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

Good afternoon. My name is Hillary and I will be your conference operator today. At this time, I would like to welcome everyone to Paycom's Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to James Samford, Head of Investor Relations. You may begin.

Thank you, and welcome to Paycom's earnings conference call for the third quarter of 2026. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10-K. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Also during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income and free cash flow. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today, and is available on our website at investors.paycom.com. I will now turn the call over to Chad Richison, Paycom's Founder and CEO. Chad? .

Thanks, James, and thank you to everyone joining our call today. I'll briefly comment on current trends and recent achievements. Then I'll pass the call over to our President, Shane Hadlock, before Bob reviews our third quarter results and full year guidance. We will then take questions. Let's get started. Third quarter results continue to demonstrate the strength of our platform coming in ahead of our expectations. Our focus on full solution automation, world-class service and ROI achievement is resonating in the market. Thanks to our strong performance year-to-date, we are once again raising our full year outlook for both revenue and profitability. We are seeing greater adoption of automation across our client base as we continue to expand automated decisioning logic and AI capabilities. For any business, AI adoption starts with delivering real value at an affordable cost. Our early investments in data centers, AI technology and GPUs are paying off for our clients and ourselves. Our clients are not paying for tokens on our system. That creates a powerful economic advantage as we continue to deliver more automation at a lower cost, creating greater value for our clients and stronger returns on Paycom's investments. On the product side, we continue to innovate and drive even more automation. Our clients appreciate the decision in logic that is built into our platform is it allows them to incorporate their company policies such as PTO, payroll, scheduling, onboarding and more directly into the system. This allows for accurate and consistent decisions that generate tremendous ROI across an organization. One of the most recent products we launched with built-in decision logic is asset management and the response to this new tool has been excellent. Through our research, we found that companies are buying assets they already own. We've seen companies hiring 50 new employees and then buying 50 new laptops, phones, tools, badges, software licenses and other equipment while perfectly good ones sit unused in storage and others remain unreturned by former employees. Our asset management platform helps clients track, recover and deploy their assets, reducing unnecessary spending and giving them control over what they already own. Demand for automation is accelerating and Paycom continues to lead the industry with the most intelligent platform for automating decisions across an organization. Our ability to develop, release host, distribute and service our technology gives us a powerful advantage. I'm very excited about our upcoming product pipeline, which will add even more value to businesses across our large and expanding TAM. Now I would like to turn the call over to Shane Hadlock.

Thanks, Chad. We delivered excellent third quarter results, thanks to our dedicated employees and their relentless focus on our clients' success. Throughout 2026, we released many powerful solutions and client response to these releases has been incredibly positive. Our award-winning AI solution, I want continues to accelerate speed to value for our clients by giving employees, managers and executives immediate access to critical data. I want this enabled across our client base and has successfully responded to millions of queries. In fact, IWant usage is up approximately 65% today versus the end of 2025. Our AI is creating meaningful value for our clients and without any incremental cost to them. In fact, Forrester found that organizations in the mid-market using IWant can achieve greater than 400% ROI and save as many as 3,600 employee hours, 600 manager hours and 60 executive hours annually. Another example of client ROI achievement is a business that used our product done to eliminate $360,000 in unmanaged PTO. This company had hundreds of employees across 73 locations in 12 states. Prior to using GONE, 1/3 of their PTO was approved manually after the day it had already been taken and the majority of their employees had negative time off balances. Thanks to GONE, the system makes the decisions, which helps eliminate time test and ensures the workforce is operating at peak efficiency driving more to the bottom line. That's the power of decisioning logic our clients are realizing. Expanding on Chad's comments, Owning and operating our data center infrastructure is a significant competitive advantage. We are one of only a handful of companies in the U.S. to operate a Tier 4 data center. That infrastructure gives us greater control over our technology and the economics behind it, which increases the ROI our clients realize. This also drives operational efficiencies across R&D and service operations to drive even more internal value. strong usage of our products and investments in customer service are resulting in increasing client satisfaction and are driving higher Net Promoter Scores. This is related to the investments we have been making in automation, product innovation and our team's ability to deliver world-class service. I am proud of what our teams have achieved this year focusing on strengthening client ROI and expanding the value of our platform. With that, let me turn the call over to Bob.

