Paycom Software, Inc.

Software Second Quarter 2023 Quarterly Results Conference Call. My name is Kate, and I will be the 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. I would now like to pass the call over to our host, James Sanford, Head of Investor Relations. You may go ahead.

Thank you, and welcome to PACOM's Earnings Conference Call for the second 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 and quarterly report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also, during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today and is available on our website at investors.paycom.com. We now turn the call over to Chad Richeson, PACOM's President and Chief Executive Officer. Chad?

Thanks, James, and thank you to everyone joining our call today. We delivered very solid results in the second quarter, and we continue to expand our opportunity both within and outside the U.S. I'll start with highlights from the second quarter and progress on our initiatives. Following that, Craig will review our financials and guidance, and then we'll take questions. Second quarter 2023 revenue of approximately $401 million represented strong growth of 27% year over year. Second quarter adjusted EBITDA came in at 157 million representing an adjusted EBITDA margin of roughly 39% up approximately 130 basis points year over year. We are delivering a solid combination of growth and high margins while maintaining a disciplined investment strategy and product and international expansion. On the product front, the ROI that our clients are achieving from Betty is unquestionable. We recently commissioned a total economic impact study from Forrester Consulting that quantified the savings from using Paycom and Betty, including a 90% reduction in labor for payroll processing and saving HR and accounting teams more than 2,600 hours per year. Companies that are not adopting Betty are missing out on a significant opportunity for savings from this structural change to how payroll should be done. With millions of employees already doing their own payroll and organizations seeing incredible ROI with Betty, there's no reason not to adopt it. The product is working as we anticipated and our messaging is resonating. So we will remain disciplined in promoting the power of Betty to new and existing clients. In April 2023, we launched access to our global human capital management software in more than 180 countries and in 15 languages and dialects. Today, we announced that we have expanded our HCM solutions to include self-service payroll for organizations with Canadian employees. Now, more North American businesses will be able to improve their payroll processing by giving their employees a more transparent and user-friendly experience in Canada with betting. We are seeing continued success selling across our entire target market range, and our efforts upmarket continue to be strong. With our recent launch into Canada, we've opened up a new large cross-border opportunity. As we continue to expand our geographic reach, I expect our move-up market to continue to accelerate. As a result, we are redefining our target market range to include organizations with greater than 10,000 employees, which represents an enterprise segment that our sales reps can now directly pursue. With our new expanded market opportunity, we now estimate our market shares well below 5%. This expansion gives me confidence that we can grow at an impressive pace for many years to come. In addition to launching our payroll services in Canada, our product development team also rolled out two significant tools in our software, Everyday and the Client Action Center. Everyday allows employees to get paid on a daily basis. Unlike other products on the market, with Everyday, employees access their earned pay early without being charged a fee, and employers are not exposed to potential losses from all factors that impact pay, including early departures, garnishments, or benefit deductions to be collected. Every day is a fully compliant payroll as opposed to a pay advance like many other daily pay services. The Client Action Center furthers our dedication to creating software that simplifies the lives of our clients by providing them with an intuitive dashboard within the Paycom mobile app. This new tool makes it even easier for our clients to take action and get updates on service-related items. We've received great feedback from clients on this streamlined approach since we rolled it out in June. Finally, Paycom was recently recognized as one of America's greatest workplaces in 2023 by Newsweek. The award highlights companies dedicated to providing employees with an enjoyable work environment that also fosters growth and development opportunities. In addition, for the second year in a row, comparably named Paycom one of the best career growth opportunities among all companies. In summary, our highly differentiated product and realized client ROI continue to drive our strong results. I'd like to thank our employees for their hard work and commitment to excellence as we continue to change the way payroll is done. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Before I review our second quarter results for 2023 and our outlook for the third 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 solid results this quarter with revenue of $401.1 million, up 26.6% compared to the prior year period. Our GAAP net income for the second quarter was $64.5 million, were $1.11 per diluted share based on approximately 58 million shares. Adjusted EBITDA was 156.6 million in the second quarter of 2023, or 39% of total revenues, compared to 119.6 million in the second quarter of 2022, or 37.7% of total revenues, or up 130 basis points year over year. Non-GAAP net income for the second quarter of 2023 was $94.3 million, or $1.62 per diluted share, up 29.1% from the prior year period. Second quarter GAAP tax rate came in higher than expected at 30.5%. For the full year 2023, we now anticipate our effective income tax rate to come in slightly higher at approximately 29.5% on a GAAP basis, and approximately 27% on a non-GAAP basis. Demand trends remain strong, particularly upmarket. Within total revenues, recurring revenue was $394.5 million for the second quarter of 2023, representing 98.4% of total revenues for the quarter and growing 26.6% from the comparable prior year period. Adjusted sales and marketing expense for the second quarter of 2023 was or 25% of revenues. We continue to aggressively spend on marketing and sales ahead of future growth. Adjusted R&D expense was 42.5 million in the second quarter of 2023, or 10.6% of total revenues. Adjusted total R&D costs, including the capitalized portion, were 61.2 million in the second quarter of 2023, compared to 48.1 million in the prior year period. We continue to invest in new products and expanded geographic offerings. Turning to the balance sheet, we ended the quarter with a very strong balance sheet, including cash and cash equivalents of $537 million and total debt of $29 million. Additionally, we announced today that we have expanded our revolver from $650 million to $1 billion. The average daily balance of funds held on behalf of clients was approximately $2.2 billion in the second quarter of 2023, up approximately 13% 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 $1,715,000,000 to $1,717,000,000, or approximately 25% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $722,000,000 to $724,000,000 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 reach the rule of 67. For the third quarter of 2023, we expect total revenues in the range of 410 million to 412 million, representing a growth rate over the comparable prior year period of approximately 23% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of 156 million to 158 million, representing an adjusted EBITDA margin of approximately 38 percent at the midpoint of the range. We paid our first quarterly dividend of 37.5 cents per share in June, and the Board has approved a quarterly dividend of 37.5 cents per share payable in mid-September. PACOM is in a strong financial position and executing well against a very large market opportunity. Our focus on delivering strong revenue growth and attractive adjusted EBITDA margins remains top priorities, and I am pleased with the consistency of our execution and the resiliency of our business model. We look forward to delivering continued strong results as many of our initiatives gain traction in 2023 and 2024. With that, we will open the line for questions. Operator?

