Q3 2024 Paycom Software Inc Earnings Call
Ladies and gentlemen, thank you for your patience. Let's go over again shortly. If you would like to register a question at any time, please press star one on your telephone key pattern.
Elliot: Good afternoon, my name is Elliot, now with your conference operator today.
Now this time I would like to welcome everyone to pay concert third quarter, 24 financial results conference call All lines have been placed on mute to prevent any background noise After this speaker's remarks, there will be a question in the last session
If you'd like to register a question during this time simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, is press star followed by the number two?
and now let's turn all over to James Samford, head of investor relations, you may be
Thank you, and welcome to Paycom's earnings conference call for the third quarter of 2024. Certain statements made on this call that are not historical facts, including those related to our future plans of objectives and expected performance, are forward-looking statements within the previous report.
James Samford: These forward-looking statements represent our outlook only as of the day to this conference call.
James Samford: While we believe any forward-looking statements made on this call our reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risk and uncertainties.
These risks and uncertainties are discussed in our findings with the SEC, including our most recent annual report on Form 10K.
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 an expressly disclaimer, any obligation to update or alter our forward-looking statements whether result of new information, future events or otherwise, except as required by applicable law.
Also during today's call we refer to certain non-gap financial measures, including adjusted EBITDA, non-gap net income, and certain adjusted expenses.
We use these non-gap financial measures to review and assess our performance and for planning purposes.
A reconciliation schedule showing gap versus non-gap 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.pacom.com.
Speaker Change: and well now, turn the call over to Chad Richison, take on CEO and President Chad.
Thanks, James, and thank you to everyone joining our call today. I'd like to discuss how pay comes automation continues to transform our industry. Then I'll review some recent client wins and industry recognition before turning it over to Craig, who will review our financials and guidance before taking questions.
We are investing in our highly differentiated automation platform that is delivering ROI for our clients.
20 years ago, user buyers bought the pay-com system because they wanted to do more for themselves. And today people buy pay-com because they wanted to do more for them without the need for day-to-day involvement in the software.
We already have the most automated system in the industry and we are rapidly moving toward full solution automation, driving even more ROI for our clients.
Our award-winning solution gone is just one example of how pay comes simplifies task throughout a nation.
James Samford: John was recently named a top HR product by HR Executive Magazine and for good reason. John is the industry's first fully automated time-off solution that decisions all time off requests.
Before gone, nearly all time off decisions were unmanaged.
A recent forester study found that gone can generate an ROI of up to 800%.
By automating time-off decisions, individual managers saved nearly a week of unproductive hours annually. An addition, the study found that on average, companies using gone saved nearly five weeks of unproductive time in the areas of HR finance and accounting every year.
Without John 10% of an organization's labor costs goes substantially and managed, resulting in increased costs from overpayments, errors and scheduling, staffing shortages and operational disruption.
One example of a client utilizing Dawn is an auto dealership with nearly 500 employees spread across multiple locations.
John saved this client approximately 200 hours of unproductive time for week. While ensuring a consistent time-off request process and apology management across the organization.
with Gone is Client Reports having reduced decision fatigue among managers and team leaders. Not only has Gone automating mundane tasks, it is also having a positive impact on employees.
Betty continues to be a differentiator and clients using it or experiencing its benefits. We recently onboarded a 1000 employee hospital organization with over 20 locations.
James Samford: Utilizing Betty, this bilingual workforce has already reduced their payroll processing by 85%.
This organization also appreciates that their managers benefit greatly for manager on the go, which consolidated their managerial task into a single app, streamlining approvals, pay-up management, applicant tracking, and more.
This client currently boasts a 99.7% DDX score reflecting the user-friendly power if they come software for the organization.
Our development teams have been focused on automating tasks across the platform that are easily adopted by our client base.
Because of this focus, both this quarter and throughout the year, we've launched more products and enhancements than any time in our company's history.
There are several examples of automation we recently launched that are having a big impact on HR and recruiting departments.
