Paycom Software Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 15 speakers on the call.

Operator

Afternoon. Thank you for attending the Paycom Software First Quarter 2023 Quarterly Results Call. My name is Matt, and I'll be the moderator for today's call. 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, Head of Investor Relations.

Operator

James, please go ahead.

Speaker 1

Thank you, and Welcome to Paycom's earnings conference call for the Q1 of 2023. 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 295. These forward looking statements represent our outlook only as of the date of this conference call. While we believe any forward looking statements made on this call are reasonable, Actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10 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 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.

Speaker 1

I will now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad? Thanks, James, and thank you

Speaker 2

to everyone joining our call today. We delivered strong results in the Q1, and I'm very pleased with the progress we've made on a variety of initiatives. I'll start with highlights from the Q1, then I'll discuss some of our plans for the remainder of the year. Following that, Craig will review our financials and our guidance and discuss our new dividend policy. Then we will take questions.

Speaker 2

With that, let's get started. Our 2023 first quarter revenue $452,000,000 came in very strong, up 28% year over year with strong recurring revenue growth from new clients. 1st quarter adjusted EBITDA also came in very strong at $221,000,000 representing an adjusted EBITDA margin of roughly 49%, up 70 basis points year over year. With our updated full year 2023 guidance, we are well positioned to exceed our initial outlook for a solid roll of 65. On the product front, Betty continues to be a key differentiator in the market with Employee self-service payroll continuing to drive strong client additions.

Speaker 2

The industry transformation to more efficient HCM Centimeters and payroll processes is accelerating and now with Betty, payroll processes can be automated to deliver perfect payroll. Using Betty, employees do their own payroll. Employee usage is a key differentiator and new clients are coming to Paycom for exactly that. With 95% of database interactions being completed by the employees of our clients as measured by the DDX, We are changing the way employees engage with HCM Solutions. Our product and go to market strategy are working.

Speaker 2

I just returned from our Annual President's Club meeting with our top salespeople and I couldn't be more excited about the tone of the conversations and enthusiasm for our product, especially around employee usage embedded. We are having increasing success up market With continued rapid growth at the upper end of our target market range, larger organizations benefit tremendously from simplifying their HCM and payroll needs with our single database solution. We have 5% of the TAM today. However, our TAM has increased now that we've laid the groundwork for our global platform beginning with Global HCM, which further strengthens our value proposition with our largest clients. To sum up, we are executing well with a highly differentiated product and go to market strategy.

Speaker 2

Our addressable market opportunities continue to expand And we are pleased to enhance our long term commitment to stockholder return with the initiation of the quarterly dividend program. I'd like to thank our employees for helping lay the foundation for another record breaking year. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Speaker 3

Before I review our Q1 results for 2023 and our outlook For the Q2 and full year 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non GAAP basis. We delivered very strong results this quarter with revenue of $451,600,000 up 27.8% compared to the prior year period. Our GAAP net income for the Q1 was $119,300,000 or $2.06 For diluted share, up 29.8% compared to the prior year period based on approximately 58,000,000 shares. Adjusted EBITDA was $220,500,000 in the Q1 of 2023 or 48.8 percent of total revenues compared to $170,100,000 in the Q1 of 2022 or 48.1 percent of total revenues. Non GAAP net income for the Q1 of 2023 was $142,700,000 or $2.46 For diluted share, up 28.9 percent from the prior year period.

Speaker 3

Our revenue growth was driven by strong demand, New business wins and new product adoption. Within total revenues, recurring revenue was $444,400,000 for the Q1 of 2023, representing 98.4 percent of total revenues for the quarter and growing 27.6% from the comparable prior year period. Adjusted sales and marketing expense for the Q1 of 2023 was $98,100,000 or 21 point 7% of revenues. We have been aggressively investing in marketing to drive strong demo leads that complement our outside sales model. Adjusted R and D expense was $37,400,000 in the Q1 of 2023 or 8.3 percent of total revenues.

Speaker 3

Adjusted total R and D costs, including the capitalized portion, were $55,200,000 in the Q1 of 2023 compared to $42,900,000 in the prior year period, reflecting continued investment in new products. For Q2 and full year 2023, we anticipate our effective income tax rate to be approximately 28% on a GAAP basis And approximately 26.5 percent on a non GAAP basis. Turning to the balance sheet. We ended the quarter with a very strong balance Including cash and cash equivalents of $506,000,000 and total debt of 29,000,000 Cash from operations was $146,100,000 in the Q1, representing an increase of 24.6%. The average daily balance of funds held on behalf of clients was approximately $2,400,000,000 in the Q1 of 2023, up approximately 10% year over year.

