Paylocity Holding Corporation (PCTY) Earnings Call Transcript & Summary

Okay. Great. So look, we're just delighted to have Paylocity joining us today virtually. To my right, at least on my screen, is Steve Beauchamp, who is the CEO; and to my left is Toby Williams, who's the CFO. Hey guys, thanks so much for joining us.

Absolutely. Thanks for having us.

How is your morning going?

Good. Good. We're already into a few meetings already. So it's been very active.

Are you exhausted yet?

No, not at all.

Okay. Good. All right. So look, we'll divide this into sort of 3 sections. So Part 1 will be, Steve, we're going to talk about you a little bit, if you don't mind.

Okay.

Okay. Part 2 is going to be, there's 3 questions that I'm going to ask 20 companies over the next 2 days. And so I'll get your answers to those. And then we'll touch on a couple sort of post-the-quarter questions that I feel like a lot of investors have this Part 3. And hopefully, we'll get through it all.

All right. So first of all, tell us a little bit about yourself. Where are you from, where did you go?

Yes. So I originally born and raised in Canada, and after college, went and worked directly in this industry. So I've been in this industry forever, really, my entire career. Worked for ADP right out of college. Went back to school, got an MBA and then had an opportunity to come down to United States and work for a very small payroll company. I think at the time, we're talking 15 employees, doubled that over the course of 2 years. The owner of the company was at retirement age, and he wanted to sell that and ended up at Advantage Payroll, which was a company that was growing pretty quickly, tried to go IPO and was bought by Paychex. And then spent really, over 5 years at Paychex and ran product management for them. And so a series of backgrounds. I started in sales. I ran operations for Advantage. I ran product management for Paychex. So I've really had a lot of cross-point from experience. And when this opportunity at Paylocity came up, targeting kind of midsized businesses with a much more software-centric solution that obviously extends much beyond payroll today. But at the time when I started, it was only payroll when I got here over 13 years ago. And that was kind of the vision was, let's try to really extend this platform so that we can put it in the hands of employees and start building other modules on top of that. And it's been an interesting journey. When I got here, we had 100 employees. We're now approaching 4,000 employees.

That's unbelievable.

And it's been great. We've got a great group of people. We're really focused on creating the right culture for our employees and then using that to be able to deliver for our customers. And that number is about 25,000 customers with an average of about 100, a little more than 100 employees.

Yes. So I'm going to dig into the story a little bit because it does seem that there's something about this industry where hiring people who basically have done it their whole life really works, right? And Ultimate Software is a very similar, the CEO and Founder had a very similar background. It's really interesting to me. So you graduate from college and you start working for ADP. This is like 1995, right?

Yes.

Yes. Okay. And so what were you doing when you're a new graduate in 1995?

Selling small business payroll.

Are you knocking on doors? How does it work?

Yes.

You are, right?

Yes. I was a bank channel rep, which meant that I had to go to banks to try to solicit referrals from banks. And then as I got referrals, then I would go to those businesses' sites and meet with them. Back then, it was a book that you would have, right, with slicks and sheets. And you would tell the ADP story and then you'd turn to the next page and talk about how you can kind of help them. And then...

And who are you having this conversation with? Like you walk in the door of the business, what do you say?

It's typically the business owner. Yes, and they're usually maybe at the time, going back many years, but pretty common to leverage either a bank or a CPA in Canada to get your payroll done. And it was always only payroll at the time typically. And you're really offering a much more automated experience. A lot of times, they were calling in the payroll back then. So they could either fax it in or call it in. And then they would get the report.

Call it in. They would pick up the phone and say, here's the employee and here's how much the deck should be for?

Yes. I mean, it was 25 employees. And that's where I started. So you got 10 employees. And sometimes it's the same as last time if they're salaried and sometimes they're hourly. And actually, it was a schedule. ADP at that time would call you every Tuesday at 10:30 or something like that. And then, and that's how you would mostly do payroll back then.

Wow. All right. And then Payroll Central was the one with -- where you came in and it was small and the owner wanted to sell it, right?

