Paycor HCM Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 13 speakers on the call.

Operator

thank you for standing by, Welcome to Paycor's Second Quarter Fiscal Year 20 24 Earnings Call. 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 Q2 of fiscal year 2024, which ended on December 31. On the call with me today are Raul Zilar, Jr, Pacore's Chief Executive Officer and Adam Manty, Pacore'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 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 financial measures and key business metrics to provide additional information to investors. Definitions of non GAAP measures and key business metrics And a reconciliation of non GAAP to GAAP measures are provided in our press release on our website. With that, I'll turn the call over to Raul.

Speaker 2

Thank you, Rachel, and thank you all for joining us to discuss Paycor's fiscal second quarter results. We had another strong quarter with revenue growth of 20% year over year. Margins expanded 130 basis points over the prior year, while we continue to invest in sales expansion and in our innovative HCM suite. HCM demand is healthy. Our deal pipeline is up significantly year over year and our win rates remain strong.

Speaker 2

We continue to excel up market, especially among the higher end of SMB and enterprise customers with thousands of employees who tend to purchase a more holistic solution and are driving higher attach rates and higher average deal sizes. Our results demonstrate our consistent execution against our 2 primary growth drivers, increasing the number of employees on our platform and expanding the amount we charge Per employee per month for Peppol. 1st, we are expanding employees on the platform through a combination of direct and indirect sales efforts. We remain on track to grow our direct sales force approximately 20% this fiscal year to strategically increase our sales coverage in the largest U. S.

Speaker 2

Metropolitan areas. As we expand our sales coverage, We are also increasing our broker coverage. We increased the number of active referring brokers by over 25% from the prior year And 50% of our field bookings in the quarter were broker influenced. We are also experiencing great traction with our embedded HCM solution, the indirect go to market channel we announced in August. Leveraging our industry leading interoperability engine, We enable software partners to embed our HCM solution within their platform for a seamless client experience.

Speaker 2

In Q2, we had robust new sales among existing partners and expanded our pipeline of interested partners. 2nd, we continue to enhance our award winning HCM suite with new capabilities that increase the value to our customers and expand our future PePfam opportunity. In the Q2, our list PePfam was $51 which equates to 16% growth year over year. This month, we introduced 2 powerful data driven analytical tools that empower frontline leaders to unlock the potential of their people and business performance. Pay benchmarking enables leaders to optimize launch labor forecasting within workforce management to help customers plan optimal staffing schedules for their businesses based on key demand drivers such as revenue, sales volume or customer foot traffic.

Speaker 2

These innovative modules will contribute to future Peppa expansion. Pacor recently received 5 Brandon Hall Technology Awards, which honor HR technology trailblazers. While we were acknowledged across our ATM suite, The core leadership framework that we launched a year ago won gold for the best advance in online coaching tools. The framework enables customers to evaluate the efficacy of their leaders, reinforce leadership best practices and to trigger development paths based on areas of growth identified. These tools are already making the impact helping educate customers on how to transform their managers into effective leaders.

Speaker 2

Since joining Paycor in 2018, Ryan Bergstrom has been vital in driving the company's growth and shaping our HCM suite into the market leader it is today. Under his leadership, Lizz Peppermint increased more than 70 5% since fiscal 2019, and I am thrilled we will now oversee our product and technology groups. Combining these functions will enable greater synergies and strengthen our capabilities to seamlessly power people and performance for our clients. I would also like to acknowledge our product and engineering teams for their unwavering dedication to building our award winning platform and enabling its rapid expansion. We continue to strategically incorporate AI To add value to customers within our HCM suite, elevate our customer experience and improve our efficiency.

Speaker 2

In our customer experience organization, we deployed AI agent assist technology, which empowers advocates to resolve customer inquiries faster and ensure consistent high quality experiences as we scale. I would like to thank all Paycor associates, especially our implementation, service and success teams for their contributions during our busiest time of year. Year over year, we improved execution, truly making it the most efficient and best year end experience for our customers. With that, I'll turn the call over to Adam to discuss our financial results and guidance.

