Paycom Software (PAYC) Q3 2026 earnings call transcript

Thank you. And welcome to Paycom's 3rd Conference Call for the 3rd 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 Litigation 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 SEC, 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 as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law. Also during today's call, we refer to certain non-GAP financial measures, including adjusted Bada, non-GAP net income, and free cash flow. 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. pecom. com. I will now turn the call over to Chad Richardson, Pecom's founder and CEO. Chad?

Thanks, James, and thank you to everyone joining our call today. I'll briefly comment on current trends and recent achievements. Then I'll pass the call over to our President, Shane Hadlock, before Bob reviews our third quarter results and full year guidance. We will then take questions. Let's get started.

Third quarter results continue to demonstrate the strength of our platform coming in ahead of our expectations. Our focus on full-solution automation, world-class service, and ROI achievement is resonating in the market. Thanks to our strong performance here today, we are once again raising our full year outlook for both revenue and profitability.

We are seeing greater adoption of automation across our client base as we continue to expand automated decisioning logic and AI capabilities. For any business, AI adoption starts with delivering real value at an affordable cost. Our early investments in data centers, AI technology, and GPUs are paying off for our clients and ourselves. Our clients are not paying for tokens on our system. That creates a powerful economic advantage as we continue to deliver more automation at a lower cost, creating greater value for our clients, and stronger returns on Pecom's investments. On the product side, we continue to innovate and drive even more automation.

Our clients appreciate a decisioning logic that is built into our platform that allows them to incorporate their company policies such as PTO, payroll scheduling, onboarding, and more directly into the system. This allows for accurate and consistent decisions that generate tremendous ROI across an organization. One of the most recent products we launched with built-in decision logic is asset management, and the response to this new tool has been excellent.

Through our research, we found that companies are buying assets they already own. We've seen companies hiring 50 new employees and then buying 50 new laptops, phones, tools, badges, software licenses, and other equipment, while perfectly good ones set unused in storage and others remain unreturned by former employees. Our asset management platform helps clients track, recover, and deploy their assets, reducing unnecessary spending and giving them control over what they already own.

Demand for automation is accelerating, and Pecom continues to lead the industry with the most intelligent platform for automating decisions across an organization. Our ability to develop, release, host, distribute, and service our technology gives us a powerful advantage. I'm very excited about our upcoming product pipeline, which will add even more value to businesses across our large and expanding team. Now we'd like to turn the call over to Shane Hadlow.

Thanks, Chad. We delivered excellent third-quarter results thanks to our dedicated employees and their relentless focus on our client success. Throughout 2026, we released many powerful solutions, and client response to these releases has been incredibly positive. Our award-winning AI solution, I want, continues to accelerate speed to value for our clients by giving employees, managers, and executives immediate access to critical data.

I want this enabled across our client base, and it successfully responded to millions of queries. In fact, I want usages up approximately 65% today versus the end of 2025. Our AI is creating meaningful value for our clients and without any incremental cost to them. In fact, Forrester found that organizations in the mid-market using I want can achieve greater than 400% ROI and save as many as 3,600 employee hours, 600 manager hours, and 60 executive hours annually.

Another example of client ROI achievement is a business that used our product gone to eliminate $360,000 in unmanaged PTO. This company had hundreds of employees across 73 locations in 12 states. Prior to using gone, one fifth of their PTO was approved manually after the day it had already been taken. And the majority of their employees had negative time-off balances.

Thanks to gone, the system makes the decision, which helps eliminate time theft and ensures the workforce is operating at peak efficiency, driving more to the bottom line. That's the power of decisioning logic our clients are realizing. Expanding on Chad's comments, owning and operating our data center infrastructure is a significant competitive advantage. We are one of only a handful of companies in the US to operate a tier 4 data center.

That infrastructure gives us greater control over our technology and the economics behind it, which increases the ROI our clients realize. This also drives operational efficiencies across R&D and service operations to drive even more internal value. Strong usage of our products and investments in customer service are resulting in increasing client satisfaction and are driving higher net promoter scores.

This is related to the investments we have been making in automation, product innovation and our team's ability to deliver world-class service. I am proud of what our teams have achieved this year focusing on strengthening client ROI and expanding the value of our platform.

