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Paycom Software (NYSE: PAYC)
Q3 2024 Earnings Call
Oct 30, 2024, 5:00 p.m. ET
Overview of Paycom Software’s Latest Achievements
- Initial Remarks
- Q&A Session
- Call Participants
Initial Remarks:
Operator
Good afternoon. My name is Elliot, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Paycom’s third-quarter 2024 financial results conference call. [Operator instructions] I would now like to turn the call over to James Samford, head of investor relations.
You may begin.
James Samford — Head of Investor Relations
Thank you, and welcome to Paycom’s earnings conference call for the third quarter of 2024. Certain statements made during this call that are not historical facts relate to our future plans and expected performance, which are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements reflect our perspective only as of today. While we believe they are reasonable, actual results may differ due to various risks and uncertainties.
These uncertainties are outlined in our SEC filings, including the most recent annual report on Form 10-K. You should carefully consider these factors when relying on any forward-looking information. We share non-GAAP financial measures today, such as adjusted EBITDA and non-GAAP net income. A detailed reconciliation of GAAP to non-GAAP results is available in our press release and on our website.
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We utilize non-GAAP financial measures to assess our performance and for planning. A reconciliation schedule showing GAAP versus non-GAAP results is included in our press release, which was released following the market close today. Now, I will turn the call over to Chad Richison, Paycom’s CEO and president. Chad?
Chad R. Richison — Chairman, President, and Chief Executive Officer
Thanks, James. I appreciate everyone joining our call today. I’ll focus on how Paycom’s automation is reshaping our industry, highlight recent client successes, and mention our industry recognition. Our commitment to improving our innovative automation platform is demonstrating solid ROI for clients. Two decades ago, clients selected the Paycom system for self-service solutions.
Today, clients choose Paycom for automated solutions that require minimal daily interaction. Our automation capabilities set us apart in the industry, with a strong drive towards complete solution automation that enhances ROI for clients. GONE, our award-winning solution, exemplifies this shift by streamlining time-off management. GONE recently received recognition as a top HR product from HR Executive Magazine.
This system represents the first fully automated time-off request solution. Previously, most time-off requests were unmanaged. According to a recent Forrester study, GONE can yield an impressive ROI of up to 800%. By streamlining these decisions, managers can save nearly a week of unproductive hours each year.
Moreover, businesses utilizing GONE have reported saving almost five weeks of unproductive hours across HR, finance, and accounting annually. Without GONE, about 10% of labor costs often remain unmonitored, leading to expenses from overpayments, scheduling errors, and operational disruption. One notable client is an auto dealership with around 500 employees. GONE has helped them save approximately 200 hours of unproductive time weekly while providing a standardized process for managing time-off requests.
This improvement has led to reduced decision fatigue among managers. GONE not only automates routine tasks but also offers significant benefits to employees. Beti, another innovative tool in our suite, continues to stand out. We recently brought onboard a hospital organization with 1,000 bilingual employees across more than 20 locations.
This organization has seen an 85% reduction in payroll processing time thanks to Beti. Additionally, their managers benefit from the “Manager on the Go” app, which centralizes managerial tasks, simplifying approvals, PAF management, tracking applicants, and more. This client has recently achieved a 99.7% DDX score, representing Paycom Software’s success in enhancing usability.
Our development teams are dedicated to automating processes throughout our platform, ensuring easy adoption by clients. This ongoing focus has led to the most product launches and enhancements in our company’s history this year.
Among the recent automation advances impacting HR and recruitment departments is our position management enhancement, which automates changes in reporting structures when employees are promoted or transferred, and during major organizational shifts like acquisitions or restructures. Another significant upgrade lies in our recruitment module.
The enhancements to our recruiting product have drastically improved…
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Paycom Reports Strong Q3 Results and Improved Client Services Through AI
Efficiencies Increase Due to New AI Solutions
Paycom’s application process has become even quicker, slashing the time required to apply by 50%. In addition, an AI agent developed by Paycom is enhancing service team capabilities. This technology leverages a knowledge-based semantic search model to connect clients with solutions faster and more consistently, leading to a 25% increase in response rates without extra human effort.
The introduction of the AI agent has also resulted in a significant rise in client satisfaction, reflected in an impressive 24-point increase in the Net Promoter Score year over year. Paycom’s sales teams are witnessing robust performance, particularly with outside sales reps as businesses prioritize system automation.
