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

Welcome to our next session. Really happy to have Chad and Bob here from Paycom. We're going back so many years now. It's kind of nice to still have that relationship.

If you think about this year was very volatile from kind of many different aspects. If you think about tariffs, new government, DOGE, et cetera, from your perspective, how has the year kind of played out so far?

We've had a really good year. We came into the year with goals to focus on world-class service, client value achievement and then, of course, full solution automation. As we move throughout the year, we were able to get our clients to realize the value of the software as we continue to work with them and get them in a good space. We worked on our service organization to continue to enhance our world-class service model. Our clients today are, I would say, in a much better position, and we're seeing a lot of client satisfaction. Those ranges continue to move higher. We've also focused on full solution automation, along with the IWant process as well. So we've been able to roll out some good products.

And then the -- if you think about it, like what -- where I get a lot of questions on the -- from investors on the macro side, like you guys had very solid results, but there were some other players in your space where the numbers didn't come through like that much. And then the question was, was it macro? Is it kind of competition, et cetera? Like how do you think from kind of employment level conversations on that, how that's playing out for you? I mean not for you, but like for your space.

Yes. Well, I mean, we've seen the press releases and those types of things. We're not really seeing anything in our numbers from an employment perspective amongst our clients. So it's not really easy for me to call out anything on that. But as we've moved throughout the year, I mean, we've had a lot of success in our strategy and going through our full solution automation. And as we kind of look into next year, we're really excited about doubling down on the sell side. I think when you looked at a couple of years ago with our opportunities of what we needed to do from a client focus and make sure they were achieving the full value of the product, we focused on that. And our clients are in a really good position right now. We had some clients that left us that returned very quickly because their total cost of ownership went up and maybe they left for a little bit lower price, but what they experienced after doing that was an increase in total cost of ownership of the system and that lacked automation. And so we've had a lot of clients come back. Our service levels are as high as they've ever been in our company. And our product is strong...

When you say service level, how do you define that?

Client satisfaction levels that we measure. And you would expect that to have an impact on client retention. That's something that we report once a year. And so we're just having a lot of satisfaction out there with both the product as well as our service model. Our opportunity as we look into next year, and this is going towards your macro. I think that -- I don't think there's anything stopping us, but us from that standpoint. I think there's a sales opportunity for us now as we look into 2026. And that's really what we're focused on now. We feel really good about what we've done with our service model. And we feel really good what we've done and going back and working with the clients to get the full value. We feel really good about where our product is right now. So really, for us, it's a go-to-market recommitment and what we're doing with that. We only have 5% of the total addressable market out there right now. So there's plenty of opportunity for us. And as we're moving into next year, and we're getting set up right now, that's really where our commitment is next year into the sales growth side.

Do you think investors over-index a little bit macro, like I don't know how your conversations went so far, but like that's the one question I get all the time, but then I always try to say like, but Chad is kind of -- macro is one thing, but he's driving the company forward like more.

Yes. I mean I don't see where macro is going to necessarily stop us from working the plan that we have into next year and being able to capture the growth that we want. This year, we had recurring revenue growth of 10% and adjusted EBITDA at 43%. As we look into next year, we're very focused on being able to increase our ability to grow. Even opening up, we have a focus over the next 2 or 3 years to be able to open up several offices with what our plan is. And so it's really just right now a focus on growth because when you look at all of our other indicators within the company, which in any given year, I've been doing this for 28 years. In any given year, you have something that you're playing whack-a-mole on. And this year is just really good from everything that we've done. But our opportunities as we look into next year is increasing our sales opportunity. So we've been really focused on that for the last couple of months now.

And then is it capacity -- well, but you always were kind of in [ per sales ] office, you always had like 8 per sales office, et cetera. So if you think about like capacity increases, does that need to be like new offices then openings? Or how do you think about that? Or is it...

Both. I think there's an opportunity for us to add within cities that we're in, and we need to open up more markets. And the other part is taking the people we have and achieving greater success. Our city in Tulsa. Tulsa sell probably $9 million in new business this year. Our top rep across the company will sell over $4 million. And so when you look at our total number of reps and our total number of cities, not everyone is doing that. And so we have an opportunity to increase that within our current group, but we're also really recommitting on the number of salespeople that we bring in. I think that's our one opportunity as we look into 2026 because I feel really good about where our product is and also our road map of what's coming out next quarter and throughout 2026. I feel really good about how we've worked with our current clients and helping them realize and achieve the value that's received when you use the full system. And I feel really good about all the work that our client service group has gone -- has done to become product experts so that we can really service those clients very well. And so when we look into 2026 and beyond, it's really that revenue growth opportunity that we have. We're a very strong sales organization. And I think as we've gotten together over the last couple of months to refocus on our value proposition, which has changed over time. It's still the single database, but it's the value that can be derived from using it. And today, our value is really decision logic. It's not -- now that you have the employees using the single database and using the system, it's how do we get managers, administrators and others out of the system and allow the system to decision -- routine decisions that should be consistent. And so we've spent a lot of time developing that within our system, and we have a lot of clients and prospects excited about those opportunities and already getting -- already generating great ROI from the utilization of those.

