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

Hello. I want to thank everyone who's dialed in this afternoon to the Oppenheimer Tech Conference. I'm Brian Schwartz, I head up the SaaS Applications Research franchise at Oppenheimer. And I'm thrilled to have with us today, Paycom. Paycom's been the top stock deck of mine this year. So I'm thrilled that we've got the CEO and Founder, Chad Richison. We've got the Head of the Finance Department, the CFO, Craig Boelte; and then, of course, James Samford is here, Head of IR, to keep us honest through the conversation. So welcome very much.

So Chad, why don't we just start? I assume most folks -- you've been a public company since 2014 with lots and lots of successes. So I assume most folks tuning in are at least somewhere familiar with the business and the problems that Paycom is solving. So maybe just to kick it off, Chad, go ahead. Just tell us about BETI? Tell us what BETI is all about and why you are so excited about the opportunity around BETI?

Sure. And so it was years ago that we started to see more and more engagement from employees when they're not at work in this type of technology. When they -- when you're at work, technology was one thing. But when you weren't at work, you may have done banking online, you may have ordered your coffee online, your movie ticket online, your -- nobody is walking up to the ticket counter and getting a ticket, they were doing that online. And so we continue to see employees when they were consumers, use technology different when they were consumers than when they were at work. And really, what that meant was the employer or our client missed out on those same efficiencies that other industries were gaining as they work with their employees as consumers. And so we continue to work on a strategy where employees would become the major data users of our system, and that means moving their own data, confirming their own selections. We continue to march forward on that and got to a point where we were able to fully automate self-service payroll where employees now do their own payroll. Now it's not to say employees give themselves their own raises, that doesn't happen. But employees are able to interact with the system to where they definitely understand what's happening with their payroll and how it's calculated. And so we started off ourselves using it, and at the end of last year, everybody at Paycom used it. We rolled it out to just over 100 clients as we went through the second quarter. And then as I mentioned on our last earnings call, on July 6, we actually started rolling it out to all, both current clients as well as new clients that we onboard, now their employees use BETI to do their payroll. And so that -- what that does is it gives those employees the control over their payroll as well as a better understanding of what's happening with their payroll. They can even see how it's different, maybe at $30 less or $30 more, and these are the components that impacted it. Employees are able to approve their check. And so on the payroll side of the payroll department, you have it might show that 97% of all the checks that are going to be cut, this payroll have been approved, maybe 100%. And so it doesn't force employees to approve their check, it gives them that opportunity. And so to the extent you're a salaried employee, your salary has been the same forever, you haven't really made any time off request or what have you, maybe you choose not to approve it. A lot of employees, though in the U.S. live check to check and if their check is off $20, it matters, and we want them to have the opportunity to correct that before it hits their bank account and all these fees are assessed from reversals, manual checks, OIs, overdraft fees and what [have you.] And so all that's to say now that we've shifted direct with the employee, we can help make business more efficient by both making them more efficient as well as eliminating and reducing some of the liabilities and exposures that are inherent in the old model of this data transfer of payroll information. And the last thing I would say about that is, I've been in payroll a long time. Well, I mean, I started Paycom when I was 27 and I worked in the industry before that. I never ran into a payroll person that didn't have anxiety about payroll day and wanted everything to be a 100% correct. This gives everybody the opportunity to make that happen.

Terrific, Chad. I thought you were 7 when you started Paycom 20 years ago. Well, you look so young there, Chad. But that is a good segue into. So clearly, you're talking about next-generation payroll and HCM opportunity with self-service. So can you talk about how the company Paycom is driving this market transformation? Maybe talk about the evolution of the self-service capabilities within the platform over the last few years?

