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

Welcome to our next session. I'm really happy to have the Paycom management team with me. Chad, Craig, James, good to have you on again. Another interesting year for all of us. Like it's funny, like every December, we come together and then the new year sounds completely different than what we expected before.

But I actually wanted to start with something kind of -- that we talked last year already about and that was kind of your strategy to push like towards more employee engagement, employee sub services. Remind us there on the strategy because I think -- kind of leads into my next questions.

Sure, Raimo. And so it was about 3 years ago that we initiated our first app, and then we followed that up as we move that app into being mobile first. We followed that up with actually a measurement tool called the Direct Data Exchange, which measures the amount of data moved by the employees versus the amount of data that was moved by HR and operating department or other because we believe that the data that's moved by other individuals is duplicative, meaning that they somehow had to get that from the employee, whether it was e-mail or phone call or potentially multiple systems that had to be integrated. And so our push has been to remove the HR and others out of the middle of the data transfer process, not removing them out of a business, but removing them from the data transfer process so that employees can connect directly with the data and make their selections as well as retrieve data of their selections. And so that's what we've been on a mission to do. As we do that, the business wins, obviously. Anytime you have employees moving direct to a database versus having someone in the middle of the business and organization wins. And it increases the return on investment that our product is able to deliver. And so we've been driving that in earnest for about 18 months roughly since we've had the DDX out. But I believe that as time goes on, we'll have more and more success with that.

Yes. Indeed. Talk about like that as a differentiation tool. Like so if you were out in the field there, like how open are customers to that because it seems like a no-brainer. And then how does it compare -- like how does it set you up against then the old timers? Because I don't believe ADP is even talking about this.

Well, there had to be a mind shift. For years, I think the reason why payroll and HR data wasn't wrong was because of the HR and payroll departments. We're very careful with employee selections, and employee would submit the data. And they would make sure things are accurate. And so that same process that they went through to make sure things are accurate. And if they weren't in the middle of that process, things weren't -- wouldn't have been accurate. It's hard for them to give some of that up. We're all creatures of habit. There's been this habit of providing that service, if you will, to employees. Well, with the prevalence of technology and especially handheld technology in employees' hands and with it being so easy, it just makes sense for those employees to make those own selection, their own selections, the same way they do everywhere else in their lives. Before we go to work, when we're at home or we're on the weekend, we're oftentimes consumers. And when we use consumer-based technology and make selections, whether we're ordering a coffee or a gift for someone or buying a plane ticket or interacting with a bank, we're doing that directly. Then we come back -- then we come to work, and we have these middle layers of data input. And I think a lot of that has to do with the importance of getting it right. If you -- if I order my drink wrong, if I order a chai tea and I get a latte, well, I've got to go get my latte. But if you do payroll wrong, if I was supposed to enroll my child in health care, and I didn't and I didn't realize it, or if I was -- you get what I'm saying. So it's a lot more important. The data has to be correct. And so I think there's been some in trepidation on the side of HR and others that will, if I pass this on to the employees, they may not do it right or it may be inaccurate. And I think as times gone on and we've given them more visibility to the data on both ends, we've been able to ease those concerns. And so it is becoming a lot more popular in mainstream to have employees interact directly with data because it provides a better experience for the employee, provide stronger ROI for the company, and it also eliminates a lot of exposure that is inherent in this type of process that...

Yes. And how does it -- how is it for your sales guys out in the field when you're selling it often against like a competitor? Like especially on the legacy guys, I mean, I'm checking -- I don't think ADP is that much there. Like is that becoming a really a tool to make it easier?

Yes, for sure. I mean, one of the reasons I believe that our close ratio is continuing to go up is because the people that are now contacting -- who are contacting us, they understand what they're buying and what the value proposition is. Before, someone might call Paycom and they understand that we are one of several companies that they may use for payroll. And then to the extent they wanted more of a comprehensive system, I think we more stood alone for that. But now when people are calling, they understand that they are calling because they want their employees to use a system and they want to remove themselves out of that data transfer process so that the employee and the business can win. And so we're having a lot of success with that right now. And it's not -- we're not going backwards. I mean, we're not going to turn the calendar and all of a sudden, everyone wants to move back to sending HR e-mails and using multiple disparate systems.

Yes. Yes. No, it kind of mentions. I think the other thing, I don't know if it was related or if it was 2 separate projects, was like a bigger focus on usage, to make sure that your customers just kind of sign up for what they're actually using as well, et cetera. Like where are we on that journey?

It continues to go up. I mean, we've had our highest usage this month. But I mean, again, it continues to go up. There's other data points that people can track. We actually track downloads, time spent -- seconds spent on the screen. We go through all that. So we're able to track usage through many different areas. But specific to when I look at usage, I look at the DDX. And we want people at is 100%. 99.6% is not an A anymore. Everyone needs to be at 100%. There should not be data transfer happening that's not going direct. And so that's what we focused on when we focus on usage. And I don't believe that the future is going to have HR in other departments inputting data into these systems. I think it produces risk, and it's just not as accurate as having an employee make their own selection.

