Paycom Software, Inc. (PAYC) Earnings Call Transcript & Summary

Good morning, everybody. This is Mark Marcon. I'm the lead analyst on human capital technology and solutions. Our next company presenting is Paycom. Paycom, as most of you know, is a rapidly growing SaaS provider of human capital and payroll solutions that's been rapidly gaining share with a very user friendly, intuitive solution that really emphasizes both employee and manager self-service. With us today, we're extremely pleased to have Chad Richison, who is the founder and CEO of the company. Chad's an American success story. He started up the company in 1998, basically with a small business loan and 13 credit cards, and he's built the company into an absolute leader and juggernaut within the space. Also with us today is Craig Boelte, the CFO. Craig joined the company back in 2006, and he's certainly been a huge contributor and partner to the growth of the company. And we also have James Samford, who's not visible but online. He's the Director of IR. So welcome to all of you. I really appreciate you coming on. Chad, before I get started in the Q&A, do you want to just say something about the overall positioning just as an intro with regards to the company or we can just jump right into the Q&A? Whatever you prefer.

Yes. I mean sure. So just to kind of give an intro, we're a human capital management software company. We started our -- we got our -- we started early in payroll. And we were a payroll -- primarily a payroll-only company for about 6 or 7 years, then we started introducing employee self-service. We moved into time and labor management to calculate time. And then we continued to build out our product over the last 20 years to now include all of the management pieces of the employment life cycle from both hire to retire. Our value proposition is that we do all of that in a single system so that there isn't a need for integration, and it's through one database that all functioning -- all functionality triggers. And today, we've made another shift about a year ago or 2 into the employee side of usage. And we believe that HR and others don't read employees' minds; that, that data has to come from employees and that the most efficient way to get information from employees into the system is by having the employees engage with easy-to-use software that's very simple. So that's just a little bit about us and where we're at today.

That's great. I mean you track all the data within your clients and with the employees. Obviously, there's -- we're in unprecedented times on so many different levels. I'm wondering, can you just talk a little bit about what you're seeing with regards to your client base, which typically is in the 50 employee up to a couple of thousand primarily? And then obviously, you go much higher than that, and you also go a little bit lower than that. But what are you seeing just in terms of companies that are basically coming back to work, number of hours worked, level of employment and activity within the client base?

Yes. We said on our earnings call that it would be unreasonable to think that we're not going to be impacted by a similar percent in the increase in unemployment just because we're an accurate sampling size of the American payroll market right now. And so -- and we're also definitely not focused in any one industry. We're industry agnostic, and we're also region agnostic as far as geography, I should say. And so I will say with unemployment, it does feel like things are starting to moderate. You are correct that there are areas that are starting to come back. I don't know that even those businesses are back to full capacity. We had some businesses that have actually grown during this. Not everybody was in a furlough-type situation. And so I think it's too early right now to still determine what does next month or the next month look like, but it definitely feels like it's not getting worse, if that makes sense.

That does. Really appreciate that perspective. And it seems like Paycom is really designed to be a really intuitive solution. I can't think of a solution that probably is better matched to kind of a work-from-home. And the intuitiveness of this solution and the way that you cut down on clutter is really highlighted by your really successful marketing campaign with Barbara Corcoran. And so I'm wondering, can you talk a little bit about like what sort of response you're seeing to the marketing campaign? What are you seeing in terms of lead generation? What types of companies are the most responsive to that and the level of activity that you're seeing?

