Q1 2025 Paycom Software Inc Earnings Call

Good afternoon, my name is Lauren and I will be your conference operator today. At this time I would like to welcome everyone to Paycom's first quarter 2025 financial results conference call. All lines have been placed from mute to prevent any background noise.

Boston Speakers remarks, there will be question and answer session.

If you would like to ask a question during this time simply press star by the number one in your telephone keypad.

If you would like to withdraw your question, please press start, make by the number two. Thank you.

Speaker Change: I will now turn the call over to James Samford Head of Investigation. You may begin.

James Samford: Thank you and welcome to Paycom's earnings conference call for the first quarter of 2025. 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.

James Samford: 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.

James Samford: These risk and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10K.

James Samford: You should refer to and consider these factors when relying on such forward-looking information. [inaudible]

James Samford: Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly describe any obligation to update or alter our forward-looking statement.

James Samford: Whether as a result of new information, future events are otherwise, except it's required by applicable law. Also during today's call, we refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, and certain adjusted expenses. [inaudible]

James Samford: We use these non-GAAP financial measures to review and assess our performance and for planning purposes.

James Samford: A reconciliation schedule showing gap 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

James Samford: who now turn the call over to Chad Richison, Paycom CEO , and President. Chad.

Chad Richison: Thanks James and thank you to everyone joining our call today. I'll focus my comments on some of our achievements in the first quarter in the progress we've made executing on our 2025 plan. I'll then turn it over to Bob for a review of our first quarter results and an update of our full year guidance.

We will then take a question.

Chad Richison: With that, let's get started. We are executing very well in delivering strong ROI for our clients as they are experiencing the benefits of our full solution automation strategy.

Chad Richison: Recent product enhancements and client-focused initiatives are driving positive trends across our client usage metrics, and our net promoter score increased to another 16.0 over year.

Chad Richison: We have the most automated solution in the industry and our clients routinely attest to this.

Chad Richison: Our award-winning solution, Gone, is a perfect example of how Paycom simplifies tasks through automation and AI.

Chad Richison: Gunn is the industry's first fully automated time-off solution that decisions all time-off requests based on customizable guidelines set by the company's time-off rules.

Chad Richison: Before Gunn, 10% of an organization's labor cost went substantially unmanaged, creating scheduling errors, increased costs from overpayments, staffing shortages, and employee uncertainty over pending time-off requests.

Chad Richison: According to a forestry study, Gunn's automation delivers an ROI of up to 800% for clients.

Gunn continues to receive recognition.

Chad Richison: Most recently, class company magazine named Paycom, one of the world's most innovative companies for a second time.

Speaker Change: This Honor specifically recognized Gunn and as a testament to how Paycom is shaping our industry by setting new standards for automation across the globe.

Speaker Change: Another example of automation that is changing our industry is Betty. Our award-winning payroll solution continues to be a major selling point for organizations looking to reduce the labor needed to process payroll by up to 90% and also kept the time spent correcting payroll errors by up to 85%.

Speaker Change: that allows clients to focus resources on profit driving initiatives as it eliminates human involvement in non-revenue generating tasks like post payroll adjustments, check reversals, voids, ledger corrections, and more.

Speaker Change: We recently brought back a 500 employee health care company who quickly realized the pain they brought on themselves by switching to another provider.

Speaker Change: Once employees experience Betty, they don't want to go backwards in technology.

Speaker Change: Declient returned to us within nine months and went from processing payroll in four days with their previous vendor to four hours with Betty.

Speaker Change: Cells continues to break records, including the first quarter where we saw a meaningful increase in book cells.

Speaker Change: We also saw an increase in the number of units sold for the quarters compared to the same period last year.

Speaker Change: One of the new clients we onboarded was a 2,500 employee restaurant group who wanted a single, easy-to-use software solution.

Speaker Change: Working across nearly 80 locations, this group is now utilizing Betty and the rest of the Paycom suite to automate tasks that were previously performed across numerous systems which created data

Speaker Change: More and more businesses like this one are abandoning disparate decision making processes for more consistent, scalable, and automated solutions.

Speaker Change: Organizationally, Paycom was named one of America's best large employers by Forbes and Newsweek ranked us as one of the most trustworthy companies in America for a fourth consecutive year, both other testaments to the strategy and execution of our organization.

Speaker Change: I'd like to thank our employees for their hard work and dedication that they demonstrate every day.

