Q2 2023 Paycom Software Inc Earnings Call
Software second quarter 2023 quarterly results Conference call. My name is Kate and I will be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now.
I'd like to pass the call over to our host James Samford head of Investor Relations you May go ahead.
Thank you and welcome to pay comes earnings conference call for the second quarter 2023.
Certain statements made on this call that are not historical facts, including those related to our future plans objectives and expected performance are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These forward looking statements represent our outlook only as of the date of this conference call. While we believe any forward looking statements made on this call are reasonable actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent.
<unk> annual report on Form 10-K, and quarterly report on Form 10-Q, you.
You should refer to and consider these factors when relying on such forward looking information.
Any forward looking statement made speaks only as of the date on which it is made and we do not undertake and expressly disclaim any obligation to update or alter our forward looking statements, whether as a result of new information future events or otherwise, except as required by applicable law.
Also during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA non-GAAP net income adjusted gross profit adjusted gross margin and certain adjusted expenses.
We use these non-GAAP financial measures to review and assess our performance and for planning purposes, a reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today and is available on our website at investors <unk> com.
Dot com.
Now I'll turn the call over to Chad Richison pay Com's, President and Chief Executive Officer Chad.
Thanks, James and thank you to everyone joining our call today, we delivered very solid results in the second quarter, and we continue to expand our opportunity both within and outside the U S. I'll start with highlights from the second quarter and progress on our initiatives following that Craig will review, our financials and guidance and then we'll take questions.
Second quarter 2023 revenue of approximately $401 million represented strong growth of 27% year over year second quarter. Adjusted EBITDA came in at $157 million, representing an adjusted EBITDA margin of roughly 39% up approximately 130 basis points.
Year over year, we are delivering a solid combination of growth and high margins, while maintaining a disciplined investment strategy and product and international expansion.
On the product front, the ROI that our clients are achieving from Betty is unquestionable.
We recently commissioned a total economic impact steady from Forrester consulting that quantified the savings from using pay com and Betty, including a 90% reduction in labor for payroll processing and saving HR and accounting teams more than 2600 hours per year.
Companies that are not adopting Betty are missing out on a significant opportunity for savings from the structural change to how payroll should be done.
With millions of employees already doing their own payroll and organization seeing incredible ROI with Betty There's no reason not to adopt it the.
The product is working as we anticipated and our messaging is resonating.
So we will remain disciplined in promoting the power of Betty to new and existing clients.
In April 2023, we launched access to our global human capital management software in more than 180 countries and in 15 languages and dialects.
Day, we announced that we have expanded our HCM solutions to include self service payroll for organizations with Canadian employees.
Now more north American businesses will be able to improve their payroll processing by giving our employees a more transparent and user friendly experience in Canada with Betty.
We are seeing continued success selling across our entire target market range and our efforts up market continued to be strong.
With our recent launch into Canada, we've opened up a new large cross border opportunity as we continue to expand our geographic reach I expect our move up market to continue to accelerate as a result, we are redefining our target market range to include organizations with greater than 10000 employees.
<unk>, which represents an enterprise segment that our sales reps can now directly pursue it.
With our new expanded market opportunity, we now estimate our market shares well below 5%. This expansion gives me confidence that we can grow at an impressive pace for many years to come.
In addition to launch in our payroll services in Canada, our product development team also rolled out two significant tools in our software everyday and the client action Center.
Every day allows employees to get paid on a daily basis. Unlike other products on the market with everyday employees access their earned pay early without being charged a fee and employers are not exposed to potential losses from all factors that impact pay including early departures garnishment for benefit.
Deductions to be collected everyday is a fully compliant payroll as opposed to a pay advance like many other daily pay services.
Client action Center furthers, our dedication to creating software that simplifies the lives of our clients by providing them with an intuitive dashboard within the Paypal mobile App. This new tool makes it even easier for our clients to take action and get updates on service related items, we have received great feedback.
Jack from clients on this streamlined approach.
Since we rolled it out in June .
Finally, <unk> Com was recently recognized as one of Americas greatest workplaces in 2023 by Newsweek.
Award highlights companies dedicated to providing employees with an enjoyable work environment that also fosters growth and development opportunities in.
In addition for the second year in a row comparably named pay Com one of the best career growth opportunities among all companies.
In summary, our highly differentiated product and realized client ROI continue to drive our strong results.
