Paycor HCM, Inc.

Hello and welcome to the PayCore second quarter 2023 earnings call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to VP of Investor Relations, Rachel White. Rachel, please go ahead.

Good afternoon and welcome to PayCorp's earnings call for the second quarter of fiscal year 2023, which ended on December 31st. On the call with me today are Raul Villar, Jr., PayCorp's Chief Executive Officer, and Adam Ante, PayCorp'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 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 second quarter results. PACOR's modern, open platform with differentiated tools for leaders and industries continues to resonate with clients and win in the market. Revenue grew 29% this quarter, driven by record bookings and ongoing PEPM expansion. Adjusted operating income margin increased by over 300 basis points year over year, and we believe there is significant opportunity to drive further expansion as we scale. Based on these robust results and our optimistic outlook for the remainder of the year, we are once again raising our guidance which Adam will discuss in more detail. Our go-to-market motion continues to deliver excellent results as we strategically expand sales coverage in Tier 1 markets, leverage influential broker relationships, and continue to grow our average deal size. We are ahead of schedule with sales hiring and already achieved a low end of our 20-plus percent seller headcount growth target for the year. We like our sales staffing level and will continue to evaluate additional hiring in the second half. We offer the only modern cloud platform empowering frontline leaders to be more effective by providing the insights and tools required to source, attract, develop, and retain their employees. This quarter, we introduced the Core Leadership Dashboard, that provides actionable information to help transform managers into effective frontline leaders. The Core Leadership Dashboard surfaces real-time employee insights and evaluates leadership effectiveness by gathering feedback on how well they coach, optimize, and engage their team. Armed with these insights, companies will understand leader effectiveness and be able to tailor ongoing leadership development. Given the continued tightness in the labor market, our client's top priority remains finding and retaining talent. This quarter, we closed the Telenia acquisition and began beta testing PayCore Smart Sourcing, which leverages AI to simplify and streamline the sourcing efforts of frontline leaders to find skilled and diverse talent. Interest among our client base has been robust, and early feedback is extremely positive. With the addition of PayCore Smart Sourcing, our full suite of solutions is $44 PEPM, and is the most comprehensive H-team offering available in the SMB market. Our platform's modern architecture enables rapid integration of point solutions, such as Telenia, that provide deeper functionality than traditional suite providers. With nearly 90 different public API endpoints available to power integrations, PACOR offers the most modern interoperability solution with a broad array of partners for our clients. We are incredibly proud PACOR was distinguished as a top workplace USA by Energage for the third year in a row. Energage's Top Workplaces program has a 15-year history of surveying over 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. This award underscores our commitment to exemplify the cultural best practices that impact associate engagement and business performance. Let me close by reiterating how confident we are about PACOR's outlook. The labor market remains tight as non-farm payrolls continue to increase, job openings are at elevated levels, and workforce participation remains low. Modest changes in unemployment or job openings are unlikely to materially impact our business as most of our revenue growth is derived from new business and the market is still in the early stages of adopting modern cloud-based HCM solutions. Furthermore, HCM is highly defensible as our value proposition is mission critical to attracting, paying, and retaining great talent, while also driving a compelling return on investment for our clients. Lastly, I would like to thank all PayCore associates for their efforts through this calendar year-end, especially our implementation, support, and success teams, who during our busiest time of year provided an amazing year-end experience for our clients. With that, I'll turn the call over to Adam to discuss our financial results and guidance.

Thanks, Raul. I'll discuss our second quarter results, then share our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. We had another strong quarter, delivering total revenues of $133 million, up 29% year-over-year, and recurring revenue growth of 22%, marking the fifth consecutive quarter of 20-plus percent revenue growth. We exceeded the top end of our revenue guidance by 4% and significantly outperformed our adjusted operating income guidance as we continue to scale the business. The majority of revenue growth continues to be from new business wins. 90% of our revenue is derived from companies with between 10 to 2,500 employees, where we continue to see outsized growth. Effective PEPM increased 11% year-over-year, which includes cross-sale as well as pricing initiatives, such as the conversion of our clients to our latest product bundles, and it also includes the impact of higher bundle adoption at the point of sale. In addition, we're pleased with the progress we're seeing across our partner program as we continue to expand our interoperability platform. The number of employees on our platform increased to more than 2.3 million, up 9% over the prior year, and we exceeded 30,000 customers. Our average customer size increased to 78 employees at the end of Q2, up from 74 in the prior year as we continue to focus our resources in the mid-market with clients above 100 employees. However, on a sequential basis, organic customer growth has been essentially flat following strong growth earlier in calendar 2022. As we shift our portfolio upmarket, we continue to see moderation in employee growth in the micro segment, while the number of employees in the mid-market and enterprise segments increased 11% year-over-year. And net retention continues to trend favorably. Adjusted gross profit margin excluding depreciation and amortization improved to 77.9%, an increase of about a point and a half year-over-year as we continue to scale the business. Sales and marketing expense was $42 million, or 32% of revenue, comparable to levels a year ago. We continue to strategically expand our sales teams and marketing programs, primarily in Tier 1 markets. We like the current level of spend and continue to evaluate investments to ensure that they will deliver an attractive return, but we have the flexibility to quickly pivot if we were to see a change in the demand environment. On a gross basis, we invested $23 million in R&D or 15% of revenue, a similar level to last year and in line with our long-term targets. We continue to focus on efficiently enhancing our modern platform to deliver on our leader strategy, whether it's through organic development, partnerships, or acquisitions. G&A expense was $19 million or 14.5% of revenue, down a point and a half from 16% in the second quarter of 2022. We intend to progressively drive G&A down as a percentage of revenue as we scale the business. While we continue to focus on building a sustainable 20-plus percent revenue engine, we are also steadily expanding margins as we scale the business. This quarter, adjusted operating income increased to $18 million, or a 13% profit margin, up more than 300 basis points from the 10% last year, even while continuing to expand investments in sales and marketing and R&D. Shifting to the balance sheet and cash flow, this quarter free cash flow was a $3 million spend compared to a negative $7 million last year. We remain on track to deliver on our plan to be free cash flow positive for the full fiscal year. We closed the quarter with $72 million in cash and no debt. Turning to client funds, this quarter we generated just under $8 million of interest income on average client funds of about $1 billion, an effective rate of just over 300 basis points. In terms of our outlook for the second half of the fiscal year, we remain optimistic on the HCM demand environment. Our guidance assumes no material change in the broader demand environment or labor market, which has been fairly consistent, and flat organic employee growth among existing customers for the balance of the year. For the third quarter, we expect total revenues of between $155 and $157 million, or 28% growth at the high end of the range, and adjusted operating income of between $35 and $36 million. For the full year, we expect revenues of $539 to $545 million, or 27% growth at the top end of the range. And we anticipate adjusted operating income of $75 to $78 million. With respect to interest income, we expect our effective rate to increase marginally in the third quarter to about 330 basis points. At today's rate, we expect interest income will be in the range of $28 to $30 million for the full year on average client fund balances of just over $1 billion. We still plan to reinvest a portion of interest income, as we've discussed this year, to accelerate our product roadmap and expand our marketing programs and investment infrastructure. However, we will look to drop any incremental interest income beyond that to the bottom line, which will increase our full-year outlook on margin and cash flow. Overall, we're pleased with our strong quarterly performance and ability to raise guidance again. We've driven increased profitability three consecutive quarters. Our differentiated platform, focused on leaders, continues to win in the market. As a mission-critical application, we believe in the durability of the category and our opportunity to continue capturing share with the expanding $32 billion HCM market. With that, we'll open the call for questions. Operator?

Thank you. And I'll be conducting your question and answer session. If you'd like to be placed into question queue, please press star 1 at this time. A confirmation tone will indicate your line is in the question queue. If you'd like to remove your question from the queue, please press star 2. One moment, please, while we poll for questions. Our first question today is coming from Gabriela Borges from Goldman Sachs. Your line is now live.

Hi, good afternoon. Thank you. Raul, you mentioned all of the ways in which your business continues to perform in this environment, so I figured I'd ask the question directly. Are you seeing any negative impacts or offsets because of the macro?