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by A1. If for any reason you would like to remove that question, please press star followed by A2. As a reminder, we would like to ask you to limit yourself to one question and one follow-up question. Again, to ask a question, please press star followed by A1. The first question will be from the line of Ramo Linchao with Barclays. Your line is now open.

Thank you. I have two quick questions. First, Chad, can you talk a little bit about what you're seeing out there in terms of end demand, et cetera? Because the reason why I'm asking is, like, if I look at this quarter, you beat by 3 million. The full year was only raised by 2 million. So do we need to read into that, that you're kind of slightly concerned about the second half of the year? Like, maybe kind of frame it for us in terms of how we should think about that. And then the second question was on every day. How should we think about that in terms of applicability, in terms of is this for all the clients? Is it for a select group that have more contingency workers, whether it's interesting? How think you broadly you can roll this out? Thank you.

Sure. So, I mean, I'll take your last question first and circle back. But in regards to every day, You know, we put it out there because there are industries and certain companies that have moved toward a more, you know, pay-as-you-want type program, typically for lower wage earners. Our product that we put out there allows early wage access or everyday access to wages. And, you know, the employer's not on the hook. It's not a loan, so the employee's not charged. And oftentimes, you know, these amounts are guesstimated, and then if the employee leaves early or if they didn't collect all of the deductions for the employee, the employer's on the hook. And so all I would say is it's meeting a need that's already out there. I do not suggest that businesses change to a daily pay environment, but some of them are already out there. And so it gives us an opportunity, and it's linked to our vault cards. In regards to your first question about demand, demand for us is still very strong, especially with outside sales and new bookings. We're booking larger deals. We're booking $2 million deals, $3 million deals. We hadn't booked those before. So outside sales is strong and up year over year. Inside sales, which sells smaller emerging businesses below 50 employees, is also up. year-over-year. We do have a metric within our business model that sells that's down year-over-year and that's our CRR sales. The CRR group upsells current clients and this group's been down year-over-year and honestly that's because we've remained very disciplined in converting our client base to Betty. You had that first group that came on and then we've been outselling the others. It's a lot of work for our CRR with very little revenue opportunity for them. So we've actually given compensation accelerators to incentivize the group to sell it. But it's still a smaller revenue product or billing item for us. So while self-inflicted, I mean, we are having CRRs focus on Betty. And that costs us $15 to $20 million in bookings this year. Again, we're doing the accelerator commission for the CRRs to make up for the lower revenue. We've been changing out the jet engines on our plane in mid-flight here. I mean, Betty dramatically changes the way our clients do their payroll, produces a dramatic ROI. So we have to remain disciplined. We're not going to make a client go on it. We have to sell them on it. It takes a while. Once you sell a deal, it takes a while. CRRs have to be out there to convert them. You know, I think we're doing something like triple. We're tripling their commissions for what they're going to be missing out. But for us, it's significant because employees are going to be doing their own payroll. Millions already are with Paycom. Employees who do their own payroll don't want to go back to the guessing game. So while Betty's a small revenue amount for Paycom, it produces strong employee and employer advocates, which produce more leads for our outside sales group. And, you know, with less than 5% of the market, you know, we'll recapture the delayed opportunities in due time.

