Paycom Software, Inc.

Good afternoon. Thank you for attending the Paycom Software first quarter 2023 quarterly results call. My name is Matt, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, James Sanford, head of investor relations. James, please go ahead.

Thank you, and welcome to Paycom's earnings conference call for the first quarter 2023. 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. 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. We delivered strong results in the first quarter, and I'm very pleased with the progress we've made on a variety of initiatives. I'll start with highlights from the first quarter, then I'll discuss some of our plans for the remainder of the year. Following that, Craig will review our financials and our guidance and discuss our new dividend policy. Then we will take questions. With that, let's get started. Our 2023 first quarter revenue of approximately $452 million came in very strong, up 28% year over year, with strong recurring revenue growth from new clients. First quarter adjusted EBITDA also came in very strong at $221 million, representing an adjusted EBITDA margin of roughly 49%, up 70 basis points year over year. With our updated full year 2023 guidance, we are well positioned to exceed our initial outlook for a solid rule of 65. On the product front, Betty continues to be a key differentiator in the market with employee self-service payroll continuing to drive strong client additions. The industry transformation to more efficient HCM and payroll processes is accelerating and now with Betty, payroll processes can be automated to deliver perfect payroll. Using Betty, employees do their own payroll. Employee usage is a key differentiator, and new clients are coming to Paycom for exactly that. With 95% of database interactions being completed by the employees of our clients, as measured by the DDX, we are changing the way employees engage with HCM solutions. Our product and go-to-market strategy are working. I just returned from our annual President's Club meeting with our top salespeople, and I couldn't be more excited about the tone of the conversations and enthusiasm for our product, especially around employee usage and betting. We are having increasing success at market with continued rapid growth at the upper end of our target market range. Large organizations benefit tremendously from simplifying their HCM and payroll needs with our single database solutions. We have 5% of the TAM today. However, our TAM has increased now that we've laid the groundwork for our global platform, beginning with Global HCM, which further strengthens our value proposition with our largest clients. To sum up, we are executing well with a highly differentiated product and go-to-market strategy. Our addressable market opportunities continue to expand, and we are pleased to enhance our long-term commitment to stockholder return with the initiation of the quarterly dividend program. I'd like to thank our employees for helping lay the foundation for another record-breaking year. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Before I review our first quarter results for 2023 and our outlook for the second 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 delivered very strong results this quarter with revenue of 451.6 million of 27.8% compared to the prior year period. Our gap net income for the first quarter was 119.3 million or $2.06 per diluted share of 29.8% compared to the prior year period based on approximately 58 million shares. Adjusted EBITDA was 220.5 million in the first quarter of 2023, or 48.8% of total revenues compared to $170.1 million in the first quarter of 2022, or 48.1% of total revenues. Non-GAAP net income for the first quarter of 2023 was $142.7 million, or $2.46 for diluted share, up 28.9% from the prior year period. Our revenue growth was driven by strong demand new business wins, and new product adoption. Within total revenues, recurring revenue was $444.4 million for the first quarter of 2023, representing 98.4% of total revenues for the quarter and growing 27.6% from the comparable prior year period. Adjusted sales and marketing expense for the first quarter of 2023 was $98.1 million, or 21.7% of revenues. We have been aggressively investing in marketing to drive strong demo leads that complement our outside sales model. Adjusted R&D expense was 37.4 million in the first quarter of 2023, or 8.3% of total revenues. Adjusted total R&D costs, including the capitalized portion, were 55.2 million in the first quarter of 2023, compared to 42.9 million in the prior year period reflecting continued investment in new products. For Q2 and full year 2023, we anticipate our effective income tax rate to be approximately 28% on a GAAP basis and approximately 26.5% on a non-GAAP basis. Turning to the balance sheet, we ended the quarter with a very strong balance sheet, including cash and cash equivalents of $506 million and total debt of $29 million. Cash from operations was $146.1 million in the first quarter, representing an increase of 24.6%. The average daily balance of funds held on behalf of clients was approximately $2.4 billion in the first quarter of 2023, up approximately 10% year over year. Now let me turn to guidance. For fiscal 2023, we are raising our outlook and now expect revenue in the range of $1,713,000,000 to $1,715,000,000, or approximately 25% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $717,000,000 to $719,000,000, representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range. With these strong results and outlook, we are well positioned to exceed the rule of 65. For the second quarter of 2023, We expect total revenues in the range of $397 million to $399 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 $152 million to $154 million, representing an adjusted EBITDA margin of approximately 38% at the midpoint of the range. Finally, after 25 years of rapidly growing PACOM, into a highly profitable company, we are expanding our capital allocation strategy. On May 1st, the Board of Directors approved a quarterly dividend program that we expect to initiate in mid-May. In 2023, we project PACOM will generate greater than $1.7 billion in revenues, over $700 million in adjusted EBITDA, and strong operating cash flow, all of which continue to grow. We believe PACOM is in a unique position to return value to stockholders in the form of a dividend and still have the necessary resources to aggressively pursue growth opportunities. Since 2016, we returned a total of nearly $600 million to stockholders through stock buybacks, and we have a $1.1 billion buyback authorization still in place. Today's dividend policy announcement reflects our confidence in the resilience of our long-term growth opportunity, the strength of our balance sheet, and the profitability of our business model. We intend to pay a dividend at an annual rate of $1.50 per share with a first quarterly dividend of 37.5 cents per share, payable in mid-June, subject to Board approval. 2023 is off to a great start. We are in a strong financial and strong competitive position in a large and attractive addressable market, and we have a long runway to continue to deliver rapid organic revenue growth, high profit margins, and attractive cash flows. With that, we will open the line for questions. Operator?

