Paycom Software Inc (PAYC) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Paycom Software Third Quarter 2021 Quarterly Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Mr. James Samford, Head of Investor Relations. Please go ahead.

Thank you, and welcome to Paycom's Third Quarter 2021 Earnings Conference Call. 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 our most recent 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?

Thanks, James, and thank you to everyone joining our call today. I will spend a few minutes on the highlights of our third quarter 2021 results and our progress on key initiatives. Following that, Craig will review our financials and our guidance, and then we will take questions.

We delivered very strong third quarter 2021 results with revenue of $256 million, representing robust year-over-year revenue growth of 30.4%, which was above the top end of our guidance range. We continue to see strong demand for our products across our target market, and we are having great success attracting new clients. We have reinvested and will continue to reinvest revenue upside into the business while still delivering attractive adjusted EBITDA margins. With these strong results, we are once again raising our full year guidance, which Craig will discuss in more detail.

Our innovative solutions continue to gain popularity and we are being recognized by industry organizations for their impact on the human capital management industry. In September, Paycom was once again awarded the 2021 top HR product honor at the HR Technology Conference for our newest innovation BETI. This marks the third consecutive year for Paycom to receive such honors, which included the Direct Data Exchange in 2019, Manager on-the-Go in 2020 and now BETI in 2021. It is precisely the combination of these 3 industry first, coupled with our comprehensive single database, that is transforming the human capital management industry and turning employee usage and easy-to-use solutions into key buying criteria for clients.

BETI is a self-service payroll technology that allows employees to do their own payroll, and we are having great success in the market. As a reminder, with BETI, employees submit their own time work, and make their own benefit selections, schedule deductions, manage tax statuses, remit expenses, request time off and do all the things that an employee does to calculate a check. BETI does the rest and works with the employee to ensure a perfect payroll for them, prior to the payroll. Employees doing their own payroll is the only way payroll should be done. I'm very pleased with the market response to BETI, and I continue to expect all clients to eventually deploy BETI.

Our advertising and marketing efforts continue to deliver strong demo leads that are fueling our revenue growth. And we will intend to continue to spend aggressively in the coming quarters to further expand our market share in the large and expanding HCM TAM. Our advertising strategy is working, and we are deliberately reinvesting revenue upside into advertising, marketing and product innovation. You've heard me say consistently that we are willing to trade a point of margin for a point of growth, but we are unwilling to trade a point of margin for a point of nothing. And that philosophy has served us well over the years, and you can see it in our results.

On the sales front, we are seeing success with both smaller and larger companies. I'm particularly pleased with the traction we are having in our recently expanded target market range of companies with up to 10,000 employees, where our messaging around ease of use and the employee self-service is resonating. Finally, it's great to see all the Paycom faces back in the office, even if behind masks.

We have successfully transitioned nearly all employees back to our offices around the country, and it is great to see we are getting our office culture back. While we accomplished extraordinary things working remotely, I believe we're even better together. Many of our new hires are experiencing for the first time, the daily buzz and enthusiasm that makes Paycom a unique place to work. While our sales teams are still selling virtually, we are already seeing the benefits of everyone being safely back in the office, sharing best practices and collaborating more closely.

In summary, Q3 was a very strong quarter, driven by record new client revenue. The investments we've made throughout 2020 and to date in 2021 have made Paycom more differentiated than ever, and we are seeing the benefits across the sales, service and product organizations. As a reminder, we have approximately 5% market share of a growing TAM and a long runway ahead of us. I want to thank all of our hardworking and dedicated employees for their grit and commitment to success.

With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Before I review our third quarter 2021 results and our outlook for the fourth quarter and full year 2021, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

We are very pleased with our third quarter results, with total revenues of $256.2 million, representing growth of 30.4% over the comparable prior year period, driven primarily by strong new client revenue growth. Within total revenues, recurring revenue was $251.3 million for the third quarter of 2021, representing 98% of total revenues for the quarter and growing 30.4% from the comparable prior year period. Total adjusted gross profit for the third quarter was $214.8 million, representing an adjusted gross margin of 83.8%. Third quarter margins were impacted by both our return to office and our aggressive hiring of the individuals needed to service our current and future growth.

For 2021, we expect to deliver a very strong adjusted gross margin of approximately 85%. Adjusted total administrative expenses were $142.5 million for the third quarter as compared to $113.3 million in the third quarter of 2020. Adjusted sales and marketing expense for the third quarter of 2021 was $66.3 million or 25.9% of revenues. Our marketing strategy continues to generate strong demo leads, and we plan to continue to invest in advertising, given the strong return on our investment we are seeing.

