Paycom Software, Inc. (NYSE:PAYC) Q4 2023 Earnings Call Transcript

Paycom Software, Inc. (NYSE:PAYC) Q4 2023 Earnings Call Transcript February 7, 2024

Paycom Software, Inc. misses on earnings expectations. Reported EPS is $1.43 EPS, expectations were $1.78. Paycom Software, Inc. 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 Sierra, and I’ll be your conference operator today. At this time. I would like to welcome everyone to Paycom’s Fourth Quarter and Full-Year 2023 Financial Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A session. [Operator Instructions] I will now turn the call over to James Samford, Head of Investor Relations. You may begin.

James Samford: Thank you, and welcome to Paycom’s earnings conference call for the fourth quarter and full-year 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 Co-CEO. Chad?

Chad Richison: Thanks, James, and thank you to everyone joining our call today. We ended 2023 with better-than-expected results, thanks to the considerable coordinated efforts of our team across the organization. Before digging into the quarterly results and achievements in 2023, I’d like to discuss today’s announcements about the promotion of Chris Thomas to Co-CEO. Following that, I will briefly introduce Chris who previously served as our COO. Craig will then review our financials and our guidance before taking questions. With that, let’s get started. As Founder and CEO of Paycom, my position has provided me the opportunity to work with great leaders who have built Paycom into a world-class HR and payroll software company.

One such leader is Chris Thomas. He is someone I have extreme confidence in and a leader I can share responsibilities with at Paycom. I’ve been preparing this opportunity for Chris and myself to work even more closely together for some time now. Today’s announcement further illustrates the trust I have in our leadership. Personally, this is very exciting, because it allows me to invest further in the areas that I’m passionate about, which are the ones where I can have the largest impact for our clients. In this new role for Chris, Paycom will be even stronger than ever before. A key area of my continued focus will be product innovation and strategy. And Chris will continue to focus on operating other aspects of the business. Our collaboration has strengthened Paycom and I’m excited for what we will do going forward.

In the last several months, we continued to strengthen our leadership team with the addition of Jason Clark as Chief Administrative Officer and Steve Sturges as Chief Marketing Officer. Jason was the CEO of one of the region’s largest workers’ comp insurance companies. Having worked with Jason in various capacities for about 12 years, I officially brought him into the organization last year knowing this was an ideal fit for him and for Paycom. Steve formerly owned and operated a very successful marketing agency and I’ve had the privilege of working with him for about 15 years. I’m excited to see him continue to elevate our brand, engage our clients and drive further demand generation for our sales force. This evolution of our organization is exciting, and I believe it will bring significant value to our clients, employees and investors.

Now, I want to discuss our vision for 2024 and then look back on some highlights of 2023. Following a better-than-expected end 2023, in 2024, we are primarily focused on three key areas. World-class service, solution automation and client ROI achievement. Our continued focus is being the leading provider of comprehensive payroll and human capital management solutions in every market we serve. We are bringing the power of Paycom to more employers and employees and showing more organizations the ROI they experience by using our single database software. On the product front, Beti has been one of the products at the leading edge of our AI and automation strategy, delivering tremendous ROI to our clients. Our recently commissioned third-party study on Beti highlighted three benefit areas.

On average, a greater than 80% reduction in errors, and 90% reduction in time spent processing payroll and improved employee engagement. A leader within the restaurant industry noted that the automation from Beti took days off payroll processing time and that as employee checkers went down, employee engagement went up. Additionally, certain organizations using Beti experienced up to 100% of their end-users regularly engaging with our easy-to-use system. Solutions like Paycom’s GONE tool are expanding automation to other areas of our product suite, namely our time off applications. The rollout of GONE towards the end of 2023 has been going very well. This new product uses AI and decisioning logic to automate all decisions for time-off requests, which further enhances both the employee and the manager experience by eliminating conflicts and resolving time-sensitive decisions.

