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spk07: Good afternoon. Thank you for attending the Paycom Software second quarter 2024 quarterly results conference call. My name is Cameron and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, James Sanford, head of investor relations. You may proceed.
spk04: Thank you and welcome to Paycom's earnings conference call for the second quarter of 2024. 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 the 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 Richardson, Paycom's CEO and President. Chad?
spk06: Thanks, James, and thank you to everyone joining our call today. I'll focus my comments on the progress we are making on our 2024 initiatives, and then I'll turn it over to Craig, who will review our financials and guidance before taking questions. This year, we remain focused on providing world-class service to our clients, solidifying client ROI achievement and deepening our automation capabilities through product innovation. I'm very pleased with the progress we are making on these client focused initiatives as they are resonating across our client base. As a result of our initiatives, our client usage metrics and our net promoter score are up and trending positively. Beyond that, I'm very pleased with our achievements on the product front. We continue to lead the industry in automation. our clients consistently confirm this view. We continue to eclipse our functionality with even greater automation as we rapidly move towards full solution automation. The enhancements we made to our development processes at the end of 2023 enabled us to transform our solutions even faster. Year to date, we have more than doubled our development productivity rates and implemented functionality for our clients that eliminates redundant payroll and HR work through automation and employee usage. We are rapidly eclipsing the industry by delivering a fundamentally differentiated value proposition for our clients, which ultimately results in a better employee experience. We are focused on continuing to automate the most automated solution in the industry. Two examples of automation in our industry are Betty and Gon. Every month, millions of checks are processed directly by employees using Betty, delivering our clients measurable ROI through this truly unique solution. One example is an existing client who has been with us for six years. This is a 2,500 employee company that recently adopted Betty. Since allowing their employees to do their own payroll, they reduced their payroll team by half. going from a process that took roughly four days before Betty to merely hours with Betty. Betty continues to evolve and raise the bar as we add more functionality and connections to solve complex decisioning. And we are seeing increased inbound inquiries from prospective clients. Gone, the industry's first fully automated time off solution was recently recognized as a Globe Award winner for transforming the time off process. It connects highly complex, traditionally disparate solutions and leverages decisioning logic to automatically approve, deny, or warehouse employee time off requests. Time off decisions are a hassle for everyone within an organization unless you use GON. Thanks to GON, employees get immediate decisions and managers gain back time and increase scheduling visibility. HR and payroll no longer have to track down managers to verify and decision requests. and GON significantly reduces after the fact liabilities and related costs. The C-suite benefits from increased confidence in operations and resource management, driving improved productivity and reducing liability. We have a retail client with over 100 stores where each manager's controlled time off requests differently. The client enabled GON and built unique rules per store to ensure each manager was in control of their appropriate coverage. Now these managers no longer need to take direct action on request, and when the payroll team is prepping payroll, they've eliminated the need for all follow-ups. Their payroll manager stated, gone took Betty to the next level. Since implementing gone, this client has automated over 1,000 time-off decisions, bringing up hours of non-productive time. I'm very excited about gone and its ability to streamline time off requests for the businesses across the globe. Through solution automation, we are helping our clients eliminate decision fatigue across the entire organization from the C-suite to HR and for managers to employees. This in turn creates better employee retention and engagement for all organizations. We are meeting the expectation of today's employees and once they've experienced Paycom, They don't want to go backwards in technology. In fact, we are seeing more and more returning clients as both user buyers and employees are missing the automation that is lacking in disparate and antiquated competitor solutions they had deployed. At the end of the day, the best product will win and we are furthering our product advantage. We continue to leverage AI across a wide variety of areas within our organization. We believe our AI approach toward full solution automation will continue to deliver even stronger ROI, value, and functionality for our clients. On the international front, we continue to make meaningful progress in the geographies that we rolled out in the last 12 months. Betty is now available for employees in Canada, Mexico, Ireland, and the UK. We continue to win new clients with domestic and foreign employees thanks to our investments. in our global HCM product and our native international payroll. On the sales side, we are seeing strong momentum. Our new outside sales reps are winning more deals earlier than ever before, and we've sold significantly more units in 2024 than we did this same time last year. Just this month, we had our top sales week in company history. Sales is energized, and last week we added our largest sales class of new reps placing 67 sales reps in the field across the country. I'm excited about the enthusiasm across our sales division heading into the back half of the year. To sum up, I'm pleased with the progress we are making with our product strategy and with our strategic initiatives. The investments we are making in 2024 and our focus on client value achievement are designed to deliver long-term value to our clients and their employees. which will in turn deliver value to Paycom and its stockholders. With that, let me turn it over to Craig. Craig?