Speaker 3

Now let me turn to guidance. For fiscal 2023, we are raising our outlook and now expect revenue in the range of $1,713,000,000 to $1,715,000,000 or approximately 25% Year over year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $717,000,000 to $719,000,000 representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range. With these strong results and outlook, we are well positioned to exceed the rule of For the Q2 of 2023, we expect total revenues in the range of $397,000,000 to $399,000,000 representing a growth rate over the comparable prior year period of approximately 26% at the midpoint of the range. We expect adjusted EBITDA for the Q1 in the range of $152,000,000 to $154,000,000 representing an adjusted EBITDA margin of approximately 38 sent at the midpoint of the range.

Speaker 3

Finally, after 25 years of rapidly growing Paycom into a highly profitable company, We're expanding our capital allocation strategy. On May 1, the Board of Directors approved a quarterly dividend program that we expect to initiate in mid May. In 2023, we project Paycom will generate greater than $1,700,000,000 in revenues, over $700,000,000 in adjusted EBITDA And strong operating cash flow, all of which continue to grow. We believe Paycom is in a unique position to return value to stockholders in the form of a dividend and still have the necessary resources to aggressively pursue growth opportunities. Since 2016, we returned a total of nearly $600,000,000 to stockholders through stock buybacks, and we have a $1,100,000,000 buyback authorization still in place.

Speaker 3

Today's dividend policy announcement reflects our confidence and the resilience of our long term growth opportunity, the strength of our balance sheet and the profitability of our business We intend to pay a dividend at an annual rate of $1.50 per share with a first quarterly dividend of $0.375 per share payable in mid June subject to Board approval. 2023 is off to a great start. We are in a strong financial and strong competitive position in a large and attractive addressable market, and we have a long runway to continue to deliver rapid organic revenue growth, High profit margins and attractive cash flows. With that, we will open the line for questions. Operator?

Operator

Thank you. We ask that you please limit yourselves to one question and one follow-up. We will pause here briefly as questions are registered. The first question is from the line of Raimo Lenschow with Barclays. Your line is now open.

Speaker 4

Thank you. Congrats on another strong quarter and the dividend introduction. Two quick questions from me. First, on the global Initiatives, Chad, can you help us understand a little bit like how global or like what's the Stender, what you're trying to do here, is this like helping existing customers that have subsidiaries? Is this like a wholesale change in Just help us understand a little bit there?

Speaker 4

And then I have one follow-up.

Speaker 2

Sure. So right now, Raimo, we have several clients who currently use our domestic software and they use it internationally. They rig the system a little bit so that they can store employees in other countries. And then oftentimes they'll work with a third party for payroll. So our current clients, they don't have to do this any longer, because the Paycom system now does have global HCM product that will work in 180 And global HCM for us is everything minus the payroll side.

Speaker 2

And so we've looked at integration We've looked at working with 3rd parties and even potential acquisitions. But The fact is that everyone else does it the old way, and payroll and HR departments send data for processing, and We're not going to be putting any development into the old way. So for us, Betty is packing her bags and we'll be going around the globe As we develop

Speaker 4

it out. Yes, yes. Okay, perfect. Okay. And but does it mean that you want to become now A global company with operations in other major countries?

Speaker 4

Or is this just more for U. S. Domestic clients to give them more optionality and kind of And work with them better.

Speaker 2

Yes, absolutely. We'll be a global company. This is the first step And that's moving our product into the different languages and getting the HCM side done. And now we're Heavily focused on bringing Betty to the other countries, which it will require us to have operations in certain countries In order to do that, in order to process in those countries.

Operator

Thank you for your question. The next question is from the line of Samad Samana with Jefferies. Your line is now open.

Speaker 5

Hi, good afternoon and congrats on the good quarter. Chad, I had a whole list of questions, but then you said the word open to acquisitions, Which I haven't really ever heard you say before. So I'm going to pivot in real time here and ask you between the dividend announcement You mentioning potential for M and A, which is something Paycom hasn't historically done. Is M and A something that is just maybe going to be something part of the broader capital allocation Have a strategy of how to use the company's cash going forward or and is that just limited to maybe the global side of it or is it Would it be something you'd explore in other areas too?

Speaker 2

Well, I mean, I don't want to say never, but it's been our Process to develop internally and develop things that way and grow that way. And so my comment earlier was more As we looked at building out the payroll side internationally, we did review multiple options for that. But At the end of the day, there's no shortcut to long term success. And so at the end of the day, we're going to dance with what brung us, and we know how to develop Software, and we're already well on our way in getting things set up to be able to have a better in all the other countries as well. So in answer to your question, I would say more no, Samad.

