Q4 2020 Paycom Software Inc Earnings Call

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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the pay Com software fourth quarter and full year 'twenty and 'twenty earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and you ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance, please press star zero and I will.

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

Thank you and welcome to pay Com's fourth quarter 2020 earnings Conference call.

Statements made on this call that are not historical fact.

<unk> those related to our future plans objectives and expected performance are forward looking statements within the meaning of the private Securities Litigation Act of 1919 five.

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.

Risks and uncertainties are discussed in our filings with the SEC, including the most recent annual report on form 10-K, 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 statement made speaks only as of the day on which it is made and we do not undertake and expressly disclaim any obligation to update or alter our forward looking statements.

Whether as a result of new information future events or otherwise, except as required by applicable law.

Also during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA.

Non-GAAP net income adjusted gross profit adjusted gross margin and certain adjusted expenses.

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

A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today and.

And is available on our website at investors Dotcom dotcom.

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

Thanks, James and thank you to everyone joining our call today, a special thank you to all of our employees for an outstanding quarter to finish the year I will spend a few minutes on the highlights of our fourth quarter 'twenty and 'twenty results. Then I will review some of our notable achievements in 'twenty and 'twenty and also discuss our goals for 'twenty and 'twenty one.

Following that Craig will review, our financials and our guidance and then we will take questions 'twenty and 'twenty was a strong year for pay com, we innovated our sales processes and accelerated our new business sales during the global pandemic. These accomplishments have set the stage for a year of rapid growth that we believe will propel pay com to reach 1 billion.

And and revenues in 'twenty and 'twenty, one the digital transformation of the human capital management industry has reached a critical stage, where the accepted practice of HR and payroll personnel and putting data for employees has come to and in the industry trend towards self service has been leading to this point and I believe the pandemic.

Effective lead sealed the fate of the old model businesses must shift to provide employees direct access to the database because it's better for the business and the employees the coming extinction of the old model has been our expectation for many years and I'm very excited to see it happening.

Our differentiated solution positions pay com very well to accelerate this trend and deliver long term sustainable growth. We finished the year with strong results, our 'twenty and 'twenty fourth quarter revenue of 221 million came in very strong thanks to elevated new business starts and the quarter, our full year 'twenty and 'twenty revenue.

841 million grew 14% compared to 2019.

<unk> com maintained and annual revenue retention rate of 93%, even with the pandemic, causing some businesses to close and a reduction and employee head count related revenue at existing clients, our full year 'twenty and 'twenty adjusted EBITDA was 331 million, representing an adjusted EBITDA margin of 39.

Per se and our focus on the sum of revenue growth and adjusted EBITDA margin has served us well and balancing both growth with profitability and in 'twenty and 'twenty, we exceeded our recently stated goal of hitting the role of 50.

With Q1 of 'twenty 'twenty, one expected to be the last quarter that the pandemic impacts our numbers from a year over year perspective, I believe we have an opportunity to reach the rule of 60 in 'twenty and 'twenty, one and our marketing plan throughout 'twenty and 'twenty worked very well delivering strong demo leads throughout the year in 'twenty and 'twenty, one we plan to.

Continued to spend aggressively on advertising to fuel future revenue growth and continue to expand our roughly 5% market share and a large and expanding H C. M. Tam.

We are capitalizing on the shortcomings of disparate H C. M systems with the value proposition of pay come single database solution that is stronger than ever for companies of all sizes, including companies well above our stated targeted range.

We continue to be pulled well above our stated target range as larger companies look to leverage automated processes for their own employees at the same time, our small business adds continued to increase and 'twenty and 'twenty. Thanks to the efforts of our expanded inside sales force growing employee usage of that.

<unk> Com system is generating a substantial return on investment for our clients their employees and pay com high employee usage rates as measured by our direct data exchange or D. D. Ex remained strong across our client base when combined with high adoption of manager on the go these applications are creating new opportunities for product innovation and automation.

And example of such automation that we've deployed internally is fully automated payroll. It has been our goal to provide our clients with a better employee transaction interface for payroll Betty or B E. T. I is that better employee transaction interface, Barry guides individuals' through and employee specific.

Payroll process, and which they create and approve their own paycheck. This means payroll is completed it pay period, and which has traditionally been the date and which the payroll department gets started.

What used to take and entire payroll teams days to aggregate is now fully automated and put directly into the employee's hands.

This new approach Leverages all of our solutions to produce what we called the perfect payroll and eliminate duplicative processes that can create confusion and and accuracies when employees don't have visibility or control over their own payroll data.

This level of employee control is the future of payroll and I'm looking forward to being able to roll Betty out to the market and 'twenty 'twenty one.

As of December 31, 2020, our head count stood at approximately 4200 employees up 12% year over year as we continued to hire high quality talent throughout the pandemic to further bolster the foundation of our future growth, while greater than 95% of our employees continue working remotely across.

And the country, we look forward to returning to our offices at some point this year, but only when it's safe to do so pay com received national recognition from several organizations in 'twenty and 'twenty. We earned the top five ranking and best places to work and the U S by top workplaces and the number one spot and Oklahoma and we were named to the Fortune 100.

