Paycom Software, Inc. Q1 FY2025 earnings call

• Achievements in Q1 include strong ROI delivery for clients, with Net Promoter Score increasing 16 points year-over-year. • Product enhancements like GONE (industry's first fully automated time-off solution) and Beti (award-winning payroll solution) are driving client usage and ROI. • Sales broke records in Q1 with increased book sales and units sold, including onboarding a 2,500-employee restaurant group. • Organizationally, Paycom was named one of America's best large employers by Forbes and one of the most trustworthy companies in America by Newsweek for the fourth consecutive year. • Strong balance sheet with $521 million in cash and cash equivalents, no debt, and $1.47 billion remaining under stock repurchase plan.

Total revenue for the first quarter was $531 million, increasing 6% over the comparable prior-year period. Recurring and other revenue reached a milestone of $500 million in the quarter, up 7% year-over-year. Interest on funds held for clients declined 10% year-over-year to approximately $31 million. GAAP net income was $139 million or $2.48 per diluted share, while non-GAAP net income was $158 million or $2.80 per diluted share. Adjusted EBITDA was $253 million, up 10% from the prior-year period with a 48% margin.

• Raised full-year total revenue guidance range to between $2.023 billion and $2.038 billion, up approximately 8% year-over-year at the midpoint. • Recurring and other revenue expected to be up over 9% year-over-year, with highest growth in Q4. • Adjusted EBITDA guidance range raised to between $843 million and $858 million, representing an expansion to approximately 42% margin at midpoint. • Full year GAAP and non-GAAP tax rate expected to be 28% and 27% respectively, and stock compensation approximately 8% of revenues.

• Tariffs and market volatility are being monitored, as any impact on clients could indirectly affect Paycom. • Need to monitor any changes in employee count and employment that could impact the business.

Q: Congrats, great start to the year. Two quick questions, one for Chad. Like at the moment, everyone is obviously worrying about tariffs, volatility. Can you talk a little bit about what you're seeing in your field, I would assume it's not that much, but like what's the feedback from the sales guys, etcetera, on that one? And then one question for Bob. You talked about the efficiency gains that help you on the EBITDA side, like can you maybe give us a couple of examples? And how far can you push that to understand that a little bit better?

A: Chad Richison: Yes, I'll take the tariffs. I mean, I would say it's still early to kind of be able to judge specifically. I would say we don't have much direct exposure to it. We're not over-concentrated down market where you might see more of the maybe mom-and-pop impact a little bit more than what you could from a total employee base impact. But ultimately, anything that impacts our clients does impact us. It's just -- we haven't seen anything yet. And -- but it is something that we'll continue to monitor. I would say that it would have to have an impact on employee count and the overall employment, I would say, to really have a meaningful impact on us. But like everyone else, it's something we're monitoring. B Bob Foster: And Raimo, on the efficiency gains, just like our clients, we use our product -- all of our product suite. And as we continue to see how we can implement and maybe there's somebody that doesn't have to -- that might leave and we don't backfill in a position, let's say, or expense management is a great way where we do some automation around there with our products. So we're seeing the benefits of our full solution automation throughout basically our entire organization. We've talked in the past about how we are dealing with less tickets now through automation and our service to provide better service to our clients.

Q: Hey good evening and thank you all for taking my questions. Congrats to the whole organization. Maybe one for you, Chad, and then one follow-up. Just as I think about the new offices. I know that they usually take, let's call it, 18 to 24 months to ramp. I think last quarter, you had mentioned that maybe this go around -- it could be a little bit faster. Just are those staffed have you seen in terms of early impact? And then a follow-up on the -- just in terms of the shape of the year, I'll go and ask them at the same time. Any shift in the number of processing days? Like does 4Q have an extra day? Just trying to understand the shape of the year with more context.

A: Chad Richison: Yes. So on the new offices, we get better and better as we open offices. And as you know, we didn't open offices for a couple of years there. And so when we did open up those offices, we were better prepared to hit the ground running. They're still going to mature in 24 months. It will still take 24 months before a new office will be carrying the same level of quota of a mature office, but we are getting better as we've opened up offices. As far as processing days, any given year, you are going to have a little bit here and there. We have -- we did kind of discuss it a little bit last quarter and then any impact from either additional or less is included in our current guide.

