Paycor HCM, Inc.

please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Rachel White, Vice President of Investor Relations. Thank you, Rachel. You may begin.

Good afternoon and welcome to PACOR's earnings call for the fourth quarter and fiscal year 2024, which ended on June 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 site. Today's call is being reported 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, 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 are 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 fourth quarter and full year results. Our unique value proposition of empowering leaders to drive people and business performance continues to win in the market and help drive revenue growth of 18% for the quarter. For the fiscal year, our team executed against our strategic growth initiatives. increasing the average number of employees on our platform by 9% and expanding the amount we earn per employee per month, or PEPM, by 6%, resulting in 19% revenue growth. We delivered significant adjusted operating income and free cash flow margin expansion this fiscal year while strategically investing in our platform and customer experience. Demand remains healthy as most employers are struggling with antiquated and incomplete HCM tools. Top of funnel metrics, including leads and first-time sales appointments, increased significantly year over year, and our win rates remained elevated as our value proposition resonates in the market. We continue to focus marketing investments and sales hiring on in the 50 largest cities in America, where we see the most opportunity. Our sales team grew 9% this year to 600 sales professionals, which increased our sales coverage in the 50 largest US cities from 52% to 55%. Average tenure, which drives seller productivity, increased 20% among our field sellers. A core component of our go-to-market strategy is developing and maintaining partnerships with key centers of influence. Benefit brokers help us identify employers that are dissatisfied with their legacy HCM tools and influence nearly half of our field bookings this year. Our mid-market product, client experience, and sales investments over the last few years continued to pay off as our average customer size and average deal size expanded for the third consecutive year. Since the IPO, the average size of our new mid-market customers increased 30%, helping to grow our average deal size by 55%. We are efficiently extending our distribution via the indirect embedded channel we announced earlier this fiscal year. Our strategic partners enhance their revenue per client and customer retention by offering a modern embedded HCM solution to their clients and prospects. In this past quarter, we continued converting our third partner's portfolio and the three new partners we announced last quarter began selling. We also signed several new partners this quarter, tripling our indirect partners over the last year. Our team also continued expanding our award-winning HCM platform with valuable new capabilities for our customers. Our product investment remains focused on deepening our core platform, further enriching our talent solution and enhancing the connectivity of our platform. This year, we released technology that empowers leaders such as pay benchmarking, pay core paths, and labor forecasting, and increased the value of our suite by $8 to $53. Within our core platform, we recently launched a new compensation management solution that streamlines budgeting and pay cycles and adds another $2 to our suite. Our collaborative tools foster alignment across teams, helping leaders ensure equitable and competitive compensation within budget while driving employee engagement. Revenue from our robust talent suite increased nearly 40% again this fiscal year. validating our unique value proposition of empowering leaders to coach, optimize, and retain top talent to drive business results. Using our unrivaled talent tools, frontline leaders are improving employee engagement, which is increasing employee retention by 10% and helping drive better business outcomes. We also significantly advanced our interoperability strategy this year. According to Finch, half of HR professionals leverage seven or more employment systems, and most of these applications are not integrated, leading to errors and inefficiencies. API use on our platform increased approximately 300% this fiscal year, demonstrating growing demand to extend HCM software to other business applications. We provide customers unrivaled flexibility to seamlessly connect their data and systems, enabling leaders to automate time-consuming, error-prone manual tasks. We have 300-plus pre-built integrations in our marketplace and made it easier to create custom integrations by increasing the number of API endpoints and our developer portal by more than 40% this fiscal year. The innovative developments we've made in our HCM platform continue to garner industry recognition. In May, PACOR won five Titan Business Awards spanning HR, analytics, workforce management, and talent. These tools empower leaders to connect and automate their back office. freeing them up to focus on what matters, building winning teams and driving business results. As we entered fiscal 25, we reflected on our strategy execution progress since the IPO. Over the last three years, we have grown revenue by over 85%, increased and adjusted operating income by over 130%, and generated nearly $50 million more in free cash flow, while expanding our sales capacity by greater than 60% and advancing our industry-leading HCM platform, growing our list pepum by more than 50%. We have made tremendous progress, and the opportunity before us is significant. On our path to $1 billion in revenue, we remain confident in our ability to deliver attractive growth while accelerating margin expansion. We believe there is a long runway to drive durable growth given the size of our market opportunity and the ongoing success we have had displacing legacy solutions, which represents 75% of our bookings. Our go-to-market motion has strong momentum as we are staffed to deliver our fiscal 25 targets and encouraged by how sales tenure and retention are trending. We have significant room to drive leverage as we scale, and our top priorities are to drive sales efficiency and accelerate cash conversion. As such, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We will do that while continuing to invest in our strategic growth initiatives, namely adding employees through sales expansion and increasing PEPM through product innovation. This progress wouldn't have been made possible without the efforts of our dedicated associates. I'd like to thank the team for their hard work and support in delivering these strong results. Now I'll turn the call over to Adam to discuss our financial results and guidance.

Thanks, Raul. I'll discuss our fourth quarter and full year financial performance and then share our outlook for the first quarter and next fiscal year. As a reminder, my comments related to the financial measures are on a non-GAAP basis. We had another solid quarter, delivering total revenues of $165 million, an increase of 18% year-over-year. Recurring revenue grew 17% over the prior year. For the fiscal year, total revenues were $655 million, increasing 19% year-over-year. Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month. This quarter, employees grew 8% over the prior year, driven by new business wins with a modest contribution from labor market growth. Net revenue retention was 98% this year, in line with our expectations as the labor market growth moderated. In a typical macro environment, labor market growth contributes a point or two of our revenue growth. While the U.S. labor market growth moderated over the last 24 months from historical highs of three to four points of revenue contribution, now closer to zero, it has remained slightly positive. We finished this quarter with approximately 30,500 customers, utilizing our platform to help coach, optimize, and retain nearly 2.7 million employees. We continue to see our average customer size and average deal size increase as we continue to move up market, demonstrating the success of our product and service investments. Similar to last year, mid-market customers represented 80% of our portfolio, with enterprise contributing 15% and a micro-segment of under 10 employees contributing just 5% of revenue. Effective PEPM increased 8% year-over-year to nearly $19 this quarter. Excluding embedded HCM deals, Effective PEPM increased 10%, fueled by expansion of our product suite. The growth and effect of PEPM is attributable to cross-sales, pricing initiatives, and higher bundle attach rates, and Talent has consistently demonstrated strong attach rates and cross-selling traction. Our embedded HCM channel continued to ramp and contributed two points of employee growth again this quarter. We have increasing demand from partners, and our pipeline grew sequentially for the fourth consecutive quarter. Although we are pleased with the progress and expect to at least double our embedded revenue in fiscal 25, it will take some time before it materially impacts our revenue. We continue to invest to scale and capitalize on this opportunity by expanding our capacity, our offering, and sales enablement tools to drive mutual success. This quarter, we generated $14 million of interest income on average client funds of approximately $1.2 billion, an effective rate of 490 basis points. In addition to achieving consistent top-line growth, we have continuously expanded operating margins on an annual basis. Adjusted gross profit margin excluding depreciation and amortization was 79% for the quarter and year. This quarter, it decreased by 40 basis points over the prior year due to macro headwinds, however, expanded by 40 basis points for the full year. This quarter, sales and marketing expense was $51 million, or 31% of revenue, down nearly 300 basis points from a year ago, largely driven by more moderated sales headcount growth and our focus on efficiency and scale. For the year, sales and marketing expense was $198 million, or 30.2% of revenue, an improvement of 160 basis points year over year. On a gross basis, we invested $25 million, or 15% of revenue, in R&D this quarter to continue differentiating our HCM suite and expanding our PEPM opportunity. We also invested 15% of revenue in R&D for the year, similar to prior years and in line with our long-term targets. As we scale the business, we have consistently driven leverage in G&A. G&A expense was $20 million or 12.1% of revenue this quarter, an improvement of 280 basis points from last year. On the full year, we achieved 150 basis points of leverage from G&A. Quarterly adjusted operating income increased over 60% to $25 million with margins of 15.2%, up 420 basis points from 11% last year. For the full year, adjusted operating income rose 36% to $112 million, up 215 basis points while differentiating our service and solution. During the quarter, we generated $37 million of adjusted free cash flow at 23% margin, up nearly 9 points. For the full year, we generated $40 million, or 6% margin, an improvement of 430 basis points. Free cash flow margins expanded at twice the rate of adjusted operating income margins as we scale the business and continue to focus on efficiency. We ended the year with $118 million in cash and no debt. In addition, our stock-based compensation expense decreased year-over-year to less than 10% of revenue with less than 1% share dilution. Entering fiscal 25, our top priorities are to drive sales efficiency and accelerate cash conversion. While growth remains our top priority, we believe a more balanced approach to profitability will maximize shareholder value. As Raul mentioned, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We plan to achieve this by balancing sales headcount growth with sales productivity to improve go-to-market efficiency and continuing to drive leverage in G&A as we scale. Similar to the dynamics this year, we expect adjusted free cash flow margins to continue expanding at roughly twice the pace of adjusted operating income margins. Our outlook for fiscal 25 remains positive, based on a healthy demand environment and opportunity to drive continued PEPM expansion. However, our guidance does reflect a fluid macro backdrop, including labor market headwinds and a declining rate environment, and of course, some conservatism at this point in the year. For the first quarter, we expect total revenues of between $161 and $163 million, or 14% growth at the high end of the range, which includes $12 million of interest income on average client funds balances of just over $1 billion. And adjusted operating income is expected to be between $17.5 and $18.5 million. For the full year, we expect total revenues of $722 to $729 million, or 11% growth at the top end of the range, including $48 to $50 million of interest income, which contemplates up to 200 basis points of rate cuts over the next fiscal year. And we expect adjusted operating income of $123 to $126 million. On a recurring basis, that implies more than 100 basis points improvement in adjusted operating income margins. In summary, we remain optimistic about our opportunity in HCM. Demand remains healthy for our innovative HCM solution that empowers leaders to unlock the potential of their people and business performance. Our solution is mission critical to attracting, paying, and retaining great talent. We're confident in our strategy and focused on executing a proven go-to-market playbook to deliver greater sales efficiency and free cash flow margins. With that, we'll open the call for questions. Operator?

