Paycom Software Inc (PAYC) — Q2 2025 Earnings Call Transcript

Thank you, and welcome to Paycom's earnings conference call for the second 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 our second quarter achievements and highlight our latest AI command-driven product, IWant. I'll then turn it over to Bob for a review of our second quarter results and an update on our full year guidance. We will then take questions. With that, let's get started. We delivered very strong second quarter results, and we are building on our momentum by continuing to strengthen recurring revenue growth and margin expansion in 2025. Outside sales continue to set records, and we recently released IWant, the most significant product in our company's history. We already have the most automated solution in the industry, and IWant delivers even more value to our clients through AI and automation. IWant will transform a client's relationship with Paycom and with its own business. Hopefully, everyone has seen the demo we linked in today's earnings press release issued at the close of the market. If you did, you saw numerous use cases for IWant on the employee, manager, administrator, and executive side of the software. You also saw how IWant eliminates the need for a Paycom user to be trained on our software. With IWant's command-driven AI users either type in or leverage voice-activated functionality to command the system, and IWant is designed to immediately provide the answer with accurate results. This means that navigation and asking others for system information is rendered obsolete. A critical component of AI is the data it pulls from. And because IWant pulls from Paycom's single database, it eliminates problems created by inconsistent or duplicative data sets. On the manager side, IWant supports HR teams and organization leaders with instant employee information. For example, a manager can use IWant to pull data on when an employee returns from vacation, see who's clocked in for the day or analyze an employee's pay history. These are just a few examples of the power of IWant. Before IWant, executives like myself were dependent upon others to complete reports and provide critical decision-making information. Today, with IWant's executive mode, executives using Paycom now have the information they need at their fingertips, enabling them to be daily users of our solution without ever having to be trained on the system. Just tell it what you want, and IWant delivers, making executives even smarter and more effective. Now I can quickly find any information about my staff available in our single database because we track the entire employee life cycle and have data from applicant tracking, onboarding, Paycom Learning, expenses, benefits, time and attendance, payroll, schedules, surveys and more, all accessible through IWant. Early feedback has been phenomenal, with clients calling this a total game changer. IWant's command-driven AI engine will increase usage among non-daily users in our system, and I fully expect IWant to increase satisfaction and client ROI. Voice-activated command-driven functionality is the future for all software, and Paycom's future started last week. We invest in innovation to increase client value, and this is fueling strong sales for Paycom. Our sales teams continue to set new records every quarter, and I'm very pleased with their strong execution. Our sales force was recently recognized by Selling Power magazine as one of the best sales organizations in the country. This is a testament to our sales leadership, training, and culture. Finally, Time Magazine listed Paycom amongst its best companies for a second consecutive year. Newsweek placed Paycom in the top 20 of their inaugural ranking of America's best online platforms, and Comparably recognized Paycom for best career growth and best leadership teams. I'd like to thank our employees for their hard work and commitment that is reflected in these awards. We had very strong results in the first half, and we are set up for continued strong momentum for the rest of 2025 and beyond. With that, let me turn it over to Bob.

