Paycom Software, Inc. Q3 FY2025 earnings call

• Third quarter results were strong with double-digit organic recurring revenue growth and margin expansion, positioning to exceed full-year 2025 financial plan. • Launched award-winning command-driven AI product IWant, enabled across the entire client base, transforming HR and payroll data engagement; seeing high usage, especially among new users and C-suite. • Beti payroll solution reduces payroll processing labor by up to 90% and error correction time by up to 85%, driving new sales and attracting former clients back. • Invested ~$100 million in data center CapEx for AI initiatives, front-loaded to support IWant rollout. • Saw 20%-30% year-over-year decline in internal tickets and inbound client call volume due to high-touch service and automation, positively impacting client satisfaction. • Ramp up in marketing spend in Q3 to support product and brand strategies, particularly for IWant launch, with positive feedback expected to yield future benefits.

Third quarter total revenues were $493 million, up 9.1% over the comparable prior year period. Recurring and other revenues were $467 million, up 10.6% year-over-year. Interest on funds held for clients declined 11% year-over-year to $27 million. GAAP net income in the quarter was $111 million or $1.96 per diluted share. Non-GAAP net income increased 17% year-over-year to $110 million or $1.94 per diluted share. Adjusted EBITDA was $194 million, up 13% year-over-year, with an adjusted EBITDA margin of 39%, a 150 basis point increase from the prior year period. Recurring revenue contribution was significant, and margin expansion was driven by automation and operating efficiencies.

• On track to deliver full-year plan for double-digit organic recurring and other revenue growth and expanding adjusted EBITDA margins. • $100 million CapEx investment in data centers for AI initiatives is largely complete, providing a multiyear capacity runway for AI initiatives. • Continues to invest in sales, personal service, new client operations, and product. • Expect benefits from Q3 marketing initiatives in future quarters.

Q: Raimo Lenschow from Barclays asked about historically higher beat levels and what's seen in 2025.

A: Chad Richison said 2025 changed guidance approach, broke out recurring revenue and interest tax, provided wider range, and revenues/ adjusted EBITDA have increased from initial guide.

Q: Mark Marcon from Baird inquired about IWant usage pattern and cost of service.

A: Chad Richison mentioned IWant changes user behavior, especially new users and C-suite; re data center CapEx, said AI initiatives cost ~$25M a quarter less than competitors' approach.

Q: Steven Enders from Citi asked about demand environment.

A: Chad Richison stated demand remains strong, with less than 5% TAM penetration in US, and focused on capturing that.

Q: Daniel Jester from BMO Capital Markets asked about product opportunities beyond AI.

A: Chad Richison said they're focused on continuing to release automation products to create value for clients, with many opportunities to automate decision fatigue in HCM modules.

Q: Jared Levine from TD Cowen asked about IWant driving product attach rates.

A: Chad Richison said IWant increases access to information, helps new employees and traditional users achieve full value of modules.

Q: Bhavin Shah from Deutsche Bank inquired about 4Q guide and 4Q recurring revenue.

A: Robert Foster said 4Q is above 3Q number, and there's nothing unusual to think about going into next year.

Q: Joshua Reilly from Needham asked about bookings translating to revenue and demand dynamic.

A: Chad Richison said deal start timing affects revenue, but no changes from expected book sales/starts; demand is same across customer segments.

Q: Phillip Leytes from Mizuho asked about monetizing IWant.

A: Chad Richison said IWant helps with retention and cross-sell, and over time will contribute to increased sales and retention through differentiated strategy.

Q: Madeline Brooks from Bank of America asked about stock catalysts and execution.

A: Chad Richison said focused on revenue growth, set up well to capture market share with differentiated product.

Q: Jacob Cody Smith from Guggenheim Securities asked about IWant usage consistency and GPU optimization.

A: Chad Richison said IWant removes usage impediments, new employees use it frequently; they optimize GPU usage through daily analyzation of product performance.