Good to go?

Sounds like we're mic'd up. So, all right. Welcome back, everybody, to, well, I guess the afternoon of day one of the Citi Global TMT Conference. I'm Steve Enders, part of the software research team here at Citi. With us for this session, we have both Chad and Bob from Paycom. I want to thank you both for being here.

Thank you.

Chad, maybe we'll start with you. Just maybe take us through the transformation of Paycom over the past few years and kind of maybe where are we on processing through some of the transition that you've been going through?

Yeah, so I would say, you know, we started off, you know, obviously online. We developed all of our system ourselves. We developed a single database system, which means no matter, it manages an employee from hire to retire. No matter if it's applicant tracking, onboarding, time and attendance, labor management, time off, payroll, benefits, learning management, and you can just continue on, background check. So all of that's done in a single system. And we've always done that. And by having a single system, it meant that it was easier for clients to utilize it. It meant that it was easier for employees to utilize the system. You asked about our transformation. And so the transformation that we've really moved to is instead of having people use the system so much, it's actually automating the system to where someone doesn't have to use the system as much. Because we're in a single database and we have all the data in one place, it's made it easier for us to automate. By automation, I mean things like gone. Prior to gone, you had to actually manage time off. You had to approve, you know, can someone take this time off? Who's going to backfill their schedule? Do they have enough time? What have you? With gone, that's all automated. The employees work with gone. There's no decisioning that needs to happen. And what I found is our clients, prospect, a lot of people, they get decisioning fatigue. You have to make the same decision over and over. And what happens, you develop a little bit of inconsistency in how you make decisions. Even I do that myself. I mean, depending on when you send me an email, you might get a yes or a no, depending on how much of it I actually want to read. And so, but what I would say is, when you have automation, you get consistency, and you remove barriers to value. And so that's what Gond has done. That's what Betty's done. And now with the transformation that we've made to a command-driven system, which removes even more impediments to value, because you don't need to know how to navigate. You don't need to know how to pull information. You just ask the system. And what we are seeing is we have clients now and employees of our clients now that are not navigating the system at all. They don't even have menu items. They just have I want set up, their choice, and it works for them. So we're having a lot of success, and the word I would use is, you know, we've transformed into a full automation strategy, and that's very important for us as well as the clients and the value they're able to achieve from our software.

That's great to hear. Definitely going to dig into a lot of the AI strategy and the product side. But Bob, before we do that, I want to talk to you a little bit. Just in terms of you recently took over a CFO a couple quarters ago, a few quarters ago now. Can you maybe just give us a brief intro about yourself and maybe some of the biggest areas of focus for you as you take over the CFO role?

Yeah, well, first of all, I was very lucky to step into a role that has such a robust business model. Prior to joining Paycom, Chad and I had met. I had a global payroll business that I was running. And then prior to that, I'd spent a long time with EY. And a couple of things that Craig and Chad had started prior to me that we continued is the execution and the discipline around our processes and how we think about the business. and we'd grown so fast and now it was really time to think about, as Chad said, the automation strategy and what that means, not just for our clients, but for us internally. And you're seeing some of that in our operating margin expansions. And even with some of the headwinds with interest rates, we're still able to expand margins. So we have a robust business model that we're going to continue to focus on.

Okay, that's great to hear. Maybe going back to the AI product strategy, you know, I think you launched IWant earlier this quarter. I guess what makes it different versus maybe some other AI assistants that are in the marketplace, or what really differentiates what you're doing with it in the market?

