Paylocity Holding Corporation (PCTY) Earnings Call Transcript & Summary

So look, we are just delighted to have Toby Williams, who is the co-CEO of Paylocity. How long has that been the case? It's been a year?

A year.

Yes. It's been a year. And -- I mean, Paylocity has been such a home run, right? I mean, it's been -- it's really been great. And then through the last year, as everyone worried about recession, people have kept worrying that the growth for all the pays was [ going to slow ] -- just hasn't right? It just hasn't. So I want to go through your background in some detail, if you don't mind.

This is the first time you're here, so -- we won't do it next year. But before I do that, let me just start with my standard question, which I'm asking everyone, which is how's business, what would you say?

Business is good. And I say that from the perspective of the demand environment that we've experienced -- first of all, stepping back, I mean, Payroll and HCM solutions for the mid-market, which to us is the companies with between 10,000 and 5,000 employees, the demand environment has remained strong, our sales execution has remained strong and employees on the platform, which is a key sort of driver for us has remained relatively flat since the beginning of our fiscal year starting in July. So I think overall, despite many sort of valid concerns out there in software land more broadly about the macro environment, the business for us has continued to be really good.

And why is that? Is it just because as much everyone worries, they're like [indiscernible] I guess people said like economists have predicted 13 of the last 3 recessions. Is it basically just that, that we're not? Or is there some other dynamic?

Yes. I think -- I think there's probably something to that. But I think also there is, I think, a broader sort of shift in the overall industry for us. So I think there are the demands of employees in terms of the technology that they use, the demands of and the expectations of our clients in terms of the technology that they're using. Everybody wants to do everything that they do on their phone and seeing really what looks like consumer-oriented technology and people seeing in the look and feel of what they experience outside of work has become absolutely the expectation across the industry. And I think that's driving a lot of the movement to more modern players like us that have a broader set of products that are really driven towards employee engagement. I think that's a key part of the success that we've experienced.

And how small will you go in terms of the companies that you service?

I mean we say that we would target companies with between 10,000 and 5,000 employees. We certainly have some that are smaller and some that are larger, but that's the -- some of the core of our market.

If you're just starting a company and you're just starting to hire people, would you use Paylocity?

Well, I think the driver is really what kind of -- what do you benefit from? What's the real client need? And if you need a broader sort of more robust set of HCM solutions and then beyond with the need towards really focusing on employee engagement, then we're a pretty good fit almost regardless of size.

All right. Cool. Okay. So you're from Upstate New York?

Just outside of Buffalo.

I asked you like a minute ago, you think I'd be able to remember. From like a big town or from like a really small -- like how small?

Like 5,000 people-ish.

And sorry, how many -- what's the name of the town?

Medina, New York.

Anyone know Medina, New York?

No takers.

How many CEOs have come out of Medina, New York?

Not many.

Are you like a celebrity Medina, New York?

No.

No?

No. My parents are both schoolteachers. So...

Do you -- are they still there?

For half the year. For the warm part of the year. Yes.

Where did you go under grad? You did -- I saw Ohio State for the...

Houghton College in Upstate New York and then went to grad school at Ohio State.

Yes. And did you work in between undergrad or were you going to have the...

Straight through.

You did. You can't really do that. I guess you came from law school. And did you get into -- so did you get in the business school and you applied to both and you got into both?

Yes. That's pretty...

Really good underground grades?

I did okay. Yes. I mean did reasonably well. Yes.

Yes. And then how did you -- what did you like better, law school or business school?

Business school. No doubt.

Yes. And you came out -- you actually -- so that's 4 years, right? That's the way that works 4 years, and then you came out and you actually practiced, right?

I did. I was a lawyer for a handful of years.

Doing what kind of law?

Corporate and securities law and mergers and acquisitions and did some venture deals back in the day, yes.

Yes. And this was in -- is this in Chicago, or it was Holland -- is Holland...

It was D.C. and New York City. So D.C. and Manhattan. Yes.

And then Citibank came calling because they didn't have enough -- it's hard to imagine that there weren't enough investor bankers to go around, but they decided to hire a lawyer.

