Paycom Software (PAYC) Q2 2026 earnings call transcript

Thank you and welcome to Paycom's earnings conference call for the second quarter of 2026. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives, and expected performance are forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the ICC, including our most recent annual report on Form 10K. You should refer to and consider these factors when relying on such forward-looking information.

Any forward-looking statement made speaks only out of the data on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Also during today's call, we will refer to certain non-GAP financial measures, including adjusted EBITDA, non-GAP net income, and certain adjusted expenses. We use these non-GAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAP versus non-GAP results is included in the press release that we issued after the close of the market today, and is available on our website at investors. paycom.

com. I will now turn the call over to Chad Richardson, Pecone's founder and CEO. Chad?

Thanks, James, and thank you to everyone joining our call today. I'll briefly comment on some of the new product launches and achievements so far this year. Then I will pass the call over to our president, Shane Hadlock, and then Bob will review our second quarter results and pull your guidance. We will then take questions. Let's get started. We delivered another solid quarter with results coming in ahead of expectations.

The benefit of our software's full solution automation, coupled with world-class service, continue to drive industry leading ROI, which is resonating in the market. With our strong first half results, we are well positioned to exceed our initial 2026 plan on both a revenue and profitability basis. Demand for automation is increasing and our platform remains the most intelligent solution in the industry. Thanks to our early focus on data integrity and consolidation, we continue to expand our automation capabilities with AI and automated decisioning to deliver even more value to our clients. Earlier this year, we announced the release of our career and succession planning solution, and we are seeing solid client adoption.

This is another automated product that equips leaders with the solution to more easily identify and develop talent, ensuring organizations are better prepared for the future. With this product, organizations have reliable data to discover workforce talent gaps and assess talent readiness, a client of ours with over 500 employees who is already using our performance and take on learning products, added career and succession planning, and for the first time, they have all key positions and successors identified. They were very pleased with how quickly they could identify leadership gaps and fill them with people who were developed to step into the roles.

Clients are thrilled with this new functionality and the automation it creates for career development and succession. In July, we released our latest automated product asset management. This solution enables businesses to manage their physical and digital assets, which represent one of their largest budgetary spins, ensuring those investments are deployed, tracked and recovered through automated software. The launch of asset management expands our capabilities into an entirely new multi-billion dollar TAM that fits perfectly within our software ecosystem. By combining asset management with the automated tools already in the Paycom system, we help our clients strengthen the security of their assets, bolster compliance, and reduce loss property. Not only can organizations track all of their assets across their locations, but they can also identify the exact resources a position requires, which ensures a consistent deployment and retrieval of all company assets.

Even though it was just released a few weeks ago, client feedback has been very strong and they're already adopting this new technology. Asset management marks the 45th product we have developed, hosted, distributed, and serviced over our nearly 28 years in business. We take great pride in our ability to consistently release industry leading technology that generates tremendous ROI for our clients. Now, I would like to turn the call over to Shane Hadlock. Prior to his role as our president, he served as our chief client officer, where he was instrumental in increasing retention, driving world-class service, building strong groups of leaders, and delivering tremendous automation across the organization.

With that, let me turn the call over to Shane.

Thanks, Chad. We are driving innovation across our industry and this quarter we released Project Arc. Project Arc was the largest system-wide release we have had in our company's history. This new release fundamentally changes the way clients and their employees experience pay come. Clients love the new scalability and customization. This new release gives each user a unique experience, helping them quickly find the information and action items most relevant to them. Our clients say that their managers are raving about how customizable the system is, making it easier for them to do their jobs. One of our clients with a few thousand employees said that they were impressed with the new Arc release because it provides great customization and performance for their employees, managers, and organization.

In addition to the new customizable features, Project Arc included significant updates to enhance the performance, scalability, and functionality of our software. These changes to system performance and scalability have produced an experience for our clients that is much more efficient. In fact, a client of ours with over 10,000 employees reported their system performance increased by 4X. Client feedback has been incredible and they are enjoying the benefits of this customization and improved scale, making the industry's most intelligent solution even more powerful. Our award-winning AI solution, I want, continues to accelerate speed to value for our clients by providing them with system intelligence that automates events and tasks within the system. For many new employees and new users of our software, utilizing I-1 is their first interaction of our software, making it easier than ever to use.

As we roll out more AI and automation across the platform, we are driving measurable value for our clients and their employees.

I want, has been a game changer for our clients and the industry. I am proud of our team and all the work we have accomplished over the course of the year to drive efficiency and client satisfaction. Across the board, we have great talent at Paycom, especially in the leadership team. We have a deep and experienced bench with institutional knowledge and a competitive mindset that sets us apart.

