Operator:

Good afternoon. Thank you for attending the Paycom Software Second Quarter 2024 Quarterly Results Conference Call. My name is Cameron, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to your host, James Samford, Head of Investor Relations. You may proceed.

Chad Richison:

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 towards 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 global 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 increase scheduling visibility. HR and payroll no longer have to track down managers to verify and decision requests and GONE significantly reduces after the FAC 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 manager's controlled 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 took Beti to the next level. Since implementing GONE, this client has automated over 1,000 time-off decisions, bringing up hours of non-productive 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 expectations of today's employees and once they've experienced Paycom, they don't want to go backwards 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 UK. 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 sell-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 this 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?

Operator:

Thank you. We will now begin the Q&A session. [Operator Instructions] The first question is from the line of Raimo Lenschow with Barclays. You may proceed.

Chad Richison:

Sure. And so new clients, and everyone by the way, everybody does get a question and a follow-up. He didn't necessarily state that on the call, but Raimo, what's happening with new clients coming in, that's why they're coming in to use it. I mean, they're coming to Paycom to actually utilize Beti. I did talk about a client on the call who had been with us for six years. They have 2,500 employees, they implemented Beti and they were able to reduce their payroll department by half and it went from four days for them working on payroll to mere hours. And so within our client base, we continue to meet clients where they are today as we work our client value achievement strategy to help them maximize the most ROI with where they are today. And then as far as new clients coming on, it's been no change. I did talk about on the call how we've had more unit sales this year than what we have in the past. And so our sales staff is doing really good in our go-to-market as well.

Chad Richison:

Yeah. So we're better staffed in sales than what we've been in probably five or six years. And what I mean by that is having all teams with the sales manager in it fully staffed and then just the number of staff that we have on each. And so, Amy Walker took over sales and had been with us for 14 years prior to that. She took over sales in April and since that time has really got them in a position, us in a position on the sell-side where we're strong from a staffing perspective and again, our sales tactics and techniques to be able to go out there and even sell more as we're differentiated in the industry.

Samad Samana:

All right. Thank you. And Craig, congrats on becoming a new grandfather, it's exciting news.

Samad Samana:

So maybe I'll start with you or for either one of you, but just as I think about the narrowing of the guidance outlook, what assumptions changed or what did you experience and what are you tweaking to get to that new narrow range? Is it a change in new business assumptions? Is it a change in CRR bookings retention? Just help us understand the mechanics of the change going forward, especially considering that 2Q came in a little bit better than you expected.

Samad Samana:

Understood. And then maybe, Chad, if I could follow up on Raimo's question about the sales hiring and you talked about capacity. Should we think about that as maybe a leading indicator, the hiring that you just did in terms of what you're seeing in the market, either opportunity increasing and new hiring behind that, or is this hiring in anticipation of? Just maybe help us understand what type of signal that suggests, especially because we haven't really gotten an update on office opening disclosures in a while and this seems like a pretty important development.

Operator:

The next question is from the line of Mark Marcon with Baird. You may proceed.

Craig Boelte:

Thank you.

Chad Richison:

Yeah, Mark. I'll take the gross margin part of that question. One thing on the gross margins, like you mentioned, is a headcount. But this quarter, we brought our fifth building at Corporate Online. And so we saw an increase in the depreciation both on the building and on the equipment and furniture and fixtures as it related to that building. So part of that gross margin was the additional depreciation, which also hit other lines of depreciation in the income statement.

Mark Marcon:

Great. And then it sounds like, I mean, with a 24% increase in terms of units sold so far year-to-date, is that part of the reason why we would anticipate seeing an acceleration with regards to the revenue growth in Q3 relative to Q2? Just wondering how baked in is that as opposed to hoping for additional incremental sales from the new salespeople.

Operator:

The next question is from the line of Joshua Reilly with Needham. You may proceed.

Chad Richison:

Yeah. I would say all of the current client factors that we discussed even at the end of 2023, those still exist today as far as additional payroll run opportunities and inefficiencies gained when someone uses our product correctly. And so all those factors continue to exist, but we also have many mitigating factors that we're able to guess and pull the levers on. And again, we have a lot of confidence in what's going on with both our sales organization, our service organization and of course, our product with what gives us confidence as we head into the end of this year and then as well as 2025.

Chad Richison:

And so yes, anytime we focus on something, we're going to have some results from that. We've been focused all year on the client value achievement strategy, which does include meeting clients where they are and helping them achieve that ROI. It's impacting our service model from a positive and it's impacting our net promoter scores. And those are commitments that we're not going to be backing off of.

Steven Enders:

Hey, great. Thanks for taking the question there. I guess maybe just kind of pull it on the last couple of lines of questioning. Just how is kind of the back to base motion kind of trending? And I guess on the back of what sounds like solid new units coming on board. Just how are you feeling about that back to base motion and kind of what that's implying for the growth outlook versus what you were expecting before?

Steven Enders:

Okay. That's helpful. And then I guess maybe is there an update on kind of a Beti penetration or adoption so far from versus the last disclosure?

Operator:

The next question is from the line of Kevin McVeigh with UBS. You may proceed.

Chad Richison:

[Technical Difficulty] database count from that perspective. So -- and we're furthering Beti as well. I mean, Beti is not the same product it was at the first of the year than what it is today. And so we're continuing to advance all of our solution with automation.

Craig E. Boelte:

Yeah. No, I mean, as we mentioned on the call, I mean, we bought back a significant amount of shares and we actually bought back 574,000 just during Q3 in a large amount since July 1st. So really an opportunistic approach to the buyback. And we were -- the other one was about to expire, so we put this one in-place for another two years at $1.5 billion.

Operator:

The next question is from the line of Siti Panigrahi with Mizuho. You may proceed.

Chad Richison:

Yes. As we develop them and as you know, certain countries have certain factors that go into their unemployment law. So -- but as we develop these countries, absolutely, we would expect that to be happening.

Operator:

The next question is from the line of Jason Celino with KeyBanc Capital Markets. You may proceed.

Craig Boelte:

Yeah. I mean, we kind of look across the entire organization and just look for efficiencies. I mean there's no levers we're really trying to pull to do that. And really it was the second-quarter be really flowing through to the full year and then raising it on top of that. So really nothing that we're pulling any levers for.

Operator:

The next question is from the line of Alex Zukin with Wolfe Research. You may proceed.

Chad Richison:

Yeah. I mean for competitive reasons, I mean, I'm not going to get into exactly what a CRR's process is today that's different than what it was last year. But I will say that, to a CRR, they work with each client, and not every client is in the same situation, which means a CRR's approach isn't the same as they go into their entire territory, if you will. And so it really depends on if I'm working with the client that has not yet gone through the client value achievement strategy fully or if I'm working with the client that has. And so that's not to say that they can't provide opportunity and additional -- that they don't have additional revenue opportunities with each client. It's just there's certain methods, that we go through today to ensure that clients are achieving that before we just sell them. So -- and I wouldn't say that's a dramatic change from any other quarter, we've had this year.

Operator:

The next question is from the line of Bhavin Shah with Deutsche Bank. You may proceed.

Craig Boelte:

Yeah. I mentioned that we just finished the last building. We've got a couple more projects throughout the end-of-the year. So kind of as we talked earlier, what we thought the percent would be for the year somewhere in that 11% to 12%, probably still thinking that. As we look at next year, we really don't have any large projects on the plan. So we mentioned even on the last call, that we would expect CapEx to be potentially single-digits next year as a percent of revenue and that really bodes well for the free-cash flow conversion, which we're also focused on.

Chad Richison:

I mean, I wouldn't say we think much of it. I mean any opportunities I think that are in regards to data type things are not necessarily strategic in nature from that standpoint and not necessarily differentiated from -- so from my standpoint, I think that if there's something we can provide our clients that helps them have a better experience with Paycom, that's what we want to look at and focus on and most things would fall in-line with that.

Daniel Jester:

Yeah. Great. Good evening, everyone. Thanks for taking my question. Maybe, Chad, on you think about the product roadmap and the focus on automation, should we be expecting sort of more specific modules to help drive that outcome for your customers? Are you going to be reengineering things that you've already put out there to increase the level of automation? sort of any sort of high-level thoughts about the direction you're embarking on here?

Daniel Jester:

Okay. Thank you. And then just on the four international geographies everybody is available now, have you sold any locally domiciled clients or is it still US centric clients that have employees abroad? Thank you.

Operator:

The next question is from the line of Jake Roberge with William Blair. You may proceed.

Chad Richison:

Yeah. I mean, having native payroll in any -- Canada was the very first time we actually ever developed a separate country. We were U.S. for 25 years. And so we learned a lot in Canada. And then we learned a lot more in Mexico and the UK and a lot of the developments we were able to do for a lot of those companies or countries, some of them were transferable, some of the items. And so we've learned a lot by going through this process. Also, we very much strengthened our global HCM product. I mean, it's not just native payroll. We have a very strong global HCM product that we continue to automate as well. And so all of that ties together to make a strong value proposition.

Chad Richison:

Yeah. I mean, again, the factors that we talked about that were impacting us at the end of the year are the same factors that impact us today. When you're talking about how fast or what have you. We also have mitigating factors that factor into that as well. But when you're talking about what happens there, you're really talking about how fast is our client base going to utilize the most efficient product in the industry and then utilize it the right way. And so, we've kind of quantified the expectation of the opportunity that could be cannibalized from good usage, but it's also differentiation. And I think we get that back in other areas. So all that's to say is, when will we be through that type of thing, I don't know, but I do think that there's mitigating factors that we're able to deploy. Again, to achieve client value, to help the client achieve value that they're helping us there as well.

Jared Levine:

Thank you. In terms of float revenue, can you discuss what the updated annual guide is embedding surrounding float revenue, including Fed fund rate assumptions? And was there any extending of duration during the quarter or plan for the rest of the year here?

Jared Levine:

Okay. So considering it, but that's not currently in motion right now. And then in terms of the sales performance, can you discuss how specifically within the inside sales, how you're doing in terms of those sub-50 employee clients, just given the notable new logo acceleration?

Jared Levine:

Sure. Thank you.

Zachary Gunn:

Hey, there. Thanks for taking my question. I just wanted to ask in terms of new client wins, has there been any change from a mix perspective of where you're seeing those wins come from, whether it's competitive takeaways or in-house or regional? Just any context there on the competitive side.

Zachary Gunn:

Got it. Thanks.

Chad Richison:

All right. I want to thank everyone for joining our call today. I want to personally thank my colleague and friend Craig for his dedication to Paycom and the amazing example he has set for brilliant careers. Our employees are working hard and strategically across the board. I want to thank all of our employees for their effort toward our plans to eclipse the industry with automation. We look forward to seeing investors at several conferences this quarter, including the Deutsche Bank Technology or the Deutsche Bank Technology Conference in Dana Point in August and the Citi Global Technology Conference in New York -- New York City in September. Thank you, all, and operator, you may disconnect the call.

Operator:

Good afternoon. My name is Terry, and I will be your conference operator today. At this time, I would like to welcome everyone to Paycom's First Quarter 2024 Financial Results Conference Call. [Operator Instructions]

James Samford:

Thank you, and welcome to Paycom's earnings conference call for the first quarter of 2024.

Chad Richison:

Thanks, James, and thank you to everyone joining our call today. I'll kick off the call with a few highlights from the quarter, and then I'll turn it over to Chris to discuss client trends and recent awards. Craig will then review our financials and our guidance before taking questions.

On our last call, we highlighted 3 key focus areas in 2024:

solution automation, client ROI achievement and world-class service. Led by Beti, our solution automation initiatives continue to generate tremendous opportunities for our clients. We released more product enhancements in the first quarter than in the previous 2 quarters combined.

Craig Boelte:

Thanks, Chris. Before I review our first quarter 2024 results and our outlook for the second quarter and full year 2024, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

Operator:

[Operator Instructions]

Raimo Lenschow:

Two quick questions. One for you or for the two of you, Chad and Chris. If you think about the strategic initiatives that you're kind of talking about, can you frame them in the -- how does it compare to what -- first of all, what are you doing there? Maybe you can be more specific. And then also how does it compare to -- or kind of relate to what you see in the market in terms of end demand, headwinds from less new hiring, et cetera? Just frame it a little bit like what's going on in the market versus what's going on with you?

Chad Richison:

Sure. So I'll take the first one, Raimo. And so our client value achievement strategy or as you called it, the strategic initiatives that we're working throughout the year really have to do with meeting clients where they live and making sure that they're achieving the full value of ROI that's available to them through the appropriate usage of our software. And so we've been focused on that. We did call that out in October 31, actually, when we reported, we did call out that we're going to be really focused on that.

Operator:

Your next question comes from Samad Samana from Jefferies.

Chad Richison:

You sound exactly like Samad. So churn, new bookings POB assumption. What is the -- I'm trying to can you maybe -- can you say that question again?

Chad Richison:

Yes, stability. I mean from a new bookings perspective, we are seeing improvement in that. Retention is something that we call out at the end of the year, but all of our initiatives that we're working through our client value achievement are set to have an impact on that, and we feel good about how that's working.

Mark Marcon:

Chad, I was wondering if you could talk just a little bit about what you're seeing in terms of variance, in terms of sales performance across the various offices. You did mention that you've got one quota carrier that achieved over $4 million, and so that obviously seems very strong. But on the other hand, we've had a little bit of a deceleration with regards to the revenue growth rate.

