Paycom Software Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2023

There are 14 speakers on the call.

Operator

Afternoon, and thank you for attending today's Paycom Software 4th Quarter and Full Year 2022 Results Conference Call. My name is Danielle, and I will be your 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. It is now my pleasure to hand the conference over to our host, James Sanford, Head of Investor Relations. James, the floor is yours.

Speaker 1

Thank you, and welcome to Paycom's earnings conference call for the Q4 and full year 2022. Certain statements made on this call that are not historical facts, Including those related to our future plans, objectives and expected performance are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements represent our outlook only as of the date of this conference call. While we believe any forward looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10 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 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 of the market today and is available on our website at investors.

Speaker 1

Paycom.com. I'll now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad?

Speaker 2

Thanks, James, and thank you to everyone joining our call today. We ended 2022 with very strong results and I'd like to thank all of our employees for the consistent hard work and execution that drove 4 consecutive quarters of revenue growth of 30% or more over the respective prior year periods. I'll spend a few minutes on the highlights of our 4th quarter and our full year 2022 results and high level expectations for 2023. Following that, Craig will review our financials and our guidance, and then we will take questions. Our 2022 Q4 revenue of approximately 371,000,000 came in very strong, up 30% year over year, bringing our full year 2022 revenue to $1,375,000,000 also up 30% year over year.

Speaker 2

4th quarter adjusted EBITDA also came in very strong at 100 and to $580,000,000 representing an adjusted EBITDA margin of 42%. The sum of our 2022 revenue growth rate And adjusted EBITDA margin resulted in us hitting the rule of 72. With our full year 2023 guidance, We are once again starting the year strong with outlook for a solid rule of 65. As a reminder, we guide to what we can see based on our existing On the product front, 2022 was a very strong year for Paycom benefiting from our 1st full year of rolling out Betty, our differentiated employee self-service payroll solution. We are seeing strong demand trends that position us to deliver another year of rapid profitable growth in 2023.

Speaker 2

We are leading an industry transformation by making payroll and HCM processes more efficient for both employees and businesses by eliminating manual tasks, improving accuracy and reducing liability exposure caused when payroll and HCM is done inaccurately. With Betty, employees are doing their own payroll by interfacing directly with their data in a self-service, easy to use software. A recent study conducted by Ernst and Young found that the average organization has a 20% inaccuracy rate when it comes to payrolls, which results in lost revenue, hours wasted correcting errors and increased exposure to potential lawsuits and fines. Each of these mistakes cost an average of $2.91 and can cost upwards of $705 for unentered non productive time errors. So you can see how costly these errors become over time.

Speaker 3

In fact, over the course

Speaker 2

of the year, a 1,000 employee company could potentially incur almost $1,000,000 in unnecessary costs correcting common payroll mistakes. Betty automates the payroll processes to deliver perfect payroll and employees are empowered to identify and correct spent aggressively on advertising. At the same time, our deliberate investments in marketing are delivering high margin revenues And we saw improving operating leverage in the sales and marketing throughout 2022. We continue to be pulled up market in 20 With only approximately 5% of the TAM today, there's still plenty of runway ahead for us to expand our market share. Paycom received national recognition from several organizations in 2022.

Speaker 2

As a workplace, we were named 1 of America's Most Trusted Companies as well as Best Company for Women and we received a Top Workplace in Oklahoma award for a 10th consecutive year. These awards are a testament to our hard work, our thriving corporate culture and our client focus. As of December 31, 2022, our headcount stood At over 6,300 employees, up 18% year over year as we continue to have great success attracting and retaining Additionally, I want to congratulate the 2022 Paycom Jim Thorpe Award Winner, Travius Hodges Tomlinson from Texas Christian University. This award recognizes the most Standing 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 in Oklahoma.

