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

Good afternoon, everyone. Thank you for joining us. My name is Josh Beck with the KeyBanc Equity Research Division. We're incredibly happy that Paycom joined us for a fireside chat. We have Chad, the CEO; Craig, CFO; and James from IR joining us today. We're really appreciative of their time. I know they're quite busy. It's always selling season at Paycom. So I really appreciate you guys carving out 30 minutes for us. But I'll just maybe hand it over to you for a quick intro. I think obviously, people know you and know the story. But maybe for those that are newer, just a quick intro and then we can dive into some Q&A. If anyone has questions that they'd like to enter in the chat, please do so, and I will intertwine those questions as well. So I'll turn it over to you.

Yes. So Chad Richison, CEO, founded Paycom in 1998. For about the first 4 or 5 years of our business, we were exclusively a payroll vendor that actually produced payroll online. And then over the last 15 years since or so, we've continued to add other products within our product suite using the same database to create one experience, which our initial goal was doing that for the HR, payroll and other departments. And then now we found the benefit of having a single database with ease of use, is that we're able to actually roll that out to employees. And through that, employees are able to use the system and do the work that was traditionally, say, for business and be able to do the confirmations and everything themselves, which makes for a more efficient way to do the overall process. So basically, it was -- we started one way with staying focused on ease of use and eliminating the integration. And now that same product, we're able to innovate as we take it more to a different end user, being more so the employee versus just HR and payroll. So we're leveraging employer user -- or employee usage patterns to benefit the employer as well as the employee.

Yes, Craig Boelte here. Just celebrating my 15th year with Paycom. So excited. I started my career kind of with Deloitte & Touche and then had my own accounting practice and Paycom was one of my clients. So it's been a good -- it's been a fun ride.

This is James, Head of IR, I've been with Paycom for about 2 years now. And if you have any questions, obviously, reach out to me directly. But I'll hand it over to Josh for our Q&A. Thanks.

Fantastic. You all are very efficient at the virtual format, I can tell. I just wanted to start with COVID because that's front and center on everyone's mind, no surprise. I think there are other areas of tech where the acceleration has been very obvious, if it was dealing with your customer, maybe a commerce solution, collaboration as we are now, telehealth. There were lots of those examples. HCM, I don't think was burning on everyone's priority calendar late March last year. But I really do feel like there's been some really positive signs that people are more seriously considering modernizing their HCM platform. So just curious, from your vantage point, what you've seen in terms of customer attitudes, maybe, say, roughly less than a year ago? And how that's developed to where things stand today?