So '04, it was just starting to come back. And so yes, it was -- went to Citigroup as an investment banker for a couple of years before going to Paychex and starting into the...

Yes. And how -- were you a good investment banker?

It was 24/7 and for the couple of years that I was there. And so I think I was probably a tired investment banker.

So -- because I was a lawyer who became an investment banker and the head of my firm at the time, like running a drafting session, I could kill it, right? But literally, the head of the West Coast or what at the time was the third -- it subsequently brought down the global economy, I don't talk about too much [indiscernible]. But anyways, he literally came to me and he was looking at something I did and he goes Pat your sources and your uses don't match. Like the most basic thing. And then my boss was like, it's my fault. I should have known when I hired a lawyer. For the next year -- for the next year, you're not going to leave the office, right? And all you're going to do is comps and [ LBO ] for a year.

There you go.

Yes. Okay. And so then -- now we get to the side that's more relevant. So then you interview for the corporate development, basically, the M&A job, right, at Paychex?

Yes.

And the guy who interviews you is?

Steve Beauchamp, my co-CEO today. So Steve and I have worked together. I've -- he hired me in 2005 to run strategy and corp dev and spent 5 plus years there and really got to the...

What's interesting that Steve as the Head of Products was hiring the M&A guy.

Yes.

And that's just how it worked?

Yes. Yes.

And what did you -- did you acquire anything during that period of time?

We did. We -- time and labor business, benefits business. I mean we basically were in a position of building out from what had been the really core sort of payroll and HR services solution to building out a set of software products. So he and I have together...

So it's kind of similar. It's more organic this time around.

Yes. But developing a view on a product strategy and how to really grow things around payroll and HCM has been a thing that we've done together on and off for more than 15 years.

Yes, that's awesome. All right. And then you departed payroll for 7 years?

Yes.

What -- was the company in D.C.?

There was company called Ellucian, it was a ERP software company, focused on higher education, where I ran strategy and corp dev and ran product, ran our cloud business and it was private equity backed.

That was Hellman?

Hellman & Friedman owned the business, yes.

Are they the ones who ended up buying Ultimate and combining it with it?

Yes.

Interesting. Yes. Interesting. Yes. Okay. And so then you're doing something else and Steve came calling again. How did you get pulled back into it? So this is now 2017, right?

Yes, 2017...

So how do you get pulled into Paylocity?

Yes. Steve and I obviously kept in touch. And the gentleman who was the CFO at the time had gotten really sick, unfortunately. And when he needed to bring in somebody else to sit in the CFO chair, reached out and we had a really good conversation around what was the direction of the business and what did that look like and how would we do that over time. And it was obviously a really -- it was a great business, growing really quickly and from my time in the industry, you could see that there's just a massive opportunity in front at that point in time. So it was a great -- it was a lot of fun.

Yes. So 5 years as CFO and you met everyone who's listened to this right now, right? And then how did the transition to co-CEO -- not that many CFOs become co-CEO.

Well, I mean, I think it's...

I'll try to think if I can think of any examples like, "Oh, [ Sam ] Beauchamp, pretty good example." Actually I could think of a great example. [ Sam ] Beauchamp is a great example.

Yes, that is a great example. Yes. I think it reflects how Steve and I have worked in the business over time. I mean we've worked as great partners in everything that we've done. And I think we've obviously had a common view of how to grow and operate the business. And I think it's worked out pretty well.

Yes. Is this part of a succession plan? Is there a view that Steve is going to go be Chairman at some point and leave you in charge?

Well, I think you always think about those things. I think from each of our perspectives, we continue to have a lot of fun, what we're doing, continue to enjoy leveraging one and another and how we run the business together. And I think from his perspective, I mean, he's -- hard to imagine a day when he's not super involved in everything we're doing, particularly from a product and strategy perspective.

How do you guys split it up today?

Well, I mean, the approach that we've taken awfully long time, including when I was the CFO is we're both involved in -- together in any major decisions that we're making across the business. We're talking -- we talk to each other every day, at least once. And we have our hands on together every major decision that we're making, certainly from a strategy perspective or otherwise. Steve has always, I think, been -- going back to the days at Paychex has been really, really involved in product and continues to be but we both are. I mean we both have a lot of time spent in go-to-market, in product and operations. I probably spend more of my time on things like ops and certainly the finance or who reports to me and spend an increasing amount of time in go-to-market, which I have over the last handful of years. And I think Steve is more passionate about product than anything else.