Sure. And so we've had to really work on good usage versus bad usage of our system, and we had to move everybody towards the good usage. And so what I mean by that is, you could be using our system, but you may have had a -- an individual that works at the company calling their manager and saying, "Hey, I forgot to do a lunch yesterday and to clock in and out for lunch. Will you do it for me?" You might have had somebody call a manager and say, hey, could you add this timecard request that I had," and that would be edited, and we would see that as usage in our system. And it is usage, but it's not the appropriate usage. The appropriate usage is where the employee does that themselves. And the reason why you want them doing it themselves is because only they know exactly what happened as well as it produces some type of layer of reduced exposure and some liability when you have the employee doing the work themselves clocking in and out, owning their own data and then now approving and agreeing with their own check. And so we continue to move down this line to make businesses more efficient through usage. In order to make that happen, you had to have a very simple system, right? HR and payroll departments and different groups within a business have a higher tolerance for complexity, for system complexity. They've lived with it. I mean, if we didn't have -- if they didn't have a high tolerance for system complexity, none of us would have even gotten paid 5 years ago. So you had payroll and HR that they do have a higher tolerance for system complexity. Employees have zero tolerance for system complexity. It's got to be easy to use. And so with the expectation that employees are going to be doing their own, we had to make it easy to use and accurate for them. So that's what we've been working on, and we've continued to see success in that area.

Yes, Brian, we continue to release products that help in that. Our DDX, which measures who does the data entry and any duplicative entries, it puts a value to that and how much the company could save if those employees were making all those entries. And then really, the manager on the go that really keeps the flow of data moving, all those approvals of expenses and timecards, those are some of the other products that we really -- released to help that flow of data.

Thanks, Craig. You have touched on all the evolution of the self-service products here just in the last few years. Chad, I want to circle back to the architecture and the platform. We always hear about the uniqueness of the platform, the ease of use, really the quality of the all-in-one database and platform technologies. Question I want to ask you, can you talk about how that benefits you from a time to value from providing support and from an innovation standpoint, the architecture?

Yes. Well, I mean, the one thing that we have to understand is how -- why prospects buy as well as how employees are going to use our system. And so a lot of that's really taking a more simplified approach into what happens. There's a lot of things in the past that were multiple steps that just don't have to be that anymore. I mean, when you think about just the verification of employees' data when they're not the one inputting it and confirmation becomes very difficult to do if you on the HR or payroll or back end or the person doing that. And so we've continued to remain focused on having those employees do the work that they're doing anyway. Let's remember, HR is not reading anybody's minds. That data has to transfer from me to you. And the best way for that to happen is through a single system that I'm able to transfer that information myself anytime of day or night, and I'm also able to confirm those selections. And so that entire usage strategy has driven both efficiencies for both the client as well as Paycom. In fact, a year ago, we had mentioned that we were servicing a larger client base with the same number of service individuals that we've had the year past. We -- our inbound calls into our company this year are less than what they were all the way back to 2019. They were less than they were last year. They were also less than what they were in 2019. As we've made the product easier to use, clients are having a better experience with them, they understand it better. They're calling us less because there's less reasons to call us. So we continue to make both the clients' environment more efficient as well as our own as we've marched toward this, the elimination of middle layers of data input as we focus directly on employee input.

Terrific. Just want to touch upon real briefly the growth story. I think you've got one of the most straightforward growth stories. I think we all get caught up in your installed base and such, but the reality is the penetration rate in the market. So can you share with us how you think about the growth story for Paycom and maybe how penetrated you are today in the market?

Well, I mean, it's important for us to continue to retain our clients and do a good job for them so that they are able to experience the ROI that they're -- for which they bought the system. That's incredibly important for us. I mean, first prize is continuing to add on new logos. That's very important for us to continue to get out there and bring new clients onto Paycom, and that's really what's driven our strategies since I started Paycom, continuing to add more and more businesses as they look to have a more modern solution that drives an incredible amount of return on investment for them.

Terrific. Let me ask you a question specifically about 2Q and the business momentum. That was -- clearly, that was a terrific quarter at the end of the day. It was the fastest growth rate since 2016, the upside momentum was double the magnitude that we normally see. So clearly, something happened there, something good, inflective in the business. The question I wanted to ask you is, if maybe you could describe a little bit the fundamental underpinnings of this? Is it the business momentum? Is it from the better new business, just top of the funnel activity or better retention or faster cycles? Is it bigger deal sizes? Or maybe it's a combination of all of those things? Maybe you can help unpack the fundamentals behind the good business momentum?

