Q3 2024 Paycor HCM Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to pay costs third quarter fiscal year 'twenty 'twenty four earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation, if anyone should require operator assistance.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to Paycor's third quarter fiscal year 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Rachel White, Vice President of Investor Relations.

Rachel White: During the conference. Please press Star Zero on your telephone keypad as a reminder, this conference is being recorded.

I'd now like to turn the call over to Rachel White, Vice President of Investor Relations. Please go ahead.

Rachel White: Good afternoon, and welcome to peak worth earnings call for the third quarter of fiscal year 'twenty 'twenty four which ended on March 31st on the call with me today are Rob Wolf, Our junior a Pea first Chief Executive Officer, and Adam Anti P course, Chief financial officer or financial results can be found in our press release issued today, which is available on the investor.

Rachel White: Good afternoon, and welcome to PayCor's earnings call for the third quarter of fiscal year 2024, which ended on March 31st. On the call with me today are Raul Villar, Jr., PayCor's Chief Executive Officer, and Adam Ante, PayCor's Chief Financial Officer. Our financial results can be found in our press release issued today, which is available in the Investor Relations section of our website. Today's call is being recorded, and a replay will be available on our website following the conclusion of the call.

Rachel White: <unk> section of our website.

Today's call is being recorded and a replay will be available on our website. Following the conclusion of the call statements made in this call include forward looking statements related to our financial results products customer demand operations and other matters.

Rachel White: Statements made in this call include forward-looking statements related to our financial results, products, customer demand, operations, and other matters. These statements are subject to risks, uncertainties, and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures are provided in our press release on our website. With that, I'll turn the call over to Raul.

Rachel White: Statements are subject to risks uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future.

Rachel White: Therefore, these statements should not be relied upon as representing our views as of any subsequent date.

Rachel White: We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures are provided in our press release on our website with that I'll turn the call over to roll.

Raul Villar: Thank you, Rachel, and thank you all for joining us to discuss PayCor's fiscal third quarter results. Our team delivered another strong quarter with revenue growth of 16% year-over-year. Excluding form filings, recurring revenue grew 20% year over year.

Roll: Thank you Rachel and thank you all for joining us to discuss paid course fiscal third quarter results. Our team delivered another strong quarter with revenue growth of 16% year over year.

Roll: Excluding form filings recurring revenue grew 20% year over year, driven by continued success upmarket.

Raul Villar: Driven by the continued success of Mark, adjusted operating margins expanded 130 basis points over the prior year, while we continue to invest in go-to-market and PEPM expansion to fuel future growth. HCM demand remains healthy. We continue to see increasing top of funnel demand with consistent win rates. Our flexible, open platform and robust talent solutions continue to resonate with larger SMB and enterprise customers who tend to purchase a more complete suite with higher average deal size. Our growth is fueled by two primary drivers.

Raul Villar: Adjusted operating margins expanded 130 basis points over the prior year, while we continue to invest in go to market and pet from expansion to fuel future growth.

Roll: ACM demand remains healthy we continue to see increasing top of funnel demand with consistent win rates.

Roll: Our flexible open platform and robust talent solutions continue to resonate with larger SMB and enterprise customers, who tend to purchase a more complete suite with higher average deal sizes.

Our growth is fueled by two primary drivers increasing the number of employees on our platform and expanding the amount we charge per employee per month or purple.

Raul Villar: Increasing the number of employees on our platform and expanding the amount we charge per employee per month, or PEPA. First, we are adding employees to our HCM suite through direct and indirect sales. We have grown our direct sales force nearly 70% over the last three years and are encouraged by the coverage expansion and capacity we have built in the 50 largest US markets. Given that nearly three-quarters of our field sellers are still ramping to full productivity, we are planning to moderate our sales headcount growth to the low to mid-teens in the near term as we continue to expand capacity.

Roll: First we are adding employees to our HCM suite through direct and indirect sales channels.

Raul Villar: We have grown our direct salesforce nearly 70% over the last three years and are encouraged by the coverage expansion and capacity, we have built and the 50 largest U S markets.

Roll: Given that nearly three quarters of our field sellers are still ramping to full productivity. We're planning the moderate ourselves head count growth to the low to mid teens in the near term as we continue to expand capacity.

Roll: On the indirect side, we continue to build momentum with our embedded HCM solution leveraging our industry, leading interoperability engine. We enabled partner so I'm better HCM solution within their platform for a seamless client experience. We continue to ramp this channel Onboarding, our third embedded partner and signing three new.

Raul Villar: On the indirect side, we continue to build momentum with our embedded HCM solution. Leveraging our industry-leading interoperability engine, we enable partners to embed our HCM solution within their platform for a seamless client experience. We continue to ramp this channel, onboarding our third embedded partner and signing three new partners. To effectively scale for an increasing pipeline of prospective partners, we continue to develop this channel by expanding our team capacity, establishing partner frameworks, and developing sales enablement tools to drive mutual success. However, while we're encouraged by the momentum, these deals have long cycle times, and the new partners we find are smaller in scope.

Raul Villar: Partners to effectively scale for an increasing pipeline of prospective partners. We continue to develop this channel by expanding our team capacity, establishing partner frameworks and developing sales enablement tools to drive mutual success. While we are encouraged by the momentum these deals have long cycle times.

Raul Villar: And the new partners, we signed are smaller in scope.

Rachel White: Second we continue to enhance our award winning HCM suite with new capabilities that add value to our customers and expand our future pepam opportunity.

Raul Villar: Second, we continue to enhance our award-winning ATM suite with new capabilities that add value to our customers and expand our future PEPM opportunities. We have the most comprehensive HCM solution in the mid-market. In the third quarter, List Peplum reached $53, an increase of 20% year over year, and achieved our $3 to $5 annual target of List Peplum expansion.

Raul Villar: We have the most comprehensive HCM solution in the mid market.

Rachel White: In the third quarter lift peplum reached $53, an increase of 20% year over year and achieved our three to $5 annual target of lift peplum expansion.

Raul Villar: We recently announced two product innovations that empower leaders to drive business performance by enabling cross functional collaboration and addressing skill gaps.

Raul Villar: We recently announced two product innovations that empower leaders to drive business performance by enabling cross-functional collaboration and addressing skill gaps. CoreSpace equips leaders with tools to communicate, align goals, and motivate cross-functional teams that span multiple departments or fall outside of typical organizational structures such as project teams, employee resource groups, social event planning, or work-based groups like a night shift at a healthcare organization. PayCor Skills leverages artificial intelligence to recommend skills associated with positions and people, which helps leaders identify potential skill gaps in areas for skill development.

Raul Villar: Core space equips leaders with tools to communicate align goals and motivate cross functional teams that span multiple departments or fall outside of typical organizational structures such as project teams employee resource groups social event planning or work.

Raul Villar: This groups like a night shift at a health care organization.

Raul Villar: <unk> core skills Leverages artificial intelligence to recommend skills associated with physician and people, which help leaders identified potential skill gaps and areas for skill development.

Rachel White: Our innovative HCM suite continues to receive external accolades.

Raul Villar: Our innovative HCM suite continues to receive external accolades. Nucleus Research recently placed Paycor as a leader in its HCM enterprise value matrix for companies with fewer than 2,500 employees and an accelerator for organizations with more than 2,500 employees.

Raul Villar: Nucleus research recently placed pay core as a leader in its HCM enterprise value matrix for companies with fewer than 2500 employees.

Raul Villar: And then the accelerator for organizations with more than 2500 employees, we were recognized for outstanding user experience and robust functionality.

Raul Villar: We were recognized for outstanding user experience and robust functionality. In addition, our core HCM and talent management solutions won four HR Tech Awards by Lighthouse Research and Advisors. This is our highest placement to date, and we are proud to have won the most comprehensive talent solution and the best solution for midsize businesses with 200 to 2,000 employees. Lastly, I'd like to highlight two recent cultural accomplishments, one associated with our customers, and another focused on our associates.

Raul Villar: In addition, our core HCM and talent management solutions, one for HR Tech Awards by Lighthouse Research and advisory.

Rachel White: This is our highest placement to date and we are proud to have won the most comprehensive talent solution and the best solution for midsized businesses with 200 to 2000 employees.

Raul Villar: Lastly, I'd like to highlight two recent cultural accomplishments one associated with our customers and another focus on our associates. We recently held our inaugural customer conference pay core connect plus aligned with our focus on creating an irresistible customer experience.

Raul Villar: We recently held our inaugural customer conference, Paycor Connect Plus, aligned with our focus on creating an irresistible customer experience. Customers from across the country were able to network and provide valuable feedback to drive our product and service roadmap. I am incredibly proud we also earned a Top Workplace USA 2024 award from Energage for the fourth consecutive year. Results are based solely on employee feedback, including 15 cultural drivers proven to predict high performance.

Raul Villar: Customers from across the country, we're able in network can provide valuable feedback to drive our product and service road back.

Raul Villar: I'm incredibly proud we also earned a top workplace USA 2024 award from <unk> for the fourth consecutive year.