I would like to thank our employees for their contributions to an excellent first half of 2026 and the robust results year to day. We are building strong momentum on a variety of new products to further automate businesses. During the quarter, our product and culture received several accolades. Paycom earned the 2026 top rated award from TrustRadius, which reflects strong client satisfaction across multiple HR and payroll categories. I was also pleased to see Paycom was named to Newsweek's greatest workplaces in tech and our sales organization was included in selling powers, 60 best companies to sell for. These awards highlight our differentiated product set, client satisfaction and elite sales program. This is an exciting time to be part of Paycom.

With that, let me turn the call over to Bob.

Thank you, Shane. Second quarter results were strong with total revenue of $531 million up 10% over the comparable prior year period and recurring in other revenue of $505 million up 11% year over year. Revenue strength in the quarter was broad based, reflecting consistent product demand conditions and increased client satisfaction. Our focus on process automation and leveraging our own technology is driving increased productivity across the organization that is fundamentally strengthening our business. Our efforts over the last several quarters are driving sustainable margin expansion and earnings growth.

Gap net income increased 20% in the second quarter to $107 million or $2.34 per deluded share based on an average of 46 million shares outstanding. Non-gapped net income for the second quarter was $128 million or $2.78 per deluded share. Adjusted EBITDA on the second quarter came in at $235 million representing a 320 basis point year over year margin expansion to 44.2%.

Based on the strength of our results in the first half, we are well positioned to deliver industry leading EBITDA margins, record free cash flow, and accelerated earnings per share growth in 2026. We continue to identify what we view as a valuation disconnect in the market during the second quarter. An opportunistically repurchased approximately 2.6 million shares of common stock or approximately 6% of our shares outstanding for a total of $346 million. Over the first six months of the year, we reduced shares outstanding by 20% by repurchasing nearly 11 million shares of common stock. We turned approximately $1.4 billion to stockholders. We ended the second quarter with approximately 44 million shares outstanding and $1.66 billion remaining on our buyback authorization.

We also paid approximately $18 million in cash dividends during the second quarter. On August 3rd, the board approved our next quarterly dividend of $0.37.5 per share payable in early September.

Turning to the balance sheet, we continue to enjoy a very strong liquidity position. We ended the quarter with cash and cash equivalents of $198 million and have drawn down a total of $900 million on our $2.1 billion revolving credit facility to support a year to date stock repurchases. The average daily balance of funds held for clients was approximately $2.9 billion in the second quarter of 2026, up 9% over the prior year period.

Now, let me turn to guidance for 2026. Based on the strength of our first half results and more visibility heading into the second half, we can confidently increase our revenue and adjusted EBITDA guidance ranges. We expect total revenues to be between $2.197 billion and $2.212 billion or between seven and eight percent year over year growth. We now expect full year recurring and other revenue to be up eight to nine percent year over year. Included in total revenue outlook is interest on funds held for clients of approximately $105 million, which assumes current rate hold for the remainder of the year.

Finally, as we continue to benefit from the impact of our automation initiatives, full year adjusted EBITDA is now expected to be between $1.007 billion and $1.022 billion, representing a record adjusted EBITDA margin of 46 percent at the midpoint of the range. Our strong first half results have bolstered our conviction in our 2026 plan and in our full solution automation strategy. We are executing well across the organization. Our clients are increasingly pleased with our platform and their ROI achievement and we continue to opportunistically return value to stockholders through our capital allocation strategy. We'd like to thank our employees for their commitment to our vision and their contribution to our strong first half result.

With that, let's open the line for questions. Operator.

Oh, no, it was broad-based. Nothing new all from the same buckets that we've always had in the past.

Yeah, I mean, obviously some of the products that we produced last year starting to contribute to that, we did release two significant products, I would say in the last three months. One of them in the last couple of weeks, I would say their contribution to this quarter wouldn't have been meaningful, but one of them would have contributed a little bit. But we do look for both of those to contribute more as we move into the future.

Yes, you know, I don't know that I would say AI as much. Definitely, AI helps us in the prospecting and identifying certain prospects and maybe what trends they had before. You know, we are a high touch sales organization, and so we do that high touch sales model. I will say that, you know, over time, especially over the last couple of years, including into this year, you know, we have allowed our clients to buy in-app. And so it does somewhat circumvent the book sales process as they can buy directly from us. Career and succession planning is actually a product that allowed for that.

You bet. When you think of CapEx, first, I mean, I kind of want to frame it this way. You know, last year, we spent over $100 million to prepare data centers to host our own AI models. And this year alone, that spend will lead to about $100 million savings in R&D and another $30 million or more. And I want response fees that would have come from a third party. And, you know, as an added bonus, we use some of the excess capacity to improve the performance of our systems with greater processing power. So we do believe last year's investments will produce even greater value as we move into 2027.