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We ask that you please limit yourselves to one question and one follow-up. We will pause here briefly as questions are registered.

first question is from the line of raimo linshaw will barclays your line is now open uh thank you uh congrats on another strong quarter and uh the dividend introduction um two quick questions from me uh first uh on the global initiative chat um can you help us understand a little bit like um how a global or like like what's the extent of what you're trying to do here is this like helping existing customers that have subsidiaries is this like a whole seed change in strategy that you become like more international uh just help us understand a little bit there there and then have one follow-up sure and so you know right now raimo we have several clients who you know currently use our domestic software and they use it internationally you know they rig the system a little bit so that they can store

employees in other countries and then oftentimes they'll work with the third party for payroll. You know, so our current clients, you know, they don't have to do this any longer because the, you know, the Paycom system now does have global HCM product that'll work in 180 countries in 15 languages and, you know, global HCM for us is everything minus the payroll side. And so, you know, we've looked at integration opportunities, we've looked at you know, working with third parties and even, you know, potential acquisitions. But, you know, the fact is, you know, everyone else does it the old way. And, you know, payroll and HR departments send data for processing. And, you know, we're not going to be putting any development into the old way. So for us, you know, Betty's packing her bags and, you know, we'll be going around the globe as we develop it out.

Yeah, yeah, okay, perfect. Okay, but does it mean that you want to become now a global company with operations in other major countries, or is this just more for U.S. domestic clients to give them more optionality and kind of work with them better?

Yeah, absolutely we'll be a global company. You know, this is the first step, and that's moving our product into the different languages and getting the HCM side done, and now we're – heavily focused on, you know, bringing Betty to the other countries, which, you know, it will require us to have operations in certain countries in order to do that, in order to process in those countries.

Thank you for your question. The next question is from the line of Samat Samana with Jeffries. Your line is now open.

Good afternoon and congrats on the good quarter. Chad, I had a whole list of questions, but then you said the word open to acquisitions, which I hadn't really ever heard you say before. So I'm going to pivot in real time here and ask you, you know, between the dividend announcement, you mentioning potential for M&A, which is something Paycom hasn't historically done. Is M&A something that is just maybe going to be something part of the broader capital allocation strategy of how to use the company's cash going forward or, and is that just limited to maybe the global side of it? Or is it, would it be something you'd explore in other areas too?

Well, I mean, I don't want to say, uh, never, but you know, it's been our, uh, process to develop internally and, and, and develop things that way and grow, uh, that way. And so my, my comment early were earlier was more as we looked at building out the payroll side internationally, You know, we did review multiple options for that, but at the end of the day, you know, there's no shortcut to long-term success. And so at the end of the day, you know, we're going to dance with what brung us, and we know how to develop software, and we're already well on our way in getting things set up to be able to have Betty in all the other countries as well. So in answer to your question, I would say more no, Samad. I mean, if I was going to have to be direct with that, but... We did do a dividend, and we still have a $1.1 billion buyback in place.