Speaker 2

To sum up, our focus on the employee experience and client ROI continue to fuel our strong results and we are executing well. I'm very excited about the long list of new innovative opportunities we will be pursuing in 2023 and beyond. I'd like to thank our employees for helping to make

Speaker 3

Before I review our Q4 and full year results for 2022 and our outlook for the Q1 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 ended the year with very strong results with full year 2022 revenue of $1,375,000,000 up 30.3% compared to 2021. 4th quarter results were excellent with total revenues of $370,600,000 representing growth of 30% over the comparable prior year period. Our revenue growth was driven by strong demand, new business wins and adoption of recent new product offerings. Within total revenues, recurring revenue was $364,000,000 for the Q4 of 2022, representing 98% of total revenues for the quarter and growing 30% from the comparable prior year period.

Speaker 3

We ended 2022 with approximately 36,600 clients, representing a growth rate of 8% compared to 2021. On a parent company grouping basis, we ended the year with roughly 19,100 clients, also up 8% compared to 2021. Total number of employee records increased 14% year over year in 2022 to $6,500,000 Paycom's annual revenue retention rate in 2022 was 93%, which was consistent with our recent full year average of 93% and up more than 200 basis points from the prior full year period average of 91%. Total adjusted gross profit for the 4th quarter was $312,500,000 representing an adjusted gross margin of 84 For the Q4 of 2022 was $87,300,000 or 23.5 percent of revenues. Our marketing strategy in 2022 has been very effective at driving high quality demo leads.

Speaker 3

With the revenue generated from prior period investments, We saw 100 basis point improvement in adjusted sales and marketing expense as a percentage of revenues for the year. We plan to continue to invest in marketing in Q1 and throughout 2023. Adjusted R and D expense was 36 $600,000 in the Q4 of 2022 or 9.9 percent of total revenues. Adjusted total R and D costs, including the capitalized portion, were $51,800,000 in the Q4 of 2022 compared to $44,000,000 in the prior year period. We have a very strong pipeline of product development opportunities in 2023 that we believe will create tremendous value for our clients and for Paycom.

Speaker 3

Adjusted EBITDA was $163,900,000 in the Q4 of 2022 or 44.2 percent of total revenues compared to $109,600,000 in the Q4 of 2021 or 38.4 percent of total revenues. For the full year 2022, adjusted EBITDA was $579,700,000 were 42.2 percent of total revenues compared to $419,300,000 or 39.7 percent of total revenues in 2021, representing over 240 basis points of margin expansion. Our GAAP net income for the Q4 was 80,000,000 were $1.38 per diluted share versus $48,700,000 or $0.84 per diluted share in the prior year period based on approximately 58,000,000 shares in both periods. For the full year 2022, Our GAAP net income was $281,400,000 or $4.84 per diluted share, up 44% year over year. Non GAAP net income for the Q4 of 2022 was $100,200,000 or $1.73 per diluted share versus $64,400,000 or $1.11 per diluted share in the prior year period.

Speaker 3

For the full year 2022, our non GAAP net income was $357,200,000 or $6.14 per diluted share versus $260,400,000 or $4.48 per diluted share in the prior year period, up 37% year over year. For Q1 full year 2023, We anticipate our effective income tax rate to be approximately 28% on a GAAP basis and approximately 26% on a non GAAP basis. Turning to the balance sheet. We ended the year with a very strong balance sheet, including cash and cash We have a strong balance sheet of $401,000,000 and total debt of $29,000,000 During 2022, we repurchased approximately 365,000 shares for a total of nearly $100,000,000 Through December 31, 2022, Paycom has repurchased nearly 4,700,000 shares Since 2016 for a total of nearly $590,000,000 and we currently have $1,100,000,000 remaining in our buyback program. Cash from operations was $365,000,000 in 2022, representing an increase of 14.3%.

Speaker 3

The new requirement in 2022 to capitalize instead of expense R and D costs resulted in approximately $27,000,000 and additional income tax payments that would have been deferred under previous law. This impacted both our operating cash flow and free cash flow as compared to 2021. The average daily balance of funds held on behalf of clients was approximately $2,100,000,000 in the Q4 of 2022. For 2023, we anticipate stock compensation to be approximately $120,000,000 On the capital expenditure front, We're in full construction of our 5th building in Oklahoma City and we now estimate total CapEx as a percent of revenues to be approximately 12% in 2023. Now let me turn to guidance.

