Q2 2022 Paycor HCM Inc Earnings Call

February 3, 2022

Ladies and gentlemen, thank you for standing by welcome to pay quarters second quarter of fiscal year 2022 earnings call. At this time, all participants are in a listen only mode.

And the answer session will follow the formal presentation.

If anyone.

If you require operator assistance during the conference. Please press Star Zero on your telephone keypad. Please note. This conference is being recorded I would like to turn the call over to Rachel White, Vice President of Investor Relations.

Good afternoon, and welcome to pay for an earnings call for the second quarter of fiscal year 2022, which ended on December 31st on the call with me today are Rob all the larger here <unk>, Chief Executive Officer, and Adam Anti <unk>, Chief Financial Officer or financial results can be found in our press release issued today, which is available on the Investor Relations section.

Our website today's call is being recorded and a replay will be available on our website. Following the conclusion of the call statements made on this call include forward looking statements relate to our financial results product customer demand operation impact of COVID-19 on our business and other matters. These statements are subject to risks uncertainties and assumptions.

Based on.

Current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied on upon as representing our views as of any subsequent date.

Also we will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures is provided in our press release on our website with that I'll turn the call over to Raul.

Thank you Rachel and thank you all for joining us to discuss <unk> fiscal second quarter results.

We delivered a strong second quarter as both revenue and profitability exceeded our guidance.

Based on these robust results we are once again, raising our full year guidance, which Adam will discuss in more detail.

The $28 billion human capital management market is still in the early stages of shifting to the cloud, which positions pay core to accelerate revenue growth and increased profitability over time.

We continue to experience strong demand for paid course, modern SaaS HCM solutions for small and medium businesses as demonstrated by our 20% revenue growth this quarter.

Two years ago, we developed a strategy to differentiate <unk> in the market, who are open and extensible platform.

Focus on leaders and by tailoring solutions for key industries.

<unk> has built a unique value proposition focused on empowering leaders, which drives employee engagement and business results.

Our technology automates mundane leadership task. So frontline leaders can focus on goal setting coaching talent development and associate engagement.

The key elements that drive business performance.

The great resignation or reevaluation labor market dynamics highlight the importance of talent acquisition and retention strategies and we've seen that demand play through to our offerings.

Our software is helping companies attract onboard coach and engage employees in a virtual environment with increasing regulatory complexity.

Our team is laser focused on executing the strategy we've outlined.

And we exceeded our internal expectations in Q2.

As an outcome of our product investment in technology designed for leaders in industries, our win rates continue to increase.

Our consistent bookings performance over the last six quarters is starting to deliver accelerated revenue growth.

This is continued validation of our differentiated value proposition.

Solid execution against our growth levers.

And the performance driven changes we've made across our organization.

We've made significant progress against each of our strategic growth initiatives during the quarter.

First our increased focused on tier one markets is working.

We continue to significantly increase bookings in tier one markets, which we define as the 15 largest cities in America.

One of our biggest strategic focus areas has been aggressively expanding our sales coverage in tier one markets.

Today, we have seller coverage in all tier one markets and are now focused on adding additional teams in these markets to drive greater coverage.

We exceeded our internal sales staffing targets again, this quarter, while maintaining high productivity levels.

We are also excited to be the newly named official HR software provider for the Pac 12 conference, which supports our tier one expansion in the west by increasing brand awareness among their enormous viewership in key business decision makers.

Four year partnership highlights pay core and the Pac 12 commitment to developing leaders in and out of the classroom.

Second we continue to successfully partner with brokers.

New business coming through our broker channel remains strong and continues to deliver outsized results.

Brokers are trusted advisers for mid market businesses and they appreciate our flexible approach that enables them to select their benefits administration solution of choice, while receiving a prioritize and guided implementation for their valuable clients.

We are working with about 10% of the broker community today, and we continue to be a significant expansion opportunity within this valuable referral channel.

Third our industry specific approach is resonating.

Our purpose built offerings for our four key verticals, which represents 50% of our Tam are driving higher win rates, including professional services that launched last quarter.

By understanding the specific needs of companies in health care manufacturing food and beverage and professional services, we develop tailored solutions to help solve their most pressing human capital challenges.

Instance, this quarter, we introduced a new payroll base shareholder reporting solution that automates complex staffing reporting requirements for nursing facilities.

Lastly, we continue to expand our HCM suite and increased adoption of our bundles.

Our team continues to expand our ATM platform by adding new functionality and expanding the breadth and depth of our product portfolio, increasing the total per employee per month or pep them right available to $40.

We are seeing excellent adoption of the talent management bundle, we launched in 2021, which not only provides leaders with the tools they need to recruit and onboard associates, but also includes deep functionality to develop recognize and engage them.

Talent is top of mind for all business leaders today and as a result, it's driving a considerable increase in attach rates for new and existing customers.

Another differentiated aspect of our software is open unified and extensible platform that enables us to rapidly add capabilities and integrate additional partners. It provides a time to market advantage to stay ahead of the dynamic evolving needs of our clients in the last year, we have made.

Significant investments to bolster our interoperability, including launching a new platform that enables customers and partners to do self serve integrations, reducing the average time it takes to build an integration by 50% and we quadrupled the total number of partners in our marketplace. We.

Now have nearly 200 partners in our ecosystem, providing flexibility for our clients to select the best applications for their industry.

This quarter, we also released new functionality within our <unk> analytics tool that provides predictive analysis unemployed turnover. It provides leaders with actual insights to identify the top drivers of employee resignation and potential at risk employees to help prevent turn.

Over in today's challenging labor market.

As leaders nationwide continue to work through the great resignation, it's more critical than ever to understand why employees leave and.

What an employer can do to prevent or better plan for that outcome. We are committed to providing intelligent analytics to help leaders uncover these valuable insights.

I would also like to commend our team for their efforts over the last year, including through this year and in providing comprehensive and customer first implementation and support to our clients both of which have been receiving excellent best in class marks over the last few quarters, we launched our customer support portal with a <unk>.

Wiley efficient customer chat tool and a robust self service knowledge base as a result of these and other enhancements we've seen an 80% improvement in client wait times during the second quarter.

We're also extremely proud to be recognized as a top workplace for the second year in a row by inner gauge an organization with a 15 year history of surveying more than 20 million employees to help build and brand top workplaces results are based on 15 cultural drivers that are proven to predict high.

Lawrence against industry benchmarks.

It demonstrates our commitment to live the cultural best practices, we advocate for our clients that drive employee engagement and business performance.

Lastly, we would like to congratulate our client the Cincinnati Bengals and who they nation on their amazing season and upcoming Super Bowl appearance.

With that I'll turn the call over to Adam to discuss our financial results and guidance.

Nope angles. Thanks role I'll begin with a review of our second quarter results and close with our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis.

Total revenue was $103 million, a 20% increase year over year and this is the first time quarterly revenues have exceeded $100 million.

