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

So my name is Jason Celino. I'm one of the software analysts here at KeyBanc. They don't need no introduction, but I'm glad to welcome Chad Richison from Paycom; and Craig Boelte who’s from Paycom as well, CFO.

So first of all, maybe a warmup question. Top of mind for everybody, macro, what do you see in the current environment? And then if we think back to when you're here last year, what's changed or stayed the same?

Yes, I mean, well, the environment has been stable. I mean, for us, now we only have 5% of the TAM. So for us, when we think about macro, it's our ability to go out and bring new logos onto our platform. And really, I mean, even comparing and contrasting a little bit with last year, maybe really even 2021 when you had more of a tighter labor market, people still had to outsource or gain efficiencies in the back office because they didn't have the staff. So we did well throughout that period, and it's the same as today. From a macro perspective, it's been, for us, stable since August of 2020.

Okay. Okay. No, that's fair. That's fair. And then you just reported recently, it was just last week, so it's still quite fresh. I think on the earnings call, you said your BETI conversions were seeing a little bit of a couple of headwinds, and that was kind of stemming from your CRR teams. Maybe if you want to just talk about that one?

Yes, sure. Well, BETI conversions and outside sales for new logos are all -- every client that comes on that's a new client comes on with BETI. The usage on that is actually about 60% of all employees on their first payroll of a new conversion do their own payroll, about 60%. And so when I separate that group from our current client base, our current client base, we still have about 40% that had been with us before we started selling BETI. And so we have to go back into that client base, and we have to sell them BETI because it creates great value for them. And so the group that we have doing this is the CRR group. Paycom has inside sales, which sells businesses below 50 employees. That represents about 5% of our revenue. We have outside sales, which sells businesses now from 50, all the way out past 10,000 employees because we've gone upmarket. That represents the overwhelming majority of our new business revenue. And then we have CRR. And what CRRs do is after the first 30 days a client's been onboarded, they can upsell current clients our products. Well, a new product that we have had in the last couple of years is BETI. BETI drives a strong amount of ROI for our client base. So we want all clients to be able to use it. We're not going to force clients to use it. And so we have to influence them. The CRR group is the group that actually goes out and influences clients to do that.

Okay. I guess how big is the CRR group in terms of like all your salespeople?

We have multiple CRR people in each office, so we have 54 outside sales teams, and so it's not a small group.

Okay. And I guess, why does it make -- well, is there an advantage that Paycom has if you're able to convert everybody to BETI?

Leads. We're getting leads from employees that use our product at one company and it's one system, and their payroll's in one system, their time and labor management is in a system. They request time off in one system. They do their expenses in that system. They do their learning management, benefit enrollment, everything in one system. And once an employee gets used to doing everything themselves, none of us do well going backwards in technology. If you take a piece of technology away, it becomes difficult. And so what happens is those employees become advocates for this type of technology. When they go to another company that has multiple products, multiple logins in which oftentimes it's duplicative effort on their part, nobody likes to go back to 1992. So we get leads. And so there's that. There's efficiencies for the business for them to be able to use BETI to get the full value. Because in order for your -- to use BETI and your payroll is correct, that means your time and labor management was correct, all your time card editing was correct, your expenses are correct. You're in a correct state. Your deductions are correct. And so it just helps a client to make sure that everything -- and they become a lot more efficient. I think some of the biggest pushback that we get when we're out in the field selling BETI to a new client is you'll take my job.

Sure.

It's true. I mean that's the pushback. And that's sometimes the fear of automation, but businesses continue to leverage that and repurpose people to do more of a revenue-generating opportunity. I mean if you're inputting payroll data, you're a cost center. That's it. If you're using a system like BETI, well, now you're getting a return on investment for what you're actually doing, and they can help you out.

Sure. Because I guess what kind of doesn't make sense to me, I mean, you've talked about being a $15 million to $20 million headwind this year, but it's not necessarily costing you revenue. I guess why would it matter if someone -- a CRR individual is selling LMS as long as they're hitting their quota or something versus than BETI?

Yes. Well, end of last year, there was a month there where no one really wanted to sell much of BETI because BETI's very low fee. But there's some effort on the sales rep, and not necessarily in the sales process, but more in the -- with BETI, at once -- right now, with payroll, once a pay period ends, that's when your payroll department starts collecting all the data to send it to the payroll. With BETI, when your pay period starts, all payroll’s done by employees, and then when pay period ends, it's over. And so my point is there's some change management for a current client. And the CRR walks them through that. Where if you're a new client, you're already in change mode because you're now converting everything over to Paycom. That's what we sold to you.

