Paycor HCM Q4 2023 Earnings Call Transcript

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Provided by Quartr
August 16, 2023

Key Takeaways

  • Paycor delivered 26% revenue growth in Q4 and 29% for FY 2023, while expanding adjusted gross margins by 300 bps and adjusted operating income margins by 275 bps year-over-year.
  • The sales force grew 22% to ~560 reps, with Tier 1 city coverage rising from 28% to 36%, driving a record Q4 bookings increase of 23% YoY.
  • Product innovation accelerated with the launch of the Engage communication platform, an AI-powered Job Description Generator, over 130 new marketplace partners added, and a near doubling of API endpoints.
  • Paycor generated $19 million of adjusted free cash flow in Q4 (14% free cash flow margin) and $10 million for the full year, ending with $95 million in cash and no debt.
  • For FY 2024, management guides to $644–650 million in revenue (up ~18%) and $97–100 million of adjusted operating income, with Q1 revenue of $138–140 million and adjusted operating income of $9–10 million.
AI Generated. May Contain Errors.
Earnings Conference Call
Paycor HCM Q4 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

And gentlemen, thank you for standing by, and welcome to Paycor's 4th Quarter and Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Rachel White, Vice President of Investor Relations.

Speaker 1

Good afternoon, and welcome to Paycor's earnings call for the Q4 fiscal year 2023, which ended on June Yes. On the call with me today are Raul Villar, Jr, Paycor's Chief Executive Officer and Adam Manty, Paycor's Chief Financial Officer. Our financial results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today's call is being recorded and a replay will be available on our website following the conclusion of the call. Statements made in this call include forward looking statements related to our financial results, products, customer demand, operations and other matters.

Speaker 1

These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We also will refer to certain non GAAP A reconciliation of non GAAP to GAAP measures is provided in our press release on our website. With that, I'll turn the call over to Raul.

Speaker 2

Thank you, Rachel, and thank you all for joining us to discuss Paycor's 4th quarter and full year results. Revenue grew 26% for the quarter 29% for the year, driven by solid execution against our strategic growth levers, namely expanding our sales coverage and increasing PePAM. We're also expanding margins as we scale and delivered nearly 400 basis points of improvement year over year while investing in capabilities that further differentiate Paycor in the market.

Speaker 3

I would

Speaker 2

like to take this opportunity to thank each of our associates for their role in contributing to these outstanding results. Demand remains strong for our modern innovative ATM solution that empowers leaders to unlock the potential of their people and business performance. Using our unrivaled talent tools, frontline leaders are improving employee engagement, which is increasing employee retention by 10% and helping drive better business outcomes. Our team has consistently executed against our go to market strategy. We expanded our sales force by 22% to approximately 560 sales associates.

Speaker 2

Most of our in market sales hires have been in Tier 1 cities, Increasing our Tier 1 sales coverage in the largest 15 cities in America from 28% to 36%. Sales coverage refers to the optimal number of prospects per seller and we could effectively still double or even triple the number of sellers we have today. Brokers remained an integral part of our go to market motion and influenced over 40% of our field bookings this year. We continue to strategically shift up market where clients tend to purchase a more complete solution. And as a result, Avid's deal size continued to expand nicely this year.

Speaker 2

Our pipeline and win rates remain strong And we are proud to announce a record Q4 bookings performance, which was our highest quarter on record. All these factors contributed to robust bookings growth of 23% year over year. We continue to expand our modern ATM suite by launching differentiated technology that powers people and performance. In the last year, List Peplum increased $3 or 7% and now stands at $48 which equates to a PEPI of $5.76 This month, we introduced Engage, which is a single platform to elevate how leaders communicate with and motivate their team. The new solution empowers leaders to share company news, communicate with teams and recognize employees across both mobile and web applications, Further strengthening our suite of artificial intelligence solutions, we also launched an AI enabled Job Description Generator.

Speaker 2

This offering strengthens our suite of artificial intelligence solutions, which includes Paycor Smart Sourcing and Predictive Resignation. By merely providing a job title and required experience, The integrated solution will create compelling job descriptions, empowering leaders to attract and hire top talent faster than ever before. The robust development of our interoperability engine is a key differentiator of our modern HCM platform. We continued to lead the industry with the most extensive network of partners, deep two way integrations and API connectivity points to meet our clients' unique business needs. In the last year, we added over 130 marketplace partners and nearly doubled the number of API endpoints available in our system.

Speaker 2

For fiscal 2024, We are going to continue to focus on execution. For us that means continuing to increase sales coverage to capture share in the SMB space and expand Peppem with innovative solutions that empower frontline leaders. Successful execution of this strategy will position us well to achieve our target of 20% plus sustainable revenue growth while expanding margins with greater free cash flow generation this year. With that, I'll turn the call over to Adam to discuss our financial results and guidance.

Speaker 4

Thanks, Raul. I'll discuss our Q4 and full year results and then share our outlook for the Q1 and next fiscal year. As a reminder, my comments related to certain financial measures are on a non GAAP basis. We posted another strong quarter delivering total revenues $140,000,000 a 26% increase year over year. Recurring revenue grew 18% year over year in line with our expectations and slightly lower than prior quarter growth due to a combination of an incredibly strong Q4 last year, moderating labor market growth and form filing timing.

Speaker 4

For the fiscal year, total revenues were $553,000,000 increasing 29% year over year. Our revenue growth continues to be driven by new business wins We also surpassed 2,500,000 employees on our platform, up 8% over the prior year with more than 30,000 customers. As we shift our portfolio up market and focus our resources on clients with greater than 100 employees, our average customer size continues to increase And now stands at 82 employees per customer, up from 77 last year. Aligned with this intentional strategic shift, We continue to see moderation in employee growth in the micro segment, while the number of employees in the mid market and enterprise segments increased 9% year over year. Net revenue retention increased to 100%, setting a new record driven by gains from cross sale and pricing initiatives.

