Q2 2020 Paycom Software Inc Earnings Call

Ladies and gentlemen, this is the operator today's conference calls scheduled to begin momentarily until that time your lines will again be placed on hold thank you very much for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the Paycom software second quarter 2020 quarterly results conference call.

At this time all participants are in listen only mode. After the speakers presentation it'll be a question and answer session.

If you would like to ask a question during the session you'll need to press star one on your telephone if you require any further assistance. Please press star zero.

I'd now like to hand, the conference over to your Speaker today, James Samford head of Investor Relations for pay Com. Please go ahead.

Thank you and welcome to pay comp second quarter 2020 earnings Conference call.

Certain statements made on this call that are not historical facts, including those related to our future plans.

This unexpected performance.

Forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.

These forward looking statements represent our outlook only after 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 these statements are based on our current expectation and subject to risks and uncertainties.

These risks and uncertainties are discussed in our filings with the FCC, including our most recent annual report on form 10-K and their most recent quarterly report on form 10-Q.

You should refer to I consider these factors when relying on such forward looking information.

Any forward looking statement made speaks only as of the date on what you didn't need and we do not undertaken expressly disclaim any obligation to update or alter our forward looking statements.

There 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 on 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.

Yes on schedule showing GAAP versus non-GAAP results is included in the press release issued after the close of the market today and is available on our website investors dotcom Dot com.

I'll now turn the call over to Chad Richison, Paycoms, President and Chief Executive Officer.

Yeah.

Thanks, James and thank you to everyone joining our call today I want to thank our employees, who continue to thrive in this ever changing environment for today's call I'll spend a few minutes owner second quarter 2020 results in some notable trends following that Craig will review, our financials and provide some perspective on guidance.

And then we'll take questions.

I'm very pleased with our performance in the second quarter ended demand we are seeing as expected our second quarter results were impacted by the headwinds we outlined in our last call, namely the impact of unemployment across our current client base due to the pandemic and a 150 basis point cut in interest rates.

In March.

Despite these headwinds we continued to see very strong lead volume and new business sales achievements, which have set us up very well for the future Q2 revenue and adjusted EBITDA came in at 181.6 million and 61.2 million respectively.

While we expected there to be similarities between the increase in the unemployment rate and the impact on our client base. We now know the actual impact on our client base, even as unemployment has fluctuated throughout the quarter.

Head count reductions at our clients and the impact on current client revenue Pete at the end of April and began to stabilize.

Based on the trends we've seen throughout the second quarter, we estimate the impact on current client recurring revenue is a loss of approximately $2 million per week.

Interest rate cuts added another 350000 in weekly lost recurring revenues.

We've seen these number stabilize at these rates for over the last few months, thus, making the impact on our revenue more predictable.

I'm pleased we are in a position to provide Q3 guidance, which Greg will walk you through shortly.

We began the second quarter with strong demand and elevated lead volumes driven by our deliberate investments in advertising.

Yeah leads were roughly three times higher than in the comparable prior year quarter.

As I mentioned last quarter. The pandemic is exposing scenes created by disparate H.C.M. systems and be increasing trend towards a more autonomy is workforce is creating high demand for the pay calm single database solution.

We believe the value proposition of our solution is stronger than ever and we continue to see success in both outbound and inbound sales efforts.

Our sales teams continue to operate in a virtual model without disruption and they had strong success in Q2.

We continue to see strong usage patterns of our products as measured by our direct data exchange or Dx with the increasing importance of working a ton of mislead. It is critical that companies enable their employees to have a direct relationship with the database with pay copy employee wins from an easier.

And more comprehensive experience and the company wins from real savings.

Throughout the second quarter, we continued to invest in product development and released several thousand product enhancements one product that continued to be enhance during the quarter was manager on the go.

This tool is built into pay comps existing mobile app and empowers leaders with 24, seven accessibility to essential manager side functionality of our solution.

Manager on the go continues to be widely adopted by managers across our client base with already almost 90% of our clients deploying it and just the first five months since launch manager on the go is transforming manager workflows and accelerating the speed that data moves throughout the system, which.

Further increases the ROI of our solution and sets up future usage patterns that paved the way for future product innovation and automation.

Going forward, we will continue to remain focused on three controllable activities, providing world class service to our clients rapidly developing new technologies and increasing the number of new clients added to our platform I'm very pleased with the execution. We have delivered on all three of these fronts today, which I believe will further strength.

In our market position in the quarters in years to calm.

We are overcoming the revenue headwind created by the pandemic as I'm sure many of you've seen or commercials on TV and our advertising assets online. We have spent more in advertising in Q2 than we've ever spent in a single quarter by a significant margin.

