This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Hello, my name is Philip, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Paycom Software first quarter 2021 quarterly results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star and the number one on your telephone keypad. If you'd like to withdraw the question, press the pound sign. Thank you. And now I'd like to turn the call over to your host, Mr. James Sanford. Please go ahead. James Sanford Thank you.
Philip
Welcome to PACOM's first quarter 2021 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 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 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 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 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. The reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued at 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?
Chad Richardson
Thanks, James, and thank you to everyone joining our call today. I will spend a few minutes on the highlights of our first quarter 2021 results, then I'll review the progress we are making on our goals for 2021. Following that, Craig will review our financials and our guidance, and then we will take questions. But first, I want to thank my colleague and good friend, Jeff York, for his many years of service leading our sales organization over the last 14 years. Jeff has built a sustainable sales organization with a deep bench of like-minded professionals. I look forward to continuing to work with him in his strategic leadership role. One of those like-minded individuals is our new Chief Sales Officer, Holly Perot. Holly is a true success story at Paycom. Her 14-year career with us began with an internship in the sales organization. Holly quickly progressed into a top sales rep, a top sales manager, and a top regional sales manager, earning many of the company's highest sales ranking awards along the way. In 2016, she was asked to further expand Paycom's client relations department, which presents additional products to clients and focuses on creating value by increasing employee usage. Holly has been instrumental in contributing to the success of Paycom across the entire sales organization, and I'm confident she will continue to build on the momentum we are seeing. We delivered strong first quarter results, even with a tough pre-COVID year-over-year comparison. Our 2021 first quarter revenue of $272.2 million grew 12.3% compared to the prior year period and came in above the top end of our guidance range, despite several previously identified headwinds. Unsurprisingly, the first quarter revenue was impacted by lower forms, filings and adjustments due to lower hiring trends in industries most impacted by the pandemic in 2020. Excluding forms, filings and adjustments revenue, our year-over-year recurring revenue growth accelerated again in Q1. As we go through 2021, we will have a cleaner comparison that will provide a truer reflection of our revenue growth profile since the arrival of the pandemic. Turning to profitability, our first quarter adjusted EBITDA was $133 million, representing adjusted EBITDA margin of 48.9%. As reflected in our updated guidance, which Craig will discuss, we believe the combination of revenue growth and adjusted EBITDA margin makes us well positioned to exceed the rule of 60 in 2021. Our marketing plan continues to work very well, delivering strong demo leads in the first quarter. We continue to see success from our advertising spend, and we intend to continue to spend aggressively to fuel future revenue growth and 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. Employees expect their HR software to be efficient and easy to use. In fact, in a recent survey we commissioned with a third party, employees expressed frustration with complex and disparate HR software that lacked the transparency and usability they've come to expect from consumer-oriented technologies. PACOM's employee usage strategy and single database solution squarely addresses these expectations. We had record high employee usage rates in Q1 as measured by our direct ad exchange or DDX. This is fueling new opportunities for product innovation and automation for products like Betty, our better employee transaction interface for payroll, which we started rolling out to a select few clients during the quarter. Betty is already receiving high marks as it transforms the way payroll is done. I believe over the next 12 to 18 months, Betty will become the standard for how payroll should be done. Now that the first quarter is over, we have substantially lapped the pandemic's impact on our comparable year-over-year numbers. New client additions are driving our growth in Q2 and beyond. The negative revenue impact the pandemic had on our pre-pandemic client revenue remains stable. While we haven't seen any material improvement in employment trends at those same clients, our forecast and future growth initiatives are not dependent on any improvement. Our strategy throughout the pandemic has remained unchanged. We will continue to focus on the three controllable activities of providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. We've done a great job and succeeded in these areas, which has kept us on track to achieve our growth initiatives. I'd like to thank our employees for their patience, flexibility, and grit over these last 14 months. In summary, now that we've lapped Q1's tough year-over-year comparison with the last pre-COVID quarter, we expect that the strength of our growth profile will be reflected in our future results. The record new business revenue and record number of new clients added in 2020, combined with robust first quarter sales, is bolstering our long-term revenue growth opportunity. As a reminder, we only have approximately 5% market share of a growing TAM, so we have a long runway ahead of us. Our strategy is working, and our products have never been more relevant. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?