Raul Villar: Results are based solely on employee feedback, including 15 cultural drivers proven to predict high performance.

Raul Villar: It reaffirms our dedication to fostering cultural best practices that not only enhance employee engagement but also deliver tangible business results. This year's results highlighted the company's practice of listening to and acting on feedback from associates, empowering leaders across the organization, and providing flexibility with a virtual first working environment. With that, I'll turn the call over to Adam to discuss our financial results and guidance. Thanks, Raul.

Raul Villar: It reaffirms our dedication to fostering cultural best practices that not only enhance employee engagement, but also deliver tangible business results.

Adam: This year's results highlighted the company's practice of listening and acting on feedback from our associates.

Adam: And powering leaders across the organization.

Adam: And providing flexibility with a virtual first working environment.

Raul Villar: With that I'll turn the call over to Adam to discuss our financial results and guidance. Thanks role I'll discuss our third quarter financial performance and share our outlook for the rest of the fiscal year.

Adam Brooks Ante: Thanks, Raul. I'll discuss our third quarter financial performance and then share our outlook for the rest of the fiscal year. This quarter, PayCor generated total revenues of $187 million, an increase of 16% year over year. Additionally, our monthly recurring revenue grew by 20%. Recurring revenue growth of 14% was weighed down by forms filing. Most year-end form filing revenues, such as W-2 and ACA forms, are collected during the third quarter, representing a mid-teens share of our recurring revenue and growing closer to employee growth.

Adam Brooks Ante: This quarter <unk> generated total revenues of $187 million, an increase of 16% year over year. Our monthly recurring revenue grew by 20% recurring revenue growth of 14% was weighed down by forms filing most yearend form filing revenue. So just W. Two NACA forms is collected during the third quarter, representing mid teens share.

Adam Brooks Ante: Of our recurring revenue and growing closer to employee growth.

Adam Brooks Ante: We saw some year-in-form filing pull forward last quarter, and volumes were slightly lower than anticipated, representing a three-point revenue growth headwind in the quarter. Also, as expected, ERTC claim processing slowed as the program winds down, and it represented another three-point revenue growth headwind in the quarter.

Adam Brooks Ante: We saw some year end foreign filing pull forward last quarter and volumes were slightly lower than anticipated representing a three point revenue growth headwind in the quarter also as expected ear Tc claim processing slowed as the program winds down and represented another three point revenue growth headwind in the quarter.

Adam Brooks Ante: Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month. Employees grew 9% over the prior year, primarily due to a new logo. In line with expectations, same-store sales growth continued slowing, contributing less than half a point of revenue growth in the quarter.

Adam Brooks Ante: Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month.

Adam Brooks Ante: Employees grew 9% over the prior year, primarily from new logos in line with expectations same store sales growth continued slowing contributing less than half a point of revenue growth in the quarter at quarter close we had over $2 6 million employees across approximately 30600 customers.

Adam Brooks Ante: At quarter close, we had over 2.6 million employees across approximately 30,600 customers. As we continue to enhance our product capabilities and customer success processes, we are seeing outsized growth among our enterprise customers. This quarter, customers with more than 1,000 employees grew at nearly twice the pace of overall employee growth, demonstrating the success of our product and service investment. Our embedded HCM solution continued gaining traction and contributed two points of employee growth again this quarter.

Adam Brooks Ante: As we continue to enhance our product capabilities and customer success motion, we're seeing outsize growth among our enterprise customers this quarter customers with more than 1000 employees grew at nearly twice the pace of overall employee growth demonstrating the success of our product and service investments.

Adam Brooks Ante: Our embedded HCM solution continued gaining traction and contributed two points of employee growth again this quarter. While we are encouraged by the early momentum. These larger embedded deals will begin to contribute more meaningfully to our revenue growth in fiscal 'twenty, five and be accretive to margins as the partnerships ramp overtime.

Adam Brooks Ante: While we're encouraged by the early momentum, these larger embedded deals would begin to contribute more meaningfully to our revenue growth in fiscal 25 and be a creative driver of margins as the partnerships ramp over time. Effective PEPM increased 4% year over year to nearly $22 this quarter.

Adam Brooks Ante: Effective pepper increased 4% year over year to nearly $22. This quarter, excluding embedded HCM deals effective pepam increased 6% driven by expansion of our product suite effective prep them growth has been driven by cross sales pricing initiatives and higher bundle adoption.

Adam Brooks Ante: Excluding embedded HCM deals, effective PEPM increased 6% driven by the expansion of our product suite. Effective PEPM growth has been driven by cross sales, pricing initiatives, and higher bundle adoption. We expect more moderate peplum growth contributions as we onboard larger enterprise customers and embedded HCM partners with volume discounts, which will be offset by their higher average deal sizes and stronger margins. However, revenue from our talent bundles continues to be a bright spot, increasing nearly 40% year over year.

Adam Brooks Ante: We expect more moderate peplum growth contributions as we onboard larger enterprise customers and embedded HCM partners with volume discounts, which will be offset by their higher average deal sizes and stronger margins.

Adam Brooks Ante: From our town bundles continue to be a bright spot increasing nearly 40% year over year.

Adam Brooks Ante: In addition to delivering steady topline growth, we've consistently expanded operating margins on an annual basis adjusted gross profit margin, excluding depreciation and amortization was 80% in line with our long term targets. It decreased by 30 basis points over the prior year due to the slower growth from foreign filing revenues. However, we are still anticipating expansion on.

Adam Brooks Ante: In addition to delivering steady top-line growth, we've consistently expanded operating margins on an annual basis. Adjusted gross profit margin, excluding depreciation and amortization, was 80%, in line with our long-term targets. However, it decreased by 30 basis points over the prior year due to slower growth from form filing revenues.

Adam Brooks Ante: However, we are still anticipating expansion on an annual basis. Sales and marketing expense was $50 million, or 26.7% of revenue, down 200 basis points from a year ago, largely due to lower marketing spend with the PAC-12 as we wind down our partnership. Higher lead generation investments, leveraging interest income last year, and driving productivity as we scale and moderate sales headcount growth this year. Comparable to prior years, we invested 13% of revenue or $25 million in R&D on a gross basis to enhance our HCM platform and expand our PEPM opportunity.

Adam Brooks Ante: On an annual basis.

Adam Brooks Ante: Sales and marketing expense was $50 million or 26, 7% of revenue down 200 basis points from a year ago, largely due to lower marketing spend with the Pac 12, as we wind down our partnership higher lead generation investments leveraging interest income last year and driving productivity as we scale and moderate sales head count growth this year.

Adam Brooks Ante: Comparable to prior years, we invested 13% of revenue or $25 million in R&D on a gross basis to enhance our HCM platform expand our pepam opportunity.

Adam Brooks Ante: We are gaining economies of scale in G&A as we grow. G&A expense was $20 million, or 10.8% of revenue, an improvement of more than 100 basis points from last year. Adjusted operating income increased more than 20% to $48 million, with margins of 25.5%, up 130 basis points from last year, while we continue to invest in service, sales expansion, and product innovation. We generated $28 million of free cash flow at a 15% margin, and we ended the quarter with $90 million of cash and no debt. The HCM demand environment remains steady.

Adam Brooks Ante: We are gaining economies of scale in G&A as we grow G&A expense was $20 million or 10, 8% of revenue an improvement of more than 100 basis points from last year.

Adam Brooks Ante: Adjusted operating income increased more than 20% to $48 million with margins of 25, 5% up 130 basis points from last year, while we continue to invest in service sales expansion and product innovation.

Adam Brooks Ante: We generated $28 million of free cash flow at a 15% margin and we ended the quarter with $90 million of cash and no debt.

Adam Brooks Ante: However, we are updating some of our macroeconomic assumptions for Q4 guidance. Based on recent employment trends, we are updating our guidance to account for potential negative same-store sales growth among existing customers, and it assumes no ERTC revenue. In addition, while we are pleased with the embedded HCM progress, these deals have long cycle times and will have an immaterial impact on the fourth quarter.

Adam Brooks Ante: The HCM demand environment remained steady however, we are updating some of our macroeconomic assumptions for Q4 guidance.

Adam Brooks Ante: Just on recent employment trends, we are updating our guidance to account for potential negative same store sales growth among existing customers and it assumes no ear TCE revenue.

Adam Brooks Ante: In addition, while we were pleased with the embedded axiom progress. These deals have long cycle times and will have an immaterial impact in the fourth quarter.

Adam Brooks Ante: But the fourth quarter, we expect total revenues of between 160 and $162 million or 16% growth at the high end of the range and adjusted operating income of between 21 and $22 million for the full year, we expect revenues of $650 million to $652 million or 18% growth at the top end of the range.

Adam Brooks Ante: For the fourth quarter, we expect total revenues of between $160 and $162 million, or 16% growth at the high end of the range, and adjusted operating income of between $21 and $22 million. For the full year, we expect revenues of $650 to $652 million, or 18% growth at the top end of the range. And we anticipate adjusted operating income of $108 to $109 million. This quarter, we generated $15 million of interest income on average client funds of approximately $1.3 billion at an effective rate of nearly 480 basis points. Based on current rates, we expect interest income to be approximately $51 million for the full year.

