Paycom Software, Inc.

Good afternoon, and thank you for attending today's Paycom Software 4th Quarter and Full Year 2022 Results Conference Call. My name is Donyell, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by 1 on your telephone keypad. It is now my pleasure to hand the conference over to our host. James Sanford, Head of Investor Relations. James, the floor is yours.

Thank you and welcome to PACOM's earnings conference call for the fourth quarter and full year 2022. 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. 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. We'll now turn the call over to Chad Richardson, Big Home's President and Chief Executive Officer. Chad?

Thanks, James, and thank you to everyone joining our call today. We ended 2022 with very strong results, and I'd like to thank all of our employees for the consistent hard work and execution that drove four consecutive quarters of revenue growth of 30% or more over the respective prior year periods. I'll spend a few minutes on the highlights of our fourth quarter and our full year 2022 results. and high level expectations for 2023. Following that, Craig will review our financials and our guidance, and then we will take questions. Our 2022 fourth quarter revenue of approximately $371 million came in very strong, up 30% year over year, bringing our full year 2022 revenue to $1,375,000,000, also up 30% year over year. Fourth quarter adjusted EBITDA also came in very strong at 164 million, representing an adjusted EBITDA margin of 44%, bringing our full year 2022 adjusted EBITDA to 580 million, representing an adjusted EBITDA margin of 42%. The sum of our 2022 revenue growth rate and adjusted EBITDA margin resulted in us hitting the rule of 72. With our full year 2023 guidance, we are once again starting the year strong with outlook for a solid rule of 65. As a reminder, we guide to what we can see based on our existing recurring revenue, new business sales, and anticipated new starts in the near term. I'm pleased with the momentum we are carrying into the new year. On the product front, 2022 was a very strong year for Paycom benefiting from our first full year of rolling out Betty. our differentiated employee self-service payroll solution. We are seeing strong demand trends that position us to deliver another year of rapid, profitable growth in 2023. We are leading an industry transformation by making payroll and HCM processes more efficient for both employees and businesses by eliminating manual tasks, improving accuracy, and reducing liability exposure caused when payroll and HCM is done inaccurately. With Betty, employees are doing their own payroll by interfacing directly with their data in a self-service, easy-to-use software. A recent study conducted by Ernst & Young found that the average organization has a 20% inaccuracy rate when it comes to payrolls, which results in lost revenue, hours wasted correcting errors, and increased exposure to potential lawsuits and fines. Each of these mistakes cost an average of $291 and can cost upwards of $705 for unentered non-productive time errors. So you can see how costly these errors become over time. In fact, over the course of a year, a 1,000 employee company could potentially incur almost $1 million in unnecessary costs correcting common payroll mistakes. Betty automates the payroll processes, to deliver perfect payroll and employees are empowered to identify and correct errors ahead of time so that everybody wins. Our marketing plan in 2022 continued to perform well, delivering strong demo leads throughout the year as we spent aggressively on advertising. At the same time, our deliberate investments in marketing are delivering high margin revenues and we saw improving operating leverage in the sales and marketing throughout 2022. We continue to be pulled up market in 2022 with the fastest growing revenue segment of our business coming from clients with greater than 2000 employees. We are seeing increasing demand from larger organizations that are recognizing the opportunity to simplify their HCM needs and Paycom is well positioned to benefit from this trend. With only approximately 5% of the TAM today, there's still plenty of runway ahead for us to expand our market share. Paycom received national recognition from several organizations in 2022. As a workplace, we were named one of America's most trusted companies, as well as best company for women. And we received a top workplace in Oklahoma award for a 10th consecutive year. These awards are a testament to our hard work, our thriving corporate culture, and our client focus. As of December 31st, 2022, our headcount stood at over 6,300 employees, up 18% year over year, as we continue to have great success attracting and retaining high-quality talent to further bolster our future growth. Additionally, I want to congratulate the 2022 PACOM Jim Thorpe Award winner, Travius Hodges Tomlinson, from Texas Christian University. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, who is one of the greatest all around athletes in history. Jim Thorpe also happened to be in Oklahoma. To sum up, our focus on the employee experience and client ROI continue to fuel our strong results and we are executing well. I'm very excited about the long list of new innovative opportunities we will be pursuing in 2023 and beyond. I'd like to thank our employees for helping to make 2022 such a strong year, and we are set up for another great year in 2023. With that, I'll turn the call over to Craig for review of our financials and guidance. Craig.