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

Thank you, Shane. Third quarter results came in strong with total revenues of $544 million, up 10% over the comparable prior year period, and recurring in other revenues of $519 million, up 11% year over year. Our continued focus on process automation and on leveraging our own technology is driving increased productivity across the organization. Fundamentally strengthening our business. Our efforts over the last several quarters are driving durable revenue growth, sustainable margins and rapid earnings growth.

Gap net income in a third quarter was $133 million or $2.99 per diluted share based on an average of 44.5 million shares outstanding. Non-gap net income increased 37% year over year in the third quarter to $150 million or $3.37 per diluted share.

Deluded non-gap EPS increased 74% year over year, reflecting strong earnings growth and the benefits of our capital allocation strategy. Adjusted EBITDA in a third quarter came in very strong at $268 million or 49.3% of revenues driven by expanding gross margin and reductions in operating costs. The investments we made in data centers, AI technology and product development processes are paying off and driving our expanded adjusted EBITDA margin.

Based on the strength of our year to date results, we are raising our outlook for full year revenue and adjusted EBITDA. Turning to capital allocation, we ended the third quarter with approximately 44 million shares outstanding, down nearly 20% from approximately 55 million shares at the end of the third quarter of 2025. During that same time period, we repurchased approximately 11.5 million shares.

We bought back $3 million of stock in the third quarter and have $1.65 billion remaining on our buyback authorization as of the end of Q3. During the quarter, we paid down $150 million of our balance on a revolving credit facility.

We ended the quarter with cash and cash equivalents of $194 million and an outstanding balance of $750 million under our revolving credit facility.

We generated three cash flow of $536 million in the first nine months of 2026 and continued to expect to deliver very strong full year free cash flow. We expect even stronger free cash flow in 2027.

In the third quarter, we paid approximately $17 million in cash dividends and on November 2nd, the board approved our next quarterly dividend of 37.5 cents per share payable in early December. The average daily balance of funds held for clients was approximately $2.7 billion in the third quarter of 2026 up 7% over the prior year period.

Now, let me turn to guidance for 2026. Based on the strength of our year to date results, we are increasing our revenue and adjusted EBITDA guidance ranges. We expect total revenues to be between $2.213 billion and $2.218 billion or approximately 8% year over year growth. We now expect full year recurring and other revenue to be up nearly 9% year over year.

Included in our total revenue outlook is interest on funds held for clients of approximately $107 million. Full year adjusted EBITDA is now expected to be between $1.069 billion and $1.079 billion, representing an industry leading adjusted EBITDA margin of 48.5% at the midpoint of the range of full 550 basis points higher than 2025 adjusted EBITDA margin. For modeling purposes, stock-based comp is expected to be approximately 3% of revenues in 2026 and CAPX is expected to be approximately 6% of revenues.

We expect 2026 gap tax rate to be 29% and 2026 non-gap tax rate to be approximately 27%. We are executing well against our 2026 plan, which is flowing through to the bottom line. Our clients are increasingly pleased with our expanding intelligent platform and the value they are achieving. We'd like to thank our employees for their contributions to today's results.

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

Yeah, I'll let Bob take the second part of that. I'll take the first. You know, we create solutions for clients and sometimes, you know, we participate that through products that we release that are billable items, such as asset management being one of the latest products that we've actually brought to market. We've got 300 so or more clients on it. We do continue to and it just came out last quarter. And so we do continue to provide that value. We've been working a lot on products. You know, AI has had a massive impact on our business, you know, especially our ability to create solutions for our clients. You know, we released I want to all of our clients last fall.

In the last year, we released more solutions than any previous 12 month period. We have enough product and testing right now are already in use by select clients to have confidence that 20, 27 won't be any different. And rhyme along the margins, you know, we believe that they are sustainable. We continue to find efficiencies in our business.

And the way that we process and use automation ourselves, we are big issues of our products. So we get the same are alive that our clients are getting. So we feel comfortable about that.

Yeah, Mark, we're pleased with our guidance for the whole year. You know, we put our plan in place to begin a year. We were fortunate enough to exceed that plan and raise our guide twice during the year. And as you know, the quarterly there can be all kinds of fluctuations and four quarter with a tough comp compared to last year as well. So we're pleased with where we sit right now.

To kind of follow up on that, you know, we're creating solutions with greater velocity and quality. We've expanded our decision logic throughout our system. You know, now we can decision your expenses, time cards, time off, request, assets and a lot more. You know, I see 2027 is being transformational for us as far as the technologies that we have in the hopper.

