per-employee-per-month (“PEPM”) basis whereby our revenue is derived from the number of employees of a given customer, and the amount, type, and timing of products provided to a customer’s employees. As a result, we increase our recurring revenue as we add more customers and expand our HCM suite and as our customers add more employees and purchase additional product modules. Our subscription-based business model is highly recurring in nature and provides significant visibility into our future operating results. Recurring and other revenues are primarily revenues derived from the provision of our five HCM software bundles and nonrefundable implementation fees, which represented approximately 92% of total revenues for both the three and six months ended December 31, 2023. In addition, we earn interest income on funds held for clients.

Our go-to-market strategy consists of a robust organic sales and marketing engine and broad referral network of health insurance and retirement benefits brokers. We primarily market and sell our solutions through a direct sales force, which is organized into field and inside sales teams based on customer size and geography. In addition, during the six months ended December 31, 2023, we launched an Embedded HCM Solution that expands our distribution model through technology partnerships. Our highly efficient and multi-pronged go-to-market strategy is a key driver of our growth.

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The table below sets forth selected results of operations for the three and six months ended December 31, 2023 and 2022.
Three Months Ended Six Months Ended
December 31,December 31,
(in thousands)2023202220232022
Total Revenues$159,541 $132,864 $303,129 $251,167 
Loss from Operations$(26,175)$(31,569)$(49,547)$(64,959)
Operating Margin(16.4)%(23.8)%(16.3)%(25.9)%
Adjusted Operating Income*$23,297 $17,643 $39,217 $28,056 
Adjusted Operating Income Margin*14.6 %13.3 %12.9 %11.2 %
Net Loss$(26,249)$(27,463)$(46,845)$(56,515)
*Adjusted Operating Income and Adjusted Operating Income Margin are non-U.S. GAAP (“non-GAAP”) financial measures. See Non-GAAP Financial Measures below for a definition of our non-GAAP measures and reconciliations to the most closely comparable U.S. GAAP measures.

Impact of Adverse Macroeconomic Conditions

Negative macroeconomic conditions, such as supply chain disruptions, labor shortages, extended periods of inflation and rising interest rates, are expected to continue to pose risks to our and our customers’ businesses for the foreseeable future and may impact our business. It is also possible that fiscal or monetary policies adopted in an attempt to curtail the broadening or protracted extension of these negative conditions could lead to an economic slowdown or cause a recession in the U.S. or global economy. Further, bank failures and the follow-on effects of those events may cause instability in the banking industry or result in failures at other banks or financial institutions to which we or our customers may face direct or indirect exposure. If a significant number of our customers are unable to continue as viable businesses or if they significantly reduce headcount in response to these conditions, we or our customers are unable (temporarily or otherwise) to access deposits or utilize existing sources of liquidity, there is a reduction in business confidence and activity, a decrease in government and consumer spending, a decrease in HCM and payroll solutions spending by SMBs, or a decrease in overall domestic production or consumption of goods and services more globally, our business, financial condition, and results of operations could be materially and adversely impacted.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

Expand Our Sales Footprint to Add New Customers

Our current customer base represents a small portion of the U.S. market for HCM and payroll solutions. We believe there is substantial opportunity to continue to broaden our customer base, particularly in the 15 most populous metropolitan statistical areas in the United States (i.e. Tier 1 markets), by expanding our sales headcount. Our ability to do so will depend on several factors, including the ability to recruit and retain qualified sales staff, the effectiveness of our products, the relative pricing of our products, our competitors’ offerings, and the effectiveness of our marketing efforts.

We define a customer as a parent company grouping, which may include multiple subsidiary client accounts with separate taxpayer identification numbers. We also track client accounts as it provides an alternative measure of the scale of our business and customers. We believe the number of customer employees on our platform is a key indicator of the growth of our business. We define customer employees as the number of our customers’ employees at the end of any particular period. As of December 31, 2023 and 2022, we had approximately 2,565,000 and 2,336,000 customer employees, respectively, representing a period-over-period increase of 9.8%.

In addition, we are focused on maintaining and expanding broker relationships to drive the acquisition of new customers through mutual referrals. Insurance and benefits brokers are trusted advisors to SMBs and are often influential in the HCM selection process.

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Increase Product Penetration with Existing and New Customers

In recent years we have increasingly focused our product pricing strategy away from sales of individual products and solutions towards a simplified bundled pricing approach whereby we market multi-product offerings to our customers. We believe our cloud platform and pricing model provides much better value and predictability for our customers and for Paycor. This strategy has enabled us to effectively drive increased product penetration and PEPM growth at the initial point of sale, as well as stronger retention. We define “effective PEPM,” as recurring and other revenue for the period divided by the average number of customer employees, which we calculate as the sum of the number of customer employees at the end of each month over the period divided by the total number of months in the period. We intend to advance this strategy by progressively expanding the breadth of features included in our product bundles. In addition to sales to new customers, there is a substantial opportunity within our existing customer base to cross-sell additional products from our portfolio, including Workforce Management, Benefits Administration, Talent Acquisition and Talent Management.