One such automation is our position management enhancement that automates reporting structure and hierarchy changes needed due to individual employee changes such as promotions and transfers or large scale organizational changes such as an acquisition or restructure.
Another example of automation is how we enhance our recruiting module.
The advances in our recruiting product have dramatically increased the application completion rates and significantly reduced time to fill. What was already a very fast time to apply process has now been reduced by 50%.
Internally, we developed and deployed an AI agent for our service team.
This technology utilizes our own knowledge-based semantic search model and enables us to provide service to help our clients more quickly and consistently than ever before.
The AI agent continually improves over time and is having an impact on helping our clients achieve even more value out of their relationship with fake-off.
James Samford: By utilizing our own AI agent, we were able to connect our clients to the right solution faster and proving our immediate response rates by 25% without any additional human interaction.
As a result of our continued focus on solution automation, ROI achievement, world class service, we also increased our net promoter score 24.0 per year.
James Samford: On the cell side we are seeing continued momentum, particularly with our outside cell reps. System automation matters more to business than ever before, and our cell forces delivering on the market's needs.
James Samford: which is driving our goals. We still have less than 5% of the addressable market. We remain focused on executing strategies that will produce extremely high ROI and automation for our clients while continuing to differentiate our solution to automation.
Finally, I'm pleased that Paekcom was recognized as one of the best employers for tech workers, boxforbs and one of the world's best companies overall by Time Magazine.
These testaments showcase our culture and the impact our technologies having on workforces all over the globe.
We are executing on our 2024 plan and I'm very pleased with the progress. Our success in 2024 will set the foundation for future growth. With that, let me turn it over to Craig. Craig.
Thanks Chad, before I review our third quarter 2024 results in our outlook for the fourth quarter and full year 2024, I'd like to remind everyone that my comments related to certain financial measures will be on a non-gap basis.
Craig: We delivered solid third quarter results with revenue and adjusted EBITDA coming in above expectations.
3rd quarter revenue of 452 million increased to 11% over the comparable prior year period.
Within total revenues recurring revenue was 445 million for the third quarter of 2024 representing 98% of total revenues for the quarter and growing nearly 12% from the comparable prior year period.
Gapnet Inc. in the quarter was 73 million, or $1.31 per diluted share based on approximately 56 million shares. Non-gapnet Inc. for the third quarter was $93 million, or $1.67 per diluted share.
Third quarter of just to be but of 171 million or 38% margin was better than expected. Primarily due to revenue upside, and our continued focus on automation.
We expanded our investments in the area of AI, automation, and international expansion, resulting in a 20% increase in adjusted R&D expense to 55 million in the third quarter of 2024.
adjusted to a low-end cost, including the capitalized portion, for 84 million in the third quarter of 2024. Compared to 69 million in the prior year period.
Our tax rate in the third quarter came in higher than expected largely due to one time discrete items recorded in the quarter primarily related to return to provision adjustments.
James Samford: For Q4 and the full year 2024, we anticipate our effective income tax rates to be approximately 28% and 24% respectively on a gap basis.
We estimate 24 and 40 or 2024 non-gap affected tax rate to be 27%.
For the fourth quarter of 2024, we expect stock-based compensation expense to be approximately 27 million.
James Samford: Turning to the balance sheet.
We ended the quarter with a very strong balance sheet, including Caching Cash Equivalence of 326 million and no debt.
The average daily balance of funds held on behalf of clients was approximately 2.3 billion in the third quarter of 2024, upper approximately 10% year over year.
During the third quarter, we repurchased approximately 300,000 shares for 44 million dollars.
Since July 1st of last year, we have repurchased approximately 2.3 million shares representing nearly 4% of total shares outstanding. And we have 1.49 billion remaining on our buyback authorization.
During the third quarter of 2024, we've paid approximately $21 million in cash dividends, and earlier this week, the board approved our next quarterly dividend, a 37.5 cents per share, table and mid-december.
Now let me turn the guidance.