Speaker 3

For fiscal 2023, we expect revenue in the range of $1,700,000,000 to $1,702,000,000 or approximately 24% year over year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $700,000,000 to $702,000,000 representing an adjusted EBITDA margin of approximately 41% at the midpoint of the range. Once again, we are starting the year's guidance at the rule of 65. For the Q1 of 2023, we expect total revenues in the range of $443,000,000 to $445,000,000 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 $210,000,000 to $212,000,000 representing an adjusted EBITDA margin of approximately 48% at the midpoint of the range.

Speaker 3

2022 was a very strong year for Paycom, reflecting the strength of prior year investments and consistent execution. We will continue to invest in talent, marketing, innovation, customer service and geographic expansion to meet the strong demands we are experiencing. With that, we will open the line for questions. Operator?

Operator

The first question comes from the line of Raimo Lenschow of Barclays. Please proceed.

Speaker 4

Two questions. Chad, can you talk a little bit about what you're seeing out there In terms of Antiman, obviously, the markets are nervous, kind of data points about SMB coming in, they might be weaker on some of the So I guess in the other segment of the software market, so just talk a little bit of what you're seeing. We're also looking at the numbers. Your renewals came in at 93% versus 94%. Just kind of just paint a picture for us a little bit there.

Speaker 4

And then one for Craig, if you think about the New Year and investments, like how do you think balance that kind of being other guys being nervous about the economy and your Investment approach for the year, just talk a little bit about the flexibility there. Thank you.

Speaker 2

Yes. I'll start off. I mean, our go to market remains very Strong. We continue to have very strong book sales and we've been selling Betty across the board. New clients They come in and have about 50% of their employees doing their own payroll within the 1st 2 months of using Betty.

Speaker 2

And so that continues to be successful. From 2015 to 2018, we had a retention rate of anywhere from 91% to 92%. It was 91% for 3 of those years and 92% for one of those years. For the last 4 years from 2019 through 2022, we've had a retention rate of 93% for 3 of the years and ninety 4% of one of those years. There's often rounding at play as you look through that.

Speaker 2

But what I will also say is With clients who have Betty, we have a much, much higher retention rate across our base. And I would expect retention to continue to rise as a larger percent of our current client base deploys Betty.

Speaker 3

Yes, Raimo. And then on the plan for 2023, we've given our guidance on our adjusted EBITDA and it's still a very strong guide on that as we're looking at 41%. So, as I mentioned in the prepared remarks, we're going to continue to spend on the marketing side, the R

Speaker 5

and D side and

Speaker 3

In the service side as well and really the marketing is the one area where we can pull leverage. We don't have any Long term commitments out there, so that is an area where we could pull levers if we needed to.

Operator

Thank you. The next question comes from Samad Samana of Jefferies. Please proceed.

Speaker 6

Great. Thanks for taking my questions. I guess first one, Chad, did I hear

Speaker 7

you say I think you said you had just north of 6,

Speaker 6

I think that's high teens growth over the prior year. I'm just curious How we should think about the hiring in context of it? It's slightly slower than it was in 2021. I'm just curious, is it that we're should expect just productivity to increase, maybe what the exit rate on that growth rate is and just how we think about that, the hiring trends for Paycom itself?

Speaker 2

Yes. I mean, we hired what we look to hire last year. I think believe our growth was around 18% in hiring. We definitely have a more efficient client. I've been talking about for quite some time who we kind of have the haves and the have nots When you look across our client base with those clients that have already deployed Betty and are getting strong usage out of it, we're just we're having to do less for them.

Speaker 2

I mean, we're having to fix less Thanks. We're having to do less adjustments and so they're just much more efficient. And so we don't need as many people when That said, we had a very healthy growth in our employment last year. And so I believe we had success with that.

Speaker 6

Great. And then maybe if I just think about, we've almost fully lapped The new office expansions by a year, I know it usually takes a little bit over a year for them to become fully productive, but just How are those progressing and how should we think about are there any new planned offices that you're assuming in the 2023 guidance that you just gave?

Speaker 2

We always guide to what we can see. I mean, first, I'll answer those office questions. We did open up Five offices over the course of about 3 months. 1 of those, I believe, was in December of 2021. The others were in the Q1 of 2022.

