Q1 2022 Paycor HCM Inc Earnings Call
Thank you for sending by this is the conference operator, welcome to the bank or H T. M first quarter 20 twenty-two earnings conference call.
As a reminder, all participants out at least I only mould and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
The joined the question queue. You May press started then one on your telephone keypad.
Sure they need assistance during the conference call you may see going on and operate there by pressing start N for Ya.
I would now like to turn the conference over to Brian then you with Iced tea or please go ahead Sir.
Good afternoon, and welcome to the earnings conference call for today Cordage, Yeah for the first quarter astutely or 2022, which ended up September 30th.
On the call with me today are real or fake, whereas chief Executive officer and automatically take her as Chief Financial Officer.
Ah Rentschler results make fun of approaches issue today, which is available investor relations section of our website.
This call is being recorded in a replay will be available on our website saw the conclusion of Nicole.
Sometimes we have what's called a include forward looking statements related to our financial results products customer demand operations.
With COVID-19 of our business and other matters.
These statements are subject to risks uncertainty either assumptions are based on current expectations I'll go to like midnight.
And they may not be updated in the future.
Therefore, it should not be relied upon as representing our views of any subsequent date.
We also refer to certain non-GAAP for natural measures and key business metrics to provide additional information to investors.
Definition of non-GAAP measures key business metrics and the reconciliation of non-GAAP to get measures is provided in our press release on our website.
With that let me turn the call over to where I will.
Thank you, Brian and thanks to all of you for joining us to discuss pay course, physical first quarter results.
We are off to a great start and physical twenty-two with both revenue and profitability exceeding our guidance for the quarter.
Our success and K. One is further evidence that our strategy is proving effective.
And that we're establishing pay corps as a leading fast paced provider of human capital management solutions for small and medium businesses.
We believe this is a multibillion dollar market.
That is still in the early stages of shifting to the cloud.
Which positions pay corps to accelerate revenue growth.
And increased profitability overtime.
Pay course built to empower the leaders of small and medium businesses to build winning teams by attracting developing engaging and entertaining employee.
As we have all seen from recent headlines.
The war for talent is a pressing challenge for small and medium businesses.
We believe our success demonstrates that our focus on leaders and their teens is resonating in the market.
We delivered strong results for the first quarter of fiscal year 22.
With total revenue of 92.7 million up 17% year over here and adjusted operating income of 3.4 million.
We also have heated our internal expectations for bookings in Q1.
This is continued validation of our differentiated value proposition.
Solid execution against our growth lovers and.
And that the efforts at Chuck Mala are cheap revenue officer undertook in fiscal 21 to level up and expand our sales organization are yielding results.
Would the strong results, we are once again, raising our guidance, which Adam will discuss in more detail shortly.
We had broad based success in the quarter.
With significant progress made across each of our key growth initiatives.
First I'll include focus on tier one markets is paying off.
We continue to significantly grow our bookings in tier one markets.
One of our biggest strategic focus areas as aggressively expanding our sales organization.
We had a strong hiring performance in Q1.
Exceeding our internal targets.
We are specifically, please with our staffing results in tier one market.
As we have discussed previously hiring in these dense markets like Los Angeles.
San Francisco and New York provides pay core a great opportunity to hand, it sales coverage and accelerate bookings.
Second.
We continue to experienced strong performance from the broker channel.
Bookings through the broker channel exceeded expectations for the quarter.
And continued to deliver outsize result.
We now have five national partnerships are a contributing towards success and this channel.
Our decision to proactively engage the broker community.
And empower them to choose the right benefits administration solution for their customers, while leveraging our platform for the insights tools and competitive advantage that increases client satisfaction and retention is working.
Third or vertical focus is resonating in the market. We have developed purpose built offerings that focus specifically on three kibbeh articles that represent a significant portion of the F&B market.
Health care manufacturing and food and beverage.
By understanding specific needs of companies in these markets. We have built tailored solutions to help solve the most pressing human capital issues facing customers.
These are small and medium businesses with limited technical capacity.
