Q1 2023 Paycor HCM Inc Earnings Call

November 2, 2022

Ladies and gentlemen, thank you for standing by and welcome to pay co 's first quarter fiscal year 2023 earnings call.

At this time all parties.

We are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.

As a reminder, this conference is being recorded.

And I'd like to turn the call over to Rachel White Vice President.

President of Investor Relations. Please go ahead ma'am.

Good afternoon, and welcome to <unk> earnings call for the first quarter of fiscal year 2023, which ended on September 30th on the call with me today are barrels all our junior <unk>, Chief Executive Officer, and Adam Anti P course, Chief financial officer or financial results can be found in our press release issued today, which is available on the Investor Relations Sir.

<unk> 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 related to our financial results products customer demand operations the 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 upon as representing our views as of any subsequent date. We also 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 roll.

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

Revenue growth reached 28% the highest level in over five years as we expand our go to market motion.

We also continue to scale, our operations and delivered more than 500 basis points of margin improvement year over year.

Based on the strong momentum we are once again, raising our guidance, which Adam will cover in more detail.

We are executing against our go to market strategy and continue to make significant progress expanding our sales coverage and growing peplum.

Competitive dynamics have been consistent demand remains strong and we had our best Q1 on record.

We continue to target increasing sales head count over 20% for the fiscal year.

We've established sellers in all tier one markets today, our ongoing focus is on expanding coverage in tier one markets, where the opportunity more than triple our sales team, we have significant runway to add sellers for the foreseeable future.

While still early we are really pleased with how both the Bengals and Pac 12 sports sponsorships are increasing brand awareness and ongoing new business development.

<unk> modern open platform is purpose built for leaders.

Figured by industry.

Combination that continues to win in the market.

A recent Gartner survey identified leader and manager effectiveness as a top priority amongst <unk> for 2023.

This quarter, we are excited to announce two key differentiators for leaders.

The core leadership framework in Columbia's award winning candidate sourcing technology.

The core leadership framework empowers organizations to transform frontline managers into effective leaders.

The framework is built on the understanding that effective leaders focus on coaching employees optimizing performance and retaining top talent.

We provide organizations with a means to evaluate the efficacy of their frontline leaders and their tools and thought leadership needed to improve leader performance.

We continue to add leapfrogging innovation to our HCM suite.

We are thrilled to have acquired plenty as intelligent candidate sourcing technology to enhance our industry leading talent solution.

The AI powered recruiting value will be unified into our platform, making it easier for frontline leaders to find skilled and diverse talent quickly and at significantly lower cost.

<unk> solution stands out and that it is fully automated and easy for frontline leaders to use.

And today's war for talent plenty of not only sources candidates are actively looking to change jobs.

But more impressively passive candidates that are not actively seeking a new role.

The technology will also help company to execute against their <unk> strategy by placing an emphasis on diverse candidates that are often overlooked by traditional recruiting systems.

This acquisition builds on our successful track record of rapidly integrating best in class point solutions that provide a competitive advantage and expand our purple opportunity.

These advanced and showcase the versatility of our product strategy, our modern platform enables us to select whether to build buy or partner to add valuable functionality options that are increasingly valuable as focus on leapfrogging technology to further differentiate <unk> in the market.

As further proof of our product differentiation, we are in the platinum 2022 tightened business award and the business intelligence solution category for <unk> analytics.

We are increasingly focused on providing leaders with intelligent analytics that deliver valuable insights to drive business performance. For example, predictive resignation provides leaders with the insights to identify the top drivers of employee resignation and potential at risk employees to help prevent turnover in.

In addition, we provide many analytics that are critical to helping our key industries manage time and labor such as overtime or schedule analysis by tenure.

In September we published our first ESG report, describing <unk> commitment to sustainable business practices and ongoing efforts to address material ESG topics I am, particularly pleased we increase the representation of females in leadership and ethnic diversity, among our associates by 8% and 30.

18%, respectively, and reduce our scope, one and scope two emissions by 14% year over year.

We are incredibly proud of <unk> 2022 top workplaces culture Excellence awards, and diversity equity and inclusion practices innovation and compensation and benefits categories by inner gauge. This is the second consecutive year <unk> has been recognized for DNI excellence over.

For the past fiscal year <unk> continued to advance its D. Eni strategy enhanced associate rewards expand benefit options and drive innovation.

