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spk01: Ladies and gentlemen, thank you for standing by and welcome to the Paycom Software fourth quarter and full year 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, James Sanford, Head of Investor Relations. Thank you. Please go ahead.
spk02: Thank you, and welcome to PACOM's fourth 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 Act of 19-1985. 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 results may 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 the 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 statement, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also, during 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. I'll now turn the call over to Chad Richardson, Paycom's President and Chief Executive Officer. Chad?
spk09: Thanks, James, and thank you to everyone joining our call today. A special thank you to all of our employees for an outstanding quarter to finish the year. I will spend a few minutes on the highlights of our fourth quarter 2020 results. Then I will review some of our notable achievements in 2020 and also discuss our goals for 2021. Following that, Craig will review our financials and our guidance, and then we will take questions. 2020 was a strong year for Paycom. We innovated our sales processes and accelerated our new business sales during the global pandemic. These accomplishments have set the stage for a year of rapid growth that we believe will propel Paycom to reach $1 billion in revenues in 2021. The digital transformation of the human capital management industry has reached a critical stage where the accepted practice of HR and payroll personnel inputting data for employees has come to an end. The industry trend towards self-service has been leading to this point, and I believe the pandemic effectively sealed the fate of the old model. Businesses must shift to provide employees direct access to the database because it's better for the business and the employees. The coming extinction of the old model has been our expectation for many years, and I'm very excited to see it happening. Our differentiated solution positions Paycom very well to accelerate this trend and deliver long-term sustainable growth. We finished the year with strong results. Our 2020 fourth quarter revenue of $221 million came in very strong thanks to elevated new business starts in the quarter. Our full year 2020 revenue of $841 million grew 14% compared to 2019. Paycom maintained an annual revenue retention rate of 93%, even with the pandemic causing some businesses to close, and a reduction in employee headcount-related revenue at existing clients. Our full year 2020 adjusted EBITDA was $331 million, representing an adjusted EBITDA margin of 39%. Our focus on the sum of revenue growth and adjusted EBITDA margin has served us well in balancing both growth with profitability And in 2020, we exceeded our recently stated goal of hitting the Rule of 50. With Q1 of 2021 expected to be the last quarter that the pandemic impacts our numbers from a year-over-year perspective, I believe we have an opportunity to reach the Rule of 60 in 2021. Our marketing plan throughout 2020 worked very well, delivering strong demo leads throughout the year. In 2021, we plan to continue to spend aggressively on advertising to fuel future revenue growth and continue to expand our roughly 5% market share in a large and expanding HCM TAM. We are capitalizing on the shortcomings of disparate HCM systems with the value proposition of Paycom's single database solution that is stronger than ever for companies of all sizes, including companies well above our stated targeted range. We continue to be pulled well above our stated target range as larger companies look to leverage automated processes for their own employees. At the same time, our small business ads continue to increase in 2020 thanks to the efforts of our expanded inside sales force. Growing employee usage of the Paycom system is generating a substantial return on investment for our clients, their employees, and Paycom. High employee usage rates, as measured by our direct data exchange, or DDX, remain strong across our client base. When combined with high adoption of Manager on the Go, these applications are creating new opportunities for product innovation and automation. An example of such automation that we've deployed internally is fully automated payroll. It has been our goal to provide our clients with a better employee transaction interface for payroll. or BETI is that Better Employee Transaction Interface. BETI guides individuals through an employee-specific payroll process in which they create and approve their own paycheck. This means payroll is completed at pay period end, which has traditionally been the date in which the payroll department gets started. What used to take an entire payroll team's days to aggregate is now fully automated and put directly into the employee's hands. This new approach leverages all of our solutions to produce what we call the perfect payroll and eliminates duplicative processes that can create confusion and inaccuracies when employees don't have visibility or control over their own payroll data. This level of employee control is the future of payroll, and I'm looking forward to being able to roll Betty out to the market in 2021. As of December 31, 2020, our headcount stood at approximately 4,200 employees, up 12% year-over-year as we continue to hire high-quality talent throughout the pandemic to further bolster the foundation of our future growth. While greater than 95% of our employees continue working remotely across the country, we look forward to returning to our offices at some point this year, but only when it's safe to do so. Paycom received national recognition from several organizations in 2020. We earned a top five ranking in best places to work in the U.S. by top workplaces and the number one spot in Oklahoma. And we were named the Fortune 100 fastest growing companies for the fourth consecutive year. These awards are very rewarding and a testament to our execution and thriving corporate culture. Additionally, I want to congratulate the 2020 PACOM Jim Thorpe Award winner, Trayvon Merrig of Texas Christian University. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, who is one of the greatest all-around athletes in history. Jim Thorpe also happened to be an Oklahoman. To sum up, we addressed the 2020 challenges with confident resolve. which enabled our solutions to shine and expose the weaknesses of other disparate systems in the market. The pandemic's impact on our pre-pandemic client revenue remains stable, and while it's unclear if or when those same clients will add to their employee counts, our continued growth relies on remaining focused on the three controllable activities that made 2020 so successful. That is providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. Our commitment to investing through the pandemic generated elevated leads and sales. Once we get past Q1 2021, we will have lapped the pandemic's impact on our comparable year-over-year numbers. Finally, I'd like to thank our employees for their ongoing commitment and flexibility. As we said throughout 2020, the pandemic didn't build character, it revealed it. I was glad to see we were all who we thought we were. Your efforts have set us up great for 2021. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?
