Paycom Software Inc (PAYC) — Q2 2016 Earnings Call Transcript

Thank you and good afternoon. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we have made are reasonable, actual results could differ materially because these statements are based on our current expectations and are subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the Securities and Exchange Commission including our quarterly report on Form 10-Q for the quarter ended March 31, 2016, and our Annual Report on Form 10-K for the year ended December 31, 2015. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise, except as required by applicable law. Also during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today, which is available on our website at investors.paycom.com. I will now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer.

Thanks Craig. Our momentum continued through the second quarter of 2016. We had excellent results with revenue of $74 million representing growth of 51% over the comparable prior year period. We are pleased with our performance and believe our success is due to the growing recognition of the benefits that can be gained from Paycom's single database architecture. Our organically built and internally trained sales force is focused solely on the U.S. market, which we believe holds ample opportunity to fuel our growth for many years to come. In fact, we believe that we are still in the early stages of a multiyear mission to gain market share and grow into one of the largest providers of cloud-based payroll and human capital management software. To further illustrate what drives our confidence, I would like to share some insight into some of the ways that Paycom's solution helps clients to improve their workforce processes and succeed. When clients select Paycom, they are not just buying the product; they are also improving their processes and unlocking ways to engage their workforce by aligning with a strategic and knowledgeable business partner. At Paycom, we developed our payroll and HCM software to work seamlessly with each other, leveraging the true power of our single database system to enable executives to run their businesses more efficiently. When we engage with a new client, the Paycom system represents an opportunity for them to not only enhance their existing processes but also institute new processes to enable the C-Suite to better manage their workforce, since it is frequently the first time they have had all of their HCM data available in a single place. So in addition to implementing the Paycom system for new clients, we are often helping them to put best practices in place that are enabled by our system. These improved practices drive even greater efficiencies and also increase client engagement with the Paycom solution across the entire organization, from front-line employees to the C-suite. Finally, leveraging both our talented development teams and our internal analytics, we gain insight into client usage across the entire system application by application, employee by employee. Using this data, we identify best practices for each aspect of the Paycom solution and bring those findings to our clients. We are now using our internally developed learning management system to teach our clients and their employees how to best use the Paycom system. Our clients have enjoyed this new media-rich learning platform known as Paycom University, and this has been a great introduction to the power of our LMS offering. The constant improvements to our system in helping clients to optimize how they can use it is having a positive impact on sales; we are seeing productivity improvements across the entire sales organization. These improvements are evident in our results and guidance. Turning to the market, I will now provide some comments regarding the upcoming changes to the FLSA overtime regulations. As many of you know, in December, the rules regarding overtime pay will change dramatically. The annual salary threshold for employee overtime exemption will increase from approximately $24,000 to over $47,000 per year. Similar to the ACA, this will have a broad and significant impact on many American businesses. From our perspective, ACA compliance initiatives were effectively tasked to the HR departments, particularly within the mid-market, where most employers were already providing appropriate health insurance to their employees. In contrast, the proposed changes to the overtime law will demand attention from the C-suite as business leaders look to accurately measure and potentially adjust their employee compensation strategies to ensure compliance with the law in the most efficient manner. We believe the FLSA potentially will have significantly greater financial impact on clients in the midmarket than the ACA. As with the lead up to the ACA compliance deadline, we are seeing a wide range of knowledge and preparedness among current and prospective clients. Many companies have not yet acknowledged, let alone embraced, the impending changes. This is where Paycom serves as a knowledge resource to future and existing clients. We provide a substantial amount of information in the form of white papers, webinars, and of course, our highly trained sales force. The proposed FLSA changes are providing useful conversation starters for our sales reps as we believe that the Paycom solution offers the best option for employers to adapt to the potential upcoming changes in the most strategic and efficient way. And with that, I'm pleased to highlight our recent announcement of the FLSA toolkit, which is part of our government compliance application. This FLSA analytics tool is simple yet powerful and uses employee data to perform the cost analysis of workforce restructuring strategy and can help executives to determine the best course of action when looking to navigate the changes to the FLSA law. This tool is yet another example of the ability of our R&D organization to comprehensively develop products that serve the needs of our clients. We continue to invest in our R&D. In the second quarter, we grew our adjusted R&D expense 114% year-over-year. As with prior earnings calls, I will now provide a few examples of notable client wins within the quarter. I will remind everyone that our target client range remains companies with 50 to 2,000 employees. However, larger clients above this range continue to see increased efficiencies and value by implementing the Paycom system as they look to abandon silo technology that no longer meets their needs. First, we onboarded an assisted living company with multiple locations and over 3,000 employees. They had been using a competing vendor for payroll and relied on several other HCM vendors while also performing manual processes for many key functions. After transitioning from a large number of providers, this client really values having a completely integrated system. Additionally, they greatly appreciated our on-site implementation and training tailored to the client's needs and schedule. Next, we converted a restaurant chain with over 40 locations and nearly 4,000 employees that had also been using a competing vendor. In addition to the benefits gained from a completely integrated system, this client was attracted to Paycom because of our learning management system. The prior vendor's solution was not fully integrated with the payroll system, and because of this, they were not achieving the results they needed. Of course, this client is also enjoying the benefits of having all of their HCM functions in one application including talent acquisition, onboarding, background checks, and many others. Lastly, we welcomed an entertainment company with over 5,500 employees across several states. They had been using an in-house system prior to Paycom and were searching for a solution that would be robust yet easy to use across their entire employee base. They also wanted to standardize hiring practices and communicate better with their workforce. With Paycom, they were able to accomplish these objectives through a combination of surveys and personal action forms. Finally, with several locations in different states, they experienced challenges in the past organizing their data and maintaining compliance with multiple tax jurisdictions. With Paycom, their tax compliant processes are now automated. To close, I would like to highlight that we were recognized as one of the Achievers 50 Most Engaged Workplaces for 2016. This accolade is a testament to our culture and also the use of our own technology. Having an engaged workforce helps us attract and retain top talent which allows us to effectively compete in the marketplace. And finally, as many of you know, earlier this year Welsh, Carson and its affiliated entities distributed their remaining Paycom shares to their limited partners and general partners. After yesterday's board meeting, Rob Minicucci and Sanjay Swani stepped down from our board. Both were former nominees of Welsh, Carson who served on our board for several years, and we would like to thank them for their service. With that, I will now turn the call over to Craig for an update on our financials and our guidance.