And again, once those are ready and, you know, I do believe that we have a strong trusted brand to be able to go out and provide a lot of these technologies and, you know, we've got several of them in testing. And so, you know, we'll release them over the next year. And I think 2027 will hold a different transformational time period for us.

Sure. So we have a lot of new salespeople. You know, we revamped the group as we shifted our entire organization toward automation. We want to make sure the clients are also utilizing the automation and the products that we have. And so, you know, we've had some new sales reps. I can tell you that the sales group that we have right now, the new people are doing better than any groups done in the past.

They are doing very well and sales overall is hitting the mark that we needed them to hit for this for this year. You know, we're excited about all the opportunities next year and the discussions we're having as more more prospects kind of get to the table on being willing to automate more and more of their decisions.

Let's see. We, you know, made that one time comment. We feel comfortable with that comment on where we were the comment about next year being stronger is the comment more about the sustainable and durable free cash flow that this that this business generates.

Yeah, so the 6% again, we want to be flexible there so that we can do what's right for our clients when we think about how we're going to provide the ROI. So there's there's nothing really important to point out there yet, but we did want to have that flexibility.

Well, it's the result. It's the result that the R and D that we're spending is delivering right now. You know, I would say both within our current product that we continue to develop and innovate and create all the automation. Available. I think people would be hard pressed to find a better product and ours has just gotten a lot better this year with that lower spend and a greater focus.

And, you know, I would also say that with the new technologies and the other spend that we're able to do and more of a greenfield type opportunity for us that didn't previously exist, you know, we're just, we have a lot of quality right now. And so that's what we focused on, not necessarily the spend. That's not to say that if we needed to spend more that we wouldn't, it's just that's where we're at right now and we feel really good with the result that that our R and D and spend is delivering.

I'll let Shane take that when he's been instrumental in this process from for a long time.

Yeah, absolutely. Security is top of mind for everyone and them knowing exactly where their data resides is a big positive. They don't have to guess. They know exactly where it resides and feel confident and our ability to do that. It's something we've done since the inception of PACOM and we're very confident in that.

Yeah, I mean, I think it's becoming more and more meaningful as we continue to release products and things that someone can buy through app. I will say that, you know, in the perfect world, you have a person influencing the purchasing decision there. And so many of our products, it's really important that we continue to do that, you know, to obviously hit volume that we want to hit. But as well as just to make sure that clients are utilizing the product the right way to get that ROI. Some things we sell are, you know, they don't require a large amount of influence. They're somewhat necessary for a client or an additional add on to, you know, something that they already have and they just need more of.

And so, you know, I don't want to go through all of our in app type opportunities there, but I would say that that's an amount that continues to grow, but it's still quite small compared to the opportunities that our CRRs have as they go out to our current clients.

You know, again, I really think this really just depends on the ROI delivered. And I think that's a really good line and, you know, we would hope to share in some of that. And that's been our focus. And I think we've done a really good job this year of doing that, making sure that, you know, a client value achievements made. You know, that was one of our core goals coming into this year. We've been working on that now for a couple of years to make sure clients get the full value of what they purchased. And, you know, there's a lot of things we've been able to develop that makes it easier for a client to get that value.

You know, one thing was I want, but we've developed a lot and automated a lot of workflows within our system that really help limit profit gaps that a business would otherwise have without. And so we continue to focus on that and we see more of that going forward. And yes, I absolutely do believe in the future as we've seen currently with asset management and others that there will be opportunities in the future.

Sure. Well, part of this product sell is, you know, kind of created within its development. You know, we really go to, we really try to create products that will drive immediate ROI for clients. For instance, our research told us that clients were buying assets that they had already owned. They just didn't know where they were. They didn't know what rooms they were in. They didn't know what employees they had handed them out to. And you know with our system and through automated decisioning, we're able to track all those. We're able to sign all assets that someone has. We're able to find where the other assets are.

You know, you're able to track assets, whether they've been handed to an employee or whether they're just sitting in a building in Toledo. You know, we're able to track all of those assets. And that's a, that's a pretty important part of all business to be able to know where their assets are. And especially the ones that also get deployed to employees. You want to make sure you get those back. And so this has been a really good product for us. It does fit in with the other things that we're selling. And CRRs have had a hard push on that, I would say, for about the last month in a concerted effort to make sure that all of our clients understand the value that can be delivered with this product.