Yes. And that was my first exposure to midsized businesses. And so it was really a licensed software product focused on that midsized business, around 100 employees, in Dallas, Texas marketplace. And so we actually almost tripled that business in just over 2 years. And he was 68 years old at the time. So for him, that was kind of his retirement plan. It was a great experience for me. I just graduated with an MBA prior to that and moved down to Texas. My wife and I just got married. And it was awesome experience because I got to do pretty much every job imaginable, whether it was implementing customers, selling customers, taking calls, you name and I did it.

So what I think is interesting about this is the part you said where it was on-premise software, which I think to investors today would be so weird. So how would you get the software? Did it come like on a...

CD.

And what would you put it into? Like does it load up on a...

You got to load it on a PC and then they would essentially, and there were some very basic HR capabilities at the time, but it was mostly payroll and you'd put in all your hours into the platform and you hit transmit. And so at first, you would transmit via dial-up connection. And then as technology advanced, you'd use FTP and transmit over the Internet connection, which was kind of revolutionary at that time. And it sped it up because the dial-up thing would take a long time and you couldn't be in the software while you were connecting and transmitting your data and stop. So it worked.

All right. So let's skip ahead a little bit to your Paychex days. So what was Paychex like in 2002?

Well, Paychex was still pretty heavily focused on small business payroll. And back then, they had an Internet product where people would go in and they would input their information into a timesheet. But they still did a lot of call in and fax in, in payroll. And that was still very, very popular back then. But they had also expanded into things like 401(k), a PEO business. And so they were kind of looking at a lot of these administrative functions, FSA, HSAs. And they've kind of expanded beyond just helping a small business with payroll into kind of these other applications. And it was less software, but it was much more administrative outsourcing that you were really doing with Paychex. And so when I ran product management, I had product management teams across the entire product portfolio, which gave me the real opportunity to learn about some of these other spaces. And then obviously, be an executive with a company at scale, which was my first opportunity to do that.

Yes. how big was Paychex back then?

Oh, geez, I think approaching $2 billion in revenue.

Yes. All right. So very different than their pace. Yes.

Yes.

All right. And Toby, I saw you take a sip of water, good. Let me just point out to people on this call that this is a chat. And in a chat, it should be, even though it's a Zoom call, should be perfectly acceptable to take your coffee and take a sip. It's just fine.

By the way, that's where I met Toby is at Paychex so.

Oh, really?

Yes.

How did that happen?

Toby came on to really form the first kind of corp development team at Paychex. Everything that had been done prior was mostly one-off or opportunistic, and it was mostly in the payroll space.

Meaning M&A corporate development?

M&A. Yes, M&A, corp development and strategic partnerships and everything that goes along with that. And so Toby was working for me at Paychex at the time to start that function.

Yes. Toby, what did you think of Steve when you first met him?

Oh I loved it or I wouldn't have gone to work for him.

Have you worked together continuously? No?

No. Toby went and spent a number of years in the enterprise software space after I came to Paylocity. And what's it been now, Toby, what, 3 or 4 years you've been here?

Going on 4 at this point, yes, yes.

I mean, honestly, I think it's one of the keys to company success is people working with people they worked with before. Ideally, you're friends. Okay. So you joined Paylocity in 2007. You have this great background in terms of you've seen small, midsized, just focused on payroll, additional services. What is it like when you joined?

Yes. I think it's pretty entrepreneurial. The first version of the payroll platform had been fairly recently launched. There was customers that were on the legacy product, which was a licensed product. And then we were in the process of transferring customers over, but selling all new customers on the new platform. And really the goal, had a really good reputation in the Chicagoland area, really well known for good service on top of the new technology that was being produced. And so really, the idea was to recreate that same service experience in other parts of the country as we expand it, but leverage the fact that we had SaaS technology. And we started hiring sales reps in different markets, and we weren't specific by market. We went where we found talent. We hired experienced folks in those markets. And then they went out there and started to present the Paylocity story, which was basically payroll plus at the time a little bit of HR. That has obviously expanded dramatically since then.

Dramatically, yes. Let's touch on one part that you just mentioned, which was the hiring experienced people. What's the philosophy there? And that hasn't changed throughout and I too guess maybe it has evolved a little bit. So tell us what you were thinking back then and how it's evolved.