Speaker Change: We have a strong balance sheet with high margin organic growth.

Speaker Change: We are building on strong momentum, and I'm very pleased with how this is setting us up for even stronger results through the rest of 2025 and beyond.

with that, let me turn it over to Bob.

Thank you, Chad.

Speaker Change: Before I review our first quarter, 2025 results, and our commentary for the remainder of 2025.

Speaker Change: I'd like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

We delivered solid first quarter results.

Speaker Change: Total revenue of $531 million increased 6% over the comparable prior year period, including a milestone quarter for recurring and other revenue at $500 million, up 7% year over year.

Speaker Change: As expected, rate cuts in 2024 represented a headwind to interest on funds held for clients, which declined 10% year over year to approximately $31 million in the first quarter of 2025.

Speaker Change: Gap net income in the quarter was $139 million or $2.48 per deluded share based on approximately 56 million shares.

Speaker Change: non-GAAP net income for the first quarter was $158 million for $2.80 per diluted share.

Speaker Change: We deliver strong profitability in the first quarter, adjusted EBITDA of $253 million increased 10% over the prior year period, representing a 48% margin and a 180 basis point increase over the prior year period.

Speaker Change: Margin's strength in the quarter was driven by solid revenues and effective spend in sales and marketing and GNA.

Speaker Change: At the same time, we continue to invest in the areas of AI, product and R&D.

Speaker Change: Combining these with efficiencies from internal automation initiatives, we are well-positioned to deliver an even stronger, full-year, adjusted evita margin than last year.

Speaker Change: A balance sheet is strong. We ended the first quarter with cash and cash equivalence of $521 million and no debt.

Speaker Change: The average daily balance on funds held for clients was approximately $2.9 billion in the first quarter of 2025.

Speaker Change: During the first quarter of 2025, we paid approximately $21 million in cash dividends.

Speaker Change: Earlier this week, the board approved our quarterly dividend of 37.5 cents per share, payable in mid-June.

Speaker Change: We repurchased $5 million of common stock through net downs on vested stock during the first quarter of 2025 and we still have $1.47 billion remaining under our stock repurchased plan.

Speaker Change: As a reminder, our capital allocation strategy includes a discipline return of capital to our dividend plan and opportunistic repurchases to our buyback authorization.

Now, let me turn to guidance for 2025.

We continue to have success selling an onboarding new logos.

Speaker Change: Based on our strong Q1 results and outlook for the remainder of the year, we are raising our full-year revenue and adjusted EBITDA guidance ranges.

Speaker Change: We expect total revenue to be between $2.023 billion and $2.038 billion up approximately 8% year over year at the midpoint of the range.

Speaker Change: For the full year 2025, we expect recurring and other revenue to be up over 9% year over year, including growth of approximately 10% year over year for the remainder of 2025 with the highest growth coming in Q4.

Speaker Change: Our expectation for interest on funds, self-reclients remains unchanged at approximately $110 million in 2025, down 12% year-over-year.

Speaker Change: Automation of HCM and payroll manual task is driving our own internally efficiencies.

Speaker Change: Because of the efficiencies we are realizing throughout our business, we are raising our full-year adjusted EBITDA guidance range to be between $843 million and $858 million.

Speaker Change: This represents an expansion of adjusted EBITDA margin to approximately 42% at the midpoint of the range, up 70 basis points compared to 2024.

Speaker Change: Other Forward-looking items include full-year gap and non-GAAP tax rates of 28% and 27% respectively, and the stock compensation of approximately 8% of revenues.

Speaker Change: We are pleased to see our teams executing well against our full year plan and the positive response from the market.

Speaker Change: We will continue to invest in our strategic initiative focused on world class service, full solution automation, and high client ROI.

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

Thank you.

Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad.

Speaker Change: In the interest of time, we ask that you please limit yourself to one question and one follow-up.

who pulls for a moment to compile the Q&A roster.

Speaker Change: Your first question comes from the line of Raimo Lenschow and Barclays. Your line is open.

Speaker Change: Thank you. Great start to the year. Two quick questions, one for Chad. At the moment everyone is obviously worrying about powers, volatility. Can you talk a little bit about what you're seeing in your field? I would assume it's not that much, but what's the feedback from the field crisis, et cetera, on that one? One question for Bob, if you talked about the efficiency gain that helped you on the EB-DAR side, maybe give us a couple of examples on that.

Thank you.