This advertising spend coupled with our world class sales organization yielded great results for us in the second quarter. In fact, Q2 was our best quarter ever from a new business sales perspective by a large margin and we will continue to spend aggressively on advertising through.

Q3, and Q4 above the Q2 levels as we deliver our value proposition to our massive target market.

With less than 5% of the total addressable market already captured we have a long way to go.

The digital transformation for business is accelerating and our investment in expanding our market shares working.

I'll stop there and handed over to Craig to review, our financials and guidance Greg.

Thanks, Chad before I review, our second quarter 2020 results I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis I will briefly cover our Q2 results and trends then I'll provide some high level comments about Q3 guidance our approach is to be as.

Parent as possible based on what we know now and we believe there has been enough predictability in the impact of the pandemic on our current client revenue to provide near term guidance before turning to the results I want to briefly discuss the environment, we faced in Q2.

During the second quarter, our analysis of the impact of the pandemic was a declining employment rates at our existing clients became progressively worse and hit a low point at the end of April and then stabilized we estimate that the effect of lower head count at our clients on our current client revenue is a loss of approximately.

$2 million and weekly recurring revenue as of today. We also experienced the impact of 150 basis point interest rate cuts that occurred in March which amounts to a loss of roughly $350000 in weekly recurring revenue.

Despite these anticipated headwinds demand for our solution continues to strengthen and we had increasing new client sales that were solidly ahead, a pre covance sales levels that success has continued into Q3 with accelerating demand and sales trends that are layering in nicely on top of our current plan.

Recurring revenue base.

With that as a backdrop I'll turn to the results in the second quarter. We generated total revenues of 181.6 million representing growth of roughly 7% over the comparable prior year period, driven by strong new business wins within total revenues recurring revenue was 178 million.

For the second quarter of 2020, representing 98% of total revenues for the quarter.

Total adjusted gross profit for the second quarter was 153.8 million representing adjusted gross margin of 84.7%, we continue to see improving efficiency and customer service and expect to see similar adjusted gross margins for the remainder of the year.

Adjusted total administrative expenses were 106 million for the second quarter as compared to 85.9 million in the second quarter 2019.

Adjusted sales and marketing expense for the second quarter of 2020 was 52.3 million were 28.8% of revenues up from 23.1% in the prior year quarter, we're seeing very positive results from our AD campaigns and marketing efforts and as a second quarter progress we made the deliver.

Our decision to further increase or advertising spend.

As long as we continue to see positive results from these investments we intend to continue to be aggressive in this area to drive market share gains, we expect Q3 sales and marketing expense to be approximately $8 million to $10 million higher than Q2 on both a GAAP and adjusted basis.

We're maximizing our opportunity to capture market share by spending more on advertising.

Adjusted R&D expense was 18.8 million in the second quarter 2020, or 10.3% of total revenues adjusted total R&D costs, including the capitalized portion were 27.7 million in the second quarter of 2020 compared to 22.3 million in the prior year period.

We have a very ambitious product innovation roadmap, which is a key driver of our success and we will continue to expand our R&D team with high quality talent.

Adjusted EBITDA was 61.2 million in the second quarter of 2020 or 33.7% of total revenues compared to 69.4 million in the second quarter of 2019 were 41% of total revenues.

We were able to partially offset the loss of high margin revenue with reduced cost from lower travel expenses, but the biggest driver of the year over year adjusted EBITDA margin decline was our deliberate increase in advertising.

Our GAAP net income for the second quarter was 28.6 million or 49 cents per diluted share based on approximately 58 million shares versus 48.8 million or 83 cents per diluted share based on approximately 58 million shares in the prior year period for Q3 in Q4, we expect our effective income tax.

Great to be approximately 30% and our full year effective income tax rate to be approximately 24% to 25%.

Non cash stock based compensation was 21.2 million in the second quarter, and we expect noncash stock based compensation for the third quarter of 2020 to be approximately 20 million for the full year, we anticipate noncash stock based compensation will be approximately $75 million.

Non-GAAP net income for the second quarter of 2020 was 35.9 million were 62 cents per diluted share based on approximately 58 million shares versus 43.7 million or 75 cents per diluted share based on approximately 58 million shares in the prior year period, we anticipate.

Fully diluted shares outstanding will be approximately 58 million shares in the third quarter of 2020.

From the time, we increased our buyback on March 12, 2020, and through the end of the second quarter, we repurchased over 330000 shares including over 240000 shares purchased in the open market as of June 32020, Paycom has repurchased over 4 million shares since 2016.

I mean with $175 million remaining in our buyback program.

Turning to the balance sheet, we ended the second quarter with cash and cash equivalents of 114 million and total debt of 32 million cash from operations was 25.5 million for the second quarter. The average daily balance of funds held for clients was approximately 1.2 billion in a second quarter of 2000.

And then 20.