Strong Financial Performance in Q3 2024
Craig E. Boelte, Chief Financial Officer, reported that third-quarter revenue for 2024 reached $452 million, marking an 11% increase from the same period last year. The recurring revenue for Q3 was $445 million, accounting for 98% of total revenue, and growing nearly 12% year-over-year. The company achieved net income of $73 million, or $1.31 per diluted share, alongside a non-GAAP net income of $93 million, or $1.67 per diluted share. Paycom also recorded an adjusted EBITDA of $171 million, representing a margin of 38%.
Investment in artificial intelligence and automation has also grown, with adjusted R&D expenses increasing by 20% to $55 million in Q3 2024. Total adjusted R&D costs, including capitalized expenses, were $84 million, up from $69 million a year ago. Notably, Paycom’s effective income tax rate was higher than anticipated, mainly due to one-time adjustments, with projections for the remainder of the year estimated at around 28% and 24% respectively for Q4 and the full year.
Cash Reserves and Stock Buybacks Highlight Strong Balance Sheet
As of the end of Q3, Paycom maintained a robust cash position of $326 million and reported no outstanding debt. The average daily client funds held was approximately $2.3 billion, a 10% increase from the previous year. During the quarter, the company repurchased about 300,000 shares costing $44 million, contributing to a total repurchase of 2.3 million shares since July 2022. Furthermore, Paycom announced a quarterly dividend of $0.375 per share, set to be paid in mid-December.
Updated Revenue Guidance Shows Confidence for 2024
After a solid Q3, Paycom raised its revenue guidance for fiscal 2024 to between $1.866 billion and $1.873 billion, projecting around 10% annual growth at the midpoint. Adjusted EBITDA expectations have also been increased to a range of $745 million to $752 million, with a 40% margin indication. Looking ahead to Q4, total revenue is expected to fall between $477 million and $484 million, further underlining a growth rate of approximately 11% compared to last year.
Q&A Session Provides Insights into Future Demand
The Q&A session commenced with questions about demand and future sales pipeline. Chad R. Richison reassured that demand remains strong, particularly for automated solutions, citing September as the highest sales month in the company’s history. Meanwhile, Craig E. Boelte addressed concerns regarding the impact of potential interest rate cuts on float revenue, projecting a possible $6 million annual impact for every 25 basis point decrease.
As the financial landscape continues to evolve, Paycom remains committed to delivering value through automation while strengthening its competitive position. The steps taken this year aim to establish a solid foundation for future growth.
Paycom’s Innovative Approach: AI-Powered Customer Service and Revenue Growth
Overview of Recent Developments
During a recent investor call, Chad R. Richison, Paycom’s Chairman, President, and Chief Executive Officer, discussed how the company is leveraging artificial intelligence in its customer service operations. Alongside Richison, Chief Financial Officer Craig E. Boelte shared insights on improving recurring revenue and the company’s ambitious targets for the future.
AI Implementation in Customer Service
Samad Samana — Analyst
Hi. Good evening. Thanks for taking my questions. Maybe first 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 into savings on the cost-to-serve side? And do you think that could be monetized as a feature in the future? I have a follow-up for Craig afterward.
Chad R. Richison — Chairman, President, and Chief Executive Officer
Yes, we developed that in-house. We have been using it effectively, and it improves with each interaction. This technology has sped up our processes by 25%, enabling us to connect clients more quickly, whether they’re asking about configurations or tax-related inquiries. It’s been beneficial for us, and its capabilities continue to grow. Now I’ll let Craig provide further details.
Samad Samana — Analyst
Great. Craig, as a follow-up, can you discuss whether we’ve moved past the challenges previously associated with cross-selling and Beti? Should we view the fourth quarter guidance as an optimistic indicator for 2025, given the recent rebound?
Craig E. Boelte — Chief Financial Officer
Clients utilizing Beti are still seeing benefits. For context, our tax resolutions have improved significantly this year, dropping by a third compared to last year. The CRRs (Customer Relationship Representatives) continue to help clients maximize the value of our software. To successfully sell an additional product, clients must first experience success with their current purchases. We have many CRRs who are performing well in helping clients with the right solutions, with several exceeding their quotas.
Sales Growth Boosted by Product Enhancements
Mark Marcon — Analyst
Hi. Good evening. It’s encouraging to see increased recurring revenue. Chad, could you elaborate on the factors behind this acceleration? Is it due to enhanced module usage like GONE, or is it linked to recent sales training improvements?