Well, I mean, I would say it works, would be number one but i mean number two you know it's over it's the it's over the entire system you know i'm not asking a question about a document that's sitting somewhere it's over the entire system so i want either going to answer your question or put you on third base so you know you may ask it uh um you know i may ask it a question about who's logged in right now it's going to uh tell me the people who are clocked in right now if i ask uh the schedule it's going to take me to the schedule if that makes sense so i want to either either going to answer your question or it's going to navigate you to the appropriate spot i don't know of anybody that's doing that i mean i'm not saying someone couldn't but we're not seeing anybody do that out in the industry it's very important that you have a single source of truth when you're going to automate something you know if we had multiple data sources that we're having to pull from that'd be difficult if our strategy was to buy best and breed technologies and integrate them it would be difficult to produce i want i'm not saying we couldn't but uh i would have to somehow have all that data in one spot and cleansed if not you get a lot of distortion even as we were developing i want there was a couple of times i mean i remember there's one time i came out and I'm like, this thing is just going to smash everything. This is incredible. And then I went in the next day and, you know, it wasn't working well because we had thrown something else into it. And so what you feed into a model is important. But AI at its best used most accurately as the best source of truth. And then the only other thing you need is something that understands the human intent. Like, what did you mean when you said, when did someone start? Did you mean when did they start this project? Did you mean when did their shift start today? Or did you mean when were they hired? And so we have gotten really good at understanding what question they're asking based on past questions they've asked as well as based on the type of employee they're asking about. And so anyway, all that's to say is I think you're going to see more and more people leveraging AI so that they can actually remove the impediments to value and get there quicker. Sure.

That makes sense. I guess now that I1's out there, what's been the feedback that you've gotten from the customer so far? And how is the rollout maybe trending versus what you were expecting?

I mean, they say it's life-changing, transformational. I mean, so much of these things, they've just given up on. It's so, some of their tasks are so daunting when you're running HR, payroll, benefits, recruiting, what have you. It's just so daunting. And a lot of the things and activities that are just, you know, need to be done in these processes, a lot of people just given up on. It's just so difficult to do. And so the one thing with I want, it gives them all that back. You know, you get all the value without the effort. You know, we developed I want, we started using it in ourselves we thought we'd roll it out to 10 clients and within the first two weeks we'd rolled it out to 2,000 wow and uh today we're well over 50 percent by by September 15th here in 10 days we'll be at 100 percent rolled out on that one wow so and that's the clients they just don't want it yeah you know we went to a company uh one call closed a company the other day because uh you know they have some spanish-speaking employees they didn't know how they were going to teach their employees how to use our system they spoke spanish into it it worked for them that's how they're doing it you know you don't need to train you don't need training you just have to be able to speak and so that's it that's a different way and i will say this if you look 10 years out probably five maybe three there shouldn't be a piece of software that you're navigating. Why would you navigate anything? Why do you have to know where to go? There's AI now. There's other opportunities. So I think all software that's still navigable is going to die, you know, and the only thing that's going to be left, those that are, you know, command-driven automation.

So I guess with the opportunity with iWand, you know, I mean, great to hear the adoption in and that rollout so quickly, do you view the opportunity more about the ability to take more share, find more customers, or is there something about what you're doing with it that you can monetize directly within the customer base?

I would say there's three primary buckets. You know, I want, we did not charge additional four because I wanted everyone to get the value. You know, it's not all the time your customer service rep calls you and you're getting value for free and you didn't have to do any work. There's a lot of things, you know, gone was free. There's some things you had to change on your side as a business to get it. With iWant, we just teach you how to use it. And, you know, once you know how to use it, it's revolutionary for you. And so it was very important to be able to do that. The monetization of iWant, though, you know, we will see reflected in probably three primary ways. One will be, yes, increased sales. Why do you want to do it the old way? It doesn't make any sense. How hard do you want to work? How hard do you want to pay somebody just so you can work at their software? It doesn't make sense. Well, when you buy a software that works for you and it's automated, so it will be increased sales for sure. It's going to increase retention. I do believe that it removes so much of the impediments to usage currently. I do think it's going to have an impact on our retention. And then the other thing I think you're going to have sales that have more modules attached. If I asked, I want right now your work history and you didn't have your applicant tracking module, it'll only give you all your work history that you've had at Citi. If Citi was using the applicant tracking module, well, then it would give you all your work history from ever. So do you want to buy the applicant tracking module or not? And so you'll have additional modules as well that people want to add because of the value that you get.

Okay. I guess from that perspective, maybe where are we in terms of that actually beginning to impact or benefit the sales process or maybe what you're seeing in the pipeline?