Yes. I mean we've been focused on that user experience. And I say user experience. I mean I would say it's less about engagement with the employee of trying to keep them on a system for a long time. It's more about task management, getting them in the system so that they can complete the task and move on. So we've really been focused on that for about 2.5, 3 years when we came out with our app. And then we moved to Manager on-the-Go. We also had put out the DDX to be able to measure employee usage versus client usage and be able to really leverage the efficiencies that can be gained when employees have not only the responsibility to do a task, but also they can do it conveniently and they can confirm all their selections. And so they have visibility into what's actually happening with their data. And so all that's to say is we've been focused on that for about 3 years now. And so then you have the pandemic. I do think that the pandemic has forced a lot of people to use maybe portions of their system that they knew they had, but they weren't really using. And so if you bought a system and you always knew, well, you could do this if you wanted to, you just don't want to right now. Maybe the pandemic forced you to test that, what you had bought. And maybe you found out it wasn't as easy as you thought it may have been to use your current system. And so I do think that at some level, the pandemic did somewhat bring to bear the inefficiencies in models where you may have multiple systems. And then some systems are not necessarily set up for the employees to use because they weren't really designed for employees to use them. They were designed to complete a task in a -- in the more traditional model. Those tasks were traditionally completed by HR, payroll, benefits administrators and what have you. So anyway, who have done a good job of keeping the data as accurate as possible without employees having pulled the visibility. So I would say one thing that the pandemic did was create another proof source for why it is best for business for employees to manage their own data. And primarily, it's because only the employees know whether or not their own data is accurate and what have you. And so I think the pandemic had -- I wouldn't want to say that the pandemic has been helpful. I mean we -- there's different areas of our business. Clients that we've had that have had very bad experiences. We've had employees with bad experiences. And we've had employees with family members with bad experiences. So I'm going to stop short of saying that the pandemic has been helpful. I think that we'd be in a great position had we never gone through it. Because right is right regardless if there's a pandemic or not. It still makes sense that the employees would be the ones to manage their own data, regardless of a pandemic. But, the pandemic, I do think forced certain usage patterns upon business that maybe they may have waited a little bit longer maybe to get to. And so -- and not just in our industry, not just in HCM, but I think in every industry. We've seen more direct-to-consumer usage, where the people are buying things off of Amazon. I had mentioned in one of my meetings previously that the first time I bought a shirt online was during the pandemic. And I kind of buy the 5 of the same shirts all the time. So anyway, and I don't know that I'll walk back into a store. For those particular shirts, definitely not. And so I just think usage patterns have changed in general for everyone. I've never used Zoom before a pandemic. I used to just show up in a sales office and say, "Hey, I'm here." And now I'm finding that I can be in more sales offices and pop in a little easier. And so I think that the entire world has kind of shifted usage patterns of how we buy as a consumer, how we even apply for jobs. I mean, you've already seen everybody already applying for jobs online and doing banking online and everything else. And so if anything, I would say it more sealed the fate and produced a very strong proof source for why the things that the initiatives we've been taking to make business more efficient around the HCM area. Why that was -- has really been the right thing all along. And I think as we move forward to 2021, 2022, 2023, it's only going to become more right for employees to manage their own data.

Great. It sounds like a lot of the initiatives that you had in place maybe the -- like you said, the value proposition has become more obvious or if someone was using some other system that promised them a great mobile experience, that they found out that maybe wasn't true. So that makes a lot of sense. But I wanted to piggyback on one of your points there towards the end, which was around the sales offices. And you mentioned you could just pop in, and I'm sure you could -- I actually used to be in a Paycom sales office. It's very close to me in this building here in Charlotte, but you could just kind of pop in and check on them versus having to fly here maybe from Kansas. So how has the go-to-market shifted? How would you maybe rank some of the either efficiency or performance differences this time versus, say, a little bit less than a year ago?

Yes. I mean, well, the way we sell is so much dependent upon how the prospect buys -- how our prospects are buying. And so I think that a couple of things have happened. I think we've gotten better at hosting these types of meetings and having these type of collaboration sessions, and so have our clients -- I mean -- our prospects, I should say. Our sales process is very collaborative. And at least half of it's based off of analysis and half of our sales calls were really going through an analysis of what their current needs are, what their current system is, which also includes the usage -- what the current usage of their employee base is. And so to be able to have a lot of those conversations online, you can get a lot more at the table, and it can be consistent. Now I will say that as a growing company, we do hire new reps and sometimes it can take salespeople a little bit of time to truly understand not just our product, but understand the processes that businesses go through to complete the role of HCM and payroll. And so one benefit that we've had is we've been able to have managers be with those reps, double the amount of time that they normally would have been with the sales rep when you think of windshield time in a car and sitting in lobbies and what have you. And so we've become more efficient from the sales organization in that -- at that level because we do have managers on now double the number of appointments that they're able to sit through than what they were on. And we're having prospects that are embracing -- buying through this type of environment. And so how long does it last? Does it ever shift back to face-to-face? I expect some of it definitely would shift back to face-to-face because I do think that that's a better way to build rapport and have that communication on both ends, not just us building rapport with the prospect, but prospects got to have to feel comfortable. They need to feel comfortable with us, too. And so I do think the face-to-face is important. Will there be a hybrid model somewhere in the future of how we sell product? Maybe. But that's really going to be dictated by the prospects and the clients that we serve. They're going to choose how they buy. And it's been our goal to help change why they buy. But how they buy is still going to be really based off of their buying patterns.