You guys are really good friends, is that fair to...

We've known each other for 15-plus years...

Yes I know it sounds like -- I'm just developing an appriciation for this now. It's really cool.

Yes. I mean most of the things we do...

Do you like to do the same things? Like on the weekend, you like to both you ride or do you...

He plays -- he enjoys playing golf more than I do, but I'm not very good. So...

Me neither, it really does -- that really does interfere. And so on the -- let's do the go-to-market side because that's kind of fun. So the go-to-market side sort of one of your focuses now. As you look out over the next year, what are your objectives?

Well, I think, first of all, I mean, we've continued to see a really strong demand environment. And I think from a -- that in part reflects a strong market. I think in part, it reflects the fact that we have a differentiated value proposition. So when you think about what we're really offering in the market, certainly, we have a competitive parity best-in-class on payroll and all the HCM modules. But I think we've really taken a view beyond the HCM and creating things like Community, which is the communication heart of our platform, really driving employee engagement. We've developed things like video, which is, again, another communication tool to be able to communicate more effectively across a company versus just e-mail surveys to get employee feedback and really drive employee engagement, our LMS solution, Leaning Management System solution to be able to drive training and development. All of those things really came together at a point in time where clients, I think, at the start of the pandemic, we're trying to find ways to communicate effectively with their employees in a pretty trying time and to be able to drive employee engagement and interaction, at a point in time where they were also trying to navigate remote and hybrid work environments, which hasn't really changed coming out of the pandemic. We've still seen a huge amount of value being delivered to clients through that product strategy and through that value proposition. And I think that's really given a lot of wins to our go-to-market teams who are out there focused on driving -- yes, we do sell back into the customer base, which is part of our business, but it's largely focused on new client acquisition. And for context, I mean, we have just over 30,000 clients in an overall market or a target market for us of over 1 million businesses. So our view would be we've got a relatively small share of a relatively large market, highly differentiated product suite. And right now, continue to see a strong demand environment and pretty solid sales execution.

Yes. And how many salespeople are there?

We had just under 700 salespeople.

Amazing, 700. And you need to add -- I mean, to grow 20%, you got to -- how many salespersons do you need to add?

Yes. So over the history...

Steve used to really focus on this. I wonder if you focus on it as much. Like it's really hard, Pat. It's really hard, every year, you got to add this many new reps that -- net of anyone that you lose. And it's really -- it's all about hiring these reps.

Well, it's -- I mean it is hard. But I think we -- on a year-to-year basis, with the exception of maybe 1 year during COVID, we would typically add -- and it's different every year, but sort of a high-teens level of incremental headcount in the sales team.

As a percent of the total?

As a percent of total. Yes, we would grow it by high teens percentage, 17%, 18% something in that ZIP code. And -- we -- on the one hand, we have full national coverage as we sit here today across the U.S., but I think we also say we have the opportunity to increase headcount in every single territory that we are covering. At the same time, I think the view has been to be able to drive sales leverage and productivity on a year-to-year basis by investing in things like channels, which today is -- contributes more than 25% of our new business comes to us referred in warm referrals from channel partners that we have, which are primarily insurance brokers or financial advisers that we've build relationships with in the field and then also driving a higher level of marketing interactions. So whether that's digital marketing or otherwise, we've certainly stepped up our maturity of investment there over the course of the last 3, 4 years. So that's the whole go-to-market picture. It's certainly growing, the sales team, continuing to drive investment in marketing from a lead gen and from an efficiency perspective and also continuing to pay attention to our channel partners that still, even at our size and scale, continue to drive more than 25% of our new business coming referred by them.

Yes. But the demand is there, it's really a question of capturing it.

It is. I mean I think the demand is there, and it becomes a question of, "hey, do we have a standout differentiated value proposition?" And I think that's where our product strategy really comes into -- really becomes the most important part of the game.

