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

I want to welcome everybody to our next presentation. My name is Jason Celino. I'm the software analyst here at KeyBanc. Really needing no introduction, but I have the pleasure of welcoming Paycom's CEO, Chad Richison; and CFO, Craig Boelte, with me here today. Maybe we should start with intros, a little bit about Paycom for those on the webcast and the presentation [ may not be necessary ].

Sure. So Chad Richison, CEO. I founded Paycom in 1998. And...

Yes, Craig Boelte, the CFO. I came on board in 2006 to become the CFO. So...

Perfect. Awesome. With the icebreaker out of the way, I guess, unemployment kind of fell to 3.5% last week. This was further validated by the strong results that you guys had and some of your peers. So my question is, why do you think the overall HCM environment and employment as a whole just remains so strong and has been resilient so far?

Well, I think the entire HCM environment has been good because people have to use a vendor these days. I mean, when you look at all the tax law, labor law and what have you, it's very important for you to use somebody that has expertise around that. Twenty years ago, I could have bought an in-house system and done these things myself. I don't even know what you would buy in-house today, to be quite honest with you. They've all really automated or combined together. Some of them become -- have become service organizations, even like ourselves. So I think that's one thing is it's very important that people use a vendor for payroll, tax, labor law type issues because it comes with a high level of expertise. So I think that's one thing that helps. The importance of automation right now, I mean people are having to do more with less. You're talking about a pretty low unemployment rate at 3.5%, and you've also got a tight labor market, that impacts the back office as well. And the only way companies can do more with less is to be able to automate. And so I think that impacts us in. And over time, we've always been fairly recession-proof. I mean if you remove out the pandemic piece, which I think impacted all of our current client base through employee attrition, if you will, and impacted our current client revenue, but it actually accelerated our go-to-market if that makes sense. And -- so I would have said it would have been hard for our business to be impacted by anything until the pandemic showed up. And so as we sit here today, even with unemployment, and let's say it goes up, unless it goes up very quickly, if it goes in 3.5% to 7% within a 2- or 3-week period, we're going to feel that. But if it does that over a 9-month period, 12-month period, I'm not a 100% sure that would be big reflection in our numbers or we wouldn't be able to move through that. And it's hard for me to reconcile unemployment going up with the fact that there's still 10 million job openings and I think all of us as businesses are still finding it not as easy to hire people as we did in 2019. So I don't think we're back to where we were.

Okay. Well, at one point I thought you said that was interesting. So you said when in the downturn, I don't even know if you want to count the pandemic as a downturn, most investors kind of forgot about it. But you said your go-to-market accelerated. So what did you mean by that? And where did those customers come from?

Well, we sold more. They came from the usual suspects of the normal companies that we go and we sell against, which would be our competitors. In the Paycom system, we just do a lot more automation at the employee level. And so if you're having -- if you have all these -- and then also during the pandemic, there was a lot of new laws that came out. I mean, cities all of a sudden had power. And then you had all these new laws coming out, labor law and what have you. So there was a lot of automation you had to do around even just labor law that didn't have much to do with payroll, but time and labor management and what have you. And so as people went through the pandemic, they were having to do more with less. They were having to comply with both additional labor laws as well as tax laws. And it just forced more and more people to be able to look at that. And that's still the same way it is today. Everyone is having to automate. We're all having to do more with less. And look, you watch the way employees use -- employees when they're not at work, they're consumers. That's what I'd like to say. And when you look at the way an employee uses a product in their consumer life or an interaction with the company in their consumer base life, they're using an app. They're using online banking. They're booking their flights online. They're getting their movies on -- everything is done with a direct connection. And then you go to work and it's 1992 all over again. All we are doing is taking that same consumer usage pattern that we see when employees aren't at work, and we're going ahead and bringing it to the office so that their client -- their company, employer can win the same way.

So we've been kind of thinking about these great resignations, great reshuffle, tailwinds over the last couple of years. Do you think that was a tailwind to the automation and the self-service? And how do you view that going forward?

Yes. I mean, I think the biggest tailwind to automation has been the prevalence of smart devices within the hand of the employee and their willingness to constantly use it. As far as the great resignation, I mean, we all have things within our product. I know to speak for Paycom specifically, we have things that help with recruiting and our applicant tracking. We have products that help with retention as well. And of course, the overall experience of using a single system that's easy to use can also help with that. It's hard for me to say that those added meaningfully to our revenue. What adds meaningfully to our revenues, the go-to-market strategy, then in the differentiated product, where there has been a shift to the expectation that employees will do these things themselves. And in fact, any time someone gets in the middle of that, it's duplicative. I like to say the user buyers, the HR people, the payroll people, they aren't reading employees' minds. That data has to be transferred and it's better that it's only transferred once through an easy-to-use system versus touched multiple times where an employee didn't even get to confirm the transfer. And so more and more HR, payroll, benefit administrators understand this. And I think they've been trying to build it on their own with integration strategies over time and -- due to necessity. And now they're realizing it's not necessary to build it anymore. It's out there already for them to be able to deploy.

Okay. So that might be a good segue to BETI. I mean, you talked about your differentiated product. This is something that's been on the market for a year, 18 months, something like that. Yet your 13,000 customers are using it, 40% total adoption. What do you think has been the main driver of its success?

