Paycom Software Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 14 speakers on the call.

Operator

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 call over to our host, James Samford, Head of Investor Relations. You may go ahead.

Speaker 1

Thank you, and welcome to Paycom's earnings conference call for the Q2 2023. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives and expected performance, Are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements Represent our outlook only as of the date of this conference call. While we believe any forward looking statements made on this call are reasonable, Actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10 ks and quarterly report on Form 10 Q.

Speaker 1

You should refer to and consider these factors when relying on such forward looking information. Any forward looking statement made speaks only as of the date on which it is made, We do not undertake and expressly disclaim any obligation to update or alter our forward looking statements, whether as a result of new information, Future events or otherwise, except as required by applicable law. Also during today's call, we will refer to certain non GAAP financial measures, including adjusted EBITDA, non GAAP net income, adjusted gross profit, adjusted gross margin and certain adjusted expenses. We use these non GAAP financial measures to review and assess our And for planning purposes, a reconciliation schedule showing GAAP versus non GAAP results is included in the press release that we issued after the close of the market today And is available on our website at investors. Paycom.com.

Speaker 1

We'll now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad?

Speaker 2

Thanks, James, and thank you to everyone joining our call today. We delivered very solid results in the Q2 and we continue to I'll start with highlights from the Q2 and progress on our initiatives. Following that, Craig will review our financials and guidance and then we'll take questions. 2nd quarter 2023 revenue of approximately $401,000,000 Represented strong growth of 27% year over year. 2nd quarter adjusted EBITDA came in at 157,000,000 representing an adjusted EBITDA margin of roughly 39%, up approximately 130 basis points year over year.

Speaker 2

We are delivering a solid combination of growth and high margins while maintaining a disciplined investment strategy in product and international expansion. On the product front, the ROI that our clients are achieving from Betty is unquestionable. We recently commissioned a total economic impact from Forrester Consulting that quantified the savings from using Paycom Embedding, including a 90% reduction in labor For payroll processing and saving HR and accounting teams more than 2,600 hours per year. Companies that are not adopting Betty 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 Betty, there's no reason not to adopt it.

Speaker 2

The product is working as we anticipated and our messaging is resonating. So we will remain disciplined in promoting the power of Betty to new and 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 Betty. We are seeing continued success selling across our entire target market range And our efforts up market continue to be strong.

Speaker 2

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.

Speaker 2

In addition to launching our payroll services in Canada, our product development team also rolled out 2 significant tools in our software, Every day and the client action center. Every day allows employees to get paid on a daily basis. Unlike other products on the market, With every day, 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. Every day 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.

Speaker 2

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 2nd 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.

Speaker 2

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?

Speaker 3

Before I review our Q2 results for 20 23 and our outlook for the Q3 and full year 2023, I would like to remind everyone that my comments related to certain financial measures We'll be on a non GAAP basis. We delivered solid results this quarter with revenue of $401,100,000 up 26.6 percent compared to the prior year period. Our GAAP net income for the Q2 was 64,500,000 We're $1.11 per diluted share based on approximately 58,000,000 shares. Adjusted EBITDA was $156,600,000 In the Q2 of 2023 were 39 percent of total revenues compared to $119,600,000 In the Q2 of 2022 or 37.7 percent of total revenues or up 130 basis points year over year. Non GAAP net income for the Q2 of 2023 was $94,300,000 or $1.62 per diluted share, Up 29.1 percent from the prior year period.

Speaker 3

2nd quarter GAAP tax rate came in higher than expected at 30.5%. For the full year 2023, we now anticipate our effective income tax rate to come in slightly higher at approximately 29.5% On a GAAP basis and approximately 27% on a non GAAP basis. Demand trends remain strong, particularly upmarket. Within total revenues, recurring revenue was $394,500,000 for the Q2 of 2023, representing 98.4 percent of total revenues for the quarter and growing 26.6% from the comparable prior year period. Adjusted sales and marketing expense for the Q2 of 2023 was $100,400,000 or 25 percent of revenues.

Speaker 3

We continue to aggressively spend on marketing and sales ahead of future growth. Adjusted R and D expense was $42,500,000 In the Q2 of 2023 were 10.6 percent of total revenues. Adjusted total R and D costs, including the capitalized portion, We're $61,200,000 in the Q2 of 2023 compared to $48,100,000 in the prior year period. We continue to invest in new products and expanded geographic offerings. Turning to the balance sheet.

