Paycor HCM Inc. Q3 2023 Earnings Call

Speaker 1: That and the.

Speaker 2: Ladies and gentlemen, thank you for standing by. And welcome to Peacore's third quarter fiscal year 2023 earnings call.

Speaker 3: 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.

Speaker 4: Please note this conference is being recorded.

Speaker 5: I would now like to turn the call over to Rachel White, Vice President of Investor Relations.

Speaker 6: Good afternoon and welcome to Pay Quartz earnings call for the third quarter of this year 2023 which ended on March 31st. On the call with me today are Rural Fuller Jr. Pay Quartz Chief Executive Officer and Adam Antti, Pay Quartz Chief Financial Officer. Our financial results can be found in our press release issue today.

Speaker 7: which is available on the investor relations section 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 in this call include forward-looking statements related to our financial results, products, customer demand, operations, and other matters.

Speaker 8: 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.

Speaker 9: 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 Paycor's fiscal third quarter results.

Speaker 10: As employee engagement nationwide dropped to the lowest level in nearly a decade, we are seeing robust demand for our modern and differentiated HCM suite that enables leaders to more effectively coach, optimize, and retain their people.

Speaker 11: With these essential talent tools, our customers are improving the core strength of their critical frontline leaders in increasing their employee retention by 10%.

Speaker 12: Revenue grew 32% this quarter as we continue to make great progress expanding our sales coverage and increasing pepum.

Speaker 13: This also marks the fourth consecutive quarter of margin expansion, delivering over 400 basis points of improvement year over year.

Speaker 14: while investing in capabilities that further differentiate Paycor in the market.

Speaker 15: Paycor's strong results are evidence of consistent execution across the enterprise.

Speaker 16: We continue to expand our go-to-market capabilities, seller headcount growth remains on track for 20%, win rates remain high, average deal size continues to expand, and we are pleased to report another record third quarter for bookings.

Speaker 17: and broker relationships that drive sales opportunities.

Speaker 18: associates with personalized development pathways.

Speaker 19: Like our other recent acquisitions, we plan to fully integrate FERB's innovative technology into our HCM suite and increase PEPFEM, leveraging our broad distribution channel. We expect the integrated offering to be available as part of our talent management bundle.

Speaker 20: and the first half of fiscal year 24. Within our talent management bundle, we recently completed the integration of our new AI-driven recruiting technology, HeyCore Smart Sourcing.

Speaker 21: We continue to see strong demand for this solution with more than 600 customers scheduled for activation. Building on Paycor's initial artificial intelligence innovation, Paycor smart sourcing, and predictive resignation, we introduced our existing natural language processing and sentiment analysis engines to the public.

Speaker 22: more humanized, engaging work culture.

Speaker 23: We will continue to leverage AI in our platform to efficiently empower leaders like using generative AI to aid the recruiting process by generating job descriptions along with several other exciting innovations on our product roadmap.

Speaker 24: Furthermore, we continue to lead the industry with the most extensive network of partners, deep two-way integrations and API connectivity points to meet our clients' unique business needs. In the last year, we added over 100 partners for ecosystems.

Speaker 25: to expand our reach and provide new capabilities and value for our customers. Lastly, we are proud that PayCore was recognized for its modern and differentiated platform with six Titan Business Intelligence Awards for our Best and Class Talent Management Solutions. PayCore Smart Sourcing.

Speaker 26: and insightful analytics that help frontline leaders optimize business decisions. I would like to thank the entire Paycorp team for these amazing results. With that, I'll turn the call over to Adam to discuss our financial results and guidance. Thanks, Raul. I'll discuss our third quarter results and outlook for the remainder of the fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. We delivered another strong quarter with total revenues of $161 million, a 32% increase year over year.

Speaker 27: and recurring revenue growth of 23% over the prior year, marking the sixth straight quarter of achieving our 20% plus target and a testament to the consistent execution from our team. Our revenue growth continues to be driven by new business wins and cross sales, growing the number of employees on our platform to nearly 2.4 million, up 7% over the prior year with more than 30,000 customers.

Speaker 28: As we shift our portfolio upmarket and focus our resources on clients with greater than 100 employees, our average customer size continues to increase. Now it's 79 employees per customer, up from 75 last year. Aligned with this intentional strategic shift, we continue to see moderation in employee growth in the micro segment, while the number of employees in the mid-market and enterprise segments increase 9% year over year.