Like to thank our employees for their hard work and commitment to excellence as we continue to change the way payroll has done with that I'll turn the call over to Craig for a review of our financials and guidance Greg.
Before I review, our second quarter results for 2023, and our outlook for the third quarter and full year 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.
We delivered solid results this quarter with revenue of $401 1 million up 26, 6% compared to the prior year period, our GAAP net income for the second quarter was $64 5 million or $1 11 per diluted share based on approximately 58 million shares.
Adjusted EBITDA was $156 6 million in the second quarter of 2023 or 39% of total revenues compared to $119 6 million in the second quarter of 2022 or 37, 7% of total revenues were up 130 basis points year over year.
Year.
non-GAAP net income for the second quarter of 2023 was $94 3 million or $1 62 per diluted share up 29, 1% from the prior year period.
Second quarter GAAP tax rate came in higher than expected at 35% for the full year 2023, we now anticipate our effective income tax rate to come in slightly higher at approximately 29, 5% on a GAAP basis, and approximately 27% on a non-GAAP basis.
<unk> trends remained strong, particularly up market within total revenues recurring revenue was $394 5 million for the second quarter of 2023, representing 98, 4% of total revenues for the quarter and growing 26, 6% from the comparable prior year period.
Adjusted sales and marketing expense for the second quarter of 2023 was $104 million or 25% of revenues, we continue to aggressively spend on marketing and sales ahead of future growth.
Adjusted R&D expense was $42 5 million in the second quarter of 2023 or 10, 6% of total revenues adjusted total R&D costs, including the capitalized portion were $61 2 million in the second quarter of 2023 compared to $48 1 million in the prior year period.
We continue to invest in new products and expanded geographic offerings.
Turning to the balance sheet, we ended the quarter with a very strong balance sheet, including cash and cash equivalents of 537 million and total debt of $29 million. Additionally, we announced today that we have expanded our revolver from $650 million to $1 billion.
The average daily balance of funds held on behalf of clients was approximately $2 2 billion in the second quarter of 2023 up approximately 13% year over year.
Now, let me turn to guidance for fiscal 2023, we are raising our outlook and now expect revenue in the range of $1 billion $715 million to $1.717 billion or approximately 25% year over year growth at the midpoint of the range. We expect adjusted EBITDA in the range of <unk>.
$722 million to $724 million, representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range with these strong results and outlook, we are well positioned to reach the rule of 67% for.
For the third quarter of 2023, we expect total revenues in the range of $410 million to $412 million, representing a growth rate over the comparable prior year period of approximately 23% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $156 million to one.
$158 million, representing an adjusted EBITDA margin of approximately 38% at the midpoint of the range.
We paid our first quarterly dividend of <unk> 37, five per share in June and the board has approved a quarterly dividend of <unk> 37 five per share.
Payable in mid September .
<unk> is in a strong financial position and executing well against a very large market opportunity our focus on delivering strong revenue growth and attractive adjusted EBITDA margins remains top priorities and I am pleased with the consistency of our execution and the resiliency of our business model, we look forward to.
<unk> continued strong results as many of our initiatives gained traction in 2023 and 2024.
With that we will open the line for questions operator.
Thank you.
Now begin the question and answer session. If you would like to ask a question. Please press star followed by a one.
If for any reason you would like to remove that question. Please press star followed by a tail.
As a reminder, we would like to ask you to limit yourself to one question and one follow up question.
To ask a question. Please press star followed by one.
The first question will be from the line of Raimo <unk> with Barclays. Your line is now open.
Thank you.
Two quick questions first.
Chad can you talk a little bit about what you're seeing out there.
Terms of end demand et cetera.
And the reason why I'm asking is like if I look at.
This quarter, you beat by $3 million the full year. It was only raised by $2 million. So maybe to read into that that there is kind of slightly concerned about the second half of the year.
Maybe you can kind of frame it for us in terms of how we should think about that and then the second question was on everyday like how should we think about that in terms of like applicability in terms of is this for all of the clients is it for select group.
Ed that have more contingency workers, whether it's interesting how thank you broadly you can roll this out thank you.
Sure. So I mean I'll take your last question first then circle back but.
In regards to every day.
We put it out there because there are industries and certain companies that have moved toward a more.
Pay as you want type program typically for lower wage earners are product that we put out there allows early wage access or everyday access to wages.
And the employer is not on the hook, it's not alone so the employees not charge and oftentimes these.