Yes. So I think our view was being a SaaS product, we should be able to sell that and service it and deploy it anywhere. And so that gave us an advantage in terms of not having to be so market-specific. Historically, people went from Chicago to Milwaukee to Indianapolis, and it was very geographic-based. And so our idea was, we've been in the industry a long time. We've got a lot of connections. And so why don't we hire folks that have had experience in the industry and bring them on board. And they can seed that market and be first to seed a market. And so we went to places like Atlanta and California right away, even though geographically, that wouldn't have made the most sense based off the historical model. And then we had to make sure that we were in a position to be able to service them and implement them in all those markets because the nuance of tax regulation in those markets can be a little bit different. So we also hired experienced implementation folks. So we mirrored that approach in terms of our model to be able to grow. And then we just kept seeding markets with talented people. The other thing it enabled us to do...

In the early days, you guys had a chart you would show, which in hindsight was a good indication this was going to be a good stock, where you basically had a little red dot for everywhere you had a sales presence in the United States. And there were a lot of little red dots around Chicago and there were very few little red dots in the rest of the country.

Yes. Correct. Yes. And so that was the...

You should bring that chart back. I wonder what it looks like. Show me the chart today and what it looked like 5 years ago.

Yes. We got sales coverage in pretty much every major market now. And we're adding people back into the markets is really what we're doing now. I think the other thing that was critical to us was having experienced people really helped us develop the broker channel. And so I've got somebody who's been in the industry a while. They go in front of insurance broker who's selling either 401(k) or benefits. And they talk about, we're not competitors. ADP and Paychex had expanded into the space already at that point in time. And so we were able to very early on create these network of relationships. And Paylocity, even when I got here, always did a lot of data integration with 401(k) providers and insurance providers. And so we're able to leverage that capability, expand on that and create a broker network, which I think was also important to have experienced reps to develop that network.

Awesome. All right. So that was Part 1. So Part 2, you're going to get 3 questions. I'll tell you ahead of time what they are so you can think about them. I know most presenters send you the questions ahead of time.

I didn't look at the question, I'll tell you that.

All right. So number one is, how is business? You knew that was coming. Number 2 is going to be, what did you learn in 2020 that you hadn't done before and that worked really well? And then number 3 is going to be, look, is Paylocity long term a work from home? Long term, is Paylocity a work-from-home company? So let's do number one first. So Steve, how's business? What would you say?

Yes. So I think many of the core elements of our business have been pretty strong through the pandemic. So we had 19.5% unit growth through the first 6 months of our fiscal year ending December 31. That compares to just over 20% last year. And so we're able to bring on the right number of customers to our platform. Obviously, we're impacted from a revenue perspective because employees in general are down, right, the ones that are on our platform and the ones that are coming to our platform. So we're feeling that impact in terms of revenue growth, but the core part of our business model is working pretty well. We definitely have seen a little bit of a hit from a sales productivity perspective. We were on a torrid pace ahead of pandemic. Our sales team was growing revenue, new bookings at almost 40% per year prior to the pandemic. We're still selling more last year than we did. And we've added sales reps. And so the model continues, but it is impacted by the pandemic. So right now, I'm feeling like we can basically anniversary the first pandemic quarter in the fourth quarter of this fiscal year, so thinking about that coming up. And we have provided guidance for the balance of our fiscal year. And so our implied guidance for fourth quarter is about 22%. So I feel like we've got an opportunity to get back to that 20%-plus growing model. And I think when you look at some of the statistics that I would look at internally in terms of the strength of the business, it's been pretty resilient throughout the pandemic.

Yes. I mean this business has cranked along in sort of that 20%, 25% rate for basically the whole time you've been there, right?

Yes. Early on it was a little higher, but yes.

Yes, definitely had periods a little higher. But once we really emerge from this, is there any reason we can't just go back to sort of being a 25% growing revenue business?

