Paycom Software Inc (PAYC) — Q1 2025 Earnings Call Transcript

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. 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. 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, 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 CEO and President.

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 and 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 questions. 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. Recent product enhancements and client-focused initiatives are driving positive trends across our client usage metrics, and our Net Promoter Score increased another 16 points year-over-year. We have the most automated solution in the industry, and our clients routinely attest to this. Our award-winning solution, GONE, is a perfect example of how Paycom simplifies tasks through automation and AI. GONE is the industry's first fully automated time-off solution that decides all time-off requests based on customizable guidelines set by the company's time-off rules. Before GONE, 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. According to a Forrester study, GONE's automation delivers an ROI of up to 800% for clients. GONE continues to receive recognition. Most recently, Fast Company magazine named Paycom one of the world's most innovative companies for a second time. This honor specifically recognized GONE and is a testament to how Paycom is shaping our industry by setting new standards for automation across the globe. Another example of automation that is changing our industry is Beti. Our award-winning payroll solution continues to be a major selling point. Organizations looking to reduce the labor needed to process payroll by up to 90% and also cut the time spent correcting payroll errors by up to 85%. Beti 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. Thanks to Beti and the importance of perfect payrolls, we are also successfully getting former clients back onto the Paycom platform. We recently brought back a 500-employee healthcare company, who quickly realized the pain they caused by switching to another provider. With this other provider, this client lost the transparency and ability to fix errors before they became problems. In fact, their employees were some of the biggest advocates and encouraged this client to return to Paycom because they missed having control over the accuracy of their pay. Once employees experience Beti, they don't want to go backwards in technology. The client returned to us within 9 months and went from processing payroll in 4 days with their previous vendor to 4 hours with Beti. Sales continues to break records, including in the first quarter, where we saw a meaningful increase in book sales. We also saw an increase in the number of units sold for the quarter compared to the same period last year. One of the new clients we onboarded was a 2,500-employee restaurant group that wanted a single easy-to-use software solution. Working across nearly 80 locations, this group is now utilizing Beti and the rest of the Paycom suite to automate tasks that were previously performed across numerous systems, which created data inconsistencies. More and more businesses like this one are abandoning disparate decision-making processes for more consistent, scalable, and automated solutions. 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 are testaments to the strategy and execution of our organization. I'd like to thank our employees for their hard work and dedication that they demonstrate every day. We have a strong balance sheet with high-margin organic growth. 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. Before I review our first quarter 2025 results and our commentary for the remainder of 2025, 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. 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. 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. GAAP net income in the quarter was $139 million or $2.48 per diluted share based on approximately 56 million shares. Non-GAAP net income for the first quarter was $158 million, or $2.80 per diluted share. We delivered 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. Margin strength in the quarter was driven by solid revenues and effective spend in sales and marketing and G&A. At the same time, we continue to invest in the areas of AI, product, and R&D. Combining these with efficiencies from internal automation initiatives, we are well positioned to deliver an even stronger full-year adjusted EBITDA margin than last year. Our balance sheet is strong. We ended the first quarter with cash and cash equivalents of $521 million and no debt. The average daily balance on funds held for clients was approximately $2.9 billion in the first quarter of 2025. During the first quarter of 2025, we paid approximately $21 million in cash dividends. Earlier this week, the Board approved our quarterly dividend of $0.375 per share payable in mid-June. 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 repurchase plan. As a reminder, our capital allocation strategy includes a disciplined return of capital through our dividend plan and opportunistic repurchases through our buyback authorization. Now let me turn to guidance for 2025. We continue to have success selling and onboarding new logos. 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. 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. 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. Our expectation for interest on funds held for clients remains unchanged at approximately $110 million in 2025, down 12% year-over-year. Automation of HCM and payroll manual tasks is driving our internal efficiencies. 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. This represents an expansion of adjusted EBITDA margin to approximately 42% at the midpoint of the range, up 70 basis points compared to 2024. Other forward-looking items include the full year GAAP and non-GAAP tax rate of 28% and 27%, respectively, and stock compensation of approximately 8% of revenues. We are pleased to see our teams executing well against our full year plan and the positive response from the market. We will continue to invest in our strategic initiatives focused on world-class service, full solution automation, and high client ROI. With that, we will open the line for questions.

