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Paycom Software Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

  • James Samford
    Head of Investor Relations
  • Chad Richison
    President and Chief Executive Officer
  • Craig Boelte
    Chief Financial Officer

Analysts

Presentation

Operator

[Starts Abruptly] Software Second Quarter 2023 Quarterly Results Conference Call. My name is Kate and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

I would now like to pass the call over to our host, James Samford, Head of Investor Relations, you may go ahead.

James Samford
Head of Investor Relations at Paycom Software

Thank you. Welcome to Paycom's earnings conference call for the second quarter 2023. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives, and expected performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Also, during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today and is available on our website at investors.paycom.com.

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

Chad Richison
President and Chief Executive Officer at Paycom Software

Thanks, James, and thank you to everyone joining our call today. We delivered very solid results in the second quarter and we continue to expand our opportunity, both within and outside the US. I'll start with highlights from the second quarter and progress on our initiatives. Following that, Craig will review our financials and guidance and then we'll take questions.

Second quarter 2023 revenue of approximately $401 million represented strong growth of 27% year-over-year. Second quarter adjusted EBITDA came in at $157 million, representing an adjusted EBITDA margin of roughly 39%, up approximately 130 basis points year-over-year. We are delivering a solid combination of growth and high margins while maintaining a disciplined investment strategy and product and international expansion.

On the product front, the ROI that our clients are achieving from BETI is unquestionable. We recently commissioned a total economic impact study from Forrester Consulting that quantified the savings from using Paycom embedding including a 90% reduction in labor for payroll processing and saving HR and accounting teams more than 2,600 hours per year. Companies that are not adopting BETI are missing out on a significant opportunity for savings from the structural change to how payroll should be done. With millions of employees already doing their own payroll and organizations seeing incredible ROI with BETI, there's no reason not to adopt it. The product is working as we anticipated and our messaging is resonating. So we will remain disciplined in promoting the power of BETI to new and existing clients.

In April 2023, we launched access to our global human capital management software in more than 180 countries and in 15 languages and dialects. Today, we announced that we have expanded our HCM solutions to include self-service payroll for organizations with Canadian employees. Now more North American businesses will be able to improve their payroll processing by giving our employees a more transparent and user-friendly experience in Canada with BETI. We are seeing continued success selling across our entire target market range and our efforts up-market continued to be strong.

With our recent launch into Canada, we've opened up a new large cross-border opportunity. As we continue to expand our geographic reach, I expect our move-up market to continue to accelerate. As a result, we are redefining our target market range to include organizations with greater than 10,000 employees which represents an enterprise segment that our sales reps can now directly pursue. With our new expanded market opportunity, we now estimate our market shares well below 5%. This expansion gives me confidence that we can grow at an impressive pace for many years to come.

In addition to launching our payroll services in Canada, our product development team also rolled out two significant tools in our software, Everyday and the Client Action Center. Everyday allows employees to get paid on a daily basis. Unlike other products on the market with Everyday employees access their earned pay early without being charged a fee and employers are not exposed to potential losses from all factors that impact pay including early departures, garnish benefit deductions to be collected. Everyday is a fully compliant payroll as opposed to a pay advance, like many other daily pay services.

The Client Action Center furthers our dedication to creating software that simplifies the lives of our clients by providing them with an intuitive dashboard within the Paycom mobile app. This new tool makes it even easier for our clients to take action and get updates on service-related items. We've received great feedback from clients on this streamlined approach since we rolled it out in June.

Finally, Paycom was recently recognized as one of America's Greatest Workplaces in 2023 by Newsweek. The award highlights companies dedicated to providing employees with an enjoyable work environment but also fosters growth and development opportunities. In addition to the second year in a row Comparably named Paycom, one of the best career growth opportunities, among all companies.

In summary, our highly-differentiated product and realized client ROI continue to drive our strong results, I'd like to thank our employees for their hard work and commitment to excellence as we continue to change the way payroll has done.

With that, I will turn the call over to Craig for a review of our financials and guidance. Craig?

Craig Boelte
Chief Financial Officer at Paycom Software

Before I review our second quarter results for 2023 and our outlook for the third quarter and full year of 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

We delivered solid results this quarter with revenue of $401.1 million, up 26. 6% compared to the prior year period. Our GAAP net income for the second quarter was $64.5 million or $1.11 per diluted share based on approximately 58 million shares. Adjusted EBITDA of $156.6 million in the second quarter of 2023 or 39% of total revenues compared to a $119.6 million in the second quarter of 2022 or 37.7% of total revenues or up 130 basis points year-over-year.

