This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Ladies and gentlemen, thank you for standing by and welcome to PACOR's third quarter fiscal year 2022 earnings call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question on today's call, you can do so by pressing star 1 on your telephone keypad. I'd now like to turn the call over to Rachel White, Vice President of Investor Relations.
spk00: Good afternoon and welcome to PayCourse Earnings Call for the third quarter of fiscal year 2022, which ended on March 31st. On the call with me today are Raul Villar, Jr., PayCourse Chief Executive Officer, and Adam Ante, PayCourse 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 may include forward-looking statements related to our financial results, products, customer demand, operations, and the impact of COVID-19 on our business and other matters. 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 is provided in our press release on our website. With that, I'll turn the call over to Raul.
spk15: Thank you, Rachel, and thank you all for joining us to discuss PACOR's fiscal third quarter results. We delivered robust revenue growth of 23% year over year, driven by continued client growth. It was our highest recurring revenue growth quarter in more than five years. Total revenue was a record $123 million, exceeding the top end of our guidance by 4%. We have now demonstrated accelerated revenue growth and increased profitability for three consecutive quarters. This sustained momentum gives us confidence to once again raise our full-year revenue and profitability guidance, which Adam will describe in more detail. Labor market dynamics, such as the great resignation and increased regulatory complexity, continue to drive strong demand for modern cloud-based human capital management solutions. The $29 billion ATM industry is still in the early stages of shifting to modern cloud solutions with significant runway for sustainable growth. Small and medium-sized businesses are seeking innovative cloud tools designed to simplify the human capital management process for their industry and their leaders. Paycor's open, extensible platform is purpose-built for leaders and configured by industry, and that differentiation continues to win in the market. Our modern SAS HCM solution automates routine management tasks so frontline leaders can focus on the key elements that drive business performance and employee engagement, such as goal setting, coaching, and talent development. Furthermore, our vertical program resonates with clients as we align human capital management with their industry and provide industry-specific product differentiation, client experience, and community. During the quarter, we continue to make progress against all four strategic growth initiatives that we believe will enable us to deliver long-term sustainable growth. Our sales teams continue to successfully expand into Tier 1 markets, which we define as the 15 largest cities in America. We have significantly expanded our Tier 1 sales coverage from the end of fiscal year 21 with established sellers in all Tier 1 markets. We are on track to expand seller headcount by 20% plus this year, which we believe is impressive given the tight and competitive labor market. Tier 1 deal metrics remain strong with consistent win rates and higher deal sizes. Our Pac-12 partnership has already started delivering encouraging results that support our Tier 1 market expansion in the West. The Pac-12 is a great strategic fit as there are over 78,000 CEOs and over 34,000 HR and finance executives associated with the Pac-12 on LinkedIn. We are generating millions of views from Pac-12 marketing campaigns and are building our brand awareness in these large markets. Second, the broker channel continues to deliver outsized results. When we revamped our sales strategy in 2020, we focused our playbook on brokers and established partnerships with five national firms that account for about a quarter of our broker revenue today with significant expansion opportunity. Our broker strategy supports our tier one expansion by providing immediate access to a sales channel in new and expanding markets. We have supplemented our broker value proposition of benefits, administration, platform flexibility, and guided implementation with a portal that provides our partners with thought leadership and co-branded marketing designed to cultivate mutual business expansion. Third, our industry-specific approach is one of the top reasons clients choose Paycor. We configure solutions for four key industries, which represent about 50% of our TAM. Our unique value proposition is driving outsized win rates. By understanding the requirements of healthcare, manufacturing, food and beverage, and professional services, we have developed tailored solutions that help solve the most pressing human capital challenges for these industries. Our industry program empowers leaders to develop winning teams through product differentiation, client experience, and community. For example, in manufacturing, recruiting skilled labor is a big challenge. Through our product differentiation, we help manufacturing leaders modernize their career pages, increase visibility of job postings, and incentivize employee referrals. We also partner and integrate with third-party technologies that manufacturers need, such as ERP systems. Our manufacturing customer experience starts with industry-skilled implementation experts and targeted training content, such as how to set up shift differentials, how blended overtime works, and adding a union code, which further enhance our industry client experience. We also help industry leaders stay on