Q1 2025 Paycor HCM Inc Earnings Call
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Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to pay cost for first quarter fiscal year 2025 earnings call.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker Change: And now I would like to turn the call over to Rachel White, Vice President of Investor Relations. Thank you Rachel you may begin.
Rachel White: Good afternoon, and welcome to <unk> earnings call for the first quarter of fiscal year 2025, which ended on September 30th on the call with me today are removal or junior papers, Chief Executive Officer, and Adam Anti P course, Chief financial officer or financial results can be found in our press release issued today, which is available on the Investor Relations section of our website.
Rachel White: Today's call is being recorded and a replay will be available on our website. Following the conclusion of the call.
Rachel White: Have you been made on this call include forward looking statements related to our financial result products customer demand operations and other matters. These statements are subject to risks uncertainties and assumptions are based on management's current expectations as of today and may not be updated any future. Therefore, these statements should not be relied upon as representing our views of any.
Rachel White: Subsequently, we also will refer to certain non-GAAP financial measures and key business metrics provide additional information to investors.
Rachel White: Nations of non-GAAP measures and cheapest next 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 real.
Speaker Change: Thank you Rachel and thank you all for joining us to discuss <unk> fiscal first quarter results.
Speaker Change: The future of HCM is connected and.
Speaker Change: Our unique value proposition of empowering leaders to drive business results by connecting them to people data and expertise continues to win in the market and help drive 17% revenue growth this quarter.
Rachel White: We continued to pragmatically invest in sales and product expansion to fuel future growth, while demonstrating the scalability of our business model with significant adjusted operating income margin and free cash flow expansion.
Rachel White: Our team executed against our strategic growth initiatives.
Rachel White: Increasing the average number of employees on our platform by 5%.
Rachel White: And expanding the amount we earn per employee per month or pep them by 11%.
Rachel White: <unk> and 16% recurring revenue growth.
Rachel White: The demand environment remains healthy as most employers are struggling with outdated and inadequate HCM tools.
Rachel White: The indicators of demand such as leads and prospects traffic to pay core dotcom increase.
Rachel White: Increased year over year.
Rachel White: And our win rates remain strong.
Rachel White: We continue to feel good about our go to market trajectory and the.
Rachel White: The average tenure of our field sellers continue to increase which drives productivity.
Rachel White: As we shift upmarket clients tend to purchase a more complete solution.
Rachel White: And average deal size and attach rate.
Rachel White: We need to expand nicely in the mid market.
Rachel White: But it's it brokers remain a key component of our go to market strategy to help us identify employers that are dissatisfied with their legacy ACM tools.
Rachel White: And they influenced over 60%.
Rachel White: Our field bookings this quarter.
Rachel White: Complementing our direct channel.
Rachel White: Our embedded HCM solution continued to gain momentum with both new and existing partners.
Rachel White: We signed several new embedded partners since our last earnings call.
Rachel White: Giving a milestone of double digit partnerships.
Rachel White: Our modern embedded HCM solution.
Rachel White: Enables our strategic partners to not only increase our revenue per client.
Rachel White: But also enhance customer retention.
Rachel White: The up market velocity within the embedded channel continued as average employees per company, our triple our current average.
Rachel White: In response to customer demand, we expanded our embedded sales team and expanded the current payroll and HR offering to include workforce management.
Rachel White: Our team continued to augment our award winning HCM platform by introducing valuable new functionality for our customers that expands our pepam opportunity.
Rachel White: Our product roadmap continues to center around connecting people data and expertise.
Rachel White: Last call. We described our new compensation management solution that connects leaders with tools that streamline the process of rewarding their team.
Rachel White: Which added $2, two our sweet, bringing our list pepper them with $55.
Rachel White: Building on our industry, leading AI capabilities this quarter, our team launched pay core assistant connected.
Rachel White: Connecting employees to expertise.
Rachel White: The assistant is the next step in our AI evolution as we continue to drive efficiency and effectiveness. So customers can focus on higher value work.
Rachel White: This AI powered HR companion transforms the way employees and leaders interact with pay core through a simple conversational interface.
Rachel White: Our modern and intuitive solution is designed to boost productivity by enhancing the speed and effectiveness of responding to employees HR related questions.
Rachel White: Empowering our leaders to focus on empowering people and performance.
Rachel White: This solution joined several existing AI innovations, including intelligent skills management.
