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

Welcome to our next session. I'm really happy to have Chad and Craig from Paycom on. It's really nice to continue the journey going. We started like way before the IPO. So it is really nice to see the progress here and see the success. So I only have to start with congratulations actually.

Chad, the other thing I need to ask you on is like, if you look at the industry, like, in theory, payroll doesn't look like something that is overly innovative, but still, you kind of come up -- every year, we have like a new initiative that is changing the industry. So can you talk a little bit about your approach to it and talk a little bit about like how the industry is evolving and from that perspective, how you're kind of staying ahead of the curve there.

Sure. Well, I mean, first, payroll is definitely necessary. I think if you surveyed all employees and what's the most important thing that any portion of HCM gets right, I'm sure it would be their payroll check. And so at Paycom, as we've done with all innovations, we focus on a problem. And that problem is how can we make it easier for our clients and the employees to have a more accurate or perfect experience around the payroll process, keeping again -- your question was about innovation around payroll. And so what we found is, is that by leveraging the same type of usage patterns that employees have when they are consumers, whether they're ordering a coffee, go into a basketball game where you have to have digital tickets now and everything else, that we've seen consumers gravitate toward apps and working directly with a system and/or database to confirm their selection and then have the experience that they want that is accurate. And so all we've done is really leverage that and brought it into the payroll business, so that the client can also win, because behind this are both clients or businesses that want to get it right, and I've still yet to meet any type of payroll person who's indifferent about having perfect payrolls, tax deposits, filings and everything else. And so by allowing employees to do their own, you ensure a greater amount of success and accuracy. And so that's been our focus from innovation on the payroll side.

Yes. Okay. Makes sense. So the latest one, based on the innovation that we started talking a lot about, and then actually I did a little bit of reading on industry feedback as well that initially, people were skeptical, and now I am almost like, "oh, my god, they kind of found some new thing that really differentiates them with Beti." Can you talk a little bit about that?

Sure. And so Beti -- traditionally, payroll is done through a payroll department, and they really -- it's not that they don't work during a pay period, but really a lot of the collection process for the data starts after pay period has ended. And so a business may end their pay period on a -- they may have started their pay period on a Monday 2 weeks prior or a week prior, and they end that pay period on a Sunday. And then the traditional model on that following Monday is when the payroll department starts collecting all the data from different systems and prepares it and gets it ready to submit for the payroll company. In the new model with Beti, the work that was traditionally done after the fact is now moved to during the pay period, either at the beginning or during, so that you're able to work with -- that employee is able to work with that data throughout the pay period so that when pay period ends, the payroll is done, there is no after-the-fact movement of data or aggregation of data or collection. That employee has done their own payroll, they've approved their own payroll. And so that reduces and/or eliminates the amount of adjustments, manual checks and voids, GL entries, wires, ACH movement and everything else, as that employee has done their own payroll, approved it and agrees with the result. And so it's a change, but it drives a significant amount of return on investment for that client, because in order for an employee to do the payroll correctly, they had to do everything else correctly as well within the system.

And what has been the customer reception there so far? I mean, from what I can see, you're the only one in the industry with this. And so is a customer understanding this? And how is this working as the differentiation factor?

Yes, we definitely have customers that gravitate right toward it because they already have a very strong employee engagement program that they're using the software for, and they see this as one more step in that. Payroll is something that you have to get perfect. So I don't know that people wake up in the morning with I can't wait to change the payroll process. Oftentimes, you'll see payroll leaders that have worked years getting their current platform to finally work for them and being able to sleep at night. So with anyone, you have to show them that it's through this that you actually have more control, as you give the employee the responsibility and more visibility of them being able to do their own payroll. And so there is some change management. If you're used to doing it at a certain time, a certain way, for the last 30 years, and then someone's coming in and saying, "Hey, we can do it differently now if you'll change up some of these processes and move them to the beginning, your employees will help you." I've kind of said a while, you kind of take off at the beginning of a week and the employees doing everything. They're editing their time card, they're clocking in and out, they're requesting time off, they're doing their expenses. They're making their benefits selection. And then before we land that plane, we blindfold them. And they don't get to see what all of the work they've been doing during the week managing their own data, how that impacts their net check and what's going to go into their account, which as we know, a substantial number of employees, the overwhelming majority of all employees in the U.S. live check to check and the exact amount of what that check is, is very important to them. So that's really what we're doing is leveraging current usage patterns that employees are already used to working directly with technology now and we're bringing that in to the back office of the payroll environment.

Yes. Okay. Makes sense. And then if you think about those differentiation factors that you're putting out there, like how long is it -- more like, the other guys are watching it as well, obviously. Like, how of a competitive advantage is this until you kind of need to find the next thing, or do you see yourself because your underlying system is cleaner, you can keep those competitive advantages for longer.