Our ability to successfully increase revenue per customer is dependent upon several factors, including the number of employees working for our customers, the number of products purchased by each of our customers, our customers’ satisfaction with our solutions and support, and our ability to add new products to our suite.

We believe our ability to retain and expand our existing customers’ spending on our solutions is evidenced by our net revenue retention. We define net revenue retention as the current quarterly period recurring revenue for the cohort of customers at the beginning of the prior year quarterly period, divided by the recurring revenue in the prior year reporting period for that same cohort. In calculating the net revenue retention for a period longer than a quarter, such as a fiscal year, we use the weighted average of the retention rates (calculated in accordance with the preceding sentence) for each applicable quarter included in such period.

On an annual basis, our net revenue retention has continued to trend favorably since the COVID-19 pandemic recovery in fiscal year 2021 and reached a new record in fiscal year 2023. Our net revenue retention was negatively impacted during the early stages of the COVID-19 pandemic by stay-at-home, business closure and other restrictive orders, which resulted in reduced employee headcount, temporary and permanent business closures, and delayed sales and starts with many of our customers.

Ongoing Product Innovation and Optimization

We believe that our product features and functionality are key differentiators of our offerings. We intend to continue to invest in research and development, particularly regarding the functionality of our platform, to sustain and advance our product leadership. For instance, in fiscal 2019, we acquired Ximble’s scheduling solution and in fiscal 2020, we released Paycor Analytics. In fiscal 2021, we launched our compensation management product and a full suite of talent management tools, including performance reviews, one-on-one coaching, objectives and key results (“OKRs”) and structured goal setting. In fiscal 2022, we introduced OnDemand Pay, expense management and a Developer Portal to enhance Paycor’s industry-leading interoperability, making it even easier for clients and partners to seamlessly integrate and sync data between HR and third-party systems. We also released a new payroll-based journal reporting platform to simplify complex staffing reporting requirements for nursing facilities and a predictive resignation feature providing leaders with actionable insights to identify the top drivers of employee resignation. In fiscal 2023, we acquired Talenya’s intelligent candidate sourcing technology, now Paycor Smart Sourcing, and Verb, Inc.’s behavioral science-based microlearning platform, now part of Paycor Paths, to enhance our industry-leading talent solutions. We also introduced the COR Leadership Framework, empowering organizations to transform frontline managers into effective leaders through the provision of technology and expertise. As a result of these and other product launches, the total list PEPM and customer-perceived value for our full suite of products continues to increase. In fiscal 2024, we introduced a generative AI analytics digital assistant, powered by Visier, that empowers leaders to quickly and easily consume people-focused analytics in a conversational chat interface. We also introduced Pay Benchmarking, which provides market salary insights to enable competitive compensation strategies, and launched Labor Forecasting, which empowers leaders to right-size their labor costs to their operations by leveraging historical data and demand data forecasts to maximize ROI and service quality. Our ability to innovate and introduce competitive new products is dependent on our ability to recruit and retain top technical talent and invest in research and development initiatives.





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Components of Results of Operations

Basis of Presentation

Revenues

Recurring and Other Revenue

We derive our revenue from contractual agreements, which contain recurring and non-recurring service fees. The majority of our contracts are cancellable by the customer on 30 days’ notice. We recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration that we are entitled to for those goods or services. Recurring revenue consists primarily of revenues derived from the provision of our payroll and HR-related cloud-based computing services, Workforce Management, Talent Management, Talent Acquisition and Benefits Administration. The performance obligations related to recurring services are generally satisfied monthly as services are provided, with fees charged and collected based on a PEPM, or per-employee-per-month. Recurring revenue is generally recognized as the services are provided during each client’s payroll period.

Other revenue and non-recurring services fees consist mainly of nonrefundable implementation fees, which involve onboarding and configuring the customer within our cloud-based platform. These nonrefundable implementation fees provide certain clients with a material right to renew the contract, with revenue deferred and recognized over the period to which the material right exists. This is a period of 24 months from finalization of onboarding, which typically concludes within three to six months of the original booking. Deferred revenue also includes an immaterial portion related to recurring subscription services where revenue is recognized over the subscription period. Deferred revenue for these nonrefundable upfront fees and recurring subscription services was $19.0 million as of December 31, 2023, with $5.0 million and $9.8 million of revenue recognized for the three and six months ended December 31, 2023, respectively. Deferred revenue for these nonrefundable upfront fees and recurring subscription services was $17.0 million as of December 31, 2022, with $5.4 million and $10.1 million of revenue recognized for the three and six months ended December 31, 2022, respectively.