Before I review our fourth quarter and full year results for 2022 and our outlook for the first quarter and full year 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We ended the year with very strong results with full year 2022 revenue of $1,375,000,000 of 30.3% compared to 2021. Fourth quarter results were excellent with total revenues of 370.6 million representing growth of 30% over the comparable prior year period. Our revenue growth was driven by strong demand, new business wins, and adoption of recent new product offerings. Within total revenues, recurring revenue was 364 million for the fourth quarter of 2022 representing 98% of total revenues for the quarter and growing 30% from the comparable prior year period. We ended 2022 with approximately 36,600 clients, representing a growth rate of 8% compared to 2021. On a parent company grouping basis, we ended the year with roughly 19,100 clients, also up 8% compared to 2021. Total number of employee records increased 14% year over year, in 2022 to $6.5 million. PACOM's annual revenue retention rate in 2022 was 93%, which was consistent with our recent four-year average of 93%, and up more than 200 basis points from the prior four-year period average of 91%. Total adjusted gross profit for the fourth quarter was $312.5 million, representing an adjusted gross margin of 84.3%. For the full year 2022, our adjusted gross margin was 84.9%. Adjusted sales and marketing expense for the fourth quarter of 2022 was 87.3 million, or 23.5% of revenues. Our marketing strategy in 2022 has been very effective at driving high-quality demo leads. With the revenue generated from prior period investments, we saw 100 basis point improvement in adjusted sales and marketing expense as a percentage of revenues for the year. We plan to continue to invest in marketing in Q1 and throughout 2023. Adjusted R&D expense was $36.6 million in the fourth quarter of 2022, or 9.9% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $51.8 million in the fourth quarter of 2022, compared to $44 million in the prior year period. We have a very strong pipeline of product development opportunities in 2023 that we believe will create tremendous value for our clients and for Paycom. Adjusted EBITDA was $163.9 million in the fourth quarter of 2022, or 44.2% of total revenues, compared to $109.6 million in the fourth quarter of 2021, or 38.4% of total revenues. For the full year 2022, adjusted EBITDA was 579.7 million, or 42.2% of total revenues, compared to 419.3 million, or 39.7% of total revenues in 2021, representing over 240 basis points of margin expansion. Our GAAP net income for the fourth quarter was 80 million, or $1.38 per diluted share, versus 48.7 million, or 84 cents per diluted share, in the prior year period based on approximately 58 million shares in both periods. For the full year 2022, our GAAP net income was $281.4 million, or $4.84 per diluted share, up 44% year over year. Non-GAAP net income for the fourth quarter of 2022 was $100.2 million, or $1.73 per diluted share, versus $64.4 million, or $1.11 for diluted share in the prior year period. For the full year 2022, our non-GAAP net income was $357.2 million or $6.14 for diluted share versus $260.4 million or $4.48 for diluted share in the prior year period, up 37% year over year. For Q1 and full year 2023, we anticipate our effective income tax rate to be approximately 28% on a GAAP basis and approximately 26% on a non-GAAP basis. Turning to the balance sheet. We ended the year with a very strong balance sheet, including cash and cash equivalents of 401 million and total debt of 29 million. During 2022, we repurchased approximately 365,000 shares for a total of nearly 100 million. Through December 31st, 2022, Paycom has repurchased nearly 4.7 million shares since 2016 for a total of nearly $590 million, and we currently have $1.1 billion remaining in our buyback program. Cash from operations was $365 million in 2022, representing an increase of 14.3%. The new requirement in 2022 to capitalize instead of expense R&D costs resulted in approximately $27 million in additional income tax payments that would have been deferred under previous law. This impacted both our operating cash flow and free cash flow as compared to 2021. The average daily balance of funds held on behalf of clients was approximately 2.1 billion in the fourth quarter of 2022. For 2023, we anticipate stock compensation to be approximately 120 million. On the capital expenditure front, We're in full construction of our fifth building in Oklahoma City, and we now estimate total CapEx as a percent of revenues to be approximately 12% in 2023. Now let me turn to guidance. For fiscal 2023, we expect revenue in the range of 1,700,000,000 to 1,702,000,000, or approximately 24% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of 700,000,000 to $702 million, representing an adjusted EBITDA margin of approximately 41% at the midpoint of the range. Once again, we are starting the year's guidance at the rule of 65. For the first quarter of 2023, we expect total revenues in the range of $443 million to $445 million, representing a growth rate over the comparable prior year period of approximately 26% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of 210 million to 212 million, representing an adjusted EBITDA margin of approximately 48% at the midpoint of the range. 2022 was a very strong year for PACOM, reflecting the strength of prior year investments and consistent execution. We will continue to invest in talent, marketing, innovation, customer service, and geographic expansion to meet the strong demands we are experiencing. With that, we will open the line for questions.

