Paycom Software Inc (PAYC) — Q4 2025 Earnings Call Transcript

Thank you, and welcome to Paycom's earnings conference call for the fourth quarter of 2025. The 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. Chad?

Thanks, James, and thank you to everyone joining our call today. I'll comment on our 2025 achievements and our areas of focus for 2026. I will then turn it over to Bob for a review of our fourth quarter and full year results along with our full year guidance. We will then take your questions. Let's get started. We executed well against our 2025 plan, exceeding our strategic and financial goals by focusing on full solution automation, client ROI achievement, and providing world-class service. We delivered strong results, including double-digit recurring revenue growth and near-record adjusted EBITDA margins. We advanced our full solution automation strategy with the launch of many automated decisioning tools that complement our command-driven AI product and other award-winning automation solutions, Beti and Gone. Our focus on client ROI achievement and world-class service strengthened revenue retention in 2025, which increased to 91%. This is a testament to the success that our clients are achieving through full solution automation as well as the world-class service we are providing across our client base. In addition, we experienced a record number of clients returning to the Paycom platform in 2025. Automation is the future of our industry and Paycom is leading the way with the most automated solution in the market. While I'm excited about the momentum in client retention, we still only have approximately 5% of the total addressable market and the opportunities ahead of us are robust. Paycom is a truly differentiated company; our single database architecture and employee first technology allow us to offer automated decisioning that is unmatched in our industry. This architecture enables us to deliver greater accuracy and efficiency, eliminating the need for complex integrations while driving strong ROI and satisfaction for our clients and their employees. Our automation tools across our full solution are clear examples of our commitment to innovation. Beti is one of these and reduces payroll processing labor by up to 90%, while cutting the time spent correcting payroll errors by up to 85%. Another is Gone, which automates PTO, fully streamlining time-off requests. These are just a few solutions that eliminate duplicative tasks, reduce redundancies, and contribute directly to unparalleled ROI for our clients. Our most advanced AI solution, IWant, is designed to accelerate the speed to value by allowing anyone to become an expert in the system without any training. Forrester's recent analysis of a composite organization with more than 500 employees found that organizations using IWant experienced an ROI of over 400%, driven by productivity gains at every level. Managers save as many as 600 hours per year, executives up to 60 hours, HR teams up to 240 hours, and employees across the organization collectively reclaimed 3,600 hours annually. Leaders describe IWant as a catalyst for deeper insight. And one CEO remarked, 'I get immediate value without any training or knowledge of Paycom; I can go in and immediately understand more about my business.' Since our founding, we have led the way in innovation and automation. With full solution automation and decisioning logic, we are again transforming our industry. Payroll and HCM are critical solutions in the enterprise that require 100% accuracy and Paycom is delivering on that expectation every day. As we look to 2026 and beyond, we will continue to extend our technological lead and focus on delivering unparalleled value to our clients while continuing to attack the remaining 95% of the addressable market that is available to us. IWant to thank our employees who have been diligently focused on leading our clients, executing our goals, and delivering strong results in 2025. With that, let me turn it over to Bob. Bob?

