Paycom Software Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2022

There are 14 speakers on the call.

Operator

Good afternoon, and thank you for attending today's Paycom Software 4th Quarter 2021 Results. My name is Austin, and I'll be the 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 our host, James Sanford with Paycom. James, please go ahead.

Speaker 1

Thank you, Welcome to Paycom's Q4 2021 earnings conference call. 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 these 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 ks.

Speaker 1

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, Adjusted gross profit, adjusted gross margin 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 Penn, Paycom's President and Chief Executive Officer.

Speaker 1

Chad?

Speaker 2

Thanks, James, and thank you to everyone joining our call today. We ended 2021 with a very strong quarter, and I'd like to thank all of our employees for the outstanding effort they put in To make in 2021 a great success. I will spend a few minutes on the highlights of our Q4 2021 results, Then I will review some of our notable achievements throughout the year. Following that, Craig will review our financials and our guidance, and then we will take questions. 2021 was a very strong year for Paycom.

Speaker 2

We extended our platform to the employee even further through innovations like Betty, Which enables employees to do their own payroll, and we are seeing very strong adoption and record employee usage as measured by the DDX. Strong demand continues to bolster our sales momentum and record new client sales in 2021 Have positioned us to deliver another year of rapid growth in 2022. For years, I have been predicting the end of the old model whereby HR and Payroll personnel's routine of inputting data for employees is replaced by a self-service model that provides employees direct access to the database. The old model is dying and that is good for both the business and the employee. Paycom is leading this transformation and we will continue to automate Processes that generate maximum ROI for our clients.

Speaker 2

Our 2021 Q4 revenue of $285,000,000 came in very strong, up 29% year over year. Our full year 2021 revenue of $1,056,000,000 grew 25% compared to 2020. Employee usage, which is at a record high, is a key driver of revenue retention. And I'm pleased to announce that Paycom's annual Revenue retention rate increased once again to 94% this year, which is a validation of the strong ROI our clients are achieving. Our full year 2021 adjusted EBITDA was 419,000,000 Representing an adjusted EBITDA margin of nearly 40%.

Speaker 2

The sum of our 2021 revenue growth rate And adjusted EBITDA margin resulted in us hitting the rule of 65%, reflecting the solid demand for our solutions and the profitability of our business model and was well ahead of our stated goal to reach the roll of 60. As you can see with our full Year 2022 guidance, we are starting strong with the rule of 65. Our marketing plan throughout 2021 continued to perform well, delivering strong demo leads throughout the year as we spend aggressively on advertising. More importantly, our sales teams are successfully closing these leads, which is the key driver to our revenue growth. In our 1st year as our Chief Sales Officer, Holli Perrault has executed fabulously on our sales plan, and I'm very pleased with the coordination we are seeing Across the sales and marketing organizations.

Speaker 2

We are capitalizing on the shortcomings of disparate HCM systems That are failing both the employees who struggle to use them and the businesses that struggle just to make them work. Our proven single database platform just Works better and we continue to differentiate ourselves with easy to use solutions that enhance the employee experience and generate Maximum ROI for our clients. In response to increasing demand in 2021, we expanded the upper end of our target client size range From 5000 to 10000 employees as we are seeing success selling to larger clients. We are also concurrently expanding geographically to meet the increased demand. In addition to the Manhattan office we announced a few months ago, We recently opened 4 outside sales offices in the following locations: Las Vegas, Jacksonville, New England in South Jersey.

Speaker 2

We have now opened 5 offices in the last 5 months. That said, I'd remind everyone that we still only have approximately 5% of the TAM today. So there's plenty of runway ahead to expand and continue to capture Market share. Paycom received national recognition from several organizations in 2021. Our latest innovation, Betty, Was awarded a top HR product of the year honor.

Speaker 2

As a workplace, we earned a top 20 ranking in best places to work in the U. S. By Top Workplaces, and we were named the top workplace in Oklahoma for the 9th consecutive year. We were also named the best company for women to work. These awards are a testament to our execution and thriving corporate culture.

Speaker 2

As of December 31, 2021, Our headcount stood at 5,385 employees, up 28% year over year As we continue to have great success attracting and retaining high quality talent to further bolster our future growth. Additionally, I want to congratulate the 2021 Paycom Jim Thorpe Award winner, Kobe Bryant from the University of Cincinnati. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, Who is one of the greatest all around athletes in history. Jim Thorpe also happened to be an Oklahoma. To sum up, We are executing well on all fronts with innovative solutions, high employee usage and increasing revenue retention.

