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

Okay. Great. Craig, this is going to be your last one. Then I need to give you the first question.

So when you joined Paycom like back many, many years ago, did you have a thought would be this big of a company?

No, I did not. I think when I joined, our revenue was $3 million, something like that. So to be at $1.8 million, whatever. I mean, it's far surpassed anything I ever dreamed of. It has been amazing. It has been amazing.

We're going to miss you, yes. And Chad, for you, like the world at the moment is there's too much change in there. Like it feels like when you reported your Q3 results, like since then, like a lot of things kind of had the election, et cetera. How does it play out for you? Like we read in the newspaper like SMB sentiment an all-time high like it's coming up, et cetera. Like how does it play out for you? What are you seeing there from your perspective?

Yes. I mean we'll see. I don't know that the election result itself will have an impact on us one way or another. So we'll just kind of see what started this company in 1998 so I've been through several. And everyone kind of comes with their own change, whether it's the taxes, labor law or what have you but we'll just kind of see. But I think for us, it's an incumbent upon us to continue to work our plans, continue to help prospects and clients out there, automate toward a full solution. And that's what we're focused on. We only have 5% of the market. So if we're not doing that, that's really about us, not about the rest of the environment.

And I mean because you've been in this business for -- or in this market for so long, is there like -- how are fluctuations from like sentiment getting better, et cetera, like in previous cycles? Was there -- is it just whoever executes better? Or do you see those kind of changes?

I think system automation is pretty important right now just because of how much work the back office even wants to do these days. I would say that when I started the company 26 years ago and if you went back to then it's someone that's buying our products so they could do more with it. Today, people are really buying the products so it can do more for them without them having to interact with it as much. And so many of these things can be fully automated from a task perspective, should be fully automated. And that's really what we're driving toward now.

Yes. Okay. I mean it's funny, like I was on the Oracle call on Monday, it's like I was asking like who's doing back office, but it was the same message well, actually, people are taking a lot more attention to it again. So okay, that's interesting, yes. And then if you think -- the story for you last year was all about Beti. And a lot of investors were asking me is like why kept on determined. We're like -- because there's -- for you, it also created some things that you needed to consider like trade-offs, et cetera. Like can you maybe just frame it for us, like one more time, like why do you think Beti is so important?

Yes. So Well, I mean, Beti just is the right way to do it. I mean, it impacts the employee in a big way. It impacts the business in a big way. With Beti, an employee knows exactly what their check is going to be. They can make changes before payrolls actually run. Many businesses actually have a makeup payroll within the way they process payroll to correct mistakes. And so Beti actually allows employees to correct mistakes before they become actual issues for the employee. And so it's the right way to do something, and it creates a lot of automation on the side of the client. It makes it easier for the client. And so -- but I've also said that Paycom is one solution. Beti is a product within that solution. So we also have many other products that our clients utilize to automate such as GONE, which now automates all paid time off request. It was actually rolled out here last year. And at that time, we had noticed that 50% of all paid time off requests or someone is requesting vacation or what have you, it's approved after they've already been paid. 50% is approved after they've been paid, and nonproductive time represents about 10% of an organization's labor cost and it's being unmanaged. And so GONE fully automates that. And so as we look into the future, that's what we're moving towards, full solution automation. I mean, it would be my goal that the system would just work for you without you even having to log into it if we set it up. And so that's where we're going, and that's important. And I think that's going to have a positive impact on the industry as well as the clients who utilize it.

And it's all -- if you talk to your clients or while you're backing it out and getting a feedback from the clients, like in theory, it seems like a no-brainer like -- so how is adoption like then from that perspective?

It's going very well. I mean when you look at new clients onboarded, they've all had Beti, they're doing very well. I mean, we've had clients. I mean, when your business is 26 years, you've got clients in varying degrees of usage of your system and our priority isn't necessarily their priority. And so I do think that there's ways that you have to interact with them to get them to see the value as well as support them until they're ready.

And if you think about it, if you're an existing client, like how much of it is a step-up or change were to go to Beti like?