[noise] fastest growing companies for the fourth consecutive year. These awards are very rewarding and a testament to our execution and driving corporate culture. Additionally, I want to congratulate the 'twenty and 'twenty pay Com, Jim Thorpe Award winner Trayvon, Mary give Texas Christian University. This award recognizes the most outstanding deep into <unk>.

And college football and Memorializes, Jim Thorpe, who was one of the greatest all around athletes and history, Jim Thorpe also happened to be and Oklahoma to sum up we address the 'twenty and 'twenty challenges with confident resolved, which enabled our solutions to shine and expose the weaknesses of other disparate systems and the market.

The pandemic impact on our pre pandemic client revenue remained stable and while it's unclear if or when those same clients will add to their employee counts are continued growth relies on remaining focused on the three controllable activities that may 'twenty and 'twenty. So successful that is providing.

World Class service to our clients rapidly developing new technologies and increasing the number of new clients added to our platform our commitment to investing through the pandemic generated elevated leads and sales.

Once we get past Q1, 'twenty 'twenty, one we will have lapped the pandemic impact on our comparable year over year numbers finally, I'd like to thank our employees for their ongoing commitment and flexibility as we said throughout 'twenty and 'twenty. The pandemic didn't build character it revealed it I was glad to see we were all.

Who we thought we were.

Your efforts have set us up great for 'twenty, and 'twenty, one and with that I'll turn the call over to Craig for a review of our financials and guidance Craig.

For a review of our fourth quarter and full year results for 'twenty and 'twenty and also our outlook for the first quarter and full year 2021, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis as Chad mentioned, we are pleased with our fourth quarter results with total revenues of 220 point and.

9 million representing growth of roughly 14% over the comparable prior year period, our full year 'twenty and 'twenty revenue was 841.4 million representing growth of 14% compared to 2019, our revenue growth continues to be primarily driven by new business wins, including very strong new client revenue.

<unk> and the fourth quarter. We ended 2020 with approximately 31000 clients representing a growth rate of 17% compared to 2019 on a parent company grouping basis. We ended the year with approximately 16000 clients, representing a growth rate of 18% compared to 2019 within total <unk>.

Revenues recurring revenue was $216 7 million for the fourth quarter of 'twenty and 'twenty, representing 98% of total revenues for the quarter and growing 14% from the comparable prior year period.

Total adjusted gross profit for the fourth quarter was $188 9 million, representing an adjusted gross margin of 85, 5% up 20 basis points compared to the prior year period.

For the full year 'twenty and 'twenty, our adjusted gross margin was 85, 9% also up 20 basis points compared to full year 2019 for 'twenty 'twenty one our target adjusted gross margin range is expected to remain strong and approximately 85% to 86% adjusted total administrative expenses were 119 point.

And $1 million for the fourth quarter as compared to $98 6 million and the fourth quarter of 2019, adjusted sales and marketing expense for the fourth quarter of 2020 was $58 9 million or 26, 7% of revenues. We've been very pleased with our marketing strategy throughout 2020, which more than doubled the demo lead.

Quest compared to 2019, and we plan to continue to invest in marketing and Q1 and throughout 2021, adjusted R&D expense was $23 2 million and the fourth quarter of 2020 or 10.5% of total revenues adjusted total R&D costs, including the capitalized portion for $33 two.

And in the fourth quarter of 2020 compared to $25 1 million and the prior year period, adjusted total R&D costs for the full year, 'twenty and 'twenty, including the capitalized portion were $118 3 million or 14.1% of total revenues compared to $93 3 million or 12, 6% of total revenues and the prior.

A year, even through the pandemic, we aggressively recruited talent and R&D and we plan to continue to invest and our future growth through innovation and new product development. Adjusted EBITDA was $84 2 million and the fourth quarter of 2020 or 38, 1% of total revenues compared to $78 6 million and the fourth quarter of 2000.

19, or 46% of total revenues for the full year 'twenty and 'twenty adjusted EBITDA was $338 million or 39, 3% of total revenues compared to $317 9 million or 43, 1% of total revenues and 2019, our GAAP net income for the fourth quarter was 24.

One 4 million or 42 cents per diluted share based on approximately 58 million shares versus $45 4 million or 78 cents per diluted share based on approximately 58 million shares and the prior year period, our effective income tax rate for the fourth quarter of 'twenty and 'twenty was 33, 4% for the full year 2000 and.

'twenty, our GAAP net income was $143 5 million or two point for six per diluted share non-GAAP net income for the fourth quarter of 'twenty and 'twenty was $49 1 million or 84 cents per diluted share based on approximately 58 million shares versus 55 million or <unk> 86 cents per diluted share based on them.

Proximately 58 million shares and the prior year period, we expect noncash stock based compensation for the first quarter of 2021 to be approximately $26 million for the full year, we anticipate noncash stock based compensation will be approximately $110 million for 'twenty and 'twenty. One we anticipate our full year effective income tax rate to.

25% to 26% on a GAAP basis on a non-GAAP basis, we anticipate our full year effective income tax rate to be 27% to 28%. We anticipate fully diluted shares outstanding will be approximately 58 million shares and the first quarter of 2021, turning to the balance sheet. We ended the year with cash and cash.

Equivalents of 152 million and total debt of 30.9 million related to the construction at our corporate headquarters cash from operations was $52 9 million for the fourth quarter, reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately 1.3.