Following solid Q3 results in our expectations for the fourth quarter, our revenue guidance range for fiscal 2024 increases to 1,866 million to 1,873 million, or approximately 10% year over year growth at the mid-point of the range.
We're raising our expected adjusted EBITDA range to 745 million to 752 million representing an adjusted EBITDA margin of 40% at the midpoint of the range.
James Samford: For the fourth quarter of 2024, we expect total revenues in the range of 477 million to 484 million representing a growth rate over the comparable prior year period of approximately 11% at the mid-point of the range.
We expected just to leave it off for the fourth quarter in the range of 184.5 million to 1951.5 million representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range.
James Samford: Overall, T3 was a good quarter with better than expected revenues and significant adjusted EBITDA website. We have an attractive, high margin recurring business model, a solid balance sheet with no debt and strong cash flows.
We will continue to focus on strengthening our competitive position through automation and delivering even more value to our clients through our Alight treatment. With that, we will open the line for questions. Operator.
Speaker Change: Thank you. At this time I would like to remind everyone in order to ask a question, press star then the number one on your teleprompter keypad. In the interest of time we ask that you let me yourself to one question and one follow up. We'll pause for just a moment to compile the Q&A roster.
The first question comes from the line of Ray Motel and Shell with Barclays. Your line is open.
Speaker Change: Perfect, thank you, Congress on a great fall of quarter. If you think about like...
The reporting season so far for the payroll names it does.
Speak to words more of it.
and Steve Belais, or like a really stable market and you know, and everyone is still hoping for like some sort of recovery. What are you seeing out there in terms of like end-to-mond, etc. like how does the pipeline evolve? Like how are the the seat of connotization going at the moment? Do you have any kind of more colour there please?
and then for Craig any comments on float and how you think about float, go into next year's vlog. Thank you.
Yeah, so I mean the demand is strong out there. I mean we have an automated solution and more and more people are looking to automate.
We continue to get stronger. In fact, last month was our largest sales month, September both for this year, as well as over the history of our company. So we continue to get stronger in sales and that's been important to us to continue to move.
Speaker Change: and moved to product into the markets so that clients can experience the ROI that can be derived from the fully automated solution.
I'll show you around on the float revenue
You know, for every 25 basis point cut, you know, a kid impact is as much as $60 million dollars per on an annual last basis and we've already seen to, you know, 50 basis point cut and maybe a couple more this year. So, you know, as we're looking in the next year, you know, that's going to be something that's going to impact us.
James Samford: and then you know who we're starting to also look at Larry and him, no more longer term on that boat balances.
James Samford: Okay, thank you.
James Samford: Thank you.
Speaker Change: Your next question comes from the line of Samad Samana with Jeffries, your line is open.
Good evening. Thanks for taking my questions. Maybe for one, Chad, for you, it's interesting to hear about using AI in the customer service organization. I'm curious if that's technology that Paycom has built or if you're using a third party and how you're thinking about that translating it to like the savings on the cost of service side. And you think that that can be something that can be monetized as a feature at some point as well. And then I have a follow up for Craig After.
So that's the internal we built at ourselves and we've been using it and so you know it gets better and better as we mentioned on the call It's set up our process by 25% as far as being able to connect
and clients to the solution quicker, whether that be a configuration, a question, a tax question, or what have you, and so that's really been helpful to us and it continues to do more and more from that perspective.
Speaker Change: and I'll let Craig answer, uh...
and then Craig maybe just as a follow-up. When I think about the acceleration, it was good to see that. Have we turned the corner on the CRR?
Cross-Sell had win and any associated Betty head wins. And we think about the fourth quarter guidance as a good starting point for 2025 now that we started to see every acceleration.
I mean, there's still benefits being gained by clients that utilize bedding. I mean, even when you look at our tax resolutions this year versus last year's same time.
you know they're down a third so
Betty is still driving efficiencies amongst those clients as far as CRRs. They continue to help clients achieve the full value of the software and they're continuing to do well. You know, but in order to sell a client and additional product, you really have to make sure that they're utilizing and having success with the products that they currently.
