Q3 2020 Paycom Software Inc Earnings Call

[music], ladies and gentlemen, thank you for standing by and welcome to the Paycom software third quarter 2020, <unk> quarterly results conference call.

At this time all participants are in you listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you may need to press star one on your telephone.

Please be advised that todays conference is being recorded.

I would now like to hand, the conference over to your speaker today Mr., James Samford head of Investor Relations of pay call. Thank you. Please go ahead Sir.

Thank you and welcome to Paycom third quarter 2020 earnings conference call certain.

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 FCC, including our most recent annual report on form 10-K and.

And our most recent quarterly report on form 10-Q.

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

Any forward looking statements 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 todays call, we look forward to certain non-GAAP measures, including adjusted EBITDA non-GAAP net income adjusted gross profit.

The gross margin and certain adjusted expenses.

We use these non-GAAP financial measures to review and assess our performance and for planning purposes.

Reconciliation schedule, showing GAAP versus non-GAAP results.

Included in the press release that we issued after the close of the market today.

It's available on our website at investors that take 'em Dot com.

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

Yes.

Thanks, James and thank you to everyone joining our call today I also want to thank our employees for delivering another excellent quarter for today's call I'll spend a few minutes on our third quarter 2020 results and the long term drivers of our business following that Greg will review, our financials and provide some perspective on guidance and then we'll take.

For your questions.

I'm very pleased with our performance in the third quarter with continued strong demand for our solutions in a large and expanding human capital management market.

We have less than 5% market share, which gives me a lot of confidence in our long runway there.

The unemployment headwinds across our pre pandemic client base remains relatively unchanged from the second quarter, but our product value proposition is having a lot of success and we're plowing through the headwinds with strong new business sales.

Q3 revenue and adjusted EBITDA came in at 196.5 million and 67.5 million respectively. Both ahead of our guidance. Thanks to strong new client adds and benefits from operational efficiencies.

Based on combining our implied full year outlook for revenue growth and adjusted EBITDA margin, we expect to hit the role of 50 and 2020, despite being in one of the most difficult economic times, we've ever seen and I believe we will improve on the role of 50 and 2021.

Our marketing plan in the third quarter delivered strong demo leads leading to strong new client sales and we plan to continue to spend aggressively on advertising to fuel future revenue growth.

The challenges created by the pandemic are exposing the shortcomings of disparate H.C.M. systems, which are cobbled together from multiple vendors and the value proposition of Paycoms single database solution is stronger than ever for companies of all sizes, including companies well above our target range.

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We continue to be pulled well above our stated targeted range as larger companies look to leverage automated processes for their own employees.

At the same time, our small business adds have continued to increase in 2020 as we continued to build out our inside sales force.

Manager on the go continues to gain popularity and was recently named a top HR product at this year's HR Technology Conference.

We are receiving more leads and referrals as the industry shifts toward an employee usage strategy.

Since the end of Q1 2020 usage of manager on the go has nearly doubled 90.

98% of all Paik on clients that have deployed manager on the go.

Manager on the go fundamentally changes manager workflows and accelerates the speed that data moves throughout the system, which further increases the ROI of our solution and sets us up for future usage patterns that paved the way for future product innovation and automation.

D X usage continues to trend upwards towards the 100% Mark up from the low Ninetys in July we changed ourselves procedures to ensure that new clients commit to 100% usage. We are now at our highest dx usage rates since launching the industry's only software.

Oh, that's kind last year Ceos and HR executives continue to see the savings from an employee's direct relationship with the database as a reminder, when an employee makes a data change themselves. The company Sage spore dollars and 51 cents and the savings are calculated in real time.

Using the DTN X, we are extremely ambitious with our product roadmap and we're continuing to invest in R&D.

The pandemics impact on our pre pandemic client revenue remained stable and it's unclear if or when those same clients well add to their employee counts. When we reported earnings in August we said that without a catalyst we wouldn't expect employee counts to improve and thus far it is.

Not improve materially nor has it gotten any worse.

As we work through these unique times, 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.

Our execution along these three fronts has been exceptional.

Based on the strength of our new client revenue trends differentiated value proposition less than 5% estimated market share and the effectiveness of our marketing and advertising campaigns I'm confident we can deliver even stronger full year revenue growth next year on top.

Of our newly established base, even without any improvement in our pre pandemic clients employee base.

The digital transformation for businesses is accelerating and our investment to expand our market shares working leads continued to be driven by users employee referrals and our investments in advertising and all are up year over year, we're putting a greater distance between our product value proposition.

And that of our competition and we believe we are the clear choice for those seeking a more efficient way to manage HCM needs I'll stop there and hand, it over to Craig to review the financials and guidance Greg.

Thanks, Chad before I review, our third 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'll briefly cover our Q3 results and trends then I'll provide some high level comments about Q4 guidance last quarter, we discussed how the.

Fact on our current client revenue of lower head count at our pre pandemic clients represented a loss of approximately $2 million in weekly recurring revenue the impact of a 150 basis point interest rate cuts that occurred in March represented an additional loss of roughly 350000 in weekly rig.

