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

All right. Good afternoon. Thank you, everybody, for joining us for this session. With us, we have the CEO of Paycom, Chad Richison; CFO, Craig Boelte; and IR, James Samford. Gents, thank you very much for joining us. We appreciate the time as always.

And maybe, Chad, let's jump in. And I think that some of the recent news that came out of your last report was the decision to kind of march further upmarket. And so let's start there. I think that the leap from 5,000 to 10,000 is pretty big on the upper end. What's driving that upmarket motion for you?

Sure. And so, Samad, we IPO-ed in 2014. Our target market at that time was 50 to 2,000. I think it was around 2018 that we actually bumped up from 50 to 2,000. We took that 2,000 number to 5,000. And the reason why we did it at that time is we were starting to see the buying criteria with 5,000 employee companies change as well, which was meeting us in the sales process. And so here we are 3 years later and just like we saw when we went from 2,000 to 5,000, we've also seen it up to 10,000 employees, where the buying criteria is starting to change and you have an appetite of people at that level to eliminate multiple systems and interfaces and replace it with a single system that can be used by their employees.

And so I understand the customers wanting to change how they're buying. But how do you think about maybe the company selling to them, right? Does it require a different type of sales motion? Are you trying to hire different types of salespeople to accomplish that? How should we think about Paycom's behavior?

Sure. So if a client or prospective client's buying criteria has changed, that means our sales process -- our current sales process actually works for that. And we've done a lot of advertising as well toward both the user buyers, which would be the people who actually use the HR and payroll systems on the back end or time and labor recruiting, benefits, what have you. And we've also done a lot to educate employees as to the benefits of them having a direct access to a single system, where they make all the data selection changes as well as confirmations. And so that's worked well for us in the mid-market. And then again, there's no such thing as a mid-market employee. I mean you can -- I can work for a 300-employee company today, and I can work for a 300,000 employee company tomorrow. But I'm literally the same person with the same mortgage in the same situations. And maybe I like technology, maybe I don't, but I've still got to manage that same process. And so we have the same user at the employee level regardless of what size the company is. It's really the company, the user buyer level and what their strategy is and where they've been. And we started to see that change over the last 5 years to fit into an area where we can sell and be successful.

I think everybody in the audience is familiar with who you're typically replacing when it was more of your sweet spot kind of that sub 1,000 category. But just as you've marched upmarket, who are you typically competing against? And who are you typically replacing in a market that may be newer for Paycom itself?

Yes. Well, I will tell you that we're not replacing anybody that's newer than us. We were started in 1998. So everybody that we're replacing upmarket on the payroll side has been in business longer than us. Now it is important that -- to understand that we do, when we are out there, working our conversion and implementing our products, we are implementing everything. And so -- and we're oftentimes running into situations where if they use one of our competitors for payroll, yes, we're going to replace that payroll. But then they will use something else for expense management. They might use something else for benefits. They might use something else for learning. They can even use something else for time off request or time and labor management. We're replacing all those. So when we talk about our competitors, we're going to have our payroll competitors. But then we're going to also have some point solution provider competitors that we also displace as we bring the full solution set to the employee base for the benefit of the client.

Great. So it sounds like the attach rate for additional products is strong upmarket, too. Maybe switching gears. I think the other big piece of buzz recently has been BETI. And I think that for a lot of us, we're still trying to figure out how it works. So what I thought might be helpful is if you could explain, how does the customer actually use it? Like what's the change in process? Because I think that's what Paycom is really good at, driving with their customers better processes, and that's what drives value.