I think we definitely feel like we always talk about our long range being 20%-plus revenue growth. We definitely think we can get back there. Evidence is already guiding towards 22% in the fourth quarter, which does not assume any employment improvement either by the way. So that's a steady-state kind of assumption. So yes, I think we do have an opportunity. And obviously, we've taken a hit from an interest revenue perspective, too, right? So if we ever get to an environment where interest rate increases, that's also another potential accelerator on top of the model.

All right. Great. So that's number one. Number two, what's something you learned in 2020 that you hadn't done before that worked really well?

So I think there was a lot in that.

Pick one.

Yes. I try to use this opportunity, and I said this to the team early on. I said, listen, you got to plan to be in this environment forever. Not that we are going to be in the environment forever, but just act like it's going to last forever because that allows you to rethink things. And so for example, a lot of the way we talked and communicated with employees has changed dramatically. Very typical, we would do a once-a-quarter town hall-like meeting. I would go from office to office. And then we'd have our remote population, which is about 50% of our employees pre-pandemic. We would connect with them that way. What I realized is that was not enough. And so what we did is we used our product. We surveyed everybody each week with what's on top of mind. And every week for half an hour, myself, Toby, the rest of the senior leadership team would get on and answer their questions. And we would get about half of the workforce that would dial in live. And then with our VidGrid kind of acquisition, we use our video technology to make it available in our product. And we get the other rest of the workforce to actually watch it asynchronously so that they didn't have to change their schedules and so on and so forth. And so we did that every week for probably 3 or 4 months. We were able to handle difficult topics like the BLM conversations and diversity and inclusion that happened with everybody in the spring and that continues to this day. And now we do it every 2 weeks. And I'm never going to go back to quarterly all-hands meetings because what I've realized is, we spend so much time preparing and trying to make sure everything is completely buttoned up. But it is actually better when it's real, authentic and in the moment, and that you can react to questions so that employees can actually see how you you're thinking, which is a better determinant of the actions that you're going to have kind of in front of you. And so we do that still to this day, every 2 weeks. And so it's examples like that. I also do a lot of asynchronous videos that I will then record. So people come into the office on a Monday morning, and they might have a video from me. And so that might be 3 minutes, by the way. It doesn't have to be long. And so it's those kind of fast, short interaction opportunities that I actually think work better despite -- it had nothing to do with being in the pandemic, but it's the pandemic that forced us into that model.

Yes. That's a good one. So the company before you, the CEO said digital marketing, right? They used to rely on events. And now they're...

That's a good one, too.

Now they're actually profiling customers and have ideal customer profiles of which product should we sell. By the end of the day tomorrow, we'll have 20 answers, and we'll put it all together. Okay. And then the third general question, and I'll be the bad guy by telling you what we're doing first. But is long-term, really work-from-home company? And JMP has decided the answer to that is no.

Yes.

And we -- so we had, I think it was 2 weeks ago, we had an all-hands meeting. And our COO said, look, we don't know exactly when, but sometime this summer, we're going to expect everyone to come back to the office. We get it, okay? We know that some people have little kids and haven't figured out how that's going to work. And we know you may have aging parents you're caring for. We know you may be a 20-something that's living back with your parents in Ohio, right? But if you don't think you can get back to your office, now is the time to start the discussion with your manager to figure it out. And we had the best year we've ever had last year, but we feel like we were burning down our human capital and human relationships in doing that.

Sure.

Anyway, so that's being the bad guy. We're going to tell people to come back. What's the view with Paylocity?

Pre-pandemic, we had about half of our workforce that was remote. So think of that being sales and technology being the bigger roles. Our implementation teams were largely remote as well. And so we're used to operating in that environment. Where we had people in the offices, especially early career folks that we did a lot more on training and development, I think that has been harder remotely, by the way. And so our view is, we will bring people back to the office. We'll continue to hire remote. We will expand the number of roles that we hire remote. So we do see an opportunity to hire more role remote than we did before. And we will have more flexible work arrangements. So I can see a scenario where someone is in the office 3 or 4 days a week, and they used to be in 5 days a week, right? And that's what we want to get back to. We do believe that the ability to get together as groups, whether those are training opportunities, team opportunities, I think people are fatigued from Zoom all day, every day. I think that the relationships kind of have suffered a little bit, generally speaking. And so we were in a hybrid before. We'll probably lean a little bit more into the remote, but we're going to get people back into the office. We'll definitely try to tie that into when schools go back. I don't think we'll pressure people to come back into the office ahead of that, just because of the...