Well, you've seen very strong first quarter that led into second quarter. We're having strong sales revenues coming in well, and that had nothing to do with iWant. We started using iWant ourselves mid-July and turned it on for our first clients around July 24th so it's it's still early innings in that but you know I mean it is accelerating ourselves in the field and I would say that there's a lot of excitement around our with our service groups and our clients right now of getting something valuable like this that does nothing but add value and ROI for the client without the additional expense associated with it.

That makes sense. And I guess in terms of the investment behind it, I think you said there's a bigger push on the CapEx side of needing to be able to support the AI capabilities, build out the data center footprint. How should we think about maybe the magnitude of that and how much investment you're putting to work here?

Well, I think it's first important to understand we manage our own data centers and always have. In fact, in 2014, there were 13 Tier 4 data centers and we were one of them. So we've always managed our own data centers. I believe we have the best margins in our industry and probably some of the best margins in software. I mean, that's like a plan. It's not just something we happen to fall into. And part of that plan is managing our own data centers to be able to have control. And again, when we're managing a data center, it's just for us. We don't have other clients in there. It's just us. Right. So we were able to spin up iWant and what we needed for it pretty quickly because we do have our own data centers. And so our spend, I looked at it like this, we can spend 10 to 12 million dollars a month with a third party leveraging GPUs, their resources, or what have you. Well, we can spend 125 to 130 million dealers ourselves within our own data centers. And it's not like we had to go build data centers where we had them. What we had to do is you got to go get, you know, 18 megs of power. You have to get cooling systems. You have to get batteries. Yes, you have to buy the GPUs. But I mean, the cost of GPUs come down over time. We have the GPUs. So the way I would look at it, so like I said on Ernie's call, you know, it's front-end loaded and it's transitory. On an ongoing basis, our AI cost compared to our competitors, I mean, we'll be 95% less. So we will. This year, our CapEx, you know, we kind of mentioned that what we thought at the beginning of the year and the change to that, we kind of mentioned on the last quarter. You know, this year, our CapEx expense, had we not spent any on AI, our CapEx expense probably would have finished around 9%. Because of AI, it's going to finish around 15% this year. but next year it's going to be well under 10 you know it's it's it's a one-time transitory type thing that we've done in the past i mean if you you know if you just look at what we've done in the past these types of things because we're already set up to actually manage our data and we do better when we do that it's actually going to allow us to do it for a lot less on an ongoing basis again i can spend 130 million dollars one year and then you know 10 of that or less every year, or I can spend $130 million every year going up. So that was the decision that we made to do that.

That makes sense.

I guess when you think then about, you call this a transitory one-time spend, I guess, how do you think about the future roadmap for AI, what you're doing from a product perspective, and what more capabilities you could build in or would make sense to build in on the ai side well i mean you know i want goes to version 1.1 and version 1.2 then vert but i will say you know in the future uh you'll be committing all your changes that way too you won't just be collecting the data it won't just be navigating to the right spot you'll be committing all your changes that way too so in the future you'll be able to do a very complex products uh summary and calculation and analysis so i mean it's the future it leverages a lot of other development that we do which is the automation behind it very important uh you know i want leverages the gone automation i want leverages the betty automation you really need to have it all i mean it's you know one's food one's water yeah i mean you can live with them for a little bit you kind of need both to have a healthy life and that's kind of where we're at right okay that makes um that makes sense um maybe i'll say a little bit differently just you think of the the future roadmap for for for paycom from a product perspective how does it maybe evolve further as the as ai capabilities become even more advanced as uh you're able to do more with with some of the the models out there i mean you know when you think about us in the future, you know, you really, I would want someone to think about just a brain that handles the HR function, the payroll functions, the benefit administration functions, background checks, onboard, just everything for a client, for what we serve. And the client doesn't have to be involved in it. And so employees can connect directly to the brain, if you will, which is a fully automated system that actually handles everything that the employees need. We're getting close to that i mean we still have more to go yep but that's the trajectory of where we're moving and i mean that's what the future's going to be yep um i do want to ask about the the margin the the the capex comment there i think you said 15 of this year would have been nine percent the six extras all ai and most of that's over an eight-week period that we spent it okay so it's not like it doesn't keep going yeah we're already almost spent it all does that say you don't have to you know you buy a vehicle you don't just keep putting gas in it change the level well sure but the expense associated with that a lot of it is already inherent in our model because we already have data centers sure already manage them all ourselves and always have yep so it's really just about the estimation of number of gpus that we have how many we're going to need in the future and the power associated with actually being able to keep a mob powered and what have you. And then, of course, you run your own data center. Whatever you buy for your primary, you have to buy for your backup. I mean, we don't, you know, we're always buying two. You know, it's like Noah's art. I mean, if you're building data centers, you have to have those backups.