Correct. Well, first of all, you have to have your employees using the product correctly and making their own selection. I mean if they're responsible for doing their own payroll, they had to do all the things along the way, so they know how it's impacted. And what I'm talking about is they had to enroll in their benefits. They had to request their own time off. They had to edit their time sheet or time card. They have to manage their expenses that might be showing on that check, manage their selection into 401(k) or what have you. Manage their direct deposit account information and all other pertinent information that could impact the check, marital status exemptions, all those things that come into place. You have to have employees using the system. Once you do have employees using the system, with 100% usage, which is, again, what BETI drives, then you can layer on top of that, which, again, all of our new clients have this already, you layer on top of that, allowing the employees to do their own payroll. And so an answer to your question, the traditional payroll model is all the works done during the pay period and after the pay period end, that's when the payroll department starts collecting all the data from different systems to do the payroll for an employee. And then maybe the pay period ended on a Sunday. Your payroll department is collecting all this on Monday and Tuesday to submit to the payroll company on a Tuesday or Wednesday for the money to be in that employee's account on Friday. Sometimes, the employee might see that check in there before Friday and might have that. But a lot of this debt and money has already been moved and what have you, and that employee didn't have clear visibility into what their check was going to be or the components of calculation of it. So I'm convinced most employees don't have a clue on how the check is calculated. They don't understand pretax deductions. They don't understand the social -- that your 401(k)s are taxable in certain instances. So people -- and I'm talking about the deduction itself. And so in certain scenarios, employees do not understand exactly how checks are calculated or what their efforts do to impact that. And so what BETI does is instead of waiting until pay period ends, to engage the employee, BETI engages that way in the beginning, calculates their check every day, shows them how their earnings are being calculated, what's going on. And at the end of the pay period, that employee is able to approve and agree with that check. In that way, when the payroll department is now involved, there's no collection. There's no after defect payroll. It's just submission. And so -- and it makes for perfect payrolls. I mean the people that use BETI, your payroll is perfect because you use the system and you had all these opportunities to make corrections with the employees along the way. So you're not having to do it after the fact, which is very important because there's not a payroll person out there. And I've been doing this 25-plus years. There's not a payroll person out there that doesn't have anxiety on payday. They all want to get it perfect. And they all know it's a difficult chore when you have a lot of employees and a lot of data moving without a lot of visibility to the employees. So BETI is bringing that level of peace of mind for both the payroll department as well as that employee who wants to be paid correctly as well.

I know payroll is a relatively thankless job. None of us complain when it's right. And no one thanks someone if it's right, but everybody complains if it's wrong. So it sounds like it's really helping your customers. And maybe to that end, I know you mentioned some metrics on the last earnings call around adoption. Just how should we think about the shape of adoption? And how have customers reacted to it? And what kind of progress has the company made on driving adoption?

Yes. So I mean, just to continue on what I said the last quarter, which, I believe, we talked about on August 2, it may have been August 3. But in any case, we talked about -- we started with 100 clients or so, which was piloted during that first period and then we opened BETI up for sale to current clients. We had 1,000 on it pretty quickly. We've also made the change that for all clients onboarding to us since I believe it's been the beginning of July, new clients, all are on BETI. So if you came to us during July, if you come to us tomorrow, if you're going to have a quote right now from us and you're looking at coming on to Paycom, that includes BETI in an effort. Your employees will be doing their own payroll. So all new clients, 100% of them, are going on it, and then we continue to upsell our current clients onto it.

And when you think about the upsell part, is that typically at renewal? Or are you proactively going to customers and saying, hey, this can help add value for you today even if your contract doesn't expire for another 12 to 24 months?

Today. We're going out to all clients today. Now as I had mentioned, you may have clients that have been with us for a long period of time. They may not have all the products needed to operate BETI. So our goal with that client is to get them those products, make sure they're using it, so that they receive the benefit of BETI. And then you have businesses that have been with us and they have almost 100% -- over 100% DDX score, and they're already ready for us. So we just go in there, apply it. There are some changes. You can imagine that if you're a payroll department and you're used to doing things after pay period end, some of those things still have to be done. So we move the period of time when they are done, so that you can engage the employee with it. So there is a little bit of a -- it's not necessarily a conversion, but there's a process change that has to happen for any of our current clients that are switching to BETI, but I'll stop short of saying it's any type of conversion. But in order for them to receive the benefit of all their employees doing their own payroll, there is a process change that happens within our current client base. For new clients, you're already making a process change when you switch it over to us. So it's less of an impact there.

Great. And maybe let's switch gears. The company, all -- well, actually for really as long as I've known you, but even over the last 18 months, as you had employment headwinds, you still talked about how strong bookings were, right? Outside of a small air pocket, new bookings growth has been really robust. What's driving that bookings growth? Is it more the increased spend in kind of advertising and sales and marketing? Or what's changed about the business that's allowed you to kind of continue to sustain that robust growth even as you've gotten bigger?

