Paycor HCM, Inc.

Good afternoon and welcome to PACOR's earnings call for the first quarter of fiscal year 2023, which ended on September 30th. On the call with me today are Raul Villar, Jr., PACOR's chief executive officer, and Adam Ante, PACOR'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, 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.

Thank you, Rachel, and thank you all for joining us to discuss PACOR's fiscal first quarter results. Revenue growth reached 28%. the highest level in over five years as we expand our go-to-market motion. We also continue to scale our operations and deliver more than 500 basis points of margin improvement year over year. Based on this strong momentum, we are once again raising our guidance, which Adam will cover in more detail. We are executing against our go-to-market strategy and continue to make significant progress expanding our sales coverage and growing Peppum. Competitive dynamics have been consistent, demand remains strong, and we had our best Q1 on record. We continue to target increasing sales headcount over 20% for the fiscal year, With established sellers in all Tier 1 markets today, our ongoing focus is on expanding coverage in Tier 1 markets. With the opportunity more than triple our sales team, we have significant runway to add sellers for the foreseeable future. While it's still early, we are really pleased with how both the Bengals and Pac-12 sports sponsorships are increasing brand awareness and ongoing new business development. PAYCOR's modern open platform is purpose-built for leaders and configured by industry, a combination that continues to win in the market. A recent Gartner survey identified leader and manager effectiveness as a top priority among CHROs for 2023. This quarter, we are excited to announce two key differentiators for leaders, the core leadership framework in Telenia's award-winning candidate sourcing technology. The core leadership framework empowers organizations to transform frontline managers into effective leaders. The framework is built on the understanding that effective leaders focus on coaching employees, optimizing performance, and retaining top talent. We provide organizations with the means to evaluate the efficacy, of their frontline leaders and the tools and thought leadership needed to improve leader performance. We continue to add leapfrogging innovation to our HCM suite and are thrilled to have acquired Telenia's intelligent candidate sourcing technology to enhance our industry-leading talent solution. The AI-powered recruiting technology will be unified into our platform making it easier for frontline leaders to find skilled and diverse talent quickly and at significantly lower cost. Telania's solution stands out in that it is fully automated and easy for frontline leaders to use. In today's war for talent, Telania not only sources candidates that are actively looking to change jobs, but more impressively, passive candidates that are not actively seeking a new role. The technology will also help companies execute against their DE&I strategy by placing an emphasis on diverse candidates that are often overlooked by traditional recruiting systems. This acquisition builds on our successful track record of rapidly integrating best-in-class point solutions that provide a competitive advantage and expand our PEPM opportunity. These advance and showcase the versatility of our product strategy. Our modern platform enables us to select whether to build, buy, or partner to add valuable functionality, options that are increasingly valuable as focused on leapfrogging technology to further differentiate PayCore in the market. As further proof of our product differentiation, we earned the Platinum 2022 Titan Business Award in the Business Intelligence Solution category for PayCore Analytics. We are increasingly focused on providing leaders with intelligent analytics that deliver valuable insights to drive business performance. For example, predictive resignation provides leaders with insights to identify the top drivers of employee resignation and potential at-risk employees to help prevent turnover. In addition, we provide many analytics that are critical to helping our key industries manage time and labor, such as overtime or schedule analysis by tenure. In September, we published our first ESG report, describing PAYCOR's commitment to sustainable business practices and ongoing efforts to address material ESG topics. I am particularly pleased we increased the representation of females in leadership and ethnic diversity among our associates by 8% and 13%, respectively, and reduced our Scope 1 and Scope 2 emissions by 14% year over year. We are incredibly proud PACOR won 2022 Top Workplaces Culture Excellence Awards in Diversity, Equity, and Inclusion Practices, Innovation, and Compensation and Benefits categories by Energage. This is the second consecutive year PACOR has been recognized for DE&I excellence. Over the past fiscal year, PACOR has continued to advance its DE&I strategy, enhance associate rewards, expand benefit options, and drive innovation. In terms of the labor market, dynamics remain unchanged. Nonfarm payrolls have slowly risen to pre-COVID levels, job openings remain at elevated levels, and the labor market continues to be tight. Modest changes in unemployment or job openings are unlikely to materially impact our business as most of our revenue growth is derived from new logo additions and the market is still very early in adopting modern cloud-based HCM solutions. Plus, HCM is highly defensible as our value proposition is mission critical to attracting, paying, and retaining great talent. Lastly, I would like to thank all the amazing Paycorians who are the foundation of these amazing results. With that, I'll turn the call over to Adam to discuss our financial results and guidance.