That makes sense. I guess with that investment you're making, just how maybe should we be thinking about, EBITDA, free cash flow, conversion rates. Is there any kind of change to that dynamic kind of moving forward here?

Yeah, we're focused on that. We know it's a focus of investors, too. And we talk about it internally. We don't guide the free cash flow. But going forward, Chad has said, as he mentioned, that that gap's going to narrow going into the future because we generate a lot of cash. And even these GPUs, Chad and I talk one night, and you don't have to talk to anybody else. Got enough cash, you can go buy them if that's what we decide. So we're focused on that, and you'll start to see that converge.

We don't know what else. We don't have any appetite to build more buildings and things like that. So we don't really, you know, it's hard for me to think of what would impact free cash flow to the negative as we look further into the out years. Now we'll say this. This opportunity came about. We looked at this last year. this wasn't something that we were putting in place we needed to make sure we could develop that we didn't know we had to go through that process as we got closer to closer like we have something yeah then I'm like we're going to put 10 clients on it we ended up putting a couple thousand on it like in the first two weeks kind of thing yeah it's like oh we're going to need a bigger boat you know and so then you start doing that but then you're set up to go yeah we kind of know what it'll be like on the go forward sure so but if we did need to spend to add more that means we came out with even more technology and value which would increase the revenue as well sure but as i sit here today you know those things will happen i don't know that it's

going to necessarily increase our spend though we're looking at our a lot of it's also how you developed it you know if you're hitting it if you're hitting a gpu five times when you could be hitting it twice changes your capacity so yeah it makes uh that makes sense um and one last question on the model then i'll open it up to the uh to the room but just in terms of um you know the the tax bill that that came out earlier this year what impact does that maybe have on on the margin or how are you thinking about what that can mean for for free cash flow as well so we we talked about a little bit on the call we were just looking at it um last quarter it's going to have an impact in the third and fourth quarter on cash benefit.

We won't have to make certain tax payments, so that'll help. It won't be as much cash-wise next year. Margin-wise, it's a balance sheet item. I'm going to say if there's any questions in the room here.

I'm going to ask about go-to-market a little bit. I do want to come back to AI after that, but just in terms of the go to market structure. I think you recently promoted Amy about a year ago, maybe a little more than that. I guess what has she done that's maybe helped drive some of the reacceleration in the business? And how do you think about maybe further opportunities to drive even better efficiency and productivity within the sales and marketing channel?

Yeah, I mean, I think, you know, it was important for us to simplify our process. You know, our product has become a lot more simplified, a lot more automated. And I think that we were able to focus our sales force on that and what the value is for the clients. Our go-to-market changed a little bit in how new reps go out there and achieve quota of certain size of deals before they move further up market. That helped drive additional unit growth in our core, which was very helpful to us. So, you know, we were able to open up three offices this year. That was helpful for us. In fact, Providence has got to a million dollars faster than any city we've ever opened got to a million dollars in sales. So there's some acceleration on that side. We continue to be called and be pulled up market. You know, prospects of any different size, I mean, they need automation. And a lot of these systems, well, no, I don't know of a system that has any automation in it, to be honest with you, of any major provider of any large system in our industry that has any automation so you know you can say well no it'll go crawl your employee handbook and tell you what t-shirt you can wear on a friday but i mean that's not really automation you know automations functions and tasks and actually automating something that somebody does every day you know you take a hundred employee company, how many times do they have to request time off and manage that in a day versus 1,000 employee company or a 10,000 employee company or 100,000 employee company? I mean, you get what I'm saying? And so the larger the company is, the more automation they require, and there's just nothing out there. So we're getting calls on those kind of things right now, too. And I think that will be an opportunity.