The increase was primarily driven by new client growth continued type of expansion as well as low single digit organic labor market growth.

The average number of employees per customer has returned to pre COVID-19 levels for our client base in that quarter and our customer base has grown to a record 29000 clients. This growth largely comes from the mid market as our micro segment of under 10 employees remained flat.

Go to market strategy targets clients with 10 to 1000 employees and all of our client growth is coming from the segment growing 8% year over year.

This segment represents 80% of our revenue and just over 60% of our clients.

Net retention continues to trend favorably and is now in line with historical pre Covid levels. We believe this is due to a combination of recovering employment levels and investments we've made across implementation and client support.

Adjusted gross profit margin was 66, 6%.

Down from 71% a year ago and in line with our expectation.

This change is largely due to increased amortization related to capitalized software and contract acquisition cost.

Margin was also impact to a lesser extent by the termination of Covid related cost initiatives as well as continued investments in our service organization to ensure a great client experience.

Adjusted gross margin, excluding depreciation and amortization was 76, 5% for the quarter, a decrease of 150 basis points year over year and in line with our expectation.

And we have now delivered sequential margin improvements for the last two quarters as we drive scale out of our customer experience investments.

Sales and marketing expense was $33 million or 32% of revenue compared to $25 million or 29% of revenue a year ago aligned with our ambitious growth plans, we continue to invest to expand our sales teams and marketing programs, especially in tier one markets. We are seeing great results and attractive returns.

On our investments and we intend to continue aggressively investing while targeting neutral free cash flow annually.

We were in a huge market and at the early stages of transitioning to the cloud and we strongly believe these investments will enable us to capture share more quickly and drive meaningful value for shareholders.

R&D expense was $9 5 million or 9% of revenue compared to 11% of revenue a year ago.

Including capitalized development costs of $6 $4 million R&D spend was $16 million or 15% of revenue.

Similar to the year ago period and in line with our expectation.

We will continue to strategically invest in R&D to expand our product portfolio and pepper them opportunity and to drive insights for leaders to better attract.

And engage their associates.

G&A expense was $16 million or 16% of revenue.

System with the second quarter of 2021, However, we aim to continue to drive G&A down as a percentage of revenue and have done so sequentially.

Operating income was $10 million or 10% profit margin compared to 15, 7% one year ago.

The change in profitability reflects the opportunity to invest in the growth drivers I previously highlighted we have been consistently profitable and expect to steadily expand margins in.

In our highly scalable business model, we are confident we can deliver strong topline growth and attractive levels of profitability overtime.

With regard to the balance sheet, we ended the quarter with $111 million of cash and no debt.

We closed the quarter with an average daily client fund balance of $933 million.

Interest income generated on these funds was approximately $340000 or 14 basis points.

Moving to the guidance for the third quarter, we expect total revenue of $117 million to $118 million or 18% growth at the midpoint of the range.

And adjusted operating income of $19 million to $20 million.

For the full year, we are raising our revenue guidance to $411 million to $415 million or about 17% year over year growth at the midpoint of the range.

And we expect adjusted operating income of 35% to $37 million.

A few things to keep in mind regarding our outlook.

Third quarter is historically, our strongest due to seasonality associated with year end revenue such as W. Two form generation.

We anticipate our year end form production in Q3 will benefit from easier comps on historically depressed production in the prior year due to lower employment associated with Covid.

We remain optimistic about the growth opportunities and underlying trends in our business. As a reminder, we expect the growth in bookings during fiscal 'twenty, one will take 12 plus months to fully ramp in the revenue.

While we've experienced a modest tailwind from improved employment trends in the low single digits, we remain cautious in our guidance, including minimal benefit from labor market growth.

This is driven in part by continued uncertainty related to Covid.

While we anticipate that interest rates will begin to rise, we expect little impact for FY 'twenty two guidance.

The overnight rate is the most critical driver of our interest income and we anticipate some marginal with rates seem likely to begin rising in March. However, a 25 basis point increase in the overnight rate on our estimate of client funds, we generate less than half a million dollars of interest income in the quarter.

In summary, we posted another strong quarter driven by focused execution of our growth plan.

We feel good about momentum in the business and believe we have all the elements in place to win in the HCM market. Our modern extensible platform with a unique focus on leaders in industries is resonating with clients.

With the remaining runway in the SMB market alone. We believe we are well positioned to deliver on our target of 20 plus percent sustainable revenue growth and improved profitability longer term.

With that well.

Open the call for questions.

Operator.

Thank you and if he would like to ask a question. Please press star one on your telephone keypad.

For me should tell will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants.

Vince you. These PCR equipment may be necessary to pick up your handset before pressing the star. He is our first question is from Mark Murphy with J P. Morgan. Please proceed.

Yes, thank you very much and congrats on a great quarter and a great football season. So.

I wanted to ask you.

Are you able to approximate how much faster is the rate of bookings growth that you're seeing in tier one cities that you compare that to tier two.

And tier three I mean is there a is it 50% versus 20% or is there a way to kind of roughly sketch that out.

Yeah. So.

Mark.

The way we're looking at is.

The growth rate in tier one.

This is above our overall average.

And it's over.

50% of our bookings now that's the way to think about it. So we're continuing to press and in those markets. We're seeing a lot of success, we're continuing to add head count.

We're on our.

Our head count targets that we had talked about previously of having 20% to 25% growth year over year and the majority of those heads are going to tier one market.

Okay.

As a quick follow up.

Could you shed any light on how you're thinking about the topic of inflation.

If it enters in at all.

<unk>.

Wage inflation that you may be seeing in your and your own cost structure.

From a margin perspective.

Are you are you able to or are you thinking about passing through our cost of living.

Increase perhaps on the.

On the <unk> right that maybe maybe curious maybe to help offset some of your higher labor input costs.

Yeah, Hey, Mark this is Adam.

Yes, I mean, we do regular price increases.

Annually and of course some.

The pressure.

So for us to see some marginally higher price increases, but it's not something that we're overly aggressive with in terms of the internal labor cost of course, we see pressure not across the board, but in some areas nothing that we haven't been able to factor into the guidance that we've shared.

But as it relates to the customers I think we'll continue to evaluate pricing opportunities where it makes sense.

We're also continuing to transition folks to.

Our newer subscription models and bundles that we've talked through and so that allows for the opportunity to to enable more products and.

For our customers and wrap the increases and at the same time.

Understood. Thank you very much.

Thanks Mark.

Our next question is from Gabriela Borges with Goldman Sachs. Please proceed.

Great. Good afternoon, and thank you for taking my question.

I'd love to talk to you.

Bobby I noticed any differences in your tier one.

Vessel Ross as it pertains to that for a company to cross sell them to buy more product as it pertains to their employee growth.

What they're seeing on the ground.

Neither can pack in trough trough health metrics and tier one two and three.

<unk>.

Hey, Hey, Gabriel.

No I don't think that we're seeing anything necessarily that different.

