Paycom Software, Inc.

Thank you for standing by, and welcome to the PACOM Software Second Quarter 2021 Quarterly Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. James Sanford. Thank you. Please go ahead.

Thank you, and welcome to PACOM's second 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 made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also, during 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 will now turn the call over to Chad Richardson, PACOM's President and Chief Executive Officer. Chad?

Thanks, James, and thank you to everyone joining our call today. I'll spend a few minutes on the highlights of our second quarter 2021 results and the opportunities we are pursuing as we look ahead. Following that, Craig will review our financials and our guidance, and then we will take questions. We delivered very strong second quarter 2021 results with revenue of $242 million that grew 33.3%, our fastest quarterly growth rate compared to the prior year period since Q4 of 2016 and well above the top end of our guidance range. The upside from the quarter was primarily a result of broad-based demand strength from new client ads and consistent cross-selling to existing clients. Our second quarter adjusted EBITDA was $87 million, representing an increase of 42% over the prior year period. With these strong results, we are once again raising our full-year guidance, which Craig will discuss in more detail. The investments we make in our products generate tremendous value for our clients and drive our differentiated employee strategies. Our newest employee innovation is Betty, the industry's first self-service payroll technology, allowing employees to do their own payroll, which we officially rolled out to the market in early July. Betty, which stands for Better Employee Transaction Interface, is an employee-driven payroll experience and represents one of the most important advances we've made to date. With Betty, employees do their own payroll, which allows our clients to benefit from increased payroll accuracy, while employees gain full insight to their paycheck, including advanced knowledge of take-home pay and how it's calculated. Employees have a direct connection to their paycheck to resolve errors well before payday, so they don't have to wait on or contact anyone for assistance. The additional clarity on how their pay changes and is calculated, combined with automatic alerts when items require their action, gives employees and clients confidence in the accuracy of their payroll. I'm very pleased with the launch so far. We are receiving tremendous feedback, including a VP of HR who said Betty's the most revolutionary payroll product I've ever seen. Another comment from a chief HR officer noted that Betty is giving ownership of payroll to employees and managers, which is great because they know better than anyone what their paychecks should be. As we said during our Q1 earnings call, we are planning to have 100 pilot clients on Betty in the second quarter, and we easily achieved that goal. On July 6th, we opened up Betty to all clients, and through the end of July, we've already sold Betty to over 1,000 new and existing clients. I continue to expect that all Paycom clients will eventually deploy Betty. It's the only way payroll should be done. Our marketing plan continues to deliver strong demo leads, and we intend to spend aggressively in the coming quarters to fuel future revenue growth and further expand our market share in a large and expanding HCM TAM. Our messaging continues to resonate with prospects as we contrast the shortcomings of disparate HCM systems with the value proposition of Paycom's single database solution and self-service capabilities that are stronger than ever. Employees expect their HR software to be efficient and easy to use. And once again, we had record high employee usage rates in Q2 as measured by our direct data exchange or DDX. We continue to enjoy increasing traction with both smaller and larger companies. As a reminder, we added multiple inside sales teams as we've continued to have success below our target range. Due to the technological advances we've made and the demand that's building around our employee self-service initiatives, we've continued to be pulled further upmarket as well. As a result, we are pleased to announce that we are expanding our proactive outside sales efforts from targeting firms with 50 to 5,000 employees to targeting firms with 50 to 10,000 employees. We've had success selling to organizations above our historic range, driven by larger company demands. This change we are announcing today empowers our sales representatives to proactively target in this expanded segment, and we are excited by this incremental opportunity. We have clients in this segment already, so we're confident that our solution will compete and serve these clients effectively. On the Paycom branding front, we recently signed a 15-year naming rights partnership with the Oklahoma City Thunder that will transform their downtown home into the Paycom Center. Oklahoma City is home to thousands of our employees, and I'm happy that the Paycom Center will be home of the Thunder. We have now lapped a tough pre-pandemic year-over-year comparison, and Q2 is more reflective of our historical growth profile. Record new client additions over this past year are driving our growth. While we saw a very small headcount improvement in our pre-pandemic client revenue base, our guidance in future growth initiatives are not reliant on any employment improvements. In summary, Q2 was a very strong quarter that reflects the strength of our execution throughout the pandemic and the investments we've made to further distance ourselves from the competition. Innovation, customer service, and new client growth represent the foundation of our long-term revenue growth strategy. And with only approximately 5% market share of a growing TAM, we continue to have a long runway ahead of us. I want to thank all of our hardworking and dedicated employees for their resilience and commitment to winning. With that, I'll turn the call over to Craig for review of our financials and guidance.

