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

Welcome, everybody. My name is Alex Zukin. I cover enterprise software here at RBC. I am privileged to be joined by the Paycom team with Chad, Craig, and James Samford. Guys, thanks for joining us and being here with us today.

Thank you.

Thank you.

Chad, so the first question for you will be on a topic that you have a love-and-hate relationship with recently, and that's the topic of bookings. But what I'll ask is we know you want to -- I get that you want to get away from giving a lot of disclosures around bookings. But if you'll indulge me in this question, it's where have you seen the strongest bounce back in bookings over the course of pandemic? And where would you say they lagged?

Yes. I mean what I said was prior, I think it was our May announcement, it was either end of April or the beginning of May that our bookings had gotten back to a pre-pandemic level. And that was prior to the pandemic, we were having a lot of success. And at that time I said with the exception of a few weeks in there where we pulled back and then as we were kind of getting our feet back underneath us, we had gotten back to the pre-pandemic level. Since then, I've said that that has accelerated. The bookings have accelerated. Not just got back to the pre-pandemic level, but they've accelerated. And so I have talked about that. And your question of where are we seeing it, it's been from the usual suspects. I can't say it's been any different as far as the mix of what we're seeing versus industry, competitor and what have you. And then as far as where we're lagging, there again there are industries that are hurting right now, but we're still selling in those industries. So we remain industry-agnostic, even though obviously there's industries that are more impacted than others. Our approach to sales is the same in that we're looking to sell all industries.

Makes sense, and just to clarify because I get this question a lot. When you talk about bookings getting back to pre-pandemic levels when you talk to accelerating, is that to say if you had sold $10 of bookings pre-pandemic, when you say I got -- we got back to the pre-pandemic levels, that means you got back to selling $10 of bookings in Q1 or Q2? When you say accelerate, that means that whatever the growth rate was before, your growth rate on that is now higher?

Yes. So when we said accelerated, I said the weekly average that we were selling, that both we got back to the same weekly average. So in your example of $10, we would have gotten back to the $10. And then when I said accelerated from beyond that, obviously that would have been more than $10. Again as a weekly average, which you add all that together, that does make for a larger year as well.

Got it. And so then let's talk about kind of walk us -- remind us on the journey of kind of what were the kind of impacts from the pandemic on the company, on bookings, on employment growth. Where are we today? And what does a vaccine world look like for Paycom? Is that a snapback? Is that a gradual resumption? Take us through the journey.

Yes. So I mean, well where we're at on the pandemic is what we talked about. The negative side of the way the pandemic has impacted us from a revenue perspective was that $1.95 million to $2 million in weekly headwinds that we have due to current clients' reduction in their employee base that we charge for. We did talk about on the last earnings call that to the extent we did see some improvement in that, it was around maybe $100,000 a week depending on what week you measured it. And so haven't seen a lot of improvement in that. But that was -- and then obviously we also -- which I don't know that was necessarily pandemic related. But we did have the decrease in interest rates at the end of March, which hit us another 150 basis points. So it was $350,000 a week there. Now that's the negative way that the pandemic has impacted us. On the positive way, there's we've become more efficient in this, as I think most businesses gained efficiencies going through this. Not just in the expenses that you don't have because you're not opening up your cafeteria in your building, but also all the efficiencies that are gained by using better technology whether it be through communication, reporting or otherwise. And so we've also gained some efficiencies there. You translate that over into the sales process. Additional efficiencies we've gained there has really been in the selling motion again. And it's helping us improve the selling skills of our salespeople. Before, a sales manager, on a good week, was able to go on 6 appointments with a salesperson. Because you had to ride around, you had to be with them, you had to go on buildings. Now they can go on 12. Our best salespeople, on a good week, can go on 6 appointments. Now they can go on 12. So there's some positive benefits that are also coming from the current environment. Now in answer to what happens in a snapback, I mean if things snap back to normal and we have restaurants that are going from doing takeout only to actually having people come and sit in a restaurant, they will probably need more employees to handle that. Same with hotels and hospitality, health clubs and what have you. So I do think that as it comes back, it will impact us. I don't know about a snapback. That will kind of depend on does the vaccine produce a snapback? We'll have to wait and see what happens there. But I don't think we have to have improvement to grow. We need stabilization, we've seen that. And I don't think we need improvement in the overall employment. The way employment looks right now, I don't think we need improvement in that for us to be able to grow. The employment environment can stay substantially the same, and we can still continue to grow.