Nothing that would be over the material and I think it's probably a little bit early as well as we've been getting into those tiers more aggressively over the last 12 to 24 months. So I think I think it's going to be I think theres going to be a little bit of time before we're going to see any material differences that we might want want to call out I would say that clients in those markets can be.

Little bit larger so we sell a little bit higher or a little bit larger clients. There. They do tend to buy a little bit more of the point of sale.

That's also a function of our sellers.

Newer sellers in those markets adopting the bundle strategy now at the.

Point of sale. So I think that you you see some of those higher unit economics.

Front and Thats really our strategy right now.

But a little bit too early to see maybe the propensity to buy longer term.

Okay. That's helpful.

Question is.

Paying ability.

How should we think about the path to being able to deliver 20% more can fulfill mitral hopefully as the comparisons get a little bit hotter than to Jim. Thank you.

Yes.

The thing for us and what we've been saying since the beginning is really about the consistency and the bookings in the new business and so as.

As we continue to.

Execute on our tier one expansion strategy and with the broker model.

And in our pricing strategies, and just deliver the bookings that we've committed to.

Thats, where youre going to continue to see the revenue growth accelerate and then of course over time as we continue to improve retention internally I think that's the other side of the cross sell back into the base, but we're on our way there we feel good about the path to get to the 20 plus percent.

I appreciate the color. Thank you.

Our next question is from Terry Tillman with truly Securities. Please proceed.

Yes, hey, good.

Afternoon, Congrats from me as well.

Didn't have this as part of my scripted questions, but I'm going to go for it roll out them and Rachel I guess I'm curious Susan who is the best at the Yankee Shuffle, and then I had two follow ups.

[laughter] Oh, Adam is definitely the leader in the shuffle.

Okay.

Thank you.

So.

When you went public role the coverage ratio was from a sales perspective pretty low on tier one and that's a big opportunity I forgot. If you said this on the call, but can you give us a sense, where you are now on kind of that coverage ratio and where it's expanded to and I.

I know the idea is 20% to 25% sales hiring.

But if you're all having success hiring have you thought about maybe it's been going through that threshold and then I had a follow up for Adam.

Yes, I mean from a hiring perspective again, the majority of the hydrogen in tier one.

<unk> significantly increased our coverage there.

We still have.

Lots of runway there.

From a.

Additional perspective.

We're staying with the 20% to 25%.

Head count target for the year.

Just because it's.

The.

The rate of how you can add people into the system and hiring the right leader Onboarding them.

Feel like that's the right number for quality.

So we're seeing there I mean, it could be a little higher but but ultimately we manage that day to day. So I think we feel good about our guidance from a head count perspective, we're ahead of the target.

We're seeing.

Good coverage in tier one obviously, we have a long way to go just based on our overall sales head count totals.

Got it.

It's something that we're going to continue to build on.

<unk> over quarter.

Okay. Thank you for that and I guess, Adam a question on the <unk>.

Conversion of bookings you've made a point consistently to remind us that could be upwards of 12 months from the strong bookings to conversion to revenue.

I'm just curious, though if there is some level of conservatism in that could there be some upside because it's a little bit faster, but the reason why I bring this question up and your All's prepared remarks, you talked about some of the technology improvements and reducing integration time by 50% I know that's part of the work to implement so I'm just kind of curious is there any kind of dry powder or potential.

Server to visit them, just youre getting a little bit more adapted rolling this stuff out on behalf of customers. Thank you.

Yes, hey, thanks Terry.

I mean, I definitely see I definitely think that we're getting more and more efficient in the space.

We put a lot of energy into that team the team's done a great job for the year, which is clearly our biggest busiest time here of January and we're also using third parties to help us support some of the peak times. So we're seeing improvements.

And I do think that there could be some opportunities to continue to accelerate faster again the thing that.

The point is really caution about is the continued bookings performance and the 43%.

Growth in bookings coming out of FY 'twenty one it doesn't just show up through December and so it's just going to continue to come in with.

January is a big quarter for us.

Sort of ramp in that April timeframe.

And before all of the revenue where all of the bookings really gets layered into that revenue, but we continue to see improvements internally and it's been a big part of our focus over the last couple of years.

Okay, great. Thanks.

Our next question is from Bryan Bergin with Cowen and company. Please proceed.

Hi, This is actually Jared Levine on for Bryan in terms of our net revenue retention does that return to the normalized level in the mid nineties, and then where did our gross revenue retention stand for <unk>.

Yes.

Yes, gross gross retention, it's been fairly consistent we haven't given the number explicitly a link on the quarters for sure but.

Fairly consistent and net retention, yes continues to show improvements and so.

We see that returned right in that mid 90% range, a little bit better quarter over quarter. So we continue to see positive momentum there and both net retention of gross retention.

Okay, Great and then in terms of the demand environment. How would you describe it in terms of was it pretty broad based or was it skewed towards a certain employer size and then any impact related to omicron.

Yes, it's that broad base I would say.

We had strong execution.

In all markets.

And all sizes.

And Amit.

Omicron, we haven't seen too much of an impact it's more of an impact for our clients and today its four for us. So we are seeing.

So some impact for them, obviously hiring people and keeping people on staff.

But other than that.

Since businesses Havent close like the first quarter.

Of Covid, we didn't see any overall impact from the demand environment.

Alright, thank you.

Thank you.

Yeah.

Our next question is from.

Savannah with Jefferies. Please proceed.

Great. Thanks for taking my question good to see the healthy growth.

Maybe dig in on the sales side, a little bit more I know you guys talked about coverage and and kind of the head count calls, but how should we think about maybe the percentage of.

<unk> fully ramped and productive reps right now so not just maybe just coverage quota, but the productivity.

Mixed for reps that are ramped AD and kind of how does it compare versus this time last year.

Yes.

So of course as we're hiring more this year than we really did last year, we see that the number of sellers with with full quota carrying capacity are lower as a percentage of our total Dan Dan.

Excuse me.

Who are still ramping into their quota of course are going to be higher as we are still hiring those folks and they're newer in their tenure with us. So.

It is going to be a little bit different than what we would've seen last year of course last year. We only grew our head count by about 6%. So a lot of growth earlier on through Q4, Q1, now and into Q2 like Roland said on target for that 20% to 25%. So we do see as a percentage of our total sellers.

Less sort of fully ramped and fully productive productive sellers, but that is clearly.

As we would've expected or as we designed as we hire these folks in.

Great. That's certainly bodes well for growth kind of sustaining right as those as those reps come on line.

That's good to hear and then maybe just.

Another question I think that in terms of that.

So for the company on the product side, I know, there's a build versus buy versus partner philosophy.

I'm curious just with maybe some of the turmoil we've seen anything that you think about the highest.

Think of that being opportunistic maybe you're accelerating some of the.

Product rollouts from a buy perspective, and how you're thinking about that.

Yes, I think.

We continue to be opportunistic in this space we are.

Evaluating.

A significant number of opportunities, but for us it has to be the right type.