Adam Brooks Ante: And we anticipate adjusted operating income of $108 million to $109 million. This quarter, we generated $15 million of interest income on average client funds of approximately $1 3 billion at an effective rate of nearly 480 basis points based on current rates, we expect interest income to be approximately $51 million for the full year.

Operator: Even with the tougher macroeconomic backdrop than when we started the year, we continue to execute against our strategic growth drivers and gain market share. The HCM demand environment remains healthy, with higher top of the funnel demand than last year. Most U.S. employees are still being paid by legacy systems, and we're delivering a compelling ROI for clients to switch to a modern cloud alternative. We are pleased with the progress we've made, expanding sales capacity in our product suite.

Adam Brooks Ante: Even with a tougher macroeconomic backdrop than when we started the year, we continued to execute against our strategic growth drivers and gain market share. The ECM demand environment remains healthy with higher top of funnel demand in the last year. Most U S employees are still being paid by legacy systems, and we're delivering a compelling ROI for clients to switch to a modern cloud alternatives. We're pleased.

Operator: With the progress we've made expanding sales capacity and our product suite, we have the most robust suite in the SMB market and we continue to have outsized success as we expand up market. We are demonstrating margin expansion as we scale and believe there is significant opportunity to drive further leverage we believe theres plenty of runway to deliver sustainable revenue growth and improved profitability over the long term.

Operator: We have the most robust suite in the S&P market, and we continue to have outsized success as we expand upmarket. We are demonstrating margin expansion as we scale and believe there is a significant opportunity to drive further leverage. We believe there is plenty of runway to deliver sustainable revenue growth and improve profitability over the long term. With that, we'll open the call to questions. Operator.

Operator: With that we'll open the call for questions.

Operator: Later.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on the telephone keypad.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for questions. The first question comes from the line of Gabriela Borges with Goldman Sachs. Please go ahead.

Kevin Kumar: Hi, this is Kevin Kumar on behalf of Gabriela. Thanks for taking the question. I wanted to ask about embedded HCM.

Kevin Kumar: A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your questions from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Kevin Kumar: The first question comes from the line of Gabriella Borges with Goldman Sachs. Please go ahead.

Kevin Kumar: Hi, This is Kevin Kumar on for Gabrielle and thanks for taking the question.

Adam Brooks Ante: Adam, based on your commentary, are you seeing some of these deals get pushed out? You know, how is that impacting kind of the guide there? It's a little bit more color on kind of the pipeline there and kind of how you're thinking about the timing of these deals.

Adam Brooks Ante: Wanted to ask about embedding HCM, Adam I think based on your commentary are you seeing some of these deals get pushed out you know how is that.

Adam Brooks Ante: Impact from kind of the guide there, it's a little bit more color on kind of the pipeline, there and kind of how youre thinking about timing of these deals.

Adam: Yeah, Hey, Kevin.

Adam Brooks Ante: Now, I don't think that Embedded is really impacting the Guide as much. We didn't expect a ton of it this year, in FY24. We'll be considering more as we get into FY25 and beyond in the long-term growth rate, for sure. The deals, it's not necessarily that they're pushing out, it's just that these are large deals. Usually, the deals that you're hunting at the top end of the space just take a long time to come together. We have signed a handful of deals this quarter. We're really excited about that. They are on a little bit of the smaller side, but that's to be expected as we continue to ramp up the program.

Adam: No I don't think that embedded is really impacting the guide as much we didn't expect a ton and in this year in FY 'twenty four.

Adam Brooks Ante: Well, you know well, we will be considering more as we get into FY 'twenty, five and beyond and the long term growth rate for sure you know the deals it's not necessarily that they're pushing out. It's just that these are large deals usually the deals that we've been you know that your hunting at the top end of the space. They just take a long time to come together and so we have signed a handful of deals. This.

Adam Brooks Ante: We're really excited about that they are on a little bit of a smaller side, but that's to be expected as we continue to ramp the program.

Adam Brooks Ante: Got it got it that's helpful and then maybe just if.

Raul Villar: Out of the Temple and then maybe just you can give an update on Paycor's move up market. I know that that's been kind of in progress. So, you know, how is the pipeline converting relative to your expectations? You know, where are you having success? And can you speak to maybe the talent solution, which is, you know, helping you kind of land some of those larger customers? Yeah, Kevin, it's Raul.

Raul Villar: If you could give an update on and pay close to move up market I know that's been kind of in progress. So how is the pipeline converting relative to your expectations, where you're having success and can you speak to maybe the talent solution, which is helping you kind of land some of those larger customers. Thanks.

Raul Villar: Yes, Kevin its role.

Raul Villar: Yeah, Kevin, it's Raul. You know, we continue to have success moving up the market. We continue to win deals at the upper end of our target segment, which is, you know, 10 to 2500. So we're seeing really strong success there. And I think it's continuing to flow through the organization. And part of that success is, you know, a combination of three components. One is, you know, as we mentioned on the call, we have the most robust platform with the most functionality available in the category.

Raul Villar: We continue to have success move.

Raul Villar: Moving up market.

Raul Villar: We continue to win deals at the upper end of our target segment, which as you know 10 to 2500.

Raul Villar: So we're seeing really strong success, there and I think it's continuing to flow through the organization.

Raul Villar: And part of that success is you know a combination of of of three components. One is you know as we mentioned on the call. We have the most robust platform with the most.

Raul Villar: Talent, by and large, you know, pulls us up market because the larger the company is, the more dynamic their sourcing, recruiting, and, more importantly, talent management, and talent retention needs are, and our talent platform, you know, meets those needs. And then lastly, you know, being the most open platform, the ability to integrate our platform with the other systems of record that they want to integrate with is really proven to be a differentiator.

Raul Villar: Feature functionality available in the category talent by and large you know pulls us upmarket against the larger the company is the more dynamic there sourcing recruiting and then more importantly talent management, our talent retention needs are.

Raul Villar: And our talent platform meets those needs and then lastly, you know being the most open platform the ability to integrate our platform with the other systems of record that they want to integrate with is really proven to be a differentiator.

Speaker Change: Thank you.

Unknown Attendee: Thank you.

Raul Villar: Next question comes from the line of Bobbin Shah with Deutsche Bank. Please go ahead.

Speaker Change: Great. Thanks for taking my question Raul I noticed one in your presentation you guys switched the language regarding sales coverage expansion kind of now targeting low to mid teens says how can growth versus 20%. Prior can you just maybe elaborate on the rationale for you guys Rethinking just the amount of head count growth going forward and how do you didn't sense.

Raul Villar: Great, thanks for taking my question. Raul, I noticed in your presentation that you guys switched up the language regarding sales coverage expansion, kind of now targeting low to mid-team sales headcount growth versus 20% prior. Can you maybe elaborate on the rationale for you guys rethinking just the amount of headcount growth going forward? And how do you then think about the levers to kind of achieve your goals of 20% sustainable growth?

Raul Villar: About the leverage there kind of a cheese achieve your goals of 20% sustainable growth.

Raul Villar: Yeah.

Raul Villar: Yeah, it's a good question. We we want to grow by 20% headcount growth. And we had some elevated churn that we've talked about previously. Throughout the year, we had a structural job issue within the organization that created this elevated churn. And so we didn't want to force hire in the fourth quarter to get to the 20% target; we felt like it was just too much to consume in the quarter. And so, you know, we've fixed the structural issue, and we feel really good about, you know, our progress going forward.

Raul Villar: Good question.

Raul Villar: We want to grow 20% head count growth and we had some elevated churn that we've talked about previously and throughout the year. We had we had a structural job issue within the organization.

Raul Villar: That created this elevated churn and so we didn't want to force higher in the fourth quarter to get to the 20% target. We felt like it was just too much to consume in the quarter.

Raul Villar: And so you know we've fixed a structural issue we feel really good about you know our go forward progress in <unk>.

Raul Villar: And, you know, as you know, we continue to onboard the people that we have in the organization, we'll begin to reaccelerate hiring. You know, we don't see any reason why we can't hire 15 to 20%. In the future, we just wanted to make sure that we weren't over hiring, or hiring too quickly, and hiring poorly. And so we essentially just ran out of room in the quarter or in the year to get to 20%. It has nothing to do with demand in the market. It's all about internal...

Raul Villar: As you know we continue to onboard the people that we have in the organization, we will begin to reaccelerate hiring.

Raul Villar: You know, we don't see any reason why we can't hire 15% to 20% in the future. We just wanted to make sure that we weren't over hiring or hiring too quickly and hiring poorly.

Raul Villar: So we essentially just ran out of room in the quarter or in the year to get to the 20% are at it.

Raul Villar: It has nothing to do with demand in the market.

Raul Villar: All about internal execution.

Unknown Attendee: I appreciate the clarification. So it sounds like it's more of a fiscal year comment more so than a go-forward comment, if I'm understanding that correctly.