Speaker 3

Thanks, Rahul. I'll discuss our 2nd quarter results, then share our outlook for the Q3 fiscal year. Paycor delivered another strong quarter with total revenues of $160,000,000 an increase 20% year over year. Recurring revenue grew 18% year over year, an acceleration of 2 percentage points sequentially, driven by continued success upmarket and strong year in form filings. As Raul mentioned, our growth is fueled by expanding the number of employees on our platform and the amount we charge per employee per month.

Speaker 3

Employees grew 10% over the prior year, primarily from new logos and to a lesser extent organic labor market growth, which has continued to slow. Now have approximately 2,600,000 employees across more than 30,000 customers. As we continue to expand our product capabilities and move up market, We are experiencing outsized growth among customers with 100 to multiple thousands of employees. In the quarter, we grew customers with more than 1,000 employees by 18%, highlighting the success of our product and service investments. We gained momentum with our embedded HCM solution, which contributed 2 points of employee growth this quarter, up a point sequentially.

Speaker 3

The average size of customers within our embedded channel is more than double our average customer size today. While we're encouraged by the early momentum, these larger embedded deals will begin to contribute more meaningfully to our revenue growth in fiscal 2025 and be accretive to margins as the partnerships ramp over time. Effective PEPM increased 7% year over year to more than $19 for the quarter. Excluding embedded HCM deals, effective PEPM increased 9%. By expansion of our product suite, effective PePAM growth has been powered by a combination of cross sales, pricing initiatives and higher bundle adoption.

Speaker 3

We expect more moderate PEPFIM growth contributions moving forward as we onboard larger enterprise customers and embedded HCM partners with volume discounts, which will be offset by their higher average deal sizes and stronger margins. In addition to driving steady top line growth, we've consistently expanded margins as we scale the business. Gross profit margin, excluding depreciation and amortization, improved to 79%, 110 basis points higher than the prior year, while elevating our client experience. Sales and marketing expense was $50,000,000 or 31 percent of revenue, similar to levels a year ago to achieve our sales force expansion targets. Comparable to prior years, we invested 16 percent of revenue or $25,000,000 in R and D on a gross basis to differentiate our HCM suite with valuable capabilities for our customers.

Speaker 3

We are gaining economies of scale in G and A as we grow. G and A expense was $22,000,000 or 13.5 percent of revenue, an improvement of 100 basis points from last year. Adjusted operating income increased more than 30 percent to $23,000,000 with margins of 14.6 percent, up 130 basis points from last year, while we continue to make strategic investments to expand our sales force and deliver product innovation. We generated $15,000,000 of adjusted free cash flow or a 9% margin this quarter. We ended the quarter with $62,000,000 of cash and no debt.

Speaker 3

As we look ahead, demand continues to be healthy for modern ACM solutions. The labor market remains tight and our guidance flat organic employee growth among existing customers for the rest of the fiscal year. The combination of steady labor market growth and our backlog of enterprise and embedded ACM deals provides confidence in our second half. For the 3rd quarter, we expect total revenues of between $185,000,000 187,000,000 or 16% growth at the high end of the range and adjusted operating income of between $45,000,000 $46,000,000 For the full year, we expect revenues of $650,000,000 to $656,000,000 or 19% growth at the top end of the range. And we anticipate adjusted operating income of $104,000,000 to $108,000,000 This quarter, we generated $12,000,000 of interest income on average client funds of $45,000,000 to $46,000,000 for the full year.

Speaker 3

We remain optimistic about our opportunity in HCM. There's plenty of runway for sustainable growth the vast majority of U. S. Employees are still being paid by legacy systems. It's an essential capability for any business and we're delivering compelling ROI for clients to switch.