Speaker 4

Effective PePAM increased 11% year over year to just over $18 for the quarter. As we continue to expand our product suite, PEPM growth is driven by cross sales, pricing initiatives and higher bundle adoption at the point of sale. This quarter, we recognized $11,000,000 of interest income average client funds of just over $1,000,000,000 at an effective rate of about 4 15 basis points. In addition to driving steady top line growth, we've also delivered consistent margin expansion as we continue to scale. Quarterly adjusted gross profit margin excluding depreciation improved to 79.4 percent, nearly 300 basis points higher than last year.

Speaker 4

We continue to expand gross margins as we invest in our service model, our customer support teams have done a great job elevating the experience for our customers this year. Sales and marketing expense was $47,000,000 or 33.8 percent of revenue, similar to levels a year ago as we continue to invest in expanding our sales team to capture market share. On a gross basis, we invested $23,000,000 in R and D or 16.5 percent of revenue. Our team continues to efficiently Deliver leader advancements that create value for our clients and expand our Peppm opportunity, which is consistently expanded annually as we release new features, Functionality and new products that resonate with our customers. G and A expense was $21,000,000 or 14.9 percent of revenue, an improvement of 100 basis points from Prior year.

Speaker 4

For the full year, G and A expense as a percentage of recurring revenue improved 115 basis points over the prior year as we continue to scale the business. While our primary objective remains sustainable 20 percent plus revenue growth, we intend to steadily expand margins as we scale the business. Quarterly adjusted operating income increased nearly 70 percent to $15,000,000 with margins of 11%, up nearly 2 75 basis points from 8.3% last year. For the full year, adjusted operating income increased nearly 75% to $83,000,000 up almost 400 basis points, while continuing to make key investments in our sales and service organizations as well as drive product innovation. We also generated $19,000,000 of adjusted free cash flow during the quarter and $10,000,000 for the year, achieving our target to be positive for the fiscal year.

Speaker 4

We've been on a journey to transform and scale the business over the last 4 years, so it's a great achievement and milestone for us. Our free cash flow margin was 14% this quarter On expansion of 9 points year over year. We expect free cash flow margin to continue expanding faster than adjusted operating income as we scale the business. At the close of the quarter, our cash balance increased to $95,000,000 with no debt. Our outlook for fiscal 2024 remains positive.

Speaker 4

1st and foremost, we continue to see strength in the HCM demand environment. HCM is highly resilient as our value proposition is mission to attracting, paying and retaining great talent. 2nd, the labor market remains tight, although growth has moderated and we expect that to continue this fiscal year. Lastly, consistent with current market expectations, our outlook anticipates moderate Fed funds decreases in the second half of the fiscal year. Even with marginal declines in the Fed funds rate, we would expect to generate marginal interest income revenue growth in fiscal 2024.

Speaker 4

For the Q1, we expect total revenues Between $138,000,000 $140,000,000 or 18% growth at the high end of the range and adjusted operating income of between $9,000,000 $10,000,000 For the full year, we expect revenues of $644,000,000 to $650,000,000 or 18% growth at the top end of the range. And we anticipate adjusted operating income of $97,000,000 to $100,000,000 I would also like to note that we do not plan to provide bookings data moving forward. At the time of the IPO, bookings gave investors some insight into the success of sales as we reaccelerated the front end growth engine. Now we believe revenue growth is the most important metric to understand our success. In summary, we are as optimistic about our opportunity in HCM as we've ever been.

Speaker 4

Demand remains strong. Our innovative HCM solution that empowers leaders to build winning teams continues to win in the market. We are focused on execution scaling the business and driving margin expansion. As a mission critical application still early in its transition to the cloud, we believe that there is significant runway for further growth in the $35,000,000,000 HCM market. With that, we'll open the call for questions.

Speaker 4

Operator?

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Speaker 5

Hi, thanks for taking the question. This is Arty on for Mark Murphy. First question is on the headwind you guys are kind of expecting from the moderating growth in the labor market, any way to kind of bookend that or quantify that as we think about the full year guide? Thanks.

Speaker 4

Hey, Ernie. What we're seeing right now is that the we're seeing sort of low single digit to no growth contribution from the labor market. And right now, year over year for the quarter, you're looking at like a 3 to 4 point headwind. On the full year, we've sort of factored in the same level of contribution on the guidance. So low single digit To 0 growth sort of 0% to 1% growth contribution from the labor market, which will be a little bit less of a headwind overall in the full year, Something to the tune of a couple of points headwind versus 2023 growth.

Speaker 5

Got it. Thank you. That's super helpful. And then just in terms of that kind of side of things, with the labor market getting a little bit More moderation. Are you seeing any differences in the buying patterns for customers among like your talent solutions and talent suite?

Speaker 2

No. We actually continue to see outstanding attach rates. Our attach rates are actually still increasing Modestly quarter over quarter. So we haven't seen any difference in any of the

Speaker 5

Perfect. Thank you. I'll step back in the queue.

Speaker 3

Yes. Thank you.

Operator

Our Our next question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed with your question.

Speaker 6

Hi, this is Kevin on for Gabriela. Thanks for the question. Maybe just one on kind of seller hiring expectations for 2024, particularly in the context of A guide that's showing a little bit of a deceleration. So just curious how you're thinking about seller hiring as we head into 2024? Thanks.

