Paycom Software Inc (PAYC) — Q2 2018 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 or make in this presentation 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, 2017. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statements speaks only as of the date on which it is made and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Also during 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 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 thanks to everyone joining our call today to review our second quarter 2018 results. As with prior calls, I’ll start with some comments on our achievements in the second quarter, then speak to developments at the Company as well as in the payroll and human capital management or HCM software market. Craig will then provide an update on our financials and guidance. Paycom’s powerful and intuitive solution continues to gain market share, powering our strong second quarter results with revenue of $128.8 million, representing growth of 31% over the comparable prior year period. Our profitable model delivered adjusted EBITDA of $53.5 million, representing a 41.5% adjusted EBITDA margin. Additionally, during the second quarter, we were pleased to return value to our stockholders by repurchasing over 400,000 shares. At Paycom, our goal is to help our clients achieve success by helping them hire, engage and better manage their workforces, using the power of our technology. In our conversations with prospective clients, we see that more and more companies are becoming excited about the potential efficiencies and improvements they can attain by deploying our advanced HCM software solution. Our solution offers a broad set of capabilities that spans the entire employee lifecycle, all of which have been built organically by our internal development team. We believe our offering remains the best option in the marketplace. We also believe that we are still at the beginning of an HCM transformation through which employers experience greater return on their investment by leveraging HCM technology for their employees. Today, HCM systems are still mostly used by system operators. Employee usage remains less than optimal. At Paycom, our vision is to see substantially greater usage of HCM software among our clients’ employees. This vision is supported by our years of experience converting clients from our competitors and is further supported by the broad trend of people becoming accustomed to working with self-service solutions and mobile software on a daily basis. Significant employee usage of HCM systems has the potential to both increase employee satisfaction and also provide useful, reliable data to employers. However, with people spending more and more time using mobile devices, this goal is only realistic if you have an application that has the capacity to handle a wide range of innovative HCM needs and is easy to log in to and use. Paycom’s mobile app meets those requirements, providing all the functionality offered by our employee self-service desktop application. We believe the work we’ve put into developing and refining our mobile app and also our overall employee usage strategy positions us well for continued growth. On our last quarter, I highlighted our redesigned employee self-service desktop and mobile apps and how they allow our clients, employees to access every part of our solution from any device at any time. I’m pleased to report that our mobile app is gaining in popularity and usage with client employees. And we are optimistic that our success in driving this usage will grow. Additionally, we continue to improve our overall offering in the second quarter, introducing several enhancements as part of our monthly updates that we roll out to our entire client base. We will continue to introduce new functionality to maintain our competitive position. We are excited about our prospects for continuing to capture market share. In an effort to generate momentum as we head into 2019, we will be investing in certain marketing initiatives in the second half of this year including a targeted national campaign that we expect to start late in Q3. Additionally, we were excited to see the Oklahoma Sports Hall of Fame release the 2018 Paycom Jim Thorpe Award Preseason Watch List. This list includes 35 of the nation’s best defensive backs, representing 11 conferences. The Paycom Jim Thorpe Award, which we are honored to sponsor, annually recognizes the best defensive backs in college football and is awarded in December. Turning to our internal growth. We also expanded our sales reach in the second quarter, opening sales offices in Columbus and San Diego. We are excited to expand our sales footprint to offer our best-in-class HCM solution to businesses in these markets. These additions bring our total sales team count to 49. On our main campus here in Oklahoma City, we completed construction of our fourth building and started to move employees into it. This 250,000 square-foot building is as large as our first three buildings combined and offers many state-of-the-art features including studio space, where we can create our own content and also a data center that will complement our existing data centers in Oklahoma City and Dallas. Regarding our Texas operations, we recently announced our plans to relocate our Texas operation center to a new facility in Grapevine, Texas. We plan on commencing construction of this new facility in 2019 and are excited about expanding our presence in Texas. Finally, I would like to provide an update regarding our executive management. We have promoted Kathy Oden-Hall, our Chief Marketing Officer to our Executive Officer team. Kathy has been instrumental to our success at Paycom, leading our marketing and PR efforts for several years and recently taking on increased responsibilities. I’d like to extend my thanks to Kathy for her service. We look forward to her continued contributions as we grow. To sum up, our momentum continued across all areas of our business in the second quarter, and we are optimistic for our prospects for the remainder of 2018. With that, I’ll turn the call over to Craig for a review of our financials and guidance.

