My name is Mark Marcon. I follow human capital technology and solutions for Baird. Our next presenting company is Paycom, one of the leading and fastest-growing and highest margin payroll and HCM providers to companies with 50 to 10,000 employees. With us today, we're extremely pleased to have Chad Richison, founder, chairman, and CEO. I always love Chad's story. I mean, he started up the company with 13 credit cards and an SBA loan back in 1998, and he served as CEO ever since. Prior to founding Paycom, he actually began his career in sales at ADP, where he excelled, so he knows the business extraordinarily well from the ground up. Also with us, we're very pleased to have Craig Boelte, the CFO.
Craig joined the company back in 2006 when the company was generating about $3 million a year in revenue. Prior to that, he was actually the CPA on the outside for Paycom. Obviously, both gentlemen know the company extremely well from the ground up. Chad, I'd like to turn it over to you just to give, you know, kind of an introduction. There's going to be a few people in here who don't know the company. If you want to introduce it, then we'll get into the fireside chat.
Sure. Paycom started in 1998. This will be 25 years this year. Started off, first on the internet, primarily payroll. Over time, we continued to build out our database to include all the other HCM products, to where both employers and employees can use 1 single system to be able to handle hire-to-retire activities. Since then, we've now rolled out Beti, our self-service payroll option, with the expectation that employees do their own payroll. For hourly or check-to-check employees, it's already inherent. They're already doing it themselves through our system, over time, we're getting others to do it as well.
That's fantastic. Chad, I'm asking 2 questions of every company out of the 22 that I'm hosting for this conference. One is just, you know, what are you seeing just from an employment perspective and a macro perspective, generally speaking? Like, if we take a look at the BLS statistics, they continue to be relatively strong. What are you seeing in terms of your client base, in terms of new hires and things of that nature?
I mean, we're not seeing a negative macro impact at all. I know from us, our own hiring of employees, it's gotten easier to hire than what it was in, I would say, a year or so ago, where people were all getting signing bonuses and everything else. I don't think you're seeing as much of that right now. From our own data internally, we're not seeing any negative numbers come in from that, which, again, would show up in our number through attrition of current clients' employees.
Great. What are you seeing just in terms of wage inflation with regards to your own employees or your clients' employees?
You know, I would say that that started to happen in 2021 and 2022 with the tight market. It kind of went along with what I said with paying...
Mm-hmm.
-signing bonuses and what have you. We've seen that moderate quite a bit across the board.
Okay, great. The other question I'm asking everybody is about their feelings with regards to generative AI. What are the potential positives? What are the potential negatives? Believe it or not, I get some questions about, you know, "Hey, could certain employees, you know, be displaced by generative AI, and therefore, could you have fewer employees to pay through your clients, or how does that work?
You know, I often think with technology, also new industries develop. I mean, I don't know how many people lost their job when the calculator came out, but, you know. In regards to AI, I mean, I do, that impacts us, is massive unemployment that happens very quickly. In the pandemic, the negative impact to us happened in the first six weeks. It moderated and then started to improve, and we've had stabilization, you know, since probably July of 2022, even within our numbers.
Yeah
from unemployment. When you look at how can the macro impact us, it's hard for me to see how it impacts our go-to-market, because I also think when people are challenged to do more with less, they automate. We're a good fit there. Again, we have 5% of the market. Our two largest competitors have 1.9 million clients combined. We have 36. Ratchets up very quickly within the course of a 2-month, 3-month period, it goes from where it's at right now, from 3.7% to 6% over the course of a couple of months. It's going to have an impact because we can't outrun that quickly, of the impact on our current client base and their employees. If that happens over the course of 2 years, I think there's mitigating factors we have to impact that.
For perspective, for those of you that don't know, I mean, the lowest quarter that you had during COVID, you know, again, the June quarter, when we think about, you know, COVID really hitting in March and April, you still ended up doing 7% growth, and for the full year of 2020, you still ended up growing 13%.
Yeah, well, those numbers don't really seem that positive, but...
No, they're not positive by your standards. Okay, great. One other thing that's impacting the macro is interest rates. Craig Boelte, do you want to talk a little bit about, you know, just the duration and the balance and how that's evolving, and, what sort of lift we could end up getting in terms of margins from that perspective?
Yeah. You know, on the interest rate, and on the balances we hold for our clients, it was $2.4 billion, first quarter. Typically, it'll come down a little second and third quarter, if you look kind of historically at the balances, and then, move back up for fourth quarter. You know, we've been very short term in our duration, but, you know, as, you know, as rates have started to peak and make come down a little, you know, we're gonna look at, you know, could we layer that out, a portion of that balance longer term, to kind of hedge against those, potential lower rates in the future.
Great.