Speaker 29: This past quarter, our client's employment level was essentially flat over the prior quarter, in line with our expectations and prior guidance. As a reminder, organic employment levels among our existing customer base have typically only impacted revenue growth by a point or two, outside of an anomaly like COVID. All in, net retention continues to turn favorably with benefits from cross sales and pricing increases.

Speaker 30: PEPFEM growth also benefited from strong form filing revenue some of which we believe was pulled forward from the fourth quarter.

Speaker 31: We're also pleased with the progress we've made expanding our partner program, made possible by the investments in our interoperability engine. New incremental partner revenue streams such as income and employment verification services and other software partnerships are expanding services to our clients and will increasingly contribute to our revenue growth into next year. In addition to the consistent revenue growth, we are also pleased with the progress we've made.

Speaker 32: 300 basis points higher than last year as we continue to scale.

Sales and Marketing events was $46 million or 29% of revenue in line with our long-term targets and we continue to invest as we expand our sales team nationally.

On a gross basis, we invested $22 million in R&D or 14% of revenue, a similar level to last year 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 PEPFEM opportunity.

GNA expense was $19 million or 11.9% of revenue, down nearly 300 basis points from 14.6% in the third quarter of 2022. We have made significant progress scaling and driving down GNA as a percentage of revenue. Year to date, GNA expense as a percentage of recurring revenue is more than 150 basis points.

Shifting to the balance sheet in cash flow, we generated $24 million of adjusted free cash flow, a net spend of $9 million year to date. We remain on track to deliver our plan to be free cash flow positive for the full fiscal year. At the close of the quarter, our cash balance increased to $83 million with no debt.

This quarter, we generated interest income of just under $11 million on average client funds of approximately $1.2 billion, yielding an effective rate of just over 370 basis points. The majority of our client funds remain in overnight counts, which are capturing Fed fund rates faster and more completely.

Our guidance assumes no material change in the broader demand environment or labor market, which has been fairly consistent, and flat organic employee growth among existing customers for the balance of the year.

Please keep in mind that we had a really strong fourth quarter last year compared to our two-year recurring revenue cager of 21% through the second quarter, and we are not anticipating the same outsized form filing benefit that we had this third quarter. Separately, while we are enthusiastic about the acquisition of Verb, it will be immaterial to our operations today.

With these factors in mind, we are once again raising our guidance for physical 23. For the fourth quarter, we expect total revenues of between $135 and $137 million, or 24% growth at the high end of the range, and adjusted operating income of between $13 and $14 million. For the full year, we expect revenues of 548 to 510-

range of $30 to $32 million for the full year, on average client funds balances of just over a billion dollars. We remain on track to reinvest about a third of our interest income in temporary programs to accelerate our product roadmap, expand marketing programs and invest in scaling the business.

In summary, our modern HCM platform that empowers frontline leaders to improve employee engagement and retention is resonating with customers. Our team continues to execute. We've demonstrated margin expansion as we scale the business and believe there is significant runway for further growth. As a mission critical application still early in its transition to the cloud.

We believe in the durability of the category and our opportunity to continue capturing share within the expanding $32 billion H.C.M. market.

With that, we will open the call for questions. Operator.

open the call for questions. Operator? Thank you.

Ladies and gentlemen, at this time we will conduct our question and answer session.

If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Once again, task a question, press star one on your telephone keypad. We'll pause for a moment while we pull for questions.

with JP Morgan.

Please see your question.

Thank you. Congrats on the very nice results. Raul, when you look at the trends across your core verticals, healthcare, manufacturing, food and bev, professional services, are the demand patterns there aligning with kind of what we see in the broader economy? For instance, what I mean is the services PMI's are showing expansion.

the manufacturing PMIs are a bit softer. I'm just wondering if that kind of spreads shows up at all in your bookings patterns or employment trends. Then I have a quick follow up.

Now we haven't seen any material changes in our performance across the four verticals. Obviously we're still seeing a strong resurgence in food beverage and accommodations across the platform

and manufacturing are really big components of our total addressable market and our overall percentage. So we haven't seen any changes in our base.

or in our groupings. Okay. Yeah, understood. Okay. And then, you know, when we look around at product ratings and reviews, they do remain ultra-strong for Paycor. I'm wondering in which areas are you most excited about kind of what you see in the R&D roadmap. The curled up

And if you could just touch a bit on talent, that module seems to have a pretty high feeling on the attach rate. And I'm just wondering if you're looking at that and feeling like that can become an ever larger mix of the revenue stream.