spk05: Thanks, Chad. Before I review our second quarter 2024 results and our outlook for the third quarter and full year 2024, I'd like to say a few words about my future plans here at Paycom. I joined this incredible company nearly 19 years ago and had the privilege of shepherding the company from a few million dollars of revenue to one approaching $2 billion in revenues. It has been a career that has surpassed all of my dreams, and I want to thank Chad for bringing me in as a partner in this journey. As a new grandfather, it is time for me to prepare for my next chapter, and I'm announcing my plan to retire from my role as CFO sometime in the next nine to 12 months. And after that, I expect to remain with PACOM in an advisory role. With that, let's dig into Q2 results by reminding everyone that my comments related to certain financial measures will be on a non-GAAP basis. Second quarter revenue of $438 million came in at the top end of our range and was up 9% over the comparable prior year period. Within total revenues, recurring revenue was $430 million for the second quarter of 2024, representing 98% of total revenues for the quarter and growing 9% from the comparable prior year period. Gap net income in the quarter was $68 million, or $1.20 per diluted share based on approximately 56.8 million shares. Non-gap net income for the second quarter was $92 million, or $1.62 per diluted share. Second quarter adjusted EBITDA of nearly $160 million, or 36.5% margin. was better than expected, primarily due to expense discipline in the quarter. We continue to aggressively invest in areas of AI, automation, international expansion, and our value proposition for the client. Adjusted R&D expense was 55 million in the second quarter of 2024, or 14% of total revenues. Adjusted total R&D costs, including the capitalized portion, were 81 million in the second quarter of 2024, compared to 61 million in the prior year period. We are building more automation on the most automated platform in the industry, which should continue to distance us from the rest of the competition. For Q3 and full year 2024, we anticipate our effective income tax rates to be approximately 28% and 23% respectively on a GAAP basis. We estimate Q3 and full year 2024 non-GAAP effective tax rate to be 26%. For the remainder of 2024, we expect stock-based compensation expense to be approximately $30 million per quarter. Turning to the balance sheet, we ended the second quarter with a very strong balance sheet, including cash and cash equivalents of $346 million and no debt. The average daily balance of funds held on behalf of clients was approximately $2.4 billion in the second quarter of 2024 up 8% year over year. During the second quarter and into July, the valuation of our stock dropped below that of slower growth and lower margin peers. We opportunistically took advantage of the low stock price to repurchase approximately 790,000 shares between April 1st and July 31st for $120 million. Since July 1st of last year, we have repurchased approximately 2.3 million shares representing approximately 4% of total shares outstanding. Nearly 2 million of that has been repurchased since November of last year. Earlier this week, we increased our buyback authorization to 1.5 billion and extended it for another two year period. We will continue to be opportunistic buyers of our stock if and when we see dislocations in valuation relative to our peers. During the second quarter of 2024, We paid over $21 million in cash dividends, and earlier this week the Board approved our next quarterly dividend of 37.5 cents per share, payable in mid-September. Now let me turn to guidance. We continue to execute on several strategic initiatives and remain on plan to achieve the 10% growth and 39% adjusted EBITDA margin that we guided to at the beginning of this year. For fiscal 2024, now that we have more visibility into the remainder of the year, we are narrowing our revenue guidance range with revenue expected to be in the range of $1,860,000,000 to $1,875,000,000 or approximately 10% year-over-year growth at the midpoint of the range. We are raising our expected adjusted EBITDA range to $727,000,000 to $737,000,000 representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range. For the third quarter of 2024, we expect total revenues in the range of $444 million to $449 million, representing a growth rate over the comparable prior year period of approximately 10% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $155 million to $159 million, representing an adjusted EBITDA margin of approximately 35% at the midpoint of the range. We have a strong balance sheet, strong free cash flow, and significant liquidity. We will continue to invest in areas that will bolster our competitive position and strengthen our client ROI through automation and the user experience. With that, we will open the line for questions. Operator?