Thanks, Chad. Before I begin, I am pleased to announce that our Founder and CEO Chad Richison has been elected as Chairman of our Board and will succeed Rob Minicucci. And before I review our second quarter results and also our outlook for the third quarter and full-year 2016, I’d like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We use adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess our performance and for planning purposes. Adjusted EBITDA is a non-GAAP financial measure that excludes non-cash stock-based compensation expense and certain transaction expenses that are not core to our operations. Non-GAAP net income is a non-GAAP financial measure that also reflects adjustments for non-cash stock-based compensation expense and certain transaction expenses that are not core to our operations which are further adjusted for the effect of income taxes. A reconciliation of the GAAP to non-GAAP measures discussed today is included in our press release. We experienced a strong second quarter with total revenues of $73.9 million representing year-over-year growth of 51% from the comparable prior year period. As Chad mentioned, we experienced ongoing success in our sales teams as our solutions continue to gain traction in the marketplace. Within total revenues, recurring revenue was $72.5 million for the second quarter of 2016 representing 98% of total revenues for the quarter and growing 52% from the comparable prior year period. Total adjusted gross profit for the second quarter was $62.3 million, representing an adjusted gross margin of 84.3%. This compares to 83.6% in the second quarter of 2015. For the full 2016, we anticipate adjusted gross margin will be within a range of 82% to 84%. Total adjusted administrative expenses were $43 million for the quarter. This amount compares to $30.1 million in the second quarter of 2015. Adjusted sales and marketing expense for the second quarter of 2016 was $24 million. Adjusted R&D expense of $4.1 million in the second quarter of 2016 represented an increase of 114% from the comparable prior year period. Adjusted EBITDA was $22.6 million or 30.6% of total revenue in the second quarter of 2016 compared to $13.1 million or 26.8% of total revenue in the second quarter of 2015. We experienced a strong increase in adjusted EBITDA due in part to sales outperformance and also increased cost efficiencies across our organization. Non-GAAP net income for the second quarter of 2016 was $12.4 million or $0.21 per diluted share based on approximately 58.7 million shares versus $6 million or $0.10 per diluted share based on approximately 58.4 million shares a year ago. The effective tax rate was 35% for the three months ended June 30, 2016. We expect the fully diluted share count in the third quarter to increase by approximately 725,000 shares less the number of shares withheld to satisfy tax obligations due to the vesting of restricted stock with market-based vesting conditions and also less any shares we may repurchase pursuant to our previously announced repurchase program. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $80.9 million and debt of $29.3 million. As a reminder, this debt represents the financing of our corporate headquarters. We were proud to recently complete the third building at our campus which helped accommodate our growth. We recently entered into a new loan agreement in connection with construction of a fourth building and are excited to commence the early phases of design and development. Cash from operations was $24.6 million for the second quarter reflecting our strong revenue performance and profitability of our business model. The year-to-date average daily flow balance for funds held for clients was approximately $660 million. With that, let me turn to guidance for the third quarter and for fiscal 2016. For the third quarter of 2016, we expect total revenues in the range of $75 million to $77 million representing a growth rate over the comparable prior year period of approximately 37% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $13 million to $15 million representing an adjusted EBITDA margin of approximately 18% at the midpoint of the range. For fiscal 2016, we’re increasing our revenue guidance to a range of $325 million to $327 million or approximately 45% year-over-year growth at the midpoint of the range. We’re also increasing our full year adjusted EBITDA guidance for fiscal 2016 to a range of $83 million to $85 million representing an adjusted EBITDA margin of approximately 26% at the midpoint of the range. With that, we will open the line for questions.