You know, to date, we haven't seen any changes in our overall demand environment. Things have been fairly consistent, and they've been fairly consistent across all of our sales segments. So to this date, you know, we've seen strong demand.

Yeah, Gabriel, the one thing I would say is that we've just seen a little bit more softness in that organic customer growth in that sort of micro segment, really small segment under 20 employees. Besides that, there's really nothing else that we're seeing.

Excellent. The follow-up that I have is on how you're thinking about normalized growth. I know that very consistently now you've been doing north of 20% recurring revenue, even on more difficult comps. So how do you think about potentially getting to 25%? How do you think about potentially accelerating your hiring further? Are there puts and takes that could potentially put you back down to 15% that are out of your control? So just a little bit more on how you think about normalized growth.

Yeah, I mean, the way that we think about it is that it's about the broader demand environment, our ability to grow the sales organization at pace and do it well so that we continue to, you know, drive the profitability and the overall return out of that investment across the sales channel. And, you know, we feel like there's sort of a natural limit in terms of that 20%, 25% headcount growth, which is what we've been targeting for the last couple years. And so, you know, as we think about our ability to grow faster than that, we just haven't seen – We've seen that operationally it's just a little bit more complex or there becomes a point of diminishing returns. And I think that there's, you know, so in that 20% plus range for us right now is where we feel comfortable in terms of building that sustainable sales, you know, engine to drive that growth. And then the opportunity will be to continue to expand that sales organization and the efficiency of that spend even further forward. So, you know, the way that we talked about it a couple years ago and over the last two years now has really been about being consistent in the sales execution, developing this engine and this flywheel that can continue to grow. And so it's just about continued execution over the next, you know, couple quarters to stay above 20%, I think.

Yeah, the other dynamic, Gabriel, is that we'll continue to add PEPM along the way. So, you know, we really think about it as two key components to drive sales. consistent, sustainable, long-term growth, our ability to continue to add sales headcount, and our ability to continue to expand our PEPM and our average deal size. And so, you know, we feel confident we've made great progress moving into, you know, the 20-plus percent range, and we're going to continue to execute and focus and obviously want to continue to, you know, improve our performance over time.

That all makes sense. Thank you.

Thank you. Thank you. Next question today is coming from Samad Samana from Jefferies. Your line is now live.

Hi, good evening. Thanks for taking my questions. So maybe first for Adam or Raul, either one, just the effective PEPM growth of 11% year-over-year, really strong. I know you mentioned a few factors, Adam, such as higher bundle adoption and good cross-sell, but I'm curious if you could maybe help us think about in the quarter which of those factors had the greatest contribution and if that's any change from what you've seen in the last few quarters.

Yeah, hey, Samad. Yeah, I mean, what we see is that it's really the combination of three key things, like we mentioned, right, the conversion and that subscription bundle. We see higher adoption at the point of sale. We see pricing initiatives as well that go into that. And I would say it's sort of a combination of all three. Each quarter fluctuates a little bit depending on the initiative that's going in. broadly, and over the last couple quarters, it's been fairly consistent, close to a third across each of those items. So there's not one item that necessarily sticks out one or the other. It's been pretty consistent, and we've seen really good execution across those three dynamics.

Great. And maybe, Raul, for you, it sounds like hiring for sales is on track to what you're expecting. Maybe could you touch on that and just sales productivity? How is that metric trending, especially as you onboard more and more at a larger scale?

Yeah, so hiring has been really strong. Retention has been excellent, which has really helped us to get into a really solid staffing perspective. And productivity, as we would expect, our new people produce at a lower rate, and they slightly drag down the overall productivity based on the outside of hiring. But by and large, our tiers are operating better. you know, as we would think from a 10-year perspective, our first-year bucket, our second-year bucket, and then beyond two years. So we feel really good that, you know, the flywheel's working, we're onboarding people successfully, and, you know, we're focused on execution.

Great. Super helpful. Great to see the good results.

Thank you.

Thanks.

Thank you. Next question is coming from Bob and Shaw from Deutsche Bank. Your line is now live.

Hi, everyone. It's Nick on for Bob and this evening. Thanks for taking the question and congrats on the strong quarter. Looking back on new sales in the quarter, was there any change in composition of those deals, say, in either size, industries, or modules bought? And, yeah, start there.

Yeah, thanks, Nick. I would say, again, we had consistent results across all segments. I would say that we saw, you know, stronger results, you know, above 500 employees than traditional. So... The product's really shifting, and we're seeing a lot of traction upmarket, which is newer for us than maybe others. And, you know, that's the primary dynamic that we saw this quarter. I mean, essentially, you know, all of our segments are operating, you know, as designed, and we saw a little more take in that 500 space. From a module perspective, you know, talent continues to fly off the shelf, and, you know, we're seeing high attach rates, and we actually charge for it. So it's... It's been a great opportunity for us, and we're really excited about it. It's differentiated, and it's winning in the market.

Great. And then just with the success of some of the sports partnerships that you've had, how are you thinking about your marketing investments going forward?

Yeah, from a marketing perspective, obviously the sports partnerships have provided some great air cover. We're getting significant awareness And it's really been a positive for PACOR as a whole and helping us as we expand, you know, nationwide. I would say, you know, we're continuing to focus on, you know, all facets of the marketing engine and really looking to continue to help you know, streamline entry into all these new markets. And so we're really focused on connected TV and driving ads through that. We're focused on continuing to increase, you know, our traffic online. And so I think all of those things are helping drive top of the funnel awareness. We're seeing record impressions, record traffic to paycore.com, and record leads. So we feel really good that the actions that we've taken and the marketing team has done an amazing job driving brand in these big relationships and making sure that we're maximizing our ROI on them. Great. Thank you.

Thank you. Next question is coming from Terry Tillman from Truist. Your line is now live.

Hey, good afternoon, Raul, Adam, and Rachel. Thanks for taking my question. I guess the first question is just, Raul, I think you said in your prepared remarks that it was a record booking. Is that for 2Q or is that for any quarter? It was a record for 2Q. Got it. Okay, thanks. And I was curious about Tier 1 markets. Any specific call-outs, whether it's kind of TFC markets, Texas, Florida, or California, or any other Tier 1 markets that kind of stand out in terms of kind of where you are versus what your expectation was? And I'm curious in those markets, since you've had some time now, What are win rates and new seller productivity like in those tier one markets versus your traditional sweet spots? Thank you.

Yeah, so we've seen significant growth, over 100% growth in L.A., San Francisco, South Florida, and the D.C. marketplace. Those four are standouts for us. And as a whole, our win rates for our new sellers are, are on par with the win rates for our overall sales organization. So the sales operations team is doing a fantastic job of getting people up to speed on our value proposition and enabling them with the tools required to be successful out of the gate. So that's a real positive component for us.

Thanks.

Thank you. Thank you. Next question today is coming in from Brian Bergen from Cowan. Your line is now live.

It's actually Jared on for Brian tonight.

In terms of year-to-date net revenue retention performance, how does that compare year-over-year in terms of your FY23 guide? Does that embed a change relative to FY22?

So the net retention has been performing well. I would say it's been fairly consistent quarter over quarter. It's been trending well. And yeah, Q1 of last year, while any one quarter isn't necessarily a good metric here on net retention, Q1 of 22 actually was rather low for us as we were growing over some of the COVID challenges. So on a year-to-date basis, it's technically up. But it's been really consistent over the last, call it, five quarters now. So we feel good about the net retention. And of course, our expectations around that are included in our guide.

OK, great. And then in terms of the calendar 1Q form filings, are you expecting a year-over-year tailwind related to those form filing activity and anything different there in the compare this year, either quarter on quarter on year on year basis to be mindful in terms of that outlook?

Yeah, I mean, I'd say that it's looking like it's going to be fairly consistent with where it was last year. We were wondering if we were going to see a little bit of an acceleration, but it's been really consistent with where I would sort of expect it to be from pre-COVID levels. So it looks like it's normalized. And I think that it's driven, you know, more dynamically by overall employee retention, right, for our customers, our customers' employees' retention, which has been maybe a little bit more consistent this year and back in line with pre-COVID levels. So nothing, I don't think that we would expect anything to look different as it has, you know, materially from any of the prior sort of pre-COVID years.