Fact that our products are built for their needs out of the box is compelling and a key driver of Gwinn's.
We had a strong quarter and all three of our target markets.
Lastly, we continued to expand our product offering and drive greater adoption of our bundles.
A core part of our growth strategy is to expand our ATM platform by adding new solutions and increase the total per employee per month or pepam available.
During the first quarter, we increase our full product suite $239 papon per month.
From $35 Pep on per month.
We are aggressively expanding our product portfolio over the past couple of years and we are seeing very positive results.
In particular, we are seeing great adoption of our talent management bundle.
Which provides leaders with the tools they need to identify attract higher and onboard the best people for their teams and then develop coach train recognize and engage them.
Town is top of mind for every F&B today and as a result is driving a significant increase and attach rates for both new and existing customers.
We announced several new product features in Q1 that highlight our ability to quickly introduce new capabilities that add value for our customers.
First we both of our Covid related offerings to help our customers navigate impending compliance changes and to provoke workplace safety with the launch of our immunization tracker and facial recognition time clocks.
Immunization tracker allows business leaders to manage and track immunization and testing status of their employees.
Workers can upload proof of vaccination or a negative COVID-19 test directly to the system and HR leaders can run a rapport to see immunization status across the organization.
This new feature will assist businesses with employment policies and position pay corps as the first HTM cloud provider to offer an immunization tracker that is fully integrated into their platform.
In addition, our time product now offers a facial recognition time clock promoting a touchless employee experience.
We also launched on demand pay and earn wage access solution that provides HR leaders with more flexible pay options for their employees.
On demand pay allows employees to access earn wages before their payday directly from our mobile App, where they can also view their current wages and compensation history.
On demand pays an exciting evolution and pay that enables employees to control their own financial health.
And provide the leaders with another benefit to attract and retain talent.
A benefit that resonates well in our core vertical.
We're also extremely proud to be recently named a top workplace 2021 for diversity equity and inclusion practices.
This covenanter list celebrates companies with a welcoming and inclusive culture across all levels of the organization.
Our commitment to D. Eni is also reflected in the success of our associate focus programs such as our employee resource groups and development opportunities to the Black leadership Academy, which we conduct in partnership with Mackenzie.
To reinforce his commitment I signed the CEO action pledged for diversity inclusion the largest CEO driven business commitment to advanced diversity inclusion in the workplace.
Before I turn it over to Adam.
Just want to reiterate how excited I am by our performance we are executing our detailed growth plan and setting the stage for pay course future. We believe we have all the elements in place to be a winner and the ATM market.
With that let me turn the call over to Adam to talk about our financial results in more detail Adam.
Great. Thanks for all.
I'll begin with a review of our first quarter results and then finished with our outlook for the second quarter and the full fiscal year 2022. As a reminder, my comments related to financial measures are on a non-GAAP basis.
Total revenue was $92.7 million, a 17% increase year over year recurring revenue grew a point faster at 18% year over year is our new business continues to layer into the portfolio.
We ended the quarter with 28700 clients growing about 3% year over year. However, this growth comes as our micro segment of under 10 employees is effectively flack or go to market strategy targets companies would tend to 1000 employees and we're seeing all of our customer count growth come from this segment growing 6% year over year.
This segment represents just over 80% of our total revenue and just over 60% of the number of our customers down.
Balance of our revenue growth was split between continued pepam expansion and it continued mix shift towards mid market segment of our portfolio as well as marginal organic employee growth of our customers.
Never tension in the first quarter remained steady over the prior quarter as we start to approach prepandemic levels, while still below our historical right in the mid nineties, we're seeing improve with recovering employment levels and expect it to continue improving as we move through the year and laughed the quarters most effected by Covid.
Adjusted gross profit margin was 65.2%, which was down from 75% in the first quarter of fiscal 2021. The primary drivers of the change in adjusted gross margin or an increase in amortization related to capitalized software and contract acquisition costs as well as the anniversary of certain COVID-19 related costs initiatives and continued investment.
And our service organization to ensure a great experience for our customers. The increase in amortization is primarily driven by purchase accounting related to the apex transaction in November of 2018.
