Paycom Software, Inc.

Welcome to the Paycom Software first quarter 2020 quarterly results conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, please press star, then one. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over. Please go ahead.

Thank you. Welcome to PACOM's first quarter 2020 earnings conference call. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives, and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements made on this call are reasonable, actual facts could differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise except as required by applicable law. Also, during the course of today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today and is available on our website at investors.paycom.com. We'll now turn the call over to Chad Richardson, Paycom's President and Chief Executive Officer.

Thanks, James, and thank you to everyone joining our call today. First, my thoughts go out to those whose health has been impacted by the pandemic. We also sympathize with businesses who are faced with unavoidable reductions in their workforces and the employees who have lost their jobs. Additionally, I'd also like to extend my sincere thanks to first responders, medical personnel, and those involved in the supply chain who are on the front line. Finally, I want to thank our employees who continue to execute while working from home and also our Phase 4 team who remain working at the office. For today's call, I'll spend a few minutes on our first quarter 2020 results and some notable achievements. Following that, Craig will review our financials and provide some perspective on financial trends, and then we will take questions. I am particularly pleased with our performance in the first quarter. First quarter results were strong driven by our high margin recurring revenue business model and continued strength of new business ads. Q1 revenue of $242.4 million came in above the high end of our guidance range in spite of the effects of unexpected interest rate cuts and an unemployment spike in March. Adjusted EBITDA of $117.9 million and Q1 was also above our guidance range as a result of record gross margins. We entered the year with strong momentum following record revenue retention in 2019 and a value proposition that is stronger than ever. Even though the month of March was impacted by declining revenues from our current client base due to the effects of COVID-19, we continue to see strong addition of new clients. We are also experiencing elevated lead volumes compared to the same period last year, which we are driving through our marketing efforts and the strength of our value proposition. The pandemic is exposing scenes created by the disparate systems, and that is creating a higher demand for the Paycom single database solution. I am pleased with the incredible results and collaboration I'm seeing across the sales and marketing organizations. The appropriate usage of human capital management solutions has never been more important than today, and we will continue to invest and innovate to strengthen our position. More employees and managers are accessing the system, and HR and employees are doing less paperwork and manual input than ever before. We continue to see strong usage patterns of our products as measured by our direct data exchange, or DDX, with usage scores well above Q4 levels. DDX numbers continue to be strong and improved as companies adopt a full employee usage strategy. When employees have a direct relationship with the database, the employee wins, the company wins, from real savings estimated at $4.51 per HR task or data entry point, as well as higher efficiency and overall employee satisfaction. In February, we launched Manager on the Go, the tool built into Paycom's existing mobile app which empowers leaders with 24-7 accessibility to essential manager-side functionality of our solution. I said at the time that I believe this was the single most important product release we had since the launch of our employee self-service app, and while we are still early, it's proving to be very popular. Within the first 12 weeks since its launch, Manager on the Go has significantly exceeded the employee self-service product adoption over the 12-week comparable post-launch period. This easy-to-use functionality distributes approval responsibilities more broadly and removes impediments to quick data flow, and managers across our client base are embracing it. Once managers use Manager on the go, the vast majority of them fundamentally change the way they interact with our solutions, and actions previously completed on the desktop are now completed on the mobile app. I'm very pleased with the trends we are seeing. While many of our clients are unfortunately experiencing significant fluctuation in their employment trends due to COVID-19, we remain focused on three controllable activities, providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. I am more confident and ever than our product's value proposition and go-to-market strategy. I've been saying for some time we may be early with our strategy, but we're not wrong, and today we're no longer early. The digital transformation for business is accelerating. I'd like to thank all of our employees for their grit and the winning spirit they display every day in this changing environment. With that, I'll turn the call over to Craig. Craig?