Thank you. We will now be conducting a question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press SAR1 on your telephone keypad. a confirmation to indicate your line is in the question queue. You may press star two if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Thank you.

Our first question comes from the line of Terry Tillman with Truist Securities. Please proceed with your question.

Yeah, hey there, Raul, Adam, and Rachel. Hopefully you can hear me okay. I've added a question and a follow-up per instructions. The first question is just on maybe Raul, kind of ending the year, you know, looking for a strong finish in bookings. How did, what's the report card on the enterprise segment, which you've been excited about those thousand plus employee businesses, and then mid-market? What was the bookings like versus your expectations in The second part of that first question is, you know, I heard something about conservatism. Are you assuming kind of, you know, kind of slower kind of close rates or what are you assuming around bookings activity in both of those key segments? And then I had a follow up for Adam.

Yeah, the bookings. Thanks, Terry. The bookings for the quarter were really consistent and were well positioned to deliver our FY25 guidance. And we feel good about the trajectory here. of the organization.

Okay. And then maybe just to follow up, it's interesting in terms of a bunch of comments here on free cash flow progression and acceleration and then that 20% target. Adam, I was hoping maybe we could unpack a little bit more, you know, just any guardrails in terms of duration, the size of the business to get to that target, and is there anything more notable on gna or sales and marketing leverage to get there as well just a little bit more hopefully to unpack on you know when you get to that what that would look like in terms of some of those dynamics thank you yeah hey terry

Yeah, I mean, no explicit time frame other than, you know, sort of medium to long term as we think about our continued progression. There's not going to be any sort of structural pops that are going to get us to 20%. I think it's going to be, you know, continued expansion. And this year, clearly, it looks like we're on that sort of inflection point. And we think about, you know, continuing to expand and driving faster free cash flow conversion. So I think that trajectory makes sense for us. And in terms of getting there, I think you're going to see it, of course, across the board. There's still opportunity across G&A. Over time, we think that there's some further opportunity across R&D and gross margin. But I think the majority, where we're going to see the real difference is going to come out of the cost of acquisition. So between our implementation and our go-to-market teams, it's really around leveraging that investment. And we're starting to drive some of that efficiency now. So you're seeing some of that show up. But we have probably 8 to 10 plus more points to go over the next couple years that I think will be a big contributor to free cash flow margins.

Thank you. Our next question comes from the line of the board with Goldman Sachs. Please proceed with your question.

Hi, good afternoon. Thank you. I'll ask Terry's question on the long-term free cash flow margins in a slightly different way. Raul and Adam, we've spoken before about your conviction in KCOR being a 20% plus growth company. Do you aim for being a rule of 40 company when delivering 20% plus free cash and margin, meaning how do you think about the long-term normalized profile of revenue growth given some of the changes in the sales and marketing and some of the newer options like embedded finance that you've talked about in the last couple of quarters?

Yeah. Hey, Gabriela. Yeah, we feel still really good about the opportunity. I mean, the market, it continues to be huge. We see a huge opportunity. We're well positioned in the product. We see some sluggishness right now in the macro that is going to make that harder. Clearly didn't achieve the target here in this last year, but we've been actually really consistent and close to the 20% growth over the last couple years on a recurring basis. So it's still our long-term target. And I do think that we think that it requires some labor market growth. It's going to require a little bit stronger macro than where we are. But nothing structurally is in the way from us continuing to grow and achieve that, to your point, sort of the rule of 40 on both the revenue and free cash flow target. So I think we're going to balance that in. We're going to lean into the productivity right now or make sure we're set up from a sales perspective. And we feel good about...

that set up into 25 and as we think about long-term you know we're not coming off of what we see in them in the market opportunity and and again our product is so well positioned right now we feel really good about that all over the long-term that makes sense and I'll ask a follow-up on veneertem it talks us a little bit about how you're feeling about your ability to retain train and enable the salespeople you mentioned that bookings have come in nicely towards the end of the year so Give us a status update on how the churn in the sales growth is trending, and how many sales count ads do you expect, or how much do you expect to grow sales count capacity in fiscal year 25? Thank you.

Yeah, thanks, Gabriella. I think, you know, in Q4, retention improved, and we feel that the territory redesign was well executed and well received. And, you know, we're looking at our sales capacity, and we feel like we have plenty of capacity to achieve our FY25 targets. And, you know, obviously, to Adam's earlier point, you know, we'll balance in, you know, more sales hiring as the macro gets better. But we feel well positioned today, both from a tenure perspective and a capacity perspective to achieve our targets.

Thank you. Our next question comes from the line of Seti Pongrahi with Mizuho. Please proceed with your question.

Hi. Thanks for taking my question. Very good execution in this tough market. So, Raul, my question is, I understand the sluggishness you talked about. Maybe that's impacting the new logo acquisition. But what are you seeing in terms of customer and across selling your new products to the customer base? I know you have been expanding the product footprint and recently added even compensation. How should we think about the effective PayPayM growth this year? What's the jumps in your guidance?

Yeah. Hey, Sidney. I mean, what we saw in Q4 was actually some slight acceleration, which was actually a little bit overweighted from some of the cross-sell opportunities. So we saw a little bit more success here in Q4. And I think as we go forward, we're really expecting to see a little bit bit less pepum growth, a little bit less pepum expansion as we add more in the enterprise space, as we add more in these embedded partners. We're going to see the pepum slow down and really lever into the employee growth. But I think actually in this quarter and maybe in the near term, you might see a little bit more of that balance in the pepum expansion as we've seen some success on the cross-sale side pick up even a little bit further. So we're seeing good attach rates, good success like we called out earlier on the talent, and that progresses or that continues.

Yeah. And then a follow-up to that embedded HCM. I know it's been a few quarters since you launched. So how is the progress so far, and what kind of traction are you seeing among your partner base and even through their customers?

Yeah, so the traction has been really strong. Since we announced it in Q1, we've seen continued growth in the pipeline each quarter. We've tripled the number of partners that we've added this year. We continue to go through the migration of some of our larger partners as well. And so it's becoming a, you know, it's really gaining traction. It's still a relatively small portion of the overall portfolio, less than half a point of the revenue here in 24. We think we'll double that into 25. But there's a lot more room to grow and continue to, you know, overall meaningfully impact our revenue over the long term. So we're still, you know, really optimistic about this channel and its long-term potential.

Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi, good evening. Thanks for taking my question. Maybe first, just as a follow-up on the embedded side to Citi's question, on your comment that you expect embedded revenue to double in fiscal 25, and you're kind of, no pun intended, embedding that in your guidance, how should we think about that between you adding additional ISVs that will embed the software versus growth of the existing partners that you've already inked and what you foresee in terms of their ramp, and Can you just remind us how those contracts work? Are there any guaranteed minimums? Just anything that helps us kind of get a view on the visibility that you have there.

Yeah, hey, Samad. Yeah, we wouldn't include new partnerships that we haven't signed necessarily inside of our guidance. So all of the revenue is really going to be and the expectation is going to be from partners that already exist. And those partners, of course, include their existing portfolios and new business that they're signing. As we think about what's reasonable is what we would include in our guidance going into 2025. In terms of the structure of those deals, there are some that have minimums for sure. We try to balance those in as, depending on sort of the size and the need of the portfolios and how much needs to come over and how much work we need to do to necessitate it. But we do have structures that may include some minimums. Most of it is really based on more of the usage and how much business our partners are adding to the platform, though.

Understood. And then, Raul, maybe just a question for you. In terms of upmarket success, you guys continue to call that out. It's been increasing in the mix. And I know you've talked about some changes in the sales organization. How should we think about how the sales organization's composition looks today and how well it's going to prepare to attack that larger customer opportunity? And as you think about fiscal 25, Is there a different type of rep that you're aiming to hire, or is there a different type of training program to target those larger, more sophisticated customers?

Yeah, Samad, thanks. You know, from a training perspective, obviously, we continually enhance our training to meet the different needs of the different segments that we have. So we're continuing to do that. And the way to think about it is a third of our organizations pointed at that you know, 500 plus segment and the two thirds are pointed below. And we think that's a really good optimal mix for us today. And, you know, we're seeing the benefits of our platform really pulling us up market. And now we're pointing, you know, you know, really qualified tenure, you know, our best of the best Navy SEALs type of reps against those opportunities.

And so we're seeing success there. Thank you.

Our next question comes from the line of Scott Burge with Needham & Company. Please proceed with your question.

Hi, everyone. Nice quarter, and thanks for taking my questions here. Raul, I wanted to see if you can help us reconcile your view on the market versus other competitors, both public and private, that talk about maybe a little bit more of a slowing market than you all talked about. You described really healthy sales and pipelines and what you thought was a pretty robust market, but maybe you can help us dissect why your view seems to be at least marginally different than others in the space.

