Paycom Software, Inc.

Good afternoon. My name is Hillary and I will be your conference operator today. At this time, I would like to welcome everyone to Paycom's second quarter 2026 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press Thank you. Thank you.

Thank you and welcome to PACOM's earnings conference call for the second quarter of 2026. 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. Thank you very much. Thank you. Thank you for joining us. 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 founder and CEO. Chad?

Thanks, James, and thank you to everyone joining our call today. I'll briefly comment on some of the new product launches and achievements so far this year, Then I will pass the call over to our president, Shane Hadlock, and then Bob will review our second quarter results and pull your guidance. We will then take questions. Let's get started. We delivered another solid quarter with results coming in ahead of expectations. The benefit of our software's full solution automation, coupled with world-class service, continue to drive industry-leading ROI, which is resonating in the market. With our strong first half results, we are well positioned to exceed our initial 2026 plan on both a revenue and profitability basis. Demand for automation is increasing, and our platform remains the most intelligent solution in the industry. Thanks to our early focus on data integrity and consolidation, we continue to expand our automation capabilities with AI and automated decisioning to deliver even more value to our clients. Earlier this year, we announced the release of our Career and Succession Planning Solution, and we are seeing solid client adoption. This is another automated product that equips leaders with a solution to more easily identify and develop talent, ensuring organizations are better prepared for the future. With this product, organizations have reliable data to discover workforce talent gaps and assess talent readiness. A client of ours with over 500 employees who is already using our performance and Paycom Learning products added career and succession planning. And for the first time, they have all key positions and successors identified. They were very pleased with how quickly they could identify leadership gaps and fill them with people who were developed to step into the roles. Clients are thrilled with this new functionality and the automation it creates for career development and succession. In July, we released our latest automated product, Asset Management. This solution enables businesses to manage their physical and digital assets, which represent one of their largest budgetary spends, ensuring those investments are deployed, tracked, and recovered through automated software. The launch of asset management expands our capabilities into an entirely new multi-billion dollar TAN that fits perfectly within our software ecosystem. By combining asset management with the automated tools already in the Paycom system, we help our clients strengthen the security of their assets, bolster compliance, and reduce lost property. Not only can organizations track all of their assets across their locations, but they can also identify the exact resources a position requires, which ensures a consistent deployment and retrieval of all company assets. Even though it was just released a few weeks ago, client feedback has been very strong and they're already adopting this new technology. Asset management marks the 45th product we have developed, hosted, distributed, and serviced over our nearly 28 years in business. We take great pride in our ability to consistently release industry-leading technology that generates tremendous ROI for our clients. Now I would like to turn the call over to Shane Hadlock. Prior to his role as our president, he served as our chief client officer where he was instrumental in increasing retention, driving world-class service, building strong groups of leaders, and delivering tremendous automation across the organization. With that, let me turn the call over to Shane.

Thanks, Chad. We are driving innovation across our industry, and this quarter we released Project ARC. Project ARC was the largest system-wide release we have had in our company's history. This new release fundamentally changes the way clients and their employees experience pay comms. Clients love the new scalability and customization. This new release is each user a unique experience, helping them quickly find the information and action items most relevant to them. Our clients say that their managers are raving about how customizable the system is, making it easier for them to do their jobs. One of our clients with a few thousand employees said, that they were impressed with the new Arc release because it provides great customization and performance for their employees, managers, and organization. In addition to the new customizable features, Project Arc included significant updates to enhance the performance, scalability, and functionality of our software. These changes to system performance and scalability have produced an experience for our clients that is much more efficient. In fact, a client of ours with over 10,000 employees reported their system performance increase by 4x. Client feedback has been incredible, and they are enjoying the benefits of this customization and improved scale, making the industry's most intelligent solution even more powerful. Our award-winning AI solution, iWant, continues to accelerate speed to value for our clients by providing them with system intelligence that automates events and tasks within the system. For many new employees and new users of our software, utilizing iWant is their first interaction of our software, making it easier than ever to use. As we roll out more AI and automation across the platform, we are driving measurable value for our clients and their employees. iWant has been a game changer for our clients and the industry. I am proud of our team and all the work we have accomplished over the course of the year to drive efficiency and client satisfaction. Across the board, we have great talent at Paycom, especially in the leadership team. We have a deep and experienced bench with institutional knowledge and a competitive mindset that sets us apart. I would like to thank our employees for their contributions to an excellent first half of 2026 and the robust results year to date. We are building strong momentum on a variety of new products to further automate businesses. During the quarter, our product and culture received several accolades. Paycom earned the 2026 top-rated award from Trust Radius, which reflects strong client satisfaction across multiple HR and payroll categories. I was also pleased to see Paycom was named to Newsweek's Greatest Workplaces in Tech, and our sales organization was included in Selling Power's 60 best companies to sell for. These awards highlight our differentiated product set, client satisfaction, and elite sales program. This is an exciting time to be part of Paycom. With that, let me turn the call over to Bob.