top of the latest trends and compliance issues and facilitate knowledge sharing in our communities. Lastly, we continue to enhance our industry-leading functionality by expanding the breadth and depth of our ATM suite and have increased our PEPM to $42. Our modern software has a seamless user experience 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 and evolving needs of our clients. This quarter, we released an innovative developer portal to enhance our interoperability, making it even easier for clients and partners to seamlessly integrate and sync data between PAYCOR and critical third-party tools. The developer portal addresses over 50 points of integration and enables leaders to access real-time data and resources to support their teams. While the developer portal is beneficial to all clients, it is especially relevant for our four verticals since they tend to have greater integration needs. For example, in food and beverage, point-of-sale integrations are critical, whereas in healthcare, scheduling integration is essential. Since the launch in February, we have received outstanding feedback from both clients and partners. In addition, this quarter we partnered with Equifax to provide automated employment and income verification services to clients at no cost, further reducing leaders' administrative burden so they can focus on what matters, developing their associates. Companies often verify employment and income history for current or past employees who are applying for a loan or other financial services, and this partnership will simplify that process. We also worked with Fidelity to provide an extensive 360-degree integration between the company's 401k and HCM platforms to streamline administration for our mutual clients. Furthermore, we recently launched expense management, enabling leaders to easily reimburse employee expenses utilizing the same unified pay core platform used to pay, hire, onboard, manage, grow, and recognize talent. By streamlining time-consuming and manual tasks like expense management, we empower leaders to invest more time and resources into developing their teams. As a testament to our ongoing product development, we are proud that Nucleus Research highlighted PayCore's ability to deliver rapid time-to-value for its clients. Our platform stood out for its ease of deployment, cost efficiency, and strong customer support. This year, we improved significantly in usability, which reflects the investments we continue to make to enhance our platform. Calendar year-end is our busiest period, and I would like to thank all PACOR associates for their commitment to our client experience and delivering our strongest year-end on record. Over the last two years, we have made focused investments in technology and resources to enhance our client experience and we are starting to see the impact. This is the first full quarter our chat tool has been live and we handled about 10% of our support volume through this new channel. Customers prefer the quick response time of this communication method. And as a result of these enhancements, we had an 80% improvement year over year in client wait times during the second and third quarters. The best acknowledgement we get about these enhancements is directly from our clients, but we are also excited to share that our tax advanced support team was recognized for their outstanding customer service with a bronze Stevie Award this quarter. Congratulations to our tax support team. With that, I'll turn the call over to Adam to discuss our financial results and guidance.
spk05: Thanks, Raul. I'll review our third quarter results, then discuss our outlook for the fourth quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. Total revenue was $123 million, with 23% recurring revenue growth year over year, our fastest recurring revenue growth in more than five years. The year-over-year growth was largely driven by processing employee growth in the low teens and continued high single-digit percentage PEPM expansion, resulting in us exceeding the top end of our revenue guidance by 4% and our adjusted operating income guidance by more than 20%. By quarter end, our customer base had increased 6% year-over-year to nearly 30,000 clients. Consistent with our go-to-market strategy, our target segment of 10,000 to 1,000 employees is showing accelerating growth close to 10%, and we are demonstrating outsized growth in the 100-plus segment. Our target market represents about 80% of our total revenue and just over 60% of our clients. In contrast, the micro-segment of under 10 employees continues to contribute single-digit percentage of revenue while representing nearly 40% of our clients. Overall, the labor market is still below pre-COVID levels and organic labor market growth remains in the low single digits, consistent with historical averages. Our average customer size has increased to just under 75 employees per customer, an increase of about 10% year-over-year, as we continue to shift away from that micro-segment and accelerate growth among clients with more than 100 employees. Net retention also continued to trend favorably and is in line with pre-COVID levels. We attribute this to the rebound in our clients' employees' levels combined with investments we've made in implementation and client service. Adjusted gross profit margin was 69%, down slightly from 70.7% a year ago, and consistent with our expectation. This change is largely due to increased amortization related to capitalized software and contract acquisition costs, as well as continued investments in our service organization to ensure a great client experience. While we are seeing some labor cost pressure, it