Craig, before I review our second quarter 2021 results and our outlook for the third 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. We are very pleased with our second quarter results with total revenues of $242.1 million, representing growth of 33.3% over the comparable prior year period, driven primarily by broad-based strength with new client wins and consistent cross-selling to existing clients. Within total revenues, recurring revenue was $237.6 million, for the second quarter of 2021, representing 98 percent of total revenues for the quarter and growing 33.5 percent from the comparable prior year period. Total adjusted gross profit for the second quarter was $206.9 million, representing an adjusted gross margin of 85.4 percent. For 2021, we remain on target for adjusted gross margin to be in the range of 85 to 86 percent. Adjusted total administrative expenses were $136 million for the second quarter as compared to $106 million in the second quarter of 2020. Adjusted sales and marketing expense for the second quarter of 2021 was $64.3 million or 26.6% of revenues. Our marketing strategy continues to generate strong demo leads both within and outside our historical target market range of 50 to 5,000 employees. We plan to continue to invest in marketing throughout the remainder of 2021, and as Chad mentioned, we have increased our target market range to 50 to 10,000, thus empowering our outside sales representatives to proactively target larger companies. Adjusted R&D expense was $26.2 million in the second quarter of 2021, or 10.8% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $38 million in the second quarter of 2021 compared to $27.7 million in the prior year period. We continue to be very pleased with the high-quality innovation we are seeing from our investments in R&D and will continue to aggressively recruit talent in R&D to drive our future growth. Adjusted EBITDA was $87 million in the second quarter of 2021 for 35.9% of total revenues compared to $61.2 million in the second quarter of 2020, or 33.7% of total revenues. Our gap net income for the second quarter was 52.3 million or 90 cents per diluted share versus 28.6 million or 49 cents per diluted share in the prior year period based on approximately 58 million shares in both periods. Non-gap net income for the second quarter of 2021 was $56.5 million or $0.97 per diluted share versus $35.9 million or $0.62 per diluted share in the prior year period. We expect non-cash stock-based compensation for the third quarter of 2021 to be approximately $25 to $26 million. For the full year, we anticipate non-cash stock-based compensation will be approximately $95 to $100 million. For 2021, we anticipate our full-year effective income tax rate to be 24 to 25% on a GAAP basis. On a non-GAAP basis, we anticipate our full-year effective income tax rate to be 26 to 27%. Turning to the balance sheet, we ended the second quarter of 2021 with cash and cash equivalents of $202.4 million and total debt of $30 million related to construction at our corporate headquarters. Cash from operations was $57 million for the second 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 $1.6 billion in the second quarter of 2021. During the second quarter of 2021, we repurchased approximately 94,000 shares for a total of roughly $32 million. Through June 30, 2021, PACOM has repurchased over 4.2 million shares since 2016 for a total of approximately $455 million, and we currently have roughly 300 million remaining in our buyback program. Shifting to guidance, we are pleased to provide strong third quarter guidance that reflects the robust performance we achieved in the first half of 2021, and we are raising our full year 2021 outlook as a result. Our Q3 and full-year guidance are as follows. For the third quarter of 2021, we expect total revenues in the range of $249 to $251 million, representing a growth rate over the comparable prior year period of approximately 27% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $87 to $89 million, representing an adjusted EBITDA margin of approximately 35.2%, at the midpoint of the range. For fiscal 2021, we are raising our expected revenue range to 1.036 to 1.038 billion, up from 1.017 to 1.019 billion, or approximately 23.2% year-over-year growth at the midpoint of the range. We expect four-year adjusted EBITDA in the range of 410 to 412 million, representing an adjusted EBITDA margin of approximately 39.6% at the midpoint of the range. When combined, we now expect revenue growth and adjusted EBITDA margin to easily exceed the rule of 60 this year. To conclude, we are very pleased with the performance in the quarter, which gives us increasing confidence in our outlook for the remainder of the year. With the launch of Betty, an expanded target market, and a deep product development pipeline, we have a long runway ahead of us to continue to deliver rapid growth for years to come. With that, we will open the line for questions. Operator?