Great. Thank you.

Thanks, Eric. Thank you. Next question is coming from Scott Berg from the Eastman Company. Your line is now live.

Hi, everyone. Congrats on the next quarter, and thanks for taking my questions. I guess I have a couple. First of all, payroll and HTM in general, at least demand for these solutions, kind of on all customer segment levels, seems to be holding up extremely well today and much better than the other software segments, I think, that most of us on this call cover. As you look at kind of what's going on under the covers, any idea why in particular today is just, you know, this great HTM environment versus others that are seeing that softness? Thanks.

Yeah, I think a couple things. One is it's like some of your other software companies that you cover, we're not a land and expand, so there's not any requirement or expectation that you're going to add more seats, so to speak. That's one. Secondly, I think the category as a whole has changed. Over the last decade, and it's really added some really powerful modules around recruiting around attracting around retaining employees. And so in this hyper tight labor market. I think that's been a big driver. of accelerated demand. Secondly, cloud solutions and HCM kind of lag behind the adoption rate of some other solutions that you would cover. And so we didn't have this explosive demand out of the gate. And I think COVID has really helped open up the eyes to people that buy our solutions that, you know, HCM in the cloud is something that can be helpful to their organization. So I think the combination of the cloud acceptance in our category, the additional modules that we're adding that are helping other facets of the organization outside of traditional finance, or traditional HR have really made the solutions more powerful and more attractive. And again, the three modern players in our space combined have somewhere between 8% and 12% share. So there's a really big pie of legacy solutions still available for us to continue to convert over to a more modern solution. And I think that's why you're seeing really strong demand across the board.

Got it. Helpful. And then from a follow-up perspective, you mentioned your sales hiring is on track and you've already achieved the low end of your range. As you look at the placement of those individuals this year, I know tier one cities have been the focus, but these hires, are you looking at putting them in maybe different geographic locations or customer segments than what you were six or nine months ago, just seeing if there's any slight change to your strategy relative to the current demand trends you're seeing?

No, I mean, we're still really focused on, you know, the majority of the people we're hiring are, you know, focused on what we would call 50 to 1,000 segment, 50 to 2,500. And, yeah, we have pockets where we have reps that are focused on 250 employees and above. But, you know, ultimately, you know, we're still in the early innings of coverage and in the fact that we're still, while we cover the entire market, we have opportunities to continue to add, we have opportunities to nearly double our current sales organization in order to secure what we would consider optimal coverage. So we have a long runway to go. If we want to add heads, we can continue to do that. And we'll look at different designs, Scott, whether it's, you know, 50 to 250 or 50 to 2,500 or 250 to, you know, 2,500. There's a lot of different ways and markets to look at it. And, you know, you don't want to be robotic in your approach to the market. So we'll look at all different options. And our objective is to maximize our LTV to CAC.

Great. Congrats again. That's all the questions I have.

Yeah. Thanks, Scott.

Thanks, Scott.

Thank you. Next question is coming from Brian Peterson from Raymond James. Your line is now live.

Hey guys, thanks for taking the question. Just one for me. It's actually a bit of a follow-up to Scott's question, but there's a lot of metrics that you have given in terms of PEPM and growth and bookings and everything else, but I'd love to understand how the pipeline looks. If you look at those embedded opportunities in the pipeline, what are you seeing in terms of the PEPM and the module adoption? I'd just love to understand what you're seeing in terms of the opportunities that we should be expecting going forward. Thanks, guys.

Yeah, hey, Brian. Yeah, I mean, when we look at the pipeline, I'm not sure that it looks any different than what we've seen historically. And I think the big thing, of course, is everybody buys payroll. Everybody gets the sort of HCM core platform. That's table stakes now and part of that bundle adoption at the point of sale that we've been talking about. And then we continue to expand our talent suite. Now, with the addition of PayCore Smart Sourcing and the Telene acquisition, it's going to continue to expand that talent solution. And we're already seeing interest and really strong demand around that solution really early days. So... I think that's where we're seeing a lot of growth. We're seeing a lot of growth in the portfolio come from talent. We continue to see our enterprise segment and the larger end of our customer segment looking for more talent solutions which continue to drive that ADS up and continue to drive Peplum up where the payroll historically has been a lower part of that rate. So I think that's what we see. The same thing inside of our pipeline is that that continues to grow with more and more customers looking for talent solutions.

Great. Thanks, Adam.

Thanks a lot. Thank you. Next question is coming from Patrick Walravens from J&P Securities. Your line is now live.

Hi, everyone. Thanks for taking the question. This is Owen on for Pat, and congrats on the strong quarter. So I was interested in the interest income line, and I guess what the mix was of a investment back into business versus straight to the bottom line previous to all these interest rate hikes?

Yeah, so when we were going into the year, we were, you know, we were expecting something in that sort of $12 million range, 12 to growing to 24. And we were targeting about half to looking to spend about half of that at that 20 to $24 million range. And I think that, you know, there comes a limit where we just simply can't consume more. We don't like what the returns look like for that incremental investment. So, you know, we've been targeting about half. meaning that we would be maybe in that $10 million to $12 million range on the full year of investment or reinvestment of those interest income funds. And I think that's probably where we're going to end. So as we look at the increase to $30 million in this case, we're not necessarily looking to – I mean, we'll look for opportunities to invest it, but I don't think that we're going to see the opportunities that we're looking for, and so that will sort of naturally fall down.

Awesome. That's it for me. Thank you.

Thank you, Colin. Thank you. Next question today is coming from Andrew Warren from D. David's Senior Line. It's now live.

Hey, guys. Thank you. I was just curious how CrossSell is doing with additional modules to existing customers, if you guys are seeing success there. And then kind of along with that, if you guys are seeing any success in getting price increases through.

Yeah, on the cross-selling side, you know, we continue to have strong success with our client sales team selling additional modules into the base. Obviously, they're really focused on, you know, talent as a primary driver, and so we've seen strong growth there, and We're going to continue to grow that team thoughtfully over time, and the team continues to play a big contribution to our overall growth, and we're excited about where we are with them. As far as the pricing goes, I'll let Adam walk you through that.

Yeah, we try to be really intentional about those price increases and make sure they follow the value that we continue to deliver for customers around either additional functionality or features and service. And so we've invested a lot in incremental product. We've released a lot of product and developed a lot of great features that we've released to our customers, as well as invested pretty heavily in our service and support organizations. And so we've been able to see pretty good take on those incremental price increases. increases that we've been able to put into the portfolio. And of course, we're really intentional with it. We don't want to be jumping out constantly with them. So it usually takes a couple years before a client comes in before we look at price increases. And since the portfolio is growing quite nicely with a lot of new customers over the last couple of years, we've been able to revisit those prices pretty regularly.

That's awesome. Thanks, guys.

Thank you. Thank you. Next question is coming from Steve Enders from Citi. Your line is now live.

All right, great. Thanks for taking the question here. I guess I want to ask a little bit on the verticalization strategy and how that's been resonating in the quarter. Anything to call out that's all particularly kind of strong bookings, book instruction here?

Yeah, so from a bookings perspective, the way you should think about it is slightly over 50% of our mix is coming from the four key industries. For a little flavor, I would say we had really strong results in professional services. and food and beverage and accommodations this quarter. And I would say healthcare, you know, kind of was a little lagging behind this quarter. You know, they're obviously growing over tougher comp from the previous years. But that's how I would think about industry. We're really excited about the progress we've made. We continue to invest. into product differentiation and tools for implementation for our clients so we can easily customize the tool for them for their specific industry.

Okay, gotcha. That's helpful. And I guess just a housekeeping question, just on the 20 acquisition, I guess, what was kind of the impact in the quarter from a REV contribution and what's kind of embedded in and the outlook there going forward?

Yeah, it's really immaterial to the P&L. So we see it's like well less than 1% of our overall revenue for the year, well less than that. So it's really more about the fantastic technology and getting that into our platform and how we're going to be able to take that to market through our broader suite. But there's almost no impact to our financials.