has not had a material impact on our profitability. Taking into consideration the significant amortization associated with our APACs acquisition and recapitalization, adjusted gross margin excluding depreciation and amortization was 78% for the quarter, an increase of 13 basis points year-over-year. In both profitability metrics, we have delivered sequential margin improvements for the last three quarters as we continue to scale the business. Sales and marketing expense was $34 million, or 28% of revenue, compared to $25 million, or 25% of revenue, a year ago. In line with our aggressive go-to-market strategy, we continue to expand our sales teams and marketing programs, especially in Tier 1 markets. Since this massive market is still in the early stages of transitioning to the cloud, and we are consistently generating strong returns on our investments, we will continue to invest to capture market share and drive meaningful value for shareholders. R&D expense was $8 million, or 7% of revenue, compared to 9% of revenue a year ago. And including capitalized development costs of $8 million, we invested $16 million in R&D, or 13% of revenue, similar to the year-ago period and in line with our expectations. Our team continues to build new capabilities that expand our product portfolio and pep them opportunity, delivering insights for leaders to develop their teams and improve their business. G&A expense was $18 million, or 15% of revenue, consistent with the third quarter of 2021. However, our goal is to continue to drive G&A down as a percentage of revenue, and we have done so for three consecutive quarters. We also see a shift towards a higher mix of technology-related spend to drive future efficiencies as we continue to scale our operations. Overall, we are driving G&A leverage year-over-year as we anniversary public company expenses and manage strategic investments. This quarter, as we fully embraced our virtual first model, we recognized a $9 million loss from exiting certain facilities leases. I'd like to emphasize that this has no impact on our expansion strategy and will be accretive to earnings beginning next quarter. Operating income was $25 million, or a 20.1% profit margin, compared to 21.6% last year. The modest change in profitability reflects investment in the growth drivers I described. We remain confident that our proven and scalable business model will deliver strong top-line growth and attractive levels of profitability over time. Shifting to the balance sheet, we increased our cash balance by over $20 million, ending the quarter with $134 million in cash and no debt. This quarter, we generated an interest income of approximately $410,000 on average client funds of just over $1 billion. Overnight interest rates remain the primary driver of our interest income, and we have yet to see an impact to the rates banks are willing to pay. Moving to guidance for the fourth quarter, we expect total revenue of $103 to $104 million, or about 18% growth year-over-year, and adjusted operating income of $3.5 to $4.5 million. For the full year, we are raising our revenue guidance to between $421 to $422 million. We're about 20% growth year-over-year at the top end of our range. And we anticipate adjusted operating income of $41.8 to $42.8 million. A few things to keep in mind regarding our outlook. Year-end processing volume drove a few points of growth in the third quarter. Following this seasonal peak, we expect our fourth quarter revenue to decline sequentially without the benefit of those year-end revenues. Employment growth has remained steady in that low single digits, and as such, we expect marginal benefit from continued labor market growth. And while interest rates continue to rise, we expect little impact to our fiscal year 22 guidance. A 25 basis point realized increase in the overnight rate on our estimated client funds would generate about half a million dollars of interest income in a quarter. To wrap up, we're pleased with the execution of our go-to-market strategy, expansion of our HCM suite, and early success of our customer experience investments. We remain optimistic about the opportunity in front of us and are enthusiastic about momentum in the business. Our unique focus on leaders and industries continues to meaningfully resonate in our mid-market customers, and we remain excited about our ability to capture market share while improving profitability longer term. And with that, we'll open the call for questions. Operator?
spk08: Thank you. We will now begin the QA session. If you'd like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. We will pause here briefly to allow questions to generate in. The first question is from the line of Jeremy Saller with Jefferies. You may proceed.
spk02: Hey, guys. I'm on for Samad Samana. My first question is actually on float income. So I know last quarter you mentioned that over 90% of client funds are in overnights, and based on your commentary, it sounds like that's still true. You mentioned last quarter that you were waiting for the rate environment to kind of flush out before you moved into longer-duration securities. Has your outlook changed on that at all?
spk05: Hey, Swat. No, it hasn't really changed. We continue to make small movements where we think it's prudent. Again, the biggest impact of the overall interest income is still going to be the overnight rates. And so those rates have just not moved materially just yet. we do have more than 80% still in overnight accounts. So I think you'll begin to see a little bit of a flow through there over the next couple quarters. But again, the biggest driver is going to be the overnight rate for sure.