Before I review our first quarter 2020 results, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. These are unprecedented times, and while we are withdrawing our full year guidance, we plan to get back to providing annual and quarterly guidance as soon as unemployment trends become more predictable. I'll briefly cover our Q1 results, and where possible, I'll provide some high-level comments about our financial outlook. Our approach is to be as transparent as possible based on what we know now. As Chad mentioned, we are very pleased with our first quarter results, especially given the unexpected interest rate cuts and spike in unemployment from the pandemic. In the first quarter, we generated total revenues of $242.4 million, representing growth of roughly 21% over the comparable prior year period, which was above our guidance range, driven by strong new business wins and robust recurring revenues. As a reminder, in Q1 2020, there were only 12 banking Wednesdays instead of the usual 13 we had, the comparable prior year period. As we discussed last quarter, a Wednesday represents roughly half a week's revenues. Within total revenues, recurring revenue was $238.5 million for the first quarter of 2020, representing 98% of total revenues for the quarter and also growing 21% from the comparable prior year period. During the month of March, we started to see the spike in unemployment across the country reflected in our client base, a trend that continued into April. The net effect as of today is that the impact on our current client revenue is similar to the percentage increase in unemployment across the country. We are closely monitoring unemployment trends and their impact on our client base. We are also experiencing the impact of 150 basis points interest rate cuts that occurred in March. We estimate the net effect on our business for the rate cuts is roughly 4.5 million per quarter for the balance of the year. Total adjusted gross profit for the first quarter was 213.5 million, representing a record adjusted gross margin of 88.1%, up 130 basis points compared to the prior year period. We continue to benefit from high margin recurring revenue and increasing customer service efficiency. Adjusted total administrative expenses were $108.4 million for the first quarter as compared to $80 million in the first quarter of 2019. Adjusted sales and marketing expense for the first quarter of 2020 was $51.9 million or 21.4% of revenues. We are seeing positive results from our recent ad campaigns and marketing efforts and plan to continue to invest in marketing in Q2 and throughout the year. We believe this is not the time to back off from our marketing plan. In fact, due to the increase in demand we are seeing and the success we are having, we plan to spend more in Q2 than we did in Q1. Adjusted R&D expense was $19.4 million in the first quarter of 2020, or 8% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $27.6 million in the first quarter of 2020, compared to $21.1 million in the prior year period. We plan to continue to invest in our future growth through innovation and new product development. Adjusted EBITDA was $117.9 million in the first quarter of 2020 or 48.7% of total revenues compared to $103.3 million in the first quarter of 2019 or 51.7% of total revenues. Our GAAP net income for the first quarter was $63 million or $1.08 per diluted share based on approximately 58 million shares versus $47.3 million or $0.81 per diluted share based on approximately 58 million shares in the prior year period. Our effective income tax rate for the first quarter of 2020 was 28.7%. Non-GAAP net income for the first quarter of 2020 was $77.9 million or $1.33 per diluted share based on approximately 58 million shares versus 69.3 million or $1.19 per diluted share based on approximately 58 million shares in the prior year period. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the second quarter of 2020. Since we increased our buyback on March 12, 2020, we have repurchased over 260,000 shares To date, Paycom has repurchased nearly 4 million shares since 2016. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of 182 million and total debt of 32 million. As a reminder, this debt represents the financing of construction at our corporate headquarters. Cash from operations was 82 million for the first quarter, reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately 1.4 billion in the first quarter of 2020. To conclude, I'll repeat what Chad said. We are focused on mitigating the impact of the pandemic on our current client revenue numbers by providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. We have a strong balance sheet, a highly profitable recurring business model, and the strongest value proposition in our industry. We are confident that 2020 can still deliver the enviable combination of growth and margins that we have consistently demonstrated, and we look forward to being able to quantify that combination for you as soon as macroeconomic factors become more stabilized or predictable. With that, we will open the line for questions. Operator?

We will now begin the question and answer session. We will have one question and one follow-up from each person. To ask a question, please press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we will momentarily pause to assemble our roster. Our first question is from Ramo Lencho from Barclays. Go ahead.

Hey, thanks for taking my question, and I hope everyone at TECOM is staying safe, and I wish all the best to everyone. First question for me, Chad. You guys have been in kind of the crisis more than 2008, 2009. Can you just kind of compare and contrast what you saw back then, how it compares to now, and then, you know, like, and what lessons you learned back then, and then have a follow-up?

Sure. So in 2008 and 2009, obviously, we were a lot smaller company. We were somewhat geo-focused in a certain area. I would say we were more in the Midwest and Southwest at that time. You know, from that period of time, you had the mortgage crisis going on and other factors. And really, at that time, it became a cash flow management business. issue for us, and at that point in time we changed the way we managed our cash for clients because you had greater ACH risk at that time. So we made changes to protect cash flow at that time and exposure for ACH risk. But actually the three things we're focusing on right now are the three things we focused on back at that time. You know, we continued to focus on providing world-class service to our clients. We continued to innovate through the rapid development of our software, and we also were aggressive in adding new clients. And so those are the same lessons or the same activities that we're focused on right now. But it's a little different 2009 and 2008 from today.

