Edited Transcript of PAYC earnings conference call or presentation 28-Apr-20 9:00pm GMT

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [3]

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Thanks, James, and thank you to everyone joining our call today. First, my thoughts go out to those whose health has been impacted by the pandemic. We also sympathize with businesses who are faced with unavoidable reductions in their workforces and the employees who have lost their jobs. Additionally, I’d also like to extend my sincere thanks to first responders, medical personnel and those involved in the supply chain who are on the front line. Finally, I want to thank our employees who continue to execute while working from home and also our Phase 4 team who remain working at the office.

For today’s call, I’ll spend a few minutes on our first quarter 2020 results and some notable achievements. Following that, Craig will review our financials and provide some perspective on financial trends, and then we will take questions.

I am particularly pleased with our performance in the first quarter. First quarter results were strong driven by our high-margin recurring revenue business model and continued strength of new business adds. Q1 revenue of $242.4 million came in above the high end of our guidance range in spite of the effects of unexpected interest rate cuts and an unemployment spike in March. Adjusted EBITDA of $117.9 million in Q1 was also above our guidance range as a result of record gross margins. We entered the year with strong momentum following record revenue retention in 2019 and a value proposition that is stronger than ever.

Even though the month of March was impacted by declining revenues from our current client base due to the effects of COVID-19, we continue to see strong addition of new clients. We are also experiencing elevated lead volumes compared to the same period last year, which we are driving through our marketing efforts and the strength of our value proposition. The pandemic is exposing seams created by the disparate systems, and that is creating a higher demand for the Paycom single database solution. I am pleased with the incredible results and collaboration I am seeing across the sales and marketing organization.

The appropriate usage of human capital management solutions has never been more important than today, and we will continue to invest and innovate to strengthen our position. More employees and managers are accessing the system, and HR and employees are doing less paperwork and manual input than ever before. We continue to see strong usage patterns of our products, as measured by our Direct Data Exchange or DDX, with usage scores well above Q4 levels. DDX numbers continue to be strong and improve as companies adopt a full employee usage strategy. When employees have a direct relationship with the database, the employee wins, the company wins from real savings estimated at $4.51 per HR task or data entry point as well as higher efficiency and overall employee satisfaction.

In February, we launched Manager on-the-Go, a tool built into Paycom’s existing mobile app which empowers leaders with 24/7 accessibility to essential manager side functionality of our solution. I said at the time that I believe this was the single most important product release we had since the launch of our employee self-service app. And while we are still early, it’s proving to be very popular. Within the first 12 weeks since its launch, Manager on-the-Go has significantly exceeded the employee self-service product adoption over the 12-week comparable post-launch period. This easy-to-use functionality distributes approval responsibilities more broadly and removes impediments to quick data flow, and managers across our client base are embracing it. Once managers use Manager on-the-Go, the vast majority of them fundamentally change the way they interact with our solutions, and actions previously completed on the desktop are now completed on the mobile app.

I’m very pleased with the trends we are seeing. While many of our clients are unfortunately experiencing significant fluctuation in their employment trends due to COVID-19, we remain focused on 3 controllable activities: providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. I am more confident than ever in our products’ value proposition and go-to-market strategy. I’ve been saying for some time we may be early with our strategy, but we’re not wrong. And today, we’re no longer early. The digital transformation for business is accelerating. I’d like to thank all of our employees for their grit and the winning spirit they display every day in this changing environment.

With that, I’ll turn the call over to Craig. Craig?

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Craig E. Boelte, Paycom Software, Inc. – CFO, Treasurer & Corporate Secretary [4]

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Before I review our first quarter 2020 results, I would like to remind everyone that my comments related certain financial measures will be on a non-GAAP basis. These are unprecedented times, and while we are withdrawing our full year guidance, we plan to get back to providing annual and quarterly guidance as soon as unemployment trends become more predictable. I’ll briefly cover our Q1 results, and where possible, I’ll provide some high-level comments about our financial outlook. Our approach is to be as transparent as possible based on what we know now.

As Chad mentioned, we are very pleased with our first quarter results especially given the unexpected interest rate cuts and spiking unemployment from the pandemic. In the first quarter, we generated total revenues of $242.4 million, representing growth of roughly 21% over the comparable prior year period, which was above our guidance range driven by strong new business wins and robust recurring revenues. As a reminder, in Q1 2020, there were only 12 banking Wednesdays instead of the usual 13 we had the comparable prior year period. As we discussed last quarter, a Wednesday represents roughly half a week’s revenues.