Rachel White: Digital assistant.
Rachel White: Candidate sourcing.
Rachel White: Job description generation.
Rachel White: And sentiment analysis and performance management and employee surveys.
Rachel White: We also recently introduced the pay core integration platform, enabling customers to seamlessly connect their preferred business solutions to our HCM suite.
Rachel White: This platform provides prebuilt connections to over 300 best in breed technology partners.
Rachel White: Along with robust developer tools and services to create custom connections, making it easier for customers to integrate their technology systems to enhance efficiency and accuracy.
Rachel White: With this platform, we're giving mid market companies the ability to connect systems at a level and scope historically reserved for larger enterprises.
Rachel White: The innovation, we have delivered in our HCM suite continues to earn industry accolades.
Rachel White: We're extremely proud that pay car was ranked among the top five vendors in SAPIEN insights groups, 27th annual HR systems voice of the customer rankings in several categories, including mid market user experience and vendor satisfaction for both payroll and HR M. S.
Rachel White: In addition, he of course talent acquisition suite was recognized and nucleus research's top leader quadrant.
Rachel White: Our top fiscal 2025 priorities remain to drive sales efficiency and accelerate cash conversion, while continuing to invest in our strategic growth initiatives, namely, adding employees through sales expansion and increasing pepper them through product.
Rachel White: <unk>.
Rachel White: Now I will turn the call over to Adam to discuss our financial results and guidance.
Adam: Thanks, Raul I'll discuss our fourth quarter performance, then share our outlook for the second quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis.
Adam: We had another impressive quarter delivering total revenues of $167 million, an increase of 17% year over year recurring revenue grew 16% over the prior year. 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.
Rachel White: This quarter average employees grew 5% over the prior year, largely driven by new business wins from our direct and embedded channels.
Rachel White: Market growth remained consistent and contributed modestly net.
Rachel White: Net revenue retention trended favorably on a sequential and year over year basis.
Rachel White: We finished the quarter with approximately 31000 customers utilizing our platform to help coach optimize and retain $2 6 million employees. We continue to see our average customer size increase year over year as we move up market demonstrating the success of our product and service investments.
Rachel White: Effective type of them increased 11% year over year to $19, excluding embedded HCM deals effective pet from increased 12% fueled by expansion of our product suite.
Rachel White: The growth in effective platform is attributable to cross sales pricing initiatives and higher bundled attach rates.
Rachel White: <unk> has consistently demonstrated strong cross sales traction and a long runway remains as the overall penetration of our base remains low.
Rachel White: We continue to add partners store marketplace and this partner referral channel contributed more than a point of growth this quarter as well.
Rachel White: For the fourth consecutive quarter, our ability to see them channel continued to ramp contributing two points of employee growth. We signed several deals since the last earnings call and now have more than 10 partners. The larger opportunities in our pipeline are progressing nicely and we are seeing more opportunities entered the funnel demonstrating strong market interest for a modern solution. While we are pleased with the <unk>.
Rachel White: Progress in anticipating doubling our embedded revenue in fiscal 'twenty five it's still very early and will take some time before this channel materially impacts our revenue we continued to invest in scale and capitalize on this opportunity by expanding our team our solution and sales enablement tools to drive mutual success.
Rachel White: This quarter, we generated $13 million of interest income on average client funds of approximately $1 1 billion, an effective rate of 490 basis points.
Rachel White: While our primary objective remains durable revenue growth, we continue to expand our focus on operating margins and free cash flow.
Rachel White: Adjusted gross profit margin, excluding depreciation and amortization was 79, 2% an.
Rachel White: An increase of approximately 90 basis points over the prior year.
Rachel White: Sales and marketing expense was $52 million for the quarter or 31% of revenue down over 200 basis points from a year ago, primarily fueled by more measured sales expansion and our focus on efficiency.
Rachel White: We invested $28 million or 17% of revenue in R&D on a gross basis. This quarter to continue differentiating our HCM suite and expanding our peplum opportunity consistent with levels a year ago.
Rachel White: As we scale, we've continued to drive leverage in G&A G&A expense was $21 million or 13% of revenue this quarter, an improvement of 110 basis points from last year.
Rachel White: Quarterly adjusted operating income increased over 40% to $23 million with margins of 13, 6% up 250 basis points from 11, 1% last year.