Today, clients may make between 20 and 30 decisions or more per year per employee concerning PTO, vacation request and the denials or approvals that go into staffing decisions. GONE eliminates those unnecessary interaction points by providing a consistent and fully automated experience for employees, managers, HR administrators and the business as a whole. With GONE, an employee in any industry can request time-off at midnight on a Friday and know immediately if it is approved or denied because GONE has automated all time-off request decisions. It’s another example of a product that’s a win for our clients and a win for their employees. We delivered a lot of innovation on the international front in 2023. We launched our global HCM product and now companies of all sizes use this product across 180 countries and in 15 languages and dialects.

We developed and launched native payroll in Canada and Mexico. Now we’ve developed and are launching a native payroll solution in the United Kingdom. Our international strategy complements our product strategy and adds to the momentum we are seeing with US-based companies that have an international presence. While still early, we are very excited about the potential impact this initiative will have on our expanded team. While I’m proud of our product developments and international expansion in 2023, I’m even more excited about where we’re headed with the product department. As a company, we all know and feel the excitement that is happening within our walls. Since 1998, Paycom has changed the way businesses operate through innovation and automation.

Our revolutionary product roadmap will continue to bring new levels of value to our clients. I’m glad to see both growth in our product and in people we are elevating and bringing back into the organization. The buzz about the future of product innovation across the organization is exciting and encouraging. The client experience is everything to us and that all starts with our product. We are excited to release more product enhancements and innovations than ever before. To sum-up, in 2024, we will continue to be hyper-focused on world-class service, solution automation and the client ROI achievement strategies. This means, we will continue our emphasis on client ROI and user experience. I’m confident that the size of our opportunity and our track-record for execution will bolster our growth trajectory.

I’d like to thank our employees for their important contributions in 2023 and commitment to Paycom. In fact, because of them, Paycom earned many top workplace accolades in 2023, most notably Gallup’s Exceptional Workplace Award. Additionally, Newsweek recognized us as one of the most trustworthy organizations and as a Top Workplaces for Diversity for parents and families. These accolades mean a lot because it’s a reflection of our leadership and the culture we’ve built. Before turning the call over to Craig, I’d like Chris to briefly introduce himself and discuss his vision for the role. Chris?

Chris Thomas: Thanks, Chad. I’m honored to help lead such an incredible organization. I want to personally thank you for the guidance, tools and insights you provided me through the years. Having had the opportunity to lead approximately 10 departments over my tenure, like product, service, learning, HCM, implementation impacts to name a few, I feel even more prepared to help leap Paycom into future. I am proud of our leadership group who have strategized and built the client value achievement strategy. We spent a lot of quality time throughout the year, especially last quarter having meaningful engagements with our clients and the feedback has been very encouraging. We are strengthening our relationships and relentlessly pursuing solutions that deliver high ROI for our clients.

The innovations in automation and user experience are resonating across our client base, delivering immediate and measurable value to our clients will deliver long-term value to Paycom. As a result, our service and client relations groups are working together more closely than ever before, which is driving further ROI for our clients. We’re going to continue to generate even more momentum as we engage clients to help them maximize their value when using our system. 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 fourth quarter and full-year results for 2023 and our outlook for the first 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. We ended the year with solid results with full-year 2023 revenue of $1.694 billion up 23% compared to 2022. Fourth quarter results were better-than-expected, with total revenues of $435 million, representing growth of 17% over the comparable prior year period. Our revenue growth was driven by new business wins, partially offset by lower cross-selling to existing clients. Within total revenues, recurring revenue was $427 million for the fourth quarter of 2023, representing 98% of total revenues for the quarter and growing 17% from the comparable prior year period.