Speaker 3

Adding to our opportunity is the continual expansion of our HCM suite, which has increased over 75% since fiscal 2019. We are demonstrating margin expansion we scale the business and believe there is significant opportunity to drive further leverage, we believe we are well positioned to deliver strong revenue growth and improve profitability over the long term. With that, we'll open the call for questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. We ask that you limit yourself to one question and one follow-up. If you have additional questions, you may re queue and time permitting, those questions will be addressed. One moment, please.

Operator

Mark Murphy with JPMorgan. Please proceed with your question.

Speaker 4

Thank you very much and congrats on a nice consistent performance. I wanted to try to double click on the embedded HDM solution. You mentioned it once or twice. I recall the announcement last summer, I think you've been refining The product in the go to market, do you have any line of sight into maybe some larger partners that might take it live and start generating bookings for you maybe later this year or as you get into the early part of next year?

Speaker 3

Yes. Hey, Mark. Absolutely, I mean, we have a pretty strong pipeline right now For new deals as well as with the existing partners, just the number of deals that they're booking has been really strong and beat our expectations early. Of course, it's still relatively small, but relative to the rest of the business. But we've seen some early success.

Speaker 3

We're really excited about how the pipeline is building on both the existing clients and future partnerships already.

Speaker 2

Yes, Mark, what I would add is that The signing the partnerships is lumpy, right? It just takes a lot of time to get those through. And so We've built up a really nice pipeline that we're hoping that will start to go from pipeline to deals closed over the next 60 days.

Speaker 4

I see. Okay. And just to double check on this, we think that that's We think that it's going to be kind of margin neutral or slightly margin accretive once that gets going at the gross margin level?

Speaker 3

Yes. I mean, we are really excited about the margin opportunity here. Between the gross margin and the adjusted operating income, I mean, I think you're going to see A little bit more favorability on overall adjusted operating income over just the gross margin side of the house, but that's primarily driven by The really low sales and marketing costs. I mean, it's like multiples lower in terms of the sales cost to bring the clients on. And depending on the size of the client, if they're bringing a portfolio on, you still might see some more implementation costs associated with that.

Speaker 3

That's what we've actually experienced thus far. So when we talk about margin expansion really into 2025, it's because there's a little bit more upfront costs associated with bringing those portfolios over, but the ongoing sales cost is significantly lower for the new business.

Speaker 4

Okay. Thank you for that clarification. And one final one, I noticed you mentioned that you're strategically incorporating AI into the business, which great to hear. Are you seeing efficiencies from those products or initiatives that are significant enough to allow you to cover more ground or write more code per developer, provide more support per person or that type of thing. I'm just wondering if the I'm wondering if you are sensing any kind of noticeable uplift that might either be helping to drive some of the margin expansion or alter hiring plans or even just kind of change your growth algorithm in the next several years?

Speaker 2

Yes, I think it's we're still in the very early innings and I think we're leveraging the technology in all those areas. And I think, as we move forward, we'll start to model that into our future guidance, from that perspective. But ultimately, it's helping us. Our number one priority is to deliver a better user experience. The number 2 priority is to become more efficient.

Speaker 2

And we think both are in line of sight, but we want to make sure the user experience is great. And then ultimately, we think as we continue to grow, we'll be able to do it more efficiently.

Speaker 4

Understood. Thank you very much.

Speaker 2

Thanks, Mark.

Operator

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

Speaker 5

Good afternoon. Thank you. I want to stay on this topic of growth algorithm and specifically the also between how you're thinking about hiring, I think you mentioned that 20% benchmark pretty consistently versus the 18% recurring revenue growth this And where that can go longer term. Maybe you could comment a little bit on how you're seeing tenured sales reps ramp within the sales force, you're thinking about improving churn, and any other data points that we should have as we think about your overall sales force productivity over the next couple of years? Thank you.

Speaker 2

Yes. Hi, Gabriel. It's Rahul. We just see such a big opportunity in the marketplace And in Tier 1 and also in Tier 2 and Tier 3, that we believe 20% is an optimal number for us to hire. And as we've talked about previously, reps, their productivity increases with their tenure.