Of.

Opportunity that we believe can help us in the future and so historically, we've added one or two.

Tuck in type acquisitions to help expand our product portfolio and add pepper him.

Two our overall objective, but I think we will continue to execute against that.

And so yes, there is a lot lot lot of opportunities in the market and it's just.

<unk>.

Find the right ones for <unk>.

Great I'll, just squeeze one more in.

I'll make it a short one because I think about maybe the top of funnel. We've heard some of that some of the other companies in this space talk about there.

Their own retention normalizing, which I think would be good for <unk> are you seeing any changes in maybe the leads that are coming into the top of the funnel or just.

How we can think of that maybe interest activity from some F&B even prior to conversion.

Yes, we have seen significant increase in both our site visitors and what we would consider you know high quality leads into the system.

So we think demand generation all the fundamentals are really strong right now in the category. There is a lot of.

Drivers to that.

Primarily regulatory complexity.

Talent issues, both attracting and retaining <unk>.

And to be thinks that the companies are looking for which has created a lot of top of funnel opportunities for us.

Great. Thank you so much for taking the questions. Thanks a lot.

Our next question is from Brian Peterson with Raymond James. Please proceed.

Congrats on the strong quarter guys and thanks for taking my question. So maybe just starting on the verticals you mentioned some early progress in pro services can you remind us how big that opportunity is relative to some of your other industry verticals I'd be curious to think about.

How do you look at the ramp of that vertical versus some others that you already have in place.

Yes, so the overall verticals like the four key verticals that we focus on represent about half of the overall market and it represents right now about half of our portfolio. So it's a pretty pretty much in line, we're seeing some outsized growth across our key verticals I think as you think about when it impacts our revenue growth and how it impacts on the page.

The revenue its really about right now the FDA upfront right in the booking as ware.

Being intentional about how we target.

In these markets and creating products and our go to market strategy that fit and then about longer term retention right could you just creating a better experience across those clients longer term so.

Do you think that there is a bit above.

<unk> to continue to see that.

And any outsized way, but it's continuing to add tomorrow overall, okay. Its performance right now and how we're playing in those verticals.

Adam maybe following up on that if we think about kind of your vertical curve.

About the four verticals is there anything different that youre seeing in terms of employment trends or attach rates or I'd be curious are you going to frame. It between kind of those four verticals and maybe the rest of the business or anything that you'd call out through the second quarter.

Yes, I think what we see is that in some of those key verticals, we see a greater demand for more complete solution, including workforce management, where you might see.

Benefits of task more frequently as well as now our talent offering and that's not the case across all the verticals. So I think the real driver there was actually the win rate we tend to win more than we see outsized performance in terms of the win rate and then you couple that with some stronger demand for those products and we end up happening good solution.

To take the market inside of those key verticals.

Very clear thanks, Adam and good luck, congrats and good Bengals.

Thanks Ryan.

And our next question is from Kevin Mcveigh with Credit Suisse. Please proceed.

Great. Thanks, so much.

It looks like you talk to a potential 50 dollar pepam target in 2024.

Was that always the case or would you revise that because I don't remember seeing that before and if it was revised up what drove that.

No.

We've had that target.

For the last two.

12 months to drive towards and we're just continuing to show the progress that we're making in that target I think we continue to close the gap, we've been averaging between three and $5 peplum increases per year.

Through organic or inorganic adds to the platform.

Great and then is there any way to frame how much that onetime tax work impacted the quarter.

Yes, I mean, it's nothing that we've given out explicitly and it becomes part of.

Part of the revenue in terms of how do we go to market through partners as well. So these partners to support.

The ERC and tax work as well as us.

Other areas the platform so it's sort of in line historically.

In terms of its contribution overall, but it's been it's been helpful to be able to support the pretax work for sure.

Great. Thank you.

Our next question is from <unk> Shah with Deutsche Bank. Please proceed.

Great. Thanks for taking my question you guys are clearly ahead of your plans in terms of tier one coverage ratio and maybe you can provide some insight into how those broker relationships in these tier one markets are kind of going and progressing where are you relative to your plan and then how do we think about those relationships ultimately translating into.

New logos and revenue.

Yes so.

Sure.

Slightly ahead of our target our internal targets.

In the broker channel.

And so we feel like we continue to make good progress there and when we expand into a tier one market. It just gives us an ability.

To meet.

Meet with more brokers and connect with more brokers and so it gives us more coverage in the channel. We saw you know.

Modest growth there.

And were up nearly 10%.

And new broker connections for the quarter.

And we're over target for the year and I think what's happening is it's really contributing.

Outsized results for us overall.

And.

We're going to continue to pressing on it both at a national partnership level and local level. So as we expand our coverage.

Super helpful and just as a follow up new logo sales are always kind of been the majority of bookings, but have you guys seen any meaningful changes in terms of existing customers coming back to the table for further expansions for things such as talent, just given the great resignation and the great reevaluation.

Yes, I mean, I'd say that we've talked about our focus there and starting to put more resources and investments there no material changes at this point, but we do continue to see positive momentum in that direction. So we will continue to support the long term long term bookings growth, but no material changes in the near term.

That's helpful. I appreciate taking my questions and congrats again.

Thanks.

Our next question is from Mark background with Baird. Please proceed.

Hi, Good afternoon, let me add my congratulations.

Wondering with regards to the color that you provided in terms of the impact in terms of float income.

How much more would you have to grow in order to change kind of the duration that you're investing in is there is there any flexibility role obviously, you had sort of experience at ADP.

And.

They obviously have a great program, what's it take to kind of extend out a little bit further.

Yes, Hey, Mark.

It's really so we have a lot of flexibility right now to go into longer duration instruments. The majority as of Q2 more than 90% of our instruments, where an overnight rate the problem with getting into longer duration right. Now is just that of course.

As the rates right.

Rise over the coming months potentially it's going to pencil so.

Our preferences right. This minute is to sort of.

Let the rates sort of flush out and then we'll continue to move into longer duration instruments, whether that's 30 60 90.

And then longer.

Not more than really five years would be the longest but we do have lots of opportunity to do that so it's something that we continue to work on right now and will I think youll start to see movement over the next call that three to six months.

That's great certainly appreciate that you want to wait until it actually.

Sure to settle out to a higher level, but.

You can go ahead and you are in a position to make those changes if you want to.

Yes, yes, like I mentioned, I mean more than 90% today is it overnight rates and.

Historically, that's been in that sort of 60% to 70% range. So there is opportunity to move into longer duration.

Or is the average float balance now.

Last quarter.

It was 933 million for Q2.

And Thats.

There is some seasonality to it of course since a little bit higher in Q2 earlier parts of Q3.

Okay, and then any color with regards to just source of wins.

You've done a really nice job in the past in terms of.

Identifying whether it's legacy players regionals.

For our in house systems, any any change at all in terms of the composition of the new wins that Youre seeing now.