Adjusted gross margin, excluding depreciation and amortization was 75.1% for the quarter, an increase of 40 basis points over the prior quarter sales.
Sales and marketing expense was $32.1 million or 35% of revenue compared to 30% of revenue in the year ago period as role discussed investing in our sales teams and expanding capacity across all markets and tier one location, specifically is a core focus for us.
We are seeing great results and attractive returns on the investments we've made and we intend to continue investing aggressively or sales capacity buildup.
This is a very large market at the early stages moving to the cloud and we strongly believe in these investments will enable us to capture more sure quickly and drive meaningful value for shareholders. We have aggressive solar expansion plans and are on track to achieve our full years of sales headcount target growth of 2025%.
R&D expense was eight $7 million or 9% of revenue compared to 10% of revenue in a year ago period, and R&D expense, excluding capitalization of $7.2 million. So on a gross basis was $15 $9 million or 17% of revenue in line with a year ago period, we will continue to make meaningful <unk>.
Vestments, and R&D and expand our product portfolio and paper opportunity.
G&A expense was $16.3 million or 18% of revenue compared to 14% of revenue in the first quarter of 2021. The increase in G&A expense was largely attributable to the incremental costs of becoming a public company and the anniversary of certain COVID-19 related costs initiatives, we expect to begin driving leverage on the G&A line in the coming quarters.
Now that most of our public company costs are in a room right.
Operating income was $3.4 million or a 3.7% profit margin compared to 16% in the year ago period.
The change in profitability reflects the drivers I mentioned, we have been consistently profitable business expect to generate steady Morgan expansion over time is a highly scalable business model and we are confident we can deliver strong top line growth and attractive levels of profitability over time.
With regards to the balance sheet, we ended the quarter with $126 million in cash and no debt. We ended the quarter with $1.6 billion in funds hope reclines with average daily client funds of $760 million into.
Interest income generated on these funds was $316000 or approximately 17 basis points.
Now turning to guidance starting with the second quarter, we expect total revenue of $99 million to $100 million or 16% growth at the midpoint of the range and adjusted operating income of $5 million to $6 million.
For the full year, we're raising our revenue guidance to $400 million to $406 million or about 15% year over year growth at the midpoint of the range and we expect adjusted operating income of 32% to $34 million.
Couple of things to keep in mind regarding our outlook.
We remain optimistic about the growth opportunities and underlying trends in our business. As a reminder, we expected growth in bookings in fiscal 21, we'll take 12 plus months to fully ramping our revenue.
And while we've experienced a modest tailwind from improved employment trends in our underlying portfolio. We continue to remain cautious in our guidance, including minimum benefit from the labor market growth.
This is driven in part by continued uncertainty related to Covid.
Our guidance still assumes interest rates remain low and will continue to be a headwind to interest income through a 422.
It's also important to keep in mind that our comps get harder throughout the fiscal year and this will be particularly true in the fourth quarter.
So to wrap we're off to a strong start in fiscal 2000 to the strength of our cloud based ACM platform is resonating with customers and we are executing in a high level. We believe we are well positioned to deliver on our target of sustainable revenue growth of 20% plus and improve profitability over the long term with that will open the call for questions operator.
<unk>.
Thank you we will now begin the question and answer session. The joined the question queue. You May Press started then one on your telephone keypad.
You will hear a tone and knowledge in your request.
If you're using a speaker phone please pick up your handset before pressing any Keith.
To withdraw your question. Please press Star then too we.
We will pause for a moment as call has joined the queue.
Our first question is from <unk> Shah with Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question and congrats on the great start to the year just quickly first one the broker channel you continue to have success year anything particular driving growth year, and how should we just thinking about the pipeline of adding more brokers weather regional internationally.
To your Arsenal.
Yeah.
Thanks for the question.
The broker channels really combination of our value prop.
More we continue to work with the broken community and enable them to select the benefit admin solution of choice and we provide them a preferential implementation.
And it's a winning formula.
Our five National partners you know.
