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

Good afternoon, everybody. My name is Mark Marcon. I follow the human capital technology and solutions for Baird. Our next presenting company is Paycom, a growing SaaS provider of payroll and HCM solutions to companies with between 50 and 10,000 employees that's grown very rapidly over the years, all on an organic basis with some of the best margins in the industry. It's one of my favorite American success stories. Chad Richison, the CEO, Founder and Chairman, basically ended up starting up the company with an SBA loan and 13 credit cards and was able to build that into one of the fastest-growing and most successful companies within the space. So we're always pleased to have you here, Chad. And then we've got Bob Foster. It's a pleasure to welcome you to a Baird conference for the first time. Bob is the CFO. He joined the company back in 2022 and assumed the role of CFO in 2025. We've always had Craig over here with us, and it's a pleasure to meet you. I'm going to start off with a real softball. How do you feel about the Oklahoma Thunder?

I think they're going to do very well. We have an advertising agreement with them. So the more games they play, obviously, the better it is for us. But I think they'll sweep it [ in 4 ].

You think they're going to sweep it [ in 4 ]? All right.

I think Denver was probably their hardest, but we'll see.

We'll see. Well, there's going to be a lot of airing of Paycom stadium.

I've got one question I've been asking everybody. So I hope you indulge me. It's not a Paycom-specific question. But post election, there was a lot of optimism with regards to the environment. Since the election, we've had Liberation Day and obviously a dampening of animal spirits. Right now, it seems like the equity markets are basically shrugging off tariff concerns. What are you seeing in terms of smaller- and medium-sized businesses and up to the enterprises that you're dealing with from that perspective?

Yes. I mean we're not seeing anything differently than really what we've seen in the past. I mean we have such a small part of the TAM right now. So when we're doing well, it's because of the plans that we had and the strategies that we deployed to do well. I mean our 2 largest competitors from a size perspective, if you combine both of their client bases together, they have 1.7 million clients, and we have 36,000 clients. So for us, there's always demand there. It's how are we going to go capture it. And we have not seen anything politically or macro or otherwise that's impacting that to the negative for us.

And how has it impacted your spending programs, I mean, just in terms of just the general macro uncertainty?

I would say our spending is starting to change, not -- but not because of that. It's really because of our product releases. And we've been focused on automation, not just for the client, but also on the back end for ourselves. And the more we focused on that, the greater the impact that it's had on where we spend our money.

That's great. Now I'd like to shift over to Paycom-specific questions. Beti, it's a great product. I've demoed it multiple times. I think it's fantastic. I'm wondering if you can talk a little bit about the evolution of your approach to marketing Beti, to messaging around Beti. Because when we think about it, it's like the most automated solution, the ROI, those are all things that are very tangible to HR decision-makers. How are you -- how has that evolution gone? And where are you in that journey in terms of marketing that?