Great. And maybe just a quick follow-up for Craig. The numbers on the margin side were impressive, as always. The sales and marketing dollars jumped a pretty good bit from 4Q to 1Q, more than you normally see. I was just curious. I know you mentioned marketing campaigns. Was there any acceleration or pull forward maybe in sales headcount addition or anything else that we need to maybe be aware there beyond just digital marketing? And how should we think about that maybe going forward?

No, I would just say it's pretty normal. You know, I think last Q1 was slightly down. But yeah, I mean, just kind of normal marketing spin and campaigns that we talked about, you know, kind of from Q4 of 2022 to Q1 of 2023, you know, some of those pushed into this quarter.

Thank you for your question. The next question is from the line of Brad Reback with Stiefel. Your line is now open.

Great. Thanks very much. Chad, you have a pretty unique perspective on the economy across the country, down market, up market, geos, verticals. Anything you're seeing specifically that gives you pause or optimism?

Yeah, I mean, no, I wouldn't say either way. I mean, I do think it's a little bit easier to hire. You know, if you're looking at from a year ago, I would say the labor market was a little bit tighter for us on hiring, just as more people, you know, touted the work from home in which we came back to work. I think that especially on the tech side, we seem to be doing very well attracting employees top talent there as, you know, more and more companies have shed some of those jobs. You know, from our own client base, you know, we're definitely focused on adding clients, don't really have anything to call out on seeing any negative softening within our own, you know, within our own client base. I've tried to, you know, do as much as I can to kind of look into the future, you know, with a with 5% of the TAM and several accelerators for ourselves. I'm focusing on being a salesperson right now than an economist. But definitely, we're really not seeing much in our own numbers as we look into the future. But from hiring people, which I think is somewhat of a proxy to what happens as well for our clients, you know, we are definitely seeing it's a little bit easier to hire, especially on the technical talent side.

Yeah, Brad, and I would say on our client base, I mean, we have a very diversified client base and that's both geographically and based on industry. So, you know, some of the things you're hearing out there that, you know, we're not overly exposed to those.

That's great. Thanks very much.

Thank you. Thank you for your question. The next question is from the line of Mark Marcon with Baird. Your line is now open.

Hey, good afternoon, Chad, Craig, and James, and congratulations on the really strong results and also the initiation of the dividend, which I think is a huge positive. With regards to what you ended up seeing during the selling season and then extending into the first quarter, Could you give us a little bit of a sense for on the recurring revenue, if we strip out the float income, you know, what you ended up seeing in terms of like sales from new logos relative to upsells relative to increases in employment within the existing base and how you're thinking about the pipeline on a go forward basis?

yeah i mean for us on that it's all really about new logo ads uh you know i mean increases in employment from existing base or decreases i can't say that that's had a meaningful impact on us one way or the other with the exception of the what i'm going to call a maybe a six month to 12 month period in covid where it went down and then you know back up you had some significant fluctuations then but since stabilization uh you know it's not going to be uh employee gains and or at this time we don't really have the employees leaving that would impact that. So for us it's new logos. We added over 3,000 clients to Betty in this first quarter and that's been going really well. I don't know if Craig would have anything to add to that.

No, I would agree with Chad. I mean it's primarily new logo wins and that's what's driving the recurring revenue.

Great. And you just came out of club. What are you seeing just in terms of Salesforce productivity? You know, and how much more were, did people have to do in order to qualify for club and, you know, what regions are you, you know, really starting to see some, some real pickups in terms of traction?

Yeah. You know, we had that president's club in Hawaii, which was the very same place that we had it at our initial president's club 15 years prior. So, I was able to actually talk about the numbers from that first club and now. We've continued to accelerate the amount that any one sales rep can sell. Our top sales reps continue to sell more than they have in the past. This year again, we had a rookie sales rep that sold over $2 million. When we IPO, that would have been great for a city, and now we have a rookie rep selling that. You know, the numbers continue to go up as we've had a, you know, we've continued to develop product. We've put more into the product, so it produces more value. So, of course, it costs a little more than what it used to. And then, you know, we're getting better at marketing and landing leads that, you know, we're also getting better at closing because we have a very strong differentiator. And we're back out in the field. I think that was a big part of it, too, for us to get back out face-to-face because these are big decisions for for companies to make, and I think we present well in person. I would expect, you know, another record to be broke next year as we've already got some reps that are, you know, very close to what our top rep finished at last year. So, you know, that's, and which is always how we've achieved our numbers is sales performance continuing to get stronger.

Thank you for your question. The next question is from the line of Brian Schwartz with Oppenheimer. Your line is now open.