Chad Richison: Yeah, I'll take the tariff. I mean, I would say it's still early.

Speaker Change: To kind of, you know, 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...

Speaker Change: May be mom and pop impact a little bit more than what you could do.

Speaker Change: from a total employee-based impact. But ultimately anything that impacts our clients, you know, does impact us. It's just, we haven't seen anything yet.

Speaker Change: and Raimo on the efficiency gains, just like our clients, we use our product, all of our products that's we and as we continue to see how we can

Speaker Change: and maybe there's somebody that doesn't have to, that might leave and we don't backfill it. 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...

Speaker Change: How we are dealing with less tickets now through automation and our service to provide better service to our clients.

Speaker Change: Thank you. Our next question comes from Samad Samana from Jeffries. Please go ahead.

Samad Samana: Hey, good evening, and thank you all for taking my question, Congressal Organization, maybe one for you Chad, and then one follow-up. As I think about the new offices, I know that they usually take, let's call it 18 to 24 months to ramp.

Speaker Change: I think the last quarter you'd mentioned that maybe just go around, it could be a little bit faster, just are those staffed? Have you seen in terms of early impact and then a fallup on the

Speaker Change: I'm just starting to the shape of the year. I'll go ahead and ask them at the same time. Any shift in the number of processing days with us 4Q have an extra day? Just trying to understand the shape of the year with more context. Thank you both for answering my questions.

Speaker Change: Yeah, it's one of the new offices, you know, 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, you know we were...

Speaker Change: Better prepared to hit the ground running. They're still going to mature in 24 months, it'll 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.

Speaker Change: As far as processing days, you know, any given year you're going to have a little bit here and there, you know, we have, we did kind of discuss it a little bit last quarter and then, you know, any impact from either additional or less is included in our current guide.

Thank you.

Speaker Change: Arnett's question comes from Mark Marcon from Boad, Mark Beaverhead

Thank you. Good afternoon, and thanks for taking my questions. So two major questions. One.

Internal CRR Group. [inaudible]

in terms of how they're approaching.

That's the first question and then the second question [inaudible]

Speaker Change: is just more on the margins, you know, when we think about. [inaudible]

Speaker Change: You know, the Q1 to Q2 transition obviously there's going to be some seasonality and obviously there's some time margin work that goes in the Q1 and explain it. And, um,

Speaker Change: You know, fun balances. Can you give us a little bit of guidance just in terms of thinking through Q2 just in terms of the typical seasonality. Thanks.

Yeah, so, well, first on the sales side, and, uh...

Speaker Change: You know, 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 cells, especially as well as increased units. [inaudible]

Speaker Change: 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.

Speaker Change: You know, we're automating everywhere. I mean, we're automating our product for the client. We're automating our product for the client. And we're also automating things internally. There's several tasks that, you know, we have to perform on the back end that we've been able to automate. [inaudible]

Speaker Change: and that has an impact on our justice 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.

Speaker Change: And so a lot of our focus has been removing impediments, removing clicks, and really focusing on allowing the client to have a fully solutioned automated product. And so that's been impacting our margins and that's been impacting ourselves.

Speaker Change: Thank you. On its question comes from Steve Enders from City, please go ahead.

Okay, great. Thank you very much. Thank you for the question, Pierre.

And...

Speaker Change: I guess just to start, I want to ask on the, I guess the kind of free cash load dynamics was pretty solid here. Is there anything that we should...

Speaker Change: to keep it into account for timing and impact.

Speaker Change: How we should be thinking about how that may be compares to the EBITDA progression for the year. And secondarily, just on the mid market opportunity, it seems like there is good traction there. Last quarter and just wanting to see how that's maybe tracking compared to leave from what you saw in one cue here.

Speaker Change: Yeah, 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 a 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. [inaudible]

online.

Speaker Change: You know, 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 AI and other and you know over time I would think that some of that spend that we spend on facilities I think you would would see some of that transfer.

Speaker Change: to those technological assets that are required to really run a full-scale, fully automated product.

Speaker Change: But we don't guide to pre-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.

Thank you [inaudible]

Speaker Change: Our next question comes from Jason Celino from Keybank Capital Market. Please go ahead.

Speaker Change: 9% this year, I think before it was technically approximately. And then I think you also said that it would be up 10% for the remainder of the year. Is that like an average or is that kind of like at each quarter? Just curious there.

Jason, we've talked about being consistent for the...