Speaker Change: and we have a lot of CRRs that have got their clients in the right solution. We have a lot of them well over plan and their quote is now.
Your next question comes from the line of Mark Mark on with bad. Your line is open.
and I'm really nice to see the acceleration with regards to recurring revenue.
Chad, you mentioned several things, but I'm wondering if you can talk a little bit about the drivers.
Mark: Behind that acceleration to what extent is it increased, you know, module uptake for things like gone relative to, you know, some of the improvements.
that have been made with regards to kind of the sales, go to market and training that you've implemented recently and then I've got to follow up.
Sure, I would say that gone definitely helps cells because of its automation. Gone isn't priced separately, so it's included in one of the modules that most all of our clients already have.
So, gone is just a way to automate that much or fully.
and then you know that also is helping cells, like I kind of said on the call.
20 years ago, people bought our systems as they could do more with it. Today people buy our systems so that it can do more for them without their involvement. I mean, 20 years ago, I...
Go to a fantasy football draft and...
Do the draft and then set my line up, you know, maybe one week on plan two kickers on accident. You know, today people can go and have that draft set it on auto draft and set it on auto line up. They're usually ones that win the...
When the season, and so, that's really the concept of our system. You know, if you set it up right, it's going to automate everything for you.
and you know, Pat Comcast, the best case scenario for usage in our industry and it's getting more and more clients to that. And we have a lot of success with that obviously in our go-to market with new clients.
Speaker Change: Great, and then any comment went for guards to just kind of the sales process in the sales training.
Yeah, Celsius is doing really well. I mean, unit counts, as I mentioned last time, continued to be elevated, go to market, they continued to sell, you know, more than we have in the past, and as I mentioned, yes, sir.
Earlier last month September was our largest sales month we've had today and ever.
Your next question comes from the line of Brian Schwartz with Open Hymmer. Your line is open.
Brian Schwartz: Hi, thanks for taking my questions this afternoon. Chad, I'd follow up on the AI agent of the AI technology that you're developing.
Do you see an opportunity in the future to product ties while you're developing internally? Maybe I can hear in future versions of your recruiting product or other products in your platform.
I mean I would say this isn't the only area in which we're using AI we have it in several.
products that we both have released and will be releasing and so there's definitely opportunities to monetize AI.
As far as this particular solution, it's really helping us on the back end and helping our mind as well. So I think we're going to see results and benefits from that in other areas of efficiency across the board within our own organization.
Thank you, and then one question for Craig, just in terms of the EBITDA website in the quarter, you know, it was a much bigger beat than we've seen in previous quarters.
Just want to ask you about the expense profile that any expenses slip into Q4 or is that just primarily from the upside in the top line. Thanks.
Yeah, I mean it was come early from the outside and in the top line, I mean there were a couple things that kind of impacted the feed. I mean some of them were at the corporate level and some of the market is marketing maybe a little bit of timing but other than that, just um...
Your next question comes from the line of Joshua Riley with Needham. Your line is open.
Alright, thanks for taking my questions. The mention, the press release, you know, moving towards a full solution automation.
How should the investor think about this period right now where you've kind of been aggressively making some changes as a platform behind the scenes? Is this something that you think is largely complete at the end of 24 or sometime in 25? And are the implications that we should be thinking about?
From RN is that the Eva-Dum margins, you know, can potentially move up as we move past that kind of elevated period of investment.
Speaker Change: Well, I mean, automation's do drive efficiencies. I mean, there's no doubt about that across the board. We're also very ambitious because we only have 5% of the market. So there's certain areas we want to capture. I mean, I would just say about automation, you know, since we're founding, you know, we focused on innovating for clients and differentiating ourselves.
Brian Schwartz: for Mark competitors by delivering that maximum ROI, which is good for everyone. And so, you know, we've doubled down on innovation to include the full automation. You know, the software is used in our industry. We'll look different in a couple of years and, you know, we're the ones who are building it.