Q: Hey good afternoon and thanks for taking my questions. So two major questions. One, Chad, can you describe a little bit more about what you've done recently in terms of fine-tuning the sales process, both externally as well as in terms of the internal CRR group in terms of how they're approaching clients, and what sort of results you're seeing from that? That's the first question. And then the second question is just more on the margins. When we think about the Q1 to Q2 transition, obviously, there's going to be some seasonality, and obviously, there's some high-margin work that goes into Q1 and inflated fund balances. Can you give us a little bit of guidance just in terms of thinking through Q2 just in terms of the typical seasonality?

A: Chad Richison: Yes. So well, first on the sell side, I would say that we've been continuing to get better and better in sales. I do believe that our sales staff is the best in the world at what they do. And we did have a reconstitution, if you will, of training early part of last year, as Amy kind of took over the group to get back to the normal blocking and tackling that we've always done here at Paycom. That resulted in increased sales, especially as well as increased units, new logo adds. Obviously, those came on throughout the year and most would have all started by now. And then as we turned into first quarter, we saw a continuation of the same, up meaningfully in both book sales and units and so activity matters in sales. And then, of course, having a product that's getting better and better and better as we go to market, removing barriers of usage. And then as far as the -- on the efficiency side, we're automating everywhere, I mean we are automating our product for the client -- we're automating our product for the client, and we're also automating things internally. There are several tasks that we have to perform on the back end that we've been able to automate, and that has an impact on our adjusted EBITDA across the board, but it also has an impact on the client experience. And that's really why we're doing a lot of the things that we're doing through automation. I'd like to say the only reason a client even calls us is due to the deficiency in the software that we create. And so a lot of our focus has been removing impediments, removing clicks and really focusing on allowing the client to have a full solution -- fully solution automated product. And so that's been impacting our margins, and that's been impacting our sales.

Q: Thanks for taking the questions, here. I guess -- sorry, I want to ask on, I guess, the kind of free cash flow dynamics was pretty solid here. Is there anything that we should be kind of keeping into account for timing impacts or how we should be thinking about how that maybe compares to the EBITDA progression for the year? And then secondarily, just on the mid-market opportunity, it seems like there was good traction there last quarter and just wanting to see how that's maybe tracking comparatively from what you saw in 1Q here?

A: Chad Richison: Yes. I mean, the mid-market opportunity, I mean, I would say everywhere for us is going very well. I mean, we're not seeing any changes to demand. If anything, I've always kind of said we also create demand ourselves by the work we do. And as I just talked about, first quarter was up meaningfully for both revenue from a book sales perspective as well as for units. As far as the free cash flow conversion, we did talk about how we've substantially finished out the completion of our facilities. I think we've got a parking garage and something else that will be coming online. I will say this, though, we are very ambitious with what we do with our technology and what we're doing in the ways of the AI and other. And over time, I would think that some of that spend that we spend on facilities, I think you would see some of that transfer to those technological assets that are required to really run a full-scale fully automated product. But we don't guide to free cash flow. It has been a focus of ours to be able to improve that. And I think you've seen a little bit of that recently.

Q: Great, thank you very much for taking my question. Maybe just another one on the product side. You also talked this quarter about, I think some credentialing on the background screening side. I guess, is that an incremental revenue opportunity? Or how should we be thinking about that?

A: Chad Richison: Yes. So we've been in pre-employment services for a while now. In fact, I think we're -- from a size perspective, we're one of the largest out there right now. And so that's been a part of our business for a while. We've continued to get more and more of our clients on that. I would say that I don't know of a better pre-employment service than Paycom's as far as a quick return and its accuracy. So that was confirmed, obviously, by receiving this accreditation. And that's just something that allows us to have a proved source for how well our product is doing for our clients, but also as we move forward and sell other clients, there's no reason for them not to switch preemployment over to Paycom as well.