Speaker 2

I think we feel comfortable with our previous guidance that we think 20% headcount growth It's something that we're targeting. Now that can flex down a few points or up a few points, based upon Demand in the marketplace based upon seller availability, based upon churn, so there's a lot of different factors. But I would say, We still look at this like there's a significant market opportunity. We have really strong win rates, and we believe the opportunity to continue to win share is available.

Speaker 6

That's helpful. And then Adam, maybe one on The guide, particularly the operating margin guide for Q1, I think that implies maybe a little bit of a decline year over year. And I think The full year implies some improvement. So just curious on kind of maybe the seasonality of operating expenses throughout the year and any moving pieces we should be aware of?

Speaker 4

Yes. I mean as we came out of 2023, we were continuing to make some investments leveraging some of the interest income like we had discussed. And as we look into 'twenty four, we still feel really positive about the momentum. We feel positive about the demand environment. And We're running into a little bit of those headwinds here in Q1.

Speaker 4

But on the full year, we see this as an opportunity to continue to expand Both margins and continue to grow. And so it's a little bit of just hitting the pressure of what we're seeing on the Q1 growth, And we'll continue to manage that in on the full year. We do feel good about the operating income margin growth and expansion that we're going to see there, as well as the free cash flow

Operator

Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Speaker 6

Great. Good evening. Hi, gentlemen. Thanks for taking my questions. Maybe one, Raul, first for you.

Speaker 6

Just you mentioned getting more success Up market, the average number of employees per customer is melted up. Is that changing maybe the type of customer or the mix of bookings? And How is that maybe changing who you're hiring as far as the sales organization goes? And then I have a follow-up for Adam.

Speaker 2

Yes. So we continue to shift up market. We continue to deploy the majority of our resources In the field, targeting customers with greater than 100 employees. And so we continue to see our average employee size grow. And at this point in time, We haven't seen a need for differentiated salesperson.

Speaker 2

I would say that we're competing From 100 into the low 1,000 and effectively with our current sales organization. So if we were going to push higher in the future Into that 5,000 plus range, it may suggest a different type and enterprise type team. We're not there. From that perspective, we're going to continue to expand our sales organization, continue to shift our resources up market, Our marketing dollars, etcetera. So we feel really good about the opportunity and the talent solutions are really resonating and pushing us upmarket.

Speaker 6

Great. And then Adam, just a follow-up on the guidance. I'm curious if you could just maybe help us understand what you're thinking about recurring revenue growth ex The interest or ex float revenues, so just how should we think about the growth of those 2 separate line items then and how that rolls into the full year guidance that you just gave?

Speaker 4

Yes. So as we're thinking about interest income, this quarter we generated about 4 14 basis points of interest income on our client funds. And On the full year, we're probably expecting something similar to that as you might see a couple of increases, couple of decreases. And we tried to factor that into our guide for the full year. So not going to see a ton of incremental lift, and you'll see a little bit more in the first half of the year, of course, than you will in the second half of the year.

Speaker 4

But I think that's going to be marginal contribution to the overall growth. And then I would say broadly, we want to try to keep our Performance relative to our guide and our cadence the same as what we've been able to achieve over the last couple of years as a public company. We want to be a little bit conservative, not include upside in the labor market growth, but there's a little bit Of room, of course, to over perform, as we get into the year.

Speaker 6

Understood. Thanks for answering my questions. Appreciate it.

Operator

Thanks, Sumant. Our next question comes from the line of Bhavan Shaw with Deutsche Bank. Please proceed with your question.

Speaker 5

Great. Thanks for taking

Speaker 6

my question. Raul, just looking at your slide deck, it looks like your source of wins versus incumbents now sits closer to 75% versus maybe 80% prior, While you kind

Operator

of noted an uptick, at

Speaker 6

least in the chart versus cloud vendors, like what's driving a little bit of change in terms of who you're winning against? Are you seeing maybe any improvement from the legacy guys in terms of them trying to hold on to their customers better than they were previously?

Speaker 2

Yes. Actually, our win rate against the largest legacy provider increased this year versus last year. So we saw a slight increase against them. I would say Some of the cloud competitors, we continue to compete with them very infrequently From a displacement perspective, we see new business generation, we see some PEO Takeaways kind of spiked up a little bit in the quarter. But I would say by and large, our top three sources of wins are And they're literally, they interchange month to month our regional service bureaus in house and ADP.

Speaker 2

And there's those 3 are comprising over 60% of the legacy wins with Paychex being A distant 4th because we don't really compete with them as they're primarily an under 50 solution, Really an under 15 solution.

Speaker 6

Got it. That's helpful there. And just kind of following up in terms of sales I mean, you guys talked about kind of 23% bookings growth this year, similar type

Speaker 7

of seller headcount. Just how

Speaker 6

do we think about sales productivity over the course of this year and how do we think about that over the next few years and kind of when can we see the leverage in terms of recurring growth in excess of kind of seller growth? Thanks.

Speaker 2

Yes. So we actually had slightly positive sales productivity year over year despite A 20 plus percent growth in headcount, which is really positive from our perspective because You're bringing in people in the 1st year of a 3 year ramp. And so ultimately, since we started adding head We're going to start to this year anniversary our largest cohort from FY 2022. And so we'll start to see some of the productivity gains there. But we're still hiring a lot of people, and we've been able Slightly increase our average productivity for the entire sales organization despite adding significant amount of 1st year cohort.