Thank you, Chad. Before I review our second 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 very strong second quarter results. Total revenue of $484 million increased 11% over the comparable prior year period with even faster growth in recurring and other revenue of 12% year-over-year, reaching $455 million. Interest on funds held for clients declined 11% year-over-year as expected to approximately $28 million in the second quarter of 2025. GAAP net income in the quarter was $89 million or $1.58 per diluted share based on 56.5 million shares. Non-GAAP net income for the second quarter increased 27% year-over-year to $117 million or $2.06 per diluted share. Profitability in the second quarter also increased significantly with adjusted EBITDA of $198 million, reflecting a 24% increase over the prior year period. Adjusted EBITDA margin was 41%, representing a 450 basis point increase over the prior year period. Margin strength in the quarter was driven by revenue upside, efficiency gains in G&A, and timing of marketing spend. We continue to invest in the areas of AI, product, and R&D. And as Chad mentioned last week, we introduced our most innovative development to date, IWant. Based on the strength of the first half of 2025, I am pleased to report that Paycom is in a very strong financial position, and we are raising our revenue and adjusted EBITDA targets for the year. Our balance sheet is also very strong. We ended the second quarter with cash and cash equivalents of $532 million and no debt. The average daily balance on funds held for clients was approximately $2.6 billion in the second quarter of 2025, up 10% over the prior year period. During the second quarter of 2025, we paid approximately $22 million in cash dividends. Earlier this week, the Board approved our quarterly dividend of $0.375 per share payable in mid-September. We also purchased roughly $33 million of common stock through net downs on vested stock during the second quarter of 2025. And we still have $1.44 billion remaining under our stock repurchase plan. Now let me turn to guidance for 2025. We continue to have success selling and onboarding new logos. Based on our strong first half results and our outlook for the remainder of the year, we are raising our full year revenue and adjusted EBITDA guidance ranges. We now expect total revenue to be between $2.45 billion and $2.55 billion, up 9% year-over-year at the midpoint of the range. For the full year 2025, we expect recurring and other revenue to be up 10% year-over-year, including quarterly growth of approximately 10.5% and 11% year-over-year in Q3 and Q4, respectively. Our revenue expectation for interest on funds held for clients is now $113 million in 2025, down 10% year-over-year, assuming two rate cuts later this year. Revenue upside, along with continued automation of HCM and payroll manual tasks, is driving margin improvement for Paycom. As a result, we are raising our full year adjusted EBITDA guidance range to between $872 million and $882 million. This represents a second increase to our prior adjusted EBITDA margin guidance to approximately 43% at the midpoint of the range. We plan to increase our marketing and R&D budgets in the back half of the year in support of the IWant product launch and additional innovation focused on AI and automation. Other forward-looking items include full-year GAAP and non-GAAP tax rates of 27% and 26%, respectively, and stock compensation of approximately 7% of revenues. We are pleased to see employees across the organization executing very well, which is driving our solid performance year-to-date. Our go-to-market and product strategies are working, and we are well positioned to deliver on our raised expectations for the year. With that, we will open the line for questions.

Two quick questions and congrats from me as well. The first chat is, if I think about IWant, how should we think about that in terms of a driver for the overall business? Is it just like it's just a differentiation tool and that basically helps you kind of against someone that doesn't have that kind of clean data structure that you guys have? And so then you kind of sell better. And as far as I remember, there's not that many guys out there as clean as you. Or do you think eventually down the road, there will be some monetization offerings as well? And then one for Bob, if you think about more AI, it probably means you need some GPUs, et cetera? How should we think about gross margin impacts that potentially could come there because obviously, they need a lot more money in computing?

Yes. I'll start, Raimo. IWant is Paycom's voice command-driven AI tool, and it really just revolutionizes how people actually access and navigate a system now. And so think of any piece of software, any system in your life that you have to navigate. Imagine just commanding it. And we find that that makes it easier for the employees. They don't have to learn a system. They can just go in and command what they need or ask what they need. Employees don't enroll in benefits all the time. There are certain things in our system that they don't do all the time. And so there's not a need for them to be experts at it. So on the employee side, it automates everything. Same thing on the client side. For me, I'm not a daily user in our applicant tracking system. So if I wanted to get a resume, I had to make a phone call. I'm not a daily user of the benefits administration system. And because I'm not a daily user, because I'm not set up as a user in those systems, I couldn't get access to certain information without contacting people. Well, now I can get access to anything. I just ask IWant; it will pull someone's resume for me, it will pull all the past job history, pay history. It will tell me who's all clocked in right now, who's late for work today. So basically, right now, I'm an expert in our system because I'm utilizing the IWant command-driven tool, which allows me to interact with our system differently. And so what's happening is as we turn this on and activate this for clients, more and more users and executives are actually engaging with the system, and it's eliminating the need for them to communicate with others in their organization or slow down the chain of data moving. And then I'll let Bob take. And then as far as from a monetization process, I mean, this is everything. This is a different way to utilize software. I'm unfamiliar with any other SaaS company that has a command-driven navigation throughout their system. And so I do think this is going to be a thing for not only our industry but any type of software where users are currently navigating. So I'll stop there and let Bob answer the GPU question.

Thank you, Raimo. Yes, we anticipate a demand. We are expanding margins as we discussed, expecting them to increase by several percentage points for the remainder of the year. We will reinvest this into capital expenditures, AI, and equipment. Consequently, we expect free cash flow to be on par with last year.