Thank you, Shane. Second quarter results were strong with total revenue of $531 million. up 10% over the comparable prior year period and recurring and other revenue of $505 million up 11% year-over-year. Revenue strength in the quarter was broad-based, reflecting consistent product demand conditions and increased client satisfaction. Our focus on process automation and leveraging our own technology is driving increased productivity across the organization that is fundamentally strengthening our business. Our efforts over the last several quarters are driving sustainable margin expansion and earning growth. GapNet income increased 20% in the second quarter to $107 million, or $2.34 per diluted share. based on an average of 46 million shares outstanding. Non-GAAP net income for the second quarter was $128 million, or $2.78 per diluted share. Adjusted EBITDA in the second quarter came in at $235 million, representing a 320 basis point year-over-year margin expansion to 44.2%. Based on the strength of our results in the first half, we are well positioned to deliver industry-leading EBITDA margins, record free cash flow, and accelerated earnings per share growth in 2026. We continue to identify what we view as a valuation disconnect in the market during the second quarter, and opportunistically, we purchased approximately 2.6 million shares of common stock or approximately 6% of our shares outstanding for a total of $346 million. Over the first six months of the year, we reduced shares outstanding by 20% by repurchasing nearly 11 million shares of common stock, returning approximately $1.4 billion to stockholders. We ended the second quarter with approximately 44 million shares outstanding and $1.66 billion remaining on our buyback authorization. We also paid approximately $18 million in cash dividends during the second quarter. On August 3rd, the Board approved our next quarterly dividend of 37.5 cents per share, payable in early September. Turning to the balance sheet, we continue to enjoy a very strong liquidity position. We ended the quarter with cash and cash equivalents of $198 million and have drawn down a total of $900 million on our $2.1 billion revolving credit facility to support our year-to-date stock repurchases. The average daily balance of funds held to clients was approximately $2.9 billion in the second quarter of 2026, up 9% over the prior year period. Now, let me turn to guidance for 2026. Based on the strength of our first half results and more visibility heading into the second half, we can confidently increase our revenue and adjusted EBITDA guidance ranges. We expect total revenues to be between $2.197 billion and $2.212 billion, or between 7% and 8% year-over-year growth. We now expect full-year recurring and other revenue to be up 8% to 9% year-over-year. Included in total revenue outlook is interest on funds held for clients of approximately $105 million, which assumes current rates hold for the remainder of the year. Finally, as we continue to benefit from the impact of our automation initiatives, full-year adjusted EBITDA is now expected to be between $1.007 billion and $1.022 billion, representing a record adjusted EBITDA margin of 46% at the midpoint of the range. Our strong first half results have bolstered our conviction in our 2026 plan and in our full solution automation strategy. We are executing well across the organization. Our clients are increasingly pleased with our platform and their ROI achievement, and we continue to opportunistically return value to stockholders through our capital allocation strategy. We'd like to thank our employees for their commitment to our vision and their contribution to our strong first half results. With that, let's open the line for questions. Operator?

At this time, I would like to remind everyone in order to ask a question, Thank you very much.

If I look through my model, Chad, it's like the biggest speech you had for a while. Revenue accelerated very nicely. Was there anything special in this quarter, like one of factors or something that drove that? Can you speak to that strength? I mean, you gave some of the pointers already that I have a lot of clients kind of wondering, wow, this is really, really good. So what happened here? And then I had one quick follow-up for Bob.