James
Before I review our first quarter 2021 results and our outlook for the second 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 first quarter results with total revenues of $272.2 million, representing growth of roughly 12% over the comparable prior year period, which was primarily driven by new business wins, including very strong new client revenue starts in the first quarter. Within total revenues, recurring revenue was $267.8 million for the first quarter of 2021, representing 98% of total revenues for the quarter and growing 12 percent from the comparable prior year period. As expected, the effects of lower headcount on our pre-pandemic clients and the impact of a 150 basis point interest rate cut that occurred in March of 2020 remained relatively unchanged. In addition, as we discussed on our Q4 2020 earnings call, fewer employees working in industries hardest hit by the pandemic and lower overall turnover in those industries resulted in fewer annual forms, filings, and adjustments. It is difficult for us to estimate the exact amount that those trends impacted us, but we don't believe it was dramatically different from our expectations. Total adjusted gross profit for the first quarter was $236.9 million, representing adjusted gross margin of 87 percent. For 2021, our target adjusted gross margin range is expected to remain strong at approximately 85 to 86 percent. Adjusted total administrative expenses were $118.8 million for the first quarter as compared to $108.4 million in the first quarter of 2020. Adjusted sales and marketing expense for the first quarter of 2021 was $59.3 million or 21.8 percent of revenues. We continue to be very pleased with our marketing strategy with another quarter of very strong demo leads and we plan to continue to invest in marketing throughout the remainder of 2021. Adjusted R&D expense was $23.1 million in the first quarter of 2021, or 8.5 percent of total revenue. Adjusted total R&D costs, including the capitalized portion, were $34 million in the first quarter of 2021, compared to $27.6 million in the prior year period. We've been aggressively recruiting talent in R&D to drive our future growth through innovation and new product development. Adjusted EBITDA was $133 million in the first quarter of 2021, or 48.9% of total revenues, compared to $117.9 million in the first quarter of 2020, or 48.7% of total revenues. We've benefited from cost efficiencies in G&A, which we expect to continue throughout the year. We plan to continue to invest in the marketing and R&D. Our gap net income for the first quarter was $64.6 million, or $1.11 per diluted share versus $63 million, or $1.08 per diluted share in the prior year period, based on approximately 58 million shares in both periods. Non-gap net income for the first quarter of 2021 was $85.9 million, or $1.47 per diluted share versus $77.9 million or $1.33 per diluted share based on approximately 58 million shares in both periods. We expect non-cash stock-based compensation for the second quarter of 2021 to be approximately $27 to $28 million. For the full year, we anticipate non-cash stock-based compensation will be approximately $105 to $110 million. Turning to the balance sheet, We ended the first quarter of 2021 with cash and cash equivalents of $215.1 million and total debt of $30.5 million related to construction at our corporate headquarters. Cash from operations was $89.5 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 $1.7 billion in the first quarter of 2021. Shifting to guidance. We have now substantially lapped the last pre-COVID year-over-year comparison, and our guidance for strong second quarter revenue growth represents a true reflection of the strong performance we achieved throughout 2020. We are pleased to be able to provide the following Q2 and full year guidance. For the second quarter of 2021, we expect total revenues in the range of $231 to $233 million representing a growth rate over the comparable prior year period of approximately 28% at the midpoint of the range. We expect adjusted EBITDA for the second quarter in the range of 80 to 82 million, representing an adjusted EBITDA margin of approximately 35% at the midpoint of the range. For fiscal 2021, we are raising our expected revenue range to $1.017 billion to $1.019 billion up from 1.009 to 1.011 billion, or approximately 21% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $400 million to $402 million, representing an adjusted EBITDA margin of approximately 39.4% at the midpoint of the range. To conclude, our strategy to mitigate the impact of the pandemic and grow the business has been working. and we will continue to focus on 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 profitable recurring business model, and a long runway to deliver sustainable long-term revenue growth. With that, we will open the line for questions. Operator?
Operator
At this time, I'd like to remind you, if you'd like to ask a question, please press star, then the number 1 on your telephone keypad. Your first question is from the line of, I'm sorry if I mispronounce it, Ramo Linshow with Barclays.
spk01
Hey, that's very close. Thank you. Hey, congrats on a great quarter, and I'm sure you're looking forward to Q2. Chad, can you maybe remind us, because that's the question I get a lot from investors, how can the 12% growth in Q1 jump to like 28% growth in Q2? in Q2. Obviously, the comps are getting easier, but maybe talk about the puts and takes that are driving it, because that makes it really exciting. And then one for Craig, you mentioned the cost efficiencies in DNA. Can you just kind of elaborate a little bit on that one? Thank you.