These amounts our guesstimate at and then deploy leaves early or if they didn't collect all of the deductions for the employee the employers on the hub and so all I would say is it's meeting a need that's already out there I do not suggest that business has changed too.
A daily pay environment, but some of them are already out there and so it gives us an opportunity and it's linked to our vault card in regards to your first question about demand demand for us is still very strong.
Especially with the outside sales and new bookings were booking larger deals. We're booking 2 million dollar deals 3 million dollar deals we haven't booked those before so outside sales was strong and up year over year inside.
Inside sales, which sells small business our smaller emerging businesses below 50 employees is also up year over year, we do have a metric within our business model that sales thats down.
Year over year, and that's our CRM our sales the Cri group up sells current clients.
And this group has been down year over year, and honestly thats, because we've remained very disciplined and converting our client base to Betty you had that first group that came on and then we've been out selling the others. It is a lot of work for our Cri with very little revenue opportunity for them. So we've actually given compensation.
Accelerating to incentivize the group.
To sell it but it's still a smaller revenue product or billing item for us so while self inflicted I mean, we are having <unk> focus on Betty.
And that cost us $15 million to $20 million in bookings this year.
But again, we're doing the accelerator commission for this <unk> to make up for the lower revenue.
We've been changing out the jet engines on our plane in mid flight here I mean, Betty dramatically changes the way our clients that do their payroll produces a dramatic ROI. So we have to remain disciplined we're not going to make a client go on it we have to see.
Sell them on it.
It takes a while once you sell a deal it takes a while <unk> have to be out there to convert them. So.
I think we're doing something like triple where.
We're tripling their commissions.
For what theyre going to be missing out but for us it's significant because employees are going to be doing their own payroll millions already are with pay com employees, who do their own payroll don't want to go back to the guessing game.
So while that is a small revenue amount per pay com. It produces strong employee and employer advocates which produce more leads for our outside sales group and with less than 5% of the market we will recapture.
The delayed opportunities in due time.
Thank you.
The next question will be from the line of Samad Samana with Jefferies. Your line is now open.
Hi, good afternoon. Thanks for taking my questions I wanted to ask one follow up to <unk> question on the guidance, if I think about recurring revenue and I take out the impact of higher rates and the average float balance it kind of suggests maybe like a 20% to 22% or lets call it low twenties.
Like software revenue growth rate going forward is that the right way to think about maybe the durable subscription revenue growth rate or just maybe help us understand is that just for the back half or if we think about the durable number how should we think about that.
Well I'll, let Craig kind of comment a little bit on that from my perspective, I mean, there is really only.
One metric that has given way for us and Thats. The fact that we're having the <unk> spend.
Three days converting a very small revenue item for a client that produces strong ROI I think it's a season that we're in as far as the percentage growth I mean, you guys have the numbers.
We talked about what we earn.
On.
Interest.
As they've increased we've also talked about how that layering and so I know there's different models out there and they all seem.
Fairly consistent with one another.
I don't plan on giving any of the interest back but.
Do you want to take it out and I think that's a fair thing.
We delivered a strong very solid quarter some odd in.
As we look to guidance.
We're still guiding to a 25% for the for the full year and 42% adjusted EBITDA.
Haven't given any long term guidance in terms of revenue, but we have a large opportunity in front of us.
We had several announcements on this call and so the opportunity is definitely there. It's just up to us to go out and achieve that.
Great and just a quick follow up on the product side.
On the on the new product relative to Canada <unk>.
Already you already have beta customers is that hiring a different type of rep would be opened sales offices. There maybe just help us think about the who just trying the product already and if you've already felt that the go to market infrastructure for that.
Yes, so we rolled out Canada and that included.
All territories in provinces in Canada, we rolled out full service payroll, where we're doing direct deposit taxes.
Everything we've already got clients that are signed up and the pilot have been for a while we really focused on those countries that.
Our U S based.
Clients already have is an opportunity we can see that because we rolled out our global HCM product and we rolled out our global HCM product based on people rig in our system for these other countries. So we're continuing to rollout countries will be rolling out more countries. This year were not picking the easiest countries we're picking the.
Countries that have the greatest amount of U S based.
Company employees and so that's where we're focused first I don't see us rolling out a sales office in Canada.
Right now just because we have so much opportunity as.
As we continue to go up market as I've been mentioning we're getting.
A larger and larger at bats.
For our business, which drives our.
Strong result, an ROI for them as well.