In terms of the labor market dynamics remain unchanged nonfarm payrolls have slowly risen to pre COVID-19 levels job openings remain at elevated levels in the labor market continues to be tight.

Modest changes in unemployment of job openings are unlikely to materially impact our business as most of our revenue growth is derived from new logo additions and the market is still very early in adopting modern cloud based HCM solutions plus HCM is highly defensible as our value proposition is mission critical.

To attracting paying retaining great talent.

Lastly, I would like to thank all the amazing pick Orients, who are the foundation of these amazing results with that I'll turn the call over to Adam to discuss our financial results and guidance.

Thanks, Raul I'll review, our first quarter results and then share our outlook for the second quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis.

Total revenue for the quarter was $118 million, increasing 20% year over year, our highest in recent record excluding the impact of interest income recurring revenue grew by 24% we exceeded the top end of our revenue guidance by 4% and significantly outperformed our adjusted operating income guidance due diligent investment management.

Revenue growth was primarily driven by new business and cross sales Pepam expansion strong execution of pricing initiatives and growth of our partner program pricing initiatives include conversion of clients to our newest product bundles and continued higher adoption of our bundles at the point of sale.

The number of employees on our platform increased to more than $2 3 million up 10% over the prior year, our average customer size increased to 78 employees at the end of Q1 compared to <unk> 73, a year ago as we continue to focus our investment in the mid market and accelerate growth among clients with more than 100 employees.

Net retention trended favorably benefitting from price initiatives and continued cross sale.

Adjusted gross profit margin improved to 66, 3% versus 65, 2% a year ago adjusted gross margin, excluding depreciation and amortization was 76, 8% an increase of nearly two points year over year. The expansion was the result of increased scale across our support teams and lower third party costs.

Sales and marketing expense was $40 million or <unk>, 34% of revenue slightly below 35% a year ago based on the continued demand and attractive returns. We're seeing we continue to invest in our sales expansion strategy and marketing programs to drive new business growth and capture market share primarily in tier one markets.

On a gross basis, we invested $19 million in R&D or 16% of revenue slightly lower than 17% a year ago and in line with our long term targets. Our team continues to efficiently add new functionality through organic development partnerships and best in class product tuck ins that create value for our clients and expand our pepam opportunity.

G&A expense was $18 million or 15% of revenue down from 18% in the FERC order of 22, we intend to progressively drive G&A down as a percentage of revenue as we scale the business consolidate our facilities footprint and anniversary public company costs.

While our primary objective remains sustainable 20% plus revenue growth, we intend to steadily expand margins as we scale. The business. This quarter, we increased operating income to $10 $4 million or an eight 8% profit margin more than doubled to three 7% last year.

The greater than 500 basis point expansion enabled us to deliver adjusted EBIT margins of 24% and when combined with our 28% revenue growth exceed the rule of 50 this quarter.

Shifting to the balance sheet and cash flow this quarter free cash flow was a negative $30 million compared to a negative $24 million last year. The first quarter tends to have the largest use of cash due to the timing of our annual bonus payment. In addition, this quarter. We made our first naming rights payment, which covered the full year and will be made quarterly moving forward. However, we plan to be free cash.

So positive for the full fiscal year and going forward, we ended the quarter with $98 million in cash and no debt.

This quarter, we generated $4 million of interest income on average client funds of approximately $920 million as overnight rates began benefiting from recent fed rate increases our overall effective rate more than tripled to 178 basis points this quarter compared to 52 basis points last quarter.

Interest income exceeded our expectations as overnight rates reflected fed fund raises faster and more completely.

Turning to our outlook for fiscal 2023, we continue to be positive about the momentum in the business strong demand environment and <unk> leadership position in the HCM market.

Labor market has remained tight and while we continue to closely monitor macro environment, we have not seen any material impact to our business.

Our guidance assumes these trends continue for the remainder of the year.

Expanding properly we are winning share any SMB segment through a differentiated platform focused on leaders and industries. Our team is laser focus on execution tier one market penetration and continued peplum expansion with less than 2% share of our $29 billion total addressable market. We had significant runway for continued growth and remain.

Think about the trajectory of the business.

With that we'll open the call for questions operator.

Thank you we will not be conducting a question and answer session.

He would like to ask a question. Please raise <unk> and then one telephone keypad.