Yeah, I mean, when we look at the market and our platform and our position in the market, you know, we just look at, you know, the key components of, you know, first appointments, deals that are in process, the velocity of the transactions. And when we look at it, we think, you know what, the market's pretty strong and You know, we finished the year with 16% recurring revenue growth and, you know, without headwinds, we would have been, you know, close to 20%. And so we still feel like it's a big macro market with 75 plus percent, you know, of the opportunity on what we would consider legacy antiquated incomplete solutions. And we have a great product, modern, robust, with some great tools that's really attractive. So for us, it's just about execution and continuing to execute. And we see the market, you know, really strong and robust. And some of it could be, you know, Scott, the size of Paycor compared to others. But outside of that, we think the market is, you know, really big and still in the early innings of transformation.

Understood, helpful. And then, Adam, in your guidance, you talked about 200 basis points or rate cuts for the year. I view that certainly on the conservative side relative to what we're seeing out there today, which is probably appropriate. But how should we view seat usage at existing customers? You talked about how that went from a nice tailwind to more of a flat metric year over year. But how are you thinking about seat counts in the guidance?

Yeah, hey, Scott. We intentionally didn't include any incremental labor market growth in our guidance. So we're effectively assuming a flat labor market contribution similar to what we saw in 23. So there might be a slight headwind 23 to 24, but there wasn't much contribution in 23, and we're assuming the same thing here into 24. Excuse me, 24 into 25 now. Thanks, Scott. Thank you.

Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Hi, thanks for taking the question. So the top of funnel comment sounded really encouraging as you close out the year. Did that actually improve or was it above your expectations for the fiscal fourth quarter versus what you saw earlier in the year? Any way to unpack that a bit?

Yeah, I mean, it's been fairly consistent throughout the year. And So for us, it's been, how can we continue to execute against the opportunities? And it was slightly elevated in the fourth quarter, but I would say all in all, pretty consistent throughout the year.

And any changes to the share donors that you guys are saying? I know we hit on some of the regional players and some of the legacy players, but anything in terms of the new business you're bringing on, has that mix changed at all over the course of the year? Thanks, Jeff.

I mean, it changes slightly. 75% of our bookings are still what we would consider from legacy incumbents, in-house, regional, ADP paychecks. It moves around quarter to quarter a little bit. And in the quarter, we had a little bit more contribution from ADP and paychecks than previous quarters.

Thank you. Our next question comes from the line of Jared Levine with TD Cowen. Please proceed with your question.

Thank you. Can you discuss how gross revenue retention changed during your, even if it was consistent, were there any underlying changes based on employer size segment or controllable versus uncontrollable terms?

Hey, Jared. Yeah, no, I mean, it's been fairly consistent. It does pop around. You see like a little bit more pressure on the smaller end of the market for sure. And we have seen a little bit more success in the enterprise space. But overall, I think actually the labor market growth really impacted it more than anything. So you saw it tick down a couple of points, which, again, was really all of that labor market slowness that we saw relative to last year. But fairly consistent otherwise than what you would expect given some of the comments around upmarket success in the enterprise and the softness on the smaller end of the space.

Got it. Thank you. And then in terms of ERTC, can you update us if there was any of that revenue in 4Q and then the headwinds that represented? And is there any assumed and what the headwind assumed for 25 is?

Yeah, it was effectively immaterial in Q4. We had anticipated it in the guidance to come out, and so it was immaterial in Q4. And we're not including anything in our guidance for ERTC for 25. So it will be about a point and a half headwind relative to 24, just as that's completely gone. Excuse me, about a point, excuse me, of headwind.

Thank you. Our next question comes from the line of Bavin Shah with Deutsche Bank. Please proceed with your question.

Great. Thanks for taking my questions. Raul, just one clarification. You talked about earlier about feeling good about the level of sales capacity today, and I just want to just clarify that kind of means no new net hires until the macro improves. Is that the right way to read it?

No. We're fully staffed for FY25, and we'll continue to add throughout the year. We have a plan to continue to add, but we'll either increase or decrease that based on market conditions. So we're going to be flexible and make sure that, you know, we're investing properly in that area.

And Bob, and just to be clear, I mean, we're, Hey Bob, and just to be clear, we are going to increase capacity through both sales hiring and productivity as we're thinking about growing into to 25. So we'll continue to grow from where we are today.

Perfect. Thanks for the clarification and kind of circling back on the embedded opportunity. Can you just provide a little bit more insight in terms of some of the recent signings or kind of what you have in the pipeline today in terms of, like, the demographics of these customers? Are they still in profile from what you have already on the platform? Do they have existing businesses that you can migrate over? Just any other insight would be appreciated.

Yeah, for sure. I mean, so we're really excited about some of the new partnerships that we've been able to sign. Some of them are a little bit different in terms of, like – payroll service bureau style partners, but then some more vertical software specific like ERPs and POS type FinTech and companies. So I think that there's some continued success that we're seeing building off of what we've already shared. So I think that you're going to continue to see that vertical specific workforce management and softwares within the ERP as well. So we're excited about those. Some of those partners are a little bit smaller than some of the earlier partnerships that we've signed that have quite a few more employees and portfolio sizes. And so I think that will be a balance in as we continue to progress. Not all of them are going to have large portfolios. So we'll balance that in. And it'll probably be a little bit choppy just in terms of the types of partners that we bring in over the next year as we continue to scale this up, but the pipeline itself continues to grow with those similar type partners.

Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question.

Good afternoon and nice quarter. I'm wondering if you can talk a little bit more about, you know, some of the new modules. I mean, you've obviously had great traction with your applicant tracking solution. I'm wondering how much further you can penetrate the existing client base. And if you can talk a little bit about the newer modules that you've come out with in terms of employee compensation and how that ends up fitting in. And then I had some follow-up questions with regards to the inside Salesforce.

Yeah. Hey, Mark, it's Raul. You know, we have a tremendous amount of white space available for to continue to cross sell. The majority of the PEPM expansions happened over the last five years. And obviously, we have a large client base that we can continue to cross sell in. And we continue to invest and grow our cross-selling team. And we saw some of that success in our fourth quarter over performance. And so that was nice to see. And we'll continue to do that. Obviously, talent is really significant. It's a broad portfolio, both attraction and retention. And we're continuing to press in on the talent solution. From a compensation perspective, giving frontline leaders the ability to equitably, you know, provide compensation increases across their teams and an equitable fare and within budget, you know, really just enables a frontline leader to be more effective during that process. And so we think that fits right in to our leader strategy and really helping empower frontline leaders to build winning teams.

Can you talk a little bit about the size of the of the internal sales force that's cross selling into the existing base? And you know, where does that stand relative to the total of 600? And how big could that become? Because it seems I mean, particularly on talent, it's a great solution.

Yeah, I mean, we're still, as you know, we're still focused more on new. You know, by and large, the majority of our assets are pointed at hunting new clients. However, about 10% of our organization is focused on cross-selling, and that's been growing year over year. And I think you'll continue to see us, you know, press in there because there is such a big white space opportunity.

Great. Thank you. Yeah, thank you.

Thank you. Our next question comes from the line of Mark Murphy with JP Morgan. Please proceed with your question.

Hey, this is already on for Mark Murphy. Congrats on the quarter and thanks for taking the question. Quick one, just any divergences to call it in terms of demand patterns by customers in terms of geography or end market or any other relevant dimensions?

No, demand has been really consistent by size, by markets, by industries. We haven't seen any significant changes from that perspective, Arnie.

Thanks. And then, you know, looking at your slide deck, you have that you've kind of reached Salesforce coverage among the top 50 metros to about 55%. And then that was 52% last year and 44% the year before that. Is there a framework of how we should think about that going forward in FY25, whether that will accelerate or not, and how that fits into the fact that you're kind of fully staffed to deliver on your targets, FY25 targets now? Thanks.

Yeah, Artie, we're going to continue to increase coverage, you know, throughout the year. I wouldn't expect... you know, dramatic coverage enhancement, I would say that, you know, we'll continue to add heads. You know, as I said earlier, we're trying to be intentional about headcount acceleration and leveraging the capacity of our existing sales organization while we continue to add reps in each of those 50 markets where appropriate. So we'll continue to grow and that number will be higher, you know, this time next year.

Great. Thank you.

Thank you.

Our next question comes from the line of Steve Enders with Citi. Please proceed with your question.

Okay, great. Thanks for taking the questions here. I guess maybe just following up on the last point of, you know, the top 50 sales coverage and it seems like it's a bit of a shift away from the prior tier one coverage number that you previously kind of reported on, I guess. What's kind of driving that shift and I guess what does that maybe signal about how you're thinking about that opportunity there.

Yeah, Steve, how are you? It really isn't a shift or a change in strategy. We've always been focused on the 50. We were extremely barren in the top 15 or the tier one, and we've continued to move that percentage up. And as we look at continued ongoing seller growth, we will continue to add in all 50 markets over time. It just will... be based on opportunity and finding the right person and having the right opportunity available for that person. So I don't think it's a change in strategy. We still love the top 15 cities. We're going to continue to add headcount in all fifth markets. And that's what comprises, you know, where our 600 sellers sit today. And so we just felt like it was more directional for everyone to understand the top 50 cities and where we sit from that perspective.