Yeah, hi. Thanks for taking my questions this afternoon. I'll congratulate a real nice, fine start to the year for the business. Chad, I wanted to ask you, I saw that you announced a global HCM solution and capability this quarter, and just wanted to ask you on the strategy behind that. Is the strategy more to extend the reach and capabilities of your multinational customers or is there an opportunity that you see in the future of targeting international markets? And then if I could ask one other question along this new solution, how should we think about the solution in terms of the impact to the margin, whether it can be accretive or dilutive to the overall business?

I mean, on the first question, I mean, I think people can talk about whether it's a single database or willingness to integrate with multiple systems and what have you. The fact is, is You know, there's one type of employee. I mean, the employees are the same. And, you know, they like doing their own payroll. And so for us, you know, international and laying the groundwork with global HCM is the first step to going all the way up market. I mean, there's never really been an issue for us in scalability of the system. It's really been about the buying decisions that you'll oftentimes see way up market. Well, employees these days, you know, they don't have a high tolerance for a system complexity issue. in any stage of product that they use and so I think we've got a very simplified product that does very complex things and you know I would say there might have been one thing that we were missing to be able to go work with the largest companies in the world and I don't think we're going to be missing that one thing very much longer that said I mean our system still does work well we have a lot of clients that have you know Definitely we're having success upmarket. We have a lot of clients that are 10,000 employees and more. We have clients that even, you know, like our system so much they were willing to work around to use it for other countries. Now they don't have to do that on the HCM side and, you know, we would be planning to roll out Betty in other countries throughout this year.

Yeah, I would say on the margin front, I mean, we wouldn't call out, you know, that it would be, you know, a creative order. You know, it should be a follow the same profile, fairly similar to what our current clients are doing. I mean, obviously, we'll have some R&D costs as it relates to building some of this out. But in terms of just the overall margins, it should be very similar.

Thank you.

Thank you for your question. The next question is from the line of Joshua Riley with Needham. Your line is now open.

Hi there. Thanks for taking my questions. On the international product here, when you say you're building Betty on a global basis, does that mean that you plan to build native payroll solutions from international countries? Or is Betty going to sit on top of the existing payroll solutions used by customers with an international presence?

We would be building Betty out in each country.

Okay.

We are building Betty out. We are building Betty out would be the better way to say that.

Okay. So you are building a native payroll in some of these international countries? Correct. Got it. Okay. And then have you increased your advertising spend sequentially from Q4? And I think in the past you've said that increasing that spend implies more confidence around demand. Is that accurate that you're seeing more demand in Q1 than Q4?

We continue to see strong demand. We saw the strong demand in Q4 too. You know, oftentimes Q4, you know, sometimes you can advertise a little bit stronger than others depending on elections, depending on how many ads are running. You know, oftentimes you can be competing against that and what the ad dollars cost. And so, you know, sometimes the juice didn't work the squeeze there. Also, you know, you have some holidays. But we do monitor our advertising spend weekly. And we monitor the lead generation from it. And, you know, we're constantly making moves in method to how we generate more leads.

Got it. Thanks, guys.

Thank you for your question. The next question is from the line of C.D. Pantni Grahi with Mizuho. Your line is now open.

Thank you. Thanks for taking my question. Chad, in this macro environment, we keep hearing, you know, small businesses kind of under pressure right now. They're cautious in terms of, you know, commit to any kind of investment. in this environment. So wondering, what are you hearing from your customer base? Any color would be helpful.

Yeah, I mean, we're not hearing a lot right now. I mean, now, I would say a part of that is we're very focused on growth and landing new logos. I wouldn't say that we're not seeing losses from clients going out of business any different than what we had seen in the past, again, with the exception of the COVID time period. So I really can't call out much, and it might just be where we're focused. Again, only about 5% of our revenue is derived from companies that have less than 50 employees. 95% of it is derived from companies that have larger than that, obviously. And then we're continuing to grow at the top end of our range. It's probably our fastest growing segment. And so, you know, I'm not saying things couldn't be happening down market. It's just from the data that we have. It's not something that, you know, that we could call out on our end.

That's super helpful. And a follow-up for Craig. If I heard your client fund balance, I think $2.4 billion is there. That's almost... kind of 9% on a year-over-year growth compared to other years, which was pretty high. Is there anything that we should – anything that caused the slowdown? And also, any color in terms of interest income, any float income contribution this quarter?