Yeah, so obviously the thing we're most excited about is as we continue to expand in the marketplace, we're finding that our platform is not only the easiest to use, but the most powerful in our competitive set. So we feel really good about that. So okay

What we're most excited about is clearly talent. Talent continues to grow. It is already a bigger part of our mix and workforce management. We believe talent has the capability to be as big as payroll and HR. So there's so many components in that.

to both source employees but also to retain employees. And we believe it's going to be the next component of a core HCM module. And so, when I started this category, we sold payroll. HR became part of payroll over the next few decades. And we believe payroll HR is talent.

will be the future definition of what a Core ACM platform is with workforce management and benefits still being, you know, based on the needs of the industry that you're serving.

Thank you very much. Yeah, thank you. Our next question comes from Gabriella Borges with Goldman Sachs. Hi, this is Kevin, I'm for Gabriella. Thanks for taking the question. I just wanted to double click on guidance.

I think it implies a higher sequential decline in recurring revenues for Q than prior years. So just curious maybe the moving pieces in terms of how much revenue was pulled forward and how you're thinking about normalize recurring revenue growths forward.

Yeah, we've tried to be consistent with the revenue guidance that we've put out over the last couple years. A couple of the key things that sort of listed off in the prepared remarks, the guidance assumes no material change in the broader demand environment in the labor market, which has been fairly consistent. The flat organic employee growth though is what we've been seeing more recently that's...

guide into the Q4 or the fourth quarter.

Got it. That's helpful. And then it looks like seller hiring is on track. Just curious how retention is holding up and then ramp and sales productivity. Is that tracking in line with your expectations, particularly more ramp reps that have been around for a year or two? Thank you.

Yeah, on seller retention, we continue to have strong retention up significantly year over year. Productivity despite strong hiring, our overall productivity is higher. So what that is, would reference is that.

The people that are anniversary into Tier II or III are doing better, so productivity continues to operate as designed.

anniversary into tier two, second year, third year are doing better. Productivity continues to operate as designed. Thanks for taking my questions.

Yeah, thank you Kevin Your next question comes from Samad Samana with Jefferies

I can ask me thanks for taking my questions. Maybe Raul, the first one for you, as you guys move up market and target the 100 employed plus companies. One, does it change maybe the type of seller that you're trying to hire? And two, relates to the micro part of the business.

Just letting that naturally maybe a trit away or is that something where you're investing less behind it, just trying to maybe think about through that dynamic.

Yeah, I'll start with the first question about sellers and seller demographics. About two years ago, or three years ago, when Chuck came on board, we changed the profile over the first nine months.

and we've kept that profile. And that profile is really focused on someone who's three to 10 years business experience, high velocity, and we want to teach them 8cm, and we want to teach them software sales. And so it's been a successful model for us.

been able to find applicants, we've been able to retain those applicants, we've been able to drive productivity. So we feel good about that. We think that will, you know, those reps can scale, you know, through the entire segment that we're covering today. As far as the micro segment goes.

we're not intentionally declining the segment. What I would say is we're investing more resources into the 100 plus segment. And so, you know, obviously like our peers that focus on the SMB, the low end of the SMB segment, like paychecks, et cetera, that low end segment's gonna have natural churn at a higher rate.

than your upmarket segment, and we're just not replacing at the same rate that we used to replace because we're replacing a five-employee company that leaves with 150-employee company. Great, and then maybe just a follow-up for Adam on the margin side. I'm not an economist, I have no idea what rates will do, but it seems like the prevailing view is that.

So first I would say that no, we're not going to shift our strategy. Our strategy has intentionally been about investing some of the interest expense or interest income back into the business, but that we want to continue to drive expansion on recurring margins. And so you can actually see that in the adjusted gross margins on a recurring basis expanded year over year. It of course expanded with interest.

We expanded that on a recurring basis and that's part of our strategy. So we want to continue to drive that going forward. And then we were opportunistic about taking some of that interest income and investing it back into the marketing and expanding sales programs and then also pulling forward the product roadmap. And so you see that showing up inside of our P&L today where those on a recurring basis did not expand. But those programs were intentionally designed to be able to be a part of our strategy.