spk02: Gotcha. That makes sense. And one more quick one on pricing. I know you guys do annual price increases, but I guess with inflationary press search, are you considering any additional increases or maybe a change to the size of the next price increase?
spk05: No, I mean, I think the way that we think about it still is really, you know, just being intentional about creating value and adding additional products and expanding, you know, our bundles. And then as we launch those new products and improve functionality, improving our support model, we drive to take a portion of that or a portion of that through annual increases. I wouldn't foresee that just because of inflationary environment that we're necessarily doing anything outsized other than continuing to invest in those critical things that customers need and trying to capture that value appropriately. We have not done increases to clients more than annually thus far.
spk02: Gotcha. Okay. Thanks a ton and congrats on the quarter, guys.
spk08: Thank you.
spk02: Thanks.
spk08: Thank you. The next question is from the line of Brad Reback with Stifel. You may proceed.
spk11: Great. Thanks very much. High-level question to start with. Raul, as you think about your M&A strategy, I know historically it's been focused on smaller deals. Any change in philosophy there?
spk15: Yeah, there's, you know, we haven't had any significant change in philosophy. We have historically been focused on small tuck-in acquisitions. that would enable us to leverage our vast distribution and sell a broader bundle. And that's what we've been focused on. Adam, anything you want to add to that?
spk05: Yeah, no, I mean, we focused the last couple acquisitions really been, you know, advanced scheduling, applicant tracking, and just finding that world-class technology. And then, like Roland mentioned, it's getting out through our distribution. We've had some success with more, like, small IP-only acquisitions as well. And, you know, we'll continue to be opportunistic, and we take a lot of looks. But, you know, that's really where we're focused is in the product space for sure.
spk11: That's great. And then switching gears real quickly – On the developer portal, is there an opportunity there to monetize that directly, or is it more indirectly via greater usage and higher retention rates? Thanks.
spk15: Yeah, with the portal, it's really indirect monetization. I mean, the premise behind the portal is we believe that the future of ATM is around interoperability and the ability to for our customers to be able to link HCM with any tools that help them run their business more efficiently. And so there may be some partners that we can find, but for us it's been about client experience and winning more clients because we have the most open, modern platform in HCM.
spk11: That's great. Thanks very much, guys. Yeah, thanks, Brad.
spk02: Thanks, Brad.
spk08: Thank you. The next question is from the line of Terry Tillman with Truist Securities. You may proceed.
spk12: Yeah, thank you, Raul, Adam, and Rachel. Congrats on the quarter. I do want to, just as an aside, say I'm sorry to see that the Bell of Cincinnati lost the great steamboat race this week. Now, moving on from the obscure reference of the year, first question I had is just maybe for you, Raul, kind of micro question around recessionary pressures, inflationary pressures. you know, could you talk anything, say anything about kind of anything you're observing either in different regions of the country or those top 15 cities or just anything that's relevant from a demand gen or seeing folks pause or anything on that or maybe anything you could share about verticals? Because I think last quarter you said healthcare was kind of coming back and I think you just launched pro services. So just a little bit more on macro and maybe double clicking into verticals. Thank you.
spk15: Yeah, Terry, without question. By the way, you know, I know that the bell of Louisville won the race, but it did finish last. So if you just look at the details there, um, so anyways, um, but no, from a macro perspective, um, we haven't seen a big impact, um, you know, on recession or, or inflation to date, you know, the overall market demand metrics have remained stable throughout the year. Um, so we haven't seen anything there. Obviously, Any of the markets that we deal in that have had more COVID pressures, we experience that when they close the market or open the market throughout the year. But outside of that, we haven't seen anything overall in the segment from a demand perspective or delaying decisions based on inflation or a recession.
spk12: Okay. That's good to hear. Maybe just a follow-up question for Adam or maybe Raul. It's just, you know, this is one of the first products I think you all have launched, kind of net new since you've gone public, expense management. It seems interesting. It seems like CFOs would be interested in that and just the leaders as you talk about serving. How would something like this and how actionable is this in terms of affecting the model positively, whether it's the PEPM and realizing that on the quarter or just larger deal sizes? How we should think about expectations of that filtering through the model? Thank you.