Chad Richison:

Yes. And so I guess, first, I would say, I mean, our best offices are going to have the best managers regardless of geography. And I think there for a couple of years, Tulsa was #1, and it's a city of 400,000 people. We've been in that city for 22, 23 years. So your best office is going to have your best manager.

Chad Richison:

Yes. So there's no change with what the CRR groups have been doing. They've been making significant impacts for us and the client value achieving the strategy. Again, meeting clients where they are today, making sure they're receiving full value of using the system that they've already purchased before we move forward. Selling them additional products, they've done a good job with that. There's no change as far as what their focus is from that, but we are seeing the positive impacts from them.

Camden Levy:

This is Camden Levy sitting in for Brian Schwartz. My question is around sales capacity. How do you guys feel about the quota carrying like sales capacity of the business? And are there any plans to increase the number of sales offices in the second half of this year or early 2025?

Chad Richison:

Yes. So first around sales capacity. Our sales capacity numbers, again, have gotten a lot more improved, I would say, over the last 2 or 3 months from that perspective. It would be too early to say exactly when we would be opening up additional offices because, as you know, we take a current manager that's successful, relocate them to a new territory to open up an office and then we backfill them with salespeople who are ready to be sales managers.

Operator:

Your next question comes from the line of Joshua Reilly of Needham.

Chad Richison:

Our unemployment services are stable, is the way I would categorize that. They've been stable. They're somewhat going to be a reflection of the new clients that you bring on as well as the current client trends. Yes, I mean I would say that increased -- if you do -- I'm not saying we're seeing this, I'm just saying if a company did have increased turnover, then they would have -- especially if they're set up for new hire background checks, then they're going to have to work those, obviously.

Joshua Reilly:

Got it. And then just a quick follow-up. The revenue guidance implies a little more of maybe a second half reacceleration in growth than what we were previously expecting. Can you just give us a sense of what gives you the confidence or visibility to that revenue growth reaccelerating in the second half?

Operator:

Your next question comes from the line of Steve Enders of Citi.

Chad Richison:

Yes. I mean our guidance for 2024, I mean, it included -- I mean, we gave this guidance for the first time, we've given -- we had talked about what we were going to do. I think it was October 31 of last year. And so the guidance at that time included our many organic initiatives that were designed to set us up for 2025. And so we've been sticking with those disciplines and time lines.

Steven Enders:

Okay. That's helpful. Maybe just to slip another one in here, I guess, maybe to ask it differently. Just I guess if we think about the guide today versus 90 days ago, like maybe how are some of the underlying assumptions different today than they were before?

Operator:

Your next question comes from the line of Kevin McVeigh of UBS.

Craig Boelte:

Yes. We didn't call it out on the call. It was a small amount, I think like $3 million.

Craig Boelte:

I would say better expense management for the quarter. I mean we've given the full year adjusted EBITDA guidance. We'll continue to look throughout the model for efficiencies. I mean yes, right now, we're like 39% adjusted EBITDA margins. And so still best-in-class and looking at additional efficiencies.

Ryan Krieger:

It's Ryan Krieger on for Alex. So first one, just to touch on margins again. You kind of previously talked about leaving a little bit of room for potential incremental investment this year. So I'm just curious what are the top investment priorities that, that optionality could be earmarked for?

Craig Boelte:

Yes. So on the cost side, I mean, obviously, we've continued to spend aggressively in the R&D area as we announced the launch of Ireland this quarter. So that's one area that we're continuing to spend heavily on. And then obviously, the one that you can pull some levers on would be the sales -- or the marketing side of the sales and marketing.

Phillip Leytes:

It's Phil on for Siti. I just wanted to ask, it sounds like you guys are heavily investing into the product to several enhancements. What are some key features that you're working on? And when can we maybe hear more about them?

Jared Levine:

My first question, how should we think about the sequential headwind to 2Q revenue growth from the annual form filings revenue recorded in 1Q?

Craig Boelte:

Not in the Q2...

James Samford:

[indiscernible].

Christopher Thomas:

Obviously, it's factored into our outlook. And as far as the sequential drop, we'll see there. And then as we probably could comment on forms filings, we're in line with expectations.

Chad Richison:

We don't comment on specific pricing initiatives in regard to competitive situations. All that's to say is we're looking to win every deal. And that's the mode that we're in right now. I know I have our sales organization listening to this call, and they know that. We're looking to win every deal. And so that includes all the initiatives that would go into that. So I would just stop with that.

Zane Meehan:

Great. This is Zane Meehan on for Jason Celino. I wanted to ask quickly about the competitive environment. Any notable changes you're seeing there? And maybe any particular strength or weakness you're seeing in any specific verticals or end markets?

Operator:

Your next question comes from the line of Bhavin Shah of Deutsche Bank.

Chad Richison:

Yes. We changed our go-to-market strategy. I mean Amy was running -- Amy got promoted to run outside sales in late November, and then she took over all of sales not long over that. And so we started shifting our go-to-market strategies, enhancing, I would say. I wouldn't say shift, I would say enhancing our go-to-market strategies, especially in regards to the outside sales group, which represents the overwhelming majority of all of our sales. And so she's had a dramatic impact on that group. And we continue to improve week after week with that.

Craig Boelte:

I mean what we talked about was some of those less runs because of Beti. I mean Beti is making it more efficient for clients in eliminating some of that. And I mean that's better for the client. In the end, that's really a better process for the client, a better situation for the client. So we call that out that we would start to -- we're starting to see those. And most of those are going to -- a lot of those are going to run through the first half of this year. And then towards the back half of the year, we won't see as large of an impact.

Operator:

Our final question today comes from Daniel Jester of BMO.

Chad Richison:

There are so many places that we can go in our product and really automate full items that were multiple steps before. It again takes appropriate client configuration. It takes a client's ability to have a mind of change management because it is different than what they've done before. It takes some trust because you are giving up some level of control when you turn it over to AI, and you have to prove that out. And so there are certain ways that you can work with clients and help prove that out.

Daniel Jester:

Okay. Great. And then I apologize if this came up earlier, I joined a little bit late. But on sort of the globalization of Paycom, I think you're in 4 countries from a payroll perspective now. Is there any way that you can sort of quantify the amount of penetration that you've gotten? And I know Ireland is brand-new, but can you help us think about sort of what the uptake has been thus far as you've gone more global? Or is there a certain threshold that you need to see before you'll be able to share some more context with us about that opportunity?

Chad Richison:

All right. Well, thank you for joining our call today. I do want to acknowledge and celebrate our 10th anniversary as a publicly traded company. I want to thank all employees who have contributed to our success and set us up for the next decade of innovation and growth.

Operator:

Good afternoon. My name is Sierra, and I'll be your conference operator today. At this time. I would like to welcome everyone to Paycom's Fourth Quarter and Full-Year 2023 Financial Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers' remarks, there will be a Q&A session. [Operator Instructions] I will now turn the call over to James Samford, Head of Investor Relations. You may begin.

Chad Richison:

Thanks, James, and thank you to everyone joining our call today. We ended 2023 with better-than-expected results, thanks to the considerable coordinated efforts of our team across the organization. Before digging into the quarterly results and achievements in 2023, I'd like to discuss today's announcements about the promotion of Chris Thomas to Co-CEO. Following that, I will briefly introduce Chris who previously served as our COO. Craig will then review our financials and our guidance before taking questions. With that, let's get started. As Founder and CEO of Paycom, my position has provided me the opportunity to work with great leaders who have built Paycom into a world-class HR and payroll software company. One such leader is Chris Thomas. He is someone I have extreme confidence in and a leader I can share responsibilities with at Paycom. I've been preparing this opportunity for Chris and myself to work even more closely together for some time now. Today's announcement further illustrates the trust I have in our leadership. Personally, this is very exciting, because it allows me to invest further in the areas that I'm passionate about, which are the ones where I can have the largest impact for our clients. In this new role for Chris, Paycom will be even stronger than ever before. A key area of my continued focus will be product innovation and strategy. And Chris will continue to focus on operating other aspects of the business. Our collaboration has strengthened Paycom and I'm excited for what we will do going forward. In the last several months, we continued to strengthen our leadership team with the addition of Jason Clark as Chief Administrative Officer and Steve Sturges as Chief Marketing Officer. Jason was the CEO of one of the region's largest workers' comp insurance companies. Having worked with Jason in various capacities for about 12 years, I officially brought him into the organization last year knowing this was an ideal fit for him and for Paycom. Steve formerly owned and operated a very successful marketing agency and I've had the privilege of working with him for about 15 years. I'm excited to see him continue to elevate our brand, engage our clients and drive further demand generation for our sales force. This evolution of our organization is exciting, and I believe it will bring significant value to our clients, employees and investors. Now, I want to discuss our vision for 2024 and then look back on some highlights of 2023. Following a better-than-expected end 2023, in 2024, we are primarily focused on three key areas. World-class service, solution automation and client ROI achievement. Our continued focus is being the leading provider of comprehensive payroll and human capital management solutions in every market we serve. We are bringing the power of Paycom to more employers and employees and showing more organizations the ROI they experience by using our single database software. On the product front, Beti has been one of the products at the leading edge of our AI and automation strategy, delivering tremendous ROI to our clients. Our recently commissioned third-party study on Beti highlighted three benefit areas. On average, a greater than 80% reduction in errors, and 90% reduction in time spent processing payroll and improved employee engagement. A leader within the restaurant industry noted that the automation from Beti took days off payroll processing time and that as employee checkers went down, employee engagement went up. Additionally, certain organizations using Beti experienced up to 100% of their end-users regularly engaging with our easy-to-use system. Solutions like Paycom’s GONE tool are expanding automation to other areas of our product suite, namely our time off applications. The rollout of GONE towards the end of 2023 has been going very well. This new product uses AI and decisioning logic to automate all decisions for time-off requests, which further enhances both the employee and the manager experience by eliminating conflicts and resolving time-sensitive decisions. Today, clients may make between 20 and 30 decisions or more per year per employee concerning PTO, vacation request and the denials or approvals that go into staffing decisions. GONE eliminates those unnecessary interaction points by providing a consistent and fully automated experience for employees, managers, HR administrators and the business as a whole. With GONE, an employee in any industry can request time-off at midnight on a Friday and know immediately if it is approved or denied because GONE has automated all time-off request decisions. It's another example of a product that's a win for our clients and a win for their employees. We delivered a lot of innovation on the international front in 2023. We launched our global HCM product and now companies of all sizes use this product across 180 countries and in 15 languages and dialects. We developed and launched native payroll in Canada and Mexico. Now we've developed and are launching a native payroll solution in the United Kingdom. Our international strategy complements our product strategy and adds to the momentum we are seeing with US-based companies that have an international presence. While still early, we are very excited about the potential impact this initiative will have on our expanded team. While I'm proud of our product developments and international expansion in 2023, I'm even more excited about where we're headed with the product department. As a company, we all know and feel the excitement that is happening within our walls. Since 1998, Paycom has changed the way businesses operate through innovation and automation. Our revolutionary product roadmap will continue to bring new levels of value to our clients. I'm glad to see both growth in our product and in people we are elevating and bringing back into the organization. The buzz about the future of product innovation across the organization is exciting and encouraging. The client experience is everything to us and that all starts with our product. We are excited to release more product enhancements and innovations than ever before. To sum-up, in 2024, we will continue to be hyper-focused on world-class service, solution automation and the client ROI achievement strategies. This means, we will continue our emphasis on client ROI and user experience. I'm confident that the size of our opportunity and our track-record for execution will bolster our growth trajectory. I'd like to thank our employees for their important contributions in 2023 and commitment to Paycom. In fact, because of them, Paycom earned many top workplace accolades in 2023, most notably Gallup's Exceptional Workplace Award. Additionally, Newsweek recognized us as one of the most trustworthy organizations and as a Top Workplaces for Diversity for parents and families. These accolades mean a lot because it's a reflection of our leadership and the culture we've built. Before turning the call over to Craig, I'd like Chris to briefly introduce himself and discuss his vision for the role. Chris?