Speaker Change: I appreciate the clarification. So it sounds like it's more of a fiscal year comment more so than a go forward comment if I'm understanding that correctly.

Speaker Change: And then.

Adam Brooks Ante: Well, I was just going to provide a little commentary there. I think, you know, it is the current state of current sales hiring. And I think, you know, over time, we can increase productivity and maybe not hire at the top end of our previous range and maybe hire, you know, you know, towards the high to mid-teens and still get the same growth levels as before, as the organization ramps up and gets full productivity.

Speaker Change: Well I was just going to provide a little commentary there I think you know it is you know occurring.

Adam Brooks Ante: State of the of the of the current sales hiring and I think you know over time, we think we can increase productivity and maybe not higher at the top end of our previous range, maybe higher you know you know towards the high Tech high to mid teens and still get the same growth levels as before as the organization.

Adam Brooks Ante: Ramps up and gets the full productivity.

Speaker Change: I appreciate that and I'm just cooking for you I appreciate the help on the.

Adam Brooks Ante: Adam, just quickly for you, I appreciate the help on the headlines from ERTC in the quarter. How do we think about that headline in 4Q and then going forward into next fiscal year? And then just kind of the assumptions on float revenue in 4Q would be helpful. Yeah, so

Adam Brooks Ante: The headwinds from you can see in the quarter, how do we think about that that that headwind for you and then going forward into next fiscal year, and then just kind of your assumptions on float revenue for Q would be helpful.

Adam: Yeah. So I'll start with the last one on flow revenue were expecting rates to remain the same clearly through Q4, and you'll see a little bit lower volume. So the rate will be close to the same with on a little bit lower volume as you head into Q4. The you know as we look out into the guide for Q4, we started to see.

Adam Brooks Ante: Yeah, so I'll start with the last one. On float revenue, we're expecting rates to remain the same clearly through Q4. And you'll see a little bit lower volume. So the rate will be close to the same with a little bit lower volume as you head into Q4. The, you know, as we look out into the guide for Q4, we started to see, well, with ERTC first, we've seen effectively little to none in Q3.

Adam Brooks Ante: Well with ear to see first we've seen effectively little to none in Q3, and so we were expecting on a full year closer to like a point of growth headwind and it's looking closer to like a point and a half almost two points of growth headwind on a full year, so really expecting that D. C has gone here in Q4, we were much lower.

Adam Brooks Ante: And so we were expecting, on the full year, closer to like a point of growth headwind. And it's looking closer to like a point and a half, almost two points of growth headwind on the full year. So really expecting that ERTC is gone here in Q4, we were much lower than what we had anticipated for the back half of the year, even though we're not expecting, you know, new filings going forward, just the revenues, it sort of slowed down a little bit faster than we had anticipated. Thank you. The next question comes from the line of Terry Tillman with Truist Securities. Please go ahead.

Terrell Frederick Tillman: Other than what we had anticipated on the back half of the year, even though we're not expecting new filings going forward just the revenues, it's sort of a slow down a little bit faster than we had anticipated.

Terrell Frederick Tillman: Thank you.

Adam Brooks Ante: Next question comes from the line of Terry Tillman with two Securities. Please go ahead.

Adam Brooks Ante: Hi, This is Dominic on Shah on for Terry. Thanks for taking the question. So I just wanted to go back to the embedded channel just one for me after activating those first few partners and now this new partner and to customers has incremental revenue new business visibility and look with them and then also other partners in terms of new relationships.

Dominic: Hi, this is Dominic.

Dominic: Yeah, Hey, yeah. The revenue visibility is really around when there's two dynamics it could be around a portfolio that they might be bringing over you know most of the small firms that we'd run into don't have portfolios are or at least not material portfolios to bring over so you're not going to see a lot of revenue opportunity in the very near term in terms of like a portfolio conversion.

Unknown Executive: Yeah, hey, Dominic. Yeah, the revenue visibility is really around, I mean, there's two dynamics. It could be around a portfolio that they might be bringing over. You know, most of the small firms that we've run into don't have portfolios, or at least not material portfolios to bring over. So you're not going to see a lot of revenue opportunities in the very near term, in terms of like a portfolio conversion. And so you're really looking at net new business.

Unknown Executive: And so you're really looking at net new business and of course, we're diligently those companies in terms of the.

Unknown Executive: Size of their portfolio or the size of their customer base currently what's the opportunity to cross sell back into that base, how much new business do they look at so thats. The visibility that we have is really as we go through diligence. We review the go to market motion with them.

Unknown Executive: And of course, we're evaluating those companies in terms of the size of their portfolio or the size of their customer base. You know, currently, what's the opportunity to cross sell back into that base? How much new business do they look at? So that's the visibility that, you know, we have is really, as we go through due diligence, we review the go-to-market motion with them. And then, based on our experience of going to market, what is the ability for them to sell into their space and add payroll, payroll, and HCM solutions.

Unknown Executive: And then based on our experience of our go to market is whats the ability for them to sell into their space and add payroll and payroll and HCM solutions I think like there there is not perfect visibility just like there's not perfect visibility into our own pipeline I mean, the the pipeline still turns pretty quickly. So youre looking at you know 30 to 60 to 90 days really.

Unknown Executive: I think there's not perfect visibility, just like there's not perfect visibility into our own pipeline. I mean, the pipeline still turns pretty quickly. So you're looking at, you know, 30, 60 to 90 days really on the long end. And as we ramp up partners, that's the sort of diligence and rigor that we try to have with them, establishing what that pipeline looks like and how quickly you can, you know, turn it. Great, thank you.

Unknown Executive: On the long end and as we ramp up partners, that's the sort of diligence and rigor that we tried to have with them is establishing what that pipeline looks like and how quickly you can turn it.

Speaker Change: Great. Thank you.

Unknown Executive: Thank you next question comes from the line of Brad Reback with Stifel. Please go ahead.

Brad Robert Reback: Thank you. The next question comes from the line of Brad Reback with Stiefel. Please go ahead. Great, thanks very much. Raul, can you walk us through some of the changes you've made on the Salesforce churn side?

Brad Robert Reback: Great. Thanks, very much well can you walk us through some of the changes you've made on the sales force churn side and what's been the early success there.

Brad Robert Reback: Yeah. So we.

Raul Villar: Yeah, so, um, we had previously created a segment of the sales organization that was 50 employees to 250. And it just had a lot of elevated churn. And so, you know, we reverted back to the way we used to structure the organization.

Brad Robert Reback: We had previously created out a segment of the sales organization.

Raul Villar: That was 50 employees to 250 and it just had a lot of elevated churn and so you know we reverted back to the way we used to structure. The organization. So it was a territory structure component you know well.

Raul Villar: So it was a territory structure component, you know, where we did the change on April 1. So, you know, we have one month of visibility, and we've seen, you know, one month of significantly better retention. Now, one month isn't a trend, Brad, but ultimately, you know, that's, you know, from our perspective, that was the driving force behind our attrition. And, you know, to put it in more, like, visible terms, like, if you think about, we have a mid-market sales organization, and when you segment the job to 50 to 250, it probably didn't give them enough opportunity to sell enough dollars that a normal mid-market seller would want to sell to earn what they wanted to earn.

Raul Villar: We did the change April 1st.

Raul Villar: So yeah, we have one month of visibility and we've seen you know one month of Cigna, probably better retention.

Raul Villar: Now one month isn't a trend Brad but ultimately you know that's you know from our perspective that was the driving force behind our attrition yeah to put it in and more like visible terms like if you think about we have a mid market sales organization.

Raul Villar: And so self-inflicted, you know, as an organization gets much larger, that segmentation is fairly normal. And it's at its highest point, you know, in the last five years. So we are keeping people. We were just churning new people at too fast of a rate in this 50 to 250 job. That's a lot of detail.

Raul Villar: And when you segment the job the 50 to $2 50, it probably didn't give them enough opportunity to sell enough dollars that a normal mid market sellers want to sell to earn what they wanted to and and so self inflicted.

Raul Villar: As an organization gets much larger that segmentation is fairly normal within ACM.

Raul Villar: We're just not at that scale today, where it was necessary. So yeah, we rolled it back and we think that the worst is behind us from a.

Raul Villar: Churn perspective, and by the way, while we've been working through this what we have done has elevated our our more tenured sellers and so our average months worked continues to increase and it's at its highest point you know in the last five years. So so we are keeping our people.

Raul Villar: We were just churning you know new people at too fast of a right in this 50 to 250 job.

Speaker Change: That's a lot of detail great no that makes a lot of sense and then Adam on the forms filing business what changed over the course of the quarter versus your expectations. If you could just give us some specificity on that that'd be great.

Raul Villar: Yes, when the program ended or when they sort of rolled it back a little bit earlier, we were still expecting some form filings with that at that point and it really stopped so new form filing stopped now we don't that's not when we recognize revenue so that theoretically shouldn't hurt us in the very immediate but but then the actual processing of the form.

Unknown Executive: Yeah, when the program ended, or when they sort of rolled it back a little bit earlier, we were still expecting, you know, some form filings at that point, and it really stopped. So new form filings stopped.