But that sounds almost -- and kind of leads us probably into the AI growth because like if the system is more automated and it's more decision-driven. So if you think, like I want is more on the user interface kind of I would think, this one sounds more like it's deeper in the system.

You're exactly right. It's not -- AI is kind of your friend. If you go all AI, you're going to miss a few things. And so there was an opportunity for us to automate a lot of these decisions within our system. And some of it is a configuration opportunity, but you also have AI involved in some others. The way I would look at AI for us right now is it's very -- outside of the analysis and the coding and other things that we use for, I'm talking about from a client's perspective of where they're seeing the greatest value. It's from not having to know our system. I mean AI is removed a lot of the need to know our system and be trained on it because it is -- think of it as more of a portal to the value that someone has available to them, which before was a lot harder. So now a lot of the employees that even come on to the system since I want with our clients, they don't even really know what the software looks like. They're just using the IWant technology. And so they're not navigating throughout the rest of the software. And so that changes habits at the employee level, which has opportunities to change it at the manager level, policyholder, administrators and then, of course, in the finance department. So we're seeing that increased usage within our system from a value perspective, and that's our opportunity into the future.

I mean I have to give you credit again because like we saw one of the more upper end of the market peers just spend like $1 billion on a system that might just kind of solve that. So the IWant was like how long did you work on that?

I want...

It's out already, yes.

Well, IWant was a large group of us locked in a room for -- we worked on it for about 14 months probably. But I would say the last 8, we were kind of -- we worked every weekend and night until we -- there were times where we had it almost done and then we'd throw something else into it and go backwards. There would be times I'd come in and like what do we do to this? We had it there. And so -- but we've gotten a lot better at that, and it's working very well. I mean our clients love utilizing it. And it's just sped up the process for a client to really achieve the value that's available to them so that they can kind of realize that.

Yes, yes, yes. And then how do you think about like does that drive already improvement on the sales and sales engagement because with IWant, you have like a nice differentiation factor in the market. Does that kind of show up already?

It does. But it's a product and not a strategy. IWant is a product, not a strategy. And so again, I think throughout the year and when you really look at throughout our history, as we've released products, we kind of -- we go out and we sell that product. Now whether it's Beti or GONE or IWant, or all the products that have come before. But when you take a step back and you look at it, I mean, we're automating a lot of these things that are critical for a business. You take something as simple as time off request where you have an employee request and time off at 7:00 tonight. And time off is not about who gets time off. It might be for the employee. For me, time off is about who comes to work. It's managing how people come to work. And so before, when we looked at our own data, 50% of time off requests were decisioned after they'd already been paid. So that's obviously not a decision. So you have employees waiting on decisions. They put request out 7:00 at night, then they chase their manager down the next day. And that manager has to decide who's on maternity leave, maternity leave, bereavement, jury duty, sick, what are my shifts that I need covered, and they have to go through all the -- does this employee have enough time? Are they in good standing? Are there overlapping shifts? And so if someone is trying to do that right, they're spending so much time just figuring out. Well, that's something we've automated through GONE. So there's no management decision on who gets off. The system knows the criteria that each person set of what they need for their capacity to run their shifts. It knows what levels people are achieving their policy for both paid time off agreement, what have you. Nonproductive time represents 10% to 12% of a company's labor budget. And the labor budget is usually #1 or 2, the largest expense. And so it's going and manage. So these are opportunities. This is about one, but this is an example of what decisioning logic and automating the system. What happens is they're not even doing it. I can't even find anybody that knows their own vacation policy. An employee or a manager or even the policyholders. And so when we're able to automate routine decisions where you expect consistency, there's a lot of value in that for clients. We were working with 1 prospect and they noticed that their revenue down on certain days. And when we went and we unpacked that, it's because they didn't have people working the shifts. And we've all stood in line where you want to purchase something, but it's so long. And you're like if they just had 2 or 3 more people there and you just put it down and you walk out, whether that's that, whether someone's -- it doesn't matter what you're doing, whether you're in manufacturing or what have you. And the point is oftentimes they did have those people. And so what you have is you have companies that are overstaffed as a company, but understaffed uncertain schedules and work. And so when you're able to put decisioning logic into a tool, it becomes the enforcer because most managers don't want to tell an employee that has 8 weeks of vacation and hasn't taken one in a year. Most managers don't want to say no to that. Even to the extent that they're willing to work a shift that's understaffed, but that impacts the company. And so by having decisioning logic throughout the system, we're able to get people out of having to move that data along, which I mean if they're trying really hard, they're failing and most people have given up to be quite honest.