Within total revenues, recurring revenue was $238.5 million for the first quarter of 2020, representing 98% of total revenues for the quarter and also growing 21% from the comparable prior year period. During the month of March, we started to see the spike in unemployment across the country reflected in our client base, a trend that continued into April. The net effect as of today is that the impact on our current client revenue is similar to the percentage increase in unemployment across the country. We are closely monitoring unemployment trends and their impact on our client base. We’re also experiencing the impact of 150 basis point interest rate cuts that occurred in March. We estimate the net effect on our business for the rate cuts is roughly $4.5 million per quarter for the balance of the year.

Total adjusted gross profit for the first quarter was $213.5 million, representing a record adjusted gross margin of 88.1%, up 130 basis points compared to the prior year period. We continue to benefit from high-margin recurring revenue and increasing customer service efficiency.

Adjusted total administrative expenses were $108.4 million for the first quarter as compared to $80 million in the first quarter of 2019. Adjusted sales and marketing expense for the first quarter of 2020 was $51.9 million or 21.4% of revenues. We are seeing positive results from our recent ad campaigns and marketing efforts and plan to continue to invest in marketing in Q2 and throughout the year. We believe this is not the time to back off from our marketing plan. In fact, due to the increase in demand, we’re seeing — and the success we are having, we plan to spend more in Q2 than we did in Q1. Adjusted R&D expense was $19.4 million in the first quarter of 2020 or 8% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $27.6 million in the first of 2020 compared to $21.1 million in the prior year period. We plan to continue to invest in our future growth through innovation and new product development.

Adjusted EBITDA was $117.9 million in the first quarter of 2020 or 48.7% of total revenues compared to $103.3 million in the first quarter of 2019 or 51.7% of total revenues. Our GAAP net income for the first quarter was $63 million or $1.08 per diluted share based on approximately 58 million shares versus $47.3 million or $0.81 per diluted share based on approximately 58 million shares in the prior year period. Our effective income tax rate for the first quarter of 2020 was 28.7%. Non-GAAP net income for the first quarter of 2020 was $77.9 million or $1.33 per diluted share based on approximately 58 million shares versus $69.3 million or $1.19 per diluted share based on approximately 58 million shares in the prior year period. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the second quarter of 2020. Since we increased our buyback on March 12, 2020, we have repurchased over 260,000 shares. Today, Paycom has repurchased nearly 4 million shares since 2016.

Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $182 million and total debt of $32 million. As a reminder, this debt represents a financing of construction at our corporate headquarters. Cash from operations was $82 million for the first quarter, reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately $1.4 billion in the first quarter of 2020.

To conclude, I’ll repeat what Chad said. We are focused on mitigating the impact of the pandemic on our current client revenue numbers by providing world-class service to our clients, rapidly developing new technologies and increasing the number of new clients added to our platform. We have a strong balance sheet, a highly profitable recurring business model and the strongest value proposition in our industry. We are confident that 2020 can still deliver the enviable combination of growth and margins that we have consistently demonstrated, and we look forward to being able to quantify that combination for you as soon as macroeconomic factors become more stabilized or predictable.

With that, we will open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Raimo Lenschow from Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division – MD & Analyst [2]

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First question from me. Chad, you guys have been in kind of a crisis mode in 2008, 2009. Can you just kind of compare and contrast what you saw back then, how it compares to now, and then like — and what lessons you learned back then? And then I have a follow-up.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [3]

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Sure. So in 2008 and 2009, obviously, we were a lot smaller company. We were somewhat geo-focused in a certain area. I would say we were more in the Midwest and Southwest at that time. From that period of time, you had the mortgage crisis going on and other factors. And really at that time, it became a cash flow management issue for us. And at that point in time, we changed the way we managed our cash for clients because you had greater ACH risk at that time. So we made changes to protect cash flow at that time and exposure for ACH risk. But actually, the 3 things we’re focusing on right now are the 3 things we focused on back at that time. We continue to focus on providing world-class service to our clients, we continue to innovate through the rapid development of our software, and we also were aggressive in adding new clients. And so those are the same lessons or the same activities that we’re focused on right now, but it’s a little different, 2009 and ’08 from today.