I mean -- well, I think the biggest thing, I mean, to use the one liners, the death of the clunky -- the old clunky ways to use something. I mean it's just everything is easier now. You can buy a coffee easier today. You can buy a shirt easier today. I mean you can do everything easier today through technology, but then you go to work and it's still 1992. And so I do think that's really what's changing. And you have to have the appropriate tools and people realize that. I mean, if I gave you a shovel to dig a 4-mile trench, you're going to quit on me because I didn't give you the right tools to do that. At work, we have multiple jobs. We have to do the job that someone is paying us to do. And then we have to do the job we have to do, which is manage our own data because you don't know that I just had a child. You don't know what I'm selecting for benefits. You don't know when I want my time off. So I have to make those selections myself. And you're seeing all of this happen. I mean it's no different than if I buy a coffee or book a plane ticket or do my banking. I'm doing it myself. And so by having that, I have that responsibility and also become educated as to my account and exactly what's going on. And really, that's what needs to happen in payroll. And when you think about it, employees are already doing almost all of this work. They're just not doing it in a way that is reflected at the time where they have their check and they don't understand how it impacts. So it's almost like we have the employee fly the plane the whole way and then we blindfold them in the last 4,000 feet before landing. It's like, well, time to put on your blindfold. We'll take it off after you land. Instead, we would like that employee engaged all the way through to landing because that's really how you start now helping the business and you want to help both. You want to help that employee, but you also want to help that business. And again, like I said, there's not a payroll person out there or a business that doesn't want to get your payroll, taxes, benefits and everything else perfect.

Great. And I think a big part of what's helping with the bookings is clearly sales productivity. How do we think about that, especially we went from an almost all in-person world to a fully virtual world to -- I don't know if we're quite somewhere in between, but the mix is changing. So how do you think about the company's sales productivity? And how much more can you gain there?

Yes. I mean, well productivities continue to increase. I think a part of that is that we've continued to advertise a differentiated strategy. And maybe more often than not, we're now starting on first base versus dragging our bat from the dug out. So I think it's a little bit better for us because we've been doing messaging. Our product is heavily differentiated. We've come out with a lot of things over the last couple of years, the DDX, which manages appropriate usage and shows the cost for usage and it's accurate. We've come up with Manager on-the-Go to keep the data moving so that managers have the ability to use and then we've also layered on BETI. So all those innovations drive increased usage and increased demand for other products that we have. If you're not using the 5 products I've already sold you, it's harder to sell you that sixth one. And so it's very important that people are not only using the products, but getting value out of them in that return on investment. So as they've done that, we've been able to sell more products, and we're also selling larger deals as well as our employees are getting better at selling our differentiated strategy. And so all of that is helping to drive the amount that any one sales rep can sell or increase our sales rep capacity from a revenue perspective.

Great. And the other impressive thing to me during the last 18 months is just how strong the retention was and then to continue to even mount up a little bit. How should we think about the dynamics that are driving those retention gains for you? And is it, hey, customers took a pause on making decisions? Or is it just that what you said about driving more value and adding more functionality, how should we break down the drivers of those retention gains?

Well, the biggest driver of retention is usage -- appropriate usage of our product. I mean, if you're gaining the value and it is differentiated, it's hard for you to shift over into a less automated or functional product. I mean, none of us as human beings do good going backwards in technology. I mean, you can take any piece of technology that you use. And if I took it away and said, now you're going to do it the old way, it's very difficult for anybody to go backwards in technology. And so we have a lot of success retaining our clients, even clients that might have been sold a product where they thought it would reduce their cost in half. After they start to go through that conversion, we get the call back. Hey, we need to stay. We want to use this product. And oftentimes, they'll buy something else and we're off to the races again. But -- so I think that's very important. With us, we definitely manage usage, and it's not -- it's from the standpoint of making sure that the client achieves that return on investment. And with BETI, you overlay BETI onto the rest of our products, and it drives substantial amount of return on that investment. And that's really what it's about for any business, is making sure they're getting value for what they're paying. And that it's really solving a problem that they have. I'd like to say our competitors get themselves out of doing their payroll. We get you out of doing the payroll.