Thank you. A couple of questions if I may. Chad, I know you don’t give ANRR numbers anymore, and you will not answer me on this one, but if you could talk qualitatively about how was business activity in the quarter, obviously the numbers look really good but we are looking at revenue which is kind of more backwards-looking. How does the quarter feel for you in terms of when compared to what you saw previously?

Well, I kind of thought you answered the question in the first part of your question. I mean, obviously, like you said, it’s not a metric that we talk about anymore. Obviously, we have had continuing strong growth as it relates to onboarding new clients. We’re very focused on that, and we look to continue to do that into the future.

Okay, perfect. It was worth trying. When considering the FLSA Act, how should we think about it in relation to the ACA and other developments? For our modeling purposes, should we expect this to be an ongoing issue with new changes each year, and how significant should we consider these changes to be?

Yes, the FLSA is set to be updated for the first time in 12 years starting December 1 of this year. The weekly salary threshold will increase from $455 to $913, meaning employees earning a salary below $913 a week, or approximately $47,000 a year, will qualify for overtime pay. It's important to note that only 10% of bonuses and commissions, which are considered nondiscretionary income, can be included in this calculation. For example, if an employee earns a $40,000 salary and an additional $30,000 from commissions and bonuses, they would still fall under the overtime rules. Monitoring hours for these employees will be necessary despite their total income exceeding $47,000 because of how it is structured. Our tool helps analyze salaried employees who are near the threshold to manage overtime efficiently and identify those who, when factoring in the 10% bonus and commission, exceed $47,000. Employers might opt to restructure compensation by increasing salary and decreasing variable pay to avoid overtime tracking. Starting in 2020, this will be updated every three years to align with economic changes. This regulation will take effect on December 1, and companies will need to manage it effectively, as it will significantly impact those that don't.

But it’s basically just another add-on model, basically, a module like you have, like obviously 2020 or more?

This toolkit is now part of our government compliance module, which is already available, and we plan to offer it to clients. We are also using it for discussions since clients, both existing and new prospects, are currently evaluating their plans, including personnel changes and their implications. They can run scenarios to see how changes in salaries and bonuses affect their business. Additionally, employers must reconcile this every quarter, and any underpayments must be paid to employees at that time. This falls under Department of Labor regulations, unlike ACA compliance where year-end returns are filed with the IRS. Employees who are underpaid can file claims with the Department of Labor. Currently, I've heard rumors of potential collaboration between the Department of Labor and the IRS, but no regulations have been released yet. Each year brings more regulations and changes that businesses must manage, and we excel at helping them navigate these challenges.

Okay, perfect. Thank you very much. That’s very helpful. Well done.