Now, let me turn to our guidance with more clarity about head count trends in our client base, resulting from the pandemic. We believe our current client revenue has become more predictable and we're now providing Q3 guidance based on what we can see as of today.

The third quarter of 2020, we expect total revenues in the range of 191 to 193 million representing a growth rate over the comparable prior year period of approximately 10% at the midpoint of the range. We expect adjusted EBITDA for the third quarter and the range of 56 to 58 million.

One representing an adjusted EBITDA margin of approximately 30% at the midpoint of the range.

Our focus continues to be on mitigating the impact of the pandemic on our business by providing world class service to our clients rapidly developing new technologies and increasing the number of new clients added to our platform. We have a strong balance sheet highly profitable recurring business model and what we believe is the strongest value.

Proposition in our industry, we're committed to taking advantage of our financial position to drive long term market share gains with that we will open the line for questions operator.

At this time I would like to remind everyone in order to ask the question. Please press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound Keith.

First question comes from laying out Raimo Lenschow with Barclays. Please go ahead.

Hey, Thank you for taking my question.

Can you I think the biggest questions we won't get just like it around the increase in sales.

In the advertisements then spending or on some marketing can you talk a little bit about your thinking here I'd like why now like obviously div level is kind of a lot higher than youve. What do you see him before you seemed like good results. Good returns on that one is it like if I listen to ATP, there seemed to be hurting a lot more sort.

This is a curated good opportunity just told me around your thinking there and then how you measure success.

Sure so on the last call right, though.

End of April I discussed, how our numbers were back to pre co bid numbers from book sales I've sense on this call said that our second quarter, a new client revenue numbers and these are sales new sales that we go out and achieve that we actually just completed our best core.

Peter.

Second quarter was the best quarter, we've ever had a from a new business sales perspective to follow up on that July. It's been this July that we just finished up on Friday has been the best month, we've ever had.

From a new business sales perspective, and so we're paying for that obviously those leads I mentioned.

That leads are up three X demo leads these are people that hit our website in requested demo. We've always had leads where someone might download a a brochure or download a white paper or come to a webinars, but these are leads where people are genuinely interested and they want a.

Ration and so about 90% of those turn into appointments and so we have a lot more appointments then we pad in the past and we're achieving greater sales of course, we're spending to do that our advertising spend in the second quarter.

It was much more than we had spent in the past and it's working and I've been saying this as long as advertising is working well continue to do it we havent made any purchases a month or two or three months out and so our commitments a week to week type of commitment on advertising, but its having great. We're having great six.

Yes, with it as I'm sure you rhyme out when everybody else is seeing.

The ads on TV and online then another point to make is we're not just advertising the pay comp brand, we're advertising a new way to use this type of technology. It makes no sense that HR inputs. This type of data all businesses have deployed technology.

Gee as we've moved toward a moved more toward an autonomous workforce I think were somewhat in the rise of the autonomous worker and it only makes sense that they would have technology in which both they win and the client and so we've been aggressive with it but it is yielding results from us on this.

Sell side, which will continue to fold in and become.

Current client revenue.

Good Okay perfect. Okay. That's really helpful. And then on that you talked about the under 2 million per week that's.

We like you're losing because of unemployment and and.

Unemployment situation.

And you talked about the stabilization since its peak in April.

Oh, we are you still kind of thinking about I'd like to see the Mafia lead out in Q1 or how do you have to think about that 2 million per week number now as as unemployment rates are coming down the track kind of a new way to think about it or any any help there in terms of like what to do with that thank you.

Yeah, I mean, the number was in between I mean, it was between 1.95 and $2 million that we're seeing it we have maxed out toward the end of April and its state.

Consistent I understand that unemployment is fluctuated, but the impact on our number stayed consistent maybe our clients took to hit in the beginning but I did want to make a point on and what you're talking about as I mentioned that directionally in the last call I said directionally it would be unreasonable to think that we wouldn't be.

Impacted by unemployment because I did believe and do believe that were an accurate sampling size and and so we should somewhat followed that we now know that while we were directionally.

Accurate, we now know the exact number that it isn't just to bring up.

The numbers that are commonly reported.

You know for another day unemployment claims via media government. What have you know, it's basically calculated to waste. The first sources the unemployment insurance data and this comes from a weekly compilation of that the DSL receives directly from unemployment agencies.

You have both initial claims and continuing claims it's a point to make is that initial claims Pete and the second quarter early second quarter. You know they were five and 6 million you had a couple of weeks. There were initial claims were five and 6 million last week initial claims were 1.4 million the week before that initial claims were 1.4.

In may and they've started to stabilize about at that level over July and important point to make though is pretty co bid. They were stabilized at average of about 200000 claims a week and so that's one calculation not as reliable for unemployment a second calculation that used by that you.