Unknown Executive: Outstanding I mean, we still have a handful outstanding that could generate revenue and we just have not seen the processing come through either and that's when we recognize the revenue as is after the customer pays and so it is that part of the processing and customer payment has just been a little bit slower than we anticipated in the back half of the year.

Unknown Executive: Now we don't. That's not when we recognize revenue. So that theoretically shouldn't hurt us in the immediate. But then the actual processing of the forms outstanding, I mean, we still have a handful outstanding that could generate revenue, and we just have not seen the processing come through either. And that's when we recognize revenue is after the customer pays. And so that part of the processing and customer payment has just been a little bit slower.

Unknown Executive: Okay.

Unknown Executive: Thank you next question comes from the line of Brian Peterson with Raymond James. Please go ahead.

Brian Christopher Peterson: Thank you. The next question comes from the line of Brian Peterson with Raymond James. Please go ahead.

Raul Villar: Hi guys, thanks for taking the question. So I just want to follow up on the sales dynamics. As you're thinking about making the changes back to more of a territory model, does that maybe make it easier or broaden the number of candidates that you could potentially bring in for sales hiring? And has there been any update, I'd say, over the last month or so, on what you've been able to do? I know we're like a couple months from the end of the fiscal year here, but how do we think about that hiring trend for the end of fiscal year 25?

Brian Christopher Peterson: Hi, guys. Thanks for taking my question. So I just wanted to follow up on the sales dynamics.

Raul Villar: I was just thinking about making the changes to the back to more of a territory model does that maybe make it easier or broaden the number of candidates that you can essentially bring in for sales hiring and has there been any update I'd say over the last month or so on what you've been able to do I know what were like a couple of months at the end of the fiscal year here, but how do we think about that hiring friends.

Raul Villar: Kind of into fiscal year 'twenty.

Unknown Attendee: Yeah, I mean, it hasn't been a supply issue. So, I think what it does is it provides the sellers that we hire an opportunity to meet the Success Criteria and the Earnings Criteria that they're looking for. So, you know, we believe we're putting our sellers in a better position to be successful. And success obviously drives retention in any sales organization.

Speaker Change: Yeah, I mean, it had been better a supply issue.

Unknown Attendee: Hum.

Unknown Attendee: I think what it does is it provides.

Unknown Attendee: All the sellers that we hire an opportunity to meet the.

Unknown Attendee: Success criteria in your earnings.

Unknown Attendee: Looking for so you know, we we believe we're putting our sellers in a better position to be successful.

Unknown Attendee: Success, obviously drives retention.

Unknown Attendee: Any sales organization.

Unknown Attendee: Yeah.

Speaker Change: Got it that makes sense and Adam just a clarification I think you were talking about the embedded channel I think you said that there wouldn't be any growth from that in the fourth quarter are you talking about an incremental step up or should we still expect kind of that two points of employment on the platform to continue into the fourth quarter. Thanks guys.

Unknown Attendee: Got it. That makes sense. And Adam, just a clarification.

Adam Brooks Ante: Yeah, no, I was saying more that the new embedded partners are not going to add anything incrementally to revenue in the quarter. And so, yeah, the lead time to revenue just is too long for that.

Adam: Yeah, No I was saying more from the new new embedded partners are not going to add anything incrementally to revenue in the quarter and so yeah. The they're the lead time to revenue.

Adam Brooks Ante: I know you were talking about the embedded channel, but I think you said that there wouldn't be any growth from that in the fourth quarter. Are you talking about an incremental step up, or should we still expect kind of the two points of employment on the platform to continue into the fourth quarter? Thanks, guys.

Speaker Change: It's too long for that.

Speaker Change: Thanks, Brian.

Adam Brooks Ante: Thank you next question comes from the line of Scott Berg with Needham <unk> Co. Please go ahead.

Scott Randolph Berg: Thank you. The next question comes from the line of Scott Berg with Neeram and co. Please go ahead.

Scott Randolph Berg: Yeah.

Scott Randolph Berg: Hi everyone. Long time no see. Thanks for taking my questions here. I guess I've got a couple.

Scott Randolph Berg: Hi, everyone, a long time no see thanks for taking my questions here.

Scott Randolph Berg: I guess I've got a couple and I'm wanted to start with.

Scott Randolph Berg: The guidance for the fourth quarter I know you had.

Scott Randolph Berg: I've mentioned, a couple of different kind of headwinds to.

Scott Randolph Berg: Two the revenue assumptions at least for the quarter, but if you were to like kind of stack rank those what's having the greatest impact do you think.

Scott Randolph Berg: Yeah, I mean, you have a combination of the lower E. R C and some of the impact on seller hiring to a lesser extent, but I mean really a more of it is on the macro and the potential impact of the macro I mean, we've seen.

Adam Brooks Ante: Adam wanted to start with the guidance for the fourth quarter. I know you all have mentioned a couple different kinds of headwinds to, you know, the revenue and assumptions at least for the quarter. But if you were to like kind of stack rank those, what's having the greatest impact, do you think?

Adam Brooks Ante: You know just like others have seen and you see in the broader market. The same store sales has seen a steady downward trend for a while now and more as of late we've seen some more early signs of a potential negative growth and so that's what we were trying to care for here this quarter.

Speaker Change: Got it helpful. And then Raul as you think about fiscal 'twenty five I know you're not guiding to fiscal 'twenty time on this call at all but given what you're seeing in some of those changes that's impacting the fourth quarter does that impact how you think about how to invest into next year and that's independent upon how you're kind of making some of these.

Adam Brooks Ante: Yeah, I mean, you have a combination of the lower ERC and some of the impact on seller hiring to a lesser extent. But I mean, really, more of it is on the macro and the potential impact of the macro. I mean, we've seen, you know, just like others have seen, and you see in the broader market, same store sales have seen a steady downward trend for a while now. And more as of late, we've seen some more early signs of potential negative growth. And so that's what we were trying to care for here this quarter.

Raul Villar: got it helpful. And then, Raul, as you think about fiscal 25, I know you're not guiding to fiscal 25 on this call at all. But given what you're seeing in some of those changes that are impacting the fourth quarter, does that impact how you think about how to invest in the next year? And that's independent of how you're kind of making some of these subtle changes or fixes to the sales organization. But this adds a new component or dynamic to how you think about, I guess, investing in business in your tier one territory. No, um...

Raul Villar: It'll changes or fixes to the sales organization, but this is out of new components are dynamic to how you think about I guess investing in the business and your tier one territories next year.

Raul Villar: No, I think it doesn't. You know, we want... to be able to improve our seller retention. We believe that we've done enough with the onboarding, training, enablement, and now territory structure to do that. And we're growing a lot of territory. So, I mean, it's complicated to begin with.

Raul Villar: No.

Raul Villar: I think it doesn't you.

Raul Villar: We want them.

Raul Villar: To be able to.

Raul Villar: To improve our salary attention, we believe that we've done enough on the Onboarding training enablement and now territory structure to do that and you know and we're growing a lot of territory. So I mean, it's it's you know complex to begin with however, you know we.

Raul Villar: However, we remain committed to continuing to expand in our tier one markets, and we'll continue to invest in expanding our direct sales organization. Obviously, we've also invested in our indirect sales organization through this embedded channel. And so we believe in the market and the opportunity. We're winning shares. And so, you know, outside of our own self-inflicted issues that created some elevated attrition, we feel really great about our value proposition, our position in the marketplace, and our win rate.

Raul Villar: We remain committed to continuing to expand our and our tier one markets.

Raul Villar: And you know, we'll continue to invest in expanding our direct sales organization. Obviously, we've also invested in our indirect sales organization.

Raul Villar: Embedded channel and so we believe in the market the opportunity we're winning share.

Raul Villar: And and so you know outside of our own self inflicted issues that created some elevated attrition we.

Raul Villar: We feel really great about our value prop and our position in the marketplace our win rates.

Raul Villar: Our broker channel, like all the components to win are there, and we're winning share. And as we stabilize and prove out our changes are working, we'll put, you know, more gas in the car. So to speak. Thank you. Next question comes from the line of...

Raul Villar: Our broker channel like all the components to winter, there and we're winning share and we and as we stabilize and prove out our changes are working yeah. We'll put you know more gas in the car.

Raul Villar: So to speak.

Raul Villar: Thank you next question comes from the line of Jared Levine with D. D. Cohen. Please go ahead.

Operator: Thank you. The next question comes from the line of Jared Levine with TD Coven. Please go ahead. Yeah, thank you. In terms of client employment levels, just want to clarify for 3Q here, were they sequential?

Jared Marshall Levine: Yeah. Thank you in terms of client appointment levels, just wanted to clarify for three Q here, where they sequentially down relative to two clear with that in terms of the <unk> guide does that assume a sequential decline there.

Operator:

Jared Marshall Levine: Yeah, I think there was some seasonality in Q3, that led to some sequential growth, actually quarter over quarter, although again, the year over year, it continues to slow. And so we do see a little bit of sequential decline into Q4, more of a sequential decline into Q4. And, but again, on a year over year basis, that was more of my commentary where now that year over year growth is, you know, potentially flipping negative.