As Chad suggested, growth remains a top priority, and advertising is a productive lever that we have continued to deploy to drive revenue growth. Adjusted R&D expense was $29.3 million in the third quarter of 2021 or 11.4% of total revenues. Adjusted total R&D costs, including the capitalized portion were $40.7 million in the third quarter of 2021 compared to $29.8 million in the prior year period. Even in this tight labor market, we are having good success attracting and retaining talent.

Adjusted EBITDA was $89.7 million in the third quarter of 2021 or 35% of total revenues compared to $67.5 million in the third quarter of 2020 or 34.3% of total revenues. Our GAAP net income for the third quarter was $30.4 million or $0.52 per diluted share versus $27.5 million or $0.47 per diluted share in the prior year period based on approximately 58 million shares in both periods.

Non-GAAP net income for the third quarter of 2021 was $53.6 million or $0.92 per diluted share versus $40.6 million or $0.70 per diluted share in the prior year period. We expect noncash stock-based compensation for the fourth quarter of 2021 to be approximately $22 million to $24 million. For the full year, we anticipate noncash stock-based compensation will be approximately $98 million to $100 million. For 2021, we anticipate our full year effective income tax rate to be 23% to 25% on a GAAP basis. On a non-GAAP basis, we anticipate our full year effective income tax rate to be 25% to 27%.

Turning to the balance sheet, we ended the third quarter of 2021 with cash and cash equivalents of $230.9 million and total debt of $29.6 million. Cash from operations was $83.2 million for the third quarter, reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately $1.6 billion in the third quarter of 2021.

During the third quarter of 2021, we've repurchased approximately 61,000 shares for a total of roughly $29 million. Through September 30, 2021, Paycom has repurchased nearly 4.3 million shares since 2016 for a total of approximately $484 million, and we currently have roughly $271 million remaining in our buyback program.

Shifting to guidance. We are pleased to provide strong fourth quarter guidance that reflects the robust performance year-to-date, and we are raising our full year 2021 outlook as a result. Our Q4 and full year guidance are as follows: for the fourth quarter of 2021, we expect total revenues in the range of $274.5 million to $276.5 million, representing a growth rate over the comparable prior year period of approximately 25% at the midpoint of the range. We expect adjusted EBITDA for the fourth quarter in the range of $103 million to $105 million, representing an adjusted EBITDA margin of approximately 37.7% at the midpoint of the range.

For fiscal 2021, we are raising our expected revenue range to $1.045 billion to $1.047 billion, up from $1.036 billion to $1.038 billion or approximately 24% year-over-year growth at the midpoint of the range. We expect full year adjusted EBITDA in the range of $413 million to $415 million, representing an adjusted EBITDA margin of approximately 39.6% at the midpoint of the range.

To conclude, we are very pleased with the performance in the quarter and how the full year has been shaping up. Product differentiation, outstanding customer service and our use of effective advertising and sales levers are all contributing to our strong results, and we have a long runway ahead of us to continue to deliver rapid growth for years to come.

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

(Operator Instructions)

Your first question comes from the line of Raimo Lenschow of Barclays.

And congrats again for another quarter as the fastest-growing HR company that I cover. The -- I have 2 quick questions. First, Chad, can you talk a little bit about -- you talked about the customer -- new customer momentum. Can you talk a little bit about the lending kind of size and the module uptick that you see from these new customers? Is there any change in terms of what people are buying, how BETI, et cetera, impacting how big you're lending for them? And then I have one follow-up question.

Yes, definitely. Well, BETI, for instance, BETI is included on all accounts since July that we've sold. And so that doesn't mean that we've converted all of them that we've sold since July, but BETI is included in that, meaning that it's sold as part of the package that we sell with that. Included in that, there are products that are -- to be honest with you, are somewhat our most popular products anyway. But I do believe BETI is making an impact on our ability to sell more products at the point -- at the initial point of sale.

Yes. Okay. Perfect. And then the -- if you think back to the pandemic, you kind of did really well in new customers, but your existing customers had lower employee count, which obviously then hurts since now in September, a lot of the benefits kind of fell away. What are you seeing in terms of rehiring at the existing customer level? And could that be another driver for you as we think about next year as well in terms of the revenue trajectory?

Yes. I'm going to take this as you're talking about the clients that we had at the time of the pandemic and then the negative impact on them, which we've quantified in the past of that $1.8 million to $2 million. We've talked about a couple of different quarters of seeing improvement in that. Specifically, this last quarter, second quarter, we did talk about, we did see a little bit of improvement to the extent we did. It was around $100,000 a week. That trend has continued into the third quarter, where I would say it was very similar to what it was in the second quarter as to that improvement of about $1 million to $1.5 million positive impact on the quarter from our pre-pandemic client base becoming a little bit more healthy.