Thank you. At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Your first question comes from the line of Ramo Linschow with Barclays. Please go ahead.

Hey, first of all, congratulations. That was an amazing quarter and amazing return to high growth. Chad, quick question on the decision to go towards, like, the 50,000 to 10,000 employee clients now. Historically, you were always a little bit hesitant because sales cycles there seemed to get more complex, slightly longer, et cetera. How do you manage that process, and can you still do it with the same sales force?

And then I had one follow-up. Sure, Raimo. And so if you remember, it was about three years ago. Our range at that time was 50 to 2,000 employees. We continued to be pulled up. And so at that point in time, we made it official allowing our employees to target, proactively target companies of that range because, again, we were being pulled more up market. Same things happened here up to 10,000. We continue to be pulled further up market. I would say that the buying criteria for companies of that size has changed. You know, we're all working with the same type of employee. There's no such thing as a large market employee and a small market employee. You can work for a 300-employee one company and work for a 10,000-employee company the next. And so, you know, we're providing a very easy-to-use standard way for employees to interact with their data, and we're finding it easier to work with larger businesses as they look to displace employees. multiple disparate systems with one.

Yeah. Okay. Perfect. Makes sense. And then on Betty, like if you think about, you know, the 1,000, the greater than 1,000 clients already signed up, like what has been the feedback so far from those clients? What were some surprises maybe that you've seen there and that you can utilize for the rest of the client base? Thank you and congrats again.

You bet. And so, you know, employees, like I've been saying, employees pretty much fly blind into every payroll. They do the work. They clock in, clock out, put in their expenses, manage benefits, manage time off and everything else. And then they get blindfolded before payday. And then they get to find out on payday what it meant. I mean, it's similar to blinding the pilots right before they land. And so what we've done is taken that blindfold off to where employees understand how their checks are calculated, and they can help the payroll department have perfect payrolls because there's not a payroll person out there that doesn't have anxiety going into each payroll day because they want it to be perfect. And so, you know, what Betty does is help everybody get to the right level of accuracy, and it also eliminates a lot of the after-fact manual checks, voids, and adjustments that oftentimes clients have to do after an employee's check is incorrect, and we know how important it is for employee's checks to be perfect. They expect it. So, you know, we're having a lot of success with it, and I would expect us to continue that.

Perfect. Thank you.

Thank you.

Your next question comes from the line of Samad Samani with Jefferies. Please go ahead.

Good evening, and I'll echo the congrats on the 30% plus growth. It was great to see that come back. So, Chad, maybe the first question for you. Just when I think about it, it sounds like cross-selling was mentioned more often on this call, and I think historically the tendency of customers to adopt what they adopt up front. So can you help us understand why cross-selling is becoming a bigger motion? Is that primarily Betty, or is it across the portfolio? Yeah.

Yeah, I couldn't say that our cross-selling today as a percentage is more of our revenue than what it's been in the past. I would say on a percentage basis, still cross-selling for the biggest percent of our revenue was during that year of ACA, where, again, everybody had to take it. I do believe that we're going to be having a – Three or four quarters here, some pretty good cross-selling as we move everybody over to the better employee transaction interface, which is Betty. Also, as we're selling new, onboarding new clients now, Betty is a part of that. And so our sales reps, you know, Betty comes with the payroll package now. It is an additional fee for that, but it is included on every quote moving forward for new businesses, as we believe. This is the way businesses win and achieve their return on investment with our product as it relates to the payroll side of what we do.

