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

Everybody. My name is Mark Marcon. I follow human capital technology and solutions for Baird. Our next presenting company is Paycom, one of the leading providers of HCM solutions in the mid- to upper part of the market. We're really pleased to have Chad Richison, the Founder, Chairman and CEO, join us, particularly during this busy time and eventful time.

Chad, we've -- basically have 28 minutes, and then we're going to get into the Aster suite. There's lots of different questions. I was in New York last week meeting with investors and then also in the Midwest. So I'm going to ask the big question that a lot of people asked when they saw the announcement on Friday first, just to start out. Can you tell us a little bit about the leadership change? And to what extent was it completely voluntary on Chris' part?

Yes. And so at Paycom, we have very high ambitious goals for ourselves, and we always have. And everyone at Paycom works toward those. Chris had been with us for 6 years. Chris, I consider a friend and certain situations develop where sometimes some people's situations don't allow them to continue on that journey. I will say that as the CEO of Paycom, I've been at -- I've done this for 26 years. I've had 1 CFO, I've had 3 sales leaders in that time. I've had 2 chief information officers in that time, and I've had 8 different people probably lead operations, starting with my sister for first the 11 years. And so at Paycom, we're a family. In fact, the person that was leading our operations prior to Chris Justin had kind of moved on, and he's been back for about the last 7 or 8 months. So at Paycom, sometimes people step away to handle certain situations of theirs. And oftentimes, they come back. The good thing is, I started the company in 1998. I was the CEO last year, and I'm the CEO right now, and I feel good about what we're doing as a company as we move forward. But I -- Chris wasn't asked to leave, if that's -- if that helps you.

Yes. And the fact is you've had other people leave before who ended up getting severance, but it didn't -- they left for personal reasons. And in certain cases, we ended up finding out like what those reasons were, and you guys were basically taking care of them.

Everyone at a company sees how you treat people when they exit so I think that's an important -- that's always an important thing, and that helps with your culture long term.

Great. Obviously, there's been a lot of discussion around Beti and what sort of impact that has had? Before we get into like the nitty gritty, and we were in a session upstairs where we were talking about the CRRs and the overall productivity. Can you just talk a little bit about like your vision for Beti and why you're as focused on it because I think there are some real positives that come out of Beti?

Yes. I mean I think Paycom we're focused on automation and automation of a full suite of product, Beti drives automation when it's utilized appropriately. Beti allows someone to do their own payroll. I've had a couple of people even at this meeting, be like, well, aren't they just approving a check? Like no, you're not just approving a check. That's the last step in the payroll process is where you would approve it. Actually, with Beti, if there's an issue, you fix it. There could be an issue because of the way your expenses were benefits. There could be an issue because your holiday pay is double. There could be an issue because your paid time off wasn't paid correctly. There could be an issue because you moved into a different county in Ohio and now you have a county local tax. I mean there could be an issue because you changed your direct deposit. So Beti actually teaches somebody something about their payroll and then walks them through the process to ensure that it's accurate for them. And when that's done correctly, that impacts the business positively as well because I've never met anybody in payroll that wasn't interested in making sure that an employee's payroll is perfect and that the taxes are perfect. And so why blindfold the employee in that moment. And that's kind of what's happened in our industry is you find out what you've made after the fact, after everything has already been done. And so, with Beti, you actually start the process at a pay period -- when the pay period begins and when pay period ends, it's done. And that's impactful for both the employee, but also it impacts the client as well from a positive perspective and also from an ROI.

In terms of -- they actually end up fixing the payroll. Can you describe those steps that they actually take to fix it? Because I've -- I've demoed Beti, I think it's a fantastic product. We've talked -- Andre and I have talked to various people who use it on a daily basis or a weekly basis. They don't know that it's called Beti, but they love the features about it. What are the steps that somebody has to take in order to fix things? Because like if the hours are off, it's like you're basically just submitting, hey, my hour is off and it goes to an approver who changes the hours, right?