It's really the change management. They have to do within their organization that's often -- Beti is not really a difficult lift from a product perspective. It's more that you feed the data throughout the history of time, data and payroll is fed after the pay period ends. With Beti, you start your payroll transaction at the pay period beginning and by the time the pay period ends, it's done. So it's a shift for businesses to have to the way they feed data into the system. But once they shift to that, it saves them days of processing. So again, there's got to be enough incentive or value that a client sees to be able to make that shift. We've been very successful in getting clients to make that shift. And again, we're supporting those clients that haven't yet.

And then -- so from your perspective, like if you think about the last year and a little bit before we all get them over now, like you have some struggle that's left, is that -- I mean you will continue to kind of help them on their journey, but like that's kind of so long way to focus for you, you're kind of pretty much done?

Well, it's very important for us to help every client no matter how they're utilizing our system to get to the full client value achievement, meaning that they're actually achieving the ROI that was in our promise to them when we actually went out and onboarded them in the beginning. So I wouldn't say I've given up on that, but I would say that the process that we go through to help clients see that and actually get them into that area. It has changed a little bit for us over time, and it's become more powerful, I guess, if you will.

Yes. And then like I mean I remember last year, you had like your customer success team kind of helped a little bit do more. Is that still something you do or like did you -- are you going to refocus them again?

Our CRRs are very valuable to us. They're a very highly skilled group. That is the group that was going back out, continues to go back out to help clients utilize again, current clients, new clients that come on. They're going through a different process, but current clients, that group has done that. That group has been have had some acceleration maybe as you kind of look at the back half of this year versus the first half. But we're doing the right things for the right reasons right now. I mean we've been in business for 26 years. It does matter to us what the future looks like and how people are going to be utilizing software and that's what we're focused on.

And do you see the -- in theory, what you should have it, Beti kind of works and you see you have a lot of clients on it now, you should see like happier employees and heavier kind of customers because there's less reruns, people get paid more correctly. Do you see that in your kind of renewal rate with clients? Like is that something that -- or do you expect that to see in renewal rate clients?

Yes, clients that are using our product correctly, even if one of our competitors go in there and low bolt or something like that, we keep. And if a client does leave, we get back in a pretty short order because Beti is impacting their employees and the full solution impacts employees. You want to make it easy for employees to get paid, easy for them to enroll in benefits, easy for them to do their expenses, easy for their time off. And so when you look at the entire package that we deliver at Paycom, it is impacting both the back office HR payroll accounting, as well as recruiting what have you in the back office as well as those employees that utilize it.

Yes. Okay. I want to shift gears a little bit to talk a little bit more about the industry. If you think about it, like how do you think about industry growth that you're selling in? And the reason I'm asking is like if you look at the growth rates for pretty much everyone kind of came down and everyone is kind of struggling now with cycle like that kind of getting more competitive? How do you think about like the industry in itself and then like the last couple of years?

Yes, I would separate us out a little bit. We believe that there are things that we faced that are unique to us that had to do more with our innovation and excitement about innovation and I think so are some things that we worked through on that. As we look to the rest of the industry. I think you've seen maybe a little bit of a slowdown in growth. It's still the same players that you've really always had. Interest rate makes an impact on that as well as it continues to or has continued to moderate and now reverse a little bit. And even for us, I mean as we look into next year, which we would expect to provide more disclosures around interest rates and even break that out we wouldn't expect to have a growth rate ex interest next year dissimilar to this year. And I do think there'll be a point of inflection at some point as we're moving through both our client base as well as our sales organizations continuing to do very well in sales.

Is that Craig's last project like you agreed?

Yes, as part of the segment reporting, I mean we'll have more disclosures probably around the amount of -- flow revenue we have earned.

Okay. No, that's interesting. And then so from your perspective, it doesn't feel like the market is slowing down or like the opportunity set has kind of changed compared to where you were years ago?

I do not know of any meaningful players that we compete against that are any different than what we competed against in 1998. They're all the same players for us. And so -- and I do think you've got a bigger market. And so, again, we've only got 5% of it. I believe, when someone utilizes our system fully that it's very difficult from any competitor even integrating with multiple other businesses to be able to exact the same result that we do for business. And we're accelerating. I mean we're in a innovation at Paycom for our industry and the clients. When you look into the future businesses, we'll use these products differently. You'll navigate it differently. I mean, it will be command driven. You won't go in and navigate it and go to this form of that form. And so those are the things that we're focused on. Those are the things that we're delivering to the industry, and it's been able to do complex things very easily. And that's kind of how we were -- that's how we were created, and that's how we continue today.