Chad Richardson
Yeah, thanks, Raimo. So I guess first I would say, as you know, Q1 is typically one of our largest quarters for revenue in any given calendar year, and that's because of are annualized revenue billings of forms, filings, and adjustments that come in throughout the year, which have to do with hiring and turnover trends throughout the year at different businesses. Well, 2020 reacted differently than any other year since I've been doing this, since 1998, in which the hiring trends were different. It wouldn't be traditionally a restaurant that may have 100 employees could easily do 300 W-2s with forms, filings, and what have you. You know, this year that same restaurant may do 120 W-2s. So we saw significant differences in hiring trends throughout 2020 than what we had seen in the past. We did try to estimate what those would be. Also, as a reminder, this Q1, we are still lapping Q1 of a previous year that did not have COVID in it. which made for tougher comps. And, you know, as we move throughout second quarter, we've substantially lapped the pandemic. Now, you did still have recurring revenue still getting worse throughout the month of April, as we had mentioned that it kind of got to its worst point beginning in May and then started to stabilize. But we are excited about our next quarter guide. You know, the guide that we're putting forth in – Q2 of this year is the largest Q2 guide we've had since 2017 on a percentage basis for revenue growth. So, you know, you weren't necessarily wrong in your early take that, you know, we're getting back on the right track or, you know, as you might say in your native language. It's very good, yeah. My minor's paying off. My German minor's paying off. Craig will answer your second one. In German?
James
In English. His last name is Bolte. You know, in terms of the G&A line and the cost effect, you know, efficiencies we're seeing, you know, as we're looking to hire additional people, you know, those are primarily going to be in other areas of our income statement. So, you know, we're continuing to hire aggressively in the R&D area and in the, you know, in the sales and marketing as well as in the operations area. So, you know, we're just not going to see the same level of hiring on the G&A line as what we would see in other areas of the business. OK, perfect. Thank you. Thank you.
Operator
Your next question is from the line of Saman Samana with Jefferies.
Saman Samana
Good afternoon, and thanks for taking my questions. Chad, maybe the first one for you on the booking side. As you mentioned, we're starting to kind of lap last year, and you guys had a great 2020. Would you say that was one Q 2020 from a bookings perspective? Was it a record compared to other quarters? Maybe just help us further triangulate on the in-quarter new bookings performance, and then just a follow-up question as well.
Chad Richardson
Yeah, so, I mean, since obviously our bookings have been very strong. I mean, last year we did have record bookings as well as we added record, well, that record new business revenue as well as a record number of clients to our platform, which was an increase from prior years. As we've returned to guidance, you know, we've gotten away from talking about bookings. Obviously, our bookings are very strong as what's reflected in our second quarter guidance.
Saman Samana
Understood. And then maybe on Betty, you mentioned a couple of customers have, it's already been rolled out to them. Can you maybe help us understand how pricing for that's working and maybe how pervasive the use of that looks like at those customers?
Chad Richardson
Yeah, I mean, Betty's really an all or nothing type of usage product. I mean, you do have to change your internal process in order to use Betty. Because like we've said in the past, payrolls are traditionally started after pay period end. And Betty contemplates all that happening at payroll beginning to where once pay period ends, the payroll's done. And so we have had clients already submit using Betty and their employees are actually able to use Betty. As a matter of fact, one within the first hour of release, we had like 65% employee approvals. And by time of submission, they were over 85%. So You know, employees are already engaging in it. We're getting feedback from employees that, you know, this is the first time I've really looked at my check and much less understood it. So we're having a lot of positive there. We expect to put on, you know, at least 100 more clients in the next couple of months on Betty, and then throughout the year, we'll continue to convert all over. And what I mean by convert, it's not a conversion of data. It's more a conversion of their internal process and how you approach each payroll a little bit differently. In our own environment, we've gone from over 55 clicks or processes within a payroll down to three. Each person's experience is going to be differently depending on whether you're doing commissions, bonuses, labor distribution, job costing. So it is a little bit different for each company, but it does drive a lot of efficiencies. And as those payroll administrators submit payroll, they have a very high degree of confidence in the accuracies that have already been approved by those employees. So it's going very well now. As far as billing, Betty's not going to be billed unlike many of our other modules. It will be a per life, per employee fee to use Betty. And then as we move throughout this year, we'll continue to sell more and more clients on its value.
Saman Samana
Great, and I apologize in advance for squeezing a third one in, but I'll break the rules here. Any other changes we should expect with Holly's appointment in her new role? Any other changes to either the go-to-market motion or the sales organization that we should anticipate in conjunction with that?