Well, I think it's important. It's definitely important to have everything in a single database system so that you're not having to integrate. I will say that there's been a tolerance for integration on the back end, the back office group, whether you're in the payroll department, HR department, or what have you. In fact, traditionally, you've had to have been somewhat good at integration in order to make a system work, and you've had to do that as a necessity. Today, it's not necessary for the back office to do that, which is why if you deploy a single system to an employee base, you get a lot more engagement. If I'm deploying multiple systems, a system different for payroll than what they might use for time and attendance than what they might use for benefits administration and what they might use for learning than what they might use for time off requests or expense band or what have you. If these are all different systems, employees use systems different ways and I almost have to reacclimate myself to each system as I go from task to task. Some tasks, an hourly employee is going to go clock in and out multiple times a day. And so that system I might be really proficient in. But then you asked me to add a benefit, you ask me to go through a learning-type system or what have you, it may have been a while since I've used that. And so by having everything in one system, you build up that employee confidence around that usage and it becomes much easier for them to use it. And then they crave using that type of system over any other, because the work we're talking about doing here, it's not fun work, it's what we have to do for an employee. And you just want to make sure they have the right tools, so that it's as easy to do their payroll or enroll in a benefit or add time or what have you, it's as easy to do that as it is to order a coffee or a shirt and it should be as easy to do that.

Yes. Okay. And talk a little bit about the -- how do you kind of package those extra systems like Beti, is it an add-on? Is it bundled in? Do you kind of charge extra for it? Or do you just use it as a differentiation factor. Talk to that a little bit.

Sure. So for current clients, Beti is an add-on, because you were a client of ours, we didn't have Beti, and now we have to go back into the client base and get them to see the value embedding and the return on investment that it can create for them, so that we can move them onto Beti. For new clients since July of this year, our system has quoted Beti as part of our solution for anyone that has received a quote from Paycom since July. So for those clients, it's not as much about talking them into changing their processes so that Beti works for them, because that was a part of the sales process all along.

And if you think about the module, I mean that's the one thing I wanted to go back, like ever since -- like from pre-IPO to right now, like the breadth of your offering hasn't expanded quite a bit. Could you quickly remind us like where we are in terms of like modules. And I remember in the older days, you had a nice kind of number, and I'm not asking for a number, but like if you would sell like all the different modules for all your clients, we would be in size significantly bigger than you are now. Like just kind of maybe talk to that a little bit.

Sure. It's roughly the same, and the number was triple. We had said if we upsold all of our current clients, all the products that we had that they weren't currently using, we could triple our revenue. And that would still hold true today. Now not all products are relative to all clients. Of course, Beti does dictate that a client has and is using appropriately a certain number of our products that are, of course, our popular products. As far as the innovation throughout the years, I mean our industry has presented a lot of opportunities to solve problems. We're in a high risk, low reward-type business. If you get it right, who cares, you were supposed to get it right. And if you get it wrong, there's penalties and many other issues that are associated with employee morale and everything else that's associated with not doing it correctly. So we're fortunate that we're in an industry where there's no lack of problems to be solved. And as you have different administrations work themselves, I think I'm on my 5th president year at Paycom, but as you have different administrations work themselves through, it creates other opportunities, whether that's on the tax side, labor management, or through automating what has traditionally been more manual fractured processes.

And the broadening of your offering, how much is that a contributing factor selling towards larger clients? Because I guess the other notion that we've noticed over the last few years is that initially, you couldn't sell over 2,000, then you could go up to 5,000. Now you go even higher than that. Is that because people see the solution and the extra motives that are coming in there? Or what are factors to drive that kind of slight upmarket motion?

I would say the biggest thing that's driving the upmarket motion would be the willingness of larger upmarket clients to use a single database solution for their business traditionally. You're extremely large clients and as you go further upmarket, the less of a point solution they would traditionally use. If we ran into someone using one of our competitors, they would primarily be using them just for payroll versus using them for everything. They typically would lay a larger enterprise SAP, Oracle-type platform over it, connect it to point solution providers, and it's through that, that the employees manage the systems. And so what's really driving our approach at market has been us more being pulled through a willingness for many of the larger businesses that realize they've overcomplicated the current task with an older technology approach. And so if you're able to give those employees one single system, they use it much more than what they would multiple systems.

And how does it...

I know, I mean, and it's that's where you have -- a 30 employee company is the same as a 300, is the same as an 8,000. As Chad mentioned, I mean, you should get the same type of modern technology as you would move from company to company.