And in the fourth quarter of 'twenty and 'twenty during 'twenty and 'twenty, we repurchased approximately 433000 shares for a total of roughly $115 million, including 244000 shares purchased in the open market through December 31, 'twenty and 'twenty Thaicom has repurchased four 1 million shares since 2016.

<unk> for a total of nearly $423 million and we currently have $135 million remaining and our buyback program now let me turn to guidance with the continued stabilization of our current client revenue base. We are pleased to be able to provide Q1 and full year guidance that is consistent with our historical guidance approach of guiding to what.

We can see as of today as a reminder, the effect on our current client revenue of lower head count at our pre pandemic clients continues to represent a loss of approximately $1.9 million to $2 million and weekly recurring revenue the impact of 150 basis point interest rate cut that occurred in March of 'twenty and 'twenty represents an additional law.

A roughly 350000 weekly recurring revenue also the first quarter benefits from form filing revenue related to employee tax forms for payrolls run in 2020, we estimate that in Q1 'twenty 'twenty. One there will be fewer forms filed and normally would have been filed by our client base as a result of fewer employees.

Working and industries hardest hit by the pandemic and lower overall turnover in those industries pure forms filed represents a roughly six to 7 million dollar headwind to Q1 'twenty 'twenty one recurring revenue with these factors in mind, our full year and first quarter 'twenty 'twenty one guidance is as follows.

For the fiscal 'twenty 'twenty, one we expect revenue and the range of 1.009 billion to 1.011 billion or approximately 20% year over year growth at the midpoint of the range, we expect adjusted EBITDA and the range of 396 million to $398 million representing an adjusted.

<unk> EBITDA margin of approximately 39, 3% at the midpoint of the range for the first quarter of 'twenty 'twenty. One we expect total revenues in the range of 270 million to 272 million, representing a growth rate over the comparable prior year period of approximately 12% at the midpoint of the range we.

<unk> adjusted EBITDA for the first quarter and the range of 126 million to $128 million, representing an adjusted EBITDA margin of approximately 47% at the midpoint of the range.

Q1, 'twenty 'twenty, one is expected to be the last quarter that the pandemic will impact our year over year comparisons after that our achievements should be more reflective of the strong fundamental growth our business can generate with that we will open the line for questions operator.

And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key.

And in order to allow everyone time for questions. We ask that you limit yourselves to two questions each.

We will pause for a moment to compile the Q&A roster.

Your first question comes from Raimo <unk> from Barclays.

And hey, Thanks for taking my question and congrats on a great entered a year.

And you guys I mean as you mentioned.

After Q1 day comps are getting significantly easier and you must be looking forward to debt as well how do you think about the linearity. If you think about Q2 Q3 Q4.

It's Gary.

For a lot of your comments have talked about like it's actually more the back half of the year et cetera, like how do I have to think about that from your perspective, and then I have one follow up.

Sure Ryan So I mean, our approach to guidance hasn't changed as Craig said in prepared remarks, I mean, we're focused on what we can say <unk>.

And you compare our Q2 through Q4 guidance that we've given implied guidance that we've given for Q2 Q3 Q4. This year, you'll notice that it's not unlike.

Guidance, we've given in the past a matter of fact, it's within a half a point to a point and a half of every guide we've started with going all the way back to 2018 for that same period. So you know, we're not going to necessarily get into the linearity of it but I would just say that we always guide to what we can see and.

And I believe that we are being consistent and how we provide this guide today.

Yeah, I agree with that Raimo I mean are you now in terms of linearity, we're not we don't have anything and the guidance as it related to.

A recovery towards the back half it would be.

You know more level throughout the year on that as opposed to any sort of a back half recovery that would be baked in.

Yeah, Okay, and then this year was like AR and up a full year, where you had like the inside sales model working like you know what.

And like what have you learned in terms of the have Denmark in terms of people kind of selling remotely inside sales being successful and term.

Of how you kind of translate that may be in true kind of climbing the expansion and going forward I know, it's a very broad open question, but.

I hope good it works.

Sure. So we had inside sales you know we've had it for a while but we actually took a strategic position with inside sales towards the end of 'twenty and 19.

And which really that group had always been selling.

On line or virtually Ah, we were able to leverage a lot of those processes that we had put in place for inside sales as we made the shift for our outside sales staff as we sit here today, we are still 100% virtual selling right now as well as conversion as well as upsells to.

Our current clients and so you know exactly what we would come back as a as far as would we do full selling onsite, that's really going to be dictated by the client I do believe that we've gained some efficiencies in this model and I'm not just talking about cost I'm talking about performance.

And I believe we would look to maintain those as we look to open back up as a nation here in the coming year.

Your next question comes from some odd Samana from Jefferies.

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

Chad maybe first one for you just as I think about bookings and the context of that customer data and it looks like pay com added actually more customers in 2028 and it did in 2019 and so it's certainly it kind of supports the strong bookings trends, but also maybe could you help us understand how the mix of those new customers adds.

Look versus inside sales versus from the quota carrying field sales that are now selling virtually versus maybe coming inbound online do some of your advertising campaigns and just trying to think what drove that nice acceleration and units.