Confirmation 10 will indicate your line is in the question queue.

Yeah, My pay Star and then two if you would like to remove the question from the queue.

Full participants using speak equipment, it might be necessary to pick up your handset before pressing the <unk>.

One moment, please while I pull for questions.

My first question is from Gabrielle approaches of Goldman Sachs. Please go ahead.

Hi, This is Kevin on for Gabrielle. Thanks for taking my question I wanted to ask about ramping a seller's hired last fiscal year. What are you, saying in terms of early trends in terms of the tender at Rand, particularly in the tier one markets. Thanks.

Yeah, Hey, Thanks, we're seeing what we'd like to track is willing to attract those sellers on a cohort basis and and look at the soldiers who have been here for four quarters of five quarters and compare them to to previous cohorts and it's still really early but we're adding closer to 70 plus sellers in each of those cohorts.

And they can do to perform like they like they have historically, we'd love to always there's always room for improvement, but we've seen good performance out of those larger cohorts that we've been hiring more recently for sure.

That's helpful. And then Adam can you talk a bit about the levers for gross margin expansion going for particularly as you brought in the Bay T M, Sweden and N as <unk> continue to increase.

Yeah, one of the things that we see is that when you add additional products and when clients are buying more products from us. There there are more effective than the gross margin increases we just for new products like our talent management solution. You don't have to put the same level of service in terms of calls and call back to the management and surface operations that you do with payroll.

Payroll is the largest part of our services server surface operations and so when we add these additional products. It really it helps to drive additional margin and and as well as we continue to go into the larger segments of out of the micro segment, we do see that those clients they tend to buy a little bit more they tend to be more <unk>.

Active in the way that they use the product and so the margin sending come on a little bit better.

That's gonna be the primary driver.

Great. Thank you.

Our next question is from T V Tillman of Jewish Securities. Please go ahead.

Great. Thanks, so much for taking the questions. This is Robert T for Terry I'm, hoping to get a little more detail in an update into the micro segment can you remind us on the mix of business. There is that segment of hold steady or perhaps becoming small growth with bigger midmarket customers and how are you all thinking about the segment in terms of overall economic sensitivity and then I have one follow.

Thanks.

Yeah, I mean, it's really just not material Ah move marginal moves in that Microsegment. It represents about 5% of our total portfolio in terms of revenue.

And we have seen that that's a slow down in terms of the growth of the companies in that segment as we are intentionally not investing quite as much in that under 10 segment, but we do continue to drive revenue growth actually in that segment and it's been it's held fairly steady in terms of that five per cent of total revenue or so and I would say in terms of.

The sensitivity, we do expect that sort of in the larger ends you know the micro segment and then the large enterprise segment is where we would see may be more sensitivity to macro changes, but again, it's just so marginal in terms of its overall impact on our portfolio.

Even large swings wouldn't really impact us.

Makes sense. Thanks, Uhm and then just as quick follow up that's where I believe you all mentioned strong growth uhm across industry, particularly in the restaurant and food services segments is that momentum still continuing or have any other specific vertical taken more of the spotlight this quarter.

Yeah, No I mean that that trend has continued it is sort of dependent on Ah, we don't seasonally adjust our hiring or or employee counts. So you do see slightly more growth and sort of the seasonal peaks and whatnot, but those trends have continued and they have outperformed sort of outsized and in line with what you'd see in the broader market as well as high.

Hearing has continued to be tight and the labor market more broadly.

Great. Thanks, so much.

Okay.

And next question is from Brian Bitcoin of current she's Gonna hit.

Hey, it's actually Caroline for Brian Tonight in terms of the Ah once you adjusted gross margin.

Hello, Sir it looks like it was flat year on year with that in line with your expectations of what are you expecting for the four year for adjusted gross margin.

Yeah, we haven't gotten into adjusted gross margin on the four year basis, but we actually did drive some expansion. If you back out interest income and look at it on a recurring basis, we did still drive some expansion across the board so across adjusted gross margin as well as adjusted operating income and.

And again I really think the best metrics to look at for our gross margin is excluding depreciation and amortization and we drove multiple points of expansionary, even with the without the benefit of interest income.

And that's that is our long term goals to continue to drive expansion across.

The business.

So we like I said, we haven't guided specifically to gross margin improvement, but we're going to continue to look at that as an opportunity.