Hi, guys. Thanks for taking my questions and a nice quarter. Just looking at the EBITDA guide for the rest of the year and looking at where it started, I’m just in terms of really impressive, and I'm curious for Craig what has changed on the expense side, where you’re getting so much leverage? And then, as it relates to new office openings, Chad, given that you're seeing so much success on the profitability side, could you maybe give us a glimpse into how you’re thinking about the number of new office openings in 2017 and whether we could see a sharp increase from where we've been for the last couple of years?

Michael, regarding the adjusted EBITDA and the guidance for the remainder of the year, the first half saw very strong forms filings, which positively impacted our adjusted EBITDA without significant costs. Moving into the second quarter, we observed some fluctuations in the income statement, noting margin expansion in areas like gross margin, G&A, and sales and marketing. As our revenue continues to surpass expectations, a substantial portion of that increase is reflected in our bottom line.

We have opened the most offices this year, and combined with last year, we have opened about 10 or 11 offices in the last 19 months. We are still adjusting to these openings, and when the time is right for further expansion, we will consider it.

Is there any limitation on increasing the number of office openings? Do you have enough experienced managers that you could open more offices if you choose to?

Well, I mean, I'm not going to really guide to exactly what we’re going to do next year at this time. What I can tell you is that for sure the longer someone is in a territory with us, the more experience they gain, and they’re more qualified they have. And just a little of numbers over time, the more offices you have with the more maturity amongst each office, the more candidates you're going to have as well. But for right now, we're very focused on continuing to absorb what we've done and really experience the benefits that we are experiencing from those offices that have been opened longer than 24 months.

Thanks for taking my questions.

Thank you. Chad and Craig, the results are impressive but revenue as you know given the SaaS models is far backward looking; the cash flow is really strong, so that’s good. It sort of helps us look forward a little bit. But Chad, could you give us any color at all, even subjective, on the momentum of the business in this quarter relative to the last couple of quarters?

I think the revenue and the guidance speak for themselves. I know that as far as closes for us, I mean, we’ve continued to have a very strong closing on our deals, and that is as far as onboarding clients. We continue to be pulled up to the top end of the range; I mean, each quarter seems like now I have highlighted those companies that actually exist above our range. Our executive reps continue to have more executive reps mature. As many of you know, it takes about 14 months, once a rep starts with us, for them to achieve executive rep status. That group represents the overwhelming majority of everything we sell. We continue to have more executive reps added each month as we continue on, and we just continue to get stronger and stronger.

That's helpful. Regarding your last point, could you discuss the transition of offices from new to mature? We understand that this process takes some time. Specifically, how have the offices that have been established for a while progressed in terms of their contribution to our results? Have their performances remained consistent with past results? Additionally, you recently mentioned what you're achieving from other customers. Has that trend remained stable or experienced any changes?

Yes, I mean, it’s all increased. I mean the top office we’re going to have this year is going to outsell the top office we had last year. Maybe we had some significant top rep sales last year, but already we have people on pace to beat that. And so we continue on. As far as the success of moving up market and selling at the top end of our range, not that we at all want to ignore the lower mid-market because we have had great success there as well. But we do have more product to sell. The product we continue our R&D efforts so it gets better and better. I mean, we just talked about our FLSA toolkit that we are now embedding into our government compliance tool to help people navigate the new regulation.

Great, thanks Chad. Nice job.

Hi, Chad and Craig, this is Albert Chi speaking on behalf of Mark Murphy, and I’d like to congratulate you on a great quarter. I have a follow-up question related to Raimo's inquiry about the details you provided regarding the FLSA. I want to better understand how to evaluate the relative impact of the overtime changes compared to the ACA. You mentioned that ACA-related billings as a percent of revenue would be in the low single digits for 2016. Do you have any insight on how the situation will unfold regarding the overtime?

I believe the impact on our clients and prospects regarding overtime will primarily affect their finances. For many companies, the most significant impact they experienced with the ACA expense was related to what they paid us or other vendors, primarily to maintain compliance. Most midmarket companies already offered affordable healthcare, so much of the ACA-related expense was tied to vendor payments or internal costs to ensure compliance while making ongoing decisions. While not every expense correlates directly to vendor payments, it constitutes a substantial portion. The actual impact depends on the specific makeup of the company. For instance, if a company employs salaried workers earning $40,000 who are working 60 hours a week, they will need to convert these salaried positions into hourly roles and pay overtime for those extra hours. This marks a significant change. Companies that excel at analyzing their current situation and predicting future outcomes based on past data will save considerable amounts of money. Those that do not will either incur higher expenses or potentially face Department of Labor investigations. My point is that this change has a more substantial impact on organizations regarding pay and salary, and there are not many alternatives to address it. Companies need to be proficient and understand their data, which is where having a single database is beneficial. When payroll, time and attendance records, and compensation data are housed within the same system, it simplifies data collection. With historical data available, I believe this change will significantly impact clients, and we're still in the early stages of them realizing the necessity of this exercise.