Speaker 2

I mean, if I was going to have to be direct with that. But we did do a dividend and we still have a $1,100,000,000 buyback in place.

Speaker 5

Great. And then maybe just a quick follow-up for Craig. Just the numbers on the margin side were impressive as always. The sales and marketing dollars jumped a pretty good bit from 4Q to 1Q, more than you normally see. I was just curious, I know you mentioned marketing campaigns.

Speaker 5

Was there any acceleration or pull forward maybe And sales headcount additions or anything else that we need to maybe be aware there beyond just digital marketing? And how should we think about that maybe going forward?

Speaker 3

No, I would just say it's pretty normal. I think last Q1 was slightly down. But yes, I mean just kind of normal marketing spend and campaigns that we talked about kind of from Q4 of 2022 to Q1 of 2023, some of those pushed into this quarter.

Operator

Thank you for your question. The next question is from the line of Brad Reback with Stifel. Your line is now open.

Speaker 2

Great. Thanks very much. Chad, you have a pretty unique perspective And the economy across the country, down market, up market, geos, verticals, anything you're seeing specifically that gives you pause or optimism? Yes. I mean, no, I wouldn't say either way.

Speaker 2

I mean, I do think it's a little bit easier to hire. I would look if you're looking at from a year ago, I would say the labor market was a little bit tighter for us on hiring, Just as more people touted the work from home in which we came back to work, I think that especially on the tech side, We seem to be doing very well attracting top talent there as more and more companies have shed some of those From our own client base, we're definitely focused on adding clients. Don't really have anything to call out on seeing any negative Softening within our own client base. I've tried to I'll do as much as I can to kind of look into the future with 5% of the TAM and several accelerators for ourselves. I'm focusing on being a salesperson right now than an economist.

Speaker 2

But definitely, we're really not Seeing much in our own numbers as we look into the future. But from hiring people, which I mean, I think is somewhat of a proxy To what happens as well for our clients, we are definitely seeing it's a little bit easier to hire especially on the technical talent side.

Speaker 3

Yes, Brad. I would say on our client base, I mean, we have a very diversified client base and that's both geographically and based on industry. So some of the things you're hearing out there that we're not overly exposed to those.

Speaker 2

That's great. Thanks very much.

Speaker 6

Thank you.

Operator

Thank you for your question. The next question is from the line of Mark Marcon with Baird. Your line is now open.

Speaker 7

Hey, good afternoon, Chad, Craig and James. And congratulations on the really strong results and also the initiation of the dividend, which I think it's a huge positive. With regards to what you ended up seeing during the selling season and then Extending into the Q1, could you give us a little bit of a sense for on the recurring revenue if we strip out the float income, What you ended up seeing in terms of like sales from new logos relative to upsells, relative to Increases in employment within the existing base and how you're thinking about the pipeline on a go forward basis?

Speaker 2

Yes. I mean, for us on that, it's all really about new logo ads. I mean, increases in employment from existing base or decrease. I can't say that that's had a meaningful impact on us one way or the other with the exception of the what I'm going to call Maybe a 6 month to 12 month period in COVID where it went down and then back up, you had some significant fluctuations Since stabilization, it's not going to be employee gains and or at this time, we don't really have the Employees leaving that would impact that. So for us, it's new logos.

Speaker 2

We added over 3,000 clients to Betty in this first quarter And that's been going really well. I don't know if Craig would have anything to add to that.

Speaker 3

No, I would agree with Chad. I mean, it's primarily new logo wins and That's what's driving the recurring revenue.

Speaker 7

Great. And you just came out of Club, what are you seeing just in terms of sales force productivity? And how much more were Did people have to do in order to qualify for club and what regions are you really starting to see some real pickups in terms of traction?

Speaker 2

Yes. We had the President's Club in Hawaii, which was the very same place that we had it at our initial President's Club 15 years Prior, so I was able to actually talk about the numbers from that first club and now. And we've continued to accelerate the amount that any one sales rep Ken Zell, our top sales reps continue to sell more than they have in the past. This year again, I mean, we had a rookie sales rep that sold over $2,000,000 When we IPO ed, that would have been great for a city. And now we have a rookie rep selling that.

Speaker 2

And The numbers continue to go up as we've had a we've continued to develop product. We've put more into the product. So It produces more value. So of course, it costs a little more than what it used to. And then we're getting better at marketing And landing leads that we're also getting better at closing because we have a very strong differentiator.

Speaker 2

And we're back out in the field. I think that was a big part of it too to get back out face to face because these are big decisions for companies to make. And I think we present well In person, I would expect another record to be broke next year as we've already got some reps that are Very close to what our top rep finished at last year. So that's and which is always how we've Achieved our numbers as sales performance continuing to get stronger.