Rachel White: During the quarter adjusted free cash flow was a use of $22 million, representing a significant margin improvement of nearly 15 percentage points compared to the prior year free cash flow margins expanded at an accelerated rate compared to operating margins as we grow over the amortization of prior sales and product investments.
Rachel White: As a reminder, Q1 is our seasonally lowest cash flow quarter due to the timing of our annual bonus payout.
Rachel White: We closed the quarter with $98 million in cash and no debt. In addition, our stock based compensation expense decreased year over year to less than 8% of revenue with less than 1% share dilution.
Rachel White: For fiscal 'twenty, five our top priorities remain driving sales efficiency and accelerating cash conversion as we laid out at the beginning of this year, we remain growth focused with a disciplined investment philosophy as we continue targeting high ROI investments, which aligns with our intent to create long term shareholder value. We look forward to providing more color on this topic in a few weeks.
Rachel White: At our Investor day.
Rachel White: Based on a stable demand environment and the potential for further.
Rachel White: Type of expansion, we are increasing our outlook for fiscal 'twenty five.
Rachel White: For the second quarter, we expect total revenues between $176 million to $178 million or 12% growth at the top end of the range, which includes $12 million of interest income on average client funds balances of approximately $1 $1 billion.
Rachel White: And adjusted operating income is expected to be between $26 million to $27 million.
Rachel White: For the full year, we expect revenues of $726 million to $733 million or 12% growth at the top end of the range, including $48 million to $50 million of interest income, which contemplates up to 150 basis points of rate cuts over the remainder of the fiscal year.
Rachel White: And we anticipate adjusted operating income of $127 million to $130 million on a recurring basis that implies approximately 180 basis point improvement in adjusted operating income margins.
Rachel White: In summary, we remain optimistic about our opportunity in HCM demand remains healthy for our innovative HCM solution that empowers leaders to drive business results by connecting them to people data and expertise our software plays a vital role in attracting compensating and retaining exceptional talent, we're confident in our strategy and focus.
Rachel White: Executing a proven go to market playbook to deliver greater sales efficiency and free cash flow margins.
Rachel White: With that well open up the call for questions operator.
Speaker Change: Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press the star key followed by one on yourself phone keypad, a confirmation tone will indicate that your line is in the queue.
Rachel White: You May press star two to remove a question from the queue.
Rachel White: Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.
Speaker Change: One moment, please pull for questions.
Speaker Change: Yeah.
Speaker Change: And the first question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed with your question.
Speaker Change: Yes. Good afternoon. This is Matt Kamm Pearl on for Gabriele today, Thanks for taking our questions.
Rachel White: On AI can you talk a bit about the initiatives around AI enablement and data infrastructure investments that you're making how are you thinking about ROI on these investments and do you see this as more of a driver to compete or could these investments actually turned into a more material drive.
Speaker Change: Or topline upside.
Speaker Change: Hey, Max Yeah sure a lot of the data investments that we've made in the structure that we've been able to utilize to enable a lot of the AI capabilities, we've been making the data investments for a long time, so you're not seeing a lot of outsized AI specific data investments that we've needed to make where we're using.
Rachel White: Is your infrastructure and other third party solutions to actually run the models. So we're not building those internally and having to staff up for that.
Rachel White: In terms of what we're actually seeing where we're seeing this come together is really around usability of the product. So how do we leverage AI to make the product more usable for clients for employees for associates and we're starting really with that mobile experience. That's what Youre seeing released more recently is that the AI assistant that's available for associates of hour.
Rachel White: <unk> of our customers.
Rachel White: And it's really about enabling efficiency and enabling them to be able to navigate workflows more rapidly navigate their own policies internally as well as all the other areas that we've been building into the platform over the last couple of years all that continues.
Rachel White: If you think about like how to monetize this and really where this can go we think that there's sort of usability is and the ability to navigate is really what will continue to invest in so I think youll see more and more functionality and capability that will come through this agent assist and and how people engage in our software from a revenue perspective, I think it's still a little bit early but we.
Rachel White: Do want to we do see this as a monetization opportunity with some of the more advanced AI solutions like this assistant, but it's still early days and so we'll see you definitely have to create the value for the customers and in this case, we're removing.
Rachel White: Questions, we're moving queries from associates to the ASR reps at our customers and that should be driving a lot of productivity for both the associates and the companies and our customers themselves.