Thank you. The next question will be from the line of Samad Samana with Jefferies. Your line is now open.

Hi. Good afternoon. Thanks for taking my questions. I wanted to ask one follow-up to Ramo's question on the guidance. If I think about recurring revenue and I take out the impact of higher rates and the average flow balance, it kind of suggests maybe like a 20% to 22% or let's call it low 20s like software revenue growth rate going forward. Is that the right way to think about maybe the durable subscription revenue growth rate or just maybe help us understand is that just for the back half or if we think about the durable number, how should we think about that?

Well, I'll let Craig kind of comment a little bit on that. From my perspective, I mean, there's really only, you know, one metric that's given way for us, and that's the fact that we're having CRR spend, you know, three days converting a very small revenue item for a client that produces strong ROI. I think it's a season that we're in. As far as the percentage growth, I mean, you guys have the numbers. We talked about what we earn on... interest as they've increased. We've also talked about how that's layering in. So I know there's different models out there and they all seem fairly consistent with one another. You know, I don't plan on giving any of the interest back, but you know, if you want to take it out, I think that's a fair thing.

Yeah, I mean, we delivered a strong, a very solid quarter of some odd and, you know, as we looked at guidance, you know, we're still guiding to 25% for the full year and 42% adjusted EBITDA. We haven't given any long-term guidance in terms of revenue, but we have a large opportunity in front of us. We had several announcements on this call, and so the opportunity is definitely there. It's just up to us to go out and achieve that.

Great. Just a quick follow-up on the product side. On the new product rolled into Canada, do you already have beta customers Is that hiring a different type of rep? Have you opened sales offices there? Maybe just help us think about both the, you know, who's trying the product already and if you've already built out the go-to-market infrastructure for that.

Yeah, so we rolled out Canada and that included, you know, all territories and provinces in Canada. We rolled out full service payroll where we're doing direct deposit taxes, everything. We've already got clients that are, you know, signed up in the pilot, have been for a while. We really focused on those countries that our US-based clients already have as an opportunity. We could see that because we rolled out our global HCM product and we rolled out our global HCM product based on people rigging our system for these other countries. So we're continuing to roll out countries. We'll be rolling out more countries this year. We're not picking the easiest countries. We're picking the countries that have the greatest amount of U.S.-based company employees. And so that's where we're focused first. I don't see us rolling out a sales office in Canada right now just because we have so much opportunity as we continue to go upmarket. As I've been mentioning, we're getting larger and larger at-bats for our business, which Betty drives a strong result in ROI for them as well.

Thank you. The next question will be from the line of Brad Reback with Stifle. Your line is now open.

Great. Thanks very much. Chad, on the CRR headwinds, you talked about 15 to 20 million of bookings. Should we assume that's the revenue sort of headwind here in 23 as well?