Yeah, so coming into the year I would have expected really our because we are selling a low market you know small business market as well, which we've opened up I mean, the percentage of small business units.

The units that we have I mean, it's a I believe a mid nineties is the percent of our revenue that's represented.

By clients that have over 50 employees. So you know you are still low on the small business, but in fact, we did accelerate debt this year and I would have expected our average amount per client to drop a little bit.

Based on that what we actually saw he as you know you're taking about 10% out let's call. It just on client employees you can already calculate through our revenue.

So you've already got that hit and then the fact that we're selling small business clients I was a little surprised to see that our average per client held very close to the same it had been growing for the last several years, but even with the Covid hit we took on our numbers that average stayed really close to the same and that came from us continuing.

To have success selling selling down market, but also we're having a lot of success continuing to sell up market and continued to be pulled further up and so those are starting to average each other out but obviously you do have some higher unit growth as you look at the down market opportunities.

Definitely helpful and and maybe just a follow up on the <unk>.

Total full year head count was up about 12% I'm curious how.

The quota carrying reps growth looked in 2000, and 'twenty and and how should we think about that embedded growth and quota carrying head count for 2021.

Yeah, we don't break out that separate from overall, obviously, we had talked about earlier in the year as we were going through the pandemic, we did re coil a little bit and kind of held off on certain things and then once we.

Kind of opened our eyes and saw what was going on we started to accelerate that to get back to a normal level as we head it throughout the summer and so you know we are we have a number of teams that we have fully staffed that's at eight per team and then we.

We look to add people to the extent that we have any turnover, we would be looking to add people to.

Replace those positions so no real strong information to give you on exactly the number of quota carrying employees. We added for sales, but what I would say is that you did see us throughout 2020 expand our inside sales.

Model quite a bit and so that was a new focus that we had had not really had until late 2019.

Your next question comes from Yao Chu from Credit Suisse.

Hi, Thank you for taking my question.

You guys had an amazing year, all things considered retention and client adds and everything but.

But and some of our work that's come across the general sentiment from share donors that they're looking to do better and be more aggressive given the lessons and the pain that the scene over 'twenty and 'twenty. So the other question I have is do you think 2021 gets tougher only because from a competitive viewpoint.

Some of these donors may be renewing a doubling down on efforts to prevent similar churn of losses net of diesel.

Well I mean, you know the I believe that with our product it's fully differentiated and it produces a return on investment for our clients as well as perspective clients. So.

I don't believe we're going to be getting into the situation, where we're doing a lot of price selling now that said there is a market for every product and so you know you have to be in line with what.

What product our fees are but really it's an ROI driven strategy strategy and so we would expect people to uptake our product that want a differentiated strategy with the different ROI I mean, we just talked about how we're going to be.

Providing our products are going to be doing full service payroll in the future I mean employees are going to be doing their own payroll and we're starting with that right now internally, we've produced a better employee transaction interface through Betty and we're going to be rolling that out throughout the year and so just as in.

Ploys are used to applying for jobs online they're used to doing their banking online. They're just they're used to do and they're shopping online and we're gonna be bringing that to the payroll business I mean.

It just doesn't make sense that we're not already there to be quite honest with you. It's how businesses when and when you think about the air hours businesses save I mean, why can't employers save more on these types of input activity. So I mean, if you're with pay com you could save a 100000 different key stroke some of our clients save millions of key.

Strokes every month, so that's where it's going I don't see us I don't see the market moving away from that so all that's to say is I believe in order for people to compete with us that the value proposition is have to getting to be more and it's gonna have to more match the value proposition that we're delivering because over time you are.

Gonna see more and more differentiation around what the employees do as it relates to data transfer versus what the employer does as it relates to that same topic.

Thank you very clear and I just have a quick follow up.

Can you broadly speak to staffing levels of new business wins.

At this point in time and I'm just curious as we've worked our way through this are new guys coming on board at 25, 50, 75% capacity is getting better just broad strokes is fine.

Yeah, I mean, I will tell you that past may we've stopped trying to figure that out I mean, we're out there we're bringing on business. They have what they have and you know if there's growth and that number great. We're not expecting it oh, we havent been forecasting at up to now.

You know I don't really know what happens next year, but.

You know for us once we've lapped this first quarter.

We don't really need the growth and the numbers now that's not to be a flippant about it obviously I would love for our clients and everybody to get back to normal I guess, what I would say is we're very much focused on new business adds and however, many employees. They have at that time is really irrelevant to us we want to set them up.

Correctly, and we need a certain number of new business adds to cover the losses that we experienced from our current client employee head count attrition.

And we need a certain amount of revenue and new clients to cover that and and we've been well on our way to doing that and as I believes reflected in both our numbers and guidance.

Your next question comes from Mark from our comp from Baird.

Good afternoon, and let me add my congratulations to the whole team can.

Can you talk a little bit more about being pulled up market.

In terms of what Youre seeing what are what are the what are the characteristics of the bigger than target market clients that are coming to you what exactly are they looking for who are they typically coming from and do you see that accelerating are you seeing more rfps and the large accounts side.

Yeah, I mean, we've continued to see it I mean, I wouldn't say, it's a whole lot different than it's been in the past, but we've continued to see acceleration of larger clients above our range are coming to us in fact, two years ago. We moved our range from 2500 up to 5000, and we continue to see clients well above the 5000 range coming to us I mean the reason.