Current revenue.

Today, we haven't seen any catalyst that have materially changed this weekly headwind our growth is therefore, largely coming from new client business.

In the third quarter, we generated total revenues of $196.5 million representing growth of 12.3% over the comparable prior year period, driven by strong new business wins within total revenues recurring revenue was 192.7 million for the third quarter of 2020 purpose.

Winning 98% of total revenue for the quarter total adjusted gross profit for the third quarter was $166.8 million, representing adjusted gross margin of 84.9%.

Adjusted total administrative expenses were $113.3 million for the third quarter as compared to $94.4 million in the third quarter of 2019.

Adjusted sales and marketing expense for the third quarter of 2014 was 58.3 million or 29.7% of revenues up from $46.7 million in the prior year period, our deliberate increase in advertising and marketing efforts over the last several quarters are translating to more demo.

Leads and virtual meetings and increased close rates and we intend to be aggressive in this area again in Q4 to drop further market share gains.

We expect Q4 sales and marketing expense to be similar to Q3 on both a GAAP and adjusted basis.

Adjusted R&D expense was $19.7 million in the third quarter of 2020 or 10% of total revenues adjusted total R&D costs, including the capitalized portion were $29.8 million in the third quarter of 2020 compared to $24.8 million in the prior year period.

Product innovation remains a key driver of our growth and we will continue to expand our R&D investments to further differentiate our solutions.

Adjusted EBITDA was 67.5 million in the third quarter of 2020 or 34.3% of total revenues compared to $66.6 million in the third quarter of 2019 or 38% of total revenues. We are deliberately investing in future growth through the pandemic and believe this.

Sets us up well for accelerating growth in 2021.

Our GAAP net income for the third quarter was 27.5 million or 47 cents per diluted share based on approximately 58 million shares versus $39.2 million or 67 cents per diluted share based on approximately 58 million shares in the prior year period for.

For Q4, we expect our effective income tax rate to be approximately 29% and our full year effective income tax rate to be approximately 22% to 24%.

Noncash stock based compensation expense was $19.5 million in the third quarter, and we expect noncash stock based compensation for the fourth quarter of 2020 to be approximately the same as Q3 2020.

Non-GAAP net income for the third quarter of 2020 was 40.6 million or 70 cents per diluted share based on approximately 58 million shares versus 41.1 million or 70 cents per diluted share based on approximately 58 million shares in the prior year period, we anticipate fully below.

Good shares outstanding will be approximately 58 million shares in the fourth quarter of 2020.

As of September Thirtyth 2020, we have repurchased over 4 million shares since 2016 and have $172 million remaining in our buyback program.

Turning to the balance sheet, we ended the third quarter with cash and cash equivalents of $156 million and total debt of 31 million cash from operations was 66.8 million for the third quarter were 24.5% increase over the comparable prior year period. The average daily balance of funds held for CLI.

Lance was approximately 1.1 billion in the third quarter of 2020.

Now, let me turn to our guidance for the fourth quarter of 2020, we expect total revenues in the range of $212 million to $214 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 fourth quarter and the right.

As of $76 million to $78 million, representing an adjusted EBITDA margin of approximately 36% at the midpoint of the range based on this outlook. We now feel we can comfortably deliver a combination of revenue growth and adjusted EBITDA margin to hit a rule of 50, despotic pandemic and lower interest on funds held for two.

Clients, we estimate the pandemics impact lowered our recurring revenue base by total of roughly $90 million to $95 million over the last three quarters of 2020. In addition to the loss of sales earlier in the year, while we transitioned our sales organization to the work from home model 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 I highly profitable recurring business model and a rapidly expanding value proposition with the.

That we will open the line for questions operator.

As a reminder to ask a question you will need to press star one on your telephone.

To withdraw your question press the pound key Andrew.

And your first question comes from the line of Raimo Lenschow from Barclays. Your line is open please.

Hey, two quick ones.

Hey, Chad you do talk about the.

You talked about the new business doing well do you have any do you have any kind.

Kind of data points to kind of help us or any more commentary around that you kind of help us understand what the momentum that you have there.

Well I mean, our bookings in our leads our new business sales in our new business starts of all remained at record highs and from where I sit right now I don't I don't see that changing you know now that Weve returned to guidance. We're focused on that piece I do believe that you see these numbers that weve added.

Reflected in our current quarter as well as in our guidance as a reminder, a deal that might start at the beginning of a quarter, we would receive 100% of the revenue for that new business and should that deals start at the middle or into the quarter, we would receive proportionate revenue for that business, but we would receive.

All of the revenue for that in subsequent quarters, so how they'll start to matter, but for US you know leads have been up a sales have been up and so start so very happy with what we're accomplishing right now.

Perfect and then one follow up like in New York and in your prepared commentary when you talked about coal, but you mentioned that obviously, it's a headwind is that people have a lower employee count then since you got paid on a per paycheck basis that hurt you. So.

So in a way if you think about it like.

It is a good way to understand it at the beginning of the crisis pre prepare for a while and.