Yes department of layer or labor is the current population survey and that's where you get the.

14.7% unemployment number for April and 13.3% unemployment number for may and the 11.1% unemployment.

Number for June and how they get how this data is derived from actual interviews of 60000 households in the U.S. about 110000 people and so.

You know, while we were directionally accurate and while the impact of Paycoms current client revenues Ben similar to the increase in unemployment numbers. We now know the exact impact it had it had on Paycom, we peak toward the end of April we stabilized so while we can't call out.

Improvement in the impact unemployment is having on current client revenue.

We can state that the situation hadn't gotten worse.

And that we've seen a stabilization and like I said I'd like to think our clients took the hits early seeing I will have to we'll have to see from there, but lastly, I did want to make this point I may not I'm not going to try to be a the drug store economist as it relates to unemployment our goal was to go.

We have directional guidance and now that we're giving actual guidance.

I don't feel like it's necessary for us to tie to the different methods of calculating unemployment whether it be the initial claims which are still elevated based on pre co bid or the sampling survey of 60000 households, So we've given that number and we have not seen that number move.

To be worse or better since the end of April.

Okay, that's very clear I'm very helpful. Thank you.

Alright, Thank you Ron.

Your next question comes from some at some non <unk> with Jefferies. Please go ahead.

Hi, good afternoon, and thanks for taking my questions as always appreciate it.

The color you just gave maybe if I could just ask a follow up on the new bookings side.

I think about sales and marketing dollars itself.

33% in dollar terms year over year, how should we think about maybe framing the.

The magnitude of that bookings growth just because.

Yes, you spent the most you ever have in Twoq is loss I'm, just trying to understand maybe how to think about what new bookings growth by guy there year over year or versus pre covered levels as a point of comparison and then I have couple of follow ups.

Well I mean, the bookings were up meaningfully and significantly from Q2 of last year I will say that Q2. This year was our largest booking quarter ever and Q2 is not typically the largest booking quarter and then to add onto that July has been the largest bookings month.

We've ever had so while we continue to face the.

Current client revenue headwind.

That's impacting us through the unemployment we mentioned that's approximately $2 million and then you layer in the $350000 a week.

In unemployment you know, we're hopeful to establish a for a floor and a new base for growth and so we've been very focused on that I do fully expect that to you know as you as we sell just as in the past we spend it we sell it as it folds into the the revenue side margins continue to improve I actually still feel.

Good about us being able to continue to focus on and and hopefully achieve at least a role a 50 this year, which we would expect to improve next year in so.

No we don't want to be a penny wise in pound foolish when it comes to the opportunity that we have in front of US and you know the spend is working.

We're not going to be wasteful with it but it's working and if you take $90 million out of a quarter.

For both revenue and.

As well as for the interest income.

You know, there's our margins are quite high it at an 85 percentish and so you've got a.

$75 million are so out there in margin that we've also.

Potentially lost as well and so we believe the advertise we know the advertising is working.

And as long as it continues to work we're going to continue to set ourselves up for the subsequent quarters because like I said, we have not yet seen are the impact the negative impact to our numbers get worse or better and.

So like I said, I mean, we're going to continue to focus on new business sales and.

Although it took a pandemic to slow an impact our current client revenue, but not even a pandemic could stop our new business sales because they're accelerating so and that has to do with the advertising spend in part or the other part has to do at the value proposition.

John some audits, that's 30 million a quarter, the 90 million would be the three quarters not yet this year sad right 90 may in for the three quarter, sorry, great very helpful and maybe if I could just in reading the press release, yes, the commentary around the client base still increasing the number of clients it sounds like maybe churn.

Putting aside the different maybe unit retention was better than expected or maybe what better than what we might have expected given how severe the pandemic was maybe if you could just comment on on quite unit retention or the number of customers and how that trended through the quarter versus just the pays per control change.

Yeah, we're not going to give exact retention numbers, because obviously, we give those at the end of the year, but I mean I will follow up on the same thing that I said last time, we're not really seeing units go away we are seeing clients.

You know that May have had 500 employees now have 60.

But we're not we're not seeing unit losses.

We do have a few clients that may be on pause.

You know and we're filing some zero returns for them those are going to be your smaller clients that.

May not have payrolls to run, but they do still have to file.

Taxes, and so we can follow zero returns for them. So theres still active so all that's to say is we're not seeing a unit attrition.

That's very helpful. I appreciate taking my questions and.

Congrats on the strong new bookings performance.

Thank you.

Next question comes from.

Please go ahead.

Chad and Craig wondering if you can talk a little bit about any sort of differences in terms of the types of.

Clients that you're seeing that are being driven by the advertising are they smaller or larger how many you know modules are they typically taking.

How did they compare to your established client base.