Got it and then just following back up on that client realization of modules that have already been sold. It seemed like the last couple quarters you've been monitoring that pretty carefully yourself.
Seeing any change in terms of making the effort with the craft self seem to get the utilization higher or is it still kind of consistent with what it's been the last few quarters. Thank you guys.
Speaker Change: Yeah, it's continuing to go up.
Speaker Change: In a good way, you know, sometimes utilization isn't always reflected in time spent in a system. Oftentimes, the best way to utilize our system is to set it up and leave it alone.
So that it can actually do to work for you. And you know, we're having a lot more of that where people trust the system. I mean, we can make 20 decisions today and help us configure something in a way that it will fully automate, you know, 4,000 decisions you would otherwise be making every day. And so so much of what we bring to market is about doing now.
Brian Schwartz: and the
Your next question comes from the line of Steve Anders with City. Your line is open.
Okay, great. Thanks for your questions, Sarah. I just wanted to start, I just wanted to have a little bit on the...
On the quirky guy in the outlook here.
Steve Anders: I mean I think kind of at a pretty good beat here but it doesn't look like the full amount kind of gold brew to the year. So can you help us maybe think about what's maybe happening in Q4 that's leading to a little bit of the change in the guide or some of the puts in takes that we should think about for Q4.
Yeah, so as we look to Q4 and then in the full year, you know, we narrow the range, we increase the bottom and narrow the range
You know, Q4 is the one that is the hardest to predict.
based on the number of bonus runs that you have and another type of off-cycle runs. As well as we've had a 50 basis point cut in the interest rates.
and potentially a couple more as we're looking through the end to the towards the end of the year. Now that's really what I would say as it relates to the, as we were thinking the guidance for a few four and four years.
Okay, and so is it or the fact that's going into it is primarily changes on the on the foot of functioning side of the thursdays and I guess other changes of being accounted for in the outlook.
Steve Anders: I'm not that I would really fall out and I'm a more interesting catch on now.
Speaker Change: Your next question comes from the line of Kevin McVay with UBS, your line is open.
Speaker Change: Great, thanks so much.
I wonder, including the EBIT to be, tell us what you talked about revenue and some automation, is there any way to think about?
Like how much was the revenue upside as opposed to automation and you think about that automation?
and they should have, how much of that is kind of through the organization of ready and how much more is there to go? I guess in terms of maybe not necessarily numbers, but percentages whether it's on the front end or back end, is really with it to frame that a little bit.
Yeah, I mean, I think there's a lot of automation to go, you know, I mean, in the perfect world, the system would just work for you as you look at it, you wouldn't even have to log in.
Speaker Change: So, you know, I think there's a lot of automation to go. We're a company that eats our own cooking. So, of course, you know, automation is going to impact us and our back office as well to the positive.
You know, big out. I mean, automation is fun. It's fun to do. It's fun to actually watch a client enact it and be able to trust the system and watch what it can do for them because that's really what it's about It's the return on investment that they're achieving and being able to do something that they couldn't do anywhere else.
Speaker Change: and the co-founder of the Lord Gisels Modever.
Speaker Change: If you're new, how much of that is kind of white space is opposed to competitive takeaway and what's described is that kind of incremental petty adoption or just, because obviously it's a really, really nice data point.
Yeah, so that's going to be our bookings, so that's going to be pretty much new business, new logo ads that's going to be the overwhelming majority of it. Of course all those will have Betty as well, but that's that number.
Your next question comes from the line of Jason Solino with Keybank. Your line is open.
Hi, this is Ashley Devon on for Jason today, thanks for
Speaker Change: Taking all questions.
Are you just wanna double?
Speaker Change: Click on the upper form of the quarter under revenue side.
with the attribute, the beat there, is mainly on new logo strength in the quarter.
was a stronger back-to-base motion or did you see maybe perhaps better retention among employees within your customers, just more color there would be helpful.
Speaker Change: This is primarily going to be just new logo ads. I mean, that's the overwhelming majority of our new revenue is going to be new logo ads.