Chad Richardson
Well, I mean, we change as a sales organization every year. You know, we changed about three or four years ago to really focus on employee usage as an organization. We focused on selling usage. We'd come out with the DDX. Then we came out with Manager on the Go, now Betty. So, obviously, as we settle into this year, you know, there are some changes that we make to our selling motion, but that's not unlike what we've done recently. in any given year. You know, Holly was, you know, she was our first intern on the sales side. And actually, she started interning for us when I was the sales manager. So Holly has a deep knowledge of what we've been doing this entire time. She's helped us build it up to now. And the reason why Holly was chosen is it allows us to continue to increase the drive that we have throughout our sales organization with a consistent leader, you know, with also a consistent talk track that we've been driving throughout the sales organization for the last 20 years. So I wouldn't see any significant changes happening to the sales other than what we always have, which is improvements on our strategies as we deliver more value to the client.
Saman Samana
Perfect. Thanks again for taking my questions.
Operator
Thank you. Your next question is from the line of Brad Reback with Skyfall.
Brad Reback
Great. Thanks very much. Chad, the upside in the quarter wasn't as robust as we've come to expect with you guys. Was there any sort of one or two items in the quarter that maybe weren't as strong, WQs maybe a bit below original expectations or anything along those lines?
Chad Richardson
Yeah, it's related to year-end services. I mean, our, you know, we have pretty good visibility quarter-to-quarter based off of our recurring revenue and then, you know, what we believe we will be adding from a new client revenue perspective. You know, when you're looking at year-end, which, as you guys have seen in the past, are typically our largest quarters because of those year-end service fees, you know, it gets harder to exactly, you know, put an exact number on business how those negative trends impacted us. We did a pretty good job of estimating that, and we don't necessarily guide to have a certain level of B. We guide to what we can see, and oftentimes with new business revenue, that can be impacted one way or the other. And as it relates to first quarter, though, we've always been heavy on annual forms, filings, adjustments, And also to note that it's not just our W-2 forms. With us, we also have ACA forms at the end of every year as well. So I think we did a pretty good job estimating its impact. Obviously, the fact that we continue to grow throughout the quarter and we're coming out strong into Q-2 reflects that we did have strong ads throughout Q-1 and coming out of Q-4. But those numbers were impacted by our annual forms filing business.
spk14
great thanks very much thank you your next question is from the line of mark marcon with baird good afternoon and thanks for taking my questions um wondering you know the commentary with regards to what you're seeing in terms of the number of employees within the client base um You mentioned it wasn't much of a help in terms of the first quarter, but as you look through the quarter and going into March and then April and now going into May, are you starting to see a rebuild? And how should we think about the sensitivity in terms of if there's a 1% increase in terms of the number of employees, how does that translate to revenue, broadly speaking?
Chad Richardson
Yeah, I mean, we always like to think, you know, 1% equals 1%, but that 1% has to happen, you know, across our client base that we serve, which is less than 5% of the total addressable market. And so, you know, in answer to your question, as far as those clients that were mostly impacted by the pandemic that we said really hit its worst for us in May and then started to stabilize for us. We haven't seen any meaningful changes in those same clients. So, you know, as we move forward, I don't know that that number becomes an important bellwether for us as far as that, you know, $1.85 to $2 million impact that we see from the recurring revenue negative impact from those clients. So I don't know that it's a part of our story moving forward. Obviously, we would hope that those clients are able to hire back and that they are able to come out of it in the same situation that they entered into it. But we'll have to see. Again, we're not seeing any meaningful improvement in those numbers.
spk14
Okay. Is that because of certain industries, Chad? Or, I mean, when you take a look at the overall employment numbers, broadly speaking, it does seem like, you know, sequentially on a seasonally adjusted basis, things are improving, broadly speaking, and we'll get the April report here in a few days. Is it just certain industries or... what would be the reason why we wouldn't start seeing some of the national trends come down to the Paycom client base?
Chad Richardson
Well, I mean, our comments weren't really a wholesale about, you know, the United States as much as it is about these particular clients that work with us and, you know, were working with us prior to the pandemic. you know, that they had layoffs in different hiring trends throughout the year. You know, a lot of them may have been kept afloat with the PPP that's been out there and what have you. But we haven't seen any significant movement with that group. Like I said, I do believe that people took their hits early as it related to many of our clients. They may not be as quick to add people back, potentially some may have become a little bit more efficient. And, you know, there may be some out there that are, you know, struggling. But, again, we've been focused on adding new business to our pipeline and focused on those. So all that's to say it's been stable with that group, and I don't know if or when the trends would impact that group because I believe it's going to be more of a client-by-client impact.