Bookings kind of flow in. They don't come in right away. So, I mean, there would be, you know, some amount of that that you wouldn't get all of that this year. But, you know, I mean, we look at how much we were up last year and how much we're not this year, the dramatic change there. But really, it just comes down to we've still got about 40% of our client base not on Betty. And that ROI is available. If not, we're servicing two different product sets here. And so the Forrester study was put out, talked about how it's 90% of the savings. And it's significant there. employees and employers are having success with it. We didn't just start doing this, we really started doing this end of last year, but we've been seeing the impact just because it takes a while. The CRR is really the only group we can send out to a client to help with that change management and be there for their first payroll on Betty and walk them through the data sets. That's the group that we're using to do it. But in answer to your question, not 100% of $20 million would we have realized in revenue this year. I will say though with CRRs, it comes in pretty quick. I'd say they sell it one month and most of it's up within four to six weeks with that group.

Got it. And then just lastly on the CRR point, was it below your expectations for the quarter or did they pretty much hit your plan for the quarter?

I would say that it's been a harder slog to move Betty than in this last group. But, you know, I mean, it's impacting us, but we have to stay disciplined in it. Once we get these clients moved over to Betty, it's a very little revenue piece for them, but it's a significant amount of their ROI. It also makes servicing clients easier for us. just because you don't have the paper cuts that come with an HR and payroll department trying to do it for the employee.

Thank you. The next question will be from the line of Marc Marcon with Baird. Your line is now open.

Good afternoon. A couple of questions. So one, you know, between Every Day and Canada, Can you talk a little bit about the types of clients that you would be targeting to a greater extent? It sounds like you're forecasting that we're going to see some decent expansion in the 10,000 plus employee range type clients. And to what extent was not having every day holding you back before?

Yeah, I wouldn't say every day was holding us back at all because people had options for that. As you know, there's daily pay options out there. And so in answer to your question and what we would go after in every day, that would be someone that's using some other product where employees are having to pay. And in some states, the client may not be compliant because taxes are due. We'll often also see everyday use in more of a quick service type environment or in an area where you might have more transient workers that typically work shorter periods of time for any one business. You know, the normal groups you'd expect there. That would be different than what we'd expect with Canada. I mean, Canada's going to be any client that has employees in Canada, And it's also the first time that we've been in business now 25 years. It's the first time that we've developed another country. And it's not like a country. It's multiple provinces, territories. And as we look at the next countries we're developing, it's the same type of thing. These countries are large entries. But we're well on our way. And like I said before on the last call, there was really only one thing holding us back from going upmarket. you know, that's the fact that we didn't have international capabilities. And with our global HCM product and now with our first expansion into Canada, you know, we're well on our way with that.

Great. And then in terms of the CRR and moving Betty to the remaining clients, what's your forecast, Chad, just in terms of how long it will take to get that 40% and, you know, to what extent could, um, you know, some of the, the, the Forrester data that you've put together, uh, help to, to speed that up.

Yeah. I mean, the Forrester data is, it's helpful. I mean, especially if you played it correctly, uh, to any client, it's hard for me to, you know, I mean, I said, I, I thought we would have, uh, all converted within, uh, 18 months and, We're going to be past, we may be past that point, but we're coming up on being past that point if not. And so I guess, you know, there's an incredible amount of value that automatically associated with clients rushing to capture that value. There's also some change management on the client side. I've also talked about how I'm not going to force a client, you know, to go on it. So we do have to sell it. And then, you know, because it's a smaller revenue item, we've got to incentivize our sales reps another way to sell it. to be able to keep them whole on commissions and what have you so that we get what we want. So it's hard to answer that question, but we're focused on it. I will say this, we've got some groups of CRRs and sales managers that are closer to having their clients converted than others, and so you have that, and we continue to bring out new products. But yeah, I mean, I think that, you know, for all of them, they're going to be in this just for a little bit to get the rest of them going.

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

Yeah, thanks for taking my questions. I guess maybe starting off, if you look at the revenue beat in the quarter, it was a little less than 1% versus the midpoint of guidance. Historically, beats could have been closer to 1.5% to 2% on revenue. How should we think about the way you're positioning guidance going forward? Has there been any change there? Is there a little bit less conservatism built into assumptions? Any color there would be helpful.

No, I mean, you know, we guide to what we can see. And, you know, obviously when a deal starts in a quarter, can impact the guidance for that quarter. So there are certain things within a quarter that can make the beat larger or smaller. And so we typically guide to what we can see, and really no change to our stance on guidance. But as Chad mentioned, we saw the CRR impact start to come through, and that's what we've seen over the last quarter. And quarter four really has much more variability. We have probably 20% of our clients that are brand new to us. So when you think of that, we don't necessarily know how they're going to pay bonuses and if they're going to pay bonuses. So a little more uncertainty in that Q4 as we move throughout the year.

