PAYCOM-SOFTWARE Earningcall Transcript Of Q2 of 2024
Chad R. Richison -- Chairman, President, and Chief Executive Officer Thanks, James, and thank you to everyone joining our call today. I'll focus my comments on the progress we are making on our 2024 initiatives, and then I'll turn it over to Craig, who will review our financials and guidance before taking questions. This year, we remain focused on providing world-class service to our clients, solidifying client ROI achievement, and deepening our automation capabilities through product innovation. I'm very pleased with the progress we are making on these client-focused initiatives as they are resonating across our client base. As a result of our initiatives, our client usage metrics and our Net Promoter Score are up and trending positively. Beyond that, I'm very pleased with our achievements on the product front. We continue to lead the industry in automation. Our clients consistently confirm this view. We continue to eclipse our functionality with even greater automation as we rapidly move toward full solution automation. The enhancements we made to our development processes at the end of 2023 enabled us to transform our solutions even faster. Year to date, we have more than doubled our development productivity rates and implemented functionality for our clients that eliminates redundant payroll and HR work through automation and employee usage. We are rapidly eclipsing the industry by delivering a fundamentally differentiated value proposition for our clients, which ultimately results in a better employee experience. We are focused on continuing to automate the most automated solution in the industry. Two examples of automation in our industry are Beti and GONE. Every month, millions of checks are processed directly by employees using Beti, delivering our clients' measurable ROI through this truly unique solution. One example is an existing client who has been with us for six years. This is a 2,500-employee company that recently adopted Beti. Since allowing their employees to do their own payroll, they reduced their payroll team by half, going from a process that took roughly four days before Beti to merely hours with Beti. Beti continues to evolve and raise the bar as we add more functionality and connections to solve complex decisioning. And we are seeing increased inbound inquiries from prospective clients. GONE, the industry's first fully automated time-off solution, was recently recognized as a Globee award winner for transforming the time-off process. It connects highly complex, traditionally disparate solutions and leverages decisioning logic to automatically approve, deny or warehouse employee time-off requests. Time-off decisions are a hassle for everyone within an organization unless you use GONE. Thanks to GONE, employees get immediate decisions, and managers gain back time and increased scheduling visibility. HR and payroll no longer have to track down managers to verify and decision requests. And GONE significantly reduces after-the-fact liabilities and related costs. The C-suite benefits from increased confidence in operations and resource management, driving improved productivity and reducing liability. We have a retail client with over 100 stores where each managers control time-off requests differently. The client enabled GONE and built unique rules per store to ensure each manager was in control of their appropriate coverage. Now these managers no longer need to take direct action on request, and when the payroll team is prepping payroll, they've eliminated the need for all follow-ups. Their payroll manager stated, GONE to Beti to the next level. Since implementing GONE, this client has automated over 1,000 time-off decisions bringing up hours of nonproductive time. I'm very excited about GONE and its ability to streamline time-off requests for the businesses across the globe. Through solution automation, we are helping our clients eliminate decision fatigue across the entire organization, from the C-suite to HR and from managers to employees. This in turn creates better employee retention and engagement for all organizations. We are meeting the expectation of today's employees. And once they've experienced Paycom, they don't want to go backward in technology. In fact, we are seeing more and more returning clients as both user buyers and employees are missing the automation that is lacking in disparate and antiquated competitor solutions they had deployed. At the end of the day, the best product will win, and we are furthering our product advantage. We continue to leverage AI across a wide variety of areas within our organization. We believe our AI approach toward full solution automation will continue to deliver even stronger ROI, value and functionality for our clients. On the international front, we continue to make meaningful progress in the geographies that we rolled out in the last 12 months. Beti is now available for employees in Canada, Mexico, Ireland and the U.K. We continue to win new clients with domestic and foreign employees, thanks to our investments in our global HCM product and our native international payroll. On the sales side, we are seeing strong momentum. Our new outside sales reps are winning more deals earlier than ever before, and we've sold significantly more units in 2024 than we did the same time last year. Just this month, we had our top sales week in company history. Sales is energized. And last week, we added our largest sales class of new reps, placing 67 