Yes. And so BETI, we started selling BETI in July of last year. And then of course, conversions would have come after that. We had done a lot of work prior to BETI, making sure our clients are getting the full value of our product by making sure their employees are the ones transferring the data. When you've got employees already doing their own time and attendance, already requested time off, already doing their expenses, already doing their benefits, everything within a system, it only made sense for us to take at the very last step and have the employees, since they already were doing all that work, be able to do their own payroll. And that's what BETI does. With BETI, employees do their own payroll. Again, they were already doing most of it anyway. I like to say, the employee did all the work to get the plane in the sky and flew it the whole way, we were just all blindfolding them before it landed and not letting them see the result and help. And so now that's the case. Most of your American workers, over 70% of them, they live check to check, a person $365. That's a big difference to someone who's living check to check and just went into the weekend. It could be the difference in them feeding their family or not. And you will watch payroll and HR departments correct that because I've never met a payroll person that didn't want the payroll to be correct. I've never met a payroll person that wasn't indifferent or that was -- sorry, that was indifferent about mistakes. They want it to be perfect. They will move mountains to get that money to them. And that comes at a significant expense to the company. And so if you allow the employee -- and by the way, the employee is always the one that knows if it's wrong or not. So if you lay out the employee to do it themselves because they're already doing the other work, then they end up understanding what they're driving at. And they get there. It's like if you tell me I'm going to go on a diet for the next 2 months, I'll be like, well, we'll see about that. But if you show me the picture of myself at the end of those 2 months, here's what you can be if you do it, maybe I would do it. I don't know. But with employees, so I'm saying that's what they're getting. They're getting the end result, which for them is knowledge versus it's a guessing game each time of -- again, you have salaried employees who maybe [indiscernible] run it over and there's not a significant change in their events each time, maybe they've hit a tax limit, so their net pay went up, maybe their dental insurance is coming out in this pay period versus the last, so their net went down a little bit. Maybe they got a bonus this time. And it will auto-approve for them and run automatically. But for a lot of your other people, it really matters. And if you give them that opportunity to do their own payroll, it helps. And it also reduces the exposure, liability and cost of the company that they're working for. And once they get used to that, once an employee does their own payroll, they don't go backwards. Well, that's what we're seeing. Once an employee does their own payroll, they refer us. 5 years ago, 0 referrals we ever got from an employee. That wasn't in the decision-making process. Today, we get hundreds of referrals from employees. They're not in the decision-making process. They just don't want to use the 8-legged octopus with no head system that's been rolled out to them. They prefer to use the single system that they had 2 months ago at the other company, they used us.

So all fair points. I mean I get the checking your paycheck thing and my wife's a nurse. She'll look at it and tell me immediately if she didn't get that night differential, whatever. But if this is such a great product and you've talked about it being 100% attach rates at some point, how should we think about the uplift or what the impact could be to the model?

I mean, BETI is 1 of 29 modules. I wouldn't say it's one of our 10 highest. Well, it's not one of our 10 highest-priced modules. So you're starting with, it's 1 of 29 and it's not in the highest 10 price modules. So you can kind of figure out what contribution it makes. Where it is making a contribution, though, is in our go-to-market and I believe it will have a contribution -- make a contribution to our retention. We had 91% retention for 6 years straight. We came up with our app. We started the DDX strategy, which is the direct data exchange, which measures the number of changes the employees make directly into the database versus the number of changes HR or payroll makes for them. As we started doing that, our retention rates started going up every year because usage is what drives that because usage creates value. And it's not engagement. I'm not trying to figure out how long I can keep an employee in the system. I'm trying to figure out how quickly they can get in, get the test done and get out. I can't make it fun for you, right? I can make it easy, but I can't make it fun. It's payroll, it's benefits, it's learning.

It's not supposed to be fun.

Well, you're right. I mean -- but I'll tell you what, if you roll out 8 different systems to people or 5 or whatever, and you get to where they don't even want to do it, and they'll end up going without and not helping you. Your employees want to help you, your payroll people want to get it perfect. Your HR people aren't indifferent about people having the right benefits and everything else. You just got to get everybody out of the way and let the employee be able to send that information directly and be able to confirm what happened in that database. Your data integrity increases. You have more actionable data. Well, I'm confident that until someone uses BETI, they almost didn't know how a check calculated. And we'll convert people over and they're using a system for payroll, a system for benefits, a system for expense management, a system for -- all these different systems, we'll put it in our system in one system. I'm also convinced that's the first time the employees ever even seen all their data together. You guys know what I'm talking about.

They probably don't, though.

If they're not using us, I bet they probably haven't seen all their data in a single system or been able to confirm.

Sure.

Because they don't want to log into it. So like I logged into that thing 2 months ago. Some of these systems you don't go into. If you're a timekeeper, you're going into time and attendance every time, but you're not going in benefits all the time, you're not checking your benefits all the time. Some of these systems, you want it all together because you gain confidence. An employee gains confidence using the same system time after time. I don't want to have to reorient myself because you've rolled out sexual harassment training once a year that I've got to do in a learning management system, and I've got to reacclimate myself to that system. You want everything in one system because that's what drives employee usage.