Same they compare the same I will say that we did sell our two largest accounts during this quarter just anecdotally, but.

You know that they've been the same.

We're getting more usage in the upfront out of them.

As we are now add say, 100% a commitment to employee usage. We now are getting that on all clients.

As they start so we are seeing people's approach to conversion.

To be more in the effort to where employees would take a full usage strategy. So we're seeing that but as far as the types of clients that were seeing a usual suspects for us.

Any any sort of change in terms of our regional composition are you seeing more from areas that you haven't typically been ended or basically being brought in by the national advertising or how would you characterize that.

No I mean, you know, our but where we have our best reps is where we're going to sell the most and so it doesn't really matter, what what city or location therein.

That's where we're going to that's where we're going to do the best in our leads have continued to come from all over we do have leads that come from Outta territory and those would be places, where we don't have specific coverage, but we've been handling them. The way. We always did now before we would fly out and see some one that had over 100 employees.

In North Dakota.

Today, we're we're doing it from the chair.

In our home office, and so, but we're still a approaching outta territory sales as well.

Okay, and then how should we think about.

The marketing spend.

Advertising is for Wimps I heard a really smart Guy said at one time.

The if.

The advertising spend if it keeps working the way it is I mean, the fall selling season hasn't even really kicked off should we think about potentially it.

The spend going up even further as we go into next year in the following year given that your market share is still leaves lots of room for for for increase.

Well I mean, you can get to a point of diminishing returns on advertising spend you net necessarily don't buy double digital and get double in so you know you have to manage that as we've identified a different touch points of opportunities and advertising for a client through either initial.

Or re targeting efforts.

You know then that gives you an opportunity to spend incrementally on that.

But you can still waste advertising dollars and so you know we take a strategy that where we look at a week by week I mean, we're managing this on a weekly basis, some we turn up and down the dials in areas, where where it met where it makes sense for us too.

To do that.

So our markets our market we are spending the advertising dollars. We are having success, but it's hard for me to say exactly where that would go other than to say that we have an elevated advertising spend now.

We are Ritchie, we are achieving a commensurate result for that and we would look to do more of that in the future you know again without wasting AD dollars and in areas that aren't going to produce results.

Historically July how does it typically rank relative to like what percentage of the typical seasonal months would July b.

You know I think you can have different months that are better than others. As you know mark that even though we may not have said that I said this I believe our industry and I know almost every one of our competitors will tell you selling seasons typically September through.

December as people come back from their vacations and what have you. So I think it's a little more difficult to compare with last year, where potentially you had some people that may have been on vacation and getting back to getting getting ready to get the kids into school in that type of thing you don't have those distractions.

This much right now and so.

Im not saying July was our best July ever I'm, saying July was the best month, we've ever had for sales ever regardless of month end of year end, so but anyway, hopefully that answers. The question I appreciate it that's why.

I'm, saying if July was the best month ever and it's not even the key selling season that.

That should portend well for September through December.

What.

The average float balance what what's sort of effective yield are you getting on that now Craig.

Yes.

We haven't disclosed the yield on our float balance, but you know as we mentioned that 150 basis point.

Cut in Marciano had had about a four and a half million per quarter impact on us we have some that's layered out.

We probably we may not layer out as much as some of our competitors on that were.

Extremely well conservative on on the way, we're investing those funds.

But as or as are renewing obviously, the rights or are pretty low on those funds.

Great. Thank you congrats.

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Thank you.

Your next question comes from Stephen Chang with Stifel. Please go ahead.

Hi, Stephen train coming on for Brad I just have one quick question calendar was I believe that you mentioned in first quarter that that quarter had one less wednesday than normal.

Am I correct to assume that the September quarter will have an extra Wednesday, this year versus a year ago.

That is correct the quarter beginning request a quote yeah the quarter ending in September will have one extra Wednesday, and so I think it happened in 2015 last time. It happened now in 2020, where Q1 had a 12 processing Wednesdays.

In Q.

Three has 14 and the point that we made.

In first quarter when we when we talked about this is that a wind stay has roughly half of a week's revenue billing.

Okay, great. Thank you so much of clearing that up.

No.

Your next question comes from Brad Zelnick with Credit Suisse. Please go ahead.

Excellent. Thank you so much guys.

I got a couple of questions maybe just for starters, Chad I have always been very impressed by your go to market very disciplined approach to opening and maturing offices in geographies, where you see opportunity, but but given the success, you're having with virtual sales now does it change or long term thinking about your go to market.

Not yet I.

I mean, we're going to go where prospects are buying and how they buy.

Prospects continue to buy online, which I mean, I think it's a pretty good model. It removes all distractions and we're watching deals.