Speaker 2

So That means our 2nd and third year people are doing more than they were doing the year prior. And so we're seeing that natural lift. We're just in this unique phase of still growing our sales organization. We're still 25% Smaller than Paylocity as an example. And so we still have plenty of opportunity to continue to add sales And I think we'll start to see overall Leverage in sales and marketing over this year and the following years as we continue to scale And some of the sales operations functions and sales leadership functions scale nicely with a larger sales organization.

Speaker 2

We'll see that, and we'll continue to drive productivity, and we're starting to get closer to meaningful scale at 600 Yes, sellers today.

Speaker 6

Super insightful. Thanks for taking my question.

Speaker 8

Yes. Thanks, Bhavan.

Operator

Our next question comes from the line of Terry Tillman with Truist. Please proceed with your question. Yes.

Speaker 8

Hi, good afternoon, Raul, Adam and Rachel.

Operator

Hey, good afternoon.

Speaker 8

Thanks for taking my questions. Yes, first question maybe, it's actually A follow-up to the prior question, Raul, in terms of sales productivity. As you layer on this large cohort of new sellers from last year, You're going to keep adding this year. Is there the potential though, I know you're not going to give us like the end of the year bookings growth, but potentially you could even see some acceleration

Speaker 3

in bookings. And the

Speaker 8

second part is of the top 15 cities, those key Tier 1s, I really don't have any idea like where you are with each of those Markets, are some you're starting to get some pretty good coverage or are there still some that you're really paltry in terms of coverage?

Speaker 2

Yes, I mean, I'll start with the coverage perspective. We've moved our coverage in Tier 1 Another 8 points excuse me, 7 points, we're up to 36%. A little over a third is what we would consider coverage. And I would say, it's fairly Equal across the 15 markets, as we continue to scale. I would say, We still have opportunities in all 15 markets to add sellers.

Speaker 2

I would say, we're probably at the high point in the 40 percentile range like in Chicago, area where we've been a little longer Since it's a Midwestern city and we have a lot more room to go in California, in the Northeast in the Southeast, just based on the time and territory. So lots of opportunity to continue to grow in the Tier 1 markets. But we're seeing really good success. All the metrics are holding up. The average employee size, Average deal size, all very similar across the organization.

Speaker 2

The one thing we would see is a slightly higher attach rate in Tier 1 markets, Subtly bigger, aligned with more talent purchases than maybe in some of the other tiers.

Speaker 4

Yes. Hey, Terry. In terms of our ability to continue to accelerate bookings growth and potentially even at a faster pace, I mean, I think that is the thesis for sure. As we look at the new cohorts that we've added and a lot of those sellers have been in the Tier 1 markets, There are lots of opportunity for those cohorts to continue to grow. And it's really important, of course, to have the Time in the market and the time with the brokers and building out those relationships.

Speaker 4

And so you have a lot of those cohorts in 2022, 2023 in those Tier 1 markets where there's lots of opportunity, the territories are still really big for them, for that Acceleration to come through 2024, 2025. And I think that that's part of the investment thesis of why we We continue to make the investments that we do around sales and marketing because we think that that's part of the long term acceleration for sure.

Speaker 8

That's very helpful for both of you. And maybe Adam, the question I was going to also ask you that was, it's good to see that breaking 100% on NRR. And any perspective directionally on how to think about that as we round out the end of FY 'twenty four? Thank you.

Speaker 4

Yes. So as we head into FY 'twenty four relative to the 100%, I mean, we saw some really strong contribution, of course, From some of the pricing actions, the new products that we've released on our cohorts in the 2023 number, A little bit of contribution from the same store sales or the labor market growth that's going to dissipate. So not that we wouldn't target or continue to press To 100% plus growth, I mean that is our aim to get to 100% to 105% is sort of like a management target. But there's going to be a couple of those headwinds that will put pressure on the net retention number, specifically the labor market growth, which is primarily, of course, against

Speaker 3

Thank you. Thank you.

Operator

Our next question comes from the of Brian Bergin with Cowen. Please proceed with your question.

Speaker 3

Hi, guys. Good afternoon. Thank you. First one, just on the outlook, really the near term guidance, if you can unpack this a bit here. Looking at the 1Q guide, it doesn't imply a decent deceleration in the year over year growth rate You exited strong in 4Q, and it seems relatively flat sequentially.

Speaker 3

So just trying to unpack what's different there? What's driving that just given the comps don't appear

Speaker 4

Yes. Hey, Brian. We're just continuing to see that pressure on the labor market growth. I mean, you're Losing a couple of points of deceleration, of course. We dealt with the form filing revenue here in terms of a pull forward in Q4 to Q3, And we're seeing those form filing revenues will become a headwind going into 2024 as well.

Speaker 4

So you're picking up a little bit more of that headwind that we didn't necessarily have in the same sense in our Q4 period. Those are the 2 biggest dynamics for sure. In 2023, we did see Some larger deals that are going to come through maybe at a little bit different timing than we were than we would on a more normalized basis or in prior years for 2023. And so Some of the strength of the bookings, of course, a lot of it comes through in Q4 as our largest quarter. And so some of those larger deals just take a little bit longer To implement.

Speaker 4

I mean nothing new or nothing different, just a little bit more of a mix in that upmarket segment for us as well.

Speaker 3

Okay. And just to be clear, are those deals related to client list acquisitions or organic additions?

Speaker 4

No, no. In terms of client yes, in terms of new business, just signing new business, I mean, we just continue to mix a little bit more in that upmarket segment, which again, it fits Squarely within the strategy and everything we're talking about. It's just as we continue to mix up that market a little bit more, we just see that those deals tend to take Towards the longer end of our implementation cycle.