Have helped drive our growth, but the majority of our growth the lion's share of our growth is coming from the non national partners.
So it's really about field execution and the value proposition driving it we continued to grow are broken relationships.
Cross the entire ecosystem.
But we were winning more transactions would the broker and that's driving our overall growth.
Got it that's helpful and just to follow up maybe just on the on demand pay offering can you just will aberrate on this a little bit more are you working with any partners or is this a native solution and then just how should we think about the money.
Yeah, So as we think about the on demand pay solution.
Using a partner for all the card processing.
In the background and so and we will continue to evaluate that over time, but.
We feel is the best strategy for us right now.
In terms of the economics. It's included in our overall core offering in our in our go to market bundle.
And.
There are no costs as long as no cost to the employee or the customer as long as they are using the native solutions and the cards that we offer them.
Great. Thanks, Thanks again congrats.
Yes. Thank you.
Our next question is from Mark Murphy with J P. Morgan. Please go ahead.
Yes, Thank you very much and I'll add my congrats.
My first question is I was curious if this immunization trucker you. Thank goodness create any kind of tangible uplift to the results in the coming quarters. Intuitively you would think that that'd be a pretty popular option for many of your customers.
I'm not sure if.
If perhaps you you've bundle that in for free or something that is priced separately.
Yeah. So for my name is Ed immunization track of perspective, it's bundled into are offering where I think you'll see it provide an advantage is I think if you're on a regional service Bureau, or an in house solution.
Bringing an immunization track of the market is is is complicated and expensive and so that tends to be a gap in those two key segments. So I think we'll benefit in those two areas specifically.
Okay.
Roll I had another one.
Which is when you just look at the strangeness of the Labor Force.
Issues in the us today and the the participation rates.
Do you think that that in some kind of a new reality.
Which case it probably would drive demand for your recruiting module, which is differentiated or do you think it is kind of a temporary log jam and.
I think in that scenario, you would benefit as they rejoined the labor force, perhaps next year.
Yeah, I think from our perspective, it's temporary.
Now how long that lasts is unknown I think the ability to work from anywhere has created massive transitions in the workforce, which has helped accelerate our recruiting solutions are talent solutions.
And we're seeing them Overperform in general.
But without question.
We think that it will it will come back into play at some time next calendar year.
The labor market will will probably we're sort of what we're used to previously.
Yeah, Okay, well, what one last one just on the comments on.
The bookings trends you refer to strong bookings in Q1.
And.
We understand you're not providing any numbers I think I don't think any any of your peers are.
But is there any additional color was driven more by volume or maybe was there any discrete large windsor just directionally, where are you able to say if the bookings were higher or lower sequentially.
Care to the June quarter.
Yeah, I mean, the way I would put it in perspective, it was our our best first quarter and the history of the company.
And one of our strongest quarters ever so we had a really strong quarter across the board, we had broad demand and all market segments.
For our solutions.
And it's really driven by we continue to outperform a tier one markets. We continue to get great contributions from the brokers.
And our industry play continues to help accelerate Irwin right. So the combination of those things.
We exceeded our internal plans and we have fairly aggressive internal plans to achieve our long term goals.
So we're off to a great start.
And we're in a great place from a head count perspective in the cellar position, which is really positions us for a strong.
Ear and bookings.
Excellent. Thank you very much.
Thank you.
Our next question is from Terry Tilman with Truth Securities. Please go ahead.
Hey, good afternoon, gentlemen, hero and Adam Congrats as well for me I have I think two and a half questions. The first question or first half of one and a half questions I can't count.
On bookings that a couple of questions have been asked you did talk about expansion bookings I think we're solid or strong. So could you maybe kind of double click on that in terms of expansion sales I know new logos are very important but how.
Oh was that muscle tissue in terms of expansion sales and then the second part of that first question is of the three kind of key vertical focus areas what are the three.
It seems to be kind of rising above the others at this point and then that follow up.
Yeah. Thanks Terry.
I think from an expansion perspective, we're seeing really strong cross-sell.
And our base as I mentioned.