Speaker Change: Great and then have you received any early feedback on the pay core assistant and any color on potential pricing of this product would be great. Thank you. Yeah. I mean, we started with pilots and the pilot feedback is great. I mean, it's still really early days, but the pilot feedback is great people are excited about it you know it it sort of hits you.
Rachel White: With with much easier to use capability inside of the mobile app. So folks are are excited about that I mean, I think that the.
Rachel White: There is high expectations for.
Rachel White: How you engage with L. O M models with some really great consumer like applications out there and so we're trying to make it as best we can but it's still really early and in terms of the monetization I would say no. It's still too early we have some ideas about it but we're not locked in on anything with the with regards to the monetization just yet.
Speaker Change: Thanks Max.
Speaker Change: And the next question comes from the line of Scott Berg with Needham <unk> Company. Please proceed with your question.
Scott Berg: Hi, everyone. Thanks for taking my questions here and nice quarter.
Rachel White: Hum.
Rachel White: Just a couple of them here lets start with Raul your comments on the on the demand environment. It sounds pretty positive so I'm pretty happy with attach rates at least for what you're seeing especially as you move up market a little bit more.
Rachel White: But it is you deconstruct maybe what the deals look like do you see customers buying the additional modules outside of payroll core HR and time and attendance differently today as it's kind of a different packaging than what they bought a year ago or is it largely consistent.
Raul: No Scott it is extremely consistent we continue to see outsized interests in our talent solutions.
Rachel White: And we continue to see really strong attach of you know over two and a half modules.
Rachel White: You know and it's been fairly consistent slightly picking up quarter over quarter. So we feel really good about you know the quarter solid execution, great performance and we really like our setup in 'twenty five.
Speaker Change: Got it helpful and then on the embedded opportunity. It sounds like you signed a couple of new partners here this quarter got it into the double digit.
Speaker Change: Territories, you've mentioned if you look at those partners and my guess is we'll get a little bit of this at the analyst day, but do those partners bring anything different than the partners that you currently have maybe I don't know what type of product that they have or type of end markets. Just trying to understand if we view them, maybe any differently than what you buy a signed today.
Speaker Change: Yeah, Hey, Scott we are really excited about some of these partnerships and they are starting to get it get into maybe a slightly different end market and territory for us. So we are really excited to talk more about that in the analyst day in a couple of weeks or the Investor day in a couple of weeks and yes. It will go through that in a little bit more detail, but we are hitting a couple of different end markets.
Speaker Change: Have some technology, we've sort of broken this into three different spaces technology.
Speaker Change: Center of influence and then payroll spiros and most of what we're seeing today is really in that center of influence and technology space, That's where we want to focus and we signed some more partners in that space. So we will talk to in a couple of weeks.
Speaker Change: And the next question comes from the line of and the next question comes from the line of <unk> Shah with Deutsche Bank. Please proceed with your question.
<unk> Shah: Great. Thanks for taking my questions and congrats on the strong quarter Raul you talked about like feeling good about the go to market and seeing kind of that would tend to improve do you think the issues that you kind of saw yourself going through a few quarters ago behind you in any kind of changes you're thinking about upcoming for this fiscal year in terms of the go to market and territories.
Speaker Change: Yes, we do.
Speaker Change: Definitely feel like we've had two consecutive quarters of improvement.
Speaker Change: And all the key seller metrics from a retention breath of participation. So we feel really good about where we are.
Speaker Change: We're going to continue to process improve and drive that forward, but we feel really good.
Speaker Change: About it and our positioning and I don't anticipate.
Speaker Change: Anything significantly different we're going to continue to have success strong success in.
Speaker Change: Our demand generation and continue to leverage the broker channel. We're getting you know a little over 60% of our mid market results from the broker channel. So we feel really good about that we're going to continue to press in there but outside of that we really like our formula It's.
Speaker Change: It's been really consistent.
Speaker Change: So live a really consistent bookings growth and it's really just about execution.
Speaker Change: And we feel like some of the challenges that we faced.
Speaker Change: In the second half of last fiscal year or the first half of this calendar year are behind us and we've had two great quarters in a row of improvement.
Speaker Change: Got it that's good to hear and just a follow up for Adam just in terms of the outperformance this quarter it sounds like.
Speaker Change: Decent Atlas pattern, driven anything specific within the modules or pricing that drove that and kind of how we will have an employment trends trended this quarter relative to expectations.