Okay, gotcha. That's helpful. And then I guess just on the free cash flow side, I mean, looks like pretty solid performance here in the quarter. I guess anything to call out that helped kind of add to that performance here? And I guess anything that kind of seems maybe got pulled forward or maybe there's some like timing shifts in there, but just I guess what does that kind of indicate as well for fiscal 25 and the free cash flow dimensions there?

Yeah, I mean, clearly on the quarters, there's quite a bit of networking capital changes. So like within the year, it's a little bit harder to look at, but we're trying to manage this to the full year. So I think that dynamic of the expansion on the full year is really important. But, you know, we'll continue to smooth out those networking capital items over time. The primary driver is of the free cash flow benefit is still the overall expansion and productivity that we're getting out of the cost of acquisition, in this case, in this year. And we're seeing the same thing out of GNA. So most of it is driven by the operating. And then within the quarters, you have some of those networking capital items.

Okay, perfect. Thanks for taking the questions.

Thank you. Thanks, Steve.

Thank you. Our next question comes from the line of Daniel Jester with BMO Capital Markets. Please proceed with your question.

Great. Thank you, everyone. Thanks for taking my question. Maybe we could spend a moment, when you talk about the mix of booking, 25% come from other solutions which are modern or new. Can you just remind us, like, why does PayCore win in those circumstances? You know, it's clear relative to the legacies, but relative to the more modern solutions, why are you winning?

Yeah, I mean, I think strength of the platform, most open platform, most robust platform, and our win rates are up and our share in winning from modern cloud competitors continues to increase and reach a high in FY24 as a percentage of the mix. So we feel really well positioned to compete against legacy and especially to compete against modern cloud. It's a really deep platform. We offer the most pepum, which in theory ties to feature functionality. So ultimately, we have the most robust platform. We have the most modern platform. It's the most open platform, and that's why we're winning.

Okay, thank you for that. And then, Adam, maybe I missed this in the prepared remarks, but do you remind us what's going on with gross profit margins? It looks like they were down year over year. Is there anything that you'd call out there? Thanks.

Yeah. Hey, Dan. Yeah, the primary drag in that case was really the form filings, just sort of pressure that we saw coming out. We actually saw some really good underlying operating expansion, margin expansion apart from those, and we'll continue to press into that for 25. There's a little bit more margin pressure that we'll see from that high margin form filings revenue. The rest of that, that's going to leave here in 25, but we'll work through that this year and be able to show continued expansion.

All right, great. Thank you. Thank you. Thank you.

Our next question comes from the line of Matt VanVleet with BTIG. Please proceed with your question.

Good afternoon. Thanks for taking the question. I guess when you look at some of the additional modules and the attach rates you're seeing and some of the momentum behind that, where do you feel like you're looking to put the most behind R&D budget and in so much as you look at M&A, are there areas of the portfolio that you think are sort of primed to add additional capabilities as you've seen demand for the attachment there?

Yeah, I mean, hey, Matt, thanks. It's Raul. I think we think about our R&D investment in three big buckets, continuing to enhance our core platform, obviously continuing to deepen our talent solutions, which are best in class already, and then continuing to make it the most open platform in the category. And those are the three areas where we continue to invest in and we feel really good about it. From an M&A perspective, there's no one area or one gap in the platform that we're looking to fill. I would say there's hundreds, if not thousands, of cottage categories that kind of surround the HCM ecosystem that we're always looking to evaluate. And so that's an ongoing process. We're always looking for great solutions that can help our leaders, you know, build winning teams.

All right, very helpful. And then as you look at a lot of the success across software seems to be in verticalizing your offering to make it a little more market ready. You've talked a lot about embedded solutions and some of your partners, but how might you be able to use AI and maybe specifically Gen AI around the talent and training side of it, as well as employee engagement to really help broaden the verticalization of your product to be a little more out of the box ready.

Yeah. Hey, Matt, I mean, actually, the AI that we're driving right now, the majority of where you're seeing it show up is inside the talent solution and inside the talent suite. There's a lot of sentiment capability, like the job description generator sort of functionality. So there's a lot of functionality around that talent attraction and recruiting. And then we'll continue to look for those opportunities, not just look for those opportunities, but building those opportunities around So some of the more sort of proactive nudging as folks are working through their workflows inside of the system and making those workflows easier to navigate so that the clients don't have to spend quite as much time inside of there and they can focus on more of the leader and performance management tasks that are more critical to the organization. And we're looking at some of that Gen AI and again, sorry, not even just looking at it, but working through some of the Gen AI processes type chat functionality that we think are going to be really additive for our customers as well.

All right, great. Thank you.

Thank you. Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question.

Yeah, thanks for taking the questions. I just wanted to follow up on the embedded strategy. When you look at the pipeline of new partners, are they primarily ones with an existing portfolio or are you looking at partners that are more on the sourcing side as well. And then have there been any learnings for that motion now that you've been able to onboard the first few partners throughout this year?

Yeah, hi, Jake. It's Raul. I think, obviously, the portfolio will be a mix. There are more embedded candidates without portfolios than with portfolios. Obviously, we look for both. And I would say our pipeline is probably 70% without portfolios, 30% with portfolios. And I think, you know, what we're doing is getting that muscle memory today about both, hey, existing portfolio companies, how much converts, and then how much they sell postmortem. And then ultimately, for people without portfolios, how fast can they ramp up their sales engine and how many units they can have. And, you know, in the fall at our, you know, investor day, You know, we're going to give some, you know, our early learnings, you know, 12 months in of how that looks from a metric perspective so people can model it.

Okay, helpful. And then benefits brokers, it sounds like those now drive nearly half of the bookings for you. Can you talk about how retention and multi-product adoption looks like for those types of logos? And is there any concern that channel might be getting too large of a new booking source? given you may not fully own the customer relationship, or would you be happy to see that continue climbing?

Well, Jake, I love bookings, so I would definitely like more bookings from benefit brokers. No, we own the client relationship. They essentially, you know, it's a mutual relationship where they own the benefit side and we own the client side. But we end up owning the client relationship on the HM side, just like they own the client relationship on the benefit side. They've been a great partner. And, you know, we're going to continue to grow. I think 50% is what we, you know, is pretty much a high watermark so far. And as we continue to grow the organization, we don't anticipate it being at 50%. You know, it should be somewhere between, you know, 30% and 40% longer term. But in the short term, Jake, we're going to take every booking dollar we can get from benefit brokers and be happy. Thank you.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question.

Great. It looks like the midpoint at 25 is about 10% revenue growth as opposed to 19%. 24, maybe this is for Adam. Adam, how much of that delta is rate versus kind of the environment as opposed to maybe conservatism or anything else? Is there any way to just dimensionalize in round percentages kind of the components of the deceleration?

Yeah. Hey, Kevin. Yeah. You're seeing a couple points from the interest income, right? Interest income is likely to slow down and reverse in terms of total nominal dollars this year. So you're seeing a little bit of pressure from that. And then you're seeing a couple points from the, or about a point from the form filings change. And then you're seeing some conservatism. I mean, just based on where we are at this point in the year, we're trying to be intentional and we want to get back to the sort of philosophy that we've uh we've seen and we're not expecting any contribution from the labor market still so we're we're still seeing the broader sort of macro sluggishness and we wanted to be intentional about that heading out to this sort of longest point in our guide curve just maybe just following up on that how much of it i don't know if you have any impact of pricing in there Just in terms of how much pricing we would intend to, you know, continue to put in. I mean, I think we're going to see a balance between employee growth and PEPM growth that is likely to persist something sort of similar to what we've been experiencing, you know, here in 24. So I think that you're going to see a mix that's probably closer to 50, 50% or half and half, and that will then start to lend itself more to the employee side over time. But, but I think it's going to be consistent with where we've been for the last couple of years.

Thank you. Our next question comes from the line of Patrick Wall-Ravens with Citizens JMP. Please proceed with your question.

Oh, great. Thank you. Raul, for you first, I want to talk a little bit more about sales productivity. You know, so many of the vendors in sort of the CRM area are talking about applying AI to businesses. increased sales efficiency and customer engagement. And then Mark Benioff had an announcement about agent force that you might have seen yesterday. So you guys have 600 reps. Are you actively using any sort of AI technologies to improve sales efficiency today? Is it working?

Yeah, so I would say we're in the early innings. We use it a lot on the front end on the marketing side to create the best optimal demand. And we're able to point you know, the prospects that are most likely to purchase from our demand to the sales rep. So I would say that, you know, we're in the early innings, but we're pointing the best prospects most likely to purchase to our sellers.

All right, cool. And then, Adam, for you, forgive me if I missed it, but if total revenue growth is 10% and 25%, how do we think about recurring revenues?

Yeah, so, I mean, we gave a little bit of the breakdown on interest income specifically for the quarter. So, you know, we're guiding to about $12 million on the quarter, which implies a couple points faster growth on recurring for the quarter and then for the full year. So $48 to $50 million on the full year on interest income, which would put it at, again, a couple points faster in terms of recurring.

But we broke all that. Thank you. Thanks. Thank you.

Thank you. There are no further questions at this time. I'd like to pass the call back over to Raul for any closing remarks.

Thank you for your continued interest and support. We're optimistic about fiscal 2025 and remain confident in our ability to deliver attractive growth while accelerating margin expansion. We look forward to connecting with you at upcoming events, including the Stiefel Tech Executive Summit in Deer Valley, the Goldman Sachs Communicopia and Technology Conference in San Francisco, and the HR Tech Conference in Las Vegas. Have a great night, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you. Music. Thank you. Thank you. Thank you.

music music

Greetings and welcome to the PayCore fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Rachel White, Vice President of Investor Relations. Thank you, Rachel. You may begin.