Yes, it's fairly consistent I would say, we're still hovering around that 80% from legacy we still have outsized performance against in house and regionals versus our peers.

But other than that I would say.

Fairly standard we haven't seen really any changes in the market dynamics.

Great. Thanks again.

Thank you.

As a reminder, it is star one on your telephone keypad, if he would like to ask a question. Our next question comes from top Wall Ravens with JMP Securities. Please proceed.

Hi team as Joe merits it gone for Pat Thanks, So much for the questions and congrats on the quarter and to your Bangles I just one question on the Tam.

How do you think about the opportunity that exists in the tier one markets relative to the overall Tam have you sort of size what that opportunity looks like any color there would be helpful. Thanks, so much.

Yeah sure as we think about the tier one markets. Those top 15 cities clearly there are huge population opportunities for us and it's.

I don't have the exact number but I mean, it's close to a third of the overall market maybe about 20% of the overall market sits inside of those.

This top 15.

Cities, where historically, we've had very little coverage. So it's a big chunk of the overall Tam.

Got it Super helpful. And then just a quick follow up as you continue to move into the tier one market that has the competition changed at all.

Are you sort of seeing more of the.

Pace or how would you describe that thanks so much.

Yes, the competition set doesn't change between.

Between the tiers.

See ADP Pelosity pay com.

In all markets in.

In most transactions so that hasnt changed as we've entered tier one.

Super helpful. Thank you.

Thank you.

We have reached the end of our question answer session I would like to turn the conference back over to Robert for closing remarks.

Thank you again for joining US Tonight. We appreciate your time and support we're excited about the momentum in the business and look forward to chatting with you again soon as always feel free to reach out if you have any questions have a great night everyone.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

[music].

Yes.

Yeah.

[music].

Yeah.

Yes.

[music].

Hum.

[music].

Okay.

Yes.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

Okay.

Sure.

[music].

Okay.

[music].

Yes.

[music].

<unk>.

[music].

Okay.

Yes.

[music].

Yes.

Okay.

[music].

Okay.

[music].

Okay.

Yeah.

Yes.

[music].

Okay.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

[music].

Okay.

Got it.

Yes.

Okay.

[music].

Yeah.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

<unk>.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Yeah.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

[music].

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Sure.

[music].

Okay.

[music].

<unk>.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Yeah.

Okay.

Yes.

[music].

Ladies and gentlemen, thank you for standing by welcome to <unk> second quarter fiscal year 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation if anyone.

Should require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I would like to turn the call over to Rachel Lei Vice President of Investor Relations.

Good afternoon, and welcome to <unk> earnings call for the second quarter of fiscal year 2022, which ended on December 30, <unk> on the call with me today are around the world. The largest here take our Chief Executive Officer, and Adam <unk>, Chief Financial Officer or financial results can be found in our press release issued today, which is available on the Investor Relations.

One of our website today's call is being recorded and a replay will be available on our website. Following the conclusion of the call statements made on this call include forward looking statements relating to our financial litho product customer demand operation impact of COVID-19 on our business and other matters. These statements are subject to risks uncertainties and assumptions.

And are based on management's.

Current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied on upon as representing our views as of any subsequent date.

Thank you Rachel and thank you all for joining us to discuss <unk> fiscal second quarter results.

We delivered a strong second quarter as both revenue and profitability exceeded our guidance.

Based on these robust results we are once again, raising our full year guidance, which Adam will discuss in more detail.

The $28 billion human capital management market is still in the early stages of shifting to the cloud, which positions pay core to accelerate revenue growth and increased profitability over time.

We continue to experience strong demand for <unk> modern SaaS HCM solutions for small and medium businesses as demonstrated by our 20% revenue growth this quarter.

Two years ago, we developed a strategy to differentiate <unk> in the market to our open extensible platform.

Focus on leaders and by tailoring solutions for key industries.

<unk> has built a unique value proposition focused on empowering leaders, which drives employee engagement and business results.

Our technology automate mundane leadership task. So frontline leaders can focus on goal setting coaching talent development and associate engagement.

The key elements that drive business performance.

The great resignation or reevaluation labor market dynamics highlight the importance of talent acquisition and retention strategies and we've seen that demand play through to our offerings.

Our software is helping companies attract onboard coach and engaged employees and a virtual environment with increasing regulatory complexity.

Our team is laser focused on executing the strategy we've outlined.

And we exceeded our internal expectations in Q2.

As an outcome of our product investment and technology designed for leaders in industries, our win rates continue to increase.

Our consistent bookings performance over the last six quarters is starting to deliver accelerated revenue growth.

This is continued validation of our differentiated value proposition.

Solid execution against our growth levers.

And the performance driven changes we've made across our organization.

We've made significant progress against each of our strategic growth initiatives during the quarter.

First our increased focused on tier one markets is working well.

We continue to significantly increased bookings in tier one markets, which we define as the 15 largest cities in America.

One of our biggest strategic focus areas has been aggressively expanding our sales coverage in tier one markets.

Today, we have seller coverage in all tier one markets and are now focused on adding additional teams in these markets to drive greater coverage.

We exceeded our internal sales staffing targets again, this quarter, while maintaining high productivity levels.

<unk> four year partnership highlights pay core and the Pac 12 commitment to developing leaders in and out of the classroom.

Second we continue to successfully partner with brokers.

New business coming through our broker channel remains strong and continues to deliver outsized results.

We are working with about 10% of the broker community today, and we continue to be a significant expansion opportunity within this valuable referral channel.

Third our industry specific approach is resonating.

Our purpose built offerings for our four key verticals, which represents 50% of our Tam are driving higher win rates, including professional services that launched last quarter.

By understanding the specific needs of companies in healthcare manufacturing food and beverage and professional services, we develop tailored solutions to help solve their most pressing human capital challenges.

Instance, this quarter, we introduced a new payroll based shareholder reporting solution that automates complex staffing reporting requirements for nursing facilities.

Lastly, we continue to expand our HCM suite and increase adoption of our bundles.

Talent is top of mind for all business leaders today and as a result, it's driving a considerable increase in attach rates for new and existing customers.

And then last year, we have made significant investments to bolster our interoperability, including launching a new platform that enables customers and partners to do self serve integrations, reducing the average time it takes to build an integration by 50% and we quadrupled the total number of partners in our markets.

Place.

We now have nearly 200 partners in our ecosystem, providing flexibility for our clients to select the best applications for their industry.

This quarter, we also released new functionality within our payroll analytics tool that provides predictive analysis unemployed turnover. It provides leaders with actual insights to identify the top drivers of employee resignation and potential at risk employees to help prevent turnover.

In today's challenging labor market as.

As leaders nationwide continue to work through the great resignation, it's more critical than ever to understand why employees leave and what an employer can do to prevent or better plan for that outcome. We are committed to providing intelligent analytics to help leaders uncover these valuable insights.

<unk>.

Highly efficient customer chat tool and a robust self service knowledge base as a result of these and other enhancements we've seen an 80% improvement in client wait times during the second quarter.