Okay. And then the follow-up, thank you for that. Next question I had was on, we had now like a good month of kind of working from home, et cetera. And you guys have been, in terms of your sales approach, very local. And I saw in the statement that you gave out, maybe there's increased productivity by kind of doing it over video calls, et cetera. Can you see what you're seeing in the field at the moment in terms of willingness to engage, ability to engage from your sales force, et cetera? We're one month in, so hopefully you're getting some data points already.

Yeah. And so, you know, we've sold face to face for a long time until we added the inside sales group. You know, again, we had about five of them for about, you know, 10, 15 years. And then we built out four teams over the last six months and inside sales. So we've had a little bit of experience with selling virtually. I will say, you know, we came into this year with strong sales momentum. We had a very strong value proposition. It continued to resonate. Then we ran into the pandemic. And so on Sunday, March 15th, we actually closed all sales offices and moved them to the virtual work from home model during the weeks of March 16th and the week beginning March 23rd. You know, we rescheduled all of those sales appointments and really focused on retraining our outside sales organization on a somewhat new model. During those two weeks, our book sales business dropped about 50% for those two weeks. During the subsequent week, which would have been the week I believe began March 30th, our book sales was back up to 80% of what we had been selling previously. And then the rest of April, we're actually at the same level of book sales numbers we were pre-COVID. So from a sales bookings perspective, We continue to sell business through this. I can tell you that, you know, used to a sales manager could go on six calls a week. Now they can go on, you know, six in two days. And so reps are still highly engaged with individuals as they also work from home. Some of them are actually our clients or prospective clients, I should say, actually may go into the office and then use a type of virtual technology to actually engage with us. But There's still people out there buying, and, you know, it's a good time to buy. I will tell you that the digital transformation has accelerated through this. I think our value proposition is stronger today, not less so, and so we're having some success with sales.

Good. Okay, bye-bye. Good luck.

Thank you.

Our next question is from Samad Samana from Jefferies. Go ahead.

Hi, good afternoon. Thanks for taking my questions. And I'd like to echo, I hope everybody is staying safe and doing well in this type of environment. So I guess my first question, Craig, just for clarity, you said that the change in Paycom's customer base has been consistent with unemployment kind of more broadly. Can you just clarify? So does that mean that you've seen – I guess what's the change in pace for control that you've seen from pre-crisis to as it stands, you know, one month into April?

Samad, I can take that as well, and Craig can also chime in. You know, the point is, is it would be unreasonable to think that PACOM would not follow – the increase in the rate of unemployment. I would say that we're an accurate sampling size of the U.S. market as it relates to payrolls. We are industry agnostic, so we're diversified across all industries. Oftentimes when it comes to unemployment, we are going to see the impact before the unemployment number actually comes out. There are many states, California, Massachusetts, Illinois, other states where you're having to pay that last check either same day or next day from your payday. And so oftentimes someone's going to receive their last check prior to filing unemployment and it actually being within the number. And so it would be unreasonable to think that we wouldn't follow that. I will say this. Unemployment, if you look at it for the last 12 trailing months, it's been fairly consistent. It's kind of run between 3.5% to 3.8 percent. And that's based on anywhere from 163 to 165 million available Americans out there in the workforce. So you calculate that. We saw that jump in March specifically. The last couple of weeks of March is really where you started to see that jump. And, you know, it jumped to 4.4 percent or 7.1 million unemployed Since that time, for April, you're looking at, since March 15th, I think we've had 26 million unemployment claims filed. It looks like about 24 million of those could hit in April, we would expect. And so that, you know, you do that division over the 163 available workforce, you're going to come up with a different unemployment number than the 3.5-ish number. that it had been, or the 4.4 that it was in March. And so all we're saying that right now is, you know, we have had visibility into our numbers. There's some changes that's happening with unemployment. We don't know if these will necessarily accelerate through second quarter. We don't know if they'll stabilize. And so I think it's just too early to tell. But unemployment does have an impact. on our current client revenue. The mitigating factors that we have are continuing to add new clients onto our platform. We are seeing people engaging right now, as well as any upsells we might do to current clients. But I would say that those have always been dwarfed by new logo ads.