Operator
Your next question is from the line of Daniel Jester with Citi.
Daniel Jester
Great. Yeah, thanks for taking my question. Kind of along the same line, Chad. I mean, I think many would project that we're going to see some historic levels of hiring here in the U.S. in the next couple of quarters. So, you know, you've been through macro up cycles in the past. So maybe you can just remind us, how does sort of the HR, either the buying cycle or sort of the spending intentions, How does that evolve as we get into a really brisk hiring environment? Do you see HR officers trying to get ahead of that, or is there a bit of paralysis because they're focused on growth in the business and maybe don't want to make a change on their payroll module when the outlook looks so bright?
Chad Richardson
Yeah, I mean, I think, you know, we're in a business where we make those departments more efficient, and so do the fact that you need to go hire many people, you know, using our onboarding product, using our applicant tracking system, or talent acquisition product, using our background checks products that we have out there. I mean, I think that we can aid people in that. So I also think you're really seeing a shift toward the employee user. You know, I don't know that four years ago you could even point to many employee users, especially in the mid-market. And today that's really becoming the standard. And so I think there are a lot of businesses that are focused on leveraging employee usage trends of what they use in their daily lives working with consumer products. I think there's a lot of businesses looking to leverage that to create value for themselves. So as businesses come back, and I'm not saying that we're not seeing positive hiring trends. My comments are related to those clients themselves. that represented the $1.85 to $2 million weekly impact. We're not seeing those numbers move dramatically. Are we seeing impacts of businesses starting to come back and hotels starting to hire more and what have you? We're seeing some of that, and where we can see that is in our talent acquisition as more requisitions are open. is in our background checks. So I do think things are getting better, but the question was more related to how are those clients that were impacted, those clients that we said had that monthly negative rate, or excuse me, monthly, weekly negative revenue impact of 1.9 to 2 million. I think about a quarter or so ago we called out it may have improved 100,000 a week-ish. It kind of fluctuated week to week. And then now we've said we haven't seen any substantial or meaningful change from that, which would be accurate as we sit here today. But we are bullish about employee trends beginning to get better for us. It's never something that we've been able to focus on you know, lay our hat on that or bet the farm on that. You know, you've got to really do the work. And what we are doing, we are going out and we are selling businesses right now. And, you know, if they have 415 employees, then we're selling them at that and we're bringing them on. Now, maybe they grow, maybe they don't. But we've just been focused on adding new business onto our platform, and that's worked well for us.
Daniel Jester
Great, thank you. And then just on on Betty quickly, you know, now that you've announced that, and you're starting to get some customers on it, are you seeing some of your other customers kind of get more with some of the modules that they need to be able to use Betty? So are you seeing more engagement on manager on the management to go? Are you seeing more engagement on DDX as customers get ready to use Betty in the future?
Chad Richardson
Yeah, both manager on the go and DDX are at the highest level of usage no matter how you measure it. So, you know, and I'm talking about at the highest level of usage right now. And so that's been getting better and better as we've gone, you know, throughout the, I'd say I think we've had the DDX for the last 18, 19 months. We've had manager on the go now for well over a year. and so we continue to see those trends tick up. Now, is that in anticipation for Betty, or is that because of the value someone's receiving by using those things independently, whether you're setting up for Betty or not? I would say it's probably the latter, but the fact that it's happening will set us up very well for Betty, and I do believe that as people look and see the value that Betty's going to deliver for both the business as well as the employees, I think you're going to even have more usage around the DDX and manager on the go from a best practice perspective.
Operator
Your next question is from the line of Brian Schwartz with Oppenheimer.
Brian Schwartz
Yeah, hi. Thanks for taking my questions this afternoon. Chad, one question for you and then a follow-up for Craig. For you, on the new business that was coming in the quarter, can you share any color in regards to the linearity on how that business came in? It seemed like there was possibly a different operating environment when we started in January versus kind of the end of the quarter. And then I have a follow-up for Craig. Thanks.
Chad Richardson
Yeah, no, I wouldn't say there's been any meaningful difference in how we brought in our revenue in first quarter this year than how we had done, than how we brought in revenue in first quarter of subsequent years. You know, you're going to typically have your greatest number of starts, you know, in the first part of that as people look to start fresh at the beginning of the year. Of course, in first quarter, your quarter to date and year to dates are the same. So any time in the first quarter is not a bad time to convert and what have you. But, no, I wouldn't say that we've seen trends meaningfully different than what we've seen in the past as far as when someone chooses to start in the quarter.
