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

All right. Great. Chad, are you on? And Craig, are you on?

Yes.

Yes.

All right. Well, thank you again to everyone who is participating today, day 2 of Citi's Global Virtual Technology Conference. I'm Dan Jester. I'm one of the software analysts here at Citi. And very pleased for this session to have Paycom. We have Chad Richison, the CEO and President; and we also have Craig Boelte, the CFO on today. So thank you both for joining us, and really appreciate your time.

So as I think everyone on the line knows, Paycom is a leading provider of HCM software. And so I don't want to go over sort of the history of the company, Chad, because I think you've said it many times before, and I think everyone understands the background. But I do want to jump in and talk a little bit about kind of what you're seeing today because you reported your last quarter about a month ago, but certainly, the world feels like it's kind of a day-to-day. So I think just to kick off the conversation, maybe at a high level, kind of take us through kind of what you're seeing today on the ground, and then we can go from there.

Yes. I mean we'll update through July. Like I talked about on the call, we had a very strong second quarter from a sales perspective. I mentioned that from a new business sales perspective, and then I mentioned that second quarter was our best quarter from a new business sales perspective and July was our best month thus far in our company's history from a sales perspective. And so that's really been driven by high demand for both a differentiated value proposition, which we definitely have; as well as driven by our advertising spend, which we have accelerated through these COVID months.

Okay. Great. All right. So let's just talk about sort of the impact that your current customers you're seeing today because they're living through a pretty significant challenge, many of them. So on one hand, you've had lower employment, and that has impacted you. But on the other hand, I suspect that you are seeing engagement because as companies navigate these times, moving to a digital, more automated solution certainly presents a lot of opportunities. So for your current customers, kind of how are they navigating this environment? And maybe walk through your current customer base, what they're seeing today.

Yes. So as I reported at the end of 1st of August, actually, as I reported then, for us, we saw a pretty dramatic trend within our clients early on that stabilized about the end of April. And at that time, in the last call, I actually mentioned that I wouldn't really expect to see major improvements in those numbers without there being major news. Unless some state that's been closed down, now all of a sudden doing a lot more than they were doing in the past or unless the travel industry is coming back, there's just -- you wouldn't expect necessarily we would get a large movement in the current client number as far as the impact on the reduction in force until we see some help from that. So that's where we're at with that. From a new business perspective, as I mentioned, in August, at the end -- during our earnings call, and again, I'm talking about through July because I don't want to really give any new information on this call that I haven't previously given, we saw a strong demand for our product. And so you're right, it's been a double-edged sword. We do have an impact to current client revenue based on reduction in force. But we've also seen accelerated new business sales based on the value proposition resonating within the market. And so in one area, obviously, I believe we've hit a floor in impact to our current clients from a negative perspective. And I don't know that there's a ceiling in new business opportunity for us, being that we have captured about 5% of the TAM, maybe a little less than that.

Got you. And just in terms of your current client, is there anything that you would call out in terms of are they asking for relief in terms of billing or payment terms? Are you seeing anything that could impact sort of your cash collections that you would call out?

No. As I mentioned before, I mean, our model is very fair. I mean if you had 300 employees and now you have 50, you were paying us for 300 employees, and now you're paying us for 50. We charge you based off of the number of people that you pay. And so that's how our products are actually built. So it's been a fair model. Now is that to say, you wouldn't have certain clients that have additional struggles and could be looking for help one way or the other? I mean I'm not saying that nobody's asked, but for us, we have a fair model, and we've stayed true to that model of you pay based on the number of employees that you pay.

Got you. And in terms of selling back into the base, has that changed? I know that's not a priority for you. Getting new clients is the priority. But certainly, there are opportunities to go and provide new services to your current customers. So have you seen any change in the willingness of those customers now that we're past the worst of the pandemic? Have you seen any change in them engaging you to kind of deepen their buy from you?

Yes. I mean we've always aggressively tried to sell into our client base. It's just that those sales were dwarfed by the overwhelming majority of all of our new revenue added on being from new client logos or new clients to us. So we've always sold aggressively into the market. We've continued to have success with that as we've shifted over to this employee usage strategy. Obviously, for companies to deploy a full employee usage strategy, you need a full product if you're going to go hire to retire. And so that trend of continuing to sell more product, both into our client base as well as at the time of initial point of sale, that's a trend that's been continuing to improve, if you will, just based on the improvement of the value proposition. And so we've seen that continue through COVID.