Yeah, and I would echo what Chad said. You know, even though we do have some clients that are in those industries hardest hit, you know, like restaurants and hotels, You know, we're not overexposed to any of those industries and are very industry agnostic.

Great. Thank you for that thorough answer. I really appreciate it. And then maybe just one follow-up. There's been a lot of investors have asked us the question about what percentage of a contract is typically fixed versus what is the variable component that's based on headcount or payrolls processed. So any directional percentage you can give us, is it 10%, is it 50%? It would be helpful just in framing as we're doing the math.

Well, I'm going to just go ahead and give this information out. I haven't given it out before, but I'm going to talk about our billing. We have a base fee, and that base fee is for one employee. And so if you have one employee with Paycom and you're using the Paycom system, we're going to have the base fee. All right? Now, if you add multiple employees, you might have multiple states, so you may have a few more base fees. But ultimately, on smaller clients, the base fee can be a measurable percent of a client's bill. But as that client gets larger, that base fee gets substantially distributed into the employee loss, and the employee loss percentage becomes very close to equal to the loss of revenue percent on that client. So it really just has to do with size of client, you know, before you can really figure out exactly how much of the base fee is in there. Now, I will say this. We're not necessarily seeing increased costs. client attrition when we're talking about units, whether it be someone leaving. Well, we're not seeing increased client attrition from either someone leaving and or going out of business. The impact we're really seeing is the impact as it relates to employee count. The clients that we're working with might go from, you know, running 200 checks normally with us. The ones that are impacted, again, not all are, and some have even some growth in this, but for the most part, You know, we do have several clients that, you know, may have been running 300 checks, and now they're running 17. And so, you know, we're going to still have the client, but, again, we're going to be impacted by that unemployment number.

Great. I really appreciate the openness and wish you guys well, and I'll pass it along to the next person. Thank you again.

Our next question is from Mark Murphy from J.P. Morgan. Go ahead.

Yes, thank you very much. Actually, good timing. I wanted to follow up on Samad's question, Chad. Just to clarify the math on the unemployment, so we've seen 26 million unemployment claims out of a workforce of about 164 million, so you get about 16%. I guess I'm just curious, if the employees are furloughed and they've applied for unemployment Wouldn't they still be a payee in the Paycom system, right, so that you'd still be getting paid for the furloughed employees, or is that not accurate?

That would not be accurate. I mean, depending on how you're using the term furloughed, typically a furloughed employee is an employee that still has their job but is not paid. Paycom's model is really based on number of paid employees as it goes through. Now, those employees would remain active in our system. They would continue to use our employee app. And, you know, when they come off furlough, we'll begin to receive the billing from them. And as far as furloughed employees and how they may be also included in that unemployment number, we would want to check on that. But in regards to our system, furloughed, terminated, laid off, those should all have a very similar impact in our number, although you're going to have different termination codes because those have different rehiring activities that someone's going to take as they turn them back into active pays.

Okay, understood. And then as a follow-up, I'm just curious if you've been able to survey your customer base at all to try to ascertain where they think their headcount might trough at, perhaps when it would bottom, the pace of rehiring, at what level perhaps they think it would stabilize to try to inform your business plan. I'll give you a for instance, if a customer had 300 employees that they They think it's going to drop to 200 in May. Maybe then they think it would ramp back up to 270. You could at least try to recalibrate and then plan on a 10% reduction in their head count. Have you been able to do anything like that, you know, somewhat scientifically or even to have enough anecdotes to create some type of a guess on how that will look?

Well, I think that there's many things that we'll be able to do once we see a trend and or some stabilization, which makes something predictable. For many of our clients, they have the same unknown factors that we do, if you think about it. So it might just be timing. We might be a little early on being able to get good information that way. But we definitely are staying close to our clients. I mean, we talk to them on a continual basis. And we've been able to kind of see in different areas and different industries potentially impacts. But it's really all over the board. And, you know, we still remain hopeful that at some point, you know, it stabilizes. We just don't know where it stabilizes at. Does a company that made a decision in March to go into a certain phase for themselves Do they take additional steps throughout the year, or is March a steady state for them because they took the hit up front? We don't really know that yet, and as this quarter goes on, I think we'll have more information on that.