Perfect. Well done. Congratulations again.

All right. Thank you.

Next question comes from the line of Samad Samana of Jefferies.

Congrats on the strong sustained growth for me as well. Maybe first, Chad, it at least seemed like you guys led that or imply that you're investing for growth and you want to invest aggressively. Just I'm curious, as you think about the investments you've made to date, is there any change in the mix between those as you think about maybe you mentioned the reopening? Will there be a mix shift in dollars going to either advertising versus back into sales headcount versus other modalities, like user conferences? Just how should we think about that investment framework mixing in terms of dollars as the world reopens?

Sure. We're definitely focused on the marketing and advertising, and I'm sure you guys have seen our assets out there working. We continue to drive that. We've also returned to the office, each of our offices as well as here in Oklahoma City. I was actually, 1.5 weeks ago, with all of our sales leaders in Aspen as we've done really our first big meeting with one another since the pandemic.

Something else that we're doing, we're having a lot of success hiring. We have to hire service individuals and train them up ahead of the revenue that we are bringing in. And so we've had a lot of success hiring service individuals with the anticipation that our growth continues as it has, and we will need them to service these accounts. And so those are the large areas. Obviously, marketing is more of a lever type area. And we spend that deliberately throughout the quarter to make sure that we're not leaving powder in the keg that we could turn into future sales.

Yes. And Samad, I would also echo that, I mean, we're also having success on the R&D side. I mean, we're able to hire and bring those individuals in as well.

Great. And then maybe just a question on bookings linearity in the quarter. Maybe you could just help us understand the overall strength of bookings in the third quarter. And then how it trended throughout the quarter, just given we've heard kind of varying use in software, more broadly around trends evolving over the course of the quarter.

Yes. I mean our bookings in the quarter remained strong throughout third quarter. In fact, the October we just finished was our largest booking month ever. I know I say that quite often, but we would expect to have strong quarters in subsequent quarters and months for bookings. But bookings remain strong. Now deals are booked and then they turn into revenue over time, whether that's 13 weeks or 17 weeks, is our focus for those. But yes, we had a lot of strong bookings come in, in the third quarter. And as I mentioned, October was our largest booking month we've ever had at our company.

Next question comes from the line of Brad Reback of Stifel.

Chad, as you sort of look back over the last 18 months and the efficiencies that you've been able to achieve across the organization, where would be 1 or 2 places where you've generated the most? And where do you think it's most sustainable going forward?

I mean that's a good question. I think that we've gained a lot of efficiencies through our own technology that we've developed to use internally. Some of that is based off of internal communication, which had to strengthen in order to survive the work from home and the impacts of the virtual environment as we move to it.

I believe we're still gaining efficiencies through the sales model, as predominantly most -- all of our sales are still done virtually, which does allow for a better training on our side and allows our managers specifically to be able to set on more calls. I'm sure there's others, but I would call out that -- those 2 for sure.

Next question comes from the line of Mark Marcon of Baird.

Really strong sequential growth in this quarter and obviously, you called out the bookings. I was wondering, could you help put a little bit more color behind where you're seeing the bookings strength? Is it newer markets for you relative to older markets, smaller clients versus larger clients? Obviously, the marketing is having a positive impact, but I'm wondering if you're seeing any patterns that are discernible.

Not really. I would say it's more of the same for us. There's just more of it. Now I would remind everyone that we did increase our inside sales group in the past. I talked about that, how we've grown that over the years. We now have 10 teams there that we have. Of course, they're bringing in smaller deals with a little bit lower revenue associated with it. But I wouldn't really be able to call out that the mix is different than what we've had in the past. It's the same type mix. We continue to go more upmarket, but we always have. And so -- but the mix is very similar.

Great. And can you give a little bit more color with regards to the impact of BETI? And then lastly, just a little bit more color with regards to the impact of bringing people into the office in terms of the gross margin for this quarter and how we should think about gross margins going forward.

Yes. I would say the gross margin, I mean, it definitely was impacted some by the return to work. You definitely have some of that. But I would also say that we've had a lot of success hiring our service individuals as we get ready to get trained up for the revenue that we're bringing in. And so there's been quite a bit of it there as well.

From a BETI perspective, we started selling it to the group, to the masses in July. And since July, I think in July, I said that we had sold 1,000. Some were in conversion, some we'd already started. As of today, we've sold nearly 4,000. Again, some have already started and some are in conversion. So that product continues to be successful for us as it changes the way that employees do their payroll and really puts the control into their hands.