Good afternoon and welcome to PACOR's earnings call for the fourth quarter and fiscal year 2024, which ended on June 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 site. 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, 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 are 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 fourth quarter and full year results. Our unique value proposition of empowering leaders to drive people and business performance continues to win in the market and help drive revenue growth of 18% for the quarter. For the fiscal year, our team executed against our strategic growth initiatives, increasing the average number of employees on our platform by 9% and expanding the amount we earn per employee per month, or PEPM, by 6%, resulting in 19% revenue growth. We delivered significant adjusted operating income and free cash flow margin expansion this fiscal year while strategically investing in our platform and customer experience. Demand remains healthy as most employers are struggling with antiquated and incomplete HCM tools. Top of funnel metrics including leads and first-time sales appointments, increased significantly year over year, and our win rates remained elevated as our value proposition resonates in the market. We continue to focus marketing investments and sales hiring in the 50 largest cities in America, where we see the most opportunity. Our sales team grew 9% this year to 600 sales professionals, which increased our sales coverage in the 50 largest US cities from 52% to 55%. Average tenure, which drives seller productivity, increased 20% among our field sellers. A core component of our go-to-market strategy is is developing and maintaining partnerships with key centers of influence. Benefit brokers help us identify employers that are dissatisfied with their legacy HCM tools and influence nearly half of our field bookings this year. Our mid-market product, client experience, and sales investments over the last few years continued to pay off, as our average customer size and average deal size expanded for the third consecutive year. Since the IPO, the average size of our new mid-market customers increased 30%, helping to grow our average deal size by 55%. We are efficiently extending our distribution via the indirect embedded channel we announced earlier this fiscal year. Our strategic partners enhance their revenue per client and customer retention by offering a modern embedded HCM solution to their clients and prospects. In this past quarter, we continued converting our third partner's portfolio and the three new partners we announced last quarter began selling. We also signed several new partners this quarter, tripling our indirect partners over the last year. Our team also continued expanding our award-winning HCM platform with valuable new capabilities for our customers. Our product investment remains focused on deepening our core platform further enriching our talent solution and enhancing the connectivity of our platform. This year, we released technology that empowers leaders such as pay benchmarking, pay core paths, and labor forecasting, and increased the value of our suite by $8 to $53. Within our core platform, we recently launched a new compensation management solution, that streamlines budgeting and pay cycles and adds another $2 to our suite. Our collaborative tools foster alignment across teams, helping leaders ensure equitable and competitive compensation within budget while driving employee engagement. Revenue from our robust talent suite increased nearly 40% again this fiscal year. validating our unique value proposition of empowering leaders to coach, optimize, and retain top talent to drive business results. Using our unrivaled talent tools, frontline leaders are improving employee engagement, which is increasing employee retention by 10% and helping drive better business outcomes. We also significantly advanced our interoperability strategy this year. According to Finch, half of HR professionals leverage seven or more employment systems, and most of these applications are not integrated, leading to errors and inefficiencies. API use on our platform increased approximately 300% this fiscal year, demonstrating growing demand to extend HCM software to other business applications. We provide customers unrivaled flexibility to seamlessly connect their data and systems, enabling leaders to automate time-consuming, error-prone manual tasks. We have 300-plus pre-built integrations in our marketplace and made it easier to create custom integrations by increasing the number of API endpoints and our developer portal by more than 40% this fiscal year. The innovative developments we've made in our HCM platform continue to garner industry recognition. In May, PACOR won five Titan Business Awards spanning HR, analytics, workforce management, and talent. These tools empower leaders to connect and automate their back office. freeing them up to focus on what matters, building winning teams and driving business results. As we entered fiscal 25, we reflected on our strategy execution progress since the IPO. Over the last three years, we have grown revenue by over 85%, increased and adjusted operating income by over 130%, and generated nearly $50 million more in free cash flow, while expanding our sales capacity by greater than 60% and advancing our industry-leading HCM platform, growing our list pepum by more than 50%. We have made tremendous progress, and the opportunity before us is significant. On our path to $1 billion in revenue, we remain confident in our ability to deliver attractive growth while accelerating margin expansion. We believe there is a long runway to drive durable growth given the size of our market opportunity and the ongoing success we have had displacing legacy solutions, which represents 75% of our bookings. Our go-to-market motion has strong momentum as we are staffed to deliver our fiscal 25 targets and encouraged by how sales tenure and retention are trending. We have significant room to drive leverage as we scale, and our top priorities are to drive sales efficiency and accelerate cash conversion. As such, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We will do that while continuing to invest in our strategic growth initiatives, namely adding employees through sales expansion and increasing PEPM through product innovation. This progress wouldn't have been made possible without the efforts of our dedicated associates. I'd like to thank the team for their hard work and support in delivering these strong results. Now I'll turn the call over to Adam to discuss our financial results and guidance.

Thanks, Raul. I'll discuss our fourth quarter and full year financial performance and then share our outlook for the first quarter and next fiscal year. As a reminder, my comments related to the financial measures are on a non-GAAP basis. We had another solid quarter, delivering total revenues of $165 million, an increase of 18% year over year. Recurring revenue grew 17% over the prior year. For the fiscal year, total revenues were $655 million, increasing 19% year over year. Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month. This quarter, employees grew 8% over the prior year, driven by new business wins with a modest contribution from labor market growth. Net revenue retention was 98% this year, in line with our expectations as the labor market growth moderated. In a typical macro environment, labor market growth contributes a point or two of our revenue growth. While the U.S. labor market growth moderated over the last 24 months from historical highs of three to four points of revenue contribution, now closer to zero, it has remained slightly positive. We finished this quarter with approximately 30,500 customers, utilizing our platform to help coach, optimize, and retain nearly 2.7 million employees. We continue to see our average customer size and average deal size increase as we continue to move up market, demonstrating the success of our product and service investments. Similar to last year, mid-market customers represented 80% of our portfolio, with enterprise contributing 15% and a micro-segment of under 10 employees contributing just 5% of revenue. Effective PEPM increased 8% year-over-year to nearly $19 this quarter. Excluding embedded HCM deals, Effective PEPM increased 10%, fueled by expansion of our product suite. The growth and effect of PEPM is attributable to cross-sales, pricing initiatives, and higher bundle attach rates, and Talent has consistently demonstrated strong attach rates and cross-selling traction. Our embedded HCM channel continued to ramp and contributed two points of employee growth again this quarter. We have increasing demand from partners, and our pipeline grew sequentially for the fourth consecutive quarter. Although we are pleased with the progress and expect to at least double our embedded revenue in fiscal 25, it will take some time before it materially impacts our revenue. We continue to invest to scale and capitalize on this opportunity by expanding our capacity, our offering, and sales enablement tools to drive mutual success. This quarter, we generated $14 million of interest income on average client funds of approximately $1.2 billion, an effective rate of 490 basis points. In addition to achieving consistent top-line growth, we have continuously expanded operating margins on an annual basis. Adjusted gross profit margin excluding depreciation and amortization was 79% for the quarter and year. This quarter, it decreased by 40 basis points over the prior year due to macro headwinds, however, expanded by 40 basis points for the full year. This quarter, sales and marketing expense was $51 million, or 31% of revenue, down nearly 300 basis points from a year ago, largely driven by more moderated sales headcount growth and our focus on efficiency and scale. For the year, sales and marketing expense was $198 million, or 30.2% of revenue, an improvement of 160 basis points year over year. On a gross basis, we invested $25 million, or 15% of revenue, in R&D this quarter to continue differentiating our HCM suite and expanding our PEPM opportunity. We also invested 15% of revenue in R&D for the year, similar to prior years and in line with our long-term targets. As we scale the business, we have consistently driven leverage in G&A. G&A expense was $20 million or 12.1% of revenue this quarter, an improvement of 280 basis points from last year. On the full year, we achieved 150 basis points of leverage from G&A. Quarterly adjusted operating income increased over 60% to $25 million with margins of 15.2%, up 420 basis points from 11% last year. For the full year, adjusted operating income rose 36% to $112 million, up 215 basis points while differentiating our service and solution. During the quarter, we generated $37 million of adjusted free cash flow at 23% margin, up nearly 9 points. For the full year, we generated $40 million, or 6% margin, an improvement of 430 basis points. Free cash flow margins expanded at twice the rate of adjusted operating income margins as we scale the business and continue to focus on efficiency. We ended the year with $118 million in cash and no debt. In addition, our stock-based compensation expense decreased year-over-year to less than 10% of revenue with less than 1% share dilution. Entering fiscal 25, our top priorities are to drive sales efficiency and accelerate cash conversion. While growth remains our top priority, we believe a more balanced approach to profitability will maximize shareholder value. As Raul mentioned, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We plan to achieve this by balancing sales headcount growth with sales productivity to improve go-to-market efficiency and continuing to drive leverage in G&A as we scale. Similar to the dynamics this year, we expect adjusted free cash flow margins to continue expanding at roughly twice the pace of adjusted operating income margins. Our outlook for fiscal 25 remains positive, based on a healthy demand environment and opportunity to drive continued PEPM expansion. However, our guidance does reflect a fluid macro backdrop, including labor market headwinds and a declining rate environment, and of course, some conservatism at this point in the year. For the first quarter, we expect total revenues of between $161 and $163 million, or 14% growth at the high end of the range, which includes $12 million of interest income on average client funds balances of just over $1 billion. And adjusted operating income is expected to be between $17.5 and $18.5 million. For the full year, we expect total revenues of $722 to $729 million, or 11% growth at the top end of the range, including $48 to $50 million of interest income, which contemplates up to 200 basis points of rate cuts over the next fiscal year. And we expect adjusted operating income of $123 to $126 million. On a recurring basis, that implies more than 100 basis points improvement in adjusted operating income margins. In summary, we remain optimistic about our opportunity in HCM. Demand remains healthy for our innovative HCM solution that empowers leaders to unlock the potential of their people and business performance. Our solution is mission critical to attracting, paying, and retaining great talent. We're confident in our strategy and focused on executing a proven go-to-market playbook to deliver greater sales efficiency and free cash flow margins. With that, we'll open the call for questions. Operator?