Speaker 3

Okay, understood. And then just a follow-up on margin. Can you bridge the margin walk from fiscal For 2023 to fiscal 2024, just the drivers of that EBIT expectation there. And I thought I heard a relatively similar Client fund interest assumption, if you could just clarify that and the remaining factors that could be the expansion? Thanks.

Speaker 4

Yes, absolutely. So in terms of the client funds interest, right, we generated about 4 15 basis points or 14 basis points of Interesting coming Q4. And so we're expecting like on the full year something similar to that, which will be marginally additive in terms of To revenue, but not material overall, especially not to the same level as in 2023. And as you look at our Full year income guide, we're driving for continued margin expansion on just operating income margin expansion As we guide up to $100,000,000 of adjusted operating income on the $650,000,000 of revenue. And as we think about some of the opportunities continue to expand, we're actually seeing pressure from the amortization as those investments build in.

Speaker 4

And then we're continuing to scale the rest of the business. You'll see continued expansion and drive for that in the gross margin, continued expansion and drive from that out of G and A or leveraging G and A. And then we're not looking to necessarily drive expansion out of the margin in R and D at this point. We like those investments. I think in those two key areas consistent with how we've been allocating capital as a public company.

Speaker 3

Okay. Thank you.

Speaker 2

Thanks.

Operator

Our next question comes from the line of Scott Berg with Needham.

Speaker 9

This is Michael Rackers on for Scott today. You mentioned a slight improvement quarter over quarter in

Speaker 2

Hey, Michael.

Speaker 9

Yes.

Speaker 2

Michael, we lost you after attach.

Operator

Sorry about that. Sorry about that.

Speaker 9

Yes, no worries.

Operator

But I guess I was

Speaker 9

just wondering where you think attach rates can expand the most in FY 'twenty four? And then how should we think about kind of the normalized PEPM growth rate effective PEPM

Speaker 3

growth rate?

Speaker 4

Yes. As we think about Yes. Hey, Michael, thanks. I mean, as we think about the opportunity to continue to expand attach, it's really about our continuing our strategy of focus on talent, leading with talent and engaging leaders across organizations around how they manage their business, Okay. Our performance management and recruiting and so you're focused on that talent management.

Speaker 4

We think that there's lots of Room there. I mean, we've seen a lot of growth already. The attach rate continues to be strong, and we think that there's lots of headway there for us as well. But even on our core platform, I mean our core module as we think about that, we continue to expand that core. And so both of those things combined really enable us to lift our overall ADS and that's been part of our story as you look at our ADS, our average deal size and our PEPM continuing to expand.

Speaker 4

We also of course offer workforce management solutions and benefits administration. We don't see the same sort of headroom in the attach There, just because of our strategies and whether or not clients need workforce management or not or benefits or not, we don't see the same level of expansion. Those should continue to grow with our client base and with our bookings, but we see more of that headroom in the Talent Management Solutions as we continue to make those investments.

Speaker 9

Great. Thank you. And then you've done a great job Go ahead.

Speaker 3

Yes. Go ahead.

Speaker 9

Sorry about that. You've done a great job of adding reps Tier 1 cities, but what is your strategy as you move up market for like larger enterprise accounts or the upper end of your range? Do you have reps specifically targeting this upper end or plan on adding reps there? Thanks.

Speaker 2

Yes. I mean, we today Have reps that focus on prospects at the larger end of the size range, so that that are targeting that by geography. So in our field organization, we have reps that target the lower end of the market Above 100 and others that target above 250, above 500 into the low 1000s as I mentioned earlier.

Speaker 9

Great. Thank you. Super. Have a great night.

Operator

Our next question comes from the line of Brad Reback with Stifel. Please proceed with your question.

Speaker 9

Great. Thanks very much. Adam, can we dive a little deeper into the 1Q OpEx guide? I'm just trying to figure out if there are any one time items, revenues up like $20,000,000 year over year, but OpEx The op income is flat.

Speaker 4

Yes. I mean, there's no one time items necessarily. We've made some of those that we've been talking through specific to R and D, new product expansion, and sales and marketing that we even though we're seeing that The sort of headwinds in Q1 revenues, we didn't want to pull back on some of those key investments. And I think that also speaks to the optimism that we have over the balance of the year and the new business that we'll continue to layer in that we see opportunity to continue to expand margins as we have better outlook for the revenue for the rest of the year. So it's more just timing of those ongoing investments and not really wanting to pull back based on the demand that we see in the broader market right now.

Speaker 9

Great. Thanks very much.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Speaker 4

Hi, thanks for taking the question. So Adam, just a clarification because I've got it from a couple of When you say marginal additions, are you talking about for interest income, are you talking about taking what was reported in fiscal year 2023 and using that fiscal year 2024 or should we be using the fiscal 4Q run rate and kind of annualizing that for next year? I just want to be clear on that.

Speaker 3

Yes, yes, it's going to

Speaker 4

be closer, of course, to what we see here in Q4, right? In Q4, 400 plus basis points Will be sort of the jumping off point, I think. And so you're going to see it more in line with Q4 as a stepping off point.

Speaker 3

Okay.

Speaker 4

All right. Got it. That's clear. And Raul, maybe one for you. Just as you think about the ramp in productivity for the sales hires, is there a significant difference And how that ramp to full speed looks for a Tier 1 rep versus other markets?

Speaker 4

Just curious to get color on that. Thanks, guys.

Speaker 2

No. I mean, We haven't seen that to this point in time. The seller ramp On the averages, it's very similar across all markets and all tiers.

Speaker 6

Great. Thank you.

Speaker 3

Yes. Thank you.

Operator

Our next question comes from the line of Mark Marcon with Robert W. Baird.