Yeah, Mark, and one thing, too, with the payroll protection program, like the example you gave, those people have applied for some assistance, and under the rules, if they use 75% of that to rehire, then you can have loan forgiveness on that. So we may see some of that as well.

Okay. And then, Craig, one very final question. Is there any change with respect to customers or prospects asking for price discounts or payment deferrals in this kind of environment?

You know, our pricing model is very fair. It's actually the thing that's impacting us right now. You know, our pricing model is based off the number of of employees that you're paying within the system substantially. And so, obviously, I'm going to take that company I said that may be 300 employees before, and now they're 17 employees. Well, when they were 300 employees, they're paying us for 300 employees. Now that they're 17, they're paying us for 17. So that's a fair model, and I wouldn't see any reason that we would make changes to our pricing model at this point.

Okay, very good. Thank you so much. You bet.

Our next question is from Brad Reback from Stifel. Go ahead.

Great. Thanks very much. Chad, on the new business activity, can you give us a sense of your ability to implement remotely? Yeah. I mean, to be able to implement is very similar to the way we were doing. A lot of our implementations, not going to say it's necessarily done. You know, you definitely have the conversation. with the transition rep with that client. You go through training that way. But substantially, most all of our implementation has been done through either the Oklahoma City and or Dallas area. And so a lot of it was really done remotely anyway, with the exception of the training and the data collection. As a reminder, also, we've had an inside sales group for quite some time. So, no, we're not seeing it being more difficult, becoming more difficult for us to implement. In fact, our measurement through the first quarters and implementations are going faster than what they traditionally had. And honestly, so is the sales process somewhat. I can tell you that, you know, before we'd set an appointment on a Tuesday, and we might have that call in two or three weeks. You know, now we're setting that appointment on a Tuesday. We could be having that appointment on Wednesday, you know, and we're getting, you know, most people at the table. And so... I wouldn't say it's – it definitely hasn't slowed us down from being able to convert. You will have clients that, due to the current situation that they may be in, you could have clients that choose to wait a little bit longer. But I don't even have anything to really call out in regards to that right now. But anyway, that's where I would leave that. Great. Thanks. And one quick follow-up. Have you seen a moderation in the rate of decline in the number of people that you're paying, your customers are paying on a weekly basis over the last, we'll call it three or four weeks? Well, I'll go back to what I said. It would be unreasonable to think that we wouldn't continue to follow increases in the unemployment rate. And so, you know, you would be hoping that that would moderate to some level of stabilization at some point. Got it. Thank you.

Our next question is from Mark Marken from Baird. Go ahead.

Hey, good afternoon, Chad and Craig. Thanks for taking my question and best wishes for safety during these times. I'm wondering, can you talk a little bit, just a follow-on on the impact of the unemployment? If you have a 1% decline in terms of the number of employees paid, What does that translate to from a revenue perspective? How should we think about just the sensitivity there? I know it varies across the different client sizes, but if we're taking a look at the portfolio as a whole, how should we think about that?

I mean, larger clients, you're going to be close to a one-to-one ratio on larger clients. Smaller clients, it's going to be a lot less. I mean, you know... from that, meaning that, you know, it really does depend on the size of clients. But a larger client, you're definitely closer to the one-to-one because the base fee has been eaten up by that one employee company. Now, if you're talking about a 30 or 40 employee company, I mean, you're going to have quite a bit of base still in there. But, you know, once you're going up to 200, 300, 500, 2,000, 3,000, I mean, the ratio is going to be closer to 1 percent loss in their employment equals close to 1 percent loss in current client revenue.

Okay. Then with regards to the new sales, that sounds tremendous. Can you talk a little bit about who you're winning from? Has there been any change with regards to that? Is there some special attraction in terms of the mobile soft service capabilities that would lead you to get more clients from older providers or has the mix changed in any way, shape or form?