Chad R. Richison — Chairman, President, and Chief Executive Officer
GONE has certainly aided our sales, thanks to its automation features. It’s included in the majority of our clients’ existing modules, providing a comprehensive automation solution. Historically, clients purchased our services to improve output; nowadays, they expect our software to manage tasks with minimal involvement. To illustrate, 20 years ago, I would draft my fantasy football team manually. Now, automation allows users to set the team to auto-draft and auto-manage lineup decisions. If clients correctly implement our system, it will streamline processes effectively.
Mark Marcon — Analyst
That makes sense. Can you also touch on the sales process and training improvements?
Chad R. Richison — Chairman, President, and Chief Executive Officer
The sales force is performing exceptionally well. We are witnessing strong unit counts, and our go-to-market strategy has them selling more than before. Notably, September marked our largest sales month to date.
Future AI Developments and Financial Outlook
Brian Schwartz — Analyst
Thank you for addressing my questions. Chad, regarding the AI technology you’re developing, do you foresee a future where this could evolve into a product offering, perhaps in your recruiting software or other applications?
Chad R. Richison — Chairman, President, and Chief Executive Officer
Indeed, we’re utilizing AI across various products, both currently available and forthcoming. There are clear opportunities for monetizing AI. While this particular internal solution enhances our backend operations and client service, we can expect related benefits across our organization.
Brian Schwartz — Analyst
Thank you. Craig, regarding the significant EBITDA increase this quarter, did any expenses shift into Q4, or was the improvement predominantly due to top-line performance?
Craig E. Boelte — Chief Financial Officer
The improvement primarily comes from an increase in top-line revenue. While there were some impacts from corporate level adjustments and slight timing differences in marketing expenses, overall, we achieved this gain through operational efficiencies.
Joshua Reilly — Analyst
Thanks for taking my questions. You mentioned moving toward full solution automation in the press release. How should investors view the current period of significant internal changes? Are the implications that EBITDA margins will improve as we move beyond this investment phase?
Chad R. Richison — Chairman, President, and Chief Executive Officer
Automation is indeed enhancing efficiencies. Our ambition is high, as we currently only capture 5% of the market. We have continuously focused on innovative strategies since our inception to provide clients with maximum ROI—benefiting both them and us. This drive will continue as we work to differentiate ourselves from competitors.
Innovative Automation Drives Client Confidence and Revenue Growth
Joshua Reilly — Analyst
Could you provide an update on how client utilization of previously sold modules has changed? It seems you’ve been monitoring this closely over the last few quarters. Are you seeing increased efforts from the cross-sell team to boost utilization, or are the trends remaining consistent? Thank you.
Chad R. Richison — Chairman, President, and Chief Executive Officer
Utilization is indeed on the rise. It’s important to note that higher utilization doesn’t always correlate with increased time spent in our system. Often, the most effective use of our technology involves setting it up so that it works independently, reducing manual inputs.
Currently, clients are increasingly trusting the system. For instance, a single decision today can configure the system to automate thousands of daily decisions. A significant portion of our offerings focuses on this level of automation.
Operator
Your next question comes from Steve Enders with Citi. Your line is open.
Steve Enders — Citi — Analyst
Thanks for taking my questions. Let’s discuss the Q4 outlook. The latest figures show a strong performance, but it seems adjustments have been made for the upcoming year. Can you elaborate on what is influencing the Q4 guidance and any key factors affecting it?
Craig E. Boelte — Chief Financial Officer
In reviewing Q4 and the entire year, we’ve adjusted our forecast by refining the range, raising the lower limit. Predicting Q4 remains challenging due to various factors, including bonus cycles and a recent 50 basis point rate cut. We foresee the possibility of additional cuts by year’s end, which also impacts our guidance.
Steve Enders — Citi — Analyst
Would you say that the variations in your forecast mainly stem from changes in flow assumptions, with no other significant changes impacting the outlook?
Craig E. Boelte — Chief Financial Officer
Essentially, yes. The changes are primarily related to interest rate adjustments.
Operator
Your next question comes from Kevin McVeigh with UBS. Your line is open.
Kevin McVeigh — Analyst
Thank you. Regarding the recent EBITDA results, Chad, could you clarify the contribution from revenue growth versus automation? Looking ahead, what percentage of automation initiatives are already integrated, and how much more is left to implement?
Chad R. Richison — Chairman, President, and Chief Executive Officer
There’s still considerable room for enhancing automation. Ideally, our system would function seamlessly, eliminating the need for users to log in. We’re committed to continuous improvement, benefiting both our operations and those of our clients.
Experiencing automation firsthand can be exciting for clients, as it significantly boosts their return on investment by enabling them to accomplish tasks unachievable with other systems.