That's a great gating item, I think, actually.

Yes. That's the way we think about it. When schools are back in, that's when we'll start to have people come back in, in any type of scale.

Yes. So you know Avalara, right?

Yes.

So that was the one, the chat right before you. And they were talking about how Scott, the CEO of Avalara, was like, we want to be flexible, but what I don't want is someone moving to -- and I forget what city he said -- Austin and commuting back to Seattle every other week. That's not what I consider flexible. How do you feel about that example?

Well, we were already pretty remote to start with, right? And so we do have some of our, like my top 20 people, some of those folks do commute into Chicago on some frequency. And that's fine with me because we do a lot remote. So I'd say we are a full-on hybrid. We were before the pandemic. We're going to be after that. And it goes back to the philosophy I said to you earlier, which is you've got to think about this as a forever thing, whether it is or not, because then you actually change the way you interact, the way you do business, the way you communicate. Like I'll give you a really good example. Early on when we started to go remote, one of the things we realized, if I'm in a meeting with 10 people and we're all sitting in a conference room and 2 people dial in, those 2 people are essentially excluded. And so for example, when we -- I have my exec team meeting and we've got our top 20 or 30 people in the room. If I'm in the office and Toby's in the office, and 6 of us are in the office and the rest are on Zoom, we're sitting at our desk on Zoom. Because the conversation is not the same for the people that are in the room and the people that are external. And there's a lot of examples of meetings that we actually do that way. And then other times, we do get meetings in person, right? And so we try to optimize, is this like an online meeting or is this an in-person meeting to really make sure that we're effective. And everybody participates, which is really the goal.

All right. So we have time, we basically have 2 minutes. So we'll do one current-day question. Toby, I'll let you pick. I was going to say, why did you buy Samepage? But if there's something that you think is more top of mind, let me know.

No, that's a good one, goes to the product strategy. So it's great.

Go ahead, Toby.

Yes. So I think it follows on to what you've seen from us from a product strategy perspective over the last stretch of time. So if you think back to some of the things that Steve was talking about earlier in terms of where we've gone from payroll to HCM, and as that has leaned forward over the last year or 2 into things like learning management system and then the premium video capabilities that we would have introduced about a year or so ago with an acquisition of VidGrid, stretching the bounds from what would have been traditional payroll and HCM into ways that I think really leverage our platform to be able to connect and communicate with employees, which I think has become even more important, over the course of the last year, as most of the world has pivoted to a remote workforce. And so one of the key elements in that strategy was our development of the Community platform, which has been, I think, a key engagement and communication tool with employees. And one of the things that we've seen over the adoption and usage of that, both in our own business because we use all of our products, but also in our clients and their employees is, we've seen those employees coming together on the platform in a way that's different than just sort of transactional work. We've seen them coming together and forming groups, which is the capability we introduced in Community. And we've seen them coming together around not just groups like social groups or team groups, but around tasks that are more project or work-oriented in HR teams and beyond. And so you think about the capabilities that Samepage brings from a collaboration standpoint, it's really a strategy of bringing in more of those collaboration-type tools, whether it's document sharing or direct messaging or giving people a workspace to actually do their work from a team standpoint and being able to create some of the workflows around that, that are really important. I think that's really the strategy. And I think that gives us sort of the next leg from a community standpoint to be able to take what is, I think, a capability that's growing in usage and acceptance and adoption of the client base, and which is free today by the way and be able to create something that you can monetize on top of that from a premium offering perspective.

No. Right. That's great. You guys have something in just in the nature of your platform, which Marc Benioff is jealous of it, Salesforce, which is by definition, you touch every employee, right?

Yes, for sure.

Yes. So there's a lot of places you can go with that. All right. Thank you so much for joining us today, Toby and Steve. It was really nice to see you. And thank you for your time in doing all the one-on-ones as well.

Yes, absolutely. Great seeing you, Pat.

Good to see you, Pat. Take care.

Have a great day.