Paycom Software, Inc. (NYSE:PAYC) Q3 2023 Earnings Call Transcript

Paycom Software, Inc. (NYSE:PAYC) Q3 2023 Earnings Call Transcript October 31, 2023

Paycom Software, Inc. misses on earnings expectations. Reported EPS is $1.3 EPS, expectations were $1.6.

Operator: Good afternoon, and thank you for attending today’s Paycom Software Third Quarter 2023 Quarterly Results Conference Call. My name is Chasson, and I’ll be the moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, James Samford, Head of Investor Relations.

James Samford: Thank you, and welcome to Paycom’s earnings conference call for the third 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 solid results in the third quarter with very strong profitability. All focus on Paycom innovations that are transforming our industry and strengthening our competitive position. Following that, Craig will review our financials and our guidance, and then we will take questions. Throughout our 25-year history, Paycom innovations have been transforming the payroll and HCM industry. And now we have fundamentally shifted how businesses use core HR and payroll products. We started transforming the industry in 1998 by moving payroll to the web. We have made many innovations in those 25 years, but none more important than do-it-yourself payroll for employees with Beti.

This is a paradigm shift for our industry and delivers tremendous value to our clients when employees do their own payroll. Along with our focus on automating and innovating all of our current products, we’re continuing to enhance our global HCM and payroll product for international enterprises. Today, we announced that we are expanding our global payroll product to include Mexico. During the third quarter, employees in Canada started doing their own payroll with Beti and now employees in Mexico can, too. We are continuing to help clients navigate to the new way of doing things. And as a result, nearly two-thirds of our clients have made the shift to Beti. For most employees, the value of the perfect payroll is oftentimes immeasurable. If their check is perfect, they don’t need to borrow money from a friend or family member to get through the weekend or make a bill payment.

How do you measure the value of that? We’re getting better and better at helping employers measure the full value available to them when payrolls are perfect. A portion of that value is easy to calculate because it’s the value they receive by the elimination of after-the-fact payroll errors that require correction payroll runs, manual checks, voided checks, direct deposit reversals, additional wires, tax adjustments, W2Cs, et cetera, et cetera. Perfect payrolls eliminate these common after-the-fact payroll corrections that would otherwise be billable. So the more employees do their own payroll, the greater the savings delivered to the client from Paycom future billings, which results in lower related revenue recognized by Paycom. I’d like to thank our employees for their consistent execution and their commitment to our long-term strategy.

I also want to wish Paycom a very happy 25th birthday. I look forward to many more. And as many of you know, we’re just getting started. With that, I’ll turn the call over to Craig for a review of our financials and guidance. Craig?

Craig Boelte: Thanks, Chad. Before I review our third quarter results for 2023 and our outlook for the fourth 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 fundamentally strong results this quarter with solid revenue and earnings growth. Revenue of $406.3 million was up approximately 22% compared to the prior year period that came in below our guidance range as a result of lower-than-expected service revenues and unscheduled payroll runs. As Chad mentioned, Beti adoption and usage creates tremendous value to clients as they experience perfect payrolls and eliminate errors, corrections and unscheduled payrolls, which would otherwise be billable items.

In addition, our CRR teams continue to focus on Beti adoption and overall system usage, which resulted in lower cross-selling revenues. We delivered very strong GAAP net income and adjusted EBITDA in the third quarter. Net income was $75.2 million or $1.30 per diluted share based on approximately 58 million shares and adjusted EBITDA was $165.6 million, representing third quarter margin of nearly 41%, up over 300 basis points year-over-year. Non-GAAP net income for the third quarter of 2023 was $102.4 million or $1.77 per diluted share, up 39% from the prior year period. During the quarter, we repurchased over $76 million worth of stock and paid nearly $22 million in cash dividends. As of September 30, 2023, we have retired nearly 5 million shares and when combined with dividends, we have returned over $700 million to stockholders.

We still have $1 billion remaining under our buyback authorization and the Board has approved our next quarterly dividend of $0.375 per share payable in mid-December. Adjusted sales and marketing expense for the third quarter of 2023 was $94.3 million, representing 23.2% of revenues. We continue to hire top talent to expand our sales footprint and invest in marketing to drive lead volume. Adjusted R&D expense was $46.2 million in the third quarter of 2023 or 11.4% of total revenues, up 20 basis points year-over-year. Adjusted total R&D costs, including the capitalized portion, were $69 million in the third quarter of 2023. The capitalization rate increased approximately 33% in the quarter as we continue to invest in new products and support our international expansion efforts.