Speaker 10

Hey, good afternoon and thanks for taking my questions. So Adam, in terms of

Speaker 5

just the float balance, would you That

Speaker 10

to basically grow in line with recurring revenue?

Speaker 4

The flow balances actually should grow a little bit more in line with employee growth Then recurring growth because the recurring revenue of course includes the expansion of stuff like talent, and workforce management and benefits that don't necessarily drive the client funds growth. So what you would expect is it's a little bit more focused on employee growth and then plus or minus wage inflation, which of course we've seen some of the wage inflation In the market data more broadly.

Speaker 10

Okay, great. And then with regards to kind of another one of the margin questions Because everybody has been asking that. Would you expect the gross margin to basically stay Fairly consistent with the 4th quarter level in fiscal Q1 of this year?

Speaker 6

I mean, of course, we don't guide to gross margin, but

Speaker 4

I wouldn't expect the gross I mean, our aim broadly on gross margin is to continue to Continue to drive operational expansion by scaling that business. And so there are some seasonality, of course, that comes with the gross margin numbers, But there's no incremental or one time investments that would drive our gross margins at a different pace. And that business is primarily lined up with our customer growth. So, I wouldn't expect anything abnormal in our gross margin numbers.

Speaker 10

Great. And then can you just talk a little bit about you've got the specialized packages by industry. How important were those? Did you see stronger growth with those? Are you continuing to gain share with those?

Speaker 10

And also, How would you describe the importance of having the dual connection with regards Other partners that you're servicing your clients with?

Speaker 2

Yes. So How are you doing, Mark? From an industry perspective, that's a really cornerstone Part of our go to market and it is over 50% of our bookings come from the 4 key industries, in line with our growth rates. So we're seeing really solid participation in those four key segments. And it's really about continuing to deliver industry specific solutions, understanding Their nomenclature and then building integrations to their partners and that combination is what's driving Our overall effectiveness there.

Speaker 2

Great.

Speaker 10

And can you Raul, could you describe what you're seeing in terms of Your core well established markets both in the Southeast and the Midwest, what sort of incremental gains are you seeing Are you continuing to gain share? And how would you describe the productivity, the sales productivity of the people who've been around for Quite a while and are well established and not necessarily ramping up from an experiential perspective. Yes.

Speaker 2

I mean, we have really we've had great performance in some of our Midwestern stalwart cities Like Cincinnati and St. Louis, and so we continue to see really strong performance. Most of them are what we would call Tier 2 markets. And so I think that continues to really operate as designed, And we continue to take advantage of our strength there. From an overall seller productivity Obviously, when you get to full tenure at the end of 24 months, you kind of are who you are and we have people that are selling well in excess of 1,000,000 that are tenured.

Speaker 2

And We're really seeing the growth in the organization, where we're seeing Tenured sellers really significantly outperforming the line average. And so we're excited about that and we're going to continue to build That scaffolding in our organization and continue to build long term solid performers that are outdoing the line average, Which will help us continue to improve our productivity.

Operator

Our next question comes from the line of Daniel Jester with BMO Capital Markets. Please proceed with your question.

Speaker 11

Great. Thanks for taking my question. Just maybe building on that sales productivity comment, Raul. I mean, shouldn't seller productivity continue to increase as you just Get more maturity around the sales force investments you've made. And I guess like what are you embedding in the guidance in terms of sales productivity in 2024 relative to the last couple of years?

Speaker 4

Yes. Hey, Daniel. In terms of the continued expansion of the sales productivity, I mean, Absolutely. The thing is when you continue to grow the sales force at 20%, it just weighs on the productivity overall as you're adding in The newer sellers who are learning and building their book. And that's why when we look at The other cohorts, previous cohorts, yes, they continue to drive productivity and you're absolutely right.

Speaker 4

That's what we would expect over time. In terms Of or impact on 2024, we're not expecting productivity improvements per se. Of course, we have expectations over the demand environment how much bookings we generate and how we manage through all of the components of our revenue growth. And I would say that There's expectations for continued bookings and continued bookings expansion into 2024 in our guide. We're not expecting or we're not including anything in our guide that would be outside of what we think that we have sort of visibility to and is appropriately risk adjusted.

Speaker 11

Great. Thank you. And then can we just double click on free cash flow margins? I think you made a comment that you should expect them to Improve at a faster rate than operating margins, but maybe a little more color as to kind of how you expect that to

Speaker 4

amortized are related to the sales investments and the cost of fulfill, and those items get amortized over 6 years. And so as that amortization builds into the adjusted operating income, it's less of an impact On our free cash flow now, right? So we're picking up the benefits here as we're leveraging and driving scale out of the business, on some of those same investments. You'll start to see or you'll see continued adjusted operating income expansion. That's what we're driving at.

Speaker 4

But We're going to see the better leverage out of some of those cost to fulfill investments and the R and D investments, the product investments that we're making, just as we continue to scale the business. So you're going to start to see that flow through to free cash flow at just a slightly faster clip, which will expand those margins.

Operator

Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please proceed with your question.

Speaker 9

Great. Thanks so much. This may be for Adam. Adam, can you just unpack the revenue Guidance 24 relative to 23. It looks like at the midpoint it's about 17% growth versus 29% in 2023.

Speaker 9

It sounds like there's a couple of 300, 400 basis points from just employment headwinds. Can you bring, Fence, just what the other components are of the deceleration? Is it just some conservatism in there, maybe a little less pricing, if I'm thinking about it right?