Congratulations on the strong quarter. Chad, the product is really slick. I like it. I'm wondering if you can talk a little bit about what the marketing plan is. Is it already turned on with all of your existing clients? If not, what do they need to do? What's the training methodology just in terms of making them all aware of it and how they can use it? And then how are you going to unfold that in terms of national advertising? Are you going to switch your campaign in order to focus on this?

The marketing plan for IWant began on July 31 when we started activating our first clients. Currently, we have activated 10% of our clients this week, and we expect to reach 15% to 20% activation by the end of this week. While clients can still navigate our system as they did before, once they start using IWant, they tend to stop navigating at other levels. Activation means enabling clients to understand what IWant does. It's crucial for them to learn how to use it effectively. We provide a list of about 20 prompts to help them understand it, after which they can use the system efficiently. We aim to activate all our clients by the end of this quarter, and this process offers them easy access, serving as a reward for our sales reps and service teams who have worked hard. Clients who implemented various modules and trust the single database system will enjoy instant access without needing extensive training. I believe this approach will become standard for all companies using business-to-business and even consumer software, as the need for training diminishes with the new tools available. In terms of training, it's minimal. For national advertising, we're focusing on full solution automation. IWant will serve as a way to access all our offerings without requiring clients to be experts. We're excited about the future, and everything we develop will incorporate an IWant component to maintain simplicity.

Great. My congratulations as well. I guess in terms of IWant, how are you going to monetize it, Chad? Is it kind of part of a base PEPM? Is it an individual? Or is it just a core package you have to adopt based on a certain number of modules? Any way to think about just the pricing and go-to-market motion on it?

Yes, I was in an elevator with someone earlier and wanted to look up their job history and resume on Paycom. However, that requires specific modules. IWant will allow you to access data that you might not have reviewed in a while. If I'm looking for resume information or asking about their work history, and they're not in our applicant tracking system, it won't be possible to retrieve that data. One way it will help us is by encouraging more full solution deployments across our client base, giving everyone access. We believe it will also boost our sales volume as it's an innovative product that is user-friendly. Over time, I expect it to positively affect our retention as clients become more engaged with the software and realize its full value. IWant eliminates obstacles to accessing value, making the process easier. We are very enthusiastic about the benefits it can bring.

Okay. Great. I guess just to start, I just want to understand like what actually maybe was different versus what you were expecting coming into the quarter? Because it looks like the upside looks pretty solid versus maybe what we've seen in the past few quarters. So I guess, a, what has kind of happened there? And then, I guess, secondly, just as we think about IWant and what that means, is there any implications for what that means for Beti adoption or need to adopt Beti to get the kind of full functionality of IWant?

Yes. I mean I think as far as the quarter, we've been talking about record sales, and eventually, those things materialize, and they turn into revenue as they start. That's something that we've been focused on. I would say our sales organization has been doing a great job. And so we've had some outperformance there, and I think you're seeing some of that here. And then, as well as on the margin side, I mean, we continue to see efficiency through our full automation goals. And it does slow our pace of hiring a bit and also our willingness to backfill some open positions just because of all of the automation. So we're getting some more efficiencies on that too. As far as implications for Beti adoption, it's not required that you've implemented Beti to get value out of IWant. I do think that the more Paycom's products that you use, which would include it, the greater the value you're going to get from it. And the more questions that we'll answer for you, the more insight it will give you. And so I do think IWant makes it easier to use all that additional functionality, but there's not a requirement that someone would have Beti. Although I will say I believe Beti is a very important product, and I still say that it's the best way to do payroll for employees. And actually, we have a lot of clients boomerang back to us because they felt it when they left and the need for having accurate payrolls to prevent errors before they become problems.

Yes. I have to admit that I only reviewed the demo 30 minutes prior to this, and it seems quite user-friendly and beneficial. However, Chad, I think you referred to it as the biggest release since the company was established, which is a strong assertion, especially since there's no charge for it. How do you plan to capture the full value you are delivering here? I understand your point about full platform sales, but what other milestones should we consider?