We delivered strong net income and adjusted EBITDA in 2023. Full year GAAP net income was $341 million or $5.88 per diluted share based on approximately 58 million shares. Non-GAAP net income for 2023 was $449 million or $7.75 per diluted share, up 26% from the prior year on a per share basis. In the fourth quarter, GAAP net income of $82 million and non-GAAP net income of $110 million represented a $1.43 and $1.93 per diluted share, respectively, based on approximately 57 million shares. Full year adjusted EBITDA was $719 million representing full year margin of 42.5%, up over 30 basis points year-over-year. Fourth quarter adjusted EBITDA was $177 million, representing a quarterly margin of 40.6% for the quarter. During the fourth quarter, we repurchased approximately 1.2 million shares of common stock or approximately 2% of our shares outstanding for a total of $213 million and we paid over $21 million in cash dividends.

As of December 31st, 2023, we have repurchased over 6.1 million shares, and when combined with dividends, we have returned nearly $1 billion to stockholders. We still have approximately $800 million remaining under our buyback authorization as of December 31st, 2023, and the Board has approved our next quarterly dividend of $0.375 per share payable in mid-March. We ended 2023 with approximately 36,800 clients, representing a growth rate of 1% compared to 2022. On a parent company grouping basis, we ended the year with roughly 19,500 clients, up 2% compared to 2022. Digging into client mix details and using client figures based on parent company groupings, client count for companies with greater than 500 employees was up 11% year-over-year and client count for companies with greater than 2,000 employees was up nearly 18% year-over-year.

Total number of employee records stored in our system in 2023 was 6.8 million. Paycom’s annual revenue retention rate in 2023 was 90% compared to 91% in 2022 with attrition concentrated primarily at the low-end of our market. Note that our earnings press release issued earlier this afternoon included additional information about a recent modification in our annual revenue retention rate calculation. Adjusted R&D expense was $51 million in the fourth quarter of 2023 or 11.6% of total revenues. Adjusted total R&D costs including the capitalized portion, were $73 million in the fourth quarter of 2023 compared to $52 million in the prior year period. We continue to invest in the long-term future growth opportunity including in areas of automation, AI and innovation.

Our tax rate for the year ended 2023 was 28% on a GAAP basis. For the full year 2024, we anticipate our effective income tax rate to be approximately 29% on a GAAP basis and approximately 25% on a non-GAAP basis. In fiscal year 2024, we expect stock-based compensation expense as a percent of revenue to be approximately 8.5%. This does not reflect any potential one-time adjustment related to the forfeiture of the 2020 CEO Performance Award. We will provide details on this one-time adjustment if any when we report first quarter earnings. Turning to the balance sheet. Even after the substantial buybacks and dividends paid in the quarter, we ended the year with a very strong balance sheet, including cash and cash equivalents of $294 million and zero debt.

Cash from operations was $485 million in 2023, representing an increase of 33%. The average daily balance of funds held on behalf of clients was approximately $2.2 billion in the fourth quarter of 2023. On the capital expenditure front, our fifth building in Oklahoma City is substantially complete. We estimate total CapEx as a percent of revenues to be approximately 12% in 2024. Now let me turn to guidance. Our approach to guidance remains consistent with our historical approach and that we guide to what we can see in factor in relevant trends, opportunities and potential constraints. For 2024, we’re also factoring in a wider range of sensitivities, such as fluctuations of interest rates and the outcomes of several near-term strategic initiatives.

For fiscal 2024, we expect revenues in the range of $1.860 billion to $1.885 billion or approximately 11% year-over-year growth at the midpoint of the range, which is consistent with the target growth range we provided on our Q3 earnings call. We expect adjusted EBITDA in the range of $720 million to $730 million, representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range. For the first quarter of 2024, we expect total revenues in the range of $494 million to $497 million, representing a growth rate over the comparable prior year period of approximately 10% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $218 million to $222 million, representing an adjusted EBITDA margin of approximately 44% at the midpoint of the range.

2023 delivered solid results for Paycom. The strength of our product and the client initiatives we have in place give me confidence that 2024 will be a solid year of execution. We will continue to invest in talent, marketing, innovation, customer service and geographic expansion to strengthen our competitive position and meet the demand of our expanding TAM. With that, we will open the line for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Raimo Lenschow with Barclays. Please proceed.