Speaker 2

And so we're excited that we're seeing our average tenure grow year over year And we believe that's what we're focused on is continue to grow our average tenure, which will drive more productivity, which will drive long term sales and marketing efficiency.

Speaker 5

Great. That makes sense. And then as a follow-up, I know in the past, Raul, you made some interesting observations on Hiring and labor trends within the SMB ecosystem versus maybe slightly above in the mid market and enterprise. I know you mentioned broadly the commentary of the demand environment is We'd love to share a little bit more within that. Any vertical specific color and any compare and contrast between the lower end of the market and the mid market?

Speaker 5

Thank you.

Speaker 2

Yes. I think we've seen demand in all three of our segments. The low end of SMB, the mid market and the enterprise market, we've seen really strong top of the funnel demand. So that's exciting. Nothing's changed there.

Speaker 2

I think when you break it down from an industry perspective, We've seen some unique trends in new bookings like we're seeing real strength in food and beverage and professional services. We've seen what I would say year over year modest performance in manufacturing. So from that perspective, It kind of mirrors some of what you would read in the newspapers. But overall, demand has been strong across all three segments that we serve.

Speaker 5

Thank you.

Operator

Appreciate the thoughts.

Speaker 2

Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Bhavan Shah with Deutsche Bank. Please proceed with your question.

Speaker 6

Great. Thanks for taking my questions. Sorry for it with Adam. Just looking at kind of guidance for the back half of the year, can you maybe just dive into the assumptions that are embedded in terms of the numbers? It seems like there's a little bit of a deceleration in 3Q that might be just a tougher comp with forms.

Speaker 6

But More broadly, as we think about embedded payroll kind of continuing to take off, looking at how you performed in the quarter relative to the raise in the guide, it seems like there's little bit more conservatism here. Can you just provide more insight?

Speaker 3

Yes. Hey, Bhavan. Yes, we try to keep a consistent level of conservatism and so not really changing any philosophy here. We do see that and expect that in Q3, The forms filing generally is going to drive a slightly lower growth rate, right, because form filings

Speaker 7

are going to grow more

Speaker 3

at the rate of employee growth plus or minus sort of any pricing changes that may be happening. And we're seeing less related to ERC. Of course, so that dynamic is going to slow down slightly in Q3. And then we also just had a little bit of over performance of form filings that came into Q2, which is part of the guide as you look at the total beat from Q2 into the full year, a portion of that is related to the form filings. And so we just we aren't going to see upside to the full year for that, which we think makes sense just given some of the performance.

Speaker 3

So just a slightly slower growth rate in Q3 with the form filings, which are outsized in Q3.

Speaker 6

Super helpful here. Just one quick follow-up. It's great to hear the additional broker traction. Can you just dive into a little bit of your efforts here and what's driving the increased kind of adoption within the active brokers that are kind of referring clients to yourselves?

Speaker 2

Yes. I think we've just really focused our direct sales team on the best targets. And so we have 4 national partnerships that we're really focusing on to drive opportunities. As we expand our sales headcount, obviously, it gives us an opportunity to expand How many people are reaching into the broker network? And so I think the value proposition works.

Speaker 2

They love the platform And it's just about us continuing to focus on the benefit brokers that have the most clients in our target market.

Speaker 6

Great. Thanks for taking my questions and congrats on the strong quarter.

Speaker 2

Yes. Thanks, Tom.

Operator

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

Speaker 7

Hey, good afternoon, Raul, Adam and Rachel. Solid execution here in the quarter. I did have a question and a follow-up. I would say the first question almost might be a 2 parter, but hopefully it counts as just one question. Raul, in terms of like do you need a little bit of an evolving or different go to market and kind of And then the second part of that first question is, I mean, if we're looking at 3Q And even early part of 4Q in terms of signing business, I mean, will you actually not maybe even see that much recurring revenue than this year for those kind of bigger transactions?