Well, yes, it depends on what the setting is. So it can go to an approver. It just depends on what the setting is. Usually, employees are the ones that are editing their own time cards in relation to time. But time card editings and those approvals and mornings come throughout. It doesn't wait until you're at the end of the payroll that oftentimes depending on how the clients set up and the way they chose to use it, you might -- for like a salaried employee, they might go in and actually see their check already calculated, and Beti is going to explain the differences between this check and last check. It might be that they enrolled someone else in a benefit that they hit a limit that their 401(k) is no longer going to come out. Then only a portion of their 401(k) is going to come out on this check. And so it will actually give them what their net pay is going to be and what the differences are between this payroll and the last payroll, and that it will drive in and explain to them here's why your tax is different, this is why this deduction is different and it just walks through that process, and oftentimes, it's the first time someone's ever seen their check in that format. Most people don't -- they don't even understand how a payroll is calculated, but it impacts them. I hear, well, they're salaried employees. Well, not all salaried employees are created the same. I mean you have salaried employees that make $90,000 a year and then you have salaried employees that make $300,000 a year. So those people are -- it's very impactful for them. If you can have a system that notifies you of things that you wouldn't know, take this, for instance. You're a salaried employee, you're going in, you change your 401(k) percent at the 1st of the year, you enroll and it's 4%. Beti is going to calculate and see how much you're leaving on the table for a company match. Beti might say, "Look, don't put 4% on that, you're leaving $878 a company match on the table, change that to 4.1%, so you can pick up this match because your limits are changing throughout" well, every year, your limits change on what you can both contribute and that also impacts the match that comes in. And so that's one anecdotal thing, but there's many and now you have GONE. We've released GONE, which is similar to Beti, but GONE is fully automated in which an employee right now as an employee, I can go in at 10:30 at night, find to fly a hotel. I can request time off and know if it's approved or not within a second. Otherwise, I request time off at 10:30 at night. I've got to wait for my manager to approve it. My manager has got to make sure my schedule is right before they approve it. You don't want to have 4 of us off on a 6-person shift or the managers work in that shift. A lot of managers are people pleaser. So if you've got the time, they want to approve it. And so Beti enforces the rules that protect the business. There are so many states that even require you to pay out time. And what we find is that over half the time off request are approved after it's already been paid. So you take a vacation 2 weeks ago, you put it into the system. They're paying you before they've actually even approved you taking that time off. And the way it should really work is there should be a process where someone approves time off, but it gets difficult, and it's all time sensitive. So anywhere you can automate something that does it fully for a business, it has a positive impact. Oftentimes, our biggest issue is we come out with the product and people are scared to death of it. They're scared of it. They're like I don't know about that. And then we kind of walk through, your nonproductive time is 10% of your labor budget, and you're not managing it at all, at all. And so those are the processes that we go through, and I think the longer time goes on, the more automation you're going to see across our platform, and I would expect the industry.

So -- and just to back up for people who aren't familiar, I mean, part of the reason for asking about Beti and focusing there is that Paycom has been historically one of the fastest-growing players within the space with the highest margins. And with this focus on Beti, we did see a bit of a slowdown. So one question -- and part of the reason why you're focused on Beti is not only does it give them a great ROI, but obviously, if you get all the employees to use the solution, that creates a barrier to exit because you've got everybody that's engaged, and so your client retention ends up being better. Can you talk a little bit about that client retention, but then pivot to talking about like I've demoed Beti, I don't understand why it's difficult to get a client to fully utilize it.