spk07: Thank you. We will now begin the Q&A session. If you would like to ask a question, please press star one on your telephone keypad. If for any reason you would like to remove that question, press star two. Again, to ask a question, press star one. And as a reminder, if you're using a speakerphone, please pick up your handset before asking a question. And in the interest of time, we ask that you please limit yourself to one question, and we will pause here briefly as questions are registered. The first question is from the line of Ramo Lenshow with Barclays. You may proceed.
spk01: Hey, thank you. And Greg, all the best. Well, I guess we still have a few quarters. My question is around Betty. Chet, in your prepared remarks, you talked about increased inbound. Can you talk a little bit about the perception that Betty now has in your installed base, and I'm thinking about the whole installed base, and how it's turning into like a a sealed tool as the industry is understanding the benefit of that for its own business, but also for the employee base. Thank you.
spk06: Sure. And so, you know, new clients, and everyone, by the way, everybody does get a question and a follow-up. He didn't necessarily state that on the call. But Rhymo what's happening with new clients coming in, that's why they're coming in to use it. I mean, they're coming to Paycom to actually utilize Betty. I did talk about a client on the call who had been with us for six years. They have 2,500 employees. They implemented Betty and you know, they were able to reduce their payroll department by half. And it went from four days for them working on payroll to, you know, mere hours. And so, you know, within our client base, we continue to meet clients where they are today. as we work our client value achievement strategy to help them maximize the most ROI with where they are today. And then as far as new clients coming on, it's been no change. I did talk about on the call how we've had more unit sales this year than what we have in the past. And so our sales staff's doing really good in our go-to-market as well.
spk01: Okay, perfect. Now that I'm allowed to follow up, may I squeeze one in? You talked about the sales reps that were added this quarter, like a record number. How do you think about that cadence on the hiring side, especially on sales? If you think about what you're seeing in your installed base and you think about the economy, how do you think that will progress? Thank you and congrats for me.
spk06: Yeah, so we're better staffed in sales than what we've been in probably five or six years. And what I mean by that is having uh, all, uh, teams, uh, with the sales manager in it, fully staffed, and then just the number of staff that we have on each. And so, you know, uh, Amy Vickroy took over sales, uh, and had been with us for 14 years prior to that. She took over sales in April and since that time has really got them in a position, us in a position on the sales side where, uh, we're strong from a staffing perspective. And again, our, uh, our sales tactics and techniques to be able to go out there and even sell more as we're differentiated in the industry.
spk07: The next question is from the line of Samad Samano with Jefferies. You may proceed. All right.
spk02: Thank you. And Craig, congrats on becoming a new grandfather. It's exciting news. Thank you. Maybe I'll start with you or for either one of you, but just as I think about the narrowing of the guidance outlook, what assumptions changed or what did you experience and what are you tweaking to get to that new narrow range? Is it a change in new business assumptions? Is it a change in CRR bookings, retention? Just help us understand the mechanics of the change going forward, especially considering that 2Q came in a little bit better than you expected.
spk05: Yeah, I mean, as we came into the year, I mean, our plan had a wide range of initiatives and opportunities. And, you know, the high range had assumptions depending on some timing and the magnitude of some of those initiatives. So, you know, some of it was timing, and now that we have more visibility during the year and it's progressed, you know, we're going to narrow that range.