Speaker Change: Yeah, Hey, Bob the employment trends have been consistent in that sort of low single digit sub 1% range and that has led to some upside. So we do see that as upside. We didn't include anything related to labor market in our guide and then yeah. We've seen some continued up more or up upsides performance across cross sale.
Speaker Change: And some of the pricing take that we've been able to accomplish and so just some consistency in the outperformance relative to a little bit of conservatism.
Speaker Change: Thanks, Kevin.
Speaker Change: And the next question comes from the line of Mark Marcon with Baird. Please proceed with your question.
Mark Marcon: Let me add my congratulations really nice quarter, all the way across the board I'm wondering can you talk a little bit more about the.
Speaker Change: The pay core integration platform.
Speaker Change: When exactly was that introduced do you have any clients on it now and you know how how much of a boost do you think that's going to provide.
Speaker Change: With regards to being able to sell to new logos.
Speaker Change: Yeah. So the platform has been live for since the beginning of the fiscal year. We have clients that are leveraging the technology every day.
Speaker Change: As either new clients are added into the platform or existing clients decide they want to leverage.
Speaker Change: The platform for an integration it really provides.
Speaker Change: <unk> self service tools to enable to accelerate that process and so we feel really good about it.
Speaker Change: Integrations.
Speaker Change: No.
Speaker Change: Dirty word and eights him for a long period of time in and we've really embraced it opened up the platform and try to leverage that as a differentiator.
Speaker Change: Ross the ATM ecosystem, and we feel like we're going to continue to invest here, we're going to continue to open our platform and we want to continue to make it easier for our clients to connect their data to all the tools they want to use.
Speaker Change: That's great and then can you talk a little bit more about this.
Speaker Change: The sales progress it sounds like things are going well in terms of both you know the pipeline at the top of the funnel as well as conversions and win rates.
Speaker Change: Can you talk a little bit about the effect of the increased maturity and where are you seeing the strongest sales growth is it still in the tier one markets that are still relatively immature for you. How do you think about that progress.
Speaker Change: Yeah, I mean, we're still seeing out performance in the tier one markets as as a percentage of the whole there. The 15 largest cities in the U S and we would expect that.
Speaker Change: So we're excited about our ability to continue to grow in those cities or grow into those cities.
Speaker Change: And so that's I would say the biggest.
Speaker Change: No.
Speaker Change: Item in the quarter was really the over performance in the broker channel.
Speaker Change: Over 60% of our field bookings coming from a trusted partner.
Speaker Change: Is great it's great for the reps, but it's also a testament to how great. They think the product is in the experiences and so.
Speaker Change: We're excited about you know that as probably a standout metric in the quarter.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: And the next question comes from the line of Terry Tillman with <unk> Securities. Please proceed with your question.
Terry Tillman: Great. Good evening, guys just garnered bestseller on for Terry I appreciate you taking the questions.
Terry Tillman: To start with I guess could you maybe talk a little bit more about the other larger upmarket deal opportunities.
Terry Tillman: Could you maybe just kind of talk to I guess the decision cycles anything around there that might be important for us to kind of think about as we think about the pipeline for the rest of the year.
Speaker Change: Yeah, I mean, we're really continuing to be pulled up market.
Speaker Change: Into larger size transactions. So that's really just based on the power of the platform the openness of the platform the robust talent suite.
Speaker Change: And so we're going to continue to go there or me you know clients that want to take a look at the pay core solutions.
Speaker Change: And so we're excited about that we continue to see strong performance in that segment and the only thing from a macro perspective I would say is you know for the majority of our book There is no change in deal cycle I would say at the top end of the book Yeah. There's like an increase of like you know.
Speaker Change: <unk> a week.
Speaker Change: The deal cycle. So it's not really that material now were not at the very high end enterprise for maybe that would be more material for other software companies.
Speaker Change: But for US we haven't seen really any changes in the deal dynamics across the segments other than slightly longer deal cycle for the larger deals are all working on.
Speaker Change: Got it that's really helpful. Thanks, guys. So.
Speaker Change: Thanks Scott.
Speaker Change: Okay.
Speaker Change: And the next question comes from the line of Jared Levine with TD Cowen. Please proceed with your question.
Jared Levine: Thank you with the particular marketplace can you discuss the current scale of partner derive revenues how materially you believe this can get over the medium term.