spk10: Before I review our fourth quarter and full year results for 2020 and also our outlook for the first quarter and full year 2021, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. As Chad mentioned, we are pleased with our fourth quarter results, with total revenues of $220.9 million, representing growth of roughly 14% over the comparable prior year period. Our full year 2020 revenue was $841.4 million, representing growth of 14% compared to 2019. Our revenue growth continues to be primarily driven by new business wins, including very strong new client revenue starts in the fourth quarter. We ended 2020 with approximately 31,000 clients, representing a growth rate of 17% compared to 2019. On a parent company grouping basis, we ended the year with approximately 16,000 clients, representing a growth rate of 18% compared to 2019. Within total revenues, recurring revenue was $216.7 million for the fourth quarter of 2020, representing 98% of total revenues for the quarter and growing 14% from the comparable prior year period. Total adjusted gross profit for the fourth quarter was $188.9 million, representing an adjusted gross margin of 85.5%, up 20 basis points compared to the prior year period. For the full year 2020, our adjusted gross margin was 85.9%, also up 20 basis points compared to full year 2019. For 2021, our target adjusted gross margin range is expected to remain strong at approximately 85% to 86%. Adjusted total administrative expenses were $119.1 million for the fourth quarter as compared to $98.6 million in the fourth quarter of 2019. Adjusted sales and marketing expense for the fourth quarter of 2020 was $58.9 million, or 26.7% of revenues. We have been very pleased with our marketing strategy throughout 2020, which more than doubled the demo lead request compared to 2019, and we plan to continue to invest in marketing in Q1 and throughout 2021. Adjusted R&D expense was $23.2 million in the fourth quarter of 2020, or 10.5% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $33.2 million in the fourth quarter of 2020, compared to $25.1 million in the prior year period. Adjusted total R&D costs for the full year 2020, including the capitalized portion, were $118.3 million, or 14.1% of total revenues, compared to $93.3 million, or 12.6% of total revenues in the prior year. Even through the pandemic, we aggressively recruited talent in R&D, and we plan to continue to invest in our future growth through innovation and new product developments. Adjusted EBITDA was $84.2 million in the fourth quarter of 2020, or 38.1% of total revenues, compared to $78.6 million in the fourth quarter of 2019, or 40.6% of total revenues. For the full year 2020, adjusted EBITDA was $330.8 million, or 39.3% of total revenues, compared to $317.9 million, or 43.1% of total revenues in 2019. Our gap net income for the fourth quarter was $24.4 million, or 42 cents per diluted share, based on approximately 58 million shares, versus $45.4 million, or 78 cents per diluted share, based on approximately 58 million shares in the prior year period. Our effective income tax rate for the fourth quarter of 2020 was 33.4%. For the full year 2020, our gap net income was $143.5 million, or 2.46 per diluted share. Non-GAAP net income for the fourth quarter of 2020 was $49.1 million or $0.84 per diluted share based on approximately 58 million shares versus $50.5 million or $0.86 per diluted share based on approximately 58 million shares in the prior year period. We expect non-cash stock-based compensation for the first quarter of 2021 to be approximately $26 million. For the full year, we anticipate non-cash stock-based compensation will be approximately $110 million. For 2021, we anticipate our full-year effective income tax rate to be 25% to 26% on a gap basis. On a non-gap basis, we anticipate our full-year effective income tax rate to be 27% to 28%. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the first quarter of 2021. Turning to the balance sheet, we ended the year with cash and cash equivalents of $152 million and total debt of 30.9 million related to the construction at our corporate headquarters. Cash from operations was 52.9 million for the fourth 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 1.3 billion in the fourth quarter of 2020. During 2020, we repurchased approximately 433,000 shares for a total of roughly 115 million including 244,000 shares purchased in the open market. Through December 31, 2020, Paycom has repurchased 4.1 million shares since 2016 for a total of nearly $423 million, and we currently have $135 million remaining in our buyback program. Now let me turn to guidance. With the continued stabilization of our current client revenue base, we are pleased to be able to provide Q1 and full-year guidance that is consistent with our historical guidance approach of guiding to what we can see as of today. As a reminder, the effect on our current client revenue of lower headcount at our pre-pandemic clients continues to represent a loss of approximately $1.9 to $2 million in weekly recurring revenue. The impact of a 150 basis point interest rate cut that occurred in March of 2020 represents an additional loss of roughly $350,000 in weekly recurring revenue. Also, the first quarter benefits from form filing revenue related to employee tax forms for payrolls run in 2020. We estimate that in Q1 2021, there will be fewer forms filed than normally would have been filed by our client base as a result of fewer employees working in industries hardest hit by the pandemic and lower overall turnover in those industries. Fewer forms filed represents a roughly $6 to $7 million headwind to Q1 2021 recurring revenue. With these factors in mind, our full year and first quarter 2021 guidance is as follows. For the fiscal 2021, we expect revenue in the range of $1.009 billion to $1.011 billion, or approximately 20% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $396 million to $398 million. representing an adjusted EBITDA margin of approximately 39.3% at the midpoint of the range. For the first quarter of 2021, we expect total revenues in the range of $270 million to $272 million, representing a growth rate over the comparable prior year period of approximately 12% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $126 million to $128 million, representing an adjusted EBITDA margin of approximately 47% at the midpoint of the range. Q1 2021 is expected to be the last quarter that the pandemic will impact our year-over-year comparisons. After that, our achievement should be more reflective of the strong fundamental growth our business can generate. With that, we will open the line for questions. Operator?