Thank you, Chad. We delivered strong fourth quarter results with total revenue of $544 million, up 10% over the comparable prior year period and recurring and other revenue of $517 million, up 11% year-over-year. Looking at 2025 full year results, we are very pleased with the execution throughout the year. Total revenue in 2025 came in at $2.05 billion, ahead of our initial outlook, with recurring and other revenue growth of 10% year-over-year to $1.94 billion compared to our initial expectation of 9% growth. We delivered even stronger fourth quarter and full year profit metrics that were driven by stronger revenues and operational efficiencies gained from automation and cost discipline initiatives. Adjusted EBITDA margin remained strong in Q4 at 43.4% or $236 million. Full year 2025 adjusted EBITDA grew 14% year-over-year to $882 million, representing a 180 basis point year-over-year margin expansion to 43%. Turning to GAAP results, GAAP net income in the fourth quarter was $114 million or $2.07 per diluted share based on 55 million shares. Full year 2025 GAAP net income was $453 million or $8.08 per diluted share based on 56 million shares. Non-GAAP net income for the fourth quarter increased 4% year-over-year to $135 million or $2.45 per diluted share. Full year 2025 non-GAAP net income was $519 million or $0.24 per diluted share based on 56 million shares. Margin strength in the quarter and full year was broad-based, driven by our continued focus on automation. We continue to invest in sales and marketing to drive future growth, and we maintain our commitment to world-class service. With that said, we are also finding significant opportunities to streamline processes across our organization while still expanding our sales capacity and maintaining a human approach to world-class service. Operating cash flow increased 27%. In 2025, it represented approximately 13% of total revenues compared to $197 million, or approximately 10% of total revenues, resulting in a 180 basis point year-over-year increase to approximately 20%. In 2025, we repurchased over 1.7 million shares of common stock, or approximately 3% of our shares outstanding, for a total of $370 million, and we paid approximately $1.1 billion remaining under our buyback authorization as of December 31, 2025. We continue to be opportunistic buyers of our stock. In addition, the Board has approved our next quarterly dividend of $0.375 per share payable in mid-March. Turning to the balance sheet, even after returning capital to stockholders through buybacks and dividends paid in 2025, we ended the year with a very strong balance sheet, including cash and cash equivalents of $370 million and 0 debt. The average daily balance on funds held for clients was approximately $2.8 billion in the fourth quarter of 2025, up 11% over the prior year period. We grew our client count to approximately 39,200 clients as of the end of 2025, representing growth of 4% compared to 2024. On a parent company grouping basis, we ended the year with approximately 2,300 clients, up 5%. Revenue growth was broad-based as we added clients across various target client sizes, but we continue to have success upmarket with revenue from clients over 1,000 employees growing faster than total revenue. Total employee records stored in our system in 2025 was 7.4 million, up 5% year-over-year. Paycom's annual revenue retention rate in 2025 increased to 91% compared to 90% in 2024, and we believe our significant efforts and investments in automation and world-class service are contributing to the value and overall satisfaction that our clients are experiencing. Now let me turn to guidance for 2026. We have a highly predictable, profitable, and resilient recurring revenue model. Similar to last year, we are providing our initial full year outlook, which represents our best estimate for certain key metrics based on what we can see today for revenues and budgeted expenses. For fiscal 2026, we expect total revenue to be between $2.175 billion and $2.195 billion, or between 6% and 7% year-over-year growth. We expect full year recurring and other revenue to be up between 7% and 8% year-over-year. We expect full year adjusted EBITDA in the range of $950 million to $970 million, representing an adjusted EBITDA margin of approximately 44% at the midpoint of the range. Included in total revenue outlook is interest on funds held for clients of approximately $103 million and is based on the consensus assumption of 2 rate cuts in 2026. 2025 was a year of solid execution with very strong fundamentals. We will continue to focus on delivering the best product and service to our clients and enhance long-term stockholder value through attractive top line growth, operational discipline, and opportunistic buybacks. We have less than 5% share of a large and growing total addressable market, and we believe our differentiated full solution automation strategy can drive long-term sustainable growth for years to come. With that, let's open the line for questions.

Chad, there are a lot of positive things on the product side coming out of you with kind of IWant, etc. Customer retention gets better. your guidance growth looks a little bit like a slowdown for many people. Can you just kind of bring these 2 kind of sides together? On the one hand, a lot of positivity and positive news; on the other hand, it looks -- is that kind of macro? Or how should we think about that?

Yes. First, I want to mention that we have been rapidly automating our product, which is now capable of making decisions in various areas without requiring users to log in. While I feel positive about our growth last year, I recognize there's still room for improvement. We are currently focusing on sales, as discussed at your conference in December. The positive news is that our clients are satisfied, and our retention rates are improving, making our product the most automated in the industry. Looking at our performance, bookings have increased annually, with a continuation of this trend into 2025, and we expect the same for 2026. We anticipate several opportunities for growth throughout the year, and these will be reflected in our financial results as they develop.

Okay. I wanted to follow up on the change in sales leadership at the beginning of the year. Should we expect significant changes in the go-to-market strategy, or is it more about fine-tuning? I know your sales organization is strong, but how should we view the adjustments with the new leadership?

A lot of this involves replacing the value. Consumers and clients often find it challenging to understand full solution automation. Therefore, much of this is about our presentation. We have been training our salespeople over the past three months to ensure they are familiar with the new product enhancements we have made since November, which automates much of our system. As we have mentioned for the last couple of years, achieving full solution automation has been a priority for us, and we are continually advancing our product toward that goal.

