Q3 2023 Paycom Software Inc Earnings Call
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At the end of the call.
Good afternoon, and thank you for attending today's pay Com software third quarter 2023 quarterly results Conference call. My name is Jason and I'll be the moderator for todays call all lines will be muted during the presentation portion of the call.
For questions and answers at the end.
If you'd like to ask a question. Please press star one on your telephone keypad.
I will now pass the conference over to our host James Samford head of Investor Relations.
Thank you and welcome to <unk> earnings Conference call for the third 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 995.
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 annual report on Form 10-K, and quarterly report on Form 10-Q.
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.
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 market today.
And is available on our website at investors <unk>.
Dot com.
Now I'll turn the call over to Chad Richison becomes president and Chief Executive Officer Chad.
Jason: The end of the call Good afternoon and thank you for attending today's Paycom Software for our third quarter of 2023 quarterly results conference call. My name is Jason and I'll be the moderator for today's call. All lines we've muted during the presentation portion call to you for questions and answers at the end.
Thanks, James and thank you to everyone joining our call today, we delivered solid results in the third quarter with very strong profitability I'll focus on pay come innovations that are transforming our industry and strengthening our competitive position.
Following that Greg will review, our financials and our guidance and then we will take questions.
Throughout our 25 year history pay come innovations have been transforming the payroll and HCM industry and now we have fundamentally shifted how businesses use core HR and payroll products. We started transforming the industry in 1998 by moving payroll to the web.
Unknown Executive: If you'd like to ask a question, please press star one on your telephone keypad.
James Samford: Now let's pass the conference over to our host, James Samford, head of Invest Relations. Thank you and welcome to Paycom's earnings conference call for the third quarter of 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 security's litigation reform act of 1995. These forward looking statements represent our outlook only as of the date of this conference call.
We have made many innovations in those 25 years, but none more important than do it yourself payroll for employees with Betty. This is a paradigm shift for our industry and delivers tremendous value to our clients when employees do their own payroll.
Along with our focused on automating and innovating all of our current products, we're continuing to enhance our global HCM and payroll product for international enterprises.
James Samford: 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 annual report on form 10K and quarterly report on form 10Q. You should refer to and consider these factors when relying on such forward looking information.
We announced that we are expanding our global payroll product to include Mexico.
During the third quarter employees in Canada started doing their own payroll with Betty and now employees in Mexico came too.
We are continuing to help clients navigate to the new way of doing things and as a result, nearly two thirds of our clients have made the shift to Betty.
Unknown Executive: 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.
For most employees the value of the perfect payroll is oftentimes immeasurable if their check is perfect.
Don't need to borrow money from a friend or family member to get through the weekend or make a bill payment how do you measure the value of that.
Unknown Executive: Also, during today's call, we will refer to certain non-gap financial measures, including adjusted EBITDA, non-gap net income, adjusted gross margin, and certain adjusted expenses. We use these non-gap financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing gap versus non-gap results is it includes in the press release that we issued after the closing market today, and is available on our website at investors.pacom.com.
We're getting better and better at helping employers measure the full value available to them when payrolls are perfect.
A portion of that value is easy to calculate because it's the value they receive by the elimination of after the fact payroll errors that require correction payroll runs manual checks voided checks direct deposit reversals additional wires tax adjustments <unk> et cetera.
Chad Richison: We will now turn the call over to Chad Richardson, Peacom's president, and Chief Executive Officer. Chad? Thanks, James, and thank you to everyone joining our call today. We delivered solid results in the third quarter with very strong profitability. I'll focus on Peacom innovations that are transforming our industry and strengthening our competitive position.
Et cetera.
Perfect payroll eliminate these common after the fact payroll corrections that would otherwise be billable.
So the more employees do their own payroll the greater the savings delivered to the client.
From pay com future billings, which results in lower related revenue recognized by paying them.
I'd like to thank our employees for their consistent execution and their commitment to our long term strategy I also want to wish pay com very happy 20, Pittsburgh day, I look forward to many more and as many of you know we're just getting started with that I'll turn the call over to Craig for a review of our financials and guidance Craig.
Unknown Executive: Following that, Craig will review our financials and our guidance, and then we will take questions.
Chad Richison: Throughout our 25-year history, Peacom innovations have been transforming the payroll and HCM industry, and now we have fundamentally shifted how businesses use core HR and payroll products. We started transforming the industry in 1998 by moving payroll to the web. We have made many innovations in those 25 years, but none more important than do it yourself payroll for employees, with Betty. This is a paradigm shift for our industry and delivers tremendous value to our clients when employees do their own payroll.
Thanks, Chad before I review, our third quarter results for 2023, and our outlook for the fourth 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 fundamentally strong results this quarter with solid revenue and earnings growth.
Chad Richison: Along with our focus on automating and innovating all of our current products, we're continuing to enhance our global HCM and payroll product for international enterprises. Today we announce that we are expanding our global payroll product to include Mexico. During the third quarter employees in Canada started doing their own payroll with Betty and now employees in Mexico can too. We are continuing to help clients navigate to the new way of doing things and as a result nearly two thirds of our clients have made the shift to Betty.
Revenue of $406 3 million was up approximately 22% compared to the prior year period, but came in below our guidance range as a result of lower than expected service revenues, an unscheduled payroll runs.
As Chad mentioned very adoption and usage creates tremendous value to clients as they experience perfect payrolls and eliminate errors corrections and unscheduled payrolls, which would otherwise be billable items. In addition, our CRM. Our teams continue to focus on better adoption and overall system usage, which resulted in.
Chad Richison: Their most employees, the value of a perfect payroll, is oftentimes immeasurable. If their check is perfect, they don't need to borrow money from a friend or family member to get through the weekend or make a bill payment. How do you measure the value of that? We're getting better and better at helping employers measure the full value available to them when payrolls are perfect. A portion of that value is easy to calculate because it's the value they receive by the elimination of after the fact payroll errors that require correction payroll runs, manual checks, voided checks, direct deposit reversals, additional wires, tax adjustments, W2Cs, etc, etc.
Lower cross selling revenues we.