Craig Boelte:

Thanks, Chris. Before I review our fourth quarter and full-year results for 2023 and our outlook for the first quarter and full-year 2024, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We ended the year with solid results with full-year 2023 revenue of $1.694 billion up 23% compared to 2022. Fourth quarter results were better-than-expected, with total revenues of $435 million, representing growth of 17% over the comparable prior year period. Our revenue growth was driven by new business wins, partially offset by lower cross-selling to existing clients. Within total revenues, recurring revenue was $427 million for the fourth quarter of 2023, representing 98% of total revenues for the quarter and growing 17% from the comparable prior year period. We delivered strong net income and adjusted EBITDA in 2023. Full year GAAP net income was $341 million or $5.88 per diluted share based on approximately 58 million shares. Non-GAAP net income for 2023 was $449 million or $7.75 per diluted share, up 26% from the prior year on a per share basis. In the fourth quarter, GAAP net income of $82 million and non-GAAP net income of $110 million represented a $1.43 and $1.93 per diluted share, respectively, based on approximately 57 million shares. Full year adjusted EBITDA was $719 million representing full year margin of 42.5%, up over 30 basis points year-over-year. Fourth quarter adjusted EBITDA was $177 million, representing a quarterly margin of 40.6% for the quarter. During the fourth quarter, we repurchased approximately 1.2 million shares of common stock or approximately 2% of our shares outstanding for a total of $213 million and we paid over $21 million in cash dividends. As of December 31st, 2023, we have repurchased over 6.1 million shares, and when combined with dividends, we have returned nearly $1 billion to stockholders. We still have approximately $800 million remaining under our buyback authorization as of December 31st, 2023, and the Board has approved our next quarterly dividend of $0.375 per share payable in mid-March. We ended 2023 with approximately 36,800 clients, representing a growth rate of 1% compared to 2022. On a parent company grouping basis, we ended the year with roughly 19,500 clients, up 2% compared to 2022. Digging into client mix details and using client figures based on parent company groupings, client count for companies with greater than 500 employees was up 11% year-over-year and client count for companies with greater than 2,000 employees was up nearly 18% year-over-year. Total number of employee records stored in our system in 2023 was 6.8 million. Paycom's annual revenue retention rate in 2023 was 90% compared to 91% in 2022 with attrition concentrated primarily at the low-end of our market. Note that our earnings press release issued earlier this afternoon included additional information about a recent modification in our annual revenue retention rate calculation. Adjusted R&D expense was $51 million in the fourth quarter of 2023 or 11.6% of total revenues. Adjusted total R&D costs including the capitalized portion, were $73 million in the fourth quarter of 2023 compared to $52 million in the prior year period. We continue to invest in the long-term future growth opportunity including in areas of automation, AI and innovation. Our tax rate for the year ended 2023 was 28% on a GAAP basis. For the full year 2024, we anticipate our effective income tax rate to be approximately 29% on a GAAP basis and approximately 25% on a non-GAAP basis. In fiscal year 2024, we expect stock-based compensation expense as a percent of revenue to be approximately 8.5%. This does not reflect any potential one-time adjustment related to the forfeiture of the 2020 CEO Performance Award. We will provide details on this one-time adjustment if any when we report first quarter earnings. Turning to the balance sheet. Even after the substantial buybacks and dividends paid in the quarter, we ended the year with a very strong balance sheet, including cash and cash equivalents of $294 million and zero debt. Cash from operations was $485 million in 2023, representing an increase of 33%. The average daily balance of funds held on behalf of clients was approximately $2.2 billion in the fourth quarter of 2023. On the capital expenditure front, our fifth building in Oklahoma City is substantially complete. We estimate total CapEx as a percent of revenues to be approximately 12% in 2024. Now let me turn to guidance. Our approach to guidance remains consistent with our historical approach and that we guide to what we can see in factor in relevant trends, opportunities and potential constraints. For 2024, we're also factoring in a wider range of sensitivities, such as fluctuations of interest rates and the outcomes of several near-term strategic initiatives. For fiscal 2024, we expect revenues in the range of $1.860 billion to $1.885 billion or approximately 11% year-over-year growth at the midpoint of the range, which is consistent with the target growth range we provided on our Q3 earnings call. We expect adjusted EBITDA in the range of $720 million to $730 million, representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range. For the first quarter of 2024, we expect total revenues in the range of $494 million to $497 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 first quarter in the range of $218 million to $222 million, representing an adjusted EBITDA margin of approximately 44% at the midpoint of the range. 2023 delivered solid results for Paycom. The strength of our product and the client initiatives we have in place give me confidence that 2024 will be a solid year of execution. We will continue to invest in talent, marketing, innovation, customer service and geographic expansion to strengthen our competitive position and meet the demand of our expanding TAM. With that, we will open the line for questions. Operator?

Raimo Lenschow:

Hey, thank you and all the best to the new management structure from me. Two questions. One, Chad, can you just speak a little bit to retention in 2023, and customer growth in 2023 because if I do the math right, it was like a 1% growth, which seems unusual for you guys. Can you talk a little bit about like factors we saw there, and that probably kind of linked in with that 90% retention number? And then on EBITDA guide, Craig for you, and if I look at this year, we're kind of guiding down a little bit on EBITDA margin. Can you talk a little bit maybe about some of the projects or some of the work you're doing there that kind of drives that? Thank you.

Raimo Lenschow:

Okay. Perfect. Makes sense. Thank you.

Operator:

Our next question comes from Samad Samana with Jefferies. Please proceed.

Chad Richison:

Yeah, I mean at the low-end it's typically more going out of business, but that group of clients are more impacted by the macro. We also changed the way we marked our clients' loss where we're pulling that forward a little bit, Samad, where we're marking them quicker than we have in the past and that way we can get back out, and really, we tried to sell some of those as are still in implementation, so.

Chad Richison:

Yeah, I mean. I would say, we probably went into fourth quarter a little more conservative than what we have in the past, after a kind of our Q3 results. We were really looking at where the downside could be or what can happen in fourth quarter, and I would say things came in better than what we expected.

Operator:

Our next question comes from Mark Marcon with Jefferies. Please proceed. Baird, I apologize.

Chad Richison:

Yeah.

Chad Richison:

Hey, Mark. We can hear you. Hey Mark, we can hear you.

Chad Richison:

Yeah. I mean, we've had a lot of success with sales effectiveness. Obviously, we're selling a differentiated solution that brings differentiated value. We did mention on the call that we've had more success in the 500 and above. I think we called out, 11% growth in that group, 18% growth in the group that has 2000 or more. And so, we have been pressured more at the lower end of our market and also there's a resource aspect, as we look to onboard clients and what we're going through there, how we use our resources to best impact client value. And so, we're having a lot of success there in the market. Oftentimes, you are trading off -- you are trading off on a unit basis, oftentimes small units for a little bit larger type units, and I'm talking about employee size.

Chad Richison:

Growth has always been first prize for us, so I mean, that's really what we're focused on. When we're talking about an impact on the -- from an adjusted EBITDA perspective, I mean, we're focused on the three areas that we talked about with solution automation, world-class service and then client ROI achievement. But those don't necessarily -- we've got the staff to do those things. Those are things we're working through and continuing to impact quite positively. From an additional expense perspective, that's going to be growth initiatives related.

Chad Richison:

Thank you.

Brian Schwartz:

Yeah. Hi, thanks for taking my question this afternoon. Chad, wanted to ask you along the lines of the sales effectiveness, what you're seeing in terms of cycles and as well as the top of the funnel momentum? Are you seeing any changes in that aspect of the sales?

Brian Schwartz:

Thank you. And the follow-up question I had on the project investments, just thinking about that on the sales and the distribution side. Is there anything you can share with us how you're thinking about the pace of either new offices, or new sales rep hiring this year, maybe versus what you did last year in 2023? Thanks.

Operator:

Our next question comes from Joshua Reilly with Needham. Please proceed.

Chad Richison:

I mean, we want to begin talking about our retention as one number, whether someone's on Beti or not, they are client of ours, we want them to be a client of ours. Obviously, I've called this out in the past, it continues to hold true, those companies that use our system fully get the most value out of it. And obviously we have a lower, much lower attrition with businesses that use Beti versus those that don't.

Chad Richison:

I mean, we've seen -- the headcount for customer has been very stable. And so, as we're looking at 2024 guidance, we're expecting the same, very stable, as it relates to headcount per customer.

Steve Enders:

Okay. Great. Thanks for taking the question. And maybe for Chad, just when we get a better sense for, I guess why now is the right time to shift to a Co-CEO structure and why is the time for you to be focusing more on the product and strategic side of the business today?

Steve Enders:

Okay. That's helpful. And then maybe we can get an update on how the Beti adoption is going, pushing that back into the base and maybe how things have -- like, what the expectations are for this year for where they could potentially go?

Operator:

Our next question today comes from Kevin Veigh with UBS. Please proceed.

Chad Richison:

Yeah, so for the quarter we bought back a little over 2% of the company. And for the full year, I think we bought back 1.5 million shares. So we've been active buying back stock of the company. We still have a significant amount left on our buyback program. So we look to be -- and we've always been very opportunistic as we're looking to buy shares back.

Chad Richison:

Well, I believe there'll continue to be clients that see and want to utilize the value of Beti. And so, yes, we will have more clients and as they see the value and choose to come on to Beti to actually achieve that value, we're going to be there to help them. I will say we're meeting clients where they live with our product right now. And that's a good place for us. That's a good place for clients. We're meeting them where they live and we're helping them achieve the value available to them in the software, whether they use Beti or not, it's a single database system. It's very easy-to-use and there's all kinds of areas where our clients are receiving value, especially right now, as we've even introduced GONE, that's giving us more-and-more conversations because everybody wants to automate time-off request. I mean there's nobody that doesn't want to automate time-off request. So we're having a lot of success with that as well right now.

Chad Richison:

Thank you.

Siti Panigrahi:

Thanks for taking my question. I wanted to ask about CRR strategy. I know last -- last few quarters you talked about how CRR going to focus on cross-selling Beti. But what I understand, it's normally focused. So what's the CRR strategy right now? Are they cross-selling any other module? And how should we think about that cannibalization opportunity that earlier you talked about CRR by spending more time pushing Beti, how is that going to change and the impact for 2024?

Siti Panigrahi:

Thanks, Chad. And then last quarter you talked about some of the impact from macro, mainly like pre-employment checks, those kind of services. How has that been trending since then?

Siti Panigrahi:

Thank you.

Jared Levine:

Thank you. In terms of the competitive environment, have you noticed any change in 1Q or 4Q, and if so, is it broad-based or limited to certain competitors?

Jared Levine:

Got it. And then looking at the...

Jared Levine:

Yeah. Then looking at the 1Q guidance here, how does the absolute dollar form filings revenue embedded within that, why don't you guys compare it to the 1Q '23 form fillings revenue, just in terms of how much of a headwind year-on-year the growth that represents?

Jared Levine:

Great. Thank you.

Jason Celino:

Great. Thanks for taking my questions. Maybe, Craig, you talked about a wider range, the guidance this year based on different scenarios, where I think you said, interest rates and other strategic initiatives. Maybe can you just talk about what to expect into the low-end versus what you're baking in at the high-end?

Jason Celino:

Okay. Perfect. And then on the customer growth for going-forward, maybe for 2024, internally, what types of initiatives like marketing, targeting, do you plan to implement or do to trying to reaccelerate that? Thanks.

Jason Celino:

Okay. Great. Thank you.

Arvind Ramnani:

Hi, thanks for taking my question. I had a couple of questions on Beti. I guess, like have you seen any sort of client attrition, that's like attrition from existing clients or some clients -- prospective clients who are choosing to kind of go a different direction, because they don't like Beti. I mean, has there been any kind of negative or pushback on Beti from customers or is that largely been quite positive?

Arvind Ramnani:

Great. And I guess that some kind of want to kind of use the latest version of Paycom, do they have the ability to use Beti, but say like, hey, in terms of like us self-certifying the payroll, if that's something they want to give the employees, is that -- are you able to turn-on and off that option where you say like even all of Beti accept this turn-on, turn-off option?

Arvind Ramnani:

Just last question here is like, if someone has payroll but they are basically not the ability to kind of run payroll through all but seem like employees are not required to certify their paycheck every two weeks. Is that a possibility or no?

Arvind Ramnani:

Perfect. Thank you.

Bhavin Shah:

Great. Thanks for taking my questions. Chad, I think you spoke about some of your strategic initiatives kind of impacting 2024 topline. Can you maybe just provide a little bit more further insight into which ones are having the greatest impact on revenue and how long do you think these kind of headwinds from these strategic initiatives last, is it a one-year thing, or do you think it will take multiple years to play-out?

Bhavin Shah:

Got it. And then. I guess maybe one clarification, I think from what at least I understand and please correct me if I'm wrong, it appears like for your messaging today that you're perhaps a little bit less aggressive in terms of pushing Beti into the customer base versus your prior commentary. If that's true, why wouldn't this decrease some of the kind of revenue headwinds that you talked about last quarter that Beti might be creating in fiscal '24?

Bhavin Shah:

Got it. Thanks for taking my questions.

Daniel Jester:

Great. Thanks for taking my question. Just on the gross margin trajectory, I know it's less of a focus than EBITDA. But three straight years of compression exiting 2023, as we think about 2024 and some of the investments you're making, should we think that gross margin compresses again or how should we be thinking about that for the year ahead?

Daniel Jester:

Okay. Great. And then on the Global HCM, great to hear about native payroll in Canada and Mexico out there. Are you actually paying people in both those countries today and when -- and if that's the case, can you just give us a flavor for kind of who or just who you you're displacing, is it some of your maybe US-based peers or is that maybe local providers, a little more color on kind of the international trajectory? Thank you.

Daniel Jester:

Great. Thank you.

Operator:

Our final question today comes from Adam Bergere with Bank of America. Please proceed.

Craig Boelte:

Yeah, I'll take the sales productivity. I mean, we've got a great sales organization. We always have. We've had a great sales strategy. We're continuing to get a lot of people involved with our sales organization. We've done a great job training them and we're set-up to go through this year. We did a great job last year throughout the year selling, we had a lot of things working with us on that as we moved throughout the year, we kind of talked about the Beti cannibalization or the displacement of certain fees. Craig talked about that being 5% still total out there, we've seen portions of that 5% already down 20%. So again, that's a successful win for the client. I do think that it takes a certain skillset to be able to go in and work with the client within our industry and we're having a lot of success there. So we do expect that we're going to sell more this year than what we sold last year and last year was a good sales year.

Adam Bergere:

All right. Thank you. And then just a follow-up to that last point. Are you investing a little less incrementally in that lower end of the market, then would you say? Thanks.

Operator:

Thank you for your questions. This concludes the Q&A portion of today's call. I will now turn the call back over to Mr. Chad Richison, for closing remarks.

Operator:

This concludes today's conference call. You may now disconnect.

Operator:

Good afternoon, and thank you for attending today's Paycom Software Third Quarter 2023 Quarterly Results Conference Call. My name is Chasson, and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, James Samford, Head of Investor Relations.