And why is because they're working with the same employee whether youre, an employee and you work for a 25000 employee company or whether you're an employee and you work for a 500 employee company you really dislike.

Manual processes that really become time suckers out of your day and so all employees would prefer to use something that's extremely easy to use comprehensive and has quite a bit of consistency and so and that's also better for the employer and so I think that and large businesses on the enterprise in the enterprise.

This level had been trying very hard for a long time to provide a single type solution to their employees because they do realize the importance of that they've just done it through integration and we do have a product that works for what they're trying to accomplish that's incredibly scalable and so I do see us continuing to go up market as well.

Pulled and I see us continuing to stay focused on the mid market and and you know as we get our leads below 50 will continue to sell them as well, but regardless of what the size of company you work for you or still the same and person and you're still the same and employee and you value things have eased when it comes to <unk>.

Task management and H C. M. So all that's to say is enterprise products are over complicating.

The situation for the employee and a lot of you guys on the call you know that you work for companies with large organizations and.

You know what kind of a.

A mess you have to work with and technology, It's often times and eight legged octopus with no head. So you know, we're fixing that problem and mid market and I see us doing the same as we continue to be pulled up market.

Great and can you talk a little bit about for attach rates for for new modules with the new clients. What are you seeing the strongest attach rates and and then also to the extent that you're upselling existing clients. What are you seeing the strongest success on.

Yes, we are having strong attach rates across the board I think that the new innovations that we've come out with with both the Ed D D ex and manager on the go is really helping.

With that as we look to go to a full service payroll set youre going to need all products I mean, you're gonna need benefits administration, and youre going to need to expense management, you're going to need time and attendance you're going to need paid time off request and youre going to obviously need payroll and so you know.

And the more full solution sets, we're able to deploy the stronger value proposition are higher the ROI and the clients going to be able to achieve again, it's not purchasing the products that produces the ROI its using the products.

That produces the ROI and as we move to more self service initiatives, which were already there.

We're gonna be measuring that for our client, which we believe drives a greater overall usage of the entire product.

Your next question comes from Daniel Jester from Citi.

Great. Thanks for taking my question just on retention looking backwards in 2020 can you just comment kind of how the year progressed did you see the largest churn sort of index and the desk.

The challenges and the spring or is that the customer churn and pretty stable as the year progressed.

Yeah, I mean, we don't necessarily disclose when I will say that you know, it's a revenue retention number and so you know obviously clients that went out of business would have impacted that number and then you know.

Our clients, who may have had reduction in force could've been impacted that number to some extent and so you know.

The fact that we remained strong at 93% we were happy with that you know the question becomes would it have been higher had we not had the pandemic and you know I think that's what the 'twenty 'twenty, one puts and in front of us to be able to to prove that out and so.

But we haven't changed the way, we calculate our retention number since well before IPO.

We were stuck at around 91% for about six years, we moved that up to 92% a year ago or two years ago, we moved it up to 93% a year ago and then this year, we held the line at that percentage as we went through the pandemic.

That's really helpful. Thank you and then maybe one for Craig and 2020 revenue was up 14%, but cash from operations was up only 1% so as I think about true.

Cash flow and 2021 can you help us think about how that could look relative to your guidance.

Yeah in terms of our cash flow you know the things that are going to impact our cash flow. Obviously are a no tax rates as well as our capex and so you know.

I would expect our capex for 'twenty and 'twenty, one as a percentage of revenue to be a fairly similar.

<unk> as a percent of revenue is what we saw and in 'twenty and 'twenty one thing to kind of keep in mind is it that capex, we're still <unk>.

Completing the Dallas operations, and so that will be complete probably and of.

Q2, we may still have some carryover costs on that on the Q3, so as you're kind of looking at Capex that would that would be the impact for 2021.

Okay.

Your next question comes from Brian Schwartz from Oppenheimer.

Yeah, Hi, Thanks for taking my question Craig I just had a follow up question for you you mentioned a comment that you're anticipating some sort of a recovery and the second half of the year is it possible just to provide a little more color and how you're thinking about that or are you thinking that that it could be a full recovery and the base exiting the year.

Year or or a partial recovery.

And just wondering if you could share a little more color on on that com and how youre thinking about the pace other recovery.

No Brian I indicated that we had not baked and any recovery and our guidance numbers, where we're as we provide guidance for the full year, we have not.

<unk> included a recovery.

And those numbers.

Okay. Thanks for the clarity on that and then I had one other question just is it possible to quantify the impact or the headwind from laptop W. Twos and that are in that Q1 for us.

Yes, we had the in the prepared remarks, we talked about six to 7 million.

And it will impact our Q1 numbers, we feel like are you know.

Obviously, that's an estimate based on the number of W. Twos, we would've expected too.

While it would be W. Twos, 10, 90, Nines 10 90 fives.

And for our clients and and you know kind of what we would expect would have expected in a normal year and then what we will file this year based on the fact that you know certain industries didn't have that obviously you didn't have the head count and the middle of the year or the turnover of those employees that would have generated a W. Two yeah for example on that.

