Paycom Software, Inc. (NYSE:PAYC) Q1 2024 Earnings Call Transcript

Paycom Software, Inc. (NYSE:PAYC) Q1 2024 Earnings Call Transcript May 1, 2024

Paycom Software, Inc. beats earnings expectations. Reported EPS is $4.37, expectations were $2.43. PAYC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Terri and I will be your conference operator today. At this time I would like to welcome everyone to Paycom’s First Quarter 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to James Samford, Head of Investor Relations. You may now begin.

James Samford : Thank you. And welcome to Paycom’s Earnings Conference Call for the First Quarter of 2024. 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 certain adjusted expenses. 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’ll now turn the call over to Chad Richison, Paycom’s co-CEO and President. Chad?

Chad Richison : Thanks, James, and thank you to everyone joining our call today. I’ll kick off the call with a few highlights from the quarter and then I’ll turn it over to Chris to discuss client trends and recent awards. Craig will then review our financials and our guidance before taking questions. Our product vision centers around eliminating redundant HR work, eliminating cost and allowing users to recoup valuable time in their day to add value to the organizations. In addition to our single database, which simplifies the client experience and reduces integration costs, another key Paycom differentiator is that employees input and validate their data directly into our HCM solution. With Paycom, employees do their own payroll, fixing errors before they become problems.

On our last call, we highlighted three key focus areas in 2024. Solution automation, client ROI achievement, and world-class service. Led by Beti, our solution automation initiatives continue to generate tremendous opportunities for our clients. We released more product enhancements in the first quarter than in the previous two quarters combined. We are leveraging AI and decisioning logic across our solution, adding more value and eliminating mundane non-revenue generating activities for our clients. A recent new client told us that prior to implementing Beti, it would take over two days to process payroll. With Beti, they complete the process in only 90 minutes. We’ve also automated time off decisioning allowing managers across the country to focus on value-added activities.

With GONE, our time off product leverages decision logic to automatically approve, deny, or warehouse time off requests by employees. This is a better experience for employees and delivers both time savings and efficiencies for workforce management and scheduling. On the client ROI achievement front, our success with Beti results in increased client ROI and is resonating with more and more businesses in the marketplace. Our clients already receive industry-leading ROI and we are focused on accelerating our product roadmap to drive even more value. Now with Beti, clients regularly tell us that their company runs much smoother when their employees do their own payroll. And I know this sentiment is shared across the client base of Beti users. We are changing the way payroll is done and our clients are telling us we’re right.

On the world-class service front, we are meeting clients where they live to help identify and close any gaps they might be seeing between their respective total available ROI and where they stand today. We are strengthening our client relationships with service and value achievement and I want to thank our employees for their incredible efforts on this front. It is working. Our go-to-market strategy continues to emphasize the differentiated nature of our offering and the significant benefits of doing your own payroll with Paycom. We are getting more leads thanks to Beti and we are seeing solid demand for our solution. At our recent sales incentive trip, we recognized our first sales rep to sell over $4 million in annual new business. It wasn’t that long ago that we celebrated the first sales rep to sell $1 million in annual new business.

We believe our unique value proposition separates us from the other disparate offerings in the market that require complex integrations and manual entry activities. We continue to make meaningful progress on the international front as we build on the momentum we achieved in 2023 and early 2024 when we released our global HCM product and announced the launch of native payroll in Canada, Mexico, and the United Kingdom. Today we are pleased to announce that we have developed and are launching our native payroll solution in Ireland. In less than a year since we announced our international journey we are already seeing US-based companies with an international presence look to Paycom as a global provider. While still early, I’m pleased to see that all the work on our international strategy is paying off.

In fact, we recently won a large international sports organization thanks to our multi-country payroll and HCM offering. This client will process payroll with Beti in multiple countries, and this win represents another proof point for our international strategy. While this is a great win for Paycom, I want to be sure to note that we remain highly focused on our US growth as we still have only an estimated 5% of the total addressable market. To sum up, I’m pleased with the progress we are making on our strategic initiatives and I look forward to building on the momentum we are seeing. With that, let me turn the call over to Chris.

Chris Thomas : Thanks, Chad. Our service and client relations groups continue to work very closely together to drive value for our clients. Usage of our system continues to increase as more employees interact directly with their data. Our average DDX score continues to rise and is above 95% across our client base today. Our innovative technology and our client ROI achievement strategy are key drivers of satisfaction and bolster our world-class service model. In fact, we were very pleased to receive several awards that highlight the strength of our relationship with our clients. Most recently, we were recognized as the 2024 winner of the Excellence in Customer Service Award by Business Intelligence Group. It’s gratifying to receive recognition from an organization for our hard work and dedicated focus on our clients.