No, it was broad-based, nothing new, all from the same buckets that we've always had in the past.

Okay, perfect. Anything on the new products contributing already, or is this just – well, it seems to be almost too early for that.

Yeah, I mean, obviously some of the products that we produced last year are starting to contribute to that. We did release two significant products, I would say, in the last three months – Thank you for your question. Your next question comes from the line of Samad Samana from Jeffries. Your line is now open. Good evening and thanks for taking my questions.

Chad, you guys have always had a very strong sales distribution team. I'm curious, you know, you've talked a lot about AI and the impact of solutions you're creating for clients. I'm curious what you guys are doing from an internal AI enablement perspective for your sales organization and how that's driving productivity and how you might think about that influencing sales office expansion or headcount growth. And then I have one follow-up.

Yes, you know, I don't know that I would say AI as much. Definitely AI helps us in the prospecting and identifying certain prospects and maybe what trends they had before. You know, we are a high-touch sales organization, so we do that high-touch, you know, sales model. I will say that, you know, over time, especially over the last couple of years, including into this year, You know, we have allowed our clients to buy in-app, and so it does somewhat circumvent the book sales process as they can buy directly from us. Career and succession planning is actually a product that allowed for that.

Understood. And maybe just a follow-up in terms of the capital allocation, especially given kind of the very aggressive buyback in the first half of the year, and I think that's paid off in spades. Should we think about capital allocation being a bit more balanced going forward? Should we think that the buyback remains the top priority? Just help us think about kind of building dry powder versus the level of buybacks we've seen in the first half of the year. Thank you again for taking my questions.

You bet. When you think of CapEx, first, I mean, I kind of want to frame it, you know, this way. You know, last year we spent over $100 million to prepare data centers to host our own AI models. And this year alone, that spend will lead to about $100 million savings in R&D and another $30 million or more in I want response fees that would have come from a third party. And, you know, as an added bonus, We use some of the excess capacity to improve the performance of our systems with greater processing power. So we do believe last year's investments will produce even greater value as we move into 2027. And then, Bob, do you want to comment on the CapEx?

Yeah, I do. Let me comment, Samad, too, on the CapEx. It will be a little more normalized than in the past, but when we look at the results, especially as it flows down through EBITDA I want to go ahead, that flows all the way through to free cash flow, so I want to kind of make a one-time comment on free cash flow, given how the market has consistently underestimated the strength of our business model over the last few quarters. What I would tell you is that based on the strong first half results and what we have visibility into for the rest of 2026, we do expect free cash flow to exceed $650 million dollars in 2026. And then maybe some cap tax, approximately 6%. And then I'll give you the tax numbers, too, for the models. Gap tax rates, 29%. Non-gap tax rates, 27%. And stock phase comp is 3% of revenues in 2026.

Thank you for your question. Your next question comes from the line of Steve Enders from Citibank. Your line is now open.

Yeah, I guess I just want to follow up on the free cash flow commentary that you just gave. I guess I want to understand, I guess, what are the levers that are really, I guess, kind of supporting the improved free cash flow outlook for this year? And then, I guess similarly, is there a framework to maybe think about Steve et al. to free cash flow moving forward into future years.

Yeah, Steve. So, last year, actually, at your conference, we talked about we were conscious of the fact that EBITDA margin and free cash flow margin had to begin to get closer and closer. So, what was driving it this year, and it is sustainable, was it was broad-based, too. It was efficiencies and how we... We do our processes and efficiencies in our labor workforce and we'll continue to drive those efficiencies in the future.

Okay, that's helpful. And then on sales productivity rates, I know there was a big focus tail end of last year to retrain the sales force. I guess where are we at in terms of and sales productivity trends and the impact that we train is having. And would you say we're kind of back to, you know, typical levels at this point or just how are you kind of thinking about the incremental improvement that can come from sales productivity?

Sure. With an enhanced system, you know, it did require somewhat of an enhanced sales process just to make sure that, Our clients are able to achieve the full ROI that's available to them, and we want to make sure we're presenting that to them on first call. And so sales has been doing great. As a reminder, we have many reps still going through training. And also, as a reminder, we expanded our teams of eight to teams of ten. So you have 100 of our new sales reps. Over 100 of the new sales reps are also additional headcount for sales.