Great. Really helpful. And maybe as a follow-up to that, you know, this was one of the biggest beats to take, I'm supposed to, kind of relative to expectations. So I'm curious if you could maybe help us maybe unpack how much, how you think about it in terms of better new bookings versus, this uplift to Betty versus employment recovery in the install base. When we, as we think about maybe the strength in the quarter.

Sure. Well, in regards to Beat and Betty, Betty had very little to zero impact on second quarter. I talked about on our May call that we would be looking to put 100 clients on it that quarter. We achieved that, I think, within the first couple of weeks. And then we held. We went through that. And then on July 6th, we actually released it to all other clients. So that was within this quarter. So Betty would have played – zero impact as it relates to last quarter. We do think it's going to be a part of our differentiated strategy moving forward. So new logo ads, as usual, is what contributes to our growth, followed by upsells to current clients. As far as macro, we've been going through this now for a little bit. I've been talking a little bit about us having some improvement with the pre-pandemic client base as far as this quarter. I'd say we saw an improvement in hiring during this past quarter, and the impact that it had on our revenue for this quarter from our pre-pandemic client base was $1 to $1.5 million for the quarter. So that's about $100,000 worth of weekly improvement on that number that we had talked about prior.

Great. Appreciate the questions, and congrats again on the strong results. Great to see it. Thank you.

Your next question comes from a line of Brad Reebok with Sequel. Please go ahead.

Great. Thanks very much. Chad, as salespeople have the opportunity to move further up market, do you think that changes the sales cycle length? And if it does lengthen, how do you manage that?

No, I don't. I mean, a little bit. It's hard for me to say that, you know, a 5,000-employee company's sales cycle is going to be the same as a 150-employee company's sales cycle. I will say the 5,000-employee sales cycle is the same as a 10,000-employee sales cycle. So I don't know that there's some major differences between the two of those as far as – what their cell cycles would be. You know, we're still not looking to engage with a long cell cycle that requires us to link up with multiple disparate systems. So, you know, somebody has to be a fit for us. to go into that. Something else I would say is we continue to have strength in down market. You know, we continue to aggressively achieve our lead volumes, and they continue to go up. And oftentimes those leads are also small business. And so first of this year we had four sales teams, and that was up from one the previous year. Throughout this year we've added another six inside sales teams, and so now we're at ten. inside sales teams which sell the emerging business, or that would be the below 50 market. So we continue to do extremely well below 50, and we continue to be a pulled-up market because, again, it's the same employee interface. Whether you work for a 15-employee company or whether you work for a 10,000-employee company, those employees expect ease of use and easy access benefits. to their system. And so, you know, we're seeing a lot of momentum being created based off of employee usage needs and how much it makes it easier for them.

That's great. And then one quick follow-up on Betty. Can you help us on the monetization? I'm sorry if I missed it. What type of uplift do you get from an existing customer that's adding Betty? And then on, you know, net new, what type of uplift?

Yeah, and so, you know, we've added products in the past where, you know, we got 100% usage very quickly, and I'm thinking of DDX and Manager on the go, and those are products that we just included in our pricing with Betty. It is an additional price product, even though it's now included on every single payroll deal. You know, we believe our pricing is competitive, so I don't like to just put it out there. You may be able to find it. uh out there but all i would say is uh it's uh reasonably priced uh like many of our other uh modules that's great thanks very much thank you your next question comes from the line of martin mccone with beard please go ahead hey good afternoon and let me add my congratulations um with regards to the you know to the the rapid ramp in terms of the the clients that are using betty

With the 100 that first came on, can you talk a little bit about what sort of experiences they were seeing? Did it really ease or increase the accuracy that they ended up experiencing? Are you getting any feedback from clients about, hey, our payroll department doesn't need as many people? And how easy was it to lift You opened it up on July 6th, and now you've got over 1,000 on Betty. How easy was it to convert them to Betty?