Then they didn't come back until you called running with that gap and then as you think about next year as hiring starts again and then you find such a when you kind of feel that that gap that was created is that the right way to think about it.

Well, we're actually going to look to fill the entire gap with new clients added that's what we've done up to now I mentioned that we haven't seen any material changes in our pre co bid or quantify the impact on our pre co bid a client base and so you know we did mention how it was $2 million anywhere from 1.9.

5 million to $2 million of loss that we were seeing per week, we mentioned that at the end of August alright, sorry at the beginning of August and we did say that we'd seen stabilization in that number throughout the second quarter as we sit here today, we can't call out that that number has changed Mattel.

Really.

I mean, you may have had a small impact a one week or another of less than 100000 dollar impact on that number to the positive. So you know to the extent it was to me and it might be a little above a 1.9 million depending on what we you measure, but you know we said in August that without a catalyst we wouldn't expect.

The impact on a pre tovia decline employee count to improve.

And while the unemployment.

Has improved since that date and its still double what it was pre co bid.

It hasn't materialized or you know for our clients, who reduced staff and it makes sense I mean, there's nothing that's really happened since August that would cause a hotel to all of a sudden start hiring their people back or restaurants or entertainment business or health clubs. So you know the fact is as those businesses are more served.

Ivan I wouldn't necessarily call. It im thriving at this point and you know we're waiting on either an end to the pandemic or some type of a stimulus before I think we'd see some meaningful change to that so as we look into the future. We believe we've established a new base hopefully we get some tailwind a out of it.

But right now I'd call it more of a crosswind as it stabilized and you know we're job and through that and we can get to where we need to get by adding on new clients, which I will say, we've been doing adding on new business at record pace through the pandemic. So I don't see a situation in which that stuff.

That's for us as our value proposition is only gotten stronger.

Productivity congrats thank you well done thank you.

Your next question comes from the line of Samad Samana from Jefferies. Your line is open.

Hi, good evening, Thanks for taking my questions I hope everybody is doing well.

Maybe just a starting point I want to follow up on Ramos question around new bookings, if I rewind back to 2019. The company that added about 3000, new clients that that's about 750 average per quarter I'm. Just curious to further frame that new bookings is it fair to assume that you're adding more than that seven.

Deeper quarter, I'm kind of on an annualized or quarterly basis exiting July and into Threeq were just trying to maybe numerically a nail down what that bookings suggests.

Yeah, I mean, well what I can tell you and I haven't called out exactly units you know units would be based on how many smaller deals we got versus larger deals I'm more talking about the revenue generated whether it's a larger or smaller deal. The aggregate amount of revenue that we are both selling as well as converting.

You know continues to remain strong and has been at record a record levels as Weve continued on now it's gotten better right in the beginning we were trying to get back to pre pandemic, which I had mentioned in our first quarter I believe I gave that announcement either the very end of April or first of May that we had gotten back to.

Pre pandemic sells levels you know after we had backed off for a little bit and kinda curled up into a ball and just kind of waiting to see what happened we got back to pre pandemic levels last quarter I talked about how that's even accelerated mention that we've had are at our best month as I reported in August talking about.

July and then at what I've talked about this quarter is just a continuation of that and that we continue to get stronger and stronger in both the book sales as well as the started sales growth.

Great and maybe just as a as a follow up to that the commentary it done Hey, Bud you and Craig mentioned in 2021 are looking out had to that end I believe re acceleration of revenue as mentioned I'm curious if you could maybe just frame that a little bit are we thinking when you say that is it in terms of accelerating from 2020 levels or should we think about accelerate.

Asia and in the context of.

Back to what peg how much historically growing when we're thinking about kind of the high twentys, 30% type of grower in 2018 2019.

Yeah, well you know we've calculated the impact on.

On our revenue right now it's no nobody has to guess how many fingers were holding up we're telling you. How many fingers were held up. So you know we've already calculated the amount the impact that that has on us and so and we also believe that it is well we know it's been stable and so as we turn into next year, obviously, we have a first quarter.

Recall.

That.

Doesn't have much cove it impact on it but as we move into those subsequent quarters throughout the year and weren't lapping a co bid.

With a new established base and added clients. During this time I feel very comfortable about our ability to get back to a you know a.

A very strong growth numbers with that with strong adjusted EBITDA numbers as well.

Great. Thanks, guys and glad to hear about the strong bookings performance again this quarter.

Thank you.

Your next question comes from the line of Yellow Chiu from Credit Suisse. Your line is open.

Hi, everyone. Good evening, Thanks for taking my questions I Hope you, all keeping well, let's say.

That's in the quarter remarkable execution from everyone involved here.

I had a question around one of the comments that ATP.

On the recent quarter and it ties a little bit to that.

You are mentioning around stimulus Chad in terms of catalyst.

Good stimulus helps clients that were just falling just bankruptcy and the remains continued uncertainty.

I mean listen strain from partial shutdowns I'm wondering you've taken this two ways number one how do you think sort of the stimulus or lack thereof would have a meaningful impact on cost recovery for your business and two how do you position the business I'll go to market motion differently to react to the possibility of stimulus.