Speaker 7

And then I had a follow-up for Adam.

Speaker 2

Yes. And on the enterprise side, the product, the clients are pulling us into the enterprise. So the platform hunts In the enterprise space, lots of feature functionality on the talent side, which is really attractive to those customers. And so that's what's taking us there. We also have reps, Our most experienced reps are really focused on the enterprise accounts.

Speaker 2

So we've like slightly segmented the sales force from that perspective to make sure that we have the right skill level that are calling on those accounts.

Speaker 7

Okay, got it. And I guess maybe just a follow-up, Adam. That kind of relates to the prior question looking at the full year guide and then the over performance in 2Q. Has anything notably changed for the full year form filing assumptions or any kind of delta in terms of your internal recurring revenue assumption? Thank you.

Speaker 3

Yes. Hey, Terry. No, nothing's changed. I mean, we see it's really there's a bit of operational performance that goes into getting the W-2s prepped and shift. And we just we had some over performance there towards the end of December where we were able to be a little bit more effective getting those out the door and that helped to the over performance here in Q2.

Speaker 3

So nothing on the full year that we would expect to be any different And in fact, that's why we see the continued feel good about the continued guide and raise for the full year on both the recurring and overall.

Speaker 7

Okay. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Scott Berg with Needham and Company. Please proceed with your question.

Speaker 8

Hi, everyone. Really nice results this quarter. Congrats.

Speaker 2

Thanks, guys. A couple of

Speaker 8

questions for me. Let's start on the broker channel. I think you said 50, 5 0% of your bookings in the quarter were a contribution from the broker channel there. How should we think about those contributions going forward, because 50 seems like a very high number. Do you expect that pace to continue or does it moderate from there?

Speaker 2

I think we've continued to think it was slightly moderate, Scott, but it's remained really strong. I think As we think about our 3 year outlook, we think high 30s, mid 40s is probably we'll be as we continue to scale bookings. But that being said, we're still in the early innings. We're there's Tons of white space in the broker opportunity. So we're kind of just getting started and our execution has gotten significantly better this year.

Speaker 2

And so the team that we have driving these programs Forrest has done a phenomenal job and we're really proud of the results.

Speaker 8

Got it. Helpful. And then from a follow-up perspective, staying on the sales kind of route, can you give some commentary on progress back to the base selling, selling to your existing installed base. You mentioned your PEPPOM is up 75% over the last several years, gives you Certainly a lot more to sell, but any changes with the way that existing customers or maybe what their appetites look like for buying additional modules?

Speaker 2

No, we I mean, it's been consistent. We're continuing to subtly improve modules sold. Obviously, Talent has a significant attach rate, workforce management also significant attach rate. And so we feel good both at point of sale that we're delivering a bigger bundle, but also our cross selling team It continues to really hit the ball out of the park and so continuing to work with our clients to make sure they're optimizing the latest technology that we offer. So, it's been really successful and we still have a lot of opportunity in that channel.

Speaker 8

Great. Thank you for taking my questions.

Speaker 9

Thanks, Scott.

Operator

Thank you. Our next question comes from the line of Brad Reebok with Stifel. Please proceed with your question.

Speaker 2

Great. Thanks very much. Raul, obviously in fiscal 'twenty three you increased or We'll say entering fiscal 20 40, your sales headcount was up about 22%. You're going to grow high teens this year all up, so there's about a 5 point How should we think about those converging on a go forward basis? What needs to happen to get those 2 to meet?

Speaker 2

Thanks. Yes, it's really about us continuing to grow the tenure in our sales organization. And as we continue to focus on driving that tenure, which is really growing the person months worked, which has grown year over year and it's moving in the right direction. That tenure drives productivity. So As we anniversary these large, what we would call headcount classes, year over year, we're going to see improved productivity.