As I consider the guidance, reflecting on the recurring revenue outlook from last year where the initial estimate was 9, which turned out to be slightly better, I am curious about this year's outlook of 7% to 8%. Is there any change to the guidance methodology? Should we view it similarly to last year, and what potential upsides might we anticipate as the year goes on? I also have one follow-up question.

Yes. Samad, last year, we guided at 7% to 8% total revenue growth, and we just reported that we finished at 9%. This year, we're guiding to 6% to 7% total revenue growth. So about a 1% difference this year versus last year. Again, last year, we focused very much on sales but also on the full value chain of our client, world-class service. We were able to see retention gains through that. Clients are happy. And as we focus on the new way to utilize our software, we've been focused on our go-to-market strategies here. Samad, I'll add that there has been no change. We're guiding to what we can see right now, and we'll continue to update throughout the year as we see that change.

Understood. And then maybe just understanding just kind of the growth algorithm. If I think about the client count growth in '25 being around 5% and use that kind of as a unit growth number. And if I think about the '26 growth kind of that, again, 7% to 8% of recurring revenue, should we think about that kind of similar unit growth? And then any ARPU expansion opportunities? Just help us understand what the different contributors are to that 7% to 8% growth and maybe where you see the room for either most conservatism or outperformance.

New logo ads is going to be our biggest opportunity for growth. We have other opportunities as well now with adjacencies that are available to us. But new logo ads, that's what we're focused on. Our sales primarily come from our outside sales organization. They only focus on new logo ads. And again, after a client has been with us for 30 days, that's when we move toward the CRR group.

So you're coming off of a quarter where sequentially, your year-over-year growth rate ended up accelerating hitting 11.3% on the recurring side against a tough comp, which was up 14.5% the year before. And the guide basically does imply a bit of a slowdown. I'm wondering what are you seeing in the field, and you did make a change with regards to sales leadership. So I'm wondering, what are you seeing in the field? Obviously, all of the stocks across all of SaaS have been hit. Are clients expressing any sort of hesitation or longer decision cycles anything that you're seeing that's different or that would suggest that things are going to slow down, perhaps its employment and just fewer seats, I don't know. Just wondering if you can give us any sense there.

No, we're not. We're not seeing any change in the desire to buy our product. Again, we did for the last 3 months, we have been going through bringing everybody into training and going through what our product does now. We've released a lot of automation just since November. And a lot of the product decisions itself, I mean you do not have to log in; you do not have to move data. And so we're making decisions on things. And so we've been talking about that for a long time. It was important for us to make sure our salespeople are going to market with that message. But no, we have not seen any reluctance from people and prospects to make changes out there in the marketplace.

That's great. And can you talk a little bit about the usage with regards to in at this point? I mean it looks really slick. So I'm just wondering what the usage patterns are there and what the customer feedback has been?

Yes. So I definitely think IWant definitely contributed to help with our retention last year, as I mentioned in my prepared remarks, we're having a record number of clients returned to Paycom as they left for maybe something that they felt was a lower price but ended up being 10 times our cost. And so specific to I-9, usage is up 80% in January alone just based on fourth quarter. And so IWant continues to generate greater and greater usage. And I think, especially at the employee level, it's really becoming the predominant way to access data as well as for the C-suite level. I think that you still have user buyers and administrators that are used to certain parts of the system. And although they're gaining value through IWant, I also think that you have certain creatures of habit that are also continuing to get value by utilizing our system. The other way, which was also yes. I would say shifted on quality, something that's been very important to us. I mean it's hard to say that we're in a sales environment that quality over quantity, but it is very, very important that we're out there doing things the right way because like I said, we lost some clients that we just shouldn't have lost because the value is there for them. And then as we brought those clients back on and as we look at going to market to sell new clients, we want to make sure that all the clients get the full solution automation available to them upfront, and they've purchased for the right reasons. And so as a sales organization, we've got to get together over the last 3 months, gone through all of our training to come out the other side of this. And so we are excited about that. We're also excited about what we see in the pipeline. Our opportunity hasn't changed. We only have 5% of the total addressable market available to us. We do have the most automated product. And we are beginning to see people crave that in a way that they're willing to digest automation.

Okay. Great. And then I guess just in terms of the guide, just wondering what you're assuming from an underlying kind of employee level perspective? And maybe how does that compare versus what you saw in Q4?