Jared Marshall Levine: Yeah, I think there was a well there is some seasonality in Q3 that leads to some sequential growth actually quarter over quarter, although again the year over year.

Jared Marshall Levine: Continues to slow and so we do see a little bit of sequential decline into Q4 more more of a sequential decline into Q4, and but again on a year over year basis was more of my commentary, where now that year over year growth is as you know potentially flipping a negative.

Speaker Change: Got it and then in terms of the E. R. A T C. Just given the lower expectations any updated thoughts in terms of what that would present in terms of a headwind for FY 'twenty five now.

Jared Marshall Levine: Unknown Speaker And then in terms of ERTC, just given the lower expectations, any updated thoughts in terms of what that would present in terms of a headwind for FY25 now? I mean, no, no, well, it's gonna be less of a headwind in 25 just because the revenue number will be lower here this year, but expectations would be that we have less than a point of revenue this year in ERTC now.

Jared Marshall Levine: I mean, no no well, it's gonna be less of a headwind in the 25, just because the revenue number will be lower here this year, but our expectations would be that we have less than a point of revenue this year and ear to see now.

Speaker Change: Thanks sure.

Adam Brooks Ante: Thank you. The next question comes from the line of Mark Marcon with Baird. Please go ahead.

Jared Marshall Levine: Thank you next question comes from the line of Mark Marcon with Baird. Please go ahead.

Mark Steven Marcon: Hey, Thanks for taking my questions.

Mark Steven Marcon: Hey, thanks for taking my questions. So if we were to strip out the ERTC and the form filings, you know, which you had talked about last quarter being pulled forward, if we just took a look at recurring, would that have been more in the 15-16% range for Q3 on a like-for-like basis relative to a year ago?

Mark Steven Marcon: So if somebody were to strip out the the.

Mark Steven Marcon: The ERP fee and the form filings, which you had talked about last quarter being pulled forward.

Mark Steven Marcon: If we just took a look at recurring would that would that have been more in the 15, 16% range for for Q3 on a like for like basis relative to a year ago.

Speaker Change: No actually we noted in the prepared remarks that it was actually 20% for the quarter, which is which is up from 18 points or 18% growth in Q2, so slightly faster this quarter. If you back out the year and form filings and the ear T. C. So that's where a little bit of the continued bullishness comes from and Ann.

Adam Brooks Ante: Now, actually, we noted in the prepared remarks that it was actually 20% for the quarter, which is up from 18 points, or 18% growth in Q2. So slightly faster this quarter, if you back out the year in form filings and the ERTC. So that's where a little bit of the, you know, continued bullishness comes from and positivity as we think about that growth and the underlying portfolio.

Adam Brooks Ante: Positivity as we think about that growth and the underlying portfolio.

Mark Steven Marcon: Okay, and but you're kind of guiding to recurring and other revenue. If we take a look at the midpoint of your guidance range for this coming quarter, and then we factor in the interest income, it sounds like you're looking more towards you know fourteen and a half to fifteen and a half or recurring and other revenue in the fourth quarter. Is that the math right?

Adam Brooks Ante: Okay.

Adam Brooks Ante: You're kind of guiding to recurring and other if we take a look at the midpoint of your guidance range for this coming quarter.

Mark Steven Marcon: And then we restructure and the interest income it sounds like you're looking more towards 14, and a half to 15 and a half are recurring and other in the fourth quarter is that the math right.

Mark Steven Marcon: Well I mean, just look like you mentioned Mark I mean, there's a couple of other headwinds as we're going into Q4 that we just noted that are slightly different include including zero ear T. C, which again has been part of the low couple of digits or points of contribution over the last couple of years, So youre seeing some points there.

Adam Brooks Ante: Well, I mean, just like I mentioned, Mark, there are a couple other headwinds as we're going into Q4 that are, you know, slightly different, including zero ERTC, which again has been part of the, you know, low couple digits or points of contribution over the last couple years. So you're seeing some points there, a little bit of the seller hiring that we talked about, and then again, the macro with some of that same source sales growth, which is now going to be, you know, potentially dragging as we look at that number in Q4.

Adam Brooks Ante: A little bit of the seller hiring that we talked about and then again the macro with some of that same store sales growth, which is now gonna be potentially dragging how should we look at that number in Q4.

Speaker Change: Thank you next.

Daniel William Jester: Thank you. The next question comes from the line of Daniel Jester with PMO Capital Markets. Please go ahead.

Adam Brooks Ante: Next question comes from the line of Daniel Jester.

Daniel William Jester: BMO capital markets. Please go ahead.

Daniel William Jester: Great. Thanks for taking my question.

Raul Villar: Great. Thanks for taking my question. So, Raul, you talked about your user conference, and I'm sure you had a lot of opportunities to connect with customers. You know, you presented a bunch of things about, you know, improving integration speed, new technology, customer success. I guess, can you just expand on one or two of the things that your customers are most excited about after leaving the conference?

Raul Villar: So Robert you talked about your user conference and I'm sure you had a lot of opportunities to connect with customers.

Raul Villar: You presented a bunch of things about you know improving integration speed new technology customer success, I guess could you just expand a one or two of the things that your customers are most excited before leaving the conference.

Daniel William Jester: Yeah, I think two things. One is clearly interoperability; the ability for them to continue to connect all the data from the HCM system of record to other tools is critical. Obviously, in HCM, you know, people care about, you know, having a success team that helps them leverage and optimize the utilization of the bundles. And I think that's probably the biggest takeaway I got is that, you know, over the last, you know, five years, the HCM bundles have continued to expand. The number of products people purchase continues to increase.

Raul Villar: Yeah I.

Raul Villar: I think two things one is <unk>.

Daniel William Jester: Clearly interoperability in the ability for them to continue to connect.

Daniel William Jester: All the data from the HCM system of record Cutler Choses is critical obviously and HCM you know people care about you know, having a success team to help them leverage and optimize the utilization of the bundles and I think that's probably the biggest takeaway I got.

Daniel William Jester: As you know over the last you know five years, the HCM bundles continue to expand the number of products people purchase continues to increase.

Daniel William Jester: And most people are initially focused on getting their workforce management and their payroll and HR system live and then how do you bring about analytics critical reporting integration talent management benefits, how do you bring those life. After the initial event how do.

Raul Villar: And most people are initially focused on getting their workforce management and their payroll and HR system live. But then how do you bring about analytics, critical reporting, integrations, talent management, and benefits? How do you bring those live after the initial event?

Raul Villar: How do you continue to change the workflow with the customer? So more change management. I would say that's the biggest takeaway that we got, you know, from the conference. And obviously, we're focused on, you know, providing them tools to be more successful in that area. And we'll continue to work with, you know, our clients to help them with that change management as they continue to buy more products from us.

Raul Villar: We continue to change workflow with the customer so more change management I would say that's the biggest takeaway that we got you know from the conference and obviously, we're focused on providing them the tools to be more successful in that area and we'll continue.

Raul Villar: To work with our clients to help them with that change management as they continue to buy more products from us.

Speaker Change: Great. Thanks, and then maybe just another one on the sales force and maybe more from a productivity angle.

Unknown Attendee: Great, thanks. And then maybe just another one on the Salesforce platform, maybe more from a productivity angle. I mean, if you exclude the portion of the Salesforce platform that you talked about with regard to churn today, and you just focus on the rest of the platform, maybe any sense about productivity levels and your confidence that you can continue to sustain improved productivity in the next year? Thank you. Yeah, um...

Unknown Attendee: If you exclude the portion of the sales force because you talked about with regard to the churn today is focused on the rest of the sales force, maybe any sense about productivity levels and your confidence that you can continue to sustain improved productivity and next year. Thank you.

Raul Villar: Yeah, so even the entire field sales organization, despite our elevated churn, we are increasing our tenure, and we have increased our productivity. And so we actually feel really good that it works. It's about graduating people into the next year, and so our overall productivity continues to increase as we grow the sales organization. And despite the trend that we have, which is why we're bullish, because we have a winning value proposition in the market that resonates, and we just had some internal execution issues that caused a slight delay.

Unknown Attendee: Yeah.

Unknown Attendee: So even the entire field sales organization.

Raul Villar: Fight our elevated churn.

Raul Villar: We are increasing our tenure.

Raul Villar: And we have increased our productivity up.

Raul Villar: And so we actually feel really good that it works its about graduating people into the.

Raul Villar: The next year and so so our overall productivity continues to increase as we're growing the sales organization.

Raul Villar: And despite the trend that we have so which is why we are bullish because we have a winning value prop in the market that resonate and we just had some internal execution issues.

Raul Villar: You know caused.

Raul Villar: Delay.

Speaker Change: Thank you.

Raul Villar: Next question comes from the line of Steve Enders with Citi. Please go ahead.

Steven Lester Enders: The next question comes from the line of Steve Enders with City. Please go ahead.