Speaker 2

Robust market demand and our proven go to market strategy are fueling strong new client revenue momentum. I'd like to thank our employees for help making 2021 Such a strong year, and we are set up to do even better in 2022, and we're off to a great start. With that, I'll turn the call over Craig for review of our financials and guidance. Craig?

Speaker 3

Thanks, Chad. Before I review our Q4 and full year results for 2021 In our outlook for the Q1 and full year 2022, I would like to remind everyone that my comments related to certain financial measures Will be on a non GAAP basis. We ended the year with very strong results, delivering a milestone full year 2021 revenue total Of $1,056,000,000 up 25.4 percent compared to 2020. 4th quarter results were excellent with total revenues of $85,000,000 representing growth of 29% over the comparable prior year period. Our revenue growth is driven by strong demand, New business wins and adoption of recent new product offerings.

Speaker 3

Within total revenues, recurring revenue was $280,000,000 for the Q4 of 2021, Representing 98% of total revenues for the quarter and growing 29% from the comparable prior year period. We ended 2021 with nearly 34,000 clients, representing a growth rate of 9% compared to 2020. On a parent company grouping basis, we ended the year with roughly 17,700 clients, representing a growth rate of 10% compared to 2020. Total adjusted gross profit for the Q4 was $239,700,000 representing an adjusted gross margin of 84.1%. For the full year 2021, our adjusted gross margin was 85.1%.

Speaker 3

For 2022, our target adjusted gross margin range Is expected to remain strong at approximately 85% to 86%. Adjusted sales and marketing Expense for the Q4 of 2021 was $72,300,000 or 25.4 percent of revenues. Our marketing strategy in 2021 has been very effective at driving high quality demo leads and our outside and inside sales teams Have been doing a great job closing these leads. We plan to continue to invest in marketing in Q1 and throughout 2022. In addition, as Chad said, we have added 4 more outside sales offices, bringing the total outside sales office opening To 5 new openings in the last 5 months.

Speaker 3

We also continue to add inside sales personnel as we grow our sales organization to meet the demand. Adjusted R and D expense was $32,300,000 in the Q4 of 2021 or 11.3 percent of total revenue. Adjusted total R and D costs, including the capitalized portion, were $44,000,000 in the Q4 of 2021 Compared to $33,200,000 in the prior year period. We aggressively recruited talent in R and D throughout the pandemic, We plan to continue to invest in our future growth through innovation and new product development. Adjusted EBITDA was 109 point $6,000,000 in the Q4 of 2021 or 38.4 percent of total revenues compared to $84,200,000 in the Q4 of 2020 Or 38.1 percent of total revenues.

Speaker 3

For the full year 2021, adjusted EBITDA was 419 $300,000 or 39.7 percent of total revenues compared to $330,800,000 Or 39.3 percent of total revenues in 2020. Our GAAP net income for the Q4 was 48,700,000 Or $0.84 per diluted share versus $24,400,000 or $0.42 per diluted share in the prior year period Based on approximately 58,000,000 shares. For the full year 2021, our GAAP net income was 196,000,000 Were $3.37 per diluted share. Our effective income tax rate for the Q4 of 2021 was 30.4%. Non GAAP net income for the Q4 of 2021 was $64,400,000 or $1.11 per diluted share Versus $49,100,000 or $0.84 per diluted share in the prior year period.

Speaker 3

For the full year 20 21, our non GAAP net income was $260,400,000 or $4.48 per diluted share Versus $203,500,000 or $3.49 per diluted share in the prior year period. For 2022, we anticipate our full year effective income tax rate to be approximately 28% On a GAAP and non GAAP basis, with Q1 GAAP effective tax rate expected to be approximately 30%. Turning to the balance sheet. We ended the year with cash and cash equivalents of $278,000,000 and total debt of 29,000,000 Cash from operations was $319,000,000 in 2021, representing an increase of 40.6%, Reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately $1,900,000,000 in the Q4 of 2021.

Speaker 3

During 2021, we repurchased approximately 164,000 shares For a total of roughly $65,600,000 Through December 31, 2021, Paycom has repurchased nearly 4,300,000 shares Since 2016 for a total of nearly $488,000,000 and we currently have $266,000,000 remaining in our buyback program. Now let me turn to guidance. For fiscal 2022, we expect revenue in the range of 1,314,000,000 To $1,316,000,000 or nearly 25 percent year over year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $524,000,000 to $526,000,000 representing an adjusted EBITDA margin of approximately 40% at the midpoint of the range. We are starting this year's guidance at the rule of 65.