Brian you know it wouldn't be uncommon for a 250 employee restaurant to have 500 W. Twos.

Now it's important to also note that our forms business isn't just W. Twos, It's Debbie three submitted <unk>. It's 10 90 nines and it also includes and Rk's HCA forms are that you know we're also fee related and charged for in the first and the first quarter and so theres more and there then just W. Twos, but the short answer is there.

Those industries, most impacted and often times would have a higher turnover rates and so again it wouldn't be uncommon for restaurant that might have 250 employees you can see 450 or 500 and W. Twos on that in a full year and you know and this type of year for someone that may have had 250 employees may have only see 200 and <unk>.

75 W twos.

Cause of kind of when it happened and then and then.

And then we lack some growth on that and so that's how it's calculated and expectation of what normally happens with R. W. Twos as it corresponds to the.

And the business that we have and their number of employees and then what didn't happen. This year in regards to that and so again, that's a first quarter impact only that we're talking about.

Your next question comes from Robert Simmons from RBC capital markets.

Alright, thanks for taking the question.

I was wondering if you could speak to what you're assuming in your guidance for retention rates this year.

And we don't guide to what we assumed for our retention I can tell you that we're very bullish on our product and the return on investment that it uses we're also bullish on watching how clients use the product and how they're actually achieving that and we do believe.

That does impact our retention and a positive way and so I would say that we are bullish as we look towards retention this year, but that's not something we guide to as we sit here today.

Got it Okay, and then net all the public payroll companies have reported the calendar for Q results was there anything on the other calls you heard that surprised you positively and negatively or just kind of interesting.

I'm not going to comment on on what are different competitors.

Competitors do out there I would say our situation's different than theirs I think our opportunities are of what we're achieving has also been shown to be a little bit different so I wouldn't want to use them as a proxy for what's going to happen to us and and I'm sure are well I mean, they may want to use us for proxy and what happens to them but.

And I don't I don't think we want to go there right now.

And I would say we are we really had a strong Q4 and and you know we felt like it was a good Q4.

And really sets us up well for 'twenty and 'twenty one.

Your next question comes from Ryan Macdonald from Needham.

Yes, good evening gentlemen, thanks for taking my questions. Chad first question for you would be curious to hear more about the Betty offering and and sort of what stage you are at in terms of the rollout. There are you starting to beta that with existing customers and then naturally I would think that given the usage component of that.

Net or self usage component from employee and it might fit more naturally as a cross sell or up sell which is a bit.

Different than obviously that traditional really focused on hunting model that debt pay com is really master and can you talk about sort of the puts and takes there.

Sure and throughout the year, we'll be rolling Betty out and at some point it will be not only and up sell to current clients. It will be what we sell as we go to market that will be the way to do payroll. We came out with employee self service and 2002, it was free and I couldn't even hardly get anybody to look at the product for two years.

A matter of a matter of fact wasn't even until we can develop time and attendance online that people started use and employee self service to clock in at time and attendance and so as we look at this today I do believe you know Betty is kind of the cherry on the top of the payroll cake.

Even internally here.

And we've returned over 80% of our hours back to our own payroll department.

Just because of the way, we do things now a.

Betty has you're doing the payroll through out versus waiting to pay period, and so and so what does that do well. It makes it a lot more efficient for every employee as well as there's a lot of work now and the payroll side, they're just not doing and then you think of all the after the fact corrections manuals voids things that were missed basically that becomes a liability and expo.

Or to the business, which is all going away and so this is going to happen you know.

Just ask nobody gets up from their chair and goes and changes their channel on their TV and we can all remember the days those that happened and that's what's going to happen here.

Employees are going to do their own payroll and theyre going to do their own payroll because its E. That's the easiest way for them to do it and they're going to do their own payroll because that's how business wins and you know and a matter of fact, that's the only way business can win at payroll and.

And so that's what we're driving at and answer to your question.

We're using it internally right now I would expect and second quarter, we'll have our first clients on it and then third and fourth quarter I would see us really starting to roll it out.

As we have moved those usage patterns and really move the way people start thinking about payroll instead of starting payroll when the period and you start it when it begins and the payrolls over win per pay period. So that's what we're driving and I believe it's the most significant product that we've ever developed it pay com to be quite on.

Just with you because it fully automates a very complicated task that there's little to zero room actually.

For inaccuracy and.

Payrolls gotta be perfect, if you're 90, 999% accurate and payroll you get and F employees expect it to be perfect. They expect it to be and their bank accounts and they're not even really going to thank you for it it's an expectation for the work they're doing and so we're going to make sure that happens and we're going to put that are responsive.

<unk> as well as confirmation ability and the hands of the employees, which is where it's already at right now nobody other than and employee themselves knows if they got paid everything that they should have been paid and it's best to have them confirmed that and be a part of that transaction. So that's what we're going to do and and I would see us rolling this out to.

The year as far as when to be kept when does it become popular when does it become a thing.

And you know like I said took us a while to get people to use employee self service. When we first came out with it I don't think this is going to take as long as that because we've been really focused on the usage patterns that drives us toward this and we're real close to be and they're now. So you know you're going to have those are early adopters and then you're going to have.

The Middle Group and then we'll have everybody else after that and we'll just kind of have to see how long that takes but very excited about it and this will be a product that we're charging for.