spk05: Yeah, hey, thanks, Harry. You know, the way that we think about it is really continuing to drive that peplum expansion and that sort of high single digits and the overall ADS as we add new, you know, business and cross sell back into our base. So I think that's where I would expect it to show up is just continued growth in that peplum expansion, you know, and that sort of high single digit range. It's not just additional products like this, but it's definitely part of the overall model as we continue to grow that.
spk12: Very good. Thanks.
spk08: Thank you, Mr. Tillman. The next question is from the line of Bob and Shaw with Deutsche Bank. You may proceed.
spk03: Awesome. Thanks for taking my questions, and congrats on the performance as well. Can you just provide any insights on how your bookings have trended relative to the plan and any specific markets or customer sizes that are maybe trending better than others?
spk05: Yeah, we don't necessarily plan to share the bookings details on a quarterly basis. They're not necessarily helpful. In terms of demand, I mean, the way that we've seen demand work through the year is that the fundamentals of the business continue to remain strong. We see that demand gen continues to be strong for us, and we see that really across our markets. As we continue to expand into those Tier 1 markets across industries and our brokers, those key strategies that we're driving towards, we continue to see positive momentum. One of the key drivers that we think about is really the win rate. How do we see us winning in these new markets? How do we see us winning against competitors as we are going heavier into these markets, and our win rates remain strong. So we continue to see the products play well in all the markets that we're operating in, including the ones that we've been expanding into specifically in those Tier 1. In terms of the overall demand in those markets, we continue to also add our seller headcount, right? And we've been driving towards this 20% to 25% headcount growth for the full year. And, you know, we're still on pace to hit that for the full year. So with the majority of those headcount going into the new markets.
spk03: Got it. That's helpful there. And that was my follow-up question, actually, just in terms of just that tier one hiring. Can you just maybe give us an update on what you've seen in terms of the productivity ramp of these hires that are turning well with the plan, ahead of plan? Any additional insight would be helpful.
spk05: Yeah, I mean, as we think about adding as many sellers in this year as we – As we are, we're definitely expecting that the overall productivity, you know, on a per-seller basis is going to, you know, decline slightly relative to, you know, the overall portfolio. And so I'd say it's still early for the cohort as they've come in. You have a handful of sellers who are sort of six months into the year, which is still relatively early. But, you know, we continue to see the opportunity and the performance across these key measures, you know, including average deal size and the size of the new – the size of the deals that we're actually selling in and the size of those clients, the win rate. So we continue to feel good about the progress that we're making with the new seller cohorts.
spk15: Yeah, and one thing to interject is when you think about that seller cohort, we really expect them to get to their full ramp by the end of their second year. So we'll have nominal impact from new sellers in-year. It will help us build you know, our bookings growth rate for next year. And as Adam said, you know, we continue to execute against the core levers of growth that we've outlined, which is really, you know, adding new sellers into Tier 1 markets. You know, we're on pace to achieve 20-plus percent growth in seller headcount, continuing to leverage the broker channel to win at an outsized rate, and leverage industry to be a big differentiator in the marketplace, and they're all executing very well, and so we feel good about our momentum in the market.
spk03: Great to hear. Thanks for taking my question.
spk08: Thank you, Mr. Shaw. The next question is from the line of Kevin McVey with Credit Suisse. You may proceed.
spk09: Great. Thanks so much, and congratulations on the results. Hey, I guess out of my role, when you think about the 4% upside relative to expectations, what drove that? Was that relative to kind of where you initially got it? What drove the upside?
spk05: Yeah, I mean, I think a big lift here that we saw during the quarter is the annual year-end fees and additional form filings just came in a little bit stronger than we had anticipated. So we did pick up a little bit more upside in the quarter than what we had projected. And I'd say those year-end fees aren't back quite to where they were pre-COVID levels, but they definitely improved significantly. you know, beyond where we were anticipating them here for the quarter. That was the primary driver. And then we continued to see the upside in the client base in terms of the company growth coming in January, as well as continued pepum expansion. So just across the board, the performance was really just a little bit tighter, a little bit better. It reached to the top into that 3.9% or 4% lift.