You know, it's an interesting question. I will say that, you know, it's usual suspects for us. We're hitting them the usual ways. You know, we do have a much stronger product now. I talked about the employee mobile app as well as the DDX success we're having. Many people are using our ask here as we've gone through this environment. By rolling out manager on the go, I mean, our adoption rate on manager on the go for the first 12 weeks was almost double what our adoption rate was for the employee app for the same launch period. And so we're having high levels of engagement. And so I would not say that any of our competitors have the level of engagement we have. And so we do continue to onboard people from the usual suspects. You do have some systems out there that were more in-house in nature or even some competitors that may have been more regional using licensed software. And those models are very much disrupted right now in this environment. So to the extent we have low-hanging fruit, it's going to be more in that area. But we're also having just a lot of success because, you know, We have a lot of clients who even call us back. You know, we pitched them one or two years ago. It was what it was. They understand the value proposition, weren't ready to make the move. Right now, you know, I think people are forced to look for additional efficiencies. I think most all companies come out of this leaner and more efficient. And, you know, we're going to do our part just to make sure that's what happens on the efficiency side.

Terrific. Thank you.

Our next question is from Daniel Jester from Citi. Go ahead.

Great. Thank you for taking my question. You know, I appreciate your comments about, you know, most of the impact you're seeing so far is in the reduction of employees at your client's account. But I suspect that as this situation extends, there is the risk of higher churn just from macroeconomic volatility. So, I'm just wondering, you've done a great job over the years improving retention. Is there anything specific you're putting in place to help improve or keep retention up even in these uncertain times?

I mean, really, for retention, if you're talking about the actual loss of a client that might go out of business, you know, other than helping them find resources that might help them stay in business, there's not a whole lot of impact we can make there. Now, what I will say is is even at IPO, you know, we announced that 90% of our revenues derive from companies that have greater than 50 employees. And so today that's only going to be greater than that as far as a percent of revenue. My bet is it's, you know, well, it's much higher than 90% at this point. And so, you know, for us, what we're seeing is more a decrease, not a go away. Now, some of that may be answered in how long are we in this. Do things improve when they improve? How long can someone last? But as we sit here today, we can't really call out business failure today. We can call out business failures, I should say. We can't call out business failures. We can call out impact that unemployment is having on those business revenues, on those client revenues.

Great. Thank you. And then you mentioned this briefly in your prepared remarks about DDX and improvement in engagement there. I'm just wondering, you know, based on what you've seen, is the usage of DDX consistent across your customers whether they're in either managing these times well or not? I just wonder in times of crisis, do people go back to the old ways and move away from automation or does the automation stick through even in times of turbulence? Thank you.

You know, that's actually a really good question. We have not seen DDX scores. I mean, DDX scores have continued to go up. I can tell you this, just in a couple of anecdotes, it's actually been where we'll have clients that you'll see in certain areas, it forces their DDX to go up, you know. If they were just kind of adopting, let's say you had a DDX score of 96% and you were sort of adopting, to some level it forced people to have 100% adoption. I'm not saying that we've made it to 100% adoption, but this, you know, the environment that we're going through right now has not had a negative impact on the DDX scores. Now, DDX is a measurement of employee usage. and actually a measurement of using the system the correct way. And so I would just answer that by saying more and more people are using the system the correct way today than what they had in the past.

Great. Thank you very much.

Our next question is from Brian Swartz from Oppenheimer. Go ahead.

Yeah, hi. Thanks for taking my question this afternoon. Chad, I was just wondering if you could provide some additional color on either what you're seeing in terms of the sales or the elevated lead activity by company size, and if there's any reason for us to think that the sales activity by company size should be materially different for the business ahead. Thanks.

No. So, you know, I'm not announcing anything different on what we're doing from a size perspective. We continue to sell both in and above our range. I had also called out that I think it was last earnings call. I called out that we have four inside sales teams that continue to sell the small business market. So. I would say that's been very consistent for us. Yes, we continue to see clients come in at the top end of our range or even above, but we've always seen that. And so, you know, it's been very consistent, and that would be also consistent with the leads that we see.

Thank you.

Our next question is from Alex Zukin. from RBC Capital Markets. Go ahead.

Hey, guys, thanks for taking the question. And glad to hear you're staying safe out there. Maybe just the first one. Jackie, can you remind us on kind of the linearity of bookings in a quarter usually? And then maybe, you know, traditionally, or typically, from a inter quarter perspective, like how much visibility do you typically have one quarter out on the business?