Okay, perfect. That's helpful.

Thanks, Steve. Thank you. Our next question today is coming from Pat Walravens from JMP. Your line is now live.

Oh, great. Thank you. Congratulations, Pat, for Pat this time. Hey, Raul, as a follow-up, it caught my attention when you reeled off three metro areas that were doing particularly well. I think L.A. was one of them. Like, taking L.A. as an example, like, what would make L.A. a place where you see particular success? What are some of the characteristics that would drive that?

Yeah, I mean, I think it's overall business density, obviously, critical. The fact that we have continued to grow our sales team there, and we're entering the third year, so we're starting to see that tenure build up in the marketplace. And when you add a really large, dense marketplace... you know, that's been saturated on legacy solutions that are just looking for something modern, you know, as we've entered there, we've seen a lot of strong success.

And you said this was year three?

Yeah, we really started in 21, and this will be our third fiscal year. You know, we're about two and a half years in.

Yeah. So, I mean, what I'm getting at here is sort of the longevity of this growth trajectory you're on, right? So how many LA-type or big metro areas are there out there where you feel like you guys are just getting started?

Yeah. I mean, so if you think about it, we really manage the 50 metro markets. and we break them into Tier 1, Tier 2, and Tier 3. And I would say Tier 1, which is the 15 largest, which includes L.A. and San Francisco and Miami, I would say we're in the early innings. We're about a third of the way there. And when you think about Tier 2 markets, which are the next 15 biggest cities in America – You know, we have, again, you know, tons of opportunity to continue to expand. We're slightly more covered there. And so for us, it's a long runway of continuing to add headcount, but also seeing that headcount mature through the tenure cohorts and continuing to drive productivity.

Awesome. Thanks a lot.

Thanks a lot, Pat.

Thank you. Our next question today is coming from Mark Murphy from JP Morgan. Your line is now live.

Thank you very much, and I'll add my congrats. I was wondering, first off, if you can speak to the trend you're seeing with your own real-time pay solution. I believe that one is a third-party solution called PayActive. Anything just in terms of what percentage of payees in your system are using it or how much revenue is flowing around between PayCore and the third-party provider there?

Yeah, hey, Mark. You know, while we see good adoption or sort of continuing growth in the adoption, it's still just overall, I mean, the materiality is, I mean, it's immaterial in terms of its impact on the revenue. So I think that we're expecting that this build is going to take years to get it to a point where the card economics are really enabling any sort of real revenue impact. When we see clients adopt it, you usually see a couple of employees in a company using the card and then it takes some time for them to really start to get into actually using it somewhere that drives card economics. What we see most of the time is that clients or employees are downloading it to their own pay card or they're taking the cash out right away versus using it on the card and so the economics just sort of occur a little bit differently. So with that in mind, I mean, I just think that it's going to be a long runway to revenue there. I think the benefit is more in terms of it's a benefit to our customers to be able to enable for their employees. And so the customers feel good about it. There's not... a huge cost to their employees. And so it's a benefit that they can provide their employees that really just continues to give, it's become table stakes almost, uh, you know, because we put it into that, the core offering and a lot of the competitors do too, but I don't expect it to be, you know, material to revenue, um, for the foreseeable future.

Okay. But Adam, if I understand the way you're describing that, that there, there is some, um, some interesting percentage of pays that are kind of, taking their cash out more often than the twice a month basis. I mean, is that a fair way to think about it, right, whether they're taking cash out right away versus using it on the card?

Yeah, yeah, absolutely. I mean, there's definitely people using it for sure. It's a benefit to associates for sure.

Yeah, okay. And then, Raul, regarding the focus that you've had for a long time now on the leaders within an organization, I'm interested in whether that is resonating perhaps in some new and different ways just because this unique type of environment that we have where unemployment I think is at a 50-year low, wage inflation is so high. I mean companies must have sort of a heightened interest in how they're leading, how they're managing, how they're retaining the workforce. Is that something that is kind of tangibly different for you in this environment?

Clearly, you know, talent is one of the biggest reasons why we win and our win rate is so strong. And we continue to invest in opportunities, whether it's you know, was goal setting or, you know, most recently with smart sourcing to help leaders find and source new employees faster. And, you know, recently with our core leadership dashboard, you know, it really helps leaders understand where they are, you know, how their employees are viewing them from a coaching perspective, from an optimization perspective, are they making them better? And then are they engaged and are they going to stay longer? And it really provides people real-time feedback from their associates in order to be a better leader. You know, obviously, we believe that leaders, you know, drive associate engagement, and associate engagement drives overall productivity for our clients. And if we can continue to help deliver that for our clients, they're going to be more successful. And so people are definitely resonating to the message, and so we're excited about where we are. And we're going to continue to add more differentiated tools for frontline leaders to help them be more effective.

Excellent. Thank you very much.

Thanks, Mark. Thank you. Next question is coming from Mark Marcon from Beargilline. Is that live?

Good afternoon, Raul and Adam, and congratulations. I'm wondering if you can talk a little bit more about the strong success that you're having with the employers that have more than 500 employees. Is there any difference in terms of the sales strategy, in terms of how you've targeted people, what is really standing out that's helping you in the upper end of your market?

Yeah, I think it's a combination of things. Obviously, you know, as we put more focus on those prospects, you know, from a sales perspective, you know, we're going to get more at-bats. The product itself over the last few years has significantly added feature functionality where we're differentiated from our peers and we believe we have the most robust solution in HCM. And our PEPM would demonstrate that. So, you know, ultimately, I think it's the feature functionality, the ease of use of the platform, and our robust talent tools that are driving success in that 500-plus market so far.

That's great. And then you did talk a little bit about, you know, your AI recruiting capabilities and pay core smart sourcing. Can you talk a little bit about to what extent that's helping, particularly with a tight labor market, and what you view from a longer-term perspective, the implications of generative AI like ChatGPT and the technology that is leaping forward, both in terms of how you service your clients, but also additional features and functions that you could provide?

Yeah, I mean, PayCore Smart Sourcing is amazing technology and an amazing addition to our portfolio. And, you know, we've already have clients in beta and, you know, we've already sold, you know, over 100 clients, you know, on PayCore Smart Sourcing in, you know, less than 45 days. And so we're excited about the prospects. People see the value. It's a time saver. And it essentially, instead of asking a frontline leader to kind of view through hundreds of LinkedIn profiles or resumes stacked in their desk, you know, we do that work for them through AI and provide them a list that, you know, they should start with first. And so it's a home run. And we're really excited about it. And we're going to continue to do you know, see more adoption, you know, on our next call, we're going to be really excited to share the results. I'm really confident about that. I think, you know, AI in general, there is tremendous opportunity across the entire HR platform to leverage the data that we have to provide insights to our customers. So that's one our product team is continuing to evaluate and work on. And obviously the team that we acquired with Telenia are experts at this and will help us think through our long-term strategic planning about how to leverage AI across the other modules of our platform. Internally, obviously there's plenty of opportunities to use that kind of functionality to improve the user experience, whether it be through Essentially, we already have chat with a person, and now you can have chat without a person. It's not a be-all, end-all solution by any means, but I think it's part of a future user experience that will help separate PACOR from the rest.

Perfect. Thank you. Thank you.

Thank you. Next question is coming from Jackson Adder from SVB Moffitt Nathanson. The line is now live.

Hi, guys. This is Kyle Dillon for Jackson. Just a quick one. I think, Adam, you had mentioned that there was no material change in labor or demand environment factored into your guidance. But in terms of the $30 million float for the full year, does that take into account any future rate hikes or is that kind of just where we are today?

Yeah, it's based entirely on where the rate environment is today. So, yeah, any increase in rates going forward would, you know, mean there's additional upside.

Got it. Okay. Thank you. Thank you. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you again for joining us tonight. We're encouraged by the momentum in the PayCore business and remain laser focused on executing our strategy. We look forward to connecting with many of you over the next few weeks and we wish you all a great evening. Good night.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today. Hello. Thank you. Thank you. Thank you.