spk09: That's great. And then you continue to do a nice job expanding the pepum, The partnerships with Equifax, the continuous pay you announced last quarter, is that in that PEPM or would that be outside of it and additive as you think about additional solutions kind of beyond the traditional scope of what you've been providing?
spk05: Yeah, I mean, there's a couple dynamics to it. I mean, the way that we share the PEPOM on the P&L or the surface here is really just the total reoccurring revenue over the number of employees on our platform, right? And so Equifax revenue, for example, would be included in that or other partner revenue would be included in that. and it's a blended number. I think in terms of our actual pricing strategy, there are some of those partnerships that we wouldn't necessarily price to the client. So Equifax, for example, does not have a pricing strategy that goes back to the individual clients. So it's a little bit of a mix in terms of how we think about our go-to-market and the overall $42 Peplum suite that we offer, as well as expanding the additional suite of services from partners specifically like like Equifax, creates some additional opportunity. Super.
spk15: Thank you. Thank you.
spk08: Thank you, Mr. McVey. The next question is from the line of Brian Bergen with Cowen. You may proceed.
spk13: Hi, this is actually Jared Levine on for Brian today. Based on your confidence over the past few quarters, tier one market traction, improving NRR and the overall demand environment, Can you give us a sense of early goalposts on how you think about FY23 growth? Is there the potential to see 20% plus growth potentially sooner than your longer-term aspirations? Why or why not?
spk05: Yeah, hey, you know, we're excited about the growth, and we've been really driving towards this 20% sustainable growth. You can see in the guide that we're not quite ready to guide to the 20-plus percent growth, but we feel good about the trajectory, and it is a long-term game around continuing to drive additional bookings, accelerate those bookings, and layer them onto the platform. So we'll intend to share guidance updated, you know, following the close of our FY22 year for full year 23. So feel good about the progress. Feel good about the execution right now. We'll continue to press in, and we'll share that guidance in the Q4 close.
spk13: And then in terms of the competitive environment, have you noticed any differences, whether that be based on employer size segment or market tier?
spk15: Yeah, we haven't seen any differences in the market, you know, either on who we're competing with or – where we're winning from. They've remained constant. So, you know, we compete with ADP, Payloxy, and Paycom on most transactions. And, you know, we take 80% of our wins from the legacy providers, which we define as in-house ADP paychecks and regional service bureaus. So that's been consistent over the past few years. And we haven't seen any real differences in the go-to-market strategies of any of our competitors.
spk13: Great. Thank you. Welcome.
spk08: Thank you. The next question is from the line of Scott Berg with Needham. You may proceed.
spk01: Hi, everyone. Congrats on the quarter. This is Michael Rackers on for Scott today. Just one quick question for me. I know you've talked a lot about the talent management opportunity in the past. Can you go a little deeper on, you know, adoption there and then maybe some other modules you're excited about longer term? Thank you.
spk15: Yeah. You know, we're really excited about talent management. And, you know, we're seeing, you know, our highest attach rate of any new product. And we're seeing, you know, in the mid-market space, upwards of 35% attachment at point of sale with talent. And we actually charge for it. So I think that's pretty exciting. And it really demonstrates the value of the product and what we're trying to accomplish, which is empower leaders to build winning teams. So we enable leaders to coach and inspire and motivate and engage their employees so they can drive better outcomes for their end clients. So we're excited about it. The market's excited about it. And we're going to continue to press in on talent as a differentiator.
spk11: Great, thank you. You're welcome.
spk08: Thank you. The next question is from the line of Brian Peterson with Raymond James. You may proceed.
spk04: Hey, thanks for taking the question. This is Chase on for Brian. Raul, I think you had mentioned the strengths of the five national partners that now account for about 25% of the partner revenue. Just curious, how do you see the opportunity to grow with those five national partners, but also the ability to kind of grow the broader partner program, both regional and kind of smaller partners?