I want to touch on the, I guess, the office openings that you did, which, I mean, encouraging to hear Providence is doing so well right now. Does that make you feel more comfortable opening up more offices in the future? How do you kind of think about, you know, when or where it would make sense to start to open additional offices?

You know, we haven't changed that algorithm of how we open up offices and how they mature and when's the right time to do that opening up offices is always about bench strength and and how's our bench strength uh and when we can do it we do it so that really tells us uh you know what those opportunities are okay and how are you feeling about bench strength right now i mean you know well uh you don't have uh bench strength unless you have strong sales. And we have very strong sales right now coming through. And so that builds a lot of end strength. Those are the people that are being successful.

Okay, that makes sense. I do want to ask a little bit around just the broader marketplace right now and some of the competitive dynamics out there. I think there's been quite a bit of M&A over the past year or so in the HR payroll space. Has that changed maybe what you've seen in the market? Is it changing pricing or competitive dynamics at all? Just, yeah, what have you seen?

I mean, you know, I've never seen a payroll company, you know, go private and get better. So, you know, and I'll just say that about that. I do think there's opportunities there. I think anytime, you know, you have mergers or acquisitions like that, I think it creates opportunities. but I will say that it's not a reason for someone to use us because this company got bought. I mean, you have to have value. You have to have an ROI. And never a part of our ROI strategy was they're bad, we're good. You know, it's what are you exactly creating in value? ROI is measured with a dollar sign in front of it and a plus, you know. And so how much is that is based on what can we provide, not based off who got bought. But I do think it's going to create further opportunities for us.

Okay. Have you started to see maybe some of those companies or some of those potential customers start to come up for, you know, as they come up for renewal? Are they looking for alternatives? Are they coming to Paycom looking for something different?

You were talking about the two that were just announced in the last month and a half. I'd say it's a little early, you know. But, I mean, we've had some in the past where it does kind of create those opportunities. But I would say it's still kind of early.

No, that makes sense. I do want to ask about some of the leadership changes that I think happened in the past month or so. New CTO, new CAO. I guess what do those changes indicate for you as a company? And how do you think about the key focus areas under that new leadership? Well, it's a normal evolution.

These are both people that have worked for Paycom 12-plus years, so it's a normal evolution. You know, Shane had run all of IT. Then he became our chief client officer and actually ran service. He had an IT background in service that really helped our clients be able to automate certain functions from them on the service side. And then so, you know, as Brad Smith is kind of moving into his new role, Shane's the natural to take over for that and then shares the role of COO with Randy because they're doing that together. Rachel, you know, I went back and took a product back. I had product forever, gave it up for about four or five years, didn't give it up, but like worked on other things and then took product back over in October of 2023. and Rachel started running it at that time. And then so her and I have worked daily on all things product and automation and she runs at this time, she's running all of our product as well as software development groups.

Okay, that's great to hear. Just on the mid-market side, that opportunity, I think you've been indicating you're trying to move more up that way. I think you've done some things on the sales side to try to make that happen. And just, you know, what's resonating in that opportunity right now?