Okay. So because that's why I kind of asked the question earlier. It's what -- it sounds like with -- if you can get all of your customers on BETI, you'll just have better data.

Yes, and they'll have a better experience. And we had 0 referrals from employees 5 years ago. Now we get thousands of leads.

Got it.

We'd cultivate them.

So that makes more sense now because if everyone loves BETI so much and you're getting these referrals from these other users, then it's like a flywheel.

Right. Millions of employees are doing their own payroll today. 0 were doing it until we came out with it a couple of years ago. And in the future, 100% of you are going to be doing your own payroll.

But not me, I'm salaried.

Well, but you'll still be verifying you're paid in the right state, and you have the right deduction.

Yes, [indiscernible] did mess that up.

Well, I mean, yes, expenses and everything else because that's how business wins. They don't read your mind. Every piece of data that comes from a payroll comes from you into the system. No one's reading your mind. And so if you're using multiple systems or someone else is involved in that, it becomes duplicative effort for an organization, plus the liability and exposure associated. You made sure you had the correct overtime. You made sure you had the correct benefits. I'm not saying someone can't bring a wage, an hour claim against the business because they can for any reason. But you're reducing and mitigating your exposure and liability when you have an employee do something. Now I want to say this. With hourly employees, we don't have to sell them on doing their own payroll, right? I'm short $42, so what? But an hourly employee is short $42, that could be 10% of their pay. That could be the difference in impacting their weekend. And with any client base, you have a lot of them. So when you're talking about an hourly employee, they're already doing their own payroll. It's just payroll and HR is fixing it after the fact. Never met a payroll person that wouldn't fix the payroll when it's broke. So why not prevent it? It doesn't cost you. Afterwards, you're doing wires, reversals, amended returns for taxes. And employees that are paid wrong 2 times in a row, they don't trust you. So you know. And how does an employee know it's wrong?

I don't know.

They look at their account, they notice it's wrong. So all the things they're doing after the fact, they could have done before the fact, and it would cost the client 0. But now they're doing it after the fact. So -- and salaried employees have had their own checks.

Sure. Great. Any questions on this before we move on? So I wanted to touch on international. I know that's a recent development over last year. I actually asked you this question last year at this conference. And I think you said something along the lines of signs of opportunity here. I guess what's changed in the last year?

Yes. I mean, we still have all the opportunity. Again, we're 5% of the U.S. market, but we've been continuing to be pulled up upmarket. One major change for us is we introduced our global HCM product with first quarter results. We launched our global HCM product. And that rolled out in all the countries and in 15 different languages. But the biggest change -- and then now, we've, of course, rolled out Canada, which we've developed ourselves for payroll. The biggest change is we continue to be pulled further and further upmarket as people look to give their employee a single system to use. There's small business, medium-sized business, large businesses, and then enterprise are very, very large businesses. But from an employee perspective, the employee is the same. Whether you work for a very large company or a small business or a midsize, you're the same person with the same mortgage, with the same -- you get what I'm saying? And so they don't have a tolerance for complexity. You're making me work to work to get paid. HR and payroll departments do have some tolerance for complexity because that's the world they've been living in. They had to. But employees, they don't have that tolerance. And so even upmarket, we've made it easier for them.

Okay. Yes. No, I think maybe my first question with international is how should we think about TAM with this? Because obviously, it's hypothetically a big opportunity, but how do you frame it?

Yes. We announced our expansion into Canada also with our now going above 10,000 employees. And so it's through that, that we would have expanded our TAM. And we're also expanding -- we would have expanded our TAM for U.S.-based companies with Canadian employees. But there'll come a time where we'll open up an office and be selling in Canada. It's just right now, we're focused on U.S.-based companies with an international presence.

So how did customers use or run payroll if they had a U.S.-based operation that had employees in Canada before?

It's a hodgepodge when you look internationally at how someone runs payroll. There's multiple services out there. Oftentimes, those services then aggregate data and send it to an in-country partner that would actually process the payroll and then potentially move the money and/or send the file to the client's bank for the client to move the money and do the taxes. Everything we've developed on ourselves and everything we're rolling out, we'll be rolling out 2 more countries this year, is all full service. We're doing all the direct depositing, all the tax depositing and filing. So we're removing the burden that still exists when someone does payroll internationally to, again, a single system. We went a long way with the global HCM product because it unified all -- everything nonpayroll, and so now we've layered the payroll on top.