It's nice to see the strong PEPFEM growth of 15% in a quarter and I know there's plenty of drivers behind that, but any way to kind of break down just where the sources of growth are coming from and how should we think about kind of PEPFEM growth going forward? Yeah, I mean we broke it down to sort of three groups. We look at the pricing increases that we might be putting in, cross-sell and up-sell opportunities, and I just believe,Liu had a very IVE which was at top.

a little bit outsized on the form filing and so I think that that was a little bit, it's not going to persist in terms of the underlying PEPM growth rate. But we've seen the PEPM growth rate traditionally be in a sort of high single digit low teens and that breakdown is typically across those thirds, again pricing, cross sell up sell, and then the new business coming in at a higher rate. And we think all those can process.

persists in the near term. That's super helpful and just kind of one follow up on some of the seller growth that you talked about earlier and you mentioned you continue to be on track for kind of 20% ish seller growth. How should we think about hiring plans going forward? Is 20% going forward still a good starting point? And then how much of that is maybe dependent on

in your term. That's super helpful and just kind of want to follow up on some of the seller growth that you talked about earlier. And you mentioned you continue to be in track for kind of 20% ished seller growth. How should we think about hiring plans going forward is 20% going forward still a good starting point? And then how much of that is maybe dependent on what you're seeing on the employment side of the macro perspective. And then how much of that is going forward.

Yeah, I mean, we're focused on driving top line bookings and, you know, in order to continue to accelerate our revenue growth. And so we've been fairly confident that we can continue to add coverage. And you know, that's what we're focused on. We're not seeing anything in the macro that would suggest that we want to pull back on seller headcount. So, yeah, I think that's what we're focused on.

capacity into versus traditional strengths of like Midwest, Great Lakes and Tier 2. Could you maybe comment, I know overall you had record bookings, but how did Tier 1 do in terms of the strength versus your expectations and then those markets that were your bread and butter a long time ago, Tier 2? Yeah, I mean we have fairly strong performance across the board.

4% of our bookings is coming from tier one, and we feel pretty good about that. We want to continue to drive that forward.

That's great. Thanks for quantifying that. That sounds pretty bullish. I guess maybe just a follow-up, and I don't know if this is for you, Raul, or Adam, but I didn't have an expectation per se on smart sourcing and how the activation was going to go, but I think I heard your prepared remarks. You've got about 600 customers.

on smart sourcing that you're kind of rolling out or activating. So how is that versus your initial kind of thoughts on where you'd be at this point? And I assume that's not a per-every employee, maybe that's just for the folks in kind of the recruiting side. What is that driving in terms of kind of an average customer, you know, kind of RPU who left or ASP or contract value list? Thank you.

Yeah, hey Terry. So yeah, first I'd say that we're really excited about the traction that we're seeing with all of our AI products and then specifically on the smart sourcing. We've been able to, through the integration, get there a little faster than what we were planning for in the first place. And then the adoption and the excitement from a customer perspective has been really strong. So at that 600 unit mark, we're earlier than what we had anticipated, getting there a little faster.

well as well. I mean it comes at the perfect time where folks are looking for access to talent, they're struggling with it, and so that sort of $2 space is where we're taking its market today.

That's great, thank you. Your next question comes from Brian Bergen with TD Cowen. Please state your question.

Hey guys, good afternoon, thank you. Just one from us here, just taking into account everything you're seeing right now in the demand environment.

kind of 4Q view. As we think forward here for fiscal 24, any thoughts and considerations we should be mindful for on growth and margin? Thanks. Yeah, I mean we haven't given anything specific to 24 yet. I'd say that we want to continue to see how the quarter wraps up and you know everybody's been talking about.

massive opportunity and we feel good about the long-term sort of recurring nature of the business. So we're going to continue to be bullish there and I think we're going to want to be consistent into next year. So we've consistently been trying to drive the 20% plus recurring revenue growth and continue to expand margins across the business.

gross retention, revenue retention compared versus last year. Just any, any changes would be mind-blowing, you know, sub 10 and a thousand or a thousand plus max.

like we've talked about, right? The retention that micro-segment, where you've seen a little bit of the softening in the organic pace per control and their hiring, we are seeing that. But it's not affecting our overall never-tension numbers. So overall, it has been consistent.

that micro-segment where you've seen a little bit of the softening in the organic pace per control and they're hiring. We are seeing that. But it's not affecting our overall never-tension numbers. So overall it has been consistent. Okay, great. Thank you.