Thank you very much for your questions.

Thank you very much for your questions. Your next question comes from the line of Ramo Lenshow from Barclays. Please go ahead.

Hey, I think I asked my question already, but the follow-up questions I wanted to have for Bob, if you think about your rate assumptions for the year, like obviously there's a debate Your next question comes from the line of Jason Salino.

from KeyBank Capital Markets. Your line is now open. Please go ahead.

Great. Thank you. Maybe just, you know, following up on Anders' last question around sales productivity, with the acceleration that we're seeing in recurring, how much would you credit the performance in the second quarter being from, you know, the better training from last year and the expanded headcount?

Bookings came in as expected. We have two categories of book sales. One is sales to new prospects, and we also have sales to current clients. As I kind of mentioned earlier at the beginning of the call, over the last couple of years we've implemented more in-app purchase capabilities, and that somewhat skips the book sales process. But bookings have come in as expected, and we would expect as we add more and more reps to the field, And as they grow those pipelines, we would expect that the additional rep headcount would be accretive to future book sales.

Great. And then maybe just a quick one for Bob. When we think about the second half, the recurring growth profile, anything we should think about in terms of seasonality with Q3 or Q4? Thank you.

Now, this is my favorite question. Thanks, Jason. The calendars. The seasonality, you have probably one more Wednesday, maybe in the third quarter, and then you have a little bit of tough comp in the fourth quarter. But as you know, we look at that and smooth that out over the two quarters, so we look at it six months. Perfect. Thanks, Chad. Thanks, Bob.

Thank you for your question. Your next question comes from the line of Mark Markin from Baird.

Hey, good afternoon and congratulations on the strong result. I had a couple of questions. One, Chad and Shane, I was just wondering, how would you describe the current pipeline? I went to SHRM, I've gone to a couple of other, you know, smaller conferences where you appeared and your booth was this packed. And it seems like, you know, there's a lot of interest in the automation story. And so I'm wondering, what's the shape of the pipeline now? You know, your revenue projections, you know, assume a little bit of decel relative to the first half. And I know you're trying to be conservative, but it seems like you've got a lot of really good momentum right now. So I was just wondering if you could talk about that and potentially also along those lines, you know, what you would expect from the new products in terms of what they can add. And then I've got a follow-up just on the financials part.

Pipelines remain very strong. In a perfect world, your pipeline turns into backlog of clients ready to implement, and so that's what we look for. But pipelines remain strong, and they'll continue to build as more and more reps enter their territory. As far as product contributions into the future, we've done a lot of development in the last year, and we've got a lot more that will be coming out in the next year. The one thing that hosting our own models has done is really allowed us to move very quickly in dev. It's also saved us on token expense, which we do have token expense, but we have a lot less of it now that we run our own models internally, and it's also allowed us to deploy our AI engine like I want, if you will. I think someone would be hard-pressed to find a client of ours that hasn't used I want, and so... I think as you look into the future, we'll continue to be adding products that add value to the client, and then those, of course, will be hosted by us. We've had 45 products now that we've developed, released, hosted, distributed, and serviced. We've gotten really good at that process, and I think that it's become a little bit easier now. to do some of those things. And so it's an opportunity for us to accelerate that as we look into the future.

That's great. And then just as a follow-up, can you talk a little bit about, like, the R&D expense? You know, it went down fairly significantly here in Q2 at the same time that the G&A actually went up a little bit. And I was just wondering, is that just a change in the allocation, or are you getting more efficiencies? Obviously, the whole total, you know, you're seeing great improvement in terms of the margins, which is terrific. But just wondering about the pieces moving around.

From an R&D perspective, I can take that, but I'll more take the G&A. I mean, we are developing differently. and many more. You know, from an R&D perspective, I would say that we've become much more effective. And that has also led to great efficiencies on that line. And then Bob, if you want to.