There's definitely a more focus on the employee usage side than what there had been 5 years ago. Five years ago, I'm deploying something to get a test done and I have 10,000 employees, so I have little choice on what I can deploy. Today, it's a little bit different in my motivation for doing that because you have employees that have become acclimated to using smartphones to make data transfer, confirmation, and test selection.

And what does it mean for your addressable market? Because like if you think about it, if you go that 2,000 to 10,000, I mean, you're not going to address maybe everyone in there, but like there are some decent kind of companies in there at decent size. I mean we have vendors like Ultimate or Civilian Network just in that space, and they're very top or successful businesses. So how excited are you to kind of be up there? Or is it for you just, yes, it's another option for my sales guys to kind of sell something.

Well, yes, it is another option. It is more for us to be able to go upmarket. There's obviously some additional unit opportunities per territory for us. But we've been selling against or providing alternatives to many of the companies you're mentioning for a long time. We were up to 2,000, and I believe it was in 2017 we then moved up to 5,000 employees. And recently, we've moved up to 10,000. You don't see a dramatic difference, specifically in size of employees between a 2,000 and a 6,000-employee company. It's oftentimes industry can dictate more of complexity than necessarily size, depending on if someone's doing job costing, labor distribution. It depends on also how we work in different states during the same payroll. So there are other things that drive complexity throughout both the payroll and the HCM process. But as Craig was talking about, regardless of complexity, you're still working with the same type of individual, whether they were at a 50-employee company, a 500-employee company, or a 5,000-employee company. They expect a full solution now as we've been continuing to work with them. And as we know, none of us do well going backwards in technology. You give us that simple use, you take it away from us, it becomes very frustrating.

Yes. Okay. Switching gear a little bit, like talk a little bit about the expansion of the offering within the U.S. I mean you had a very disciplined model in terms of sales offices, what was required to open up the sales office, with kind of a proven leader going into new location and hiring people there and building it up. Has the pandemic changed like where are you on that journey? And has the pandemic changed your thinking there a little bit in terms of more remote working, et cetera, in terms of like the expansion that you can see or potentially can't see.

Yes, I wouldn't say the pandemic has changed everything for us. It delayed a little bit of what we were doing, I would say. And I would say our go-to-market has changed a little bit and we'll see if that's for good or if that's for now. But it hasn't changed our plans from what we believe -- the number of offices we believe we could open in time and then also the cadence in which we open them with the understanding that we've got to get the productivity gains out of the offices we have opened. It's more important -- you've got to be able to go both deep and wide, not just wide. For a while there, we were probably going more wide than deep. We spent some time working on our skill sets, our talents, development internally to be able to get to a point where now we can start opening up offices again. We did open up an office in the last couple of months, call it, in Manhattan, and we'll continue to open up offices. It is a part of our strategy. But also we continue to increase the amount that any one sales person can sell or any one team can sell and it's through that, that we've been increasing the productivity across the board at our offices.

Yes, yes. No, that's really interesting to see. And talk a little bit at the other motion that -- I get questions in from investors around inside sales and you started to have a couple of teams doing a little bit of that. Yes, is that kind of just more for the low end of the market? Can you go into geographies where unproven and you just try that model for a while. How do you think about that?

Yes. Well, with inside sales, it is a down market focus for those businesses that are smaller, maybe even newer that want to work with a single system because, again, we're working with the same employee. If you work for an 8-employee company, you still want technology as well. You need the appropriate tool to be able to manage your data and you may have come from a 1,000 employee company that used us. So we continue to get referrals down market. We're doing a lot of advertising. Last year in, call it, April of last year, we started really doing aggressive advertising. As we did that, it continued to grow the small business opportunities as well. As we do our advertising, it's for everybody that sees it. Most companies in the U.S. are below 50 employees and so we get a lot of those calls. We had 5 individuals, salespeople that sold to small businesses for about our first 22 years in business, call it. And then we started adding teams as the lead volume went up for those small businesses. And today, we have 10 teams versus 5 people and each of those 10 teams are fully staffed at 8 people.

Yes. And you talked a little bit about like sales productivity as you have more modules, slightly bigger customers. Talk a little bit about what you're seeing there in terms of the sales force. And we're going back quite a few years, and it was always that what a sales person have to sell in to become like a senior sales rep versus a junior sales rep, et cetera. And what was required to kind of go to the Presidents Club is kind of constantly going higher? Like what do you see there in terms of -- are you reaching a limit? Are you still seeing productivity gains coming through every year? Like what's the situation there?

