Paylocity Holding Corporation (PCTY) Earnings Call Transcript & Summary

Yes, let's not a shift to that one yet. Let's stay on leading.

Yes. Yes. So I think, yes. So I think at the end of the day, for me, on the leadership, I need to have a great team behind me, that's first and foremost. So that's promoting some people from within and sometimes bring in some talent that you need to help scale. And then secondly, I need to stay close to what's happening from a real employee's perspective. So I need to understand what it's like to be a customer service person or a salesperson. So I need contact with client. I need contact with my frontline employees. And I need to be able to have enough of that where I know what's happening in our business. And then I can talk to my leaders about those things that will really happen. Because when you get to 3,000 employees, as a CEO, you don't want to be isolated from what's really happening. So I have to spend time with my team driving the strategy, but I have to do dive deep at times to be able to really connect with our employees.

How you do that?

And that is something that I spend a variety of ways. So we'll do -- I'll do roundtables with folks at different levels of the organization. I'll definitely get involved in meetings that maybe would be unusual for the CEO to be involved with. It could be product demonstrations on the product side, it could be saving a customer who might have some complaints and picking up the phone and calling them. I just met with a current client yesterday before coming here and got their feedback around what their needs are, being in Boston times in the sales process. Obviously, I don't sell a lot because we don't have huge deals, but I do get involved in that. And so that's how I try to balance my time and stay close to what's happening and make sure we're focused on the right thing.

Loved that. How do you find those situations to get into?

I think once you start making it known that you appreciate that, people start to reach out for help in those scenarios. And so the situation with the client yesterday was they reached out and think it'd really be cool if you could kind of swing by because they know I'm willing to do that. And then I got...

Who is "they", like a low-level sales person?

[ Macky Zeus. Macky Zeus ], our client account manager who's dealing with the customer. And so we got in a big conversation around product and what they were trying to do from a reward and recognition and how our product could evolve and meet their needs. And so I ended up with a drive by that ended up being a 45-minute conversation around product. Same thing with -- we do a lot of training in our organization. So sometimes it's popping into a training class. I meet all of our sales new hires still today and get in front of them for an hour. And so I look for those opportunities. And the more you do those, the more you kind of get asked.

That is super interesting. It's -- I have a friend who's a salesperson at an unnamed large company. I won't say who it is. And I go, "Do you ever get the CEO to come on?" And these are even before huge deals, and he's saying, "Oh, no, you don't want to do that." "Why not?" Because if you do that, the next day he'd say, I would love to have the CEO show up at this place at this time for this big deal. The next day, you'll get a call from the CEO's assistant, and you'll go down the office and you'll walk in and you'll get a, "What the blank is wrong with you that you can't close this deal yourself?" Right? But what's so interesting about it is it's not so much -- you're doing it not so much to help close one more deal, right? That's not going to make a difference. It's for you to learn. So you can be a better CEO.

Yes. I think it's that natural curiosity that I have and have always had. I also live in paranoia. I don't want to be the CEO standing in front of 3,000 people describing what's happening at the company and everyone goes, that's not it at all. And I've been at companies like that before where I thought...

Well, maybe that's why -- so where were you -- and maybe you don't want to name it, but...

Yes. Like, we're not going to get into kind of names. But as you get large, it's kind of hard to kind of stay connected with it. And so hey, we're not perfect. We have challenges like any organization, but the more we can identify them, the more we can tackle them and the more we name them as reality, I think the better company we can be.

Yes, love that. Okay, good. So I've been asking everyone about the coronavirus. I'll ask you, too. Are you seeing it anywhere in your companies in terms of sales cycle? They realize you're domestic and smaller, and then also in marketing events, things you would attend or things you're hosting. Have you started thinking about it?

Yes. Obviously, the news is coming out day-by-day in terms of how it's growing, what the risk is like. So we're U.S.-based. And therefore, all of our clients that we serve are U.S.-based. And so we haven't seen that a lot within our client base. We haven't seen that in any type of restricted travel. We don't do really any international travel. I speak of from a business perspective. So I'd say, so far, to date, we have been somewhat unaffected. But I think like everybody, we're watching it closely. And at some point, you've got to start preparing for contingency plans. One of the great things about our culture that I think will help us, hopefully, this doesn't spread, but if there is more danger, we have a big remote employee culture.