Yeah, so first of all, on the bookings, I would say that, you know, month to month, they'll kind of change. I mean, typically, I'll say this, typically summers aren't a great month. I can tell you two years ago, August was our largest book sales month. So, you know, it just depends. They're all over it, ebbs and flows, right? You fill up your pipeline, then you close pipeline. It is most common that the end of the year for our industry would be where your largest booking numbers would come just because Admittedly, most all companies in our space would tell you January is a large start month for prospective clients for us. And so you do expect sales to be higher. Matter of fact, some people in our industry even call it selling season. They'll say we're gearing up for selling season, which is kind of the September through December timeframe. I can tell you with Paycom, you know, We're open for sales on a continual basis and it's hard for us to really point to significant book sales in one area versus the other. It really has to do with how fast we're clearing out that pipeline, which leads to your visibility question. You know, if we have somebody within our pipeline in a 90-day close, the likelihood of them closing, being that they've been in our pipeline for 90 days, you know, is much smaller. It's our goal to continue to get deals that we engaged with today, to be able to move forward throughout the sales process and to get them closed up in the six to eight week period. So when it comes to visibility, as it relates to book sales, sure, we have some. Do we have three to six month visibility? I wouldn't trust a six month pipeline. for myself, because those are businesses that we should be able to get them going on the solution so that they can start receiving the ROI sooner rather than later.

Got it. And then, you know, just maybe as a follow up, I think, you know, probably some of us are pretty surprised to hear that new bookings have kind of returned to pre-COVID levels in April, and you're not seeing any customer, any meaningful changes in customer churn, do you anticipate that being, like, when you think about, you know, the balance of this year, is that something you're anticipating to continue? Do you anticipate those levels to kind of trend off? And if so, how much do you anticipate to kind of sell into the base to insulate a little bit from that?

Well, I think there's a difference between hope and anticipation. I mean, if I think if we were able to really quantify a lot of those and have a high level of confidence in that of this, of the trend we have today continuing, you know, we would be able to be providing more information than what we're doing right now. I will say that even our appointment numbers, you know, through April are similar as they were pre-COVID. the interest hadn't slowed down and our ability to have those meetings hasn't slowed down. As far as your answer on client, you know, on clients maybe losing their business, I would say, which we hope doesn't happen, I mean, that's really something I'm not going to have great visibility in. I mean, I can see when a client might drop, again, to use the same example, from 300 to 17 employees I don't know what happens to that client after that if we're in a certain environment for too long. That's really going to depend on, it's almost a per-client basis, you know, what decisions they're making about their business. So it's just hard to judge that right now. I don't think it's going to be forever that we're unable to judge that. And I'm talking about, you know, I do think there's going to come a point in time where we'll have better information on that. But it's hard to tell right now.

Got it.

Thank you. Our next question is from Ryan McDonald from Needham & Company. Go ahead.

Hi, Chad and Craig. Thanks for taking my question. Chad, you mentioned before that there's a bit of a difference, I think, in the code that's entered whether a customer furloughs an employee versus lays off an employee. Can you just talk about what you're seeing in terms of mix with your clients or to the extent that you have seen thus far of layoffs versus furloughing at this point?

No, I would just go back to what I said. The impact on us would be the same from a revenue perspective. I don't know. You're really going through and asking, okay, do clients even understand the difference between them, between furlough and between a laid off employee or between an employee that you might be using a, you know, something different through some type of termination method or an onboarding method you're going to go back to later. So, no, I mean, I wouldn't be able to give you exact numbers on those who have been furloughed versus terminated and or laid off. All that's to say, though, if someone has put in a termination code for any one of those within the system or left them furloughed and active, but they're not receiving payment, it's going to impact our revenue the same, regardless of which one of those they choose.

Got it. And then just to follow up, you know, I wanted to touch on gross margins in the quarter. You know, I think over the past few years here, first quarter gross margins have been running in that 86% to 87% range. You had a really strong performance there at 88%. What drove that nice increase that we saw on a year-over-year basis during the quarter? Is it, you know, the expanded usage from some of these self-service products or perhaps something else?

Yeah, I mean, well, you're definitely having, and I'll let Craig chime in a little bit on this, but you're definitely having efficiencies gained from usage of the product. I mean, we've talked about before that our call volume, even the calls coming into Paycom has been equal to or less than prior year same quarter, right? And so even the call volumes that are coming into Paycom, we're receiving less calls because clients are using the product correctly, they understand it, and now their employees are using it correctly. And so, you know, we're having a lot more success. And also we're onboarding clients with full usage strategies, and we've been doing that for over a year. And so, you know, we don't have to do a lot of fixing, if you will, getting all the clients to the right strategy. So you definitely have some of that, and I'm sure there's some other efficiencies games Craig will talk about.