Speaker 2

All of those continue to progress. They wouldn't be at full staffing yet, but they would achieve that throughout this year as well as with the full back line pipeline. And then next year in the year of 2024, They would all be on the same quota as our mature offices are. As far as what we anticipate to do this year from office openings, As we all know that you followed us for a while, office openings that we would anticipate to expand into this year would have very little impact on this But would have more of an impact on both 2024 as well as 2025.

Operator

Thank you. The next question comes from Mark Marcon of Baird. Please proceed.

Speaker 8

Hey, good afternoon and thanks for taking my questions. One question. Craig, you mentioned you've got $2,100,000,000 held for cash held for clients in the Q4. What sort of effective yield Are you getting on that? And what is the expectation with regards to the flow balance growing over the course of the coming year?

Speaker 8

And how we should think about an effective yield on that?

Speaker 3

Yes. So Mark, on the balance, if you look at it this quarter, it grew about 13% has grown at different rates throughout 2022. So it's typically going to grow at a rate lower than what our Expected revenue growth rate is going to be. And part of that is, as we continue to move up market that those funds are held For a less period of time, we have to make those payments much quicker. So that move up market would keep that from growing at the same rate as You know our growth rate.

Speaker 3

In terms of the yield, we haven't really given the exact yield, but what we do say is that as The rates move up for every 25 basis points. We would expect to get about $5,000,000 but it layers in over time. And As we're continuing to look for longer term investments on our portfolio, some of those are a little lower rate and We've actually started to layer in some of those. You could see that from some of our earlier filings. So we're not going to get and also the banks are a little slower to give you those 25 basis points, so it takes a couple of quarters to get those layered in.

Speaker 3

So it would be something lower than the Fed funds rate.

Speaker 8

Okay. Would the rule of thumb 70% to 80% of Fed funds with a delay The kind of a good rule of thumb to think of?

Speaker 3

I mean, I think you're close. I would say that that's kind of in the range, Mark.

Operator

Thank you. The next question comes from Brian Schwartz of Oppenheimer. Please proceed.

Speaker 9

Hi, Chad and Craig. Thanks for taking my questions. Congratulations on a real nice job with the business in 4Q. Chad, I just wanted to ask you a question about either the business activity or the pipeline momentum by customer size. Are you seeing any differences in terms of the demand or the behavior of the larger organizations that are flowing through the pipeline versus, say, the smaller companies?

Speaker 2

Well, we definitely continue to Creep up as we have done even since IPO as we've continued to increase our target market. In fact, last year revenue was up 60% with clients that had 2,000 employees or more. So we are definitely seeing a demand Continuing to be pulled higher, especially as businesses are looking to deploy Betty so that their employees can actually do their own payroll.

Speaker 9

Thank you. And then one follow-up just for Craig real quickly. Did you buy back any stock In the quarter and can you just remind me again how much authorization you have left for buybacks? Thanks.

Speaker 3

Yes. So I don't think we didn't buy back any this quarter. For the full year, we bought back about $100,000,000 worth. I think we have $1,100,000,000 left on our buyback.

Operator

Thank you. The next question comes from Joshua Riley of Needham. Please proceed.

Speaker 6

Hey guys, thanks for taking my questions. If you look at the growth expectations for 2023 here, how do you think about the mix of growth from new customers versus existing? As we know, existing customers, while smaller historically and net new bookings, Their growth has increased in the last couple of years and we're seeing some different trends with different software vendors.

Speaker 2

Yes. Ours is going to primarily come from new logo ads when you just look at the size of revenue that we need to grow by in order to continue to hit our objectives. And so first price is going to be new logo ads. We don't really have a lot to call out on pace per control growth from that perspective. But new logo ads is going to be primary

Speaker 3

for us. We've always had

Speaker 2

a healthy upsell to current clients. It's just been at a much smaller level than what new logo ads are. And it's been consistent. Our upsells to current clients as a percentage Has been consistent each year with the exception of the year we had ACA.