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Raimo Lenschow, Barclays Bank PLC, Research Division – MD & Analyst [4]

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Okay. And then the follow-up, the next question I had was on — we had now like a good month of kind of working from home, et cetera. And you guys have been, in terms of your sales approach, very local. And I saw in the statement that you gave out maybe — I think Craig, productivity by kind of doing it over video calls, et cetera. Can you see what you’re seeing in the field at the moment in terms of willingness to engage, ability to engage from your sales force, et cetera? We’re 1 month in. So hopefully, you’re getting some data points already.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [5]

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Yes. And so we’ve sold face-to-face for a long time until we added the inside sales group. Again, we had about 5 of them for about 10, 15 years, and then we built out 4 teams over the last 6 months in inside sales. So we’ve had a little bit of experience with selling virtually. I will say we came into this year with strong sales momentum. We had a very strong value proposition that continue to resonate. Then we ran into the pandemic. And so on Sunday, March 15, we actually closed all sales offices and moved them to the virtual, work-from-home model. During the weeks of March 16 and the week beginning March 23, we rescheduled all of those sales appointments and really focused on retraining our outside sales organization on a somewhat new model. During those 2 weeks, our booked sales business dropped about 50% for those 2 weeks. During the subsequent week, which would have been the week, I believe, began March 30, our booked sales was back up to 80% of what we had been selling previously. And then the rest of April, we’re actually at the same level of booked sales numbers we were pre-COVID.

So from a sales bookings perspective, we continue to sell business through this. I can tell you that it used to be a sales manager could go on 6 calls a week. Now they can go on 6 in 2 days. And so reps are still highly engaged with individuals as they also work from home. Some of them are actually our clients — our prospective clients, I should say, actually may go into the office and then use a type of virtually — virtual technology to actually engage with us. But there is still people out there buying and it’s a good time to buy. I will tell you that the digital transformation has accelerated through this. I think our value proposition is stronger today, not less so. And so we’re having some success with sales.

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Operator [6]

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Our next question is from Samad Samana from Jefferies.

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Samad Saleem Samana, Jefferies LLC, Research Division – Equity Analyst [7]

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So I guess my first question, Craig, just for clarity, you said that the change in Paycom’s customer base has been consistent with unemployment kind of more broadly. Can you just clarify? So does that mean that you’ve seen — I guess what’s the change in pace for control that you’ve seen from pre-crisis to as it stands 1 month into April?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [8]

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Samad, I can take that as well, and Craig can also chime in. The point is it would be unreasonable to think that Paycom would not follow the increase in the rate of unemployment. I would say that we’re an accurate sampling size of the U.S. market as it relates to payrolls. We are industry-agnostic. So we’re diversified across all industries. Oftentimes, when it comes to unemployment, we are going to see the impact before the unemployment number actually comes out. There are many states, California, Massachusetts, Illinois, other states where you’re having to pay that last check either same day or next day from your pay date. And so oftentimes, someone’s going to receive their last check prior to filing unemployment and then actually being in — within the number. And so it would be unreasonable to think that we wouldn’t follow that. I will say this. Unemployment, if you look at it for the last 12 trailing months, it’s been fairly consistent. It’s kind of run between 3.5% to 3.8%, and that’s based on anywhere from $163 million to $165 million available Americans out there in the workforce. So you calculate that. We saw that jump in March specifically, the last couple of weeks of March is really where you started to see that jump. And it jumped to 4.4% or 7.1 million unemployed. Since that time, for April, you’re looking at — since March 15, I think we’ve had 26 million unemployment claims filed. It looks like about 24 million of those could hit in April, we would expect. And so that — you do that division over the 163 available workforce, you’re going to come up with a different unemployment number than the 3.5-ish that it had been or the 4.4% that it was in March.

And so all we’re saying that right now is we have had visibility into our numbers. There are some changes that’s happening with unemployment. We don’t know if these will necessarily accelerate through second quarter. We don’t know if they’ll stabilize. And so I think it’s just too early to tell. But unemployment does have an impact on our current client revenue. The mitigating factors that we have are continuing to add new clients onto our platform, we are seeing people engaging right now, as well as any upsells we might do to current clients but I would say that those have always been dwarfed by new logo adds.

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Craig E. Boelte, Paycom Software, Inc. – CFO, Treasurer & Corporate Secretary [9]

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Yes. And I would echo what Chad said. Even though we do have some clients who are in those industries hardest hit, like restaurants and hotels, we’re not overexposed to any of those industries and are very industry-agnostic.