And then Bob, you want to comment on the CapEx? Yeah, I do. Let me comment them out too on the CapEx. It will be a little more normalized than in the past. But when we look at the results, especially as it flows down through EBITDAH, I want to go ahead. That flows all the way through to free cash flows. So I want to kind of make a one-time comment on free cash flow given how the market has consistently underestimated the strength of our business model over the last few quarters. But I would tell you that based on the strong first half results and what we have visibility into for the rest of 2026, we do expect free cash flow to exceed $650 million in 2026.

And then maybe the CapEx approximately 6%. And then I'll give you the tax numbers too for the models. Gap tax rates 29%. Non-gap tax rates 27. And stock based comp is 3% of revenues in 2026.

Yes, Steve. So last year, actually, it's your conference we talked about. We were conscious of the fact that even DAH margin and free cash flow margin had to begin to get closer and closer. So what was driving this year, and it is sustainable, was it was broad-based too. It was efficiencies in how we do our processes, and it was efficiencies in our labor workforce. And we'll continue to drive those efficiencies in the future.

Sure, with an enhanced system, it did require somewhat of an enhanced sales process just to make sure that our clients are able to achieve the full ROI that's available to them. And we want to make sure we're presenting that to them on first call. And so we have, sales has been doing great as a reminder. We have many reps still going through training. And also, as a reminder, we expanded our teams of A to teams of 10. So you have 100 of our new sales reps. Over 100 of the new sales reps are also additional headcount for some.

Sure. And we, in our assumptions that there would not be any kind of rate increase or cut through the rest of the year, even if their world would have a minimal impact on this year.

You know, we have two categories of book sales. You know, one is sales to new prospects. And we also have sales to current clients. As I kind of mentioned earlier at the beginning of the call, you know, over the last couple of years have implemented more in-app purchase capabilities. And that somewhat skips the book sales process. But, you know, bookings have come in as expected. And we would expect as we add more and more reps to the field. And as they grow those pipelines, we would expect that the additional rep headcount would be a creative to future book sales.

Now, there's, you know, this is my favorite question. Thanks, Jason. The count is, we, the seasonality have probably one more Wednesday, maybe in the third quarter. And then you have a little bit of tough comp in the fourth quarter. But as you know, we look at that and smooth that up over the two quarters. So we look at it six months.

Sure. Pipelines remain very strong. You know, in the perfect world, your pipeline turns into backlog of clients ready to implement. And so, you know, that's what we look for. But pipelines remain strong and they'll continue to build as more and more reps, you know, enter their territory. As far as product contributions into the future, you know, we've got, we've done a lot of development in the last year. And we've got a lot more that will be coming out in the next year. The one thing that hosting our own models has done is really allowed us to move very quickly. And Deb, it's our, it's also saved us on token expense, which we do have token expense.

But we have a lot less of it now that we run our own models internally. And it's also allowed us to deploy, you know, our AI engine like I want, if you will. And I think someone would be hard pressed to find a client of ours that hasn't used I want. And so I think as you look into the future, we'll continue to be adding products that add value to the client. And then we've developed, released, hosted, distributed and serviced. And so we've gotten really good at that process. And I think that, you know, it's become a little bit easier to do some of those things. And so it's an opportunity for us to accelerate that as we look into the future.

You're from an R&D perspective, I can take that more take the G&A. I mean, we are developing differently than what we ever have in the past. I mean, we're organized differently. Our structure is different. The process that product goes through is different, that a product would go through to get all the way through to release is different. And so, you know, I would say that's quite a bit to do all of this and increase productivity and client satisfaction with the product. And so, you know, from an R&D perspective, I would say that we've become much more effective.

And that has also led to great efficiencies on that line.

And then Bob, if you want to. Yeah, on the G&A, you can go up a little bit. Biggest category is probably around professional services. And some of that was related to, you know, a one-time expense. We expanded our and renewed our line of credit. It was a great interest in that. We were proud that, you know, people believe in a robust business model. And that's what led to some of that in the G&A.

Yeah, I mean, I would say that my expectations are always higher than, you know, what could maybe even reasonably be achieved. But what I will say this is yes, bookings came in as expected, and also just a stat to share is that our new reps coming out of training are getting up to productivity much faster than they ever have in the past, and we're having great success with that. And so, you know, all this builds well as we look into the future.