spk02: Understood. And then maybe, Chad, if I could follow up on Ramo's question about the sales hiring and you talking about capacity, should we think about that as maybe a leading indicator, the hiring that you just did in terms of what you're seeing in the market, either opportunity increasing and you hiring behind that, or is this hiring in anticipation of just maybe help us understand what type of signal that suggests, especially because we haven't really gotten an update on on office opening disclosures in a while. And this seems like a pretty important development.
spk06: Yeah, I mean, I would say that, you know, I've always felt like we've had the best sales organization. I think having the best products part of that, you know, we focus very hard on sales this year. We were very focused on it and what we wanted to accomplish with it. And, you know, being fully staffed does allow us to get to, the opportunity to be able to open up offices, again, when it's right for us. Right now, we're really focused on unit growth and sales skills development. Second quarter, we sold 24% more units than what we had sold second quarter the previous year. That's but one data point that Amy just took over in April. That's helping, and being staffed really helps with that. The more people that you're staffed with, the more you're going to sell. We're having a lot of success right now with the CELS group, and staffing's a big part of that.
spk07: Next question is from the line of Mark Marcon with Bayard. You may proceed.
spk08: Hey, good afternoon, and thanks for taking my questions. And let me add my congrats, Craig. That's huge in terms of being a grandpa. That really is. Thank you. Wanted to ask a little bit about, you know, some of the investments that you're making, Chad. Can you talk a little bit about, you know, the investments behind service as well as R&D? And, you know, specifically I'm looking at, you know, the gross margins and trying to think through, you know, you've ramped up the investments. It sounds like the NPS scores are going up as a result. Um, how should we think about, you know, the further pace of the investments, you know, both in terms of cost of service, as well as R and D, um, and, and how that's going to unfold over the course of the year. And then I've got a follow-up.
spk05: Yeah, Mark, I'll take the gross margin part of that question. You know, one thing on the gross margins, like you mentioned is a head count, but this quarter, uh, we, we brought our fifth building, uh, at corporate online. And so we saw an increase in the depreciation both on the building and on the equipment and furniture and fixtures that related to that building. So part of that gross margin was the additional depreciation, which also hit other lines of depreciation in the income statement.
spk06: And I'll kind of add on to that. I mean, from a hiring perspective in operations, I mean, we're hiring. So we're open for business. We're hiring there. Again, we only have 5% of the market. We have a differentiated product. We're focused on our sales methods. We're focused on our service and, of course, heavily, heavily focused on product, which leads to our R&D expense. I know that that jumped up in there in the second quarter, but that's because we're putting out a lot of product. As I said on the call, we've put out twice as much product release this past month than we did in January. January was also a good month for product releases and so, you know We sell our product. I mean our products were all our values derived from from our clients And so it's just very important that we're always focusing on that. We have very ambitious goals in regard to our product as well and so you know, but we're also mindful of our spend and you know, we're mindful of having quality revenue and that generates a strong bottom line. And so all that's included when we go through this for what we're going to budget and spend.
spk08: Great. And then it sounds like, I mean, with a 24% increase in terms of units sold so far year to date, is that part of the reason why we would anticipate seeing an acceleration with regards to the revenue growth in Q3 relative to Q2. Just wondering how, you know, how baked in is that as opposed to, you know, hoping for additional incremental sales from the new salespeople?
spk06: Sure. So let me correct one thing. 24% is the unit growth for the second quarter over prior second quarter. Year-to-date, we're about 15% in unit growth. I was just making the point since Amy's taken over. Now, I will say, so far for third quarter starts, July starts, which are always the largest of a quarter, you know, your first quarter month is the largest revenue of any one quarter. Our July starts are up 40%, you know, from a revenue perspective. And so, again, these are but one data point that, you know, It's from where we're starting. And, you know, we get to start with the best product, we get to start with the best sales training, and we get to start with the best service model. And so for us, it's a continuation of working our 2024 plan into next year.
spk07: The next question is from the line of Joshua Riley with Needham. You may proceed.