We delivered very strong GAAP net income and adjusted EBITDA in the third quarter net income was $75 2 million or $1 30 per diluted share based on approximately 58 million shares and adjusted EBITDA was $165 6 million, representing third quarter margin of nearly 41% up over.
300 basis points year over year non-GAAP net income for the third quarter of 2023 was $102 4 million or $1 77 per diluted share up 39% from the prior year period.
During the quarter, we repurchased over $76 million worth of stock and paid nearly $22 million in cash dividends as of September 32023, we have retired nearly 5 million shares and when combined with dividends. We have returned over 700 million to stockholders, we still have <unk>.
Chad Richison: Perfect payrolls eliminate these common after the fact payroll corrections that would otherwise be billable. So the more employees do their own payroll, the greater the savings delivered to the client from Paycom Future Billings, which results in lower related revenue recognized by Paycom.
$1 billion remaining under our buyback authorization and the board has approved our next quarterly dividend of <unk> 37, five per share payable in mid December.
Chad Richison: I'd like to thank our employees for their consistent execution and their commitment to our long term strategy. I also want to wish Paycom a very happy 25th birthday. I look forward to many more. And as many of you know, we're just getting started.
Adjusted sales and marketing expense for the third quarter of 2023 was $94 3 million, representing 23, 2% of revenues, we continue to hire top talent to expand our sales footprint and invest in marketing to drive lead volume.
Craig Boelte: With that, I'll turn the call over to Craig for review of our financials and guidance. Craig? Thanks, Chad.
Craig Boelte: Before I review our third quarter results for 2023 and our outlook for the fourth quarter and full year 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAT basis. We delivered fundamentally strong results this quarter with solid revenue and earnings growth. Revenue of 406.3 million was up approximately 22% compared to the prior year period became in below our guidance range as a result of lower than expected service revenues and unscheduled payroll runs.
Adjusted R&D expense was $46 2 million in the third quarter of 2023 or 11, 4% of total revenues up 20 basis points year over year, adjusted total R&D costs, including the capitalized portion were $69 million in the third quarter of 2023, the capitalization rate <unk>.
Creased approximately 33% in the quarter as we continue to invest in new products and support our international expansion efforts.
Third quarter GAAP tax rate came in at 26, 3% for the full year of 2023, we expect our effective income tax rate to come in at approximately 29% on a GAAP basis, and approximately 26, 5% on a non-GAAP basis, turning to the balance sheet, we ended the quarter.
Craig Boelte: As Chad mentioned, Betty adoption and usage creates tremendous value to clients as they experience perfect payrolls and eliminate errors, corrections and unscheduled payrolls, which would otherwise be billable items. In addition, our CRR teams continue to focus on Betty adoption and overall system usage, which resulted in lower cross-selling revenues. We delivered very strong gap net income and adjusted EBITDA on the third quarter. Net income was 75.2 million, or $1.30 per deluded share based on approximately 58 million shares.
With a very strong balance sheet, including cash and cash equivalents of 484 million and total debt of $29 million. The average daily balance of funds held on behalf of clients was approximately $2 1 billion in the third quarter of 2023.
Now, let me turn to guidance.
Craig Boelte: And adjusted EBITDA was 165.6 million, representing third quarter margin of nearly 41%. Up over 300 basis points year-over- Year. Non-Gatinette income for the third quarter of 2023 was $102.4 million for a $1.77 for the looted share of 39% from the prior year period. During the quarter, we repurchased over $76 million worth of stock and paid nearly $22 million in cash dividends. As of September 30, 2023, we have retired nearly 5 million shares, and when combined with dividends, we have returned over $700 million to stockholders.
2023, we had been seeing moderating upside to our guidance model, which corresponded with increases in data usage and macro headwinds from inflation that may impact each client differently now.
Now that more clients are achieving the ROI that he has to offer it is eliminated certain billable items, which is cannibalizing a portion of our services and unscheduled revenues with 10 months of data from increased data usage, we are incorporating the impact that our clients' ROI achievement has on our model based on these.
<unk>, we expect fourth quarter 2023, total revenues to be in the range of $420 million to $425 million, representing a growth rate over the comparable prior year period of approximately 14% at the midpoint of the range.
Craig Boelte: We still have $1 billion remaining under our buyback authorization, and the board has approved our next quarterly dividend of $37.5 cents per share payable in mid-December. Adjusted sales and marketing expense for the third quarter of 2023 was $94.3 million representing 23.2% of revenues. We continue to hire top talent to expand our sales footprint and invest in marketing to drive lead volume. Adjusted R&D expenses $46.2 million in the third quarter of 2023 were $11.4% of total revenues of 20 basis points year over year.
We expect adjusted EBITDA for the fourth quarter in the range of $169 million to $174 million, representing an adjusted EBITDA margin of 41% at the midpoint of the range.
With our Q3 results and our Q4 guidance. We now expect fiscal 2023 revenues to be in the range of $1 $679 million to $1 billion $684 million or approximately 22% year over year growth at the midpoint of the range. We expect adjusted EBITDA in the range of 712.
Craig Boelte: Adjusted total R&D costs, including the capitalized portion were $69 million in the third quarter of 2023. The capitalization rate increased approximately 33% in the quarter as we continue to invest in new products and support our international expansion efforts. Third quarter gap tax rate came in at 26.3%. For the full year of 2023, we expect our effective income tax rate to come in at approximately 29%. On a gap basis and approximately 26.5% on a non-gap basis.
To $717 million, representing an adjusted EBITDA margin of nearly 43% at the midpoint of the range combining our expected revenue growth and adjusted EBITDA margin, we're still on track to reach the rule of $65 in 2023.
As we look out to 2024, we have a number of strategic initiatives that we believe will further strengthen the value clients receive from our offering.
We are making strategic performance and client value decisions that we feel are best for our long term relationship with our clients. Our mission is to ensure and achieve client value and that is our focus our guidance for the next 15 months assumes the impact from the strategic revenue decisions, we are and we'll be making.
Craig Boelte: Turning to the balance sheet, we ended the quarter with a very strong balance sheet, including cash and cash equivalence of $484 million and total data of 29 million. The average daily balance of funds held on behalf of clients was approximately $2.1 billion in the third quarter of 2023.