sales reps in the field across the country. I'm excited about the enthusiasm across our sales division heading into the back half of the year. To sum up, I'm pleased with the progress we are making with our product strategy and with our strategic initiatives. The investments we are making in 2024 and our focus on client value achievement are designed to deliver long-term value to our clients and their employees, which will in turn deliver value to Paycom and its stockholders. With that, let me turn it over to Craig. Craig? Craig E. Boelte -- Chief Financial Officer Thanks, Chad. Before I review our second quarter 2024 results and our outlook for the third quarter and full year 2024, I'd like to say a few words about my future plans here at Paycom. I joined this incredible company nearly 19 years ago and had the privilege of shepherding the company from a few million dollars of revenue to one approaching $2 billion in revenues. It has been a career that has surpassed all of my dreams, and I want to thank Chad for bringing me in as a partner in this journey. As a new grandfather, it is time for me to prepare for my next chapter, and I'm announcing my plan to retire from my role as CFO sometime in the next 9 to 12 months. And after that, I expect to remain with Paycom in an advisory role. With that, let's dig into Q2 results by reminding everyone that my comments related to certain financial measures will be on a non-GAAP basis. Second quarter revenue of $438 million came in at the top end of our range and was up 9% over the comparable prior-year period. Within total revenues, recurring revenue was $430 million for the second quarter of 2024, representing 98% of total revenues for the quarter and growing 9% from the comparable prior-year period. GAAP net income in the quarter was $68 million or $1.20 per diluted share based on approximately 56.8 million shares. Non-GAAP net income for the second quarter was $92 million or $1.62 per diluted share. Second quarter adjusted EBITDA of nearly $160 million or 36.5% margin was better than expected, primarily due to expense discipline in the quarter. We continue to aggressively invest in areas of AI, automation, international expansion, and our value proposition for the client. Adjusted R&D expense was $55 million in the second quarter of 2024 or 14% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $81 million in the second quarter of 2024 compared to $61 million in the prior-year period. We are building more automation on the most automated platform in the industry, which should continue to distance us from the rest of the competition. For Q3 and full year 2024, we anticipate our effective income tax rates to be approximately 28% and 23%, respectively, on a GAAP basis. We estimate Q3 and full year 2024 non-GAAP effective tax rate to be 26%. For the remainder of 2024, we expect stock-based compensation expenses to be approximately $30 million per quarter. Turning to the balance sheet. We ended the second quarter with a very strong balance sheet, including cash and cash equivalents of $346 million and no debt. The average daily balance of funds held on behalf of clients was approximately $2.4 billion in the second quarter of 2024, up 8% year over year. During the second quarter and into July, the valuation of our stock dropped below that of slower growth and lower-margin peers. We opportunistically took advantage of the low stock price to repurchase approximately 790,000 shares between April 1st and July 31st for $120 million. Since July 1st of last year, we have repurchased approximately 2.3 million shares, representing approximately 4% of total shares outstanding. Nearly 2 million of that has been repurchased since November of last year. Earlier this week, we increased our buyback authorization to $1.5 billion and extended it for another two-year period. We will continue to be opportunistic buyers of our stock if and when we see dislocations in valuation relative to our peers. During the second quarter of 2024, we paid over $21 million in cash dividends. And earlier this week, the board approved our next quarterly dividend of $0.375 per share payable in mid-September. Now let me turn to guidance. We continue to execute on several strategic initiatives and remain on plan to achieve the 10% growth and 39% adjusted EBITDA margin that we guided to at the beginning of this year. For fiscal 2024, now that we have more visibility into the remainder of the year, we are narrowing our revenue guidance range with revenue expected to be in the range of $1.86 billion to $1.875 billion or approximately 10% year-over-year growth at the midpoint of the range. We are raising our expected adjusted EBITDA range to $727 million to $737 million, representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range. For the third quarter of 2024, we expect total revenues in the range of $444 million to $449 million, representing a growth rate over the comparable prior-year period of approximately 10% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $155 million to $159 million, representing an adjusted EBITDA margin of approximately 35% at the midpoint of the range. We have a strong balance sheet, strong free cash flow, and significant liquidity. We will continue to invest in areas that will bolster our competitive position and strengthen our client ROI through automation and the user experience. With that, we will open the line for questions. Operator? Operator Questions & Answers: |
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