Paycor HCM, Inc. (NASDAQ:PYCR) Q1 2024 Earnings Call Transcript

Paycor HCM, Inc. (NASDAQ:PYCR) Q1 2024 Earnings Call Transcript November 11, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to Paycor’s First Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel White, Vice President of Investor Relations. Please go ahead.

Rachel White: Good afternoon and welcome to Paycor’s earnings call for the first quarter of fiscal year 2024, which ended on September 30. On the call with me today are Raul Villar, Jr., Paycor’s Chief Executive Officer; and Adam Ante, Paycor’s Chief Financial Officer. Our financial results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today’s call is being recorded, and a replay will be available on our website following the conclusion of the call. Statements made on this call include forward-looking statements related to our financial results, products, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management’s current expectations as of today and may not be updated in the future.

Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures are provided in our press release on our website. With that, I’ll turn the call over to Raul.

Raul Villar: Thank you, Rachel and thank you all for joining us to discuss Paycor’s fiscal first quarter results. We had a strong start to the year with revenue growth of 21% this quarter. We drove margin expansion of nearly 200 basis points year-over-year while continuing to invest in differentiating our platform, which increases the value of our HCM suite to our customers and expand our future PEPM opportunity. The demand environment remains solid for our innovative HCM suite that empowers leaders to unlock the potential of their people and business performance. As we shift upmarket, clients tend to purchase a more complete solution and average deal size and attach rates continues to expand nicely. Our deal pipeline is up year-over-year and win rates remain strong.

Our team is making significant progress on our two strategic growth initiatives: expanding sales coverage and increasing the amount we charge per employee per month or PEPM. We are on track to deliver on our full year sales headcount growth target of approximately 20% and sales productivity is progressing in line with our expectations. This quarter, we announced a new go-to-market channel, leveraging our industry-leading interoperability engine. Paycor has a substantial opportunity to partner with technology firms such as vertical-focused SaaS solutions. Our existing software partners offer our embedded HCM solutions nested within their platform for a seamless client experience. Legacy in-house solutions are right for disruption as the HCM requirements continue to increase in complexity and demand for more than just the payroll solution.

We are the only HCM provider with an embedded mid-market offering, and we have a growing pipeline of interested partners. The larger embedded HCM partnerships we mentioned last call will increasingly contribute to our revenue growth in the second half of fiscal 2024 and be accretive to margins in fiscal ‘25. This quarter we enhanced our modern award-winning HCM suite with valuable new functionality that powers people and performance. Our list PEPM of $51 increased $9 or 21% year-on-year, which equates to a PEPM of $612. Further strengthening our suite of artificial intelligence solutions, we recently released a new generative AI analytics, digital assistance powered by Visier. The new offering empowers leaders to quickly and easily consume people-focused analytics and a conversational chat interface.

We are helping leaders save time and resources by seamlessly providing them with the answers they need to effectively power their teams. We continue to see excellent adoption of the talent solution we launched in fiscal 2021, with revenues up 40% year-over-year. We are also proud that nucleus research recently recognized our talent acquisition suite as a market leader. I am also incredibly pleased with the promotion of Brett Meager, to Chief Customer Experience Officer, where she will lead our next generation of service, leveraging data and technology to best serve our customers. In this new role, Brett will unify Paycor’s implementation and service and loyalty organization further enhancing the company’s relentless focus on creating an irresistible customer experience.

Lastly, I am proud Paycor received several culture excellence awards by Top Workplaces. This is the third consecutive year we have been recognized for promoting DE&I practices. And the first time we were acknowledged for employee appreciation, employee well-being and professional development. As a human capital management company, we know firsthand how important leaders and culture are in driving employee engagement and business performance. With that, I will turn the call over to Adam to discuss our financial results and guidance.

Adam Ante: Thanks, Raul. I’ll discuss our first quarter results and share our outlook for the second quarter and fiscal year. This quarter, Paycor generated total revenues of $144 million, an increase of 21% year-over-year. Recurring revenue grew 16% year-over-year, slightly above our guidance as labor market growth of 2% marginally outperformed our 0 to 1% assumption. Recurring revenue growth is largely driven by increasing the number of employees on our platform and the amount we charge per employee per month. We have more than 2.5 million employees on our platform, up 9% over the prior year across more than 30,800 customers. As we shift our portfolio upmarket, our average customer size continues to increase and now stands at 83 employees per customer, up from 78 a year ago, supported by even stronger growth in enterprise customers.