Yes. And so we started off payroll in the early days, and then we added time and labor management and benefits, expenses, learning management, just all of that, that we have today. And it was all in a single system as it still is today, and you eliminated the need of -- for integration. If you kind of fast-forward and we've developed more and more products that allow you to utilize a full system and make it count, well, Beti was one of those because we're doing the time and labor management, people already using the expense management within our system. Obviously, we're doing the payroll and so -- and time-off request and what have you. And so you were able to bring that all together and actually put it in the employees' hands where they could fix and edit payroll before they became issues after they were paid. They were able to fix problems and prevent things from happening. And so that was a piece that we did, and we rolled that out, which really put the payroll into people's hands. As we look into the future, that changes even more. I mean I mentioned this in December at a conference that I was at, and it's still true today. I mean the future of our industry will all be command driven. You will not navigate a system. And we expect we'll be rolling out our version here in the next -- this year. But the future of our industry, you'll tell the system what you want it to do or you'll ask it for the information that you want it to give you. We'll not go screen to screen and have to navigate it. And that will be both at the employee and the employer level. There are so many things that -- there's not like 14 different ways to get a payroll right. There's only one. There's not many different ways to get your time card right. There's only one. I mean it's either perfect or it's wrong. And so when you have something like that, when you're always trying to hit something that's exact, you can automate it. You've got to know what you're doing. But the better we've gotten with these tools, which we're releasing a lot right now, the easier it is for us to see kind of what the future is going to look like. And so we have all this data. And that's different than our competitors. Our competitors, they try to exact the same type of result, but there are multiple systems and there's integration. When you move to a command-driven system, not unlike Beti, you require all those data pieces. So for instance, if I asked, tell me about Mark's career on our system, and I'm using it on my phone right now, I can say, tell me about Mark's career. It's going to tell me everything you've done so far at Paycom. And because you used our applicant tracking system to apply, because we also have all of our preemployment services, it's going to go through all of your past jobs, too. I can even ask it, tell me about your performance. Well, all your performance and compensation is in our system, too. And so that's the point is today, in order to utilize systems, you have to become maybe somewhat of an expert on the administration, especially on the back end. And so with the command-driven system, you're putting the information as well as the tasks in people's hands and you're putting it in more people's hands than what you could have before. If I need to know something about a specific employee or department, I can obviously use our system. But it's been a while since I've gone into advanced report writer and run a bunch of different reports. And so I might have to ask somebody to do that for me. Well, a command-driven system, I don't have to ask anybody to do anything. I ask for it right then, and it might be small. I might be asking...

What's an example of that?

Okay. This could be an example. I'm about to promote this person. I need to make sure we're giving them the right title. What's their boss' title? I mean that might take me a second. I can go into the system and find it. I just asked the system. I can say, who's taking time off? What does the schedule look like in the next -- who's taking time off? Anything that I have a question about. I wanted to see -- I ran into someone in the hall the other day, and they're part of a dev group. I'm heavy into dev, have been back since November. And I'm like, where did this person come from? What was their hiring -- what did they do before now? What did they do before this? Maybe normally, I'd have to ask somebody that. I just asked my prompt. It gave me their information. So that's the way the future is going to be. It will all be command driven. You won't navigate. You'll command the system to go get what you wanted to get -- retrieve for you or to go do what you want it to do. And so that's just one thing that we're doing. But there's a lot -- as we look into the future, there's a lot that we can do now that we couldn't before.

Well, you've been leveraging AI and you just released Ask Here. What percentage of those capabilities that you're talking about does Ask Here currently have?

I mean Ask Here is not -- I mean, it's not command-driven yet. Ask Here is going through and filtering through their list of questions they've already answered all in the past. And they'll go through and filter through their handbook and things like that to answer a question for them. But absolutely, we use AI in that. A lot of AI is used to determine what did you ask. It might be your voice, it might be -- I can ask -- in our command-driven system, I can say, when did you start? What does that mean? When did you clock in today? Did that mean when were you hired? What does that mean? When did you start? Well, that's part of AI. You have to be able to work with that. You have to be able to speak the language and know that these are the different variables of that speech. And so that's a lot of what we work with so that we know what to return to you. My point is in our business, you have to be 100% accurate or you get an F. I've always said that. If we're 99.99% accurate, we get an F. Someone didn't get paid right, there's tax problems, there's liability, what have you. And the good thing about our business, though, is it does calculate to an exact answer. And because of that, we are able to automate it a lot easier.

When are we going to see this?

And I would say within the next 2, 3 months, we'll start rolling things out.

Within the next 2 to 3 months. So when I go to HR Tech, I'll be able to demo it?

In October?

Yes.

We'll see. I'm hoping. I've got it right here on my phone right now, but we'll see.

I mean it sounds really powerful. I mean can you actually run like applications -- like if you're running a business, could you actually put in there like how much would it cost to run a third shift?

Our system -- well, if the data is in our system, you can come up with it. So there'll be different variations of it. But in the beginning, you'll be able to ask it any question about an employee, and it will pull you any information that is in our system. So...