Third quarter GAAP tax rate came in at 26.3%. For the full year of 2023, we expect our effective income tax rate to come in at approximately 29% on a GAAP basis and approximately 26.5% on a non-GAAP basis. Turning to the balance sheet. We ended the quarter with a very strong balance sheet, including cash and cash equivalents of $484 million and total debt of $29 million. The average daily balance of funds held on behalf of clients was approximately $2.1 billion in the third quarter of 2023. Now let me turn to guidance. Throughout 2023, we have been seeing moderating upside to our guidance model, which corresponded with increases embedded usage and macro headwinds from inflation that may impact each client differently. Now that more clients are achieving the ROI that Beti has to offer, it has eliminated certain billable items, which is cannibalizing a portion of our services and unscheduled revenues.

With 10 months of data from increased Beti usage, we are incorporating the impact that our clients’ ROI achievement has on our model. Based on these factors, we expect fourth quarter 2023 total revenues to be in the range of $420 million to $425 million, representing a growth rate over the comparable prior year period of approximately 14% at the midpoint of the range. We expect adjusted EBITDA for the fourth quarter in the range of $169 million to $174 million, representing an adjusted EBITDA margin of 41% at the midpoint of the range. With our Q3 results and our Q4 guidance, we now expect fiscal 2023 revenues to be in the range of $1.679 billion to $1.684 billion or approximately 22% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $712 million to $717 million, representing an adjusted EBITDA margin of nearly 43% at the midpoint of the range.

Combining our expected revenue growth and adjusted EBITDA margin, we are still on track to reach the Rule of 65 in 2023. As we look out to 2024, we have a number of strategic initiatives that we believe will further strengthen the value clients receive from our offering. We are making strategic performance and client value decisions that, we feel are best for our long-term relationship with our clients. Our mission is, to ensure and achieve client value and that is our focus. Our guidance for the next 15 months assumes, the impact from the strategic revenue decisions, we are and will be making. As a result, we believe it is prudent, for us to set expectations, for 2024 year-over-year revenue growth, of between 10% and 12%. We’ll have more visibility when we provide formal guidance in early February.

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

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Q&A Session

Operator: [Operator Instructions] Our first question is from Raimo Lenschow with Barclays. Your line is now open.

Raimo Lenschow: Hi. Thank you. I’m trying – to get a little bit more clarity on the Beti impact. So if I’m listening to you, it sounds like Beti is the main problem here or the main issue for what’s going on. But it’s kind of – but it has been launched for a while. So, why do we see the impact like so dramatically now? And maybe you can link it in with the strategic revenue decisions for next year. Is that kind of Beti or do we need to think broader here? Thank you.

Chad Richison: Sure. I mean, first, in regards to the first one, Beti usage has continued to increase throughout the year for us, and that continues to increase. We’ve been pretty close to guidance almost every quarter this year. And so Craig kind of talked about that moderating throughout the year. And we’re seeing what accelerated impact Beti has. And then, Craig, you can add kind of the…

Craig Boelte: Yes. So Raimo, I mean, it impacted it in a couple of different areas. I mean, obviously, the unscheduled runs to correct payrolls and some of those service revenues that, we have as it relates to correcting payrolls, those numbers were moderating, and they typically come in towards the end of the quarter. So that’s part of the impact for the quarter as well as the CRR impact, which I called out on the prepared remarks. And then also the pre-employment services came in a little light. So it was really a combination of all four of those items.

Operator: Our next question is from Samad Samana with Jefferies. Your line is now open.

Samad Samana: Hi. Thanks for taking my questions. I guess I want to unpack a couple of things to follow-up on Raimo’s question. I mean if I think about the dollars that you would add based on that 10% to 12% growth in 2024. Yes, I guess I’m curious, based on the staffing levels of the organization, should we see either a change in the cost structure or just thinking about dollars added and sales headcount that’s adding it? Just how do we kind of square those two things, especially with the offices that you added in late ’21 and early ’22? I’m just trying to understand, because 10% to 12% would be a pretty significant departure, from the growth we’ve seen historically?

Craig Boelte: Yes. We haven’t given any guidance as it relates to the cost structure, Samad. I mean that’s something we’ll be looking at. One thing we just wanted to do is give you guys kind of an indication, of what we would expect with some of the things we’re seeing now, as to how 2024 would be shaping up.

Samad Samana: And maybe just, I guess, a follow-on on that. So I understand that Beti’s efficiency drives maybe some services revenue that you would have otherwise gotten, but what about in terms of whether – can you give us any update on maybe the number of new customers that you added in the quarter, or ARR added in terms of new represented seats that, can maybe help us think about either growth in customer count going forward? Or what are you assuming for that for 2024? Just any color would be helpful?

Chad Richison: Sure. I mean what we can tell you about, what we see right now, is outside sales remain very strong inside sales remain very strong. And cross-selling with our CRR group continues, to be down as we are focused on these current clients that we have.