We defer certain commission costs that meet the capitalization criteria. We also capitalize certain costs to fulfill a contract related to our proprietary products if they are identifiable, generate or enhance resources used to satisfy future performance obligations and are expected to be recovered. We utilize the portfolio approach to account for both the cost of obtaining a contract and the cost of fulfilling a contract.

Capitalized costs to fulfill a contract and cost to obtain a contract are amortized over the expected period of benefit, which is generally six years based on our average client life and other qualitative factors, including rate of technological changes. We do not incur any additional costs to obtain or fulfill contracts upon renewal. We recognize additional selling and commission costs and fulfillment costs when an existing client purchases additional services. The additional costs only relate to the additional services purchased and do not relate to the renewal of previous services. We continue to expense certain costs to obtain a contract and cost to fulfill a contract if those costs do not meet the capitalization criteria.

We expect recurring and other revenue to increase as we continue to add new customer employees and sell additional products to our existing customers.

Interest Income on Funds Held for Clients

We earn interest income on funds held for clients. We generally collect substantially all funds for employee payroll payments and related taxes in advance of remittance to employees and taxing authorities. Prior to remittance to employees and taxing authorities, we generally earn interest on these funds through demand deposit accounts with financial institutions with which we have automated clearing house arrangements. We also earn interest by investing a portion of funds held for clients in highly liquid, investment-grade marketable securities. We expect funds held for our clients to generally grow as the employees per customer increase and as we add customers. Interest income on funds held for clients will fluctuate based on market rates of demand deposit accounts, as well as the highly liquid, investment-grade marketable securities in which we invest the client funds.




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Cost of Revenues

Cost of revenues includes costs relating to the provision of ongoing customer support and implementation activities, payroll tax filing, distribution of printed checks and other materials providing our payroll and other HCM solutions. These costs primarily consist of employee-related expenses for associates who service customers, as well as third-party processing fees, delivery costs, hosting costs, and bank fees associated with client fund transfers. Costs for recurring support are generally expensed as incurred, while such costs for onboarding and configuring our products for our customers are capitalized and amortized over a period of six years.

We amortized $8.8 million and $6.2 million of capitalized contract fulfillment costs during the three months ended December 31, 2023 and 2022, respectively, and $17.0 million and $11.8 million of capitalized contract fulfillment costs during the six months ended December 31, 2023 and 2022, respectively. We expect to realize increased amortization in future periods as the total capitalized contract fulfillment costs on our balance sheet increases.

We also capitalize a portion of our internal-use software costs including external direct costs of materials and services associated with developing or obtaining internal-use software and certain payroll and payroll-related costs for associates who are directly associated with internal-use software projects, which are then generally amortized over a period of three years into cost of revenues. We amortized $9.8 million and $8.0 million of capitalized internal-use and acquired software costs during the three months ended December 31, 2023 and 2022, respectively, and $19.6 million and $15.6 million of capitalized internal-use and acquired software costs during the six months ended December 31, 2023 and 2022, respectively.

Our cost of revenues is expected to increase in absolute dollars as we expand our customer employee base. However, in the long-term we expect cost of revenues to reduce as a percentage of total revenues as our business scales.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of employee-related expenses for our direct sales and marketing staff, marketing, advertising and promotion expenses, including amortization expense associated with the exclusive naming rights to Paycor Stadium (the “Naming Rights”), home to the Cincinnati Bengals since 2000, and other related costs. We capitalize certain commission costs related to new contracts or purchases of additional services by our existing customers and amortize such items over a period of six years.

We amortized $6.7 million and $4.9 million of capitalized contract acquisition costs during the three months ended December 31, 2023 and 2022, respectively, and $12.9 million and $9.3 million of capitalized contract acquisition costs during the six months ended December 31, 2023 and 2022, respectively. Additionally, we recorded $1.1 million and $1.2 million of amortization expense associated with the Naming Rights during the three months ended December 31, 2023 and 2022, respectively, and $2.1 million of amortization expense associated with the Naming Rights during both the six months ended December 31, 2023 and 2022. We expect to realize increased amortization in future periods as the total capitalized contract acquisition costs on our balance sheet increases.

We seek to grow our number of customer employees and upsell existing customers, and therefore our sales and marketing expense is expected to continue to increase in absolute dollars as we grow our sales organization and expand our marketing activities.

General and Administrative

General and administrative expenses consist primarily of employee-related costs for our administrative, finance, accounting, legal, enterprise technology and human resources departments. Additional expenses include consulting and professional fees, occupancy costs, insurance, and other corporate expenses.