We're not looking to do anything unnatural in mitigating. You know, the best way to mitigate any flattening impact that interest would have on us is through logo ads, you know, new business ads. We're not looking to do anything unnatural from that, from a perspective. We've been doing it 25 years. When I started Paycom in 1998, we were getting 5.4% interest on overnight sweep accounts, and it represented, like, 16% of our revenue. You know, then went through a period of just trying to keep the dollar whole, getting 0, and then it's kind of creeped back up. I mean, if you've been in this industry long enough, you know it's gonna move up and down and, you know, you don't want to do anything unnatural by chasing it as well, so.
Great. Let's talk a little bit about, you know, the go-to-market, because we run into skepticism, you know, when we talk about, from a positive perspective, about your prospects. You know, some people wonder, gee, the market must be getting saturated, you know, everybody's got a payroll system. Let's talk a little bit about, you know, what makes Paycom different, both in terms of your go-to-market strategy, the way that you organically grow your own sales force, but obviously, importantly, the solution itself and the efficiencies it can drive.
I mean, for us, the solution kind of solves the problem that exists today. If you look back 10 years ago, the major users of a human capital management system or payroll system was the user buyer. That was the person that was in the payroll department or the HR department. The major users of the systems today are the employees. They just are. The data comes directly from them into the database. No HR or payroll person ever read your mind. It had to come from you into the system, and doing it directly versus using multiple systems and emails and everything else, is the most efficient way for an employee to actually make the change, as well as confirm the selection that they made.
We've been able to produce a lot of ROI for our clients that way, and that's through providing a very simple system and a single database that employees can use. People in the HR and payroll department, you know, they're overworked, overtasked, and even then, they have some level of tolerance for complexity. Employees have zero tolerance for complexity. You give them a complex product, they're just not going to use it, and so the business doesn't benefit. One thing we've realized that whether you're an employee at a 200-employee company or whether you're an employee at a 10,000 or 20,000 or 50,000-employee company, you still have a very low tolerance for complexity in what you use. The largest companies in the world have the worst systems. I mean, they are. They're terrible.
They're the eight-legged octopus with no head. There are multiple systems. Your data is in multiple systems. They don't work together, and they're not good at integrating it. We believe that replacing all of that with one system that's highly functional, highly configurable, and is a very simple product to use. It is complex things, but it's a simple product to be used for the employee. We believe that's what drives ROI, and we see that within our client base and prospects.
In terms of talking about that simplicity, just to give the audience a feel for that, like, when you go to the R&D team and you give them, you know, a new module to come up with or the whole process development team decides on a new module, can you talk a little bit about, like, how you test things out? What's the process in order to ensure that a frontline worker can actually use it?
Yeah, I mean, it's a, you know, measure twice, cut once type approach. A lot goes into the research of something. We'll actually have different people use products. You know, I used to say, you know, if one of my grandparents couldn't use it doesn't work, you know, because you want something. Again, what we've done is we've taken our enterprise technology and made it for a consumer. We've taken a consumer approach to enterprise technology that employees use. I don't think anyone's ever uttered the word: "I don't like this software, it's too easy." You start with that approach. You would like a software that only has you do the minimal required to be able to complete the task.
At Paycom, we're not trying to see how long we can keep you engaged with our product. We're trying to see how fast you can make the functional change and move about your day, to impact, you know, the result that's needed. That's what we focus on. We focus on doing complex things simply. Our approach is that.
You do measure the usage. You have the DDX.
Mm-hmm.
You are early in terms of that from an employee perspective. You know, it's been more than a year now since you've rolled out Beti. What are you seeing with Beti in terms of the usage, the adoption, and you know, how is that resonating in terms of new prospects?
Sure. The DDX is the Direct Data Exchange. It measures the number of data impressions that employees make directly into the database versus the number of data impressions that are made in the database, which is what we call duplicative effort, meaning the employee put it in this system, and then it got into the system, or the employee sent an email to somebody, and they typed it in, and it got in the system. The Direct Data Exchange measures efficiency from data getting into the system. At Paycom, we're at about 95%. 95% of all data impressions in the Paycom system come directly from employees. That's measured by the DDX. With Beti, we're over 50% now of the employees do their own payroll. Again, it's inherent with anybody that lives check to check or hourly.
They're going to do it automatically. It matters to them if they're short $40 or $100 going into the weekend. I mean, might be some people in this room where if you're short $100, it doesn't impact in your weekend, but, you know, 60% of Americans, that's a big amount, and it impacts what they're able to do over the weekend, their plans, or what bills they even pay. They'll do it. They actually look. It matters to them that they got their time and a half. It matters to them that they got all the hours. It matters to them that they got their expenses on that check, and so they'll do it.
As we see new clients come in, it's 50% or more of their employees are doing their own payroll, and that'll continue to move up. With the DDX, we're already at 95% for all data impressions. We have many clients that are at 100% in the DDX.