Speaker 3

We ended the quarter with a very strong balance sheet, Including cash and cash equivalents of $537,000,000 and total debt of $29,000,000 Additionally, we announced today that we have Expanded our revolver from $650,000,000 to $1,000,000,000 The average daily balance of funds held on behalf of clients It was approximately $2,200,000,000 in the Q2 of 2023, up approximately 13% year over year. Now let me turn to guidance. For fiscal 2023, we are raising our outlook and now expect revenue in the range of $1,715,000,000 to $1,770,000,000 or approximately 25% year over year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $722,000,000 to $724,000,000 representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range. With these strong results and outlook, we are well positioned to reach the rule of 67.

Speaker 3

For the Q3 of 2023, we expect total revenues in the range of $410,000,000 to $412,000,000 Representing a growth rate over the comparable prior year period of approximately 23% at the midpoint of the range. We expect adjusted EBITDA for the Q3 in the range of $156,000,000 to $158,000,000 representing an adjusted EBITDA margin of approximately 38% at the midpoint of the range. We paid our 1st quarterly dividend of 0.37 0.5 dollars per share in June, and the Board has approved a quarterly dividend of $0.375 per share payable in mid September. Paycom is in a strong financial position and executing well against a very large market opportunity. Our focus on delivering strong revenue growth And attractive adjusted EBITDA margins remains top priorities and I am pleased with the consistency of our execution and the resiliency of our business model.

Speaker 3

We look forward to delivering continued strong results as many of our initiatives gain traction in 2023 2024. With that, we will open the line for questions. Operator?

Operator

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

Speaker 4

Thank you. I have two quick questions. First, Chad, can you talk a little bit about what you're seeing out there In terms of end demand, etcetera, because and the reason why I'm asking is like if I look at this Quarter, you beat by €3,000,000 The full year was only raised by €2,000,000 So do we need to read into that that there is You're kind of slightly concerned about the second half of the year. Like maybe kind of frame it for us in terms of how we should think about that? And then the second question was on everyday, like how should we think about that in terms of like applicability, in terms of Is this for all the clients?

Speaker 4

Is it for select group that have more contingency workers? But it's interesting. How thinking broadly you can roll this out? Thank you.

Speaker 2

Sure. So I mean, I'll take your last question first then circle back. But in regards to every day, 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.

Speaker 2

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's meeting a need that's already out there. I do not suggest that businesses change to a daily pay environment, but some of them are already out there.

Speaker 2

And so It gives us an opportunity and it's linked to our Vault 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 $2,000,000 deals, dollars 3,000,000 deals. We hadn't booked those Before. So outside sales is strong and up year over year.

Speaker 2

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 sales 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 Betty. You had that first group It came on, and then we've been out selling the others.

Speaker 2

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 Betty. And that costs us $15,000,000 to $20,000,000 in bookings this year. But again, we're doing the accelerator commission for the CRRs to make up for the lower revenue.

Speaker 2

We've been changing out the jet engines on our plane in mid flight here. I mean, Betty 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.

Speaker 2

And it takes a while. Once you sell a deal, it takes a while. CRRs have to be out there to convert them. I think we're doing something like triple. We're tripling their commissions for what they're going to be missing out.

Speaker 2

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 Betty 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.

Operator

Thank you. The next question will be from the line of Samad Samana with Jefferies. Your line is now open.

Speaker 5

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 the impact of higher rates 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.

Speaker 5

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 DuraLift number, how should we think about that?

Speaker 2

I'll let Craig kind of comment a little bit on that. From my perspective, I mean, there's really only One metric that's given way for us, and that's the fact that we're having CRR spend 3 days converting a Very small revenue item for a client that produces strong ROI. I think it's a season that we're in. As far as the percentage growth, I mean, you guys have the numbers. We've talked about what we earn on Interest, as they've increased, we've also talked about how that's layering in.

Speaker 2

So I know there's different models out there and they all seem Fairly consistent with one another. I don't plan on giving any of the interest back, but if you want to take it out, I think that's a fair thing.

Speaker 3

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 percent 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.

Speaker 5

Great. And just a quick follow-up on the product side. On the new product rolled into Canada, have you already have beta customers? Is that hiring a Different type of rep, have you opened sales offices there? Maybe just help us think about both the who's trying the product already and if you've already built out the The go to market infrastructure for that?

Speaker 2

Yes. So we rolled out Canada, and that included all territories and provinces 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.

Speaker 2

We could see that because we rolled out Our global HCM product and we rolled out our global HCM product based on people rigging 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.