In our previous call. We have we're really reinforcing that muscle within pay corps, and we had really strong cross-sell, particularly on the talent side I think that's a real stand out for us across sound talent into the base.
What was the second question Terry I'm sorry.
[laughter].
Whereas the vertical three very yeah yeah.
Yeah on the vehicles.
I would say this year healthcare's outperforming.
Overall, and that's really a bounce back post COVID-19 as we've become more normalized and the entire health care system is open for business, we've seen strong performance and health care of the three particularly.
That's good to hear about the bounced back there thanks, and I guess the follow up question my.
My second of two questions is related to you know I don't know I don't know if trucks around but hopefully charts doing well in the idea of enabling him or giving him 20% to 25% more sellers what I'm curious about it what are the early trends in terms of the sellers in the tier one market in terms of their time to ramp because what I'm getting at is could could they actually affect the model materially and book.
By the end of the year. Thank you.
Yeah, Terry so.
And the tier one markets the exciting thing for US is some of the Kpis. How we look look at our average number of employees per deal average deal size, an average pepam and they're all above the line average and in many times the highest of all the tears. So I think from our perspective tier one market.
Spansion.
Is operating.
As planned and we're really excited and.
Sure.
Well above you know our path to 20% to 25% headcount growth for the full year. So we're on a really good track to exceed those targets for the year and.
Hey, Terry one thing I would add there is even if those sellers do outperform they're sort of ramp and are accelerating the ramp, which which we feel like which we're seeing that performance already it's still going to be marginal in terms of its overall addition to the 22 number so coming in over our head count.
Adding sellers more quickly ramping them faster is still has a marginal impact on the in year bookings performance.
Understood. Thank you.
Thank you.
Our next question is from Kevin Mcvie with Credit Suisse. Please go ahead.
Great. Thanks, so much and congratulations on the results.
It sounds like the client and the micro segment under 10 was flat and a lot of the growth was an allergic clients any thoughts around that and I guess.
Just following up on the brokerage channel can you give us what percentage of bookings in the quarter were sourced with the broker's as opposed to internal.
Yeah, So I'll take the brokers and then I will take the make shift from a broker perspective over 40% of our bookings in the quarter came from brokers.
Yeah, Hey, Kevin as we think about the customer mix, it's really operating exactly as we as we designed.
We're really focusing all of our investments and resources in our targets segment tend to 1000.
And we're seeing outsize performance, even in the 100 plus segment, which is growing in the double digits and so it's exactly as we would expect we see dramatic increases in <unk> as you go above 10.
And the average deal size of those clients is more than 10 times, what we see in the in that micro segment in the under 10 segment. So yeah, we're seeing the flat growth there in the micro segment, but again operating exactly as we would as we would expect as we continue to focus on that target segment.
That's helpful and then just real quick.
On demand sounds like it can be a real differentiator in the sense of what the adoption rate.
Whether in the quarter already or is that something we would expect in the next quarter in any way to think about what you think the adoption rate will be on that.
Yes, I would say, it's going to be a little early right now to talk about the adoption rate, but I would say that it's it's slightly better than what we would have expected right out of the gate, we're seeing pretty good uptake and as a partnership that we have with our with our partner on the product.
Has been strong so far so we're excited about it again, it's a little early but something that will definitely want to be.
Keeping our our ion and we expect to talk a little bit more about in the future.
Thank you.
[noise]. Thank you.
Our next question is from some add some minor with Jeffries. Please go ahead.
Hi, good evening, Thanks for taking my questions get to see that the solid results maybe.
First if I could just dig into I know, we talked about bookings and some of the tier one expansion, but when I think about the the source of new bookings has there been any change that you're seeing and who's contributing.
To your new bookings or maybe the wind rates that you're seeing especially with the context of.
What some of your.
Incumbent competitors have sat around their own retention rates.
So we are mix of business remains the same.
80% of our winter still coming from legacy providers that we define as.
Regional service bureaus in house ADP paycheck.