As a result, we believe it is prudent for us to set expectations for 2024 year over year revenue growth of between 10% and 12%.
Craig Boelte: Now, let me turn to guidance. Throughout 2023, we had been seeing moderating upside to our guidance model which corresponded with increases in Betty usage and macro headwinds from inflation that may impact each client differently. Now that more clients are achieving the ROI that Betty has to offer, it has eliminated certain billable items which is cannibalizing a portion of our services and unscheduled revenues.
More visibility when we provide formal guidance in early February with that we will open the line for questions operator.
Okay.
In the interest of time, please limit yourself to asking one question she'd.
If you'd like to ask a question. Please press star followed by one or yourself phone keypad. If for any reason you'd like to remove that question. Please press star followed by two <unk>.
Craig Boelte: With 10 months of data from increased Betty usage, we're incorporating the impact that our clients ROI achievement has on our model. Based on these factors, we expect fourth quarter 2023 total revenues to be the in the range of $420 million to $425 million, representing a growth rate over the comparable prior period of approximately 14% at the midpoint of the range. We expected just to debit off of the fourth quarter in the range of $169 million to $174 million, representing an adjusted EBITL margin of 41% at the midpoint of the range.
Again to ask a question it is star one.
As a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question.
We will pause here briefly ask questions are registered.
Our first question is from Raimo <unk> with Barclays. Your line is now open.
Hey, Thank you.
I'm just trying to.
I'm, just trying to get a little bit more clarity on the FTE impact so.
So if I'm listening to you it sounds like Becky is the main problem here or didn't issue for what's going on.
Thanks.
Craig Boelte: With our Q3 results and our Q4 guidance, we now expect fiscal 2023 revenues to be in the range of $1,679 million to $1,684 million or approximately 22% you're over your growth at the midpoint of the range. We expect adjusted EBITDA in the range of 712 million to 717 million representing an adjusted EBITDA margin of nearly 43% at the midpoint of the range. Combining our expected revenue growth and adjusted EBITDA margin, we're still on track to reach the rule of 65 in 2023.
But it has been launched for a while so why do we see the impact like so dramatically now and maybe you can link it with the <unk>.
Strategic revenue decisions for next year is that kind of FTE or do we need to think broadly yes. Thank you.
Sure I mean first in regards to the first one.
Better usage has continued to increase throughout the year.
For us and that continues to increase we've been pretty close to guidance almost every quarter. This year and so Craig talked about that.
Moderating throughout the year and we're seeing what accelerated impact Betty has and then Craig you can add Canada, yes, yes suraj.
Craig Boelte: As we look out to 2024, we have a number of strategic initiatives that we believe will further strengthen the value clients receive from our offerings. We are making strategic performance and client value decisions that we feel are best for our long-term relationship with our clients. Our mission is to ensure an achieved client value and that is our focus. Our guidance for the next 15 months assumes the impact from the strategic revenue decisions we are and will be making. As a result, we believe it is prudent for us to set expectations for 2024 year-over-year revenue growth of between 10% and 12%.
It impacted in a couple of different areas you know I mean, obviously, the unscheduled runs to correct payrolls.
Craig Boelte: We'll have more visibility when we provide formal guidance in early February.
Some of those service revenues that we have as it relates to correcting payrolls.
Those numbers were moderating in a typically come in towards the end of the quarter. So.
That's part of the impact for the quarter.
Well as the <unk> impact, which I called out on the prepared remarks and then.
Also.
Preemployment services came in a little light. So it was really a combination of all four of those items.
Okay.
Our next question is from Samad Samana with Jefferies. Your line is now open.
Unknown Executive: With that, we will open the line for questions, operator. In the interest of time, please limit yourself to asking one question. If you'd like to ask a question, please press star followed by one or your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, it is star one. As a reminder, if you use your phone, please remember to pick up your handset before asking your question. We will pause you briefly as questions are registered.
Hey, Thanks for taking my question I guess I want to unpack a couple of things to follow up on Ramos question. I mean, if I if I think about the dollars that you would add based on that 10% to 12% growth in 2024.
I guess I'm curious based on the staffing levels of the organization should we see.
Either a change in the cost structure or just.
Just thinking about dollars added in sales head count that's adding it just how do we how do we kind of square those two things, especially with the offices that you added in late 'twenty. One in early 'twenty two I'm, just trying to understand because 10% to 12% would be a pretty significant departure from the growth we've seen historically.
Raimo Lenschow: Our first question is from Raimo Linchow with Barclays. Your line is now open. Hey, thank you.
Chad Richison: I'm just trying to get a little bit more clarity on the betty impact. If I'm listening to you, it sounds like betty is the main problem here or the main issue for what's going on. But it has been launched for a while. Why do we see the impacts so dramatically now? And maybe you can link it in with the strategic revenue decisions for next year. Is that betty or do we need to think broader here? Thank you.
Yes.
We haven't given any guidance as it relates to the cost structure some odd.
Something will be looking at one thing. We just wanted to do is give you guys kind of in an indication of what we would expect with some of the things we're seeing now as to how 2024 would be shaping up.
And maybe just I guess follow on on that just so I understand that that is efficiency drive maybe some services revenue that you would have otherwise gotten but what about in terms of whether it can you give us any update on maybe the number of new customers that you added in the quarter or.
Craig Boelte: Sure. I mean, first in regards to the first one, you know, betty usage has continued to increase throughout the year for us. And that continues to increase. You know, we've been pretty close to guidance almost every quarter this year. And so Craig kind of talked about that moderating throughout the year. And we're seeing what accelerated impact betty has and then Craig, you can add kind of the.
<unk> added in terms of new represented seats.
That could maybe help us think about either growth in customer count going forward or what are you assuming for that for 2024, just any color would be helpful.
Craig Boelte: Yeah, so Raimo, I mean, it impacted it in a couple of different areas. You know, I mean, obviously the unscheduled runs to correct payrolls and some of those service revenues that we have as it relates to correcting payrolls. You know, those numbers were moderating and they typically come in towards the end of a quarter. So, you know, that's part of the impact for the quarter. You know, as well as the CRR impact, which I called out on the prepared remarks. And then, you know, also, you know, the pre-employment services came in a little light.