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Samad Saleem Samana, Jefferies LLC, Research Division – Equity Analyst [10]

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Great. And then maybe just one follow-up. There’s been a lot of investors who’ve asked us a question about what percentage of a contract is typically fixed versus what is the variable component that’s based on head count or payrolls processed. So any directional percentage you can give us. Is it 10%? Is it 50%? It would be helpful just in framing as we’re doing the math.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [11]

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Well, I’m going to just go ahead and give this information out. I haven’t given it out before, but I’m going to talk about our billing. We have a base fee, and that base fee is for one employee. And so if you have one employee with Paycom and you’re using the Paycom system, we’re going to have the base fee, all right? Now if you add multiple employees, you might have multiple states, you may have a few more base fees. But ultimately, on smaller clients, the base fee can be a measurable percent of a client’s bill. But as that client gets larger, that base fee gets substantially distributed into the employee loss — and the employee loss percentage becomes very close to equal to the loss of revenue percent on that client. So it really just has to do with size of client before you could really figure out exactly how much of the base fee is in there. Now I will say this. We’re not necessarily seeing increased client attrition when we’re talking about units, whether it be someone leaving. We’re not seeing increased client attrition from either someone leaving and/or going out of business. The impact we’re really seeing is the impact as it relates to employee count. The clients that we’re working with might go from running 200 checks normally with us, the ones that are impacted. Again, not all are and some have even some growth in this, but for the most part, we do have several clients that may have been running 300 checks, and now they’re running 17. And so we’re going to still have the client. But again, we’re going to be impacted by that unemployment number.

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Operator [12]

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Our next question is from Mark Murphy from JPMorgan.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division – MD [13]

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Actually, good timing. I wanted to follow up on Samad’s question, Chad. Just to clarify the math on the unemployment. So we’ve seen 26 million unemployment claims out of a workforce of about 164 million. So you get about 16%. I guess I’m just curious, if the employees are furloughed and they’re — and they’ve applied for unemployment, wouldn’t they still be a payee in the Paycom system, right, and then — so then you’d still be getting paid for the furloughed employees? Or is that not accurate?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [14]

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That would not be accurate. I mean depending on how you’re using the term furloughed, typically, a furloughed employee is an employee that still has their job but is not paid. Paycom’s model is really based on number of paid employees as it goes through. Now those employees would remain active in our system. They would continue to use our employee app. And when they come off furlough, we’ll begin to receive the billing from them but — and as far as furloughed employees and how they may be also included in that unemployment number, we would want to check on that. But in regards to our system, furloughed, terminated, laid off, those should all have a very similar impact in our number although you’re going to have different termination codes because those have different rehiring activities that someone’s going to take as they turn them back into active pays.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division – MD [15]

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Okay. Understood. And then as a follow-up, I’m just curious if you’ve been able to survey your customer base at all to try to ascertain where they think their head count might trough at, perhaps when it would bottom, the pace of rehiring. At what level perhaps they think it would stabilize to try to inform your business plan? I’ll give you — for instance, if a customer had 300 employees, they think it’s going to drop to 200 in May. Maybe then they think it would ramp back up to 270. You could at least try to recalibrate and then plan on a 10% reduction in their headcount. Have you been able to do anything like that somewhat scientifically or even to have enough anecdotes to create some type of a guess on how that will look?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [16]

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Well, I think that there’s many things that we’ll be able to do once we see a trend and/or some stabilization, which makes something predictable. For many of our clients, they have the same unknown factors that we do, if you think about it. So it might just be timing. We might be a little early on being able to get good information that way. But we definitely are staying close to our clients. I mean we talk to them on a continual basis and we’ve been able to kind of see in different areas and different industries potentially impacts, but it’s really all over the board. And we still remain hopeful that at some point, it stabilizes. We just don’t know where it stabilizes at. There’s a company that made a decision in March to go into a certain phase for themselves. Do they take additional steps throughout the year? Or is March a steady state for them because they took the hit upfront? We don’t really know that yet. And as this quarter goes on, I think we’ll have more information on that.

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Craig E. Boelte, Paycom Software, Inc. – CFO, Treasurer & Corporate Secretary [17]

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Yes. Mark, and one thing too with the payroll protection program, like the example you gave, those people have applied for some assistance. And under the rules, if they use 75% of that to rehire, then you can have a loan forgiveness on that but — so we may see some of that as well.