Chad, let me ask this question. It's a question I get a lot, and to the extent that you've talked about it either earlier on in the pandemic or even before. When you look at your customer base, what percentage of your customer base is in the most exposed industries, travel, retail, restaurant hospitality? What percentage of your overall employee count or customer count or both is generally exposed to those sectors?

I mean I wouldn't say it would be any different than the percentage that those businesses make up of the mid-market workforce. And I don't know the specific answer to that, but I mean we wouldn't be over-concentrated in these areas. And I wouldn't expect we would be-under concentrated in those areas either.

Okay. So then I guess one of the questions that I also got, particularly after the last quarter, not just to your report but also on one of your competitors', was you saw -- if we saw initial employment trends change by 5% and we saw some sequential differential for you guys, about 1%, benefiting from the changes in employment, why was there such a big -- why was there not more of a benefit in your employment base, based on what you saw from some of the macro indicators and some of the [ ADPs and Paychex? ]

Yes. I mean well, I think ours was very similar to what everybody else did. I mean ADP, I think, had a 10.5-point headwind on their pays per control. Now they have a 9.2 headwind on their pays per control. So they had a little bit of improvement from what I saw. As far as the others, I think we were all similar. Important to note, if an employee leaves one of our clients, there's 100% chance we're going to lose that revenue. But there's only a 5% chance we'll get it back because we only have 5% of the market. So if an employee leaves a restaurant, if they don't go back to that restaurant if the employee is like, "Well, I'm no longer going to be a waiter right now. I'm going to go work in retail," or something like that, unless that employee went to somebody that we were working with, we're not going to receive the benefit of that. So it could be that. But when I heard what everybody said, it seemed like we were all pretty much talking the same language. Maybe ADP did have a little bit improvement from what they mentioned, more so than some of the others. But I'm just not 100% sure that we weren't all very similar.

Got it. And I guess because then the question becomes as employment trends potentially improve, do you get that back? Is that -- is employment a tailwind, hopefully since we've troughed? And how quickly does that tailwind accrue to the business? And how should we kind of think about that over the next 6 to 12 months?

Yes. If there's a catalyst, yes. I mean I would say that if the pandemic's over and people are going back to restaurants, going back to football games, going back to hotels, then absolutely we can't help but benefit from that because we still have the client. We still have the restaurant that had 180 employees and now has 14. We still have the hotels. We still have the business. So we can't help from (sic) benefit. But if unemployment gets incrementally better, unless it gets incrementally better at our client base, it won't necessarily have the impact. Which is why we went ahead and separated out us from the unemployment trends, by giving you the exact dollar amount we're being impacted on a weekly basis. We did call out very small improvement on that. Not meaningful, but I do believe it more than proved out a stabilization in the number for now. And that's what we're dependent upon. If we have stabilization, we can outgrow the negative impact that's been created for us. And you're right. If things get better in next year and there is some type of catalyst? Absolutely, that's going to help us. But I'm not so sure that incremental impacts on the unemployment survey method, which is our most accurate method of surveying unemployment, I'm not 100% sure that, that will directly transfer into mitigating our headwinds as it relates to those revenue amounts.

That makes sense. So maybe what are you seeing when you talk to your customers, when you survey your customers? What are the employment trends that you're seeing? How have they been looking over the last, call it I don't know, month or 2 months versus 6 months ago? And how do you -- when you start thinking about what that could mean, are people just generally kind of paused that some net new normal until we get through by the end of the year, we see where a vaccine is and then we reevaluate? Like does it come in waves? Or is there some other seasonal component that we should be aware of?