On the G&A, it did go up a little bit. Biggest categories probably around professional services, and some of that was related to, you know, a one-time expense. We expanded and renewed our line of credit. There was a great interest in that, so we were proud of it. People believe in a robust business model, and that's what led to some of that in the GNA.

Thank you for your questions. Your next question comes from the line of Jared Levine from TD Cohen. Your line is now open.

Thank you. It was good to hear that bookings came in line with your expectations in 2Q. I guess, have you seen that inflection that you were hoping for in terms of when you went into this year? Just directionally, any kind of color in terms of kind of the momentum here would be helpful on the bookings front and how you're kind of seeing things progressing to 3Q so far.

Yeah, I mean, I would say that my expectations are always higher than, you know, what could maybe even reasonably be achieved. But what I will say this is, yes, Bookings came in as expected. And also, just a stat to share is that our new reps coming out of training are getting up to productivity much faster than they ever have in the past, and we're having great success with that. And so, you know, all this bodes well as we look into the future.

Got it. And then in terms of we've seen multiple of your competitors pushing more into managed services, I guess how are you thinking about this opportunity, if at all?

You know, I think we look at everything that has a positive impact on a client and can produce a strong ROI for them. And we also try to automate everything that we can. You know, and we think that's very important, asking the questions why and what are you going to do with that so that we can go ahead and complete it for them. So we're going to continue to focus on that. You know, we do have pre-employment services. I think we're probably one of the largest pre-employment service companies in the U.S. I think at one time we were about, you know, fourth. That side of our service business continues to be very strong and is up a measurable amount for this year.

Your next question comes from the line of Daniel Jester from BMO Capital Markets. Your line is now open. Please go ahead.

Great. Well, thank you for taking my question. Maybe first on I-1, is there anything you can share about sort of how that ramped from a usage perspective in the quarter? And as you go back to customers that have been with you for a long time, have you seen any change in their willingness to adopt I-1 and all of the functionality it provides?

Yeah, not really any change. I would say the more you work with a consistent model that delivers accurate responses, the better you get at knowing how to ask it a question. And, you know, the better you get at asking questions, the less time it takes for you to get that response. And in our environment, you know, your consecutive responses per second, you know, that helps that become more efficient as well. We continue to see great uptake. Nobody goes backwards in technology once you're used to using something. Once you're there, nobody steps away and goes backwards from that. We've said in the past that IWANT is the predominant way that new employees experience our system. As we completed Project ARC, it put that even more in the spotlight. IWANT will continue to grow in capability, but It's very also important that we be accurate. You know, we come up with AI functionality all the time and agents all the time. And I always have the same question for the people that create it. I'm like, well, is it cool or is it accurate? You know, and if I don't get an accurate response, I mean, you know, we continue to work until we can produce that. And so we've been focused on that. And IWANT does deliver a very reliable response. Your next question comes from the line of Jacob Smith from Guggenheim.

Your line is now open. Please go ahead.

Hey, thanks for taking my question. Revenue from customers above 1,000 employees has grown faster than total in past quarters, so I was wondering if you could provide an update in what you're seeing there. and as the sales org goes to market with full solution automation pitch, are you seeing average deal size or module count at initial end trend higher this quarter, particularly upmarket?

I wouldn't say that the profile of size of clients changed in the second quarter here. I think we continue to produce value across the board regardless of the client size, industry or locations.

Okay, and just as a quick follow-up, Chad, you talked about at the beginning of the year the goal of expanding sales capacity across offices, and on the last call you mentioned new reps were coming through, training and ramping faster than pretty much any class in a number of years. Can you give us an update on where you stand on that capacity expansion, or are you at the pace of hiring you'd like to be, and is this year more about driving productivity higher with existing reps or ramping reps?

Both. I would say it's both. Definitely productivity with existing reps continues to increase. With new reps, it takes a second. Your initial productivity gains you're going to get are always going to be with your current reps. New reps, it takes a second. They can get the value proposition. They understand the pitch, but then you go out there and you run into some situations that you have to and it takes sometimes a new rep a little bit longer to get that. So they stay in the game, and then they start having success, and then that confidence starts to build, and then they start selling more and more and more. And so our existing reps are going to obviously outsell a lot more than our new reps, but we do have so many new reps that we put in the field that we're very excited about what that's going to mean for us. as we have both throughout this year and then as well as we go into next year.