Non-GAAP net income for the second quarter of 2023 was $94.3 million or $1.62 per diluted share, up 29.1% from the prior year period. Second quarter GAAP tax rate came in higher-than-expected at 30.5%. For the full-year 2023, we now anticipate our effective income tax rate to come in slightly higher at approximately 29.5% on a GAAP basis and approximately 27% on a non-GAAP basis.

Demand trends remain strong, particularly up-market. Within total revenues, recurring revenue was $394.5 million for the second quarter of 2023, representing 98.4% of total revenues for the quarter and growing 26.6% from the comparable prior year period. Adjusted sales and marketing expense for the second quarter of 2023 was a $100.4 million or 25% of revenues. We continue to aggressively spend on marketing and sales ahead of future growth.

Adjusted R&D expense was $42.5 million in the second quarter of 2023 or 10.6% of total revenues. Adjusted total R&D costs including the capitalized portion were $61.2 million in the second quarter of 2023 compared to 48.1 million in the prior year period. We continue to invest in new products and expanded geographic offerings.

Turning to the balance sheet, we ended the quarter with a very strong balance sheet, including cash-and-cash equivalents of $537 million and total debt of $29 million. Additionally, we announced today that we've expanded our revolver from $650 million to $1 billion. The average daily balance of funds held on behalf of clients was approximately $2.2 billion in the second quarter of 2023, up approximately 13% year-over-year.

Now let me turn to guidance. For fiscal 2023, we are raising our outlook and now expect revenue in the range of $1.715 billion to $1.717 billion or approximately 25% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $722 million to 724 million representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range.

With these strong results and outlook, we are well-positioned to reach the Rule of 67. For the third quarter of 2023, we expect total revenues in the range of $410 million to $412 million, representing a growth rate over the comparable prior year period with approximately 23% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $156 million to $158 million, representing an adjusted EBITDA margin of approximately 38% at the midpoint of the range.

We paid our first quarterly dividend of $0.375 per share in June and the Board has approved a quarterly dividend of $0.375 per share payable in September. Paycom is in a strong financial position and executing well against a very large market opportunity. Our focus on delivering strong revenue growth and attractive adjusted EBITDA margins remains top priorities and I am pleased with the consistency of our execution and the resiliency of our business model. We look forward to delivering continued strong results as many of our initiatives gain traction in 2023 and 2024.

With that, we will open the line for questions. Operator?

Questions and Answers

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions] As a reminder, we would like to ask you to limit yourself to one question and one follow-up question. [Operator Instructions] The first question will be from the line of Raimo Lenschow with Barclays. Your line is now open.

Raimo Lenschow
Analyst at Barclays Capital

Thank you. I had two quick questions. First, Chad, can you talk a little bit about what you're seeing out there in terms of end demand, etc? And the reason, why I'm asking, is, like if I look at this quarter, you beat by $3 million and the full year was only raised by $2 million. So do we need to read into that that there you are kind of slightly concerned about the second half of the year like you maybe you kind of frame it for us in terms of how we should think about that? And then the second question was on Everyday, like how should we think about that in terms of like applicability in terms of is this for all the clients, is it for a select group that have more contingency workers, whether it's interesting, how to think you probably you can roll this out. Thank you.

Chad Richison
President and Chief Executive Officer at Paycom Software

Sure. So, I mean, I'll take your last question first, then circle back. In regards to Everyday, we put it out there because there are industries and certain companies that have moved toward a more pay-as-you-want type program typically for lower-wage earners. Our product that we put out there allows early wage access or everyday access to wages, and the employer it's not on the hook. It's not alone, so the employees is not charged and oftentimes these amounts are guesstimated, and then if the employee leaves early or if they didn't collect all of the deductions for the employee, the employer is on the hook. And so all I would say is, it's meeting a need that's already out there. I do not suggest that businesses change to a daily pay environment, but some of them are already out there. And so it gives us an opportunity and it's linked to our vault card.