Chad Richison:

Thanks, James, and thank you to everyone joining our call today. We delivered solid results in the third quarter with very strong profitability. All focus on Paycom innovations that are transforming our industry and strengthening our competitive position. Following that, Craig will review our financials and our guidance, and then we will take questions. Throughout our 25-year history, Paycom innovations have been transforming the payroll and HCM industry. And now we have fundamentally shifted how businesses use core HR and payroll products. We started transforming the industry in 1998 by moving payroll to the web. We have made many innovations in those 25 years, but none more important than do-it-yourself payroll for employees with Beti. This is a paradigm shift for our industry and delivers tremendous value to our clients when employees do their own payroll. Along with our focus on automating and innovating all of our current products, we're continuing to enhance our global HCM and payroll product for international enterprises. Today, we announced that we are expanding our global payroll product to include Mexico. During the third quarter, employees in Canada started doing their own payroll with Beti and now employees in Mexico can, too. We are continuing to help clients navigate to the new way of doing things. And as a result, nearly two-thirds of our clients have made the shift to Beti. For most employees, the value of the perfect payroll is oftentimes immeasurable. If their check is perfect, they don't need to borrow money from a friend or family member to get through the weekend or make a bill payment. How do you measure the value of that? We're getting better and better at helping employers measure the full value available to them when payrolls are perfect. A portion of that value is easy to calculate because it's the value they receive by the elimination of after-the-fact payroll errors that require correction payroll runs, manual checks, voided checks, direct deposit reversals, additional wires, tax adjustments, W2Cs, et cetera, et cetera. Perfect payrolls eliminate these common after-the-fact payroll corrections that would otherwise be billable. So the more employees do their own payroll, the greater the savings delivered to the client from Paycom future billings, which results in lower related revenue recognized by Paycom. I'd like to thank our employees for their consistent execution and their commitment to our long-term strategy. I also want to wish Paycom a very happy 25th birthday. I look forward to many more. And as many of you know, we're just getting started. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Operator:

[Operator Instructions] Our first question is from Raimo Lenschow with Barclays. Your line is now open.

Chad Richison:

Sure. I mean, first, in regards to the first one, Beti usage has continued to increase throughout the year for us, and that continues to increase. We've been pretty close to guidance almost every quarter this year. And so Craig kind of talked about that moderating throughout the year. And we're seeing what accelerated impact Beti has. And then, Craig, you can add kind of the...

Operator:

Our next question is from Samad Samana with Jefferies. Your line is now open.

Craig Boelte:

Yes. We haven't given any guidance as it relates to the cost structure, Samad. I mean that's something we'll be looking at. One thing we just wanted to do is give you guys kind of an indication, of what we would expect with some of the things we're seeing now, as to how 2024 would be shaping up.

Chad Richison:

Sure. I mean what we can tell you about, what we see right now, is outside sales remain very strong inside sales remain very strong. And cross-selling with our CRR group continues, to be down as we are focused on these current clients that we have.

Brad Reback:

Great. I'll keep it simple. Is there any ERTC revenue in 2023?

Operator:

Our next question is from Mark Marcon with Baird. Your line is now open.

Chad Richison:

Sure. Well, the first question is, you may have a client that was used to - they're supposed to be running 13 payrolls in a quarter. And they were running 19, and now they're back to running 13. And so you have some of that going on with Beti as well as a lot of just the fixes. I mean it just eliminates everything. I mean perfect payroll's a thing. New clients come on with Beti and half of their employees are doing their own payroll by the end of the first month. Our new logo sales are strong, like I said, inside sales is a cross-selling, I mean it's been pretty weak. And that's not going to change for a little bit. I mean we're not going to keep trying to sell more products to a portion of the base, not using it or receiving value. We're going to go back in and partner with the client to ensure they're achieving the full value available to them. And so that's a big part of our strategy here. And I will say our strategy is related to the base, not the go-to-market.

Ari Friedman:

Hi. This is Ari Friedman sitting in for Brian Schwartz. Thanks for taking my question. I guess like a question I have, can you just talk about like the - what you're seeing just in terms of SMB and mid-market in terms of demand in comparison to last quarter and how it's trended? Thanks.

Ari Friedman:

Thank you.

Joshua Reilly:

Yes. Thanks for taking my question. Has anything changed in terms of customer retention in the last couple of quarters? And how much of an impact, if any, is that having on the Q4 and the initial 2024 guidance?

Operator:

Our next question is from Steve Enders with Citi.

Chad Richison:

Sure. So, we report gross retention once a year in February. As I've said before, we measure retention throughout the year. It's usually strongest in the fourth quarter. And so in February, we'll give our gross retention number. When you're looking at retention of revenue specific to a client that is using the Paycom system, if they're a new client, that revenue retention remains strong and specific to that one client, because they were new. It's not something we had previously. If they were a current client, as we transition them to Beti that does impact their future billing with us. And so, absolutely, as they continue to get great value, it is - a lot of that value is reflected in reduced billing. I mean I would say from a customer perspective, that's a smaller portion of the overall value that, they receive for Beti. But I mean, look, the only people that went in the old model is the payroll company and whoever is getting the accolades for fixing all the errors. I mean the employee and the business loses. And so, we're continuing to work with our clients in that - on that.

Siti Panigrahi:

Thanks for taking my question. Chad, what I understood that Beti now seems like cannibalizing your services revenue. But have you thought about the incremental revenue that you could get from Beti or even raising pricing? I understand you even did it for free. Have you thought about any changes strategically, to offset some of this services revenue coming from your unscheduled payroll?

Operator:

Our next question is from Bryan Bergin with TD Cowen.

Chad Richison:

Sure. I mean, new business sales as well as cross-selling within our base has always been a mitigating factor to any type of transition shift, we make like this. And again, new business sales remained strong. In fact, most of the calls we get in is about Beti. We've got our first enterprise rep and they're only targeting deals that have greater than 25,000 employees. Its current rep to Paycom. And they've got plenty of leads. And so, it's a paradigm shift that we've been making and, but as far as the go-to-market and the new business logos that we're on-boarding, I mean we're not having issues with that, and we're not looking to make changes in regards to that.

Chad Richison:

I would say that's more specific to the setup of the client at what time we actually went and set them up and kind of how we walked through that. It's also kind of dependent upon their own payroll and how they're doing things. As far as does it have a bigger impact on one versus the other? If deployed correctly potentially, but the larger the impact would really be, based on how much were you messing it up. I mean, you get to some points in large companies. And I mean, they don't even have pray to do it correctly. I mean they just don't. So - and then if you're dealing with a four-employee company, their employees not care about perfect payroll. I mean - so from that standpoint, I mean, it's the way to do it. And like I said, the only person that wins in the old model is the payroll company. I mean we've been charging people to fix mistakes for 80 years, our industry, mistakes that we've allowed them to make. And so yes, we could look at - well, if we eliminate all these mistakes, we're not going to have as many direct deposit reversals and tax changes, and W2Cs and new payroll runs. I mean we get it, and we've been mitigating it with business sales along the way. But now our CRR group, as I said on the last call, we're dedicated to helping clients achieve value. That's where we're at today and the decisions we're making today will drive long-term share or long-term value for our shareholders, me being one of them. And so, the decisions we're making today will allow us to get to the next step. But we're not abandoning and/or changing our strategy in regards to Beti. If anything, I would say we're leaning in more.

Jason Celino:

Great. Hi guys. I'm just also trying to unpack these new numbers and when we look at the exit rate from Q4, it kind of assumes a 14% growth rate. So, the early look for next year is a deceleration from that. So I guess, I'm just trying to wonder if this early look you're giving us, does it imply incremental bookings headwinds?

Operator:

Our next question is from Arvind Ramnani with Piper. Your line is now open.

Chad Richison:

So I mean, we're making strategic decisions with our base to make sure they're achieving full value. We don't really need to telegraph more than that. I don't want to share what we're doing and I'm not going to hand one end of the thread from, which someone can pull. I can tell you that all these decisions are specific to what we are doing with our base and not our go-to-market or new clients.

Bhavin Shah:

Great. Thanks for taking my questions. Chad, just one clarification and one question. Just clarifying the 10% to 11% guidance, is it fair to say that those headwinds that you're seeing next year is primarily all due to changes in assumptions to your customer base? Or is that more a little bit on the new logo side as well?

Operator:

Our next question is with Robert Simmons with D.A. Davidson.

Chad Richison:

Every - we're not - I think what Craig was trying to give is more initial outlook, if you will, a nod to all the initiatives that we have right now as we move forward. I do believe that next year, we're already seeing it now will be - continue to be pulled up market. But still focused on our core market that we focus on, but we'll continue to be pulled up as we have been. And yes, a big part of that continues to be the global HCM product and expansion into additional countries. I mean zero employees are doing their own payroll in Canada until I think it was August. And now employees in Mexico will be.

Matt Pfau:

Hi. Great. Wanted to ask, one of the items you mentioned were some macro headwinds from inflation. Maybe you can just clarify how big of a factor that those are? And then in the initial 2024 guide, what you're anticipating from a macro or a demand perspective? Any change there? Thanks.

Craig Boelte:

We expect that to carry through into the fourth quarter and into next year as well.

Adam Bergere:

Hi. Thanks for taking the question. I guess kind of open-ended, but what's like the silver lining in this from like an investor shareholder perspective, like win rates go up pretty materially since there's tangible cost savings there when you use Beti. Is help with the move upmarket, given more value. Just trying to think about past this initial cannibalization period, like what should we look at like as the positives on the other side. Thank you.

Operator:

And our last question is from Alex Zukin with Wolfe Research.

Craig Boelte:

Yes. I mean there's going to be two pieces. There's a services revenue and then obviously, the unscheduled to do some of those corrections as well. So I mean, as you've seen throughout our history, you kind of see a sequential Q3 to Q4. So you can tell that a lot of those services revenue and on schedule, even though some of them relate to bonus runs, there's quite a few of those in Q4. So as we were looking out to Q4, that's really the impact that we saw into Q4. And some of that's going to carry over into 2024. And that's why we thought it was important for us to give that initial look.

Operator:

There are no more questions. So I'll pass over.

Operator:

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Operator:

Good afternoon. Thank you for attending the Paycom Software Second Quarter 2023 Quarterly Results Conference Call. My name is Kate, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to our host, James Samford, Head of Investor Relations. You may go ahead.

Chad Richison:

Thanks, James, and thank you to everyone joining our call today. We delivered very solid results in the second quarter, and we continue to expand our opportunity, both within and outside the U.S. I'll start with highlights from the second quarter and progress on our initiative. Following that, Craig will review our financials and guidance, and then we'll take questions. Second quarter 2023 revenue of approximately $401 million represented strong growth of 27% year-over-year. Second quarter adjusted EBITDA came in at $157 million representing an adjusted EBITDA margin of roughly 39%, up approximately 130 basis points year-over-year. We are delivering a solid combination of growth and high margins, while maintaining a disciplined investment strategy and product and international expansion. On the product front, the ROI that our clients are achieving from Beti is unquestionable. We recently commissioned a total economic impact study from Forrester Consulting that quantified the savings from using Paycom and Beti, including a 90% reduction in labor for payroll processing and saving HR and accounting teams more than 2600 hours per year. Companies that are not adopting Beti are missing out on a significant opportunity for savings from this structural change to how payroll should be done. With millions of employees already doing their own payroll and organizations seeing incredible ROI with Beti, there's no reason not to adopt it. The product is working as we anticipated, and our messaging is resonating. So we will remain discipline in promoting the power of Beti to new and existing clients. In April 2023, we launched access to our Global Human Capital Management Software in more than 180 countries and in 15 languages and dialects. Today, we announced that we have expanded our HCM solutions to include self-service payroll for organizations with Canadian employees. Now, more North American businesses will be able to improve their payroll processing by giving their employees a more transparent and user friendly experience in Canada with Beti. We are seeing continued success selling across our entire target market range, and our efforts up market continue to be strong. With our recent launch into Canada, we've opened up a new large cross-border opportunity. As we continue to expand our geographic reach, I expect our move-up market to continue to accelerate. As a result, we are redefining our target market range to include organizations with greater than 10,000 employees which represents an enterprise segment that our sales reps can now directly pursue. With our new expanded market opportunity, we now estimate our market share is well below 5%. This expansion gives me confidence that we can grow at an impressive pace for many years to come. In addition to launching our payroll services in Canada, our product development team also rolled out two significant tools in our software, Everyday and the Client Action Center. Everyday allows employees to get paid on a daily basis. Unlike other products on the market, with Everyday, employees access their earned pay early without being charged a fee, and employers are not exposed to potential losses from all factors that impact pay, including early departures, garnishments or benefit deductions to be collected. Everyday is a fully compliant payroll as opposed to a pay advance like many other daily pay services. The Client Action Center furthers our dedication to creating software that simplifies the lives of our clients by providing them with an intuitive dashboard within the Paycom mobile app. This new tool makes it even easier for our clients to take action and get updates on service related items. We've received great feedback from clients on this streamlined approach, since we rolled it out in June. Finally, Paycom was recently recognized as one of America's Greatest Workplaces in 2023 by Newsweek. The award highlights companies dedicated to providing employees with an enjoyable work environment that also fosters growth and development opportunities. In addition, for the second year in a row, Comparably named Paycom, one of the best career growth opportunities among all companies. In summary, our highly differentiated product and realized client ROI continue to drive our strong results. I'd like to thank our employees for their hard work and commitment to excellence, as we continue to change the way payroll is done. With that, I'll turn the call over to Craig, for a review of our financials and guidance. Craig?