Thank you, Shane. Third quarter results came in strong with total revenues of $544 million, up 10% over the comparable prior year period and recurring and other revenues of $519 million, up 11% year-over-year. Our continued focus on process automation and on leveraging our own technology is driving increased productivity across the organization, fundamentally strengthening our business. Our efforts over the last several quarters are driving durable revenue growth, sustainable margins and rapid earnings growth. GAAP net income in the third quarter was $133 million or $2.99 per diluted share based on an average of 44.5 million shares outstanding. Non-GAAP net income increased 37% year-over-year in the third quarter to $150 million or $3.37 per diluted share. Diluted non-GAAP EPS increased 74% year-over-year reflecting strong earnings growth and the benefits of our capital allocation strategy. Adjusted EBITDA in the third quarter came in very strong at $268 million or 49.3% of revenues, driven by expanding gross margin and reductions in operating costs. The investments we made in data centers AI technology and product development processes are paying off and driving our expanded adjusted EBITDA margin. Based on the strength of our year-to-date results, we are raising our outlook for full year revenue and adjusted EBITDA. Turning to capital allocation. We ended the third quarter with approximately 44 million shares outstanding, down nearly 20% from approximately 55 million shares at the end of the third quarter of 2025. During that same time period, we repurchased approximately 11.5 million shares. We bought back $3 million of stock in the third quarter and have $1.65 billion remaining on our buyback authorization as of the end of Q3. During the quarter, we paid down $150 million of our balance on a revolving credit facility. We ended the quarter with cash and cash equivalents of $194 million and an outstanding balance of $750 million under our revolving credit facility. We generated free cash flow of $536 million in the first 9 months of 2026 and continue to expect to deliver very strong full year free cash flow. We expect even stronger free cash flow in 2027. In the third quarter, we paid approximately $17 million in cash dividends. And on November 2, the Board approved our next quarterly dividend of $0.375 per share payable in early December. The average daily balance of funds held for clients was approximately $2.7 billion in the third quarter of 2026, and up 7% over the prior year period. Now let me turn to guidance for 2026. Based on the strength of our year-to-date results, we are increasing our revenue and adjusted EBITDA guidance ranges. We expect total revenues to be between $2.23 billion and $2.218 billion, or approximately 8% year-over-year growth. We now expect full year recurring and other revenue to be up nearly 9% year-over-year. Included in our total revenue outlook is interest on funds held for clients of approximately $107 million. Full year adjusted EBITDA and is now expected to be between $1.069 billion and $1.079 billion, representing an industry-leading adjusted EBITDA margin of 48.5% at the midpoint of the range, a full 550 basis points higher than 2025 adjusted EBITDA margin. For modeling purposes, Stock-based comp is expected to be approximately 3% of revenues in 2026, and CapEx is expected to be approximately 6% of revenues. We expect 2026 GAAP tax rate to be 29% and 2026 non-GAAP tax rate to be approximately 27%. We are executing well against our 2026 plan, which is flowing through to the bottom line. Our clients are increasingly pleased with our expanding intelligent platform and the value they are achieving. We'd like to thank our employees for their contributions to today's results. With that, let's open the line for questions. Operator?

[Operator Instructions] Your first question comes from the line of Raimo Lenschow from Barclays.

Perfect. Congrats. I have 2 questions. Chad, one for you. If you think about you guys doing more automation, that's getting broader than like the core HR per platform, et cetera. How do you think about the monetization strategy for you in terms of making sure you're obviously delivering value to clients because they like it and since adopting it, but also making sure that you guys are participating in the value created there? And then the follow-up is on the margin side. Obviously, very, very strong margins this quarter. How do you think about the leverage from here going forward?

Yes. I'll let Bob take the second part of that. I'll take the first. We create solutions for clients, and sometimes we participate that through products that we released that are billable items such as asset management being one of the latest products that we've actually brought to market. We've got 300 so or more clients on it. We do continue to -- and it just came out last quarter. And so we do continue to provide that value. We've been working a lot on products. AI has had a massive impact on our business, especially our ability to create solutions for our clients. We released IWant to all of our clients last fall. In the last year, we released more solutions than any previous 12-month period. We have enough product in testing right now or already in use by select clients to have confidence that 2027 won't be any different.

And Raimo, on the margins, we believe that they are sustainable. We continue to find efficiencies in our business and the way that we process and use automation ourselves. We are the biggest user of our products. we get the same ROI that our clients are getting. So we feel comfortable about that. .

Your next question comes from the line of Mark Marcon from Baird.

Let me add my congratulations. I mean the quarterly performance was really strong, particularly in terms of recurring revenue growth and in terms of going out to various HR and IT conferences. It seems like you're getting a lot of traction. I'm wondering just a little bit about the guide as it relates to for the full year. It seems to imply a bit of a deceleration. And so I'm wondering if you can explain that given that seems like the momentum is really quite strong. And then the second question is, Chad, you mentioned you're going to have a big release and you've got an upcoming product pipeline. I'm wondering when that will be? And to what extent will we see even greater AI capabilities? Because IWant is great about summarizing the existing data, but like actually doing the kind of what if I'm wondering if that's going to be part of the plan.