In regards to your first question about demand. Demand for us is still very strong, especially with our outside sales and new bookings. We are booking larger deals, we are booking $2 million deals, $3 million deals, we hadn't booked those before. So outside sales is strong enough year-over-year. Inside sales, which sells small-business are smaller emerging businesses below 50 employees is also up year-over-year. We do have a metric within our business model that sells that's down year-over-year and that's our CRR sales. The CRR group upsells current clients and this group has been down year-over-year and honestly, that's because we've remained very disciplined in converting our client base to BETI. We had that first group that came on and then we've been outselling the others. It's a lot of work for our CRR with very little revenue opportunity for them. So we've actually given compensation accelerators to incentivize the group to sell it, but it's still a smaller revenue product or billing item for us.

So whilst it is self-inflicted, I mean, we are having CRR's focus on BETI and that's -- that cost us $15 million to $20 million in bookings this year but again, we're doing the accelerator commission for the CRR is to make up for the lower revenue. We've been changing out the jet engines on our plane in mid-flight here. I mean BETI very dramatically changes the way our clients do their payroll but this is a dramatic ROI. So we have to remain disciplined. We're not going to make a client go on it, we have to sell them on it and it takes a while. Once you sell a deal, it takes a while, CRRs have to be out there to convert them. So, I think we're doing something like triple. We're tripling their commissions for what they're going be missing out but for us, it's significant because employees are going to be doing their own payroll. Millions already are with Paycom. Employees to do their own payroll, don't want to go back to the guessing game. So while that is a small revenue amount for Paycom, it produces strong employee and employer advocates, which produce more leads for outside sales group, and with less than 5% of the market we will recapture the delayed opportunities in due time.

Operator

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

Samad Samana
Analyst at Jefferies Financial Group

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

Chad Richison
President and Chief Executive Officer at Paycom Software

I'll let Craig kind of comment a little bit on that. From my perspective, I mean, there's really only one metric that's given way for us and that's the fact that we are having CRR spend three days converting a very small revenue item for a client that produces strong ROI. I think it's a season that we're in. As far as the percentage growth, I mean you guys have the numbers. We talked about what we earn on interest as they've increased. We've also talked about how that's layering in. So, I know there's different models out there and they all seem fairly consistent with one another. I don't plan on giving any of the interest back but If you want to take it out. I think that's a fair thing.

Craig Boelte
Chief Financial Officer at Paycom Software

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

Samad Samana
Analyst at Jefferies Financial Group

Craig, just a quick follow-up on the product side. On the new product rollout into Canada and you already have beta customers. Is that hiring a different type of rep, have we opened sales offices there? Maybe just help us think about what the -- who is trying the product already and if you've already built out the go-to-market infrastructure for that?

Craig Boelte
Chief Financial Officer at Paycom Software

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

Operator

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

Brad Reback
Analyst at Stifel Nicolaus

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

Chad Richison
President and Chief Executive Officer at Paycom Software

Bookings kind of flow and they don't come in right away, so I mean, there would be some amount of that, you wouldn't get all of that this year, but I mean, we look at how much we were up last year and how much we're not this year, the big -- the dramatic change there, but really it just comes down to, we've still got about 40% of our client base not on BETI and that ROI is available if not we're servicing, two different products sets here. And so the Forrester study was put out, talked about how it's 90% of the savings, I mean and it's significant there.

Employees and employers are having success with it and so we didn't just start doing this. We really started doing this end of last year, but we've been seeing the impact just because it takes a while and the CRR is really the only group we can send out to a client to help with that change of management be there for the first payroll on BETI and walk them through the datasets. And so, that's the group that we're using to do it and so.

But in answer to your question, not 100% of $20 million would have -- what we have realized in revenue this year. I will say though with CRR, as it comes in pretty quickly. I'd say they sell at one month and most of it's up with them four to six weeks with that group.

Brad Reback
Analyst at Stifel Nicolaus

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

Chad Richison
President and Chief Executive Officer at Paycom Software

I would say that it's been a harder slog to move to BETI than in this last group, but I mean it's impacting us, but we have to stay disciplined in it. Once we get these clients moved over to BETI, it's a very little revenue piece for them, but it's a significant amount of their ROI, also make servicing clients easier for us just because you don't have the paper cuts that come with an HR and payroll department trying to do it for the employee.

Operator

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

Mark S. Marcon
Analyst at Robert W. Baird

Hey, good afternoon. A couple of questions. So one between Everyday and Canada, can you talk a little bit about like the types of clients that you would be targeting to a greater extent? It sounds like you're forecasting that we're going to see some decent expansion of 10,000 -plus employee range type clients, and to what extent was not having Everyday holding you back before?