Operator

Thank you for your question. The next question is from the line of Brian Schwartz with Oppenheimer. Your line is now open.

Speaker 8

Yes. Hi. Thanks for taking my questions this I'll congratulate a real nice fine start to the year for the business. Chad, I wanted to ask you, I saw that you announced a global HCM Solution and capability this quarter. And just wanted to ask you on the strategy behind that.

Speaker 8

Is the strategy more to extend the reach and capabilities Of your multinational

Speaker 9

customers? Or is

Speaker 8

there an opportunity that you see in the future of targeting International Markets. And then if I could ask one other question along this new solution. How should we think about the solution in terms of the impact to the margin, It can be accretive or dilutive to the overall business.

Speaker 2

I mean, on the first question, I mean, I think people can talk about whether it's a single database or willingness to integrate with multiple systems and what have you. The fact is There's one type of employee. I mean, the employees are the same, and they like doing their own payroll. And so for us, International and laying the groundwork with global HCM is the first step to going all the way up market. I mean, there's never really been an issue for us And scalability of the system, it's really been about the buying decisions that you'll oftentimes see way upmarket.

Speaker 2

Well, Employees these days, they don't have a high tolerance for a system complexity in any stage of product that they use. And so I think we've got a very simplified product that does very complex things. And I would say there might have been one thing that we were missing To be able to go work with the largest companies in the world, and I don't think we're going to be missing that one thing very much longer. That said, I mean, our system still does work well. We have a lot of clients that have definitely, we're having success upmarket.

Speaker 2

We

Operator

We have a lot of clients

Speaker 6

that are 10,000 employees and more.

Speaker 2

We have clients that even like our system so much, they were willing to Work around it to use it for other countries. Now they don't have to do that on the HCM side, And we would be planning to roll out a BETI in other countries throughout this year.

Speaker 9

Thank you. Yes.

Speaker 3

I would say on the margin front, I mean, we wouldn't call out that it would be accretive or it should be I follow the same profile fairly similar to what our current clients are doing. I mean, obviously, we'll have some R and D costs as it relates to building some of this out. But in terms of just the overall margins, it should be very similar.

Speaker 10

Thank you.

Operator

Thank you for your question. The next question is from the line of Joshua Reilly with Needham. Your line is now open.

Speaker 5

Hi there. Thanks for taking my questions. On the international product here, when you say you're building betty on

Speaker 11

a global basis, Does that mean

Speaker 5

that you plan to build native payroll solutions in some international countries? Or is Betty going to sit on top of the existing payroll solutions Used by customers with an international presence.

Speaker 2

We would be building Betty out in each country. Okay. We are building Betty out. We are building Betty out would be the better way to say that.

Speaker 5

Okay. So you are building the native payroll in some of these international countries?

Speaker 2

Correct.

Speaker 5

Got it. Okay. And then, have you increased your advertising spend sequentially from Q4? And I think in the past you've said that Increasing that spend implies more confidence around demand. Is that accurate that you're seeing more demand in Q1 than Q4?

Speaker 2

We continue to see strong demand. We saw the strong demand in Q4 too. Oftentimes, Q4, Sometimes you can advertise a little bit stronger than others depending on elections, depending on how many ads are running. Oftentimes, You can be competing against that and what the ad dollars cost. And so sometimes the juice didn't work to squeeze there.

Speaker 2

Also you have some holidays, but We do monitor our advertising spend weekly, and we monitor the lead generation from it. And we're constantly making moves in method to how we generate more leads.

Speaker 5

Got it. Thanks guys.

Operator

Thank you for your question. The next question is from the line of Sreede Pantnigrahi with Mizuho. Your line is now open.

Speaker 10

Thank you. Thanks for taking my question. Chad, in this macro environment, we keep hearing small businesses Kind of under pressure right now. They are cautious in terms of commit to any kind of investment in this environment. So wondering what are you Hearing from your customer base, any color would be helpful.

Speaker 2

Yes. I mean, we're not hearing a lot right now. I mean, now I would say a part of that is we're very focused on growth And landing new logos, I wouldn't say that we're having we're not seeing losses from clients going out of business Any different than what we had seen in the past, again, with the exception of the COVID time period. So I really can't call out much, and it might just be where we're focused. Again, only about 5% of our revenue is derived from companies that have less than 50 employees.

Speaker 2

95% of it's derived from companies that are larger than that obviously. And then we're continuing to grow at the top end of our range. It's probably our fastest growing And so I'm not saying things could be happening down market. It's just from the data that we have. It's not something That we could call out on our end.