spk15: Yeah, it's a huge opportunity. Obviously, the five national partners contribute, you know, a little over 25% of our overall contribution from the broker channel. And, you know, we have over 1,500 partners across the U.S. that we work with, and there's 14,000-plus opportunities. So we have a long way to go in this really exciting channel that has a significant impact in the mid-market segment, and so we're going to continue to press in. And it's really helpful because as we add sellers in the Tier 1 markets, obviously brokers are located in dense markets, which are akin to our tier 1 market. So it's a great place for our new sellers to start and build relationships right out of the bat. So we're going to continue to press in. We're excited about the progress we've made, and, you know, it's a great channel for PayCorps.
spk04: Very helpful. And then just to follow up on the sales hiring, as we've kind of seen some broader wage inflation in the marketplace, how are you guys kind of seeing that as you continue to – to heavily invest in the sales headcount. Thanks.
spk05: Yeah, I mean, we see wage inflation across the board. I mean, primarily in some of those key roles like, you know, development or engineering and implementation, I'd say. less so in sales across the country. I mean, there is a little bit of a natural hedge for them in just the commission side or the variable comp side. But there has been a little bit. I'd say broadly it has not impacted or materially impacted our overall business, and it hasn't impacted our guidance per se. So there has been a little bit of it for sure. We're not immune to it, but in fact it hasn't been material just yet.
spk04: Thanks, and congrats on the great quarter. Thank you.
spk08: Thank you. The next question is from the line of Mark Marcon with Baird. You may proceed.
spk06: Let me add my congratulations on a terrific quarter. I'm wondering, can you talk a little bit about, you know, what you ended up seeing with regards to client retention in the key, you know, January through November time period? How did that trend relative to your expectations? What sort of changes have you seen?
spk05: Yeah, you know, I think the way that I would say it, Mark, is, you know, retention is – there's a really long tail to it. So we had, you know, certain expectations just coming off of the service year in 20 and 21. But we made a lot of improvements and invested a ton in the service model implementation and product. through 21 that has demonstrated some really positive momentum for us. So you can see it clearly reflected the net retention improvement in the revenue, and you're seeing that play all the way through. Gross retention, in terms of just the longer tail or the longer nature of that, It just takes some more time for it to fully come through, but we're seeing continued positive trends around the customer experience. It shows up in the product. It shows up in the service time. And January, of course, is a big period for us. So we felt good about coming through the year end, and you can see it reflected in the overall revenue growth for sure.
spk06: That's great. And then, Raul, you mentioned a number of initiatives. you know, Fidelity, Equifax, Developer Portal, expense management solution. Of all the initiatives that you mentioned, which ones are you the most excited about? Which ones can be, you know, the most impactful over the next year or two?
spk15: Yeah, I mean, without question, the Developer Portal. I mean, it's the gateway, you know, to the future of ATM, and it's about, If you believe in the power of modern APIs, then you believe in the power of a developer portal like we've delivered. And it's about us enabling our clients and our partners to integrate seamlessly with our platform and able to expand the reach of what we do. And so we believe that the most important thing that we can do for our customers is have an open, accessible platform that enables them to manage their business specifically the way they want to. And so being open with the power of the technology that's available today, without question, is a game changer.
spk06: That's great. And when would you anticipate that we actually see the real impact from that coming through?
spk15: Well, I think we see it in our win rates today. And so as we continue to press in, it supports seller expansion, accelerating bookings, which is driving our accelerated revenue growth. And I think you're seeing it, and it will continue to drive forward. Obviously, we're building out a partner ecosystem, you know, over the next 12 to 18 months that will continue to help supplement that. So I think we're in the early innings part, but I think, you know, the potential to continue to layer on top is exciting for us.
spk06: That's great. And then you also, you know, talked about, you know, increased success with regards to larger clients and particularly the win rate with companies that are over 100 employees. Can you talk a little bit more about that in terms of what you're seeing? Are you taking away those 100-plus employee clients from the same group that you were previously taking smaller clients away from, or how should we think about that? And what are the features and functions that are the most attractive to to those clients that are driving that switching behavior?
spk15: Yeah, I think, you know, it remains consistent. I mean, 80% of our wins are coming from, you know, the legacy providers. And so I think what we're seeing is, you know, an expansion of our sales force, so we're getting more at-bats in that segment as we've, you know, expanded it significantly over the last few years. And what we're winning with is, you know, a modern... HCM platform that has, you know, a simple, easy-to-use, you know, experience for them. And then the talent component coupled with industry differentiation are the reasons why we're winning. So when we look at a win-loss report, you know, the first thing is we win because of industry. The second is we win because of talent. And the third is we win because our product's the easiest to use with the most functionality.