Yes. Lead generation continues to be very high. I mean we talked about it being very high coming into the year. It's still very high right now. And so it's work from home, but also it's somewhat the rise of the autonomous worker. You have a lot more worker autonomy today than what you had 3 months ago. And that's been forced somewhat, obviously, by the current situation that we're in. But it also has opened up opportunities for business, I mean, not just Paycom, but for business to engage their workers in ways that benefit themselves. Again, in our model, translating that over to our model, that's having employees that have direct relationship with the database. And you're moving HR and other out of the middle of that data transfer process. And so somewhat, the situation -- the pandemic-type situation that we've entered into has somewhat given rise to more usage of those technology types. And then I also believe we're all creatures of habit. And so once we finally made this shift to a more simple, easier solution that sticks. And so I think that overall, this current situation that we're in is providing us opportunities. I think it's exposing seams that existed in your traditional models that existed out there. It would be unreasonable to think that all businesses operate the same. So a company that might be using 6 or 7 different products may be having 6 or 7 different experiences during this time based on which companies they're working with. And so again, having one system makes it obviously easier to service -- us to service a client. But really, what it does is it makes it very simple for employees to be able to transfer their choices into the system, which has traditionally been done through some type of intermediary input or interface. So I think that this is only going to produce more usage, not less. And we were already seeing that prior to the current environment we're in. We were already seeing a shift to the employee usage strategy with businesses as they realize that, that's a good model.

That's terrific. And Chad and Craig, you mentioned on the last conference call, you had some of the strongest bookings commentary of anybody in the space in terms of coming back. And you mentioned, in the second half of March, you were down 50% as you were transitioning to work from home, then you went through some training. And first week of April, you were down by about 20%, so nice improvement. And then you basically said you went back to pre-COVID levels. Was that just a little bit of kind of pent-up demand or kind of some of the buildup? Or has that been able to -- have you been able to sustain that? What can you tell us there?

No, that's a good question. We're not going to update booked sales, but what I can say is that demand remains as high as it's ever been for our product. Mark, everybody that we sell, it's rare that we hadn't already talked to them once or twice before in the past. As you're familiar, our territories are set up so it's -- they have 1,500 to 2,000 prospects, and then we have 80 sales reps per territory. And so each sales rep can have anywhere from 200 to 300 prospects in a territory. And as we've discussed in the past, these sales reps going 7 appointments a week. More so now that we're in this environment, the 7 appointments a week. So you can imagine, if you have 300 clients, you're going on 7 appointments a week, it would be rare that you hadn't been talking to people, marketing into them and what have you. And so we've always had a strong business that calls us back, strong sales from callbacks in the past. And that's not been changed as we've headed through and even come through the other side of it. And what I mean by that is I disrupted us for a couple of weeks, honestly, because I didn't know what was going to happen and where we were going to be. And at the time, I honestly didn't even know how we were going to handle sales leads coming in. I mean we were so used to having everybody in the building, and that was our sales lead process. And then now you're sending everybody home, you're getting technology set up to be able to handle that. But one thing we didn't want to do was waste money on leads coming in that we weren't getting right back with and getting the sales. And so it was my first pandemic, not my first crisis to manage through. So -- but after a couple of weeks, we got right back on to our feet with that and moved forward. And so I wanted to give that update anecdotally on the earnings call so that people understood that we're still doing very well in sales. And in fact, we're back to the level we would have been without the COVID happening, and I don't have anything to update on that today differently other than we continue to be strong in our sales focus, and there continues to be a high level of demand for this -- for our product.

That's terrific. And then can you talk a little bit about -- you mentioned your sales teams are typically used to basically working closely together in your offices. Can you talk a little bit about -- and you have a really distinct culture. Can you talk a little bit how well the organization has been able to work in this work-from-home environment and any sort of impacts that it has from a longer-term perspective in terms of thinking about opening up work-from-home or how you think about expanding new sales teams across the country on a go-forward basis based on this experience?