Speaker 3

For the Q1 of 2022, we expect total revenues in the range of $342,000,000 to $344,000,000 Representing a growth rate over the comparable prior year period of 26% at the midpoint of the range. We expect adjusted EBITDA for the first Quarter in the range of $161,000,000 to $163,000,000 representing an adjusted EBITDA margin of 47% at the midpoint of the range. 2021 was a very strong year for Paycom as a direct result of the investments we made. We will continue to invest in talent, Marketing, innovation, customer service and geographic expansion to meet the strong demand we are experiencing And to support our high expectations for long term future growth. With that, we will open the line for questions.

Speaker 3

Operator?

Operator

We will pause here briefly as questions are registered. Our first question is from Raimo Lenschow of Barclays.

Speaker 4

Thank you. Congrats to a great finish to the year. Chad and Craig, I'd like 2 questions. One more is on the retention rates. So 94% is kind of again up from last year, a very, very Strong number, especially considering where you're playing in the market.

Speaker 4

Can you talk a little bit about the drivers there? And is that kind of how are you thinking about this number going forward? And then the second question is where I got a lot of questions from investors was around the customer adds. Obviously, last year was especially with the pandemic, so you had like a crazy Big number there. That kind of moderated this year.

Speaker 4

Like how should we think about it, especially in light of your comments, Craig, around the investments on inside and outside sales? Thank you.

Speaker 2

Yes, Raimo. So starting with the first on retention, it was about 3 or 4 years ago that started to increase that rate. We've been 91% for 6 years straight. And then it jumped up to 92%. And it really jumped up once we started implementing employee usage products, we'd come out with the app, it went up.

Speaker 2

Then we looked at the year before the pandemic 2020, it went up again to 93%. Again, we had driven through the direct debt exchange. Having employees make those changes themselves, Increased satisfaction again for those clients as it increased the return on investment. 2020, we held the line at 93 and that had somewhat to do it to trailing Revenue trailing 12 revenue retention number, obviously 2020. We did have some retreat in our revenue, just the natural attrition That came from those employees being laid off or leaving their business during the pandemic.

Speaker 2

And then now in 2021, we've been able to increase it once Again, to 94%. In answer to that question, it's all really driven by usage. The more success a client has using our products, the greater The return on the investment they're achieving and that makes them want to stay with us longer. And so how high can it go? Obviously, at some point, you do Have to look at, you're always going to have a certain number of clients that could be bought, sold and merged.

Speaker 2

But I we're very ambitious with that number. We're seeing a lot of satisfaction across the client base. I don't I wouldn't necessarily say we're done with our retention aspirations, but we feel really good by being Raise it again. As far as the client count that you mentioned, in 2019, our parent company group and those are decision client decisions Grew by 6.5%, that client number. Of course, today in 2021, it grew 10%.

Speaker 2

Last year, it grew 18%. And that was really in conjunction with the fact that we added small business teams To sell small business units. We accelerated our advertising spend in 2020, Which generated a high volume of leads. A lot of those were beneath the 50 employee range. And so that's when we added several Teams to catch that and that really we benefited that from a percentage growth unit add.

Speaker 2

I would point out That in 2020, even though we did have around 18% parent company group growth from a unit perspective, Our growth per client billings per client annualized was roughly flat. And in 2021, That number is up, about 14%.

Speaker 4

Okay, perfect. Thank you. Congrats.

Speaker 5

Thank you.

Speaker 6

Thank you.

Operator

Our next question is with Samad Samana of Jefferies.

Speaker 7

Hi, great. Congrats. I'll echo that as well. Just a really great

Speaker 8

end to

Speaker 7

2021. So maybe, Chad, one just to follow-up on Raimo's question and you kind of touched on it a little bit there at the end. But if I think about The net adds that you've added in the context of the call it net new recurring revenue, you're getting to like an average customer size of new customers added like north $70,000 of average revenue versus like let's call Again, growth there. I'm just curious, is that a fair way to think about it that you're just signing customers that are even much larger today than in 21. And how should we maybe think about that just on the historical comparison?

Speaker 2

Sure. So it's been similar as what you've seen us tick up in the past. As we've continued to focus on larger clients that's driven that number up, we're having more success selling Larger clients. So you might say that the ones we're bringing in on average are larger than what we brought in in the past. We're selling more of them.

