Paycor HCM, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to PACOR's second quarter fiscal year 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would like to turn the call over to Rachel White, Vice President of Investor Relations.

Good afternoon and welcome to PayCore's earnings call for the second quarter of fiscal year 2022, which ended on December 31st. On the call with me today are Raul DeLar, Jr., PayCore's Chief Executive Officer, and Adam Ante, PayCore'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, impact of COVID-19 on our business, and other matters. These statements are subject to risks, uncertainties, and assumptions and are based on our management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied on 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 is provided in our press release on our website. With that, I'll turn the call over to Raul.

Thank you, Rachel, and thank you all for joining us to discuss PayCore's fiscal second quarter results. We delivered a strong second quarter as both revenue and profitability exceeded our guidance. Based on these robust results, we are once again raising our full year guidance, which Adam will discuss in more detail. The $28 billion human capital management market is still in the early stages of shifting to the cloud. which positions Paycor to accelerate revenue growth and increase profitability over time. We continue to experience strong demand for Paycor's modern SaaS HCM solutions for small and medium businesses, as demonstrated by our 20% revenue growth this quarter. Two years ago, we developed a strategy to differentiate Paycor in the market to our open, extensible platform a focus on leaders, and by tailoring solutions for key industries. PayCore has built a unique value proposition focused on empowering leaders, which drives employee engagement and business results. Our technology automates mundane leadership tasks so frontline leaders can focus on goal setting, coaching, talent development, and associate engagement. The key elements that drive business performance. The great resignation or re-evaluation labor market dynamics highlight the importance of talent acquisition and retention strategies. And we've seen that demand play through to our offerings. Our software is helping companies attract, onboard, coach, and engage employees in a virtual environment with increasing regulatory complexity. Our team is laser-focused on executing the strategy we've outlined, and we exceeded our internal expectations in Q2. As an outcome of our product investment in technology designed for leaders and industries, our win rates continue to increase. Our consistent bookings performance over the last six quarters is starting to deliver accelerated revenue growth. This is continued validation of our differentiated value proposition, solid execution against our growth levers, and the performance-driven changes we've made across our organization. We've made significant progress against each of our strategic growth initiatives during the quarter. First, our increased focus on Tier 1 markets is working. We continue to significantly increase bookings in Tier 1 markets which we define as the 15 largest cities in America. One of our biggest strategic focus areas has been aggressively expanding our sales coverage in Tier 1 markets. Today, we have seller coverage in all Tier 1 markets and are now focused on adding additional teams in these markets to drive greater coverage. We exceeded our internal sales staffing targets again this quarter while maintaining high productivity levels. We are also excited to be the newly named official HR software provider for the Pac-12 Conference, which supports our Tier 1 expansion in the West by increasing brand awareness among their enormous viewership and key business decision makers. The four-year partnership highlights PACOR and the Pac-12's commitment to developing leaders in and out of the classroom. Second, we continue to successfully partner with brokers. New business coming through our broker channel remains strong and continues to deliver outsized results. Brokers are trusted advisors for mid-market businesses, and they appreciate our flexible approach that enables them to select their benefits administration solution of choice while receiving a prioritized and guided implementation for their valuable clients. We are working with about 10% of the broker community today and we continue to be a significant expansion opportunity within this valuable referral channel. Third, our industry-specific approach is resonating. Our purpose-built offerings for our four key verticals, which represents 50% of our TAM, are driving higher win rates, including professional services that launched last quarter. By understanding the specific needs of companies in healthcare, manufacturing, food and beverage, and professional services, we've developed tailored solutions that help solve their most pressing human capital challenges. For instance, this quarter, we introduced a new payroll-based general reporting solution that automates complex staffing reporting requirements for nursing facilities. Lastly, we continue to expand our HCM suite and increase adoption of our bundles. Our team continues to expand our HCM platform by adding new functionality and expanding the breadth and depth of our product portfolio, increasing the total per employee per month, or PEPM, rate available to $40. We are seeing excellent adoption of the talent management bundle we launched in 2021, which not only provides leaders with the tools they need to recruit and onboard associates, but also includes deep functionality to develop, recognize, and engage them. Talent is top of mind for all business leaders today, and as a result, it's driving a considerable increase in attach rates for new and existing customers. Another differentiated aspect of our software is its open, unified, and extensible platform that enables us to rapidly add capabilities and integrate additional partners. It provides a time-to-market advantage to stay ahead of the dynamic evolving needs of our clients. In the last year, we have made significant investments to bolster our interoperability, including launching a new platform that enables customers and partners to do self-serve integrations, reducing the average time it takes to build an integration by 50%. And we quadrupled the total number of partners in our marketplace by We now have nearly 200 partners in our ecosystem, providing flexibility for our clients to select the best applications for their industry. This quarter, we also released new functionality within our PACOR analytics tool that provides predictive analysis on employee turnover. It provides leaders with actual insights to identify the top drivers of employee resignation and potential at-risk employees to help prevent turnover in today's challenging labor market. As leaders nationwide continue to work through the Great Resignation, it's more critical than ever to understand why employees leave and what an employer can do to prevent or better plan for that outcome. We are committed to providing intelligent analytics to help leaders uncover these valuable insights. I would also like to commend our team for their efforts over the last year, including through this year end, in providing comprehensive and customer-first implementation and support to our clients, both of which have been receiving excellent, best-in-class marks. Over the last few quarters, we launched a customer support portal with a highly efficient customer chat tool and a robust self-service knowledge base. As a result of these and other enhancements, we've seen an 80% improvement in client wait times during the second quarter. We're also extremely proud to be recognized as a top workplace for the second year in a row by Energage, an organization with a 15-year history of surveying more than 20 million employees to help build and brand top workplaces. Results are based on 15 cultural drivers that are proven to predict high performance against industry benchmarks. It demonstrates our commitment to live the cultural best practices we advocate to our clients that drive employee engagement and business performance. Lastly, we would like to congratulate our client, the Cincinnati Bengals and Houdet Nation on their amazing season and upcoming Super Bowl appearance. With that, I'll turn the call over to Adam to discuss our financial results and guidance.