Yes. Stabilization is what our expectation is, and that's what we saw in Q4 too. Without some dramatic change in unemployment, really what's going to impact us would be our execution of our strategy.

This was the biggest new customer adds here since, I think, 2022. How much of this is maybe due to those new sales offices that have been ramping or those new returning customers that you talked about? And then what are some new incremental initiatives that are targeted toward new customers for 2026, if you have anything to share?

Yes. I mean the new office is definitely spun up quicker than any offices in the past to say that they were the largest contributor to the gain, I think, would be too fast. But we've done very well with our product throughout the year, and we continue to have strong go-to-market. I mean, in some areas, we have offices that do well over $9 million in sales. In some areas, we have offices that do much, much, much lower than that. In some areas, we have a sales rep that will sell $4 million as they did last year. And so all these are opportunities for this. And so we've had both buckets of success and pockets of opportunity. And as we've looked at our organization as a whole, we're very confident on the go-forward of capturing all that opportunity and continue to maximize those pockets of success that we see across the board.

Okay. And then retention, 91%, nice to see the improvement. I think with IWant, part of that product was to improve retention. So it's nice to see. But maybe it was unrealistic for me to have wanted to see more improvement, no pun intended. And it sounds like you're doing some training, but you might have some more room to improve in getting kind of retention back to what it was in years past. But maybe talk about the strategy there and how to think about improvement in the years to come.

Sure. Well, providing world-class service to clients and making sure that they achieve the full value that's available to us has been our focus. And so I did expect retention would go up last year because of how hard we focused and how well the clients now are using and getting value for the product. Do I think retention still has room to raise? Absolutely. And that not only do I think it has an opportunity; I mean, I think there's an expectation there across the board with all the work that we've done. And we have that momentum going in the right direction right now. So that's definitely a focus of ours.

Can you just elaborate a little bit on how AI is improving internal productivity and efficiencies, maybe which areas you are specifically seeing improvement? And then how are you thinking about balancing the benefits between bottom line expansion and reinvesting in the business?

AI is benefiting us in many ways. While we can discuss specific products and the speed of processing, we've made significant enhancements to our back end that really accelerate our operations. There seems to be some confusion about AI being perceived as a threat, but at Paycom, AI is an ally. I've put considerable effort into clarifying how AI impacts us positively. Looking ahead, we have opportunities now that were unavailable in the past, such as faster development and an improved ability to adapt to user needs. We can create much more now than ever before. We are in a new era of software development, and in some cases, we are replacing existing software. Paycom can now enter adjacent industries within a timeframe of weeks or months. It's worth noting that I was the first coder back in 1998, so several components that may be easy to displace are not only linked to our industry but are also reliant on it for data. Now that we can develop rapidly and leverage various technologies to transform other sectors in such a short time, we're looking forward to what that means for our future.

Great. I think maybe I'll just piggyback a little bit off the answer that you just gave there, Chad. I think in your prepared remarks, you talked about building some tools maybe around IWant. And so if there are any examples you could share there, that would be great. And I know that part of the thesis, they're not the biggest one, was about the ability to cross-sell as customers use IWant and want access to all the data and functionality. So are you seeing any evidence of that?

IWant provides users with easy access to its value without requiring them to be system experts or undergo extensive training. The automation we've developed throughout our system, combined with IWant, significantly simplifies user access. We're continuously enhancing the system and adding more functionalities, making it more robust than ever. We're releasing more products now than we have in the past, even if we don't always announce these launches to the market. Our clients are experiencing these improvements daily as we introduce them to new products and automation. Moving forward, our focus will be on achieving full solution automation with Paycom software, where users can purchase and configure the system, allowing it to handle everything else. We are concentrating on this, leveraging AI tools and other innovations we've integrated. While there are still backend tasks to manage, we're optimistic about the current developments in our industry and how they lead to strong returns on investment for clients using Paycom.

Yes. Sure. So we did have a one-time expenditure, like you mentioned. The way we look at that, though, we do run this business with a long-term outlook. If we do see an opportunity again like that to invest and help our clients achieve even more, we would take that. And the positive thing there is we do have the EBITDA margins and the cash to do that.

Can you give us a sense in terms of your January retention performance, just given the significance of that churn for the full year? And then as we kind of look at the 2026 guidance here, what are you assuming in terms of retention versus are you assuming any improvement or relatively stable?