Again, we have traditionally and still overweight to retail service bureaus, an in house versus AVP and paychecks like some of our peers just based on a market coverage and that will continue to change as we move forward or when rates continue to accelerate.
So we feel really good.
From that perspective, so I would say that our when rates.
Are accelerating against all of our key competitors and we feel really strong about the value proposition.
In the marketplace.
Great and then when I think about what are the things that really differentiates.
Or I think it's.
The vertical focus in a couple of key vertical even though you're available broadly I'm just curious if.
If you are seeing anything in particular on the vertical side. That's notable in terms of strength and some additional attraction there.
And maybe just how should we think about.
That may be additional verticals now that you've now that you've seen strong success and the ones that you already have.
Yeah. So I think we'll be launching our fourth vertical professional services this quarter coming up so that's exciting news or excited about that it's a strong outsourcer to begin with.
We will continue to develop solutions for that vertical I think in general.
Just gives or sells a lot of confidence in the marketplace.
Because we coach them on the nomenclature and.
And the value proposition and we have not only workflow oriented for those three verticals, but also.
<unk> key partner integrations.
And then the confidence that they're being implemented by someone that only implement that industry until that combination.
Has proven to be a really good winning formula for us.
And so we're going to continue to press in on it with our fourth industry being launched this quarter.
Okay, great and if I could maybe just squeeze in one more out of curiosity.
I know, we've we've talked about pier, one and the coverage that you have there from a sales headcount perspective.
When I think about your broker channel relationships is that does that sit it is it kind of consistent in terms of where your sales coverages and does tier one markets or or is there are there are big differences between broker channel coverage in your market right now versus where your sales coverages.
No it it kind of mirrors our sales cover chose we expand sales coverage. The great News is that's why we're seeing continued growth and broken channel because they're more brokers in tier one markets and they're on tier two and tier three so.
So in in our National partnerships are also centralized in those key areas. So it reinforces our strategy.
Great very helpful and good to see the strong results. Thanks again for taking my question. Thanks a lot.
Okay.
Our next question is from Pat Patted Robin's with JMP. Please go ahead.
Oh, great. Thanks, very much and let me add my congratulations.
So one of the questions that I get a lot is.
Investors, saying, Hey, Pat this whole F&B payroll space getting crowded.
So now we have a core and before that we had pelosity and pay com.
And I know you feel like the spaces is.
26 billion I think it was what you had on the deck, but if you could just sort of reminds us of your ticket how big this tan and why there's.
Why there is room, even with really good vendors.
In that target market I think that would be really helpful.
Yeah, I mean, it is an enormous marketplace and we look at the Tam at 26 billion.
And the way we think about it is.
If you think about the three cloud providers combined.
I'll have some more between depending on how you.
Look at the market somewhere between eight and 12% penetration so 88% of the market is available in USA ADP and paychecks are obviously donatus to the cloud.
And will continue to be donated to the cloud for the foreseeable future just based on the relative size of those two organizations to the other three organizations, but I think what what people also fail to realize is that the in house.
And regional service for your markets are really large and provide lots of opportunity for us as well and we've seen.
Outside wins from that perspective in those areas.
Okay, great. Thank you.
Thank you.
Our next question is from Scott Erica with need them. Please go ahead.
Hey, everyone. This is Michael Rackers Amman for Scott Berg, Congrats on the quarter and thanks for taking my question just.
I just had one quick one basic.
Basically around some of the additional modules outside of the core HTM bundle.
You mentioned getting some traction, especially the talent management.
Have you seen that mainly within existing customers or within new logos as you as you move into tier one markets.
Yes, it's primarily new logos, while we've seen Sean cross-sell the majority of our results are in new logo since the majority of our bookings or a new logos. So we are sharing seeing really strong adoption of of talent.
Into the portfolio and I think I think that's something we're really excited about succeeding or expectations. We continue to see strong adoption of of workforce management as well, but ultimately.
The talent and recruiting.
Keen on top of mind for for the market and we have a really compelling value proposition for people as they're really focused on retaining their employees and so some of our our unique competitive tools are focused on enabling managers to culture associate set goals really help people keep on track and engaged or.
