Paycor HCM, Inc. (NASDAQ:PYCR) Q2 2024 Earnings Call Transcript

Paycor HCM, Inc. (NASDAQ:PYCR) Q2 2024 Earnings Call Transcript February 7, 2024

Paycor HCM, Inc. misses on earnings expectations. Reported EPS is $-0.14783 EPS, expectations were $0.09. PYCR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. And welcome to Paycor Second Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Rachel White, Vice President of Investor Relations. Please go ahead.

Rachel White: Good afternoon, and welcome to Paycor earnings call for the second quarter of fiscal year 2024, which ended on December 31. 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 second quarter results. We had another strong quarter with revenue growth of 20% year-over-year. Margins expanded 130 basis points over the prior year, while we continue to invest in sales expansion and in our innovative HCM suite. HCM demand is healthy. Our deal pipeline is up significantly year-over-year, and our win rates remain strong. We continue to excel up market, especially among the higher end of SMB and enterprise customers with thousands of employees, who tend to purchase a more holistic solution and are driving higher attach rates and higher average deal sizes. Our results demonstrate our consistent execution against our two primary growth drivers, increasing the number of employees on our platform and expanding the amount we charge per employee per month for PEPM.

First, we are expanding employees on the platform through a combination of direct and indirect sales efforts. We remain on-track to grow our direct sales force approximately 20% this fiscal year to strategically increase our sales coverage in the largest U.S. metropolitan areas. As we expand our sales coverage, we are also increasing our broker coverage. We increased the number of active referring brokers by over 25% from the prior year and 50% of our field bookings in the quarter were broker influenced. We are also experiencing great traction with our embedded HCM solution, the indirect go-to-market channel we announced in August. Leveraging our industry-leading interoperability engine, we enable software partners to embed our HCM solution within their platform for a seamless client experience.

In Q2, we had robust new sales among existing partners and expanded our pipeline of interested partners. Second, we continue to enhance our award-winning HCM suite with new capabilities that increase the value to our customers and our future PEPM opportunity. In the second quarter our list PEPM was $51, which equates to 16% growth year-over-year. This month we introduced two powerful data-driven analytical tools that empower frontline leaders to unlock the potential of their people and business performance. Pay benchmarking enables leaders to optimize compensation strategies and pay decisions based on industry standards and market data. We also launched labor forecasting within workforce management to help customers plan optimal staffing schedules for their businesses based on key demand drivers such as revenue, sales volume or customer foot traffic.

These innovative modules will contribute to future PEPM expansion. Paycor recently received 5 Brandon Hall Technology Awards, which honor HR technology trailblazers. While we were acknowledged across our HCM suite, the core leadership framework that we launched a year ago won gold for the best advance in online coaching tools. The framework enables customers to evaluate the efficacy of their leaders, reinforce leadership best practices and to trigger development paths based on areas of growth identified. These tools are already making an impact in helping educate customers on how to transform their managers into effective leaders. Since joining Paycorp in 2018, Ryan Bergstrom has been vital in driving the company’s growth and shaping our HCM suite into the market leader it is today.

Under his leadership, list PEPM increased more than 75% since fiscal 2019, and I am thrilled we will now oversee our product and technology groups. Combining these functions will enable greater synergies and strengthen our capabilities to seamlessly power people and performance for our clients. I would also like to acknowledge our product and engineering teams for their unwavering dedication to building our award-winning platform and enabling its rapid expansion. We continue to strategically incorporate AI to add value to customers within our HCM suite, elevate our customer experience and improve our efficiency. And our customer experience organization, we deployed AI agent assist technology, which empowers advocates to resolve customer inquiries faster and ensure consistent, high-quality experiences as we scale.

I would like to thank all Paycorp associates, especially our implementation, service and success teams for their contributions during our busiest time of year. Year-over-year, we improved execution, truly making it the most efficient and best year-end experience for our customers. With that, I’ll turn the call over to Adam to discuss our financial results and guidance.

