Paycom Software, Inc. (NYSE:PAYC) Q2 2023 Earnings Call Transcript

Paycom Software, Inc. (NYSE:PAYC) Q2 2023 Earnings Call Transcript August 1, 2023

Paycom Software, Inc. misses on earnings expectations. Reported EPS is $0.84 EPS, expectations were $1.59.

Operator: Good afternoon. Thank you for attending the Paycom Software Second Quarter 2023 Quarterly Results Conference Call. My name is Kate, and I will be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to our host, James Samford, Head of Investor Relations. You may go ahead.

James Samford: Thank you, and welcome to Paycom’s earnings conference call for the second quarter 2023. 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 and quarterly report on Form 10-Q.

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, adjusted gross profit, adjusted gross margin 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 will now turn the call over to Chad Richison, Paycom’s President and Chief Executive Officer. Chad?

Chad Richison: Thanks, James, and thank you to everyone joining our call today. We delivered very solid results in the second quarter, and we continue to expand our opportunity, both within and outside the U.S. I’ll start with highlights from the second quarter and progress on our initiative. Following that, Craig will review our financials and guidance, and then we’ll take questions. Second quarter 2023 revenue of approximately $401 million represented strong growth of 27% year-over-year. Second quarter adjusted EBITDA came in at $157 million representing an adjusted EBITDA margin of roughly 39%, up approximately 130 basis points year-over-year. We are delivering a solid combination of growth and high margins, while maintaining a disciplined investment strategy and product and international expansion.

On the product front, the ROI that our clients are achieving from Beti is unquestionable. We recently commissioned a total economic impact study from Forrester Consulting that quantified the savings from using Paycom and Beti, including a 90% reduction in labor for payroll processing and saving HR and accounting teams more than 2600 hours per year. Companies that are not adopting Beti are missing out on a significant opportunity for savings from this structural change to how payroll should be done. With millions of employees already doing their own payroll and organizations seeing incredible ROI with Beti, there’s no reason not to adopt it. The product is working as we anticipated, and our messaging is resonating. So we will remain discipline in promoting the power of Beti to new and existing clients.

In April 2023, we launched access to our Global Human Capital Management Software in more than 180 countries and in 15 languages and dialects. Today, we announced that we have expanded our HCM solutions to include self-service payroll for organizations with Canadian employees. Now, more North American businesses will be able to improve their payroll processing by giving their employees a more transparent and user friendly experience in Canada with Beti. We are seeing continued success selling across our entire target market range, and our efforts up market continue to be strong. With our recent launch into Canada, we’ve opened up a new large cross-border opportunity. As we continue to expand our geographic reach, I expect our move-up market to continue to accelerate.

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As a result, we are redefining our target market range to include organizations with greater than 10,000 employees which represents an enterprise segment that our sales reps can now directly pursue. With our new expanded market opportunity, we now estimate our market share is well below 5%. This expansion gives me confidence that we can grow at an impressive pace for many years to come. In addition to launching our payroll services in Canada, our product development team also rolled out two significant tools in our software, Everyday and the Client Action Center. Everyday allows employees to get paid on a daily basis. Unlike other products on the market, with Everyday, employees access their earned pay early without being charged a fee, and employers are not exposed to potential losses from all factors that impact pay, including early departures, garnishments or benefit deductions to be collected.

Everyday is a fully compliant payroll as opposed to a pay advance like many other daily pay services. The Client Action Center furthers our dedication to creating software that simplifies the lives of our clients by providing them with an intuitive dashboard within the Paycom mobile app. This new tool makes it even easier for our clients to take action and get updates on service related items. We’ve received great feedback from clients on this streamlined approach, since we rolled it out in June. Finally, Paycom was recently recognized as one of America’s Greatest Workplaces in 2023 by Newsweek. The award highlights companies dedicated to providing employees with an enjoyable work environment that also fosters growth and development opportunities.

In addition, for the second year in a row, Comparably named Paycom, one of the best career growth opportunities among all companies. In summary, our highly differentiated product and realized client ROI continue to drive our strong results. I’d like to thank our employees for their hard work and commitment to excellence, as we continue to change the way payroll is done. With that, I’ll turn the call over to Craig, for a review of our financials and guidance. Craig?

Craig E. Boelte: Before I review our second quarter results for 2023 and our outlook for the third quarter and full year 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We delivered solid results this quarter with revenue of $401.1 million, up 26.6% compared to the prior year period. Our GAAP net income for the second quarter was $64.5 million or $1.11 per diluted share based on approximately 58 million shares. Adjusted EBITDA was $156.6 million in the second quarter of 2023, or 39% of total revenues compared to $119.6 million in the second quarter of 2022 or 37.7% of total revenues or up 130 basis points year-over-year. Non-GAAP net income for the second quarter of 2023 was $94.3 million or $1.62 per diluted share up 29.1% from the prior year period.