Thank you. We will now be conducting a question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. a confirmation to indicate your line is in the question queue. You may press star two if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions. Thank you.

Our first question comes from the line of Terry Tillman with Truist Securities. Please proceed with your question.

Yeah, hey there, Raul, Adam, and Rachel. Hopefully you can hear me okay. I've added a question and a follow-up per instructions. The first question is just on maybe Raul, kind of ending the year, you know, looking for a strong finish in bookings. How did, what's the report card on the enterprise segment, which you've been excited about those thousand plus employee businesses, and then mid-market? What was the bookings like versus your expectations and The second part of that first question is, you know, I heard something about conservatism. Are you assuming kind of, you know, kind of slower kind of close rates or what are you assuming around bookings activity in both of those key segments? And then I had a follow up for Adam.

Yeah, the bookings. Thanks, Terry. The bookings for the quarter were really consistent and were well positioned to deliver our FY25 guidance. And we feel good about the trajectory here. of the organization. Okay.

And then maybe just to follow up, it's interesting in terms of a bunch of commentary on free cash flow progression and acceleration and then that 20% target. Adam, I was hoping maybe we could unpack a little bit more, you know, just any guardrails in terms of duration, the size of the business to get to that target, and is there anything more notable on gna or sales and marketing leverage to get there as well just a little bit more hopefully to unpack on you know when you get to that what that would look like in terms of some of those dynamics thank you okay hey terry

Yeah, I mean, no explicit time frame other than, you know, sort of medium to long term as we think about our continued progression. There's not going to be any sort of structural pops that are going to get us to 20 percent. I think it's going to be, you know, continued expansion. And this year, clearly, it looks like we're on that sort of inflection point. And we think about, you know, continuing to expand and driving faster free cash flow conversion. So I think that trajectory makes sense for us. And in terms of getting there, I think you're going to see it, of course, across the board. There's still opportunity across G&A. Over time, we think that there's some further opportunity across R&D and gross margin. But I think the majority, where we're going to see the real difference is going to come out of the cost of acquisition. So between our implementation and our go-to-market teams, it's really around leveraging that investment. And we're starting to drive some of that efficiency now. So you're seeing some of that show up. But we have probably 8 to 10 plus more points to go over the next couple years that I think will be a big contributor to free cash flow margins.

Thank you. Our next question comes from the line of the board with Goldman Sachs. Please proceed with your question.

Hi, good afternoon. Thank you. I'll ask Terry's question on the long-term free cash flow margins in a slightly different way. Raul and Adam, we've spoken before about your conviction in KCOR being a 20% plus growth company. Do you aim for being a rule of 40 company when delivering 20% plus three-part cash and margin, meaning how do you think about the long-term normalized profile of revenue growth given some of the changes in the sales and marketing and some of the newer options like embedded finance that you've talked about in the last couple of quarters?

yeah hey hey gabriella yeah we feel still really good about the opportunity i mean the market it continues to be huge we see a huge opportunity uh we're well positioned in the product we see some sluggishness right now in the macro that um is going to make that harder clearly didn't achieve the target here in this last year but we've been actually really consistent and close to the 20 growth over the last couple years on a recurring basis so it's still our long-term target And I do think that we think that it requires some labor market growth. It's going to require, you know, a little bit stronger macro than where we are. But nothing structurally is in the way from us, you know, continuing to grow and achieve that, to your point, you know, sort of the rule of 40 on both the revenue and free cash flow target. So I think we're going to balance that in. We're going to lean into the productivity right now or make sure we're set up from a that set up into 25. And as we think about long-term, you know, we're not coming off of what we see in the market opportunity. And again, our product is so well positioned right now. We feel really good about that over the long-term.

That makes sense. And I'll ask a follow-up on the near term. Talk to us a little bit about how you're feeling about your ability to retain, train, and enable the salespeople. You mentioned that bookings have come in nicely towards the end of the year. So, Give us a status update on how the churn in the sales growth is trending, and how many sales count ads do you expect, or how much do you expect to grow sales count capacity in fiscal year 25? Thank you.

Yeah, thanks, Gabriella. I think, you know, in Q4, retention improved, and we feel that the territory redesign was well executed and well received. And, you know, we're looking at our sales capacity, and we feel like we have plenty of capacity to achieve our FY25 targets. And, you know, obviously, to Adam's earlier point, you know, we'll balance in, you know, more sales hiring as the macro gets better. But we feel well positioned today, both from a tenure perspective and a capacity perspective to achieve our targets.

Thank you. Our next question comes from the line of Seti Pongrahi with Mizuho. Please proceed with your question.

Hi. Thanks for taking my question. Very good execution in this tough market. So, Raul, my question is, I understand the sluggishness you talked about. Maybe that's impacting the new logo acquisition. But what are you seeing in terms of customer and across selling your new products to the customer base? I know you have been expanding the product footprint and recently added even compensation. How should we think about the effective PayPayM growth this year? What's the jumps in your guidance?

Yeah, hey, Sidney. I mean, what we saw in Q4 was actually some slight acceleration, which was actually a little bit overweighted from some of the cross-sell opportunities. So we saw a little bit more success here in Q4. And I think as we go forward, we're really expecting to see a little bit less PEPM growth, a little bit less PEPM expansion as we add more in the enterprise space, as we add more in these embedded partners. We're going to see the PEPM slow down and really lever into the employee growth. Uh, but I think actually, you know, in this quarter and maybe in the near term, you might see a little bit more of that balance in the, in the PEMM expansion, as we've seen some success on the cross sale side, uh, pick up even a little bit further. So we're seeing good attach rates, good success, like we called out earlier on the talent and, uh, that, that progresses that, or that continues.

Yeah. Uh, And then a follow-up to that embedded HCM. I know it's been a few quarters since you launched. So how is the progress so far, and what kind of traction are you seeing among your partner base and even through their customers?

Yeah, so the traction has been really strong. Since we announced it in Q1, we've seen continued growth in the pipeline each quarter. We've tripled the number of partners that we've added this year. We continue to go through the migration of some of our larger partners as well. And so it's becoming a, you know, it's really gaining traction. It's still a relatively small portion of the overall portfolio, less than half a point of the revenue here in 24. We think we'll double that into 25. But there's a lot more room to grow and continue to, you know, overall meaningfully impact of our revenue over the long term. So we're still, you know, really optimistic about this channel and its long-term potential.

Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi, good evening. Thanks for taking my question. Maybe first, just as a follow-up on the embedded side to Sydney's question, on your comment that you expect embedded revenue to double in fiscal 25 and you're kind of, no pun intended, embedding that in your guidance, how should we think about that between you adding additional ISVs that will embed the software versus growth at the existing partners that you've already inked and what you foresee in terms of their ramp and Can you just remind us how those contracts work? Are there any guaranteed minimums? Just anything that helps us kind of get a view on the visibility that you have there.

Yeah, hey, Saman. Yeah, we wouldn't include new partnerships that we haven't signed necessarily inside of our guidance. So all of the revenue is really going to be and the expectation is going to be from partners that already exist. And those partners, of course, include their existing portfolios and new business that they're signing. As we think about what's reasonable is what we would include in our guidance going into 2025. In terms of the structure of those deals, there are some that have minimums for sure. We try to balance those in as, depending on sort of the size and the need of the portfolios and how much needs to come over and how much work we need to do to necessitate it. But we do have structures that may include some minimums. Most of it is really based on more of the usage and how much business our partners are adding to the platform, though.

Understood. And then, Ro, maybe just a question for you. In terms of upmarket success, you guys continue to call that out. It's been increasing in the mix. And I know you've talked about some changes in the sales organization. How should we think about how the sales organization's composition looks today and how well it's going to prepare to attack that larger customer opportunity? And as you think about fiscal 25, Is there a different type of rep that you're aiming to hire, or is there a different type of training program to target those larger, more sophisticated customers?

Yeah, Samad, thanks. You know, from a training perspective, obviously, we continually enhance our training to meet the different needs of the different segments that we have. So we're continuing to do that. And the way to think about it is a third of our organizations pointed at that you know, 500 plus segment and the two thirds are pointed below. And we think that's a really good optimal mix for us today. And, you know, we're seeing the benefits of our platform really pulling us up market. And now we're pointing, you know, you know, really qualified tenure, you know, our best of the best Navy SEALs type of reps against those opportunities. And so we're seeing success there.

Thank you.

Our next question comes from the line of Scott Bird with Needham & Company. Please proceed with your question.

Hi, everyone. Nice quarter, and thanks for taking my questions here. Raul, I wanted to see if you can help us reconcile your view on the market versus other competitors, both public and private, that talk about maybe a little bit more of a slowing market than you all talked about. You described really healthy sales and pipelines and what you thought was a pretty robust market, but maybe you can help us dissect why your view seems to be at least marginally different than others in the space.