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from the line of Raimo Lenschow with Barclays. Your line is now open.

Chad Richison:

Sure. So, I mean, I'll take your last question first and circle back. But, in regards to Everyday, we put it out there because there are industries and certain companies that have moved toward a more pay as you want type program, typically for lower wage earners. Our product that we put out there allows early wage access or everyday access to wages. And the employer is not on the hook. It's not a loan, so the employee is not charged. And oftentimes, these amounts are guesstimated. And then if the employee leaves early, or if they didn't collect all of the deductions for the employee, the employer is on the hook. And so, all I would say is it, it’s meeting a need that's already out there. I do not suggest that business has changed to a daily pay environment, but some of them are already out there. And so, it gives us an opportunity and it's linked to our bulk card. In regards to your first question about demand, demand for us is still very strong, especially with outside sales and new bookings. We're booking larger deals. We're booking $2 million deals, $3 million deals. We hadn't booked those before. So, outside sales is strong and up year-over-year. Inside sales, which sells small business or smaller emerging business below 50 employees is also up year-over-year. We do have a metric within our business model that sells that's down year-over-year and that's our CRR sales. The CRR group upsells current clients and this group’s been down year-over-year and honestly, that's because, we've remained very disciplined in converting our client base to Beti, you had that first group that came on and then we've been out selling the others. It's a lot of work for our CRR with very little revenue opportunity for them. So, we've actually given compensation accelerators to incentivize the group to sell it, but it's still a smaller revenue product or billing item for us. So, while self-inflicted, I mean, we are having CRR's focus on Beti. And that's cost us $15 million to $20 million in bookings this year. But, again we’re doing the accelerator commission for the CRRs to make-up for the lower revenue. We've been changing out the jet engines on our plane in mid-flight here. I mean, Beti, dramatically changes the way our clients do their payroll, produces a dramatic ROI. So, we have to remain disciplined. We're not going to make a client go on it. We have to sell them on it and, it takes a while. Once you sell a deal, it takes a while. CRRs have to be out there to convert them. So, I think we're doing something like triple. We're tripling their commissions, for what they're going to be missing out. But for us, it's significant, because employees are going to be doing their own payroll. Millions already are with Paycom. Employees who do their own payroll don't want to go back to the guessing game. So, while Beti is a small revenue amount for Paycom, it produces strong employee and employer advocates, which produce more leads for our outside sales group. And, with less than 5% of the market, we'll recapture the delayed opportunities in due time.

Samad Samana:

Hi. Good afternoon. Thanks for taking my questions. I wanted to ask one follow-up to Raimo’s question on the guidance. If I think about recurring revenue, and I take out, but the impact of higher rates and the and the average flow balance, it kind of suggests maybe, like, a 20% to 22% or let's call it low-20s like, software revenue growth rate going forward. Is that the right way to think about maybe the durable, subscription revenue growth rate or just maybe help us understand, is that just for the back half or if we think about the durable number? How should we think about that?

Craig E. Boelte:

Yes, I mean, we delivered a strong, a very solid quarter, Samad, and as we looked at guidance, we're still guiding to 25% for the full year and 42% adjusted EBITDA. We haven't given any long-term guidance in terms of revenue, but we have a large opportunity in front of us. We had several announcements on this call. And so, the opportunity is definitely there. It's just up to us to go out and achieve that.

Chad Richison:

Yes. So, we rolled out Canada and that included all territories and provenance in Canada. We rolled out full service payroll where we're doing direct deposit taxes, everything. We've already got clients that are signed up in the pilot have been for a while. We really focused on those countries that our U.S. based clients already have as an opportunity. We could see that because we rolled out our Global HCM product. And, we rolled out our Global HCM product based on people rig in our system for these other countries. So, we're continuing to roll out countries. We'll be rolling out more countries this year. We're not picking the easiest countries. We're picking the countries that have the greatest amount of U.S. based company employees. And so, that's where we're focused first, I don't see us rolling out a sales office in Canada, right now, just because we have so much opportunity as we continue to go upmarket. As I've been mentioning, we're getting a larger and larger at-bats for our business, which, Beti drives a strong result in ROI for them as well.

Brad Reback :

Great. Thanks very much. Chad, on the CRR headwinds, you talked about $15 million to $20 million of bookings. Should we assume that's the revenue sort of headwind here in ‘23 as well?

Brad Reback :

Got it. And then just lastly on the CRR point, was it below your expectations for the quarter, or they pretty much hit your plan, for the quarter?

Operator:

Thank you. The next question will be from the line of Mark Marcon - Baird. Your line is now open.

Chad Richison:

Yeah. I wouldn't say Everyday was holding us back at all, because people had options for that, as you know, there's daily pay options out there. And so an answer to your question and what we would go after in Everyday, that would be someone that's using some other product where employees are having to pay. And in some states, the client may not be compliant, because taxes are due. We'll often also see Everyday used in more of a quick service type environment or in an area where you might have more transient workers that typically work shorter periods of time for any one business, the normal groups you'd expect there. That would be different than what we'd expect with Canada. I mean Canada is going to be any client that has employees in Canada, and it's also the first time that we've been in business now 25 years. It's the first time that we've developed another country, and it's not like a country. It's multiple provinces, territories. And as we look at the next countries we're developing, it's the same type of thing. These countries are large entries. But we're well on our way. And like I said before on the last call, there was really only one thing holding us back from going up market. And that's the fact that we didn't have international capabilities. And with our global HCM product and now with our first expansion into Canada, we're well on our way with that.

Chad Richison:

Yeah. I mean, the Forrester data is -- it's helpful. I mean, especially if you played it correctly to any client. It's hard for me to, I mean, I said I thought we would have all converted within 18 months and we're going to be past, we may be past that point, but we're coming up on being past that point, if not. And so I guess, there's an incredible amount of value that automatically associated with clients rushing to capture that value. There's also some change management on the client side. I've also talked about I'm not going to force a client to go on it. So, we do have to sell it. And then because it’s a smaller revenue item, we've got to incentivize our sales reps another way to sell it to be able to keep them whole on commissions and what have you so that we get what we want. So, it's hard to answer that question. But we're focused on it. I will say this, we've got some groups of CRRs and sales managers that are closer to having their clients converted than others. And so, you have that and we continue to bring out new products. So, I mean, I think that, for all of them, they're going to be in this just for a little bit to get the rest of them going.

Joshua Reilly:

Yeah. Thanks for taking my questions. I guess maybe starting off, if you look at the revenue beat in the quarter, it was a little less than 1% versus the midpoint of guidance. Historically, these have been cultured to 1.5% to 2% on revenue How should we think about the way you're positioning guidance going forward? Has there been any change there? Is there a little bit less conservatism built into assumptions? Any color there would be helpful.

Chad Richison:

And quarter four really has much more variability. We have probably 20% of our clients that are brand new to us. So when you think of that, we don't necessarily know how they're going to pay bonuses and if they're going to pay bonuses. So, a little more, uncertainty in that Q4 as we move throughout the year.

Chad Richison:

No, I would say, we saw some efficiencies in sales and marketing. And as we've mentioned on previous calls, at some point, you get to hit the point of diminishing returns. So, I think you saw big increase last Q2. This second quarter wasn't quite as large and some of those are also timing quarter-to-quarter. But I don't think we've necessarily pulled back on sales and marketing. We didn't pull back on sales and marketing to invest in R&D. It's just where can we get the best returns?

Steve Enders:

Okay, great. Thanks for taking the question here. I guess maybe to start, now that you're opening up into the 10,000 fee customer range, does there need to be any change in the go to market to go capture some of those more enterprise focused accounts and any areas that may needed to be built out to be able to get into those customers?

Steve Enders:

Okay. Gotcha. That's helpful there. and then on the international expansion, good to see the entry into Canada and officially announced. How should we be thinking about the pace of further country openings and I guess any initial learning’s from entering Canada and have the platform performed there that could be applied to some of the other countries that you're targeting here?

Operator:

Thank you. The next question will be from the line of Siti Panigrahi with Mizuho. Your line is now open.

Chad Richison:

I mean, the answer is yes. We will eventually have sales teams in other areas that we're expanding to, but it's first things first and that we're not focused on opening up sales team in Canada right now. We do have a service centre there now with people available to service. They've been trained and have been using our product themselves. But really it's an opportunity for us to continue to go further up market. We get a lot of call ins and interest in regards and leads in regards to a large businesses. And we sometimes fall by the wayside in regards to how they manage their global group. Our global HCM product helped a lot with that, because so much of the global payroll is already disparate and siloed all over the place. And so the global HCM helps some of that. But now as we're building out Beti in each country, it just wouldn't make sense for a company not to use us for all of that. And so originally, our focus is US based companies. There's plenty of them as we go up market, but eventually, absolutely, we'll have sales, we'll have sales teams other countries. That's not something more eyeballing right now, though.

Chad Richison:

Yeah. I mean, I think the biggest pushback is the fact that it is -- it can be a significant reduction in force as well. I think that there's change management on the client side, some changes they have to make on their side of how they feed the data. So that's primarily it. I mean, I can tell you a lot of what we get, it's not broke. you know, we're already using Paycom. Our payroll's not wrong. you know, we've got a 100% DDS. Why do we have to go through? We're working on other things. I just don't know that it becomes the priority. And so the Forrester study will help and as we continue to go out there and show the value that it can create with appropriate usage. And then also we kind of got a little bit of the tail wag and the dog strategy with the employee base, especially hourly employees that's inherent, they'll do their own. So that's helping us out a little bit in there. But at the end of the day, it's a sales call that we have to provide value for we're not going to force a client, we're going to influence them in making a decision that can drive significant ROI in regards to payroll and HCM Software.

Bryan Bergin:

Hi, guys. Good afternoon. Thank you. Wanted to ask a margin question first here. So can you talk about investments being made in in cost to revenues just considering the higher float revenue tailwinds has been a bit lighter than we've expected. Are there catch up investments being made here? Are you broadening out the international operation? Just give us a sense on what's kind of weighed year-on-year and where you're expecting adjusted gross margin to land this year.

Bryan Bergin:

Okay. And then on the updated revenue guide for the year, did you add any incremental revenues assumptions related to the Canada entry or for Everyday?

Craig E. Boelte:

Yes, that’s not going to move the number.

Unidentified Analyst:

Great. thanks. This is actually Devin on for Jason today. Thanks for taking my question. I wanted to get an update on your sales capacity, do you feel pretty good about capacity for the remainder of the year and for next year, particularly as you continue to move up market and expanding to Canada and maybe other regions down the line?

Unidentified Analyst:

Got it. No. That's helpful. And then, just a quick follow-up. Any additional details on how would you think about what you're getting on your effective yield for [cash health] (ph) clients just given another interest rate hike, in the past month Thank you.

Operator:

Thank you. The next question will be from the line of Alex Zukin with Wolfe Research. Your line is now open.

Chad Richison:

I'll take the last one first and I'll let you handle the free cash flow margin. We report retention once a year does fluctuate throughout the year. And then we report once a year, I believe, in February, every year for the prior year. And so we don't have any updates on the retention number right now, but we will, at the end of the year.

Operator:

Thank you. The next question will be from the line of Bhavin Shah with Deutsche Bank. Your line is now open.

Chad Richison:

Stable. We've seen stability. I mean, I can't point to macro issues.

Chad Richison:

I mean, very strong. I mean, outside sales is probably the strongest growth we've had in three years from a percentage basis. I mean, inside sales strong, but again like I said, it represents 5% of our revenue. So, it's important, but yeah, I mean, I would say, from a sales perspective, we're getting stronger and stronger. I mean, again, we're selling $2 million and $3 million deals. I mean, that's when we IPO, that's what a city would sell and last couple of years that's what a sales rep of the year would sell and now we've got deals of that size. So as our products gotten stronger, and again, the value's gone all the way out to the employee, and the employee user has become more technological in what they expect for usage. We're kind of really able to help everything out. The employee as well as the employer to drive this and capture this ROI available.

Daniel Jester:

Great. Thanks for taking my questions. So, first, I want to ask about sort of the back to the base motion. You know, you made a comment that the Beti transition is, kind of impacting the velocity of that group. As you think about Global HCM it also sounds like that's going to be a back to the base motion with customers that are already have, international employees. So, it's going to be the same team selling that and how do you deal with the bandwidth, as you ramp that global product? And then secondly, can you just clarify is Everyday and Client Action Center, are those green modules that you charge for? Thank you.

Operator:

Thank you. The next question will be from the line of Robert Simmons with D.A. Davidson. Your line is now open.

Chad Richison:

Yeah. The best way to think of Everyday, it's still per employee per pay cycle, but now you have more pay cycles.

Chad Richison:

We haven't updated any retention number since we last did our retention, but it's -- I don't see people leaving that have Beti. It's very -- let's not say you can have some [bots sold] (ph) merged. I mean, we've been the benefactor of where a large company's buying a smaller company. The smaller company uses us, Beti, and then we get a $1.4 million deal because the small company doesn't want to convert off Beti, and the large company ends up converting to us for it. So, I even see us being more the benefactor of mergers as we move into the future, which oftentimes it was a wash or the larger company buys the smaller company.

Operator:

The next question will be from the line of Arvind Ramnani with Piper Sandler. Your line is now open.