This award highlights businesses who are redefining service standards in their industries. This achievement showcases our ability to further drive client ROIs while making a positive impact across our client base. We were also named one of the most trustworthy companies in America by Newsweek for the third consecutive year. These awards are testaments to our service model. I’m pleased to see that our relationships with our clients continue to get even stronger. Finally, we earned the Gallup Exceptional Workplace Award for the second consecutive year, and we’re grateful to be recognized among global leaders in workplace culture. With that, I’ll turn the call over to Craig for a review of our financials and guidance. Craig?

Craig Boelte : Thanks, Chris. Before I review our first quarter 2024 results and our outlook for the second quarter and full year 2024, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. First quarter revenue of $500 million was up 11% over the comparable prior year period. Within total revenues, recurring revenue was $492 million for the first quarter of 2024, representing 98% of total revenues for the quarter and growing 11% from the comparable prior year period. We delivered strong net income and adjusted EBITDA in the first quarter of 2024 with GAAP net income of $247 million or $4.37 per diluted share based on approximately 57 million shares. Included in our GAAP results is a one-time non-cash stock compensation benefit of $118 million related to the forfeiture of the 2020 CEO Performance Award.

Non-GAAP net income for the first quarter was $147 million or $2.59 per diluted share. First quarter adjusted EBITDA of nearly $230 million was better than expected primarily due to higher revenue and expense discipline and represented a margin of 45.9% for the quarter. During the first quarter, we paid over $21 million in cash dividends and earlier this week, the Board approved our next quarterly dividend of $0.375 per share payable in mid-June. We still have approximately $796 million remaining under our buyback authorization as of March 31, 2024. Adjusted R&D expense was $45 million in the first quarter of 2024, or 9% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $71 million in the first quarter of 2024, compared to $55 million in the prior year period.

We continue to invest in our long-term future growth in areas of automation, AI, and international. Our tax rate for the first quarter of 2024 was 15% on a GAAP basis, reflecting the benefit of the forfeiture of the 2020 CEO Performance Award during the quarter. For Q2 and the full year 2024, we anticipate our effective income tax rates to be approximately 33% and 22%, respectively on a GAAP basis. We estimate Q2 and full year 2024 non-GAAP effective tax rate to be 25%. Quarterly fluctuations in our effective tax rates are generally due to the timing of stock compensation vesting and related tax effects. For the remainder of 2024, we expect stock-based compensation expense to be approximately $33 million per quarter. Turning to the balance sheet, we ended the first quarter with a very strong balance sheet including cash and cash equivalents of $371 million and no debt.

The average daily balance of funds held on behalf of clients was approximately $2.6 billion in the first quarter of 2024, up 8% year-over-year. On the capital expenditure front, our fifth building in Oklahoma City is substantially complete and will be placed into service in the second quarter. While we continue to estimate total CapEx as a percent of revenues to be approximately 12% in 2024, we also expect that percentage to decline beginning in 2025. Now let me turn to guidance. For fiscal 2024, we are maintaining our revenue and adjusted EBITDA guidance ranges, with revenue expected to be in the range of $1.860 billion to $1.885 billion, or approximately 11% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA to be in the range of $720 million to $730 million, representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range.

We remain on track with the full year plan we put in place at the beginning of the year and are beginning to see positive responses from our strategic initiatives. For the second quarter of 2024, we expect total revenues in the range of $434 million to $438 million, representing a growth rate over the comparable prior year period of approximately 9% at the midpoint of the range. We expect adjusted EBITDA for the second quarter in the range of $151 million to $155 million, representing an adjusted EBITDA margin of approximately 35% at the midpoint of the range. We continue to focus our efforts on executing on our plan and building momentum. We have a differentiated product, an industry-leading value proposition, and a solid foundation to build upon.

With that, we will open the line for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Raimo Lenschow of Barclays. Please go ahead, your line is open.