Okay. Great. And I just got pointed out that I made a fatal error there and said Kansas instead of Oklahoma, so I need to set the record straight there. On the TAM, this gets a lot of focus, particularly as you really start to dissect it into some of the smaller subsegments of, say, more middle market, enterprise, low end. So it's really -- it's a topic that gets a lot of airplay, maybe more than it deserves, I think. I think you mentioned you have 5% market share. So just maybe where you've established the first 5% as you think about your customer segmentation? And do you think the next 5% looks that much different? You're obviously being pulled up market as well as downmarket with some of the inside sales efforts. Just curious how you're thinking about that algorithm.

Yes. When you're trying to calculate a percentage of TAM, the biggest issue with that is the TAM is growing at a rate faster than us as we implement other industries within our software, like expense management. I mean we didn't do expense management when we IPO-ed. We didn't have benefits administration. We didn't have a learning management. Those come with their own TAM. And if you wanted to include them in HCM, then the HCM is a larger TAM. But how we measured TAM for us, at least at IPO was at the time in 2009, there was 126 million American workers, of which at least 50 million of them were in our sweet spot. At that time, it was 50 to 2,000 employees. Now our sweet spot of our main area of focus is 50 to 5,000 employees, and we continue to even go above that. At the time of IPO, our opportunity for any 1 employee billing annualized PEPM, if you will, annualized, would be $400 a year. And when you multiply that times the 50 million Americans that existed within our target market at that time, that was a $20 billion total TAM. Now that's how we calculate it. If you use IDC and other groups, then you're going to get a much larger number than that. And since IPO, obviously, we've added a lot of products. So it's no longer $400 annualized per employees or max, it's much higher than that. And so our TAM continues to grow as we add additional product and capture additional industries into our complete HCM system. And so from a percentage of TAM, potentially we could double, triple our size and still be 5% of the TAM. That's kind of a calculation -- it depends on how you calculate it. But no matter how we calculate our TAM, it's growing, and so are we.

Very helpful. Wanted to shift gears a little bit to the product side. You've talked a little bit about Manager on-the-Go and DDX. Certainly, those have been multiyear initiatives that really seem to be receiving very strong adoption. On the most recent earnings call, you talked about BETI, which is this new interface. That really sounds like you have to have maybe those other foundational pieces in place to be able to really fully utilize. But it seems like an area of products you're really excited about. You've obviously been very forward-looking in this industry. So maybe just help us understand the opportunity and why this is such an important product.