Operator? If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. We would also ask that you limit yourself to one question and one follow-up question. The first question comes from the line of Ramo Lencho of Barclays. Please proceed.

Two questions.

Chad, can you talk a little bit about what you're seeing out there in terms of end demand? Obviously, you know, the markets are nervous. There's kind of data points about SMB coming in that They might be weaker on some of the players in the other segment of the software market. So just talk a little bit of what you're seeing. We're also looking at the numbers. Your renewals came in at 93 versus 94. Just paint a picture for us a little bit there. And then one for Craig. If you think about the new year and investments, how do you think balance that, kind of seeing other guys being nervous about the economy and you're investment approach for the year. Just talk a little bit about the flexibility there. Thank you.

Yeah, I'll start off. I mean, our go-to-market remains very strong. We continue to have very strong book sales, and we've been selling Betty across the board. New clients that come in have about 50% of their employees doing their own payroll within the first two months of using Betty. And so that continues to be successful. From 2015 to 2018, we had a retention rate of anywhere from 91 to 92%. It was 91% for three of those years and 92% for one of those years. For the last four years, from 2019 through 2022, we've had a retention rate of 93% for three of the years and 94% of one of those years. There's often rounding at play as you look through that. But what I will also say is with clients who have Betty, We have a much, much higher retention rate across our base, and I would expect retention to continue to rise as a larger percent of our current client base deploys Betty.

Yeah, Ronald, and then, you know, on the plan for 2023, you know, we've given our guidance on our adjusted EBITDA, and, you know, it's still a very, you know, a strong guide on that as we're looking at 41%. So, you know, as I mentioned in the prepared remarks, you know, we're going to continue to spend on the on the marketing side, the R&D side, and then, you know, in the service side as well. And really, you know, the marketing is the one area where we can pull levers. You know, we don't have any long-term commitments out there, so that is an area where, you know, we could pull levers if we needed to.

Thank you. The next question comes from Samad Samana of Jefferies. Please proceed.

Great, thanks for taking my questions. I guess first one, Chad, did I hear you say, I think you said you had just more than 6,300 employees. I think that's high team's growth over the prior year. I'm just curious how we should think about the hiring in context of it. It's slightly slower than it was in 2021. I'm just curious, is it that we should expect just productivity to increase maybe what the exit rate on that growth rate is and just how we think about that, the hiring transfer pay comp itself.

Yeah, I mean, you know, we hired what we looked to hire last year. I believe our growth was around 18% in hiring. You know, we definitely have a more efficient client. I've been talking about for quite some time who, you know, we kind of have the haves and the have-nots when you look across our client base with those clients that have already deployed Betty and are getting strong usage out of it. We're having to do less for them. I mean, we're having to fix less things. We're having to do less adjustments. And so they're just much more efficient. And so we don't need as many people when people are using Betty. That said, we had a very healthy growth in our employment last year. And so I believe we had success with that.