spk08: The next question is from the line of Mark Murphy with JPMorgan. You may proceed.
spk10: Yes, thank you very much. I joined slightly late. Please forgive me if you've covered any of this. But the first thing I wanted to ask is just whether you might be sensing any more urgency or any more demand from customers on the employee engagement. side of the product suite or the talent management side, just as they try to grapple with this shortage of skilled labor out there and all the wage inflation that they might be seeing?
spk15: Yeah. I mean, we have seen significant acceleration in both those categories. Talent management, which enables us to coach and develop and do one-on-ones and really connect and engage with an employee is we're seeing attach rates between 35 and 40%. We're also seeing strong attach rates of engagement, whether it be recognition or the ability to chat between each other. And that's within our core bundle. So that kind of is included with all of our clients. But we're seeing strong demand for all of those. And as we think about why customers select PayCore, it's because we deliver all these in this unified experience that's really easy for someone to undertake. And so for us, it's been a game changer and very powerful. Okay.
spk10: Great to hear. The second question that I had is, are you seeing any flow of customers that might be forced for some reason to move off of UKG just in the wake of that unfortunate outage that they suffered, I think, back in December and January? Is there anything happening there or not a real important effect?
spk15: Yeah, I mean, I think, I mean, we had, you know, we got a few wins in the end of the calendar year where clients had to process payroll and we were able to get them started in you know, in a week or two. But I would say that the majority of that target market, you know, is slightly outside of where we compete. So a lot of those clients may be, you know, 5,000 employees and above, which isn't really where we're hunting on a day-to-day basis. So the clients that we were able to win, you know, we can easily go up to 2,500. And so we were able to win clients, you know, in that pay range. and help them convert over.
spk10: I see. Okay. One last one. Can you just remind us in terms of your contract with customers, is there a standard clause in there for a cost of living increase annually or upon renewal, just something that would allow your PEPM pricing to kind of keep pace with what they're seeing in terms of inflation?
spk05: Yeah, you know, most of our contracts are greenfield, right? So they don't necessarily come up on a term. And we do reserve the right to change prices. You know, it has been our practice to do that annually. And, you know, I'm not sure that you're going to see any... significant change in our strategy the way that we just talked about it is around, you know, creating value for the clients and then capturing that value, you know, where appropriate. And so we're going to continue that strategy. But there's not really, you know, a forcing mechanism like a cost of living increase like you mentioned.
spk10: Understood. Thank you. And congrats on the great results. Thanks, Mark.
spk08: Thanks, Mark. Thank you. The next question is from the line of Robert Simmons with DA Davidson. You may proceed.
spk14: Hey, guys. Thanks for taking the questions. I was wondering what is the typical rent time for your new sellers? Are we talking a quarter or two or taking more of a year for them to get, you know, reasonably productive?
spk15: Yeah, so the way to think about it is they ramp, you know, through the first six months. And full productivity comes after the second year, but they stair-step up throughout month to month through the first 24 months. So they'll continue to accelerate through that 24-month period. At the end of 24 months, they hit full productivity in there. So think about it. Three months, they start selling and producing, and then they increase their productivity throughout the next 21 months.
spk14: Got it. That makes sense. And then how much of your bookings in a quarter are typically back-to-base selling?
spk05: I'm sorry, Tim. Back-to-the-base? Oh, back-to-the-base.
spk15: Yeah, about 15% of the bookings are back-into-the-base.
spk14: Got it. That makes sense. Thank you very much.
spk15: Yeah, thank you.
spk08: Thank you. That concludes our question and answer session. I'd like to turn the call back over to Raul Villar for closing comments.
spk15: Thank you again for joining us tonight. We appreciate your interest in PACOR. We are excited about the trajectory of the business heading into our fiscal year end. We look forward to staying in touch and hope to connect with many of you in person at upcoming JPMorgan, Baird, and Stifel conferences this quarter. Have a good night. and a great Cinco de Mayo.
spk08: Thank you for joining today's call and enjoy the rest of your day.
Disclaimer