Paycom Software Inc (PAYC) — Q3 2017 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 the 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 Annual Report on Form 10-K for the year ended December 31, 2016. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement speaks only as of the date on which it was 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 schedule 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 and thank you to everyone joining our call to review our third quarter 2017 results. As with the prior calls, I will start with a brief review of our results and then provide some comments on the payroll and human capital management or HCM market and recent developments. Craig will speak to our financials and guidance, and then we’ll open up the line for Q&A. Our third quarter results were solid with revenue coming in at $101.3 million representing growth of 31% over the comparable prior year period. Our commitment to client success continues to fuel our progress at Paycom. This drive combined with our powerful single-database solution allows us to attract new clients as our reputation for providing the best option for business continues to grow. Our success was recognized in September when we placed second on Fortune Magazine’s 100 fastest-growing companies list of publicly traded companies for 2017. Each company ranked on the list was determined based on three areas of performance over a three year period; average revenue growth, average increase in earnings per share and total stock return. We believe this recognition underscores the fact that Paycom is one of a very small number of public companies that is achieving not just the revenue growth but the profitability as well. When you look at the combination of our revenue growth and adjusted EBITDA margin, we are very proud of this achievement. Our profitable business model continues to allow us to return value to our shareholders. We recently completed our second $50 million stock repurchase plan. And today I’m pleased to announce that our board has reloaded and increased our plan to allow us to repurchase an additional $75 million of common stock. We are able to achieve these results by remaining focused on providing the best possible user experience. With this goal in mind, we continue to enhance our value proposition in October by creating our own content and releasing 10 learning courses to clients who have our Learning Management System or LMS module. These courses were designed and built internally at Paycom and the feedback we have received from clients regarding our proprietary content has been tremendous. These courses are built into our LMS module enabling employers to educate their managers and employees quickly, easily and consistently on topics like workplace violence, preventing discrimination and harassment, workplace ethics, hiring practices, lawful separations and more. We look forward to delivering even more content to our LMS clients and believe offering these courses will help drive further adoption of this module. Additionally, with Paycom’s November release, our mileage tracker capability will now be available in our native mobile app. This significant upgrade to our expense management module allows our clients’ employees to easily calculate mileage reimbursement for work-related activities that then automatically populate Paycom’s expense management module. Employers can now track mileage more accurately, which will help them eliminate profit leaks within their organization. For instance, without this functionality an employee might travel 22.1 miles, but actually fill out an expense report reflecting 25 miles. With mileage trackers, specific miles are tracked accurately. On a trip of one current employee where 2.9 miles were rounded up, the Company will now save over a $1.50 on that one trip for just that one employee. This is based on the federal reimbursement rate of $0.535 per mile. As this is extrapolated out to include all reimbursable travel mileage for employees, the savings can be into the tens if not hundreds of thousands of dollars for any one company. On the marketing side, I’m pleased to highlight that toward the end of the third quarter we launched our first national television advertising campaign with an accompanying digital strategy. The ad supports our overall value proposition of using one system with a very simple tagline. Paycom does more. We have been monitoring several indicators of brand awareness growth to evaluate the success of this campaign and are pleased with the early returns we are seeing. You can view the ad at our website paycom.com. I want to make a brief mention of hurricanes Harvey and Irma. We have a significant presence in the affected areas with two offices in Florida and five in Texas. We evacuated both our Florida offices and even asked our personnel to evacuate the state during the storm. Our offices in Texas experienced disruption as well with two complete evacuations in Houston and Austin. We had all of our offices back up and running as quickly as possible. And I want to thank people on the ground in those areas as well as our teams in Oklahoma City for making sure the impact was as minimal as possible both for our employees and for our clients. As of today, all of the Paycom sales offices are fully operational. Our final point to be understood is that while we experienced some disruption to our prospecting and conversion efforts in the affected areas, at no time were any clients' payrolls impacted by these events. This wasn't our first hurricane experience and that was evident in our preparations before and service during these events. Before I turn the call over to Craig for an update on our financials and our guidance, I’d like to take a moment to thank William Kerber, our long-time CIO for his many years of service and invaluable contributions to helping Paycom grow and to the success it is today. I have known William for many years and we continue our friendship even as this chapter working together is closed. Regarding our software development and IT efforts, we have a very solid team with a deep bench in place that will continue to ensure that we remain on the cutting edge of HCM and are able to provide the best solution to our clients and prospective clients. Now, I’ll let Craig comment on our financial performance for the quarter.