In line with this shift, the number of employees in the mid-market and enterprise grew 11% year-over-year, while growth in the micro segment remained flat. Additionally, about 1 point of our employee growth this quarter is from our embedded HCM solutions. In conjunction with our transition years ago to being a modern cloud HCM platform, we price our solutions on a PEPM model. This pricing model has enabled us to simplify our pricing, employing a bundled offering approach and reduce friction in the adoption of our broader set of HCM solutions. We believe our cloud platform and pricing model provides much better value and predictability for our customers and for Paycor. As our HCM suite has expanded, more than half of our revenue is generated from non-payroll HCM solutions, such as talent and workforce management.

All of which is on a PEPM pricing model. Effective PEPM increased 6% year-over-year to more than $17 for the quarter, driven by continued expansion of our product suite, PEPM growth has been fueled by a combination of cross-sales, pricing initiatives and higher bundle adoption. We are seeing steady PEPM contribution from cross-sales and higher bundle adoption. However, we expect more moderate contributions from pricing initiatives as inflation flows and new business as we onboard larger enterprise and embedded HCM technology partners with greater pricing power, which will be offset by higher average deal sizes and stronger margins. While our primary objective remains sustainable 20% plus recurring revenue growth, we’ve consistently expanded margins as we scale the business.

Adjusted gross profit margin, excluding depreciation and amortization, improved to 78.3%, more than 140 basis points higher than the prior year while continuing to invest in differentiating our client experience. Sales and marketing expense was $47 million or 33% of revenue, similar to levels a year ago as we increased sales coverage nationwide to capital market share. On a gross basis, we invested $25 million in R&D or 17% of revenue to enhance our HCM platform and expand our PEPM opportunity. On an annual basis, we expect to invest 15% to 16% of revenue, similar to levels last year. We are driving leverage in G&A as we scale the business. G&A expense was $20 million or 13.7% of revenue, an improvement of 120 basis points from last year. Adjusted operating income increased more than 50% to $16 million, with margins of 11.1%, up over 200 basis points from 8.8% last year, while we continue to make strategic investments to accelerate sales, elevate service and differentiate our products.

As typical in the first quarter due to the timing of our bonus payments, adjusted free cash flow was negative $40 million. We expect to generate greater adjusted free cash flow for the full year and for free cash flow margins to expand faster than adjusted operating income as we scale the business. We ended the quarter with $54 million of cash and no debt. For fiscal 2024, we remain focused on execution, scaling the business and driving margin expansion. The demand environment remains resilient with higher top-of-funnel demand than we had a year ago. Our leader value proposition continues to resonate and we’re delivering compelling value for clients to transition from legacy solutions. The labor market remains tight and our guidance assumes flat organic employee growth among existing customers for the remainder of the year.

For the second quarter, we expect total revenues of between $154.5 million and $156.5 million or 18% growth at the high end of the range and adjusted operating income of between $19.5 million and $20.5 million. For the full year, we expect revenues of between $648 million to $654 million or 18% growth at the top end of the range, and we anticipate adjusted operating income of $102 million to $106 million. This quarter, we generated $11 million of interest income on average client funds of just over $1 billion at an effective rate of about 425 basis points. Based on current rates, we expect interest income in the range of $44 million to $45 million for the full year. The combination of labor market growth comps moderating year-over-year and larger enterprise customers and embedded a team partner starting provides confidence in our second half revenue growth acceleration.

Overall, demand remains healthy and our innovative HCM solution that powers people and performance is winning in the market. We are demonstrating margin expansion as we scale the business and believe there is significant opportunity to drive further leverage. As the mission-critical applications is still early in transition to the cloud, we believe there is significant runway for sustainable growth in the $38 billion HCM market. With that, we’ll open the call for questions. Operator?

See also 15 Largest Troop Contributors to UN Peacekeeping and 25 Cheapest and Safest Places to Live in The World.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Gabriela Borges with Goldman Sachs. Please go ahead.

Kevin Kumar: Hi, this is Kevin Kumar on for Gabriela. Thanks for taking the questions. I wanted to ask if there is any changes in how you are thinking about linearity of recurring revenue for the year, particularly any color on enterprise pipeline and overall timing of go lives would be very helpful? Thank you.

Adam Ante: We talked through a little bit of those enterprise and large partnerships that we are really going to come live and start to contribute more in the back half of the year and things are looking really consistent. So no real change from how we were thinking about it just a couple of months ago, so.

Kevin Kumar: That’s helpful. And then maybe just on cross-selling, how should we maybe think about the cadence of cross-selling for the year? What segments of the market are there opportunities to drive further penetration in modules, particularly talent management?