Excellent that's really helpful. As a follow up as you think about.

Adding to sales capacity into the new year, and you talked about the 95% of your employees are still working remote does this change and how effective you've been changed the way youre thinking about that traditional.

Expansion model of opening a sales office and in various regions or or cities are there areas, where you can continue to expand with a virtual model.

And saves smaller tier two tier three cities as you look into 'twenty and 'twenty one.

Yeah, no it hasn't changed my thoughts yet now the go to market could be a little bit different you know what you're talking about there's territory division and <unk> and where we place and office and then you know how we work together so do I see pay come individuals' working together and an office setting moving forward absolutely.

Do do I know exactly when that would be or what that might look like as we are as we gear back up to maybe be able to visit a client are back in their office.

I don't know exactly how that looks right right now, but but I am extremely confident that our employees will be back and their offices only when it's safe to do so and we will continue the mission that we've set for today.

Your next question comes from city Pankaj from Mizuho.

Hey, This is Michael Berg on for Citi, and congrats again on a good quarter and.

Thanks for taking my question I wanted to quickly follow up on on the Betty offer and what type of.

Pricing uplift for WD and the core payroll you offer now.

Yeah, we're not going to disclose pricing right now and this call, but I mean, eventually it would be published and and you guys would be able to to figure that out but oh.

It's important first we go through that with our own salespeople individually and and our own teams internally, but again it will be a price debt. It will be something that we're charging for because it produces an incredible amount of return on investment.

And and you know in order to use Betty you had to do everything else right.

It's not like you can you can do everything else wrong, and he's better if youre going to use Betty you have 100% DD ex score you. All your managers are used and manager on the go correctly and baddies completely automated your entire payroll process I mean, it's almost the.

The the means to the and if you will.

Betty as we roll it out, but it'll be a product that we're charging for because it does create great value.

Got it that's very helpful. And then it seems like you guys are making some pretty significant progress on the below 50 segment that he mentioned it for less than 10% of revenues. How can we think about that a year ago.

Same type of.

Percentage or lessen and 5% how can we think about how.

And how that's progressed.

Very similar I believe it I P. O. It was 6% I don't think it's changed dramatically from year to year I think we're real close to where we've we've been in the past on that now we have added a small business teams, but we really just started adding them and Ernst in 2019, and I and even.

So they've had a lot of success in 2020, we didn't really even see an incredible drag on our.

<unk> per client fee, even with losses of <unk>.

Certain employees at different clients and with selling small business and I do believe we would have had more growth and that client revenue number had we not been selling as many small businesses, but I don't really think the percentage is going to move drastically.

From where it's at today, just because of all the success, we're also having up market.

Your next question comes from Bryan Bergin from Cowen.

Hey, good afternoon, and thank you wanted to clarify around bookings did you see a notable acceleration in for Q demand versus <unk>. Just curious if there was any indication at all of extensions of sales cycles us as Covid cases Spike from December and then how have you seen the pace of demand and progress in January.

Yeah, I can't really say that spikes in Covid cases had impacted our sales.

And from week to week.

Now we did see again, the spike had impacted us and.

And that March April and May time period, where things got really bad and then kind of started to stabilize but throughout the year a different spike and cases didn't impact our ability to sell and move product. You know now that we've returned to guidance I believe that our strong sales bookings are included.

In our guidance as well as our performance so I'm not going to keep talking about bookings, but what I would say it's this debt you know.

When when we got into March and and especially towards the end of March I didn't have an expectation that 'twenty and 'twenty would necessarily be a record for bookings and starts. It was you know and and as we turn into 'twenty 'twenty, one when you're looking at our guidance and Youre looking at the things that we have to accomplish through the year.

I believe we're going to need that also in 2021, which not is not unlike any other year. We've had in the past, where we've always need record sales and.

And as well as record starts to.

To hit our numbers and accomplish our goals so as we head into 'twenty 'twenty, one there theres no difference and that.

Okay, and then and the competitive environment any changes to call out as far as the source of new client additions.

No.

Thank you.

Thank you.

Your next question comes from Josh Beck from Keybanc.

Thanks for taking the question and I wanted to follow up on some of your early comments Chad on digital transformation of HCM hitting a critical point. So I'm just curious initially obviously and the pandemic people were focused on things like collaboration.

And they were very heads down, but I'm just curious.

As we went through the year did you see the conversation with with clients change their interest change and a and a meaningful way and I'm. Just curious if that was a big contributor to the pipeline.

Or if there's other factors you'd call out there.

Yeah.

Sure that both employees and HR departments as well as the C suite of like agree that removing.

Middle layers of the data transfer process as is the most efficient way to do it and I think throughout 'twenty and 'twenty you saw frustration rise on both the side of of the people doing the input as well as on the side of the employees.

And you know that lacked access or and then also you've kind of had a rush to deploy our products I think 'twenty 'twenty. One was the year that people dusted off products that they really thought where they bought for certain situation and then they really tried to use them and 2020 and you know maybe it didn't work exactly like the the brochure said and so.

<unk>.

I see this happening more and more I think there's there's always been some reluctance to change I've always said, you know waking up and change and ACM HCM companies I don't think that's something people look to do every day you know its kind of like waking up and go into the dentist.