Speaker 4

Yes. Well, of course, we picked up a pretty strong contribution of growth from interest income in 2023. And so We saw about 7 points of growth from interest income on that 29%. And you're not going to see that level of contribution growth into 2024. And so those two numbers, of course, are the biggest drivers.

Speaker 4

We're seeing about 7 points in 2023. We're going to see maybe a couple of points, just a couple of Interest income contribution to the growth rate in 2024 and we're then you're seeing those labor market Headwinds that we talked about, some of those form filing headwinds that we talked about that are really putting pressure, especially on the first half of the year. So those are a couple of the key factors. And then of course as we get into the guide, we are not looking to change our philosophy on guidance versus the last couple of years. And so we want to continue to create some of the space for us to over perform where we Can, and we want to be consistent, of course, in that approach throughout the year.

Speaker 9

Very helpful. Thank you.

Speaker 5

Thanks, Kevin.

Operator

Our next question comes from the line of Steve Enders with Citi. Please proceed with your question.

Speaker 9

Okay, great. Thanks for taking the questions here. I do want to ask on the Tier one investments that you're continuing to make and Good 7 point increase here, but how should we think about how much more room there is to expand in these areas? And I guess what would those levels look like over the Next couple of years here.

Speaker 2

Yes, I mean, in the Tier 1 market today, We sit roughly at 36% coverage. So we could more than double the sales organization in the Tier one markets. And again, we're going to continue to leverage the majority of the incremental headcount that we add each year We'll go into these Tier 1 markets. So I think we think the runway is long And we're going to continue to pragmatically deploy the resources in these Tier 1 markets and drive productivity.

Speaker 9

Okay. That's helpful context there. And then I guess maybe for like the 1Q guide, just want to make sure that thinking about like the float income dynamics here in here in a similar way that you're talking about the year. I mean is it kind of similar like flow through what came in for 4Q For 1Q and that's like the right level here or are there other factors that we should be accounting for? Yes.

Speaker 4

No, I mean, I think it should be fairly consistent between the Between the quarters, you're not going to see much sort of swings, mini swings when we're changing 25 basis At this level, you're just not going to see the same level of material swing. So, I think you're going to see it quite similar to where we were in Q4.

Operator

All right, perfect.

Speaker 9

Thanks for taking the questions.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Robert Simmons with D. A. Davidson. Please proceed with your question.

Speaker 12

Hey guys, thanks for taking the question. So last year your seasonality was thrown off a little bit by some of the form filing fees shifting around a bit. Do you expect that to continue this year or should we expect that to normalize back to a more normal cadence?

Speaker 4

Hey, Robert. I think that you're probably going to see a little bit more of a cadence like a prior year With some a little bit of outsize in Q3 still. So we implemented some new Services and pricing that we talked about last quarter in Q3 that will persist. But as some of the form filings become a headwind and begin to go away. I think it's going to revert more to a normalized environment.

Speaker 4

You're just not going to see quite as much sort of Spread throughout the year. So we'll see less form filings in Q1 and Q4. And then the Q3 actually might be a little bit more consistent, but still remain At a slightly elevated level because of some of the products and services that we've offered as well.

Speaker 12

Got it. Okay. That makes sense. And then, so you Kind of touched on it before, but on the competitive landscape, have you seen things change over not just last quarter, but maybe over the last year So are the newer entrants getting up to size now that they matter at all? Or do you think they're still pretty subscale?

Speaker 12

And what are you seeing in terms of like competitive price pressures up and down?

Speaker 2

We definitely don't see any new entrants. So Nothing has changed from that perspective. We still obviously See ADP Paylocity and Paycom the most.

Operator

Our next question comes from the line of Jackson Ader with MoffettNathanson, please proceed with your question.

Speaker 6

Great. Thanks for taking our questions, guys. The first one, so Raul, actually, if you can just follow-up on the Competitive comment you made about win rates at ADP picking up. Yes. Was this Any particular type of customer that you saw more success with this year compared to last year?

Speaker 6

Is it similar to just like winning more upmarket against ADP?

Speaker 2

Yes. Good question. It was really tied to the overall mix Increased from ADP by a point or 2 and it is primarily upmarket.

Speaker 6

Okay. All right. That makes sense. And then, Adam, we've talked a lot about kind of the continuing to invest in sellers, but What about have you given any thoughts as to the linearity? Like will you maybe front load things While we can kind of see what the economy looks like here in the next 3, 6 months and then take a look at the second half of the year and make decisions from there?

Speaker 4

Yes. I mean, that is definitely how we think about it. I mean, we tend to plan it a little bit more linear and then we make adjustments as we go through the year. And of course, we're considering seller retention and how that is trending as well as how we're performing internally. And then we look for those opportunities as we continue to go through the year.

Speaker 4

Also January is a really important month for us as we think about our own seasonality in the market in terms of A lot of new business that we start in January. Of course, we see some of our larger clients losses. They want to leave in January as well. I mean, For the same reason why we win. And so we do like to get through January and see how that trends before we really pull the trigger on too much Anything that's too outsized?

Speaker 4

So I think, I mean, how you're saying it is sort of how we think about it. We sort of think about it linearly and then we make decisions On how the business is trending.

Speaker 6

Got it. All right,

Speaker 3

cool. Thank you. Thanks, Jackson.

Operator

Our next question comes from the line of Matt Foo with William Blair. Please proceed with your question.

Speaker 7

Great. Thanks for taking my questions. Wanted to first ask on the relationship between bookings growth And your guidance for fiscal 2024, so bookings growth was up 23% for FY 2023. And then If you look at the sort of implied recurring revenue guidance for fiscal 2024, it's probably around 17%. What are the factors there that drive that delta in the bookings growth and then what you're forecasting looking forward for recurring revenue growth?