Adam Ante : Thanks, Raul. I’ll discuss our second quarter results then share our outlook for the third quarter and fiscal year. Paycor delivered another strong quarter with total revenues of $160 million, an increase of 20% year-over-year. Recurring revenue grew 18% year-over-year, an acceleration of 2 percentage points sequentially driven by continued success of market and strong year in form filings. As Raul mentioned, our growth is fueled by expanding the number of employees on our platform and the amount we charge per employee per month. Employees grew 10% over the prior year primarily from new logos and to a lesser extent, organic labor market growth, which has continued to slow. We now have approximately 2.6 million employees across more than 30,000 customers.

As we continue to expand our product capabilities and move up market, we are experiencing outsized growth among customers with 100 to multiple thousands of employees. In the quarter, we grew customers with more than 1,000 employees by 18%, highlighting the success of our product and service investments. We gained momentum with our embedded HCM solution, which contributed 2 points of employee growth this quarter, up 1 point sequentially. The average size of customers within our embedded channel is more than double our average customer size today. While we’re encouraged by the early momentum, these larger embedded deals will begin to contribute more meaningfully to our revenue growth in fiscal ’25 and be accretive to margins as the partnerships ramp over time.

Effective PEPM increased 7% year-over-year to more than $19 for the quarter. Excluding embedded HCM deals, effective PEPM increased 9%, driven by expansion of our product suite, effective PEPM growth has been powered by a combination of cross-sales, pricing initiatives and higher bundle adoption. We expect more moderate PEPM growth contributions moving forward as we onboard larger enterprise customers and embedded HCM partners with volume discounts, which will be offset by their higher average deal sizes and stronger margins. In addition to driving steady top line growth, we’ve consistently expanded margins as we scale the business. Adjusted gross profit margin, excluding depreciation and amortization improved to 79%, a 110 basis points higher than the prior year, while elevating our client experience.

Sales and marketing expense was $50 million or 31% of revenue, similar to levels a year ago to achieve our sales force expansion targets. Comparable to prior years, we invested 16% of revenue or $25 million in R&D on a gross basis to differentiate our HCM suite with valuable capabilities for our customers. We are gaining economies of scale in G&A as we grow. G&A expense was $22 million or 13.5% of revenue, an improvement of 100 basis points from last year. Adjusted operating income increased more than 30% to $23 million with margins of 14.6%, up 130 basis points from last year, while we continue to make strategic investments to expand our sales force and deliver product innovation. We generated $15 million of adjusted free cash flow or 9% mark in this quarter.

We ended the quarter with $62 million of cash and no debt. As we look ahead, demand continues to be healthy for modern HCM solutions. The labor market remains tight and our guidance assumes flat organic employee growth among existing customers for the rest of the fiscal year. The combination of steady labor market growth and our backlog of enterprise and embedded HCM deals provides confidence in our second half. For the third quarter, we expect total revenues of between $185 million and $187 million or 16% growth at the high end of the range and adjusted operating income of between $45 million and $46 million. For the full year, we expect revenues of $650 million to $656 million or 19% growth at the top end of the range, and we anticipate adjusted operating income of $104 million to $108 million.

This quarter, we generated $12 million of interest income on average client funds of approximately $1.1 billion, an effective rate of just under 450 basis points. Based on current rates, we expect interest income in the range of $45 million to $46 million for the full year. We remain optimistic about our opportunity in HCM. There’s plenty of runway for sustainable growth as the vast majority of U.S. employees are still being paid by legacy systems. It’s an essential capability for any business, and we’re delivering compelling ROI for clients to switch. Adding to our opportunity is the continual expansion of our HCM suite, which has increased over 75% since fiscal 2019. We are demonstrating margin expansion as we scale the business and believe there is significant opportunity to drive further leverage.

We believe we are well positioned to deliver strong revenue growth and improve profitability over the long-term. With that, we’ll open the call for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Mark Murphy with JPMorgan.