Sure I mean, what we can tell you about what we see right now is outside sales remained very strong inside sales remained very strong and cross selling with our Cri group continues to be down as we are.
Focused on.
On this.
Current clients that we have.
Okay.
Our next question is from Brad Reback with Stifel. Your line is now open.
Samad Samana: So it was really a combination of all four of those items. Our next question is from Samad Samana with Jeffries. Your line is now. Thanks for taking my questions. I want to unpack a couple of things to follow up on Raimo's question. I mean, if I think about the dollars that you would add, based on that 10-12% growth in 2024, I guess I'm curious based on the staffing levels of the organization.
Okay, Great I'll keep it simple was there any <unk> revenue in 2023.
Yeah.
Brad I know you don't mean.
Some of the competitors have called out the top of our revenue and that it was going to have an impact.
Samad Samana: Should we see either a change in the cost structure or just thinking about dollars added and sale cut time that's adding it? How do we kind of square those two things, especially what the offices that you added in late 21 and early 22? I'm just trying to understand because 10-12% would be a pretty significant departure from the growth we've seen historically.
Our client base is quite a bit larger.
And what Youre hearing from some of the competitors in terms of our client side. So I'm sure. There was some we had some people that were applying for the.
Floyd retention credit.
And most of that I think you have to file by the end.
Second quarter of next next year and the IRS has kind of put a moratorium on that for a period.
I would say it's not significant.
Our next question is from Mark Marcon with Baird. Your line is now open.
Okay.
Chad Richison: Yeah, we haven't given any guidance as it relates to the cost structure, Samad. I mean that's something we'll be looking at. One thing we just wanted to do is give you guys kind of an indication of what we would expect. You know, with some of the things we're seeing now as to how 2024 would be shaping up. And maybe just I guess follow on on that. So I understand that Betty is efficiency drives.
Just following on on the other questions. Thanks for taking my question.
Is it possible to break down like.
What the impact was with regards to.
What youre seeing in terms of these efficiencies how.
How much you're seeing out of the <unk> group.
Can you clarify what you mean by this.
The strategic revenue.
Decisions that you are taking for next year does that mean potentially pairing some clients or not renewing or.
Chad Richison: Maybe some services revenue that you would have otherwise gotten. But what about in terms of whether can you give us any update on maybe the number of new customers that you added in the quarter or ARR added in terms of new represented seats. That could maybe help us think about either growth in customer count going forward or what are you assuming for that for 2024? Just any color would be helpful. Sure, I mean what we can tell you about what we see right now is outside cells remain very strong inside cells remain very strong and cross selling with our CRR group continues to be down as we are focused on these current clients that we have.
What exactly does that mean and how does that.
How does strong outside sales correspond to the 11% to 12% growth.
Sure well. The first question as you may have a client that was used to they are supposed to be running 13 payrolls in a quarter.
And they were running 19 and now they are back to running 13, and so you have some of that going on with <unk> as well as you know a lot of just the fixes I mean, it just eliminates everything perfect.
Perfect payroll so thanks.
New clients come on with Betty and half of their employees are doing their own payroll by the end of the first month.
Brad Reback: Our next question is from Brad reback with Cecil. No, I'm just now open. A great. I'll keep it simple. Is there any ERTC revenue in 2023? You know, Brad, I know, you know, I mean some of the competitors have called out the top of revenue and it was going to have an impact. You know, our client bases are quite a bit larger than what you're hearing from some of the competitors in terms of our client size.
Our new logo sell new logo sales are strong like I said inside sales is our cross selling I mean, it's been pretty weak and that's not going to change for a little bit I mean, we're not going to keep trying to sell more products to a portion of the base not not using and are receiving value.
Go back in and partner with the client to ensure they are achieving the full value available to them and so that's a big part of our strategy here.
Brad Reback: So I know I'm sure there was some, you know, we had some people that were applying for the employee retention credit. And you know, most of that, I think you have to file by the, you know, first or second quarter of next next year and the IRS has kind of put a moratorium on that for a period. But, you know, I would say it's not significant.
And I will say our strategy is related to the base not the go to market.
Our next question is from Brian Schwartz with Oppenheimer.
Yeah.
Hi, this is sitting.
Sitting in for Brian Schwartz.
Thanks for taking my question.
I guess like a question I have is can you talk about like.
Mark Marcon: Our next question is from Mark Marken with Baird. Your line is now open. Just following on on the other questions. Thanks for taking my question. Is it possible to break down like, you know, what the impact was with regards to, you know, what you're seeing in terms of these efficiencies. How much you're seeing out of the CRR group. And can you clarify what you mean by the strategic revenue decisions that you're taking for next year? Does that mean potentially pairing some clients or not renewing them or what exactly does that mean? And how is that? How does strong outside sales correspond to the 11 to 12 percent growth?
What youre seeing just in terms of.
The SMB and mid market in terms of demand in.
In comparison to last quarter and how that's trended.
Yeah.
Demand remains strong I believe that what we're talking about some more specific to <unk> com and not.
Something that would necessarily be happening with the rest of our industry. I mean, we've made a big paradigm shift and going through this these are things that we've done before as we.
As we've gone through these types of things and I think that we've stayed very dedicated and theres a lot of clients that we have that we continue to onboard all the new ones that continue to get great.
Great value and so we're going to stay focused on what we're doing and also.
Looking out for our current clients.
Our new boats.
Chad Richison: Sure. Well, the first question is you may have a client that was used to, you know, they're supposed to be running 13 payrolls in a quarter, you know, and they were running 19 and now they're back to running 13 and so you have some of that going on with Betty, as well as, you know, a lot of just the fixes. I mean, it just eliminates everything. I mean, perfect payrolls, a thing.
Thank you.
Our next question is from Joshua Reilly with Needham.
Hi, yes. Thanks for taking my question has anything changed in terms of customer retention in the last couple of quarters and how much of an impact if any is that having on the Q4 and the initial 2020 for guidance.