Okay. And then turning to new business. You did comment on the last call and you commented this morning about sequentially how things have improved since the first quarter. I'm just -- can you talk about some of the new business that you booked? Any change in terms of its -- how many of modules people are taking, industry composition, geography? Anything that has changed relative to what you would look like maybe 6 to 12 months ago from a new client perspective?

No. I mean it's been progressively getting better from a new client perspective. As I've said, we've continued to sell at the top end of our market. We continue to sell more product as clients are onboarded. And so that's stayed consistent. As we've moved through this, we've become more efficient on the sales side, just like we're all connected right now through Zoom and probably very few of us connected this way before. Well, that's just like all the prospects out there right now. They also are all connecting this way. And so it does make it a little bit easier for us to engage with them more comprehensively when we're going through our product. And so we've picked up some success doing that. And I believe what's really driving that is the need for technology. I think we're all using technology these days that we probably weren't using before, and we have people more willing to use technology these days than maybe what we did before. And so I think all of that adds up to future success for us, which is being driven by new business sales right now.

And so when this first started, you had a pretty aggressive pivot that you've talked about in the past in terms of getting the sales force reoriented to this new environment. Can you just give us an update in terms of what your sales force are doing? Are they back in the office? Are you still going to be remote for a while? Is it dependent on your clients and whether they want to see you in person? Kind of how have trends evolved there over the past few months?

Sure. So we're doing the same that we've been doing since we left. So there's been no change on that. We're still selling virtually. And so we aren't going into clients, and we aren't going into the office. And so sales reps are all working remotely. Would there come a time that sales reps might work remotely from the office? I mean if it's safe to do that, then obviously, there may come a time when we would do that. Would there come a time where we would go back into the office, back into our prospects' offices to make sales? I mean to the extent that they start allowing that, which, I mean, at some point, they will. And then also, what we don't know, I believe that we've changed why prospects buy through our technology and our value proposition. Not 100% sure how prospects buy has changed yet, but it might. I bought my first shirt online about 2 months ago. Before that, I was a go-to-the-store kind of person and buy a shirt once a year. So my habits have changed through buying. I would expect that everyone has had some level of change in their life through technology purchasing in that. And so we'll just have to see. We're going to meet the prospect where they live. If they live in online purchasing, we will meet them there. If they live through in-person purchasing, we'll meet them there. And so we're going to really let the prospect dictate that.

Is that similar across all of your prospect sizes? Like selling to a 4,000- or 5,000-person organization, is that different than a 500-person organization today from that standpoint?

It would be -- yes, it's the same right now from that standpoint. Now before COVID, below 50 employees, we already were selling in the virtual model. Now everybody was in the office, but they did not go out to prospects' offices. They sold from the chair in the office. So now we're doing that same thing in outside sales, which has been our traditional outside sales model, which would sell companies that have 500 employees as well as companies that have 10,000 employees.

Okay. And as you think about some of the success you've had in virtual selling, how does that alter your calculus about making incremental investments in the sales force? Over the years, you've obviously opened a lot of sales offices, but you've also been hiring sales teams at your headquarters. So kind of how do you think about that in this current environment? Is it too early to pivot one way or the other? Or is there enough evidence to suggest that maybe you don't need to have 75 offices, maybe you can have 60 or 55?

Well, no. I think the offices, the number of salespeople is really based off of total opportunity that we have out there in the market. And so yes, we're going to continue to add sales teams. Now your question as to will they be virtual or not. Obviously, anything we had during COVID would be virtual. But it won't take us any time to shift back into the office if that's where the strategy goes. And so it's really going to be about not how we sell, but how they buy is really what we're going to let dictate that. I think that more businesses are probably becoming a little more acclimated to buying technology online. You've had to. I mean anybody that's upgrading servers or buying firmware, I mean, anything you're buying right now, you're probably buying online. And so the longer we're in there in this type of situation, could that become more of the norm? Maybe. I just -- I don't know enough about that yet. But right now, I mean, it's 100% online. We're not getting prospects requesting us to come into their office. So if it changes on their end, we'll maintain a similar look to what we have today. But I do -- I really believe in being in the office as a company. We aren't right now, and we don't have a good reason to be. If we were manufacturing widgets, we would have to be in the office. If we were a grocery store, we would have to. So we have certain luxuries that maybe many of our own clients don't have in that certain scenario. But I do believe in being in the office, I do believe you build a culture that way. I think had we not been in the office before this, we wouldn't have the same culture we have today that's helping us move through this pandemic with success. And so I do see us going back into the offices at some point. Will we go back out to clients even when it's safe? Well, that just depends on whether or not buying habits and buying patterns have changed.