Speaker 2

So we're just having more unit counts at that level than what we've had in the past. And then obviously, we've continued to add product Into the mix, which also adds value to each deal that we bring in regardless of what size they're at.

Speaker 7

Great. And then maybe just a follow-up, Betty is impacting retention in a positive way. I'm curious if you can maybe Data on what the traction is in terms of getting the installed base to using Betty and how we should think about that progression In 2022?

Speaker 2

Yes. And so we're having a lot of success with the installed base using Betty. I mean, internally, there is a little bit of a process Change for our clients. You're moving things that you were doing after the payroll ends, the pay period ends. You're moving that to the beginning.

Speaker 2

But we continue to have success selling Betty, both into our current installed base. And as a reminder, All new business that we've brought on since July of last year all have Betty included In its pricing and usage expectation.

Speaker 7

Great. Thank you for taking my questions.

Speaker 2

Thank you.

Operator

Our next question is with Brad Reback of Stifel.

Speaker 2

Great. Thanks very much. Just a first quick one. Chad, can you remind us how many sales teams, both Internal and external you have today and maybe where that was a year ago? Sure, Craig.

Speaker 2

Yes. So outside sales teams, we're 54 now. And as we mentioned, we've added The 4 recent ones and then we added one towards the end of last year. So we've added 5 of those. And then in terms of inside sales teams, From our KPIs, we count the inside and the CRR group as one, but we've also announced that We've had over have 10 plus we're adding to the inside sales group.

Speaker 2

And so outside sales is at 54. I think right now, total outside sales teams Brad, the last time we added a sales outside sales team, we added in 2019, we added our New Orleans office. We did not add any in 2020. The end of 2021 is when we brought through Manhattan and then we continued on with 4 That's great. And maybe just following up to close the loop on The unit versus pricing dynamic, with these added sales teams, would it be right to assume that we could probably see a more even split in 22% with the 25% growth between unit and price or maybe even a little more unit?

Speaker 2

Not sure. We're not as focused on unit growth, I would say. I mean, obviously, we want to win Our deals, sometimes our unit growth goes up as it did in 2020 just because of the success we had With our inside sales group. Obviously, those deals have a smaller revenue contribution. So as we turned into 2021 and we had success selling in 2020 as well above our range, but In 2021, we raised our range because we continue to have so much success.

Speaker 2

So our focus continues to be the mid market, But we also have success below and that is really what contributes to the increase in unit count Are those small unit deals. Got it. Thanks very much.

Speaker 9

Thank you.

Operator

Our next question is with Mark Macone of Baird.

Speaker 10

Hey, good afternoon. Let me add my congratulations.

Speaker 11

With regards to the revenue per client increasing by 14%, How much of that is just because of the bigger clients that you're selling relative to an increase in terms of the number of employees per Client just as employment came back versus adding more modules or selling more modules. Is there a way to just think about that In terms of the three elements? Yes.

Speaker 2

I mean, well, it's going to be driven by size of client, number of modules sold into client for Sure. Any contribution from improving employment in regards to our base would be minimal.

Speaker 11

Okay. So that was a minimal contribution in terms of the employees in the base?

Speaker 2

Correct.

Speaker 11

Great. And then can you talk a little bit about the assumptions for the gross margins? Obviously, it continue to be best in class. Wondering if you can just talk a little bit about the expectations here for 2022. What are you assuming in terms of average Slope balance and with rates starting to finally move back up,

Speaker 8

how much do you

Speaker 11

think you could end up capturing as rates start Hopefully normalizing.

Speaker 2

Yes. In our gross margins, we don't Anticipate we don't factor in any rate increases. I mean, obviously, if there are rate increases, which they're talking about here in Q1 in March, that would be a tailwind to us. Based on the average daily balance, Somewhere between $4,000,000 $5,000,000 on an annual basis, but that would layer in, Mark. I mean, it wouldn't come to us the day they So that's something that kind of layers in over time.

Speaker 11

Is that $4,000,000 to $5,000,000 for How many basis points?

Speaker 2

Per quarter basis for 25, Ryan. Yes, it would be on an annual basis for each 25 basis point increase.

Speaker 9

So on a 12 month basis.

Speaker 6

Excellent. Thank you.

Operator

Our next question is with Ryan MacDonald of Needham.

Speaker 12

Hey guys, this is Josh on for Ryan. Congrats on the strong year end quarter here. Curious, now that you've just opened 5 sales offices, what are you seeing in the macro that's kind of giving you this confidence here over the last couple of quarters open these offices. And then are you seeing improved activity in hospitality and some of the troubled industries From the pandemic starting to pick up here materially before Omicron hit? And then what kind of a pause are you seeing with Omicron, if any?