Bill Bengals, thanks Raul. I'll begin with a review of our second quarter results and close with our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. Total revenue was $103 million, a 20% increase year over year. And this is the first time quarterly revenues have exceeded $100 million. The increase was primarily driven by new client growth and continued PEPM expansion. as well as low single-digit organic labor market growth. The average number of employees per customer has returned to pre-COVID levels for our client base. And at quarter end, our customer base had grown to a record 29,000 clients. This growth largely comes from the mid-market, as our micro-segment of under 10 employees remained flat. Our go-to-market strategy targets clients with 10 to 1,000 employees, and all of our client growth is coming from this segment, growing 8% year over year. This segment represents 80% of our revenue and just over 60% of our clients. Net retention continues to trend favorably and is now in line with historical pre-COVID levels. We believe this is due to a combination of recovering employment levels and investments we've made across implementation and client support. Adjusted gross profit margin was 66.6%, down from 71% a year ago and in line with our expectations. This change is largely due to increased amortization related to capitalized software and contract acquisition costs. Margin was also impacted to a lesser extent by the termination of COVID-related cost initiatives, as well as continued investments in our service organization to ensure a great client experience. Adjusted gross margin excluding depreciation and amortization was 76.5% for the quarter, a decrease of 158 basis points year over year and in line with our expectations. and we have now delivered sequential margin improvements for the last two quarters as we drive scale out of our customer experience investments. Business marketing expense was $33 million, or 32% of revenue, compared to $25 million, or 29% of revenue a year ago. Aligned with our ambitious growth plan, we continue to invest to expand our sales teams and marketing programs, especially in Tier 1 markets. We are seeing great results and attractive returns on our investments, and we intend to continue aggressively investing while targeting neutral free cash flow annually. We are in a huge market and at the early stages of transitioning to the cloud, and we strongly believe these investments will enable us to capture share more quickly and drive meaningful value for shareholders. R&D expense was $9.5 million, or 9% of revenue, compared to 11% of revenue a year ago. including capitalized development costs of $6.4 million, R&D spend was $16 million, or 15% of revenue, similar to the year-ago period and in line with our expectations. We will continue to strategically invest in R&D to expand our product portfolio and PEPM opportunity and to drive insights for leaders to better attract, coach, and engage their associates. G&A expense was $16 million, or 16% of revenue, consistent with the second quarter of 2021. However, we aim to continue to drive G&A down as a percentage of revenue and have done so sequentially. Operating income was $10 million, or a 10% profit margin, compared to 15.7% one year ago. The change in profitability reflects the opportunity to invest in the growth drivers I previously highlighted. We have been consistently profitable and expect to steadily expand margins In our highly scalable business model, we are confident we can deliver strong top-line growth and attractive levels of profitability over time. With regard to the balance sheet, we ended the quarter with $111 million of cash and no debt. We closed the quarter with an average daily client fund balance of $933 million. Interest income generated on these funds was approximately $340,000, or 14 basis points. So moving to the guidance for the third quarter, we expect total revenue of $117 to $118 million, or 18% growth at the midpoint of the range, and adjusted operating income of $19 to $20 million. For the full year, we are raising our revenue guidance to $411 to $415 million, or about 17% year-over-year growth at the midpoint of the range. And we expect adjusted operating income of $35 to $37 million. A few things to keep in mind regarding our outlook. Our third quarter is historically our strongest due to seasonality associated with year-end revenue, such as W2 form generation. We anticipate our year-end form production in Q3 will benefit from easier comps on historically depressed production in the prior year due to lower employment associated with COVID. We remain optimistic about the growth opportunities and underlying trends in our business. As a reminder, we expect the growth in bookings during fiscal 21 will take 12-plus months to fully ramp in the revenue. While we've experienced a modest tailwind from improved employment trends in the low single digits, we remain cautious in our guidance, including minimal benefit from labor market growth. This is driven in part by continued uncertainty related to COVID. While we anticipate that interest rates will begin to rise, we expect little impact to our FY22 guidance. The overnight rate is the most critical driver of our interest income, and we anticipate some marginal lift as rates seem likely to begin rising in March. However, a 25 basis point increase in the overnight rate on our estimated client funds would generate less than half a million dollars of interest income in a quarter. In summary, we posted another strong quarter driven by focused execution of our growth plan. We feel good about momentum in the business and believe we have all the elements in place to win in the HCM market. Our modern, extensible platform with a unique focus on leaders and industries is resonating with clients. With the remaining runway in the SMB market alone, we believe we are well-positioned to deliver on our target of 20-plus percent sustainable revenue growth and improved profitability longer term. With that, we'll open the call for questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Mark Murphy with JP Morgan. Please proceed.

