Yahoo Finance Paycor HCM, Inc. (NASDAQ:PYCR) Q3 2024 Earnings Call Transcript
Paycor HCM, Inc. (NASDAQ:PYCR) Q3 2024 Earnings Call Transcript May 12, 2024
Paycor HCM, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Paycor’s Third Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Rachel White, Vice President of Investor Relations. Please go ahead.
Rachel White: Good afternoon, and welcome to Paycor’s earnings call for the third quarter of fiscal year 2024, which ended on March 31. On the call with me today are Raul Villar Jr., Paycor’s Chief Executive Officer; and Adam Ante, Paycor’s Chief Financial Officer. Our financial results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today’s call is being recorded, and a replay will be available on our website following the conclusion of the call. Statements made in this call include forward-looking statements related to our financial results, products, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management’s current expectations as of today and may not be updated in the future.
Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures are provided in our press release on our website. With that, I’ll turn the call over to Raul.
Raul Villar Jr.: Thank you, Rachel, and thank you all for joining us to discuss Paycor’s fiscal third quarter results. Our team delivered another strong quarter with revenue growth of 16% year-over-year. Excluding form filings, recurring revenue grew 20% year-over-year, driven by continued success upmarket. Adjusted operating margins expanded 130 basis points over the prior year, while we continue to invest in go-to-market and PEPM expansion to fuel future growth. HCM demand remains healthy. We continue to see increasing top of funnel demand with consistent win rates. Our flexible open platform and robust talent solutions continue to resonate with larger SMB and enterprise customers who tend to purchase a more complete suite with higher average deal sizes.
Our growth is fueled by two primary drivers, increasing the number of employees on our platform and expanding the amount we charge per employee per month or PEPM. First, we are adding employees to our HCM suite through direct and indirect sales channels. We have grown our direct sales force nearly 70% over the last three years and are encouraged by the coverage expansion and capacity we have built in the 50 largest U.S. markets. Given that nearly three quarters of our field sellers are still ramping to full productivity, we are planning to moderate our sales headcount growth to the low-to-mid-teens in the near-term as we continue to expand capacity. On the indirect side, we continue to build momentum with our embedded HCM solution. Leveraging our industry-leading interoperability engine, we enable partners to embed our HCM solution within their platform for seamless client experience.
We continue to ramp this channel, on-boarding our third embedded partner and signing three new partners. To effectively scale for an increasing pipeline of prospective partners, we continue to develop this channel by expanding our team capacity, establishing partner frameworks and developing sales enablement tools to drive mutual success. While we’re encouraged by the momentum, these deals have long-cycle times and the new partners we signed are smaller in scope. Second, we continue to enhance our award winning HCM suite with new capabilities that add value to our customers and expand our future PEPM opportunity. We have the most comprehensive HCM solution in the mid-market. In the third quarter, list PEPM reached $53, an increase of 20% year-over-year and achieved our $3 to $5 annual target of list PEPM expansion.
We recently announced two product innovations that empower leaders to drive business performance by enabling cross-functional collaboration and addressing skill gaps. COR Space equips leaders with tools to communicate, align goals, and motivate cross-functional teams that span multiple departments or fall outside of typical organizational structures such as project teams, employee resource groups, social event planning or work-based groups like a night shift at a healthcare organization. Paycor skills leverages artificial intelligence to recommend skills associated with physicians and people, which help leaders identify potential skill gaps in areas for skill development. Our innovative HCM suite continues to receive external accolades. Nucleus Research recently placed Paycor as a leader in its HCM enterprise value matrix for companies with fewer than 2,500 employees and an accelerator for organizations with more than 2,500 employees.
We were recognized for outstanding user experience and robust functionality. In addition, our Cor HCM and talent management solutions won four HR Tech Awards by Lighthouse Research & Advisory. This is our highest placement to-date and we are proud to have won the most comprehensive talent solution and the best solution for mid-size businesses with 200 to 2,000 employees. Lastly, I’d like to highlight two recent cultural accomplishments, one, associated with our customers and another focused on our associates. We recently held our Inaugural Customer Conference Paycor Connect+ aligned with our focus on creating an irresistible customer experience. Customers from across the country were able to network and provide valuable feedback to drive our product and service roadmap.
I’m incredibly proud, we also earned a Top Workplace USA 2024 award from Energage, for the fourth consecutive year. Results are based solely on employee feedback, including 15 cultural drivers proven to predict high-performance. It reaffirms our dedication to fostering cultural best practices that not only enhance employee engagement, but also deliver tangible business results. This year’s results highlight the company’s practice of listening and acting on feedback from associates, empowering leaders across the organization, and providing flexibility with a virtual first working environment. With that, I’ll turn the call over to Adam, to discuss our financial results and guidance.