Speaker 2

Yes. First, I would talk about the office openings. I mean, demand is really what's driving us to add more sales teams. Again, we started really spending heavily on marketing in 2020. It brought on high quality revenue that produced very strong margins For us and we continue to have elevated leads.

Speaker 2

And so when again, we didn't really open anything in 2020. So It's really time for us to start that again. As it relates to Omicron, I would say that oftentimes we don't really know Why one company may be experiencing less employment today than it did last week and You know why it may have more next week. So I don't really see these factors as long as we have stability having A large impact one way or another on our quarters as we move forward. I talked about the importance it was need that we had to lap The pandemic with stability and we've had that substantially since the summer of 2020.

Speaker 2

So we feel good about Where we're at from here and feel like barring any major move and I believe it would have to be major in some type of employment Which we don't expect. I think it should be business as usual for us as we go forward throughout the year.

Speaker 12

Okay, got it. Great. And then just a follow-up question on the interest income. That kind of returns to the model here over the next couple of years. Investors are obviously more focused on free cash flow generation with the increasing interest rates.

Speaker 12

How do you think about the balance of Reinvesting that interest income for growth versus letting it just fall to free cash flow and ultimately buying back more shares, Obviously, depending on how the stock price goes.

Speaker 2

Yes. 1st price is always growth for us. I mean, we have been investing Our profits into growth and they're creating more profits. So that's just kind of what's been happening. But in regards to the interest rates, We wouldn't do anything unnatural than the things we're doing right now.

Speaker 2

Craig, I don't know if you'd add anything. No, I mean, obviously, as they come back, I mean, we would trade off a point of Margin for a point of growth, but we're going to still spend wisely as you see that we've always done. And we're focused as growing as fast as we can in 20 22. So we have that locked and loaded and the funds to be able to do that.

Speaker 12

Great. Thanks guys.

Speaker 2

Thank you.

Operator

Our next question is with Rithee Panigarajee.

Speaker 6

Oh, Rithee Panigarajee. Hey, congratulation. Great quarter. So I was getting a few question about your Q1 guidance. Sequentially, it is 21%, it's almost Similar to last year versus prior to COVID is 30% plus.

Speaker 6

Is there a similar kind of expectation from W-two and Form filing this year as well, Chad, or any other factor you have considered in your guidance?

Speaker 2

Yes, there's a little bit of that. I would Kind of point to how 4th quarter in 2021 was our highest revenue quarter That we've had from a Q4 perspective, meaning typically Q1 can outpace Q4 throughout the years. This year, Q4 outpaced Q1 in 2021, really hadn't happened since 2015 and then it happened in 2014. Really what's happening is our revenue makeup mix. As we continue to sell more products, both at the time of sale as well as into the base, the contribution that those annualized form filings has On an overall client annualized revenue that we get from them is smaller.

Speaker 2

And so The recurring revenue, monthly recurring we're charging the client, you might say is outpacing that we would have growth in annualized Fees, if you will. And so and then yes, I think you still have some of the trends that were followed in 2020 or happened again in 20 2021 somewhat, but I think our comps were a little bit easier comping over this year than what we had going into 2021 W-2s versus the 2019 W-2s. But anyway, all that's to say, I think one thing that's Starting to happen in a revenue mix is that the monthly recurring that we're charging a client due to the additional products That we've come up with that they're buying and finding value in is outpacing any growth in our annualized fees.

Speaker 6

That's great color. And then quick follow-up on now great to see that you already added 4 to 5 Sales offices. And how do you think the competitive landscape will change your 5,000 above Kind of segment now that you have sales office and they can do in person, which is probably more relevant for targeting this high end customer. How should we think about that growth in that?

Speaker 2

Well, I think it still remains to be seen how prospects are going to buy this technology. We're still, I mean, are going to buy this technology. We're still I mean, most people are still buying virtually. Again, we're not going to Try to pull clients on to a certain way to buy. We're going to meet them where they live.

Speaker 2

So if they're used to buying virtually And they want to buy virtually, well, we have the solution for that. And then of course, if clients are wanting us to come out there, we have that availability To be able to do that. But I would say that we're not seeing a huge shift To in person selling at this point. We remain ready, but again, that's something that's going to We're going to meet the client where they live on that.

Speaker 6

That's great. Thank you, Chad.

Speaker 2

Thank you.