Yeah, well I mean, we're operating our business to succeed whether theres, a state a stimulus or a fast into the pandemic, regardless and so.

We're focused on those things, we can control and and there being a stimulus stimulus for there being a.

Stimulus that actually works to drive business growth.

We'll have to kind of take a wait and see approach on that.

But I do think that as stimulus can bridge the gap between those businesses that may be going out of business. It could be the difference in them going out of business or their survival. You know as we look at the amount of revenue that we've lost per week, which again has been stable there is an amount of business.

Hi, there that we've been able to identify that it has gone out of business. It's a smaller number but there is a percentage of of the hit that we are taking on these headwinds that we would not expect to come back just because it is a.

It's related to business closures and that's a much smaller amount I mean, I would say that represents a problem.

Probably a less than 10%, it's probably in the single digits of of that amount of that we've lost every week.

You know I would say, a 90% or more of it is still in business a processing with a lower employee count.

Gotcha Super helpful. Thank you one quick follow up wanted to double click on inside sales, which you called out can you remind us the size and resources dedicated to this effort what the learnings have been any particular module on need that's resonating with clients in this environment.

Yes, so right now we have four inside sales teams. They are fully staffed at a 32 employees obviously, they each have managers they focus on the businesses that have to be low.

50 employees, you know Weve continued to generate interest a down market.

Thankfully, we had inside sales before we made the shift because I would say our outside sales, they're not using the exact same model to sell that inside sales is using but they do use a lot of the same technology and methods to which to connect and so we've continued to grow our inside.

Sales, obviously, when you add a number of inside salespeople much larger than what you had the previous year you would expect to have success a down market and so we do continue to have success, a down market as well with our inside sales group.

That's great. Thank you congrats again.

Thank you.

Your next question comes from a line of Adam Borg from Stifel. Your line is open.

Great and thanks for taking the question just maybe for Chad and now that we're in the typically strong selling season, just given the pandemic and the changes that cause any sense on how the HCM optimizations are being prioritized prioritized relative to past years.

Well I mean, I think that our advertising side, helping with that I wouldn't say that people wake up in the morning excited about shifting over changing over there are human capital management products you know.

Probably about as many people that wakeup excited about going to the dentist.

However, if you have enough pain, you are excited about going to the dentist or are making those changes and as we've moved through co bid I think that the pain points should become more apparent and using outdated systems, where employees have a multiple systems that they need to use so I actually they often.

Times go without the shift to employ usage I mean, that's the thing moving forward were not going backwards as a society and youre going to just see more and more businesses figure out that they can leverage their own employees desires for their own benefit and receive a very strong return on the best.

But that they are paying with paycom. So we're going to continue to drive that and received those benefits and again the pandemic has only exposed.

You know the problems with using disparate outdated systems and so you know we're focused on that and we're having quite a bit of success and and that's going to continue through selling season.

Great, Thanks for pay comps, which which for Paycoms all year round.

Excellent. Thanks again.

Your next question comes from the line of Mark Mark on from Baird. Your line is open.

Hey, good afternoon and congratulations.

Wondering with regards to the to the bookings that you're seeing any change at all in terms of the composition in terms of the source of the bookings are you seeing that or more that are coming from say regionals relative to some of the bigger competitors that are out there and Chad I think you also mentioned.

That you're being pulled up market even beyond your range can you expand a little bit on that in terms of what you're seeing.

Sure so as far as the bookings that they're all similar there's just more of them. It's the usual suspects I did call out that we do continue to be pulled up above our targeted range or our stated range I should say and that's been happening I mean thats been happening since we went public we continue to be talk.

Thing about being pulled up above our range and so that's continued to happen.

During the.

This environment as well and so we have both that as well as as I mentioned earlier, we have built out our inside sales group a much larger than what we had this same time last year. So you would also expect that we would be having some success.

Below 50, as well as that was a.

Somewhat traditionally I.

I don't necessarily want to say ignored, but what's not a focus for us and now we have a group and several teams that are making that a focus down market.

It sounds like you're being Barbelled, a little bit in terms being pulled the up and down.

Which is great.

Can you talk a little bit about you mentioned that the close rates are improving how how much and what do you attribute that to.

No, we're not going to call out exactly the specifics on that improvement, we've always had a better close rates as you measure them over time, you know you're one month close rate on on selling a deal is going to be different than your three month close rate again, you know.

If you give a deal a little bit longer you might have a higher close rate, but I would say the one thing that I would point to that I believe that's really helping us with our close rate is the fact that we are catching a more interested and knowledgeable prospect.

We're hitting the airwaves hard with our advertising we've been doing quite a bit on digital as well as we've had significant word of mouth from employees that go from one company to another and then bring that sand and so you know we are when someone's calling us now, which again is different you know often times.

Most of the business, we brought on we've called and I'm not I'm, not stating that still isn't a large part of our business, but one thing that has gone up.