Okay, Great and then in terms of that updated for your look revenue guidance does that include the most recent funds rate hike from today or any additional rate assumptions.

It includes the 75 basis points for them today and it doesn't include any potential future races.

Alright, thank you.

Make sure.

Ah next questions from our committee of J P. Morgan. Please go ahead.

Hi, guys. Thanks for taking the questions is already on from Mark Murphy, just a quick question until I know it looks like an interest in acquisition in terms of the focus about the company. There is that kind of focus towards any particular customers might be frontline workers blue collar white color et cetera.

Yeah, it's primarily today focused on professional services.

So I think we'll continue to leverage that in our professional services and healthcare vertical I think over time will be able to also identify more use cases for.

Hourly employees to identify hourly employees more effectively.

Got it thanks, and then in terms of the are you guys said that kind of move favorably.

Any commentary on grocery attention is that something you would expect to improve as you guys do above market.

Oh, Yeah, Yeah, I definitely think that we expect gross stringent to continue to improve it's been relatively stable.

For some time now and even even while we've been driving that retention improvements. So those have been continuing and remained strong.

Coming into 2003 now.

Well thank you.

That makes Christians from <unk> Ostrich Bank. Please go ahead.

Great. Thanks for taking my question a couple of quick what some agents first on the sale front them and you guys talked about adding another towards the sniper from sellers, how should we think about the linearity of jail hires over the course of the year and what does the hiring environment looked like today in terms of finding balance.

Yeah. So we map out hiring we obviously will hire the majority of the people in the first half of this fiscal year.

That are in our plan budget growth.

And that will enable us to get.

Some minor contribution in the fourth quarter, but to have those people fully ramped up for.

F y 24.

We've seen.

No issues.

Identifying recruiting and hiring.

Sales associates, and so we feel really good about our staffing physician.

And sales today.

That's very helpful. And then just send you send me everything sponsorships.

Noted, increasing papa funnel potential customers and prospective customers are you able to bring in a certain types of <unk> customers are they more regional focus any kinda. Additionally, it's out there and it kind of how he was thinking about this kind of avenue of marketing overboard.

Yeah, I think I think there's two key elements to consider.

Versus just overall brand awareness, obviously, we're still trying to build brand awareness nationally as we expand our sales coverage in in the first quarter alone we add more digital impressions over one trillion dollars than we did all of last year as a company I think the sponsorships are serving their purpose and.

Creating you know air cover for our sales team as we continue to build awareness and expand coverage and.

And as far as the.

The actual conversion I think what we've done a great job of is leveraging both.

The both sponsorships with game day Activations.

And so what we're doing is we're <unk>.

Significant presence of bringing large prospects and influenced centers.

To you know the activities and that's proven to be a winning formula for us. So we're really optimistic about the opportunity to continue to drive bookings growth based on these sponsorships in our early indicators are are really favorable and we're excited to finish both the Pac 12 football season and the.

Bangle season, then we're leveraging both home games in away games.

For the bangles, so it's more than just the mid western influence and I I think that's been exciting for us as they've had games. This year in New York, and Dallas and some of the large tier one markets that we're trying to further penetrate within.

Next time.

Quick follow up on that for for Adam in terms of the castle dynamics. So if I could clear you have an annual payment. This year and then every other year I'll be more quarterly or there's a quarter the payments to be paid this fiscal year.

We made the payment for the for the first full year for the fiscal year already and then beginning in 2004, they will be quarterly.

Going forward, that's what I thought I just wanted to clarify thanks again for taking my questions Yep.

Yeah.

Our next question <unk>. Please go ahead.

<unk>, Thanks for taking my questions congratulated quarter.

I guess I wanted to start up a sales environment.

As you look back at the new sales in the quarter is there any difference and I don't know maybe the composition of those deals in Q1 this year versus last year.

Maybe customer sizes types of modules their bike cetera that might kind of highlight an environment that may or may not be changing.

While the environment Scott's been really steady sort of seeing consistent production in our tier one markets from our broker partners and our industry go to market strategy. So nothing is as change were still.

Running the same plays and winning allies rate in all markets.

So we feel really good about the about I'll go to Mark emotion.

And there are no macro impacts whatsoever in the size of our deals or the number of modules people are purchasing at point of sale.

Got it helpful. And then a follow up question on your sales investments for this year.