Yeah, I mean, when we look at the market and our platform and our position in the market, you know, we just look at, you know, the key components of, you know, first appointments, Deals that are in process the velocity of the transactions and and when we look at it We think you know what the markets, you know pretty strong and you know, we finished the year and With 16% recurring revenue growth and without headwinds, we would have been close to 20%. And so we still feel like it's a big macro market with 75 plus percent of the opportunity on what we would consider legacy antiquated incomplete solutions. And we have a great product, modern, robust, with some great tools that's really attractive. So for us, it's just about execution and continuing to execute. And we see the market, you know, really strong and robust. And some of it could be, you know, Scott, the size of Paycor compared to others. But outside of that, we think the market is, you know, really big and still in the early innings of transformation.

Understood, helpful. And then, Adam, in your guidance, you talked about 200 basis points or rate cuts for the year. I view that certainly on the conservative side relative to what we're seeing out there today, which is probably appropriate. But how should we view seat usage at existing customers? You talked about how that went from a nice tailwind to more of a flat metric year over year. But how are you thinking about seat counts in the guidance?

Yeah, hey, Scott. We intentionally didn't include any incremental labor market growth in our guidance. So we're effectively assuming a flat labor market contribution similar to what we saw in 23. So there might be a slight headwind 23 to 24, but there wasn't much contribution in 23, and we're assuming the same thing here into 24. Excuse me, 24 into 25 now. Thanks, Scott. Thank you.

Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Hi, thanks for taking the question. So the top of funnel comment sounded really encouraging as you close out the year. Did that actually improve or was it above your expectations for the fiscal fourth quarter versus what you saw earlier in the year? Any way to unpack that a bit?

Yeah, I mean, it was, it's been fairly consistent throughout the year. And again, So for us, it's been, how can we continue to execute against the opportunities? And it was slightly elevated in the fourth quarter, but I would say all in all, pretty consistent throughout the year.

And any changes to the share donors that you guys are saying? I know we hit on some of the regional players and some of the legacy players, but anything in terms of the new business you're bringing on, has that mix changed at all over the course of the year? Thanks, Jeff.

I mean, it changes slightly. 75% of our bookings are still what we would consider from legacy incumbents, in-house, regional, ADP paychecks. It moves around quarter to quarter a little bit. And in the quarter, we had a little bit more contribution from ADP and paychecks than previous quarters.

Thank you. Our next question comes from the line of Jared Levine with TD Cowen. Please proceed with your question.

Thank you. Can you discuss how gross revenue retention changed during your, even if it was consistent, were there any underlying changes based on employer size segment or controllable versus uncontrollable terms?

Hey, Jared. Yeah, no, I mean, it's been fairly consistent. It does pop around. You see like a little bit more pressure on the smaller end of the market for sure. And we have seen a little bit more success in the enterprise space. But overall, I think actually the labor market growth really impacted it more than anything. So you saw it tick down a couple of points, which, again, was really all of that labor market slowness that we saw relative to last year. but fairly consistent otherwise than what you would expect given some of the comments around upmarket success in the enterprise and the softness on the smaller end of the space.

Got it. Thank you. And then in terms of ERTC, can you update us if there was any of that revenue in 4Q and then the headwinds that represented? And is there any assumed in what the headwind assumed for 25 is?

Yeah, it was effectively immaterial in Q4. We had anticipated it in the guidance to come out, and so it was immaterial in Q4. And we're not including anything in our guidance for ERTC for 25. So it will be about a point and a half headwind relative to 24, just as that's completely gone. Excuse me, about a point, excuse me, of headwind.

Thank you. Our next question comes from the line of Bavin Shah with Deutsche Bank. Please proceed with your question.

Great. Thanks for taking my questions. Raul, just one clarification. You talked about earlier about feeling good about the level of sales capacity today. I just want to clarify that means no new net hires until the macro improves. Is that the right way to read it?

No. We're fully staffed for FY25. We'll continue to add throughout the year. We have a plan to continue to add, but we'll either increase or decrease that based on market conditions. So we're going to be flexible and make sure that, you know, we're investing properly in that area.

And Bob, and just to be clear, I mean, we're, Hey Bob, and just to be clear, we are going to increase capacity through both sales hiring and productivity as we're thinking about growing into to 25. So we'll continue to grow from where we are today.

Perfect. Thanks for the clarification and kind of circling back on the embedded opportunity. Can you just provide a little bit more insight in terms of some of the recent signings or kind of what you have in the pipeline today in terms of, like, the demographics of these customers? Are they still in profile from what you have already on the platform? Do they have existing businesses that you can migrate over? Just any other insight would be appreciated.

Yeah, for sure. I mean, so we're really excited about some of the new partnerships that we've been able to sign. Some of them are a little bit different in terms of, like – payroll service bureau style partners, but then some more vertical software specific like ERPs and POS type FinTech and companies. So I think that there's some continued success that we're seeing building off of what we've already shared. So I think that you're going to continue to see that vertical specific workforce management and softwares within the ERP as well. So we're excited about those. Some of those partners are a little bit smaller than some of the earlier partnerships that we've signed that have quite a few more employees and portfolio sizes. And so I think that will be a balance in as we continue to progress. Not all of them are going to have large portfolios. So we'll balance that in. And it'll probably be a little bit choppy just in terms of the types of partners that we bring in over the next year as we continue to scale this up, but the pipeline itself continues to grow with those similar type partners.

Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question.

Good afternoon and nice quarter. I'm wondering if you can talk a little bit more about, you know, some of the new modules. I mean, you've obviously had great traction with your applicant tracking solution. I'm wondering how much further you can penetrate the existing client base. And if you can talk a little bit about the newer modules that you've come out with in terms of employee compensation and how that ends up fitting in. And then I had some follow-up questions with regards to the inside Salesforce.

Yeah. Hey, Mark, it's Raul. You know, we have a tremendous amount of white space available to continue to cross sell. The majority of the PEPM expansions happened over the last five years and obviously we have a large client base that we can continue to cross sell in and we continue to invest and grow our cross-selling team. And we saw some of that success in our fourth quarter over performance. And so that was nice to see. And we'll continue to do that. Obviously, talent is really significant. It's a broad portfolio, both attraction and retention. And we're continuing to press in on the talent solution. From a compensation perspective, giving frontline leaders the ability to equitably, you know, provide compensation increases across their teams and an equitable fare and within budget, you know, really just enables a frontline leader to be more effective during that process. And so we think that fits right in to our leader strategy and really helping empower frontline leaders to build winning teams.

Can you talk a little bit about the size of the of the internal sales force that's cross selling into the existing base? And you know, where does that stand relative to the total of 600? And how big could that become? Because it seems I mean, particularly on talent, it's a great solution.

Yeah, I mean, we're still, as you know, we're still focused more on new. You know, by and large, the majority of our assets are pointed at hunting new clients. However, about 10% of our organization is focused on cross-selling, and that's been growing year over year. And I think you'll continue to see us, you know, press in there because there is such a big white space opportunity.

Great. Thank you. Yeah, thank you.

Thank you. Our next question comes from the line of Mark Murphy with JP Morgan. Please proceed with your question.

Hey, this is already on for Mark Murphy. Congrats on the quarter and thanks for taking the question. Quick one, just any divergences to call it in terms of demand patterns by customers in terms of geography or end market or any other relevant dimensions?

No, demand has been really consistent by size, by markets, by industries. We haven't seen any significant changes from that perspective, Arnie.

Thanks. And then, you know, looking at your slide deck, you have that you've kind of reached Salesforce coverage among the top 50 metros to about 55%. And then that was 52% last year and 44% the year before that. Is there a framework of how we should think about that going forward in FY25, whether that will accelerate or not, and how that fits into the fact that you're kind of fully staffed to deliver on your targets, FY25 targets now? Thanks.

Yeah, Artie, we're going to continue to increase coverage, you know, throughout the year. I wouldn't expect... you know, dramatic coverage enhancement, I would say that, you know, we'll continue to add heads. You know, as I said earlier, we're trying to be intentional about headcount acceleration and leveraging the capacity of our existing sales organization while we continue to add reps in each of those 50 markets where appropriate. So we'll continue to grow and that number will be higher, you know, this time next year.

Great. Thank you.

Thank you.

Our next question comes from the line of Steve Enders with Citi. Please proceed with your question.

Okay, great. Thanks for taking the questions here. I guess maybe just following up on the last point of, you know, the top 50 sales coverage and it seems like it's a bit of a shift away from the prior tier one coverage number that you previously kind of reported on, I guess. What's kind of driving that shift and I guess what does that maybe signal about how you're thinking about that opportunity there.

Yeah, Steve, how are you? It really isn't a shift or a change in strategy. We've always been focused on the 50. We were extremely barren in the top 15 or the tier one, and we've continued to move that percentage up. And as we look at continued ongoing seller growth, we will continue to add in all 50 markets over time. It just will... be based on opportunity and finding the right person and having the right opportunity available for that person. So I don't think it's a change in strategy. We still love the top 15 cities. We're going to continue to add headcount in all fifth markets. And that's what comprises, you know, where our 600 sellers sit today. And so we just felt like it was more directional for everyone to understand the top 50 cities and where we sit from that perspective.