Thank you.
The next question will be from the line of Brad Reback with Stifel. Your line is now open.
Great. Thanks, very much Chad on the CR headwinds you talked about $15 million to $20 million of bookings should we assume that's the revenue sort of headwind here in 2003 as well.
Bookings kind of flow and they don't come in right away. So I mean, there would be some.
Some amount of that that you wouldn't get all of that.
This year, but.
I mean, we look at how much we were up in the last year and how much we're not this year the big dramatic change there, but really it just comes down to we still got about 40% of our client base.
Not on Betty and.
That rois available if not we're servicing two different product sets here so the.
The Forrester study was put out talks about how it's 90% of the savings I mean.
And it's significant their employees.
Employees and employers are having success with it and so.
We didn't just start doing that we really started doing this end of last year, but.
We've been seeing the impact just because it takes a while and then <unk> really the only group we can send out to our clients to help with that change management and be there for their first payroll embed in locked in through the datasets and so thats the group.
That we're using to do it and so.
But in answer to your question not 100% of $20 million would have.
We have realized in revenue this year I will say, though with <unk> as it comes in pretty quick.
They sell at one month.
Most of it's up within.
Four to six weeks with that group.
Got it and then just lastly on the CR point was it below your expectations for the quarter or are they pretty much hit your plan.
For the quarter.
I would say that it's been a harder slog to move bedding then in this last group but.
You know I mean, its impacting us, but we have to stay disciplined in it.
Once we get these clients moved over to Betty It's a very little revenue piece for them, but it's a significant amount of their ROI. It also make servicing clients easier for us just because you don't have the paper cuts that come with.
And HR and payroll department trying to do it for the employee.
Yes.
Thank you.
The next question will be from Dave line of Mark Marcon with Baird. Your line is now open.
Hey, good afternoon, a couple of questions. So one.
Between every day in Canada.
Can you talk a little bit about like the types of clients that you would be.
Targeting to a greater extent it sounds like your like your.
Forecasting that we're going to see some some decent.
Spansion and 10000, plus employee range type clients.
To what extent was not having everyday holding you back before.
Yes, I wouldn't say every day is holding was holding us back at all because people had options for that as you know.
<unk> daily pay options out there and so in answer to your question and what we would go after and everyday that would be someone that's using some other product where employees are having to pay and in some states. The client may not be compliant because taxes are due.
We will often also see everyday used in more of a quick service type environment or in an area, where you might have more transient workers.
That typically work shorter periods of time for any one business.
Normal groups, you would expect there that would be different than what we would expect with Canada, Canada is going to be.
Any client that has employees in Canada and it's also the first time that we have.
We've been in business now 25 years is first time that we've developed another country and it's not like a country. It's multiple provinces territories and as we look at the next countries. We're developing it's the same type of thing these countries or large increase but we're well on our way and like I said before on the <unk>.
<unk> call. There was really only one thing holding us back from going up market and.
That's the fact that we didn't have.
International capabilities.
With our global HCM product and now with our first expansion into Canada.
We're well on our way with that.
And then in terms of the Cri.
Moving to.
The remaining clients what is your what's your forecast just in terms of how long it will take to get that 40% and to what extent could.
Some of the Forrester data.
Put together.
Help to speed that up.
Yes, I mean, the Forrester data as it's helpful. I mean, especially if you've played it correctly to any client it's hard for me to ask.
Setup.
I thought we would have at all converted within 18 months.
We're going to be passed we may be past that point, but we're coming up on being passed that point, if not and so I guess there is an incredible amount of value that automatically associated with clients rushing to capture that value.
Theres also some change management on the client side Ive also talked about I'm not going to force a client.
To go on it so we do have to sell it and then because it's a smaller revenue item, we've got a incentivize our sales reps another way to sell it.
To be able to.
Keep them whole on commissions and what have you. So that we get what we want and so it's hard to answer that question.
And.
But we're focused on it I will say this you've got we've got some groups of Cri sand sales managers that are closer to having their clients converted than others and so you have that but and we continue to bring out new products. So, but yes, I think that for all of them theyre going to be in this just for a little bit to get the <unk>.
Rest of them.
<unk>.
Thank you.
The next question will be from the line of Joshua Reilly with Needham. Your line is now open.
Yes, thanks for taking my questions.
I guess, maybe starting off if you look at the revenue beat in the quarter. It was a little less than 1% versus the midpoint of guidance historically <unk> had been closer to one 5% to 2% on revenue.