Kevin McVeigh — Analyst
That’s helpful. You mentioned September was your best sales month ever. How much of that was due to unexplored market opportunities versus displacing competitors? What factors contributed to this remarkable performance?
Chad R. Richison — Chairman, President, and Chief Executive Officer
The majority of those bookings came from attracting new business and clients. While our existing clients utilized Beti, the impressive sales figures primarily result from new acquisitions.
Operator
Your next question comes from Devin Au with KeyBanc. Your line is open.
Devin Au — KeyBanc Capital Markets — Analyst
Hello, this is Devin speaking on behalf of Jason. I’d like to discuss revenue performance this quarter. Can you clarify the extent to which the revenue increase stemmed from acquiring new clients, returning clients, or improved retention rates?
Craig E. Boelte — Chief Financial Officer
Most of our new revenue originated from new client acquisitions, which represent a significant portion of our growth.
Devin Au — KeyBanc Capital Markets — Analyst
That clarifies things. Lastly, I’m curious about how the newly added sales representatives, over 60 last quarter, are performing compared to your expectations.
Chad R. Richison — Chairman, President, and Chief Executive Officer
The new sales team is performing exceptionally well. We possess a robust sales strategy and a compelling market approach. The enthusiasm of our sales representatives for the product greatly reflects in their success, as indicated by the latest metrics for starts and bookings.
Operator
Your next question comes from Arvind Ramnani with Piper Sandler. Your line is open.
Arvind Ramnani — Analyst
Thank you for the opportunity. Can you provide insights on Beti adoption among clients who have previously been slow to engage? Are these clients starting to adapt more readily now?
Chad R. Richison — Chairman, President, and Chief Executive Officer
We actively work with all our clients to highlight the value of our products, whether they utilize Beti or not. Many clients recognize the advantages of Beti and are now implementing it, while all new clients have adopted Beti for about three years.
Arvind Ramnani — Analyst
That’s valuable information…
Paycom’s Expanding Global Reach & Financial Insights
Progress in International Markets
Chad R. Richison, the Chairman and CEO, reported that Paycom is currently active in four countries, enhancing its payroll services while also expanding its global Human Capital Management (HCM) products. Despite this international footprint being relatively small, the company sees promising growth ahead. Craig E. Boelte, the Chief Financial Officer, noted recent wins such as the addition of a manufacturing company that operates in the U.S., Canada, and Mexico, indicating a trend toward U.S. companies adopting international payroll solutions.
Maximizing Client Value with CRRs
Addressing the effectiveness of Customer Relationship Representatives (CRRs), Richison emphasized their role in ensuring clients maximize the value of Paycom’s software. CRRs need to ensure customers fully utilize existing products before introducing new solutions to improve return on investment (ROI). Paycom’s service teams are also committed to aiding clients in configuration and usage, ensuring they derive the full benefit of their software purchases.
Gross Margin Pressures and Future Stability
Bhavin Shah from Deutsche Bank questioned the factors affecting gross margin compression this quarter, with Boelte explaining that costs associated with a new building and increased headcount in client services have contributed. He mentioned that as client service needs grow, maintaining a balanced staffing level becomes crucial to stabilizing margins.
Capital Spending Trends and Market Performance
Kyle Aberasturi, representing BMO Capital Markets, inquired about capital spending trends. Boelte stated that Paycom’s priority is to invest in growth primarily through sales, marketing, and research and development. He added that they have also initiated stock buybacks, demonstrating confidence in their financial position. Richison noted that the company is seeing healthy performance across both up-market and down-market segments, with expectations for a decrease in capital expenditures next year as they have completed significant projects.
Closing Remarks
In closing, Richison expressed gratitude to employees for their dedication to Paycom’s success and mentioned upcoming investor conferences, including the UBS Conference in Phoenix and the Barclays Conference in San Francisco. He concluded the call with thanks to all attendees.
Operator, you may disconnect.
Call Participants:
James Samford – Head of Investor Relations
Chad R. Richison – Chairman, President, and Chief Executive Officer
Craig E. Boelte – Chief Financial Officer
Bhavin Shah – Deutsche Bank – Analyst
Kyle Aberasturi – BMO Capital Markets – Analyst
This article is a transcript of the conference call produced for The Motley Fool. While we strive for accuracy, we encourage readers to verify the content and consult the company’s SEC filings for detailed information.
The Motley Fool has positions in and recommends Paycom Software. The Motley Fool has a disclosure policy.
The views expressed herein do not necessarily reflect those of Nasdaq, Inc.