Yes, absolutely. I mean our top reps continue to sell more. We continue to have more of them. But again, we continue to go a little bit further upmarket. We definitely have more product to sell with the expectation of usage and selling usage at the time of sale. You would expect deals to come in with more product, because they're going to get the actual value out of using it. And without that additional product, they can't get the value which we now even measure through the DDX. And so we are having more opportunities. We've gotten better at selling. We always get better at that or being able to provide the client a true view into the solution and how it impacts them. The value of the product has increased through both driving ROI. So obviously, as we have more product, it costs more. So we have that. And again, in the outside sales market, which represents 94% of our revenue, we continue to creep even further upmarket. So all of that's going to add to the amount that any 1 sales rep can sell, which aggregates into the amount that any 1 of our sales teams can sell.

Yes. Okay. Got it. Let's switch gear a little bit and talk a little more on the higher level side. So if you look at the labor market, it seems to be coming relatively well. Like how does that translate into kind of business for you in terms of customers rehiring kind of new customer wins, et cetera? Like how are you correlated there?

Yes. I mean I've never really thought of us as a macro play that -- I mean over the years until 2020, I would tell you, macro hasn't really impacted us that much. I mean, in 2008, we went through more of the mortgage situation, but that was more relative to funding, widening of money and what have you. It's a little bit different. Employment, and people had always asked me, what's the biggest thing that can impact you, and I'm like massive overnight unemployment. And that happened in 2020. And so we were able to be negatively impacted, obviously. And I'm talking about employment more at the macro level, obviously. Interest rates can impact us one way or another. All that's to say is we lost about $2 million in weekly revenue from employee attrition of that current client base at that time, which we now call our pre-pandemic client base. We've seen about $350,000 of that come back on a weekly basis. So we're down probably still $1.6 million. I've said we're already 18 months out from that. I mean how long would we expect that to legitimately ever come back? I mean we're still going to be waiting on it 5 years from now. So I guess what I would say is, with the tight labor market, what we have stability, which is important for us, because with stability, we don't have a giant hole in the bottom of the bucket. So as we're pouring more into the top of it, it stays. If we have instability with massive unemployment, we lose revenue out the bottom. So as we're adding into the top, it makes it more difficult to grow. We've had stability since the end of May 2020. And it hasn't been getting worse since then. And when we measure it, anything, it gets better. But I would think that having those same employees come back to those same clients or the person that shut down 2 of their 4 restaurants and they've still been shut down for a while, I just think that's going to be more of a long play and as it filters into our numbers, it may or may not be noticed as much. What would be noticed is what brought us here, which is, again, new logo adds across the board for us.

So in a way, you were like -- okay, so you had a step down from the installed base, but you were really, really good for a new customer business of old time. And then once we lapped it, that was in the summer, actually, we saw it also in the numbers, we were back to 30% -- around 30% growth. So we're basically back to -- it took you a year to kind of upfill it, but like you got there.

Correct. Well, I believe that's a true reflection of our current growth and our growth opportunities. Once we've lapped it, it gets for us. As long as we have stability, it's a true reflection of what our growth opportunity is.

And then a quick couple of last questions. If you think about -- like you did more advertisements. I see you on TV now when I'm watching my basketball and the ads are really good. So it's good themes there that you're kind of playing there. How has that helped on top of the funnel, but also on the employment side for you to find people and get the brand recognition and people who want to work at Paycom.

Well, I actually appreciate you are presenting it that way, because it has helped both. One is obviously at the top of the funnel. What I would say is, I don't think anybody watches an ad and says, "Hey, I'm going to use that company." But it's a conversation starter. And I would say one thing that the advertising has been able to let us do is, we're probably starting more on second base versus kind of dragging our back from the dugout to the batter's box. So it's a little bit -- I'm not going to say it's an easier sell for us, but people understand why they're calling us. So it's helped us some there -- or helped us a lot actually. There is, we're also advertising a new way to use something, which is the employees should be the major user of HCM systems because it's 2021 and everybody uses technology. Now for us internally, we've had a lot of success getting upgrades definitely in management level because we have become more of a destination location, especially in our region of corporate taxes and some other areas through which we hire bulk employees. I would say on the front end, it's just tight for us as many other people. You've got to move people through the process. We don't skip pieces of our process, but there's often times you need to accelerate them to be able to onboard both hire and onboard employees more quickly because it's an employees' market and a tight employee market. They oftentimes don't seem to be available for 2 and 3 months. And also in a tight labor market, people need to automate. They need to automate with technology that allows them to be more efficient in the work that they're doing, because you just can't find the labor to do the same things you could do, like transfer employee data into a system that they could do themselves.

Yes. Yes. Chad, I see time's up there. That was actually a good closing statement. Craig, Chad, good to see you again. Thanks for joining us. And hopefully, AWS is soon up again.

Take care, Raimo. Hey, we don't use AWS. We do our own. So we're good. We're up. Take care.