How should we think about the way you're positioning guidance going forward has there been any change there is there a little bit less conservatism built into assumptions any color there would be helpful.
No I mean, we guide to what we can see and obviously when a deal starts in a quarter can impact the guidance for that quarter. So there are certain things within a quarter that can make.
The beat larger or smaller and so.
We typically guide to what we can see and really no change to our.
Our stance on guidance, but as Chad mentioned, we saw the CR.
Impact start to come through and and that's what we've seen.
Over the last quarter.
Quarter four it really has much more variability.
We have probably 20% of our clients that are brand new to us. So when you think of that we don't necessarily know how theyre going to pay bonuses and if theyre going to pay bonuses. So a little more uncertainty in that Q4 as we as we move throughout the year.
Okay.
Got it and then sales and marketing was up about $2 million quarter over quarter. This year in Q2, while last year was up about $10 million sequentially should we read into anything around the pace of investments in sales and marketing slowing a bit while you increase more investments in product and R&D continues to increase do you need to get some of these new products out and then you are.
Reaccelerate investments in sales and marketing after that point in time. Thank you.
No I would say we saw some efficiencies in sales and marketing and you know as we've mentioned on previous calls.
At some point you get hit the point of diminishing returns so.
I think you saw a big.
Increased last Q2 this.
Second quarter wasn't quite as large but on some of those are also timing quarter to quarter.
I don't think we've necessarily pull back on sales and market, we didn't pull back on sales and marketing to invest in R&D.
Where can we get the best returns.
Yeah.
Thank you.
The next question will be from the line of Steve Enders with Citi. Your line is now open.
Okay, great. Thanks for thanks for taking the question here I guess maybe to start.
I know that you're opening up into the 10000.
T customer range does there need to be any change in there.
The go to market to go capture some of those more enterprise.
The counts in any areas that may need to be built out too.
<unk> been able to get into those customers.
No I mean, our marketing efforts are a little bit different I would answer the question on the sales motion no I mean.
<unk>.
Back in the day I mean every client is different but today employees are the same.
What we're dealing with there is no such thing as a large market employee versus a small market.
Employee they've got all have perfect payrolls, and what have you and so our approach to selling because we're selling one system is.
It's very similar to prospecting methods, meaning the message through which you go to get appointments.
There are a little bit different and how we're doing that but not unlike how we've been doing it with companies that have 10000 employees.
Already.
So I wouldn't say, it's it's much different than what we were doing there but and.
And it's a little bit different if youre trying to get into a company that has 250000 employees.
How you are getting in there to be able to make an impact and theres a lot of companies that will listen to you but.
We're looking to meet with the decision makers and buyers and so and again employee advocates are helping us.
Three or four years ago, we had zero employee advocates today, we continue to cultivate advocates of the <unk>.
Our client employees, who use our system and then go to other companies and bring us in and so.
We're still having a lot of success with that.
Okay got you.
That's helpful. There.
And then on the international expansion.
The entry into Canada and that is.
Basically announced how should we be thinking about the pace.
Further country openings in.
I guess any initial learnings from.
From entering Canada, and how the platform performed there that could be applied to some of the other countries that you are targeting here.
I mean, it gets easier as you do more countries because you run into.
Crazy things in each country I mean every country operates a little bit different there's there's countries that.
They're year round April six through April 5th.
Theres countries. So that you don't reconcile the tax at the end you got to have a stamp in the beginning so we're running into that with all countries. We do continue to expect amount and we will have out.
Couple more significant countries. This year I had mentioned on the call not long ago.
We believe that about 20 countries will represent most all of the opportunity.
Need.
For the for the.
U S based.
Clients not all but most of all.
Thank you.
The next question will be from the line of <unk> <unk> with Mizuho. Your line is now open.
Thank you. Thanks for taking my question just wanted to follow up chart. When you are now going to Canada and other countries.
Are you targeting customer in those countries or are you focusing on U S customer who are employed there. The reason I'm asking are you trying to build our sales team in Canada and other countries are still focused here in the U S.
I mean, the answer is yes, we will eventually have.
Sales teams.
In other areas.
We're expanding too, but it's first things first.
We're not focused on opening up a sales team in Canada right now we do have a service center there now.
With people available to service they have been trained and have been using our product themselves.
But really it's an opportunity for us to continue to go further up market, we get a lot of.