Jason Salino: Q2, Q3, and Q4 with a little celebration and Q4 on recurring revenue. That's how we're looking at that.

Speaker Change: Perfect. Thank you for that. And then, you know, changing topics a little bit, I think in the quarter, there was a press release saying that you received

Jason Salino: Authorization as a payment institution from the Central Bank of Ireland, curious what this means for the business and the international part of the story. Thank you.

Jason Salino: Yeah, and so Ireland and being there allows us to get to the rest of Europe from there, and we've been focused on continuing to build out our product.

Jason Salino: You know, I mentioned Global HCM that works for all countries. We continue to onboard for that. We actually process native payroll and for other countries other than the US, which includes the banking side of it. And so we're continuing to do that. And this is one of those steps that you take.

to be able to continue to move further into Europe .

Speaker Change: Thank you. Our next question comes from Daniel Jester from BMI Capital Markets. Please go ahead.

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

Daniel Jester: Yeah, so we've been in pre-implement services for a while now. In fact, I think we're, uh...

Daniel Jester: You know, 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. You know, we've continued to. You are.

Daniel Jester: 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.

Daniel Jester: for how well our product's doing for our clients, but also as we move forward and sell other clients. There's no reason for them not to switch pre-employment over to Paycom as well.

Speaker Change: That's great. Thank you. And then in the script, you talked about a boomerang client who left and came back. I guess you have specific programs targeting some of those customers that may have churned over the past few years.

Our best prospects sometimes are clients that left.

Speaker Change: because they didn't solve the problem, you know, it's oftentimes just the thorns pulled out of the paw and...

Craig Boelte, Unknown Executive, Chad Richison

Speaker Change: and a cost type thing. You know, at the end of the day, you know…

Speaker Change: When you look at total cost of the system, you have to include both what you're paying as well as the ROI that it delivers to you and the value that you're achieving.

Speaker Change: and when that's real, and you leave, and it doesn't work out, you look to come back. [inaudible]

Speaker Change: We're also focused on that. We want every client to come back. I mean, there's no questions asked on our part. Let's get going. You know, and so we do have a strategy to get clients that

Speaker Change: We also have a strategy to make sure that clients are receiving the value so that they don't have to go through that pain of a conversion to just to turn around and come back to us. And so that remains a part of our overall strategy it has, and we're having a lot of success with that.

Thank you.

Speaker Change: On Next Question comes from Jared Levine and T.D. Cabin, please go ahead.

Speaker Change: Thank you. It just enough to have limited sequential growth relative to recent years and haven't really seen too many TV commercials in recent months. Can you talk about how advertising spend is expected impact FY25 margins and is there any new strategies surrounding advertising spend right now?

Speaker Change: Yes, I mean, we are still continuing to spend brand advertising, which is more what you're talking about with commercials and things.

on TV, we're also doing a lot more direct

Speaker Change: as we continue to move people down the funnel. We have deployed. We have deployed.

Speaker Change: Different initiatives through marketing and advertising that we have not done previously that are having more success with as well but to the extent we were a little light in first quarter on marketing spend it will be up more in subsequent quarters as well we are not reducing what we are doing in marketing and advertising but you will have some timing.

Speaker Change: here and there, based on the spins, especially now that we're doing more direct than what we've been doing in the past.

Speaker Change: and then just wanted to clarify in terms of ex-flow growth gains for the year. Can you dig into why the 4Q ex-flow growth would be the highest for the year?

Speaker Change: Yeah, I mean, as we continue to go through the year, you know, fourth quarter has always kind of had that opportunity with your additional payroll runs.

which again are hard to for us to necessarily...

Speaker Change: Forecast right now, but we do have, you know, placeholders for that. I think you saw fourth quarter last year.

Speaker Change: was also one of our largest growth quarters and so you know and also I would say traditionally you know first quarter has been what's like that for quite a long time but with our first quarter [inaudible]

Speaker Change: Forms Business. It just doesn't grow at the same level with the rest of our business, meaning, you know, at the end of the year we've pretty much done ACA W2s in 1099s.

Speaker Change: For about 10 years now, we haven't added any additional annual services to that. And I believe the fees are the exact same that they were 10 years ago still. And so meanwhile, the rest of our business with the products that we make and sell, it continues to grow.

Speaker Change: Gifts proportionately to those forms of business in the first quarter and so you've been kind of seeing a little bit of a trend of that in regards to fourth quarter because of those additional payroll runs.