Speaker 2

S.-based company employees. And so that's where we're focused first. I don't see us rolling out of sales office in Canada right now just because we have so much opportunity As we continue to go up market, as I've been mentioning, we're getting larger and larger at bats For our business, which Betty drives a strong result in ROI for them as well.

Operator

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

Speaker 2

Great. Thanks very much. Chad, on the CRR headwinds, you talked about $15,000,000 to $20,000,000 of bookings. Should we assume that's The revenue sort of headwind here in 'twenty three as well? Bookings kind of flow in.

Speaker 2

They don't come in right away. So I mean, there would be some amount of that. You wouldn't get all of that this year, but I mean, we look at how much we were up last year and how much we're not this year, The dramatic change there, but really it just comes down to we've still got about 40% of our client base not on Betty and That ROI is available. If not, we're servicing 2 different products that's here. And so the Forrester study was put out, Talked about how it's 90% of the savings, I mean, and it's significant there.

Speaker 2

Employees and employers are having And so we didn't just start doing this. We really started doing this end of last year, but We've been seeing the impact just because it takes a while. And the CRR is really the only group we can send out to a client To help with that change management and be there for their 1st payroll on Betty and walk them through the datasets. And so that's the group That we're using to do it. And so but in answer to your question, not 100% of $20,000,000 Would have realized in revenue this year.

Speaker 2

I will say though with CRRs, it comes in pretty quick. I'd say they sell it 1 month and most of it's up within 4 to 6 weeks with that group. 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? I would say that it's been a harder slog to move betting than in this last group.

Speaker 2

But I mean it's impacting us, but we have to stay disciplined in it. It's Once we get these clients moved over to Betty, it's a very little revenue piece for them, but it's a significant amount of their ROI. It also makes Servicing clients easier for us just because you don't have the paper cuts that come with an HR and payroll department trying to do it for the employee.

Operator

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

Speaker 6

Good afternoon. A couple of questions. So Between everyday and Canada, can you talk a little bit about like the types of clients that you would be Targeting to a greater extent, it sounds like you're forecasting that we're going to see some decent Expansion in the 10,000 plus employee range type clients and to what extent was not having every day holding you back before?

Speaker 2

Yeah, I wouldn't say every day 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 every day, 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.

Speaker 2

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.

Speaker 2

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.

Speaker 6

Great. And then in terms of the CRR and moving Betty to the remaining clients, What's your forecast, Chad, just in terms of how long it will take to get that 40%? And to what extent could Some of the Forrester data that you've put together helped to speed that up.

Speaker 2

Yes. I mean, the Forrester data, 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, 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.

Speaker 2

There's also some change management on the client side. I've also talked about how 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.

Speaker 2

And, but we're focused on it. I will say this, you've got we've got some groups of TRRs and sales managers that are closer to having their clients converted than others. And so you have that. But and we continue to bring out new products. So but yes, 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

Operator

This question will be from the line of Joshua Riley with Needham. Your line is now open.

Speaker 5

Yes. 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, BEATs could have been closer 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?

Speaker 5

Is there a little bit less conservatism built into assumptions? Any color there would be helpful.

Speaker 3

No, I mean, we guide to what we can see and obviously when a deal starts in a quarter can impact the guidance for that quarter. There are certain things within a quarter that can make the beat larger or smaller. And so we typically We guide to what we can see and really no change to our stance on guidance. But as Chad mentioned, We saw the CRR impact start to come through and that's what we've seen over the last quarter. Thank you.

Speaker 3

Quarter 4 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.

Speaker 5

Got it. And then sales and marketing was up about $2,000,000 quarter over quarter this year in Q2, while last year was up about $10,000,000 sequentially. Should we read into anything around the pace of investments in sales and marketing slowing a bit while you increase more investments in product and R

Speaker 7

and D continues to increase?

Speaker 5

Do you need to get some of these New products out and then you're going to reaccelerate investments in sales and marketing after that point in time? Thank you.

Speaker 3

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 hit the point of diminishing returns. So I think you saw a big increase last Q2. This Q2 wasn't quite as large, but and some of those are also timing quarter to quarter. But I don't think we've necessarily pulled back on sales and market.

Speaker 3

We didn't pull back on sales and marketing to invest in R and D. It's just where can we get the best returns.

Operator

Thank you. The next question will be from the line of Steve Enders with Citi, your line is now open.

Speaker 8

Okay, great. Thanks for taking the question here. I guess maybe to start, I know that you're opening up into the 10,000 seat 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 need to be built out to Be able to get into those customers?