Got it. And then sales and marketing was up about $2 million quarter over quarter this year in Q2, while last year was up about $10 million sequentially. Should we read into anything around the pace of investments in sales and marketing slowing a bit while you increase more investments in product and R&D continues to increase? Do you need to get some of these new products out and then you're going to re-accelerate investments in sales and marketing after that point in time? Thank you.

No, I would say, you know, we saw some efficiencies in sales and marketing. And, you know, as we've mentioned on previous calls, you know, at some point you get hit the point of diminishing returns. So I think you saw a big increase last Q2. This second quarter wasn't quite as large. And some of those are also timing quarter to quarter. But I don't think we've necessarily pulled back on sales and marketing. We didn't pull back on sales and marketing to invest in R&D. It's just where can we get the best returns.

Thank you. The next question will be from the line of Steve Enders with Citi. Your line is now open.

Okay, great. Thanks for taking the question here. I guess maybe to start, you know, I know that you're opening up into the 10,000 customer range. Does there need to be any change in the go-to market to go capture some of those more enterprise-focused accounts and any areas that may need to be built out to be able to get into those customers?

No, I mean, our marketing efforts are a little bit different. In answer to the question on the sales motion, no. I mean, you know, back in the day, I mean, every client's different, but today, employees are the same. I mean, it's just what we're dealing with. There's no such thing as a large market employee versus a small market employee. They've got to all have perfect payrolls and what have you, and so Our approach to selling, because we're selling one system, is very similar. The prospecting methods, meaning the methods through which you go to get appointments, they're a little bit different in how we're doing that, but not unlike how we've been doing it with companies that have 10,000 employees already. So I wouldn't say it's much different than what we were doing there. And it's a little bit different if you're trying to get into a company that has 250,000 employees. how you're getting in there to be able to make an impact. There's a lot of companies that will listen to you, but we're looking to meet with the decision makers and buyers. Again, employee advocates are helping us. Three or four years ago, we had zero employee advocates. Today, we continue to cultivate advocates of our client employees who use our system and then go to other companies and bring us in. we're still having a lot of success with that.

Okay, gotcha. That's helpful there. And then on the international expansion, good to see the entry into Canada and that officially announced. How should we be thinking about the pace of further country openings and I guess any initial learnings from from entering Canada and how the platform performed there that could be applied to some of the other countries that you're targeting here?

I mean, it gets easier as you do more countries because you run into, you know, crazy things in each country. I mean, every country operates a little bit different. There's countries that, you know, their year runs April 6th through April 5th, you know, There's countries that you don't reconcile attacks at the end. You've got to have a stamp in the beginning. So we're running into that with all countries. We do continue to spec them out. And we'll have out a couple more significant countries this year. I mentioned on the call not long ago that we believe that about 20 countries will represent most all the opportunity we'll need for the US-based clients. Not all, but most all.

Thank you. The next question will be from the line of Sidi Panigrahi with Mizuho. Your line is now open.

Thank you. Thanks for taking my question. Just want to follow up, Chad. When you are now going to Canada or even other countries, are you targeting customer in those countries or are you focusing on U.S. customer who are employed there. The reason I'm asking, are you trying to build now a sales team in Canada and other countries or it's still focused here in the U.S.?

I mean, the answer is yes, we will eventually have sales teams, you know, in other areas that we're expanding to. But, you know, it's first things first. And we're not focused on opening up a sales team in Canada right now. We do have a service center there now. with people available to service. They've been trained and have been using our product themselves. But really it's an opportunity for us to continue to go further up market. You know, we get a lot of call-ins and interest in regards and leads in regards to large businesses. And we kind of sometimes fall by the wayside in regards to how they manage their global group. Our global HCM product helped a lot with that, because so much of the global payroll is already disparate and siloed all over the place. And so the global HCM helped some with that. But now as we're building out Betty in each country, it just wouldn't make sense for a company not to use us for all of that. And so originally, our focus is US-based companies. There's plenty of them as we go up market. But eventually, absolutely, we'll have sales teams in other countries. That's not something we're eyeballing right now, though.