We'll get a lot of call ins and interest in regards in Leeds in regards to <unk>.
Large businesses and we can sometimes fall by the wayside in regards to how they manage their global.
<unk>, our global HCM product helped a lot with that because so much of the global payrolls already disparate and Siloed all over the place and so the global HCM helped somewhat that announced we're building out better in each country.
It just wouldn't make sense for our company and not to use us for all of that and so.
Originally our focus is U S based companies Theres plenty of them as we go up market, but eventually absolutely will have sales.
<unk> sales teams and other countries.
That's not something we're eyeballing.
And.
Okay. Thanks for that color and one more follow up on the BT. When you say, 40% of customer to move I understand that all your.
Prior to customer or not the new customer by default get Brady.
So definitely there is a clear value proposition obesity and its been there two years. So what's the pushback you're hearing from those customer whats topping them moving to <unk>.
Okay.
Yes, I mean, I think the biggest push back is the fact that it is a it can be a significant reduction in force as well.
I think that Theres change management on the client side some changes they have to make on their side of how they feed the data.
You know.
So thats, primarily it I mean I can tell you a lot of what we get it's not broke.
We're already is in pay com, our payroll is not wrong.
We've got 100% DDA ask why do we have to go through we are working on other things.
And I, just don't know that it becomes the priority and so the Forrester study will help and.
As we continue to go out there and show the value that it can create with appropriate usage and then also we kind of got a little bit of the tailwind and the dog strategy with the employee base.
Especially hourly employees its inherent.
They'll do their own so that's helping us out a little bit in there, but you know.
At the end of the day, it's a sales call that we have to provide value for we're not going to force a client we're going to influence them in and making a decision that <unk>.
Can drive significant ROI in regards to payroll and HCM software.
Thank you.
The next question will be from the line of Bryan Bergin with PD Cowen. Your line is now open.
Hi, guys. Good afternoon. Thank you I wanted to ask a margin question first year. So can you talk about investments being made in cost of revenues.
<unk> the higher float revenue tailwind this has been a bit lighter than we'd expected are there catch up investments being made here are you broadening out the international operations, just given the design center and whats kind of weighed year on year, and where you're expecting adjusted gross margin to land this year.
Yes.
This quarter was down slightly.
It's typically going to be head count we hire ahead of the growth.
It's going to be higher head count and a service group, we're starting to see a few cost as it relates to international but it's not really moving the needle at this point so.
We haven't guided to gross margins, we've always been in that 84%, 85%, 86% range and we would expect that to.
With similar moving forward.
Okay, and then on the updated revenue guide for the year did you add any incremental revenues assumptions related to the Canada entry or for everyday.
I mean, it would be a small that would be is going to be very small.
Impacts this year.
Just because you have bookings than conversions, I mean everyday could add a little bit but.
Yes, it would be not going to move a number that's not going to move the number.
Thank you.
The next question will be from the line of Jason <unk> with Keybanc. Your line is now open.
Great. Thanks. This is actually Devin obligation today, thanks for taking my question.
Wanted to get an update on your on your sales capacity do you feel pretty good about capacity for the remainder of the year and for next year, particularly as you continue to move up market.
Expanding two Canada, and maybe other regions down the line.
Yes, I mean, well outside sales as Roeland I mean, we've got people that are <unk>.
Sell in numbers that I mean, even one deals bigger than <unk>.
Some unsold before it pay Tom So I mean.
Sales is continuing to do well that our capacity is continuing to.
Increase continuing to get stronger staffing and again I'm talking about from our outside sales perspective, which sells 95% of our new business.
That we bring on a.
And new clients that we bring on so.
We're doing well there and.
I would expect us to continue to do so.
Got it no. That's helpful. And then just a quick follow up any additional detail.
How would you think about what youre getting on your effective yield for cash held for clients just given another interest rate hike in the past months. Thank you.
Yes, I mean, what we've said in the past and really don't have an update on that as you know we typically get about.
$5 million annually on a 25 basis point increase we had $2 2 billion average daily funds held this quarter.
Typically trying to get somewhere between 80 and 90%.
The fed funds rate it layers in over time it doesn't it's not an immediate impact to us we have certain products that are layered out longer so.
The impact.
That rate hike has on us.
Thank you.
The next question will be from the line of Alex Zukin with Wolfe Research. Your line is now open.