Great. Can you talk a little bit about, you know, the ability to upsell to larger clients? Like, you have been moving upmarket, and I'm going to get to international, but just domestically, you went from 2,000 to 5,000 to 10,000. I know you've got clients that are well over 10,000, but what's that move like?
Yeah, I mean, you know, upmarket, it's not a product deficiency. Our product's highly scalable, and it works well. Like I said, there's no such thing as a small business employee in a large business if you're an employee. But it's really the change of the buying criteria upmarket's changed. The buying criteria upmarket used to be buy best in breed and integrated. Okay, well, they're not good at that. They're not good at integration, and the products don't work well together. That started to change, to implement a single database solution where employees do it themselves, and as that buying criteria changed, it continued to change going upmarket, which made it easier for us to engage in those businesses.
You know, we don't have a high tolerance for a 3-year sales process, and it's important for us to be able to work our process and reflect a strong ROI in the process, gain sponsorship, so that we can move forward with the client. That's what I would say has changed upmarkets, the buying criteria. I mean, I don't think they're producing HR and payroll people anymore that want to do a lot of integration. I mean, you know, I don't think that happens. I think they'd rather focus on the things that HR likes to focus on, which isn't, you know, fixing data and system issues that come up by having disparate systems.
Great. Just to continue the path, you know, you recently announced that you're going to expand internationally. It's going to start with HCM and then eventually have native payroll. Can you talk about what drove that decision and, you know, how investors should think about it, both in terms of revenue opportunity and also, you know, we've heard. We hosted a dinner last night, you know. Some investors are worried about incremental cost.
Yeah. Well, first, the opportunity. You know, as we went through the pandemic, we only charged clients for the number of employees that are paid, not the number of employees stored in our system. Some of our competitors charged for the number of employees stored in the system, it impacted us in a big way. I think we lost 14.5% of our current clients' employee base, like, within a two-week pay period or something. It impacted us. Then we started looking at our database. Well, if we did charge per record, what would that look at? We found clients that, you know, looked like they had 1,000 employees. You look at their database, they have 10,000 employees, and they're not even in the U.S. They were using our system and putting different data in there.
We looked. We already have a demand because we do have clients that have international presences right now. They use us domestically, and they'll use third parties outside of that. We looked at our demand. First product that we developed was we took all of our current products, with the exception of the gross to net calc and payroll, we put it in 15 different languages to where it'll work in 180 countries, employee perspective. That's what we're focused on right now. I mean, people talk about the expanse, but it's what we do. I mean, you know, to be able to capture international for this year is currently in our guidance.
When you think about that international opportunity, I mean, initially, you're looking at US-based companies that have international operations. What percentage of your existing 36,000 clients have some sort of international operation?
I mean, you have some of that there, I would say, but they're typically your larger ones.
Mm-hmm.
You, when you look at % of clients or-
percent of revenue.
... percent of revenue opportunity, percent of revenue opportunities, larger. Also, I mean, you know, we've only been missing one thing to do the largest companies in the world, and that's the fact that we don't have international. Someone might say, "Well, no, you're unwilling to work an integration strategy with nine other products." Well, yeah, that's not going to change. The only thing we're really missing is the fact that we don't have international, then we can do everything in one system. Well, now we do have international HCM, and we'll be continuing to roll out the payroll... you know, throughout this year and next year.
How many employees does the biggest client that you have? You don't need to name the client.
About $20,000.
Okay.
Yeah, you know, we work with clients above 10,000 employees. It's our marketing efforts are focused between 50 and 10,000. We have 5% of our client base is below 50 employees. Okay? We get call-ins and referrals and what have you, but we're just not marketing specifically to them. Sales reps can go out and sell above 10,000 employees, it's just our marketing efforts are in that range.
I mean, given the global opportunity, given the fact that even domestically, you have 5% of the market, how confident are you that you're gonna be able to continue to grow 20%+ assuming we don't have a significant recession?
Yeah, you know, we're focused on accelerating our growth rate. You know, we're always focused every week on. We have weekly quotas, so we're focused on selling as much as we can. We have 5% of the TAM with a unique value proposition that generates an incredible amount of return on investment. I believe it's in our core. You know, guidance is guidance. That's what we've provided for this year, you know, I would be disappointed if we're not able to continue a strong path of growth and capture all that's available to you. I think most everybody's doing payroll wrong. Half of the clients that use Paycom right now are doing it wrong. They get on Beti.
That's what I believe, and, I believe we're gonna see great efficiencies within our industry, and, you know, those aren't things that we've necessarily seen in the past. People have always deployed our systems defensively so that they don't get sued, or so that someone gets paid, or so that a tax gets paid. I think over time, you're gonna see them deploy this more as a focus on return on investment, 'cause it's there for them. I've always said, product costs the same whether you get your return on investment or not, so you may as well use it right so that you get that return.