Chad Richison
President and Chief Executive Officer at Paycom Software

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

And like I said before, on the last call, there was really only one thing holding us back from going up-market and that's the fact that we didn't have international capabilities and with our global HCM product and now with our first expansion into Canada, we're well on our way with them.

Mark S. Marcon
Analyst at Robert W. Baird

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

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Operator

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

Joshua Reilly
Analyst at Needham & Company LLC

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

Craig Boelte
Chief Financial Officer at Paycom Software

No, I mean, we guide to what we can see and obviously when a deal starts in a quarter it can impact the guidance for that quarter. So there are certain things within a quarter that can make it be larger or smaller. And so we typically guide to what we can see and really no change to our stance on guidance but as Chad mentioned, we saw the CRR impact start to come through and that's what we have seen in the last call. And quarter four really has much more variability. We have probably 20% of our clients that are brand-new to us. So when you think of that, we don't necessarily know how they're going to pay bonuses and if they're going to pay bonuses. So a little more uncertainty in that Q4 as we move throughout the year.

Joshua Reilly
Analyst at Needham & Company LLC

Got it. And then sales and marketing was up about $2 million quarter-over-quarter in this year in Q2, while last year was up about $10 million sequentially. Should we read into anything around the pace of investments in sales and marketing slowing a bit while you increased more investments in product and R&D continues to increase? Do you need to get some of these new products out and then you're going to re-accelerate investments in sales and marketing after that point in time? Thank you.

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Operator

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

Steven Enders
Analyst at Smith Barney Citigroup

Okay, great, thanks for -- thanks for taking the question here. I guess, maybe to start. I know that you are opening up into the 10,000 fee customer range, is there's going to be any change in the go-to-market to go capture some more of these enterprise-focused accounts and any areas that may need to be built out to be able to get into those customers?

Chad Richison
President and Chief Executive Officer at Paycom Software

No, I mean, our marketing efforts are a little bit different. In answer to the question on the sales motion, no, I mean, back in the day, I mean every client is different, but today employees are the same, I mean, it's just what we're dealing with, there is no such thing as a large market employee versus a small market employee, they've got all perfect payrolls and what have you. And so, our approach to selling because we're selling one system is very similar.

The prospecting methods meaning the methods through which you go to get appointments, they are a little bit different on how we're doing that, but not unlike how we've been doing it with companies that have 10,000 employees already. So, I wouldn't say it's much different than what we were doing there, but -- and it's a little bit different if you're trying to get into a company that has 250,000 employees. How you're getting in there to be able to make an impact, I mean there's a lot of companies that will listen to you, but we're looking to meet with the decision-makers and buyers. And so -- and again, employee advocates are helping us. Three or four years ago, we had zero employee advocates. Today, we continue to cultivate advocates of our client employees who use our system and then go to other companies and bring us in, and so we're still having a lot of success with them.

Steven Enders
Analyst at Smith Barney Citigroup

Okay. Got you. That's helpful there. And then on the international expansion, did you say the entry into Canada was not officially announced? How should we be thinking about the pace of further country openings and I guess any initial learnings from entering Canada and having a platform perform there that could be applied to some of the other countries that you're targeting here?

Chad Richison
President and Chief Executive Officer at Paycom Software

I mean, it gets easier as you do more countries because you run into crazy things in each country. I mean, every country operates a little bit differently. There's --there's countries that their year runs April 6th through April 5th. There's countries that you don't reconcile tax at the end, you got to have a stamp at the beginning. So we're running into that with all countries. We do continue to spec them out and we will have a couple of more significant countries this year. I mentioned on the call not long ago that we believe that about 20 countries represent most of all the opportunity that we will need for the US-based clients, not all, but most of all.

Operator

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

Siti Panigrahi
Analyst at Mizuho Securities

Thank you. Thanks for taking my question. Just wanted to follow up, Chad. When you are now going to Canada or even other countries are you now -- are you targeting customers in those countries, or are you focusing on US customer employees there. The reason I'm asking, are you trying to build a sales team in Canada and other countries, or it's still focused here in the US?

Chad Richison
President and Chief Executive Officer at Paycom Software

I mean, the answer is yes, we will eventually have sales teams in other areas that we're expanding to, but it's first things first and we're not focused on opening up a sales team in Canada right now. We do have a service center there now with people available to service, they've been trained and they have been using our product themselves but really, it's an opportunity for us to continue to go further upmarket, we get a lot of -- we get a lot of call-ins and interest in regards and leads in regards to large businesses and we kind of sometimes fall by the wayside in regards to how they manage their global group.