And then how does it -- go back to my question, like how does it true up on sales guys engaging with prospective clients or going back to the installed base, like, well, first of all, is IWant, just as a reminder for all of us, like, IWant, do I pay for that? Is it part of the overall package and then, how is it with new clients?

Yes. And so our opportunity to monetize IWant is going to be through increased retention and through greater generation of new logo adds, if you will, that's our biggest opportunity. With products where we want 100% adoption, I don't really love to go through the process of trying to sell it to each person. But we do believe it will impact -- in our early stages, we're seeing it impact client satisfaction. And of course, the happier your clients are, the more value they're achieving out of the product that they're using, you would expect that they would stay with you longer and that would impact retention and also give us the ability to go out and sell other deals. There's a whole generation of Paycom users now since August that log in and they use the IWant interface. They're not navigating. It's where they go first. And so you extrapolate that out 2 or 3 years as employees move from place to place, and they have certain expectations of automation, even managers now, they don't want to approve time off because it can be automated. And so the more you can get people to change their habits and it's easy to get people to change their habits if it creates great value and it's simple for them to do. And so that's really -- that's really where IWant is going to help us. We've made it easier for a prospect to evaluate Paycom and see its value. And we've made it easier for clients to convert to Paycom. So we're really excited about how we're set up as we move into 2026 and beyond.

And then the -- how sustainable do you think that is as an advantage? Like if you look at your industry, you drove a lot of the innovation in the space, but there's kind of relatively quick follow-on for some of the stuff, like the single database for some of them is kind of impossible, so you can't really do that. But like how quickly do you think this will be like copied or how long -- how sustainable is that competitive advantage...

Well, I will just say, I think it's easier to copy the brochure -- actually what's being achievable. We're not seeing that out there. We're seeing a lot of people are still even focused on adoption. We're past that in the Paycom system. You already have adoption at the employee level. A lot of systems, I mean, for employees to be able to go through and do their expenses and their benefits and their payroll and their time off and their learning and their scheduling and everything in 1 system, I can keep going, recruiting and everything -- performance and compensation, doing everything in 1 system, usually for other businesses and their employees that utilize those, those could be anywhere from 6 to 8 different systems. And they don't talk well together and they're not easy to automate. And so for Paycom, the first thing we wanted to do with the Direct Data Exchange is make sure we're measuring all employee interactions in the system, like having those employee interactions direct from employee to the system. Once you've done that, now you can get to automation, because you have employees that are utilizing the system, but it was moving through a flow all the way to the back end users to make decisions and move the data from there. Well, we automate it before it gets there now in many cases. And so there's great value there, and I think that, in some cases, our marketing was doing a better job than ourselves -- group was. And now as we have total alignment, and we're refocused on getting back out there, which we've had a great sales year too. But I don't think anybody should be using any of our competitor. And so we really shouldn't be losing any deals. It's 2025, and we'll go into a competitor and half their employees aren't even utilizing the system. And it doesn't make any sense on the reason they're not is because it's cumbersome, complex, and they don't get any value out of it. So anyway, that's been our focus. And it's not about being first, it's about making sure that we're doing the right things for our clients in the future for our clients as well. And we just feel really good right now about how we head into next year. We had a lot of things that we needed to get through and get shored up, and we've had those things shored up for some time now.

Okay. I mean, I know you're a very competitive person. If you -- and so if you think about it, if I'm listening to you now, like more sales capacity, product is there, so you're looking forward to next year.

Yes. I mean I've been working with our sales staff myself for the last 4 weeks. I mean I'm direct with them. And what I mean by that every day, we've had our groups coming into Dallas, and we're just all really refocused on what the strategy is for clients. Because I think we're telling them so many things or so many things available to them. We've been able to now condense that to make it easier for -- to equate that to a client. So it's easier for them to see where the true value is through full solution automation. That's what we're talking about here. It's not how many times you log in and use the system. It's how many times you don't need to log in and use the system. That's what automation is. And you have to know your industry, you have to know what the user buyer needs and how they're utilizing the system. And when you do that and you understand the decisions that are being made, you can automate that for the benefit of our clients.

Yes, yes. Okay. Perfect. And then the -- yes, you mentioned earlier, like 1 of the drivers is like it's on -- I see this capacity, one of the drivers was like new office. Historically, you always had like you're very thoughtful about like where you -- if you want to go into a market like how you do that. So is that kind of thoughtful cadence changing for you? Or like how do you think about that? Or did the processes improve or change that you kind of different...

I wouldn't say it's necessarily changed, but we have identified opportunities to expedite it. So -- but I wouldn't say the criteria is the criteria for someone to be able to open up an office. The criteria is the criteria for someone to be able to become a manager, but we are seeing improvement in capabilities with that group. And so -- and I think as we kind of look into next year, we'll be seeing a lot more of it with that group, and that will produce more opportunities for us to open up office...