You do?

And so the idea of people working remote. So almost half of our workforce is remote work from home. So salespeople, implementation folks, a lot of our technology teams. So the idea that if we got to a point we want to lower the risk of our workforce and have less people coming together in gatherings and maybe less travel, that's probably -- that is very doable for us in terms of just how we generally operate.

Yes. And what tools do they use when they work from home?

So I'd say a couple of things. It's -- this is interesting. When you think of the communication tools, so Zoom Video is obviously a big part of every -- is camera-on culture, so we expect to hear that.

I have heard that. It only works if you can answer the [indiscernible], right?

Yes. I've been on a conference call with 50 people, and I'll say, we've got 32 out of 50 with cameras on. We'll start when everyone's cameras on. You really have to force that a little bit, but it does create a more personal connection. So that's something that we use. We use a lot of our -- a product that we rolled out, Community for kind of our -- it's really, really reimagine that old HR Internet. And it's got groups and reactions and documents and announcements, and we found a lot of activity within that. I think of our Paylocity employees, we get more than 1/3 of them on that every day which is pretty cool. And then certain groups will use, obviously, you're going to be in your CRMs, if you're our operational teams or if you're our sales folks and our technology team does use Slack as well.

How about DocuSign?

We use DocuSign probably in -- sparingly, we use it for a lot of our purchasing functions and contract negotiations.

So the CEO of another company who is sitting here, Matthew Prince was joking about the people -- not joking, but talking about the other companies that would benefit besides Slack, and he was saying, DocuSign, fewer and fewer people are going to want to touch that, right?

Yes.

So -- okay. So then, there's been a big merger in your space with the company that I know you really admired, which is Ultimate Software. What do you think?

So Ultimate was taken private, roughly a year ago and the owners own Kronos as well. Yes, I think the first thing I would say is we don't overlap market segment with them a ton. The large end of our market is really the lower end of their market. So we don't see them a ton. They're definitely a competitor, but not one we see very often. And yes, I think they've done a pretty good job from an employee culture perspective, which is one of the things that I think we take pride in as well. So I was a little surprised that, that happened so soon?

Me, too.

Yes, I guess I wasn't surprised that it happened just because you've got the single-owner scenario of both entities. But I think that will be -- there's a challenge there to bring any 2 organizations of those sizes together. And from an employee and customer perspective and go-to-market and road maps and all the things that you've got to do. But it's just not a big enough competitor of ours that we think...

That it will make a difference for you?

No.

Yes. Yes. Okay. Why don't we pause a second here and see if we have any questions from our audience.

You guys have your analytics software [indiscernible].

Yes. So one of the areas we're pretty excited about is if you think of historically, payroll, HR, those teams spend a lot of time running reports, putting together analysis for the rest of the organization for the leadership teams. And then they use that information to then try to drive initiatives. So the classic example is putting together turnover reports and understanding where that spike in turnover might be coming from. So I use that as an example because that's really the first place we've made some big investments in our analytics package. So we have a turnover dashboard that uses machine learning algorithm to actually surface your highest risk employees. So we have millions of people in the platform. We run that algorithm through the millions of people and we come up with the risk factors. And so you would drill into that person and you would see why they've become a risk factor. And sometimes, it's very intuitive, like they've moved locations, their commute is now twice as long to work. So they become a risk factor. Sometimes it's not as intuitive because they've gotten a raise. They've had a great performance review and they're high performer. Why would they be a risk factor? Because they're one of your highest performers and other people want them too, right? And so you start to then expose that data to customers that allow them to kind of drive initiative and processes on them. More recently in our analytics package, we've really become transparent about utilization in our platform. So we show a customer in module all the employees and how many of them are logging on each day, each week, each month. And so this idea of driving utilization, putting that in the power of our clients. And then we back that up with what we call adoption kits, we show them how they could actually drive more utilization. And it's not about utilization. It's about driving engagement with their employees. And so the combination of using analytics to be transparent about how they can get more out of our platform and then giving them best practices about being able to do that. Community as a great product where we've done that, and we've seen increases in utilization, the more we've got them comfortable in rolling it out.