spk01: As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. In order to allow everyone time for questions, we ask that you limit yourselves to two questions each. We will pause for a moment to compile the Q&A roster. Your first question comes from Rima Lenshow from Barclays.
spk13: Hey, thanks for taking my question and congrats on a great end to the year. You guys, I mean, as you mentioned, you know, after Q1, the comms are getting significantly easier and you must be looking forward to that as well. How do you think about the linearity if you think about Q2, Q3, Q4? Is there, you know, a lot of your comms have talked about, like, it's actually more the back half of the year, et cetera. Like, how do you have to think about that from your perspective? And I have one follow-up.
spk09: Sure, Rhymo. So, I mean, our approach to guidance hadn't changed, as Craig said, in prepared remarks. I mean, we're focused on what we can see. You know, if you compare our Q2 through Q4 guidance that we've given, implied guidance that we've given for Q2, Q4 this year, you'll notice that it's not unlike guidance we've given in the past. Matter of fact, it's within a half a point difference. to a point and a half of every guide we've started with going all the way back to 2018 for that same period. So, you know, we're not going to necessarily get into the linearity of it, but I would just say that we always guide to what we can see, and I believe that we are being consistent in how we provide this guide today.
spk10: Yeah, I would agree with that, Rhymo. I mean, you know, in terms of linearity, we're not, you know, we don't have anything in the guidance related to, you know, a recovery towards the back half. It would be, you know, more level throughout the year on that as opposed to any sort of a back half recovery that would be baked in.
spk13: This year was another full year where you had the inside sales model working. What have you learned in terms of the pandemic, in terms of people selling remotely, inside sales being successful, in terms of how you translated maybe into planning the expansion going forward? I know it's a very broad, open question, but I hope that works.
spk09: Sure. So we had inside sales, you know, we've had it for a while, but we actually took a strategic position with inside sales toward the end of 2019, which really that group had always been selling, you know, online or virtually. We were able to leverage a lot of those processes that we had put in place for inside sales. as we made the shift for our outside sales staff. As we sit here today, we are still 100% virtual selling right now, as well as conversion, as well as upsells to current clients. And so, you know, exactly what we would come back as, as far as would we do full selling on site, that's really going to be dictated by the client. I do believe that we've gained some efficiencies in this model. And I'm not just talking about cost. I'm talking about performance. And I believe we would look to maintain those as we look to open back up as a nation here in the coming year.
spk01: Your next question comes from Samad Samana from Jefferies.
spk06: Hi, good evening. Thanks for taking my questions. Chad, maybe first one for you. Just as I think about bookings in the context of that customer data, it looks like Paycom added actually more customers in 2020 than it did in 2019. It certainly supports the strong bookings trends. But also, can you help us understand how the mix of those new customers' ads looked versus inside sales, versus from the quota-carrying field sales that are now selling virtually, versus maybe coming inbound online through some of your advertising campaigns? Just try to think what drove that nice acceleration in units.
spk09: Yeah, so coming into the year, I would have expected really our – because we are selling low market, you know, small business market as well, which we've opened up. I mean, the percentage of small business, you know, units that we have, I mean, it's – I believe mid-90s is the percent of our revenue that's represented by clients that have over 50 employees. So, you know, you're still low on the small business. But, in fact, we did accelerate that this year. And I would have expected our average amount per client to drop a little bit based on that. What we actually saw is, you know, you're taking about 10% out, let's call it, just on client employees that you can already calculate through our revenue. So you've already got that hit. And then the fact that we're selling small business clients, I was a little surprised to see that our average per client held very close to the same. It had been growing for the last several years, but even with the COVID hit, we took in our numbers that average stayed really close to the same and that came from us continuing to have success selling down market but also we're having a lot of success continuing to sell up market and continue to be pulled further up and so those are starting to average each other out but obviously you do have some higher unit growth as you look at the down market opportunities.
spk06: Definitely helpful. And maybe just a follow-up, the total full-year headcount was up about 12%. I'm curious how the quota-carrying reps growth looked in 2020, and how should we think about that embedded growth in quota-carrying headcount for 2021? Yeah.