Chad Richison: You know, new clients come on with Betty and a half of their employees are doing their own payroll by the end of the first month. You know, our new logo sell new logo sales are strong. Like I said, inside sales is are cross selling. I mean, you know, it's been pretty weak. And that's not going to change for a little bit. I mean, we're not going to keep trying to sell more products to a portion of the base.
Sure and so neither what I would call is our surprise in the third quarter.
Nor are larger.
And then normal adjustment for fourth quarter guide or related to any change in our expectation for retention achievements set a different way there've been no changes to our retention expectations. Since we gave Q3 guidance on October one.
Chad Richison: You know, not not using it or receiving value. We're going to go back in and partner with the client to ensure they're achieving the full value available to them. And so, you know, that's a big part of our strategy here. And I will say our strategy is related to the base, not to go to market.
Our next question is from Steve Enders with Citi.
Okay, great. Thanks for thanks for taking the question here maybe just.
I guess follow on to that last question I mean, it seems like gross retention hasn't hasn't changed but it's more of a view of the net retention dynamics.
Ryan Schwartz: Our next question is from Ryan Schwartz with Oppenheimer.
Chad Richison: Hi, this is Ari Friedman fitting in for Ryan Schwartz. Thanks for taking my question. Ryan, I guess like a question I have is can you talk about like the what you're seeing just in terms of the SMB in mid market in terms of demand in comparison to last quarter and how it's trend is thanks. Demand remain strong. I believe that what we're talking about is more specific to pay comm and not something that would necessarily well, I mean be happening with the rest of our industry.
I guess first of all is that the right way to be thinking about it even for next year as we think about.
Low teens guide.
Any way to quantify the change in net retention.
That you are talking about here.
Sure. So we report gross retention once a year in February as I've said before we measure retention throughout the year, it's usually strongest in the fourth quarter.
And so in February we will give our gross retention number when youre looking at retention of revenue specific to a client that is using the <unk> system, if they're a new client.
Chad Richison: I mean, we've made a big paradigm shift in going through this. These are things that we've done before as we, you know, as we've gone through these types of things. And I think that we've stayed very dedicated and there's a lot of clients that, you know, that we have that we continue to onboard all the new ones that continue to get great value. And so, you know, we're going to stay focused on what we're doing and also, you know, looking out for our current clients.
Unknown Executive: Thank you.
That revenue retention remained strong and specific to that one client because they were new its not something we had previously if there were a current client as we transition them to Betty.
It does impact their future billing with us and so absolutely as they continue to get great value.
It is a lot of that value is reflected and reduce billing I mean, I would say from a customer perspective, that's a smaller portion of the overall value that they receive for Betty but.
Joshua Reilly: Our next question is from Joshua Riley with Edom. Yeah, thanks for taking my question.
The only people that win in the old model is the payroll company and.
Chad Richison: Has anything changed in terms of customer retention in the last couple quarters and how much of an impact, if any, is that having on the Q4 and the initial 2024 guidance? Sure. And so, you know, neither what I would call is our surprise in the third quarter nor are larger than normal, you know, adjustment for fourth quarter guide are related to any change in our expectation for retention achievements. Set a different way. There have been no changes to our retention expectations since we gave Q3 guidance on October 1st.
Whoever is getting the actual accolades for fixing all the years I mean, the employee and the business loses and so.
We're continuing to work with our clients are now on that.
Our next question is from Citi. Upon the Gras E with Mizuho. Your line is now open.
Thanks for taking my question, Chad what I understood is that the beta analysis like cannibalizing your services revenue.
Have you talked about the incremental revenue.
You could get from baby are even raising pricing I understand you didn't get it for free have you thought about any changes strategically.
Chad Richison: Our next question is from Steve and there's a city. Great. Thanks for the next thing in the question here. Maybe this sort of, I guess, follow on to the last question. I mean, it seems like gross retention hasn't changed, but, you know, it's more of a view of the never tension dynamics. I guess, I guess, first of all, that's the right way to be thinking about it, even for next year's, we think about the low-chains guide.
To offset some of this.
Services coming from why you're on.
Unscheduled payroll.
Yes, I mean, I will tell you right now I'm focused on.
The client value and the differentiation that the differential between.
What they are paying and what they are actually achieving and I've kind of been saying it for a while.
Chad Richison: And I guess, anyway, to like, quantify the change in never tension, that you're kind of talking about here. Sure. So we report gross retention once a year in February. As I've said before, we measure retention throughout the year, usually strongest in the fourth quarter. And so, you know, in February, we'll give our gross retention number. When you're looking at retention of revenue specific to a client that is using the Paycom system, if they're a new client, you know, that revenue retention remains strong and specific to that one client, because they were new, it's not something we had previously.
We've got the early adopters the late adopters.
Betty rollout to new clients was revolutionary I mean, our go to market.
Continuing to be unchanged.
Health indexes for that group and by that I mean the usage.
The employees are using manager on the go everything across the board, they're very strong.
Betty rollout to our current client base I mean, it was heavily nuanced and it's not betting small bet.
The way to do payroll people may need some time to see the value and I get it but I mean that is still the right way.
Chad Richison: If there were current clients, we transition them to Betty. That does impact their future billing with us. And so, absolutely, as they continue to get great value, it is, a lot of that value is reflected in reduced billing. I mean, I would say from a customer perspective, that's a smaller portion of the overall value that they receive for Betty. But, you know, I mean, look, the only people that went in the old model is the payroll company. And, you know, whoever's getting the actual accolades for fixing all the air. So, I mean, the employee and the business loses. And so, you know, we're continuing to work with our clients in there on that.
Our next question is from Brian <unk> with CV Cowen.
Unknown Executive: All right.
Okay.
Hi, guys. Thank you.
I'm just trying to unpack. This 2024 early growth to you and if I just think about how we understood your growth algo before I guess in round numbers that normal growth was around 20%, but we figured 15, 75% of the 20 points would have been new logo driven it sounds like there is demand there but.
There's a pretty sharp disconnect versus the 10 to 12. So just can you help us with us.
Sure I mean, new business sales as well as cross selling within our base has always been a mitigating factor to any type of transition shift.