It sounds pretty exciting.

I'm sure our competitors will come out with one tomorrow and say they developed it. We'll see.

We'll see. Your TrustRadius scores are really big -- I've looked through the annual report, you said your #1 priority was actually customer satisfaction. Can you talk a little bit about that just in terms of -- because when you went through the Beti transition initially, there were -- among some of your players, some of the people on your team, there were certain people that were a little bit heavy-handed in terms of talking to clients about switching over to Beti. How has that changed? What are you seeing in terms of your client scores, client scores fully utilizing the system, things of that nature?

Yes. I mean we're doing a lot better with that, obviously. We were so excited about Beti because of all the things it does for a client. I mean we can look and see how many payroll issues each client has every payroll. And so when you're able to prevent those, that really impacts the employee that's getting paid in a big way, and then it obviously impacts the client because they're the ones that have to pay to fix it and/or live with an upset employee. I think there's a stat that says if you pay an employee wrong more than twice, there's a 50% chance they're leaving kind of thing. So people expect to get paid right. I mean it's not -- it's just what we all expect. And so -- but I think as you look into the future -- and again, you're talking about Beti. We're not -- I think we were disrupting a little bit of our client base. I don't -- if you're on Beti, great. If you're not on Beti, you're still on the Paycom system, it's the most automated system, and we want you to stay on Paycom. I do believe, when you look at the future, it does make more sense for employees to be able to do things that only they know if it's correct or not anyway. So it's not something that we've stopped on. But I think that we've recognized that our priority isn't always our client's priority at that moment. But we haven't changed our goal of making sure that all clients get the opportunity to achieve the greatest ROI that we have to offer.

And what percentage of clients are now on Beti?

We haven't updated that. I think the last update, we probably said 65%, 70%. It's more than that now, but we haven't updated that because we see it as 1 client base, not 2.

But it sounds like the client satisfaction scores are going up across the board. Is that correct?

It is. I mean there's been a very big focus. I went back into -- I had our product group forever, gave it up for 5 years, took it back over in 2023. And so we've been really focused on not just Beti, not any 1 product, but the entire usage strategy. And a lot of it comes down to configurations. A business has the best intent to utilize a system of full automation and then something changes in their business environment. They buy something, make a change or something changes in ours. We're rolling something new out. So it's very important for them to achieve that ROI for us to make it easy for them to digest changes and not have to do a lot of work to receive the value. And so we've been focused on that for quite some time now, and it's making an impact, as you see, in both whatever score you're looking at as well as in our Net Promoter Scores that we measure.

And when we think about like client retention, I mean, if the scores are going up, naturally, you would assume that client retention rates are going to start moving back up. Can you talk a little bit about that?

Well, I think we've talked about we have the haves and the have-nots. We've been trying to -- and it didn't cost you any more to use the system correctly. It's the same price. Say, it's a hammer. I go to the store to buy a hammer. I turn it around and use the claw side to beat in the nail. I mean it didn't cost me any more to turn it around a hit the nail the right way. And so that's really about what we're doing right now to drive usage and to help clients achieve that ROI.

I mean your client retention scores had gone up into the 92%, 93% range. Do you think we can get back there?

That's our hope. Yes. I mean definitely. The hope is that the greater experience and the greater ROI that clients actually achieve, the longer they stay. And everything we are doing right now is about that. It's about increasing the value that the client can achieve as well as increasing opportunities to go to market. It's really both. We're looking to deliver more of the product to clients that hadn't used us in the past as well as working with our current client base to get them in a better position.

I was going through your website, I saw a number of examples of clients that left you that have come back. Can you talk a little bit about how much -- how often you're seeing that?