Great. And then maybe if I just think about, we've almost fully lapped the new office expansions by a year. I know it usually takes a little bit over a year for them to become fully productive, but just how are those progressing and how should we think about, are there any new planned offices that you're assuming in the 2023 guidance that you just gave us?

You know, we always guide to what we can see. I mean, first I'll answer those office questions. You know, we did open up five offices over the course of about three months. One of those, I believe, was in December of 2021. The others were in first quarter of 2022. All of those continued to progress. They wouldn't be at full staffing yet, but they would achieve that throughout this year, as well as with the full backline pipeline. And then next year, in the year of 2024, they would all be on the same quota as our mature offices are. As far as what we anticipate to do this year from office openings, as we all know that you followed us for a while, office openings that we would anticipate to expand into this year would have very little impact on this year, but would have more of an impact on both 2024 as well as 2025.

Thank you. The next question comes from Mark Marcon of Baird. Please proceed. Hey, good afternoon, and thanks for taking my questions.

One question, Craig, you mentioned you've got $2.1 billion cash held for clients in the fourth quarter. What sort of effective yield are you getting on that, and what is the expectation with regards to the float balance growing over the course of the coming year and how we should think about an effective yield on that?

Yeah, so Mark, on the balance, if you look at it, this quarter it grew about 13%. It's grown at different rates throughout 2022. So it's typically going to grow at a rate lower than what our expected revenue growth rate is going to be. And part of that is, as we continue to move up market, that those funds are held for a less period of time. We have to make those payments much quicker. So that move up market would keep that from growing at the same rate as our growth rate. In terms of the yield, we haven't really given the exact yield. But what we do say is that as the rates move up for every 25 basis points, we would expect to get about 5 million. But it layers in over time. As we're continuing to look for longer-term investments on our portfolio, some of those are at a little lower rate. We've actually started to layer in some of those. You can see that from some of our earlier filings. We're not going to get, and also the banks are a little slower to give you those 25 basis points, so it takes a couple quarters to get those layered in. It would be something lower than the Fed funds rate.

Would the rule of thumb, 70% to 80% of fed funds with a delay be kind of a good rule of thumb to think of?

I mean, I think you're close. I would say that that's kind of in the range, Mark. We're sub four today. Yeah, we're sub four.

Thank you. The next question comes from Brian Schwartz of Oppenheimer. Please proceed.

Hi, Chad and Craig. Thanks for taking my questions. Congratulations on a real nice job with the business and 4Q. Chad, I just wanted to ask you a question about either the business activity or the pipeline momentum by customer size. Are you seeing any differences in terms of the demand or the behavior of the larger organizations that are flowing through the pipeline versus, say, the smaller companies?

Well, we definitely continue to creep up, as we have done even since IPO, as we've continued to increase our target market. In fact, last year, revenue was up 60% with clients that had 2,000 employees or more. So we are definitely seeing a demand continuing to be pulled higher. especially as businesses are looking to deploy Betty so that their employees can actually do their own payroll.

Thank you. And then one follow-up just for Craig real quickly. Did you buy back any stock in the quarter? And can you just remind me again how much authorization you have left for buybacks? Thanks.

Yeah, so I don't think we... We didn't buy back any this quarter for the full year. You know, we bought back about $100 million worth, and I think we have $1.1 billion left on our buyback.

Thank you. The next question comes from Joshua Riley of Needham. Please proceed.

Hey, guys. Thanks for taking my questions. If you look at the... growth expectations for 2023 here. How do you think about the mix of growth from new customers versus existing as, as we know, existing customers while smaller historically and net new bookings, their growth has increased in the last couple of years. And we're seeing some different trends with different software vendors.