Normally you had a meeting this week in a meeting two weeks from now in a week meeting two weeks from them I mean, we're seeing some deals you have a meeting on Tuesday, and meeting on Thursday and meeting the following Monday, So I think as you removed the distractions out of the way I think even buyers are able to focus more on a.

Functionality as well and.

Product replacement so.

Not yet.

You know, we're we're looking at it we're definitely gaining some efficiencies within our sales process.

Throughout management leadership, you now a better development with salespeople because we're obviously on a lot more calls with them a than what we were able to be physically in person.

So as well as cells achievements continue to go up so.

I like the environment we're in.

You know could have done without the whole impact to our current client recurring revenue.

But we like this type of sales environment that we're going through right now, but the fact is up of clients returned back to having people in their office to buy this type of technology, then we're going to be in the office with them.

It makes perfect sense, and maybe if I could just follow up with one on pricing.

You've now got the government's PPP program, that's expired our customers asking for concessions. When we think about you know pap them on a like for life like basis, how does that trending.

Yes, so we have a fair pricing model you know you only pay for the employees that you pay so if you have active employees within our system and you're not paying them. We're not charging you form. So you know that company that had 500 employees that may now have 60 employees were only charging you for those 60 employees.

As you pay them. So it's a fair model does that mean, we haven't had a client here or there that may have asked for that I'm sure we have but our model. So fair model and in that you pay for who you Pat.

Excellent. Thanks, so much and congrats to you on all the success in generating new business in the environment. Thanks, guys.

Q.

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

Great. Thanks for taking my question just first on the on the product side I think you briefly mentioned the manager on the go update.

Out six months now can you just talk about sort of adoption and maybe more generally as you think about sort of the product.

Are there any big themes, you're looking about in terms of sort of evolving and rolling out new features that have come across your client conversations in the last couple of months.

Yeah, you know we've had a product road map for a while now and you got to do first things first and so for US. It was first getting employees to interact with the database we've done a good job on that but we.

We can do better and I again, I don't think there should ever be one change that the employee didnt make.

On their own because anytime someone else does it for them its duplicative no HR departments reading and employees mind and so.

That said there are some things obviously, an HR person has to do.

That an employee is not privy to be able to do themselves. So you have that we came out with the App now we've moved into manager on the go and the good thing about manager on the go is it's very similar to the App. It's within the same technology and it keeps the data flow moving time card approvals performance reviews.

Time off.

Approvals and what have you and so it allows us to get to further automation as we move along and so our goal right now is to be making sure that people are using all the products. We have the more use cases, we have for these the more companies that by a full solution set because it's going to tell.

The full solution set to have full automation and so yes, we continue to be aggressive with our R&D efforts.

We rolled out thousands of update this quarter. We're also finding efficiencies throughout our R&D group from a number of hours that they are actually producing you know we assign hours to a project hours a project takes so many hours were.

We're producing more hours of development in this environment as well and so we continue to be ambitious and as Weve laid the road map and especially as clients and their employees use these products. It gets us even closer to other areas of innovation and automation that we continue to move in.

Great. Thanks for that and then maybe just a little bit of a longer term question here over the years, you've invested a lot in sort of physical space right. You built a new campus and Texas last year, you made a big land purchase right next year facility, Oklahoma City, I guess, given how you've been able to pivot to more of remote.

Work environment, how do you think about the physical need for space and the physical need to invest to help you grow the business over the next year chip. Thanks.

Well I've got a I think we've got about you know.

50, or so people in occupying 1 million square feet right now so we're overbuilt for the environment that we're in.

Right now.

I think it's too early to say I mean, I do think there is something to be said about building a relationships in face to face.

Environment, So do I see a model where we're.

Virtual not really not from where I'm sitting right now I think had we not had those face to face interactions and built those relationships a working the way. We are right now could have been a little bit difficult, but you know we're going to we're going to see what happens I don't think we need to make those decisions.

Today, but if there's an opportunity to be more efficient obviously, that's something we'd be looking to achieve provided that is supports a strong the strong business continuity that objectives that we have today.

Great. Thank you very much.

Thank you.

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

Hi, Thanks for taking my questions. This afternoon, Chad just wanted to drill down into the record sales and try to see if anything is changing out there in the market. What I just wanted to ask you really I know you've been pushing the self service messaging for for a couple of years now you've really been evangelize thing, yet and I'm I Wonder if covidien.

Team and the work from home trend now that's taken hold if that is somehow accelerating the messaging around self service and that could be one of the drivers of the bookings momentum.

Yeah, absolutely I mean, you know we've been running these ads for a while I do believe people are getting it also you know people are having a lot of success with usage. So as employees leave one company and go to another.

We're getting leads that way or even people that used to pay calm solution as it administrator, whether they're in HR payroll benefits administration.

Procurement performance whatever their end.