Speaker 2

No, I mean, our marketing efforts are a little bit different. I wouldn't in answer to the question on the sales motion, no. I mean, back in the day, I mean, every client's different, but today employees are the same. I mean, it's just what we're dealing with. There's no such thing as a large market employee versus a small market employee.

Speaker 2

They've got all have perfect payrolls and what have So our approach to selling because we're selling one system is very similar. The prospecting methods, meaning the methods through which Go to get appointments. They're a little bit different in how we're doing that, but not unlike how we've been doing it with companies That have 10,000 employees already. So I wouldn't say it's much different than what we were doing there. But And it's a little bit different if you're trying to get into a company that's 250,000 employees, how you're getting in there to I mean, there's a lot of companies that will listen to you, but we're looking to meet with the decision makers and buyers.

Speaker 2

And so And again, employee advocates are helping us. 3 or 4 years ago, we had 0 employee advocates. Today, we continue to cultivate advocates of our client employees who use our system And then go to other companies and bring us in. And so we're still having a lot of success with that.

Speaker 8

Okay. Got you. That's helpful there. And then on the international expansion, good to see the entry The Canada and that officially announced, how should we be thinking about the pace of further country openings and I guess any initial learnings from entering Canada and how the platform performed there that could be applied to some of the other Countries that you're targeting here?

Speaker 2

I mean, it gets easier as you do more countries because you run into Crazy things in each country. I mean, every country operates a little bit different. There's countries that Their year runs April 6 through April 5. There's countries that you don't reconcile attacks At the end, you got to have a stamp in the beginning. So we're running into that with all countries.

Speaker 2

We do continue to spec them out and We'll have out a couple more significant countries this year. I mentioned on the call not long ago that we believe that About 20 countries will represent most all the opportunity we'll need For the U. S.-based clients, not all, but most all.

Operator

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

Speaker 9

Thank you. Thanks for taking my question. Just want to follow-up, Chad. When you are now going to Canada or even other countries, are you targeting customer in those countries or are you focusing on U. S.

Speaker 9

Customer who has employed there. The reason I'm asking, are you trying to build now a sales team in Canada and other countries or it's still focused Here in the U. S?

Speaker 2

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 center 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 upmarket, we get a lot of call ins and interest in regards and leads in regards to Large businesses. And we kind of sometimes fall by the wayside in regards to how they manage their global group.

Speaker 2

Our global HCM product helped a lot with that because so much of the global payrolls are already disparate and siloed all over The place. And so the global HCM helps some with that. But now as we're building out Betty in each country, it just wouldn't make sense for a company not to For all of that. And so originally our focus is U. S.-based companies.

Speaker 2

There's plenty of them as we go up market, but eventually absolutely we'll

Speaker 9

Okay. Thanks for that color. And one more follow-up on the BATY. When you say the 40% of customer yet to move, I understand they are all your prior customer, not the new customer. They by default get Berry.

Speaker 9

So definitely there's a clear value proposition of Berry and it's been there 2 years. So what's the pushback you're hearing from those Customer, what's stopping them moving to Betty?

Speaker 2

Yes, I mean, I think the biggest pushback is the fact that it is a 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. We're already using Paycom.

Speaker 2

Our payroll is not wrong. We've got 100% DDX. Why do we have to go through? We're working on other things. I just don't know that it becomes the priority.

Speaker 2

And 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 in the dog strategy with the employee base, especially hourly employees, it'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.

Speaker 2

We're not going to force a client. We're going to influence them in making a decision that

Operator

Thank you. The next question will be from the line of Brian Bergin with TD Cowen. Your line is now open.

Speaker 10

Hi guys. Good afternoon. Thank you. Wanted to ask a margin question first here. So can you talk about Investments being made in cost of revenues, just considering the higher float revenue tailwind, it's been a bit lighter than we've expected.

Speaker 10

Are there catch up investments being made here? Are you broadening out the international operations? 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?

Speaker 3

Yes, I mean, this quarter was down slightly. It's typically going to be headcount. We hire ahead of the growth. It's going to be a higher headcount in the service group. We're starting to see a few costs as it relates to international, but it's not really moving the needle at this point.

Speaker 3

We haven't guided to gross margins. We've always been in that 84%, 85%, 86% range and we would expect that To be similar moving forward.

Speaker 10

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?

Speaker 2

I mean, it would be a small, there would be very small impacts this year Just because you have bookings then conversions. I mean every day could add a little bit, but it's not going to move a number.