Our global HCM product helped a lot with that because so much of the global payrolls are already to spirit [Phonetic] and siloed all over the place. And so the global HCM helps some of that but now as we're building out BETI in each country, it just wouldn't make sense for a company not to use us for all of that and so originally, our focus is US-based companies, there's plenty of them as we go market, but eventually, absolutely we will have sales teams in other countries. That's not something more of an eyeball and flick of an eyeball.

Siti Panigrahi
Analyst at Mizuho Securities

Okay, thanks for that color. And one more follow-up on the BETI when you say 40% of the customer is yet to move, I understand they're all your prior customer not that your new customers by default get BETI, so definitely there is a clear value proposition of BETI and it's been there two years. So, what's the pushback you're hearing from those customer, what's stopping them from moving to BETI?

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Operator

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

Bryan Bergin
Analyst at TD Cowen

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

Chad Richison
President and Chief Executive Officer at Paycom Software

Yeah, I mean this quarter was down slightly. It's typically going to be headcount, we hire ahead of the growth, it's going to be a higher headcount and the service group. We're starting to see a few costs as it relates to international, but it's not really moving the needle at this point. So, we haven't guided to gross margins, we've always been in that 84%, 85%, 86% range and we would expect that to to be similar moving forward.

Bryan Bergin
Analyst at TD Cowen

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

Craig Boelte
Chief Financial Officer at Paycom Software

I mean, it would be a small -- there would be, is going to be very small impact this year. Just because you have bookings than conversions. I mean Everyday can add a little bit, but yeah, it would be not going to give a number.

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Operator

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

Unidentified Participant
at Paycom Software

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

Chad Richison
President and Chief Executive Officer at Paycom Software

Yeah, I mean, well, outside sales, as it rolls in. I mean, we've got people that are selling numbers that I mean, even one deal is bigger than what some unsold sold before at Paycom. So I mean sales is continuing to do well. Our capacity is continuing to increase. We are continuing to get stronger at staffing, and again I'm talking about from our outside sales perspective, which sells 95% of our new business that we bring on -- the new clients that we bring on. So we're doing well there and I would expect us to continue to do so.

Unidentified Participant
at Paycom Software

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

Chad Richison
President and Chief Executive Officer at Paycom Software

Yeah, I mean, what we've said in the past, and really don't have an update on that. As you know, we typically get about. $5 million annually on a 0.5 basis point increase, we had $2.2 billion average daily funds held this quarter. I mean we're typically trying to get somewhere between 80% and 90% of the Fed funds rate. It layers and over time, it doesn't, it's not an immediate impact to us, we have certain projects that are layered out longer. So that's the impact that rate hike has on us.

Operator

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

Unidentified Participant
at Paycom Software

Hey guys, this is Ryan on for Alex. Thanks for taking the question. So two quick ones. Historically, free cash flow margin and cash conversion have been lowest in 2Q but it came in relatively strong this best quarter. So I'm just wondering if you can unpack that strength. And then on retention, you reported 93% at the end of last year, but given the macro, any swings in that number that we should be aware of just through this first half. Thanks.

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Craig Boelte
Chief Financial Officer at Paycom Software

Yeah, I mean, our free cash flow came in very strong for Q2, some of that can be timing but overall, the main thing that going to impact free cash flow are going to be capex, and in some of your tax rate on that and -- but yeah, we're very happy with the way it came in Q2 much, much better than last year's Q2.

Operator

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

Bhavin Shah
Analyst at Deutsche Bank Aktiengesellschaft

Great, thanks for taking my question. So there's always a lot of noise as to where we are in the macrocycle. Can you just help us understand what you're seeing with your customers in terms of pays per control, how that might have trended throughout the quarter, and if there's any differences across the various customer sizes that you serve?

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Bhavin Shah
Analyst at Deutsche Bank Aktiengesellschaft

Got it. And then earlier in your prepared remarks, you mentioned kind of year-over-year growth in both outside and inside sales. Can you double-click on this, like how its growth trended in terms of both of those areas versus prior quarters? Are you seeing accelerating growth, similar growth, deceleration? Just any way to kind of think about the magnitude of what you're seeing with both inside and outside sales.