Speaker Change: Yeah, Hey, Jared.
Speaker Change: It's still pretty early days. So it's been consistent in terms of the number of partners that we've had at scale, but the revenue itself is it's still it's not immaterial I mean, it's it's a good portion, but we're still in like low single digits in terms of percentage of total revenue that we have.
Speaker Change: Derived from the partner channel or that referral partner channel, we do think that Theres a lot of opportunity I mean, this has been growing the interoperability of the platform that we've enabled a theres a lot of partnership opportunities and we continue to evaluate those so we think that there's a good opportunity to continue to expand this section of the market.
Speaker Change: Great and then in terms of cleanliness acquisitions can you talk about the current state of the pipeline. There are you witnessing any competition for these deals.
Speaker Change: I mean, we don't really do a ton of portfolio acquisitions. There there are opportunities and so it does tend to be a little bit more opportunistic and we're always evaluating them. So there's always stuff in the pipeline I would say we.
Speaker Change: We haven't seen anything necessarily that we would call out as a competitive difference in the market around portfolio acquisitions as of late.
Speaker Change: Thanks Jared.
Speaker Change: And the next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.
Speaker Change: Hi, This is jessica on they're buying today. Thank you for taking my question. So as you think you have filled out your embedded are there particular customer verticals that you've been seeing they are displaying higher interest in embedded or that could improve your retention rates.
Speaker Change: Mr. <unk>, if he built up a partnership here.
Speaker Change: Yeah, Hey, Jessica there are a couple of areas that we see that that are sort of evolving for us. So as we as I mentioned before you have a little bit more on the technology side and then you have these centers of influence.
Speaker Change: And on that within the technology segment itself really where we're focused or where we see the opportunities around these vertical specific either workforce management ERP P. O S type solutions.
Speaker Change: And we've seen some success there I'd say that there's we haven't signed enough partners, just yet and gotten deep enough with those partners to call out any one specific goal, but what we tend to see generally is that the software companies who are going to market are experiencing the same thing across broad software right, they're trying to improve their value prop they were trying to add additional.
Speaker Change: Services and products into their suite and they want something more punch in and be able to go to market with and we see that payroll tends to be a service that sits around the erp's N. P. O S that is.
Speaker Change: Is is really sought after by customers, but it is really hard to do and really hard to build a scaled platform and so we feel like there's this natural fit in a lot of areas around these vertical specific workforce management ear P. P. O S et cetera, so not not anything that were sort of locked in and really tight on just yet but continues to be lots of opportunity.
Speaker Change: That space.
Speaker Change: Awesome. Thanks for the color a follow up question is so.
Speaker Change: You've already announced these AI expansions like Sanchez I didn't think furthering your product roadmap on a high level, what I look at that.
Speaker Change: Functions of products are you prioritizing for this year to continue put them. Thanks.
Speaker Change: Yeah, Hey, Jessica So we still are focused on a lot of things around this sort of AI says I think that it's early on this and so theres going to be a lot of opportunities for us to continue to expand the depth and the functionality of of where that assistant gets too and the sorts of workflows that it can enable the insights that we can offer back to our clients.
Speaker Change: Their associates, so theres a lot to continue to advance around that and then we'll continue to look for opportunities around our talent suite and around benefits and our workforce management platform. So lots of opportunities still to continue to expand.
Speaker Change: Okay.
Speaker Change: And the next question comes from the line of Mark Murphy with Jpmorgan. Please proceed with your question.
Speaker Change: Hello. This is Josephine irizarry on for Mark Murphy. Thank you guys for taking the question and congrats on a good corner. Another question on AI, but a little different you talked about kind of some of the efficiencies you've seen in your business there've been a couple of quarters, where you've been asked about internally and so they I would you say thats been.
Speaker Change: Adding to that or have you seen a benefit and where did you expect you might adopt tomorrow I kept the body's internally.
Speaker Change: Thanks.
Speaker Change: Yeah, Hey, Josephine we are trying a handful of things and piloting things across the business internally and I'd say that we're still really optimistic although clearly some of them. There is a little bit of a trough in terms of some of the closeness of the capability, but I think the idea and the promise of that capability is.
Speaker Change: Probably a little bit further along than then how real it is just yet I think we're seeing that broadly in the market. So we're excited about it we're piloting some things we have it in our call Center, where we're supporting our.