Thank you.

Hello, and welcome to the PayCore second quarter 2023 earnings hall. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to VP of Investor Relations, Rachel White. Rachel, please go ahead.

Good afternoon and welcome to PACOR's earnings call for the second quarter of fiscal year 2023, which ended on December 31st. 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, 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 as 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 second quarter results. PACOR's modern, open platform with differentiated tools for leaders and industries continues to resonate with clients and win in the market. Revenue grew 29% this quarter, driven by record bookings and ongoing PEPM expansion. Adjusted operating income margin increased by over 300 basis points year over year, and we believe there is significant opportunity to drive further expansion as we scale. Based on these robust results and our optimistic outlook for the remainder of the year, we are once again raising our guidance which Adam will discuss in more detail. Our go-to-market motion continues to deliver excellent results as we strategically expand sales coverage in Tier 1 markets, leverage influential broker relationships, and continue to grow our average deal size. We are ahead of schedule with sales hiring and already achieved a low end of our 20-plus percent seller headcount growth target for the year. We like our sales staffing level and will continue to evaluate additional hiring in the second half. We offer the only modern cloud platform empowering frontline leaders to be more effective by providing the insights and tools required to source, attract, develop, and retain their employees. This quarter, we introduced the Core Leadership Dashboard, that provides actionable information to help transform managers into effective frontline leaders. The core leadership dashboard surfaces real-time employee insights and evaluates leadership effectiveness by gathering feedback on how well they coach, optimize, and engage their team. Armed with these insights, companies will understand leader effectiveness and be able to tailor ongoing leadership development. Given the continued tightness in the labor market, our client's top priority remains finding and retaining talent. This quarter, we closed the Telenia acquisition and began beta testing PayCore Smart Sourcing, which leverages AI to simplify and streamline the sourcing efforts of frontline leaders to find skilled and diverse talent. Interest among our client base has been robust, and early feedback is extremely positive. With the addition of PayCore Smart Sourcing, our full suite of solutions is $44 PEPM, and is the most comprehensive A-Team offering available in the SMB market. Our platform's modern architecture enables rapid integration of point solutions, such as Telenia, that provide deeper functionality than traditional suite providers. With nearly 90 different public API endpoints available to power integrations, PayCore offers the most modern interoperability solution with a broad array of partners for our clients. We are incredibly proud PayCore was distinguished as a top workplace USA by Energage for the third year in a row. Energage's Top Workplaces program has a 15-year history of surveying over 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. This award underscores our commitment to exemplify the cultural best practices that impact associate engagement and business performance. Let me close by reiterating how confident we are about PACOR's outlook. The labor market remains tight as non-farm payrolls continue to increase, job openings are at elevated levels, and workforce participation remains low. Modest changes in unemployment or job openings are unlikely to materially impact our business as most of our revenue growth is derived from new business and the market is still in the early stages of adopting modern cloud-based HCM solutions. Furthermore, HCM is highly defensible as our value proposition is mission critical to attracting, paying, and retaining great talent, while also driving a compelling return on investment for our clients. Lastly, I would like to thank all PayCore associates for their efforts through this calendar year-end, especially our implementation, support, and success teams, who during our busiest time of year provided an amazing year-end experience for our clients. With that, I'll turn the call over to Adam to discuss our financial results and guidance.

Thanks, Raul. I'll discuss our second quarter results, then share our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. We had another strong quarter, delivering total revenues of $133 million, up 29% year-over-year, and recurring revenue growth of 22%, marking the fifth consecutive quarter of 20-plus percent revenue growth. We exceeded the top end of our revenue guidance by 4% and significantly outperformed our adjusted operating income guidance as we continue to scale the business. The majority of revenue growth continues to be from new business wins. 90% of our revenue is derived from companies with between 10 to 2,500 employees, where we continue to see outsized growth. Effective PEPM increased 11% year-over-year, which includes cross-sale as well as pricing initiatives such as the conversion of our clients to our latest product bundles, and it also includes the impact of higher bundle adoption at the point of sale. In addition, we're pleased with the progress we're seeing across our partner program as we continue to expand our interoperability platform. The number of employees on our platform increased to more than 2.3 million, up 9% over the prior year, and we exceeded 30,000 customers. Our average customer size increased to 78 employees at the end of Q2, up from 74 in the prior year as we continue to focus our resources in the mid-market with clients above 100 employees. However, on a sequential basis, organic customer growth has been essentially flat following strong growth earlier in calendar 2022. As we shift our portfolio upmarket, we continue to see moderation in employee growth in the micro segment, while the number of employees in the mid-market and enterprise segments increased 11% year-over-year. And net retention continues to trend favorably. Adjusted gross profit margin excluding depreciation and amortization improved to 77.9%, an increase of about a point and a half year-over-year as we continue to scale the business. Sales and marketing expense was $42 million, or 32% of revenue, comparable to levels a year ago. We continue to strategically expand our sales teams and marketing programs, primarily in Tier 1 markets. We like the current level of spend and continue to evaluate investments to ensure that they will deliver an attractive return, but we have the flexibility to quickly pivot if we were to see a change in the demand environment. On a gross basis, we invested $23 million in R&D, or 15% of revenue, a similar level to last year and in line with our long-term targets. We continue to focus on efficiently enhancing our modern platform to deliver on our leader strategy, whether it's through organic development, partnerships, or acquisitions. G&A expense was $19 million, or 14.5% of revenue, down a point and a half from 16% in the second quarter of 2022. We intend to progressively drive G&A down as a percentage of revenue as we scale the business. While we continue to focus on building a sustainable 20-plus percent revenue engine, we are also steadily expanding margins as we scale the business. This quarter, adjusted operating income increased to $18 million, or a 13% profit margin, up more than 300 basis points from the 10% last year, even while continuing to expand investments in sales and marketing and R&D. Shifting to the balance sheet and cash flow, this quarter free cash flow was a $3 million spend compared to a negative $7 million last year. We remain on track to deliver on our plan to be free cash flow positive for the full fiscal year. We closed the quarter with $72 million in cash and no debt. Turning to client funds, this quarter we generated just under $8 million of interest income on average client funds of about $1 billion, an effective rate of just over 300 basis points. In terms of our outlook for the second half of the fiscal year, we remain optimistic on the HCM demand environment. Our guidance assumes no material change in the broader demand environment or labor market, which has been fairly consistent, and flat organic employee growth among existing customers for the balance of the year. For the third quarter, we expect total revenues of between $155 and $157 million, or 28% growth at the high end of the range, and adjusted operating income of between $35 and $36 million. For the full year, we expect revenues of $539 to $545 million, or 27% growth at the top end of the range. And we anticipate adjusted operating income of $75 to $78 million. With respect to interest income, we expect our effective rate to increase marginally in the third quarter to about 330 basis points. At today's rate, we expect interest income will be in the range of $28 to $30 million for the full year on average client fund balances of just over $1 billion. We still plan to reinvest a portion of interest income as we've discussed this year to accelerate our product roadmap and expand our marketing programs and invest in infrastructure. However, we will look to drop any incremental interest income beyond that to the bottom line, which will increase our full year outlook on margin and cash flow. Overall, we're pleased with our strong quarterly performance and ability to raise guidance again. We've driven increased profitability three consecutive quarters. Our differentiated platform, focused on leaders, continues to win in the market. As a mission-critical application, we believe in the durability of the category and our opportunity to continue capturing share with the expanding $32 billion HCM market. With that, we'll open the call for questions. Operator?

Thank you. And I'll be conducting your question and answer session. If you'd like to be placed into question queue, please press star 1 at this time. A confirmation tone will indicate your line is in the question queue. If you'd like to remove your question from the queue, please press star 2. One moment, please, while we poll for questions. Our first question today is coming from Gabriela Borges from Goldman Sachs. Your line is now live.

Hi, good afternoon. Thank you. Raul, you mentioned all of the ways in which your business continues to perform in this environment, so I figured I'd ask the question directly. Are you seeing any negative impacts or offsets because of the macro?