Yes. I mean as -- keeping it towards sales, I mean as it relates to sales, we're going to let the prospect drive that. That'll be based off of how prospects buy. Now work-from-home, I don't know about that as much as selling digitally. There are 2 separate ways. We can come back to the office and sell digitally without going into a client site, and we can also stay out of our office and sell from home and sell digitally. And so there are 2 different concepts there. But I would say that the more prospects stay, willing to buy online, we want to meet prospects where they live. Right now, that is online. Even as prospects have come back to the office, it's where that they want to allow a sales rep to go into those offices. And honestly, within Paycom right now, we're not allowing our sales reps to go in to the office [indiscernible]. Could that change in the future? Absolutely. And at the point in time where it opens up and people want salespeople coming into the building and it's safe to do so, then obviously, I could see us moving back into that model. But to the extent that people are still buying online, we're going to support that. There may also be steps to our sale that are always going to be better online moving forward virtually. There are certain parts of our sales process that could be more conducive toward a virtual-type environment. For instance, demoing product, being able to demo a product and getting everybody in the same room before, we may have had multiple trips to an office to have those demos. There is an opportunity now that you can have the demo with everybody on screen. I had not used Zoom until March 15 of this year. And this type of technology -- now most of the meetings I have are through Zoom, but also it's allowed me to go to more meetings. So I think just like you use a prospect -- Paycom for a proxy of what do our prospects go through, I think you're also seeing prospects being able to engage and be more efficient because we can all go to more meetings now. In fact, in Paycom, one thing that's been driving a lot of our success in sales through this as well as development of our salespeople is the fact that our sales managers can now be on double and, in some cases, 2.5x the number of weekly appointments they were going on. Because, again, when you're riding with a sales rep and you're driving across town, you can only be in so many meetings. Now you're able to transport from one meeting to the next meeting within 2 minutes. And so they just have a lot more volume. So I do think there's going to be efficiencies gained in our sales model that drive stronger results over time, but I do think it's too early for us to dictate exactly what that's going to be. We need to follow how prospects buy. We've already changed why prospects buy. Now we're going to kind of follow how prospects buy. And if that changes, then we'll be ready to capture that at that time.

Great. And then I'd like to transition over from thinking about the current environment to thinking about the long term and getting to the next side of this -- the pandemic. First of all, as I know you're going to look at the data, and you're going to be flexible and evaluate based on how things are going. But just from a personal perspective, Chad and Craig, how are you guys thinking about the shape of this next recovery? I know it's -- there's lots of different data points, but are you thinking about -- I'm asking every company this just to get a sense. Is it a V? Is it a U? Is it an L? Is it a W? A swoosh? How are you -- just personally, how are you thinking about it?

Yes. I mean I would say we're focused on new logo adds right now. I'm not -- we're not looking to do anything unnatural here at Paycom. This is something you manage through. You load the wagon, and that's really what we're doing. And so we're focused on that. We continue to have strong engagement with our current clients. In fact, our call volume's down year-over-year because our clients are doing a better job working through the process. I believe our clients are a lot happier than they've been, and they continue to get happier and happier year-over-year. We're focused on continuing to put out rapid software development. We've done a lot of that during this. So we're definitely focused on new logo adds to our system. And we believe if we stay focused on that, when it shifts, whether it's a V, W, whatever it becomes, when it shifts, we will receive organic growth because we continue to load up during this time. Whether someone was a normal 2,000-employee company that now has 150, it doesn't matter to us. We want to continue to load up the business so that when the shift happens, we're in better shape for it. And so I don't really have any -- your guess would be as good as mine in exactly what a market recovery looks like. But we're hopeful for a -- we're hopeful that it's quick. I mean -- and it does -- again, I want to say it does feel like -- I'm not going to say the worst is behind us, but I mean it feels like it's not getting worse.

Terrific. One thing just with regards to just your employment sensitivity, different companies have different ways of expressing their sensitivity to changes in employees per client. Craig, can you talk a little bit about that just in terms of Paycom sensitivity, and how direct or indirect that is?

Yes. I mean we mentioned on the call, Mark, that we're fairly sensitive to the increase in the unemployment. And on the larger clients, you're going to see a little bit more than on the smaller, where more of the base fee as part of that billing. So we are sensitive to that. As it comes back, obviously, we'll get an uplift on that. And -- but that's kind of what we called out on the call as well.

Great. And can you -- Craig, can you also talk a little bit, just for those who aren't as familiar, the interest rate sensitivity and specifically the impact with regards to the flow?