Speaker 4

Hey, Matt. There are a couple of dynamics, of course, as we think about the rest of the business. There's a lot of factors as we think about Just the components of that revenue growth, new business is a piece of it, client sales are a component of that, and then we have dynamics like pricing that we've talked through, losses or retention of our client base that we've talked through. And then of course, there's the labor market growth and how the labor market growth is trending, plus other things like the form filings that we've discussed as well. And so We want to see revenue growth and it's possible that revenue should accelerate faster than our bookings growth.

Speaker 4

And there's some other dynamics, of course, in there today that are creating those headwinds that we've discussed. But we think longer term, there's no reason that, that can't be part of the dynamic. And we just need to continue to keep executing In our Tier 1 and I mean our market expansion and sales expansion strategy like we've been discussing for sure.

Speaker 7

Got it. And then just the last one for me. Sorry to ask another question about the Q1 guide specifically. But

Speaker 3

if we

Speaker 7

look at the, I guess, implied interest income that you'd be expecting in Q1, I think people would have expected perhaps more of that to flow down to operating income. Maybe just sort of update us on how you're thinking about Interest income relative to investment versus letting it flow down to operating income?

Speaker 4

Yes. I mean, so we want to continue to expand margins on a recurring basis, and that is our aim. That's how we manage the business. And we're also leveraging the interest income today to continue to expand and fuel our strategy, which we think is prudent given the environment and our ability to continue I mean, we see the demand, we see the product working in the market, and we so we want to continue to make those investments. And longer term to the extent that, that interest income goes away, which is not what we see in the near term, but to the extent that it does, then we'll be set up From a management perspective to be able to pull back on those incremental investments that we're making, again, specifically around marketing programs, digital investment, Brand investment to drive that expansion and the accelerated product investments, which we've been really intentional about to drive towards what we consider our innovation buckets, which is more around new product expansion, new functionality to get the product to maintain our competitive advantage that space.

Speaker 4

And so those are the areas that we're going to continue to invest in. And again, based on what we saw for the full year and how we're thinking about Our performance through the year, how bookings came in from last year or and how they're going to layer in for this year, we didn't think that it was prudent Marketing investments and campaigns that we're running there. And so we wanted to continue those even at the expense of some of that margin pressure that we're guiding to here in Q1. And then of course, as you look at our guide and our philosophy, I think we've been prudent about How we've guided and we wanted to keep that same philosophy going forward. So hopefully, you see the same from us as we Get through

Operator

24. Our next question comes from the line of Siti Panjrahi with Mizuho. Please proceed with your question.

Speaker 5

Thank you. Most of my questions have been asked, but just wanted to dig to one comment, you said you are moving up market average deal size. So how do you differentiate from your competitors? What's helping you win against your competitor?

Speaker 2

Yes. I mean, I think there's a combination of things. And No. The wonderful thing about ATM is every company that we sell to is unique. But I would say, some of the key areas is to differentiate us in the marketplace are the simplicity of our platform, modern cloud platform.

Speaker 2

We have A best in class talent platform that helps people source, onboard, coach, inspire and manage their employees most effectively. So we're really focused on We're really focused on enabling leaders to drive people and performance. And then we have the most open platform in ATM. So If a customer is interested in taking the HCM system of record and integrating it with other key tools that they use, They're definitely going to select us.

Speaker 5

Thank you.

Speaker 3

You're welcome.

Operator

Our last question comes from the line of Patrick Walravens with JMP Securities. Please proceed with your question.

Speaker 6

Hi, this is Owen Hobbs on for Pat. Thanks for taking the question. So kind of going back to that moderating labor force growth, I was wondering if you're seeing Any difference in that moderation by different verticals or if it's all kind of at once moderated?

Speaker 4

Yes. Hey, Owen. We see it matches up to the broader market, that's for sure. I mean, we're seeing some slowness, A little bit slower in manufacturing, professional services has sort of bounced around a little bit and actually recovered marginally. And then Food and Beverage and Healthcare have been they ramped a little bit faster earlier in 2023 and those have slowed, but they sort of look they still look normal relative to what seeing the broader market.

Speaker 4

So, yes, we do see a little bit of those dynamics. Our portfolio has a good mix and does represent the overall average of the economy. So We see some of those same dynamics.

Speaker 6

Great. Thank you. And then obviously can't predict the future, but is there any indication Based on historical patterns or any kind of analysis you guys are doing on how long this headwind will last?

Speaker 4

Yes. I mean, you can look at macroeconomic forecasts from all the big players, and we certainly take all those into consideration. And It feels like it's everybody's guess, right? And I think that the market's been expecting A faster slowdown for a long time, and we've been talking about this for more than a year. I mean, the fact is that it's decelerated.

Speaker 4

Labor market growth has decelerated, and we're in that Low single digit sort of growth today. And who's the safest going to compress Further or go negative, we tried to be as conservative as we thought has been prudent in our guide based on what those macroeconomic experts are predicting, which is varied. There's plenty of projections that I think the labor market is going to compress and or decline, And there's plenty that are a little bit more bullish. I think that folks have been leaning a little bit more bullish and dovish lately. But we've tried to be moderate in how much we've included in our guide, which we think is prudent.

Operator

That concludes our question and answer session. I'd like to hand it back to Raul Viara for closing remarks.

Speaker 2

Thank you again for attending our earnings call. We remain optimistic about the opportunity in front of us and remain focused on executing our strategy. We look forward to connecting with you at the Stifel Tech Executive Summit in Deer Valley, the Goldman Sachs Communicopia Have a great evening.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful

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