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Mark Ronald Murphy, JP Morgan Chase & Co, Research Division – MD [18]

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Okay. And then Craig, one very final question. Is there any change with respect to customers or prospects asking for price discounts or payment deferrals in this kind of environment?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [19]

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Our pricing model is very fair. It’s actually the thing that’s impacting us right now. Our pricing model is based off the number of employees that you’re paying within the system substantially. And so obviously, I’m going to take that company. I said that maybe 300 employees before, and now there are 17 employees. Well, when they were 300 employees, they’re paying us for 300 employees. Now that they’re 17, they’re paying us for 17. So that’s a fair model and I wouldn’t see any reason that we would make changes to our pricing model at this point.

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Operator [20]

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Our next question is from Brad Reback from Stifel.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Equity Research Analyst [21]

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Great. Chad, on the new business activity, can you give us a sense of your ability to implement remotely?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [22]

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Yes. I mean to be able to implement is very similar to the way we were doing a lot of our implementations. I’m not going to say it’s necessarily done. You definitely have the conversation with the transition rep with that client. You go through training that way. But substantially, most all of our implementation has been done through either the Oklahoma City and/or Dallas area. And so a lot of it was really done remotely anyway with the exception of the training and the data collection. As a reminder also, we’ve had an inside sales group for quite some time. So no, we’re not seeing it being more difficult — becoming more difficult for us to implement. In fact, our measurement through the first quarters and implementations are going faster than what they traditionally had. And honestly, so is the sales process somewhat. I can tell you that before, we have a — we’ve set an appointment on a Tuesday and we might have that call in 2 or 3 weeks. Now we’re setting that appointment on a Tuesday, we could be having that appointment on Wednesday. And we’re getting most people at the table. And so I wouldn’t say it’s — it definitely hasn’t slowed us down from being able to convert. You will have clients that — due to the current situation that they may be in, you could have clients that choose to wait a little bit longer but I don’t even have anything to really call out in regards to that right now. But anyway, that’s where I would leave that.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Senior Equity Research Analyst [23]

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Great. And one quick follow-up. Have you seen a moderation in the rate of decline in the number of people that you’re paying — your customers are paying on a weekly basis over the last, we’ll call it, 3 or 4 weeks?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [24]

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Well, I’ll go back to what I said. It would be unreasonable to think that we wouldn’t continue to follow increases in the unemployment rate. And so you would be hoping that, that would moderate to some level of stabilization at some point.

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Operator [25]

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Our next question is from Mark Marcon from Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [26]

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I’m wondering, can you talk a little bit, just a follow-on, on the impact of the unemployment. If you have a 1% decline in terms of the number of employees paid, what does that translate to from a revenue perspective? How should we think about just the sensitivity there? I know it varies across the different client sizes. But if we’re taking a look at the portfolio as a whole, how should we think about that?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [27]

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I mean larger clients, you’re going to be close to a 1:1 ratio in larger clients. Smaller clients, it’s going to be a lot less, I mean, from that, meaning that it really does depend on size of clients. But a larger client, yes, you’re definitely closer to the 1:1 because the base fee has been eaten up by that one-employee company. Now if you’re talking about a 30- or 40-employee company, I mean you’re going to have quite a bit of base still in there. But once you’re going up to 200, 300, 500, 2,000, 3,000, I mean the ratio is going to be closer to 1% loss in their employment equals close to 1% loss in current client revenue.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [28]

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Okay. And then with regards to the new sales, that sounds tremendous. Can you talk a little bit about like who you’re winning from? Is there any — has there been any change with regards to that? Is there some special attraction in terms of the mobile self-service capabilities that would lead you to get more clients from older providers? Or has the mix changed in any way, shape or form?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [29]

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It’s an interesting question. I will say that it’s usual suspects for us. We’re hitting them the usual ways. We do have a much stronger product now. I talked about the employee mobile app as well as the DDX success we’re having. Many people are using our Ask Here as we’ve gone through this environment. By rolling out Manager on-the-Go, I mean our adoption rate on Manager on-the-Go for the first 12 weeks was almost double what our adoption rate was for the employee app for the same launch period. And so we’re having high levels of engagement. And so I would not say that any of our competitors have the level of engagement we have. And so we do continue to onboard people from the usual suspects. You do have some systems out there that were more in-house in nature or even some competitors that may have been more regional, using licensed software. And those models are very much disrupted right now in this environment. So to the extent we have the low-hanging fruit, it’s going to be more in that area. But we’re also having just a lot of success because we have a lot of clients who even call us back. We pitched them 1 or 2 years ago. It was what it was. They understand the value proposition, weren’t ready to make the move. Right now, I think people are forced to look for additional efficiencies. I think most all companies come out of this leaner and more efficient. And we’re going to do our part just to make sure that’s what happens on the efficiency side.