Yes. Last quarter, they had basically 150-basis-point drop in the interest rate. We called out that it was about $4.5 million per quarter that is going to impact us on that interest rate. Now obviously, we have some of our float in shorter term, but then we also have some layered out as well. So -- but overall, it does have that top of an impact on us.

Okay. And then you've done a really nice job of quantifying the value that you're providing to clients. And you've been increasing your client retention rate as we've basically gone from 91% for several years to 92% to 93%. And to a large extent, that's due to this employee usage strategy and being able to quantify that. Now you have Manager on-the-Go. Can you talk a little bit about, philosophically, some of the levers that you have to capture some of the value or share in some of the value that you're providing to the clients and thinking about that in terms of pricing and bundles and things of that nature?

Yes. I think, well, you had a -- one thing you talked about was increasing the value. And that's the first thing you have to do, is continue to increase the value, and there has to be a reason that your product's worth more today than what it was yesterday. So that's something we've been very focused on, is increasing ROI. You mentioned one product, Manager on-the-Go, which we implemented for everyone in February, and we've seen an incredible amount of adoption on that. One thing that Manager on-the-Go's going to allow us to do is keep the data flow moving, the time card approvals, the vacation request approvals, the schedule approvals, the hiring request approvals. Everything that someone may have gone to a desktop to do now is being able to be done on mobile. And then also, it allows you to distribute the burden a little more. You had managers that weren't a part of the approval process just because they didn't have ready access to a desktop and data had to flow, and so someone else may have been approving those types of tasks because a manager didn't even have visibility into the system just because of the technology that they had at the time, and they may have been out of the office. Now everybody carries a laptop with a phone card. And so with -- by having a handheld, it actually keeps the data flowing faster, which allows us even greater automation, especially on the payroll side. And so as you create additional ROI for the company, it does make sense that you're able to share in that. And how you share in those is through adding additional products that you charge for once you get to a point where you're able to create that value as well as pricing adjustments along the way when they make sense, and then as well as using that ROI case, referral sources and others to generate new logo adds on to your platform as well. And so that's the way we look at it.

That's great. Can you talk a little bit about the long term? We basically have roughly 51 sales teams, including the inside sales teams. Where are we in terms of thinking about productivity growth within those sales teams relative to the addition of new sales teams? Where are the Bostons and some of the newer markets relative to the old established markets, whether it's a Tulsa or an Oklahoma City? And what does that tell you about the long-term share that you can get? Because when we take a look at this industry, you cover 50 to 5,000 employees. That's a huge swath of the market. Conceptually, you're well below a 5% share of the total addressable market. How do you think about the next 3 to 5 years in terms of the trajectory from a growth perspective that would be reasonable to assume, assuming we're going into a normal economic environment?

Well, I mean we have a differentiated product. It's only getting stronger. The ROI cases are only proving themselves out even more. So I mean it would be -- I would be extremely frustrated to think that we wouldn't continue to be a strong grower for the foreseeable future because of, again, we have such a small amount of the TAM. From a sales team perspective, we have now 4 inside sales teams. And I can tell you, 3 months ago, we would close about 5% of the deals on the first call. First time they called us, we'd close about 5%. And then you'd have a second or third call. Now we're closing over 50% of the small business that we receive. We're closing on the first call, and they call us on the phone. So we've learned some things even about small business, which hadn't particularly been our foray from a sales perspective. We've got a product that works there, but it hasn't been our sales motion. So we've learned a lot from that perspective. Whereas outside sales, you mentioned Tulsa. Tulsa is still a strong office, the reason why it's got a great manager. The offices that are going to do the best have the best managers, and that's just a fact. And then also, they -- because of that, they've developed the most executive reps that are also doing well. But with such a small percent of the market still, and again, the market continues to grow as well as the TAM continues to expand with additional products, we're just not any -- at any level where the market itself is going to impact our opportunity. That's going to be based on sales manager leadership. Now it would be great to get to that point when we're saturated in any one market. But we're nowhere close to that in any of the markets that we serve, including Oklahoma City, which we've been in for 21 years now.