Obviously big focus for the company and the last two years as putting new sales.

Heads in these tier one cities, how do you think about crossover or upsells overtime.

<unk> staffing, maybe further staffing a team or head count in that area versus just adding new heads going after four I meant new logo acquisition.

Yeah, we have a a centralized team that handles cross selling.

And we continue to invest in that team and continued to drive.

Cross selling.

Against the legacy base, obviously, our new clients are coming.

Coming aboard.

With two or three modules attached already.

A lot of it is cross selling back into the legacy base or following up.

As an example.

When we are fully unified with plenty of will be able to cross sell plenty into the entire.

Client base of 30000, so we're with you were continuing to invest in across selling team and we're seeing really good results there and I think you'll see us continue to generate somewhere between 15 and 20 per cent of our bookings will come from cross cells.

Great. That's all I have to ask for taking my questions. Thanks, a lot Scott.

<unk> asked.

The question and answer session I would like to turn the Quebec Avenue <unk>, sometimes and comments. Please go ahead.

Thank you again for joining Tonight were enthusiastic about the accelerated momentum in the business and look forward to connecting with you again soon as always feel free to reach out if you have any questions and have a great night.

Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.

Mmm.

[music].

Ladies and gentlemen, thank you for standing by and welcome to pay co 's first quarter fiscal year 2023 earnings call.

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

A brief 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.

As a reminder, this conference is being recorded.

I would now like to turn the call over to Rachel White Vice.

President of Investor Relations. Please go ahead ma'am.

Good afternoon, and welcome to <unk> earnings call for the first quarter of fiscal year 2023, which ended on September 30th on the call with me today are rural Villard Junior <unk>, Chief Executive Officer, and Adam Anti P course, Chief financial Officer or financial results can be found in our press release issued today, which is available on the Investor Relations.

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 Rahul.

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

Revenue growth reached 28% the highest level in over five years as we expand our go to market motion.

We also continue to scale, our operations and delivered more than 500 basis points of margin improvement year over year.

Based on the strong momentum we are once again, raising our guidance, which Adam will cover in more detail.

We are executing against our go to market strategy and continue to make significant progress expanding our sales coverage and growing papon.

Competitive dynamics have been consistent.

Demand remains strong and we had our best Q1 on record.

We continue to target increasing sales head count over 20% for the fiscal year.

We've established sellers in all tier one markets today, our ongoing focus is on expanding coverage in tier one markets, where the opportunity more than triple our sales team.

We have significant runway to add sellers for the foreseeable future.

While still early we are really pleased with how both the Bengals and Pac 12 sports sponsorships are increasing brand awareness and ongoing new business development.

<unk> modern open platform is purpose built for leaders and configured by industry.

A combination that continues to win in the market.

A recent Gartner survey identified leader and manager effectiveness as a top priority amongst <unk> for 2023.

This quarter, we are excited to announce two key differentiators for leaders.

The core leadership framework in Columbia's award winning candidate sourcing technology.

The core leadership framework empowers organizations to transform frontline managers into effective leaders.

The framework is built on the understanding that effective leaders focus on coaching employees optimizing performance and retaining top talent.

We provide organizations with a means to evaluate the efficacy of their frontline leaders and their tools and thought leadership needed to improve leader performance.

We continue to add leapfrogging innovation to our HCM suite and are thrilled to have acquired millenia intelligent candidate sourcing technology to enhance our industry leading talent solution.

The AI powered recruiting analogy will be unified into our platform, making it easier for frontline leaders to find skilled and diverse talent quickly and at a significantly lower cost.

Colonial solution stands out and that it is fully automated and easy for frontline leaders to use.

And today's war for talent plenty of not only sources candidates are actively looking to change jobs, but more impressively passive candidates that are not actively seeking a new role.

The technology will also help companies execute against their <unk> strategy by placing an emphasis on diverse candidates that are often overlooked by traditional recruiting systems.

This acquisition builds on our successful track record of rapidly integrating best in class point solutions that provide a competitive advantage and expand our purple opportunity.

As further proof of our product differentiation. We are in the platinum 2022 tightened business award in the business intelligence solution category for <unk> analytics.

In addition, we will provide many analytics that are critical to helping our key industries manage time and labor such as overtime or schedule analysis by tenure.