Great. And when you start conversations with new customers, new potential customers, say, and you're building your pipeline, is the catalyst for them to start that conversation, has that changed relative to a year ago? And how so if it has?

It has changed. I mean we've always been the single database hire to retire, but the users have changed. As we look at it now, you look at the employee usage strategy, that's really what shifted things. You had to have a single database before you could shift to an employee usage strategy because you can't roll out 8 different products to employees that are rarely integrated, especially in the mid-market. And so you had to have a full system. As we've rolled that out to an employee, and especially as we've advertised that differentiation in the market, our advertisings that we're running, you will notice they say Paycom, but they're also advertising a different way to use a product. We're very clearly saying the employees should be transferring data, they should not be sending e-mails, making phone calls and that type of process. They shouldn't be doing that, and then having HR and others input the data. Employees should have control over what they input. They should be able to confirm what they input, the same way they do in their consumer lives when they order a coffee or a flight or work with their bank. They're doing everything direct with the database. And then oftentimes, they come to work and it's 1992. And so that's really what we're driving at. And so I do think now when a client comes in, and this is a difference from a year ago, we just put out the DDX in April of last year, okay? When we're getting clients last year, we're still dragging them into usage. They're coming willingly, but we're still bringing them over to usage. Now we have a lot of clients call us because of usage. They want to have their employees use. Maybe they bought different products, and they always knew they can deploy usage strategy, but didn't really want to. And then the pandemic started, now they've had to deploy usage strategy. Those same products they thought would work for them that they had never really went through and tried to stress test them from significant usage haven't been working for them the way they thought. And so they still want that strategy. And so I don't see that going backwards. I mean I don't think that anyone -- I don't think any HR department should ever input a data point from an e-mail. E-mail is not a secure way to transfer data. You don't even know who it's from. You can't even confirm the data if you're an employee. So -- and that was probably the #1 method of how data got transferred in the mid-market. So I just -- that's not coming back. And it's just how fast can we move everybody into the new way to use a product, I think is where we're at right now.

Great. I do want to come back to the product and DDX specifically. But maybe before we go there, we can talk about the success in your advertising spend because that is something that you've done a lot more of this year and timely because if I recall correctly, you started the advertising program and ahead of the pandemic. But sort of how successful has that been? How are you going to view advertising for the rest of this year? And kind of how are you measuring its success in terms of efficiency and things like that?

Yes. Well, every week, we measure it by a number of leads that came in and number of appointments we've set with those leads, and we already know what our close ratio is on an appointment that's set. And so that's how we track it. I've pulled back on advertising before and watch them drop. I've tried to spend more and watch them not go up as much. So there -- you get to a point of diminishing return on an advertising spend. You really try to hit that sweet spot. And there's more than just television. I mean you have digital, you have SEO, and you have some other opportunities there. But we have had a strong spend, and I think, primarily, that's because we just have it in the past. It's strong spend compared to a very somewhat anemic spend as it relates to advertising in the past. Now we've had pockets of advertising spend. You mentioned that we started this early this year. We actually talked about the leads it was generating earlier this year. And then it was about 2 years ago toward the fourth quarter, it may have been 2018, maybe 2017, Craig might chime in on that.

'18.

'18, we did another spend that quarter. We were advertising a little bit different way, had some success then. But we haven't had this success -- even earlier this year, we haven't had the success with our advertising spend that we're having now. And I think that's because of the differentiation and the fact that the value proposition is resonating because it's just logical. It's 2020. Employees should be inputting and retrieving their own data. I mean how long are we going to wait?

Yes. When you decided to do this latest round of sort of more aggressive advertising earlier this year, was there a specific reason why now was the time that you wanted to do that?