As a percentage has been the number of call ends we're interested parties that a request in those demos and they're just more educated on what our value proposition is going into it and I think that that's a leading to a higher level of crop close rate for us right now.

And then one last one just sounds like you are getting more logos, but can you talk a little bit about upsells to the extent you're seeing them.

Yeah, we continue to up sell to current clients. That's never been anything that we've ignored we've always done that aggressively and that remains the case today no change in percentage from Upsells to current clients versus.

New client or new business revenue that were onboarding to our platform. So no changes in percentage there, we're not selling more we're not up selling more to to our current clients now as a percentage of the new revenue added than what we've done in the past.

Great. Thank you very much.

Your next question comes from a line of Daniel Jester from Citi. Your line is open.

Great. Thanks, Hey, my question everybody.

First maybe a question on margin.

Year to date EBITDA margins are down I think about four point compared to the same period in 2019, so can.

You just reflect like how much of this is Jeff the float revenue going away versus other factors impacting the business and as you think about the margin structure of the business going into next year kind of what are the puts and take two we should be thinking about in terms of the potential to improve off of this year's level.

Sure. So the EBITDA margins down like you said about four points I mean, that's primarily from the slow revenue that we were receiving which is a high margin.

Piece of our business as well as the fact that our current clients are paying less employees. I mean, that's that's also a piece that impacts that margin. So the things. We've been extremely proud of is just you know our gross margin stayed fairly consistent even through this and we're seeing efficiencies throughout the organization both in our service.

Seeing organization and our our on boarding as well as just the sales organization. So you know as we move into 2021, you know weve talked about.

Opened to improve and obviously the margin is is one area, we're going to continue to focus on that you know the.

The other thing is we're super focused on revenue growth, so we're going to spend too in.

In terms of sales and marketing for that revenue growth as well.

And then I know the implementation is a very small part of the revenue base, but it is growing at half the pace on a year over year basis subscription revenue given sort of the commentary about the strength of new bookings should we see improvement in the growth rate in that implementation revenue line in the upcoming quarters or how should we thinking about that thanks.

Yes, as a reminder of the.

The new booking the set up revenue that we charge clients.

We capitalize that and Emirates recognize it over a 10 year period. So.

The amount that we're charging for that set up goes into the deferred.

Deferred bucket so.

You're not going to see significant changes in that on the revenue line. As a reminder, there's other items in that line as well you know we have a certain hardware sales as it relates to a time and attendance and some other items as well.

Great. Thanks, guys appreciate the color.

Uh huh.

Your next question comes from the line of Brian Schwartz from Oppenheimer and company. Your line is open.

Thank you and thank you for taking my questions.

After now Chad a follow up question here. The implementation are you seeing any change in the pace of the implementations you know whether it's the smaller deals that you're doing or.

Higher deals.

Have they changed at all here in the virtual world.

No not really I mean, you know we did have a a transition period right of deals that we had sold.

January February and March that had a certain expectation of what conversion would look like and then you know we changed what all that looked like I mean, you were expecting someone to come out to your office or you're expecting different training on side. I mean, there was a lot of things that we had to change, but as we sit here today that's all.

Filtered itself out.

Any pushes that we had through into the second quarter. You know we started to all see that come back in as we sit here today, our no start rate for business sold is not unlike it was last year or.

So its it they are very similar so I think as we moved throughout the quarters. You did have some pushes you had a few delayed starts just because we had to really go back and not.

Not going to say resell because we never really lost the deal that we did have to acclimate them to a different process mindset of implementation and we've done that and those deals.

Have been onboard and so as we sit here today and as we look forward, there's nothing to call out on any type of either elongated type.

Time to go live or accelerated time to go lives.

Then if I could ask you the follow up question just thinking about it moving ahead.

Do you do you feel that you have enough sales capacity here. You said you are fully staffed with the inside sales, but clearly you know what you're talking about the velocity of the new deals in the bookings in the advertising and that Correspondently with with your services organization to be able to continue.

To deploy the these new customers and achieved a high satisfaction levels that the company has always been able to do.

Yeah. I mean, you know you always want more salespeople, we're continuing to add salespeople I think one thing we've been able to do you know in the beginning again, we had to shift over to the new model. We've done a good job of that we did pull back on hiring at that time, we've since put the gas back into hiring and we started doing that.

Early this summer, where we started getting back to that our sales reps are having a lot more success right now or are we are having a significant productivity gains amongst our same sales organization that we've had our office opening strategy still intact, we still we still do plan to.

Open up offices as it makes sense also right now every cities over so we're able to really sell from anywhere right now so Oh I.

I see us returning back.

To the same model, we had in the past.

You know at the appropriate time, we still may receive some efficiencies through us selling you know look if the if the client is going to continue to buy online maybe they do maybe they don't I don't know yet you know then we're going to continue to sell that way, even though we may be back in our offices.

Selling from those desks instead of selling from our home desks. So you.

You know what kind of see what happens, but so far.

Now with the exception of the negative impact that the Pandemics had on our current client pre pandemic revenue as well as interest rates with the exception of that every every impact that.