You know, to date, we haven't seen any changes in our overall demand environment. Things have been fairly consistent, and they've been fairly consistent across all of our sales segments. So to this date, you know, we've seen strong demand.

Yeah, Gabriel, the one thing I would say is that we've just seen a little bit more softness in that organic customer growth in that sort of micro segment, really small segment under 20 employees. Besides that, there's really nothing else that we're seeing.

Excellent. The follow-up that I have is on how you're thinking about normalized growth. I know that very consistently now you've been doing north of 20% recurring revenue, even on more difficult comps. So how do you think about potentially getting to 25%? How do you think about potentially accelerating your hiring further? Are there puts and takes that could potentially put you back down to 15% that are out of your control? So just a little bit more on how you think about normalized growth.

Yeah, I mean, the way that we think about it is that it's about the broader demand environment, our ability to grow the sales organization at pace and do it well so that we continue to, you know, drive the profitability and the overall return out of that investment across the sales channel. And, you know, we feel like there's sort of a natural limit in terms of that 20%, 25% headcount growth, which is what we've been targeting for the last couple years. And so, you know, as we think about our ability to grow faster than that, we just haven't seen – We've seen that operationally it's just a little bit more complex or there becomes a point of diminishing returns. And I think that there's, you know, so in that 20% plus range for us right now is where we feel comfortable in terms of building that sustainable economy. sales, you know, engine to drive that growth. And then the opportunity will be to continue to expand that sales organization and the efficiency of that spend even further. So, you know, the way that we talked about it a couple years ago and over the last two years now has really been about being consistent in the sales execution, developing this engine and this flywheel that can continue to grow. And so it's just about continued execution over the next, you know, couple quarters to stay above 20%, I think.

Yeah, the other dynamic, Gabrielle, is that we'll continue to add PEPM along the way. So, you know, we really think about it as two key components to drive consistent, sustainable, long-term growth as our ability to continue to add sales headcount. and our ability to continue to expand our PEPM and our average deal size. And so, you know, we feel confident we've made great progress moving into, you know, the 20-plus percent range, and we're going to continue to execute and focus, and obviously we want to continue to, you know, improve our performance over time.

It all makes sense. Thank you.

Thank you. Thank you. Next question today is coming from Samad Samana from Jefferies. Your line is now live.

Hi. Good evening. Thanks for taking my questions. So maybe first, for Adam or Raul, either one, just the effective PEPM growth of 11% year-over-year, really strong. I know you mentioned a few factors, Adam, such as higher bundle adoption and good cross-sell, but I'm curious if you could maybe help us think about in the quarter which of those factors had the greatest contribution and if that's any change from what you've seen in the last few quarters.

Yeah, hey, Saman. Yeah, I mean, what we see is that it's really the combination of three key things, like we mentioned, right, the conversion and that subscription bundle. We see higher adoption at the point of sale. We see pricing initiatives as well that go into that. And I would say it's sort of a combination of all three. Each quarter fluctuates a little bit depending on the initiative that's going in. broadly, and over the last couple quarters, it's been fairly consistent, close to a third across each of those items. So there's not one item that necessarily sticks out one or the other. It's been pretty consistent, and we've seen really good execution across those three dynamics.

Great. And maybe, Raul, for you, it sounds like hiring for sales is on track to where you're expecting. Maybe could you touch on that and just sales productivity? How is that metric trending, especially as you onboard more and more at a larger scale?

Yeah, so hiring has been really strong. Retention has been excellent, which has really helped us to get into a really solid staffing perspective. And productivity, as we would expect, our new people produce at a lower rate, and they slightly drag down the overall productivity based on the outside of hiring. But by and large, our tiers are operating better. you know, as we would think from a 10-year perspective, our first-year bucket, our second-year bucket, and then beyond two years. So we feel really good that, you know, the flywheel's working, we're onboarding people successfully, and, you know, we're focused on execution.

Great. Super helpful. Great to see the results.

Thank you.

Thanks.

Thank you. Next question is coming from Bob and Shaw from Deutsche Bank. Your line is now live.

Hi, everyone. It's Nick on for Bob and this evening. Thanks for taking the question and congrats on the strong quarter. Looking back on new sales in the quarter, was there any change in composition of those deals, say, in either size, industries, or modules bought? And, yeah, start there.

Yeah, thanks, Nick. I would say, again, we had consistent results across all segments. I would say that we saw – you know, stronger results, you know, above 500 employees than traditional. So the product's really shifting and we're seeing a lot of traction up market, which is, you know, newer for us than maybe others. And, you know, that's the primary dynamic that we saw this quarter. I mean, essentially, you know, all of our segments are operating, you know, as designed, and we saw a little more take in that 500 space. From a module perspective, you know, talent continues to fly off the shelf, and, you know, we're seeing high attach rates, and we actually charge for it. So it's... It's been a great opportunity for us, and we're really excited about it. It's differentiated, and it's winning in the market.

Great. And then just with the success of some of the sports partnerships that you've had, how are you thinking about your marketing investments going forward?

Yeah, from a marketing perspective, obviously the sports partnerships have provided some great air cover. We're getting significant awareness And it's really been a positive for PACOR as a whole and helping us as we expand, you know, nationwide. I would say, you know, we're continuing to focus on, you know, all facets of the marketing engine and really looking to continue to help you know, streamline entry into all these new markets. And so we're really focused on connected TV and driving ads through that. We're focused on continuing to increase, you know, our traffic online. And so I think all of those things are helping drive top of the funnel awareness. We're seeing record impressions, record traffic to paycore.com, and record leads. So we feel really good that the actions that we've taken and the marketing team has done an amazing job driving brand in these big relationships and making sure that we're maximizing our ROI on them. Great. Thank you.

Thank you. Next question is coming from Terry Tillman from Truist. Your line is now live.

Hey, good afternoon, Raul, Adam, and Rachel. Thanks for taking my question. I guess the first question is just, Raul, I think you said in your prepared remarks that it was a record bookings. Is that for 2Q or is that for any quarter?

It was a record for 2Q.

Got it. Okay, thanks. And I was curious about tier one markets. Any specific call-outs, whether it's kind of TFC markets, Texas, Florida, or California, or any other Tier 1 markets that kind of stand out in terms of kind of where you are versus what your expectation was? And I'm curious in those markets, since you've had some time now, what are win rates and new seller productivity like in those Tier 1 markets versus your traditional sweet spots? Thank you.

Yeah, so we've seen, you know, significant growth, over 100% growth in L.A., San Francisco, South Florida. Yeah. and the DC Marketplace, those four are standouts for us. And as a whole, our win rates for our new sellers are on par with the win rates for our overall sales organization. So the sales operations team is doing a fantastic job of getting people up to speed on our value proposition and enabling them with the tools required to be successful out of the gate. So that's a real positive component for us.

Thanks.

Thank you. Thank you. Next question today is coming in from Brian Bergen from Cowan. Your line is now live.

It's actually Jared on for Brian tonight.

In terms of year-to-date net revenue retention performance, how does that compare year-over-year in terms of your FY23 guide? Does that embed a change relative to FY22?

So the net retention has been performing well. I would say it's been fairly consistent quarter over quarter. It's been trending well. And yeah, Q1 of last year, while any one quarter isn't necessarily a good metric here on net retention, Q1 of 22 actually was rather low for us as we were going in, sort of growing over some of the COVID challenges. So on a year-to-date basis, it's technically up. But it's been really consistent over the last, you know, call it five quarters now. So we feel good about the net retention. And of course, our expectations around that are included in our guide.

Okay, great. And then in terms of the calendar 1Q form filings, are you expecting a year-over-year tailwind related to those form filing activity and anything different there in the compare this year, either quarter on quarter on year on year basis to be mindful in terms of that outlook?

Yeah, I mean, I'd say that it's looking like it's going to be fairly consistent with where it was last year. We were wondering if we were going to see a little bit of an acceleration, but it's been really consistent with where I would sort of expect it to be from pre-COVID levels. So it looks like it's normalized. And I think that it's driven, you know, more dynamically by overall employee retention, right, for our customers, our customers' employees' retention, which has been maybe a little bit more consistent this year and back in line with pre-COVID levels. So nothing, I don't think that we would expect anything to look different as it has, you know, materially from any of the prior sort of pre-COVID years.