Yes, thank you very much. And congrats on a great quarter and a great football season. So, Raul, I wanted to ask you, are you able to approximate how much faster is the rate of bookings growth that you're seeing in Tier 1 cities if you compare that to Tier 2 and Tier 3? I mean, is it 50% versus 20%, or is there a way to kind of roughly sketch that out?

Yeah, so, Mark, the way we're looking at it is the growth rate in Tier 1 is above our overall average. And it's over, you know, 50% of our bookings now. That's the way to think about it. So we're continuing to press in in those markets. We're seeing a lot of success. We're continuing to add headcount. You know, we're on, you know, our headcount targets that we had talked about previously of having 20% to 25% growth year over year, and the majority of those heads are going into Tier 1 markets.

Okay. And as a quick follow-up, could you shed any light on how you're thinking about the topic of inflation if it enters in at all, including, you know, wage inflation that you may be seeing in your own cost structure? From a margin perspective, are you able to or are you thinking about passing through a cost of living increase perhaps on the PEPM, right, that maybe to help offset some of your higher labor input costs?

Yeah. Hey, Mark. This is Adam. Yeah, we do regular price increases. And, of course, some of the pressure could allow for us to see some marginally higher price increases, but it's not something that we're overly aggressive with. And in terms of the internal labor costs, of course, we see pressure not across the board, but in some areas, nothing that we haven't been able to factor into the guidance that we've shared. But as it relates to the customers, I think we'll continue to evaluate pricing opportunities where it makes sense. We're also continuing to transition folks to our newer subscription models and bundles that we've talked through. And so that allows for the opportunity to enable more products for our customers and wrap the increases in at the same time.