Yeah, ours is going to primarily come from new logo ads when you just look at the size of revenue that we need to grow by in order to continue to hit our objectives. And so first prize is going to be new logo ads. We don't really have a lot to call out on pace per control growth from that perspective. But new logo ads is going to be primary for us. We've always had a healthy upsell to current clients. It's just been at a much smaller level than what new logo ads are. And it's been consistent. Our upsells to current clients as a percentage has been consistent each year with the exception of the year we had ACA.

Got it. That's helpful. And then as we look to Q1 here, how should we think about the impact from W2 revenue? Remember last year, you know, that was impacted on a year-over-year basis because of the turnover in 2020 due to COVID. Are the trends going to normalize here in this March quarter given what happened in 22 with hiring or anything to highlight there?

Yeah, I feel like they are more normal. I think it's important to understand that our year-end services as far as what we provide to a client, that hadn't changed a lot in the last 15 years as far as you added 1099s at one point, but you have W-2s, W-3s, 1099. Meanwhile, The growth of our other revenue as we've added all these other products has been somewhat substantial. It's just the percentage or amount that our year-end services has on the overall client base is much lower now than what it was in the past just because it's not growing at the same rate. I would say yes from a normalization. I think you saw normal hiring and business patterns more so last year than what you had in a couple of years past. So from a normalization of year-in-forms filing, yes, I would say that we're there.

Thank you. Next question comes from Steve Enders of Citigroup. Please proceed.

Hi, great. Thanks for taking the question here. I guess I just want to you know, dig into a little bit more on the outlet for next year and particularly on the margin side. I think, you know, talked about in the past that, you know, if we think about floating income flowing through that, you know, some of that would flow down to the bottom line. So just trying to think about how you're thinking about, you know, that layering in for 23 and kind of where the biggest areas of incremental investment are coming and that's leading to the EBITDA you know, siting the guy down from where we were in 22.

Yeah, it's primarily, you know, we've continued to, you know, invest in sales and marketing, you know, and that's what we've, you know, we said on the prepared remarks, you know, we're going to continue to invest there, you know, and assume that it's going to continue to work. So that's really the area where we're going to continue to invest. Also in the R&D, I mean, we have a lot of, you know, projects in the works, and we'll continue to hire aggressively in the R&D side as well.

Okay. I guess on the marketing spend that you are putting out there, I know it's been a more recent initiative for you all. I guess what's kind of been the ROI on those dollars that you have seen, and how has that kind of changed the top-of-funnel activity or conversion rates that you've seen as kind of the brand awareness campaigns have gotten out there more?

yeah i mean marketing you know we started in 2020 that was also the year that we added four inside sales teams and then in 2021 we added another six inside sales teams i believe one of those years our unit count went up about 17 with 17 uh growth marketing drove that uh you know as we do our marketing and spend money on advertising you know we have clients of all size uh call us and so Marketing's directly responsible for any business that's coming in below 50 employees, and you have some direct responsibility for it above 50 employees, but it provides more support at that level as our go-to-market's different above 50 employees than what we experience below. Growth's first prize, as Craig's talked about, and as we look at guidance into this year, we expect to spend healthy marketing, but also we expect for it to work which would return itself with highly profitable revenue, you know, which we did see throughout 2022, which produced healthy adjusted EBITDA margins. Thank you.

The next question comes from of Mizuho. Please proceed.

Oh, thanks for taking my question. Chad, if I look at your clients growth, you know, in 2022, 8%, that's kind of slowing down versus pre-COVID level, which used to be more in teens. I'm sure there's a factor of like you're moving up markets or client size, but is there anything else we should, you know, anything that impacted and how should we think about the client growth rate going forward?

Yeah, I would say the comp had a little bit to do with it. Prior to 2020, we had five sales reps that sold inside sales. In 2020, we added 40. And then in 2022, we added roughly another 50, 60. So we started selling small business, emerging business in a much stronger way as the advertising was working. And I don't want to say that our unit count was inflated prior, you know, but it was different because we did add a lot of small business units and, you know, it contributed to a 17% growth in units. I think we've had, and again, it did that in a year where we did 25% revenue growth. So I think as we look last year, you know, you could deduct that we had a lot of success selling in mid-range and above mid-range in clients. And I would say our small business ads were somewhat more normalized because we didn't really add any small business teams last year like we had in 2020 and 2021.