Your next question is from Scott Berg with Needham. Please state your question.

jump from your second quarter number than you have for as far back as my model goes. I just want to try to help understand what that jump in particular means just because it stood out in the model.

Yeah, I mean a bit of it is the continued press into new hiring and sales expansion as well as some of the additional demand programs that we've been running that we've been talking about incrementally that we layered into in the middle of the year or beginning sort of in the first quarter. And so some of those programs really were in full swing towards the end of last year in that November-December timeframe and then really the full quarter here for...

There's a lot of opportunity I've been sniffing around this for the last couple weeks, but I don't think the average investor really looks at HTM as maybe a space or a sector that can benefit from these technologies. How do you all have a viewpoint on those opportunities? Yeah, hey Scott, I think that we're really excited. We've been investing in this space around AI for the last couple years. It's not a brain...

how they're describing it to their employees and to the associates. Term prediction and the term predictor has been in the product for the last couple years as well. So that's been a place that we've been playing. Something that's coming out real recent or real soon is job description generators. And so you'll see some more stuff from us around enabling our customers to be able to.

to write job descriptions more quickly and more effectively and line it up across, you know, industry best practices. And there's a couple other things that are on the come for us as well. And we're thinking about it, of course, inside of the product, but then how we can use it internally, you know, for our infrastructure, for productivity, to drive additional, you know, better assist internally for our customer support reps. So, we're really excited about the opportunity.

Please state your question. Great, thanks very much. I know you guys haven't guided to next year yet, but as we think about the piece parts of the business with recurring being guided to in sort of the upper teens this quarter, and I know that there's some difficult comps because of the pull forward, but is that a good starting place roughly for the recurring revenue for next year? Thanks.

Hey Brad. Yeah, I mean we'll clearly give the guidance when we get through get into the first quarter and we'll shape it up. I mean, we his overall I would say our strategy to continue to drive to 20% recurring over the right period is is still our strategy and and continue to drive margin expansion any one quarter. You know we're going to have to you know we'll take a different.

That's not shifting in any material way in the near term to make us think differently about the opportunity.

That's great. Thanks very much. Thanks, Brad.

So does the ramp to revenue from those partners become quicker, or is it kind of the same education? I would love to maybe unpack that a little bit. Thanks guys.

Yeah, I mean there are some software partners where we're, that are going to take a little bit different timing as we layer them in, I think than what you might see historically in the market. And so, you know, we have talked a little bit about some of the software partnerships that we're creating and they're really...

partnerships take a little bit longer, will bleed into the 24 like we had mentioned in the prepared remarks, you know, sort of really ramping up revenue into 24 and beyond.

Got it. Thanks, man. Your next question comes from Mark Markon with Baird. Please state your question.

Good afternoon and thanks for taking my questions.

Number one, with regards to talent, Raul, you mentioned eventually it could end up being as big as payroll or HR.

How penetrated is talent right now within the existing client base and what's the plot for going back to existing clients to ramp that up?

Yeah, I mean, it is, you know, we're in the early innings of cross selling talent into the base. As we continue to expand the suite, we have a great opportunity to cross sell it back into our clients. And so we have a team of over.

of cross-sellers that focuses on bringing these new solutions into our client base. And so we continue to see good penetration there, which is driving it. It's one of the three components that Adam talked about that lifts our PEPM, and we're continuing to see that growth.

Right and then can you talk a little bit about in terms of the the recurring revenue growth.

What percentage was from, you know, new logos as opposed to cross-sells? Obviously, there's form filings in there, but in terms of just thinking about year over year over the course of this last quarter.

Yeah, yeah, what we see, Mark, is typically about a third of the growth that comes from the PEPM growth is from cross-sell upsell opportunities. And so that's how you might think about that 15%. It's a little less than third because we sort of outsized in a couple of other areas this quarter. But that's typically what we see from the growth in the cross-sell upsells. Great. And then just the implied recurring revenue guide as a...

you know, if we're going to be 30 to $32 million.

if we're assuming $32 million in terms of float income for the year. How much was the form revenue in the year-ago quarter relative to what you're expecting this year?

Yeah, I mean what we normally see, especially in the third quarter, is that we're generating high teens of our total recurring and other revenue is related to form filings and then you get sort of low single digits in non Q3 quarters. And so we were definitely at the high side of that here for Q3 and then we'll be maybe before standard use.