Thanks, Chad. Before I review our third quarter results and also our outlook for the fourth quarter and full year 2017, I would 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. Non-GAAP net income is a non-GAAP financial measure that also reflects adjustment for non-cash stock-based compensation expense, which is further adjusted for the effective income taxes. Reconciliations of the GAAP to non-GAAP measures discussed today are included in the earnings press release issued earlier this afternoon. As Chad mentioned, we had good results in the third quarter with total revenues of $101.3 million, representing year-over-year growth of 31% from the comparable prior year period. Our revenue growth continues to be primarily driven by new business wins, and we are pleased with our continued performance over the comparable growth we saw in 2016. Within total revenues, recurring revenue was $99.5 million for the third quarter of 2017, representing 98% of total revenues for the quarter and growing 31% from the comparable prior year period. Total adjusted gross profit for the third quarter was $85 million, representing an adjusted gross margin of 84%. For the full year 2017, we anticipate that our adjusted gross margin will be within a range of 83% to 84%. Total adjusted administrative expenses were $59.3 million for the quarter as compared to $49.1 million in the third quarter of 2016. Adjusted sales and marketing expense for the third quarter of 2017 was $33.5 million. Adjusted R&D was $7.4 million in the third quarter of 2017 or 7.3% of total revenues. Although, we capitalized a higher percentage of total R&D costs this quarter, we anticipate going forward our capitalized R&D costs will be in line with our historical capitalization rate of approximately 29% to 32%, but we may see fluctuations from quarter-to-quarter. Total adjusted R&D costs including the capitalized portion were $10.8 million in the third quarter of 2017, compared to $7.6 million in the prior year period. Adjusted EBITDA was $30.7 million or 30.3% of total revenues in the third quarter of 2017, compared to $18.2 million or 23.5% of total revenues in the third quarter of 2016. Our GAAP net income for the third quarter was $14.1 million or $0.24 per diluted share, based on approximately 59 million shares versus $6.2 million or $0.10 per diluted share based on approximately 59 million shares a year ago. Our effective income tax rate for the third quarter year-to-date 2017 was 8.3%. Non-GAAP net income for the third quarter of 2017 was $17 million or $0.29 per diluted share based on approximately 59 million shares versus $9 million or $0.15 per diluted share a year ago. We expect stock-based compensation to be approximately $7 million in the fourth quarter of 2017. In the second quarter, we repurchased a total of approximately $17.3 million of stock under our $50 million share repurchase plan. As Chad mentioned, we are pleased to announce our $75 million repurchase plan and look forward to continuing to return cash to our stockholders opportunistically via open market purchases. For modeling purposes, we anticipate fully diluted shares outstanding will be approximately 59 million in the fourth quarter. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $66.6 million and total debt of $34.4 million. As a reminder, this debt represents a financing of construction at our corporate headquarters. Construction of our fourth building continues to go well and according to schedule. Cash from operations was $37.1 million for the third quarter, reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately $740 million in the third quarter of 2017. Now, let me turn to guidance for the fourth quarter and full year for fiscal 2017. For the fourth quarter of 2017, we expect total revenues in the range of $111.5 million to $113.5 million, representing a growth rate over the comparable prior year period of approximately 28% at the midpoint of the range. We expect adjusted EBITDA for the fourth quarter in the range of $26 million to $28 million, representing an adjusted EBITDA margin of approximately 24% at the midpoint of the range. For fiscal 2017, we are increasing our revenue guidance to a range of $430.5 million to $432.5 million or approximately 31% year-over-year growth at the midpoint of the range. We’re increasing our full year 2017 adjusted EBITDA guidance to a range of $131 million to $133 million, representing an adjusted EBITDA margin of approximately 31% at the midpoint of the range. With that, we will open the line for questions.

I have a quick question for Chad. Regarding the hurricane's impact, will it disrupt some sales cycles, and could that affect revenue in Q3 and Q4? Or is it just a matter of missing a week or two in the sales cycles?