We amortized $23.3 million and $22.1 million of intangible assets, excluding acquired software amortized through cost of revenues and the Naming Rights amortized through sales and marketing, during the three months ended December 31, 2023 and 2022, respectively, and $46.5 million and $43.4 million of intangible assets, excluding acquired software amortized through cost of revenues and the Naming Rights amortized through sales and marketing, during the six months ended
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December 31, 2023 and 2022, respectively. The increase in amortization expense in the three and six months ended December 31, 2023 is attributable to our asset acquisitions.

We expect our general and administrative expenses to increase in absolute dollars as we grow and scale our business.

Research and Development

Research and development expenses consist primarily of employee-related expenses for our software development and product management staff. Additional expenses include costs related to the development, maintenance, quality assurance and testing of new technologies, and ongoing refinement of our existing solutions. Research and development expenses, other than internal-use software costs qualifying for capitalization, including costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred.

We capitalize a portion of our development costs related to internal-use software, which are amortized over a period of three years into cost of revenues. The timing of our capitalized development projects may affect the amount of development costs expensed in any given period. The table below sets forth the amounts of capitalized and expensed research and development costs for the following periods:
Three Months EndedSix Months Ended
December 31,December 31,
(in thousands)2023202220232022
Capitalized software$11,470 $9,139 $24,028 $17,742 
Research and development expenses$16,665 $13,875 $30,720 $26,277 

We expect to increase our research and development expenses in absolute dollars as we continue to broaden our product offerings and extend our technological leadership by investing in the development of new technologies and introducing them to new and existing customers.  

Interest Expense

Interest expense consists primarily of interest payments and accruals relating to outstanding borrowings as well as accretion expense associated with the Naming Rights liability. We expect interest expense to vary each reporting period depending on the amount of outstanding borrowings and prevailing interest rates.

Other Income (Expense)

Other income (expense) generally consists of other income and expense items outside of our normal operations, such as interest income on operating cash, realized gains or losses on the sale of certain positions of funds held for clients, change in fair value of contingent consideration, gains or losses on the extinguishment of debt and expenses relating to our financing arrangements.

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Results of Operations

The following table sets forth our unaudited condensed consolidated statements of operations for the periods indicated.
Three Months Ended Six Months Ended
(in thousands)December 31, 2023December 31, 2022December 31, 2023December 31, 2022
Consolidated Statement of Operations Data:
Revenues:
Recurring and other revenue$147,232 $124,982 $279,940 $239,151 
Interest income on funds held for clients12,309 7,882 23,189 12,016 
Total revenues159,541 132,864 303,129 251,167 
Cost of revenues55,125 46,184 106,503 89,369 
Gross profit104,416 86,680 196,626 161,798 
Operating expenses:
Sales and marketing57,753 51,913 110,531 100,108 
General and administrative56,173 52,461 104,922 100,372 
Research and development16,665 13,875 30,720 26,277 
Total operating expenses130,591 118,249 246,173 226,757 
Loss from operations(26,175)(31,569)(49,547)(64,959)
Interest expense(1,153)(404)(2,397)(1,491)
Other (expense) income(1,745)66 (814)511 
Loss before benefit for income taxes(29,073)(31,907)(52,758)(65,939)
Income tax benefit(2,824)(4,444)(5,913)(9,424)
Net loss$(26,249)$(27,463)$(46,845)$(56,515)
Comparison of the Three Months Ended December 31, 2023 and December 31, 2022

Revenues
Three Months Ended
(in thousands)December 31, 2023December 31, 2022$ Change% Change
Revenues:
Recurring and other revenue$147,232 $124,982 $22,250 18 %
Interest income on funds held for clients12,309 7,882 4,427 56 
Total revenues$159,541 $132,864 $26,677 20 %

Total revenues for the three months ended December 31, 2023 and 2022 were $159.5 million and $132.9 million, respectively. For the three months ended December 31, 2023 and 2022, recurring and other revenue accounted for $147.2 million and $125.0 million, respectively, of total revenues. Additionally, interest income on funds held for clients accounted for $12.3 million and $7.9 million, respectively, for the three months ended December 31, 2023 and 2022. Total revenues increased over the prior year period primarily as a result of an increase in customer employees, an increase in effective PEPM and an increase in interest income on funds held for clients as discussed below.

Interest income on funds held for clients increased primarily as a result of higher average daily balances for funds held due to the addition of customer employees and higher average interest rates across our portfolio of debt-security investments. Average client funds balances for the three months ended December 31, 2023 and 2022 were $1,092.9 million and $1,020.1 million, respectively.

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Cost of Revenues
Three Months Ended
(in thousands)December 31, 2023December 31, 2022$ Change% Change
Cost of revenues$55,125