Thanks, Raul. I'll review our first quarter results, then share our outlook for the second quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. Total revenue for the quarter was $118 million, increasing 20% year-over-year, our highest in recent record. Excluding the impact of interest income, recurring revenue grew by 24%. We exceeded the top end of our revenue guidance by 4% and significantly outperformed our adjusted operating income guidance through diligent investment management. Revenue growth was primarily driven by new business and cross-sales, PEPM expansion, strong execution of pricing initiatives, and growth of our partner program. Pricing initiatives include conversion of clients to our newest product bundles and continued higher adoption of our bundles at the point of sale. The number of employees on our platform increased to more than 2.3 million, up 10% over the prior year. Our average customer size increased to 78 employees at the end of Q1, compared to 73 a year ago as we continue to focus our investment in the mid-market and accelerate growth among clients with more than 100 employees. Net retention trended favorably, benefiting from price initiatives and continued cross-sale. Adjusted gross profit margin improved to 66.3% versus 65.2% a year ago. Adjusted gross margin excluding depreciation and amortization was 76.8%, an increase of nearly two points year over year. The expansion was the result of increased scale across our support team and lower third-party costs. Sales and marketing expense was $40 million, or 34% of revenue, slightly below 35% a year ago. Based on the continued demand and attractive returns we're seeing, we continue to invest in our sales expansion strategy and marketing programs to drive new business growth and capture market share, primarily in Tier 1 markets. On a gross basis, we invested $19 million in R&D, or 16% of revenue, slightly lower than 17% a year ago and in line with our long-term targets. Our team continues to efficiently add new functionality through organic development, partnerships, and best-in-class product tokens that create value for our clients and expand our peplum opportunity. G&A expense was $18 million, or 15% of revenue, down from 18% in the first quarter of 22. We intend to progressively drive G&A down as a percentage of revenue as we scale the business, consolidate our facilities footprint, and anniversary public company costs. While our primary objective remains sustainable 20% plus revenue growth, we intend to steadily expand margins as we scale the business. This quarter, we increased operating income to $10.4 million, or an 8.8% profit margin, more than double the 3.7% last year. The greater than 500 basis point expansion enabled us to deliver adjusted EBITDA margins of 24%, and when combined with our 28% revenue growth, exceed the rule of 50 this quarter. Shifting to the balance sheet and cash flow, this quarter free cash flow was a negative $30 million compared to a negative $24 million last year. The first quarter tends to have the largest use of cash due to the timing of our annual bonus payment. In addition, this quarter we made our first naming rights payment, which covered the full year and will be made quarterly moving forward. However, we plan to be free cash flow positive for the full fiscal year and going forward. We ended the quarter with $98 million in cash and no debt. This quarter, we generated $4 million of interest income on average client funds of approximately $920 million. As overnight rates began benefiting from recent Fed rate increases, our overall effective rate more than tripled to 178 basis points this quarter, compared to 52 basis points last quarter. Interest income exceeded our expectations as overnight rates reflected Fed fund raises faster and more completely. Turning to our outlook for fiscal 2023, we continue to be positive about the momentum in the business, strong demand environment, and Paycor's leadership position in the HCM market. The labor market has remained tight, and while we continue to closely monitor the macro environment, we have not seen any material impact to our business. Our guidance assumes these trends continue for the remainder of the year. While we are enthusiastic about integrating Telinia's innovative technology into our platform and expanding our PEPM opportunity, we expect it to be immaterial to the financials this fiscal year. We generated about 180 basis points of interest income in the first quarter and expect that rate to increase further in the second quarter. At today's rates, we anticipate interest income will be in the range of $20 to $24 million for the full year on average client fund balances of just under $1 billion. We currently plan to reinvest about half of interest income into either accelerate our product roadmap or expanding our marketing programs to support our sales expansion. For the second quarter, we expect total revenue of between $126 and $128 million, or 24% growth at the high end of the range, and adjusted operating income of between $12.5 and $13.5 million. For the full year, we expect revenue of $528 to $534 million, or 24% growth at the top end of the range, and we anticipate adjusted operating income of $65 to $68 million. In summary, we continue to deliver strong top-line growth while expanding profitability. We are winning share in the SMB segment through our differentiated platform focused on leaders and industries. Our team is laser focused on execution, Tier 1 market penetration, and continued PEPM expansion. With less than 2% share of our $29 billion total addressable market, we have significant runway for continued growth and remain enthusiastic about the trajectory of the business. With that, we'll open the call for questions. Operator?