It varies by office. Some locations were inaccessible for an extended time, while others were not as affected. We needed to ensure that people could return to areas where there were fuel shortages and similar issues. Additionally, we had potential clients in areas that weren’t directly hit by the hurricane, but they had assets in those locations. The clients we serve and those involved in conversions are also the same ones focusing on asset protection regarding their employees. There was some minor disruption, but from Paycom's perspective, I view this as a temporary impact. It specifically affected certain prospecting efforts and conversions, but I can't say there were deals that were scheduled and are now off the table. Many are still progressing as planned, so it really depends on the client and their individual circumstances regarding the impact in those areas.

And then Craig, you like on the beat on EBITDA this quarter a lot of that came from sales and marketing. Is there anything you can help us like look in as a devil's advocate, I would say like the new ARR sales force weak and hence there’s no commission or lower commission payment, but maybe I'm kind of right or wrong there. Can you just help us understand what kind of drill that outside? Thank you.

So, this is Chad. We definitely did have some deals that pushed in out of that quarter that were ready to start and they pushed out of that quarter. You have the Houston piece and then the Florida. So, I mean there's some of that there, and there's also if you think back, last year we opened up six offices and we not only that we opened them all up in the beginning of the year, and we talked about how it takes 14 months for reps to become executive reps and productive, and it takes 24 months for an office to become mature. So last year, we had six offices with twice or more because again as you're heading into the third quarter, you would have had additional reps hired in those offices. So, we were carrying more reps last year that weren't selling as much because they're newer. This year, we opened up three offices and we didn't open them up at the 1st of the year, we actually opened them up later. And so, they actually have less non-productive reps. You have a little bit of that and then you have a little bit of some of the hurricane. And the other thing is our sales and marketing just doesn't include sales commissions and sales salaries. You also have marketing in there and we gained some efficiencies also in that area.

I want to follow up on the hurricane by first expressing my hope that all of your employees are safe. Chad, can you provide some details on the impact on revenues and bookings in Q3? Additionally, if there is an impact expected in Q4, can we quantify that? Are you observing any ongoing effects on new bookings in the areas that were affected?

I'll address your last question first. There are still some prospects and clients dealing with the effects of the hurricane, which might have a meaningful impact on us, but as I sit here today, I don't believe it will be significant. When considering the weeks leading up to the hurricane and the time required to get people back into our office after evacuations, it's important to recognize that it involves more than just our staff. There are data, paper, and files that need to be handled, which adds complexity. The transition back to our locations happens quickly, but there’s still a lot involved. Regarding the specific analysis, I believe that the deals are solid, and we're already seeing activity from many of them. While some impact from prospecting efforts may linger, I feel we've managed this situation well. I don't anticipate it affecting our performance in 2018, and as we progress through this quarter, I expect the impact to diminish further.

That’s helpful, Chad. I mean asked another way. Do you think that your Q4 guidance on revenue was impacted by the hurricane?

Well, as I mentioned, if deals are set to start in September or even mid-August or early August and those get postponed past the first quarter, it will affect our first quarter. This means we could have had the entire revenue billed in the fourth quarter, but we may only see two-thirds of that expected revenue. However, we have already factored this into our Q4 guidance.

And I think Chad said first quarter. I think he meant the first month…

Not the first quarter I meant…

Right, alright. Just one for Craig, if I many. I am just piggybacking on Raimo's question. Your prior long-term target operating model has adjusted EBITDA at 30% to 33% and your guide this year already implies at the lower end of this range. So how should we view the margin profile in the medium to long-term going forward? Thanks. That’s it.

We increased our adjusted EBITDA long-term model to the range of 30% to 33% around the middle of last year, and we're starting to achieve that as we move forward. One factor that may impact this going forward is the change in revenue recognition standards. We are still assessing the implications of 606 and do not anticipate a significant effect on revenue; however, we expect it to influence adjusted EBITDA. Our primary focus is on being a high-growth company. Excluding the impact of 606, adjusted EBITDA is not our main area of concentration. Our priority is on growth, and we plan to allocate resources accordingly, while aiming for margin expansion along the way.