I can take the first question. I'll let Craig handle the interest income, but from a float balance perspective, the larger the client, the less days you hold onto that money. That money clears very quickly with large clients. If you're handling a small business, you might hold onto that for a month or a quarter. You're handling a large client, you're holding onto that for about 24 hours. There's larger amounts, but it impacts your average steady balance a little bit because it's clearing out of there so quickly with the larger clients. And then I'll let Craig handle the second part.

Yeah, I would say on the interest income on our client funds, we called out last quarter, we're realizing around 80% of the Fed funds rate. And part of that's because it's layered in. We have some investments that are a little bit longer term And then, you know, I mean, the banks don't give you the full amount as the Fed raises those rates. So that's kind of what we've said last quarter and really wouldn't update that inning.

Great. Thank you. Great quarter. Thank you.

Thank you for your question. The next question is from the line of Brian Bergen with TD Cowan. Your line is now open.

It's actually Jared Levine on for Brian tonight. In terms of retention, how did 1Q revenue retention compare to 1Q22? Were there any notable changes based on clients with under 50 employees and then those clients with 50-plus employees?

Yeah, so we provide, you know, retention at the end of each year. You know, it fluctuates quarter to quarter. You know, I kind of said on the last call, we have the have and the have-nots here at Paycom, and that was related to Betty. You know, our Betty retention rate last year was better than 99%. anybody that had Betty. So I expect our, you know, retention to remain strong and even as an increase as a, you know, increase a larger percentage as, you know, more clients use the product the right way to achieve the maximum ROI that's available to them. But yeah, for retention, I've also said in the past, typically, regardless of, I'm not comparing it from last first quarter to this first quarter, but typically, you know, for, especially for larger clients of any of our competitors. Retentions, you know, oftentimes starts off lower the first of the year and continues to increase throughout the year because less clients usually leave, you know, in the fourth quarter, if you will. But nothing to call out special in the first quarter. I would just say we've been very stable and, you know, the companies that use Betty do better.

And then as my follow-up, what is your adjusted gross margin expectation for this fiscal year? And then more specifically, looking at 1Q, what weighed on that adjusted gross margin within that operating expense line item?

Yeah, I mean, we didn't guide to the adjusted gross margin. I mean, it's been very stable, you know, over the last few years and at 85% to 86%. I mean, typically, if it gets too high, you know, we may be a little bit behind on hiring. And so, you know, that's usually what would cause it to creep up some. And, you know, it fluctuates based on how our hiring trends are because those are the individuals that are bringing on, you know, handling the new business that we're bringing on. And we have to hire them ahead of the revenue growth. And that way they can be trained up and ready to, you know, capture those clients.

Great. Thank you.

Thank you for your question. The next question is from the line of Jason Salino with KeyBank. Anyone else know open?

Hey, thanks, guys, for taking my questions. Chad, in the press release for Global HCM a few weeks ago, you mentioned that you've been working on the product for two years. Since it doesn't include Betty yet, you know, why not just wait until you had developed it for some of those countries first? Maybe can you just talk about the timing on why move now?

Sure. Well, you're going to have to do first things first. You're going to have to have it. But as I mentioned with Raimo's very first question, we have a demand for global HCM right now as we have clients that are storing employees that they have in other countries in our system right now and somewhat rigging the system. So we have demand right now for HCM. And you have to have first things first. I mean, with Betty, everything's connected. It's not like it's payroll only. You have to have time in attendance. You have to have expense management. You have to have paid time off. So you have to have these other products within the system to work Betty. I wouldn't say that we're developing just payroll only. We're developing Betty, the Betty process internationally. You know, we looked at, you know, kind of us two following Betty. what the competition does out there with international. And I mean, quite honestly, I think it was unimpressive from an ROI strategy that it produces for clients. And our clients now are used to using Betty. And so I think they're going to expect that internationally. And I think that's how we win. So, you know, I would say it's the beginning foundation for what we're doing, but also we have demand for that product in of itself right now.

Okay. Yeah, that's fair. You know, and you have mentioned, you know, some of your customers are kind of jerry-rigging, you know, onto your system already. But how – is there any way to know how many of your customers have international employees or offices?

You know, it's our larger clients. It would be our larger clients in many of those cases, right? You know, so not going to give out a specific number, but, I mean, the revenue opportunities there for them. And then, of course, when you look at our just prospect base that's out there, you know, over time this will increase the size of companies that we prospect.