We're also extremely proud to be recognized as a top workplace for the second year in a row by inner gauge an organization with a 15 year history of surveying more than $20 million employees to help build and brand top workplaces results are based on 15 cultural drivers that are proven to predict high perf.

Formats against industry benchmarks.

Demonstrates our commitment to live the cultural best practices, we advocate for our clients that drive employee engagement and business performance.

Lastly, we would like to congratulate our client the Cincinnati Bengals and who they nation on their amazing season and upcoming Super Bowl appearance.

With that I'll turn the call over to Adam to discuss our financial results and guidance.

Bill Bengals thanks role.

I'll begin with review of our second quarter results and close with our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis.

Total revenue was $103 million, a 20% increase year over year and this is the first time quarterly revenues have exceeded $100 million the.

The increase was primarily driven by new client growth and continued type of expansion as well as low single digit organic labor market growth.

The average number of employees per customer has returned to pre COVID-19 levels for our client base.

At quarter end, our customer base has grown to a record 29000 clients. This growth largely comes from the mid market is our micro segment of under 10 employees remained flat.

Our go to market strategy targets clients with 10 to 1000 employees and all of our client growth is coming from this segment growing 8% year over year.

This segment represents 80% of our revenue and just over 60% of our clients.

Adjusted gross profit margin was 66, 6% down from 71% a year ago and in line with our expectation.

Change is largely due to increased amortization related to capitalized software and contract acquisition cost.

Margin was also impacted to a lesser extent by the termination of Covid related cost initiatives as well as continued investments in our service organization to ensure a great client experience.

Adjusted gross margin, excluding depreciation and amortization was 76, 5% for the quarter, a decrease of 150 basis points year over year and in line with our expectations.

And we have now delivered sequential margin improvement for the last two quarters as we drive scale out of our customer experience investments.

Our investments and we intend to continue aggressively investing while targeting neutral free cash flow annually.

We are in a huge market and at the early stages of transitioning to the cloud and we strongly believe these investments will enable us to capture share more quickly and drive meaningful value for shareholders.

R&D expense was $9 5 million or 9% of revenue compared to 11% of revenue a year ago include.

Including capitalized development costs of $6 $4 million R&D spend was $16 million or 15% of revenue.

Similar to the year ago period and in line with our expectations.

We will continue to strategically invest in R&D to expand our product portfolio and peplum opportunity and to drive insights for leaders to better attract.

And engage their associates.

G&A expense was $16 million or 16% of revenue.

System with the second quarter of 2021, However, we aim to continue to drive G&A down as a percentage of revenue and have done so sequentially.

Operating income was $10 million or 10% profit margin compared to 15, 7% one year ago.

The change in profitability reflects the opportunity to invest in the growth drivers I previously highlighted we have been consistently profitable and expect to steadily expand margins in.

In our highly scalable business model, we are confident we can deliver strong topline growth and attractive levels of profitability overtime.

With regard to the balance sheet, we ended the quarter with $111 million of cash and no debt.

We closed the quarter with an average daily client fund balance of $933 million.

Interest income generated on these funds was approximately $340000 or 14 basis points.

So moving to the guidance for the third quarter, we expect total revenue of $117 million to $118 million or 18% growth at the midpoint of the range.

And adjusted operating income of $19 million to $20 million.

For the full year, we are raising our revenue guidance to $411 million to $415 million or about 17% year over year growth at the midpoint of the range.

And we expect adjusted operating income of 35% to $37 million.

A few things to keep in mind regarding our outlook.

Our third quarter is historically, our strongest due to seasonality associated with year end revenue such as W. Two form generation.

We anticipate our year end form production in Q3 will benefit from easier comps on historically depressed production in the prior year due to lower employment associated with Covid.

While we've experienced a modest tailwind from improved employment trends in the low single digits, we remain cautious in our guidance, including minimal benefit from labor market growth.

This is driven in part by continued uncertainty related to Covid.

While we anticipate that interest rates will begin to rise, we expect little impact for FY 'twenty two guidance.

The overnight rate is the most critical driver of our interest income and we anticipate some marginal with as rates seem likely to begin rising in March. However, a 25 basis point increase in the overnight rate on our estimate of client funds would generate less than half a million dollars of interest income in a corner.

In summary, we posted another strong quarter driven by focused execution of our growth plan.

With the remaining runway in the SMB market alone. We believe we are well positioned to deliver on our target of 20 plus percent sustainable revenue growth and improved profitability longer term.

With that well.

We will open the call for questions.

Operator.

Thank you if he would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star. He is our first question is from Mark Murphy with J P. Morgan. Please proceed.

Thank you very much and congrats on a great quarter and a great football season.

So Ralph I wanted to ask you.

Are you able to approximate how much faster is.

Is the rate of bookings growth that you're seeing in tier one cities. If you compare that to tier two and tier three I mean is there a is it 50% versus 20% or is there a way to kind of catch that out.

Yeah, So mark.

The way, we're looking at that.

The growth rate in tier one.

This is above our overall average.

And it's over.

50% of our bookings now that's the way to think about it. So we're continuing to press and in those markets. We're seeing a lot of success, we're continuing to add head count.

We're on.

Our head count targets that we had talked about previously of having 20% to 25% growth year over year and the majority of those heads are going into the tier one market.

Okay.

As a quick follow up.

Can you shed any light on how youre thinking about the topic of inflation.

If it enters in at all including.

Wage inflation that you may be seeing in your and your own cost structure.

From a margin perspective.

Are you are you able to or are you thinking about passing through our cost of living.

Increase perhaps on the.

On the peplum right that maybe maybe acuity maybe to help offset some of your higher labor input costs.

Yeah, Hey, Mark this is Adam.

Yes, I mean, we do regular price increases.

Annually and of course.

The pressure.

Allow for us to see some marginally higher price increases, but it's not something that we're overly aggressive with in terms of the internal labor cost of course, we see pressure not across the board, but in some areas, but nothing that we haven't been able to factor into the guidance that we've shared.

But as it relates to the customers I think we'll continue to evaluate pricing opportunities where it makes sense.

We're also continuing to transition folks to.

Our newer subscription models and bundles that we've talked through and so that allows for the opportunity to to enable more products and.

For our customers and wrap the increases and at the same time.

Understood. Thank you very much.

Thanks Mark.

Our next question is from Gabriela Borges with Goldman Sachs. Please proceed.

Great. Good afternoon, and thank you for taking my question.

And Adam I'd Love for you.

Why do you notice any differences in your tier one optimal vessel the Ross.

As it pertains to that propensity to cross sell and to buy more product as it pertains to their employee growth.

What they're seeing on the ground just curious if you could can pack in trough trial, the health metrics and tier one two and three.

Hey, Hey, good yes.

Yes, no I don't think we're seeing anything necessarily that different.