<unk>, which will will drive associate retention.
At this point in time, which is more critical than probably in my lifetime in the U S workforce.
Alright, thank you.
Thank you.
Our next question is from bread Rebeck with Stifel. Please go ahead.
Great. Thanks, very much rolled competitively I think we almost always focus on sorta either.
Legacy service bureaus or the other cloud vendors, but are you seeing any change in the market with PEO vendors, especially sort of in the sub 100 segment.
Yeah not really.
We don't we just don't come across from that often they don't show up in the wind loss at.
Had any kind of outsize right.
And.
We win.
He'll call at 4% I think of our wins come from Pel. So.
A small trade between us and PEO.
And we've just won't see it.
As a big value prop because of the cost and again, we're not spending a lot of time in the sub 50 space, So which is more that value prop tenzer resonated a little more for a small business owner, who is looking for some of the provide all those services for them.
And so as you get above 50.
Comes less compelling and we just don't see them that often.
Okay. That's that's great and then just unrelated but with the U S economy now having added back basically all the jobs that were lost during the pandemic as of last week should we now think of employment gains within your installed base as sort of that modest tailwind.
It was pre COVID-19 to a small driver to incremental revenue growth as opposed to something that's maybe been a bit larger over the last few quarters.
Yeah, I mean, I think that's definitely right.
See sort of low single digit growth is what we as what we've seen prior to Covid and and I think.
As you think overall labor market growth over time, I think that makes sense. So.
That's how we're thinking about going forward and of course, as we think about guidance, we haven't really.
Expected much out of that out of that line. So low single digit growth would be sort of what we would expect otherwise.
That's great. Thanks, a lot guys.
Okay. Thank you.
Our next question is from Brianne Bergen with Cohen. Please go ahead.
Hi, guys. Good afternoon. Thank you.
<unk> comments on the continued services investments are you at a full run rate for the incremental expenses you guys put into the services Org and how in general how shall we.
Margin for the balance of the year.
Yeah, I mean, we've made some.
Some pretty intentional investments in the service organization as we head into.
Two things on our mind head into the end of the year, which is a peak season for our clients and we want to make sure that we're creating the right service dynamic and then getting in front of a lot of the future head count or the future customers that are coming in that we've booked in her in the backlog so.
Get in front of both of those dynamics.
At this point, we don't expect any outsized investments in service in the future. We think that we've appropriately staffed putting into the peak season. So we feel really good about those investments.
Okay and gross margin you expect to build off of these levels.
Yeah, I think you're going to see us continue to build off of off of these levels for sure and I think we noted in queue for coming off a cue for that that adjusted operating income margin was sort of at the at the trough. We were at the low low end of where we expect to be so yeah. I think that you should expect us to continue to.
Drive margin over time.
Of course, there's there's some seasonal dynamics with ear and revenue. So it is not always.
Exactly straightforward like that but.
We feel good about the leverage that we're going to expect out of those investments for sure.
Okay. Thanks, and then just how much did the client employment.
Oh and contribute here in the quarter.
It was marginal in this quarter. So we saw again like and that sort of low single digits and if you remember in queue for we drove four to five points of growth off of an easy comp over Q4 of last year, and we really didn't see that significant of an inquiry so more than that low single digit.
<unk> from the overall labor market this quarter.
Okay. Thank you.
Thank you.
Our next question is from Brian Peterson with Raymond James. Please go ahead.
Hey, Thanks for taking my question is truth Tannenbaum for Brian May still see the increase in pebble in this quarter, but those curious what you guys are thinking about emanating abilities as you tuck in the spring and functionality and help group have them over time.
Yeah. So we're.
Extremely diligent and opportunistic with M&A, we've had a history of successful acquisitions to expand our platforming provide a unified platform for for our clients and so we're going to continue to do that I think will be.
Thoughtful.
About that and.
We're evaluating lots of different opportunities and we have a history of one or two transactions per year.
I think that will probably.
Be something that will target on a go forward basis.