Yes. I mean we increased our strategy to get clients back. You think of a breakup. And sometimes, you've got to go ask that person to come back to you. And I think that we've been through that. And we have a little bit different strategy for how we'd go after lost clients, no matter how long they've been gone because they didn't impact their situation. Maybe they got a lower price. Maybe they got -- but their situation didn't change. And so our opportunity is going back out there and delivering on the promise that we know that we can deliver on, and that's been a focus of ours.

I'm wondering if we can switch over to go-to-market. You had Amy takeover sales. Can you talk a little bit about some of the things that she's done to fine-tune the training, the selection, what sort of opportunities people go for and what that's done in terms of sales productivity?

I mean back to basics is all I would say. I would say that we eliminated a lot of the extra things that we implemented into training and just went back to the basics for us. I mean our training had gotten to 17 weeks, primarily off-site. I mean -- and after about 5 weeks, you're untraining people. And so we started implementing a lot more of the role-play that we've done in the past and really focused people. I think we had a lot of elephant hunters and focused them on unit counts as well. So there's a lot that we did. Jeff York is still at the company, has been at the company. I know he retired as a Chief Sales Officer. I mean I would say he's probably the greatest sales mind out there. He continues to work with Amy every day as well. And together, they've kind of gone back to the basics. And it makes an impact for us.

It seems like it's working. I mean, if we take a look at like your sales trajectory and your bookings, there was a period of time we were consistently growing 25%, 30% organically. Obviously, there's a lot of larger numbers. But it started trending down, and then it's stabilized and it looks like it might even be trending up a little bit. Can you talk a little bit about what your aspirations are in terms of sales growth? Because we take a look -- it's like take ADP and Paychex combined, 1.8 million clients. You've got less than 40,000. There's natural churn. There's natural opportunities. How are you thinking now about the potential revenue growth rate and the algorithm there?

As much as we can get, I mean, I don't really think of it in terms of a percentage other than to your point, there's 1.8 million clients out there with just the 2. You add everybody else, there's a lot more of that. We have less than 40,000. We're the most automated solution. So we should have more clients, and that's a focus of ours. I think it's very important that we remove impediments to value. There's a lot of things you buy. I mean you might have bought a refrigerator that has technology in it. It can do a lot of things, but you got to set it all up. Do you, though? There's different techniques now and into the future where a system can work with you to make sure that you're getting the full value and keep you up to date on it. And so that's really, I think, where we have the -- that's really the challenge of our industry. I don't know that it's just unique to Paycom. But it's something that we've been driving toward. And it's in our hands to be able to fix it. I mean we can. So...

And part of the growth algorithm is also coverage of territories. You've got 57 sales teams now. You just recently started up a group of them. But you went through several years where it was relatively stable without much change. How are you thinking about the number of sales teams that you could ultimately end up having? And what's that going to end up doing in terms of driving the growth?

When we looked at our opportunity -- and again, a sales group is measured by the number of prospects in a territory. About a couple of thousand prospects in our sweet spot, that's a territory right there. At one time, when I looked at it, we could have over 100 sales teams just with the number of prospects that we have out there. You're not going to have 1 sales team in New York City or 1 sales team in Atlanta. But you would have 1 in Tulsa. And so some cities, you can have multiple teams. And so we looked at -- at that time, it was over 100. Today, we're at 57. We hadn't opened up -- to your point, we hadn't opened up any sales offices in the last 3 years. This year, we opened up 3. As you know, we take a current sales manager who's successful. We relocate them to a new city where they open it up, and then we backfill them with a sales rep who's ready to be sales manager. Our log jam kind of -- prevents us from being able to open up offices is if you have managers that aren't yet at the success level where we're ready to relocate them or if you have a bench that's not ready to come in and backfill those managers who are relocating. So when you have success in your sales organization, it kind of tells you when is the right time to do that. We did. And so we had an opportunity to do 3 this year. But I would say 100 total over time, when it makes sense.

How much time? Look, I mean...

I'd like to do it tomorrow, but it's a function of having to backfill and having success.

I mean given that algorithm in terms of having the...

I don't know, Mark. I mean it just kind of -- I hope in my lifetime. I mean I don't know. It's...