Understood. Thank you very much.

Thanks, Mark.

Our next question is from Gabriella Gorgeous with Goldman Sachs. Please proceed.

Great. Good afternoon, and thank you for taking my question. Raul and Adam, I'd love to ask you whether you're noticing any differences in your Tier 1 customers versus the rest as it pertains to their propensity to cross-sell and to buy more product, as it pertains to their employee growth, what they're seeing on the ground. Just curious if you could compare and contrast for us the health of those metrics in Tier 1 versus 2 and 3.

Hey, Gabrielle. Yeah, no, I don't think that we're seeing anything necessarily that different. Nothing that would be overly material. And I think it's probably a little bit early as well as we've been, you know, getting into those tiers more aggressively over the last, you know, 12 to 24 months. So I think it's going to be, I think there's going to be a little bit of time before we're going to see any material differences that we might want to call out. I would say that, you know, clients in those markets can be a little bit larger. So we sell a little bit higher or a little bit larger clients there. They do tend to buy a little bit more at the point of sale. That's also a function of our sellers, you know, newer sellers in those markets adopting the bundle strategy at the point of sale. So I think that you see some of those higher unit economics up front, and that's really our strategy right now, but a little bit too early to see maybe the propensity to buy longer term.

Okay, that's helpful. The follow-up question is on the sustainability of the 20% growth that you just put up. How should we think about the path to being able to deliver 20% more consistently, particularly as year-over-year comparisons get a little bit harder into June? Thank you.

Yeah, thanks. The thing for us and what we've been saying since the beginning is really about the consistency in the bookings in the new business. As we continue to execute on our tier one expansion strategy and with the broker model, and our pricing strategies and just deliver the bookings that we've committed to, I think that's where you're going to continue to see the revenue growth accelerate. And then, of course, over time, as we continue to improve retention internally, I think that's the other side of the cross-sell back into the base. But we're on our way there. We feel good about the path to get to the 20-plus percent.

I appreciate the call. Thank you.

Our next question is from Terry Tillman with Truist Securities. Please proceed.

Yeah, hey, good afternoon. Congrats from me as well. I didn't have this as part of my scripted questions, but I'm going to go for it. Raul, Adam, and Rachel, I guess I'm curious, who's the best at the icky shuffle? And then I had two follow-ups.

Oh, Adam is definitely the leader in the icky shuffle.

Okay. All right, thank you. Got that out of the way. So, you know, when you went public, Raul, the coverage ratio was, from a sales perspective, pretty low on Tier 1, and hence that's a big opportunity. I forgot if you said this on the call, but can you give us a sense where you are now on kind of that coverage ratio and where it's expanded to? And, you know, I know the idea is 20% to 25% sales hiring, but if you're all having success hiring, have you thought about maybe even going through that threshold and then add a follow-up for Adam?

Yeah, I mean, from a hiring perspective, again, the majority of the hires are in Tier 1. We've significantly increased our coverage there. We still have, you know, lots of runway there. I think from a, you know, an additional perspective, you know, we're staying with the 20% to 25%, you know, headcount target for the year just because, you It's, you know, the rate of how you can add people into the system and hiring the right leader, onboarding them. We feel like that's the right number for quality. And so we're staying there. I mean, it could be a little higher, but ultimately we manage that, you know, day to day. So I think we feel good about our guidance from a headcount perspective. You know, we're ahead of the target. We're seeing good coverage in tier one. Obviously, we have a long way to go just based on our overall sales headcount totals. But, you know, it's something that we're going to continue to build on, you know, quarter over quarter.

Okay. And thank you for that. And I guess, Adam, a question on the conversion of bookings. You've made a point consistently to remind us it could be upwards of 12 months from the strong bookings to conversion to revenue. I'm just curious, though, if there's some level of conservatism in that. Could there be some upside? Because it's a little bit faster. The reason why I bring this question up, in your all's prepared remarks, you all talked about some of the technology improvements and reducing integration time by 50%. I know that's part of the work to implement. So I'm just kind of curious, is there any kind of dry powder or potential conservatism, just you all getting a little bit more adept at rolling this stuff out on behalf of customers? Thank you.