Brian Schwartz
Thanks for that. And then, Craig, one follow-up I just have on the guidance, maybe underlying the annual guidance. I remember last quarter when you reinstated the annual guidance, you know, you set a target out there for a rule of six-day And at that time, that guidance had assumed no macro recovery. And, you know, you are raising your guidance here today, still targeting that rule of 60 for this year. But I'm just wondering if there's any change in terms of your view on the timing behind a macro recovery or if it still assumes no, you know, big macro recovery this year. Thanks.
James
Yeah, I mean, our annual guidance still assumes no macro recovery at this time. So consistent with how we, you know, guided last year as well.
Operator
Your next question is from the line of Robert Simmons with RBC.
Robert Simmons
Hi, thanks for taking the question. Can you talk to what you're seeing in terms of return to office and return to in-person selling? and also then what the expense and margin implications of that are or could be?
Chad Richardson
Yeah, so is that question as it relates to us or our clients from a return to office?
Robert Simmons
Mostly for you, but, you know, whatever you're seeing.
Chad Richardson
Yeah. You know, well, first I would say it's very regional in, you know, return to office strategies depending on, you know, where you're located. For us internally, we've continued to be work from home for most everybody. We have put out a return to office plan for our employees. beginning with the supervisors and certain leaders coming in June. We will then have team leaders start to come back in in July, and then we will start alternating in our general population throughout the month of August in hopes of being back to the office full-time in September. Now, when you're talking about our sales opportunities as far as going to meet with clients, we're going to continue to meet clients where they live. You may have some clients that are wanting us to come in. You may have some parts of our sales process and our steps of certain sales that continue to stay in more of a hybrid model, and then I would see us going in person for others. But I wouldn't say that we're back at that level or anywhere close yet. In fact, we don't have any salesperson that's gone out and called on a business in person yet. So we're kind of waiting to see how that develops. I would say we're hopeful, but I think that's something that's going to just kind of happen, you know, throughout these next couple of quarters, and we'll just kind of see what happens.
James
Yeah, and, you know, the expense related to kind of return to office, you know, we wouldn't see that as a significant increase in costs. You know, we're already maintaining the buildings and all of those things. So even on the travel side, we wouldn't see it. a significant uptick, and any of that's been already baked into our guidance.
Robert Simmons
Great.
Operator
Thank you very much. Thank you. Your next question is from the line of Ryan McDonald of the Needleman Company.
Ryan McDonald
Hey, guys. This is Josh on for Ryan. Just one question for me. If you look at platform usage pre-colored versus today, do you think clients are deepening their understanding of productivity and how software can affect their workflows that previously maybe they didn't understand in the same way versus managing their operations? And then do you think this results in a permanent shift of customers buying more modules up front as we exit the pandemic? Or could there be some reversion to pre-pandemic trends?
Chad Richardson
I mean, it would be hard to think that we're going to go backwards in technology. It doesn't usually happen that way once you've, you know, once you've made that jump. So I wouldn't think that we're going backwards. As far as your question about, you know, I do believe that the farther an employee is away, maybe the more metrics you may have to look at, you know, the harder an employee is to touch, the more metrics you're left with that you really need to manage. And so, I do think being able to engage with employees through technology makes it both easier for the employee as well as for the business to kind of really share in the same transparency there. So I don't see us going backwards in regards to that. Plus, I really – it's something that was happening anyway. I mean, it wasn't that the pandemic created these opportunities. I think the pandemic more sealed the fate of the old way. In fact, we were already seeing trends with employees – that are used to using consumer-based technology to, you know, do banking, get a plane ticket, order a coffee, and then they came to work and it was 1992 through email and what have you. And so we were already seeing the trends of that usage happening. I think the pandemic just provided a stronger proof source for the reason for that. It probably accelerated that for some people. But I don't see us going backwards in that because it was right before the pandemic, and the pandemic just, you know, produced another proof source for reasons why it's important to the employees to have a direct relationship with the database.
Operator
Your next question is from the line of Citi Penigrahi with MizzouO.
spk11
Hey, guys, it's actually Matt Diamond on Citi's behalf. Congrats on the strong print. I've heard the questions about guidance, and I want to phrase mine a little bit differently. It looks like the magnitude of the 2Q guide and the magnitude of the annual year, the full year guide, implies some strength in the back half of the year. I know you can only comment on what you see for sure right now, but I'd love to get your insight on how to disentangle the magnitude of the 2Q guide and that of the annual guide. Anything you're seeing in the second half of the year specifically would be helpful.