That's different about Paycom is, you know, you don't spend money just for the sake of spending money. You currently have, you know, some of the highest margins in the business.
Mm-hmm.
How do you think, you know, the margin trajectory goes? Obviously, it's a scalable business model.
Mm-hmm.
You've got very high gross margins.
Mm-hmm.
you know, 85%.
Yeah.
how do we think about this?
I mean, if you've ever started a company with an SBA loan, 13 credit cards, and you're losing $30K a month, once you get positive, you know, old habits die hard.
Yeah.
You don't look to go back into that. You know, to me, you create margins through sales discipline. That's the way you create. I think that's the only way you create margins is through sales discipline. You have a disciplined approach. You know, you get the client to understand the value proposition and use it create, correctly. That creates the value for them, and then we get to share in that as well. I believe it's through that you create margins, and we've done a good job of doing that, as well as understanding why prospects buy in the first place, so being able to develop software that meets that need.
Yeah, I would also say that, I mean, just in the model, we always look for efficiencies, Mark. I mean, you know, we're an efficiency play for our clients. We also look for it in our own model. You know, where can we do things quicker and easier and continue to drive those margins?
Great. I mean, so I mean, you're already doing 42% adjusted EBITDA margins.
Mm-hmm.
Is there upside to that from a five-year horizon perspective? I mean, could you even get to 50%?
Well, guidance is guidance. We haven't updated our long-term.
Mm-hmm. Try to mark them off.
-uh-
Yeah.
Goals.
I've got to try, though.
You know, there's I mean, we're capturing growth.
Growth.
We're focused on growth. you know, so like Craig said, there's opportunities. We continue to add products, and as we've added products, I mean, a lot of them are 100% gross margin products for us. you know, there's opportunities there.
Can you talk a little bit about the free cash flow? 'Cause, you know, you get compared to some companies that are barely profitable, or they're leasing space. Talk about your free cash flow and your approach, and then, you know, what does that mean from a longer term perspective? Because you won't have lease costs.
Yes. I mean, a couple of things that impact our free cash flow is we currently own our operations facility as well as our data center, so those are things that we own and control. The other thing, like you mentioned, Mark, is, I mean, we're profitable, so we pay taxes. One thing last year that impacted us on the tax side, it didn't impact the rate, but it impacted when we paid the taxes, is the Section 174 deduction on the R&D expenses, where you had to capitalize that and expense it over five years. Probably impacted us $24 million-$26 million just on free cash flow last year.
You know, obviously we're looking at that conversion rate between adjusted EBITDA and free cash flow, and, you know, to the extent we can impact that, we definitely look at that.
Uh-
In a positive way.
Over time, I mean, you should actually see that conversion rate increase materially, particularly if you don't.
Yeah, well, you don't have to continue. Yeah, exactly.
Yeah.
Exactly.
At scale.
Right.
Yeah, I believe we're still growing, so.
Chad, one thing that's really distinctive about Paycom is also your culture, just the way that you approach things in terms of sales, in terms of growing your own salespeople. For somebody who doesn't know your culture all that well, how would you describe it? How would you talk about the fact that your people are all coming back to the office? How's that working for you?
Coming back to the office was necessary. I mean, that's worked. You know, I mean, I hope our competitors and everybody have people working out at home, because I will tell you, coming back to the office for us has been hugely impactful. I believe there's a certain focus people get when they're in their office and a certain focus, at least in our industry, if you're talking about servicing clients, selling clients, and what have you, that's been very important. I mean, we're a culture of, you know, we like to win. We're competitive. I think we're a culture of fairness for sure, treat everybody well, and, you know, we're gritty. I would also say, you know, if you walk around the Paycom walls, you know, grit's a part of our culture.
I mean, we're there to work, and we're there to win, and, you know, when you win and you're working, that's when you have fun. That's what we're focused on.
Can you talk about your approach in terms of developing office branch managers?
Sure.
expanding?
Yeah. With Paycom, we look for salespeople that typically have less than 2 years outside sales experience. We do not look for experience, and we do not hire reps that work in the industry. If you work for a competitor, we don't hire you. If you have more than a couple of years of outside sales experience, we typically wouldn't hire that person either. We look for people that are in changing career. Maybe you were in retail, maybe you're doing something else. We do require in our sales department a bachelor's degree or better, that's the way we operate.
The way we grow is we take a current sales manager, relocate them to the new office that we're opening, and then backfill them with a current sales rep that's ready to be a sales manager, and that's how we've grown our 54 sales offices.
That's great. Unfortunately, we're out of time in this room, so please join me in thanking, Chad Richison and Craig Boelte for a terrific discussion.
Thank you.
We are gonna be going to Astor Suite A, for a breakout.