Great. Thank you. Thanks, Eric. Thanks, Eric. Thank you. Next question is coming from Scott Berg from the Eastman Company. Your line is now live.

Hi, everyone. Congrats on the nice quarter, and thanks for taking my questions. I guess I have a couple. First of all, payroll and HCM in general, at least demand for these solutions, kind of on all customer segment levels, seems to be holding up extremely well today and much better than the other software segments that I think that most of us on this call cover. As you look at the kind of what's going on under the covers, any idea why in particular today is just, you know, this great HCM environment versus others that are seeing that softness? Thanks.

Yeah, I think a couple things. One is it's like some of your other software companies that you cover, we're not a land and expand, so there's not any requirement or expectation that you're going to add more seats, so to speak. That's one. Secondly, I think the category as a whole has changed over the last decade, and it's really added some really powerful modules around recruiting, around attracting, around retaining employees. And so in this hyper-tight labor market, I think that's been a big driver of accelerated demand. Secondly, Um, you know, cloud solutions and ATM kind of lag behind the adoption rate of some other, you know, solutions that you would cover. And so we didn't have this explosive demand out of the gate. And I think COVID has really helped open up the eyes to, to people that buy our solutions that, you know, ATM in the cloud is something that can be, uh, helpful to their organization. So I think the combination of the, the, um, the cloud acceptance in our category The additional modules that we're adding that are helping other facets of the organization outside of traditional finance, or traditional HR have really made the solutions more powerful and more attractive. And again, the three modern players in our space combined have somewhere between 8% and 12% share. So there's a really big pie of legacy solutions still available for us to continue to convert over to a more modern solution. And I think that's why you're seeing really strong demand across the board.

Got it. Helpful. And then from a follow-up perspective, you mentioned your sales hiring is on track and you've already achieved the low end of your range. As you look at the placement of those individuals this year, I know tier one cities have been the focus, but these hires, are you looking at putting them in maybe different geographic locations or customer segments than what you were six or nine months ago, just seeing if there's any slight change to your strategy relative to the current demand trends you're seeing?

No, I mean, we're still really focused on, you know, the majority of the people we're hiring are, you know, focused on what we would call 50 to 1,000 segment, 50 to 2,500. And, yeah, we have pockets where we have reps that are focused on 250 employees and above. But, you know, ultimately, you know, we're still in the early innings of coverage. in the fact that we're still, while we cover the entire market, we have opportunities to continue to add, we have opportunities to nearly double our current sales organization in order to secure what we would consider optimal coverage. So we have a long runway to go. If we want to add heads, we can continue to do that. And we'll look at different designs, Scott, whether it's, you know, 50 to 250 or... 50 to 2,500 or 250 to 2,500. There's a lot of different ways and markets to look at it. And you don't want to be robotic in your approach to the market. So we'll look at all different options. And our objective is to maximize our LTV to CAC.

Great. Congrats again. That's all the questions I have.

Yeah.

Thanks, Scott.

Thanks, Scott.

Thank you. Next question is coming from Brian Peterson from Raymond James. Your line is now live.

Hey guys, thanks for taking the question. Just one for me. It's actually a bit of a follow-up to Scott's question, but there's a lot of metrics that you have given in terms of PEPM and growth and bookings and everything else, but I'd love to understand how the pipeline looks. If you look at those embedded opportunities in the pipeline, what are you seeing in terms of the PEPM and the module adoption? I'd just love to understand what you're seeing in terms of the opportunities that we should be expecting going forward. Thanks, guys.

Yeah, hey, Brian. Yeah, I mean, when we look at the pipeline, I'm not sure that it looks any different than what we've seen historically. And I think the big thing, of course, is everybody buys payroll. Everybody gets the sort of HCM core platform. That's table six now and part of that bundle adoption at the point of sale that we've been talking about. And then we continue to expand our talent suite. Now, with the addition of PayCore Smart Sourcing and the Telania acquisition, it's going to continue to expand that talent solution. And we're already seeing interest and really strong demand around that solution really early days. So... I think that's where we're seeing a lot of growth. We're seeing a lot of growth in the portfolio come from talent. We continue to see our enterprise segment and the larger end of our customer segment looking for more talent solutions, which continue to drive that ADS up and continue to drive Peppum up, where the payroll historically has been a lower part of that rate. So I think that's what we see. The same thing inside of our pipeline is that that continues to grow with more and more customers looking for talent solutions.

Great. Thanks, Adam.

Thanks a lot. Thank you. Next question is coming from Patrick Walravens from J&P Securities. Your line is now live.

Hi, everyone. Thanks for taking the question. This is Owen on for Pat, and congrats on the strong quarter. So I was interested in the interest income line, and I guess what the mix was of a investment back into business versus straight to the bottom line previous to all these interest rate hikes?

Yeah, so when we were going into the year, we were, you know, we were expecting something in that sort of $12 million range, 12 to growing to 24. And we were targeting about half to looking to spend about half of that at that 20 to $24 million range. And I think that, you know, there comes a limit where we just simply can't consume more. We don't like what the returns look like for that incremental investment. So, you know, we've been targeting about half. meaning that we would be maybe in that $10 million to $12 million range on the full year of investment or reinvestment of those interest income funds. And I think that's probably where we're going to end. So as we look at the increase to $30 million in this case, we're not necessarily looking to – I mean, we'll look for opportunities to invest it, but I don't think that we're going to see the opportunities that we're looking for, and so that will sort of naturally fall down.

Awesome. That's it for me. Thank you.

Thank you, Colin. Thank you. Next question today is coming from Andrew Warren from D. David's Senior Line. It's now live.

Hey, guys. Thank you. I was just curious how CrossL is doing with additional modules to existing customers, if you guys are seeing success there. And then kind of along with that, if you guys are seeing any success in getting price increases through.

Yeah, on the cross-selling side, you know, we continue to have strong success with our client sales team selling additional modules into the base. Obviously, they're really focused on, you know, talent as a primary driver, and so we've seen strong growth there and We're going to continue to grow that team thoughtfully over time, and the team continues to play a big contribution to our overall growth, and we're excited about where we are with them. As far as the pricing goes, I'll let Adam walk you through that.

Yeah, we try to be really intentional about those price increases and make sure they follow the value that we continue to deliver for customers around either additional functionality or features and service. And so we've invested a lot in incremental product. We've released a lot of product and developed a lot of great features that we've released to our customers, as well as invested pretty heavily in our service and support organizations. And so we've been able to see pretty good take on those incremental price increases. increases that we've been able to put into the portfolio. And of course, we're really intentional with it. We don't want to be jumping out constantly with them. So it usually takes a couple of years before a client comes in, before we look at price increases. And since the portfolio is growing quite nicely with a lot of new customers over the last couple of years, we've been able to revisit those prices pretty regularly.

That's awesome. Thanks, guys.

Thank you. Thank you. Next question is coming from Steve Enders from Citi. Your line is now live.

All right, great. Thanks for taking the question here. I guess I want to ask a little bit on the verticalization strategy and how that's been resonating in the quarter. Anything to call out that's all particularly kind of strong bookings, bookings traction here?

Yeah, so from a bookings perspective, the way you should think about it is slightly over 50% of our mix is coming from the four key industries. For a little flavor, I would say we had really strong results in professional services. and food and beverage and accommodations this quarter. And I would say healthcare, you know, kind of was a little lagging behind this quarter. You know, they're obviously growing over tougher comp from the previous years. But that's how I would think about industry. We're really excited about the progress we've made. We continue to invest. into product differentiation and tools for implementation for our clients so we can easily customize the tool for them for their specific industry.

Okay, gotcha. That's helpful. And I guess just a housekeeping question, just on the Talendian acquisition, I guess, what was kind of the impact in the quarter from a REV contribution and what's kind of embedded in and the outlook there going forward?