How do you decide which countries to expand first? Because you said 2. I mean Canada is kind of like our hat. So how do you think about it?

So what you look at -- so for us, we look at our -- both our client base and our prospect base and where do they have the highest number of employees. There's a couple of logical places that you would look to for that. And those are the areas that we focus first. Not the easiest ones. I mean, ones that are going to have the highest number of an employee base of U.S. companies.

So if you're going off of, call it, the synergies with your customers, the complexity of each country, is that going to affect how fast or how slow you launch in different areas?

Well, complex company -- complex countries take longer, but it doesn't change their prioritization. Next is next regardless how difficult it is.

Because it was -- is Canada, do you view that as a complex country?

I mean, I think you're -- you've got 17 total territories and provinces. And I mean, is it different than the U.S.? No, I don't consider it. I mean, it's more difficult than many of the other things that we've spec-ed out for other countries. But Pennsylvania is pretty difficult. Ohio is pretty difficult. Labor law in California is pretty difficult. I mean there's a proxy for everything we do. And so whether it's labor law, whether it's reciprocity between New York and Connecticut, I mean we're already in this business. And so then you go to the other countries, and you're like, what's the proxy for this? What's the proxy for the IRS? What's the proxy for the Colorado Department of Revenue? What's proxy for state unemployment? What's the proxy for federal unemployment? Who pays? There are some countries that they pay your vacation time.

Sure. I mean this all sounds very complicated, yes.

So well, it's the business we're in. It's the business we're in so.

So I think my last question here, then I'll move on. To me, it sounds like payroll's hard. We know this. International, also incrementally hard. But in the past or maybe when we think about the hurdle, it's about the expertise, right? So other companies have acquired their way into international. I'm not asking if you're planning to do that, but like how -- like how do you gain kind of the expertise with all these tax laws?

You research it. I mean that's the way. It's the same way we started off in Oklahoma, then we added Texas, then we added Ohio. It's the same way.

Yes, but you can...

It's the research. I mean, it's the research. I mean that's what you have to go through. If you're -- there are certain countries that where you research tax jurisdictions and it's a certain language, and it may not even be run by the country. I mean, there's just -- there's different groups that we work with and we have to get in there. So -- but there's a proxy for everything in payroll, and people figured it out. I mean, people -- I mean I said this last time, I mean people built like 3 space shuttles over a 2-year period. You can launch payroll into another country.

Okay. I'm sorry, last question here then. So if you can research it no matter where you are, that makes sense. But in -- for your sales office expansions, you're usually taking someone you've developed internally, but if -- but would you just be trying to find employees in the U.S. who spoke to other countries? Or how do you think about that?

Well, I mean, well, first of all, we're not focused on -- we're [ exposed ] to on expanding our payroll to U.S.-based companies in these other countries. There'll come a time where we will expand ourselves. And it depends on the sales culture of a country. You're going to sell differently in Canada than what you would in Italy or Germany or some other place. And so it just kind of depends on what's the culture of that country that we're going into, their sales culture. What's accepted? Can you foot canvas? Can you not? What's accepted? How do you market to them? But yes, I'd imagine that we'll be hiring salespeople in the country when that makes sense. But we're not focused on that right now. We're focused on bringing full-service payroll services to very large companies in the U.S. that have employees in those countries.

Okay. No, that's a good segue to my next topic. I wanted to talk about your upmarket. So I know on the last call, you said you're targeting companies over 100 -- or over 10,000 now. But on a couple of quarters ago, you said that your customers with greater than 2,000 employees is your fastest-growing segment, up 60% in 2022. Is that a big business today?

Yes, I mean it continues to grow. I mean, I mentioned on the call we IPO-ed. I think our largest city sold $3 million, $3.5 million. That was in 2014. Then we had 2017, our first rep sold $1 million, then our rep sold $2 million. Now reps sell $2 million all the time. A rep last year sold $3 million. Our highest rep sold $3 million. This year, we're selling $2 million and $3 million deals. So the amount that any one rep can sell continues to grow as we have. We've gone from 18 products at IPO to 33. So we've got more products. We continue to be pulled upmarket. And the value that the software is creating, the solution it's creating for the clients, we're able to share more of that.

Okay. Because if I think about the enterprise sale, what are the main couple of reasons why you wouldn't win?