Mark Murphy : Congrats on a nice consistent performance. I wanted to try to double-click on the embedded HCM solution. You mentioned it once or twice, I recall the announcement last summer, I think you’ve been refining the product in the go-to-market. Do you have any line of sight into maybe some larger partners that might take it live and start generating bookings for you maybe later this year or as you get into the early part of next year?

Adam Ante : Yes. Mark, Absolutely. I mean, we have a pretty strong pipeline right now for new deals as well as with the existing partners, just the number of deals that they’re booking has been really strong and beat our expectations early. Of course, it’s still relatively small, but relative to the rest of the business. But we’ve seen some really success. We’re really excited about how the pipeline is building on both the existing clients and future partnerships already.

Raul Villar : Yes. Mark, what I would — what I would add is that the signing the partnerships is lumpy, right? It just takes a lot of time to get those through. And so, we’ve built up a really nice pipeline that we’re hoping that will start to go from pipeline to deals closed over the next 60 days.

Mark Murphy : I see. Okay. And just to double check on this we think that it’s going to be kind of margin neutral or slightly margin accretive? Once that gets going at the gross margin level?

Adam Ante : Yes. I mean, we are really excited about the margin opportunity here. Between the gross margin and the adjusted operating income, I mean, I think you’re going to see a little bit more favorability on overall adjusted operating income. Over just the gross margin side of the house, but that’s primarily driven by the really low sales and marketing costs. I mean it’s like multiples lower in terms of the sales cost to bring the clients on. And depending on the size of the client, if they’re bringing the portfolio on, you still might see some more implementation costs associated with that. And that’s what we’ve actually experienced thus far. So when we talk about margin expansion really into ’25, it’s because there’s a little bit more upfront costs associated with bringing those portfolios over, but the ongoing sales cost is significantly lower for the new business.

Mark Murphy : Okay. Thank you for that clarification. And one final one. I noticed you mentioned that you’re strategically incorporating AI into the business, which is great to hear. Are you seeing efficiencies from those products or initiatives that are significant enough to allow you to cover more ground or write more code per developer, provide more support per person or that type of thing? I’m just wondering, if the — I’m wondering if you are sensing any kind of noticeable uplift that might either be helping to drive some of the margin expansion or alter hiring plans or even just kind of change your growth algorithm in the next several years.

Raul Villar : Yes. I think it’s — we’re still in the very early innings, and I think we’re leveraging the technology in all those areas. And I think as we move forward, we’ll start to model that into our future guidance from that perspective. But ultimately, it’s helping us — our #1 priority, is to deliver a better user experience. The #2 priority is to become more efficient. And we think both are in line of sight, but we want to make sure the user experience is great. And then ultimately, we think as we continue to grow, we’ll be able to do it more efficiently.

Operator: Our next question comes from the line of Gabriela Borges with Goldman Sachs.

Gabriela Borges : I want to stay on this topic of growth algorithm and specifically, the delta between how you’re thinking about hiring, I think you mentioned that 20% benchmark pretty consistently versus the 18% recurring revenue growth this quarter and where that can go longer term. Maybe you could comment a little bit on how you’re seeing tenured sales reps ramp within the sales force? How you’re thinking about improving churn? And any other data plans that we should have as we think about your overall sales force productivity over the next couple of years?

Raul Villar : Yes. Gabriel, it’s Raul. We just see such a big opportunity in the marketplace in Tier 1 and also in Tier 2 and Tier 3 that we believe 20% is an optimal number for us to hire. And as we’ve talked about previously, reps, their productivity increases with their tenure. And so, we’re excited that we’re seeing our average tenure grow year-over-year. And we believe that’s what we’re focused on is to continue to grow our average tenure, which will drive more productivity, which will drive long-term sales and marketing efficiency.

Gabriela Borges : Great. That makes sense. And then as a follow-up, I know in the past Raul, you made some interesting observations on hiring and labor trends within the SMB ecosystem versus maybe slightly above in the mid-market and enterprise. I know you mentioned broadly the commentary of the demand environment is healthy. Would love to share a little bit more within that? Any vertical specific color and any comparing contrast between the lower end of the market and the mid-market.