Speaker Change: Our agents to enable them to be more effective and summarize calls and that's working we're seeing it we're seeing some improvements there we're looking for opportunities with co pilots and we're seeing more adoption there, but I would say there's nothing that's sticking out that is driving outsized margin improvement at this point.
Speaker Change: Great. Thanks for that and then kind of second question on them.
Speaker Change: On another macro environment question were there any specific verticals that you saw that did particularly well in this quarter or was it kind of across the board a good corner anything any other color you can provide.
Speaker Change: Yes, I mean, we saw a really strong quarter in health care kind of stood out amongst you know all the verticals.
Speaker Change: Yeah.
Speaker Change: And the next question comes from the line of Brad Reback with Stifel. Please proceed with your question.
Brad Reback: Great. Thanks, very much Raul you talked about the over performance in the broker channel are you doing anything differently, there or just trying to get a sense of what would have caused that quarter over quarter, and really causing to break out of the historical range.
Speaker Change: Yeah, a couple of things I think.
Speaker Change: Over the past we've narrowed our focus.
Speaker Change: And really pointed our.
Speaker Change: Our sellers to.
Speaker Change: To the brokers have the most opportunity.
Speaker Change: Secondly, our sales tenure continues to increase so obviously he has a combination of pointing sales associates.
Speaker Change: At the right target and then having a more tenured reps execute against that target. Yes, just delivers better outcomes. I think those are you know its primarily blocking and tackling the value prop has always resonated with you know our ability to enable them to pick the Ben admin that they care about and they don't have to use ours is a big.
Speaker Change: The value prop for the broker and then secondly, given them a prioritized and seamless implementation and good client experience is what they want because they have you know.
Speaker Change: A handful of clients that they want to be treated like gold.
Speaker Change: Yeah.
Speaker Change: Got it and then Adam.
Speaker Change: Quickly on the peplum growth.
Adam: Does the embedded business start to impact capital growth this year.
Speaker Change: Or is that something that we should see in future years.
Speaker Change: I do think that it impacts this year. It is dragging right now you're seeing about a point to two points of a drag.
Speaker Change: And what we're what's showing up on the actuals today. So you did see like of the 11% growth a slightly better if you were to take out some of the embedded performance. So we have a lot of actual benefit coming through this quarter in the last couple of quarters with cross sell opportunities with some of the pricing that we had mentioned so where we're seeing some of that benefit and it will be muted over.
Speaker Change: Time as as our embedded continues to grow.
Speaker Change: Yeah.
Speaker Change: And the next question comes from the line of Steve Enders with Citi. Please proceed with your question.
Steve Enders: Hi, Thanks for taking the question maybe just to follow up on that last comment about taking price is there any way you can help us size the magnitude of that impact and maybe just more broadly what you're seeing from a pricing environment in the market.
Speaker Change: Yeah, I mean, the what we tend to do when we increase prices or when we run.
Speaker Change: Ron our pricing increases is wrapped around additional products and additional services that we can launch into the market and that we offer to our clients. So we will continue to expand our functionality our capabilities the depth of the service offering and then launch it all alongside that and we've seen some pretty good success.
Speaker Change: With that as we really position it around the value that the company continues to build into we've seen that with the AI offerings, where we continue to add AI functionality and features and we're not necessarily adding it is as a product that someone needs to subscribe to so youre seeing some of that come through.
Speaker Change: And you see the the cross sell opportunities as we continue to do the same thing we're building our bundles up we're offering new products side of the bundles and then our our insight team has taken that back to our customers and seeing some of the success typically what we see is about a third split between.
Speaker Change: Pricing a third split between cross sale, and then higher adoption at the point of sale and enlarge larger clients and embedded sort of pushing down on that so those tend to split equally in about thirds I'd say that we're getting just a little bit more from that cross sell and the price point.
Speaker Change: Point or so each in those other areas.
Speaker Change: Okay Super helpful. And then it sounds like Rep productivity is trending well over the last two quarters.
Speaker Change: Is it right to think about increasing rep tenure as the main driver or are there kind of other components, maybe a more healthy demand backdrop or something else that you would point to that's that's helping here.
Speaker Change: Yeah, I think it's more about.
Speaker Change: 10 year drives productivity.
Speaker Change: And so.
Speaker Change: That is probably the biggest impact.
Speaker Change: Obviously.
Speaker Change: We're also selling.