Yeah, hey, thanks, Jerry. I mean, I definitely think that we're getting more and more efficient in the space. We put a lot of energy into that team. The team's done a great job through the year end, which is clearly our busiest time here in January. And we're also using third parties to help us support some of the peak times. So we're seeing improvements. And, you know, I do think that there could be some opportunities to continue to accelerate faster. Again, the thing that the point is really cautioned about is the continued bookings performance and the 43% growth in bookings coming out of FY21 doesn't just show up, you know, through December. And so it's just going to continue to come in. January is a big quarter for us. It'll sort of wrap in that April timeframe. and before all of the revenue or all of the bookings really gets layered into that revenue. But, yeah, we continue to see improvements internally, and it's been a big part of our focus over the last couple years. Okay, great. Thanks.

Our next question is from Brian Bergen with Cowan & Company. Please proceed.

Hi, this is actually Jared Levine on for Brian. In terms of net revenue retention, did that return to the normalized level in the mid-90s? And then where did gross revenue retention stand for 2Q?

Yeah, hey, Jared. Yeah, gross retention has been fairly consistent. We haven't given the number explicitly on the quarters for sure, but fairly consistent. And net retention, yeah, has continued to show improvements. And so we see that return right in that mid-90% range, a little bit better quarter over quarter. So we continue to see positive momentum there in both net retention and gross retention.

Okay, great. And then in terms of the demand environment, how would you describe it in terms of was it pretty broad-based or was it skewed towards a certain employer size? And then any impact related to Omicron?

Yeah, it's been broad-based. I would say we had strong execution in all markets and all sizes. And You know, Omicron, we haven't, you know, seen too much of an impact. It's more of an impact for our clients than it is for us. So, you know, we're seeing, you know, some impact for them, you know, obviously hiring people and keeping people on staff. But other than that, you know, since businesses haven't closed like the first quarter of COVID, we didn't see any overall impacts in the demand environment.

All right. Thank you.

Thank you.

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

Great. Thanks for taking my question. Good to see the healthy growth. I want to maybe dig in on the sales side a little bit more. I know you guys talked about coverage and kind of the headcount goals, but how should we think about maybe the percentage of fully ramped productive reps right now? So not just maybe just coverage to quotas, but the productivity mix for reps that are ramped and kind of how does it compare versus this time last year?

Yeah, hey, Smad. So of course, as we're hiring more this year than we really did last year, we see that the number of sellers with full quota carrying capacity are lower as a percentage of our total than, you know, than they, excuse me, the ones who are still ramping into their quota, of course, are going to be higher as we're still hiring those folks and they're newer in their tenure with us. So it is going to be a little bit different than what we would have seen last year. Of course, last year we only grew our headcount by about 6%. So a lot of growth earlier on through Q4, Q1 now and into Q2, like Roland said, on target for that 20 to 25%. So we do see, as a percentage of our total sellers, less sort of fully ramped and fully productive sellers. But that is clearly, you know, as we would have expected or as we designed as we, you know, hired these folks in.

Great. That certainly bodes well for growth kind of sustaining, right, as those reps come online. So that's good to hear. And then maybe just another question I think about in terms of, Um, Raul, you know, for the company on the product side, I know there's, there's a build versus buy versus partner philosophy. Um, I'm curious just with maybe, you know, some of the turmoil we've seen anything that you think about how you think about being opportunistic, maybe you're accelerating some of the, the, the product rollouts from a buy perspective and how you're thinking about that.

Yeah, I think, um, you know, we continue to be opportunistic in the space. We, we are, um, you know, evaluating, you know, a significant number of opportunities. But for us, it has to be, you know, the right type of opportunity that, you know, we believe, you know, can help us in the future. And so, historically, we've added one or two tuck-in type acquisitions to help expand our product portfolio and add PEPM to our overall objectives. And I think, you know, we'll continue to execute against that. And so... Yeah, there's a lot of opportunities in the market, and it's just trying to find the right ones for PayCore.