Okay. Thanks for that, caller. And one more follow-up on the Betty. When you say that 40% of customers are yet to move, I understand they are all your prior customer, not the new customer. They, by default, get Betty. So definitely there's a clear value proposition of Betty, and it's been there two years. So what's the pushback you're hearing from those customers? What's stopping them moving to Betty.

Yeah, I mean, I think the biggest pushback is the fact that it can be a significant reduction in force as well. I think that there's change management on the client side, some changes they have to make on their side of how they feed the data. So that's primarily it. I mean, I can tell you a lot of what we get, it's not broke. We're already using Paycom. Our payroll's not wrong. You know, we've got 100% DDX. Why do we have to go through? We're working on other things, you know. I just don't know that it becomes the priority. And so, you know, the Forrester study will help. And, you know, as we continue to go out there and show the value that it can create with appropriate usage. And then also, we kind of got a little bit of the tail wagging the dog strategy with the employee base, especially hourly employees. It's inherent, you know. They'll do their own. That's helping us out a little bit in there. At the end of the day, it's a sales call that we have to provide value for. We're not going to force a client. We're going to influence them in making a decision that can drive significant ROI in regards to payroll and HCM software.

Thank you. The next question will be from the line of Brian Bergen with TD Cohen. Your line is now open.

Hi, guys. Good afternoon. Thank you. I wanted to ask a margin question first here. Can you talk about investments being made and cost to revenues, just considering the higher float revenue tailwinds have been a bit lighter than we've expected? Are there catch-up investments being made here? Are you broadening out the international operation just Give us a sense on what's kind of weighed year on year and where you're expecting adjusted gross margin to land this year.

Yeah, I mean, you know, this quarter was down slightly. You know, it's typically going to be headcount. You know, we hire ahead of the growth. It's going to be a higher headcount in the service group. You know, we're starting to see a few costs as it relates to international, but it's not really moving the needle at this point. So, You know, we haven't guided to gross margins. We've always been in that 84, 85, 86% range. And, you know, we would expect that to be, you know, similar moving forward. Okay.

And then on the updated revenue guide for the year, did you add any incremental revenues assumptions related to the Canada entry or for every day?

I mean, it would be very small impacts this year just because you have bookings and conversions. I mean, every day could add a little bit, but it's not going to move the number.

Yeah, it's not going to move the number.

Thank you. The next question will be from the line of Jason Salino with KeyBank. Your line is now open.

Great, thanks. This is actually Devin on for Jason today. Thanks for taking our question. Wanted to get an update on your sales capacity. Do you feel pretty good about capacity for the remainder of the year and for next year, particularly as you continue to move up market and expand into Canada and maybe other regions down the line?

Yeah, I mean, well, outside sales is rolling. I mean, we've got people that are, you know, selling numbers that, I mean, even one deal is bigger than, you know, was someone sold before at Paycom. So I mean, you know, sales is continuing to do well. Our capacity is continuing to increase. We're continuing to get stronger at staffing. And again, I'm talking about from our outside sales perspective, which sells 95% of our new business that we bring on, new clients that we bring on. So, you know, we're doing well there. I would expect us to continue to do so.

Got it. No, that's helpful. And then just a quick follow-up, any additional details on how would you think about what you're getting on your effective yield for cash health for clients, just given another interest rate hike in the past month? Thank you.

Yeah. What we've said in the past and really don't have an update on that is we typically get about You know, $5 million annually on a 25 basis point increase. We had 2.2 billion average daily funds held this quarter. You know, I mean, we're typically trying to get, you know, somewhere between 80 and 90% of the Fed funds rate. It layers in over time. It doesn't, it's not an immediate impact to us. We have certain funds that are layered out longer. So that's the impact that rate hike has on us.

Thank you. The next question will be from the line of Alex Zukin with Wolf Research. Your line is now open.

Hey, guys. This is Ryan on for Alex. Thanks for taking the question. So two quick ones. Historically, free cash flow margin and cash conversion had been lowest in 2Q, but it came in relatively strong this quarter. So just wondering if you can unpack that strength. And then on retention, you reported 93% at the end of last year, but given the macro, any swings in that number that we should be aware of just through this first half? Thanks.