Speaker 10

That's super helpful. And a follow-up for Craig. If I heard your client fund balance, I think $2,400,000,000 you said, that's almost kind of 9% on a year over year growth Compared to other years, which was pretty high, is there anything that we should anything that Caused the slowdown and also any color in terms of interest income, any float income contribution this quarter?

Speaker 2

I can take the first question. I'll let Craig handle the interest income. But from a float balance The larger the client, the less days you hold on to that money. So that money clears very quickly with large clients. So which if you're handling a small business, you might hold on to that for a month or a quarter.

Speaker 2

You're handling a large client. You're holding on to that for about 24 hours. So there's larger amounts, but it impacts your average steady balance a little bit Because it's clearing out of there so quickly with the larger clients. And then I'll let Craig handle the second part. Yes.

Speaker 3

I would say On the interest income on our client funds, we called out last quarter, we're realizing around 80% of the fed funds rate. And part of that's because it's layered in. We have some investments that are a little bit longer term. And I mean the banks don't give you the full amount as the Fed raises those rates. So that's kind of what we've said last quarter and really Wouldn't update that any.

Speaker 10

Great. Thank you. Great quarter.

Speaker 2

Thank you.

Operator

Thank you for your question. The next question is from the line of Bryan Bergin with TD Cowen. Your line is now open.

Speaker 6

It's actually Jared Levine on for Brian tonight. In terms of retention, how did 1Q revenue retention compare to 1Q 2022? Were there any notable changes based on clients with under 50 employees and then those clients with 50 plus employees?

Speaker 2

Yes. So we provide retention at the end of each year, fluctuates quarter to quarter. I kind of said on the last Call, we have the have and the have nots here at Paycom, and that was related to Betty. Our Betty retention rate last year was better than 99% Anybody that had Betty. So I expect our retention to remain strong and even as an increase as Increase a larger percentage as more clients use the product the right way to achieve the maximum ROI that's available to them.

Speaker 2

But yes, for retention, I've also said in the past, typically, regardless of I'm not comparing it from last Q1 to this first But typically, especially for larger clients of any of our competitors, retentions Oftentimes, that starts off lower the 1st of the year and continues to increase throughout the year because less clients usually leave in the Q4, if you will. But nothing to call out special in the Q1. I would just say we've been very stable. And the companies that use Betty do better.

Speaker 11

Got it.

Speaker 6

And then as my follow-up, what is your adjusted gross margin expectation for this fiscal year? And then more specifically looking at 1Q, what weighed on that adjusted gross margin within That operating expense line item?

Speaker 3

Yes. I mean, we didn't guide to the adjusted gross margin. I mean, it's been very stable Over the last few years and at 85% to 86%, I mean typically if it gets too high, it's we may be a little bit behind on hiring. And so that's usually what would cause it to creep up some and it fluctuates based on how our hiring trends are Because those are the individuals that are bringing on handling the new business that we're bringing on and we have to hire them ahead of the revenue growth and That way they can be trained up and ready to capture those clients.

Speaker 12

Great. Thank you.

Operator

Thank you for your question. The next question is from the line of Jason Celino with KeyBanc. Your line is now open.

Speaker 9

Hey, thanks guys for taking my questions. Chad, in the press release for Global HCM a few weeks ago, You mentioned that you've been working on the product for 2 years. Since it doesn't include Betty yet, why not just wait until you had developed it First, some of those countries first or maybe can you just talk about the timing on why move now?

Speaker 2

Sure. Well, you're going to have to do first things first. You were going to have to have it. But as I mentioned with Raimo's very first question, we have a demand for global Right now, as we have clients that are storing client or employees that they have in other countries in our system right now, And somewhat rig in the system. So we have demand right now for HCM and you have to have first things first.

Speaker 2

I mean with Betty, everything's connected. It's not like it's payroll only. You have to have time and attendance. You have to have expense management. You have to have paid time off.

Speaker 2

So you have to have these other products within the system To work Betty, I wouldn't say that we're developing just payroll only. We're developing Betty, the Betty process internationally. We looked at Kind of us 2 following what the competition does out there with international and I mean quite honestly I think it was unimpressive from ROI strategy that it produces for clients and our clients now are used to using Betty. And so I think They're going to expect that internationally and I think that's how we win. So I would say it's the beginning foundation For what we're doing, but also we have demand for that product in of itself right now.

Speaker 9

Okay. Yes, that's fair. And you have mentioned some of your customers are kind of jerry rigging onto your system Already, but how is there any way to know how many of your customers have international employees or offices?

Speaker 2

It's our larger clients. It would be our larger clients in many of those cases. So not going to give out a specific number, but I mean the revenue opportunities there for them. And then of course, when you look at our just Prospect base that's out there, over time this will increase the size of companies that we prospect.