Hey, guys. This is Ryan on for Alex Thanks for taking the question. So two quick ones historically free cash flow margin and cash conversion has been lowest in <unk>, but it came in relatively strong best quarter. So just wondering if you can unpack that strength.
And then on retention you reported 93% at the end of last year, but given the macro any swings in that number that we should be aware of just through this first half.
I'll take the last one first and then I'll, let you handle the free cash flow margin. We report retention once a year does fluctuate throughout the year and then we report it once a year I believe in February every year for the prior year and so we don't have any updates.
On the retention number right now, but we.
We will at the end of the year on.
On free cash flow came in.
Very strong for Q2, some of that can be timing.
Overall.
Well the main things that impact free cash flow, we're going to be capex.
And some of your tax rates on that but yes, we're very happy with the way it came in Q2.
Much better than last year's Q2.
Thank you.
The next question will be from data line of Bobbin Shah with Deutsche Bank. Your line is now open.
Great. Thanks for taking my question. So there's always a lot of noise as to where we are in the macro cycle can you just help us understand what youre seeing with your customers in terms of pace per control, how that might have trended throughout the quarter and if you see any differences across the various customer sizes that you service.
Stable, we've seen stability.
I can't point to macro issues.
Sure.
Got it and then earlier in your view.
Her remarks, you mentioned kind of year over year growth in both outside and inside sales so can.
Can you double click on this like how it trended in terms of both of those areas versus prior quarters are you seeing accelerating growth similar growth deceleration just any way to kind of think about the magnitude of what you are seeing with both inside and outside sales.
I mean, very strong I mean outside Celsis.
Sure.
Probably the strongest growth we've had in three years from a percentage basis.
<unk> sales strong, but again like I said it represents 5% of our revenue so.
<unk>.
It is important but.
But yes, I would say.
From a sales perspective, we're getting stronger and stronger I mean again, we're selling two and $3 million deals I mean, that's.
When we IPO thats, what our city would sell well.
Last couple of years, so that's what our sales rep of the year with sell in now we've got deals of that size. So as our product has gotten stronger and again the value has gone all the way out to the employee and the employee user.
As to become.
More technological and what they expect for usage.
We're kind of really able to help everybody out the employee as well as the employer to drive this and capture this ROI available.
Thank you.
The next question will be from the line of Daniel Jester with BMO. Your line is now open.
Great. Thanks for taking my question.
First I wanted to ask about sort of the back to the base motion you made a comment that the transition is kind of impacting the velocity of that group are you thinking about global HCM. It also sounds like that's going to get back to the base motion with customers that are already have international employees, So let's get going.
The same team selling that and how do you deal with the bandwidth.
As you ramp that global product and then secondly can you just clarify is everyday and client action center or those be modules that you charge for thank you.
Okay everyday yes client action Center now every client has it.
The ability to enable it.
Right now.
As far as yes. It is the exact same team that sells.
The global HCM product as was sales Betty. It's also that same team will sell everyday as what <unk> and so they still have the ability to sell it they still have the ability to go out nothing precluding someone from going out and making a cell. The issue becomes it's not an issue again, it's something that we have to do.
Is regardless of what you choose to go sell on your own you've got these clients that don't have Betty that some of them you already have sold Betty to and Youre going to have to go out there and spend the time to get them converted and its our <unk> that do those conversions and so the difference can be instead of having a one five.
Ours are two hour sales call to sell a product youre out there for three three and a half days again not all in the same week it might be $3 five days over a four week period of time getting the company converted over to Betty and then Youre out there when theyre doing their first payroll and making sure that the ROI is being realized and so.
And once someone's made that conversion.
I believe we earn the right to even helped.
Help them.
Achieve greater return on investment with these other products and so I'm not saying I've told <unk> don't go out and sell a product what I've said is this is your priority.
Any clients that aren't currently on at achieving the value I know, it's a smaller revenue amount so I'm going to pay your triple.
Because I know, it's a small revenue amount. So anytime you sell one this will be your commission we have to do that so that we can move everybody into the right value because it is the correct way to do it is correct way for employees to do it themselves and so that's what we're focused on we're not retreating from that and I also believe that we do.
We have some good things coming out here with product, we've announced some of it we've got more coming out throughout the year. So.
But it is a first things first I mean, I'm not thrown my hands up on what the <unk> can do I'm, just explaining where they are at as of today.
Thank you.
The next question will be from the line of Robert Simmons with D. A Davidson your line is now open.