Okay. Great. Thanks a lot.

Thank you.

Thank you for your question. The next question is from the line of Arvin Ramani with Piper Sandler. Your line is now open.

Hi, thanks for taking my question. I just wanted to ask about some of the churn benefit you see from churn from legacy players. Are you seeing any kind of change in the competitive dynamics or the win rates that you've historically seen from some of the legacy players?

Yeah, I mean, I wouldn't call out anybody in particular. We're getting much stronger. When we released Betty in 2021, I think it was July of 2021, when we very first even started selling it, we've gotten a lot better at our value proposition and how we actually go to market with it. I think it took some learning. It was somewhat hard to teach old dog new tricks from our standpoint of our sales force. When we started selling Betty, we were all virtual sales, and we've made a bunch of changes dramatically. And so I definitely think having a stronger value proposition, as we've had with Betty, as well as us being face-to-face, is helping our close ratio out there, and I would say it would be competitor agnostic. When we have a strategic buyer... that takes the time to really try to achieve the return on investment that implementing any one of these products would, you know, promise to produce, we do very well.

Perfect. And, you know, certainly within the tech technology world, there's, you know, a lot of conversation with chat GBT and AI. And, you know, just wanted to sort of get your perspective either from you know, sort of expected impact to Paycom specifically, but even to the HCM space. Do you think this is a space that's, you know, kind of susceptible to change or kind of some pressure from ChatGP to you? Do you think it's not yet kind of relevant to your space or to your company?

No, I definitely think it'll be relevant. You can use AI for multiple things. There are areas that you can use it for that are better than others. There are front-end things you can use it for, direct to the client. There are back-end things that you can use it for that a client may never see. When you're talking about AI, it has many uses, some of which is front-end and some back-end. I don't want to talk specifically about what exactly. you know, we're using it for already internally and what our opportunities would be into the future. But in answer to your question, yeah, I do think that, you know, over time, you know, AI is going to be a thing in our industry. Perfect. Thank you very much.

Thank you for your question. The next question is from the line of Jackson Ader with SVB. Your line is now open.

Great. Uh, thanks for taking our questions guys. The first one is on, um, Chad, you mentioned hiring and maybe being able to kind of Hoover up some of the tech, uh, talent that have been coming from some of the larger, maybe tech layoffs. It sounded like that was more on the developer or the R and D side. I was curious whether you've also been able to, uh, maybe pick up additional sales people, uh, along the way as well.

Yeah, I mean, well, I called out R&D because that's a side that, you know, we oftentimes hire people that have, you know, experience with technology, writing code, and what have you. You know, our salespeople, you know, we typically look for people with less than two years outside sales experience. We do take changing careers, what have you. We do have specific... education requirements for that position. I wouldn't necessarily say it was difficult for us to hire jobs, but what has changed on the sales side is you get a little bit more time to look. There for a while, if you had a salesperson that you were interviewing, you had a week or two to make a decision because they were getting 12 offers. I would say today that's slowed down quite a bit. I would say you're able to take a little bit more time than what you were able to do when we were a very compressed in time during the interview process to hire salespeople. I'd say that's changed some on the sales side, but I just, I called out technology because we're just, we're seeing it. We're seeing it. Right. Okay. All right, cool.

That's great. One quick followup, just like on the mechanics of the Betty payroll rollout. So you're, you're in 180 countries with global HCM, but like, do you roll out Betty, one country at a time? Are we going to see like 180 press releases for all the different countries? Is it a block here, a block there? Just mechanically, how is that rollout going to work?

There's about 16 to 20 countries that represent about over 80% of the opportunity. So I would expect us to be rolling those out first. as you look at it. But, uh, yeah, I mean, over time, you know, it's, we, we build things ourselves. And so, uh, uh, I would expect us to continue to roll them out, but you know, there's 16 to 20 countries that are going to be first.

Yep. Okay. All right. Great. Thank you.

Thank you for your question. The next question is from the line of Alex Zuckin with Wolf Research. Your line is now open.

Hey, guys. Thanks for taking the question. Most of my questions have been asked, but I guess maybe on the topic of just pipeline and sales, you know, expansion efficiency, I guess, how do you think about office openings, territory expansion through the rest of the year, maybe sales hiring moving into the back half of this year to get ready for next year? Just any kind of Commentary around that, particularly as it would relate or compare to last year, and then just a quick follow-up.