That we've had as we've gone through this has really been positive and.

You know we're.

We're very happy about a you know about what our future looks like right now [noise] lap.

Lap and really that's that really is driven by the value proposition I mean, that's what's driving everything you know we have the right value proposition for business and they can make that shift very easily right now and start they can receive a product that works for them and pays them back versus a product they.

I have to work and thats costing them money and so that's really what's driving.

Last question from me for Craig I think you got the question here before kind of just more direct way about thinking about the margin trajectory for 21, I'll ask it a little bit differently, because you've given a lot of color here so far.

Are any of the savings that are happening today, let's just say PMT from having got the remote workforce.

Are any of those sustainable here as we think about 21 or any other items such as Lee said, maybe you can share with thoughts how you're thinking about the pace.

Organization, returning to work down any color on that would be helpful. Thank you very much.

Yes, I would say on the travel and entertainment you know obviously, that's it at a much lower level than it had been in the past, where we would bring the entire sales organization into train I mean, a lot's going to depend on what it looks like next year I mean, once we if we get back to normal and we'll we'll see those numbers start to go up some.

So so I think that's what I would say on that on the leases were still evaluating that.

You know, but at this point you know, we're we're continuing kind of as normal until we see what it what it looks like in 2021, and just to kind of dovetail off of that you know we haven't been.

Expanding our adjusted EBITDA and our adjusted EBITDA percentages by pulling levers we've been doing it by.

Selling profitable business that all follows the same margin profile and so the more business we sell.

Over time, we are receiving that benefit of the increase of adjusted EBITDA and so when we look into next year or.

Saving money on travel and invert entertainment and those types of sales you know I mean, if we're not going to spend.

Poorly on it but that's not really our objective is saving that our objective is to continue to accelerate revenue continued to onboard clients and capture.

More than the 5% of the market that we have today and that's what's going to drive our margins as well as our revenue growth into the future.

Thank you very much.

Your next question comes from a line of Alex you can from RBC. Your line is open.

Hey, guys. Thanks for taking my question and congrats.

Well, maybe just the first one from me chat can you remind us what's the Ics vertical exposure for the business. You mentioned one of the reasons that you didnt see kind of the same uptick from employment bouncing back was because of the hospitality travel maybe restaurants can you remind us what's the exposure rate there.

Yeah, we're industry agnostic and so we've said that.

Now I guess, you could somewhat calculate the exposure rate in that we've told you guys exactly what the weekly impact to our revenue has been from that those same clients, having employee attrition layoff furloughs or or what you have but I would say its a.

A little bit different everywhere, you know some states have restaurants doing better than others. Some states are doing better at restaurants, because the weather is conducive.

For their business and potentially if the weather does not hold up you know.

We could see a different situation, but what we've seen up to now as people were being responsible early on.

With preparing for the pandemic at least our clients I think I mentioned early on I mean, when we were reporting second quarter first quarter that we do think many of our clients took their hits early because we started to see some of that.

In in mid March as as they started to make those moves so.

I'm hopeful that people start to add back up.

And I think that they will at some point, we're just not waiting on for that we're not just not waiting on that to happen or being dependent upon that for our future growth initiatives.

That makes total sense and I guess do you expect walk us through you know because.

Because you've seen a round of stimulus get enacted and then if you can kind of share with us from a timing perspective, if we do get stimulus you know it.

It's very early in the year when would you expect that actually flow into your customer base hiring trends or is that not the right way to think about it yeah.

Yeah, I don't I don't know you know when you look at stimulus I would say even stimulus in the last package had a a much larger impact on small business than what it did mid size and and large business at least from my standpoint of kind of what we saw who took.

What if you will and so.

You know I just think all that just depends on what type of stimulus. They are putting out there you know if they if they do a stimulus that's tied to quality jobs of people producing quality jobs of certain amounts of pay and and you get your stimulus based on that or.

Or even a stimulus that has some reimbursements based off of the company, adding quality jobs, probably going to be a pretty nice tailwind for us.

If the stimulus comes in sending checks directly to individuals that are at their house you now we could have a tighter labor market. So we're just going to have to see from that but again I'm going to separate us from the impacts of employment. The the changes in employment that have impacted paycom, we've seen those stabilized now.

For I mean, four or five months and so you know.

As we head throughout this quarter and definitely as we head into next year, we're expecting that to be stable and then we're expecting to be able to.

You know hit our growth objectives through adding new clients to our platform, which you know has really we've been doing a good job right now and I think as we lap.

No bid with co bid you know, we're going to be in good shape.

That makes sense and then maybe just a final one when you talk about bookings trajectory talking about new record bookings. This.

This quarter.

Last quarter I would say you talked about record months.

You know as well when I hear you say faster sales cycles more informed buyers more effective and efficient go to market is that fair to ask you. Then are you seeing accelerating sequential bookings growth.

Threeq to Twoq, you and your and if you kind of stay on cadence you should see the same thing threeq to fourq.