Hey, Thanks for taking the question. So I was wondering how does every day work in terms of monetization will you do it the same way you do other modules per employee per pay cycle or will it be a different model.
Yes, the best way to think of everyday it's still per employee per pay cycle, but now you have more pay cycles.
Got it got it and then on Betty are you still seeing 99% annual retention for clients, who are who are using it.
We haven't updated any retention number since we last did our retention but.
I don't see people leave and that have betting it's very that's not to say you can have some bought sold merged I mean.
We've even been the benefactor of where a large companies buying a smaller company with smaller company uses us Betty and then we get a $1 $4 million deal because of the small company doesn't want to convert off Betty and the large company ends up converting to us for it so I haven't seen as being more of the benefactor of.
Mergers as we move into the future, which often times it was a wash or the larger company buys the smaller company.
Got it thank you very much.
Uh huh.
Yes.
Thank you.
Next question will be from the line of Arvind <unk> with Piper Sandler Your line is now open.
Thanks.
Thanks for taking my question.
So I just kind of hosting.
Can you talk a bit about the competitive environment, particularly from.
Some of the legacy players ADP and paychex hasn't changed.
Does it put any any kind of pressure on it seems like there was a kind of conversions.
Now I would say the competitive convergent has been very similar as it has which as I've always said has been competitive.
And it's always been a dogfight I've said that multiple times.
You've always had competitors that will go out there and say hey, I'll give you a year for free.
I've always told prospects I mean, if you want the lowest price call your current.
Call your current vendor threaten to leave them. That's how you get your lowest price, but now if you want value and a return on your investment and you want to turn those fees and the actual value that you can achieve on the way to do that to go with us. So we're always going to have that you always have to have competitive.
Competitors out there and it's no different than it has been.
Terrific and then just really quick one.
Yes.
Can you kind of give us kind of.
Kind of interesting contribution for the quarter.
No as we've mentioned in the past Arvind.
We received our goal is somewhere between 80 and 90% of the fed funds rate.
Have a.
Sure.
Increases in the fed funds rate and it takes a couple of quarters for that to layer in.
So that's what we've said in the past.
Sure.
Thank you.
And the last question comes from the line of Jackson Ader with Moffett Nathanson. Your line is now open.
Great. Thanks for taking my questions guys.
The first one is maybe on the talent acquisition or the recruiting modules, we're starting to see maybe a loosening in in the labor markets and I'm curious, whether you're seeing usage for your recruiting or talent products either start to slow or maybe.
Actually pick up if there is some sort of.
Kind of counterintuitive demand for those products.
The labor market begins to lose.
Yes, it's stable I would say, where we see it as a talent acquisition product, but I would see where you start seeing that his background checks preemployment background checks and how those are going I would say it's stable.
As of right now.
Yeah.
Okay, Alright, that's fair and then the follow up is for.
On the sales side.
When you are increasing the target market.
Yes.
Up to 10000 employees, how do you make sure.
That your outside salespeople don't just go out there and start hunting the gigantic deals in and make sure that.
They don't take their eye off the ball in terms of the bread and butter deals. Thanks.
Yes, well weekly quotas and I'll make sure of that.
But ultimately they will go after larger deals they don't have that many of them for any one territory.
It's not going to increase it so much that thats, all youre doing and our salespeople.
Probably 75% to 80% of what they make is commission based and that's based off revenue being achieved.
You can still.
<unk> achieved a lot of revenue off of.
The sweet spot of our market that we're that we've been focused on but we continue to be pulled up market I've been mentioning that and Theres. No reason not to go after that market as well I mean, eventually we are going to land one of these largest largest companies in the world kind of deal.
I mean, eventually that's going to happen because its just right. So we've got to take our at bats, and our swings with them.
That concludes today's Q&A session I would now like to pass the call back over to Chad Richison for closing remarks.
I want to thank everyone for joining the call today over the next quarter will be hosting meetings at five conferences beginning next week, we'll be at the Keybanc Tech leadership Forum at the end of August we'll be hosting meetings at the Stifel Tech exact summit and the Deutsche Bank Technology Conference in September will be.
Presenting at the Citi Global Tech Conference in New York and hosting meetings at the Wolf TMT Conference in San Francisco, We look forward to catching up with many of you soon.
Operator, you may disconnect.
Okay.
That concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Operator, you may disconnect.
Okay.
That concludes today's conference call. Thank you for you.