We make.
Like this and again new business sales remained strong in fact, most of the calls we get in is about Betty.
Sitikantha Panigrahi: Next question is from city, Pani Grawi with Mizeha. Your line is now open. Thanks for taking my question.
We've got our first enterprise Rep and they are only tar.
Chad Richison: Chad, what I understood is that that Betty now seems like cannibalizing your services revenue, but have you talked about the incremental revenue that he could get from Betty or even raising pricing? I understand you even did it for free.
Targeting deals that have greater than 25000 employees current rapid pay comms and they've got plenty of leads and so.
It's a paradigm shift that.
That we've been making and but as far as the go to market and the new business logos that we're onboarding I mean, we're not we're not having issues with that and we're not looking to make changes in regards to them.
Chad Richison: Have you thought about any changes strategically, you know, to upset some of this services revenue coming from your on schedule pedal? Yeah. I mean, I will tell you right now I'm focused on, you know, the client value and the differential between, you know, what they're paying and what they're actually achieving. And, you know, I've kind of been saying it for a while. You know, we've got the earlier doctors, the later doctors.
Okay is the is the activity that youre seeing for clients better usage is it occurring any differently with any particular clients segment sizes I E larger clients using it more and that having a bigger impact.
I would say that's more specific to the setup of the client at what time, we actually went and set them up.
Chad Richison: I mean, Betty roll out to new clients was revolutionary. I mean, our go to market is continuing to be unchanged. You know, in the health indexes for that group. And by that, I mean, the usage, how many employees are using it manager on the go everything across the board. They're very strong.
And kind of how we work through that its also kind of dependent upon their own payroll and how theyre doing things as far as does it have a bigger impact on one versus the other.
Chad Richison: You know, Betty roll out to our current client base. I mean, it was heavily nuanced. And it's not Betty's fault, you know, Betty's the way to do payroll. You know, people may need some time to see the value and I get it, but I mean Betty's still the right way.
If deployed correctly potentially but the larger the impact would really be based on how much were you messing. It up I mean, you get to some point in large companies I mean.
They don't even have prior to do it correctly.
So and then if you're if you're dealing with a four employee company did their employees not care about perfect payroll I mean.
Brian Sergen: Our next question is from Brian Sergen with TV.
So from that standpoint, I mean, it's the way to do it and like I said, the only person that wins in the old models to payroll company, we've been charging people to fix mistakes for 80 years or industry mistakes that we've allowed them to make.
Chad Richison: Hi, guys. Thank you. I'm just trying to unpack this 2024 early growth to you. And if I just think about how we understood your growth algo before, I guess in round numbers, if normal growth was around 20% with we figured 1575% of the 20 points would have been new logo driven. It sounds like there's demand there, but this is a pretty sharp disconnect versus the 10 to 12.
And so yeah, we could look at well if we eliminate all of these mistakes.
We're not going to have as many direct deposit reversals and tax changes in <unk> and.
The new payroll runs we get it and we've been mitigating it with business sales along the way, but now our <unk> group as I've said in the last on the last call. We're dedicated to helping clients achieve value, that's where we're at today and the decisions, we're making today will drive long term share our long term value.
Chad Richison: So just can you help us with this? Sure, I mean, new business sales as well as cross selling within our base has always been a mitigating factor to any type of transition shift, you know, we make like this. And again, new business sales remains strong. In fact, most of the calls we get in is about Betty. You know, we've got our first enterprise rep, and they're only targeting deals that have greater than 25,000 employees. It's current rep at Paycom. And you know, they've got plenty of leads. And so it's a paradigm shift that, you know, that we've been making.
For our shareholders me being one of them.
So the decisions, we're making today will allow us to get to the next step, but we're not abandoning and or changing our strategy in regards to Betty if anything I would say we're leaning in more.
Our next question is from Jason <unk> with Keybanc.
Great Hey, guys.
Chad Richison: And, but as far as the go to market and the new business logos that we're onboarding, I mean, we're not, we're not having issues with that and we're not looking to make changes in regards to them. Okay, is the is the activity that you're seeing for clients that usage is it occurring any differently with any particular client segment sizes, IE larger clients using it more and that having that bigger impact. You know, I would say that's more specific to the setup of the client at what time we actually went and set them up.
Im just also trying to unpack these new numbers and when we look at the exit rate from Q4 kind of assumes a 14% growth rate.
Early look for next year is a deceleration from that so I guess I'm just trying to wonder this early.
Early look youre, giving us does that imply incremental bookings headwind.
Now booked.
Bookings from our go to market now.
Our next question is from Arvin Rahmani with Piper Your line is now open.
Chad Richison: And kind of how we walked through that. It's also kind of dependent upon their own payroll and how they're doing things. As far as does it have a bigger impact on one versus the other, if deployed correctly, potentially, but the larger the impact would really be based on how much were you messing it up. I mean, you get to some points in large companies and I mean, they don't even have a prayer to do it correctly.
Hi, Thanks for taking my question.
I guess it was.
Two questions.
Can you just expand on the.
Kind of the strategic initiatives you are taking that's that's kind of causing you.
Kind of.
I guess do what's right for our client, but see deceleration in your revenue growth can you just expand on what specific.
Chad Richison: I mean, they just don't. So and then if you're, you know, if you're dealing with a four employee company, did their employees not care about perfect payroll? I mean, you know, so from that standpoint, I mean, it's the way to do it.
Let's try to take initiatives have taken.
So I mean, we're making strategic decisions with our base to make sure they are achieving full value.
Chad Richison: And like I said, the only person that wins in the old models of the payroll company, I mean, we've been charging people to fix mistakes for 80 years are industry mistakes that we've allowed them to make. And so yeah, we could look at, well, if we eliminate all these mistakes, you know, we're not going to have as many direct deposit reversals and tax changes and W2Cs and new payroll runs. I mean, we get it and we've been mitigating it with business sales along the way. But now our CRR group, as I said in the last on the last call, we're dedicated to helping clients achieve value. That's where we're at today.
We don't really need to telegraph more than that.