spk09: Yeah, we don't break out that separate from overall. Obviously, we had talked about earlier in the year as we were going through the pandemic, we did recoil a little bit and kind of held off on certain things. Then once we kind of opened our eyes and saw what was going on, we started to accelerate that to get back to a normal level as we headed throughout the summer. And so You know, we have the number of teams that we have fully staffed. That's at eight per team. And then, you know, we look to add people to the extent that we have any turnover. We would be looking to add people to replace those positions. So no real strong information to give you on exactly the number of quota-carrying positions. employees we added for sales. But what I would say is that you did see us throughout 2020 expand our inside sales model quite a bit. And so that was a new focus that we had not really had until late 2019.
spk01: Your next question comes from Yao Chu from Credit Suisse.
spk00: Hi. Thank you for taking my question. You guys had an amazing year, all things considered, retention, client ads, everything. But in some of our work, we've come across a general sentiment from share donors that they're looking to do better and be more aggressive, given the lessons and the pain that they've seen over 2020. So the question I have is, do you think 2021 gets tougher only because, from a competitive viewpoint, some of these donors may be renewing or doubling down on the efforts to prevent similar churn of losses that they saw?
spk09: Well, I mean, you know, I believe that with our product, it's fully differentiated and it produces a return on investment for our clients as well as prospective clients. So, you know, I don't believe we're going to be getting into the situation where we're doing a lot of price selling. That said, there's a market for every product. And so, you know, you have to be in line with what product fees are, but really it's an ROI-driven strategy. And so we would expect people to uptake our product that want a differentiated strategy with a different ROI. I mean, we just talked about how, you know, we're going to be providing, our products are going to be doing full-service payroll in the future. I mean, employees are going to be doing their own payroll. And, you know, we're starting with that right now internally. We've produced a better employee transaction interface through Betty. And, you know, we're going to be rolling that out throughout the year. And so just as employees are used to applying for jobs online, they're used to doing their banking online, they're used to doing their shopping online, you know, we're going to be bringing that to the payroll business. You know, it just doesn't make sense that we're not already there, to be quite honest with you. It's how businesses win. And when you think about the hours businesses save, I mean, you know, why can't employers save more on these types of input activities? I mean, if you're with Paycom, you could save $100,000. different keystrokes. Some of our clients save millions of keystrokes every month. So that's where it's going. I don't see the market moving away from that. So all that's to say is I believe in order for people to compete with us, that the value proposition is going to have to more match the value proposition that we're delivering because we're Over time, you're going to see more and more differentiation around what the employees do as it relates to data transfer versus what the employer does as it relates to that same topic.
spk00: Thank you. Very clear. And I just have a quick follow-up. Can you broadly speak to staffing levels of new business wins at this point in time? I'm just curious as we've worked our way through this. Are new guys coming on board at 25%, 50%, 75% capacity? Is it getting better? Just broad strokes is fine.
spk09: Yeah, I mean, I will tell you that past May, we've stopped trying to figure that out. I mean, we're out there. We're bringing on business. They have what they have. You know, if there's growth in that number, great. We're not expecting it. You know, we haven't been forecasting it up to now. You know, I don't really know what happens next year. But, you know, for us, once we've lapped this first quarter, you know, we don't really need the growth in the numbers now. That's not to be flippant about it. Obviously, I would love for our clients and everybody to get back to normal. I guess what I would say is we're very much focused on new business ads. And however many employees they have at that time is really irrelevant to us. We want to set them up correctly and, you know, we need a certain number of new business ads to cover the losses that we experienced from a current client employee headcount attrition. You know, we need a certain amount of revenue and new clients to cover that and we've been well on our way to doing that, as I believe is reflected in both our numbers and guidance.
spk01: Your next question comes from Mark from Barrett.
spk11: Good afternoon. Let me add my congratulations to the whole team. Can you talk a little bit more about being pulled up market in terms of what you're seeing? What are the characteristics of the bigger than target market clients that are coming to you? What exactly are they looking for? Who are they typically coming from? And do you see that accelerating? are you seeing more RFPs in the large account side?
spk09: Yeah, I mean, we've continued to see it. I mean, I wouldn't say it's a whole lot different than it's been in the past, but we've continued to see acceleration of larger clients above our range coming to us. In fact, two years ago we moved our range from 2,500 up to 5,000. We continue to see clients well above the 5,000 range coming to us. I mean, the reason why is because they're working with the same employee. Whether you're an employee and you work for a 25,000-employee company or whether you're an employee and you work for a 500-employee company, you really dislike manual processes that really become time suckers out of your day. And so all employees would prefer to use something that's extremely easy to use, comprehensive, and has quite a bit of consistency. And that's also better for the employer. And so I think that large businesses in the enterprise level have been trying very hard for a long time to provide a single type solution to their employees because they do realize the importance of that. They've just done it through integration. And we do have a product that works for what they're trying to accomplish that's incredibly scalable. And so I do see us continuing to go upmarket as we're pulled. And I see us continuing to stay focused on the mid-market. And then, you know, as we get leads below 50, we'll continue to sell them as well. But regardless of what size company you work for, you're still the same in person and you're still the same employee. And you value things of ease when it comes to task management and HCM. So all that's to say is enterprise products are overcomplicating the situation for the employee. And a lot of you guys on the call, you know that. You work for companies with large organizations, and, you know, you know what kind of a – a mess you have to work with in technology. It's oftentimes an eight-legged octopus with no head. So, you know, we're fixing that problem in mid-market, and I see us doing the same as we continue to be pulled up market.