Speaker 2

And so it's really about us, driving them from year 1 to year 2 to year 3. Great. Thanks very much. Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Brian, your line may be

Speaker 2

muted. Sorry, I'm bamboozled by the mute button. Sorry about that guys.

Speaker 10

So just one for me on the embedded channel. So I'd love to And as you think about the 2% of lives on the platform already, is that fairly concentrated within a couple of Or is it maybe a little bit more diverse and then there's kind of an opportunity to expand with some of those partners over time? Thanks guys. Yes.

Speaker 3

Hey, Brian. Yes, I mean it's just with a couple of partners right now. It's still really early with us in terms of the number of active partners that we have on our platform. And so

Speaker 2

yes, there's only a few partners that are

Speaker 3

really generating that sort of So yes, there's only a few partners that are really generating that sort of growth for us. And of course, as we continue to sign new partners, We're going to see a lot more expansion. There's not really a concentration from an end customer perspective. They do look a lot like the customers that we have today. They're strong middle market and enterprise customers, but the partners themselves are still just a few.

Speaker 10

And Adam, maybe a follow-up. So how do we think about the land and expand in that channel? So when you kind of get launched with one of those customers, does it get fully implemented across the customer base or is that something that gradually folds in over time?

Speaker 2

Yes. Every agreement is unique. The ones that we have today were had existing customer bases that they're converting over. And then They sell on a go forward basis to new. And so we've been really pleased with the Cross selling ability of our partners to sell new on a go forward basis outside of the existing base.

Speaker 2

And so That's kind of exceeded our expectations.

Speaker 4

Great to hear.

Speaker 10

Thanks guys.

Speaker 2

Yes. Thanks a lot, Brian.

Operator

Thank you. Our next question comes from the line of Jared Levine with TD Cowen. Please proceed with your question.

Speaker 9

Hi, thanks. This is Zach Azeman on for Jared. First question on demand. Any change in the pace of prospective client decision making relative to prior quarters and further any change in attach rates on new client sales? If so, what modules and functionality are witnessing A change in attach rate?

Speaker 2

Yes. As far as deal cycle timeframe, On the entire base, there's no change. However, if you break it down by size, I mean, there's a subtle elongation in the enterprise space year over year, but we're on a smaller sample size. So but ultimately our core overall base, the same, no changes in the mid market or SMB space. And as far as modules go, we continue to slightly tick up.

Speaker 2

So they're not ticking down. They're actually we're seeing slightly better attachment across the board.

Speaker 9

Got it. And a follow-up on retention. How did the January's gross revenue retention compare year on year and if that was consistent, were there any underlying changes based on employer size segment or based on controllable versus uncontrollable churn?

Speaker 3

Yes, I mean we haven't shared like month specific month retention results, but gross retention has been consistent. And January of course is a big month for us both on starts and losses. And I'd say that it's been in line with our expectations broadly, Especially as how we're thinking about guidance for the full year as well. So no significant changes one way or the other on retention broadly.

Speaker 4

Very helpful. Thanks.

Speaker 2

Thank you.

Operator

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

Speaker 11

Hey, great. Thanks for taking my question. Just wanted to ask one on embedded HCM. I think it'd be helpful if you could just help us understand the cadence of When a partner is signed, how long it takes for them to build pipeline and then how long it takes for them to convert that pipeline? So the partners that are currently converting, when Did they originally start using the embedded HCM functionality?

Speaker 11

And then how long before we start to see a material contribution to growth from the partners that are in the pipeline and the ones that you currently signed?

Speaker 2

Yes, every deal is slightly different in the sense that some have existing client bases that need to be converted. And so that may take a little longer upfront work on the implementation side. And then others are looking to sell new and that's a quicker go to market motion. So it really depends on the type of partner. And so I think From our perspective, we're looking to continue to expand the partner base and then continue to expand the penetration of existing partners.

Speaker 2

And new partners, once they're up and running, They have contributions on a monthly basis. So, it's the speed to success is relatively short. It's no different than the sales cycle of a normal mid market rep in the industry.