Next question comes from the line of Ryan MacDonald of Needham.

This is Michael Rackers on for Ryan. Congrats on the quarter. At HR Tech and some other industry work we've done this year, we've heard about a lot of new customer interest and vendor functionality and things like daily pay and talent intelligence, which seems to be more targeted to the customer segment that you are starting to target more moving upmarket. How do you think about product expansion in the larger customer segment that may or may not have some different module requirements?

I mean, we're in the large -- for us, the larger clients are the 10,000-employee companies, I believe, our largest client is around 20,000-ish employees. And so we believe we provide a very strong product for that. I've kind of said in the past that there may be such thing as an enterprise level business, but I do not believe there's such thing as an enterprise level employee. You're an employee, you can be working with a 300 company today and a company that might have 50,000 employees tomorrow. But you're the same person, and you expect the same type of functionality.

And that's really what we are providing is the appropriate tools for the employee base. I mean you can hand me a shovel and ask me to dig a 4-mile trench, and I may or may not be able to do it, but that's not the correct tool to do that. And so one thing we've been able to do is bring the correct tools to the employee base regardless of size.

And a lot of the things you'll find is that the things that an employee has to do are pretty much the same, whether that employee is working at a company that has 300 employees or 5,000 employees, all rules apply. As you get into the larger companies, you do sometimes have to deal more with international type tax situations and other. But for the most part, we feel really good about the value that our product is able to deliver to those large market employees as well.

Next question comes from the line of Siti Panigrahi of Mizuho.

This is actually Matt Diamond on behalf of Siti. Congrats again on the results here. One thing I'm trying to figure out is the potential for sales office reopening. Chad, it sounds like everybody is enthusiastic to be back in the office. But it's undeniable the benefits that came from virtual selling over the last 18 months. How should we think about sales office openings in 2022?

Sure. We actually did. I didn't call it out in the prepared remarks, but we actually did open up an office in this past quarter. We opened up a second Manhattan office there in New York City.

As far as from sales, I think it's important to state that we are back in the office, but we are selling virtually from our office. And so the change there is we were selling virtually from our homes. Now we are back in the office selling virtually from the office. And so we have the collaboration and it just makes more sense for us to be there.

Helpful. And with BETI, it sounds like there's a lot of positive momentum happening in that module. Could you help us understand what percentage of the Paycom's client base today is prepared to upgrade to BETI or be sold BETI? I know that there's some prerequirements that go into that module, but any color there would be helpful.

Well, prepared from a product -- prepared mentally, I'm hoping all of them are. But prepared from a product standpoint, there would be some products that we would upsell to some of our clients that would enable them to get the full value and actually be able to use BETI. I haven't disclosed exactly what that is because that's a moving target as we continue to have success selling BETI, both into the current client base as well as for all new clients that are brought on.

Next question comes from the line of Bryan Bergin of Cowen.

I have a follow-up on BETI here. So just curious how the efforts are progressing on selling it back into that existing base. So Chad, of those 4000-or-so sold clients, can you give us a sense on how many of those were in the existing base versus new?

Well, we're not splitting that out separately, but I would -- you could expect there'd be a healthy mix of both with 4,000. So you'd have a healthy mix of both. For current clients, it's one of those things where they're having success with our current product and the current environment, and we are going up to them, asking them to change their internal processes, again, to start the process at the beginning versus at the end.

We're having a lot of success with that. And as we get more and more proved sources of current clients that have shifted over to it, and their employees are having great success. We are receiving both more client referrals as well as more prospect referrals, which is driving more results for us.

Okay, fair. And then just on the talent and the hiring front, any challenges at all in acquiring needed talent across the organization, whether that's in sales or services?

Well, there's no doubt it's a tighter market. And it really does depend on at what level we're talking about bringing people in and then also what departments. Some levels, we're actually receiving upgrades in talent due to the fact that I think our brand is much stronger than it's been in the past, and we are a destination location for employment. In some areas, just like everyone else, it's a tight labor market and we're all fighting for talent. So it's really somewhat department dependent as well as at what level of employees versus is it a new frontline type position or is this a management level position. But it's tight everywhere, but we are having a lot of success continuing to bring people in.

Next question comes from the line of Alex Zukin of Wolfe Research.

This is Allan on for Alex Zukin. It seems like there's a bit of an inflection in the demand environment in the March and April time frame. How are you thinking about the competing trends around both reopening, along with the shortage of talent? Are these opposing forces? Or are they coming together to drive demand?

I'll tell you from where we're at right now, and I've kind of said this a little bit or consistently, I would say, is we needed stability in the market in order for us to enable our growth so that our growth could actually be reflected as we brought businesses in. We needed some stability we've had that.