I mean where do you think a reasonable upper limit would be in terms of what your share could be? I -- you've grown so dramatically over the years.

Well, I mean, there's a lot of -- we're continuing to develop product that makes our overall revenue opportunities greater. And then also, we've got 5% of the TAM. And so there's still a lot of antiquated processes out there. There's a lot of antiquated systems. And honestly, I think that there's newer systems that are doing things the old way. And so I think as you look into the future of how businesses win, and that's really what this is about is. How does a business win in HR? There's things that we can impact for a business, and there's things we can't. Can we impact the business' revenue? Well, maybe. I mean to the extent that a salesperson, operation person or software developer was spending 2 or 3 hours working with old technology that's fractured and they're having to work harder just to work, yes, we can help them with that because now it's going to be simpler. But what we can really help them with is the data transfer model that carry both exposure because when you're doing -- multiple people are doing input into multiple systems that lacks confirmation from the individual who it came from, that's going to create exposure in other areas. And so for us, it's really about helping a business win where they can. There's only so much that we can do for a company, but there's also a lot that we can do for them if they make a shift and do a full usage mandate with their employees. Things change for them, and it becomes easier to hire employees, easier to engage with employees, and also your employees are more satisfied because no one wants to make work harder. Now why can't it be simple? It shouldn't be difficult for me to choose a benefit, for me to change my 401(k) percentage, for me to access my schedule, for me to get my expenses, for me to get payroll, for me to request time off. These should not be difficult tasks. They were only difficult tasks because they were created over time by multiple vendors and then integrated. In fact, the tasks are very simple. And so that's what we've done. We've taken the model, and we've explained to the C-suite that you need to transfer out of this data transfer model, which does nothing but create exposure and cost more. So that's what we're focused on. What does the future look like for that? I mean, eventually, I think everybody's on it. Does not mean that we wouldn't have competitors at some point in time, make shifts to do different things. And would there be other options? Maybe. But I mean I really think that the opportunity is all the businesses out there that want to become more efficient. So we -- you have early adopters that we had in the beginning that kind of went on version 1 of our employee app, which started about 2.5, 3 years ago. And now we're at where we're at today. And I don't know that we're in the early adoption time period. It's time for everybody to get on board and take a win for themselves. It's not going to cost you any extra to use technology correctly, and you actually get great value. So I think our prospects are great out there.

That's terrific, Chad. Chad or Craig, I'm wondering -- you've had some of the highest margins while growing very quickly just because of the efficiency that you have. How should we think about the margin prospects from a longer-term perspective?

I'll let Craig mention -- but I just wanted to say one thing on margins. The -- what we're automating for our clients also helps us, okay? A case in point. We have the same number of service individuals at the end of December of 2019 that we had at the end of December 2018. Not similar, the exact same number to the FTE, okay? And the number of calls, inbound calls, that we have calling us from our clients are down. Now we do outbound calls of service and usage. The number of inbound calls where clients are calling us for service is down year-over-year. So we get the same number of specialists, the call volume's down. Why? We have more clients, we're doing more for them. That's because they're using the products the way they were meant to be used, and so that's helped with our margins. Craig, you might be able to give up some other things.

Yes. I mean, Mark, we had high margins coming into this, and we mentioned some of the items that might impact that as it relates to interest rates, and one thing that we did call out on the call is that we're going to continue to spend aggressively in the sales and marketing area right now and really to get those new logo adds coming in out of the backside of this. So in the short term, we're definitely spending in sales and marketing, but we had high margins and would hope to -- that's what we always strive for.

That's terrific. Thank you so much. We really appreciate the time. Unfortunately, we're out of it. We could keep going for hours, but thank you for joining us. It was really enlightening, and I hope you enjoy the rest of the conference.

Thanks, Mark.

Thanks, Mark.

Appreciate it. Take care.

Take care.