Your next question comes from the line of Kevin McVie from UBS. Your line is now open.

Great, thanks, and congratulations on the results. I mean, it feels like the business is structurally different, right? I mean, the pacing of the margin, the revenue you're delivering, is that primarily to stand up for the data centers last year. Are you in the early phases of the AI across the expense structure with more to come? And from a revenue perspective going forward, is it going to shift to more of a fixed with a variable component as opposed to PEPM? Any way to think about how the business model will be impacted? Clearly, you're in a good position and able to leverage it, but just anything... The results have been and continue to be exceptional.

We started using it in areas of our service, how to identify things. And so we're becoming better and better at it. I wouldn't say we use AI for AI's sake. I mean, automation matters, and there's a great amount of accuracy you get with automation. And in our industry, you only get points for being accurate. And so that's always been a focus of ours. So we see that to continue. What's the other question from a fixed variable? I'm not 100% sure on your revenue question except to say, you know, our pricing model does follow somewhat industry norm. It is proprietary to us. It does follow industry norms, and we do look to deliver to our clients the greatest amount of ROI for that spend with us.

Thank you for your question. Your next question comes from the line of Babin Shah from Deutsche Bank. Your line is now open.

Great. Thanks for taking my question and congrats on the strong quarter. It's nice to see all the new product releases. As you move into other adjacencies such as asset management, how do you have to think about adjusting maybe the go-to-market motion to account for the different potential end buyers that you might be dealing with outside of just the HR department?

Yeah, I mean, we've had spin management for a while. We have other areas that impact the accounting department or the office of the CFO, if you will. I mean, there's never been a deal that we've ever done where we weren't integrating with a general ledger system and what have you. Also, I mean, CFOs care about labor and what HCM does. Thank you for joining us. tracking system as well. And so we feel like that folds in nicely with what we're selling anyway.

Got it. And then just a quick follow-up for Bob. Just in terms of the strength you saw in the first half of the year, especially on the growth side, why not invest more into the business just given what you're seeing happening versus kind of slow to the bottom line and that strong even thought that we saw? You guys got this.

Well, we are continuing to invest in the business in different ways, and you'll see that, and that's why we believe we're just smart about how we do it and it's sustainable. So, again, we are worried about the growth side and the efficiency side.

Thank you for your question. Your next question comes from the line of Patrick O'Neill from Wolf Research. Your line is now open.

Hey guys, thanks for taking my question. Just a quick one for me.

How would you characterize the client employment growth in the first half of the year and then maybe if the growth was positive, what was the benefit in the first half and what's implied in the guidance from here following the impressive raise to the full year outlook?

Thanks. I mean, client employment growth would have just been stable, same consistent with as it's been every year in the past with the exception of when it went down about 14% during COVID and then it came right back not long after that. It may have been a little more than 14% that it went down, but really since that time we've had stability and we would expect that and all of our guidance going forward would expect stability in that.

Thank you.

Your next question comes from the line of Alan Verkovsky from U.S. Bancorp. We are just opening your line. Your line is now open.

Hey, guys. Given the sequential decline in OpEx, how are you thinking about Paycom's headcount growth through year-end? You mentioned earlier you're seeing labor efficiencies, so more color there would be helpful.

Sure, so our focus is product automation, and that drives cost efficiencies in many areas, including labor. We update our employment numbers annually, and we had 5,770 employees as of our last update that we gave on the February earnings call. We're focused on client ROI achievement, not necessarily our cost. The ROI achievement is higher with automation, and while there's no limit to what can be automated. There is a limit on labor efficiency as we do believe there's a strong human aspect to developing, selling, converting, and servicing business.

Thank you for your questions. This concludes the question and answer portion of today's call. I will now turn the call back to Mr. Chad Richison for closing remarks. Thank you.

Thanks, everyone, for joining the call today. We look forward to speaking with many of you at the Deutsche Bank Conference on August 26th in Dana Point and the Citi Conference in New York City on September 8th. I want to thank our employees for their contributions over the first half of the year.

This concludes today's conference call. You may now disconnect.