Operator

Our next question is with Bryan Bergin of Cowen.

Speaker 10

Hi, guys. Good afternoon. Thank you. So you measure kind of the sales force metrics. Can you talk a bit About where sales force productivity stands relative to pre pandemic levels?

Speaker 2

Sales productivity is way up from pre pandemic levels when you look at a on a per rep basis or Even if you look at a per team basis, when you lose one of your senses, the other takes over and we just we became a lot better Throughout the pandemic and how we sold, we got better at strategy. We got better at connecting to our prospects. We got better at marketing. We got better at retargeting. So, sales has been very strong and it remains that today.

Speaker 10

Okay. And as far as employee growth or client employee growth goes, I think I heard you say it was minimal in the 4th quarter. Are you embedding any assumption on client employee growth in your 2022 outlook?

Speaker 2

No.

Speaker 10

All right. Thank

Speaker 2

you. Thank you.

Operator

Our next question is with Alex Zukin of Wolfe Research.

Speaker 9

Hey guys, thanks for taking the question. I guess maybe Chad for you, if you think about the pipeline, the sales cycles, Sales cycle length and just in general the impact of kind of the great resignation, both the puts and takes on the business, where do we Stan, on all those fronts as we look at 'twenty two?

Speaker 2

Yes. Well, I would say in regards to the Sorry, go ahead. Okay. I would say in regards to the Pipeline, our pipeline remains very strong. I also would say through virtual selling, I do think it's been to some Easier to connect to some of the players that you would have in a larger organization.

Speaker 2

In a smaller organization, you might talk 2 or 3 people. But in a large organization, you have multiple decision makers and in our case, multiple user buyers Because we are impacting many parts of the businesses of the business. As far as a tight labor market, I mean, I think that impacts All of us. We've had a lot of success in the tight labor market, especially in the management ranks Of being able to increase quality for us in those areas. We're up 28 I mean, from an employment perspective, we added 28% to our employee base last year.

Speaker 2

Definitely, we noticed it being tied out there, but it's definitely you have to be competitive. But we've had a lot of success building our recruiting teams over the years with very strong learning management systems We were able to spin up employees quickly, get them started on their career.

Speaker 9

Got it. And then maybe just a follow-up. Chad, obviously, the amount of sales offices that you added in 2021 is I don't know if you're Catching up from kind of where you weren't able to move as quickly in 2020, obviously. But from the to the extent that that's A direct result of like more people being in a position to make a move after being stalled to some extent with COVID, whether it's Attrition from your competitors like ADP and Paychex or whether it's the competitive environment, There was a large hack, ransomware attack at UKG. Like what is the competitive set or landscape look like?

Speaker 9

And how Is your dialed in investment incrementally and kind of expanding the sales team number by a lot more than in previous years? What is that what's the signal we're supposed to take away from that?

Speaker 2

Well, I mean, we're focused on dominating the industry and really providing Businesses with a very strong return on investment. And really that's happening. I mean, a lot of the things that we're competing against are just There are old ways to use systems. And I believe over time, and you're starting to see that, it just becomes more and more to use them. So and we only have 5% of the market.

Speaker 2

I mean, that's the other thing. So we have such an opportunity. Demand continues to increase. The popularity of our brands getting stronger. We have a lot stronger proved sources for larger clients.

Speaker 2

We have increased retention rate, which shows you that they're just having a lot of success with it. And what was your question about UKG?

Speaker 3

I was just asking, have

Speaker 9

you seen any impact from the hack that they suffered, The security breach in terms of more clients, has that been a pain point that has been used by more clients to switch providers?

Speaker 2

Yes, I just wanted to get you to say it again. We're having success with that. It's a pretty bad deal when you're down that long and we are having success with that. Our hearts go out to those Clients and especially their employees that are impacted. And those are a little bit longer sales cycle when you're talking about the larger Deals, I think this happened in December.

Speaker 2

Obviously, we're on it. We do believe that we're going to have success Taken some business and I mean, I think if you're a CFO or HR person, you'd be hard pressed to stay in that environment without Quite a few explanations. I mean, some points you got to read the room on what industry you're in. There's a lot of restaurants that won't serve you a salmonella 32 days in a row. You might want to eat at one of them.

Speaker 2

Thanks for the question.

Operator

Our next question is with Brian Schwartz of Oppenheimer.