Yeah, and so, well, with BETA, you're already on it. It's something that we turn on for you, but what we have to work with you to convert are your processes. You've got a lot of these processes that happen after the fact. We need to have those happen at the beginning or during the payroll transaction, and once you do that, a lot of the processes you'd normally do after the fact are irrelevant. We're able to displace those, and so we eliminate a lot of processes, and then with some of the processes, we move them into earlier in the processing phase. But in answer to your question, we haven't had anybody turn it off. You know, once you turn it on and that's what your employees are doing, you have a very high satisfaction rate with employees. And you have a very strong ROI. You know, Betty itself 100% pays for itself. And it actually helps even pay for the payroll, the entire payroll module. Because there's an incredible amount of ROI when you're not having to do manual checks, voids, adjustments, and wire money into employees' accounts to cover NSF fees they may have because their payroll was wrong. And so it also gives employees visibility into what their check's going to be. A lot of people live check to check. I mean, over 80%, 85% of the U.S., employee lives check to check and you know they need to know exactly what the pay is going to be and if it's $30 off that's a big difference for them and so VETA gives them visibility long before check date and gives them the ability to interact with their check to make sure it's accurate, which, again, increases ROI for the business. It also lowers a business's exposure and certain risks associated with paying people. You know, there's some pretty specific laws on making sure you pay your employees correctly and that you pay them on time. And with Betty, you know, that's easily achieved. That's great.

And did all of those clients have time and attendance already set up, or did some of them have to –

add that you know that's a great question raimo i would expect that most of our first oh sorry mark sorry mark mark i would expect that most of our uh clients already had time in attendance because you know we'd like to go through there and and uh get the ones using quickly that are already ready Now, I would say most of our clients at PACOM already have time and attendance, but you are right. There will be certain modules that as we go to move Betty would be required for a client to implement. Great.

And then one last one. Just on the increasing the target range from upper limit of 5,000 to 10,000, When you first expanded from 2,000 to 5,000, how many of those 5,000 employee companies were kind of like inbound and kind of approaching you guys? Obviously, you've got a great marketing campaign that's been very successful. I imagine that's drawn a number of inquiries. But can you talk about like how much of that is being pulled in as opposed to being pushed?

Yeah, I mean, you know, we do not have a marketing strategy for companies above 5,000. We do targeted prospecting, and our targeted prospecting strategies had been, you know, three years ago they were companies below 2,000, and then we moved that to below 5,000, which we've experienced for the last three years, and now we're moving it to 10,000. And what that means is we'll start proactively targeting these. We have continued to have people call us. of employee sizes in that range. And again, the more that we've had, you know, we've continued to move up our market. And so what it allows us to do now is do targeted prospecting toward those. And as salespeople make calls, you know, they're able to proactively make those calls. Now, sales reps have always been able to make a proactive call. A sales rep can go out there right now and sell a 50,000-employee company. I don't care. But as far as what our targeted prospecting efforts are toward, those companies now that have between 50 and 10,000 employees, and then in our more small business or emerging type companies, it would be for those that are also below 50. Great. Congratulations. Thank you.

Your next question comes from the line of Daniel Jester with Citi. Please go ahead.

Great afternoon. Thank you for taking my question. It seems like every day there's a new story about how tight the labor market is. So I'm just wondering if you could talk about sort of how the tight labor market may or may not be impacting inbound demand that you're seeing.