Got it. That’s interesting. So do you think, I guess broadly, do you think that these changes could weigh on companies’ earnings in any particular way?

I think it depends on the company. I don't see how it has no impact on expenses for any midsized company. I just can’t envision a scenario unless they were already paying everyone a salary over $47,000. In companies with 600, 700, or 800 employees or even 400 employees, there's typically more diversity than just adding. Therefore, I believe it’s definitely going to have an impact on businesses.

Hi, this is Trevor Upton for Brendan. Thanks for taking my questions. Just a follow-up on the FSLA question. I am assuming that Paycom would benefit through increasing adoption of the government compliance application, is that correct?

That is correct.

And can you guys talk about kind of where the penetration of that currently is?

We don’t talk about adoption rates for our products but I do believe that we do have some bandwidth in government compliance to go out there and be able to push this product. Clients can then leverage it to manage this highly sensitive cost area for them, and I also believe it’s a major conversation starter that we have with prospects. I do believe we were, like ACA, we were very quick to this, and when we developed something, we developed a comprehensive system that not only helps them out of the gate but helps them on an ongoing basis. Even there is a lot of the thinking for them as far as being able to predict data points based on prior data points over the same period. And so I think that we’re going to get some bets with this, we’re going to have conversations with this, and like everything else, we’re going to see it move forward.

That makes sense. One of the incumbent service providers decided ACA as a change event that’s increased churn for them, it sounds like FLSA should have a similar impact?

I don’t know what necessarily impacts other companies’ churn but we do have a very good product. We had a good ACA product and I believe that our FLSA product we have at the gate is a very strong product, and like any of our products we’re very committed to making the necessary changes along the way as regulations change.

Okay, thanks. And then lastly, can you talk about the impetus for the share buyback and how you weigh that versus other uses of cash?

Well, I think it’s our goal. We started off with our share buyback last quarter. It is our goal over time to reduce the overall share count. We looked at our cash and what we’re really able to do at this time, and we felt like it was an appropriate amount to start that now.

Great, thanks very much. Craig just real quickly on the gross margin guide for the year that’s 82% to 84%, it would imply somewhat of a tick up in COGS in the back half. Are there any specific guidance causing that?

No, as we look at our gross margin guidance we kind of kept it at that 82% and 84% and then if we overachieve, it tends to be closer to that 84% in terms of our overachievement on revenue. Now one that we’ve pointed out is we have to hire in front of the revenue growth. So as we look quarter-to-quarter, we want to make sure that we have the people in the bench to service that growth and those clients that come on board. So that’s kind of it fluctuates potentially from quarter-to-quarter. It’s really on a headcount basis.

Great. Thanks very much.

Good afternoon. Thanks for taking my question, and congratulations. Just wondering if you could talk just about the sales teams just in terms of like what the latest count is in terms of total and how many you would consider to be mature right now. And then as a follow-up to that, if you could describe what sort of activity the mature ones are currently seeing particularly in some of the older markets just in terms of pipeline, level of growth prospects going forward. Thank you.

So we have 42 offices right now. 11 are still in the process of maturing, so that leaves us with 31 that are currently mature being that we’re now in August. I would say as far as how one looks different than the other, the substantial difference outside of the first maybe six months opening is really going to be the staffing in each office. A newer office is going to have a couple of sales reps in it, maybe two or three; and a mature office is going to have between seven and nine sales reps at full staff. A new office is going to have zero executive reps and a mature office might have four, five, six or more; and so it just makes a difference, and that’s why it takes a little bit of time for these to mature. As far as the activity and the expected quota for new reps and everything else, those remain the same, and so really what changes is just the progression and maturity stage that they are out of that time.