And what are you doing from a go-to-market perspective to go after that and try to capture I'd say we're focused on mid-market, I would say, but we continue to get up-market opportunities. We've been able to sell a lot of them. They're very happy. So that's very, you know, that's very helpful to us. I would just say this. I mean, we have 37,000 clients. Our two largest competitors have 1.7 million clients combined. So there's a lot of opportunity for us, regardless of market, regardless of mid-market, up-market, what have you. We're being pulled more up-market, I think, just because of the automation. We are focused on mid-market. And then we have a lot of smaller businesses, too. The under-50 employee market represents about 3.5% of our revenue. So it is a much smaller piece, but we do have that market there as well. um i mean i guess is there anything that's changing from a go-to-market perspective like you building out a mid-market team to try to support that or does it you know any other kind of requirements to try to do that no we're we've been doing i mean we've been doing what we've been doing now for 27 years that's been our market i would say there for a while uh we had different reps maybe going elephant hunting a little bit too much and you know we focused them more on you know what they need to be focused on okay that makes um that makes sense um i think one of the questions we tend to get from investors is i think sort of on the second half ramp up

on the revenue side i think it's maybe pivoted from what gives you the confidence in that acceleration to now you know 2q is so strong how do we now think about the the growth algorithm for the rest of the year from some of the prior comments about 4q being the strongest just how do you think about that we've already got the sales i mean a lot of it you know what i mean sales are already coming in so you kind of that's the way you look at it and a lot of it started even before i'll let bob kind of continue on but mine would be sales growth the sales growth and starting earlier in the year with the record sales and having a waterfall go through q2 was strong but you know we still if you look at the stat comps too it's still accelerating growth into q3 and q4

so we're still excited about it.

And I guess as we think about that acceleration and we think about beyond Q4, I guess what does that mean kind of moving forward? I guess what other factors maybe should we be thinking about as we think about what happens beyond this year?

I think as we always say, you know, sales is our number one driver of growth going into next year. And as Chad's mentioned, he's pretty happy with where sales is and the momentum that they've gained. And so as we start to look to 26 and 27, you know, the levers all look pretty positive that we can pull.

Yeah. I guess as you think about kind of the future of Paycom and what that looks like, I guess where do you kind of see the most opportunity? What do you kind of view as or kind of what you're most excited about?

New logo ads is our biggest opportunity. We have 37,000 clients. Our two largest competitors have 1.7 million combined. So, I mean, new logo ads is our biggest opportunity. Our product now, I mean, I was telling someone the other day, it feels a little bit like 2012 where we just got the single database. And it's like we have something that nobody's had. It feels like that now, I mean, with the opportunity that we have here. So, you know, I think we're very excited about it as we look into the future. But for us, I mean, it's going to be new logo ads because I think that's an important part for our clients. It's important for us to get them on the right product.

What does that mean then, I guess, for the back-to-base motion? How do you feel about some of those reps who think maybe there's a little bit of pause on their ability to go push product back to the base?

Yeah, I mean, iWant's going to drive a lot of that right now because iWant exposes weaknesses in your setup. It exposes weaknesses in your configuration. It'll expose weakness in maybe systems of ours that you're not even utilizing. And so, you know, and I mean that, I mean, exposes weaknesses in a good way. You know, people are seeing data they hadn't even seen before in some cases. And so I want, will provide additional opportunities for our CRRs to upsell clients' products that provide them, you know, strong ROI and value.

Sure. We've got about a little over a minute left. I want to see if there's any last questions in the room. I'm going to ask one more question and we'll let you get out of here.

Just in terms of your own internal use of AI, I guess, how are you leveraging it? how are you driving efficiencies within the organization and what does that mean for kind of the go forward margin opportunity i mean it's going to have a a positive impact on our margins going forward you know we eat our own cooking so there's a lot of automation and i mean we're using ai to help us develop software spec software test software deploy software sure you know and then And you have some of the same thing on the tax service and other side. And so, you know, when you can automate something, I think it's important to do so. I mean, Paycom will always have an individual to talk to that services our clients. So, you know, we're always going to have that. We're always going to have a human touch model. But I've kind of said it at Paycom, and I've been kind of bullish on this. To the extent someone's taking data out of this system and putting it into this system or taking data out of this spreadsheet into that spreadsheet, well, that job's going away, and that's going to be going away everywhere because automation's here.

Awesome. Well, I think we can leave it there, but Chad, Bob, I want to thank you both for being here and thank everybody in the room. Thank you.