So I think you’ve hit the natural disaster aspects pretty well. But I guess one of the things we noticed in our model here, Chad and Craig, is that you’ve shown significant sales and marketing leverage not only this year but in last year too. And you mentioned the national TV ad campaign. I guess should we start to see that not show as much leverage going forward? Or should we continue to see some of that?

We have seen leverage in our sales and marketing efforts. Our advertising campaign was launched late in the third quarter, and its impact on our results will vary. This variability is influenced by various factors, including the number of less productive sales representatives, the sales performance of newer reps who earn half the commission of more experienced ones, and the overall commission structure. Additionally, we promoted fewer regional managers this year compared to last, and the costs associated with marketing, such as our presence at HR tech events, are considerable. Despite these challenges, we have improved efficiencies in other areas of sales and marketing. However, there will be months where performance may not be consistent due to factors like timing of deals and commission levels. Craig, do you have anything to add?

I agree with that. In terms of marketing, there are specific events we've attended one year that we may not attend the next. We probably won't see the same level of growth in areas like HR tech compared to our revenue rate. Therefore, from quarter to quarter, you might notice some fluctuations in those areas.

Yes, thank you very much. And I’ll add my congrats on the results. Chad, so I wanted to ask you did anything in the Ackman slide deck regarding ADP standout to you, anything in there that you think further illustrates the industry backdrop? And just whether you think their assessment of the landscape and the technology in there is accurate or not?

Yes, I mean I don’t really think it's fair for me to comment on that situation. I do think that there’s a lot of information out there. I think a lot of the information that was pulled was information that was already out there and well known. And so, we don’t really have a dog in that hunt. So, I'll let ADP enactment comment on that.

Okay. So over the summer you conducted a survey based on our professionals, and I think you published some of those results. It kind of touched self-service trends like single log-in and data entry and so on and so forth. What do you think we should take away from the findings? Was there anything in there that surprised you?

I was surprised to see that people are still engaging with businesses and utilizing HCM in various ways. New technologies and devices are emerging, such as our mileage tracker in the app. You can start it with a push, and it tracks your journey, suggesting the best routes and recording the specific drives you take. This information feeds back into the system, supporting expense management for employees who may not receive direct reimbursement but need to track for tax reasons. This capability wasn’t available in the past, but now it is, and we believe it will encourage greater adoption and use of not only our self-service features but specifically the expense management module. The same can be said for LMS training. Overall, it's evident to me that there's still a significant opportunity to change how businesses utilize HCM products, particularly regarding their employees.

Okay. The next one I wanted to touch on the course content. I think you mentioned you launched 10 courses. Can you just help us understand at a high level? Why did you decide to begin developing content and how material do you think that revenue stream could become for Paycom?

Well, this first group, the first step piece of content is included within our LMS module. And so if there is client using LMS today, they just receive 10 courses of value in their content which we do believe is going to increase usage and drive additional adoption of that. Training is not something new. People have been training people since the stone tablets. And so training is not anything that’s new. But again that’s another area where maybe people in the enterprise level have started training people this way. And now it’s making its way to the mid-market. And so, there is also a piece we have to train people on how to train and go through that process. And so, we created the distribution module of LMS that allows us to update LMS courses. And then, it’s not just the courses that they’re taking, it’s also we measure retention of the information that the training that they enter. So for us, I do believe that something that can be learning management is a very important thing for any organization. We are a very large user of our own system and I think were thousands of courses in our own system that we use internally here at Paycom to manage our own business. And so I see that. That’s been a future catalyst for LMS for sure. And a potential revenue driver, it will be in the future a revenue driver as we release more courses.

Chad, as you sort of think about the expansion here on learning, beyond that, what type of growth do you think you can see in per employee, per month pricing a couple of years from now on your percent basis?

That’s hard, it’s all about the value just because we come up with something it doesn’t necessarily mean that it drives value for the client. For us, it’s about the value and the ROI that we’re driving for the client to the extent that at least they are paying as a dollar. They need to have an ROI of $2 plus. And so, and that’s really the way we approach pricing of the products that we put out. We do have monthly releases. Here at Paycom, we're always updating the system. And 99% of that, we’re not charging for. It's enhancements to our current system and sometimes we do. And that’s just hard to forecast from here when we’re talking to company years out.