Yes, I want to get away from calling out bookings. Each time, you know I have been calling out bookings because we weren't giving you much of anything else and I thought that you know well listen I at least want to tell people that even though we're not guiding bookings are going well now that weve returned to guidance I don't want to keep talking about bookings.

I have said this on this call that we've been having record bookings.

As we've gone through each of these quarters in co bid last quarter I wouldn't have been any different and our expectations for this quarter for bookings that were entering and wouldn't be any different.

And that.

Perfect. Thank you guys.

Your next question comes from the line of Ryan Macdonald from Needham Your line is open.

Hi, good evening gentlemen, thanks for taking my questions.

First one for you when you look at the new client wins that you've had any strong bookings what sense do you have the capacity that these clients are starting with on the initial land in terms of.

Total employees I'm sure, it's a bit different for each client, but trying to get a sense of what the potential uplift could be once we're starting to see these new clients start hiring again.

Yes, I don't have a good feel for that I mean, I look at it a client that to onboard with US with 500 employees has 500 employees well they grow to a thousand maybe could they be 200 next year based on other factors that may not even be coveted related maybe and so you know as we.

Joan we add clients, we don't try to get that myopic in what the future could bring because that's not controllable by us and so what is controllable is the number of new clients, we add onto our platform that's completely controllable by US we only have 5% of the market what is controllable by us.

Is continuing to expand our value proposition and therefore, the return on investment foreign clients and then also what is controllable for US is a is the world class service that we provide in an effort to keep all of our clients that were currently servicing choosing pay calm and so that's what we're.

We're focused on getting more hopeful.

Hopefully were selling some clients that are in industries that are growing but that's not a that's not how we're going to market right now.

Got it and Craig just a follow up for you it looks like free cash flow was quite strong in the quarter not only from a margin perspective, but also the conversion rate from even better free cash flow compared to last few quarters here what drove the strong performance. There if anything that you call out and how sustainable is this from a margin perspective as we look at.

<unk> fourth quarter and next year. Thanks.

Yes, So we had a we had a very strong operating cash flow for the quarter as well as free cash flow.

Obviously some of that's timing on some of those accruals. We did have a little benefit from a tax rate for some items that were.

Specific to the quarter, but overall, we felt like it was a good quarter in terms of operating cash and then on free cash flow you know our capex was for.

Fairly similar to where it was.

Last quarter so.

Excited about both of those.

Great. Thanks.

Due to due to time constraints, we ask that you. Please limit yourself to two questions and your next question comes from the line of city Pentagon from Mizuho. Your line is open.

Hi, Thanks for taking my question I, just wanted to dig into the your commentary on the rapidly investing on the new product and technology. So Ted you talked about to to broadly TDX and manage their go which basically increase stickiness and maybe out of life.

What are your customer, but during this pandemic have you come across any kind of customer need or requirement that could potentially even.

And drive new revenue opportunity cross selling into your base.

Like on demand pay or any of that kind of product.

Sure well, we've seen a significant a usage patterns be deployed around learning management we.

We recently.

Upgraded and released our enhanced.

Background checks product into the market, which is actually allowed us to.

Eliminate some partnerships that we had on the backend.

And we've seen that impact to go out there, but again manager on the go I would say it will Dx last year and then manager on the goal being so significant this year has allowed managers to really improve the data flow and the timeliness of it and it's been no surprise for anyone that we are.

Trying to automate this industry.

Because it needs to be automated it's complex, it's high risk low reward if you get it right, who cares you're supposed to get people their benefits you're supposed to onboard them you're supposed to get them. There checks correctly. So nobody really cares if you get it right and if you get it wrong there significant penalties and so the more you can automate.

These products the bigger win for the business and so that's what we've been focused on throughout this and you know each product has a plan and and as we work out those plans we continue to enhance each one of the usage patterns for each of those products and so we have been.

Doing that through the pandemic across the board on all of our products, whether its performance whether its onboarding, whether its learning management background checks you've mentioned a couple of products that we've added and so we'll continue to do that and we also look forward into the many product initiatives that will be rolling out here into the future.

Your next question comes from a line of Bryan Bergin from Cowen Your line is open.

Hi, guys. Good afternoon. Thank you.

Waterfall on demand it sounds like you've had good success across each sub segment of the market can you dig in around your ability to serve the larger clients. We've got some questions around enterprise clients ceiling. So any metrics you can share on the scale of the largest clients or any details to better gauge your ability to serve that top end.

Well I mean, we're serving clients it triple our stated range.

If you're if you're talking about that from a from a top end you know.

We have a direct focus on clients that we prospect and the primary reason for that is we do believe that.

The way they make a decision.

Fits with the way that we sell you know our salespeople that paycom sell every week.

And so we definitely choose those prospects we've continued to be pulled up market as businesses realize it doesn't have to be as difficult as they've made it in many cases and so you know.

Now, there's usually more decision makers. The further up market you go I bet, you're also typically dealing with.

More product, but less functionality that they've deployed.

Often times you run into somebody that has a 15000 30000 employee company.