Inbound interest that we're seeing? Yeah, that's right. Okay, okay, got it. Your last part there cut off. Well, I mean, definitely I think it plays a role. You know, we've done a lot of surveys that employees like easy-to-use technology at work. I've said employees shouldn't have to work to work. And so you definitely have a frustrated employee base if you have multiple pieces of technology that are difficult to use. Also, to hunt for talent out there, you want to retain your good employees. That's a must. Good technology helps you do that. You also need to deploy pretty good technology on the talent acquisition side because everybody's in a dogfight for talent right now. It's a very tight labor market. I do believe that there's some of that in there. But, you know, everything shifted to this digital transformation and the right way to do something. And it only makes sense that employees would be the ones engaging with their data. And so, you know, we're having success with that. But, you know, I think the labor market might be tight for a while here. We'll kind of see what happens after that. As far as our business, you know, because of our new business ads, we've really what we've needed stability. And we've had that since the summer of last year. We just we needed some stability within the labor market. And so I don't think even if, you know, there's different situations with the pandemic as we go through the remainder of this year. I still believe we're dealing with somewhat of a tight labor market. So I don't feel like the macro on the go forward is going to impact us like it had, provided that we have some stability here. And it looks like we will from an employment perspective.

That's great. And then just as a follow-up, you've been selling virtually for like 18 months now. You talked about adding six inside sales teams. I'm just wondering if you can kind of reflect on once we actually do get back to a normal environment, does this change your philosophy about adding new sales officers?

No. No, I mean, it's timing. You know, we're just now, our managers are getting back into the office and, you know, throughout the rest of this year, you know, people are going to be filtering back into our offices as we, you know, go back to the office to do our selling. As far as what type of model and hybrid model we're going to be using, you know, we've, We've been paying attention to why prospects buy, and we've also been paying attention to how prospects buy. So, you know, we're going to be supporting the methods that best help both the prospect as well as us be able to, you know, in our case, display what our product does, and in their case, you know, have a clear understanding of what the ROI is for them.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Brian Schwartz with Oppenheimer. Please go ahead.

Yeah, hi. Thanks for taking my questions, and congratulations on a great quarter. Chad, maybe if I could just start there on the quarter. Can you shed any light on just how the bookings or the business activity trended in the quarter, just how the linearity was? We'll start from there.

Yeah, I mean, you know, we've had really strong bookings since – April of last year, you know, things kind of took off and we were doing well anyway. But, I mean, you know, we've had very strong bookings. In fact, these last two weeks that we just had here in July, these last two weeks, you know, that's the largest number we've put up ever in bookings. And so bookings have been strong, you know, as we've continued to push a differentiated strategy that's, you know, getting a lot of momentum here in the marketplace.

Thank you. And then, Chad, one question I had just on the target expansion move here. I'm just wondering if there's any industry verticals that, you know, would have, I would think about fewer organizational complexities to them and therefore would just be ripe for Betty and more likely to switch to self-service when you target?

Yeah, I mean, I really look at it as it's a product for everybody, you know, from the employee's perspective. I would even say that the more complex it is, the more you need to deploy Betty, you know, the more data points you have on a check, you know, the more important it is to deploy something like Betty. So I'm not going to say that any specific vertical or – you know, either easy or complex type of company that Betty would be best for. I think it's best for everybody, and it's 100% best for the American worker to have a product like this to where they can engage themselves with their data and something that's going to significantly impact their, you know, ability to work their financial plan.

And then last question for Craig, just on the marketing and advertising campaigns. Given the bookings momentum here in the business, the commentary, I wonder if you have any plans to increase your advertising spend here in the second half of the year in support of the Betty product cycle and the current momentum in the business.

Yeah, you know, we're going to continue to spend aggressively on sales and marketing. You know, you've seen that in the past, you know, the back half of the year where we've kind of ramped up sales and marketing. So, you know, I would expect, you know, to kind of see the same for us through the rest of the year. Obviously, any marketing plans we've currently baked into our, you know, third quarter and full year guidance. Thank you.

Your next question is from the line of Ryan McDonald with Needham. Please go ahead.