Speaker 11

Perfect. Thank you.

Speaker 2

Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Matt Van Vliet with BTIG. Please proceed with your question.

Speaker 7

Hey, good afternoon. Thank you for taking the question. I guess one more on the embedded channel. Just curious, I know it's early, but What kind of attach rate of multiple products are you seeing? Is it drastically different than sort of the overall average?

Speaker 7

And then maybe how do you see that trending? Is there something that is maybe more specifically needed in that embedded channel that maybe is less common or more common. So I'm just curious on how the number of products is per customer.

Speaker 2

Yes. When we entered it, it was really, Matt, with primarily payroll and which is what we We're focused on and what we found is that people also want workforce management and some of the other services. So it's actually a broader suite than we anticipated when we started the venture. So Payroll definitely is the driver of the conversation, but many are focused on workforce management, reporting, analytics, A lot of the other ancillary services that our clients talent that our clients are purchasing that they're wanting as well, Because the end client doesn't really isn't any different than the end client we sell. It's just a different way to go after the end client.

Speaker 7

Okay, very helpful. And then when you're looking at the roughly 20% headcount growth that you're looking for on the go to market team, Any particular focus around whether it's the top 50 markets that you're targeting? Is it a little more top heavy? Are you trying to kind of reach out and further the breadth there, just curious where you have a need for more capacity across those key markets? Yes.

Speaker 2

I mean, we can add sales reps in almost every market in the U. S. Still. There's so much opportunity available. The way we think about and the way we've allocated our resources over the past few years is that about 70% to 75% of the hires go into a Tier 1 market, which we define as the 15 largest cities in America and then the balance go into Tier 2 and Tier 3, which are the next 35 largest cities in America.

Speaker 2

And that combination is kind of the formula that we're executing against today.

Speaker 7

All right, great. Thank you.

Speaker 2

Yes, thank you.

Operator

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

Speaker 9

Hi, thanks for taking the question. This is George on for Steve. I think first, there's been some noise with some of your peers in the payroll space. I'm just wondering if that's caused any incremental shifts in the competitive landscape and where you're sourcing bookings from?

Speaker 2

I didn't know there was any noise going on in the category. But that we compete against everyone in the category and we take share from everyone in the category. And we'll continue to do that. In a quarter, you don't really see any material changes that bounce around. Most of these decisions take a quarter or 2 to happen.

Speaker 2

And so we'll see as we go forward if that changes. At the end of the day, what we're really focused on is our value propositions on delivering a perfect payroll every time. That's not that complicated. And really delivering tools for leaders so they can power their people and performance. And that's what we go to market with.

Speaker 2

We have a modern tech stack. We deliver the most PeP in the category. And so we're going after all competitors. We're not focused on anyone.

Speaker 9

Great. That makes sense. And then just a follow-up on embedded. I think you've talked about how each of these deals tend to be somewhat Spoken, there's a bit of an onboarding process, but I'm just wondering if you could talk about the learnings you've had from the partners that are ramping so far, if there's any Commonalities that you can leverage to smooth the onboarding process for future partners and speed up the flywheel of the product? Thanks.

Speaker 2

Yes, for sure. I mean, I think we're starting to understand the frameworks. While every partner is different, They do get bucketed into what type of partners and a lot of that is what type of partners. Is it a workforce management solution? Is it a vertical software solution?

Speaker 2

Is it an ERP? Those type of things, they all have slightly different needs and we're building playbooks by partner type, to help make the implementation more efficient, and to make the cross selling more effective over time.

Speaker 9

Thanks for taking the questions.

Speaker 2

Yes, you're welcome.

Operator

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

Speaker 12

Hi, this is Kyle Headmaster on for Dan Jester. Thanks for taking the questions. On the 2 new launches, benchmarking and forecasting, was wondering if you could provide any further color here. Are these 2 new modules, are you charging for them? And then how you're thinking about the growth opportunity relative to other modules?