Speaker 9

Okay, great. Thanks a lot.

Speaker 2

Thank you.

Operator

Thank you for your question. The next question is from the line of Arvind Ramani with Piper Sandler. Your line is now open.

Speaker 11

Hi. Thanks for taking my question. I just wanted to ask about Some of the churn kind of benefit you see from churn from legacy players, and are you seeing any kind of change in So the competitive dynamics or sort of the win rates that you've historically seen from some of the legacy players?

Speaker 2

Yes. I mean, I wouldn't call out anybody in particular. We're getting much stronger. When we released Betty In 2021, I think it was July 2021, we very first even started selling it. We've gotten a lot better At our value proposition and how we actually go to market with it, I think it took some learning.

Speaker 2

It was somewhat hard to teach old dog new tricks From our standpoint of our sales force, when we started selling Betty, we were all virtual sales, and we've made a bunch And so I definitely think having a stronger value proposition as we've had with Betty as well as us being face to face It's helping our close ratio out there and I would say it would be competitor agnostic. When we have a strategic buyer That takes the time to really try to achieve the return on investment that implementing any one of these products We do very well.

Speaker 11

Terrific. And Certainly, within the technology world, there's a lot of conversation with ChatGbt and AI. And just wanted to sort of get your perspective either sort of expected impact To pick on specifically, but even to the HCM space, do you think this is a space that's Can I say, Cerro, to change or kind of some pressure from Tag BP? Or do you think it's not yet kind of relevant to your space or to your company.

Speaker 2

No, I definitely think it'll be relevant. You can use AI for multiple things. There are areas that you can use it for that are better than others. And There are front end things you can use it for direct to the client. There are back end things that you can use it for that a client may never see.

Speaker 2

And When you're talking about AI, it has many uses, some of which is front end and some back end. And I don't want to talk specifically about what exactly we're using it for already internally and What our opportunities would be into the future, but an answer to your question, yes, I do think that over time, AI is going to be a thing in our industry.

Operator

Perfect. Thank you very much. Thank you for your question. The next question is from the line of Jackson Ader with SVB. Your line is now

Speaker 6

open. Great. Thanks for taking our questions, guys. The first one is on, Chad, you mentioned hiring And maybe being able to kind of hoover up some of the tech talent that have been coming from some of the larger maybe tech layoffs. It sounded like that was more on the developer or the R and D side.

Speaker 6

I was curious whether you've also been able to Maybe pick up additional sales people along the way as well.

Speaker 2

Yes. I mean, well, I called out R and D because that's a We oftentimes hire people that have experience with technology writing code and what have Our salespeople, we typically look for people with less than 2 years outside sales experience. We do take change in careers, what have you. We do have specific education requirements for that position. And so I wouldn't necessarily say it was difficult for us to hire jobs.

Speaker 2

But what has changed on the sales side is you get a little bit more time to look. There for a while, I mean, if you had a salesperson that you had that you were interviewing, you had a week or 2 to make a decision because they were getting 12 offers. I would say today that's slowed down quite a bit. So I would say you're able to take a little bit more time than what you were able to do when we were very compressed And time during the interview process to hire salespeople. I'd say that's changed some on the sales side.

Speaker 2

But I just I called out technology because we're just we're seeing it. We're seeing it.

Speaker 6

Right. Okay. All right. Cool. That's great.

Speaker 6

One quick follow-up. Just like on the mechanics of the Betty Payroll rollout. So you're in 180 countries with Global HCM, but like do you roll out BETI One country at

Speaker 8

a time.

Speaker 6

Are we going to see like 180 press releases for all the different countries? Is it a block here, a block there? Just mechanically, How is that rollout going to work?

Speaker 2

There's about 16 to 20 countries that represent about Well, over 80% of the opportunity. So, I would expect us to be rolling those out First, as you look at it. But, yes, I mean, over time, We build things ourselves. And so I would expect us to continue to roll them out, but there's 16 to 20 countries that are going to be first.

Speaker 5

Yes. Okay. All right, great. Thank you.

Operator

Thank you for your question. The next question is from the line of Alex Zukin with Wolfe Research. Your line is now open.

Speaker 6

Hey guys, thanks for taking the question.

Speaker 3

Most of my questions have been asked, but

Speaker 6

I guess maybe on the topic of just pipeline and sales Expansion efficiency, I guess, how do you think about office openings, territory expansion through the rest of the year, Maybe sales hiring moving into the back half of this year to get ready for next year. Just any kind of commentary around that, Particularly as it would relate or compare to last year, and then just a quick follow-up.