Speaker 6

Got it. That's helpful. And then as we look to Q1 here, how should we think about the impact from W2 revenue? Remember last year that was impacted On a year over year basis because of the turnover in 2020 due to COVID, are the trends going to normalize here in this March quarter given what happened in 2022 with hiring or Anything to highlight there? Yes.

Speaker 2

I feel like they are more normal. I think it's important to understand that the our year end services as far as We provide to a client that hadn't changed a lot in the last 15 years as far as you added 1099s at one point, but you have W-2s, W-3s, $10.99 Meanwhile, the growth of our other revenue as we've added all these other products has been somewhat substantial. And so it's just the percentage or amount that our year end services has On the overall client base, it's much lower now than what it was in the past just because it's not growing at the same rate. I would say, yes. I mean, I would say yes from a normalization.

Speaker 2

I think you saw normal hiring and business patterns more so last year than what you had in years past in a couple of years past. So from a normalization of year in forms filing, yes, I

Speaker 3

would say that we are we're there.

Operator

Thank you. Next question comes from Steve Enders of Citigroup. Please proceed.

Speaker 10

Hi, great. Thanks for taking the question here. I guess I just want Digging into a little bit more on the outlook for next year and particularly on the margin side, I think talked about in the past that If we think about floating income flowing through that some of that would flow down to the bottom line. So just trying to think about How you're thinking about that layering in for 2023 and kind of where the biggest areas of incremental Investments are coming and that's leading to the EBITDA, slight EBITDA guide down from where we were in 2022.

Speaker 3

Yes, primarily we continue to invest in sales and marketing and that's what We said on the prepared remarks, we're going to continue to invest there and assuming it's going to continue to work. So That's really the area where we're going to continue to invest. Also in the R and D, I mean, we have a lot of projects in the works And we'll continue to hire aggressively in the R and D side as well.

Speaker 10

Okay. I guess on the marketing spend that you are Putting out there, I know it's been a more recent initiative for you all, I guess. What's kind of been the ROI on those dollars that you Have seen and how has that kind of changed the top of funnel activity or conversion rate that you've seen as kind of the brand awareness Campaigns have gotten out there more.

Speaker 2

Yes. I mean marketing, we started in 2020. That was also the year that we added 4 inside sales Teams and then in 2021, we added another 6 inside sales teams. I believe one of those years, our unit count went up about 17% with 17% growth. Marketing drove that as we do our marketing and spend money on advertising.

Speaker 2

We have clients of all size call us. And so marketing is directly responsible for any business that's coming in below 50 employees. And you have some direct responsibility for it above 50 employees, but it provides more support At that level as our go to market is different above 50 employees than what we experienced below. Growth's first prize, as Craig's talked about. And as we look at guidance into this year, we expect to spend healthy marketing.

Speaker 2

But also, we expect for it to work, which would return itself with highly profitable revenue, which we did see throughout 2022, Which produce healthy adjusted EBITDA margins.

Operator

The next question comes from Siti Panigrafi of Mizuho. Please proceed.

Speaker 5

Thanks for taking my question. Chad, If I look at your clients' growth in 2022, 8%, that's kind of slowing down versus pre COVID level, which used to be more in teens. I'm sure there's a factor of like you are moving up So client size, but is there anything else we should anything that impacted? And how should we think about the client growth rate going forward?

Speaker 2

Yes. I would say the comp had a little bit to do with it. Prior to 2020, we had 5 sales reps that sold inside sales. In 2020, we added 40. And then in 2022, we added roughly another 50, 60.

Speaker 2

So we started selling small business, emerging business in a much stronger way as the advertising was working. So and I don't want to say that our unit count was inflated prior, but it was different because we did add a lot of small business units and it contributed to a 70% growth in units. I think we've had and again, it did that in a year where we did 25% revenue growth. So I think as we look last year, You could deduct that we had a lot of success selling in mid range and above mid range in clients. And I would say our small business adds were somewhat more normalized because we didn't really add any small business teams last year like we had in 20

Speaker 5

202021. Thanks for that color. And then as a follow-up, into your guidance, what sort of Conjugate, have you backed into your guidance? I know this is definitely going to help float income this year, but What sort of macro environment you're factored into your guidance?