As far as it being a tight labor market, I do think there is some impact, obviously. And the larger we get, the larger the impact on our ability to have what I'm going to call, same-store or current client growth and see that. We've never been a company that's been dependent upon that nor have we really looked at that as any type of driver for us. And probably still today, wouldn't even have thought of it as a question, except for we did go through the pandemic and lost a significant amount through our client base. But from a macro standpoint of what we see amongst our client base, we see stability and our growth is coming from our ability to add new clients onto our platform.

Next question comes from the line of Robert Simmons of D. A. Davidson.

So I was wondering, what are you seeing out there in the market around the competition, is there anything unusual going on in terms of pricing, marketing or anything that [you've acquired]?

Okay. So it's hard to hear you. I heard the -- what is going on -- is anything going on new with the competition. I can't say -- I would say we've always been in an extremely competitive market. I think that's good for clients. The more competitive an industry is, the more innovation you see because the harder we're all trying. I can't say that I've seen anything new in the market from our clients, be it from different types of technologies and/or techniques that are used.

We've always -- clients have always sold against us with different pricing discounting and different people accentuate their positives. The positive we accentuate is the fact that we drive significant return on investment for those in a low-cost total ownership, for those businesses that choose Paycom, and that's all experienced through employee usage and an easy-to-use product.

Okay. Great. And then are you seeing any kind of change in the demand environment in terms of like which modules are particularly being -- picking up by clients in terms of like -- there's like change of what people really want to focus on? Or is that really not a factor that (inaudible) anymore?

Yes, sure. I will tell you one thing that we are seeing. and I've said this in the past, we've always been really good at selling product, sometimes not as good at getting clients to use the products that we've sold. What I would say is happening now, and it's really been happening. We came out with the DDX. We came out with Manager on-the-Go. We kept the data moving. We gave people visibility. Then we came out with BETI and gave them another reason to go ahead and fully automate. We've continued to do that, and we've continued to see great success around usage, which is really driving everything for us right now.

And your last question comes from the line of Bhavin Shah of Deutsche Bank.

Congrats on the quarter. Chad, I was wondering if you could just dive into the upmarket motion a bit. How has the pipeline here evolved since you formally opened up this opportunity? And any sense of how the initial sales cycles that are win rates that compare to the rest of your business? I know it's kind of early days still.

Yes. I would say really no big changes on that. We expanded the market, because we're already having success in it and already had a very strong pipeline as we continue to move upmarket. I would just say it's more of the same on that and really wouldn't be able to call out many differences than what we've had in the past. We've just formalized our target market up to 10,000 employees now as we had been having success in that 5,000 to 10,000 range throughout this year.

Got it. And then on BETI, I know you're not breaking up the split between the 4,000 of new and existing. But maybe of those existing, any sense of how many of them have come back to the table to adopt additional modules to kind of fully utilize the benefits of employee self-payroll?

Yes. I would say every client that's deployed BETI would have to have the full solution set that BETI requires to be able to even implement BETI. So that would have happened upfront. Again, I do want to state that most all of the products required or necessary to work BETI are our most popular products. And we're always pretty -- we've always been pretty good at selling the value to both the client and the employee for them taking that product and using it.

So BETI itself, it's incremental to our overall revenue, and it will prove very positive. But really, where it's making the impact, it's driving an incredible amount of value for the client. I mean, it's a very nominal spend for them to add it. But the value multiple that they're receiving, just by adding BETI, really makes all the other products that we've already provided to have been much more valuable with the stronger return, and it's very measurable for both them and the employee.

One thing we are starting to receive a lot more of right now, are employee referrals who have used BETI even at one company, they go to another company, and we're continuing to have strong referrals from rank-and-file employees that have used our technology and now are at a different location or business.

That's great to hear. Congrats again.

Thank you.

There are no further questions at this time. I would now like to turn the call back to Mr. Chad Richison. Please go ahead, sir.

All right. I want to thank everyone for joining us today on the call and a special thanks to our employees for helping to deliver another very strong quarter. I'd like to reiterate that I believe getting vaccinated saves lives. So I hope that everyone who hasn't been vaccinated is able to get it so we can end this pandemic.

On the investor outreach front, this quarter, we'll be participating in several virtual investor conferences, including the Stifel Growth Conference on November 11; the Needham SaaS 1x1 Conference on November 18; and the Barclays Global TMT Conference on December 1. We look forward to speaking with many of you very soon and appreciate your continued support of Paycom.

Thank you, operator. You may disconnect.

This concludes today's conference call. Thank you for participating. You may now disconnect.