spk03: Yeah, thanks for taking my question. Just wanted to understand better with the better new customer activity, but the lower, the high end of the guidance is slightly lower. How should we think about, you know, the impact from the payment, you know, the extra run for payroll runs revenue coming out of the model? Has that been in line with your expectations? I just wanted to understand if there's any other impact to the high end of the guidance. Thank you.
spk06: Yeah, I would say all of the current client factors that we discussed even, you know, at the end of 2023, you know, those still exist today as far as additional payroll run opportunities and efficiencies gained when someone uses our product correctly. And so all those factors continue. to exist, but we also have many mitigating factors that we're able to gas and pull the levers on. And again, we have a lot of confidence in what's going on with both our sales organization, our service organization, and of course our product with what gives us confidence as we head into the end of this year and then as well as 2025.
spk03: Got it. And then last quarter you discussed getting better utilization of modules that have already been sold to customers.
spk06: any update there in terms of getting customers to maybe utilize the modules that have already been sold at a faster pace than what was we've seen over the last year thank you and so yes you know anytime we focus on something you know we're going to have some results from that we've been focused all year on the client value achievement strategy which does include meeting clients where they are and helping them achieve that ROI. It's impacting our service model to a positive, and it's impacting our net promoter scores. And those are commitments that we're not going to be backing off of.
spk07: The next question is from the line of Steven Enders with Citi. You may proceed.
spk00: Hey, great. Thanks for taking the question there. I guess maybe just kind of pull it on the last couple lines of questioning, just How was kind of the back-to-base motion kind of trending? And I guess, you know, on the back of what sounds like solid new units coming on board, just how are you feeling about that back-to-base motion and kind of what that's implying for the growth outlook versus what you were expecting before?
spk06: Yeah, you know, my opinions on that haven't really changed. I mean, it's very important for us to meet each client where they're at and make sure that they're utilizing the product. to get the full value of it. And we're still very focused on that. I mean, you look throughout the history of Paycom, we've sold a lot of product and it's very important that clients are utilizing it the right way to get ROI out of it. There's a lot of things we're also working on in product and developing and releasing that also helps with that. And so, it's not like we've abandoned working with clients to be able to help them purchase new modules from us that can help them drive that roi but we have changed the game a little bit in making sure that uh you know we're doing our part to make sure that clients are achieving uh the level of roi needed uh for their satisfaction and so you know that really hadn't changed for us as far as what we're doing uh throughout 2024 and what we're focused on here okay that's um that's helpful and then i guess maybe is there an update on
spk00: kind of a Betty penetration or, you know, adoption so far from versus the last disclosure?
spk06: Yeah, it continues to go up every month. I mean, you know, we're adding, and again, we're adding more and more clients and each client that starts, they're starting with greater Betty usage than we have in the past. And so, and those that are using it and have been using it, it continues to go up. And so, you know, with good technology, that's easy to use usage continues to to move forward. Of course, we do have a percent of our client base still that may not be receiving the full benefit that it may have to offer at this point, just because it's not the right time for them or what have you, or it doesn't fit specifically with their initiatives. And so those clients, we're meeting them where they live. And you know, sometimes they do come on. Again, I talked on the call about a 2,500 employee company that finally said yes. It reduced their labor cost in regards to working the payroll system by half. And they went from four days of working on payroll to merely hours. So that's available to everyone out there. But again, we're servicing clients where they are right now today. And that's what we're focused on. And we'll move forward with clients on their timeline, not ours. And then when it comes to new prospects coming in, we want them to receive the full value that we have to offer so that they can achieve that ROI, which is available only through Betty for new clients.
spk07: The next question is from the line of Kevin McVeigh with UBS. You may proceed.
spk09: Great. Thanks so much.
spk06: database count, you know, from that perspective. And we're furthering Betty as well. I mean, Betty's not the same product it was at the first of the year than what it is today. And so, you know, we're continuing to advance all of our solutions with automation.
spk05: And then with the extended buyback, you know, is there any way to think about approach around that relative to, you know, there's been some
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