Q: Great. Thanks for taking my question. Chad, just back to the authorization you received be a payment institution in Europe. But what are the next steps that you're looking to accomplish to go further into that region? And then how are you kind of thinking about your go-to-market strategy, your product strategy internationally as you progress kind of down the path?

A: In our global market strategy right now is focused on U.S.-based companies that have locations, employees and operations in other countries, as we continue to build out our systems and as it makes sense for us to go in country to make sales locally to those, that's something that will be deploying at the right time for now. This allows us to move money throughout Europe. The last yard of a payroll is actually getting it into the employee's account correctly. And if you do everything else right, you don't do that part, you kind of did nothing. So for us to make sure that we ensure the highest quality for all of our clients, we like to keep the ball in our hand, and this is something that's required to do that.

Q: Hi, this is Ian [ph] Black on for Joshua Riley. Thank you for taking my question. How is gross retention trending given the improving customer satisfaction and the lapping of any churn on the shift to Beti?

A: Chad Richison: Yes. So we do report retention once a year. Obviously, it's reflected. The net of it is reflected in both of our current quarter achievements as well as any future guidance. We did talk about on the call how our Net Promoter continues to go up, and also that we are continuing to see more utilization of all of our products as we've removed more and more impediments to good usage. All of that is meant to have a positive impact on our retention. So those are all early indicators of things that we would expect to be reporting at the end of the year.

Q: Hey it's Phil on for Siti. Just a quick one for me. Are you guys seeing any shifts in how your competitors are positioning on price or discounting in the market?

A: Chad Richison: Not be different than anything we've seen in the past.

Q: Thank you for taking my questions this afternoon. A nice start to the year. Chad, in terms of maybe more of a real-time question on what you're seeing in terms of demand. Clearly, the macro pressures did not impact the business at all in 1Q. But how is the business faring in April when those macro pressures intensified? And I have a follow-up for Bob.

A: Chad Richison: Yes. I mean, we're just not seeing it right now. I mean, again, I wouldn't say we're overexposed to any one industry or any one employee size necessarily. We don't -- definitely don't have overexposure to the small business side. I will just say, I think there's a lot of different movements. And I think as you have different tariffs and what have you. businesses will maneuver and to maneuver to what makes sense for them. And so I think there'll be a lot of that at play as we move on. I think it's important to keep in mind, although our direct exposure is low, and we're not seeing anything. I mean, we are not seeing anything. Anything that impacts our clients, I mean it will eventually impact us, but that would have to be somewhat reflected through reduction in force. And so I think you would have some leading indicators to that. And right now, we just -- we don't have anything to call out.

Q: My follow-up question for Bob, given the greater operating efficiencies that you're realizing internally from AI, has that made you change the hiring plan for the year?

A: Chad Richison: No, we have had an AI plan and a full automation plan for a little bit now. And so our hiring plans did change, but not for what our expectations were this year. We've been able to repurpose people in different areas. I do always want to -- I do want to make a point on this, though. With all the automations that we've done on the back end, we will always have a high-touch service model. We do have a high-touch service model. And we're putting a lot of resources into our people to make it easier for them to service our clients as well as allow the clients to get more value out of the product without having to crawl through something to get it. And so we've been very focused on that. With greater automation, obviously, we can do things quicker, and it doesn't require the same type of labor commitment to it. That said, when you have great people and you do have an opportunity to put them in places that can make impacts, we look to do that. So oftentimes, to Bob's point, Bob made the point early in this call. It's oftentimes where we just don't need to hire as many people in certain areas. There are areas within Paycom that continues to grow at a rate equal to or larger than it has in the past when you're looking at areas like sales, you're looking at areas like software development and those types of areas. And so -- and then there's other areas which were more administrative on the back end, which are -- those are being automated. I mean, I'm telling people. I mean, if you're inputting something into spreadsheets and out of spreadsheets and all that, I mean, that's going away. It's going away, and it will end up going away everywhere. So get a skill set that's not that. And that's what we're focused on. And so we're that type of business, we create value for our clients when we automate, we create value for ourselves when we automate, and that's what we've been focused on for quite some time now, and it's rolling out. It's actually rolling out. It's not just a goal. We're actually achieving it rolling out throughout the product as well as our back end.