Yes. Well, there's some change management. Pay -- our industry is used to pay period ends on a Sunday, you start payroll on Monday. That's the way it's used to. You -- payroll ends on a Sunday, you collect all the hours and everything and then the payroll department starts working on it on a Monday. They submit it for payment on Tuesday and then use the employees will get their direct deposits. It will process Tuesday, Wednesday night and give your direct deposits, Thursday or Friday. That's been the case since. Before that, people would ride on their horse and hand the time sheet and someone would pay them. And that's the way outsourcing was. So it was always after the fact. Beti starts the payroll process at the pay period beginning. So if you're a 2-week process, June 1 and your pay period ends on June 14. The normal process is payroll starts on June 15, it's all the hours collected. The Beti process starts you off on June 1. And when June 14 comes, it's done. And so that's the process. It's a little bit different. And you're leveraging what the employees know about their own payroll, their own expectation. I mean if you get 1,000 employees, it's difficult for me to know that, that employee worked 42.7 hours regular time and x amount of overtime. And so you do need a process. The employee does know though. And the employees catch a lot of things in the system that we would be fixing after the fact. But there is some change management for people. You know businesses, they want to keep their electricity going. They want to sell their product. There's a lot of things that they want to do. And so we're one aspect of that coming in and working with them. And to some extent, they had a good process already. I mean, with -- if you're in -- if you're utilizing Paycom already because we have this single database, things are working for them, and then we go out and we say, hey, we can make this even more automated for you. And the first time you hear that we expect employees to do their own payroll, people when you first tell them that, they're not all keen on that until they understand the advantages and how they can't get hurt through that process.

And so is the change management the barrier coming from the payroll department? Or is it coming from the employees or both?

I would say it's more payroll department driven than employees. And it's really a timing thing oftentimes. And we've gotten better at helping people go through the change management to benefit them. I don't think anyone makes a decision to do something without understanding how it impacts them positively. And I think it's incumbent upon us to make sure as a business that we're showing that to people. Now I will say this, since 2021, a new client coming on that's been the process that they've gone through and they utilize Beti coming on. It's really our current client base that now we've gone back to. And we're not making any one go on Beti, that's not it. We're not forcing it on someone, client will make that decision. But I do believe that as you look into the future, full automation of these products because it can be done. I mean, payroll and HR is about consistency. It's not about taking risks. I mean, Georgia doesn't let you do your withholdings 12 different ways. There's one way. The city of Younkers doesn't let you deposit and file multiple, there's one way. Your 401(k) only happens one way. Labor law, there's only one way. And so when you have a system that can be consistent, it's better than a human, right? It's better than that because you can provide a consistency. Just like I said, you're utilizing gone, you're managing all of your time off requests employees are getting instantaneously and you're managing your budget. I think there's 17 states where you have to pay out PTO if it's not taken. If you're not using GONE, you're probably approving most of your time off request after they've already been paid. And so what process does someone want to work. It's not that they're utilizing products in many cases correctly. They're utilizing them defensively. I have to get a PTO paid. And so when you can be strategic about it and you can create an automated process like Beti, like GONE and you get more and more people to utilize it that can kind of take the place of many manual processes as well as inefficiencies and profit leaks that you're going to actually have.

And what percentage of the installed base now has Beti?

We haven't updated it. We call it one installed base total. We have not updated it since we last gave the number of 2/3. We do say, though, we -- all new clients continue to come on Beti, and we do continue to have success with current clients uptaking it.

And the clients that haven't taken Beti, you're not getting rid of them. And you used to have some competitors that would actually say hey, you better switch to us because Paycom is going to force the switch and you don't want to do it, but you've made it clear to them that you're not forcing anybody.

Yes, we're not forcing anybody. I will say that I do believe that that's where the value, the value for a client is leveraging their employee base to actually do the work with a consistent system. So I think that's important. But I also think there has to be -- there has to be those meetings with the client, and there has to be the right timing with the client. And again, if a client chooses not to do something, we aren't forcing it. I think we were kind of absent our communication of that, and I think that hurt us a little bit, but...

So one thing that I hear from investors all the time and you're very frequent topic of discussion is like why not allow certain -- certain clients to come on without using Beti, like new ones. I know lots of companies that utilize Paycom that actually don't have Beti as well, and they're very, very happy. They pay you guys on a regular basis. Why not allow them to come on? And maybe at some point, they switch as opposed to insisting on that right upfront.