Yes. Okay. Cool. Now you can put your M&A hat back on for a second. So on one hand, first of all, with this -- under what circumstances would this business ever be sold?

Well, I mean, I think you'd have to have someone that wanted to be in or in the payroll and HCM space in a bigger way with -- and want to be focused on the client segment that we've really targeted. We've been focused on the employees or businesses with between 10,000 and 5,000 employees, and that's really been our focus. Our average client size is just over 100 employees, and that's been pretty consistent over the course of time. I think we've -- if you go back by probably 3, 4 years, we were seeing incremental traction in the lower end of the market. And that meant we were seeing more deals there, and they were buying more from us. And so I think at that point in time, we put a little bit more focus there. And we've also seen the same thing a little bit upmarket. We've seen more business traction there in terms of the number of deals, we've also seen the solutions that are resonating. So I think you've seen this sort of full coverage in...

What do you -- upmarket you called strategic? What do you call the upmarket group?

I mean we would refer to it as more of our upmarket or enterprise part of the market.

And where do you draw the line? 500?

Yes, it's roughly 5,000 -- or 500 to 5,000.

I hear that side is doing really well.

Yes. We've had -- it's been a good year. I mean I think the -- as we've launched all the new solutions that I've talked about between Community to surveys and LMS and video, I mean all -- Community Plus, all of that's really focused on collaboration, all of those solutions, I think, have resonated really nicely across the full market, including the upper end. Yes.

Okay. On the other side, what do you want to buy?

Well, I think...

You like to build things, right? But what would you maybe want to buy?

Yes. I mean I think our preference has always been to -- I mean, this is a software business with, I think, a product and development heart to it. So I think our view has always been that we would rather build the next feature function or product. And we've not done a ton of M&A deals. We've done probably a handful, and those have been deals where we found something like video is a really good example of something that was in the market that we were already integrated with that we thought we could drive a lot of value to our clients through and really accelerate our product road map. But also gave us an opportunity to integrate the solution seamlessly across our product set so that from a user experience and from a data-flow perspective, there was seamless integration. So I think the types of things that we would be interested in would include areas where you could accelerate the product road map, develop seamless integration, and those have been really, I think, product or tech-oriented deals for us.

And you can see it bubbling up through your ecosystem anyways.

Yes. Yes.

How does the video work?

How does it work?

Yes.

It's great. I mean it's -- honestly, it's one of my favorite things...

The example I'll give you is so like -- this cracks me up. I'll be walking past my daughter's room, and I'll hear her going, "so anyways Tabitha, about that boy in your class, I think that you should" -- and she talks for like a minute, right? And I'm like, wait, where's Tabitha? And Tabitha is not on the face time, right? And then she hit send, she's doing these long-form video and Tabitha's got like a 2-minute response, right? And so it's basically -- is that basically how you're using it?

Yes. Asynchronous video has become really, I think, really important and really -- it's become an effective communication channel.

Yes, we're not using. I think we should be. It's cool. I mean -- yes.

So we just -- so this past Friday was Employee Appreciation Day. And I snap -- just Thursday afternoon, on my phone, snapped a video, just thanking everybody across our business for all the hard work they put in so far this year. January is a -- it's the biggest month in our whole entire business. And so just said a huge thank you to -- for all of their efforts across the business on -- and delivered that through our Community solutions so that everybody sees it on Friday. And that's but one example of which there have been many, particularly in the course of the pandemic when we're trying to drive a much higher level of communication, both to get information out and continue to build culture and community in a situation where a lot of people were remote or navigating a hybrid work environment. So really easy to use and I think really effective in terms of how that resonates, getting a live message from somebody that you can actually see versus a lifeless e-mail that you can't track or really figure out who's read it or what they took away from it.

Yes. It's a funny thing. It's really effective -- all right. Any questions from our audience? Yes.

Could talk a little bit about the competition with the other players in payments space?