Chad Richison:

No. I'd say the competitive environment's been very similar as it has, which, as I've always said, has been competitive. And it's always been a dog fight. I've said that multiple times. You've always had competitors that'll go out there and say, hey, I'll give you a year for free. I've always told prospects. I mean, if you want the lowest price, call your current vendor, threaten to leave them. That's how you get your lowest price. But now if you want value and a return on your investment and you want to turn those fees into actual value that you can achieve. One way to do that is to go with us. So you were always going to have that. You're always having to have competitive -- competitors out there, and it's no different than it has been.

Chad Richison:

No. As we've mentioned in the past, Arvind, we received, our goal is somewhere between 80% and 90% of the fed funds rate. As they have increases in the fed funds rate, and it takes a couple of quarters for that to layer in. And so that's what we've said in the past.

Jackson Ader :

Thanks for taking my questions, guys. The first one is maybe on the talent acquisition or the recruiting modules. We're starting to see maybe a loosening in the labor markets. And I'm curious whether you're seeing usage for your recruiting or talent products either start to slow or maybe actually pick up, like if there is some sort of counterintuitive demand for those products as the labor market begins to loosen.

Jackson Ader :

Okay. Alright. That's fair. And then the follow-up is for – so on the sales side, when you're increasing the target market up to 10,000 employees. So how do you make sure that your outside salespeople don't just go out there and start hunting the gigantic deals and make sure that -- they don't take their eye off the ball in terms of the bread and butter deal. Thanks.

Operator:

That concludes today's Q&A session. I would now like to pass the call back over to Chad Richison for closing remarks.

Operator:

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Operator:

Good afternoon. Thank you for attending the Paycom Software First Quarter 2023 Quarterly Results Conference Call. My name is Matt and I will be the moderator for today's call. All lines have been muted during the presentation portion of the call for an opportunity for questions and answers at the end. [Operator Instructions]. I would now like to pass the conference over to our host, James Samford, Head of Investor Relations. James, please go ahead.

Chad Richison:

Thanks, James. And thank you to everyone joining our call today. We delivered strong results in the first quarter and I'm very pleased with the progress we've made on a variety of initiatives. I'll start with highlights from the first quarter then I'll discuss some of our plans for the remainder of the year. Following that, Craig will review our financials and our guidance and discuss our new dividend policy, then we will take questions. With that, let's get started. Our 2023 first quarter revenue of approximately $452 million came in very strong up 28% year-over-year with strong recurring revenue growth from new clients. First quarter adjusted EBITDA also came in very strong at $221 million representing an adjusted EBITDA margin of roughly 49% up 70 basis points year-over-year. With our updated full-year 2023 guidance, we are well positioned to exceed our initial outlook for a solid Rule of 65. On the product front, BETI continues to be a key differentiator in the market with Employee Self Service Payroll continuing to drive strong client additions. The industry transformation to more efficient HCM and payroll processes is accelerating. And now with BETI, payroll processes can be automated to deliver perfect payroll. Using BETI, employees do their own payroll. Employee usage is a key differentiator and new clients are coming to Paycom for exactly that. With 95% of database interactions being completed by the employees of our clients, as measured by the DDX, we are changing the way employees engage with HCM solutions. Our product and go-to-market strategy are working. I just returned from our Annual President's Club Meeting with our top salespeople. And I couldn't be more excited about the tone of the conversations and enthusiasm for our product especially around employee usage in BETI. We are having increasing success at market with continued rapid growth at the upper end of our target market range. Large organizations benefit tremendously from simplifying their HCM and payroll needs with our single database solution. We have 5% of the TAM today, however, our TAM has increased now that we've laid the groundwork for our global platform beginning with Global HCM, which further strengthens our value proposition with our largest clients. To sum up, we are executing well with a highly differentiated product and go-to-market strategy. Our addressable market opportunities continue to expand and we are pleased to enhance our long-term commitment to stockholder return with the initiation of the quarterly dividend program. I'd like to thank our employees for helping lay the foundation for another record breaking year. With that I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Operator:

Thank you. [Operator Instructions]. The first question is from the line of Raimo Lenschow with Barclays. Your line is now open.

Chad Richison:

Sure, and so right now, Raimo, we have several clients who currently use our domestic software, and they use it internationally, they rigged the system a little bit so that they can store employees in other countries, and then oftentimes, they'll work with a third-party for payroll. So our current clients, they don't have to do this any longer. Because the Paycom system now does have Global HCM product that'll work in 180 countries in 15 languages. And Global HCM for us is everything, minus the payroll side. And so, we've looked at integration opportunities, we've looked at working with third-parties, and even potential acquisitions. But the fact is everyone else does it the old way, and payroll and HR departments send data for processing. And we're not going to be putting any development into the old way. So for us, BETI is packing her bags, and we'll be going around the globe, as we develop it out.

Chad Richison:

Yes, absolutely. We'll be a global company, this is the first step. And that's moving our product into the different languages and getting the HCM side done. And now we're heavily focused on bringing BETI to the other countries which it will require us to have operations in certain countries in order to do that, in order to process in those countries.

Samad Samana:

Hi, good afternoon, and congrats on the good quarter. Chad, I had a whole list of questions. But then you said the word open to acquisitions, which I'm really stay before. So I'm going to pivot in real time here and ask you between the dividend announcement, you mentioning potential for M&A, which is something to take on as an historically done, is M&A something that is just maybe going to be something part of the broader capital allocation strategy of how to use the company's cash going forward or and is that just limited to maybe the global side of it? Or is it -- would it be something you'd explore in other areas too?

Samad Samana:

Great. And then maybe just a quick follow-up for Craig, just the numbers on the margin side were impressive as always, the sales and marketing dollars jumped a pretty good bit from 4Q to 1Q more than you normally see. I was just curious, I know, you mentioned marketing campaigns. Was there any acceleration or pull forward maybe in sales, headcount addition, or anything else that we need to maybe be aware there beyond just digital marketing? And how should we think about that maybe going forward?

Operator:

Thank you for your question. The next question is from the line of Brad Reback with Stifel. Your line is now open.

Chad Richison:

Yes, I mean, no, I wouldn't say either way. I mean, I do think it's a little bit easier to hire, I would look at the -- if you're looking at from a year ago, I would say the labor market was a little bit tighter for us on hiring, just as more people touted the work from home in which we came back to work. I think that, especially on the tech side, we seem to be doing very well attracting top talent there as more and more companies have shed some of those jobs. From our own client base so, we're definitely focused on adding clients don't really have anything to call out on seeing any negative softening within our own client base. I've tried to do as much as I can to kind of look into the future with 5% of the TAM and several accelerators for ourselves. It's, I'm focusing on being a sales person, right now then an economist. But definitely, we're really not seeing much in our own numbers as we look into the future, but from hiring people, which I mean, I think is somewhat of a proxy to what happens as well, for our clients. We are definitely seeing it's a little bit easier to hire, especially on the technical talent side.

Brad Reback:

That's great. Thanks very much.

Operator:

Thank you for your question. The next question is from the line of Mark Marcon with Baird. Your line is now open.

Chad Richison:

Yes, I mean, for us on that it's all really about new logo adds, I mean increases an employment from existing base or decreases, I can't say that that's had a meaningful impact on us, one way or the other, with the exception of the -- what I'm going to call maybe a six month to 12-month period in COVID, where it went down and then back up, you had some significant fluctuations then, but since stabilization, it's not going to be employee gains and/or at this time, we don't really have the employees leaving that would impact that. So for us it's new logos, we added over 3,000 clients to Beti in this first quarter. And that's been going really well. I don't know if Craig would have anything to add to them.

Mark Marcon:

Great. And you just came out of club. What are you seeing this in terms of sales force productivity? And how much more were the people have to do in order to qualify for club? And what regions are you really starting to see some real pickups in terms of traction?

Operator:

Thank you for your question. The next question is from the line of Brian Schwartz with Oppenheimer. Your line is now open.

Chad Richison:

I mean on the first question, I mean, I think people can talk about whether it's a single database or willingness to integrate with multiple systems and what have you. The fact is, is there's one type of employee, I mean, the employees are the same. And they like doing their own payroll. And so for us international and laying the groundwork with global HCM is the first step to going all the way up market. I mean, there's never really been an issue for us in scalability of the system, it's really been about the buying decisions that you'll oftentimes see way up market. Well, employees these days, they don't have a high tolerance for a system complexity in any stage of product that they use. And so I think we've got a very simplified product that does very complex things. And I would say there might have been one thing that we were missing, to be able to go work with the largest companies in the world. And I don't think we're going to be missing that one thing very much longer. That said, I mean, our system still does work well. We have a lot of clients that have, definitely we're having success up market, we have a lot of clients that are 10,000 employees and more. We have clients that even like our system so much they were willing to work around to use it for other countries. Now, they don't have to do that on the HCM side, and we would be planning to roll out Beti in other countries throughout this year.

Craig Boelte:

Yes, also on the margin front, I mean, we wouldn't call out that it would be accretive order, it should be a follow the same profile fairly similar to what our current clients are doing. I mean, obviously, we'll have some R&D costs as it relates to building some of this out, but in terms of just the overall margins, it should be very similar.

Operator:

Thank you for your question. The next question is from the line of Joshua Reilly with Needham. Your line is now open.

Craig Boelte:

We would be building Beti out in each country.

Joshua Reilly:

Okay, so you are building a native payroll in some of these international countries?

Joshua Reilly:

Got it. Okay. And then have you increased your advertising spend sequentially from Q4? And I think in the past, you've said that increasing that spend implies more confidence around demand. Is that accurate that you're seeing more demand in Q1 than Q4?

Joshua Reilly:

Got it. Thanks guys.

Siti Panigrahi:

Thank you. Thanks for taking my question. Chad, in this macro environment, we keep hearing small businesses kind of under pressure right now, they're cautious in terms of commit to any kind of investment in this environment. So wondering, what are you hearing from your customer base? Any color would be helpful?

Siti Panigrahi:

That's super helpful, and follow-up for Craig. If I heard your client phone balance, I think 2.4 billion you said, that's almost kind of 9% on a year-over-year growth, compared to other years, which was pretty high. Is there anything that we should, anything that caused this slowdown. And also, any color in terms of interest income any float income contribution this quarter?

Craig Boelte:

Yes, I would say on the interest income on our client funds, we call out last quarter we're realizing around 80% of the Fed funds rate. And part of that's because it's layered in, we have some investments that are a little bit longer-term. And then I mean, the banks don't give you the full amount as the Fed raises those rates. So that's kind of what we've said last quarter, I really wouldn't update that any.

Chad Richison:

Thank you.

Jared Levine:

It's actually Jared Levine on for Bryan tonight. In terms of a retention, how did 1Q revenue retention compared to 1Q '22. Were there any notable changes based on clients with under 50 employees, and then those clients with 50 plus employees?

Jared Levine:

Got it. And then there's my follow-up, what is your adjusted gross margin expectation for this fiscal year? And then we're specifically looking at 1Q, what weight on that adjusted gross margin within that operating expense line item?

Jared Levine:

Great, thank you.

Jason Celino:

Hey, thanks guys for taking my questions. Chad, in the press release for Global HCM a few weeks ago, you mentioned that you've been working on the product for two years. Since it doesn't include BETI yet, why not just wait until you had developed it for some of those countries first, or maybe can you just talk about the timing on why move now?

Jason Celino:

Okay, yes, that's fair. And you have mentioned some of your customers are kind of [indiscernible] onto your systems already, but how is there any way to know how many of your customers have international employees or offices?

Jason Celino:

Okay, great. Thanks a lot.

Operator:

Thank you for your question. The next question is from the line of Arvind Ramnani with Piper Sandler. Your line is now open.

Chad Richison:

Yes, I mean I wouldn't call at anybody in particular, we're getting much stronger. When we released BETI in 2021, I think it was July of 2021, we very first even started selling it, we've gotten a lot better at our value proposition and how we actually go to market with it, I think it took some learning, it was somewhat hard to teach old dog new tricks, from our standpoint of our sales force. And when we started selling BETI, we were all virtual sales. And we've made a bunch of changes dramatically. And so I definitely think having a stronger value proposition as we've had with BETI as well as us being face to face is helping our close ratio out there. And I would say it would be competitor agnostic. When we have a strategic buyer that takes the time to really try to achieve the return on investment that implementing any one of these products would promise to produce, we do very well.

Chad Richison:

No, I definitely think it'll be relevant. You can use AI for multiple things. There are areas that you can use it for that are better than others. There are front end things, you can use it for direct to the client, there are back end things that you can use it for, that a client may never see. And so, when you're talking about AI, it has many uses, some of which is front end and some back end. And I don't want to talk specific, what exactly, we're using it for already internally and what our opportunities would be into the future. But an answer to your question. Yes, I do think that over time, AI is going to be a thing in our industry.

Operator:

Thank you for your question. The next question is from the line of Jackson Ader with SVB. Your line is now open.

Chad Richison:

Yes, I mean, well I called out R&D, because that's a side that we oftentimes hire people that have experience with technology writing code and what have you, our salespeople, we've always -- we typically look for people with less than two years outside sales experience. We do take changing careers, what have you. We do have specific education requirements for that position. And so, I wouldn't necessarily say it was difficult for us to hire jobs. But what has changed on the sales side is you get a little bit more time to look there for a while. I mean, if you had a salesperson that you had, that you were interviewing yet a week or two to make a decision, because they were getting 12 offers, I would say today, that's slowed down quite a bit. So I would say you're able to take a little bit more time than what you were able to do when we were very compressed in time, during the interview process to hire salespeople. I'd say that's changed some on the sales side. But I just I called out technology, because we're just we're seeing it. We're seeing it.