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Operator [30]

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Our next question is from Daniel Jester from Citi.

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Daniel William Jester, Citigroup Inc, Research Division – VP [31]

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Great. I appreciate your comments about most of the impact you’re seeing so far is in the reduction of employees at your clients’ account. But I suspect that as this situation extends, there is the risk of higher churn just from macroeconomic volatility. So I’m just wondering, you’ve done a great job over the years improving retention, is there anything specific you’re putting in place to help improve — or keep retention up even in these uncertain times?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [32]

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I mean really for retention, if you’re talking about the actual loss of a client that might go out of business other than helping them find resources that might help them stay in business, there’s not a whole lot of impact we can make there. Now what I will say is even at IPO, we announced that 90% of our revenue is derived from companies that have greater than 50 employees. And so today, that’s only going to be greater than that as far as a percent of revenue. My bet is it’s — well, it’s much higher than 90% at this point. And so for us, what we’re seeing is more a decrease, not a go away. Now some of that may be answered in how long are we in this. Do things improve when they improve? What — how long can someone last? But as we sit here today, we can’t really call out a business failure today. We can call out business failures — I should say we can’t call out business failures. We can call out impact to — that unemployment is having on those business revenue, on those client revenues.

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Daniel William Jester, Citigroup Inc, Research Division – VP [33]

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Great. And then you mentioned this briefly in your prepared remarks about DDX and improvement in engagement there. I’m just wondering based on what you’ve seen, is the usage of DDX consistent across your customers, whether they’re in — either managing these times well or not? I just wonder in times of crisis, do people go back to the old ways and move away from automation? Or does the automation stick through even in times of turbulence?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [34]

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That’s actually a really good question. We have not seen DDX score — the DDX scores have continued to go up. I can tell you this just in a couple of anecdotes. It’s actually been where — we’ll have clients that you’ll see in certain areas. It forces their DDX to go up. If they were just kind of adopting, let’s say you had a DDX score of 96% and you are sort of adopting, to some level, it forced people to have 100% adoption. I’m not saying that we’ve made it to 100% adoption but this — the environment that we’re going through right now has not — had a negative impact on the DDX scores. Now DDX is a measurement of employee usage and actually a measurement of using the system the correct way. And so I would just answer that by saying more and more people are using the system the correct way today than what they had in the past.

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Operator [35]

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Our next question is from Brian Schwartz from Oppenheimer.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division – MD & Senior Analyst [36]

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Chad, I was just wondering if you could provide some additional color on either what you’re seeing in terms of the sales or the elevated lead activity by company size. If there’s any reason for us to think that the sales activity by company size should be materially different for the business ahead.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [37]

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No. So I’m not announcing anything different on what we’re doing from a size perspective. We continue to sell both in and above our range. I had also called out that — I think it was last earnings call I called out that we have 4 inside sales teams that continue to sell to small business market. So I would say that’s been very consistent for us. Yes, we continue to see clients come in at the top end of our range or even above but we’ve always seen that. And so it’s been very consistent, and that would be also consistent with the lead that we — the leads that we see.

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Operator [38]

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Our next question is from Alex Zukin from RBC Capital Markets.

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Aleksandr J. Zukin, RBC Capital Markets, Research Division – MD of Software Equity Research & Analyst [39]

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Maybe just the first one. Chad, can you remind us on kind of the linearity of bookings on a quarter usually? And then maybe traditionally or typically, from an intra-quarter perspective, like how much visibility do you typically have 1 quarter out on the business?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [40]