Yes. I mean it's -- so in our industry, I mean, it's always been a competitive -- there has always been a high degree of competition for new deals for us. We would see the biggest bucket in terms of source of business for us has traditionally been from ADP and Paychex. That continues to be the case. I think in broad brush, Paycor has been focused on a little bit smaller client than we are, and you've got Paycom, who I think has been focused on a slightly larger client than we are. But we certainly see them out there competing day to day. I don't think we see them as much as the larger players like an ADP or Paychex. But overall, I mean, I think it has been and continues to be a competitive environment for sure. It's also one of the reasons that I think we focus so much on product differentiation. It's really where you get a chance to tell a different story than a lot of the other folks that are out there.

What would cause you to lose a deal versus win a deal? Is it just product differentiation or are there other factors in play?

Well, I mean, I think in any given deal, you face, hey, how good is -- how good is the rep that's handling the deal? How well do they run the sales process? And then beyond that, I think you're into what are the needs of any specific client? Do they have a need that really lines up well against what we're offering, what solution are they coming off of? And what's sort of -- how do those things compare? I think those are the dynamics that you really try and uncover in the sales process when you're talking about sort of a needs-focused conversation in what a client actually needs. But I think in most cases, it's not that we win every deal for sure, but I think in most cases, the value prop that we're focused on in terms of, "hey, you've got a great payroll solution. You have great sort of normal course HCM solutions that are all integrated out of a single platform." And you also have a access to the other things that I just described, which nobody else is really delivering in terms of Community or Community Plus, which gives broader collaboration capabilities or video. I mean, those are things that I think, have become even more important to customers in the face of trying to engage with the next generation of the workforce with -- engage with employees that are perhaps remote or working in a hybrid environment where your ability to communicate and drive engagement and therefore drive culture are absolutely critical to being able to drive employee retention in a labor market that despite whatever may be going on in the macro still remains pretty darn tight.

So talking about the macro, could you just reconcile for those of us on the outside to try to understand your business, the cadence between -- we'll get weekly payroll numbers this Friday. How is the cycle of that payables report and the sales cycle happen? Meaning, I mean, if you're going to lay off 10,000. We're in the [ valley ] and you get that notice, cut your last check or just the timing of that. And given, again, [ Howard's ] testimony today, tomorrow, how are you calibrating the macro at the jobs level or particularly the second half of the year?

Yes. So there's no perfect reconciliation, start with that. I mean I think we began our fiscal year -- we're a July 1 fiscal year turn. When we looked at the year in front of us, we certainly acknowledge that there was storm clouds potentially in play from a macroeconomic perspective and that if we did see a recession, one of the impacts that you would have historically...

But you had a massive January 5, 12-payroll month, right? So I mean I'm just -- I'm really interested in the monthly payroll numbers that we see reported by labor and have the sales cadence of your -- you run your business.

So the sales cycles in our business are typically happening within a quarter. So sales cycles are fairly short. So inside of 90 days, you could take a deal from the average size deal from start to finish. It's usually a 4- to 6-week implementation time on average. Could be longer for a larger deal, could be shorter for a smaller deal, but that's really the cadence and the rhythm of the business in terms of the go-to-market motion and then taking somebody from the sales cycle to live in production. It can all happen inside of a quarter. What I was starting to say in relation to your question was when we started the year, our assumption with our annual guidance was we were seeing employment on our platform, so the number of employees on our platform, which has a -- I mean, that's really what the driver of revenue is in terms of the existing client base. We were seeing that flatten out. So if you go back to COVID, you saw it fall off precipitously and then you saw it really rise back to -- in our view, with our client base, get back to where we had started pre-COVID, and we were seeing it flatten out. So our assumption underlying our guidance for the year was that it would be flat because we call what we can see. We tell you what the assumption is, and then we'll update you on a quarterly basis. The last quarterly update that we gave on the conference call was on a month-to-month basis, it's been flat. Employees in the platform has been flat. When you look at the high level, there is no perfect reconciliation. But when you look at the best I can sort of do and this is what I do, is look at the overall unemployment rate is also fairly steady. So I mean we're driving against a demand environment that we've seen remain strong and employees on the platform level number that we have seen remain flat over the course of the year-to-date so far. So it's not a view of, "hey, it couldn't drop off, but we just haven't seen it yet."

Thanks so much, Toby. It's great to have you here...

Yes, it's good to be here. Thanks, everybody, for the time. Really appreciate it.

Really appreciate it.

Thank you.