Speaker 2

Yes. So that opening up offices continues to be A big part of our strategy, we've continued to open up offices, I think a year ago, was it last year, maybe about 15 months ago, let's call it, 14 or so. We opened up 5 offices from December through February. And those offices are maturing very well and continue to mature, and we'll continue to open up offices. For us, our bottleneck on being able to open up offices is capacity of our management group being ready to do that.

Speaker 2

We have to both backfill for managers that may not be accomplishing their goals as well as We have to expand. And over the course of 25 years, I think we've done that pretty well. But It's a part of our growth strategy and we'll continue to open up offices when we're able.

Speaker 6

Perfect. And then I guess maybe just a quick financial question. Free cash flow was really, really strong Here in Q1, I think quite a bit stronger than we were modeling. What's the right way to think about that progression as we head through the year? And in general, as you're seeing FETI adoption specifically get better, I think last quarter you mentioned With almost 50% penetration for Betty, where does what's the target for this year?

Speaker 6

And how much is that How much more efficient is an incremental Betty sale than traditional one?

Speaker 3

Yes, I'll take the free cash flow question. I mean, Q1 was strong. As we look out through the rest of the year, we've called out Kind of what our CapEx is going to be. We're wrapping up our building in Oklahoma City, a large building here. So CapEx will be a little bit more Back end loaded in terms of how it flows throughout this year.

Speaker 3

So That's kind of the way I would look at the free cash flow for the year. And then on the betting penetration,

Speaker 2

Yes, I can take that. So I think the question was how much more efficient is an incremental Betty sell. I mean, Betty is a very nominal sell to a current client from that I mean, it's not an expensive item and drives a significant amount of ROI. What I would say on new clients that come in Betty, because they all have to. I would say the biggest margin impacts for them than us.

Speaker 2

I've always said, it costs you the same whether you use the Correctly or not, charge is the same. So you may as well try to get the most value out of the system by using it the So when someone uses betting, it returns a significant there's a significant return on investment to the client. For us, You might see some positive margin impact by those clients that use Betty have less Paper cuts caused to themselves and therefore on the margin they require less service For us to be able to provide them and less services around what I would call more of our low margin activities, which It's going to be amended returns and other issues that could come out by having payroll done wrong.

Speaker 6

Understood. Thank you, guys.

Operator

Thank you for your question. The next question is from the line of Bhavan Shah with Deutsche Bank. Your line is now open.

Speaker 12

Great. Thanks for taking the questions. Just a couple for Craig. Craig, if I Look at your 1Q sequential growth in 4Q on recurring revenue, it looks like it trended a little bit lower versus the prior 1Qs. I know the declining mix of tax revenue has an impact here, but any other commentary on linearity of go lives or even growth within the tax forms and how that's trending?

Speaker 3

I would say, we've called out the tax forms. I mean, obviously, they don't grow at quite the same Rate is the rest of our revenue, but they become a smaller portion of our overall revenue. So I would say that That's kind of what we've seen on those tax forms filings. They don't have the same growth rate as the rest of our Revenue.

Speaker 2

Yes. Said a little bit differently, since 1998 when we started the company, we've only added one product to our year end services, And that was ACA. That's it, in 25 years. Meanwhile, our monthly recurring revenue products, We've continued to add products that we charge on a monthly recurring basis for them. And so the monthly recurring It's just growing at a rate much more so than our annual recurring.

Speaker 2

And over time, the annual recurring amount Represents a smaller amount of a client's bill because of that.

Speaker 12

Got it. Helpful. Just one follow-up on float revenue and just your philosophy on reinvesting some of the upside here. Can you just remind us of your philosophy? And if anything has changed at all given some of the announcements on kind of your global initiatives?

Speaker 3

Yes. I know, I mean, we still invest in a pretty short Term investments, very safe. We're looking at CDs, commercial paper, treasury notes and then some overnight. We're still very safe on our investments and fairly short term. And then as we do global, we'll look at those opportunities as well.

Speaker 6

Thanks again for

Speaker 12

taking my questions.

Operator

Thank you for your question. The next question is from the line of Daniel Jester with BMO Capital. Your line is now open.

Speaker 5

Hey, thanks for taking my question. Good afternoon, everybody. Maybe want to tackle Global HCM in a different way. If I think about the some new products you've launched in the last couple of years, Betty, TDX, like that goes into theoretically the entire customer base. And for Betty, I think we saw the impact on your business like relatively quickly.

Speaker 5

I'm just trying to size up like On Global HCM, it's not going to go into all of your customers. And so is it so is your large customer opportunity so big that it actually The needle this year or is Global ACM something you're just thinking about from like a multiyear perspective laying the groundwork and it's not going to look like BETI Affecting the numbers this year. It's a long question, but hopefully got my point across. Thank you.