Thanks for that color. And then as a follow up into your guidance, what sort of conservatism have you backed into your guidance? I know this is definitely going to help float income this year, but what sort of macro you know, environment you're, you know, factored in into your guidance?

Yeah, I mean, you know, we continue to guide in the $2 million range, so we have quite a bit of visibility as we go quarter to quarter. You know, I will say that in, you know, we started our guide last year for 2022. We started it at 25%, and we were comping over a year where we had done 25% growth. This year we're starting our guide at 24%, comping over a year where we had done 30% growth. And so we haven't changed our approach to guidance. We guide what we can see. And achievement matters throughout the year. And so that's what we're focused on as we move throughout the year. And so I'm trying to answer your conservatism. I mean, we guide to what we can see each time, and we look to unload the musket throughout the quarter.

Thank you. The next question comes from Brian Bergen of Cowen. Please proceed.

Hi, good afternoon. Thank you. I wanted to follow up on retention first. So I heard the comments about Betty clients being higher and the relative stability from prior years. But just as we think about the year-on-year downtick here, can you talk about, you know, is this larger client turn or is it a lot of turn among smaller clients? Just trying to understand that dynamic.

Well, we're definitely, from a smaller client perspective, now, of course, they contribute smaller revenue amounts, but from a smaller client perspective, I do think that you're seeing more of a trend, like maybe what you saw more pre-pandemic. I mean, there's less prop up for them in the market. For most new businesses, I believe about 75% of them fell within the first three years. So all that's at play. When you're working with smaller business, as I just mentioned, we really started adding those small business units in 2020 and then continued throughout 2021 and even added more, obviously, in 2022. That definitely plays into it. I would also say that it's a revenue retention number, so you have a dividing number that you start with. I've been talking for quite some time about the efficiencies that clients who are using Betty and what they're gaining. In fact, we're just we're not having the same hiccups with them, that we would often charge them for at a lower margin and then have to fix. And now those are really being prevented with Betty. So you've got a couple of things at play. And then also you've got some rounding at play. But all that's to say is 93% from what I've seen still up there in industry-leading number. And I do expect, again, with clients that have Betty, I mean, we're running at a 99% type retention rate with them. So, you know, it's a little bit different there. And as we continue to convert our current client base over to Betty, you know, we expect to have some gains in that. I will mention that, you know, we always have some uncontrolled losses. You're bought, sold, merged type businesses. So getting to 100% isn't achievable.

But, you know,

I believe that we continue to have an opportunity to bump up retention, and that's going to come through appropriate usage of our product.

Okay, understood. And then a follow-up on margin here. So, Craig, I may have missed it, but did you say where you expect gross margin to land in 2023? And, you know, I hear your message on increased efficiency in sales and marketing, and you've also mentioned increased, I guess, new product development. Should we expect that to the explanation around the EBITDA downtick you're on. You're more about R&D ramping, or is it both R&D and S&M?

Yeah, I would say it's both R&D and sales and marketing, you know, as we're looking, you know, for our plans for 2023. You know, we didn't really talk about the adjusted EBITDA, but we've been, you know, in a pretty narrow range for the last several years. Yeah, gross margin for the last several years.

Thank you. The next question comes from Jason Salino of KeyBank. Please proceed.

Hey, afternoon, guys. Maybe, Chad, you've been pretty vocal about opportunities to automate payroll and broader HR. You know, when we think about generative AI, I feel like this is up your alley. I mean, what excites you most about the technology if you've looked into it, and what could it mean for Paycom and HR as a whole?