Yes. And then just since we started talking for the first time like many, many years ago, like your footprint in terms of what you offer to client has expanded quite a bit. Like can you just spend a little bit of time on that journey of like the different modules that you have added? And then maybe a little bit also like where are we in terms of penetration there for what you have in totality versus what clients having today?

Yes. Well, oftentimes, our products follow -- the uptake of products follow the time line in which they were developed. So the longer we have a product, the more people we're going to have on it. And 100% of everybody is on payroll. But an answer to your question, we started with payroll in '98. It was 2003 that we had an employee self-service. It wasn't until 2005 that someone actually used it. In 2004, we developed time and attendance. And then we just continued to add other additional products, modules into our system, whether it was benefits administration, applicant tracking, onboarding, learning management, expense management. So we continue to build out the entire platform because of where we're going next. And what we wanted to do is have all components that any payroll or HR would have because we are going to be moving into self-service payroll and full payroll automation. Right now, payroll pay period ends, and that's oftentimes when payroll starts gathering all the data ready to submit. In the new model, Paycom will start -- or payroll will start when the pay period begins, not ends. And when the pay period is over, the payroll has already been calculated and individuals have done their own payroll, of course, with the rules and configuration that each business allows based on how they currently do payroll. And so we've determined that payroll for a company can be difficult, that payroll to an individual not so much. And so we do believe that payroll can be fully automated as well. And you have to have a full system to be able to do that. And full 100% usage of a full system so that you can get there. A lot of these things were early on. I mean, if you look a year ago and we're driving the DDX strategy, our numbers are lower for the percentage of employees that are pushing data. Now they're much higher. And as we sell new clients, they're all coming on with a commitment to full-service usage, and so they're even a lot higher than that. And so -- but we need to get to 100% so that we can automate extremely complex tasks that have to be accurate and can be accomplished by the employee.

Yes, yes, yes. Okay. That makes sense. And if you think about model, do you look at that even like or is that just a Wall Street thing to look at model penetration? So I think how many did you have? Like 24 models, I think or like -- and you -- kind of years ago, you gave out a number of like, look, if everyone would kind of have everything, then it's obviously a massive market. Like do you track that? Or is this more us?

We do. I mean, we've never been asleep at the wheel in trying to sell a different additional technology products into our client base. An answer to your question, we had 18 products at 2014. We now have 26, I believe it is, that we expanded to. At the time of purchase, people will typically take half or more of the product we have. And so then our opportunity was the rest of it. As we move to a full solution set, I believe that people are wanting to buy even more products because you need all to make everything work, especially as we head to full-service payroll. But all that's to say is that if we were to go out and sell all of our current clients, the products they don't currently have from us, we could triple our revenue. But the bigger opportunity is the 95% of the market that we don't have of prospects that don't currently use Paycom's system.

Yes, yes, yes. Okay. And then on that note, when we started -- like talk a little bit about the -- a typical customer -- or like the customer that you kind of serve now? Because like I remember like a few years ago when we talked and I was like, yes, 1,000, maybe 2,000. Now a couple of years ago, you kind of said like, okay, we actually might sell against a 5,000-seater. You have like on the earnings call, there's a couple of more deals that look a little bit like more on the upper end. Is that -- is your -- is that a trend because your solution is getting more powerful, you get more notice as well that you kind of get pulled up? Or is this just like individual examples?

No. I mean, it is a trend. We've been -- that's why we moved from 2,000 to 5,000. We were 50 to 2,000. And then it was about 2 years ago that we moved to 50 to 5,000 because we continue to be pulled up market. I think that has to do with the complexity in the systems that are out there in that market. I mean, Raimo, you know you guys probably have 15 systems there. How's it working for you?

Yes, it was almost -- oh, yes.

You understand what I'm saying. So I mean, again, the harder you try upmarket, the uglier it looks unless you switch to a full solution set. And so I do believe that upmarket, and I'm talking about 10,000-, 15,000-, 20,000-employee companies, they've had their hands full. Again, if they hadn't built what they built, you wouldn't even be getting payroll out. But there's an easier way to do things right now. And so as we look into the future, I definitely think that market is an opportunity for us as we get -- as we've continued to be pulled up market.

Yes, yes, yes. Okay. Perfect. And then one thing on that kind of journey like, so now I'm watching NBA games and stuff like that. And where I usually go for my beer, and stuff, I'm watching Paycom commercials. Like in the olden days, you were never like overly keen on this because you kind of always questioned a little bit like, is that money wisely spent? Like how has your thinking changed here?

The message is a lot stronger. If you have a strong message, it's resonating and you need to advertise it. And so I would say the biggest difference for us right now is we do have a very strong message. And we're going to deliver the product that's demonstrated throughout the commercials as well as through our advertising, which is really not so much of the product, but more about an employee's experience and the expectation of how an employee will now interact with their data at work versus how they were interacting with their data since the '80s and '90s. So again, we've -- the world has transformed into this direct-to-system model where employees and everyone else use consumer-grade technology to access information and make selections directly. And then you go to work and it's still 1990. And so what we're doing is taking the same usage patterns that consumers have when they're buying products. And we're taking those same usage patterns and we're bringing it into work so that businesses can benefit from them. They don't have to stay in the middle of that data transfer process anymore. We're not really that good at it. I mean, we're not really that good at data transfer. And there's an easier way. And so businesses are starting to realize that, and advertising that differentiation is working.