Raimo Lenschow: Hey, thank you and all the best to the new management structure from me. Two questions. One, Chad, can you just speak a little bit to retention in 2023, and customer growth in 2023 because if I do the math right, it was like a 1% growth, which seems unusual for you guys. Can you talk a little bit about like factors we saw there, and that probably kind of linked in with that 90% retention number? And then on EBITDA guide, Craig for you, and if I look at this year, we’re kind of guiding down a little bit on EBITDA margin. Can you talk a little bit maybe about some of the projects or some of the work you’re doing there that kind of drives that? Thank you.

Chad Richison: Sure, Raimo. I’ll take — I might take both of those actually. As it relates to retention, this year we reported 90% versus 91% from last year. Kind of looking at retention, we typically don’t discuss it based on client size, but the main part of the attrition was really in that down-market side. If you remember, we added a lot of smaller clients during COVID where we used to have five individuals — five sales people in that group and we increased that to actually 10 teams of 8. So we added a lot of smaller clients during that time. And that was really what we saw as it related to the retention and that group to pressure on that down-market group. And they are the ones that are most impacted by the macro, the higher interest rates, the higher inflation.

As it relates to the margins, what I would say is we’ve really started at 39% to 41% for the last four, five years, and that’s really where we wanted to start this year. And it really gives us the room to invest where we need to invest in the areas of innovation and sales to continue to drive revenue growth.

Raimo Lenschow: Okay. Perfect. Makes sense. Thank you.

Chad Richison: Thank you.

Operator: Our next question comes from Samad Samana with Jefferies. Please proceed.

Samad Samana: Hi, good evening. Thanks for taking my questions and welcome to the new members of management. Maybe my question follows up a little bit on Raimo’s. I’d like to dig deeper into the retention change. It’s gone from 94% down to 90%, that’s about 4 points. Is that all due to the surge in clients that you added in during the COVID period, and I guess the question is maybe what is causing the attrition beyond that being is it business failure ticking up, is it non-controllable churn, maybe help us think through what is causing that at the low-end?

Chad Richison: Yeah, I mean at the low-end it’s typically more going out of business, but that group of clients are more impacted by the macro. We also changed the way we marked our clients’ loss where we’re pulling that forward a little bit, Samad, where we’re marking them quicker than we have in the past and that way we can get back out, and really, we tried to sell some of those as are still in implementation, so.

Samad Samana: Great. And then maybe just as I think through the fourth quarter, it was well-ahead of what the guidance was, just trying to unpack that with rates, maybe looking like they’re clicking down, have you seen any change in either — and the employment market things, have you seen any change in either pre-employment services doing better-than-expected bonus runs, maybe help us think through the strength that you saw in the fourth quarter versus the guidance you gave after the third quarter?

Chad Richison: Yeah, I mean. I would say, we probably went into fourth quarter a little more conservative than what we have in the past, after a kind of our Q3 results. We were really looking at where the downside could be or what can happen in fourth quarter, and I would say things came in better than what we expected.

Samad Samana: Great. Appreciate taking my questions.

Operator: Our next question comes from Mark Marcon with Jefferies. Please proceed. Baird, I apologize.

Mark Marcon: Can you hear me?

Chad Richison: Yeah.

Mark Marcon: Hello? Can you hear me?

Chad Richison: Hey, Mark. We can hear you. Hey Mark, we can hear you.

Mark Marcon: Okay. Great. Thanks. Hey, can you talk a little bit about the traction with the sales force and what you’re seeing just in terms of new client growth, because I’m looking at the implied ex-float revenue growth for the first quarter and you did mentioned the retention is lower, so understand part of that, but I’m wondering, can you just talk a little bit about sales effectiveness and what you’re seeing there?