I believe it's our most significant development to date. Flying an F-16 is challenging, but we've streamlined the process to just one button or command. This innovation removes previous barriers to value. While adding more functionality to these systems typically requires training, this solution eliminates that need, making it our biggest innovation since the company's inception due to its substantial impact. Our clients are genuinely thrilled; conversations on the service floor reflect their amazement, and they truly deserve this advancement. I am confident in categorizing it as the largest development. Looking ahead to versions 2 and 3, I struggle to imagine what more we could introduce, given that we have full backend solution automation. Regarding how we plan to capture the full value, it will certainly influence our market approach. By eliminating barriers to value, we enhance what our clients receive, fostering more significant relationships with our system and positively affecting retention over time.

I wanted to follow up on the second quarter, where you saw a significant sequential increase in capital expenditures, particularly in property, plant, and equipment. It seems like you are planning to spend quite a bit in that area for the rest of the year. Could you provide more details on what that spending will involve and when it might begin to decrease?

Yes. I mean I can take a little bit of this, Bob, then you can jump in. We've always developed and hosted our own platforms. And as we move into AI, it does require a certain level of spend. So as we look at that, I do believe it to be more transitory in nature. But as we look at that, that's going to be front-end loaded for us right now, and that's really what we're looking at. And a lot of that's going to be through CapEx. I think Bob explained kind of we do expect to take the benefit that we're receiving in the additional margin accretion right now and put that into some of these CapEx expenditures. And then we would expect our margin for free cash flow to be not dissimilar this year to what it was last year. Again, I do believe these spends will be more front-end loaded and transitory. So we'll go from there. I don't know, Bob, if you have anything to add to it?

No. One thing I'll add, Chad, is that we see this as a growth opportunity for us, and we have the capital to take advantage of it right now, and that's what we're doing.

So maybe on IWant specifically, when you think about how it fits into the overall product strategy with Beti, maybe help us a little bit where you're getting the most customer interest, what does success look like for IWant? And also, any update or mix around retention with Beti and kind of as you see that mix with Beti and IWant across your customers growing, kind of where is the opportunity for retention in that well to go to?

Yes, I believe both options offer significant retention opportunities. They both represent the best approach to achieve our goals. When considering IWant, it integrates seamlessly across our entire system. Beti connects with several modules, while IWant interacts with every module and all data within our system. This makes it quite distinct. The users of IWant will encompass everyone, whereas Beti users will primarily include employees during payroll processing and the payroll department. Both are crucial, but IWant can be viewed as a new means of accessing information. You can think of it like accessing your bank and simply communicating your needs. For example, I can use IWant to say that I had a baby and need to add records, or even inquire about someone’s spouse, and it will retrieve the information for me. I can ask it anything; if the data is in our system, it will provide a response. We are genuinely excited about this shift in our industry and in any industry reliant on software, as we are now moving towards voice-activated, command-driven interactions. While IWant and Beti function a bit differently, IWant will definitely enhance the experience of using Beti.

Chad, you just kind of mentioned earlier that you think the CapEx will be a little bit more transitory as you build this out? And kind of with you owning the entire tech stack and once the entire customer base is up and running on IWant and extending usage, why shouldn't there be more continued spend from a CapEx perspective as users kind of use it more and you're kind of running through GPU cycles?

Well, I mean, I think there's a certain amount of spend you have to do just to get to the starting line. And then I think on an ongoing basis, it becomes more incremental. But I think as you're looking at rolling out massive usage, like I said, I mean, we would expect to activate all of our clients this quarter. So there's going to be a certain level of first hit as they're using it, which we're already seeing. And then in subsequent quarters and years, of course, we will add to that. Also, kind of you see it over time, the cost of technology comes down, but the cost of power doesn't. And so there's just different things you have to look at as you go through building these things out. And we've incorporated all of that in our guidance and on our comments today.

Given how useful IWant is and the engagement it has generated, why not directly monetize it based on usage instead of indirectly benefiting through improved sales and increased attachment rates with the modules?

I believe that every client should access their data this way, and we've had clients that have been with us a long time, and there's no reason to make them pay to get the value that's available for them, where I really think that this is just going to take off for us. So I really just don't think we need to do that plus. I don't want to spend a lot of time having to go out and sell clients and charge them on things that I can really get them to use the full utilization of the system. And I believe that will create other opportunities for us both with these clients and definitely with prospects. So I think we have to be careful to stop and pick up the change on the ground when there's opportunities out there. We remain disciplined and really help the clients achieve the value available to them.