Speaker 5

Yes. Hi, congratulations on a good quarter and thanks so much for taking my questions. Chad, just a follow-up again on your Optimism on the demand trends as well as the sales successes that you experienced in the quarter. Clearly, your marketing and sales expansions having Some fruition. I just wanted to ask you again here, are you seeing any changes at all in the environment In terms of maybe what customers are asking for on top of the payroll or anything the competition?

Speaker 5

Or is your optimism about the demand trend just kind of Strong productivity across the sales force today.

Speaker 2

Yes. Well, I think we definitely have a strong productivity across our sales force, But I do believe that that's driven by high quality leads and a differentiated product strategy that clients are having a lot of Success for it. You sell one thing, but we're able to prove it out as well. And so we go out there, we onboard Clients onto our product and then we're able to prove out the value they're receiving. And so the more you do that, the more that increases demand as well as it increases confidence with your sales force.

Speaker 2

The salesperson goes out there and has an incredible amount of success bringing someone onto our platform and that's a happy client. A lot of confidence is built up within the sales staff. And so we had to shift strategies here. We didn't start off with the employee Does the work and inputs the data into the system themselves through the DDX. We didn't start off with that.

Speaker 2

We didn't start off with self-service payroll. And so There's been a little bit of a shift from our sales department selling it one way and really coming into their own with understanding the Value of selling it the correct way, which is how the clients are going to currently use the product. So we're very bullish on that. And really our demand hasn't Seeing much or any of a tail off and I'm thinking of since 2020 or since we came out in 2020. Of course, it's up from there From what we would have sold in 2020.

Speaker 2

But since those first couple of weeks in the pandemic, when we shifted into virtual leads and increase in marketing And really becoming more efficient in our areas. We've had a lot of success since that time and I haven't seen us take a step back since that time.

Speaker 5

Thanks, Chad. And one follow-up for Craig. Craig, I have a question on the 4Q cash flow. It came in far above While we were modeling, you pointed out the revenue upside is one of the driver. I just wanted to ask you, did some of the spend planned for 4Q, did that get pushed into 1Q or were there any other anomalies to explain the outsized cash flow growth in the quarter?

Speaker 5

Thanks.

Speaker 2

No, I would say it's mostly just timing, a little bit of timing Q3, Q4 to Q1, but I mean really nothing Unusual there. I mean, and part of it's just the overall strength of the quarter. We had a very strong Quarter from a revenue perspective as well for Q4.

Speaker 5

Thanks, Craig.

Operator

Our next question is with Robert Simmons of D. A. Davidson.

Speaker 10

Hey, thanks for taking my question. So I guess most of them have been asked and answered already. I guess have you thought about giving new updated for ASC 606 long term target margins?

Speaker 2

Under 606, I'm not exactly sure of the question. We're continuing that.

Speaker 11

Long term

Speaker 10

market targets, you used to give like a long term EBITDA margin, not guide, but a target. I was wondering if you

Speaker 9

were 606 lines were down.

Speaker 2

Yes, correct. We did. And I think we Continue to hit that and then we would update it. And you're right, as we went to 606, we have not updated those long term margins. We have Strong margins that we're starting off with right now.

Speaker 2

Again, we are focused on growth, but our growth is producing high quality profitable Business. So for us, we're focused on the growth side, but we do have healthy strong margins. It's something we have to take a look at internally of When we may be able to update what a long term growth margin looks like, but we're focused on growing for the foreseeable future. Yes. And I would say, I mean, one thing we're really starting this year adjusted EBITDA margin off at where we finished last year.

Speaker 2

Coming out strong out of the gate, a couple of things kind of looking into 2022 just on a modeling Stock comp, we would expect it to be around $110,000,000 up slightly from this year. And then one thing, We did bring our Grapevine office facility online here at the end of Q4. So we're going to see a little bit of An increase in the depreciation for 2022 as it relates to that facility probably up around 50 basis Points as a percent of revenue. And then one thing else that we've announced is kind of the expansion in Oklahoma City as well. So CapEx Will be similar to last year as it relates to CapEx.

Speaker 2

So all of those play into our margins are some of those are Get added and subtract it out for adjusted EBITDA, but we're really excited about where we're starting 'twenty two with the rule of 65.

Speaker 10

On the CapEx, is that similar dollar amount or similar percent of revenue?

Speaker 2

Percent of revenue.

Speaker 10

Got it. Great. Thank you very much.

Operator

Our next question is with Bhavan Shah of Deutsche Bank.

Speaker 8

Great. Thanks for taking my questions. Chad, just any commentary you can provide in terms of which modules are seeing increased adoption as HR becomes more strategic with a great resignation? And then are you seeing any customers like are you seeing more customers come back to the table or even the size of the land get bigger?