Great. I'll just squeeze one more in. I'll make it a short one. Just as I think about maybe the top of the funnel, we've heard some of the other companies in the space talk about their own retention normalizing, which I think would be good for PayCore. Are you seeing any changes in maybe the leads that are coming into the top of the funnel or just how we think that may be interest activity from SMBs even prior to conversion.

Yeah, we've seen significant increase in both our site visitors and what we would consider, you know, high quality leads into the system. So we think demand generation, all the fundamentals are really strong right now in the category. There's a lot of drivers to that, primarily regulatory complexity, talent issues, both attracting and retaining, tend to be things that the companies are looking for, which has created a lot of top-of-the-funnel opportunities for us.

Great. Thank you so much for taking the questions. Thanks, Tomas.

Our next question is from Brian Peterson with Raymond James. Please proceed.

Congrats on the strong quarter, guys, and thanks for taking the question. So maybe just starting on the verticals you mentioned, some early progress in pro services, can you remind us how big that opportunity is relative to some of your other industry verticals? And I'd be curious to think about, you know, how do you look at the ramp of that vertical versus some others that you already have in place?

Yeah, so the overall verticals, like the four key verticals that we focus on, represent about half of the overall market, and it represents – right now about half of our portfolio. So it's pretty much aligned. We're seeing some outsized growth across our key verticals. I think as you think about when it impacts our revenue growth and how it impacts the pace of the revenue. It's really about, right now, the upfront, right, in the booking as we're, you know, being intentional about how we target in these markets and creating products and a go-to-market strategy that fits. And then about longer-term retention, right, just creating that better experience across those clients longer term. So I do think that there's a bit of a ramp to continue to see that in any outsized way, but it's continuing to add to our overall strategy. performance right now and how we're playing in those verticals.

And Adam, maybe following up on that, if we think about kind of your vertical curve, you think about the four verticals, is there anything different that you're seeing in terms of employment trends or tax rates? I'd be curious if you're going to frame it between kind of those four verticals and maybe the rest of the business or anything that you call out through the second quarter.

Yeah, you know, I think what we see is that in some of those key verticals, we see a greater demand for more complete solution, including workforce management, where you might see benefits attached more frequently, as well as now our talent offerings. And that's not the case across all the verticals. So I think the real driver there is actually the win rate. We tend to win more, and we see outsized performance in terms of the win rate, and then couple that with some stronger demand for those products, and we end up having a good solution, you know, to take the market inside of those key verticals.

Very clear. Thanks, Adam, and good luck. Congrats, and go Bengals.

Thanks, Ryan.

Our next question is from Kevin McVey with Credit Suisse. Please proceed.

Great, thanks so much. Hey, it looks like you talked to a potential $50 PEPM target in 2024. Was that always the case, or did you revise that? Because I don't remember seeing that before, and if it was revised up, what drove that?

No, we've had that target for the last 12 months. to drive towards and uh we're just continuing to show the progress that we make against uh that target i think you know we continue to close the gap we've been averaging between three and five dollars peplum increases per year um through organic uh or inorganic uh ads to the platform great and then is there any way to frame how much that that one-time tax work impacts the quarter

Yeah, I mean, it's nothing that we've given out explicitly. I mean, it becomes part of, you know, a part of the revenue in terms of how do we go to market through partners as well. So we use partners to support the ERC and tax work as well as other areas of the platform. So it's sort of in line historically in terms of its contribution overall, but it's been helpful to be able to support the tax work for sure.

Great. Thank you.

Our next question is from Bhavin Shah with Deutsche Bank. Please proceed.

Great. Thanks for taking my question. You guys are clearly ahead of your plans in terms of tier one coverage ratio, but maybe can you provide some insight into how those broker relationships in these tier one markets are kind of going and progressing? Where are you relative to your plan? And then how do we think about those relationships ultimately translating into new logos and revenue?

Yeah, so we're slightly ahead of our target, our internal targets in the broker channel. And so we feel like we continue to make good progress there. And when we expand into a tier one market, it just gives us an ability to meet with more brokers and connect with more brokers. And so it gives us more coverage in the channel. We saw modest growth there. And we're up nearly 10%. um in new broker connections for the quarter um and we're over target for the year and i think you know what's happening is it it's really contributing you know outsized results for us overall um and uh you know we're going to continue to press in on it both at a national partnership level and local levels as we expand our coverage super helpful and this is a follow-up new new logo sales have always kind of been the majority of bookings but have you guys seen any meaningful changes in terms of existing

customers coming back to the table for further expansions for things such as talent, just given the great resonation and the great evaluation?