Okay, gotcha. That's helpful. And then I guess just on the free cash flow side, I mean, looks like pretty solid performance here in the quarter. I guess anything to call out that helped kind of add to that performance here? And I guess anything that seems maybe got pulled forward or maybe there's some like timing shifts in there, but just I guess what does that kind of indicate as well for fiscal 25 and the free cash flow dimensions there?

Yeah, I mean, clearly on the quarters, there's quite a bit of networking capital changes. So like within the year, it's a little bit harder to look at, but we're trying to manage this to the full year. So I think that dynamic of the expansion on the full year is really important. But, you know, we'll continue to smooth out those networking capital items over time. The primary driver is of the free cash flow benefit is still the overall expansion and productivity that we're getting out of the cost of acquisition, in this case, in this year. And we're seeing the same thing out of GNA. So most of it is driven by the operating. And then within the quarters, you have some of those networking capital items.

Okay, perfect. Thanks for taking the questions.

Thank you. Thanks, Steve.

Thank you. Our next question comes from the line of Daniel Jester with BMO Capital Markets. Please proceed with your question.

Great. Good evening, everyone. Thanks for taking my question. Maybe we could spend a moment, when you talk about the mix of booking, 25% come from other solutions which are modern or new. Can you just remind us, like, why does PayCore win in those circumstances? You know, it's clear relative to the legacies, but relative to the more modern solutions, why are you winning?

Yeah, I mean, I think strength of the platform, most open platform, most robust platform, and our win rates are up and our share in winning from modern cloud competitors continues to increase and reach a high in FY24 as a percentage of the mix. So we feel really well positioned to compete against legacy and especially to compete against modern cloud. It's a really deep platform. We offer the most pepum, which in theory ties to feature functionality. So ultimately, we have the most robust platform. We have the most modern platform. It's the most open platform, and that's why we're winning.

Okay, thank you for that. And then, Adam, maybe I missed this in the prepared remarks, but do you remind us what's going on with gross profit margins? It looks like they were down year over year. Is there anything that you'd call out there? Thanks.

Yeah. Hey, Dan. Yeah, the primary drag in that case was really the form filings, just sort of pressure that we saw coming out. We actually saw some really good underlying operating expansion, margin expansion apart from those, and we'll continue to press into that for 25. There's a little bit more margin pressure that we'll see from that high margin form filings revenue. The rest of that, that's going to leave here in 25, but we'll work through that this year and be able to show continued expansion.

All right, great. Thank you. Thank you. Thank you.

Our next question comes from the line of Matt VanVleet with BTIG. Please proceed with your question.

Good afternoon. Thanks for taking the question. I guess when you look at some of the additional modules and the attach rates you're seeing and some of the momentum behind that, where do you feel like you're looking to put the most behind R&D budget and in so much as you look at M&A, are there areas of the portfolio that you think are sort of prime to add additional capabilities as you've seen demand for the attachment there?

Yeah, I mean, hey, Matt, thanks. It's Raul. I think, you know, we think about our R&D investment in three big buckets, continuing to, you know, enhance, you know, our core platform, obviously continuing to deepen our talent solutions, which are best in class already, and then continuing to make it the most open platform possible. in the category. And those are the three areas where we continue to invest in and we feel really good about it. From an M&A perspective, there's no one area or one gap in the platform, you know, that we're looking to fill. I would say there's hundreds, if not thousands, of cottage categories that kind of surround the HCM ecosystem that we're always looking to evaluate. And so that's an ongoing process. We're always looking looking for great solutions that can help our leaders build winning teams.

All right, very helpful. And then as you look at a lot of the success across software seems to be in verticalizing your offering to make it a little more market ready. You've talked a lot about embedded solutions and some of your partners, but how might you be able to use AI and maybe specifically Gen AI around the talent and training side of it as well as employee engagement to really help broaden the verticalization of your product to be a little more out of the box ready.

Yeah, hey, Matt, I mean, actually, the AI that we're driving right now, the majority of where you're seeing it show up is inside the talent solution and inside the talent suite. There's a lot of sentiment capability, like the job description generator sort of functionality. So there's a lot of functionality around that talent attraction area. and recruiting. And then we'll continue to look for those opportunities, not just look for those opportunities, but building those opportunities around some of the more sort of proactive nudging as folks are working through their workflows inside of the system and making those workflows easier to navigate. so that the clients don't have to spend quite as much time inside of there, and they can focus on more of the leader and performance management tasks that are more critical to the organization. And we're looking at some of that Gen AI, and again, sorry, not even just looking at it, but working through some of the Gen AI type chat functionality that we think are going to be really additive for our customers as well.

All right, great. Thank you.

Thank you. Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question.

Yeah, thanks for taking the questions. I just wanted to follow up on the embedded strategy. When you look at the pipeline of new partners, are they primarily ones with an existing portfolio or are you looking at partners that are more on the sourcing side as well? And then have there been any learnings for that motion now that you've been able to onboard the first few partners throughout this year?

yeah yeah hi uh jake it's it's raul i i think you know obviously you know the portfolio will be a mix there there are there are more um embedded candidates without portfolios and with portfolios um you know obviously we we look for both and i would say our pipeline is probably 70 percent without portfolios 30 with portfolios And I think what we're doing is getting that muscle memory today about both, hey, existing portfolio companies, how much converts, and then how much do they sell postmortem? And then ultimately, for people without portfolios, how fast can they ramp up their sales engine and how many units they can have? You know, in the fall at our, you know, investor day, you know, we're going to give some, you know, our early learnings, you know, 12 months in of how that looks from a metric perspective so people can model it.

Okay, helpful. And then benefits brokers, it sounds like those now drive nearly half of the bookings for you. Can you talk about how retention and multi-product adoption looks like for those types of logos? And is there any concern that channel might be getting too large of a new booking source, given you may not fully own the customer relationship? Or would you be happy to see that continue climbing?

Well, Jake, I love bookings, so I would definitely like more bookings from benefit brokers. No, we own the client relationship. They essentially, you know, it's a mutual relationship where they own the benefit side and we own the client side. But we end up owning the client relationship on the HCM side just like they own the client relationship on the benefit side. They've been a great partner, and we're going to continue to grow. I think 50% is pretty much a high watermark so far. And as we continue to grow the organization, we don't anticipate it being at 50%. It should be somewhere between 30% and 40% longer term. But in the short term, Jake, we're going to take every booking dollar we can get from benefit brokers and be happy. Thank you.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question.

Great. It looks like the midpoint at 25 is about 10% revenue growth as opposed to 19%. 24, maybe this is for Adam. Adam, how much of that delta is rate versus kind of the environment as opposed to maybe conservatism or anything else? Is there any way to just dimensionalize in round percentages kind of the component to the deceleration?

Yeah. Hey, Kevin. Yeah, you're seeing a couple points from the interest income, right? Interest income is likely to slow down and reverse in terms of total nominal dollars this year. So you're seeing a little bit of pressure from that. And then you're seeing a couple points from the, or about a point from the form filings change. And then you're seeing some conservatism. I mean, just based on where we are at this point in the year, we're trying to be intentional and we want to get back to sort sort of the philosophy that we've seen, and we're not expecting any contribution from the labor market still. So we're still seeing the broader sort of macro sluggishness, and we wanted to be intentional about that heading out to this sort of longest point in our guide curve.

Got it. And just maybe just following up on that, how much of it – I don't know if you have any impact of pricing in there.

Just in terms of how much pricing we would intend to, you know, continue to put in. I mean, I think we're going to see a balance between employee growth and PEPM growth that is likely to persist something sort of similar to what we've been experiencing, you know, here in 24. So I think that you're going to see a mix that's probably closer to 50, 50% or half and half, and that will then start to lend itself more to the employee side over time. But I think it's going to be consistent with where we've been for the last couple of years.

Thank you. Our next question comes from the line of Patrick Wall-Ravens with Citizens JMP. Please proceed with your question.

Oh, great. Thank you. Raul, for you first, I want to talk a little bit more about sales productivity. You know, so many of the vendors in sort of the CRM area are talking about applying AI to businesses. increased sales efficiency and customer engagement. And then Mark Benioff had an announcement about agent force that you might have seen yesterday. So you guys have 600 reps. Are you actively using any sort of AI technologies to improve sales efficiency today? Is it working?

Yeah, so I would say we're in the early innings. We use it a lot on the front end on the marketing side to create the best optimal demand. And we're able to point you know, the prospects that are most likely to purchase from our demand to the sales rep. So I would say that, you know, we're in the early innings, but we're pointing the best prospects most likely to purchase to our sellers.

All right, cool. And then, Adam, for you, forgive me if I missed it, but if total revenue growth is 10% and 25%, how do we think about recurring revenues?

Yeah, so, I mean, we gave a little bit of the breakdown on interest income specifically for the quarter. So, you know, we're guiding to about $12 million on the quarter, which implies a couple points faster growth on recurring for the quarter and then for the full year. So $48 to $50 million on the full year on interest income, which would put it at, again, a couple points faster in terms of recurring. But we broke all that.

Thank you. Thanks. Thank you.

Thank you. There are no further questions at this time. I'd like to pass the call back over to Raul for any closing remarks.

Thank you for your continued interest and support. We're optimistic about fiscal 2025 and remain confident in our ability to deliver attractive growth while accelerating margin expansion. We look forward to connecting with you at upcoming events, including the Stiefel Tech Executive Summit in Deer Valley, the Goldman Sachs Communicopia and Technology Conference in San Francisco, and the HR Tech Conference in Las Vegas. Have a great night, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.