Speaker 2

Yes. And so, well, first I would start with the modules. We've always had healthy uptake and I've always said the longer we have a module, the more uptake we have in it. When you deploy Betty, it does require certain modules to be implemented into the client base into that client in order for them to use Betty. So that's helpful oftentimes with our modules, especially for the new clients that we bring on that have Betty, of which all of them do.

Speaker 2

So that's helpful there. As far as module impact that we see, I mean, you are seeing some impact On learning management, just as people are looking to both retain as well as spin up training for new employees. Obviously, our recruiting Product has been very strong going throughout the pandemic to be able to identify those people that you want to hire. But As far as when we look at the product mix, we've had healthy usage across all of them. And it really just depends on what industry And what area client might be in to whether or not they would use all of those modules or not, if that makes sense.

Speaker 2

And then as far as seeing customers come back to the table, we're not having a lot of On customers as we just talked about our retention rate going up. When we do lose a client though, it is We get a meeting with them normally pretty quick just because of the usage around their employee base. We're looking at a DDX of 95 Where employees are making 95% of all the changes into the system. That's a client that finds it difficult to leave without Destroying their return on investment and all the automation that they had achieved through our products. So we had a lot of win backs there, but I would just start off by saying we're not really losing as many as we once did.

Speaker 8

Got it. That's helpful there. And just a quick follow-up on your office openings. I mean, As you guys open up 5 offices after not opening 1 in a handful of years, how do you ensure that you don't see any disruption to your productivity with your other offices As you shift around personnel and make them sales leaders. And to the other point of like, how do we think about sales productivity ramping For these 5 offices, is there any change to the historical cadence?

Speaker 2

Well, you don't ever take top managers Out of an office and relocate them to a new office where they start up with 0 employees and you don't have some impact on that office Where those managers came from, because we are these are some of our top managers that we relocate like that now. But what you're going to gain out of that new office is going to cover up anything that you may have been negatively impacted on the old. And then by the time they get to maturity, There's not much difference between the 2, but well, there's not a difference between the 2 on what their quota is and oftentimes quota achievement. And so I wouldn't say it's necessarily a giant sacrifice that we make, but you do whenever you do move managers out of an office, do have an impact. Now, we're disrupting 5 of those.

Speaker 2

There used to be a time where we would disrupt 4 out of 12. So the disruption to us is a little bit less and I'm using disruption. I don't know that that'd be the right word to use to be honest with you, but It does take a little bit for those managers as they get into those new territories to spin up, but they're our best managers, so they spin up pretty quickly.

Speaker 8

Got it. Helpful. Thanks so much.

Operator

Our final question is with Daniel Jester of BMO.

Speaker 13

Great. Thanks for squeezing me in. Just to piggyback on the last question, Are all of the 5 new offices fully staffed today? No.

Speaker 2

Our method is we get sorry, go ahead. No, no, no. Fair shot, please. Our method is that typically we'll hire 4 fully staffed office has 8 sales reps. We'll start off with 3 or 4 in an office.

Speaker 2

They get selling pipeline, they start getting starts. As we've said in the past, it usually takes 24 months for an office To get to maximum maturity, and that's where they have the same quota, the same number of reps, with the same level of pipelines and with the same level Of expectation that we would have for their success as any other mature office.

Speaker 13

Got you. And then just to wrap up on Betty, when the product went live, Chad, you made some comments about how long you thought it would Take to get full penetration into the base. Now that we've seen sort of the growth in the adoption, any updated thoughts about how that progression is going to evolve? Thank you.

Speaker 2

I still feel strongly about what I said in the past. I mean, Betty ensures perfect payrolls. It ensures you're not going to have manual checks, you're not going to have voids, you're not going to have employees with overdrafts and everything else. So We continue to have a lot of success deploying Betty and I still expect that all of our clients will be using Betty at some point.

Speaker 13

Great. Thank you very much.

Speaker 2

All right. Thank you. All right. Well, I would like to thank everyone for joining us Today on the call and a special thanks to our employees for helping deliver another very strong year. This quarter, we will be participating in the KeyBanc and Morgan Stanley Conferences in San Francisco on March 8 March 9, respectively.

Speaker 2

Both should be in person, but we'll see. We look forward to speaking with many of you very soon and we appreciate your continued support in Paycom. Thank you. Operator, you may disconnect.

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Earnings Conference Call
Paycom Software Q4 2021
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