Chad Richison: Yeah. I mean, we’ve had a lot of success with sales effectiveness. Obviously, we’re selling a differentiated solution that brings differentiated value. We did mention on the call that we’ve had more success in the 500 and above. I think we called out, 11% growth in that group, 18% growth in the group that has 2000 or more. And so, we have been pressured more at the lower end of our market and also there’s a resource aspect, as we look to onboard clients and what we’re going through there, how we use our resources to best impact client value. And so, we’re having a lot of success there in the market. Oftentimes, you are trading off — you are trading off on a unit basis, oftentimes small units for a little bit larger type units, and I’m talking about employee size.

Mark Marcon: Great. And then can you talk a little bit about the specific areas of investment that you would be making, you’re starting the year out slightly more conservative EBITDA target, what are the specific areas where you’re going to invest a little bit more, I imagine part of that is product which you ended up referencing, but I’m wondering if there’s any other areas that we should look to?

Chad Richison: Growth has always been first prize for us, so I mean, that’s really what we’re focused on. When we’re talking about an impact on the — from an adjusted EBITDA perspective, I mean, we’re focused on the three areas that we talked about with solution automation, world-class service and then client ROI achievement. But those don’t necessarily — we’ve got the staff to do those things. Those are things we’re working through and continuing to impact quite positively. From an additional expense perspective, that’s going to be growth initiatives related.

Mark Marcon: Great. Thank you.

Chad Richison: Thank you.

Operator: Our next question today comes from Brian Schwartz with Oppenheimer. Please proceed.

Brian Schwartz: Yeah. Hi, thanks for taking my question this afternoon. Chad, wanted to ask you along the lines of the sales effectiveness, what you’re seeing in terms of cycles and as well as the top of the funnel momentum? Are you seeing any changes in that aspect of the sales?

Chad Richison: I mean, that’s a good question. We’ve continued to go further at market, I’ve mentioned it on the call. And there is a little bit different motion as we work through that process and as we’ve gotten better at it. And so, as you go further up market, you’re going to have, it might take you a little bit longer than what it would then if you’re in the mid-market. For us, it’s still about the work of the sales individual. I mean, it really does determine how strong a sales individual is in regards to the process that’s being worked and how quickly a client can see that value and then onboard onto the system. So, I would say it’s more specific to an individual salesperson. And then I would add to that that as you go up market, you have more people that you talk to, more stakeholders within any company, and you want to make sure you cover all those bases as you move toward.

Brian Schwartz: Thank you. And the follow-up question I had on the project investments, just thinking about that on the sales and the distribution side. Is there anything you can share with us how you’re thinking about the pace of either new offices, or new sales rep hiring this year, maybe versus what you did last year in 2023? Thanks.

Chad Richison: We’re heading into 2024 really well staffed in sales. So I think that — even it have to play itself out, but as everyone knows. I mean, our sales office openings are based on the capacity that we have internally to be able to do that. And all I would say is that we’re better staffed going into 2024 than what we have been in a while for managers all the way out. And so, those opportunities as they make sense for us — as it makes sense for us to do it, we’ll be looking at that throughout the year.

Operator: Our next question comes from Joshua Reilly with Needham. Please proceed.

Joshua Reilly: Yeah, thanks for taking my questions. Maybe just some more color on the customers you’re seeing attrition with, in the cohort of those who have adopted Beti versus the remaining customers yet to adopt Beti. Are you seeing higher attrition with those that are yet to adopt Beti?

Chad Richison: I mean, we want to begin talking about our retention as one number, whether someone’s on Beti or not, they are client of ours, we want them to be a client of ours. Obviously, I’ve called this out in the past, it continues to hold true, those companies that use our system fully get the most value out of it. And obviously we have a lower, much lower attrition with businesses that use Beti versus those that don’t.

Joshua Reilly: Got it. That’s helpful. And then what are you seeing an average headcount for customer and what assumptions are you making in guidance in terms of average headcount per customer? If you — and then just following-up on that, if you expect it’s going be flat year-over-year in ’24, is that somewhat of a headwind to growth versus a normal year for you guys? Thanks.