Yeah, so that, you know, opening up offices continues to be a big part of our strategy. We've continued to open up offices, I think, a year ago, was it? Last year, maybe about 15 months ago, let's call it. 14 or so. We opened up five offices from December through February. and those offices are maturing very well and continue to mature, and we'll continue to open up offices. For us, our bottleneck on being able to open up offices is capacity of our management group being ready to do that. We have to both backfill for managers that may not be accomplishing their goals as well as you know, we have to expand. And, you know, over the course of 25 years, you know, I think we've done that pretty well. But it's a part of our growth strategy, and we'll continue to open up offices when we're able.

Perfect. And then I guess maybe just a quick financial question. Free cash flow was really, really strong here in Q1, and quite a bit stronger than we were modeling. What's the right way to think about that progression as we head through the year? And in general, you know, as you're seeing Betty adoption specifically get better, I think last quarter you mentioned, you know, almost 50% penetration for Betty. What's the target for this year and how much is that? How much more efficient is an incremental Betty sale than, you know, a traditional one?

Yeah, I'll take the free cash flow question. I mean, first quarter was strong. As we look out through the rest of the year, we've called out kind of what our CapEx is going to be. We're wrapping up our building in Oklahoma City, a large building here, so CapEx will be a little bit more back-end loaded in terms of how it flows throughout this year. That's kind of the way I would look at the free cash flow for the year. And on the Betty penetration... Yeah, I can take that.

So, you know, I think the question was how much more efficient is an incremental Betty sale. I mean, Betty's a very nominal sale to a current client, you know, from that perspective. I mean, it's not an expensive item and drives a significant amount of ROI. What I would say on new clients... new clients that come in with Betty because you know they all have to I would say the biggest margin impacts for them than us you know I've always said it costs you the same whether you use the system correctly or not you know charges the same so you may as well you know try to get the most value out of the system by using it the right way so when someone uses Betty it returns a significant there's a significant return on investment to the client for us you might see some positive margin impact by those clients that use Betty have less paper cuts caused to themselves and therefore on the margin they require less service for us to be able to provide them and less services around what I would call more of our low margin activities, which is going to be amended returns and other issues that could come out by having payroll done wrong. Understood. Thank you, guys.

Thank you for your question. The next question is from the line of Bob and Shaw with Deutsche Bank. Your line is now open.

Great. Thanks for taking the questions. Just a couple for Craig. Craig, if I just look at your 1Q sequential growth or 4Q on recurring revenue, it looks like it trended a little bit lower versus the prior 1Qs. I know the declining mix of tax forms revenue has an impact here, but any other commentary on linearity of goal lives or even growth within the tax forms and how that's trending?

I would say we've called out the tax forms. I mean, obviously, they don't grow at quite the same rate as the rest of our revenue, but they become a smaller portion of our overall revenue. So I would say that that's kind of what we've seen on those tax forms filings that have You know, they don't have the same growth rate as the rest of our revenue.

Yeah, I said a little bit differently since 1998 when we started the company. We've only added one product to our year-end services, and that was ACA. That's it, in 25 years. Meanwhile, our monthly recurring revenue products, you know, we've continued to add products that we charge on a monthly recurring basis for them. And so the monthly recurring... You know, it's just growing at a rate much more so than our annual recurring. And over time, you know, the annual recurring amount represents a smaller amount of a client's bill because of that.

Kind of helpful. Just one follow up on float revenue and just your philosophy on reinvesting some of the upside here. Can you just remind us of your philosophy and if anything's changed at all, given some of the announcements on kind of your global initiatives?

Yeah, I know, I mean, we still invest in pretty short-term investments, you know, very safe. You know, we're looking at CDs, commercial paper, treasury notes, and then some overnight. So, you know, we're still very safe on our investments in fairly short-term. And then, you know, as we do global, you know, we'll look at those opportunities as well.

Thanks again for taking my questions.

Thank you for your question. The next question is from the line of Daniel Jester with BMO Capital. Your line is now open.

Hey, thanks for taking my question. Good afternoon, everybody. Maybe we want to tackle global HCM in a different way. If I think about the new products you've launched in the last couple of years, Betty, TDX, that goes into theoretically the entire customer base. And for Betty, I think we saw the impact on your business like relatively quickly. Just trying to size up like on Global HCM, it's not going to go into all of your customers. And so is your large customer opportunity so big that it actually can move the needle this year? Or is Global HCM something you're thinking about from like a multi-year perspective, laying the groundwork, and it's not going to look like Betty affecting the numbers this year? It's a long question, but hopefully I got my point across. Thank you.