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Operator

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

Daniel Jester
Analyst at BMO Capital Markets

Great, thanks for taking my question. So, first, I wanted to ask about sort of the back-to-the-base motion, you made a comment that the BETI transition is kind of impacting the velocity of that group, are you thinking about global HCM? It also sounds like that's going to be back to the base motion with customers that already have international employees. So is that going to be the same team selling that and how do you deal with the bandwidth, as you ramp that global product? And then secondly, can you just clarify is Everyday and Client Action Center, are the modules that you charge for? Thank you.

Okay, Everyday, yes, Client Action Center, no. Every client has it's -- has the ability to enable it right now. As far as, yes, it is the exact same team that sells the global HCM product as what sells BETI, it's also that same team will sell Everyday as that's what sells BETI and so, they still have the ability to sell it, they still have the ability to go out, nothing's precluding someone from going out and making yourself. The issue becomes, it's not an issue. Again, it's something that we have to do is, regardless of what you choose to go sell on your own, you've got these clients that don't have BETI, that some of them you're already have sold BETI to and you're going to have to go out there and spend the time to get them converted and it's our CRRs who do those conversions and so the difference can be instead of having a one and half hours or two hours sales call to sell a product, you're out there for three, three and a half days. Again, not all in the same week, it might be three and a half days over a four-week period of time getting the company converted over to BETI and then you're out there when they're doing the first payroll and making sure that the ROI is being realized.

And so -- and once someone's made that conversion, I believe we earn the right to even help them achieve greater return on investment by with these other products. And so I'm not saying I've told any CRRs, hey, don't go out and sell the product. What I've said is, this is your priority. Any clients that aren't currently on it achieving the value. I know it's a smaller revenue amount, so I'm going to pay for your trip because I know it's a small revenue amount, so anytime you sell one, this will be your commission, we have to do that so that we can move everybody into the right value because it is the correct way to do it, it is the correct way for employees to do it themselves. And so that's what we're focused on, we're not retreating from that and I also believe that we do have -- we have some good things coming out here with products, we've announced some of it, we got more coming out throughout the year. So, but -- it is a first thing first, I'm not going to throw my hands up on what the CRRs can do, I'm just explaining where they're at as of today.

Operator

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

Robert Simmons
Analyst at D.A. Davidson

Thanks for taking the question. So I was just wondering, how does Everyday work in terms of monetization, would do you do it the same way your other modules work currently per pay cycle or would it be a different model?

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Robert Simmons
Analyst at D.A. Davidson

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

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Robert Simmons
Analyst at D.A. Davidson

Got it. Thank you very much.

Chad Richison
President and Chief Executive Officer at Paycom Software

Aha.

Operator

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

Arvind Ramnani
Analyst at Piper Sandler & Co.

Thanks, sir. Thank you for taking my question. So I was just kind of first things like that. Can you talk a bit about the competitive environment, particularly from some of the legacy players, be it Paychex. Has that changed, have they put any kind of pressure on your sales cycles and conversions?

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Arvind Ramnani
Analyst at Piper Sandler & Co.

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

Craig Boelte
Chief Financial Officer at Paycom Software

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

Operator

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

Jackson Ader
Analyst at MoffettNathanson

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

Chad Richison
President and Chief Executive Officer at Paycom Software

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

Jackson Ader
Analyst at MoffettNathanson

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

Chad Richison
President and Chief Executive Officer at Paycom Software

Yeah, well, weekly quotas, I'll make sure that but ultimately, they will go after larger deals, they don't have that many of them for any one territory. It's not going to increase it so much, that's all you're doing and I mean our salespeople probably 75% to 80% of what they make is commission-based and that's based off revenue being achieved. You can still achieve a lot of revenue off of the sweet spot of our market that we've been focused on, but we continue to be pulled up-market, I've been mentioning that and there's no reason not to go after that market as well.

I mean, eventually, we're going to land one of these largest -- largest companies in the world kind of deal. I mean, eventually, that's going to happen because it's just right. So we've got to take care of them as it swings with them.

Operator

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

Chad Richison
President and Chief Executive Officer at Paycom Software

I want to thank everyone for joining the call today.

Over the next quarter, we will be hosting meetings at five conferences. Beginning next week we'll be at the KeyBanc Tech Leadership Forum; at the end of August, we'll be hosting meetings at the Stifel Tech Exec. Summit and the Deutsche Bank Technology Conference; in September, we will be presenting at the Citi Global Tech Conference in New York and hosting meetings at the Wolfe TMT Conference in San Francisco. We look forward to catching up with many of you soon.

Operator, you may disconnect.

Operator

[Operator Closing Remarks]

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