Great, thanks. Thank you. Is there any way to think about the growth in the PEPM relative to the average client size? It seems like the average client is around 79 employees up from 75. How much of that is driving the PEPM growth as opposed to...

you know, just the natural evolution of the client size is opposed to maybe other factors.

Yeah, hey, actually, you know, smaller clients have a much larger PEPM. So what we see in the micro space is that those clients tend to pay, you know, two to three times as much on a PEPM basis because the pricing strategy has like a larger base fee, right, in those smaller clients. But what's happening really is that as new clients are coming on, they're buying a more complete PEPM.

more products. So that's really the dynamic. It's not necessarily that the PEPM increases. You know the larger clients tend to get a little bit of scale as they as they have pricing power. Got it. And then as you drive more chatty PT are you going to be able to

slow the rate of the cells for higher and still maintain the growth. I guess there's going to be more efficiency in the cells for this AI permeates itself. Would it keep the rate of cells for growth constant and accelerate revenue overall?

I should be thinking about that. Yeah. The way we think about it is, we are still expanding out our Salesforce, but we're making great progress. We're getting closer to the point where we can start to decelerate hiring, it could be next year or the year after, and drive more productivity. That productivity will be through any of the existing financial resources to headed professional management, and theports doesn't reorient you. So what we currently have a

every territory covered that we can then flex to productivity which would yield more margin back to the business.

Thanks, sense. Thank you. Yep. Your next question comes from Daniel Jester with BMO Capital Markets. Please go ahead.

Hey, good evening. Thanks for taking my question. Can you just spend a moment walking us through how you see the regulatory environment for AI with regards to hiring and some of the performance reviews and the like? It feels like there's a patchwork of state and local rules that are being formed around this. I just wonder...

as you introduce this into the toolkit for your customers, what's their concern level about the regulatory environment and how much of an impact should we think that that has going forward?

Yeah, great question. Obviously, it's on everyone's top of mind, and we've been really thoughtful about how we do it. We're on the front end, we're really taking feedback from the hiring managers on what they're looking for. So it's just the source. It's not the select, which is an area that has

far more scrutiny. And then secondly, as far as performance reviews, it's really about helping coach the frontline leader on how their performance review is coming across. Is the verbiage positive? Is it negative? Does it match the sentiment?

of the review that you're trying to write. And so we've been very careful on the technology that we use. Obviously, our legal team is continually evaluating different laws of regulation to make sure that we comply with all those.

you know, jurisdictions. But ultimately, we feel like we're in a good place and the products that we're selecting are kind of focused on helping frontline leaders be more effective in their jobs and not really about who to select.

Yeah, and hey Dan, you know, as we think about things like candidate sourcing, we do think that it's important that we understand the AI, that there's transparency, and that we're applying it ethically and people understand what any sort of biases may or may not exist inside of those models and it's complicated, right? And so I think we're working intent...

it but that's not what drives us for it is it I mean we want to like I said continue to build AI responsibly into the product and ethically and make sure people understand it's especially important for us being an HCM where we're focused you know almost entirely on people and leaders. Gotcha appreciate the detailed answer there maybe just the second one

Can you remind me where we are on the journey from shifting customers from the per paycheck model to the PEPPA model? Where are we there? Thank you. Yeah, you know, so most of that shift has really been focused in what we would call the S&B market under 50 in the micro segment.

And we have moved the majority of those clients over to our bundle strategies and subscription models. We're not going to take that sort of direct approach in the mid-market when we get up into our enterprise clients. That will take longer. So just because we want to be more intentional about those specific contracts and how their current billing status is. And so we'll migrate those over time when it's right for the client, when they're interested in more products.

Simmons with DA Davidson. Please, your question. Thanks for taking my question. So, speaking of float revenue, I was wondering, given how rates seem to be stabilizing, what do you think float revenue growth kind of normalizes and approximates recurring revenue growth?

Yeah, so I think next year rates will, if rates were to be normal or flat I should say over where they sit today, there will still be some growth into next year. And of course, there's a lot of variables around that in terms of where the rate environment goes ultimately.

But if they were to sit in at this rate, they would effectively be growing over the Q1, the Q1 first quarter primarily. And there's with the 25 basis point increase, I mean there's marginal growth here that we're going to see just a couple more dollars into Q4. You're not going to see much change there.

competitively changes from what some of your competitors are doing in terms of price or offerings, everything of that.