They leave one company go to another they're bringing in an easier to use solution whereby the client wins. So absolutely a differentiated product is what's driving our sales results, but advertising the differentiation is getting us those at bat.

And so we've been focused on that.

Thank you and then the one follow up I had for either you or Crag way just trying to get off its possible anymore color in terms of what that growth is on the bookings is there anything that maybe you can help us maybe band.

Share what the bookings growth was last year in this quarter. Since we know it's above that are or maybe what your best month was in the company's history. Since we know July would be above that without necessarily given the exact rate. Thanks.

Yeah, I mean, we haven't we havent disclosed that and that's kind of a rabbit hole. We go down that you know we just continue to go down once we do it is a fact that our Q2 bookings of this year was the highest booking quarter. We've ever had we've had great booking quarters.

Before this was the highest we've ever had up and then it's also a fact that July the month oriented right. Now is the highest month, we've ever had which would tell you that our July month.

Month was better than any month, we had in Q2 and Q2 was our largest or new business core. So we just finished our largest month after having just finished our largest quarter. So we'll see what happens the rest of of Q3, but we've kept momentum.

Ever every sense I shift I shuts down for two waves end of March my mistake cost us about 50% of of book sales revenue for those two.

Rigs, we got back to about 80% or where we were the first week of April we got right back to where we were on pace toward the end of April and then as you've heard during this that accelerated throughout the rest of the quarter, making it the largest a quarter we've ever had four new.

Business bookings and then now we've just followed that up with our largest month.

And we believe that right now at least from what we can see.

And as we sit here today are.

Our at the impact of our current client revenues has has stabilized and that's why we've returned to a guidance for Q3.

Thank you for that additional color.

Thanks, Brian.

Your next question comes from Alexander with RBC Capital markets. Please go ahead.

Hi, This is Robert Simmons on for Alex.

I believe you've opened one new sales office in the last two plus years.

Given the usual ramp time for your office with this now be a good opt opportunistic time to open a few new ones or opportunity. Alternatively are you expanding your team sizes.

Yeah, we havent necessarily expanded team sizes now we did talk about how we've added inside sales teams. We started adding those we had one that we really put together through last year and then continued to add additional teams to that right now everybody is an inside sales.

Sales rep on an inside sales team. It's just our inside sales by definition focuses on below 50 employee companies and our and our outside sales group, which again is working inside focuses on.

Above 50 employees.

We're just having a great success with performance I think that the amount that anyone reps sales is continuing to increase and it has been I mean this isn't a phenomenon that just happened right. Now you know our top reps have content. We have continued to increase the amount that one rep.

Ken sale and so it's not that we've hired a bunch of extra reps. It's that we're having very strong performance amongst our sales rep groups with some moderate increases and inside sales.

Teams as we fill them out.

Got it great and then.

Can you size the impact of lower levels on Q2 revenue can we think that 2 million to multiply that by 13 or is that two simple.

Roughly it'd be yet to be to me and multiplied by 13 for the quarter Yep plus the impact on the intra and then the interest would be what we called out last quarter.

Was 4.5 million per quarter, which I think you're looking at close to $30 million. Yeah 30 may in total for the quarter.

Got it great. Thank you.

No.

Your next question comes from Ryan Macdonald with Needham. Please go ahead.

Hey, guys. This is Josh on for Ryan.

What assumptions are you baking into Q3 guidance for improved improvement in employment trends versus new customer growth.

Do you expect that 2 million per week to remain steady and your assumption and then the benefit.

Of the extra Wednesday is that roughly 8 million dollar benefit to the corner with a half week of recurring revenues.

Yes.

First off on the extra Wednesday, you know that would've been a kind of the pre covert levels. You know now you're looking at more of a six and a half to $7 million range on on that impact on the on the quarter.

In terms of the Q3 guidance you know what we've seen so far as it relates to our current client bases not not much of an improvement you know what kind of hit that 2 million dollar level in this stayed there and any improvements.

Kind of in the unemployment.

Level would have minimal impact on us.

What.

Obviously happened in April work, where it went up so much so.

We really haven't baked in any improvements we haven't seen any so far for the quarter.

Okay, Great and then I just one follow up how should we think about your hiring plans in the back half of the year versus.

Pre cultivated plans earlier this year do you feel like this is also a time to ramp up hiring more than you had maybe originally expected at the beginning of the year.

I think it depends on the department I think that you're going to see every business come out of this more efficient I think we all are sent groups of people to work from home and you know we all had groups of people working a different ways from home and as you go through any business and you start identify.

Fine Who's doing what you know theres opportunities to become more efficient across the board, which we've taken advantage of that.

So I think all businesses come out of this a leaner than what they did a going into it to be honest with you and I think that we've seen some of that now that said just like we have pulled back a little bit on getting people out there selling for those couple of weeks, we did very similar with our recruiting and hiring.