Speaker 3

Yes, it's not going to move a number.

Operator

Thank you. The next question will be from the line of Jason Celino with KeyBanc. Your line is now open.

Speaker 11

Great. Thanks. This is actually Devon on for Jason today. 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 expand into Canada and maybe other regions down the line?

Speaker 2

Yes, I mean, well, outside sales is rolling. I mean, we've got people that are selling numbers that I mean even one deal is bigger than what someone sold before at Paycom. So I mean Sales is continuing to do well that our capacity is continuing to increase, continuing to get stronger staffing. And again, I'm talking about from our outside sales perspective, which sells 95% of our new business That we bring on, new clients that we bring on. So we're doing well there and I would expect us to continue to do so.

Speaker 11

Got it. No, that's helpful. And then just a quick follow-up, Any additional details on how we should think about what you're getting on your effective yield for cash held for clients just given Another interest rate hike in the past month. Thank you.

Speaker 3

Yes. I mean, what we've said in the past and really don't have an update on that is we typically get about $5,000,000 annually on a 25 basis point increase. We had $2,200,000,000 average daily funds held this quarter. I mean, we're typically trying to get somewhere between 80% 90% of the Fed funds rate. It layers in over time.

Speaker 3

It doesn't it's not an immediate Impact to us, we have certain funds that are layered out longer. So that's the impact that rate hike has on us.

Operator

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

Speaker 5

Hey guys, this is Ryan on for Alex. Thanks for taking the question. So two quick ones. Historically, free cash flow margin and cash conversion had been lowest in 2Q, but it came in relatively strong this quarter. So Just wondering if you can unpack that strength.

Speaker 5

And then on retention, you reported 93% at the end of last year, but Given the macro, any swings in that number that we should be aware of just through this first half? Thanks.

Speaker 2

I'll take the last one first and then I'll let you handle the free cash flow margin. We report retention once a year, It does fluctuate throughout the year and then we report it 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.

Speaker 3

Yes. I mean, on free cash flow came in very strong for Q2. Some of that can be timing, but overall it's The main things that impact free cash flow are going to be CapEx and some of your tax rates on that. But yes, we're very happy with the way Came in Q2 much better than last year's Q2.

Operator

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

Speaker 7

Great. Thanks for taking

Speaker 5

my question. Chad, there's always a lot

Speaker 12

of noise as to where we are

Speaker 5

in the macro cycle.

Speaker 12

Can you just help us understand what you're seeing with your customers In terms of taste print control, how that might have trended throughout the quarter and if you see any differences across the various customer sizes that you serve?

Speaker 2

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

Speaker 12

Got it. And then earlier in your prepared remarks, you mentioned kind of year over year growth in both outside and inside sales.

Speaker 11

Can you double click on this?

Speaker 12

Like how has growth trended in terms of both of those areas versus prior quarters? Are you seeing accelerating growth, similar growth, Deceleration, just any way to kind of think about the magnitude of what you're seeing with

Speaker 11

both inside and outside sales?

Speaker 2

I mean, very strong. I mean, outside sales is Probably the strongest growth we've had in 3 years from a percentage basis. I mean inside sales strong, but again, like 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 $2,000,000 $3,000,000 deals.

Speaker 2

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. As our products gotten stronger and again, the value has gone all the way out to the employee and the employee user Has become more technological and what they expect for usage. We're kind of really able to help everything out, the employee as well as the

Operator

Thank you. The next question will be from the line of Daniel Jester with BMO. Your line is now open.

Speaker 5

Great. Thanks for taking my question. So, first, I want to ask about sort of the back to the base motion. You made a Comment that the Betty transition is kind of impacting the velocity of that group. As you think about global HCM, Yes.

Speaker 5

And 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 every day in Client Action Center, are those going to be modules that you charge for? Thank you.

Speaker 2

Okay. Every day, yes. Client action center, no. Every client has it, the ability to enable it Right now. As far as yes, it is the exact same team that sells The global HCM product as what sells Betty.

Speaker 2

It's also that same team will sell every day That's what sells Betty. And so they still have the ability to sell it. They still have the ability to go out. Nothing's precluding someone from going out and making a sale. The issue becomes It's not an issue.

Speaker 2

Again, it's something that we have to do is regardless of what you choose to go sell on your own, you've got these clients that don't have Betty That some of them you already have sold Betty to and you're going to have to go out there and spend the time to get them converted. And it's our CRRs that do those conversions. And so the difference can be instead of having a 1.5 hours or 2 hour sales call to sell a product, You're out there for 3, 3.5 days. Again, not all in the same week. It might be 3.5 days over a 4 week period of time, Getting the company converted over to Betty and then you're out there when they're doing their 1st payroll and making sure that the ROI And once someone's made that conversion, I believe we earn the right to even Help them achieve greater return on investment with these other products.