Raimo Lenschow: Perfect, thank you. Two quick questions, one for you or for the two of you Chad and Chris, if you think about the strategic initiatives that you’re kind of talking about, can you frame them in the — how does it compare to what — first of all — what are you doing there? Maybe you could be more specific. And then also, how does it compare to or kind of relate to what you see in the market in terms of end-demand, headwinds from less new hiring et cetera. Just frame a little bit like and what’s going on in the market versus what’s going on at you? And then my following question is for Craig. Can you speak to the benefits or extra benefits you might see from less rate cuts this year? Is that kind of helping you or how does it play into the model? Thank you.

Chad Richison: Sure, so I’ll take the first one Raimo. And so our client value achievement strategy, or as you called it, the strategic initiatives that we’re working throughout the year really have to do with meeting clients where they live and making sure that they are achieving the full value of ROI that’s available to them through the appropriate usage of our software. And so we’ve been focused on that. We did call that out in October 31st, actually, when we reported, we did call out that we’re going to be really focused on that. All of those initiatives are in efforts to continue to drive improvements in retention and again, be able to set clients up to achieve full value because we do have additional products for many of these clients that can really help them out once they’re utilizing the product correctly that we’ve already implemented.

And I’m going to say that’s in regards to our current client base. From a new client base perspective, we’re focused on our sales initiatives and those have been, you know, unchanged as we’ve moved throughout the year as far as what our focus is there.

Craig Boelte: Sure. And Raimo, on the rate cuts, I mean, obviously that changes every day as to how many there might be, but it seems like there may be less than we had originally thought. So you know, I mean, that is a benefit towards the end of the year, but the one thing we’re also looking at is do we try to extend the duration of some of those funds, and when you do that, you’re trading off some of those higher rates. Effectively, you’re taking two or three rate cuts if you do that. So that’s kind of what we’re looking at strategically with those funds.

Operator: Thank you. Your next question comes from Samad Samana from Jefferies. Your line is now open.

Mason Marion: Hi, this is Mason Marion on first, Samad. Thanks for taking our questions. So looking at your guidance, can you kind of elaborate on what you’re seeing from a churn new bookings perspective and how — and the assumptions that you have to those in your guidance?

Chad Richison: You sound exactly like Samad. So churn new bookings POV assumption. What is the — I’m trying to think. Can you maybe refrag, can you say that question again?

Raimo Lenschow: I’m just trying to better understand what you’re factoring into your 2Q assumptions and maybe for the back half the year around what you’re seeing from a new bookings perspective and from a churn perspective?

Chad Richison: Yeah, stability. I mean from a new bookings perspective, you know, we are seeing improvement in that. You know, retention is something that we call out at the end of the year but all of our initiatives that we’re working through our client value achievement are set to have an impact on that and you know we feel good about how that’s working.

Raimo Lenschow: Great, thank you.

Operator: Your next question comes from Mark Marcon of Baird. Please go ahead, your line is open.

Mark Marcon: Hi, good afternoon and thanks for taking my questions. Chad, I was wondering if you could talk just a little bit about what you’re seeing in terms of variance, in terms of sales performance across the various offices. You did mention that you’ve got 1 quota carrier that achieved over $4 million. And so that obviously seems very strong. But on the other hand, we’ve had a little bit of a deceleration with regards to the revenue growth rate. And so I’m just wondering, when you talk to your sales leaders, and you obviously made some changes there, what are they seeing out in the market? How much more difficult is it to get new sales? There have been some investors that have been asking about saturation in the mid-market. I’m wondering what your perspective is with regards to that.

Chad Richison: Yeah, so I guess first I would say our best offices are going to have the best managers regardless of geography. And I think, there for a couple of years, Tulsa was number one, and it’s a city of 400,000 people. We’ve been in that city for 22, 23 years. So your best office is going to have your best manager. From a saturation perspective, that’s no — there’s no such thing as saturation in the mid-market. I mean, you’ve had the same players for a long period of time. We’re all very competitive in the market. We have about 5% of the total addressable market available to us. And so, no, I wouldn’t say it’s from a saturation perspective. It comes from appropriate management, appropriate training, and appropriate leadership.

And as we’ve gone through the year, we’ve gotten better and better. And can call out that we are having accelerated sales if you look at the last two months of this year versus the first two months of this year from a bookings perspective. And that’s not to say that the first two months were bad. It’s just to say that we are getting better and better at how we move product.

Raimo Lenschow: That’s great. Can you talk a little bit about what you’re doing with regards to the internal sales group that typically does the up sales, how are you structuring commissions, is there still a mandate that new clients have to have Beti. And where do you stand with the Beti penetration within the existing client base?