Yeah, I mean, I'd say that we've talked about our focus there and starting to put more resources and investments there. No material changes at this point, but we do continue to see positive momentum in that direction. So it'll continue to support the long-term bookings growth, but no material changes in the near term.

That's helpful. I appreciate taking my questions and congrats again. Thank you. Thanks.

Our next question is from Mark with Baird. Please proceed.

Good afternoon. Let me add my congratulations. I'm wondering with regards to the color that you provided in terms of the impact and in terms of float income. How much more would you have to grow in order to change kind of the duration that you're investing in? Is there any flexibility role? Obviously, you had a ton of experience at ADP, and they obviously have a great program. What's it take to kind of extend out a little bit further?

Yeah. Hey, Mark. It's really, so we have a lot of flexibility actually right now to go into longer duration instruments. The majority, as of Q2, you know, more than 90% of our instruments were in overnight rates. You know, the problem with getting into longer duration right now is just that, of course, you know, as the rates rise up or rise over the coming months, potentially it's going to pinch us. So our preference is right this minute is to sort of let the rates sort of flesh out and then we'll continue to move into longer duration instruments, whether that's 30, 60, 90, and then longer, you know, not more than really five years would be the longest, but we do have lots of opportunity to do that. So it's something that we continue to work on right now. And we'll, I think you'll start to see, you know, movement over the next, call that three to six months.

That's great. I certainly appreciate that you want to wait until rates actually continue to settle out at a higher level. But you can go ahead and you are in a position to make those changes if you want to.

Yeah, yeah. Like I mentioned, I mean, more than 90% today is in overnight rates. And, you know, historically that's been in that sort of 60% to 70% range. So there's opportunity to move into longer durations.

Where's the average float balance now for this last quarter?

It was $933 million for Q2. And there's some seasonality to it, of course, and it's a little bit higher in the Q2 earlier parts of Q3. Great.

And then any color with regards to just source of wins? You've done a really nice job in the past in terms of identifying whether it's legacy players, regionals. or in-house systems, any change at all in terms of the composition of the new wins that you're seeing now?

Yeah, it's fairly consistent. I would say we're still hovering around that 80% from legacy. We still have outside performance against in-house in regionals versus our peers. But other than that, I would say it's fairly standard. We haven't seen really any changes in the market dynamics.

Great. Thanks again.

Thank you.

As a reminder, it is Star 1 on your telephone keypad if you would like to ask a question. Our next question comes from Pat Walravens with JMP Securities. Please proceed.

Hi, team. It's Joey Marincik. I'm for Pat. Thanks so much for the questions, and congrats on the quarter. And to your bangles, just one question here. I'm a TAMM. How do you think about the opportunity that exists in the Tier 1 markets relative to the overall TAM? Have you sort of sized what that opportunity looks like? Any color there would be helpful. Thanks so much.

Yeah, sure. As we think about the Tier 1 markets, those top 15 cities, clearly they're huge population opportunities for us. And it's – I don't have the exact number, but, I mean, it's close to a third of the overall market. Maybe about 20% of the overall market sits inside of those top 15 cities where historically we've had very little coverage. So it's a big chunk of the overall TAM. Got it.

Super helpful. And then just a quick follow-up. As you continue to move into the Tier 1 markets, does the competition change at all? Are you sort of seeing more of the, you know, pace or – How would you describe that? Thanks so much.

Yeah, the competition set doesn't change between the tiers. We see ADP, Paylocity, Paycom, you know, in all markets in most transactions. So that hasn't changed as we've entered tier one.

Super helpful. Thank you. Thank you.

We have reached the end of our question and answer session. I would like to turn the conference back over to Ralu for closing remarks.

Thank you again for joining us tonight. We appreciate your time and support. We're excited about the momentum in the business and look forward to chatting with you again soon. As always, feel free to reach out if you have any questions. Have a great night, everyone.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.