Yeah, it's really immaterial to the P&L. So we see it's like well less than 1% of our overall revenue for the year, well less than that. So it's really more about the fantastic technology and getting that into our platform and how we're going to be able to take that to market through our broader suite. But there's almost no impact to our financials.

Okay, perfect. That's helpful.

Thanks, Steve. Thank you. Our next question today is coming from Pat Walravens from JMP. Your line is now live.

Oh, great. Thank you. Congratulations, Pat, for Pat this time. Hey, Raul, as a follow-up, it caught my attention when you reeled off three metro areas that were doing particularly well. I think L.A. was one of them. Taking L.A. as an example, what would make L.A. a place where you see particular success? What are some of the characteristics that would drive that?

Yeah, I mean, I think it's overall business density, obviously, critical. The fact that we have continued to grow our sales team there, and we're entering the third year, so we're starting to see that tenure build up in the marketplace. And when you add a really large, dense marketplace there, you know, that's been saturated on legacy solutions that are just looking for something modern, you know, as we've entered there, we've seen a lot of strong success.

And you said this was year three?

Yeah, we really started in 21, and this will be our third fiscal year. You know, we're about two and a half years in.

Yeah, so I mean what I'm getting at here is sort of the longevity of this growth trajectory you're on, right? So how many LA-type or big metro areas are there out there where you feel like you guys are just getting started?

Yeah, I mean, so if you think about it, we really manage the 50 metro markets. and we break them into Tier 1, Tier 2, and Tier 3. And I would say Tier 1, which is the 15 largest, which includes L.A. and San Francisco and Miami, I would say we're in the early innings. We're about a third of the way there. And when you think about Tier 2 markets, which are the next 15 biggest cities in America – You know, we have, again, you know, tons of opportunity to continue to expand. We're slightly more covered there. And so for us, it's a long runway of continuing to add headcount, but also seeing that headcount mature through the tenure cohorts and continuing to drive productivity. Awesome. Thanks a lot.

Thanks a lot, Pat. Thank you. Our next question today is coming from Mark Murphy from JP Morgan. Your line is now live.

Thank you very much, and I'll add my congrats. I was wondering, first off, if you can speak to the trend you're seeing with your own real-time pay solution. I believe that one is a third-party solution called PayActive. Anything just in terms of what percentage of payees in your system are using it or how much revenue is flowing around between PayCore and the third-party provider there?

Yeah, hey, Mark. You know, while we see good adoption or sort of continuing growth in the adoption, it's still just overall, I mean, the materiality is, I mean, it's immaterial in terms of its impact on the revenue. So I think that we're expecting that this build is going to take years to get it to a point where the card economics are really enabling any sort of real revenue impact. When we see clients adopt it, you usually see a couple of employees in a company using the card, and then it takes some time for them to really start to get into actually using it somewhere that drives card economics. What we see most of the time is that clients or employees are downloading it to their own pay card, or they're taking the cash out right away versus using it on the card, and so the economics just sort of occur a little bit differently. So with that in mind, I mean, I just think that it's going to be a long runway to revenue there. I think the benefit is more in terms of it's a benefit to our customers to be able to enable for their employees. And so the customers feel good about it. There's not... huge cost to their employees. And so it's a benefit that they can provide their employees that really just continues to give. It's become table stakes almost, you know, because we put it into that the core offering and a lot of competitors do too. But I don't expect it to be, you know, material to revenue for the foreseeable future.

Okay, but Adam, if I understand the way you're describing that, there is some interesting percentage of payees that are kind of taking their cash out more often than the twice a month basis. I mean, is that a fair way to think about it, right, whether they're taking cash out right away versus using it on the card?

Yeah, yeah, absolutely. I mean, there's definitely people using it for sure. It's a benefit to associates for sure.

Yeah, okay. And then, Raul, regarding the focus that you've had for a long time now on the leaders within an organization, I'm interested in whether that is resonating perhaps in some new and different ways just because this unique type of environment that we have where unemployment, I think, is at a 50-year low. Wage inflation is so high. I mean, companies must have sort of a heightened interest in how they're leading, how they're managing, how they're retaining the workforce. Is that something that is kind of tangibly different for you in this environment?

Clearly, you know, talent is one of the biggest reasons why we win and our win rate is so strong. And we continue to invest in opportunities, whether it's you know, was goal setting or, you know, most recently with smart sourcing to help leaders find and source new employees faster. And, you know, recently with our core leadership dashboard, you know, it really helps leaders understand where they are, you know, how their employees are viewing them from a coaching perspective, from an optimization perspective. Are they making them better? And then are they engaged and are they going to stay longer? And it really provides people real-time feedback from their associates in order to be a better leader. And so, you know, obviously we believe that leaders, you know, drive associate engagement and associate engagement drives overall productivity for our clients. And if we can continue to help deliver that for our clients, they're going to be more successful. And so people are definitely resonating to the message. And so we're excited about where we are. And we're going to continue to add more differentiated tools for frontline leaders to help them be more effective.

Excellent. Thank you very much.

Thanks, Mark. Thank you. Next question is coming from Mark Marcon from Beargilline. Is that live?

Good afternoon, Raul and Adam, and congratulations. Wondering if you can talk a little bit more about the strong success that you're having with the employers that have more than 500 employees Is there any difference in terms of the sales strategy, in terms of how you've targeted people? What is really standing out that's helping you in the upper end of your market?

Yeah, I think it's a combination of things. Obviously, as we put more focus on those prospects from a sales perspective, we're going to get more at-bats. You know, the product itself, you know, over the last few years has significantly added feature functionality where we're differentiated from our peers and we believe we have the most robust solution in HCM. And our PEPM would demonstrate that. So, you know, ultimately, I think it's the feature functionality, the ease of use of the platform, and our robust talent tools that are driving success in that 500-plus market. so far.

That's great. And then you did talk a little bit about, you know, your AI recruiting capabilities and pay core smart sourcing. Can you talk a little bit about, you know, to what extent that's helping, you know, particularly with a tight labor market and what you view, you know, from a longer term perspective, you know, the implications of generative AI, you know, like chat GPT and the technology that that, you know, is leaping forward in terms of both in terms of how you service your clients, but also, you know, additional features and functions that you could provide.

Yeah, I mean, PayCore Smart Sourcing is amazing technology and an amazing addition to our portfolio. And, you know, we've already have clients in beta and, you know, we've already sold, you know, over 100 clients on PayCore Smart Sourcing in less than 45 days. And so we're excited about the prospects. People see the value. It's a time saver. And it essentially, instead of asking a frontline leader to kind of view through hundreds of LinkedIn profiles or resumes stacked on their desk, we do that work for them through AI and provide them a list that they should start with first. And so it's a home run. And we're really excited about it. And we're going to continue to do this. you know, see more adoption, you know, on our next call, we're going to be really excited to share the results. I'm really confident about that. I think, you know, AI in general, there is tremendous opportunity across the entire HR platform to leverage the data that we have to provide insights to our customers. So that's one our product team is continuing to evaluate and work on. And obviously the team that we acquired with Telenia are experts at this and will help us think through our long-term strategic planning about how to leverage AI across the other modules of our platform. Internally, obviously, there's plenty of opportunities to use that kind of functionality to improve the user experience, whether it be through Essentially, we already have chat with a person, and now you can have chat without a person. It's not a be-all, end-all solution by any means, but I think it's part of a future employee user experience that will help separate PACOR from the rest.

Perfect. Thank you. Thank you.

Thank you. Next question is coming from Jackson Adder from SVB Moffitt Nathanson. The line is now live.

Hi, guys. This is Kyle Dillon for Jackson. Just a quick one. I think, Adam, you had mentioned that there was no material change in labor or demand environment factored into your guidance. But in terms of the $30 million float for the full year, does that take into account any future rate hikes or is that kind of just where we are today?

Yeah, it's based entirely on where the rate environment is today. So, yeah, any increase in rates going forward would, you know, mean there's additional upside.

Got it. Okay. Thank you. Thank you. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you again for joining us tonight. We're encouraged by the momentum in the PayCore business and remain laser focused on executing our strategy. We look forward to connecting with many of you over the next few weeks and we wish you all a great evening. Good night.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.