spk11: Great. And can you talk a little bit about attach rates for new modules with the new clients What are you seeing the strongest attach rates? And then also to the extent that you're upselling existing clients, what are you seeing the strongest success on?
spk09: Yeah, we are having strong attach rates across the board. I think that the new innovations that we've come out with with both DDX and Manager on the Go is really helping with that. You know, as we look to go to a full-service payroll set, you're going to need all products. I mean, you're going to need benefits administration. You're going to need expense management. You're going to need time and attendance. You're going to need paid time off requests. You know, you're going to obviously need payroll. And so, you know, the more full solution sets we're able to deploy, the stronger value proposition or higher the ROI the client's going to be able to achieve. Again, it's not purchasing the products that produces the ROI. It's using the products that produces the ROI. And as we move to more self-service initiatives, which were already there, we're going to be measuring that for a client, which we believe drives a greater overall usage of the entire product.
spk01: Your next question comes from Daniel Jester from Citi.
spk14: Great. Thanks for taking that question. Just on retention, looking backwards in 2020, can you just comment kind of how the year progressed? Did you see the largest churns? sort of in the depth of the challenges in the spring, or is the customer churn pretty stable as the year progressed?
spk09: Yeah, I mean, we don't necessarily disclose when. I will say that, you know, it's a revenue retention number, and so, you know, obviously clients that went out of business would have impacted that number. And then, you know, clients who may have had reduction in force, could have impacted that number to some extent. And so, you know, the fact that we remained strong at 93%, we were happy with that. You know, the question becomes would it have been higher had we not had the pandemic? And, you know, I think that's what 2021 puts in front of us to be able to prove that out. And so, but, you know, we haven't changed the way we calculate our retention number since well before IPO. uh you know we were stuck at around 91 for about six years uh we moved that up to 92 a year ago or two years ago we moved it up to 93 a year ago and then this year uh we held the line at that percentage as we went through the pandemic that's really helpful thank you and then maybe one for craig you know in 2020 revenue was up 14 but the cash from operations was up only one percent so
spk14: As I think about sort of cash flow in 2021, can you help us think about, you know, how that could look relative to your guidance?
spk10: Yeah, in terms of cash flow, you know, the things that are going to impact our cash flow, obviously, are, you know, tax rates as well as our CapEx. And so, you know, I would expect our CapEx for 2021 as a percent of revenue to be fairly similar as a percent of revenue as what we saw in in 2020. One thing to kind of keep in mind is that CAPEX, you know, we're still, you know, completing the Dallas operations. And so that will be complete probably end of Q2. We may still have some carryover costs on that on Q3. So as you're kind of looking at CAPEX, that would be the impact for 2021.
spk01: Your next question comes from Brian Schwartz from Oppenheimer.
spk03: Yeah, hi. Thanks for taking my question. Craig, I just had a follow-up question for you. You mentioned a comment that you're anticipating some sort of a recovery in the second half of the year. Is it possible just to provide a little more color in how you're thinking about that? Are you thinking that it could be a full recovery in the base exiting the year or a partial recovery? Just wondering if you could share a little more color on that comment, how you're thinking about the pace of the recovery.
spk10: No, Brian, I indicated that we had not baked in any recovery in our guidance numbers. As we provide guidance for the full year, we have not included a recovery in those numbers.
spk03: Okay, thanks for the clarity on that. And then I had one other question, just is it possible to quantify the impact or the headwind from last W-2s in that Q1 for us?
spk10: Yeah, in the prepared remarks, we've talked about $6 to $7 million that it will impact our Q1 numbers, we feel like. Obviously, that's an estimate based on the number of W-2s we would have expected to file. That would be W-2s, 1099s, 1095s. for our clients and, you know, kind of what we would have expected in a normal year and then what we will file this year based on the fact that, you know, certain industries obviously didn't have the headcount in the middle of the year or the turnover of those employees. that would have generated a W-2.
spk09: Yeah, for example on that, Brian, you know, it wouldn't be uncommon for a 250-employee restaurant to have 500 W-2s. Now, it's important to also note that our forms business isn't just W-2s. It's W-3 submittals. It's 1099s. It also includes, in our case, ACA forms that, you know, are also fee-related and charged for in the first quarter. And so there's more in there than just W-2s. But the short answer is those industries most impacted oftentimes would have higher turnover rates. And so, again, it wouldn't be uncommon for a restaurant that might have 250 employees you could see 450 or 500 W-2s on that in a full year. And, you know, in this type of year, for someone that may have had 250 employees, we may have only seen 275 W-2s because of kind of when it happened. And then, you know, then we lacked some growth on that. And so that's how it's calculated in expectation of what normally happens with our W-2s as it corresponds to the business that we have and their number of employees and then what didn't happen this year in regards to that. And so, again, that's a first quarter impact only that we're talking about.