Adam Ante: Thanks, Raul. I’ll discuss our third quarter financial performance then share our outlook for the rest of the fiscal year. This quarter, Paycor generated total revenues $187 million, an increase of 16% year-over-year. Our monthly recurring revenue grew by 20%. Recurring revenue growth of 14% was weighed down by forms filing. Most year-end form filing revenues such as W-2 and ACA forms is collected during the third quarter, representing mid-teens share of our recurring revenue and growing closer to employee growth. We saw some year-end form filing pull-forward last quarter and volumes were slightly lower than anticipated, representing a three-point revenue growth headwind in the quarter. Also as expected, ERTC claim processing slowed as the program winds down and represented another three point revenue growth headwind in the quarter.
Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month. Employees grew 9% over the prior year, primarily from new logos. In-line with expectations, same-store sales growth continued slowing contributing less than half a point of revenue growth in the quarter. At quarter close, we had over 2.6 million employees across approximately 30,600 customers. As we continue to enhance our product capabilities and customer success motion, we are seeing outsized growth among our enterprise customers. This quarter customers with more than 1,000 employees grew at nearly twice the pace of overall employee growth, demonstrating the success of our product and service investments.
Our embedded HCM solution continued gaining traction and contributed two-points of employee growth again this quarter. While we’re encouraged by the early momentum, these larger embedded deals will begin to contribute more meaningfully to our revenue growth in fiscal ‘25 and be accretive to margins as the partnerships ramp over time. Effective PEPM increased 4% year-over-year to nearly $22 this quarter. Excluding embedded HCM deals, effective PEPM increased 6%, driven by expansion of our product suite. Effective PEPM growth has been driven by cross-sales, pricing initiatives and higher bundle adoption. We expect more moderate PEPM growth contributions as we onboard larger enterprise customers and embedded HCM partners with volume discounts, which will be offset by their higher average deal sizes and stronger margins.
Revenue from our talent bundles continue to be a bright spot, increasing nearly 40% year-over-year. In addition to delivering steady topline growth, we’ve consistently expanded operating margins on an annual basis. Adjusted gross profit margin excluding depreciation and amortization was 80%, in-line with our long-term targets. It decreased by 30 basis points over the prior year due to the slower growth from form filing revenues. However, we are still anticipating expansion on an annual basis. Sales and marketing expense was $50 million or 26.7% of revenue, down 200 basis points from a year ago, largely due to lower marketing spend with the Pac-12 as we wind-down our partnership. Higher lead generation investments leveraging interest income last year and driving productivity as we scale and moderate sales headcount growth this year.
Comparable to prior years, we invested 13% of revenue or $25 million in R&D on a gross basis to enhance our HCM platform and expand our PEPM opportunity. We are gaining economies of scale in G&A as we grow. G&A expense was $20 million or 10.8% of revenue, an improvement of more than 100 basis points from last year. Adjusted operating income increased more than 20% to $48 million with margins of 25.5%, up 130 basis points from last year, while we continue to invest in service, sales expansion and product innovation. We generated $28 million of free cash flow at a 15% margin, and we ended the quarter with $90 million of cash and no debt. The HCM demand environment remains steady. However, we are updating some of our macroeconomic assumptions for Q4 guidance.
Based on recent employment trends, we are updating our guidance to account for potential negative same-store sales growth among existing customers, and it assumes no ERTC revenue. In addition, while we are pleased with the embedded HCM progress, these deals have long-cycle times and will have an immaterial impact in the fourth quarter. For the fourth quarter, we expect total revenues of between $160 million and $162 million or 16% growth at the high-end of the range, and adjusted operating income of between $21 million and $22 million. For the full-year, we expect revenues of $650 million to $652 million or 18% growth at the top-end of the range. And, we anticipate adjusted operating income of $108 million to $109 million. This quarter, we generated $15 million of interest income on average client funds of approximately $1.3 billion at an effective rate of nearly 480 basis points.
Based on current rates, we expect interest income to be approximately $51 million for the full-year. Even with the tougher macroeconomic backdrop than when we started the year, we continue to execute against our strategic growth drivers and gain market share. The HCM demand environment remains healthy with higher top of funnel demand than last year. Most U.S. employees are still being paid by legacy systems and we’re delivering a compelling ROI for clients to switch to a modern cloud alternative. We are pleased with the progress we’ve made expanding sales capacity in our product suite. We have the most robust suite in the SMB market and we continue to have outsized success as we expand up market. We are demonstrating margin expansion as we scale and believe there is significant opportunity to drive further leverage.
We believe there is plenty of runway to deliver sustainable revenue growth and improve profitability over the long-term. With that, we’ll open the call for questions. Operator?
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