In September we published our first ESG report, describing <unk> commitment to sustainable business practices and ongoing efforts to address the material ESG topics.

Particularly pleased we increase the representation of females in leadership and ethnic diversity, among our associates by 8% and 13%, respectively and reduce our scope, one and scope two emissions by 14% year over year.

Over the past fiscal year <unk> continued to advance its D. Eni strategy enhanced associate rewards expand benefit options and drive innovation.

In terms of the labor market dynamics remain unchanged nonfarm payrolls have slowly risen to pre COVID-19 levels job openings remain at elevated levels in the labor market continues to be tight.

To attracting paying retaining great talent.

Lastly, I would like to thank all the amazing pick Orients, who are the foundation of these amazing results.

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

Thanks role I'll review, our first quarter results, then share our outlook for the second quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis.

Net retention trended favorably benefitting from price initiatives and continued cross sale.

Sales and marketing expense was $40 million or <unk>, 34% of revenue slightly below 35% a year ago basically continued demand and attractive returns. We're seeing we continue to invest in our sales expansion strategy and marketing programs to drive new business growth and capture market share primarily in tier one markets.

The greater than 500 basis point expansion enabled us to deliver adjusted EBIT margins of 24% and when combined with our 28% revenue growth exceed the rule of 50 this quarter.

In addition, this quarter, we made our first naming rights payment, which cover the full year and will be made quarterly moving forward. However, we plan to be free cash flow positive for the full fiscal year and going forward, we ended the quarter with $98 million in cash and no debt.

As the overnight rates reflected fed fund raises faster and more completely.

Turning to our outlook for fiscal 2023, we continue to be positive about the momentum in the business strong demand environment and <unk> leadership position in the HCM market.

<unk> market has remained tight and while we continue to closely monitor macro environment, we have not seen any material impact to our business.

Our guidance assumes these trends continue for the remainder of the year.

While we are enthusiastic about integrating to lineage <unk> innovative technology into our platform and expanding our pepam opportunity, we expect it to be immaterial to the financials this fiscal year.

We generated about 180 basis points of interest income in the first quarter and expect that rate to increase further in the second quarter at today's rates. We anticipate interest income will be in the range of $20 to $24 million for the full year on average client fund balances of just under $1 billion.

We currently plan to reinvest about half of interest income into either accelerate our product roadmap or expanding our marketing programs to support our sales expansion.

For the second quarter, we expect total revenue of between 126 and $128 million or 24% growth at the high end of the range and adjusted operating income of between 12, five and $13 5 million.

For the full year, we expect revenue of $528 million to $534 million or 24% growth at the top end of the range and we anticipate adjusted operating income of $65 million to $68 million.

In summary, we continue to deliver strong topline growth, while expanding profitability. We are winning share in the SMB segment through a differentiated platform focused on leaders and industries. Our team is laser focused on execution tier one market penetration and continued platform expansion with less than 2% share of $29 billion total addressable.

The whole market, we have significant runway for continued growth and remain enthusiastic about the trajectory of the business.

With that we'll open the call for questions operator.

Thank you we will now be conducting a question and answer session.

If you would like to ask a question. Please press Star then one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue you.

You might pay Star and then two if you would like to remove your question from the queue.

For participants using speaker equipment, it might be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question is from KPN approaches of Goldman Sachs. Please go ahead.

Hi, This is Kevin on for Gabrielle and thanks for taking my question.

Wanted to ask about ramping it salaries hired last fiscal year. What are you seeing in terms of early trends in terms of the tender at ramp, particularly in the tier one markets.

Yes, hey, thanks.

We are seeing.

What we'd like to track as we like to track those sellers on a cohort basis and look at the soldiers who have been here for four quarters or five quarters and compare them to previous cohorts and it's still really early but we're adding closer to 70 plus sellers in each of those cohorts in and they can do to perform like they like they have historically, we'd love to always.

There is always room for improvement, but we've seen good performance out of those larger cohorts that we've been hiring more recently for sure.

That's helpful. And then Adam can you talk a bit about the levers for gross margin expansion going forward, particularly as you broaden the HCM suite in and continues to increase.

Yes, one of the things that we see is that when you add additional products and when clients are buying more products from us.

They are more effective in the gross margin increases we just for new products like our talent management solution. You don't have to put the same level of service in terms of calls and call backs in management and service operations that you do with payroll payroll is the largest part of our service and server service operations and so when we add these additional products.