Yeah, there really has been any shift in the competitive environment.

you know from last quarter I would say it's fairly static.

Great, thank you very much. Thank you. Your next question comes from Steve Enders with Citi. Please state your question. Steve?

All right, great. Thanks for, thanks for taking the questions here. Appreciate the strengths and the bookings or new bookings in the quarter. Just wondering, I guess, how did that kind of translate across the different customer sizes and how should we think about, you know, the upper market execution in this past quarter to drive that, to drive that strength?

our cross-sell team, our SMB team, and our mid-market team. And our enterprise segment continues to grow at a really strong rate. So we had a really across the board strong quarter in all the segments. Our win rate.

you know, remain strong. And in our deal pipeline, you know, is as strong as it's ever been. So we feel really good about where we are in the demand environment.

I think the very number one from last quarter, maybe the micro segment was a little bit weaker, maybe there's just not only employees side that there's some softness there, but I guess any kind of view into where the pipeline is across those various segments, and if you're seeing maybe some of that continue weakness on the micro side of it. Yeah, I mean, so to put it in perspective Steve,

from 50 employees up into to the low end of enterprise. And that's not changing and so it's been fairly consistent the mix. And so you know what like the micro segment whether you know the the softness we had was more in our installed base.

where they weren't seeing organic growth in their clients. But by and large, we're not seeing any changes in our bookings distribution. Gotcha, okay, no, very helpful context there. And last question from me and I'll jump back in is just, as we think about the bundle, appreciate that the talent has been resonating.

trend, you know, positively. And it does contribute pretty well to the overall ADS and the PEPM that we're picking up, part of what's driving the overall, you know, effective PEPM rate increase.

Okay, perfect. Thanks for taking the questions. Your next question comes from Jackson Aitor with SVB Mawfit in Nathanson. Please see your question. Great. Great. Good evening guys. Thanks for taking our questions. The first one, Adam, you...

I made the comment about larger customers getting a bit more scale on their pep-m. But I'm just curious how much pricing, and how much does like-for-like pricing between you guys and your competitors end up becoming a factor in customer decisions.

Is that is there any difference either in the mid market versus enterprise how much pricing plays back?

Well, I think it's Raul. I mean, clearly, larger customers have more pricing power, just in sales in general in any category, right? And so we see, you know, PEPM decline with size.

And so that's kind of natural and that's just, you know, nothing has changed. It's not accelerating. It's very similar as it's always been. What I would say is every deal is competitive and individually negotiated. And so that's why you see a difference between, you know, maximum PEPM, available PEPM, and realized PEPM.

That's one component, right? One component is how many modules they buy. Do they buy the whole suite or a part of the suite? And the second component would be the discounting component. And so I think by and large, that pricing has been consistent and we've seen no behavioral changes in any of our competitors.

I actually have a follow up to that though. Because we've been hearing from ADP that their retention rates have been kind of ticking up and I'm just curious. Is there a...

Is there a possibility for you guys to use maybe pricing as more of a weapon in order to take more share from some legacy incumbents? I mean, that hasn't been a strategy that we've gone after. We've really been focused on the value prop and what we deliver. And I think, you know...

how people calculate retention is different, right? And so I would suggest that, you know, that's a revenue retention number based on a lot of businesses that have nothing to do with what Paycor does.

is different, right? And so I would suggest that, you know, that's a revenue retention number based on a lot of businesses that have nothing to do with what PayCore does at ADP.

Okay, noted. Thank you. Our next question comes from Matt Fowle with William Blair. Please state your question. Great. Just wanted to ask one on the verb acquisition. So maybe what attracted to you with verb versus other options and why did you feel that this was an important part of your job?

children have the attention span of like three minutes long. And so we want to make sure that you are meeting the market, right? So the days of 30-minute online LMS training courses is probably going to be gone. And so we want to be part of the next generation of technology.

to add them to our team. And so the combination of a really cool modern product that is meeting the needs of people in the workforce and that our leaders can use to coach their employees to better outcomes and a great leadership team is why we decided.

it was the perfect fit for us. Great, thank you. Thank you. Thank you, there are no further questions at this time, so I'll hand the floor to Raul Villar for closing remarks. Thank you again for joining our conference call this evening. I would like to take this opportunity to thank our associates for contributing to these excellent results.