Opportunities those have.

Ticked back up, especially on a sales R&D side and some of the others and so.

But.

We will continue to look at that and staff at what we need.

So yeah I mean, we have started rehire again.

For sure.

Got it thanks guys.

Yeah.

And as a reminder, have you would like to ask a question at this time. Please press Star then the number one on your telephone keypad.

Your next question comes from Arvind Ramnani with Piper Sandler. Please go ahead.

Hi.

Thats on a on a good quarter.

Just.

Question, you know settlement abandon Mckay.

Brent into changing how your product.

I was just line.

No no other than that.

You know I've two questions.

What areas are you most surprised about from upside and downside perspective.

And that can they are there any sort of permanent changes you're looking to.

We're going to put in place.

Yeah, I mean, I would say you know the upside perspectives, obviously the sales a piece and I do think that this has like I said the pandemics exposed weaknesses and also created opportunities you know I think probably every business would like their employee to have a direct relation.

And ship, but the database maybe they just didnt want to have that conversation and now it's much easier.

To do that.

You know from a surprise to the downside I guess I'm surprised that our number at the impact to our number got to where it was an it stayed there consistently.

Week to week, you know I would've expected some fluctuation in it.

You know getting worse over time, and then getting better over time it seemed to have gotten really bad at the beginning and stayed there.

But I also think you know maybe clients took their hits a early and and hopefully if that's the case, we will we will see continued to see stabilization in the number we have thus far I mean, we've seen stabilization in the number now for almost three months.

And unemployment as you guys have seen has moved up and down but I will just go back to what I say the most accurate unemployment data is derived from a random survey of 60000 households that have 110000 people.

So that's the most accurate number that we're all trying to tie to and it's difficult to tie to you can take that number and then also what I said is pre co bid. The number of initial unemployment claims you know what was to around 200000, I mean, specifically first week in January was 212.

Thousand second week 207000, the next week to 20. The next week to 12, Firstly can February to a one and two Ofour you get the bank and then we get to the third weekend March it jumps to 3.3 million. The next week at 6.8 million. The next week at 6.6 million and then it goes until over the.

Yes last I'm going to call. It six weeks, you've been in between 1.35 million and 1.5 million.

For weekly initial unemployment claims filed far cry almost seven ex times. The number of initial claims filed pre co bid and we're still our numbers are continuing to be stabilized we're not saying.

That impact and so you know we're going to separate ourselves from that comment. It was an important commented we weren't giving guidance we needed to give a directional and so we did that but now we know the direct impact that it's going to have on our numbers and and so like I said, we're bringing it.

Or building a new baseline here hopefully it's built.

And we'll see but we're also building the launch pad as we head forward into next year and that's what we're that's what we're focused on if unemployment numbers.

Get better with our clients then we're going to experience some growth if unemployment numbers get better from a survey and not with our clients. Then we will not experience organic growth of current client revenue, it's going to come from the heavy lifting of of new business sales, which Oh, we continue to.

Achieve.

In great fashion right now.

Yeah that's.

Thats Super helpful on.

On the existing clients there.

Clients have been reducing headcount you're talking about some of them enough sterilization <unk> are you going to help us.

I think to.

Yeah, what triggers youre not seeing far but that didn't there exist existing bank go back and rehire employees that either footnote on it.

Yeah, I mean, I believe that.

Some of the ones that I'd mentioned before I mean, I know, we had health clubs, we had hotels, we had a transportation when we had some different different groups that you know were impacted by by that could we get some uplift yes, we could we absolutely could could we be negative impact.

Negatively impacted more in areas that haven't yet experienced a significant shut down I don't know, maybe but we're just going to have to wait and see but one thing. We did was we went through an analysis of what were the impacts on a current client revenue what were those numbers when did they start what.

Has been the movement sense and I believe that's the most relative number to us and so.

We've seen stabilization I am hopeful that that stabilization continues we feel good about third quarter. That's why we've gone ahead and returned to guidance here in the third quarter and then we'll see what happens subsequent.

To that but thus far for the last three months, our numbers have been stabilized as far as the a negative impact on our current clients a unemployment trends.

There are no further questions at this time I'll turn the call back to Chad Richison for closing remarks.

Alright, well I want to thank everyone for joining us on the call today and I'd like to spend or send a special. Thank you to all the employees for all the valuable work, they're doing well.

Over the next couple of months will be meeting with investors virtually at the Oppenheimer Conference on August 12, and in September we plan to participate in the city and Jefferies Virtual conferences. We appreciate your continued interest in pay calm and look forward to connecting with many of you soon.

Thank you operator, you may disconnect.

This concludes today's conference call. Thank you for joining you may now disconnect.

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