Nothing that would be over the material and I think it's probably a little bit early as well as we've been getting into those tiers more aggressively over the last 12 to 24 months. So I think I think it's going to be I think theres going to be a little bit of time before we're going to see any material differences that we might want to call out I would say that clients in those markets can be.

But larger so we sell a little bit higher or a little bit larger clients. There. They do tend to buy a little bit more at the point of sale.

That's also a function of our sellers.

Newer sellers in those markets adopting the bundle strategy now at the point of sale. So I think that you you would see some of those higher unit economics.

Upfront and Thats really our strategy right now, but a little bit too early to see maybe the propensity to buy longer term.

Okay. That's helpful.

Final question.

Paying ability.

How should we think about the path to being able to deliver 20% marking and fulfillment.

As comparisons get a little bit hotter on to Jim. Thank you.

Yes.

I mean, the thing for us and what we've been saying since the beginning is really about the consistency and the bookings in the new business and so.

As we continue to.

Execute on our tier one expansion strategy and with the broker model.

And in our pricing strategies and just deliver the bookings that we've committed to I think thats, where youre going to continue to see the revenue growth accelerate and then of course over time as we continue to improve retention internally I think that's the other side and the cross sell back into the base, but we're on our way there we feel good about the path.

To get to the 20 plus percent.

I appreciate the color. Thank you.

Our next question is from Terry Tillman with Truth Securities. Please proceed.

Yeah, Hey, good afternoon, Congrats from me as well I didn't have this as part of my scripted questions, but I'm going to go for it roll out them and Rachel I guess, I'm curious, who can who is the best at the Yankee Shuffle and then I had two follow ups.

Oh, Adam is definitely the leader in the shuffle.

Okay alright, thank you.

Otherwise so.

When you went public role the coverage ratio was from a sales perspective pretty low on tier one and that's a big opportunity.

Forgot what you said this on the call, but can you give us a sense, where you are now on kind of that coverage ratio and where it's expanded to and I know the idea is 20% to 25% sales hiring.

But if you're all having success hiring have you thought about maybe you've been going through that threshold and then I had a follow up for Adam.

Yes.

Hiring perspective again, the majority of the hires are in tier one.

<unk> significantly increased our coverage there.

We still have.

Lots of runway there I think from a.

Additional perspective.

We're staying with the 20% to 25%.

Head count target for the year.

Just because it's.

The rate of how you can add people into the system and hiring the right leader Onboarding them.

We feel like that's the right number for quality.

And so we're seeing there I mean, it could be a little higher.

But ultimately we will.

We manage that day to day, so I think we feel good about our guidance from a head count perspective, we're ahead of the target.

We're seeing.

Good coverage in tier one obviously, we have a long way to go just based on our overall sales head count totals.

But.

That's something that we're going to continue to build on quarter over quarter.

Okay. Thank you for that and I guess a question on the conversion of bookings you've made a point consistently to remind us that could be upwards of 12 months from the strong bookings to conversion to revenue.

Just curious, though if there is some level of conservatism in that could there be some upside because it's a little bit faster, but the reason why I bring this question up and your All's prepared remarks, you all talked about some of the technology improvements and reducing integration time by 50%.

So that's part of the work to implement so I'm just kind of curious is there any kind of dry powder or potential conservatism. Just you all getting a little bit more adept at rolling the stuff out on behalf of customers. Thank you.

Yeah, Hey, Thanks Terry.

I mean, I definitely see I definitely think we're getting more and more efficient in the space.

We put a lot of energy into that team the team's done a great job for the year ended which is clearly our business busiest time here January and.

We're also using third parties to help us support some of the peak times, So we're seeing improvements.

And.

I do think that there could be some opportunities to continue to accelerate faster again the thing that the.

The point is really caution about is the continued bookings performance and the 43%.

Growth in bookings coming out of FY 'twenty one it doesn't just show up through December and so it just continues to come in.

January is a big quarter for us it'll sort of ramp in that April timeframe.

Before all of the revenue or all of the bookings really gets layered into that revenue, but we continue to see improvements internally and it's been a big part of our focus over the last couple of years.

Okay, great. Thanks.

Our next question is from Bryan Bergin with Cowen and company. Please proceed.

Hi, This is actually Jared Levine on for Bryan in terms of our net revenue retention does that return to the normalized level in the mid <unk> and then where did our gross revenue retention stand for <unk>.

Yes.

Gross gross retention, it's been fairly consistent we haven't given the number explicitly on like on the quarters for sure but.

Fairly consistent and net retention, yes continues to show improvement and so we.

We see that return right in that mid 90% range, a little bit better quarter over quarter. So we continue to see positive momentum there and both net retention of gross retention.

Yes, it's been broad based I would say.

We had strong execution.

In all markets.

And all sizes.

And Amit.

Omicron, we haven't seen too much of an impact it's more of an impact for our clients and that is for for us. So we're seeing.

So some impact for them, obviously hiring people and keeping people on staff.

But other than that.

Since businesses Havent close like the first quarter.

Covid, we didn't see any overall impact on the demand environment.

Alright, thank you.

Thank you.

Our next question is from <unk>.

Savannah with Jefferies. Please proceed.

Great. Thanks for taking my question good to see the healthy growth.

Maybe dig in on the sales side, a little bit more I know you guys talked about coverage and and kind of the head count calls, but how should we think about maybe the percentage of <unk>.

Fully ramped and productive reps right now so not just maybe just coverage quota, but the productivity.

Mix for reps that are ramped AD and kind of how does it compare versus this time last year.

Yes.

So of course as we're hiring more this year than we really did last year, we see that the number of sellers with with full quota carrying capacity are lower as a percentage of our total then.

Excuse me the one.

Who are still ramping into their quota of course are going to be higher as we are still hiring those folks and they're newer in their tenure with us. So.

Less sort of fully ramped and fully productive productive sellers, but that is clearly.

As we would've expected or as we designed as we hire these folks in.

Great. That's certainly bodes well for growth kind of sustaining right as those as those reps come online.

That's good to hear and then maybe just.

Another question I think about in terms of.

ROE for the company on the product side I know there is a build versus buy versus partner philosophy.

I'm curious just with maybe some of the turmoil we've seen anything that you think about things.

Things like the opportunistic maybe you're accelerating some of the.

Product rollout from a buy perspective, and how you're thinking about that.

Yes, I think.

We continue to be opportunistic in this space we are.

Evaluating.

A significant number of opportunities, but for us it has to be the right type of.

Of opportunity that we believe can help us in the future and so historically, we've added one or two tuck.

Tuck in type acquisitions to help expand our product portfolio and add pepam.

Two our overall objectives that I think will continue to execute against that.

And so yes, there is a lot lot lot of opportunities in the market and it's just trying to.

Find the right ones for <unk>.

Great I'll, just squeeze one more in.

I'll make it a short one because I think about maybe the top of the funnel we've heard some of that some of the other companies in this space talk about.

Their own retention normalizing, which I think would be good for <unk> are you seeing any changes in maybe the leads that are coming into the top of the funnel or just.