Yes, Mark, we're pleased with our guidance for the whole year. We put our plan in place at the beginning of the year. We were fortunate enough to exceed that plan and raise our guide twice during the year. And as you know, the quarterly, there can be all kinds of fluctuations and fourth quarter was a tough comp compared to last year as well. So we're pleased with where we sit right now.

To kind of follow up on that, we're creating solutions with greater velocity and quality. We've expanded our decision logic throughout our system now we can decision your expenses, time cards, time-off request, assets and a lot more. I see 2027 as being transformational for us as far as the technologies that we have in the hopper right now. . And again, once those are ready, and I do believe that we have a strong trusted brand to be able to go out and provide a lot of these technologies, and we've got several of them in testing. And so we'll release them over the next year. And I think 2027 will hold a different transformational time period for us.

Your next question comes from the line of Steve Enders from Citi.

Okay. Great. Maybe just to start, it would be great to kind of get your view on how, I guess, bookings or new build bookings and sales execution this quarter and maybe how you're kind of seeing the environment today and how that compares to some of the prior -- some of the past few quarters?

Sure. So we have a lot of new salespeople. We revamped the group as we shifted our entire organization towards automation. We want to make sure the clients are also utilizing the automation and the products that we have. And so -- we've had some new sales reps. I can tell you that the sales group that we have right now, the new people are doing better than any groups done in the past. They are doing very well. And sales overall is hitting the mark that we needed them to hit for this year. We're excited about all the opportunities next year and the discussions we're having as more and more prospects kind of get to the table on being willing to automate more and more of their decisions.

Okay. Great. And then maybe just a follow-up on some of the free cash flow commentary. I guess if I know last quarter, you kind of gave a framework for how to think about where free cash flow could be for this year. I just want to see if there's any update on that. And I guess dovetailing off of that, and you're talking about expecting free cash flow to be kind of stronger next year, any way to maybe kind of directionally kind of put us in the right place for how to think about what that could look like from either a margin perspective or factors that could impact incremental dollars for next year?

Steve, we made that onetime comment. We feel comfortable with that comment on where we were. The comment about next year being stronger is the comment more about it's sustainable and durable free cash flow that this business generates.

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets.

Great. I wanted to ask about CapEx. So I think the 6% of CapEx for the full revenue for the full year, kind of unchanged from last quarter. It looks like you're kind of running 20-ish million of CapEx about 2 quarters. So it would kind of imply like a little bit of a step up in Q4. Maybe can you just speak to what some of your priorities would be for Q4 kind of implied in that framework, Bob?

Yes. So the 6%, again, we want to be flexible there so that we can do what's right for our clients when we think about how we're going to provide the ROI. So there's nothing really important to point out there yet, but we did want to have that flexibility.

Okay. And then, Chad, it's not lost on me that your R&D in Q3 is down obviously, sequentially and year-over-year. So you are seemingly getting a lot of efficiency from AI and AI coding. And I hear you on the product copper for next year and the paid SKUs that you've launched this year. But maybe can you elaborate a little bit more on what gives you the confidence that you're spending enough on R&D? I know it's a silly question, given kind of the amount of leverage you're seeing. But is it in this form, I'm happy to hear your thoughts.

Well, it's the result that the R&D that we're spending is delivering right now. I would say both within our current product that we continue to develop and innovate and create all the automation available. I think people hard pressed to find a better product and ours has just gotten a lot better this year with that lower spend and a greater focus. And I would also say that with the new technologies and the other spend that we're able to do and more of a greenfield-type opportunity for us that didn't previously exist. We're just -- we have a lot of quality right now. And so that's what we focused on, not necessarily the spend. That's not to say that if we needed to spend more that we wouldn't -- it's just -- that's where we're at right now, and we feel really good with the result that our R&D spend is delivered.

Your next question comes from the line of Jacob Smith from Guggenheim.

Great. Chad, you've always emphasized the benefits of owning your own data centers from reliability to cost efficiency -- but I think the security benefits of controlling your own technology stack are especially relevant right now. The growing concern about cyber risk is AI models become more capable. Are customers and prospects placing more value on that control -- and is that becoming a bigger selling point against competitors that rely on third-party infrastructure and integrations?

I'll let Shane take that one. He's been instrumental in this process for a long time.

Yes, absolutely. Security is top of mind for everyone and them knowing exactly where their data resides, is a big positive. They don't have to guess. They know exactly where it resides and feel confident in our ability to do that. It's something we've done since the inception of Bacon and we're very confident in that.

And as a follow-up there, you mentioned last quarter that customers can increasingly buy additional products directly within the Paycom platform? How meaningful is that self-service motion becoming to bookings? And do you expect that to increase going forward?