Speaker 12

And then my second question, just if you could dig a bit deeper into the booking conditions you saw during the quarter, maybe any shifts as 4Q progressed? Thank you.

Speaker 2

Yes. So, the 2 new products will each add an incremental PEPA. I believe it's $1 per per for each of the new products. And they're really a combination of taking our data analytics capabilities and providing insights for frontline leaders so they can be more effective with compensation strategies and scheduling strategies with their employees. And so it fits right in line with our strategy and where we're trying to help our customers.

Speaker 2

Our Q2 or calendar 4th quarter bookings were consistent, consistent across all of our segments and we didn't have anything that jumped off the page from that perspective. And It's kind of what we expected.

Operator

Thank you. Our next question comes from the line of Mark McCrone with Baird. Please proceed with your question.

Speaker 7

Hey, good afternoon and thanks for taking my question. Wondering with regards To the enterprise accounts, you talked about them a little bit more. And I'm wondering how far up market could you be pulled and to what extent are you managing the sales force in terms of making sure that they stay within the target market? Or how are you thinking about that?

Speaker 2

Yes. I mean, as you know, As a savvy long time HCM analyst, while we define ourselves by size, Like clients don't define themselves that way their needs define what kind of platform they can use. So it's really a needs analysis that we look at and we sell into the 1,000. We have clients with over 10,000 employees. And so it really depends on what the client, what needs the client is looking for, and we present it that way.

Speaker 2

Obviously, our most tenured reps are the ones that are focused on the enterprise account. So they understand the power of the Paycor platform and they help the customers make sure that we can meet all their needs. So, it's obviously, We're in the early innings here. But over the last 4 or 5 quarters, we continue to get pulled up market based on the power of the platform. And we've continued to educate our reps and our reps to be able to meet the opportunity.

Speaker 7

That's great. And you mentioned the tenure of sales force. Can you talk a little bit more about the sales force just in terms of your increasing effectiveness with regards to Selecting training and keeping them?

Speaker 2

Yes. I mean, so that's number one priority. And what I would say is we've increased our person's month's work by over 15% year over year. And so that's really positive for us. And we're really focused on onboarding and activating the reps and making them successful.

Speaker 2

And so that's an ongoing process. We could clearly do better there. We want to do better. And But I think we're making good progress. And if we continue to see this kind of progress, it will continue to drive productivity year over year.

Speaker 7

Fantastic. Thanks a lot, Rahul.

Speaker 2

Yes. Thanks, Tay.

Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Raul Villar for closing comments.

Speaker 2

Yes. Thank you again for joining us this evening. Demand remains healthy with plenty of runway for sustainable growth and we remain focused on executing our strategy to capture market share. We look forward to connecting with you at several upcoming events including the JMP Securities Technology Conference in San Francisco. Have a great night everyone.

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Key Takeaways

  • Paycor reported 20% revenue growth in Q2 on a year-over-year basis, expanded adjusted operating margins by 130 basis points, and accelerated recurring revenue growth to 18%.
  • Key growth drivers include expanding employees on the platform via a 20% increase in direct sales headcount, over 25% growth in active referring brokers (50% of bookings broker-influenced), and new embedded HCM partnerships.
  • The HCM suite was enhanced with two data-driven modules—pay benchmarking and labor forecasting—that each add incremental PEPM, and Paycor won five Brandon Hall Technology Awards, including gold for its leadership development framework.
  • Effective PEPM rose 7% to $19 in Q2 (9% excluding embedded deals), while gross profit margin reached 79% and adjusted free cash flow was $15 million, with no debt on the balance sheet.
  • For Q3, Paycor expects revenues of $185–187 million (up to 16% growth) and adjusted operating income of $45–46 million, and full-year guidance remains $650–656 million in revenue and $104–108 million in adjusted operating income.
A.I. generated. May contain errors.
Earnings Conference Call
Paycor HCM Q2 2024
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