I mean one of the -- like you understand where we are coming from because to look at the numbers and stuff. Like maybe one different way to think about it or like to answer is like, if you think about your sales scatter out selling, like how is that -- like you talked in the past about like, okay, making President's Club or like what's the ACV or like what's the revenue you guys are selling, like what are you seeing that evolution of your sales guys being able to sell?

Sales is having a very good year this year, and we're very happy with that group. We're selling more units our sales revenue that they're selling is also increasing. So new business revenue. So we've been very happy with that group. I've always felt like we've had the best sales organization. We've refocused on certain training initiatives that we have, and it's been going very well.

So then if you think about it, you feel it's good and it does feel like client retention is getting better, now that we kind of through this stuff. So from that perspective, it doesn't look like there's better times ahead?

Well, I definitely feel like there's better times ahead. And I wouldn't say what we've had in the past was bad. It was just unique to us. We did have a shift, and the shift was important. It's important for clients to get the full value achievement of what they do. We have not updated on retention, but all the moves that we are making is to create a more satisfied client that is achieving the full value of the software that we've sold them. And you still do have some Beti cannibalization, if you will, that's out there where we're not having as many rerun payrolls or tax problems or what have you, we're able to -- I'd like to call it bad revenue. I mean it's revenue, but -- the only way we get to it, someone had to mess something up. So if you focus on prevention, that's going to have a little bit of an impact. And then next year and kind of as we've already experienced with the lower interest rates, that creates a little bit of a headwind.

Okay. Yes. And then with all the Beti news, we kind of forgot a little bit to talk a bit about your kind of move upmarket, international. Can you update us on that one? Like what's the journey there?

Yes. I mean we're continuing to go up market. We're having success there. I will tell you that with our new sales staff that we've been bringing in, with our new training, we have focused them until they can get 7 or 8 sales in the mid-market. We're now not allowing them to go upmarket, which is producing more mid-market units for us than what we had in the prior year.

And can you remind us like how do you define those -- what is the mid-market versus upmarket for you?

Well, I mean, I would say in the 50 to 500 market is going to be more our mid-market, like that. It's going to be more a large market.

And then the -- do you see a change in the industry a little bit on the upmarket side? Because I remember, and we're going back I'm aging myself here as well, like going back to like when you IPO-ed, remember, we talked with clients back at the time, and there were when you talk with like a 10,000 employee customer, they were like, no, no, Paycom is like, sort of I want to do it myself. I want to own software and do all the little 100 tweaks. But I think the world has changed a little bit. Like what do you see on that upmarket side of people appreciating the full value that you're providing here?

Yes. I mean, well, it makes it harder to sell sometimes but easier for them to see the value. But sometimes when you're replacing 18 products at market, I mean, it's a big meal to eat at once. And so -- but we've also made a lot of enhancements and innovations to our software that make it even easier for people as well as the back office up market, they have a low tolerance for complexity. I think everybody has a low tolerance for complexity in regards to software these days because software has gotten easier. And I just can't say when I look and look at the upmarket software that people are using and integrating and then rolling out to their employees. It's still pretty complex. So I definitely think there's opportunity for us to continue to capture share as we go upmarket as well as continuing to be focused in the mid-market as well.

And then how do you make sure that you don't end up with elephant hunting? Because that happens often like, oh, I go off that is kind of 20,000 feature and I'm not selling in the meantime with luck?

Well, I mean, part of what we did is for new reps now once they come out of training, we've eliminated their ability to go do that because that's exactly what someone did. But I don't think you can eliminate it all the way. I mean we do have weekly quotas, that helps. I mean you go elephant hunting, you might be on a deal for 6 months. So I do think that helps. But you're going to have that in any good sales organization with reps that have had success up market, they tend to continue to like to stay there.