So, but I do think as we move through 'twenty and 'twenty. It became very obvious to people that you're either winning the game of HCM and your business or you're losing it and we've identified the way that business is when and I think more and more people accept that.

As what will be the future and more and more people are motivated to get there now versus waiting you know.

Too much longer to do that and so we'll continue to drive.

That so that businesses can have a clear ROI and a and a good choice for HCM.

Yes.

Really helpful and then on the gross margin guidance.

You've discussed the forms headwind in Q1, typically Q ones and a stronger gross margin periods. So should we maybe make some adjustments to what would be a typical year. Just anything you can share with us on the gross margin cadence throughout the year.

Yes, I mean, I think if you look at our like I said before I mean, ex first quarter, where we're still lap and COVID-19 there but.

Once we get into second through fourth quarter, our guide for growth and it's not a at least on the growth side isn't isn't incredibly dissimilar than what we've done and in 'twenty and 'twenty 2019, and 2018, our guidance again, it's I think it's a 0.2% different than last year and and you know it's.

Maybe a full point different than 18 and air the 19, and maybe Ah Ah.

A point and a half from 18. So you know we feel really good about that our gross margins remained strong.

And so you know as we've continued to spend in both R&D and sales and marketing and I'm sure you guys have seen our ads, we do believe that as we achieve success of that new business revenue coming in as well as success of of usage of the products that we've deployed we do think that that's going to be accretive to our margin profile.

And into the future and I'm very happy with where we've guided right now we have set ourselves up well to achieve a what we call rule of 60 and Oh I'm.

So I feel really good about where we're at right now, but just like every year. We enter into there is a lot of work to be done between now and then so I don't know if Craig if you'd add anything on the margin side and on the gross margin. We kind of gave the guide on <unk> for the full year are that 95 to 96, I mean, obviously the first quarter is.

One of our largest gross margin quarter. So.

For the six to 7 million would have a slight impact first quarter, but we still think for the full year. We can finish net 95 to 96 range.

Yeah.

Your next question comes from RV, and Romani from Piper Sandler.

Yes.

Hi, Thanks for taking my question I, just wanted to ask about your <unk>.

Play and that there was impacted by the pandemic.

And the windows clients recover and I think they will at some point.

Demand for cloud based HCM is likely to be very strong from from that segment and then there'll be probably like a pent up demand from from that from that particular segment.

Is there anything specific you are doing.

To make sure that you and your cash era.

The demand in terms of.

Hiring sales our delivery teams too.

To be there and the demand that's coming.

Yeah, we never stopped selling those industries I mean, you know my philosophy is as if youre growing by 100 employees well, it's a great time to add pay comp you know if you're reducing force by 100 employees well, it's a great time to add pay com.

So that's my opinion, we never retreated from trying to sell those organizations, we would look forward to them being able to come back fully.

We're not there yet, but I do think at some point in time that will happen I don't really know that it is a light switch that'll go on I think it'll more happen over time that we start to see things like that happen, we'll have to see havent seen it yet and then but again, we remain focused on on all industries.

As we remain industry agnostic.

Great and just a quick follow up on net.

And our personally there are probably some pretty good lessons.

And that you learned over 'twenty and 'twenty. So are there any permanent changes.

Longer term changes and looking through two for kind of put in place is in terms of.

There are investment and sales offices and in terms of better Burger and it teams and any kind of longer term changes and and.

And the operations of the business.

Okay.

Yeah, I mean, there's a lot of changes that we're going to maintain as we head through this I mean, I would honestly say, probably the only area and which were kind of waiting to see what's going to be a more accepted practices, how we go to market and sales.

And we're not waiting on anything else I mean, you know when it comes to how we develop software when it comes to how we're servicing clients when it comes to how we're having those meetings.

As far as that process. The efficiencies we've gained there we'd be looking to keep those efficiencies, we've gained efficiencies and conversions and how we do conversions.

And would be looking to maintain them. So.

I'm not I don't think there's a whole lot of things we're waiting to see you know.

What happens before.

We make decisions there's a few of them we've talked about those as far as the go to market, but on the backend of other efficiencies that we've gained through this process. Some of them were forced we had to gain certain efficiencies to be even able to work at home and we have any answer to answer the phones at home we had the gain.

Certain efficiencies and so there's things that we're going to maintain as we are as we come back to work from the office and and and most of those are already known to US and one thing I'd say, we are continuing to look for efficiencies throughout the model I think I'd mentioned I'd say 95 to 96 on the gross margin I mean and 85 debt.

To 86 is what we're guiding to for the full year on the gross margin, but we're continuing to look for a <unk>.

Patiency throughout the model and.

And we'll continue to do that.

And I will now turn the call over to Chad Richison for closing comments.

Alright, I want to thank everyone for joining us today on the call and a special thanks to all the employees at pay com for their flexibility and their perseverance through 'twenty and 'twenty over the next couple of months, we'll be at several conferences this quarter, including the Keybanc emerging technology summit on February 24th.

And Craig and James will be hosting one on one meetings at the Morgan Stanley Technology Media and Telecom conference on March 3rd we look forward to speaking with many of you again very soon and appreciate your continued interest and pay com. Thank you operator, you may disconnect.

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

And.

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