Yes. I mean, I think there's a lot of things that have been impacting us on the positive, both prior to the pandemic and then as we've gone through it. I have to say the major though has to be this shift of employees to using these types of products. I mean, again, if you make it easy for them to use, they use it. I also believe a lot of people deployed apps on their own phone. I know myself, I have 4 or 5 more apps on my phone that I didn't have on my phone last March. As we've kind of gone through the pandemic, a lot of us have been forced to interact directly with databases because your storefronts were closed. And so I don't see a lot of that usage going back. And so I think that's helped us as much as anything as you've had employees not only willing to interact directly with the database, but now a lot of them expect to be able to interact directly with the database. So I think that kind of shift has been helping us. No doubt, there's been -- we've had some help in our ability to meet with people online. I've mentioned that in the past that we have been able to have an increased number of appointments when you eliminate drive time and lobby time. So we've had some impact there that's been able to help us. But it does seem like there's a groundswell now, our business is really shifting to a mobile-first effort as they go for these employee database changes into the system with confirmation, which makes the system a lot more accurate as well when you're having those employees make those selections and confirmations themselves. So we only have 5% of the market. So we still have a lot of opportunity out there for us. And we remain focused on continuing to innovate our product toward the efforts of that employee experience in an effort to generate greater return on investment for our client base.

Terrific. Chad, a couple of questions on BETI, been happy to open it up to the field. Feel free anyone if you want to type in a question, I'm happy to read it to Chad and Craig, I think they're warmed up now. So on BETI, Chad, so thinking about the monetization opportunity, as we think about the future of payroll and the shift towards self-service, it seems maybe logically that it would make sense to have all the data in a single database, really for all those elements of the payroll that involves an employee. So I'm picking to expand their expense management, their benefits that they're doing, their time and attendance. I guess can you validate that, that makes sense? And then can you explain why there's an efficiency benefit or a value to the customer by having one solution handle all the self-service activity?

Yes. Well, just comparing this model with the old model where I might be using a different expense management system, I might have a different time and attendance system, I could have a different payroll system, a different learning management system, I was onboarded by a different system, a different benefits administration system. With employees, we're not in these systems every day. Maybe an hourly employees clocking in and out every day, but they're not enrolling in benefits every day. They're not changing their dependents every day. They may have some expenses every day, maybe not. So they're maybe not requesting time off every day. And so when you have some things that you're doing every day in a system and other things are somewhat sporadic, you're almost having to learn a new system once a quarter, if you want full usage and you have a full usage strategy and expectations. So by having it all in one single system, the employee is always familiar with how to work the system because for many of those components, even though you're not in there every day, you can't be in there more regularly when you look at everything as a whole. And so it's getting those employees confident. We all -- any time we first convert someone over from Paycom and we're saying, "Hey, we're going to have your employees, you're going to be using the system. And you guys aren't going to be inputting from e-mails and using multiple systems or taking phone calls and input data." There's a little anxiety with that because, again, all HR and payroll people and everyone else, they want to serve their employees. They're there to help them. Once we start to convince them this is helping them, just once you get them over the hump, at first week, you'll have employees call and, "Hey, please make these changes," and you'll be pushing back, you'll say, "Hey, I'm sorry, I need you to make them yourself." And then the second week, less employees will call. And then a week or 2 later, employees aren't calling, they're using the system. And once they're used to that, they don't go backwards. Very few of us go backwards in technology. Once we've advanced into a technological opportunity, whether that be we've used a star -- a coffee app for the first time or we've booked something, a plane ticket for the first time, it's rare that we go back to the Barista or back to a ticket counter or making phone calls. That's typically our new method of usage. That's what we're seeing happen in our industry with our product, is the more that people use it, the more -- usage begets usage, is the way to think about that. So our innovation is driven toward continuing to help those employees interact with the database the same way they would interact on a data experience with HR, which is the expectation that it's perfect. And also give the opportunity to confirm that in a very simple and easy-to-use product. Remember, there is a level of complexity that HR and payroll are willing to deal with when it comes to system. But with employees, there's -- they have zero willingness to deal with complexity. They shouldn't have to work to do work. So that's what we're helping with.

Terrific. Chad, just so our listeners are aware, can you share what BETI stands for in that norm? Just another quick follow-up on BETI. Is it fair to assume, your salespeople now, are they leading with BETI when they're prospecting new customers?