Yes. And then more on the national side now, like how is your thinking about new offices? And remember a few years ago, we were like everyone was super obsessed about like, oh, how many offices do you want to open. I think we kind of all learned that's kind of like a city question. But like if the world is getting better, does that mean are your willingness to kind of do more on the office side is kind of increasing? Or how do you think about that? How should we think about that?

Yes. And so our office openings and how we increase our sales reps taking a current sales manager that's successful. We relocate them to a new territory where they have zero reps, and then they build it from there. And then we backfill the office that they left with the sales rep who's ready to be a manager. And whether or not we open up offices or not is really just dependent upon the strength of that process: how many managers do we have ready to relocate, how many sales reps do we have ready to become manager. I will say that right now, at this point in our business, we're more prepared to open up offices than what we were 2 years ago, just because of that big strength. And so we'll see. We've never -- we've only opened up 1 office ever in the fourth quarter, so it's not typically -- it's not usually what we would do. But as we move into next year, we're going to have opportunities there.

Is part of this -- like I heard it from other guys that attrition was actually lower like because in bad times, like people want to stay with the company, they were successful so they didn't move around. Does that help you to increase like the guys that are already you have more of them available now because there was less attrition? Or does that mean trimming it?

I mean our sales attrition is based off of performance. And so if you're performing, you're staying and if you're not, you might not be. Maybe that's having some impact, but I would say it's more increased performance around sales reps. And success builds confidence, which has been continuing to do the job.

Yes, yes, yes. Okay. And do you still -- remember, like a few years ago, we talked about like the number of ZIP codes you kind of still can cover? Have you reported that opportunity set? Or are we still kind of in the same boat ride?

Yes, we haven't changed anything. We did change things up in our sales training for our new people coming in because, again, the type of focus that we were focused on, but nothing in regards to territory or how we go to market or step to the sell and any of that.

And we talked upmarket like what's the story on the international side?

We're doing well internationally. We do have 4 countries that we developed native. And so we're actually running the payroll ourselves. We do have a very strong...

Can you -- like Canada, U.K.?

Yes, Canada, Mexico, U.K. and Ireland.

Ireland. Okay.

Which Ireland kind of gets into the rest of Europe but then we also have our global HCM product, and that's a product that, regardless of what country you're in, you can actually utilize that product. I believe it's in 16 different languages right now, and that's global HCM separate from payroll. And so sometimes people will run something in our global HCM and then they will send it to an in-country partner, if you will, they utilize. But in 4 of the countries, we actually run the payroll ourselves.

Yes. Okay. And is that more -- if you think about it, do you think that's more helping as you sign bigger U.S. companies that -- because they will have more international. So it's more that's the starting point? Or do you think more about getting like an international and international customer? Like how do we think about the go-to-market there?

It's definitely for U.S.-based right now for U.S.-based companies that have locations elsewhere. That's not to say, I mean, we have demand in Canada. I mean we have people calling us wanting to. It's not to say that we wouldn't have an office in Canada at some point that just sells Canadian payroll. But for now, it's really for U.S. businesses that have locations elsewhere. You're going to have businesses that have large companies usually are going to have an international presence. But I also think you see that in the mid-market as well, and it's just important to be able to check those boxes.

And then how do you think about -- I mean you have solutions for 4 countries. How do you do the sales? Do you have like a sales team in the country? And then remember, you've been very disciplined in terms of like how much of a ZIP code sales territory is allowed to kind of sell into, like how do you do it internationally and can they do the whole country? Or do you start like small? Like how do you do that?

Well, our contact is usually in the U.S. in these or at least our point of sales contacts in the U.S., they may have a partner in one of these other companies that we talk with, but we do not have sales reps in these other countries.

Yes, is that -- would that be that's further down the line if even...

Yes. I mean that opportunity exists. I mean, we have 5% of the U.S. TAM.

Yes. So you have like a lot of...

Yes.

Yes. Okay. Perfect. Yes, makes sense. And then the -- if you think about kind of -- I know the answer, but I want to ask it anyway. If you look about your industry, there was a always a tendency to kind of think like, okay, well, I want to do something else so I buy a company and in adjacent areas where Paylocity just did that on a kind of adjacency or ADP just would do stuff. With greater size for you guys, is that -- does that come up with you? Or like we've been doing it for 26 years now. I'm an organic guy, like how do you think about that?