Yes. So we disclosed retention once a year. We did just disclose it for 2025. I'll let my prior comments kind of speak for themselves as far as how important usage is and value attained is for a client in order to increase tension and how well I thought we did last year with this initiative and how more and more usage should be accretive for us into the future.

Yes. So as I disclosed in the Barclays Conference, we have expanded our sales teams to 10 from 8. So that puts an extra 100 salespeople in the field. All salespeople now are experiencing a different level of training through our program. That's happening right now, and we're hiring as many salespeople as we can. Right now, we would expect that those would give us an opportunity in the future to open up more offices. It is a goal of ours, and it is also a goal of ours to capture the opportunity available to us in the offices that we have opened.

Chad, your comments on AI were pretty helpful. I wonder, could you give us a sense of, have you seen client behavior patterns in terms of consumption across any modules change as a result of the Gen AI adoption? I mean, obviously, one of the questions we get a lot is the perpetual displacement risk, which we don't subscribe to. But is there anything you can help kind of the market understand that it helps alleviate some of that concern, whether it's clients that have these tools that are still using Paycom or leveraging different parts of your platform that they haven't in the past just to help dimensionalize and calibrate some of this concern.

Yes. I would say there are some clients that will run toward the full automation or what you might be calling a Gen AI consumption. But I will tell you, it's much more important that you meet them further than halfway there; if you want to get them fully utilized and actually getting the value out of it. You've got to make it easy for people to digest. And that's what we've spent a lot of time doing. You release something great, you ask yourself, why aren't they using it? Well, it's not good enough for them to understand how to digest it or plug into it. And so those are the things that we've been working on, both with our software as well as our go-to-market to make sure that we're bridging all those gaps.

Most of my questions have been asked, but any update on how the CRR team performed in 2025 relative to 2024 sales productivity? And how much room do you see for improvement in 2026 cross-sell activity?

Yes. I mean I think CRRs have done a good job. They did exactly what we expected them to do last year. They're doing a good job this year. A big part of the play when we talk about full solution automation and helping clients understand that value that's available to them. And absolutely, in some cases, there's products that clients don't currently have which are needed to get to full solution automation. In addition to that, we're rapidly continuing to put out new products, and many of those have revenue opportunities associated with them. So CRRs are part of the play as we move forward through 2026 and beyond.

We're ambitious with what our expectations are for win rates, both this year and going forward. When I look into last year, I would say they were consistent with what they've kind of been in the past. But we have a new view on what close rates should look like these days just because of the major differentiation between our product and what we see out there. And we've made it, again, easier to sell and easier for a client to understand and achieve its full value. So we are bullish on those opportunities this year.

Chad, following up on the previous question, ADP mentioned that they are working on improving their retention rate. Are you noticing any changes in your business as a result of that?

No.

Okay. And then the other question that investors asked is the AI impact on overall employment. How do you see that impacting Paycom's business? Are you well diversified? Do you expect it to be more in certain kinds of industries? Any color would be helpful.

Well, one, I'd say we're not seeing it. I'm not going to dismiss potential impacts for us in the future. I would say that we are not overexposed to any one industry, any one client, client size. And again, we only have 5% of the market. And so you could do some calculations and we're the most automated product in the industry and the best product for the best value that someone is going to achieve throughout the industry. And so when you look at that, I think that you could do some adjustments in employment, which again, we have not seen. But I mean, even if you did, I still think our opportunity is intact for us. So I'll just leave it at that.

Strong margins. Can you share what the size and scope of the lots you did the past month was as well as how you're thinking about the company's head count trajectory over the next year in the context of just realizing more and more AI efficiencies over time?

We did announce a restructuring last year and finished with about 5,800 employees. We won't discuss internal employment trends or related strategies, but that will be the number reflected in the K.

Thanks, everyone, for joining the call today. I want to congratulate the 2025 Jim Thorpe Award winner, Caleb Downs from Ohio State University. This award recognizes the most outstanding defensive back in college football and also memorializes one of the greatest all-around athletes in history in a fellow Oklahoma and Jim Thor. I’d also like to thank our employees for their contribution to Paycom's success in 2025. We remain focused on world-class service, full solution automation and client ROI achievement, which is resonating across our client base. With that, operator, you may disconnect. Thank you.