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Yes. So first of all, on the bookings, I would say that month to month, they’ll kind of change. I mean typically — well, I’ll say this. Typically, summer is not a great month. I can tell you 2 years ago, August was our largest booked sales month. So it just depends. They’re all over. It ebbs and flows, right? You fill up your pipeline then you close pipeline. It is most common that the end of the year for our industry would be where your largest booking numbers would come just because admittedly, most all companies in our space would tell you January is a large start month for prospective clients for us. And so you do expect sales to be higher. As a matter of fact, some people in our industry even call it selling season. They’ll say we’re gearing up for selling season, which is kind of the September through December time frame. I can tell you with Paycom, we’re open for sales on a continual basis and it’s hard for us to really point to significant booked sales in one area versus the other. It really has to do with how fast we’re clearing out that pipeline, which leads to your visibility question. If we have somebody within our pipeline in a 90-day close, the likelihood of them closing, being that they’ve been in our pipeline for 90 days, is much smaller. It’s our goal to continue to get deals that we engaged with today to be able to move forward throughout the sales process and to get them closed up in the 6- to 8-week period. So when it comes to visibility as it relates to booked sales, sure, we have some. Do we have 3- to 6-month visibility? I wouldn’t trust a 6-month pipeline for myself because those are businesses that we should be able to get them going on the solution so that they can start receiving the ROI sooner rather than later.

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Aleksandr J. Zukin, RBC Capital Markets, Research Division – MD of Software Equity Research & Analyst [41]

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Got it. And then just maybe as a follow-up. I think probably some of us are pretty surprised to hear the new bookings have kind of returned to pre-COVID levels in April and you’re not seeing any customer, any meaningful changes in customer churn. Do you anticipate that being — like when you think about the balance of this year, is that something you’re anticipating to continue? Do you anticipate those levels to kind of trend off? And if so, how much do you anticipate to kind of sell into the base to insulate a little bit from that?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [42]

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Well, I think there’s a difference between hope and anticipation. I mean if I — I think if we were able to really quantify a lot of those and have a high level of confidence in that — of the trend we have today continuing, we would be able to — be providing more information than what we’re doing right now. I will say that even our appointment numbers through April are similar as they were pre-COVID. And so the interest hadn’t slowed down, and our ability to have those meetings hasn’t slowed down. As far as your answer on clients maybe losing their business, I would say, which we hope doesn’t happen, I mean that’s really something I’m not going to have great visibility. And I mean I can see when a client might drop, again to use the same example, from 300 to 17 employees, I don’t know what happens to that client after that if we’re in a certain environment for too long. That’s really going to depend on — it’s almost a per-client basis, what decisions they’re making about their business. So it’s just hard to — it’s hard to judge that right now. I don’t think it’s going to be forever that we’re unable to judge that. And I’m talking about — I do think there’s going to come a point in time where we’ll have better information on that, but it’s hard to tell right now.

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Operator [43]

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Our next question is from Ryan MacDonald from Needham & Company.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division – Senior Analyst [44]

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Chad, you mentioned before that there’s a bit of a difference, I think, in the code that’s entered, whether a customer furloughs an employee versus lays off an employee. Can you just talk about what you’re seeing in terms of mix with your clients or to the extent that you have seen thus far of layoffs versus furloughing at this point?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [45]

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No. I will just go back to what I said. The impact on us would be the same from a revenue perspective. I don’t know — you’re really going through and asking, okay, do clients even understand the difference between them, between furlough, between a laid off employee or between an employee that you might be using something different through some type of termination method or an onboarding method you’re going to go back to later. So no, I mean I wouldn’t be able to give you exact numbers on those who have been furloughed versus terminated and/or laid off. All that’s to say though if someone has put in a termination code for any one of those within the system or left them furloughed and active but they’re not receiving payment, it’s going to impact our revenue the same regardless of which one of those they choose.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division – Senior Analyst [46]

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Got it. And then just a follow-up. I wanted to touch on gross margins in the quarter. I think over the past few years here, first quarter gross margins have been running in that 86% to 87% range. You had a really strong performance there at 88%. What drove that nice increase that we saw on a year-over-year basis during the quarter? Is it the expanded usage from some of these self-service products or perhaps something else?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [47]

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Yes. I mean, well, you’re definitely having — and I’ll let Craig chime in a little bit on this, but you’re definitely having efficiencies gained from usage of the product. I mean we talked about before that our call volume, even the calls coming into Paycom, has been equal to or less than prior year same quarter, right? And so even the call volumes that are coming into Paycom, we’re receiving less calls because clients are using the product correctly. They understand it, and now their employees are using it correctly. And so we’re having a lot more success. And also, we’re onboarding clients with full usage strategies and we’ve been doing that for over a year. And so we don’t have to do a lot of fixing, if you will, getting all the clients to the right strategy. So you definitely have some of that, and I’m sure there’s some other efficiencies gains Craig will talk about.