spk01: Your next question comes from Robert Simmons from RBC Capital Markets.
spk08: Hi, thanks for taking the question. I was wondering if you could speak to what you're assuming in your guidance for retention rates this year?
spk09: And we don't guide to what we assume for retention. I can tell you that we're very bullish on our product and the return on investment that it uses. We're also bullish on watching how clients use the product and how they're actually achieving that. And we do believe that does impact retention in a positive way. And so I would say that we are bullish as we look toward retention this year, but that's not something we guide to as we sit here today.
spk08: Got it. Okay. And then now that all the public payroll companies have reported the calendar 4Q results, was there anything on any of the calls that you heard that surprised you positively, negatively, or just kind of interesting?
spk09: I'm not going to comment on what our different competitors do out there. I would say our situation is different than theirs. I think our opportunities of what we're achieving has also been showed to be a little bit different. So I wouldn't want to use them as a proxy for what's going to happen to us. And I'm sure, well, I mean, they may want to use us for a proxy of what happens to them. But, you know, I don't think we want to go there right now.
spk10: Yeah, I would say we really had a strong Q4, and we felt like it was a good Q4 and really sets us up well for 2021.
spk01: Your next question comes from Ryan McDonald from Needham.
spk04: Yes, good evening, gentlemen. Thanks for taking my questions. Chad, first question for you. We'd be curious to hear more about the Betty offering and sort of what stage you're at in terms of the rollout there. Are you starting to beta that with existing customers? And then naturally, I would think that, you know, given the usage component of that or self-usage component from employees, that it might fit more naturally as a cross-sell or up-sell, which is a bit different than, you know, obviously that traditional really focused on hunting model that Paycom has really mastered. Can you talk about sort of the puts and takes there? Thanks.
spk09: Sure. Throughout the year, we'll be rolling Betty out, and at some point, it will be not only an upsell to current clients. It will be what we sell as we go to market. That will be the way to do payroll. You know, we came out with employee self-service in 2002. It was free. And I couldn't even hardly get anybody to look at the product for two years. Matter of fact, it wasn't even until we developed time and attendance online that people started using employee self-service to clock in at time and attendance. And so as we look at this today, I do believe, you know, Betty's kind of the cherry on the top of the payroll cake. You know, even internally here, we've returned over 80% of our hours back to our own payroll department. just because of the way we do things now. You know, Betty has you doing the payroll throughout versus waiting to pay through it in. So what does that do? Well, it makes it a lot more efficient for every employee as well as there's a lot of work now on the payroll side they're just not doing. And then you think of all the after-the-fact corrections, manuals, voids, things that were missed, basically that becomes liability and exposure to the business, which is all going away. And so this is going to happen. You know, just as nobody gets up from their chair and goes and changes their channel on their TV, and we can all remember the days that happened, you know, that's what's going to happen here. Employees are going to do their own payroll, and they're going to do their own payroll because that's the easiest way for them to do it. And they're going to do their own payroll because that's how business wins. And, you know, as a matter of fact, that's the only way business can win at payroll. And so that's what we're driving at, in answer to your question. You know, we're using it internally right now. I would expect in second quarter we'll have our first clients on it. And then third and fourth quarter, I would see us really starting to roll it out as we move those usage patterns and really move the way people start thinking about payroll. Instead of starting payroll when the period ends, you start it when it begins. and the payroll's over when pay period ends. So that's what we're driving at. I believe it's the most significant product that we've ever developed at Paycom, to be quite honest with you, because it fully automates a very complicated task that there's little to zero room, actually, for inaccuracies. You know, payroll's got to be perfect. If you're 99.99% accurate in payroll, you get an F. Employees expect it to be perfect. They expect it to be in their bank account. And they're not even really going to thank you for it. It's an expectation for the work they're doing. And so we're going to make sure that happens, and we're going to put that responsibility as well as confirmation ability in the hands of the employees, which is where it's already at right now. Nobody other than an employee themselves knows if they got paid everything that they should have been paid, and it's best to have them confirm that and be a part of that transaction. So that's what we're going to do, and I would see us rolling this out throughout the year. As far as when does it become popular, when does it become a thing, You know, like I said, it took us a while to get people to use employee self-service when we first came out with it. I don't think this is going to take as long as that because we've been really focused on the usage patterns that drives us toward this, and we're real close to being there now. So, you know, you're going to have those early adopters. Then you're going to have, you know, the middle group, and then we'll have everybody else after that, and we'll just kind of have to see how long that takes. But very excited about it, and this will be a product that we're charging for.
spk04: Excellent. That's really helpful. As a follow-up, as you think about adding to sales capacity into the new year, you talked about the 95% of your employees are still working remote. Does this change in how effective you've been, change the way you're thinking about the traditional expansion model of opening a sales office in various regions or cities? Are there areas where you can continue to expand with a virtual model in, say, smaller tier two, tier three cities as you look into 2021?