Because it really it helps to drive additional margin and as well as we continue to go into the larger segments out of the micro segment, we do see that those clients they tend to buy a little bit more they tend to be more effective in the way that they use the product and so.

The margins tend to come on a little bit better.

That's going to be the primary driver.

Great. Thank you.

Our next question is from Jamie Tillman of <unk> Securities. Please go ahead.

Great. Thanks, so much for taking the questions. This is Robert on for Terry.

Hoping to get a little more detail and an update into the micro segment can you remind us on the mix of business. There is that segment of hold steady or perhaps becoming small from growth with bigger midmarket customers and how are you all thinking about the segment in terms of overall economic sensitivity and then I had one follow up thanks.

Yes, I mean, it's really just not material move marginal moves in that micro segment. It represents about 5% of our total portfolio in terms of revenue.

And we have seen that thats slowed down in terms of the growth of the companies in that segment as we are intentionally not investing quite as much in that under 10 segment, but we do continue to drive revenue growth actually in that segment and it's held fairly steady in terms of that 5% of total revenue or so and I'd say in terms of the <unk>.

<unk>, we do expect that sort of in the larger and the micro segment and then the large enterprise segment is where we would see maybe more sensitivity to macro changes, but again, it's just so marginal in terms of its overall impact on our portfolio.

Even large swings wouldn't really impact us.

Makes sense. Thanks, and then just as a quick follow up last quarter. I believe you all mentioned strong growth across industries, particularly in the restaurant and food services segments is that momentum still continuing or have any other specific verticals taken more of a spotlight this quarter. Thanks.

Yes, no I mean that trend has continued.

It is sort of dependent on Ah, we don't seasonally adjust our hiring or employee counts. So you do see.

Slightly more growth in sort of the seasonal peaks and whatnot, but those trends have continued and they have outperformed sort of outsized and in line with what you'd see in the broader market as well as hiring has continued to be tight in the labor market more broadly.

Great. Thanks, so much.

Okay.

Our next question is from Bryan <unk> of Cowen. Please go ahead.

Hey, this is actually Jared on for Brian Tonight in terms of the <unk> adjusted gross margin it flows.

Hello, Sir it looks like it was flat year on year was that in line with your expectations or what are you expecting for the full year for adjusted gross margin.

Yeah, we havent guided to adjusted gross margin on a full year basis, but we actually did drive some expansion. If you back out interest income and look at it on a recurring basis, we did still drive some expansion across the board so across the adjusted gross margin as well as adjusted operating income.

And again I really think the best metric to look at for our gross margin, excluding depreciation and amortization.

And we drove multiple points of expansionary, even with the without the benefit of interest income.

And that's that is our long term goal is to continue to drive expansion across the business.

We like I said, we haven't guided specifically to gross margin improvement, but we're going to continue to look at that as an opportunity.

Okay, Great and then in terms of that updated our full year look.

Guidance does that include the most recent fed funds rate hike from today or any additional rate assumptions.

It includes the 75 basis points from today and it doesn't include any potential future races.

Thank you.

Thanks sure.

Our next question is from Mark Murphy of Jpmorgan. Please go ahead.

Hey, guys. Thanks for taking the questions already on for Mark Murphy.

Quick question on <unk>, it looks like an interesting acquisition in terms of the focus about the company. There is that kind of focus towards any particular customers, maybe frontline workers bluecollar glycol et cetera.

Yes, primarily today focused on professional services.

So I think we'll continue to leverage that in our professional services and healthcare verticals I think over time, we'll be able to also.

Identify more use cases for <unk>.

Hourly employees to identify hourly employees more effectively.

Got it thanks, and then in terms of the NRO you guys said that kind of moved favorably.

Any commentary on gross retention is that something you guys expect to improve as you guys move up market.

Oh, yes, yes, I definitely think that we expect growth stringent to continue to improve its been relatively stable.

For some time now and.

<unk>, even while we've been driving that retention improvements. So those have been continuing remained strong coming into 'twenty three now.

Thank you.

Our next question is from Levine Shah of Deutsche Bank. Please go ahead.

Great. Thanks for taking my question a couple of quick ones for me just first on the sales front I mean, you guys talked about adding another 20% growth in sellers, how should we think about the linearity of sales hires over the course of the year and what is the hiring environment looks like today in terms of finance Alan.