Yes. Well, I would say that I believe that we have -- we've had a lot of success with clients onboarding. It's a differentiation when we're upfront. You create margins through sales discipline. You don't create margins after sales. You create it within the sales, through sales discipline. And so I believe that if we're out there selling a product that we know is going to produce less ROI than our best product, I don't know that we could pat ourselves on the back for that. I mean the passion for Beti is it really does drive a significant amount of ROI as well as usage within the system for the client, it's inherent that when someone's using Beti, they're going to utilize the rest of the system because it's impossible to do one without the other. And so to allow someone to utilize the system the same way we would in 2010 just doesn't and it's fine for current clients, but to go to market with that strategy. And plus it's where we're going from here. It's -- it's -- Beti is not the strategy, it's the next step in the strategy. So those things become -- those things become important.

Can you talk a little bit about sales force productivity and how you think about that? I mean, you've got your top salesperson last year sold $4 million worth, which is the equivalent of what a market used to sell when you first went public. So some people are being very, very successful in this environment. But on the whole, things have slowed down, not just for you but for everybody, your slowdown has been a little bit more dramatic because of some of the factors you've discussed with regards to Beti. But how are you thinking about that sales force productivity in terms of finding a base and now potentially reaccelerating.

I would say -- I mean, our sales group right now is as good as it's been, better than it's been, I would say, in the last couple of years. And I wouldn't say we've had a bad sales year last year or the year before we had strong sales. But this year, I mean, they're doing very well. Sales are up, units are up and staffing is going well for us. And so from a sales perspective, we've always been strong with that group. Our bookings have always been pretty strong. They're getting even stronger now. But -- and I've always looked at you separate our company into sell, service and software is kind of how I look at it, but that's been very strong -- that group has been very strong for us and continues to get stronger.

Great. And how about the CRR group, which is basically the group that does the upsells, their productivity ended up changing you mentioned on a call that they were down $20 million relative to the prior year because of the focus on Beti and upsells. How is that trending now?

Yes. And so last year, our CRRs were down $20 million in new business sales. And really, what that had to do with, as I've said, we had them go back out and get utilization out of the products they already sold. I mean if you listen back to what I said 5, 6 years ago, we're better at selling -- and this isn't unique to Paycom, any software company has this issue where they sell you a product, and you may, may not utilizing it fully, but you're paying fully for it. . And so it's not unique to us, but here's what we're doing about it. And so back in the past, you might go out and a client has $10 worth of billing and they're only utilizing 4 of it and you just went out and sold them another 2. So now they're at 12 utilizing 4. The change that we've made is in regards to our relationship with our client when we go to upsell a product that our agreement with them through our CRR group now is that we're going to turn on the product and we're going to set it up. We're not going to start billing until the client actually starts utilizing that product. That way we're focused on utilization. If I walk into my bathroom and it's flooded with water. The first thing I do is turn the water off before I start fixing everything. And so this is more in that vein that you want to make sure you're not creating issues for the future if that makes sense. And this is unique -- this isn't unique to Paycom. It's any software company you go out to we'll have features and functionalities that someone is paying for that they purchase that they're not getting the full benefit of ROI out of it. And Paycom's the low-cost provider through ROI achievement. And so that becomes very important for us get that ROI. And once you get that ROI, the system is going to pay for itself. And so -- and it's measured throughout the system. So that's very important for us to continue down that strategy with both where we're at as well as where we are going.

Is the CRR group doing more in terms of selling other solutions now that as opposed to just focusing on Beti?

It's both. Yes, yes, they're doing all solutions. But I will say that Beti -- if you're utilizing Beti, it's going to drive a lot of the usage that you're going to get value for or that the client is going to achieve ROI from. So I mean, I can take you shopping for a tuxedo and shoes and Cummerbund and suit or I can just send you the black tie invitation and you'll take care of the rest of it. And so there's a little bit of that in what we do with our product.