Speaker 2

Yes. I mean, we continue to guide in the $2,000,000 range. So we have quite a bit of visibility as we go quarter to quarter. I will say that in we started our guide last year for 2022. We started it at 25% And we were comping over a year where we had done 25% growth.

Speaker 2

This year, we're starting our guide at 24% comping over a year where we had done 30 And so we haven't changed our approach to guidance. We guide what we can see. And achievement matters throughout the year. And so That's what we're focused on as we move throughout the year. And so I'm trying to answer your conservatism.

Speaker 2

I mean, we guide to what we can see each time, And we look to unload the musket throughout the quarter.

Operator

Thank you. The next question comes from Bryan Bergin with Cowen. Please proceed.

Speaker 11

Hi, good afternoon. Thank you. I wanted to follow-up on retention first. So I heard the comments about steady clients being higher and the relative stability from prior years. But just as we think about the year on year downtick here, Can you talk about is this larger client churn or is it a lot of churn among smaller clients?

Speaker 11

Just trying to understand that dynamic.

Speaker 2

Well, we're definitely from a smaller client perspective, now of course, they contribute smaller revenue amounts, but from a smaller client perspective, I do think that You're seeing more of a trend, like maybe what you saw more pre pandemic. I mean, there's less prop up for them in the market. For most new businesses, I believe about 75% of them fell within the 1st 3 years. So all that's at play. When you're working with smaller business, as I just mentioned, we started adding really started adding those small business units in 2020 and then continued throughout 2021 and even added more obviously in 2022.

Speaker 2

And so that definitely plays into it. I would also say that's Revenue retention numbers, so you had a you have a dividing number that you start with. I've been talking for quite some time about the efficiencies that Clients who are using Betty and what they're gaining, in fact, we're just we're not having the same hiccups with them that we would often charge them for at a lower margin and then have to fix. And now those are really being prevented with vetty. So you've got a couple of things at play.

Speaker 2

And then also you've got some rounding at play. But All that's to say is 93% from what I've seen still up there in industry leading number. And I do expect, again, with clients that have Betty, I mean, we're running at a 99% type retention rate with them. It's a little bit different there. And as we continue to convert our current client base over to Betty, we expect to have some gains In that, I will mention that we always have some uncontrolled losses, your bought sold merge type businesses.

Speaker 2

So getting to 100% isn't achievable. But I believe that we continue to have an opportunity to bump up retention and that's going to come through usage appropriate usage of our product.

Speaker 11

Okay, understood. And then a follow-up on margin here. So Craig, I may

Speaker 12

have missed it, but did

Speaker 11

you say where you expect gross margin to land in 2023? And I hear your message on increased efficiency in sales and marketing, and you've also mentioned increased, I guess, new product development. Should we expect that The explanation around EBITDA downtick, you're only more about R and D ramping or is it both R and D

Speaker 8

and S and M?

Speaker 3

Yes, I would say it's both R and D and sales and marketing, and as we're looking for our plans for 2023. We didn't really talk about the adjusted EBITDA, but we've been on a pretty narrow range for the last several years. We have gross margin for the last several years.

Operator

Thank you. The next question comes from Jason Celino of KeyBanc. Please proceed.

Speaker 13

Hey, afternoon guys. Maybe Chad, you've been pretty vocal about Opportunities automate payroll and broader HR. When we think about generative AI, I feel like this is up your alley. I mean, What excites you most about the technology if you've looked into it and what could it mean for Paycom and HR as a whole?

Speaker 2

Well, I mean, we are solving problems for the client and processes that I believe can be automated and Hadn't been until really Betty came into play, which somewhat forces appropriate usage within our software for employees so that they can get Paid correctly. I do believe that there's more automation that we can be doing. But you've got to start with you've got to have the client And the employees using the product correctly, which I will say that about 50% of our client base that is the case. And last year was our 1st full year of selling Betty and bringing it to the market. And so we're having a lot of success for that.

Speaker 2

I believe AI for the sake of AI isn't really valuable to the client, but I believe that If you can do something consistently and you can use something like AI to do that, think that's a good thing. So I don't expect we would see it as a wide platform within our industry this year Type thing with that, but I think you'll have more and more businesses looking for that machine learning and other types of automation that could be used To automate problems experienced by our clients right now.