Sales and marketing is a large focus for us. It's been a large focus for us this year. And as we look into next year, you know, I would say our focus is going to be significant there. We have, like I said, we have an ambitious pipeline of products. Some of these products will require a different type of sales group to do that. And so you will see both sales and marketing, you know, with a strong focus next year. And again, technology service hosting and all the other things that we.

Yeah, this is Shane and I'll take that one. You know, international is an integral part of what we have been doing and continue to do. Yes, we are expanding that. You know, we're seeing many new adoptions. For instance, we just brought on the large enterprise client, Mexico. And that has been going very well and it's a strategic direction for us going forward.

Yeah, Jared, nothing particular to call out other than, you know, the calendar kind of anomalies that y'all know so well. And last year was a good quarter. So a little bit more of a tougher comp going forward.

Yeah, I don't know that you kind of broke up there at the end, but you were talking about our service organization and how we're gaining the efficiencies there and how we see this playing out in the future, I believe, is what you're saying. Just greater efficiencies. I mean, you know, when we make a product more automated, that gets a client out of it more. You know, I think if you guys kind of listened to some of my calls in the past that said the perfect world, our product would just work for you and you'd never have to log in.

And so when you automate a lot of these very important workflows, you know, you're able to actually achieve a lot of that. And so that does, you know, when you make something easier to use and easier for someone to get the result, you know, you do supply less service. When you set somebody up, correct from the beginning with that automation, you are going to be able to provide less service. You know, receiving a service call on how to do something that's really an old model. And, you know, when you're using self-service technologies, especially in our case, automated technologies with layers of AI, you know, you would expect to make that easier to service. And that's been the case.

And actually, what it allows our service individuals to do is shift toward a more value of that client. We're able to do more analysis of how and what areas of the system that, you know, we could impact for them for even greater ROI. So I guess to answer that, it turns into more outbound calls for us in proactive service based on analysis versus inbound calls waiting for a client or to call us, you know, to be able to ask a question about that.

Yeah, so this is Bob. I'll answer that question. You know, as anything, we look at the investment and what it's going to pay off over the long term. You know, we do play the long game and we're in it for that. So, as you see while we're expanding those offices that we're having some success over there, your data, the data center investment question.

I think you asked about how do we see that? We see that as a critical value for our clients and for PACOM itself, and we'll continue to monitor those investments last year. As you all know, we made a big investment in that. We're not afraid to do that again. If it makes sense for our clients.

I think there's a lot more internal efficiencies to be gained. I think we just kind of scratched the surface. You know, we didn't set up these data centers for GPUs and AI. We've set up our data centers for security, uptime, speed, and all the things that we had been doing prior to, you know, having the chance to purchase the GPUs and going ahead and hosting that. But it's just something we've done for a long time and we're good at. You know, to Bob's last comments that we're not afraid to continue to spend at data center, we will continue to spend at data center. But it will also be more incremental, you know, over time, kind of how we go through that process.

And so we feel good about where we're at with our CAPEX spend and guide right now. And then, you know, as we look into 2027, Bob's already given kind of a directional comment in regards to cash flow. And so that might let you know that where we sit, where we feel like we set from a city perspective in those areas.

Yes, I think we'll both Project ARK as well as a lot of the products that came out around the same time. You know, during that time, we also produced a greater data lake. We produced a lot of automation. I mean, I can't speak enough about, we didn't really release it to the market from a conversational perspective, but we did to our clients. And so, you know, now clients are, they have automated punch changes, time card approvals, expenses, if someone goes into expense, to actually expense something, the system can decision it. And so we've been able to remove inconsistent decisioning in many of the areas that produce, you know, profit leaks, revenue, reduces revenue opportunities for our clients.

And so we'll continue to focus on that as we move forward indefinitely, Project ARK kind of built the foundation through which all that can be realized.

I'd say in addition to that, you know, we talked about the speed and that really played out for more enterprise clients where we had one that saw kind of a 4x increase in performance. And so that was a big enhancement, you know, across the board.

All right, I just want to thank everyone for joining the call today. We look forward to speaking with many of you at the UBS conference on December 1st in Phoenix in the Barclays Conference in San Francisco on December 9th. Our people done a great job transforming our products and processes toward automation. I want to thank our software teams, our cells and conversion teams, our service organization, really everyone.

2026 has been a year of pride as we get back to our old cells and prepare for an exciting future. With that operator, you may end the call.