spk09: Yeah, no, it hasn't changed my thoughts yet. Now, the go-to market could be a little bit different. You know, what you're talking about, there's territory division and where we place an office and then, you know, how we work together. So do I see PACOM individuals working together in an office setting moving forward? Absolutely. Do I know exactly when that would be or what that might look like as we gear back up to maybe be able to visit a client back in their office? You know, I don't know exactly how that looks right now, but I am extremely confident that our employees will be back in their offices only when it's safe to do so and will continue the mission that we've set for today.
spk01: Your next question comes from Citi Panigrahi from Mizuho.
spk12: Hey, this is Michael Berg on for Citi. Congrats again on good quarter and thanks for taking my question. I wanted to quickly follow up on the Betty offering. What type of pricing upload would that be to the core payroll you offer now?
spk09: Yeah, we're not going to disclose pricing right now on this call, but, I mean, eventually it would be published and you guys would be able to figure that out. But, you know, it's important first we go through that with our own salespeople individually and our own teams internally. But, you know, again, it will be a price that it will be something that we're charging for because it produces an incredible amount of return on investment. And, you know, in order to use Betty, we had to do everything else right. You know, it's not like you can do everything else wrong and use Betty. If you're going to use Betty, you have 100% DDX score, all your managers are using manager on the go correctly, and Betty's completely automated your entire payroll process. I mean, it's almost the, you know, the means to the end, if you will, Betty, as we roll it out. But it'll be a product that we're charging for because it does create great value.
spk12: Got it. That's very helpful. And then it seems like you guys are making some pretty significant progress on the below 50 segment. And you mentioned it's less than 10% of revenues. How can we think about that a year ago? Was that the same type of percentage or less than 5%? How can we think about how that's progressed?
spk09: Very similar. I believe at IPO it was 6%. I don't think it's changed dramatically from year to year. I think we're real close to where we've been in the past on that. Now, we have added small business teams, but we really just started adding them in Ernst in 2019. And even though they've had a lot of success in 2020, we didn't really even see an incredible drag on our team. per client fee, even with losses of certain employees at different clients and with selling small business. Now, I do believe we would have had more growth in that client revenue number had we not been selling as many small businesses. But I don't really think the percentage is going to move drastically from where it's at today just because of all the success we're also having up markets.
spk01: Your next question comes from Brian Bridging from Cowen.
spk02: Hey, good afternoon. Thank you. I wanted to clarify around bookings. Did you see a notable acceleration in 4Q demand versus 3Q? I'm just curious if there was any indication at all of extensions of sales cycles as COVID cases spiked in December. And then how have you seen the pace of demand progress in January?
spk09: Yeah, I can't really say that spikes in COVID cases had impacted our sales from week to week. Now, we did see, again, the spike had impacted us in that March, April, and May time period where things got really bad and then kind of started to stabilize. But throughout the year, a different spike in cases didn't impact our ability to to sell and move products. You know, now that we've returned to guidance, I believe that our strong sales bookings are included in our guidance as well as our performance. So I'm not going to keep talking about bookings, but what I would say is this, that, you know, when we got into March and especially toward the end of March, I didn't have an expectation that 2020 would necessarily be a record for bookings and starts. It was. And as we turn into 2021, when you're looking at our guidance and you're looking at the things that we have to accomplish through the year, I believe we're going to need that also in 2021, which is not unlike any other year we've had in the past where we've always need record sales and as well as record starts to hit our numbers and accomplish our goals. So as we head into 2021, there's no difference in that.
spk02: Okay. And then in the competitive environment, any changes to call out as far as the source of new client additions? No. Thank you. Thank you.
spk01: Your next question comes from Josh Beck from KeyBank.
spk07: Thanks for taking the question. I wanted to follow up on some of your early comments, Chad, on digital transformation of HCM hitting a critical point. So I'm just curious. Initially, obviously, in the pandemic, people were focused on things like collaboration, and they were very heads down. But I'm just curious, as we went through the year, Did you see the conversation with clients change, their interests change in a meaningful way? And I'm just curious if that was a big contributor to the pipeline or if there's other factors you could call out there.
spk09: Yeah, you know, I'm pretty sure that both employees and HR departments, as well as the C-suite alike, agree that removing middle layers of a data transfer process is the most efficient way to do it. And I think throughout 2020, you saw frustrations rise on both the side of the the people doing the input as well as on the side of the employees, you know, that lacked access. And then also you kind of had a rush to deploy products. I think 2021 was the year that people dusted off products that they really thought they bought for a certain situation, and then they really tried to use them. 2020 and you know maybe didn't work exactly like the the brochure said and so you know I see this happening more and more I think there's there's always been some reluctance to change I've always said you know waking up and changing ACM HCM companies I don't think that's something people look to do every day you know it's kind of like waking up and going to the dentist so but I do think as we move through 2020 it became very obvious to people that you're either winning the game of HCM in your business or you're losing it and we've identified the way that businesses win and I think more and more people accept that as what will be the future and more and more people are motivated to get there now versus waiting you know too much longer to do that. And so, you know, we'll continue to drive that so that businesses can have a clear ROI and a good choice for HCM.