I want to hold most questions on the LMS. Now that you guys have invested in the content, do you feel like you’re going to put a more concerned effort to go back into the base with that product? Or is just really about improving a catch on new deals?

Well, for instance the 10 content courses we created, we created a library launching and 100% of every one of our LMS clients today now has those 10 courses in their LMS platform. And so that’s already there today. Yes, it will allow us to go back in the clients and talk about how they use those courses and gain value. We have to have a focus group as we went during creating these products. And we are very deliberate with this as we moved Stacy into our, that role of our Chief Learning Officer earlier this year to really go through that. And we just think that that’s going to impact not just client training but also how they learn on our system and increase use of time as well.

So, it sounds like a little of both. And I want to ask about stock-based compensation as it pertains like it's a quality of earnings. I think you guys came in double where you had guided us it’s the second quarter in a row what's ticked up. Just curious, if there is any change in philosophy there, if there is anything onetime in nature of we should be aware of? How are you thinking about that line as we build our model forward?

In terms of stock-based comp, what we saw in this quarter was we have certain market shares out there. And two of those hit the triggers on those and so we had some of that as well as in the second quarter. All of those have hit their triggers now and so moving forward to be more of those issued next year. We don’t really guide on stock comp we did give some information that we expect fourth quarter to be in that $7 million range.

Chad, try to give any thoughts about 2018 high level framework for thinking about growth versus profits and the trade off there?

Well, I mean in the perfect world, there is not as much trade off on that. You can somewhat capture both and that’s I think we have proven that as we continued to grow. As far as 2018 there is so much that we are doing right now, and we are going to know so much more as we turn the corner on that. So as with the years in the past we will update that with our fourth quarter announcement.

I was wondering if you could just come back to some of the earlier questions. If we take a look at the Florida and Texas, what percentage of your revenue base is that? And how different are the commission runs that there or the new sales that they are seeing in those offices relative to areas that would be completely unaffected whether it's out in the Northeast or West Coast et cetera?

We currently have 36 mature offices, 45 total, with nine still in the maturation phase. Of the 36 matured offices, four were impacted. Business doesn't come in uniformly; you might have a strong month followed by a weaker one. This can happen as offices switch focus to prospecting or other areas. It’s challenging to assess the specifics, but all our offices are successful, particularly a couple that consistently rank at the top in their regions. As I mentioned earlier, it's difficult to precisely quantify missed opportunities or potential deals still being processed, but we have plans in place for all of them and feel optimistic about progress. Many of these offices have already converted successfully, so it’s hard to give exact numbers. I apologize for that.

No, no, no, you go ahead.

I was just going to say, it's not nothing. I mean there is an impact there. And again we're dealing with our own employee base too. We had our own employees that experienced loss during this as well and so there's kind of a time for everything and right now we've called the time to get back out there and be prospecting and get those businesses set up and I'm really happy with the people of how they handle this and I mean I feel really good and like I said before any disruption we would have expected happened to us in Q4, is provided within that guidance that we've given and we do not expect this to have any impact on our 2018.

Great. And then just a follow-up. You obviously have you know a ton of different feelers out there in terms of the real economy, it seems like economic activity is picking up. How would you characterize in areas that are completely unaffected just kind of the level of you know buyer enthusiasm, the pipeline etc. how would you characterize that?

I would say it's been business as usual. I can't point to anything that's changed there I mean it’s been good, but we're a business that you know in a down market we look to drive efficiencies for our client and therefore we're a good fit for them and you know that doesn’t really change when things are going well and so for us we have to be strong regardless of what's happening and again we still represent such a small portion of our overall opportunity there's still plenty out there.

Great, and the new offices that are just opened. How are those progressing?

They're progressing as expected, and just to note, it takes 24 months for a new office to mature, but they are making progress.

Hi, good afternoon congratulations on the quarter. So also returning to a topic from earlier when talking about maybe the reasons for the beat, you mentioned a couple of things but the hurricanes going to affect the commissions. I'm not sure I got a full sense of you know beating EBITDA is not unusual, but it’s a larger beat than usual. Can you just talk a little bit more about what drove the outperformance relative to your expectation?