Steven Lester Enders: Okay, great. Thanks for taking the questions here I guess, maybe to start you know understand the the factors going into the guide for <unk>, but I guess as we're thinking about the models moving forward how should we be thinking about those factors, maybe impacting the quarters quarters after that.

Unknown Attendee: Okay, great. Thanks for taking the questions here. I guess maybe to start, you know, understand the factors going into the guide for 4Q. But I guess as we're thinking about the models moving forward, how should we be thinking about those factors maybe impacting the quarters after that?

Unknown Attendee: Yeah.

Steven Lester Enders: Boy I mean, we clearly haven't given any guidance for 25, a I mean, we continue to be bullish on the embedded channel and we have a couple of partners.

Adam Brooks Ante: Well, I mean, we clearly haven't given any guidance for 25. But, I mean, we continue to be bullish on the embedded channel.

Adam Brooks Ante: Or that are not even boarded yet right just booked haven't added anything yet and we're going to be in the process of implementing those and standing up those partnerships over the next couple of months and those will begin to be additive next year and then we have a partner who is going through the migration right now and are there they're coming on online here this quarter.

Adam Brooks Ante: And next quarter and that you know the whole process. When you bring over a portfolio takes six to nine months, usually and maybe a little bit longer with some of the at the tails of the portfolio. So I think we have you know we're expecting an ongoing ramp probably for a while and we will love to share I think more at analyst day, as we sort of onboard these client.

Adam Brooks Ante: And we have a couple of partners that are not even boarded yet, right, just booked, haven't added anything yet. And we're going to be in the process of, you know, implementing those and standing up those partnerships over the next couple months. And those will begin to be additive next year. And then we have, you know, a partner who's going through the migration right now. And they're coming on online here this quarter and next quarter.

Adam Brooks Ante: And new partnerships and really we can start to unpack them, a little bit more detail as we step into 'twenty five and beyond.

Adam Brooks Ante: Okay.

Adam Brooks Ante: And that, you know, the whole process when you bring over a portfolio takes six to nine months, usually, and maybe a little bit longer with some of the details of the portfolio. So I think we have, you know, we're expecting an ongoing ramp for a while. And we'll love to share, I think, more at Analyst Day as we sort of onboard these clients and new partnerships, and really, we can start to unpack them in a little bit more detail as we step into 25 and beyond.

Speaker Change: That's helpful. There.

Adam Brooks Ante: And I think you called out you know seen continued healthy top of funnel activity or maybe he said it was better than then it was a year ago if any.

Unknown Attendee: Okay, that's, that's helpful there. I think you called out, you know, seeing, you know, continued healthy top of funnel activity, or maybe you said it was better than it was a year ago. If any, any segments or geographies or anything to call out there for maybe what's helping support the better levels there.

Unknown Attendee: Any segments or geographies or anything to call out there for maybe what's you know what is helping support the better levels there.

Unknown Attendee: Yeah, I mean, well I mean, we've been focused.

Unknown Executive: Yeah, I mean, we've been focused, and we've had really strong execution, generating MQLs and first deployment. So our top of the funnel growth has been excellent. And that's growth on a per seller basis. So not just overall growth, but growth, you know, as we continue to grow and grow the sales organization. So our marketing team has done a great job of generating top of funnel demand. And so that gives us a lot of confidence that as we continue to fix, you know, our tenure and increase our tenure, that will, you know, drive FTAs through the pipeline into a close one.

Unknown Executive: We've had really strong execution generating M <unk> and first appointment so our top of the funnel.

Unknown Executive: Growth has been excellent and thats growth on a per seller basis. So not just overall growth, but growing you know as we continue to grill grow the sales organization. So our marketing team has done a great job of of generating top of funnel demand.

Unknown Executive: And so that gives us a lot of confidence that as we continue to fix.

Unknown Executive: Our tenure.

Unknown Executive: And increase our tenure that will drive.

Unknown Executive: F T A's through the pipeline into.

Unknown Executive: And to close one.

Speaker Change: Thank you next.

Matthew David VanVliet: Thank you. The next question comes from the line of Matt VanVliet with BTIG. Please go ahead.

Speaker Change: Next question comes from the line of Matt Van Vliet with BTG. Please go ahead.

Raul Villar: Yeah, good afternoon. Thanks for taking the question. I'm curious how much you feel like you were able to add to the pipeline and sort of to the overall opportunities coming out of the user conference. Obviously, not a like-for-like comparison year over year, but that's to your benefit, I assume. So, curious about what the key takeaways are in terms of business development.

Matthew David VanVliet: Hey, good afternoon. Thanks for taking my question I'm curious on how much you feel like you were able to add to the pipeline and sort of to the overall opportunities coming out of the user conference. Obviously, it's not it's not a like for like comparison year over year, but that's true benefit I assume so curious on what are the key takeaways are in terms of business development.

Raul Villar: Yeah, I mean on the user conference obviously.

Matthew David VanVliet: Yeah, I mean, the user conference is obviously a huge opportunity. For our client team, we have an amazing client sales team. And for them to have the ability to spend time, you know, with our clients there, it does generate, you know, more opportunities to cross sell and folks, you know, some of our great solutions like talent and workforce management and benefits and analytics. And so, you know, we're excited about it.

Matthew David VanVliet: Huge opportunity.

Matthew David VanVliet: For our client team, we have an amazing client sales team.

Matthew David VanVliet: And for them they have the ability to spend time with our clients. There. It does generate you know more opportunities to cross sell and folks you know some of our great solutions like talent and workforce management and benefits and analytics and so.

Matthew David VanVliet: You know we're excited about it.

Matthew David VanVliet: And, you know, but it was a relatively small conference. And so, we'll continue to grow that conference, we've got great feedback on it, we'll hopefully double that conference next year and continue to increase the number of clients that we're able to touch and impact. But it's a great lead generator, obviously, for our client sales.

Matthew David VanVliet: And yeah, but it was a relatively small conference and.

Matthew David VanVliet: And so you know we will continue to grow that conference. We got great feedback on it well hopefully double that conference next year and continue to increase the number of clients that we're able to touch and impact, but it's integrate lead generator, obviously for our client sales team.

Raul Villar: And then you called out enterprises being particularly strong. Curious what the trends were at the lower end of the market. We've heard other companies continuing to struggle recently on the S&B side. So on the smallest area, how much of a headwind is that now and sort of baked into the fourth quarter?

Matthew David VanVliet: And then you called out enterprise as being particularly strong curious what the trends were at the lower end of the market. We've heard of other companies continuing to struggle recently on the SMB side. So on the smallest area how much of a headwind is that now and sort of baked into the fourth quarter.

Speaker Change: Yes, I mean, we definitely see in the micro segment I mean is declining marginally now that still only represents like you know mid single digits in terms of our total revenue, but it grows at a much smaller piece and then the in terms of the number of customers, it's actually marginally declining and that's been the case for a while so that's not necessarily a new trend, but its definitely persist.

Raul Villar: Yeah, I mean, we definitely see in the micro segment that it's declining marginally. Now, that still only represents like, you know, mid single digits in terms of our total revenue, but it grows at a much smaller pace. And then, in terms of the number of customers, it's actually, you know, marginally declining. And that's been the case for a while. So that's not necessarily a new trend, but it's definitely persistent.

Raul Villar: And we've seen some some lower growth really up into the 50, so that sort of 10 to 50, which we would call like the lower part of the small market that that segment is growing much smaller or much slower than our mid market and that's from either a a turnover perspective, but also you know like like on.

Raul Villar: And we've seen some lower growth really up into the 50s. So the sort of 10 to 50, which we would call the lower part of the small market, that segment is growing much smaller, much slower than our mid market. And that's from either a turnover perspective, but also, you know, like on a net new business basis, we see a lot more growth in that mid market. So the same store sales growth in that segment's a little bit slower. And we see losses at a little bit higher rate, of course, in that micro segment.

Raul Villar: Our net new business of course, we see a lot more growth in that mid market. So so the same store sales growth in that segment is a little bit slower and we see the losses at a little bit higher rate of course in that micro segment.

Speaker Change: Thank you.

Raul Villar: Next question comes from the line of Mark Murphy with JP Morgan. Please go ahead.

Speaker Change: Hey, this is already who on for Mark Murphy. Thanks for taking the question I'm wondering I want to double click on I think you hinted around it but some of the kind of incremental headwinds you are seeing the same sort of thing.

Unknown Attendee: Thank you.

Speaker Change: Excuse me same store sales can you talk about how that looks across the different kind of enterprise and mid and small into the marketplace.

Speaker Change: Yeah, Hey, so the same store sales.

Arti Vula: Hey, this is Arti Vula on for Mark Murphy. Thanks for taking the question. One area I want to double-click on, I think you hinted at it, but some of this kind of incremental headwinds you're seeing in same source sales. Can you talk about how that looks across the different kinds of enterprise, mid, and small end of the market, please?

Speaker Change: It's fairly consistent it is not as much by size I mean, we see a little bit more pressure on the smaller end of the market for sure, but it is a little bit more distinct by industry. So we see a little bit more like on the food and beverage has slowed down considerably we see manufacturing sort of flipping a little bit professional services has been a little bit stronger.