Chad Richison:

There's about 16 to 20 countries that represent about well over 80% of the opportunity. So, I would expect us to be rolling those out first as you look at it, but yes, I mean over time, we build things ourselves. And so I would expect us to continue to roll them out. But there is 16 to 20 countries that are going to be first.

Operator:

Thank you for your question. The next question is from the line of Alex Zukin with Wolfe Research. Your line is now open.

Chad Richison:

Yes, so that opening up offices continues to be a big part of our strategy. We've continued to open up offices, I think a year-ago, was it last year, maybe about 15 months ago, let's call it 14 or so, we opened up five offices from December through February. And those offices are maturing very well, and continue to mature and we will continue to open up offices. For us our bottleneck on being able to open up offices is capacity of our management group being ready to do that. We have to both backfill for managers that may not be accomplishing their goals, as well as we have to expand and over the course of 25 years, I think we've done that pretty well. But it is an -- it's a part of our growth strategy. And we'll continue to open up offices when we're able.

Chad Richison:

Yes, I'll take the free cash flow question. I mean, first quarter was strong, as we look at through the rest of the year, we've called out kind of what our CapEx is going to be. We're wrapping up our building in Oklahoma City, a large building here. So CapEx will be a little bit more back end loaded in terms of how it throat flows throughout this year. So that will -- that's kind of the way I would look at the free cash flow for the year. And on the Beti penetration.

Alex Zukin:

Understood. Thank you guys.

Bhavin Shah:

Great. Thanks for taking the questions. Just -- I come for Craig. Craig, if I just look at your 1Q sequential growth or 4Q our recurring revenue, it looks like a trend a little bit lower versus the prior 1Q's. I know the declining mix of tax wins revenue has an impact here, but any other commentary on the narrative go lives or even growth within the tax forms? And how that's trending?

Chad Richison:

Yes, set a little bit differently. Since 1998, when we started the company, we've only added one product to our year end services. And that was ACA, that's it in 25 years. Meanwhile, our monthly recurring revenue products, we've continued to add products that we charge on a monthly recurring basis for them. And so the monthly recurring, it's just growing at a rate much more so than our annual recurring. And over time, the annual recurring amount represents a smaller amount of a client's bill because of that.

Chad Richison:

Yes, I mean, we still investing in a pretty short-term investments very safe. We're looking at CDs, commercial paper, treasury notes, and then some overnight. So we're still very safe on our investments and fairly short-term. And then as we do global, we'll look at those opportunities as well.

Operator:

Thank you for your question. The next question is from the line of Daniel Jester with BMO Capital. Your line is now open.

Chad Richison:

Yes, I mean, we just came out with global HCM. I do think it'll be somewhat accretive to our numbers this year, more so in subsequent years. And it's a significant system. I think it'll allow us to continue to go further up, even just the global HCM side, increases our TAM by about 50%. So, I mean, it's available there. And then, as we continue to add the payroll to it, I just think that puts us on a different playing field for us to continue to go up market as well as serve those clients of ours that currently have international presence and might not be using our system, the way they're going to be using it into the future.

Chad Richison:

Well, I would, for one thing we did buy back over $100 million last year. So we've been, maybe not the last couple of quarters, but for sure last year, we continue to do buybacks and over $100 million over time, we've bought back $600 million and 4.7 million shares. So, I would expect that, it'll be a balance between buybacks and dividends as we kind of look to the future.

Kevin McVeigh:

Great. Thank you, and congrats on that terrific results. I think I know the answer. But the source of the upside, and then the race beat -- be it kind of the quarter as well, that was new logo, primarily just wanted to understand where that's at relative to expectations initially?

Kevin McVeigh:

And then if you think about kind of the move internationally in up market? Does that impact the implementation strategy at all? In terms of upfront, you try to be very opportunistic, RAM modules, things like that. Is that the same strategy as you kind of scale the client base?

Kevin McVeigh:

It's great.

Operator:

Thank you for your question. The last question comes from the line of Robert Simmons with DA Davidson. Your line is now open.

Chad Richison:

We have some companies that are starting to pilot it, I think there's a couple. And a lot of global HCM is developed with current client feedback. From that perspective, just seeing what they're trying to accomplish, what they're using. And then just making a decision that we had just take our current systems and be able to put them to where they could be used in 180 countries and in 15 languages and so that we would expect more and more clients throughout this year to use the global HCM piece of Paycom.

Chad Richison:

Now, I mean, right now, it's -- we're looking at it as a fixed amount, the $50 over the next year, or $37.5 a quarter. I mean, right now, it's, that -- it's basically a 50% to about a 50% or 0.5% dividend yield based on our start current share price. So, but we would look at it as that $50 and then adjust that as we see fit in the future.

Operator:

Thank you for your question. There are no additional questions waiting at this time. So I'll pass the conference back the Chad Richison for closing remarks.

Operator:

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Operator:

Good afternoon, and thank you for attending today's Paycom Software Fourth Quarter and Full Year 2022 Results Conference Call. My name is Daniel, and I will be your moderator for today's call. [Operator Instructions]. It is now my pleasure to hand the conference over to our host, James Samford, Head of Investor Relations. James, the floor is yours.

Chad Richison :

Thanks, James, and thank you to everyone joining our call today. We ended 2022 with very strong results, and I'd like to thank all of our employees for the consistent hard work and execution that drove 4 consecutive quarters of revenue growth of 30% or more over the respective prior year periods. I'll spend a few minutes on the highlights of our fourth quarter and our full year 2022 results and high-level expectations for 2023. Following that, Craig will review our financials and our guidance, and then we will take questions. Our 2022 fourth quarter revenue of approximately $371 million came in very strong, up 30% year-over-year, bringing our full year 2022 revenue to $1.375 billion, also up 30% year-over-year. Fourth quarter adjusted EBITDA also came in very strong at $164 million, representing an adjusted EBITDA margin of 44% bringing our full year 2022 adjusted EBITDA to $580 million, representing an adjusted EBITDA margin of 42%. The sum of our 2022 revenue growth rate and adjusted EBITDA margin resulted in us hitting the Rule of 72. With our full year 2023 guidance, we are once again starting the year strong with outlook for a solid Rule of 65. As a reminder, we guide to what we can see based on our existing recurring revenue, new business sales and anticipated new starts in the near term. I'm pleased with the momentum we are carrying into the new year. On the product front, 2022 was a very strong year for Paycom benefiting from our first full year of rolling out Beti, our differentiated employee self-service payroll solution. We are seeing strong demand trends that position us to deliver another year of rapid profitable growth in 2023. We are leading an industry transformation by making payroll and HCM processes more efficient for both employees and businesses by eliminating manual tasks, improving accuracy and reducing liability exposure caused when payroll and HCM is done in accurately. With Beti, employees are doing their own payroll by interfacing directly with their data and a self-service, easy-to-use software. A recent study conducted by Ernst & Young found that the average organization has a 20% in accuracy rate when it comes to payrolls, which results in lost revenue, hours wasted correcting errors and increased exposure to potential lawsuits and fines. Each of these mistakes cost an average of $291 and could cost upwards of $705 for unentered nonproductive time errors. So you can see how costly these errors become over time. In fact, over the course of the year, a 1,000-employee company could potentially incur almost $1 million in unnecessary costs, correcting common payroll mistakes. Beti automates the payroll processes to deliver perfect payroll and employees are empowered to identify and correct errors ahead of time so that everybody wins. Our marketing plan in 2022 continued to perform well, delivering strong demo leads throughout the year as we spend aggressively on advertising. At the same time, our deliberate investments in marketing are delivering high-margin revenues and we saw improving operating leverage in the sales and marketing throughout 2022. We continue to be pulled upmarket in 2022 with the fastest-growing revenue segment of our business coming from clients with greater than 2,000 employees. We are seeing increasing demand from larger organizations that are recognizing the opportunity to simplify their HCM needs. And Paycom is well positioned to benefit from this trend. With only approximately 5% of the TAM today, there's still plenty of runway ahead for us to expand our market share. Paycom received national recognition from several organizations in 2022. As a workplace, we were named One of America's Most Trusted Companies, as well as Best Company for Women, and we received a Top Workplace in Oklahoma award for a tenth consecutive year. These awards are a testament to our hard work, our thriving corporate culture and our client focus. As of December 31, 2022, our headcount stood at over 6,300 employees, up 18% and year-over-year as we continue to have great success attracting and retaining high-quality talent to further bolster our future growth. Additionally, I want to congratulate the 2022 Paycom Jim Thorpe Award winner, Travis Hodges Tomlinson from Texas Christian University. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, who is one of the greatest all-around athletes in history. Jim Thorpe also happened to be an Oklahoman. To sum up, our focus on the employee experience and client ROI continue to fuel our strong results and we are executing well. I'm very excited about the long list of new innovative opportunities we will be pursuing in 2023 and beyond. I'd like to thank our employees for helping to make 2022 such a strong year and we are set up for another great year in 2023. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Operator:

[Operator Instructions] The first question comes from the line of Raimo Lenschow of Barclays.

Chad Richison:

Yes, I'll start off. I mean our go-to-market remains very strong. We continue to have very strong book sales, and we've been selling Beti across the board. New clients that come in have about 50% of their employees doing their own payroll within the first 2 months of using Beti. And so that continues to be successful. From 2015 to 2018, we had a retention rate of anywhere from 91% to 92%, was 91% for 3 of those years and 92% for 1 of those years. For the last 4 years, from 2019 through 2022, we've had a retention rate of 93% for 3 of the years and 94% of one of those years. There's often rounding at play as you look through that. But what I will also say is with clients who have Beti, we have a much, much higher retention rate across our base. And I would expect retention to continue to rise as a larger percent of our current client base deploys Beti.

Operator:

The next question comes from Samad Samana of Jefferies.

Chad Richison:

Yes. I mean, we hired what we look to hire last year. I believe our growth was around 18% in hiring. We definitely have a more efficient client. I've been talking about for quite some time, who we kind of have the haves and the have-nots when you look across our client base with those clients that have already deployed Beti and are getting strong usage out of it. We're just -- we're having to do less for them. I mean we're having to fix less things. We're having to do less adjustments, and so they're just much more efficient. And so we don't need as many people when people are using Beti. That said, we had a very healthy growth in our employment last year. And so I believe we had success with that.

Chad Richison:

We always guide to what we can see. I mean, first, I'll answer those office questions. We did open up 5 offices over the course of about 3 months. One of those, I believe, was in December of 2021. The others were in the first quarter of 2022. All of those continue to progress. They wouldn't be at full staffing yet, but they would achieve that throughout this year as well as with the full backline pipeline. And then next year, in the year of 2024, they would all be on the same quota as our mature offices are. As far as what we anticipate to do this year from office openings, as we all know, that you followed us for a while, office openings that we would anticipate to expand into this year would have very little impact on this year but would have more of an impact on both 2024 as well as 2025.

Mark Marcon:

One question. Craig, you mentioned you've got $2.1 billion held for cash, held for clients in the fourth quarter. What sort of effective yield are you getting on that? And what is the expectation with regards to the float balance growing over the course of the coming year? And how we should think about an effective yield on that?

Mark Marcon:

Okay. Would the rule of thumb, 70% to 80% of Fed funds with a delay be kind of a good rule of thumb to think of?

Craig Boelte :

I mean I would say that that's kind of in the range, Mark.

Craig Boelte :

Yes, we're sub-4.

Brian Schwartz:

Congratulations on a real nice job with the business in 4Q. I just wanted to ask you a question about either the business activity or the pipeline momentum by customer size. Are you seeing any differences in terms of the demand or the behavior of the larger organizations that are flowing through the pipeline versus, say, the smaller companies?

Brian Schwartz:

And then one follow-up just for Craig real quickly. Did you buy back any stock in the quarter? And can you just remind me again how much authorization you've left for buybacks?

Operator:

The next question comes from Joshua Reilly of Needham.

Chad Richison:

Yes. We're -- ours is going to primarily come from new logo ads when you just look at the size of revenue that we need to grow by in order to continue to hit our objectives. And so first price is going to be new logo adds. We don't really have a lot to call out on pace per control growth from that perspective. But new logo ads is going to be primary for us. We've always had a healthy upsell to current clients. It's just been at a much smaller level than what new logo ads are. And it's been consistent, our upsells to current clients as a percentage has been consistent each year with the exception of the year we had ACA.

Chad Richison:

Yes. I feel like they are more normal. I think it's important to understand that the -- our year-end services as far as what we provide to a client. That hasn't changed a lot in the last 15 years as far as you added 10 99s at one point, but you have W2s, W3s 10 99. Meanwhile, the growth of our other revenue as we've added all these other products has been somewhat substantial. And so it's just the percentage or amount that our year-end services has on the overall client base is much lower now than what it was in the past just because it's not growing at the same rate. I would say, yes. I mean I would say, yes, from a normalization. I think you saw normal hiring and business patterns more so last year than what you had in year's past -- in a couple of years past. So from a normalization of year in forms filing, yes, I would say that we were there.

Steve Enders:

I guess I just want to dig into a little bit more on the outlook for next year and particularly on the margin side. I think you talked about in the past that if we think about float income flowing through that, that some of that would flow down to the bottom line. So just trying to think about how you're thinking about that layering in for '23 and kind of where are the biggest areas of incremental investments are coming and that's lead into the EBITDA, slight guide down from where we were in '22.

Steve Enders:

Okay. And I guess on the marketing spend that you're putting out there, I know it's been a more recent initiative for you all, I guess, what's kind of been the ROI on those dollars that you have seen? And how has that kind of changed the top of funnel activity or conversion rates that you've seen as kind of the brand awareness campaigns have gotten out there more?