Chad Richardson
Yeah, so we've always guided to what we can see. You know, we have not changed that approach. As we've said, the Q2 is our highest guide that we've had since 2017. You know, as we sit here today, I really don't know of deals that are starting in October. But I know as we move throughout this quarter and especially as we move throughout, you know, future into the future quarters that, you know, we'll see more and more revenue that we're onboarding.
James
No, that's what I would say as well. As we set up our guide, we guide to what we can see. And, you know, for the back half, you know, we'll continue to take a look and update as appropriate.
spk11
And on the sales office side, I know there's been some commentary around a return to the office. I'm curious about your plans for sales office openings this calendar year. Is there any light that could be shed there?
Chad Richardson
You know, it's still part of our strategy, opening sales offices. And, you know, we're going to continue to do that as it makes sense. As we talked about during the pandemic, you know, every office was substantially open because our people could really sell a prospect anywhere. Prior to the pandemic, you know, it was all in person. So if we needed to, if we wanted to sell a deal in Las Vegas, we don't have an office in Las Vegas. We had to We had to fly someone there and go there in person. During the pandemic, we were able to do that virtually. And so, you know, as we shift back, there will be offices that we'll be looking to open. And then, you know, we'll have to do it in the right time as well because I'm not 100% sure when we will be going to full in-office selling again, if ever. from that perspective as it relates to the mid-market. I'm talking about where every appointment's in person. I mean, before, if we had five appointments with the prospect, every one of them were in person. I'm not 100% sure that's going to be the case on a go-forward basis, and that's not something we're trying to force. That's something where we're going to meet the prospects where they live in a way that produces, you know, a successful communication for both us and the prospects.
Operator
Your next question is from the line of Brian Bergen with Cowan.
Robert Simmons
Hi, thank you. I wanted to ask a question around client switching behavior. So the large incumbent providers have talked about a retention benefit for them that seems to be partly supported by a reluctance to switch here from a pandemic uncertainty and some of the PPP reporting requirements. Has your sales team seen any of that behavior in the pipeline? And if so, do you consider that an incremental opportunity as things normalize?
Chad Richardson
Well, our retention is directly reflected with usage. In fact, someone gave me a retention report the other day and I thought it was a usage report because the trends are almost the exact same. You know, you watch usage go up, you watch retention go up. And so that's really what we've been seeing as a reflection of strong retention. It's about usage. You know, are there things out there that make it to where somebody is less likely to switch? I mean, I don't think so. I mean, you're going to become more efficient if you switch to us. We have a very strong value proposition. Your employees are going to like it more. And we're going to create even more value. So I don't really think waiting is a good opportunity to wait on that. We've been focused on driving revenue prior to the pandemic. We've been focused driving it during the pandemic. And, you know, once the pandemic ends, I mean, it's not my job to say when that happens. But once the pandemic's over, I would expect us to continue to have strong sales regardless of what's out there as far as trends one way or the other with software because of the efficiencies that we're driving and the dramatic changes difference in experience that a client's going to have using our product today than what they would have, you know, four or five years ago.
Robert Simmons
Okay. And then just are you seeing any different behavior in what modules existing clients are attaching as the economy is reopening here or seeing new clients take on more at the point of purchase?
Chad Richardson
I mean, look, background checks are doing better than they've done in the past or than they did last year because you're having – you know, more people hire. You know, when I talk about hiring trends and improvement, I'm talking about those businesses that we had pre-pandemic that were hit. I'm not talking about all the new businesses that we've added since or businesses that weren't hit negatively by the pandemic last year. So I want to be able to separate the two of those. When I'm talking about, you hiring trends where we're not seeing improvement, I'm talking about of those clients that were most impacted by the pandemic last year, and they're in the industries you would think they would be in. But we still do see positive trends happening across the board with more people, you know, doing background checks, doing onboarding today, more so than they were doing last year, but we're still not back, you know, to where we were at pre-pandemic levels.
Operator
Your next question is from the line of Josh Beck with KeyBank.
Josh Beck
Thank you for taking the question. Chad, you made a pretty specific comment about Betty becoming the standard for payroll in 12 to 18 months. So I'm just curious what you mean by that. Would love to hear a little more on that topic.
Chad Richardson
I think all of our clients will be using Betty within the next 12 to 18 months.
Josh Beck
Okay. That definitely clarifies it. What about with respect to marketing and advertising? How have you changed maybe the composition, the channels versus say pre-pandemic? Is there any notable differences in how you want to invest across those areas?