The 1 thing maybe I'd like to go backwards or at least test is maybe no e-mail. I don't know. We'll see if we can ever get there. But just maybe if we zoom into more short-term trends, I know the company -- that you've already given guidance for the back half. You didn't assume any improvement really in the macro environment. We've seen up until maybe recently pretty strong jobs numbers. How should we think about just what's happened so far in 3Q in relation to what the company talked about when we last heard from you in early August?

Yes. I'm not going to update on Q3. One thing I will say, and it's something I've been saying since end of May of last year. What's been very important for us is to have stability, stability in the numbers. Meaning that as we add new business revenue into the bucket, it doesn't retreat out the bottom through reduction in force of our current client base. And we had new business revenue on, but we lose current business revenue as clients have a reduction in force, which we did see during the pandemic. But we've had stability since then. So now as we pour more into the top of the bucket, it stays and continues to move up. And so that's really what we've needed. From an employment perspective, we've never really been -- our growth has never been dictated by macro improvements. The pandemic has caused us to look at that a little bit differently because something that we had never accounted for happening, which is a massive impact of unemployment did happen during the pandemic. It hasn't come back as fast as we thought. We've updated those numbers each time as to the improvement into our pre-pandemic client base. But again, with us, stability is what was needed. We have that in our client base as far as from their employment. And we're focused on adding new logos onto our system, which is what's driving our revenue today.

Great. And then we have a few minutes left, so maybe I'll squeeze in a couple more questions. And one of the questions that we get a lot from investors is maybe around the company's win rates. It is relatively competitive out there in the world. Just out of curiosity, have you seen any change, increase, decrease, stay the same as far as win rates against your typical competitors? And to the extent that you track metrics around why you win, what are maybe the 1 or 2 reasons that your customer keeps the same?

Well, I do think it's the differentiated strategy at the employee level and having 100% usage is really why we're winning and the value that, that creates. I mean everyone implemented technology during this to make them more efficient, how did they get there with their current HCM product. And so our product really does work. It really does everything that we say it does and employees really like to use it. And so when someone have -- when we have the right buying criteria and a person wants to have their employees engage with the system and be responsible for just both making those data transfers as well as confirming them, we're going to win that. We're going to win that all day because it's our system that is a single database and does have the functionality and measurement and what have you. If the buying criteria is different and someone wants to deploy a different type of strategy than what ours is, those are ones we're going to be less successful in unless we can somehow get them to shift into the appropriate buying criteria that we need in order to win.

Great. And then one of the things that I've noticed the NFL is back, and I've been seeing the Paycom commercials in between. So I'm just curious maybe more broadly on the national advertising strategy and maybe how that's been trending. And how -- do you see a certain type of customer come through that? And how does conversion look at that? And maybe just more broadly, how does the top of the funnel look for you?

Yes, still extremely strong. I mean our advertising -- I mean, I talked about it being strong all through that last year. It's better or equal all throughout this year from an advertising leads perspective. We don't always get to dictate who sees the ad and when they're going to call and what size company they may have. I believe we talked about over the last 2 years, we've added 9 or 10 inside sales groups that focus on those leads that come in below 50 employees. And so -- but the lead generation has been -- it's been good. And it's not just for the lead generation itself. We're also advertising a new way to use product at the employee level. We're getting a lot of referrals that come from employee users of our product. They used this at 1 company. They go to another company. They're not in the payroll department. They're not in the HR department. Maybe they're in sales. Maybe they're in logistics or whatever. They're a frontline employee, but they don't want to go back to using 4 systems and e-mails and whatever. They want to continue with a single system. And so oftentimes, we get a lot of referrals from that as well. But from a referral and from a lead generation for us, our leads this year are continuing to be elevated. They were elevated last year, too, but they're also elevated this year.

We're out of time, so we'll leave it there. I think that's the perfect place to stop it. So Chad, as always, it's great to have you here with us. We appreciate your thoughts. And until our next conversation, best of luck.

Thanks, Samad. Have a good one.

Thanks, Samad.