I'll take the last one first, and then I'll let you handle the free cash flow margin. You know, we report retention once a year. It does fluctuate throughout the year, and then we report it once a year, I believe in February, every year for the prior year. And so we don't have any updates on the retention number right now, but we will at the end of the year.

Yeah, I mean, on free cash flow, it came in very strong for Q2. Some of that can be timing, but overall, the main things that impact free cash flow are going to be CapEx and some of your tax rates on that. But yeah, we're very happy with the way it came in Q2, much better than last year's Q2.

Thank you. The next question will be from the line of Bob and Shaw with Dosha Bank. Your line is now open.

Great. Thanks for taking my question. Chad, there's always a lot of noise as to where we are in the macro cycle. Can you just help us understand what you're seeing with your customers in terms of pay spread control, how that might have turned throughout the quarter, and if you see any differences across the various customer sizes that you serve?

Stable. We've seen stability. I mean, I can't point to macro issues.

Got it. And then earlier in your prepared remarks, you mentioned kind of year-over-year growth in both outside and inside sales. Can you double-click on this? Like, how is growth trended in terms of both of those areas versus prior quarters? Are you seeing accelerating growth, similar growth, deceleration? Just any way to kind of think about the magnitude of what you're seeing with both inside and outside sales?

I mean, very strong. I mean, outside sales is, you know, probably the strongest growth we've had in three years from a percentage basis. I mean, inside sales, you know, strong, but again, like I said, it represents 5% of our revenue. So, you know, it's important, but, you know, but yeah, I mean, I would say, you know, from a sales perspective, we're getting stronger and stronger. I mean, again, we're selling two and three million dollar deals. When we IPO, that's what a city would sell. Last couple of years, that's what a sales rep of the year would sell, and now we've got deals that size. As our product's gotten stronger, and again, the value's gone all the way out to the employee, and the employee user has become more technological in what they expect for usage. You know, we're kind of really able to help everything out, the employee as well as the employer, to drive this and capture this ROI available.

Thank you. The next question will be from the line of Daniel Jester with VMO. Your line is now open.

Great. Thanks for taking my question. So first I want to ask about sort of the back-to-the-base motion. You know, you made a comment that the Betty transition is kind of impacting the velocity of that group. As you think about global HCM, it also sounds like that's going to be a back-to-the-base motion with customers that already have international employees. So are these going to be the same team selling that, and how do you deal with the bandwidth as you ramp that global product? And then secondly, can you just clarify, is every day in Client Action Center, are those going to be modules that you charge for? Thank you.

Okay. Every day, yes. Client Action Center, no. Every client has the ability to enable it right now. As far as, yes, it is the exact same team that sells the global HCM product as what sells Betty. It's also that same team will sell every day as what sells Betty. And so they still have the ability to sell it. They still have the ability to go out. Nothing's precluding someone from going out and making a sell. The issue becomes, and it's not an issue, again, it's something that we have to do, is regardless of what you choose to go sell on your own, you've got these clients that don't have Betty that some of them you already have sold Betty to, and you're going to have to go out there and spend the time to get them converted. And it's our CRRs that do those conversions. And so the difference can be instead of having a one and a half hours or two hour sales call to sell a product, you're out there for three, three and a half days, again, not all in the same week, it might be three and a half days over a four week period of time, getting the company converted over to Betty, and then you're out there when they're doing their first payroll and making sure that the ROI is being realized. And once someone's made that conversion, I believe we earn the right to even help them achieve greater return on investment with these other products. And so I'm not saying I've told any CRRs, hey, don't go out and sell a product. What I've said is, this is your priority. Any clients that aren't currently on it achieving the value I know it's a smaller revenue amount, so I'm going to pay you triple because I know it's a small revenue amount. So anytime you sell one, this will be your commission. And we have to do that so that we can move everybody into the right value because it is the correct way to do it. It's the correct way for employees to do it themselves. And so that's what we're focused on. We're not retreating from that. And I also believe that we have some good things coming out here with product. We've announced some of it. We've got more coming out throughout the year. But it is a first things first. I'm not throwing my hands up on what the CRRs can do. I'm just explaining where they're at as of today.

Thank you. The next question will be from the line of Robert Simmons with DA Davidson. Your line is now open.