Yes, I mean I think if you look at the overall beat, it came in a couple early. I think we probably talked about the sales and marketing. And R&D one of the things I pointed out was we capitalized at a little higher rate this quarter than what we had been seeing. That probably drove 80 basis points in the R&D from where it would have been, had we capitalized at a more normal rate. And we expect that to come back to more normal rates for our fourth quarter. In our G&A, we saw some efficiency there as well as in the gross margin and I think on the gross margin we were probably it was more of a headcount. We didn't hire quite as many people as what we had expected for the quarter, but we're continuing to staff up and looking good going into fourth quarter on that.

And you've been investing more in R&D whether it’s expensed or capitalized. Are you happy with this, if you look at this run rate as a percent of revenue? Or do you expect that to still increase over time?

Well, I mean what we're happy about the output that's coming out of R&D and to the extent we need to spend more as a percent of revenue to get the specific output we’re looking for. We’re going to do that. I think I’ve said it before. We’re at where we’re at as a percent of R&D. We’ve continued to spend. We continue to increase that. I don’t see us rivaling our competitors in that area of R&D spent. But I believe that we are doing a great job on the output side and that has to do with our process and the way we work.

Great. And then just one last quick one. I may be taking this out of context since it's in response to another question, but I recall Craig mentioning that the focus is on growth rather than margin. Considering that, where do you see potential areas to invest more to drive growth? Should we think about speeding up new office openings or increasing TV advertising spend? How should we approach these opportunities?

Yes, I mean the best way to increase growth for us is productivity. And then obviously in order to best leverage of productivity gains that you have within the sales force. You definitely want to continue to open up offices because that comes your future productivity model, so I would see us focusing on both of those.

Chad, you did an excellent job highlighting the number of affected offices and the context of the productive ones. I was wondering if it’s accurate to view this impact as occurring during the last two months of Q3 and the first month of Q4 in relation to the go-live, the selling motion, and then the go-live itself. So, it seems like a three-month period with a focus on Q3. Would that be a correct understanding of the situation following the hurricane?

Yes, I definitely don't want to focus on any single client that may still be struggling, as their situation might require more time. However, I wouldn't expect this to last much longer. While there may be a few exceptions, I'm feeling quite positive. We measure pushes on a weekly basis, and during this period, we experienced weeks with $900,000 in annualized pushes, which is unprecedented for our company. The question now is when those will return. Some are already coming back, and we didn't lose them again; there were just other priorities for them regarding their own assets in those areas. We did experience pushes, but I want to emphasize that any disruptions we anticipated in the fourth quarter have already been factored into our guidance, and we do not believe this will affect 2018.

That’s very clear. So that 900,000 probably come down but it’s not quite at a normalized level yet?

That was just a one-week. Yes, that’s an annualized number. So that’s an annualized number, that’s 900,000 annualized.

I understand. Yes. And just one for Craig. You mentioned 606, and I'm considering that you didn't capitalize commissions and generally recognize them within the first month of the deal start. Should we think of this as having a benefit to your EBIT, but then facing a tail of amortization? So it could be short-term beneficial for EBITDA, or am I not considering this correctly given there are other factors influencing EBITDA under 606?

No, I think you’re on the right track, but we are aware of the absence of a client for 10 years. As we have grown over the years, our top expenses have continued to increase, and it's not just commissions; there are also some related salaries. Those expenses have been rising as well. The amortization from some of those earlier years is quite small. However, we should see a benefit under 606, and you are correct about that.

Yes. And then that’s helpful. And then just on that I know you don’t talk about office openings, but just on the productivity commentary. I just wondered you know is there a trigger point when you look at the productivity across the productive offices, and you say okay, now is the time to move forward with the new opening or maybe just any commentary about kind of where you are on that productivity curve? And when you get to a threshold where you want to start to maybe press on more openings that would be helpful?

Yes, I mean it’s important for us to be opening up offices throughout 2018. I think that we took a more staggered approach this year to develop those sales people who are ready to be in management. They know who they are and we’ve been working with that group, many of them, you know, better part of seven or eight months and so. As we trying to corner on the beginning of the year, we’ll assessing that and making those decisions. But I mean in 2018, we’ll be opening up offices.