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Craig E. Boelte, Paycom Software, Inc. – CFO, Treasurer & Corporate Secretary [48]

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Yes. I mean obviously, our service department — as the clients are able to use a system and are using the system correctly, our service department is able to handle a larger volume as well. So we’ve seen that and we’ve talked about that in the past as well.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [49]

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To give you one more thing on that, Ryan, the number of service individuals that we had servicing clients in — at the end of December 2020 was the same as the number of service individuals we had servicing clients December 2019.

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Craig E. Boelte, Paycom Software, Inc. – CFO, Treasurer & Corporate Secretary [50]

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Yes. I think, Chad, in ’19 and ’18.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [51]

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Sorry, ’19 and ’18.

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Craig E. Boelte, Paycom Software, Inc. – CFO, Treasurer & Corporate Secretary [52]

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’19 and ’18.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [53]

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Not 2020. The number of service individuals we had servicing clients at the end of 2019 was basically the same as we had at the end of 2018. So you’re going to get some efficiencies when you have service individuals that are able to service more clients because the client is using the system better.

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Operator [54]

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Our next question is from Siti Panigrahi from Mizuho.

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Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division – MD [55]

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Yes, Siti Panigrahi. Chad, just following up your comment about new business activities, the leads on a pre-COVID level, that’s something different we have been hearing. What we’re seeing is mostly businesses focusing on mission-critical application. So what do you think — what’s the motivation right now for most of those customers switching their payroll at this point? Is there a different kind of motivation then that you’ve been sharing pre-COVID level? And then are these mainly starting…

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [56]

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No. Well, I will say this. I don’t think any business ever liked waste. And to the extent businesses still have waste, they’re looking to become more efficient. I would also say that payroll and benefits administration and a lot of the things that we’re doing in the system, I would say, is a very important part of what any business does. So when we’re talking about critical functions, I don’t know that I align with that same thought that the types of things that someone is doing to engage with their employees right now during this environment is less critical. I definitely understand the cash flow management and the other areas that people have to manage throughout their business. And am I going to say we’re the top priority for all businesses? No. Are we the top priority for all? Yes, we are. And there’s many businesses in the U.S., and we don’t have to sell all of them this week. But we are having a lot of success continuing to drive sales. And I really don’t have anything to call out from a sales perspective save the 2 weeks we took them out to train and the 1 week it took us to kind of get back where we did drop 50% for those 2 weeks, and we dropped 80% that third week coming back. But since then, we’ve been all pistols firing — pistons firing in regards to our sales efforts and the results they’re having in booked sales.

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Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division – MD [57]

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Got it. And I wanted to ask, is there any particular verticals you are seeing more interest activities than others? And also, like given that inside sales — increased efficiency in inside sales, are you planning to hire more inside sales this year?

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [58]

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Yes. We continue to be industry-agnostic. There are industries that are going through — there’s 5,000-employee companies that are now 280 employees. And you know what, what a great time to convert to Paycom. You only pay for the 280 employees that you work through. It’s almost like a year-end conversion. And so those are great times to convert to Paycom. We’re industry-agnostic. For us, it doesn’t matter where someone is. We’re going to be focused on gaining market share as we come through this. We want to be the net winner in that as we come through this. And we’ve got some headwinds, right? We’ve got the interest rate. Now it’s at 0. We’ve got unemployment that continues to climb. If we’re doing the right things and we’re focused on the 3 key areas that we mentioned, which is continuing to give world-class service, which we have absolutely done during this; continue to roll out rapid product development which we’ve absolutely done through this; and continue to add more clients to our platform, I feel like as these things reverse on us that we’re going to have some organic tailwinds, if you will. So it’s very important right now that we stay focused on all. It doesn’t matter to me if a client is furloughing, terminating, laying off employees. Right now, we’re open for business. We want to get those clients just like we do those clients who are already growing in the face of this. We want to get them all.

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Operator [59]

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This concludes our question-and-answer session. I would like to turn the conference back over to Chad Richison for closing remarks.

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Chad Richison, Paycom Software, Inc. – Founder, President, CEO & Chairman of the Board of Directors [60]

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All right. I want to thank everyone for joining us on the call today. I’d like to send a special thank you to Paycom employees for all the valuable work they’re doing. Over the next couple of months, we’ll be meeting with investors virtually at the JPMorgan conference on May 12. We’ll also be at the Needham conference on May 19. Both of these are virtual. And in June, we will participate in the Baird and Stifel conferences. We appreciate your continued interest in Paycom and look forward to meeting with many of you soon. Thank you, operator. You may disconnect.

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Operator [61]

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Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.