Well, international is one. Having a global solution on the HCM side, I think, helps. Typically, when you're dealing with large companies and you go way upmarket, they're not really using -- like, if they're -- I don't want to mention competitors' name, that's what's hard to do. But if you're using a payroll system, you're using it for payroll tax calculation. I'll go ahead and say it. You might have ADP for payroll. Workday for requesting time off. Something else -- Concur for expense management, Cornerstone for learning management, some other way to enroll and benefit. Well -- and they've built it. That's a company that's trying, by the way. That's if somebody's trying to do a good job. And then you roll that out to your employee base, it can be kind of difficult for them versus rolling out a single system. And so upmarket, we're replacing an integration strategy that they believed was best in breed. And we're going in there, and we're replacing it with a single system that does massive automation, and it's going to be a significant reduction in force. There's a strong ROI associated. So they're not used to buying that way. If I'm a buyer, I'm used to taking this product out and finding this product and inserting here. And now you're buying something in a different way. But an employee's an employee. And the employees are benefiting from it. They're helping the client benefit from it, and it's the future.

Okay. Okay. We've got 5 minutes left. I did want to ask a couple of margin-related questions, if that's okay. So Paycom is going to have 42% EBITDA margins, something like that? Few companies with the 4 handle, right? That's an impressive club. Is there a way to think about future margin expansion where that would come from? Or is the right thinking EBITDA dollar growth?

Yes. I mean we've been in that 42% range for a while other than -- I mean, it's typically in the 42% area with strong growth and revenue growth as well. So as we're looking at our margins, I mean, first of all, revenue growth's first prize. So we're going to continue to spend where we can get the revenue growth. And then you kind of look throughout the model on whether there might be some efficiencies. We saw a few of that on the sales and marketing line this quarter, but some of that is just quarter-to-quarter noise that you see there. But overall, as we continue to grow as a company, you would think that we could find other efficiencies throughout the model where we could drive that up. But like I said, first prize right now is still revenue growth for us.

Okay. And then over the last couple of years, you've seen these tailwinds from higher interest rates, float income, and you've taken an opportunity to reinvest some of that. It sounds like a lot of that investment has gone international, but are there any other areas that you've been working on?

I mean typically, it's going to be in the R&D side. We talked about some product launches this quarter as well and [indiscernible].

Oh, yes, Everyday.

Yes. So it's going to be in the R&D line as well as sales and marketing.

We also released our Client Action Center. I mean, that kind of went by the wayside as well just from a discussion purpose. But it's giving clients the same experience to communicate with us and have service with us is what our app gives the employee and/or manager on the go gives the manager in a self-service environment for taxes, banking. And so that's another product that we put out recently as well that's helpful to the service side and the client experience.

Okay. And then to wrap up, I just have some speed round questions, but any final questions from the audience? Sure.

Do you think you're at an advantage when the macro is a little bit tougher? I guess, just the ROI, and customers saying this is the reason [indiscernible].

Yes, I don't think it hurts us. I mean the advantage would be there's so much in a go-to-market that you do to do strategic selling to get in. We're kind of a general-pressure, relentlessly-applied-type sales organization. So -- but I would say it doesn't really hurt us. I mean, I get the macro question and I'm like if we're not getting our logos, it's on us. We only have 5% of the market. It produces an incredible amount of ROI. You're downsizing? Well, you need to automate. I mean unless you just like overpaying, there's no reason not to implement it now so.

And we've done very well in other...

In the macro, typically, we do pretty good in that -- those environments.

Okay. That's a good question. So speed round. Yes or no for a couple of questions. Last one I'll leave open ended. So we've been asking this question to everybody. Exiting Q2 versus exiting Q1, would you say your business has improved?

Yes.

Okay. And then almost afraid to ask this question, but yes or no, do you think Paycom can directly benefit from generative AI?

Yes. We got to figure out how. Well, I mean, you don't implement it just to say we have AI. I mean, it's got to solve a problem that can be solved consistently that we trust. So you meet all those? Yes.

Okay. And then with that answer, I don't even know if you'll be able to answer this, but when would we be able to see those revenues? Would that be this year? Or next year? I don't know.

Well, whether or not -- I would say there's a couple of different ways. You can use AI for things that you may not even charge for that makes you more efficient, that could speed up yourself in other areas. AI, from a product perspective, I do believe that there are certain really modules that we have that I believe in the future will benefit from an AI-type agent.

Okay. Time will see. Yes. Perfect. With that, I want to thank Chad and Craig for coming; everyone, for coming out, and have a great rest of your time in Vail.

Thank you.

Thank you.