Thanks for taking the question. Chad, I'll actually follow-up on our last question. And this is just from a high-level perspective as you think about new offices, the mature offices. I think 80% of the offices are mature now. You have another six that looking like they’ll turn that 24 month maturity in Q1 of next year. So many no additional offices that puts you at north of 90% of the offices that are kind of mature. How do you think about that balance, mature versus new? What’s the right kind of balance as you think about kind of that mature versus new equation?

Yes. I would like to be able to say our approach is very scientific, but to be straightforward, if we have the right people ready, we move forward. We identified some areas for improvement in developing people and identifying the right individuals, and we've made significant progress in that regard. This is about developing our team. The market conditions are favorable, and there are ample opportunities for us. We are experiencing productivity gains. If I were waiting for those gains, I would be looking for more action. Ultimately, this is about ensuring that our team is prepared to fill positions as managers relocate.

Got it. And as you think about the target cities opportunity out there. Is there still some low hanging fruit and opportunities you like to pursue sooner than later and the people that is kind of slowing things down a little bit, but walk us through the opportunity for new city expansion?

I mean when it comes to any specific territory that we’ve identified for opening, I am somewhat agnostic on which one. To some extent that depends on the relocating manager. I think I’d said it before. We would necessarily take an Oklahoma City manager and relocate into Manhattan. You want to make sure you have a culture fit with the people that you are putting in an area and on our Manhattan people are doing quite well. And so, you have to look at that as well across the board.

I think a lot of the questions that I was going to ask have been answered. But could you kind of this talk about, if you see any changes in the competitive landscape specifically from ADP or any other competitors?

I mean it’s been somewhat business as usual for us. I mean I can’t say it’s harder to get business for sure. But it’s been business as usual for us. I think I’ve said it before. We’re very focused on our own value proposition and what we do and we’re really staying in our own lane on that. So yes, I can’t speak to any. And I’d say that, I don’t know if any new entrants that have made an impact. For us, it’s been the usual suspects.

Chad, you talk about the leverage from sales and marketing that we saw. Can you just break it down how much of it was personal versus commission versus scale-back in some marketing spend?

I guess, maybe starting on maybe what you talked about with the new national brand campaign. I mean, to the extent that maybe you're starting to see results and benefits from that. Can you talk about how you're thinking about brand awareness? And maybe how that might factor in your potential office expansions? When you’re looking at the data and trying to see certain regions or areas where you might not have much brand equity in that space, just try and look at that as a new greenfield opportunity or perhaps scenarios where since you think you have some really great brand awareness, and that you want to even double down on that type of region?

Yes, I would say that the ads are relatively new, so they aren’t affecting our numbers at the moment. However, driving brand awareness could relate to deals we pitched two years ago that didn’t materialize, which you definitely want to be part of. Additionally, our advertising isn’t solely focused on potential clients; it also highlights how our existing client base uses our product. I’ll also point out that I didn’t understand the iPhone’s features until I saw a commercial for it, even after using it for a couple of years. It's essential for people to learn how to use our products correctly.

I have a quick follow-up question. When discussing learning management, I've noticed it has been adopted primarily in the enterprise sector. As you consider your target customer base and your expansion efforts, could you share insights on the level of penetration you have achieved in the learning management market? Are you discovering new opportunities with your existing customers in this area?

Well, we sell a single system and so, we don’t breakdown adoption for anyone modular. But like I said everyone in the mid market does training. There is not a client that doesn’t do training and learning. They just might be doing it using a different type of model which could even be manual in many cases. We are not bringing the tool. We are not just bringing the content we are also bringing the process through which someone can set up training specific to their business and then they already have the tool to be able to or get it out to all the employees and then be able to actually assess comprehension of the information that was presented and trained on. And ladies and gentlemen, this will conclude the question-and-answer-session. I would now like to turn the conference back over to Chad Richison for any closing remarks. I want to thank everyone for joining us on the call today. We appreciate your time and interest. We look forward to meeting with investors of the Credit Suisse TMT Conference on November 28, in Scottsdale; also the Wells Fargo Tech Summit in Park City on December 5; and the Barclays Global TMT Conference in San Francisco on December 6. I thank you and operator you may disconnect.