Speaker 13

Okay. No, that's fair. And then just Craig, maybe a quick one. I think the EBITDA Beat in the quarter $18,000,000 6 percent beat toward the higher end of what we've typically seen over the last 4 years. Anything to note on the strength, Expense management, anything on timing of some investments?

Speaker 13

Thanks.

Speaker 3

I mean, there were really 3 or 4 buckets that really helped drive that EBITDA beat. 1, your marketing spend was a little higher Q4 and some of that's just when we We are doing those marketing things that we have planned, Little higher capitalization rate on the development and that's focused on new initiatives. Betty clients generate higher quality revenue. So we saw a little bit of that. Then in the quarter, we had a net insurance proceeds of about $4,800,000 for expenses that were incurred both current and prior year quarter.

Speaker 3

So That's really what drove the adjusted EBITDA beat.

Operator

Thank you. The next question comes from Arvind Ramani of Piper Sandler. Please proceed.

Speaker 12

Thanks for taking my question. I just wanted to ask a question. How should we think about growth from existing clients Who are expanding their own client base?

Speaker 2

Not any different than what we've experienced In the past, I mean, again, I'm removing the COVID

Speaker 7

year out

Speaker 2

of that, but not any different than what we've experienced in the past. In any given year, you have some clients grow, you have some clients not, you have some clients buy business, you have some clients sell business. And so I believe that's always somewhat worked itself out. Maybe we win some, maybe we lose some, but really the growth for us is driven by new logo ads. I mean, Holly has book sales numbers that drive our revenue growth and that's how we're going to hit our targets.

Speaker 2

I think that we expect stability within our current client base as we look to guide. We do have an assumption of stability. We don't really make assumptions of growth and or downsizing within those within our current clients. Across a 30,000 plus client base, it seems it tends to have averaged Over the last 25 years that I've done this with the exception of the 2020, some in 2021 time period.

Speaker 12

Terrific. And if you can just kind of help me sort of reconcile the 8% growth in new logos versus the 14% Employee expansion, how should I interpret those two numbers?

Speaker 2

Well, I mean, that would tell you that the client size is growing as well there. We I've been continuing to call out that we're having continuing to be pulled further and further upmarket. A couple of years or about 6 years ago, we went from 2000 to 5000. Couple of years ago, I mentioned that we're going above we're going up to 10,000. I've talked about how we're continuing to build up even further.

Speaker 2

And so that's going to get you a larger employee count with Potential for less of a unit count. But I would also say, I don't want to overlook the fact that we've had a lot of success On the small business unit and when you're looking at unit count growth, they're all created equal. I mean, everything's whether you're a 1 employee unit or whether you're 10,000 employee unit, you're created equal on that report from a unit count percentage. But it's just been a trend to larger clients with the exception of the 2 years where we decided we're going to add our small business emerging business units or groups, Of which now we have 10 teams and that really hadn't grown. The teams haven't grown.

Speaker 2

Of course, we continue to add small business units.

Operator

Thank you. The next question comes from Bhavan Shah of Deutsche Bank. Please proceed.

Speaker 6

Great. Chad, I know we touched on this a bit earlier in the call, but are

Speaker 7

you seeing anything as it

Speaker 6

relates to changes in the pipeline generation or sales cycles Over the past 8 months, maybe even reasons why customers are maybe looking to switch even selecting Taycan?

Speaker 2

I mean, we continue to have strong product demonstration leads, but that's oftentimes a function of our marketing and advertising, and we pay for those leads. I can say for us, it's been business as usual. We've been back in the field since September Last year, meaning actually back on-site on every single call where before we were doing more of a hybrid, some were virtual, Somewhere in person. So I would say, if anything, we're having less calls with the client to get to close. I can't necessarily say that speeding up the process, but I think we're having better conversations as we go through the process.

Speaker 2

So really nothing to call out there other than today when a client calls Paycom And it looks to have a product demonstration. It's about Betty. And I would say in times past, it could be about whatever corn they had in their paw that we're looking to pull out. So it's a little different today in the type of lead we are generating.