Arti Vula: Actually, but but those are more of the dynamics that we see you know things like Arts and entertainment since the same store sales has slowed a little bit and sort of the flip.

Speaker Change: And just a little bit more.

Arti Vula: That's very helpful. Thank you and then and then on you know if you're kind of thinking about the talent solution is that something that could be potentially affected by some of these very reasons or is the fact that there's you know reskilling and upskilling kind of make it a priority for the air customers anyway. Thank you.

Adam Brooks Ante: Yeah, hey, so the same sort of sales, you know, growth, it's fairly consistent, it's not as much by size. I mean, we see a little bit more pressure on the smaller end of the market, for sure. But it's a little bit more distinct by industry, so we see a little bit more like food and beverage has slowed down considerably. We see manufacturing sort of flipping a little bit. Professional services has actually been a little bit stronger, actually. But those are more the dynamics that we see, you know, things like arts and entertainment. The same sort of sales slowed a little bit and started to flip and drag just a little bit more.

Speaker Change: Yeah, Hey, you're already I missed the first part of what you said, maybe if you're if you were saying if that's an optional products is that what you're saying.

Arti Vula: That's very helpful. Thank you. And then, and then on, you know, if you're kind of thinking about the talent solutions, is that something that could be kind of potentially affected by some of these variations? Or is the fact that there's, you know, rescaling and upscaling kind of making it a priority for the customers anyway?

Adam Brooks Ante: No I was wondering if you know the change in kind of the hiring patterns is affecting the interest and the talent pool is complete or whether that's kind of being offset by the fact that theres reskilling upskilling and other other factors of that but or customers are purchasing for.

Arti Vula: Yeah.

Arti Vula: The labor market doesn't have a huge impact on talent in the sense that.

Arti Vula: Even in a tight labor market companies have normal organic churn of their employee base and so they're always looking to recruit employees. So that that tends to be fairly stable on the front end recruiting modules and then I think in a tighter labor market.

Arti Vula: People do focus more on hey, how do I retain the great employees that I have now and so some of the talent retention.

Arti Vula: Modules that we have are are really popular and helpful. There.

Arti Vula: Yeah.

Speaker Change: Thank you.

Unknown Attendee: Thank you.

Unknown Attendee: Hey Arti, I missed the first part of what you said, maybe if you're saying if that's an optional product, is that what you're saying?

Arti Vula: Next question comes from the line of Austin <unk> with citizens JMP. Please go ahead.

Speaker Change: Great. Thanks for taking my question Raul I'd Love to get your take on how you view the AI opportunity at this stage are you hearing more or less interest about AI from your customers over recent months or about the same.

Arti Vula: I was wondering if the change in hiring patterns is affecting the interest in the talent solution suite, or whether that's being offset by the fact that there's reskilling and upskilling and other factors that customers are purchasing it for. Yeah, um...

Raul Villar: Yeah, it doesn't, you know, the labor market doesn't have a huge impact on talent in the sense that even in a tight labor market, companies have normal, organic churn in their employee base. And so they're always looking to recruit employees. So that tends to be fairly stable on the front-end recruiting modules. And then, I think, in a tighter labor market, people do focus more on, hey, how do I retain the great employees that I have now? And so some of the talent retention modules that we have are really popular and helpful there. Thank you. The next question comes from the line of Austin Cole with CitizenJob.

Speaker Change: I think.

Arti Vula: I think theres a lot of excitement on this call about AI.

Austin Cole: I think there's a lot of excitement on my leadership team about AI the opportunities.

Austin Cole: No two continuing to enhance the insights that we provide our customers the opportunity.

Austin Cole: To you know develop products faster be more efficient with marketing continue to provide better service with AI tools. All those things are really things that we're diving into and in each area of the business has unique projects going on at.

Austin Cole: Thank you. The next question comes from the line of Austin Cole with Citizen JMP. Please go ahead. Great, thanks for taking my question. Raul, I'd love to get your

Austin Cole: At a customer level in the mid market.

Austin Cole: Their users are they they're experiencing it but they're not really asking about it but I don't take the benefits of it.

Raul Villar: I think, I think there's a lot of excitement on this call about AI. I think there's a lot of excitement, you know, on my leadership team about AI, the opportunities, you know, to continue to enhance the insights that we provide our customers, the opportunity to, you know, develop products faster, you know, be more efficient with marketing, and continue to provide, you know, better service with AI. Tools, all those things are really things that we're diving into.

Raul Villar: But you know most of them are consumers they read the articles they get worried about the pros and cons of AI. So we have you know clearly explained in the product how we use AI et cetera, but I would say in this segment. We serve you know people are.

Raul Villar: And each area of the business has, you know, unique projects going on at a customer level in the mid market. Their users, or they're experiencing it, but they're not really asking about it, right? They'll take the benefits of it.

Raul Villar: And you know like you know, saying, Hey can you walk us through what you have in AI and the product you know it they're seeing the benefits in the product versus asking for it specifically.

Speaker Change: Okay. That's helpful. And then maybe just as a quick follow up are you are you do you think that in the enterprise space that might start to change a little bit or no.

Unknown Attendee: But, you know, most of them are consumers; they read the articles, they get worried about the pros and cons of AI. So we have to, you know, clearly explain in the product, how we use AI, etc. But I would say, you know, in the segment we serve, people are, you know, like, you know, saying, Hey, can you walk us through what you have an AI in the product? You know, they're seeing the benefits in the product versus asking for a specific.

Unknown Attendee: I think I said Ah well.

Raul Villar: And then maybe just as a quick follow-up, do you think that in the enterprise space that might start to change a little bit or not? I think at the place where we're operating in the enterprise space, it might change a little bit. But it's not going to be that prevalent. You know, I think, as you get up into, you know, 10,000 plus employees, and, you know, it becomes maybe more of an opportunity for them to think about how they can streamline their products and platform, but ultimately, we're not, we're not seeing it at all.

Unknown Attendee: Well we're operating.

Raul Villar: Operating in the enterprise space.

Raul Villar: It might come up a little bit, but it it's not going to be that prevalent.

Speaker Change: Thank you.

Raul Villar: As you get up into 10000, plus employees and be able it becomes maybe more of an opportunity for them to think about how they can streamline their their products and platform, but ultimately we're not we're not seeing it at all.

Speaker Change: Thank you.

Unknown Attendee: Thank you. The next question comes from the line of Siti Panigrahi with Mizuho Group. Please go ahead. Thank you. Raul, are you...

Sitikantha Panigrahi: The next question comes from the line of Siti Panigrahi with Mizuho Group. Please go ahead. Thank you. Raul, as you see...

Speaker Change: Next question comes from the line of City Panic Raheem with Mizuho Group. Please go ahead.

Sitikantha Panigrahi: Thank you Oh as you see some of the payroll companies Ah Ah Ah Rachel I'll send that growth guidance raise some kind of concerned about growth of this they are you know cloud payroll industry and there was some concern about saturation how would you response.

Sitikantha Panigrahi: To that end and what gives you that confidence you can actually revenue from here.

Sitikantha Panigrahi: Yeah.

Raul Villar: Yeah, I think it's more of a point in time than, you know, a trend. And when I look at the overall category, the three modern cloud providers in our space, we have about 15 to 20% of the eligible market. And the lion's share of the market is still with suboptimal regional service bureaus, ERP systems, or legacy providers like ADP and Paycheck. So we view that as a ripe opportunity to continue to grow and continue to focus on disrupting the category.

Sitikantha Panigrahi: I think it's more of a point in time then.

Raul Villar: A trend.

Raul Villar: And when I look at the overall category you know the three modern cloud providers in our space, we have about 15% to 20%.

Raul Villar: Of the eligible market and that's the lion's share of the market is still on sub optimal regional service bureaus.

Raul Villar: ERP systems or legacy providers.

Raul Villar: ADP and paychex, so we view that as a ripe opportunity to continue to grow and continue to focus on disrupting the category.

Speaker Change: Thank you.

Speaker Change: Youre welcome.

Raul Villar: Okay.

Raul Villar: Thank you ladies and gentlemen, we have reached the end of question and answer session I would now like to turn the floor over to al Wheeler for closing comments.

Raul Villar: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Raul Villar for closing comments.

Raul Villar: Thank you again for joining US Tonight, we are encouraged by the underlying fundamentals of the business and remain focused on executing our strategy. We look forward to connecting with you at several upcoming events, including the J P. Morgan Technology conference in Boston.

Raul Villar: Thank you again for joining us tonight. We are encouraged by the underlying fundamentals of the business and remain focused on executing our strategy. We look forward to connecting with you at several upcoming events, including the J.P. Morgan Technology Conference in Boston, the Baird Technology Conference in New York City, and the William Blair Growth Talk Conference in Chicago. Have a great night, everyone.

Raul Villar: The Bear Technology Conference in New York City.

Raul Villar: And the William Blair growth stock conference in Chicago.

Raul Villar: Late night everyone.

Raul Villar: Yeah.

Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Thank you.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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