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

I can address the tariffs. It's still too soon to make a definitive assessment. We don't have significant direct exposure to them and we're not overly reliant on the lower market where the impact might be felt more by smaller businesses compared to our broader employee base. However, any effects on our clients will ultimately affect us. So far, we haven't observed any significant issues, but it's something we'll keep an eye on. For there to be a substantial impact on us, there would need to be effects on employee numbers and overall employment. Like others, we're monitoring the situation closely.

And Raimo, on the efficiency gains, just like our clients, we use our entire product suite. And as we continue to see how we can implement additional automation, perhaps there are positions that we might not need to backfill, or we can improve expense management with our products. So we're seeing the benefits of our full solution automation across basically our entire organization. We've talked in the past about how we are dealing with fewer customer tickets now through automation and are providing better service to our clients.

Hey, good evening, and thank you all for taking my questions. Congrats to the whole organization. Maybe one for you, Chad, and then one follow-up. Just as I think about the new offices. I know that they usually take, let's call it, 18 to 24 months to ramp. I think last quarter, you had mentioned that maybe this go-around could be a little bit faster. Just are those staffed, and have you seen any early impact? And then a follow-up on the shape of the year. I'll go and ask them at the same time. Any shift in the number of processing days? Like does Q4 have an extra day? Just trying to understand the shape of the year with more context. Thank you both for answering my questions.

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

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

Yes. So first on the sales side, I would say that we've been continuing to improve our sales process. I believe that our sales staff is the best in the world at what they do. We had a reconstitution of training early last year, as Amy took over the group to get back to the normal blocking and tackling that we've always done here at Paycom. That resulted in increased sales, especially as well as an increase in new logo additions. Obviously, those came on throughout the year, and most would have all started by now. As we turned into the first quarter, we saw a continuation of up trends in both book sales and units, and activity matters in sales. And of course, having a product that's continually improving as we go to market, removing barriers to usage. And then as far as the efficiency side, we're automating everywhere. We are automating our product for the client, and we're also automating things internally. There are several tasks that we have to perform on the back end that we've been able to automate, and that has an impact on our adjusted EBITDA across the board, but it also has an impact on the client experience. That's the key reason behind a lot of the automation efforts we're implementing.

Thanks for taking the questions here. I guess I want to ask about the kind of free cash flow dynamics. It was pretty solid here. Is there anything that we should be keeping in mind for timing impacts or how we should be thinking about how that compares to the EBITDA progression for the year? And then secondarily, just on the mid-market opportunity, it seems like there was good traction there last quarter, and I just wanted to see how that's tracking comparatively from what you saw in Q1 here.

Yes. The mid-market opportunity is going very well for us. We're not seeing any changes in demand. If anything, I've always said we also create our own demand through the work we do. First quarter was up significantly for both revenue from a book sales perspective as well as for units. As far as the free cash flow conversion, we did talk about how we've substantially completed building out our facilities. I think we have a parking garage and something else that will be coming online. I will say this, though: we are ambitious with what we do with our technology and our investments in AI and other areas. Over time, I would think that some of that expenditure you see on facilities will eventually transfer to technological investments that are essential for running a fully automated product. But we don't provide guidance on free cash flow. It has been our focus to improve that, and I think you've observed some of that recently.

Great, thank you. I'm just trying to understand some of the subtleties in the script language today. I think, Bob, in your section, you mentioned recurring revenue growth was up over 9% this year. I think before it was technically approximately. I also think you said it would be up 10% for the remainder of the year. Is that an average? Or is that more like each quarter? Just curious.

Yes, Jason, we've talked about consistency for Q2, Q3, and Q4 with a little acceleration in Q4 on recurring revenue. That's how we're looking at that.

Okay, perfect. And then changing topics a little bit. I think in the quarter, there was a press release saying that you received 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.

Yes. Our presence in Ireland allows us to extend operations to the rest of Europe. We are focused on building out our product to suit global HCM needs across various countries. We continue onboarding for that. We now process native payroll in countries beyond the U.S., which includes banking services. This authorization is a crucial step towards further expansion into Europe.

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

Yes. We have been in pre-employment services for a while now. I think from a size perspective, we're one of the largest providers out there. This has been a segment of our business for some time, and we are continually onboarding more of our clients on that service. I would argue that there is no better pre-employment service than Paycom's in terms of speed and accuracy. This recent accreditation confirms how well our product performs for our clients and will support our efforts to sell to new clients as well.

That's great, thank you. And then in the script, you talked about a boomerang client who left and came back. Do you have specific programs targeting customers that may have churned over the past few years?