I don't want to share what we're doing and I'm not going to hand to one end of the thread from which someone can poll I can tell you that all of these decisions are specific to what we're doing with our base and not our go to market our new clients.
Our next question is from Bob and Shah with Deutsche Bank.
Great. Thanks for taking my questions.
Just one clarification and one question just clarifying the 10th 11% guidance is it fair to say that those headwinds are you seeing next year is primarily are all due to changes in assumptions into your customer base or is that more a little bit on the new logo side as well.
Chad Richison: And the decisions we're making today will drive long-term share or long-term value for our shareholders, me being one of them, you know, so that the decisions we're making today will allow us to get to the next step. But we're not abandoning and we're changing our strategy in regards to Betty. If anything, I would say we're leaning in more.
Now, it's a paradigm shift and no I would not say, it's regard again back to my previous statement.
Not seeing anything within our go to market and by that I'm talking about outside sales new logo <unk> inside sales.
Jason Celino: Our next question is from Jason Salino with Keybank. Great. Hey guys, I'm just also trying to unpack, you know, these new numbers. And when we look at the exit rate from Q4, it kind of assumes a 14% growth rate. So the early look for next year is a disseleration from that. So I guess I'm just trying to wonder if, you know, this early look you're giving us. Does it imply incremental booking handling? No, bookings for our go-to-market? No.
New logo from that perspective.
We've made a paradigm shift I mean, we can't change the industry and not change the industry. So we've been going hard at it for two years.
That's not changing some of the largest companies in the world are going to be using Betty.
It can be challenging to make a paradigm shift, but it's not our first rodeo I mean back in 98 would have been eased lot easier to install windows 95 on our software.
<unk> hundred 86 desktop with a hard drive communicated with a modem like our competitors in 2003, it would have been easier to partner with best in breed. So we don't necessarily do what's easy we do what creates value for our clients and draw it drives the return on investment and when we stay disciplined doing the right things we accelerated.
Arvind Ramnani: Our next question is from Arvind Ramnani with Piper. Your line is now open. Thanks for taking my question.
Chad Richison: You know, I just was, I took questions, you know, one is, can you just expand on the, kind of the strategy, initiative, the thinking that's kind of causing you all to kind of, I guess, do what's right for a client, but see, like, illustration in your revenue growth, can you just expand on what's the strategic initiative that you're taking. So, I mean, we're making strategic decisions with our base to make sure they're achieving full value. You know, we don't really need to telegraph more than that.
Opportunities for ourselves the client and consequently drive shareholder value, which is very important to me personally.
Our next question is with Robert Simmons with da Davidson.
Okay.
Hey, Thanks for taking the question.
I guess, how much revenue are you generating today from from your international efforts.
And I guess, how quickly do you think that can ramp up is that included in the outlook for next year or is that would that be potential upside to those numbers.
Chad Richison: I don't want to share what we're doing, and I'm not going to hand, you know, one end of the thread, from which someone can pull. I can tell you that all these decisions are specific to what we are doing with our base and not a go-to-market or new client.
We're not I think what Craig was trying to give us more.
<unk>.
<unk>.
Initial outlook, if you will a nod to all of the initiatives that we have right now as we move forward I do believe that next year, we're already seeing it now will be continued to be pulled upmarket, but still focused on our core.
Arvind Shah: Our next question is from Arvind Shah with Deutsche Bank. Great. Thanks for taking my question. Okay, just one clarification, one question. Just clarifying the sense along with that guidance. Is this fair to say those headlines that you're seeing next year? It's primarily or all due to changes in assumptions to your customer base, or is that more a little bit on the new look at that as well.
A market that we focus on and but we will continue to be pulled up as we have been and yes, a big part of that continues to be the global HCM products and expansion into additional countries I mean zero employees for doing their own payroll in Canada until I think it was August.
Chad Richison: No, it's a paradigm shift, and no, I would not say it's regard, again, back to my previous statement. We're not seeing anything within our go-to-market. And by that, I'm talking about outside sales, new logo, and or inside sales, new logo from that perspective. You know, we've made a paradigm shift. I mean, we can't change the industry and not change the industry. So, you know, we've been going hard at it for two years, and I mean, that's not changing.
And.
Now employees in Mexico will be.
Our next question is from Matt Pfau with William Blair. Your line is now open.
Hey, great. Thanks, I wanted to ask one of the items, you mentioned, where some macro headwinds from inflation. Maybe you can just clarify how big of a factor that those are and then in the initial 2024 guide what you're anticipating from a macro or a demand perspective any change there.
Chad Richison: Some of the largest companies in the world are going to be using Betty. It can be challenging to make a paradigm shift, but, you know, it's not our first rodeo. I mean, back in 98, it would have been easier to install Windows 95 on a software, you know, 486 desktops with a hard drive communicated with a modem, like our competitors. In 2003, it would have been easier to partner with the best and breed. So, you know, we don't necessarily do what's easy. We do what creates value for our clients and drives the return on investment.
I mean from the math from the macro headwinds, where we're seeing it specifically is in related to pre employment.
Services that we have.
So that's really more in regards to that.
Yes, I would expect it to carry through into the fourth quarter and into next year as well.
Chad Richison: And when we stay disciplined doing the right things, we accelerate opportunities for ourselves, the client, and consequently, you know, drive shareholder value, which is very important to me personally.
Our next question is from Adam <unk> with Bank of America.
Hey, Thanks for taking the question I.
I guess kind of open ended but what's the silver lining in this channel.
Robert Simmons: Our next question is with Robert Simmons with the A. Davidson. Hey, thanks for taking the question. How much revenue are you generating today from premier international efforts? And how quickly do you think they can ramp up?
Shareholder perspective.
When rates go up pretty materially.
Potential cost savings there when you study.
Help with the move up market give them more value.
Just trying to think about it.
Passengers.
Initial cannibalization period like what should we look at it like as the positives on the other side.
Chad Richison: Is that included in the outlook for next year, or is that would that be potential upside to those numbers? Every, you know, we're not, I think what Craig was trying to give is more of. Initial Outlook, if you will, a nod to all the initiatives that we have right now as we move forward. I do believe that next year we're already seeing it now will be continued to be pulled up market, but still focused on our core market that we focus on.