Raul Villar: Yes. We’ve had – Kevin, we’ve had really strong, consistent cross-selling across all sizes of the enterprise. Obviously, talent continues to outperform the rest of the portfolio as people are still looking to attract and retain quality associates. And so we feel really good about our cross-selling motion that we have in process there.

Kevin Kumar: Great. Thanks for taking my questions.

Operator: Thank you. Our next question is from the line of Bhavin Shah with Deutsche Bank. Please go ahead.

Bhavin Shah: Great. Thanks for taking my questions. Can you guys just speak about what you are seeing in terms of the broker channel and how that’s helping from a repo basis? Have you seen any kind of change there and any kind of sort of the investments you are making into that opportunity?

Raul Villar: Yes. We are really bullish on the broker channel. The percent contribution to our overall bookings is still around 50% in the field bookings. We continue to focus on our large national partners and we are getting an outsized performance in those cohorts. So, we are excited. We think we have a winning formula with brokers. We grew the number of brokers that we partnered with year-over-year, and we continue to see really solid participation in the channel.

Bhavin Shah: That’s helpful. And I know during the quarter you guys kind of unveiled your embedded HCM solution. Can you just talk a little bit more about the longer term opportunity here and how your go-to-market for this product differs from competitors offering kind of embedded payroll?

Adam Ante: Yes. So first, we think that there is a huge opportunity. I mean there is thousands of software players who could leverage o service like ours, HCM and payroll capabilities, many of them are trying to offer their own services today and find that when they work through our offering that it just makes more sense to partner with us. And we think that it’s a great go-to-market from that perspective to be able to create – for them to be able to create more compelling a differentiated service really helps us to be able to expand more quickly across services – across markets where we usually have coverage, but we will be able to provide a deeper coverage across more of the market at a faster pace. And in terms of the go-to-market strategy for us, I mean it’s really around finding those winning partnerships and making the right bets on great partners early.

And we have had a really strong pipeline, a lot of really great interest and some key partners that are winning already today.

Operator: Thank you. Our next question is from the line of Terrell Tillman with Truist Securities. Please go ahead.

Terrell Tillman: Yes. Hi, Raul, Adam and Rachel. Nice job in the quarter. So, actually I want to build on the embedded HCM question. That’s my first question. It might be a multi-parter, sorry about that, Rachel. But if I heard Adam, I think you said that actually may have contributed 1 point of growth. So, I wanted to confirm that. And then on embedded HCM, it does seem like a pretty big opportunity. Is this something that would support kind of the sustained 20%, or could this actually help even maybe potentially accelerate or have growth drift a little higher? And then I had a follow-up.

Adam Ante: I think longer term it has an opportunity to really continue to expand our ability to grow at a higher level. I mean I think it’s early, of course, and we want to hit that 20% sustainable in the near-term, but we think that has an opportunity to really continue to accelerate. Again, there is a lot of market opportunity. And like we talk about, half of the entire market is really serviced by these in-house and regional providers. A lot of those are the software providers that we are working with and that we think that are really a great opportunity to partner with. In terms of the contribution, yes, it was about a point of employee growth, that’s going to come on at a slightly lower PEPM, but it did already add about a point of PEPM or employee growth in the quarter.

Terrell Tillman: That’s great to hear. And then just a follow-up question relates to sales and marketing. It was actually a little lower than what we were forecasting and just kind of the trends year-over-year and sequentially, it’s definitely slower. So, I am curious like – I think Raul, you did say something about productivity of the sales team. Any more color you could share there? And also just – what about seller retention, how is that trending, or was there something else with maybe just certain kind of discretionary marketing that we just didn’t see? Thank you.

Raul Villar: So, as far as the overall seller cohorts and productivity, they are operating consistently with our expectations and retention has been consistent year-over-year. So, we haven’t seen any changes there. Obviously, our objective always is to continue to increase productivity per rep. While you are adding a big cohort of new people, it’s always favorable to make sure that you can at least maintain the productivity you had in the prior year while adding less productive people into the ecosystem. So, we feel good about that. Obviously, we have to ramp, trained and grow the productivity of that cohort year-over-year, and that’s what we are focused on execution from that perspective.

Adam Ante: Yes. I think, Terrell, on the full year, we are still going to – we are planning to be in that 32% to 34% of revenue range, which will continue to grow at a good rate. I mean I think there are some dynamics inside of the quarter as well. We moved some of our – a couple of larger programs between Q4 and Q1. So, there might have been a couple of points just back and forth between that. No real difference in the trends, especially as we think about overall sales personnel and marketing programs that we have continued to invest fairly similarly although we do expect to continue to get more scale out of the organization as we are really focused on hiring reps and our sales leaders.