But again and are the opportunities we look at our primarily product IP related and we're really focused on unifying that that technology into our platform and selling is part of our unified suite. So we're not looking for any.
Significant installed base is that we're going to retain on a long long go forward basis.
Perfect. Thanks.
Yeah. Thank you.
Our next question is from Mark Martin with Bird. Please go ahead.
Good afternoon, and thanks for taking my questions.
In terms of the West coast and the northeast you mentioned your pesos selling or sales hires in tier one markets increased I was wondering if you could just be a little more granular in terms of what your what you've added both of those through key territories.
Yeah, Hey, Mark.
We weren't expecting to necessarily talk through the dynamics of each of the markets of course, there's lots of dynamics in terms of hiring and when leaders are moving around and so.
So it's just not quite as helpful. I would say that.
Over the first three months and through this through October we've had a lot of success in hiring across all of our tier one markets.
And and we're well on our way to achieving that 20% to 25%.
Headcount growth for the year so.
We're going to we're going to be opportunistic when it makes sense to bring bring sellers into markets, where we have our new leaders, where we have strong leaders, where we have opportunities for continuing to round out teams and the bulk is still going to go into those tier one markets.
Great and then can you talk a little bit about.
Some of the investments that you've made in the service what's the feedback been like what are you seeing in terms of response times any sort of.
NPS feedback.
Just.
A sense of.
Client retention and how that would.
Trend going into the queue fall selling season.
Yes, we've made a handful of really strong technology investments to enable our customers to be able to interact with this more effectively to be able to engage with our reps more effectively and and for our own service reps to be more effective as well and.
We noted on protocol some noise that we had last year and feeling like we were understaffed and so making those investments in partnership with the technology seem to come through really well.
We've been able to improve our our handled times on our way times.
Two levels that we think are better than they've ever been and we've gotten really good feedback so.
Yeah, we've seen some some really good returns and it's still early for a handful of these investments as well.
Great and then can you just talk a little bit about the expectations with regards to pace per control I just want to make sure I understood. It.
Correctly it sounds like the prior quarter was up.
4% to 5%.
This quarter.
Is.
Low single digits.
You mentioned Colgate at the beginning when you were talking a little bit about the expectations. So I was just wondering.
Are you are you, saying low single digits in terms of increases in terms of pays per controls for the balance of the year or something more modest in terms of what's being baked into the formal guidance.
Yes, I mean as as we think about our guidance I think we've been really conservative in terms of including any sort of growth from from the labor market.
What I would.
What I would say is that prior to Covid, we were sitting in that sort of 72 employees per company and we're back above that now, but again as we think mark about the future guidance I mean, we really haven't baked in any any continued growth from the labor market.
Okay great.
And one last one just how would you describe pricing in the market now.
I would say that it may be it feels a little different for us because we're seeing some really strong success with with our new modules, especially again that talent solution. So across our base, we're seeing higher take rates of our products. We're seeing some really strong success with with continue to to.
Tache.
And I would say that we've seen some for some of our competitors, maybe a little bit more pricing pressure nothing that's necessarily change any anything for us as we think about that overall, new business coming in and the rates that it's coming in at feel really good about that.
And your talent module really did get a lot of really good reviews coming out of HR tax.
Was wondering what are the tax rates and to what extent can you even.
Further market got pretty.
Or module.
Yeah, I mean, we weren't giving specific attach rates, but I'd say workforce management continues to be our highest attach right and that's still in the sort of.
Sort of 50% range is similar to the dynamics that we've shared over the last handful of quarters.
And there's plenty of room left for talent. So talent has grown dramatically and I'd say really quickly relative to other products that we've historically release in terms of how quickly it's sort of penetrated and attached.
But still not too not even yet to the workforce management.
So we think that there's plenty of room for that.
This concludes that question and answer session I would like to turn the conference back over to around the yard for any closing remarks.
Again, we want to thank you for your time today, we're excited.
About our queue, one performance and we're even more excited about <unk> future, we look forward to.
Working with all of you all over the next few quarters. Thanks, so much.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant.
[laughter].
[music].