Hi, this is Michael Rackers. I'm on for Ryan McDonald. Thanks for taking my question. So we've heard from multiple vendors that churn ticked up slightly in the quarter. Some of the customers that may have wanted to make a change last year couldn't do so because of the other pandemic-driven priorities. Did you experience any similar uptick in churn within your customer base? And did you see any more opportunities to replace competitors during the quarter given this dynamic?

Yeah, what I would first say is it's a bad idea to use our competitors in relation to churn as a proxy to us. But we do not report, you know, either gains or no gains as it relates to retention opportunities. until the end of each year. What I would say, though, is that we're having a lot of success deploying a differentiated product, both to new customers as well as to current customers. And those clients that are buying product are staying. And so we're having a lot of success. It's a differentiated strategy. And as we continue to have increased DDX usage, where more and more employees are the ones making the impressions on the database and not an intermediary through another department within the company, you know, we would have an expectation that we would continue to have a strong retention rate with our clients.

Great. Thank you.

Thank you.

Your next question is from the line of CDA. And in graphy with Mizuho, please go ahead.

Hey, guys. This is Matt Diamond on the line for Citi. I want to add my congrats for the solid results. The one question that's come up, and we've alluded to it a little bit, is around Betty. It was mentioned that there were going to be three to four quarters of continued pretty above normal cross-selling. We also know that Betty necessitates all of the Paycom modules in order for a client to be eligible for Betty. Can you help us handicap what size of the existing client base has all of those modules? T&A, it sounds like, is pretty widespread, so that we can get an idea of what the magnitude of that cross-sell opportunity looks like over the next three to four quarters.

Sure. And so, you know, I do want to say one thing. Betty does not require you to have all of our modules. There's a lot of modules, you know, you don't need to utilize Betty. Now, it would make sense that someone would take the modules, but things like talent acquisition as far as, you know, recruiting, COBRA. A lot of our modules you don't necessarily have to have to run Betty, but it's a good idea that you implement it within your business so that your employees can use one system. But there are modules that would be required to use Betty, like paid time off, time in attendance, expense management, benefits administration. There are some of them definitely that, you know, you're going to want to use them because without them, you wouldn't be able to use Betty. A lot of those are, you know, fairly popular products to us, but, you know, we have several clients that don't have them, and so I would like to think our sales reps are probably out there right now. Our CRRs are probably working with a lot of those clients that are already ready to go, where we just go and click a button, eliminate most of your processes, and shift a few to the beginning. But I'm sure that we will have our internal sales group, our client relations group, continuing to reach out to clients of all characteristics, whether they have All of the products currently required are just partial. So there is an opportunity there for us. As far as handicapping it again, we consider our pricing competitive in nature, but there are opportunities for us out there. I do want to say this, though. Our revenue gains are going to be primarily driven by new business wins just because of what – and I'm saying new logo wins – just because of the size of a new logo compared to the potential upsell of that same logo.

That's a perfect segue to my next question. Is there anything that's being done differently or – that's being adjusted on the product side to address these 10 K customers and above this employees, but 10 K employees and above, it doesn't seem to be the case, but anything that could be commented on in regards to the R and D spend and what's being prioritized for that customer base would be helpful.

No, there's no dip. We're not doing anything different for a 10,000 employee company that we're doing for a 2,300 employee company.

Excellent. Thanks so much guys. Thank you.

Your next question is from the line of Brian Bergen with Cowan. Please go ahead.

Hey, good afternoon. Thank you. Question here on Betty. Can you comment on what level of client adoption you're anticipating by the end of 2021? And a clarification on the new sales. I understand it's being included in each deal you bid, but are you seeing near 100% attach on it as well here the last several weeks?