Okay. So you are seeing -- but I mean the sales productivity is improving now.

Yes, I want to separate, outside sales did really good last year. They're doing even better this year. Outside sales sells all companies that have greater than 50 employees. Our inside sales is doing good. That represents less than 4% of our business. They sell clients that have less than 50 employees. Our CRR group goes in after we've onboarded a client, after that client has been onboarded for 30 days or longer, then the CRR group goes out, and that's when they can actually upsell a client those additional products, and the change that we've made is the process through which they go through to upsell those products and the importance of utilization and ROI achievement as we go through that. And in some cases, they're identifying where there might be low ROI for a client that we want to meet that client where they live to make sure that they're achieving that.

You've got -- you've been going upmarket. You've got some clients that are -- have 28,000 employees. When you go up market what are some of the headwinds versus some of the tailwinds in terms of going after some of those larger clients? And to what extent is having an open system important when you start going upmarket?

I think the key upmarket, I will say there's a couple. Number one, I'll say there's no such thing as an upmarket employee. You work for a 50-employee company yesterday, you work for a 50,000-employee company today, you're the same person. You're just probably using a lot less technology because now you're using 10 different products. . Like I said, it's the 8-legged Octopus with no head. That's the software strategy once you are 50,000 employees. But you're the same person. The difference for Paycom, you start getting into data and reporting. When you start getting up there because your data sets at the 28,000 employee with historical tables and everything, it's going to be a little bit from a reporting perspective that you could run into that we work at. We work with the client on. It's not -- I mean, the functionality is there, the scalability is there. But when you start looking at it, it's going to be from that, that you're going to have that. And you're right, there are more current interdependencies that a client will have with different systems, which can make the conversion a little bit unique oftentimes with some of those and how you might work with those loans standouts of the piece of software. But once a client buys off on our strategy, we're the ones working that process of implementation with them, and that's our process to do.

Okay. And then in terms of margins, you've had some of the -- outside of Paychex you had the highest margins in the group. You still have the highest margins outside of Paychex but they've been coming down just a little bit. You've been making some investments, both in terms of your service infrastructure and then you've been rolling out some international capabilities. . Can you talk -- and you also have early wage access, can you talk a little bit about like how investors should think about the margin profile on a go-forward basis ex float?

Yes. I mean I think if you just look at us in the history, we've never had to, we haven't really sacrificed margins for growth. It's that growth has helped drive our margins because we do sell a product that has a margin within it when utilized correctly. And so, we value our spend. We don't spend -- again, I started the company with an SBA loan and 13 credit cards. So old habits don't die hard from that perspective. We don't utilize -- we don't have a lot of waste in our model. And so there's a reason why we've had high margins. We don't like to be dependent upon banks and other things to run your company. And so that's not going to change from us from that perspective. I will say that growth is first prize for us always. But in our case, it usually produces margins. We have done for -- we have done share repurchases, which are helpful to investors, and then we've done also the dividends. Something else that kind of can have a little bit of an impact on our margins as we've continued to have some rising interest rates, and as we look to potentially mitigate some of reverse of that over time, you might take a little bit lower interest in the short term to be able to lock some of that down. But that can have some short-term impact on it as well.

Okay. So I mean, given where the margins are currently, should investors expect them to be steady state? And again, I'm talking ex float.

We're not changing guidance, but I mean, they would -- should expect us to be where we're at on guidance.

Yes. But I mean given the scalability of the business, margin should go up over time.

Yes. I mean definitely, if you're -- I mean, again, tell me what our growth rate would be. And then you would even have margins go up from that based on how well we achieve our growth numbers.

Great. Trying to cover a lot of different things. Unfortunately, we're out of time. Please join me in thanking Chad for a terrific discussion. We are going to be an Aster Suite A for a breakout. So hope you can join us there.