Operator:

The next question comes from Siti Panigrahi of Mizuho.

Chad Richison:

Yes, I would say the comp had a little bit to do with it. Prior to 2020, we had 5 sales reps that sold inside sales. In 2020, we added 40. And then in 2022, we added roughly another 50, 60. So we started selling small business, emerging business in a much stronger way as the advertising was working. So -- and I don't want to say that our unit count was inflated prior, but it was different because we did add a lot of small business units and it contributed to a 17% growth in units. I think we've had -- and again, it did that in the year where we did 25% revenue growth. So I think as we look last year, you could deduct that we had a lot of success selling in midrange and above midrange in clients. And I would say our small business adds were somewhat more normalized because we didn't really add any small business teams last year like we had in 2020 and 2021.

Chad Richison:

Yes. I mean, we continue to guide in the $2 million range. So we have quite a bit of visibility as we go quarter-to-quarter. I will say that in -- we started our guide last year for 2022, we started it at 25%, and we were comping over a year where we had done 25% growth. This year, we're starting our guide at 24% comping over a year where we had done 30% growth. And so we haven't changed our approach to guidance. We guide what we can see and achievement matters throughout the year. And so that's what we're focused on as we move throughout the year. And so I'm trying to answer your conservatism. I mean, we guide to what we can see each time, and we look to unload the musket throughout the quarter.

Bryan Bergin:

I wanted to follow up on retention first. So I heard the comments about Beti clients being higher and the relative stability from prior years. But just as we think about the year-on-year downtick here, can you talk about -- is this larger client churn? Or is it a lot of turn among smaller clients? Just trying to understand that dynamic.

Bryan Bergin:

Okay. Understood. And then a follow-up on margin here. So Craig, I may have missed it, but did you say where you expect gross margin to land in 2023? And I hear your message on increased efficiency in sales and marketing, and you've also mentioned increased, I guess, new product development. Should we expect that the explanation around EBITDA downtick year-on-year, more about R&D ramping? Or is it both R&D and S&M?

Operator:

The next question comes from Jason Celino of KeyBanc.

Chad Richison:

Well, I mean, we are solving problems for the client and processes that I believe can be automated and hadn't been until really Beti came into play, which somewhat forces appropriate usage within our software for employees so that they can get paid correctly. I do believe that there's more automation that we can be doing. But you've got to start with, you've got to have the client and the employees using the product correctly, which I will say that about 50% of our client base, that is the case. And last year was our first full year of selling Beti and bringing it to the market. And so we're having a lot of success for that. I believe AI for the sake of AI isn't really valuable to the client. But I believe that if you can do something consistently and you can use something like AI to do that, I think that's a good thing. So I don't expect we would see it as a wide platform within our industry this year type thing with that, but I think you'll have more and more businesses looking for that machine learning and other types of automation that could be used to automate problems experienced by our clients right now.

Craig Boelte :

I mean there are really 3 or 4 buckets that really helped drive that EBITDA beat. One, your marketing spend was a little higher fourth quarter, and some of that is just when we are doing those marketing things that we had planned. A little higher capitalization rate on the development, and that's focused on new initiatives. Beti clients generate higher-quality revenue. So we saw a little bit of that. And then in the quarter, we had a net insurance proceeds of about $4.8 million for expenses that were incurred both current and prior year quarters. So that's really what drove the adjusted EBITDA beat.

Arvind Ramnani:

I just wanted to ask a question. How should we think about growth from existing clients who are expanding their own client base?

Arvind Ramnani:

Terrific. And if you can just kind of help me to reconcile the 8% growth in new logos versus 14% employee expansion? How should I interpret those two numbers?

Operator:

The next question comes from Bhavin Shah of Deutsche Bank.

Chad Richison:

I mean we continue to have strong product demonstration leads, but that's oftentimes a function of our marketing and advertising, and we pay for those leads. I can say for us, it's been business as usual. We've been back in the field since September last year, meaning actually back on site on every single call, where before we were doing more of a hybrid some were virtual, some were in person. So I would say, if anything, we're having less calls with the client to get to close. I can't necessarily say that's speeding up the process, but I think we're having better conversations as we go through the process. So really nothing to call out there. Other than today, when a client calls Paycom and looks to have a product demonstration, it's about Beti. And I would say, in times past, it could be about whatever thorn had in their paw that we'd be looking to pull out. So it's a little different today in the type of lead we are generating.

Chad Richison:

Well, Beti definitely drives PEPM, because you definitely have to have a certain product set for us -- from us purchased and being used -- so I would say that the clients that we are selling in 2022 have a better, stronger product mix than those clients we would have been selling in 2018 in or 2019. We still do have an opportunity with current clients. We do have to really work at their pace to get them over to Beti and really to get them to achieve the value that it can deliver, and we continue to look at that. And there's still opportunities obviously, within our current client base to deliver more PEPM as well as on new business sales.

Daniel Jester :

Great. Just on that comment about Beti, Chad, can you update us what percentage of the base has Beti at year-end?

Daniel Jester :

Great. And then just lastly, and you touched on this a couple of times about sort of the upmarket success and opportunities. As I think about sort of how you're investing to attack those opportunities. Is this strategic, i.e., that you're devoting more resources specifically because you think there's more opportunity upmarket? Or is this tactical in which kind of year in and year out, you're deploying resources and maybe 1 year, you see more opportunities smaller and down market and another you're seeing more opportunity in the upmarket, so you can be sort of tactical with those sales investments.

Operator:

Thank you. And with that, we will conclude our time of question and answer. I would now like to hand the conference back over to Chad Richison for closing remarks.

Operator:

Thank you for joining today's call. Thank you for your participation. We would now disconnect your lines.

Operator:

Good afternoon. Thank you for attending today’s Paycom Software Third Quarter 2022 Quarterly Results. My name is Hannah and I will be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, James Samford, Head of Investor Relations. Please go ahead.

Chad Richison:

Thanks, James and thank you to everyone joining our call today. We delivered another very strong quarter with a focus on high-quality revenue growth that produces world-class margins. I'll spend a few minutes on the highlights and then turn it over to Craig to review our financials and our guidance and then we'll take questions. Our third quarter 2022 revenue of approximately $334 million came in very strong, up 30% year-over-year, with rapid recurring revenue growth driven by new business sales. Demand for self-service solutions that enable employees to interact directly with their data continues to be strong and feedback on self-service payroll remains very positive. At the center of our automation strategy is BETI which is how businesses and their employees win in payroll. BETI is the future of payroll and already nearly half of our clients have embraced self-service payroll. Our go-to-market strategy includes 54 outside sales teams that focus on penetrating their respective territories. And we augment their sales efforts with marketing and advertising that drive lead volumes, brand awareness and the call to action. Our efforts are producing strong demo leads and our new brand campaign is driving strong recognition across our target market range. We are also seeing a surge in organic lead referrals coming directly from employees. As more employees experienced BETI and Paycom's comprehensive employee self-service solutions, many are seeking to bring us into the current workplace. Just like in the consumer world, employees don't want to go backwards in technology. And with Paycom, employees get the best HCM user experience and the most control over their data interactions. Employee users are becoming Paycom advocates. And when they get promoted in their current position or move on to a new organization, they are becoming strong influencers. We have a long runway to go and our multifaceted go-to-market strategy should help deliver rapid new business growth for many years to come. To sum up, we are delivering high-quality profitable revenue growth. Based on our strong financial results to date and expectations for the remainder of the year, achievement of our full year guidance for 30% revenue growth and 41% adjusted EBITDA margin puts us back into the pre-pandemic Rule of 70. Our differentiated product strategy focused on employee experience and self-service payroll is producing outstanding fundamentals with accelerating revenue growth in 2022, expanding adjusted EBITDA margins and strong cash flows. I want to thank our employees for their focus and commitment to Paycom. With that, I’ll turn the call over to Craig for a review of our financials and guidance. Craig?

Operator:

[Operator Instructions] Your first question is from the line of Raimo Lenschow with Barclays.

Chad Richison:

Sure. I mean I'll take the first one. And I would say, first, I mean, the hiring market is still a little tight, not like it was. I mean I would say there's been a little softening in hiring as far as it shifting maybe more into an employer's market. I would still say that we're not there yet. I mean for us, though, as far as moving deals around, I mean, moving deals forward, I mean, September and October were huge book sales months for us. And as a reminder, I mean, we only have 5% of the TAM. I mean we reported 33,800 clients at the end of last year. Our 2 largest competitors have a combined 1.7 million clients. And we’re out there making businesses more efficient by having their employees do the payrolls themselves. So we’re not short on opportunity right now. We’re making businesses more efficient and I don’t see why that would slow down for us as that’s really within our control.

Operator:

The next question is from Samad Samana with Jefferies.

Chad Richison:

Yes. I mean we've had a lot of strong starts as of late. And so those starts, when a deal starts in the quarter, that really does matter. The size of our beat for a quarter is really dictated by when a deal starts. If we start that new business, that new client for us, if we start them at the beginning of the quarter, we receive 100% of the revenue billing for that client. If we start the deal at the end of the quarter, we might receive only 15% to 30% of the revenue billing for that client for that quarter. Then of course, all subsequent quarters, we receive 100%. So we do have pretty good visibility as we go quarter-to-quarter. And what would be driving the fourth quarter is, obviously, we benefited from some rate increases. We've talked about that as how those layer in. I mean as you've seen, those do start to layer in. But also just the strength of our new client conversions. We're converting clients at a rapid pace. They're using the product right off the bat which is helpful. And so we're having strong growth into the fourth quarter.

Chad Richison:

Yes. I mean with the offices that we've opened up last year and I'm going to call it 5, even though we opened up 1 late in the first quarter of 2021. And then I think we opened up 4 in the very -- at the very beginning of 2022 or this year. I mean all offices, just as a reminder, it takes offices 24 months to reach full maturity and that's having 8 reps with the backlog and pipeline having been out in the field. Today, I mean, I would say our best one probably has 4 reps on quota right now, as we sit here today as they’ve been going through and selling. And so that will continue to increase throughout next year for them and then they will become mature offices and have the exact same quota as all of our other offices in 2023 -- or sorry, at the end -- or sorry, at the beginning of -- at the end of 2023 for one of them and then at the beginning of 2024 for the other 4.

Brad Reback:

Chad, have you seen any noticeable change in hiring or retention at your customers?

Operator:

The next question is from the line of Mark Marcon with Baird.

Craig Boelte:

Yes. So Mark, what we've talked about, what each 25 basis points represents, we haven't disclosed the exact rate that we're achieving. Those kind of layer in over time. But for every 25 basis points, at some point, we should be getting close to $5 million on an annualized basis. But all of our investments are fairly short term. We're doing CDs overnights and then also commercial paper. So those are the types of investments, as well as some 2-year treasuries. So those are really the investments we're seeing now. And then that's kind of where we're at, at this point.

Chad Richison:

Yes. I mean I would say I mentioned those months because they're the most recent. I mean I can go back to August, July and I can go back as far as we want. We've just been having strong book sales. I mean for a long time, I mean even since the pandemic started, we're getting a lot of leads from just employees. I mean -- and we're getting leads from the largest companies in the world. I mean 20 of their employees will hit our database in a 1-month period of time. And so we’re having strong leads. We’re able to turn those leads, some of them into -- to influencers as we go in there. But definitely, they become data points and information that we’re able to gather as we go in to clients. And we’re finding that employees really like to use the product. Once we convert a client over onto our system -- and again, all new clients have BETI. They’re all using BETI. But within the very first 2 payrolls, over 50% of their employees are already doing their own payroll. So that is a differentiated strategy. They’re not doing that with any other company. And as those employees either get promoted where they’re at or move to other companies, they’re bringing us into other businesses. And so we’re having a lot of success with that. And I wouldn’t expect that to slow down. I think if the labor market loosens up or even becomes tighter or what have you, it doesn’t really change the value proposition of eliminating and reducing exposure and risk for the company as well as helping those employees so that they don’t suffer the negative consequences associated with your pay not matching what you expected to be paid.

Brian Schwartz:

And congratulations on an excellent quarter. Chad, in terms of deal sizes or maybe the cycles as the lead generations going through to your conversions, are you seeing any meaningful changes in those metrics?

Brian Schwartz:

Yes, you got them both. And then Craig, one follow-up for you. The guidance for 4Q for -- on the EBITDA, on the margin, it’s showing less improvement than what the business has done for the last 2 quarters. And I’m just wondering if there’s any catch-up in spend or maybe you’re increasing your advertising here in Q4. So I was just wondering if you have any color on that target.

Operator:

The next question is from Joshua Reilly with Needham.

Chad Richison:

Yes, I would say it's both. Our strategy, when it comes to both module creation and adoption, hasn't changed. Sometimes, we create additional features and functionality within a product and we do not charge for those features and functionality. DDX is an example of that. Manager on-the-Go is an example of that and I could name many others. And then sometimes, we create a product that has a different level of return on investment. And then we do charge for those products. And it's those products that we call modules and we do have 29 of them. So as we move forward, you'll continue to see a healthy mix of both as it makes sense for us.

Craig Boelte:

Yes. I mean any rate increase in November and December will have very little impact on our fourth quarter. Those layer in over time. So those would have a very small impact on our fourth quarter.

Unidentified Analyst:

This is George [ph] on for Steve. I want to ask about competitive landscape. Have you noticed any changes in your running into deals, in particular, as you started to move up market?