spk07: Really helpful. And then on the gross margin guidance, you've discussed the forms, Headwind and Q1. Typically, I think Q1 is a stronger gross margin period. So should we maybe make some adjustments to what would be a typical year? Just anything you can share with us on the gross margin cadence throughout the year.
spk09: Yeah, I mean, I think if you look at our, like I said before, I mean, X first quarter, we're still lapping COVID there. But, you know, once we get into second through fourth quarter, our guide for growth, and it's not, at least on the growth side, isn't incredibly dissimilar than what we've done in 2020, 2019, and 2018 guidance. Again, I think it's 0.2% different than last year. And You know, it's maybe a full point different than 19 and maybe a point and a half from 18. So, you know, we feel really good about that. Our gross margins remain strong. And so, you know, as we continue to spend in both R&D and sales and marketing, I'm sure you guys have seen our ads. We do believe that as we achieve success of that new business revenue coming in as well as success of usage of the products that we've deployed, we do think that that's going to be accretive to our margin profile. into the future. And, you know, I'm very happy with where we've guided right now. We have set ourselves up well to achieve a, you know, what we call rule of 60. And, you know, so I feel really good about where we're at right now. But just like every year we enter into, there's a lot of work to be done between now and then. So I don't know, Craig, if you'd add anything on the margin side.
spk10: No, I mean, on the gross margin, we kind of gave the guide on for the full year, you know, that 95 to 96. I mean, obviously the first quarter is, you know, one of our largest gross margin quarters. So, you know, the six to seven million would have a slight impact first quarter, but we still think for the full year, you know, we can finish in that 95 to 96 range.
spk01: Your next question comes from Arvind Ramani from Piper Sandler.
spk05: Hi. Thanks for taking my question. Yeah, I just wanted to ask about your pipeline that was impacted by the pandemic. When those clients recover, and I think they will at some point, demand for cloud-based HCM is likely to be very strong from that segment, and there'll be probably like a pent-up demand from that particular segment. Is there anything specific you're doing to make sure that you win your fair share of the demand in terms of hiring sales or delivery teams to you know, to be there when the demand does come in?
spk09: Yeah, you know, we never stopped selling those industries. I mean, you know, my philosophy is if you're growing by 100 employees, well, it's a great time to add Paycom. You know, if you're reducing force by 100 employees, well, it's a great time to add Paycom, you know. So that's my opinion. We never retreated from trying to sell industries. those organizations. We would look forward to them being able to come back fully. We're not there yet, but I do think at some point in time that'll happen. I don't really know that it's a light switch that'll go on. I think it'll more happen over time that we start to see things like that happen. We'll have to see. Haven't seen it yet. But again, we remain focused on all industries as we remain industry agnostic.
spk05: Great. And just a quick follow-up on that. You know, operationally, there are probably some pretty good lessons that you learned over 2020. So are there any permanent changes or longer-term changes you're looking to kind of put in place in terms of sales or investment in sales offices or in terms of delivery teams, any kind of longer-term changes in the operations of the business?
spk09: Yeah, I mean, there's a lot of changes that we're going to maintain as we head through this. I mean, I would honestly say probably the only area in which we're kind of waiting to see what's going to be a more accepted practice is how we go to market in sales. We're not waiting on anything else. When it comes to how we develop software, when it comes to how we're servicing clients, when it comes to how we're having those meetings, as far as that process, the efficiencies we've gained there, we'd be looking to keep those efficiencies. We've gained efficiencies in conversions and how we do conversions. We would be looking to maintain them. I don't think there's a whole lot of things we're waiting to see, you know, what happens before we make decisions. There's a few of them. We talked about those as far as the go-to-market. But on the back end of efficiencies that we've gained through this process, some of them were forced. We had to gain certain efficiencies to be even able to work at home. To be able to answer the phones at home, we had to gain certain efficiencies. And so there's things that we're going to maintain as we come back to work from the office, and most of those are already known to us.
spk10: Yeah, one thing, you know, I'd say, you know, we are continuing to look for efficiencies throughout the model. I think I'd mentioned, I'd said 95 to 96 on the gross margin. I mean, 85 to 86 is what we're guiding to for the full year on the gross margin. But we're continuing to look for, you know, efficiencies throughout the model, and we'll continue to do that.
spk01: And I will now turn the call over to Chad Richardson for closing comments.
spk09: All right, I want to thank everyone for joining us today on the call, and a special thanks to all the employees at Paycom for their flexibility and their perseverance through 2020. Over the next couple of months, we'll be at several conferences this quarter, including the KeyBank Emerging Technology Summit on February 24th, and Craig and James will be hosting one-on-one meetings at the Morgan Stanley Technology Media and Telecom Conference on March 3rd. We look forward to speaking with many of you again very soon and appreciate your continued interest in PACOM. Thank you, operator. You may disconnect.
spk01: Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.
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