I'm sure you can make that happen if you want to.

But I believe what we've also been doing is growing the amount that any 1 sales rep can sell to. I mean we've got reps that sell $4 million, for 1 sales rep. I mean when we IPO-ed and worked with you, I mean, [ as a ] city would sell $4 million, if you're lucky. And so it's not just the number of sales teams that we add. It's also the amount, the productivity for any 1 sales reps continuing to go up as well.

Can you talk a little bit about the -- you're not only automating your clients' business processes, but you're automating your own. You already have some of the best EBITDA margins in the space. But -- and for a while there, it was stagnant or potentially going down a little bit. Now it's starting to move back up. How should we think about the margins as you're continuing to automate?

They're the same thing. Automating for the client is automating for us or automating for us is automating for the client. I mean anything that we automate on the back end is to speed up a result for the client, whether that's on taxes, whether that's setting up EDI files or benefit carrier, whatever. Anything that we can automate on the back end is focused on client value. And so whether we're doing it on the client side and there's just work that we don't have to do anymore or whether we're doing it on the back end and it's impacting the service that's being delivered to a client. We will always have a high-touch service model. I'm not going to automate relationships. But I think over time, you'll see service people shift out of a task management into an influence of usage model because sometimes people like to call and talk to somebody about how do I this, that and the other. I don't know that our system is going to mimic a conversation. But if you know the data you want, it will bring you the data. If you know the task you want to automate, it will do that. But I don't know that's going to automate the conversation. I believe that's going to be done through our service individuals. So I always see us having a high-touch sales model, high-touch conversion model and high-touch service model, but we're not trying to see how many times we can touch it, if that makes sense.

And so where are you in that journey just in terms of automation and...

One yard line, I mean, with what our plan is and where we are today. I mean I think if you looked at us compared to others, we're way, way beyond that. But I think for our own plan and what's possible today...

And so I mean that implies that the margins could actually improve much more than just small incremental changes from a long-term perspective.

Yes, I wouldn't say that's our -- I mean, I wouldn't say that we're doing it for that reason. But I do think the more automation you have, everyone wins, right? The client wins because they're getting the value without having to crawl through the forest to get it. We win for the same reason. I mean the only reason a client calls us is due to a deficiency in the product that we make. Why are they calling us? I mean we make the product. We have control over all of it. And so we can also provide the solution there as well.

You recently completed your fifth office in your big corporate park. CapEx, some people are assuming it may end up coming down a little bit. Can you talk a little bit about capital expenditures and capital allocation and how we should think about free cash flow conversion relative to EBITDA?

Bob?

Yes. So no, we have -- we finished a lot of the infrastructure at the corporate campus. Our data center in Arizona is online. And so when you look at the free cash flow, we had a good quarter. But we're also finding things -- we're still investing in our product and development. And AI is not expensive -- or not inexpensive to roll out. So we're still going to be opportunistic on how we spend that. We're not -- we haven't guided to free cash flow, but we are -- we focus on it internally, for sure.

But I mean would you anticipate -- even though AI is not inexpensive, would you anticipate that the free cash flow as a percentage of EBITDA is going to increase at least marginally over the next 12 months relative to where it's been?

I don't know that we can guide to that. I mean I think that we are -- I think you're going to see a shift away from buildings into -- because we're substantially built, even as you look at our employment base, we're still automating a lot. And then I think there is equipment and opportunities there. And fortunately, even that's coming down at a pretty good rate and especially when -- which you can get from a capability. So we are ambitious in what we're doing. And so -- but I don't think we know yet. We're doing what needs to be done and we haven't -- I wouldn't know yet. I wouldn't say we don't know yet. We know what we're doing. But I think from a percentage standpoint I don't think we're ready to talk about that yet.

Unfortunately, I think we're out of time in this room. But we do have time for a breakout session. So please join me in thanking Chad and Bob for a terrific discussion.