Yes, no I think that's actually a good 0.1st of all I think you should see this as a transitory period and we've kind of been talking about our continued ability to move current clients over to Betty and help them achieve value.
Came out and said I hope all clients are on it 100% within the first because it produces that much value I thought it'd be quickly.
We have a third of our clients that we want to make sure are getting value out of pay com with what they are using and.
Chad Richison: But we'll continue to be pulled up as we have been. And yes, a big part of that continues to be the global HCM product and expansion into additional countries. I mean, zero employees were doing their own payroll in Canada until I think it was August. And, you know, now employees in Mexico will be.
Also want to be able to preserve the opportunity to.
We were able to sell them on the real value of that.
And the opportunity it has for them.
And our last question is from Alex Zukin with Wolfe Research.
Hey, guys. Thanks for taking the question I guess, maybe just.
Matthew Pfau: Our next question is from Matt Pfau with William Blair. Your line is now open. Hey, great. Thanks. Wanted to ask, one of the items you mentioned were some macro headwinds from inflation. Maybe you can just clarify how big of a factor that those are. And then in the initial 2024 guide, what you're anticipating from a macro or a demand perspective, any change there? Thanks. I mean, from the macro, you know, headwinds where we're seeing it specifically in related to pre-employment services that we have. So that's really more in regards to that. Yeah, and we have a carry through into the fourth quarter and into next year as well.
Verifying one.
Think about recurring revenue versus services revenue, what's the right way to think about services revenue specifically for Q4, our implementation revenue and then for next year is that just going to be something that trend down significantly from where.
We're scheduled to end this year I know, you've typically not provided that level of detail, but it sounds like this strategic shift is associated with maybe some elimination of that implementation or services evidence.
Yes.
There's going to be two pieces, there's the services revenue and then obviously the on schedule to do some of those corrections as well so.
As you've seen throughout our history.
See our sequential Q3 to Q4. So you can tell that a lot of those services revenue and an unscheduled even though some of them relate to bonus runs there's quite a few of those in Q4. So as we were looking at the Q4, that's really the impact that we saw into Q4.
Adam Bergere: Our next question is from Adam Berger with Bank of America. Hey, thanks for taking the question. I guess kind of open ended, but what's like the solar lining in this from like an investor shoulder perspective? Like when rates go up pretty materially, since there's the potential cost savings there when you use Betty is help with the move up market, give them more value. Just trying to think about, you know, past this initial kind of realization period like what should we look at it like as the positives on the other side. Thank you.
Some of Thats going to carry over into 2024 and Thats why we thought it was important for us to give that initial look.
And we've got 50% of our employee. Okay. Go ahead Thats fine, we've got 50% of the ones used embedding of.
The clients have deployed 30, 50% of their employees are now doing their own payroll. So.
Chad Richison: Yeah, no, I think that's actually a good point. First of all, I think you should see this as a transitory period. And we've kind of been talking about our continued ability to move current clients over to Betty and help them achieve value. I came out and said, I hope all clients are on it 100% within the first because it produces that much value. I thought I'd be quickly. You know, we have a third of our clients that we want to make sure are getting value at a paycom with what they're using. And we also want to be able to preserve the opportunity to, you know, be able to sell them on the real value of Betty and the opportunity it has for them.
That eventually goes to 100 and then eventually we continue to work with their client base and so all that's to say is our clients should be getting more and more efficient if we're actually if it actually works. That's the way the value would be showing up and then to US it'll show up and go to market. So.
Alright.
There are no more questions sorry, I'm going to go ahead.
Very good I want to thank everybody for joining the call today over the coming months will be hosting meetings at a few conferences and mid November will be participating in meetings at the PD Cohen and Needham virtual conferences on November 28 will be attending the UBS Global Tech conference in Arizona in December we'll be in.
Chad Richison: And our last question is from Alex Zuchen with Wolf Research. Hey guys, thanks for taking a question. I guess maybe just a clarify on one. If I think about recurring revenue versus services revenue, what's the right way to think about services revenue specifically for you for our implementation revenue. And then for next year, is that just going to be something that trends down significantly from where scheduled to end this year? And you've typically not provided that that level of detail, but it sounds like the strategic shift is associated with maybe some elimination of that implementation or service.
San Francisco at the Barclays Global TMT Conference, we look forward to catching up with many of you. Soon operator, you may disconnect and thank you.
Yes.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.
That concludes the conference call. Thank you for your participation you may now disconnect.
Chad Richison: Yeah, I mean, you know, there's gonna be two pieces. There's a services revenue and obviously the end schedule to do some of those corrections as well. So, you know, I mean, as you've, you know, seen throughout our history, you know, you, you kind of see a sequential Q3 to Q4. So you can tell that a lot of those services revenue and, and on schedule, even though some of them relate to bonus runs.
Chad Richison: There's quite a few of those in Q4. So as we were looking at the Q4, that's really the impact that we saw in the Q4 and that, you know, some of that's going to carry over into 2024. And that's why we thought it was important for us to give that initial look and we've got 50% of our employees. Okay, go ahead. That's fine. We've got 50% of the ones using Betty that have the clients have deployed to Betty, 50% of their employees are now doing their own payroll.
Chad Richison: So, you know, that eventually goes to a 100 and then eventually, you know, we continue to work with our client base. And so all that's to say is our clients should be getting more and more efficient if we're actually, if it actually works. That's the way the value would be showing up. And then to us, it'll show up and go to market.
Unknown Executive: So, all right. There are no more questions. Okay. Sorry. I'm going to go ahead and very good. Want to thank everybody for joining the call today over the coming months. We'll be hosting meetings at a few conferences. And mid November, we'll be participating in meetings at the PD Cohen and need them virtual conferences. On November 28 will be attending the UBS Global Tech Conference in Arizona. And December will be in San Francisco at the Barclays Global TNT conference. We look forward to catching up with many of you soon operator. You may disconnect. Thank you. That concludes the conference call. Thank you for your participation. We're now disconnect your lines. That concludes the conference call.
Unknown Executive: Thank you for your participation.
Unknown Executive: We're now disconnect.