Yes, yes, yes. And is that more like a -- but like the -- I mean, theory is a tough thing to advertise like to a consumer. But actually, I look at the commercial and like, yes, to me, it makes total sense, and it's a really good message. Is that kind of then employees bring it in? Is it HR guys seeing it like, oh, I should look at a different way. Like how does it kind of help you then?

Well, I mean, it's obviously written for both, but we've had a lot of success for employees. I mean, it's hard to go backwards in technology. I mean, I've got to get up and go change the channel on my TV again. That's a long walk backwards from the remote. So it's the same thing. Once employees are using a single system, and they're used to having that access even if they didn't want to do it in the beginning, once they're used to having that access, we all become creatures of habit. It makes life easier for me. If you take that away, I go get a job somewhere else. And now I'm working with an 8-legged octopus with no head for this system. Where I did have a single system, that can create problems for me as an employee as well as for a business. And so we are having employees bring us into businesses, and then we're also having businesses that watch the commercial and/or have heard of us before, and they just understand the changing times and what's happening throughout the world with technology. And it's an opportunity for them to leverage it. I mean, why not have a system that pays for itself? That pays itself back versus having a system you get to pay for? And so that's what we've been driving. And I think that the world's conspiring to help us right now.

Yes. Let me shift gears because I'm realizing I could talk for this -- about this forever. But like actually, we need to talk about pandemic. Like what's been your journey here so far? I mean, like what's the new Paycom experience over the last few quarters?

I mean, we've been business as usual since third week of April probably. We made that shift. In the beginning, it was kind of understanding what was going on. We moved very quickly. I mean, Raimo, I don't even know if we were going to -- how we were going to even answer client phone calls from people's phones. Thought we were going to be working with e-mail day 1. So we've had to make a large shift. But as we've made that shift, we've settled into a what I'm going to call a temporary normal for us. We do have the expectation that we're going to be coming back here into the office when it's safe to do so. We're not going to try to break any records or set any examples. But we're going to do it safely, and we're going to return to -- back to work at the office when we're able to do that.

Yes. And what's the -- in terms of what's the stuff that surprised you most around like what happened, like in terms of how quickly you were able to shift, like how customer behavior was? I would have expected a lot more attrition in the base, which kind of didn't seem to happen. Like talk a little bit of what you were expecting and what played out for you.

Sales was better than what I thought. Selling in the environment was -- we had more success than what I had -- would have anticipated in the first couple of weeks. And that's obvious by me shutting everything down for 2 weeks. But as I look at that today, I mean, sales has been a surprise of -- we already had a strong value proposition. So even as we turned into the year, I think February 5 was our earnings call, I said our hot leads were already up 600% at that point in time. So we were already having a lot of success with it. But I do think that as you've gone through this, the fact that businesses are very resilient. I mean, I would say that's another thing. Business is extremely resilient. Business finds a way. And so I probably shouldn't have been as surprised, but the fact that the app bats that we've had during this time and people are making changes. I'm sure some are making changes because they're in extremely bad situations. And some are making changes because they see this as an opportunity to improve and get themselves set up for the future. Not everybody's system is dying, but I think most people can see the end of it, if they're not making the shift into this type of model.

Yes. And then like in terms of how I think about your numbers because like if I look at the growth for you guys, it's still below like what we kind of were hoping at the beginning of the year because like there's a pandemic. It's kind of you're growing, but maybe not quite as the same clip. Like what's the stuff to kind of really bring that up? Is like it was just hitting the comps in Q2 next year? Is it a mix because you signed very good new business and eventually, you kind of make up what you lost? Is it unemployment coming back? How do you think about those factors?

Well, with stability, it's just lapping the -- it's lapping the comps. I mean, with stability -- well, we've talked about the weekly negative impact to our recurring revenue being approximately $2 million, and then you add on to that the $350,000. As we lap and get through first quarter, I mean, again, you've got a little bit still that we're lapping in first quarter when you're looking -- especially the last 2 weeks in March were as [indiscernible] as any other week. But -- so we still have first quarter to lap. But after that, provided that we have stability, which, I mean, we wouldn't expect not to have stability next year as we look into the other quarters, I don't know why we couldn't be in a real good position as we come out of this.

The $350,000 Chad mentioned was the $350,000 per week related to the lower interest rates, the 150 basis point.

Yes. Correct. Yes, exactly. That was a good one, yes. Actually, I wanted to ask more, but my time is up there. I'm getting the sign here that I need to leave. Hey, Chad, Craig, James, that was really helpful. I'm looking forward next year to do it in person again. That would be nice. But I'm glad that you were able to join us. And congratulations. I mean, it looks like you're kind of really evolving as a nice company, and I'm glad I've been able to work with you on this journey. Thank you.

Thanks, Raimo.

Thanks, Raimo.

Thanks, Raimo.

Thank you.