I think those are things that are oftentimes presented to me. Craig knows that. He oftentimes presents them. I think it's -- up to now, we've wanted to impact the client experience through a single database. I think that I'm not saying never because I just wouldn't say that. But I think it would -- for us, it would have to really be a unique opportunity. I don't think we would do it like our competitors where you're buying and deploying those products. For us, we're heavy into the software development and a single database and point of usage. And we're moving to full system automation I mean if we're integrating with 8 other products, I do not know how you get to full solution automation. So that's what we're focused on. So I kind of leave it at that.

And then I almost feel the kind of -- it almost feels it that I've been waiting for so long, but GenAI or AI. Like if you think about it like in your space, how do you think about that for what you guys want to do?

We're using it. I mean we're using it both internally. We use it when we develop software and a lot of our software has different components of it when you think of assembly line or what have you, you would expect AI to be a part of, and you take -- you think a full product goes through an assembly and there's a part of assembly within a product, you're going to have parts of that, that are AI. Our industry doesn't really have a tolerance, if you will, for AI confusion. It's got to be 100% accurate. And so there are some areas that it's harder for us to use it in than others. But even internally right now, about 25% of all of our service is being handled through AI. That wasn't the case a year ago. There's areas of our business that we're automating. We're having interest rates go down, that does impact our margin, but we also have automations increasing the back office. And that same type of automation we're bringing to the back office of our clients. And so that's kind of the world we're in right now. Do you want to make 20 decisions today and tell us how to configure this and we can automate everything in 1 specific product or do you want to make 2,000 decisions every single day because you did not automate? And so we have the opportunities now that we didn't have before.

Yes. And then like, let's -- how do you think about pricing and packaging there? And like you've been always been more conservative because it's part of like what I'm offering, so I should give it you. There's obviously other vendors not in your space that was like, oh, yes, here's AI, just pay for it and it's not -- it works either way. How do you think about like the kind of monetization of this? Or like how does -- how it feeds into your offering?

Well, greater automation produces more ROI probably relieve certain headcounts within organizations definitely eliminate certain exposure and liabilities to what comes with doing something wrong. I mean most of the things we do in our industry, there's a big penalty if you get the tax wrong or you're paying someone longer. They were supposed to enrolling benefits today, but they did not. Now they have a health concern and they don't have coverage. And so there's a lot that we do and it has to really be perfect. I've kind of said in our industry, 99.9% accuracy gets you an F. It's either correct or it's wrong. And we're also in a business that's high risk and low reward. I mean, if you do it right, so what, people expect it to get paid. They expected to have the right over time. They expected to get their benefit. And so it's very important that anything we deploy gets to that 100%. And then so because of that, you have to be a little careful about what you do. But I believe AI and how we utilize it, it's really 2 things. It comes down to your source of truth and what you ask it to do. If you do not have the right source of truth or if you ask it to do the wrong thing, you've got nothing. If you get both of those 2 correctly, though, there's a lot you can do with it. So it is a thing. It is already impacting our industry and definitely will impact it into the future even more.

Yes. And then last question I wanted to have is like -- Craig retiring now. But you have also other changes on the team. And how should we think about it? Because I have a lot of investors saying like, what's going on here? Like to me, it's like a very independent of each other. But like if you get that question, like how do you enter that?

Just from the changes within our organization? Well, I mean, I've had -- we've been in business 26 years. I'm on my third Chief Sales Officer, Jeff York still with us. I talked to him constantly. I've had 2 CIOs, Brad's with us. Our Chief Operating Officer, we've had some changes there but Randy has been with us for 23 years, doing a good job, and Craig's been our only CFO. So I know there's been some changes this year but I believe there's a lot of stabilization. We have very deep benches. And gas in the tank and institutional knowledge is very important. Craig, he's just not going to get paid. I'm still on this call. Let me know. But and that's what a successful career should look like for people. I mean, you come in a company's $3 million in revenue, you get it to a point that you're at right now. And if you get the opportunity to go do the things for yourself, great. I mean I think that's a celebration that all the company has. And he'll be followed up with someone strong as well.

Yes. Perfect. That's a good closing statement as well. All the best.

Thank you.