Yeah, I mean, you know, obviously our service department, you know, as the clients are able to use the system and are using the system correctly, you know, our service department is able to handle a larger volume as well. So, you know, we've seen that, and we've talked about that in the past as well.

To give you one more thing on that, Ryan, the number of service individuals that we had servicing clients at the end of December 2020 was the same as the number of service individuals we had servicing clients December 2019. Yeah, I think, Chapman, 19 and 18. Sorry, 19 and 18. 19 and 18. Not 2020. The number of service individuals we had servicing clients at the end of 2019... was basically the same as we had at the end of 2018. So you're going to get some efficiencies when you have service individuals that are able to service more clients because the client is using the system better.

Great. Thanks for the call. You bet.

Our next question is from Titsi Panigrani from Missouho. Go ahead.

Thanks for taking my question. Just pulling up your comment about new business or activities or leads on the pre-COVID level, that's something different we have been hearing. What we're seeing is mostly businesses focusing on mission-critical application. So what do you think, what's the motivation right now for most of those customers switching their payroll at this point? Is there a different kind of motivation than that you've been hearing pre-COVID level?

And then are you seeing any certain... No, well, I will say this. I don't think any business ever liked waste. And to the extent businesses still have waste, they're looking to become more efficient. I would also say that, you know, payroll and benefits administration and a lot of the things that we're doing in the system, I would say... is a very important part of what any business does. So when we're talking about critical functions, I don't know that I align with that same thought that the types of things that someone is doing to engage with their employees right now during this environment is less critical. I definitely understand the cash flow management and the other areas that people have to manage throughout their business. And am I going to say we're the top priority for all businesses? No. Are we the top priority for all? Yes, we are. And, you know, there's many businesses in the U.S. and we don't have to sell all of them this week. But we are having a lot of success continuing to drive sales. And I really don't have anything to call out from a sales perspective. save the two weeks we took them out to train and the one week it took us to kind of get back where we did drop, you know, 50% for those two weeks and we dropped 80% that third week coming back. But since then, you know, we've been all pistons firing in regards to our sales efforts and the results they're having in book sales.

Got it. And I wanted to ask, is there any particular verticals you're seeing more interest activities than others? And also, like, given that inside sales, you know, increase, you know, efficiency and inside sales, are you planning to hire more inside sales this year?

Yeah, we continue to be industry agnostic. You know, there are industries that are going through, you know, there's, you know, 5,000 employee companies that are now 280 employees. And you know what? What a great time to convert to Paycom. You only pay for the 280 employees that you work through. It's almost like a year in conversion. And so, you know, those are great times to convert to Paycom. We're industry agnostic. For us, it doesn't matter where someone is. You know, we're going to be focused on gaining market share as we come through this. We want to be the net winner in that as we come through this. And, you know, we've got some headwinds, right? We've got the interest rate. Now it's at zero. We've got unemployment that continues to climb. If we're doing the right things and we're focused on the three key areas that we mentioned, which is continuing to give world-class service, which we have absolutely done during this, continue to roll out rapid product development, which we've absolutely done through this, and continue to add more clients to our platform, I feel like as these things reverse on us that we're going to have some organic tailwinds, if you will, So it's very important right now that we stay focused on all. It doesn't matter to me if a client is furloughing, terminating, laying off employees. Right now, we're open for business. We want to get those clients just like we do those clients who are already growing in the face of this. We want to get them all.

Thank you, Ted.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Chad Richardson for closing remarks.

All right. I want to thank everyone for joining us on the call today. I'd like to send a special thank you to the Paycom employees for all the valuable work they're doing. Over the next couple of months, we'll be meeting with investors virtually at the JPMorgan Conference on May 12th. We'll also be at the Needham Conference on May 19th. Both of these are virtual conferences. And in June, we will participate in the Baird and Stiefel conferences. We appreciate your continued interest in PACOM and look forward to meeting with many of you soon. Thank you, operator. You may disconnect. Thank you. The conference is now concluded.

Thank you for attending today's presentation. You may now disconnect.