Babin Shah: Thank you. The next question comes from Bhavin Shah and Deutsche Bank. Please go ahead.

Great, thanks for taking my question.

Babin Shah: Chad, just back to the authorization you received to be a payment institution in Europe , but one of the next steps that you're looking to accomplish to go further into that region and then how are you kind of thinking about you go to market strategy, your product strategy, internationally as you progress kind of done the best.

Babin Shah: and our global market strategy right now is focused on US-based companies that have locations, employees, and operations in other countries.

as we continue to build out our systems.

Babin Shah: and as it makes sense for us to go in country to make cells locally to those, you know, that's something that will be deploying at the right time for now. This allows us to move money throughout Europe , you know.

Babin Shah: The last yard of a payroll is actually getting it into the employee's account correctly.

Babin Shah: 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, you know we like to keep the ball in our hand, and this is something that's required to do that.

Speaker Change: That's all for there. Just one quick call for Bob, just on the flow guidance. Can you just remind us what's embedded in terms of rate cut expectations? Thank you so much.

Bob: Yes, we had two rate cuts embedded in the guidance one in June and one in December .

Thank you.

Speaker Change: Burnett's question and concerns from Joshua Reilly from Neeterm and Company. Please go ahead.

Speaker Change: Hi, this is Ian Blackhound for Joshua Reilly. Thank you for taking my question. How was gross retention trending, given the improving customer satisfaction and the laughing of any charity from the shift to Betty?

Speaker Change: Yeah, so, you know, 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.

Speaker Change: You know, 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.

Speaker Change: All of that is meant to have a positive impact on our retention. So, you know, those are all early indicators of things that we would expect to be reporting at the end of the year.

Thank you.

Thank you.

Speaker Change: Our next question comes from Siti Panaglahi from the ZUHO. Please go ahead.

Not me, different than anything we've seen in the past. [inaudible]

Got it. Thank you, couple.

Brian Schwartz: Our next question is Brian Schwartz from Oppenheimer, please go ahead

Brian Schwartz: Thank you for taking my questions this afternoon and I start to the year.

Brian Schwartz: 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 one cue. But how was the business faring in April when those macro pressures intensified? And I have a follow-up for Bob.

Brian Schwartz: Yeah, I mean, we're just not seeing it right now. I mean, again, I wouldn't say we're overexposed to anyone industry or anyone...

Brian Schwartz: Employee Size, Necessarily, we definitely don't have over exposure to the...

Small Business Side,

Brian Schwartz: You know, I will just say I think there's a lot of different movements and I think as you have different tariffs and. [inaudible]

Brian Schwartz: What have you, you know, businesses will maneuver and they'll maneuver to, you know, 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 exposures low and we're not seeing anything, we're not seeing anything.

Brian Schwartz: You know, 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.

Brian Schwartz: And right now we just we don't have anything to call out. [inaudible]

Speaker Change: My follow up question for Bob, give us a great air operating efficiencies that you're realizing internally from AI because that made you change the hiring plan for the year. Thanks.

Speaker Change: No, we've had an AI plan in a full automation plan.

Speaker Change: 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 want to make a point on this though.

Speaker Change: 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.

Chris Morrow

Speaker Change: 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, you know.

Speaker Change: Crawl through something to get it and so we've been very focused on that with greater automation obviously we can do things quicker. [inaudible]

We look to do that.

Speaker Change: Your input and something into spreadsheets and out of spreadsheets and all that, I mean that's going away.

Speaker Change: It's going away and it'll end up going away everywhere. So get a skill set that's not that. And that's what we're focused on. And so, you know, 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. [inaudible]

Speaker Change: 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 and rolling out throughout the product as well as our back end. [inaudible]

Thank you.

Speaker Change: This concludes the question and answer portion of today's call, so now I'll turn the call back over to Mr Chad Richison for closing remarks.

Speaker Change: I want to thank everyone for joining our call today and I want to thank our employees for all their hard work and their commitment to pay

Speaker Change: We'll be participating in several investor events this quarter, including the need and virtual technology and media conference on May 12th.

Speaker Change: Then on May 28th, Bob and James will be attending the Jeffrey Software Conference in Newport and finally on June 3rd we'll be presenting at Baird's Global CTS Conference in New York City. Thanks for your interest in Paycom and operator you may disconnect.

This concludes today's conference call, human out disconnect.