How we can think about maybe interest activity from some F&B even prior to conversion.

Yes, we've seen significant increase in both our site visitors and what we would consider.

<unk> high quality leads into the system.

So we think demand generation all the fundamentals are really strong right now in the category. There is a lot of <unk>.

Drivers to that.

Primarily regulatory complexity.

Talent issues, both attracting and retaining <unk>.

And to be thinks that the companies are looking for which has created a lot of top of funnel opportunities for us.

Great. Thank you so much for taking the questions. Thanks, so much.

Our next question is from Brian Peterson with Raymond James. Please proceed.

How do you look at the ramp of that vertical versus some others that you already have in place.

Yes, so the overall verticals like the four key verticals that we focus on represent about half of the overall market and it represents.

Now about half of our portfolio. So it's pretty it's pretty much in line, we're seeing some outsized growth across our key verticals I think as you think about when it impacts our revenue growth and how it impacts the pace of the revenue its really about right now the FDA upfront in the booking as ware.

The intentional about how we target.

In these markets and creating products and go to market strategy that fit and then about longer term retention rate could you just creating that better experience across those clients longer term. So.

I do think that there is a bit above.

Ramp to continue to see that in any outsized way, but it is continuing to add more overall performance right now and how we're playing in those verticals.

It added maybe following up on that if we think about kind of your vertical curve because when you think about the four verticals is there anything different that youre seeing in terms of employment trends or attach rates.

So you kind of frame it between kind of those four verticals and maybe the rest of the business or anything that you'd call out through the second quarter.

Yes, I think what we see is that in some of those key verticals, we see a greater demand for more complete solution, including workforce management, where you might see benefits of task more frequently as well as now our talent offering and that's not the case across all the verticals. So I think the real driver.

There was actually the win rate we tend to win more than we see outsized performance in terms of the win rate and then you couple that with some stronger demand for those products and we end up having a good solution.

Take the market inside of those key verticals.

Very clear thanks, Adam and good luck, congrats and good Bengals.

Thanks, Ron.

And our next question is from Kevin Mcveigh with Credit Suisse. Please proceed.

Great. Thanks, so much.

It looks like you talk to a potential $50 pepam target in 2024.

Is that always the case or would you revise that because I don't remember seeing that before and if it was revised up what drove that.

No.

We've had that target.

For the last 12 months to drive towards and we're just continuing to show the progress that we're making in that target I think we continue to close the gap, we've been averaging between three and $5 peplum increases per year through.

Through organic or inorganic adds to the platform.

Great and then is there any way to frame how much that that onetime tax work impacts of the quarter.

Yes.

That we've given out explicitly it becomes part of.

Part of the revenue in terms of how do we go to market through partners as well so we use partners to support.

The ERC and tax work as well as other.

Other areas the platform so it's sort of in line historically.

In terms of its contribution overall, but it's been it's been helpful to be able to support the tax work for sure.

Great. Thank you.

Our next question is from Bhavan Shah with Deutsche Bank. Please proceed.

Yes so.

Sure.

We are ahead of our target our internal targets.

In the broker channel.

And so we feel like we continue to make good progress there and when we expand into a tier one market.

It gives us an ability.

Two.

Meet with more brokers and connect with more brokers and so it gives us more coverage in the channel we saw modest growth there.

We're up nearly 10%.

And new broker connections for the quarter.

We're over target for the year and I think what's happening is it's really contributing.

Outsize results for us overall and.

We're going to continue to pressing on it both at a national partnership level and local level. So as we expand our coverage.

Super helpful and just as a follow up new logo sales I've always kind of been the majority of bookings, but have you guys seen any meaningful changes in terms of the existing customers coming back to the table for further expansions for things such as talent, just given the great resignation and the great reevaluation.

Yeah.

That's helpful. I appreciate taking my questions and congrats again.

Thank you thanks.

Our next question is from Mark Mcmahon with Baird. Please proceed.

Hi, Good afternoon, let me add my congratulations.

Wondering with regards to the color that you provided in terms of the impact in terms of float income.

Okay.

How much more would you have to grow in order to change kind of the duration that you're investing in.

Is there any flexibility role, obviously, you had sort of experience at ADP.

And.

They obviously have a great program, what's it take to two.

To kind of extend out a little bit further.

Yeah, Hey, Mark.

It's really so we have a lot of flexibility right now to go into longer duration instruments. The majority as of Q2 more than 90% of our instruments, where an overnight rate.

The problem with getting into longer duration right now is just that of course.

As the rates rise up.

Arise over the coming months potentially it's going to pencil so.

Our preferences right. This minute is to sort of.

Let.

The rates sort of flush out and then we'll continue to move into longer duration instruments, whether thats 30 60 90.

And then longer.

That's great. That's certainly appreciate that you want to wait until <unk> actually.

Sure to settle out to a higher level, but.

You can go ahead and you are in a position to make those changes if you want to.

Yes, yes, like I mentioned, I mean more than 90% today is it overnight rates and.

Historically, that's been in that sort of 60% to 70% range. So there is opportunity to move into longer duration.

Or is the average float balance now.

Last quarter it was.

933 million for Q2 and Thats.

There is some seasonality to it of course, and it's a little bit higher in Q2 earlier parts of Q3.

Great and then any color with regards to just source of wins.

You've done a really nice job in the past in terms of.

When applying whether it's legacy players regionals.

For in House systems, any any change at all in terms of the composition of the new wins that Youre seeing now.

Yes, it's fairly consistent I would say, we're still hovering around that 80% from legacy we still have outsized performance against in house and regionals versus our peers, but other than that I would say.

Fairly standard we haven't seen really any changes in the market dynamics.

Great. Thanks again.

Thank you.

As a reminder, it is star one on your telephone keypad, if he would like to ask your question. Our next question comes from Wall Ravens with JMP Securities. Please proceed.

Hi team as Joe mentioned gone for Pat. Thanks, So much for the questions and congrats on the quarter and to your Bangles just one question here on the Tam.

Yeah sure as we think about the tier one markets. Those top 15 cities clearly there are huge population opportunities for us and it's.

I don't have the exact number but I mean, it's close to a third of the overall market maybe about 40% of the overall market sits inside of those.

Our top 15.

Cities, where historically, we've had very little coverage. So it's a big chunk of the overall Tam.

Got it Super helpful. And then just a quick follow up as you continue to move into the tier one markets does the competition changed at all.

Are you sort of seeing more of the.

Pes or how would you describe that thanks so much.

Yes, the competition set doesn't change between.

Between the tiers.

See ADP Pelosity pay com.

In all markets in.

In most transactions so that hasnt changed as we've entered tier one.

Super helpful. Thank you.

Thank you.

We have reached the end of our question answer session I would like to turn the conference back over to Robert for closing remarks.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Q2 2022 Paycor HCM Inc Earnings Call

Request a DemoDemo

PYCR

Paycor HCM

Earnings