You know, I think we look at everything that has a positive impact on a client and can produce a strong ROI for them. And we also try to automate everything that we can, you know, and we think that's very important, asking the questions why and what are you going to do with that so that we can go ahead and complete it for them. So we're going to continue to focus on that. You know, we do have pre-employment services. I think we're probably one of the largest pre-employment service companies in the U. S. I think at one time we were about, you know, fourth. That side of our service business continues to be very strong, and it's up a measurable amount for this year.

Yeah, not really any change. I would say the more you work with a consistent model that delivers accurate responses, the better you get at knowing how to ask it a question. And, you know, the better you get at asking questions, the less time it takes for you to get that response. And in our environment, you know, your consecutive responses per second, you know, that helps that become more efficient as well. So, but yes, we continue to see great uptake. Nobody goes backwards in technology once you're used to using something. You know, once you're there, nobody steps away and goes backwards from that. We've said in the past that I want is the predominant way that employees, new employees experience our system.

As we completed Project ARK, you know, it put that even more in the spotlight. I want, we'll continue to grow in capability, but it's very also important that we be accurate. You know, we come up with AI functionality all the time and agents all the time. And I always have the same question for the people that created. I'm like, well, is it cool or is it accurate? You know, and if I don't get an accurate response, I mean, you know, we continue to work until we can't produce that. And so we've been focused on that. And I want does deliver a very reliable, efficient way for someone to achieve all the value that's available to them in the PECOM system.

I wouldn't say that the profile of size of clients changed in the second quarter here. I think we continue to produce value across the board, regardless of the client size, industry, or location.

Both. I would say it's both. Definitely productivity with existing reps continues to increase. You know, with new reps at Texas second. I mean, your initial productivity gains you're going to get are always going to be with your current reps. New reps that takes a second, you know, they can get the value proposition. They understand the pitch, but you know, then you go out there and you run into some, you know, situations that you have to get through. And it takes sometimes a new rep a little bit longer to get that. So they stay in the game and then they start having success. And then that confidence starts to build. And then they start selling more and more and more.

And so, you know, our existing reps are going to obviously outsell a lot more than our new reps. But we do have so many new reps that we put in the field that we're very excited about, you know, what that's going to mean for us as we head both throughout this year, and then as well as we go into next year.

Yeah, I mean, I would say that the whole world is probably still a little bit in the early stages of AI. I would say we jumped in head first with everything we had last year, not just in product, but in infrastructure and everything else. And then, you know, then we started using it to develop and become a lot stronger at that. And we started using it in areas of our service to identify things. And so, you know, we're becoming better and better at it. I wouldn't say we use AI for AI's sake. I mean, automation matters. And, you know, there's a great amount of accuracy you get with automation. And in our industry, you know, you only get points for being accurate.

And so, that's always been a focus of ours. You know, so we see that to continue the other question from a fixed variable. I'm not 100% sure on your revenue question, except to say, you know, our pricing model does follow somewhat industry norm. It is proprietary to us, but does follow industry norms. And we do look to deliver to our live for that spend with us.

Yeah, I mean, you know, we've had spend management for a while. We have other areas that impact, you know, to find the accounting department or the office of the CFO, you will. I mean, there's never been a deal that we've ever done where we weren't integrating with a general ledger system and what have you. Also, I mean, CFOs care about labor and what HCM system is deployed because for most, for a lot of companies anyway, labor is one of their largest expenses. And so asset management does blow naturally into what we already do. Our same sales organization that we have now are well equipped to go sell our asset management as it both has an impact in provisioning for employees.

And then it also has a total asset tracking system as well. And so we feel like that folds in nicely with what we're selling anyway.

Well, we are continuing to invest in the business in different ways. And you'll see that. And that's why we believe it's we're just smart about how we do it, and it's sustainable. So again, we are worried about the growth side and the efficiency side.

I mean, climate growth would have just been stable, same consistent with as it's been every year in the past with the exception of the, you know, when it went down about 14% during COVID, and then it came right back not long after that. It may have been a little more than 14% that went down. But really, since that time, we've had stability and we would expect that, and all of our guidance going forward would expect stability in that.

Sure. So, you know, our focus is product automation, and you know, that drives cost efficiencies in many areas, you know, including labor. You know, we update our employment numbers annually, and we had 5, or 5,770 employees as of our last update that we gave on the February earnings call. You know, we're focused on client ROI achievement, not necessarily our cost. You know, the ROI achievement is higher with automation. And you know, while there's no limit to what can be automated, you know, there is a limit on labor efficiency as we do believe there's a strong human aspect to developing, selling, converting, and servicing business.

Thank you. Thanks everyone for joining the call today. We look forward to speaking with many of you at the Deutsche Bank Conference on August 26th in Dana Point in the City Conference in New York City on September 8th. I want to thank our employees for their contributions over the first half of the year.

With that operator, you may end the call.