Speaker 2

And so I'm not saying I've told any CRRs, hey, don't go out and sell a product. What I've said is, this is your priority, any clients that aren't currently on it achieving the value. I know it's a smaller revenue amount. So I'm going to pay you triple because I know it's a small revenue amount. So anytime you sell 1, this will be your commission.

Speaker 2

And We have to do that so that we can move everybody into the right value because it is the correct way to do it. It's correct way for employees to do it themselves. And so that's what we're focused on. We're not retreating from that. And I also believe that we do have we have some good things coming out here with product.

Speaker 2

We've announced some of it. We've got more coming out throughout the year. So, but it is a first things first. I mean, I'm not throwing my hands up on what the CRRs can do. I'm just Explaining where they're at as of today.

Operator

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

Speaker 13

Hey, thanks for taking the questions. So I was wondering how does everyday work in terms of monetization? Will you do it the same way you do other modules works per employee per pay cycle or would it be a different model?

Speaker 2

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

Speaker 13

Got it. Got it. And then on VETI, are you still seeing 99% annual retention for clients who are using it?

Speaker 2

We haven't updated any retention numbers since we last did our retention, but it's I don't see people leaving that half betting. It's very it's not to say you can't have some bought sold merged. I mean, we've even been the benefactor of where a large company is buying Smaller company, the smaller company uses us, Betty, and then we get a $1,400,000 deal because the small company doesn't want to convert off Betty 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.

Speaker 13

Thank you very much.

Operator

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

Speaker 7

Thanks for taking my questions. So I guess kind of First thing is like, can you talk a bit about the competitive environment, particularly from some of the legacy players, HP and Paychex? Has that changed has it put any kind of pressure on your sales cycles or kind of conversions?

Speaker 2

Now, I'd say the competitive environment has been very similar as it has, which as I've always said, has been competitive. And it's always been a dogfight. I've said that multiple times. You've always had competitors that will 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.

Speaker 2

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 And the actual value that you can achieve, only way to do that is to go with us. So you are always going to have that, you always have to have Competitors out there and it's no different than it has been.

Speaker 7

Terrific. And then just a really quick one. Can you kind of tell us kind of Kind of interest income contribution for the quarter?

Speaker 3

No. As we've mentioned in the past, Arvind, We received our goal is somewhere between 80% 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.

Operator

Thank you. And the last question comes from the line of Jackson Ader with MoffettNathanson, your line is now open.

Speaker 5

Great. 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 kind of counterintuitive demand for those products as the labor market begins to loosen?

Speaker 2

Yes, it's stable. I would say where we see it, it is a talent acquisition product, but I would see where you start seeing that's background checks, Pre employment background checks and how those are going. I would say it's stable as of right now.

Speaker 5

Okay. All right. That's fair. And then the follow-up is for on the sales side, When you're increasing the target market, up to 10,000 employees, 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

Speaker 12

deal. Thanks.

Speaker 2

Yes. Well, weekly quotas, I'll make sure of that. But ultimately, they will go after larger deals. They don't have that many of them for any one territory. It's not going to increase it so much that that's all you're doing.

Speaker 2

And I mean our salespeople Probably 75% to 80% of what they make is commission based and that's based off revenue being achieved. You can still achieve a lot of revenue off of the sweet spot of our market That we've been focused on, but we continue to be pulled up market. I've been mentioning that and there's no reason Not to go after that market as well. I mean, eventually, we're going to land one of these largest companies in the world kind of deal. I mean eventually that's going to happen because it's just right.

Speaker 2

So we've got to take our at bats and our swings with them.

Operator

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

Speaker 2

I want to thank everyone for joining the call today. Over the next quarter, we'll be hosting meetings at 5 conferences. Beginning next week, we'll be at the KeyBanc Tech Leadership Forum. At the end of August, we'll be hosting meetings at the Stifel TechExec Summit and the Deutsche Bank Technology Conference. In September, we'll be presenting at the Citi Global Tech Conference in New York And hosting meetings at the Wolf TMT Conference in San Francisco.

Speaker 2

We look forward to catching up with many of you soon. Operator, you may disconnect.

Operator

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

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Earnings Conference Call
Paycom Software Q2 2023
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