All right. I was just curious, maybe a little different angle than some of the other things we've been talking about, but how are you adjusting your sales and marketing processes internally with all the new different AI sales tools that are out there for front-end lead automation? And then also, along with that, the way that customers find you might be changing as well with organic Google search traffic declining, TAM on a secular basis over time. How do you kind of square all these items up to manage sales efficiency over the next few years?

Yes, I would separate marketing from sales. Our marketing team has been using tools effectively for a while and continues to look for more. In terms of sales strategy, we've reverted to the approach we used in 2000. This type of training, leverage, and influence was reinstated when Amy took charge, and it has been successful. While I'd like to believe the product sells itself, that's not the case. Ultimately, strong salespeople are essential to help clients understand the value being created, alongside a clear ROI case. We will maintain our current selling methods, but this is a significant change. We introduced this on July 23 to our first client, and it has made a substantial difference in the system's simplicity as we move forward. I believe this will impact sales significantly. Also, we activated our first client on July 23, but sales only got the information last Monday. They are just a week into discussing it, so we'll see how IWant affects the sales organization in the coming quarters and years.

Just a quick follow-up. Is it fair to say that the new sales activity was up sequentially from Q1 to Q2? And how do you think about that in terms of visibility for revenue in the second half and what level of visibility that you have into the updated revenue guidance?

What I would say is you know we're talking about record sales in the first quarter, and we just reported second quarter, and now we've talked about record sales in the second quarter. So obviously, those haven't really started yet. So let's say most of those haven't started yet. And so those will be reflected in subsequent quarters. And we always guide to what we can see. But I would say there's a level of excitement across Paycom right now that's different than it's been in a long time, and we've always been a pretty exciting company anyway.

I want to ask about a demand environment, how you're seeing it in the first half and your expectation for the second half. And then are you seeing any kind of changes in the competitive landscape, especially with all the consolidation that happened recently in your space?

Yes. I mean I would say our demand environment remains strong. I've always said we also create demand. And remember, we have less than 5% of the total addressable market just in the U.S. even. And so there's many opportunities. From a change in the competitive market, I think they all got a lot less competitive a couple of weeks ago, to be honest with you. And this is going to be a thing. I mean you guys kind of see this will be a thing moving forward. I mean our client feedback has been really good. I think that I know competitors will say they have the most automated, the most is the most staff. But if you can't talk to it, it's not the most automated, it's not the most modern. People might want to drive an old car or a motorcycle or fly an old plane; I mean those things are nostalgic and cool. The driving an old HCM system around is not cool; it's just sad. So I do think that you're going to see a lot of clients gravitate toward this type of experience because why should they work extra hard to get the value, which is why we created it in the first place.

When you talk about IWant taking off for you, where do you think it shows up most? Is that new logos? Is it retention? Is it new product adoption? I guess, what should we be looking for on our end? And when do you think it actually starts showing up more meaningfully in the numbers?

I believe it will start to be evident in various areas, and I am quite optimistic about its visibility across these segments. New sales and acquiring new clients have always represented our biggest opportunity. It's essential that we enhance and accelerate our revenue growth, so I would expect this to be the primary contributor. Additionally, I anticipate significant improvements in our retention rates over time, as users become more familiar with the system. It should also positively influence our client retention rates, allowing us to engage with businesses on leveraging data from the entire employee lifecycle. Having these additional modules is crucial for ensuring employees can fully utilize the platform. I'm also seeing positive signs in terms of client win-backs; we're witnessing former clients return after a short absence, influenced by features like Beti and strong client service. This transformation in experience is substantial; once accustomed to a system that resolves issues simply and efficiently, it would be challenging for clients to revert to the old way of navigating problems. In technology, we generally don't revert to previous solutions, whether in professional or personal settings. I believe IWant has made it simpler to access automation, and once clients realize its full value, they are unlikely to desire less functionality.

Well, I want to thank everyone for joining the call today. We look forward to speaking with many of you over the coming months. We will be participating in several investor events this quarter, including Deutsche Bank Technology Conference on August 27 in Dana Point. Then on September 3, we will be attending the Citi Global TMT Conference in New York City. We will also be hosting meetings at the Wolfe TMT Conference in San Francisco on September 10. With the strong results and the recent launch IWant, I'm even more excited about how the future is shaping up for Paycom. I want to thank all of our employees for their contributions to our success. And with that, operator, you may end the call. Thank you.