Great. And then can you just talk a little bit more about the pipeline that you are currently seeing just in terms of new opportunity? There are fees that are out there, the hits that you are getting. What sort of impact is the success that you’ve seen thus far helping with regards to potential client recognition acceptance, et cetera?

It’s always really been strong that we’re really in an industry where people really like tenderness as they continue to engage their workforce. It hasn’t been that long that there has really been technology that where you could really even engage a workforce. I mean if we think back 15, 20 years ago, it wasn’t that often that people were leveraging this type of technology in the cloud to communicate with employees in a meaningful way as well as the rest of their management staff to be able to collaborate on important items that can impact cost, HR, and what have you. So we’re continuing to see that. I’ve never really seen a time where it’s been down. I think that anytime you have a great solution, you are going to get your best out there. I think the longer in the business, the more popular you get. The more references you have at different levels, the more references you are able to create. And so we’re just continuing our momentum as have in the past, and I would say it’s been all similar and that it’s been very strong demand there for a long time, I think for our entire industry.

Great. And then one last one, just any other comments with regards to the client retention rates and what you are seeing there?

I mean, as far as our client retention rates, that’s a metric that we actually disclose each year, and as all of you know, it’s been flat the same for the last four years, and it is something we definitely focus on at Paycom how you continue to set a company up, make sure they are good from the get-go, and then continue to increase usage along the way. You definitely want to have your clients using the technology they are purchasing and so that’s something that we’re very focused on for us from a retention standpoint.

Good afternoon, guys, and Chad, congrats on becoming Chairman. Could you tell your thoughts on are you going to replace the two Welsh, Carson directors that resigned?

Yes, it is our expectation that we would be replacing that. We’re in the process right now of conducting those interviews, and we’ll be announcing those in the future.

Great, and as a follow up to Mark’s question, as you grow so rapidly, how do you think about maintaining your service quality and really making sure your clients have a seamless experience?

Well luckily, I’ve had years and years of practice. From our standpoint, we’ve continued to grow. I think we’ve got a 40% CAGR over the last five years, and so you have to continue to do that. Really it’s about the processes you put in place. I’ve said it before that a substantial number of employees anywhere would fail at a company if it weren’t for the processes that they put in place to help them succeed, and so we’re very focused on our processes. We’re very focused on updating our processes. We’re very focused on client feedback that revolves around our process because likewise with new technology, we also have to make sure we are providing a new type of service. You don’t want to have a 2016 technology, and your service model is stuck in 2001, and so you really are onboarding a piece, and so you have to continue to innovate across the board. It’s not just the software; it’s the process, it’s the setup, it’s R&D, it’s everything. You have to continue to innovate across the board, and we’ve really gotten a lot of experience in continuing to do that and be good at recruiting. A lot of that comes from leveraging our own tools internally to be able to make those things happen.

And just a quick follow-up to that, do you try to maintain client contact so that people aren’t seeing new faces all the time?

Well, definitely. You want to give the client the best experience that they can have. I believe that starts off with a great technology. I can remember when I used to do first sales calls myself, I actually sold our first 400 deals here at Paycom, where I was teaching people what the Internet was, and kind of plug it in for them. Even from back then, you go in with your plan, and you want to have very good, you want a very good technology solution. We’ve just continued to innovate that along the way. It’s something we’ve experienced in the past as far as continuing to grow these departments over time, and I see us just continuing that.

Great, thanks very much.

Hi, thank you. Just wanted to kind of go back to the FLSA a little bit. In terms of the government and compliance module, given that you’ve added more functionality; would you be increasing the price for that? And is there any way to get a sense for how that's priced relative to other core modules?

At this time, the functionality is within the government compliance tool. We did put in there. So clients of ours that have current government compliance, they have it available for them today, and we are working with them. We do have a large number of clients that aren't set up on government compliance. We're looking at bringing that to them as well as adding it to each prospect that comes in. I mean, this is almost a have-to-have now for companies to start with us moving forward. That’s not to say that they absolutely have to buy it from us, but it wouldn’t make a lot of sense, I wouldn’t think, for a product with this type of impact for a client to onboard our service without it. And so but it’s still optional for them.

Okay. And then in terms of the potential impact, is there any way to think about the seasonality or timing? I mean, should there be some market increase in the Q4 or would you really more spread out?