Speaker 5

Got it. That's helpful.

Speaker 7

And just a follow-up, how do you

Speaker 6

think about the Peppram opportunity in 2023 relative to some of the growth that you saw in 2022?

Speaker 2

Because you definitely have to have a certain product set for us from us purchased and being used in order for Betty to work for you. So I would say that the clients that we are selling In 2022, have a better stronger product mix than those clients we would have been selling in 2018 Indoor 2019, we still do have an opportunity with current clients. We do have to really work at their pace To get them over to Betty and to really to get them to achieve the value that it can deliver and we continue to look at And there's still opportunities, obviously within our current client base to deliver more Peppam as well as on new business sales.

Operator

Thank you. And our final question comes from the line of Daniel Jester of BMO Capital Markets. Please proceed.

Speaker 7

Hey, great. Thanks for squeezing me. I appreciate it. Just on that comment about Betty, Chad, Can you update us what percentage of the base has betty at year end?

Speaker 2

We're around 50%. It's about where we were when we reported in November. As clients go through year end, there's different objectives for both them and us as we're onboarding clients. Betty does require a conversion of process on the side of the client as it is going to change how their employees Utilize the system. There's a detailed conversion type plan that we go through with every Current client as they choose how and when to deploy.

Speaker 2

But we're continuing to meet out there with our clients. I would also say That your larger clients are deploying it a lot quicker current clients are deploying it a lot quicker Then what

Speaker 8

your smaller

Speaker 2

your smaller clients current clients might be deploying it as a point that I would mention once more. All businesses of any size, whether they are small or large, since July of 2021 Have been sold and converted into Betty. So we're really talking about our current client base that

Speaker 7

we had prior to that. Great. Thanks, Juan. And then just lastly, and you touched on this a couple of times about sort of the upmarket success and opportunities. As I think about sort of how you're investing to attack those opportunities, is this strategic, I.

Speaker 7

E, You're devoting more resources specifically because you think there's more opportunity up market or is this tactical in which kind of Year in and year out, you're deploying resources and maybe 1 year you see more opportunity smaller in down market and another year you're seeing more opportunity in the upmarket, so you can be sort of tactical with those sales investments? Thanks very much.

Speaker 10

Yes. I'd say it's a little bit of both.

Speaker 2

And one thing I've been saying for Quite some time now. Our industry shifted. It shifted to leverage employee usage to help the client. When employees use the product correctly, the client has less exposure and liability around this process, which Paying employees, providing them benefits and everything else, I mean that carries some exposure, even how you have an employee applies for a job. And so I believe that all these self-service technology has really been helping the client.

Speaker 2

The reason I say that is this, When it comes to an employee, Jan Smith, whether Jan Smith works at a 30 employee Or whether Jan Smith works for a 10,000 employee in regards to how they work with HCM and Payroll Products, it's substantially the same as far as the needs that Jan has. So what I would say is we've stayed very focused on the employee and an employee is an employee regardless Of which company they work for? Are there some things that a larger company, we just know we're going to run into that's going to be different Than what we would run into in a company that might have 150 employees? Absolutely, there's some changes in that. And I would say that's where more Strategy comes into play as well as making tactical moves to make sure that we're able to provide the back end Experience that they're looking for.

Speaker 2

But I will say the more that we're doing at the employee level, the less you're having to do on the back end. Because a lot of the things you're doing on the back end is to make sure you're not having issues with the employee data and or if you do, you're having to fix it. And You get a lot of points for prevention these days. And large companies, they don't want to do

Speaker 10

a lot of extra work either.

Operator

Thank you. And with that, we will conclude our time of question and answer. I would now like to hand the conference back over to Chad Richistan for closing remarks.

Speaker 2

I want to thank everyone for joining the call today, and I want to send a special thank you to our employees for contributing to our continued success. 2022 is a great year for Paycom, and we're set up for another great year in 2023. We'll be hosting meetings in New York at the Wolf March Madness in March. We look forward to catching up with many of you soon. And operator, you may disconnect.

Speaker 2

Thank you.

Powered by Quartr
Earnings Conference Call
Paycom Software Q4 2022
00:00 / 00:00