They deploy technology, they've spent $2 million on it and it can do three things that's not really a strategy. So I do see us overtime continuing to be pulled up market because I do think we're a better fit for businesses that just don't want to work that much on just software was a necessity 15 years ago.

Might even say it was a necessity seven years ago, just not necessary right now so I see us to continue I see us continuing to have success up market as well.

Okay, and then on sales and marketing I think it was slightly lower than you had projected there is that just a function of greater efficiency on the spend you were making any color on the on a better variants that France's outlook and the learnings you can share about sales and marketing targeting and efficiency in this environment.

I would say on the sales and marketing some of that was more timing you know of.

Slightly lower third quarter and fourth quarter, we've called out what our fourth quarter spend is but we're going to make sure that what we spend in marketing that is sufficient and that we're getting the return that we expect with that as well.

Yes, we account for every dollar in marketing so mean for spending in advertising dollar we need to get that back so.

And you know and thus far that's what's been happening.

All right. Thank you.

Your next question comes from the line of urban for another you from Piper Sandler Your line is open.

Yeah. Thanks, Thanks for taking my question.

One of the things you mentioned was the continued progress you are seeing are bidding from traditional players.

I you are you seeing any of these traditional players and and that technology to become more competitive or are you still able to keep the distance from them.

Yes, so I mean I go I've never thought that our competitors have been asleep at the will you.

We've it's been a very competitive industry for a long time, I think that you've seen us well we have for sure delivered a different value proposition in the beginning it was a.

I don't know anybody that lead us to the Internet and I don't know anybody that beat ATP to second.

Then you looked at the.

A single database solution that we had built out that was different than what our competitors were doing which is primarily a sell sell best in breed by best in breed and integrate and now we've shifted to an employee strategy in which you have to be online and you really have to have a single database employees don't want to use multiple systems and so.

We continue to differentiate our product by the ROI that's delivered to the client if you want to receive the ROI on a software investment similar to pay comp I mean, you're going to have to use paycom. We're.

We're not going to beat our competitors being them and they're not going to beat us at being us and so we're going to continue to.

Widen the competitive mode as it revolves around a usage and we're going to continue to automate even more and more as we move on.

Great. Thank you.

In the past you shared a metric on aggregate.

Cost savings by using your Dx.

HM.

And are you able to share.

Similar to that in terms of like aggregate savings from your clients using PBX.

Well, so dx what DDS does it actually measures the savings each time and employee makes a change in the system versus of HR makes the change for them. The thought is that any change at an employee at that an HR Department makes HR payroll benefit department hiring department any change.

They make for that employee and or applicant in their system is duplicative. They did not read that applicants minded. They did not read that employees mine and so that employee and or applicant could have made that change themselves. If they had had an easy to use technology because that employees, making all changes themselves every.

Where else in their daily lives why not leverage that at work for the business and so what the Dx does is it adds that up and if a client and wouldn't be uncommon.

For many of our mid sized clients to make 100000 changes in a month and if you know 2000 of those changes are made by the HR Department instead of the employees. That's a company that has a 98 dx 98% Dx rating.

But they may 2000 changes HR may 2000 changes in the database. So I mean, you know its going to cost them $90000 and hard slash soft cost.

Savings that they left on the table because they did the work themselves and so that's a calculation that was put together by Ernst and young I believe when it first came out it was $4.39. It was updated earlier this year for $4.51 and as we move into next year I'm sure it will be updated.

At some point again.

Your final question comes from the line of Josh Beck from Keybanc. Your line is open.

Thanks, so much for taking the question I just wanted to ask a little bit about the return on sales and marketing spend it seems quite favorable when I hear your commentary about new bookings and market share gains. So really as you look into the next year and if we remain in this.

Work from home environment is that an area that you want to continue to to lean into just would like to hear your framework and how how you would evaluate.

That investment as we go into next year.

Yes for sure we'll continue to lean into it I mean, we are having success you know there's been times throughout the quarter that we realize that.

We can spend more but we're not necessarily going to get more I mean, you know sometimes you can spend double and it only goes up 5% on different advertising as you go through this weve become smart on this and really how we've done that by measuring every dollar that we're spending.

Obviously, we had more powder in the CAD this quarter and you know if we had thought MTN that out would have brought us more leads than we would have 100% done that.

I'm interested in training, a dog or a percent of adjusted EBITDA for a percentage growth I, just we just not going to train a percent of adjusted EBITDA for a percent of nothing so.

We've been focused on it leads still remain at record levels sales to remain at record levels and new client sales are remaining at reckoned let record levels right now so I haven't a lot of success and looking forward to next year.

And fourth quarter.

Good to hear really helpful. Thank you.

Alright.

This brings us to the end of our question and answer session Mr., Chad Richison I turn the call back over to you for some closing remarks.

I want to thank everyone for joining us on the call today and all the Paycom employees for their continued commitment and execution over the next couple of months will be at several virtual conferences this quarter, including Stifel RBC Needham credit Suisse as well as Barclays. We look forward to speaking with many of you at.

Again soon and appreciate your continued interest in Paycom. Thanks, operator, you may disconnect.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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