Q3 '24 HCM Earnings: Here comes Gen AI & How to double PEPM!
Growing revenues, expanding product surface areas, and Gen AI features.
Quick revenue summary
Listed in descending order of revenue, for earnings recently reported.
ADP - Revenue: $4.83 billion, 7.1% YoY growth. Employer Services revenue rose by 7%, PEO services by 7%.
Paycom - Revenue: $452 million, 11% YoY growth. Recurring revenue reached $445 million (98% of total revenue). Beti and GONE are seeing increased traction.
Dayforce - Revenue: $440 million, 16.6% YoY growth. Dayforce recurring revenue was $333 million, up 19%. Successful integration of eloomi.
Paylocity - Revenue: $363 million, 14.3% YoY growth. Recurring revenue increased by 14.2%. Integrating Airbase acquisition.
Paycor - Revenue: $167 million, 16.6% YoY growth. Growth led by expanding PEPM and employee count, especially through embedded channels.
Comparing payroll and staffing performance
Payroll and HCM companies continue to do well in this labor market. HCM revenue performance contrasts with companies that monetize hiring, like staffing and placement. Staffing and placement have (generally) seen revenue decreases.
The labor market is becoming less active, with fewer quits and hires, but unemployment has stayed low. This difference in hiring and employment levels, and monetization, shows up in the relative performance of the different segments. The stock of these HCM companies performed well, particularly in the past month.
Comparison of stock performance of HCM and Staffing
For comparison, take a look at a set of select, top staffing firms.
Labor market differences don’t solely explain the differences in performance. HCM companies have had an easier time expanding their monetizable surface area and SKU counts. And, Generative AI actually expands the TAM of these providers.
Growing contract values
As a SaaS company, and HR Tech companies in particular. There are a number of paths a company can take to expand its annual contract value.
The Workday - Move from HR into Finance and ERP. Workday is successfully moving from HR, into Finance with its ‘Fins’ offering.
The ADP - Move from HCM into services like PEO.
The Dayforce I - Dayforce is moving from Payroll, workforce, benefits into talent management. On the latest earnings call, Dayforce CEO detailed how moving into talent attraction doubled PEPM.
Dayforce II - Dayforce isn’t just moving into talent, it also has a debit card to capture more of the payments stream. All payroll companies monetize the float, some of them have started moving into the card space, enabling a larger picture.
Dayforce’s CEO, David Ossip, dove into pricing, packaging, and revenue opportunities during the call:
From a pricing perspective, we've also done a lot of work on packaging and simplification around that. The way that you can really think about is, if we sell the compliance modules Payroll, ben, and Time, at say just to, as an example, about 1,000 employee level, you'll be expecting a price range probably around $12. When we add talent modules, we effectively more than double that.
And finally, we have the managed services offering, which has proven to be also a very good driver of growth for the client base and for net new customers. And remember, for managed services, our margins are very similar to that of cloud, and that adds another probably about $10 to $12 on top of that.
HCMs are able to expand from post-hire offerings, to pre-hire offering, and through managed services as well. These companies are likely to add a fourth area for monetization - Gen AI.
Here comes Gen AI features!
We’re almost at the two year anniversary of ChatGPT, and all HCMs have a Gen AI play in market. Almost all players have a Gen AI offering publicly available, and all companies are, at least, using the tools internal.
The starting point for HCMs fall along a crawl, walk, run continuum (that HR has been going through with Gen AI, generally.) A common starting point is text generation, initially for job descriptions, then perhaps question and answer on company documents, and, eventually, maybe something truly novel like Rippling’s Talent Signal.
Crawl - Paycom (PAYC)
AI in Customer Service: Deployed an internally built AI agent to enhance service speed, improving client solution response rates by 25%.
Walking - Paylocity (PCTY)
AI Assistant Launch: Introduced a conversational AI chatbot to assist HR processes and enhance user experience. The AI features streamline admin tasks and boost employee engagement through recommendations and query handling.
Embedded AI: Positioned as an integrated feature, not a standalone SKU, with potential for increased client self-service capabilities.
Jogging - Dayforce (DAY)
Dayforce Co-Pilot: HR Q&A bot, job description writing, and talent matching.
Dayforce was one of the few companies to outline the potential revenue opportunity for its Dayforce copilot. Again, David Ossip:
Dayforce Co-Pilot, and the way that that works is any data that you upload into the hub - the hub is effectively the landing page of the application, which is a content management system. So, any PDF documents, Word documents, text documents, and the like, we now index and we allow the users of the application, whether they be employees, managers, executives, to ask questions that are answered from the documents that they are in the audience of.
So, a typical use case could be, I could upload my employee benefits book and I could ask questions like, what is my vision copay? When are my benefits going to change? Or if I upload up my employee handbook, I could ask questions about policy and the like.
We believe that that particular SKU, if you like, should allow us to go back to the base and see a lift of between 5% to 7% just from that one particular monetization of that AI feature.
These products seem like experimental forays, rather than Gen AI native features. However, they do signal to the market that the companies are investing in Gen AI.
HCM players are doing well, despite an increasingly illiquid labor market and concerns over SaaS pricing changes. These experiments with Gen AI could open up new TAM, but, even if they don’t, there are plenty of other opportunities.
v useful.