Speaker Change: Got it, that's the top bowl and then just one more for me, curious how the new cohort of sales wrap, I'm not going to believe you guys added 60 plus new sales wrap last quarter to the year, as how those have been ramping versus expectations. Thank you.
Yeah, very well, I mean we have a very strong cell's model
A very strong go-to-market. I would say that our cells reps are very fired up about the product that they're selling and what can be delivered to our clients. And they've been doing very well as reflected by, you know, both the start's number and unit numbers that we gave.
both last quarter and giving some comment on bookings this quarter.
Speaker Change: Your next question comes from the line of Arbendram Nanny with Parker Samford. Your line is open.
Hi, thanks for taking my question. You know, I just wanted to see if you would comment on, you know, sort of, that a adoption, you know, put it clearly with...
sort of the cohort of customers who were kind of, you know, kind of slow to adopt, you know, the, I mean, you definitely had some customers who were slow to adopt Betty, have they, has that adoption increased between that, that, that quota folks who were, who were slow to adopt?
Speaker Change: Yeah, so you know, we definitely are still meeting clients where they live to help them achieve value through the products that they utilize from us, whether they have Betty or not. But you do continue to have clients that see the value of Betty and continue to implement it as well. And of course, all new clients have been coming on with Betty now for about three years.
Speaker Change: Terrific. Can you provide a bit of an update on some of the progress in the international markets? I know it's much smaller, but any details around that would be helpful.
Yeah, so we're in four countries right now, native of us having developed payroll, but our global HCM, you know, actually encompasses all countries and we continue to build that product out as well.
So we're doing well in that.
We recently added a manufacturing company with locations all over the world, and they had native payroll in US, Canada, and Mexico. So we're seeing more and more companies, primarily US, with multinational operations adopt that.
Your next question comes from the line of Babin Shah with Deutsche Bank. Your line is open.
Great, thanks for taking my questions. Just first, I guess for Chad, going back to earlier comments, just back to the CRR team.
Speaker Change: where are they in terms of helping clients achieve full value for that software? Like what percentage of the base have you gone through and have optimized their spend with Paycom?
Yeah, I mean, I would say CRRs is, you know, that's one of the groups that is helping clients achieve.
Speaker Change: Craig Boelte, James Samford
You know, make sure they have all the products necessary to reach full ROI, there's certain products I want to sell them.
but in order to sell them those products, you know, I have to make sure they're utilizing the current products that they have and so where a CRR is going to be involved in that is during that process, but whether a CRR is out there or not.
how much of it is kind of industry pricing dynamics or needing to hire more customer service support reps or anything else? And when should that stabilize going forward?
Speaker Change: Unknown Speaker Yeah.
Your next question comes from the line of Daniel Jester with BMO. Your line is open.
Speaker Change: Unknown Speaker 0.0.0
Good afternoon. This is Kyle Labarastre on for Dan Jester. Thank you for taking our questions. Can you talk about the capital spending trends and how you expect that will evolve next year? Then secondly, on segment performance, was there anything to call out in terms of up-market versus down-market performance during the quarter? Thank you.
Yeah, I mean, I'll cover the capital spending trends. I mean, obviously, we're going to spend for growth first, you know, and so definitely going to invest there either in sales and marketing and then also on the
R&D front, that's one of the line items that's continuing to grow some. After that, we're looking at the stock buybacks. We've done some stock buybacks this quarter that you guys have seen as well as dividends.
Speaker Change: And from, you know, segment performance, up or down market, no change on that.
This concludes the question and answer session of today's call. I'll now turn the call back over to Mr. Chad Richison for closing remarks.
All right, I want to thank everyone for joining our call today, and I want to thank our employees for all their hard work and commitment to Paycom's success. We look forward to seeing investors at several conferences this quarter, including the UBS Conference in Phoenix in early December and the Barclays Conference in San Francisco in mid-December.
Speaker Change: Thank you. Operator, you may disconnect.
This concludes today's conference call. You may now disconnect.
Speaker Change: Music