I mean, you do have a mandate right now, December 1. So that is something that’s out there, that all companies need to be compliant by then. And then you’re going to have the ongoing aspect of management continuing on. So if there is a point where people want to jump on, it’s that; you might have some people jump on after they get their first DoL compliant. It just really depends.

Okay, that's helpful. One last question. You're getting increasing success of market, and just wondering if you are seeing work in ultimate more often as you move up and in what situations do you do notably better than them when you do see them?

Well, we see them more often because we have more reps and more - in more cities. We’re going to see them more often because we have more at-bats, and obviously, they’re in that market. But I would say, we’ve been hearing of where day-in especially ultimate on a continual basis for a long time, across the board, whether we’re above the 2,000 employees range, or whether we’re in mid-market. I think we’ve all kind of existed, and we all kind of have our focus, but we all really exist in similar markets as far as and ultimate we do have crossover. And so we’re going to see them quite a bit. I think we’ve been very successful with onboarding and converting businesses from all of our competitors.

Great, thanks very much.

Hi, guys, congrats on the great quarter. Just kind of piggybacking off of the last question there. As we're talking about this new FLSA toolkit last year, you saw, I think in the fourth quarter, you saw kind of an early pull-through of revenues or new customers adopting the solution based on ACA. Do you think, given the December 1 deadline or cutoff date for the FLSA or the new regulations, is there a potential for that? Or at least what are you seeing in the pipeline as we're going to the third quarter here? How is that reflected, if at all, in guidance for the third quarter?

Yes. I mean, I would say this: one, as far as guidance, even though deals that would start December 1, you’re going to get that 1/12 of the total annualized value for that on this - for December. So a major impact in the last month, I don’t know, but as far as onboard, we are trying our best to make sure we have several people. And let people know that December 1 go-live date for this. It’s very important for them to have this information and be able to be utilizing these tools. Whether or not that means a lot of companies convert very quickly to something is a little different than ACA from that standpoint, just because ACA did have the forms filing piece to it where you’re going to get caught quick. This might be a situation where you might actually make a decision just to give everybody the $47,000 salary so that you abide by the rules, but then you go back and realize that had you used good analytics and made some of them hourly because their overtime would have put them over that, you find that - you make the decision save yourself $280,000 just by managing it. So someone wants to get compliant, they just raise everybody to $47,000 and make everybody hourly. But I believe in the mid-market especially, and definitely upper mid-market, people are a lot more strategic than when it comes to their cost. We’re going to be doing everything we can to educate both clients and prospects alike on what’s coming and how we can make substantial impact on mitigating their exposure, as well as reducing their operating costs.

Okay. And then shifting to hiring trends, when you look at what your hiring plan was for this year and what you've done thus far and looking to the back half of the year, can you talk about, would you say you are on plan, ahead of plan, maybe a little behind in terms of your ideas for what you are going to add in terms of sales headcount? As we look at the back half of the year here, can you talk about what your additional hiring plans are and maybe potential mix between outside sales and client relations?

Sure. We give employee count updates once a year. I can’t tell you just having been here for now 19 years that from a hiring perspective, you’re up, you’re down, you’re up, you’re down, you’re up, you’re down, and then you always end up where you need to be. So for us, we continue that throughout the year and really being methodical on when we bring people on. We’re fortunate in a couple of ways in that as we sailed deals, they start. We have a pretty quick start date. So as we sell deals, we start; so we had a little bit of notice. But oftentimes we don’t have enough notice in the pipeline necessarily to just run out and hire people and get them trained. Oftentimes, you have to train those people, which Craig was talking about ahead of, which can inflate sometimes our gross margin. You've got to hire and train those people ahead of when you are actually able to catch the business and the revenue follows later. Sometimes when the revenue follows quicker than what you have actually added employees, sometimes you can get upside down a little bit where you need to take staff and get them trained and going quickly. It’s kind of something in our business, at least, that you’re always managing. But we’re also fortunate in that the business comes incrementally over time and stays with us, and so it allows us to be able to do that.

All right, thanks a lot. Congrats again.

I'd like to thank everyone for joining us on today’s call. We had an excellent second quarter and we’re energized for the second half of the year. I want to remind everybody, we’ll be presenting at the Pacific Crest Technology Conference in Vail on Monday - Tuesday August 9 and also at the Canaccord Conference in Boston on August 10. Thank you all, and we’ll be speaking with you soon.