Hey, thanks for taking the question. So I was wondering, how does every day work in terms of monetization, will you do it the same way you do other modules where it's per employee, per pay cycle, or will there be a different model?

Yeah, the best way to think of every day, it's still per employee, per pay cycle, but now you have more pay cycles.

Got it, got it. And then on Betty, are you still seeing 99% annual retention for clients who are using it?

We haven't updated any retention numbers since we last did our retention, but I don't see people leaving that have Betty. It's very, that's not to say you can't have some bots sold merged. I mean, you know, we've even been the benefactor of where a large company's buying a smaller company, the smaller company uses us Betty, and then we get a $1.4 million deal because the small company doesn't want to convert off Betty, and the large company ends up converting to us for it. I even see us being more the benefactor of mergers as we move into the future, which, you know, oftentimes it was a wash or the larger company buys the smaller company.

Got it. Thank you very much.

Thank you. The next question will be from the line of Arvind Ramnani with Piper Sandler. Your line is now open.

Thanks for taking my question. Can you talk a bit about the competitive environment, particularly from some of the legacy players, ADP and Paychex? Has that put any kind of pressure on your sales cycles or conversions?

No, I'd say the competitive environment's been Very similar as it has, which, as I've always said, has been competitive. And it's always been a dogfight. I've said that multiple times. You've always had competitors that'll go out there and say, hey, I'll give you a year for free. I've always told prospects, I mean, if you want the lowest price, call your current vendor, threaten to leave them. That's how you get your lowest price. But now if you want value and a return on your investment, And you want to turn those fees into actual value that you can achieve. Only way to do that is to go with us. So you are always going to have that. You're always having to have competitive competitors out there. And it's no different than it has been.

Perfect. And then just a really quick one. Can you kind of tell us kind of interesting contribution for the quarters?

No, as we've mentioned in the past, Arvind, you know, we receive, you know, our goal is somewhere between, you know, 80 and 90% of the fed funds rate. You know, as they have, you know, increases in the fed funds rate, then it takes a couple of quarters for that to layer in. You know, and so that's what we've said in the past.

Thank you. And the last question comes from the line of Jackson Ader with Moffitt Nathanson. Your line is now open.

Great. Thanks for taking my questions, guys. The first one is maybe on the talent acquisition or the recruiting modules. We're starting to see maybe a loosening in the labor markets, and I'm curious whether you're seeing usage for your recruiting or talent products either start to slow or maybe actually pick up, like if there is some sort of kind of counterintuitive demand for those products as the labor market begins to loosen?

Yeah, it's stable. I would say where we see it, it is a talent acquisition product, but I would see where you start seeing that's background checks, pre-employment background checks and how those are going. I would say it's stable as of right now.

Okay. All right. That's fair. And then the follow-up is for the, on the sales side, when you're increasing the target market, um, up to 10,000 employees, how do you make sure that your outside salespeople don't just go out there and start hunting the gigantic deals and, and make sure that, you know, that they don't take their eye off the ball in terms of the bread and butter deals.

yeah well weekly quotas you know make sure that uh but but ultimately they will go after larger deals they don't have that many of them for any one territory you know it's not going to increase it so much that that's all you're doing and you know i mean our sales people uh probably 75 to 80 percent of what they make is commission based and that's based off revenue being achieved uh You know, you can still achieve a lot of revenue off of, you know, the sweet spot of our market that we've been focused on. But, you know, we continue to be pulled up market. I've been mentioning that. There's no reason not to go after that market as well. I mean, eventually we're going to land one of these largest companies in the world kind of deal. You know, I mean, eventually that's going to happen because it's just right. So, you know, we've got to take our at-bats and our swings with them.

That concludes today's Q&A session. I would now like to pass the call back over to Chad Richardson for closing remarks.

I want to thank everyone for joining the call today. Over the next quarter, we'll be hosting meetings at five conferences. Beginning next week, we'll be at the KeyBank Tech Leadership Forum. At the end of August, we'll be hosting meetings at the Stifel Tech Exec Summit and the Deutsche Bank Technology Conference. In September, we'll be presenting at the City Global Tech Conference in New York and hosting meetings at the Wolf TMT Conference in San Francisco. We look forward to catching up with many of you soon. Operator, you may disconnect.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Operator, you may disconnect.

That concludes today's conference call.