Our best prospects sometimes are clients that left because they didn't find a suitable solution. It's often just the thorns pulled out of the paw, and they realize they need us back. At the end of the day, clients who use our products tend to come back after experiencing issues with other providers. We're also focused on ensuring clients stay because they receive value, mitigating the need to go through the pain of conversion to another provider only to turn back to us soon after. We do have a strategy aimed at bringing back clients that have left, and we've been successful with that.

Thank you. Adjusted S&M had limited sequential growth relative to recent years and I haven't really seen too many TV commercials in recent months. Can you talk about how advertising spend is expected to impact FY 2025 margins? Is there any new strategy surrounding advertising spend right now?

Yes. We are still continuing to invest in brand advertising, which includes commercials and other forms of media. We're also focusing more on direct advertising as we lead potential clients down the sales funnel. We have implemented various new initiatives in marketing and advertising that have shown greater success than before. But to the extent that we were a bit light in first quarter advertising spend, we expect it to increase in subsequent quarters. We're not reducing our marketing and advertising efforts; timing impacts may vary, especially because we’re now leveraging more direct marketing strategies than before.

Got it. And then just wanted to clarify in terms of Xflow growth cadence for the year. Can you dig into why the Q4 Xflow growth would be the highest for the year?

Yes. As we progress through the year, historically, the fourth quarter has had opportunities with additional payroll runs, which makes forecasting a bit challenging. However, we set placeholders for that. Fourth quarter last year was one of our largest growth quarters. Additionally, traditionally, the first quarter had high growth, but with our first quarter forms business stabilizing, it doesn't grow at the same level as the rest of our business. Meaning at the end of the year, we've pretty much completed ACA, W2s, and 1099s for about a decade, and those fees have remained the same. Meanwhile, the rest of our business continues to grow disproportionately compared to the forms business. Thus, you see a trend towards fourth quarter growth owing to those additional payroll runs.

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

Our global market strategy right now is focused on U.S.-based companies that have employees and operations in other countries. As we continue to build out our systems and as it makes sense to sell in-country to local clients, we will deploy that strategy at the appropriate time. This authorization allows us to manage funds within Europe. The final step of payroll is getting the money into employee's accounts correctly. If you do everything else correctly but not this, it's as if nothing was accomplished. We want to ensure the highest quality service for all our clients, which is why we prioritize this step.

Yes. We had two rate cuts embedded in the guidance: one in June and one in December.

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

Yes. We do report retention once a year. Obviously, the net of it is reflected in our current quarter achievements and our future guidance. We did talk on the call about how our Net Promoter Score continues to rise, and we are seeing more utilization of all our products as we've removed impediments to effective usage. All of that is meant to yield a positive impact on our retention. These are early indicators of results we expect to report at the year's end.

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

Not any different than what we have seen in the past.

Thank you for taking my questions this afternoon. A nice start to the year. Chad, in terms of what you're seeing in terms of demand, the macro pressures did not impact the business at all in Q1. But how is the business faring in April when those macro pressures intensified? And I have a follow-up for Bob.

Yes. I mean, we're just not seeing it right now. I wouldn't say we're overly exposed to any one industry or to any specific employee size. We definitely don’t have overexposure to the small business segment. I will say, I think there are many movements underway, and businesses will adapt to what makes sense for them when tariffs and other pressures arise. While our direct exposure is low, and we're not experiencing any negative impact, anything that affects our clients will eventually impact us. But that would have to be reflected through a reduction in force. As of now, we have nothing to report.

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

No, we have had an AI and full automation plan in place for some time. Our hiring plans changed, but not from what we expected this year. We've been able to repurpose people in different areas. I want to emphasize that with all the automation we've implemented on the back end, we will always maintain a high-touch service model. We have a high-touch service model, and we're allocating significant resources to make it easier for our employees to service clients effectively while also ensuring clients get more value from our product. Therefore, with greater automation, we can undertake tasks more quickly without requiring the same labor commitment. However, we still have areas within Paycom that continue to grow at rates equal to or larger than in the past, such as sales and software development. Other areas that were more administrative on the back end are being automated. If you're involved in inputting data into spreadsheets and similar processes, that will phase out. It's important to develop skills that suit the evolving business landscape.

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 Paycom's success. We'll be participating in several investor events this quarter, including the Needham Virtual Technology and Media Conference on May 12. Then on May 28, Bob and James will be attending the Jefferies Software Conference in Newport. Finally, on June 3, we'll be presenting at Baird's Global CTS Conference in New York City. Thanks for your interest in Paycom. Operator, you may disconnect.