If we -- I mean, if we step back for a second, and you're going to sort of pitch why this is a good long-term durable business. And you can keep doing what you're doing for quite a while. What are the 2 or 3 key points you'd make to someone who wants to own this for 5 years?

Yes. So I think the first and foremost, number one, it's a huge addressable market, right? And so -- and everybody has to do payroll in some way, shape or form. So this is just not something that you can realistically do on your own. So we have a must-have product that you have to do in a very, very large market. Secondly, I would look at our history and ability to innovate and stay ahead of the competition. So we've been able to add a lot of product. We've been able to approach different areas, and we are able to build those organically and deliver a better user experience. And so as the market continues to evolve, we think we're well positioned to be able to do that. Third, I think from a go-to-market perspective, we have a high motion go-to-market that's able to really work in the SMB space. And so we're able to bring on a lot of customers. Our unit growth last year was 21%. And that's something that's not always easy to put together. And then I think the last point I would bring up is this is a market still filled with change. So as Gen Z enters the workforce, their demands around transparency and diversity and work flexible schedules, remote working, and I think it's a changing landscape for the HR leaders, and they're trying to figure out a way to manage this. So that creates an opportunity to deliver interesting tools to be able to help them. So I like the idea that it's a big market with a lot of change. And then you look at our go-to-market and product execution over the last number of years. I think we're well positioned.

What could go wrong? What should a new investor looking at the story worry about?

I think the big questions I get are probably more macro in many ways. So you get the macro questions around potential recession.

No, no. What do you worry about?

What I worry about? I worry about how do I find -- we have 3,000-plus people across the organization. And if we're growing at north of 20%, I'm going to double the organization in a number of years, 3 or 4 years. And so that means I'm probably not -- I'm not going to double the number of people, but I'm going to need a lot of people. So how do I find a couple of thousand more of great talented people in sales and product, and we've been really successful in doing that. In fact, last year, we had a great hiring season for salespeople. I mentioned on the call that we were really well staffed. That was one of the contributors to success. So we've been able to do it. But that's the thing that I kind of worry about because it is a competitive market. We are going after folks that are in demand, and we need to be able to execute on that because it's a people powered business.

Yes. And then for your first point on the TAM, you guys actually, I feel like you have it -- I don't know, a good quantification of how many of these businesses there actually are out there. You mind talking about that a little bit in terms of what the opportunity is?

Yes. Because everybody needs payroll, it's kind of easy to look at the number of businesses. So if you just look at like our core market of 20 employees to 1,000 employees, you got 600,000 businesses. And so we've got 21,000 out of 600,000. And so even doubling our business doesn't get us to 10% penetration, right? And so we also think that we've had recent success in expanding a little below that 20-employee market down to the kind of 10-plus employees. And that increases it significantly. And so the fact that we've had success there makes us feel even better about the size of the opportunity.

Yes. And then just the short version because we have a minute left. So the 600,000 if you have [ 20 ] what are the other 580,000 using, and you're going to put it in buckets. Everyone's going to pay their employees?

Yes. So ADP and Paychex would be the dominant share of that marketplace. So from one employee and above, they have about 1.2 -- over 1.2 million customers. And so they're the biggest share. There's a whole market for small local regional providers that look like Paylocity, maybe 10 years ago. There's hundreds, if not thousands of those providers across the country. Every market has some that are serving that local market. And then you've got, like, what I would call...

So like in the 20 to 100, would you have to -- do ADP and Paychex have like half? Do they have 300 or more?

They're more. If you look at the number of businesses above 1 employee, you get into the 5 million or 6 million range, and we've got about 1.2 million.

I know, but we're trying to get 20 to 100.

20 to 100, they don't segment it exactly that way, right? So I don't know how many of their customers fit into that bucket. So if I were to guess, I would say they probably have less than half the market.

Less than half. Steve, thank you so much, it's great having you here. We really appreciate it. Thank you so much.