Yeah. So.

We map out hiring we obviously.

We will hire the majority of the people in the first half of this fiscal year.

That are in our planned budget growth.

And that will enable us to get.

Some minor contribution in the fourth quarter, but to have those people fully ramped up for FY 'twenty four.

And we've seen.

No issues identifying.

Identifying recruiting and hiring.

Sales associates, and so we feel really good about our staffing position.

In sales today.

Yes.

That's very helpful. And then just on your some of your recent sponsorships.

A noted increase in top of funnel.

Emergent and prospective customers are you able to bring in either certain types of size customers are they more regional focus.

Additionally, it's out there and kind of how are you thinking about this kind of avenue of marketing going forward.

Yes, I think I think there is two key elements to consider first as just overall brand awareness. Obviously, we're still trying to build brand awareness nationally as we expand our sales coverage and in the first quarter alone. We had more digital impressions over one trillion dollars than we did all of last year as a company I think the spot ships are serving their perp.

<unk> and relocating air cover for our sales team as we continue to build awareness and expand coverage and as far as.

The actual conversion I think what we've done a great job of is leveraging.

Both.

Both sponsorships with game day, Activations and so what we're doing is we're seeing significant presence of bringing large prospects and influence centers.

<unk>.

The activities and that's proven to be a winning formula for us. So we're really optimistic about the opportunity to continue to drive bookings growth based on these sponsorships in our early indicators are really favorable and we're excited to finish both the Pac 12 football season, and the bangles season in <unk>.

<unk>, both home games in away games for.

The bangles so it's more than just the Midwestern influence and I think thats been exciting for US is they've had gains this year in New York and Dallas and some of the larger tier one markets that we're trying to further penetrate within.

Thanks.

A quick follow up on that for Adam in terms of the cash flow dynamics. So if I'm clear you have an annual payment. This year and then every other year it'd be more quarterly or their sort of quarterly payments to be paid this fiscal year.

We made the payment for the for the first full year for the fiscal year already and then beginning in 2004, they will be quarterly.

Going forward Thats, what I thought.

Just wanted to clarify thanks again for taking my questions.

Yes.

Our next question is from Scott Berg of Needham. Please go ahead.

Hi, Raul and Adam Thanks for taking my questions Congrats on a good quarter.

I guess I wanted to start on the sales environment.

As you look back at the.

New sales in the quarter is there any difference in that I don't know maybe the composition of those deals in Q1 this year versus last year.

Maybe customer size types of modules, they are buying et cetera that might kind of highlight an environment that may or may not be changing.

While the environment Scott's been really steady so we're seeing consistent production in our tier one markets from our broker partners and our industry go to market strategy. So nothing has changed we're still running the same plays and winning at <unk>.

Right in all markets.

We feel really good about the about our go to market motion.

And no macro impacts whatsoever.

And the size of our deals or the number of modules people are purchasing at point of sale.

Got it helpful. And then follow up question on your sales investments for this year obviously.

Obviously, a big focus for the company. The last two years is putting new sales.

Heads in these tier one cities how do you think about cross sells are upsells overtime.

<unk> staffing maybe further staffing a team of our head count in that area versus just adding new heads going after for a net new logo acquisition.

Yes, we have.

Centralized team that handles cross selling.

And we continue to invest in that team.

And continue to drive.

Cross selling.

Against the legacy base, obviously, our new clients are.

Coming aboard.

Two or three modules attached already so a lot of it is cross selling back into the legacy base or following up.

As an example.

When we are fully unified with plenty of we'll be able to cross sell plenty into the entire client base of 30000. So with you we're continuing to invest in our cross selling team and we're seeing really good results there.

And I think Youll see us continue to generate somewhere between 15% and 20% of our bookings will come from cross sells.

Great Thats all I have thanks for taking my questions. Thanks, a lot Scott.

Okay.

We have reached the end of the question and answer session I would like to turn the call back over to Leila for closing comments. Please go ahead.

Thank you again for joining US Tonight, we are enthusiastic about the accelerated momentum in the business and look forward to connecting with you again soon as always feel free to reach out if you have any questions and have a great night.

Okay.

Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.

Q1 2023 Paycor HCM Inc Earnings Call

Request a DemoDemo

PYCR

Paycor HCM

Earnings