Well, we are solving problems for the client and processes that I believe can be automated and hadn't been until really Betty came into play, which somewhat forces appropriate usage within our software for employees so that they can get paid correctly. I do believe that there's more automation that we can be doing. But you've got to start with, you've got to have the client and the employees using the product correctly, which I will say that about 50% of our client base, that is the case. And last year was our first full year of selling Betty and bringing it to the market. And so we're having a lot of success for that. I believe AI for the sake of AI isn't really valuable to the client, but I believe that if you can do something consistently and you can use something like AI to do that, I think that's a good thing. So I don't expect we would see it as a wide platform within our industry this year type thing with that, but I think you'll have more and more businesses looking for that, machine learning and other types of automation that could be used to automate problems experienced by our clients right now.

Okay. No, that's fair. And then just, Craig, maybe a quick one. I think the EBITDA beat in the quarter, 18 million, you know, 6% beat, or the higher end of what we've typically seen over the last four years. Anything to note on the strength, expense management, anything on timing of some investments? Thanks.

I mean, you know, there were really three or four buckets that really helped draw that EBITDA beat. You know, one, you know, marketing spend was a little higher fourth quarter, and some of that's just when we you know, are doing those marketing things that we had planned. A little higher capitalization rate on the development, and that's focused on new initiatives. You know, Betty clients generate higher quality revenue, so we saw a little bit of that. And then in the quarter, we had a net insurance proceeds of about $4.8 million for expenses that were incurred both current and prior year quarters. So that's really what drove the adjusted EBITDA beat.

Thank you. The next question comes from Arvind Romani of Piper Sandler. Please proceed.

Thanks for taking my question. I just wanted to ask a question. How should we think about growth from existing clients who are expanding their own client base?

Not any different than what we've experienced in the past. I mean, again, I'm removing the COVID year out of that. But not any different than what we've experienced in the past. In any given year, you have some clients grow, you have some clients not. You have some clients buy business, you have some clients sell business. And so I believe that's always somewhat worked itself out. Maybe we win some, maybe we lose some. But really the growth for us is driven by new logo ads. I mean, Holly has book sales numbers that... drive our revenue growth, and that's how we're going to hit our targets. I think that we expect stability within our current client base as we look to guide. We do have an assumption of stability. We don't really make assumptions of growth and or downsizing within our current client base. Across a 30,000 plus client base, It tends to have averaged out over the last 25 years that I've done this with the exception of the 2020, some in 2021 time period.

Perfect. And if you can just kind of help me to reconcile the 8% growth in new logos versus the 14% employee expansion, how should I interpret those two numbers?

Well, I mean, that would tell you that the client size is growing as well there. I've been continuing to call out that we're having success, continuing to be pulled further and further up market. A couple of years, or about six years ago, we went from 2,000 to 5,000. A couple of years ago, I mentioned that we're going up to 10,000. I've talked about how we're continuing to be pulled up even further. And so that's going to get you a... a larger employee count with potential for less of a unit count. But I would also say, I don't want to overlook the fact that we've had a lot of success on the small business unit, and when you're looking at unit count growth, they're all created equal. I mean, everything's, whether you're a one employee unit or whether you're a 10,000 employee unit, you're created equal on that report from a unit count percentage. It's just been a trend to larger clients with the exception of the two years where we decided we're going to add our small business emerging business units or groups of which now we have 10 teams and that really hadn't grown. The teams haven't grown. Of course, we continue to add small business units.

Thank you. The next question comes from Bobbin Shah of Deutsche Bank. Please proceed. Great, thanks for taking my question.

Chad, I know we touched on this a bit earlier in the call, but are you seeing anything as it relates to changes in the pipeline generation or sales cycles over the past few months? Maybe even reasons why customers are maybe looking to switch or even selecting take-home?

We continue to have strong product demonstration leads, but that's oftentimes a function of our marketing and advertising, and we pay for those leads. I can say for us it's been business as usual. We've been back in the field since September of last year, meaning actually back on site on every single call where before we were doing more of a hybrid, some were virtual, some were in person. So I would say if anything, we're having less calls with the client to get to close. I can't necessarily say that's speeding up, of the process, but I think we're having better conversations as we go through the process. So really nothing to call out there. Other than today when a client calls Paycom and looks to have a product demonstration, it's about Betty, and I would say in times past it could be about whatever corn they had in their paw that we were looking to pull out. So it's a little different today in the type of lead we are generating.