Speaker 2

Yes. I mean, we just came out with Global Sam, I do think it'll be somewhat accretive to our numbers this year, more so in subsequent years. And it's a significant system. I think it'll allow us to continue to go further up. Even just the global HCM side Increases our TAM by about 50%.

Speaker 2

So I mean it's available there and then as we continue to add the payroll to it, I just think that puts us on a different playing field for us to continue to go up market as well as serve Those clients of ours that currently have international presence and might not be using our system The way they're going to be using it into the future.

Speaker 11

Okay. Thanks. And then as a

Speaker 5

follow-up, Maybe just on the dividend and the buyback and capital allocation, you haven't really been utilizing that buyback authorization In the last few quarters, so I'm wondering maybe just refresh us on your thinking about doing the dividend when you haven't been using Other levers that you already have had in place? Thank you.

Speaker 3

Well, I would for one thing, we did buy back over $100,000,000 last So we've been maybe not the last couple of quarters, but for sure last year, we continue to do buybacks and over 100,000,000 Over time, we bought back $600,000,000 $4,700,000 shares. So I would expect that it will be a balance between buybacks

Speaker 6

The

Operator

next question is from the line of Kevin McBee with Credit Suisse. Your line is now open.

Speaker 13

Great. Thank you and congrats on the terrific results. I think I know the answer, but the source of the upside and then the raise beat kind of the quarter as well, that was new logo Primarily just wanted to understand where that's at relative to expectations initially.

Speaker 2

Yes, new logos drive our growth. And so, now I'm not going to say you see when interest rates go up, we've talked about how We're achieving roughly 80% of that as it moves. So obviously that impacts us positively as well. For us, what's always driven our revenue is to spend new logo ads.

Speaker 13

And then as you think about kind of the move internationally and upmarket, does that impact the implementation strategy at all in terms of I know upfront you try to be very opportunistic around modules, things like that. Is that the same strategy as you kind of scale the client base?

Speaker 2

Yes, I mean, it's our implementation strategy as you continue to add other countries, yes, I mean, it is going to change Implementation to some extent. Now that will a lot of that will be determined by the Origination of the client, where's the client? Are they in Nebraska? Are they in Mexico? Are they in the UK?

Speaker 2

Where's the client? You have different time zones and everything else where sometimes people are awake, sometimes they're not. Definitely, it changes your implementation strategy as you go global.

Speaker 6

Great. Thank you.

Speaker 2

I don't know that many of our methods will change as much as it would be modifying them To meet the needs of the country that we are in.

Operator

Thank you for your question. The last question comes from the line of Robert Simmons with D. A. Davidson. Your line is now open.

Speaker 14

Hey, thanks for taking the question. I was wondering, do you have customers who are now using global HCM? And if so, what's And the early feedbacks?

Speaker 2

We have some companies that are starting to pilot it. I think there's a couple. And a lot of global HCM is developed with current client feedback from that perspective, just Seeing what they're trying to accomplish, what they're using and then just making a decision that we had just to take our current systems and Be able to put them to where they could be used in 180 countries and in 15 languages. And so But we would expect more and more clients throughout this year to use the global HCM piece of Paycom.

Speaker 14

Got it. And then on the dividend, how are you thinking about adjusting that going forward? Would it be as a percent of GAAP EPS or free cash flow or some other metric?

Speaker 3

No, I mean right now it's we're looking at it as a fixed amount, dollars 1.50 over the next year, At $0.375 a quarter, I mean right now it's basically about a 50%, 0.5% Dividend yield based on our current share price. So we would look at it as that $1.50 and then adjusted as we see fit in the future.

Speaker 14

Got it. Thank you very much.

Operator

Thank you for your question. There are no additional questions waiting at this time. So I'll pass the conference back to Chad Richardson for closing remarks.

Speaker 9

Right. I want to

Speaker 2

thank everyone for joining the call today. Our employees' efforts continue to put Paycom in a great position, and we're off to a great start in 2023. So thank you to the Paycom team. Over the next quarter, we'll be hosting meetings at 5 conferences, beginning with the Needham Tech and Media Conference and the MoffettNathanson Technology Media and Telecom Conference, both of which will be held in New York. Following that, we'll be attending the JPMorgan TMT Conference in Boston and the Jefferies Software Conference in Newport Beach.

Speaker 2

We'll also be presenting at the Baird Global Consumer Technology And Services Conference in New York in early June. We look forward to catching up with many of you soon. And operator, you may disconnect. Thank you.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your

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Earnings Conference Call
Paycom Software Q1 2023
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