Well, again, yeah, we just, like you said, I mean, we started selling it July 6th. And, you know, as it relates to new clients, a lot of them would be in conversion. It would be rare that we'd sell a client on July 6th and they would have started by now, unless they're a smaller business. And on the smaller business side, then you definitely could have had some of that. Yes, I mean, because it's the way we're training and setting them up. We're not training you on the old model now. I mean, when you're going through conversion and training, we're training you on how employees do their own payroll. We're not training you how you input your employees' data into our system. And so, yeah, it's part of the conversion, and so it would be illogical for me to think that anybody would even try to do it the old way. And also it's included in the ROI. I mean, you know, now our ROI cases include Betty. And, you know, it's an important part of the ROI. I mean, you can use Betty and actually it can help pay for the entire system depending upon how many true issues you've been having in payroll. You know, payroll is a high-risk, low-reward activity. If you get it right, who cares? Employees expect it. And if you get it wrong, you know, you upset employees. They have NSF fees, and then you get to pay tax penalties. And so, you know, having perfect payroll is extremely important, and it just wouldn't make any sense to me that any client would buy our product without betting. And it wouldn't make any sense that they would, since they bought it, it wouldn't make any sense that they wouldn't use it because their employees want to use it.

Okay. And then just a follow-up, a common question we're getting around FETI and the potential offsets of existing service revenue, can you help kind of frame the magnitude of that work within your business to begin with as far as error correction and things like that, and then clarify your view on the revenue accretion of FETI versus those types of services it might automate away?

You know, I mean, there's definitely going to be. Betty's going to replace what I'm going to call bad revenue for the client. You know, the client didn't have visibility. The employee didn't have visibility. So they have to void a check and they have to do a manual. Then they have to send a wire. And then, you know, to the extent there's tax issues. a tax event created because it extends a different quarter, a different tax period. You've got to deal with that. And so, you know, there are definitely some fees associated with that. That can be labor work on both our side and the client's side, which can carry maybe a higher or a lower, I should say, operating margin, as it were, in regards to that, or higher expense to both us and the client. From a vetting perspective, you know, There's not anything we're doing to it on our end, and there's not anything the client's having to do. And what I tell clients is, hey, our competitors got themselves out of doing your payroll. We get you out of doing your payroll.

Thank you.

Your next question comes from the line of Alex Zukin with Wolf Research. Please go ahead.

Hey there. This is Alan on for Alex Zukin. I just wanted to drill in on the new business going forward. Obviously, it sounds like you guys are seeing a lot of strength there. I was wondering if you could help kind of put to context what you're seeing at the lower end of your customer employee range and the top end and kind of how you're thinking about that for the second half.

Yeah, I mean, I would say more of the same. You know, we don't really get to dictate what size companies coming in from our lead volume. You know, as we use our advertising assets, you could have a three-employee company clicking on it that has a pet store, and you could have a 10,000-employee company clicking on it. And, you know, we're going to be going after those of all sizes and have been. And so... I wouldn't see how we would expect it to be dramatically different than what we're seeing right now. Again, our move-up market, we're already there. I'm just announcing it. I mean, we're already there. We're already getting the leads. We're already selling the deals. You know, we've got deals larger than $10,000 that are already using our company. You know, we're just making it more official and kind of flying the flag out there right now that we're open for business and we're going to be targeted prospecting those clients up to 10,000 as well. Thank you.

And at this time, there are no further questions. I will now turn the call back over to Mr. Chad Richardson.

All right. Thank you. I want to thank everyone for joining us today on the call. As we communicated internally, we're gradually making our way back to the offices and hope to be back as soon as conditions safely permit. I want to thank all of the PACOM employees for their perseverance through the pandemic. Over 70% of our staff are either fully vaccinated or in the process. I'd like to reiterate that I believe getting vaccinated saves lives for every 100,000 fully vaccinated people. It's estimated that less than one will lose their life from a breakthrough COVID-19 case. Please get your vaccinations and let's end this pandemic. On the investor outreach side, this quarter we'll be presenting at the Oppenheimer Conference on August 10th, followed by the Wolf Conference on September 8th. and the city conference on September 14th. PACOM will also be hosting one-on-one meetings in August and September at Key Bank and Piper Sandler conferences. We look forward to speaking with many of you very soon and appreciate your continued support of PACOM. Thank you, operator. You may disconnect.

Thank you. And this does conclude today's conference call.