Yes. I mean the leading indicators we're going to be looking at are people who are onboarding employees back, either into their work -- into their current client or clients that might be growing, or clients that are onboarding employees that are just backfill. So you look at that. You look at background checks. Then you start looking at punch in, punch out. So there are some leading indicators. The way I would best describe the environment is survival. I think that's what most businesses have been in, a survival mode. And obviously businesses are also trying to thrive through this. But I think when you're looking at those businesses that have been negatively impacted, I would still say they're in survival mode, those industries. There are some industries that have been positively impacted by this as well. Logistics, some health care, on the margin, there are some other industries that have been impacted positively. But I think when you look at the impact on those that have been impacted negatively and what's going on with them, I still think there's an attitude of survival that people are in right now and kind of in a waiting situation. Which does seem to be more positive, but until consumer confidence returns, I don't think you'll see those restaurants bringing back those employees, or hotels or others. That's really what we're waiting on, is the improvement in consumer confidence.

And I guess the -- what is the impact of the potential effects of stimulus and all this? And kind of walk us through if it happens, how long would it take until it impacted your business positively?

That's hard. There again it depends on how they do the stimulus. I mean if they do the stimulus the way they did last time and they send money to people sitting at home, I don't know. On some levels especially on small business, the PPP helped the businesses stay alive. Now did it help them stay alive past September? I'm not so sure. But I do think that there was some opportunity there, specifically with PPP and impact on business. If they do a stimulus and it's about creating quality jobs to where you get tax benefit, or you get reimbursed based off of creating a quality job at a certain salary and what have you, then I think there'll be some benefits if it's truly a stimulus. So it's just going to depend. But I do think that the last stimulus did help a lot of companies, especially on the smaller end. I wouldn't say mid-market was incredibly impacted. But on the smaller end, I do think it was the difference in many companies going under or being able to survive.

And so when you -- back to our favorite topic of bookings. When you think about the tailwinds and what kind of growth you're kind of architecting for, if I think about on one hand, you've got twice as efficient sales organization. On the other hand, you've got a buyer that -- well, maybe tell us, right? Is the priority to switch the same, less, higher? Is the sales cycle, same, less, more? Is the budget environment same, less, more? Walk us through those puts and takes and kind of how that constitutes into what kind of -- assuming that there, it takes time to get back to some level of normalcy, what kind of growth, once we lap the COVID impact in that period, what kind of growth are you architecting for?

Yes well, I mean I believe our value proposition is becoming more mainstream. I mean I don't think 5 years from now, HR is going to be and operating will be -- or payroll will be inputting data points from e-mails and other. I do think you're going to have more and more employees have a direct relationship with that database because that's how the business wins. So I think you'll continue to see us drive that. You're going to see more and more around the self-service in the future. I think people will be doing their own payroll as individuals. I think when pay period ends, payroll will be done. You won't have all this collection and processing after the fact. And so as long as we stay focused on continuing to drive true efficiencies for our clients and ROI, I don't see why we couldn't take the 5% of the market that we have approximately and continue to expand on that. We continue to get more and more leads. I mean we get leads both of our -- both from our advertising. And then we had a lot of leads just from employees that go from one business to another where they were used to having a single experience, and now they have multiple systems, e-mails and everything else. And so I think that our value proposition is going to become more and more prevalent as we continue to drive value for our clients.

And what about the selling environment? I mean I get the leads. But is it easier to sell, harder to sell as the cloud transition accelerated in this category? Or it will, once people actually have money to spend -- like what -- in real time if you look at your kind of business and the conversations that your salespeople are having, is it on -- net-net, is it a little bit harder to sell? Or is it easier to sell?

Easier. It's easier right now just because of the method through which we're going through to sell. Before, maybe we had to meet with one department then the next department, the next department. Now you're really able to meet with everybody at once, as we're doing right now. So there are technologies. Maybe these same technologies will be utilized to sell in our industry after this. Maybe we'll be going back up face to face. We'll have to see. I think the prospects will dictate that, not us. But right now in the environment we are in right now, we are able to be a lot more efficient. And we are having a lot more success moving sales calls along. I would find it hard to believe that's unique to just our industry. I would like to think that most B2B sales organizations in this environment are finding efficiencies in their own sales process. And we're just one of those, I would think.

Makes sense. I guess maybe talk about the pace set of go-lives. And also, what are in your mind, like what are the biggest growth catalysts that you're looking at for 2021? And what are the biggest headwinds that you want to make sure and caution people to kind of recall or to keep in mind when they're modeling growth?