Can you -- historically, you talked about like territory opportunities in terms of like what you cover at the moment, what you don't cover. Has that number changed? But can you remind us...

Not really. I mean -- yes, it was about 100 offices we're able to open. We have 55 open right now. A territory represents 2,000 what we call, well, rainbow accounts, which are prospects within our sweet spot. And so some cities have 8,000 of those. You could have multiple offices. Some cities have 1,800. And so I just talked about Tulsa earlier. And so yes, the prospect basis there, and the abilities there, we've kind of been the -- a little bit -- we've kind of been our own log jam on that just from not having the people ready to lift up. But we're doing a lot better with that now. So I think in the next couple of quarters, I think that we'll be able to see what's happening with the sales organization from that standpoint.

Yes. Okay. And then the last few minutes I want to talk about more like slip over a little bit on the margin side. Like one of the things that comes up a lot with investors is like if you do AI, how do you do that? In the hyperscaler do you do it yourselves? Like, talk a little bit about your setup on AI, like where are you doing it?

You mean as far as we've always managed our own data from the beginning. So we didn't have that as an issue. We actually also manage our own the data centers that hold our GPUs and what have you. They're actually little bit different than some of our other data centers as well. But -- so we manage those ourselves. When you're looking at -- I mean, I've had to learn a lot about this. There's not -- you can put a lot of things in AI or in this model that you don't need to just because of, for instance, employees clocking in. Well, I want -- we had a program, but what you could say, clock me in. But it actually takes longer than what the widget on the very front of your screen. It takes longer to click IWant and say, clock me in than what it does to have the widget on your screen, say, clock me in. Plus, when you look at the consecutive responses that we're getting, that's hitting those GPUs. There's a -- it eats up a lot, and there's not a ton of value in it when you understand an employee that's trying to log in and you -- that's collecting time that has to be there at AI, and they're trying to clock in and you're making them go through an AI tool. And so you do have to understand where does it work. Where does it slow down the process and becomes where I have to have something to understand you versus you already see it in front of you and you can click it. So where is it helpful and where is it going to slow you down. And so those are the things we focus on. And then I think you're also looking at opportunities for a different level of AI that could potentially answer best practice type questions and serve as a proxy for an individual that might be having to answer those same types of questions. But I think a lot of that is -- you got to have a lot of configuration in there too, because you have to start with understanding what needs to be accomplished.

Yes, yes, yes. Okay. And then like the other big discussion point, that's 1 for you, Bob, it's like, how do you use -- do you use internally like -- I know Chad is always about increasing efficiency and not wasting money internally. Like, are you guys using it internally like already? And what are you doing there?

Oh, absolutely. I mean we're our biggest -- we're the biggest super user of the product out there, and that's driving the full solution automation that we're doing internally as well. So -- and it also helps improve our product because we see what clients see. We can help work with the teams on that.

Yes. And then the -- if you look at internal, is it the classic areas sort of like development is getting a little bit better because you can use tooling there, support...

It definitely helps in development -- being able to analyze certain things from client data, from conversations with clients when they call in through service, just analyzing clients' communication patterns with us and being able to predict which clients are in a good spot and which clients are susceptible and you need to make sure that we're covering those. And so I wouldn't say, we, of course, have it in our product, but we also have it in other areas of our business, even being able to have it analyzed the usage components of how do I get clients from this level of value over to a much higher level of value with the exact same spend. I mean, I've kind of said it for a long time. I can -- I kind of call it swinging the jackhammer, right? I can buy a jackhammer and I can sit there and swing it or I could have just turned it on. And we have a lot of clients that sometimes still do that. They buy a product that has automation, but they kind of use it the old way. And so we've also been able to use certain AI tools and what have you to be able to identify that and make it much easier for people to get value. I mean, prior to IWant, a lot of people were making a lot of extra clicks even if they try to get the data in the system, sometimes they didn't know where to get it. And so IWant just speeds that up. IWant is either going to give you a home run or put you on third base, so you have one more click.

The last question for me and then it's time to say goodbye, it's kind of amazing. Last question for me is like as you think about better times next year, how do you think about margin as part of that? Because if you have more sales capacity, maybe more office opening, et cetera, do you...

I mean, I'm right this year, I'm really 2026, I'm focused on growth. Now I will say this as we sell -- we sell a really good product that creates a lot of efficiencies for the client. We get to share in that. So you would expect that as you are selling, you're also impacting your margins positively as well with this additional revenue. So we're focused on that. But we're also protective of our margins. We've got strong margins now. And we're not working through anything in our model to change the margin profile toward the negative, anyway.

Yes. Okay, perfect. That's a good summary. Okay. Chad, Bob, good to see you again. Thank you.

All right. Thank you.