Second quarter GAAP tax rate came in higher than expected at 30.5%. For the full year 2023, we now anticipate our effective income tax rate to come in slightly higher at approximately 29.5% on a GAAP basis, and approximately 27% on a non-GAAP basis. Demand trends remained strong, particularly upmarket. Within total revenues, recurring revenue was $394.5 million for the second quarter of 2023, representing 98.4% of total revenues for the quarter and growing 26.6% from the comparable prior year period. Adjusted sales and marketing expense for the second quarter of 2023 was $100.4 million or 25% of revenues. We continue to aggressively spend on marketing and sales ahead of future growth. Adjusted R&D expense was $42.5 million in the second quarter of 2023 or 10.6% of total revenues.

Adjusted total R&D costs, including the capitalized portion, were $61.2 million in the second quarter of 2023 compared to $48.1 million in the prior year period. We continue to invest in new products and expanded geographic offerings. Turning to the balance sheet, we ended the quarter with a very strong balance sheet including cash and cash equivalents of $537 million and total debt of $29 million. Additionally, we announced today that we have expanded our revolver from $650 million to $1 billion. The average daily balance of funds held on behalf of clients was approximately $2.2 billion in the second quarter of 2023, up approximately 13% year-over-year. Now, let me turn to guidance. For fiscal 2023, we are raising our outlook and now expect revenue in the range of $1.715 billion to $1.717 billion or approximately 25% year-over-year growth at the midpoint of the range.

We expect adjusted EBITDA in the range of $722 million to $724 million, representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range. With these strong results and outlook, we are well-positioned to reach the Rule of 67. For the third quarter of 2023, we expect total revenues in the range of $410 million to $412 million representing a growth rate over the comparable prior year period of approximately 23% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $156 million to $158 million representing an adjusted EBITDA margin of approximately 38% at the midpoint of the range. We paid our first quarterly dividend of $37.5 per share in June, and the Board has approved a quarterly dividend of $37.5 per share payable in mid-September.

Paycom is in a strong financial position and executing well against a very large market opportunity. Our focus on delivering strong revenue growth and attractive adjusted EBITDA margins remains top priorities, and I am pleased with the consistency of our execution and the resiliency of our business model. We look forward to delivering continued strong results as many of our initiatives gain traction in 2023 and 2024. With that, we will open the line for questions. Operator?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from the line of Raimo Lenschow with Barclays. Your line is now open.

Raimo Lenschow: Thank you. I had two quick questions. First, Chad, can you talk a little bit about what you’re seeing out there in terms of end demand, etcetera. Because, and the reason why I’m asking is, like, if I look at, this quarter you beat by $3 million, the full year was only raised by $2 million. So, do we need to read into that, that there is, that you’re kind of slightly concerned about the second half of the year, like — maybe you kind of frame it for us in terms of how we should think about that. And then the second question was on Everyday. Like, how should we think about that in terms of, like applicability in terms of is this for all the clients? Is it for a select group, that have more contingency workers, whether it’s interesting, how think you broadly you can roll this up? Thank you.

Chad Richison: Sure. So, I mean, I’ll take your last question first and circle back. But, in regards to Everyday, we put it out there because there are industries and certain companies that have moved toward a more pay as you want type program, typically for lower wage earners. Our product that we put out there allows early wage access or everyday access to wages. And the employer is not on the hook. It’s not a loan, so the employee is not charged. And oftentimes, these amounts are guesstimated. And then if the employee leaves early, or if they didn’t collect all of the deductions for the employee, the employer is on the hook. And so, all I would say is it, it’s meeting a need that’s already out there. I do not suggest that business has changed to a daily pay environment, but some of them are already out there.

And so, it gives us an opportunity and it’s linked to our bulk card. In regards to your first question about demand, demand for us is still very strong, especially with outside sales and new bookings. We’re booking larger deals. We’re booking $2 million deals, $3 million deals. We hadn’t booked those before. So, outside sales is strong and up year-over-year. Inside sales, which sells small business or smaller emerging business below 50 employees is also up year-over-year. We do have a metric within our business model that sells that’s down year-over-year and that’s our CRR sales. The CRR group upsells current clients and this group’s been down year-over-year and honestly, that’s because, we’ve remained very disciplined in converting our client base to Beti, you had that first group that came on and then we’ve been out selling the others.

It’s a lot of work for our CRR with very little revenue opportunity for them. So, we’ve actually given compensation accelerators to incentivize the group to sell it, but it’s still a smaller revenue product or billing item for us. So, while self-inflicted, I mean, we are having CRR’s focus on Beti. And that’s cost us $15 million to $20 million in bookings this year. But, again we’re doing the accelerator commission for the CRRs to make-up for the lower revenue. We’ve been changing out the jet engines on our plane in mid-flight here. I mean, Beti, dramatically changes the way our clients do their payroll, produces a dramatic ROI. So, we have to remain disciplined. We’re not going to make a client go on it. We have to sell them on it and, it takes a while.