Yes. And so with BETI, you had to have the other things first. We didn't just come up with a vision for BETI. I mean we planned to do BETI, but everything else had to come before it. We had to get employees engaged in the system 100% for task management. I said, I don't know that we can make it fun for people, but we can make it easy to get in the system and complete the task and be done. And I think that's what people like. They like it being easy. They don't like to have to do it twice, and they like it being perfect. And that's very important from the employee standpoint. So we had to have an app where people could do that, so we came up with that. And -- which I wouldn't say it's a novel approach, but we have an app. And then we decided we needed to show businesses the cost associated with employees not doing it themselves and be able to calculate that in real-time and have buy off from business. And so we created the Direct Data Exchange so businesses would have visibility into that. Now before we had released the Direct Data Exchange, we had it internally, so we could tell the efficiency gains within each client. We worked with them. Once we decided we put it on their front screen, the management of that process and the uptake of managing of that process accelerated, and we have 100% usage on DDX. We're not at 100% aggregate scoring of DDX, we're in the 90s, which means 90% of all database changes made in the Paycom system are made by employees of our clients, greater than 90%. And so then we moved on and we needed Manager on-the-Go because all the things -- all the approval processes of approving time off requests and approving time cards and approving expenses and approving benefits changes and approving whatever else that someone might -- schedules and all the things that managers approve. We don't want them to wait until they got back to their desktop. Plus you had certain people that were in the management chain of approval that didn't have easy access to it as well. And so we came out with Manager on-the-Go, used very similar coding to what we had on the employee app. It's actually, if you're an employee and a manager, you'll have 1 log in, and you can very quickly toggle from your Manager on-the-Go to the employee side to be able to make management changes. And the important part of that is it keeps the data flowing. Now to get to self-service payroll, we can't have a lot of time sheets and expense reports and all these approvals waiting. Right now, what happens in -- so now BETI. Now I'm going to explain BETI. Right now, traditionally, what happens in the payroll models, your pay period starts on 1 day and then 14 days later, you have a pay period end, let's say, you're biweekly. And let's say that pay period ends on a Saturday, and that's the end of that 14 days. That's typically when your payroll department gets started. I'm not saying that the payroll department wasn't doing other things during that. But I'm saying that's go time of collection, let's bring in the bonuses, the commissions, any expenses, any time off requests, time work, time and attendance data, might be merging that with other employee demographic change data that's been made, and they collect all that. And then they work on that Sunday, Monday, Tuesday, and then maybe Wednesday, they submit it to the payroll company. That money is in that bank account for those employees on Friday. And so that's the way it works. The new model is that pay period end, payroll is done. There's no after the fact. And the importance of that is that employees have visibility into it. They participate in it. So that reduces an employer's liability around errors. If I have somebody else editing my time card and I'm not approving it myself, maybe I agree with the edits made, maybe I don't. But if I myself have made those edits and I'm agreeable, it's kind of got my signature on it. And so that's helpful. And so employees have visibility. Then they go to approve their check, and it will even talk with them and explain to them the differences in this check and past checks. And so if their taxes are higher, it's going to explain why. If they didn't get an expense paid, it will explain why. They don't have to go to HR or what have you. It's all answered right there. Because again, payroll to a company may be difficult, but payroll to an individual is not that difficult because you're working with that same individual payroll each time. And there are certain characteristics that develop over time. Last thing I'll say on this, and there's a lot more to be said but it's a short meeting. I don't know as much -- I don't know if this Friday is a check date for me. I don't necessarily live check to check. I'm one of those blessed individuals in the world that doesn't necessarily live like that. But most of the companies we work with and most of their employees that -- you mispay $30, and that's a big thing. That's a real big thing. You mispay $20, you short them $20, that's a big thing. Most people already have their debits coming out of their account or their bills on check day. They've got their electric bill coming out. They've got their gas bill. They have their rent. And then they need to use the rest of it to buy food and what have you to get through the weekend for the kids and everything else. And so having visibility and the comfort of knowing that, that check is accurate and knowing what it is instead of waiting until the following Friday and then finding out that you're short of $30 and then your payroll department has to either reverse wire out of that, direct wire back in and then cover your NSS and overages, those are big things. And then they have to go into the GL and post manuals and voids to correct that payroll so that the tax liabilities are corrected. Anyway, all of this can be prevented, and it will actually reduce some cost on the employer side from all these additional additive things they're having to do to make sure things are accurate because the employee didn't have the responsibility in the beginning because they didn't have the visibility or a method through which to do their payroll accurately. So that's what's changing. And I've said, this is the biggest product we've developed at Paycom, and it is. If you can get self-service payroll perfect for all employees, that's going to produce an incredible amount of ROI for every business we serve. And so that's our focus. I've also said when we came out with employee self-service, it's free. And for 2 years, I couldn't even get anybody to look at. Our employees aren't going to use that. We're not -- we got our data online, take it down. This is 2002. It wasn't until we had time and attendance that we could actually get people to start using employee service so they can log in. And so I don't know how long it's going to take for BETI to take off, but I'm going to be shocked if the old model, the traditional model of doing payroll is still around 5 years from now. And so we're focused internally, working it ourselves this next quarter. We do have some clients that are already signed up, looking forward to getting going on it. They've already committed to 100% usage on it. And then as we move on to add other clients to that through the years, and eventually, I said, through the years, through the quarters. And eventually, it will become the model that we sell when we go-to-market for how someone would do their payroll. Sorry for the long answer, but it's a pretty specific product.