Chad Richardson
Yeah, well, I would just say we've gotten better at it, you know, as you continue to spend on it. And, again, we measure this week after week, week over week, based off the number of leads that we get. And so, you know, sometimes some weeks leads are generated in areas maybe a little bit stronger areas one week than what we may see in the next week, meaning that you may have more come in digitally. One week and the next week could be delivered through what we're doing from a targeted marketing perspective where we already know who you are. We're targeting you. All of that's a part of our marketing strategy. We're not just putting ads on TV and seeing who's calling us. You know, we have many legs to our marketing department and as well as to our marketing strategy. And so it's continued to evolve, but we've continued to measure it the same way. I mean, our successful marketing campaign delivers demo leads for us. Those are companies that request a demo. We have leads that aren't demo leads of someone that may go in and download white papers or, you know, they're interested, but they have not yet requested a demo. From a demo lead perspective, we're still setting appointments with over 90% of those as they come in. So they're very strong leads for us, and we've been having a lot of success there.
Operator
Your next question is from the line of Arvind Ramani with Piper Sandler.
Piper Sandler
Hi. Thanks for taking my congrats and a good quarter. I just want to go back to this topic of Betty and You know, you certainly provided a lot of color on Betty, and it seems that it's getting really good traction. And I know it's very different than DDX, but can you kind of help frame how impactful Betty is as it pertains to win rates? I know DDX had like a big impact on win rates. And, you know, I'm just trying to get an understanding of the business model impact of Betty. Okay.
Chad Richardson
Yeah, I mean, well, Betty is a unique product that comes with a unique strategy, and that is about having employees being able to visualize what their checks are, what the check's going to be, what components impact their check to where they're able to visualize and participate in that throughout the pay period. And then at pay period end, you know, they're able to approve that that check is – is correct. And what that does is it eliminates manuals, voids, adjustments, all the things that payroll departments and accounting departments traditionally have to do after the fact once they found out that that check didn't exactly include everything that it should have for that employee. And so by moving the process up to the beginning of the pay period, versus at the end of the pay period, you know, it's going to change the way people do that payroll. As far as a win rate, do I think it's going to impact our win rate? Absolutely, once people really start using it. You know, the DDX we came out with, it started impacting our retention not long after we – uh came out with it and manager on the go i would say is a similar product as that and all of that got more and more people engaged employees again engaged in our software interacting with the database on their own and the more people that interact with the database on their own the more accurate the data is the more confirmation that you have that the data is accurate And it produces less liability and exposure for the businesses that deploy it. So I see that continuing with us as we move forward. And I do think it's going to impact both our win rates and our retention positively as it becomes prevalent within our platform.
Operator
Great. Your last question is from the line of Alex Zukin with Wolf Research.
Alex Zukin
Hey there, this is Alan. Thanks for taking my question. I know we don't get client counts on a quarterly basis, but can you talk about the momentum you're seeing up market that is driving improvement in revenues per client? And I just got one follow-up.
Chad Richardson
Yeah, we've continued to have success. You know, we really started rolling out an inside sales group. I would say we had five or so people for several years, and then about two years ago we started building out that group. As we've done that, we've obviously seen more deals below our target market, and we've continued to see deals above our target market. Even as we rolled through last year, I was even a little bit surprised that our average billings per client wasn't down a little bit when you looked at the growth that we had in client units. But it was pretty much the same which just shows the fact that, yes, we are continuing to add small business clients, but they're also being bookended with the large business that we continue to bring on as well.
Operator
And that does conclude the Q&A portion. I would like to turn the call over to Chad Richardson for closing remarks.
Chad Richardson
All right. I want to thank everyone for joining us on the call today. I'd like to send a special thanks to all the employees at Paycom for their commitment and patience throughout the pandemic. Over two-thirds of our staff are either fully vaccinated or in the process. As I've stated in the past, I do believe that getting vaccinated saves lives, maybe your own, but likely a loved one's. And as from an investor outreach front, this quarter we'll be presenting at the Cowan Technology Conference on June 1st and at the Baird Global Consumer Technology and Services Conference on June 10th. PACOM will also be hosting one-on-one meetings in May and in June at the Needham, J.P. Morgan, and Stiefel conferences. We look forward to speaking with many of you very soon, and I appreciate your continued interest in PACOM. Thank you, operator. You may disconnect.
Operator
Thank you. That does conclude today's conference. Thank you for participating.
Chad Richardson
You may now disconnect.
Disclaimer