How do you think about the Pepperm opportunity in 2023 relative to some of the growth that you saw in 2022? Any specific areas and modules that are ?

Well, Betty definitely drives Pepperm because, you know, you definitely have to have a certain product set from us purchased and being used, you know, in order for Betty to work for you. I would say that the clients that we are selling in 2022 have a better, stronger product mix than those clients we would have been selling in 2018 and or 2019. We still do have an opportunity with current clients. We do have to really work at their pace to get them over to Betty and really to get them to achieve the value that it can deliver. And we continue to look at that. And there's still opportunities, obviously, within our current client base to deliver more PEPM, as well as on new business sales.

Thank you. And our final question comes from the line of Daniel Jester of BMO Capital Markets. Please proceed.

Hey, great. Thanks for squeezing me in. Appreciate it. Just on that comment about Betty, Chad, can you update us what percentage of the base has Betty at year end?

We're around 50%. It's about where we were when we reported in November. You know, as clients go through year end, there's different objectives for both them and us as we're onboarding clients. Betty does require a... conversion of process on the side of the client as it is going to change how their employees utilize the system. There's a detailed conversion type plan that we go through with every current client as they choose how and when to deploy. But we're continuing to meet out there with our clients. I would also say that your larger clients are deploying it a lot quicker. Current clients are deploying it a lot quicker. than what your smaller clients, current clients might be deploying it. As a point that I would mention once more, all businesses of any size, whether they are small or large, since July of 2021 have been sold and converted into Betty. So we're really talking about our current client base, what we had prior to that.

Great. Thank one. And then just lastly, and you touched on this a couple of times about sort of the upmarket success and opportunities. As I think about sort of how you're investing to attack those opportunities, is this strategic, i.e. that you're devoting more resources specifically because you think there's more opportunity upmarket? Or is this tactical in which kind of year in and year out you're deploying resources and maybe one year you see more opportunity smaller and downmarket and another year you're seeing more opportunity? in the upmarket so you can be sort of tactical with those sales investments. Thanks very much.

Yeah, I'd say it's a little bit of both. And one thing I've been saying for quite some time now, our industry shifted. It shifted to leverage employee usage to help the client. When employees use the product correctly, the client has less exposure and liability around this process, which paying employees, providing them benefits, and everything else, I mean, that carries some exposure, even how an employee applies for a job. And so, you know, I believe that all this self-service technology has really been helping the client. The reason I say that is this. You know, when it comes to an employee, you know, Jan Smith, whether Jan Smith works at a 30 employee or whether Jan Smith works for a 10,000 employee in regards to how they work with HCM and payroll products, it's substantially the same as far as the needs that Jan has. So what I would say is we've stayed very focused on the employee, and an employee is an employee regardless of which company they work for. Are there some things that a larger company we just know we're going to run into that's going to be different than what we would run into in a company that might have 150 employees? Absolutely, there's some changes in that. I would say that's where more strategy comes into play as well as making tactical moves to make sure that we're able to provide the back end experience that they're looking for. I will say the more that we're doing at the employee level, the less you're having to do on the back end. A lot of the things you're doing on the back end is to make sure you're not having issues with the employee data and or if you do, you're having to fix it. You get a lot of points for prevention these days. And large companies, they don't want to do a lot of extra work either.

Thank you. And with that, we will conclude our time of question and answer. I would now like to hand the conference back over to Chad Richardson for closing remarks.

Well, I want to thank everyone for joining the call today, and I want to send a special thank you to our employees for contributing to our continued success. 2022 is a great year for Paycom, and we're set up for another great year in 2023. We'll be hosting meetings in New York at the Wolf March Madness Software Conference in February. We'll also be participating in the KeyBank Emerging Tech Conference and the Morgan Stanley TMT Conference in San Francisco in March. We look forward to catching up with many of you soon, and operator, you may disconnect. Thank you.

Thank you for joining today's call. Thank you for your participation. We will now disconnect your lines.