Yeah, I mean, we just came out with global HCM. I do think it'll be somewhat accretive to our numbers this year, more so in subsequent years. And it's a significant system. I think it'll allow us to continue to go further up. Even just the global HCM side increases our TAM by about 50%. So I mean, it's available there. And then as we continue to add the payroll to it, I just think that puts us on a different playing field uh for us to continue to go up market as well as serve uh those clients of ours that currently have international presence and uh you know might not be uh using our system uh uh you know the way they're going to be using it into the future okay thanks and then as a follow-up maybe just on the dividend and and the buyback and capital allocation

you haven't really been utilizing that buyback authorization in the last few quarters. So I'm wondering, maybe just refresh us on your thinking about doing the dividend when you have been using other levers that you already have had in place. Thank you.

Well, I would, you know, for one thing, you know, we did buy back over $100 million last year. So we've been, you know, maybe not the last couple quarters, but for sure last year, we continue to do buybacks and, you know, over 100 million. Over time, we've, you know, bought back 600 million and 4.7 million shares. So, you know, I would expect that, you know, it'll be a balance between buybacks and dividends as we kind of look to the future.

Thank you for your question. The next question is from the line of Kevin McDee with Credit Suisse. Your line is now open.

Great. Thank you, and congrats on the terrific results. I think I know the answer, but the source of the upside and then, you know, the raise beat kind of the quarter as well, that was new logo primarily? Just wanted to understand where that's at relative to expectations initially.

Yeah, new logos drive our growth, and so, you know, and now I'm not going to say, you see when interest rates go up, we talked about how we're achieving roughly 80% of that as it moves. So, you know, obviously that impacts us positively as well. But for us, you know, what's always driven our revenue has been new logo ads.

And then as you think about kind of the move internationally in upmarket, Does that impact the implementation strategy at all in terms of, you know, I know up front you try to be very opportunistic around modules, things like that. Is that the same strategy as you kind of scale the client base?

Yeah, I mean, our implementation strategy, as you continue to add other countries, yeah, I mean, it is going to change implementation to some extent. Now, that will, you know, a lot of that will be determined by By the origination of the client, where's the client? Are they in Nebraska? Are they in Mexico? Are they in the UK? Where's the client? You have different time zones and everything else where sometimes people are awake, sometimes they're not. Definitely, it changes your implementation strategy as you go global. I don't know that many of our methods will change as much as it would be, you know, modifying them to meet the needs of the country that we are in.

Thank you for your question. The last question comes from the line of Robert Simmons with DA Davidson. The line is now open.

Hey, thanks for taking the question. I was wondering, do you have customers who are now using Global HCM? And if so, what's been the early feedback?

We have some companies that are starting to pilot it. I think there's a couple. And a lot of Global HCM was developed with current client feedback from that perspective, just seeing what they're trying to accomplish, what they're using, and then just making a decision that we had just to take our current systems and be able to put them to where they could be used in 180 countries and in 15 languages. But we would expect more and more clients throughout this year to use the global HCM piece of Paycom.

Got it. And then on the dividend, how do you think about addressing that going forward? Would it be as percent of gap EPS or free cash flow or some other metric?

No, I mean, right now it's a, you know, we're looking at it as a fixed amount, $1.50, you know, over the next year, 37.5 cents a, you know, a quarter. I mean, right now it's, you know, that it's basically a 50 to, you know, about a 50%, a half a percent dividend yield based on, you know, our current share price. So we would look at it You know, is that $1.50 and then adjust it as we, you know, see fit in the future.

Got it. Thank you very much.

Thank you for your question. There are no additional questions waiting at this time, so I'll pass the conference back to Chair Richardson for closing remarks.

All right. I want to thank everyone for joining the call today. Our employees' efforts continue to put PACOM in a great position, and we're off to a great start in 2023. So thank you to the Paycom team. Over the next quarter, we'll be hosting meetings at five conferences, beginning with the Needham Tech and Media Conference and the Moffett Nathanson Technology Media and Telecom Conference, both of which will be held in New York. Following that, we'll be attending the JPMorgan TMT Conference in Boston and the Jefferies Software Conference in Newport Beach. We'll also be presenting at the Baird Global Consumer Technology and services conference in New York in early June. We look forward to catching up with many of you