Before I review our second quarter results for 2018 and also our outlook for the third quarter and full-year 2018, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. Also, we adopted the new accounting standard, ASC 606 on January 1, 2018, utilizing the full retrospective method of transition, which required us to recast the prior period presented. Our comparisons discussed in today’s call reflect those adjustments. We use adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess our performance and for planning purposes. Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures that exclude non-cash stock-based compensation expense and certain transaction and other expenses that are not core to our operations. Non-GAAP net income also reflects adjustments 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. We are pleased with our second quarter results with total revenues of $128.8 million, representing growth of 31% over the comparable prior year period. Our revenue growth continues to be primarily driven by new business wins, and we are pleased with our continued excellent performance. Within total revenues, recurring revenue was $126.6 million for the second quarter of 2018, representing 98.3% of total revenues for the quarter and growing 31% from the comparable prior year period. Total adjusted gross profit for the second quarter was $108.3 million, representing an adjusted gross margin of 84.1%. For the full-year 2018, we anticipate that our adjusted gross margin will be within a range of 83% to 84%. Total adjusted administrative expenses were $61.7 million for the quarter as compared to $49.9 million in the second quarter of 2017. Adjusted sales and marketing expense for the second quarter of 2018 was $30.2 million. Adjusted R&D expense was $10.5 million in the second quarter of 2018 or 8.1% of total revenues. Total adjusted R&D cost including the capitalized portion was $14.6 million in the second quarter of 2018 compared to $10 million in the prior year period. Adjusted EBITDA was $53.5 million or 41.5% of total revenues in the second quarter of 2018 compared to $36.6 million or 37.2% of total revenues in the second quarter of 2017. Our GAAP net income for the second quarter was $35.7 million or $0.61 per diluted share, based on approximately 59 million shares versus $20 million or $0.34 per diluted share based on approximately 59 million shares in the prior year period. Our effective income tax rate for the second quarter of 2018 was 17.9%. Non-GAAP net income for the second quarter of 2018 was $34.8 million or $0.59 per diluted share, based on approximately 59 million shares versus $20.5 million or $0.35 per diluted share in the prior year period. We anticipate our full-year effective income tax rate to be 22% to 23% on a GAAP basis. On a non-GAAP basis, we anticipate our full-year effective income tax rate to be 25% to 26%. In the second quarter, we returned value to our stockholders by repurchasing over 400,000 shares, including 350,000 shares purchased in the open market. Since we initiated the repurchase program, we have repurchased over 3.3 million shares, including over 2 million shares in the open market. We anticipate fully diluted shares outstanding will be approximately 59 million shares in the third quarter of 2018. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $54.6 million and total debt of $35.3 million. As a reminder, this debt represents a financing of construction at our corporate headquarters. As Chad mentioned, construction of our fourth building is complete. In addition, we recently announced our planned expansion in Grapevine, Texas and expect to close on the land purchase in the second half of the year. Cash from operations was $42.7 million for the second 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 $960 million in the second quarter of 2018. Now, let me turn to guidance for the third quarter and full-year for fiscal 2018. For the third quarter of 2018, we expect total revenues in the range of $129 million to $131 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 third quarter in the range of $45.5 million to $47.5 million, representing an adjusted EBITDA margin of approximately 36% at the midpoint of the range. For fiscal 2018, we are increasing our revenue guidance to a range of $554 million to $556 million or approximately 28% year-over-year growth at the midpoint of the range. We are increasing our full-year 2018 adjusted EBITDA guidance to a range of $231 million to $233 million, representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range. With that, we will open the line for questions.

Thank you for the question and congratulations on a great quarter. Chad, you've been discussing usage more frequently as a way to deepen client engagement, and there's also an increased emphasis on employees. Could you share your observations regarding the companies you've traditionally sold to, specifically those with 1,000 to 2,000 employees? Are they ready to move toward the enterprise level, as we've typically seen in that segment?

We’ve been concentrating on usage, particularly at the employee level, because we believe it’s one of the most effective ways for our clients to generate ROI. When employees have a direct connection with the database, we observe that occurring across various sectors as digital transformation progresses. While it seems to have progressed more slowly in our industry due to the critical nature of payroll, time and attendance, and benefits, we are beginning to witness this change. We have been advocating for this shift, and I am confident that it represents the correct strategy for the future.

Okay. Regarding your profitability, you have performed better this year compared to last year, but your guidance indicates a significant increase in the second half. Can you discuss the timing and the amount you plan to invest there, as it represents a notable increase in the second half?

Sure. I mean, Chad called out that in the second half we’re looking at really ramping up some of our sales and marketing initiatives. And so, we would see that in the second half as well as some on the R&D, we’ve always seen a step-up as well from quarter to prior year quarter in the R&D area.

And then, my last question is about the capital expenditures. Can you share your thoughts on the purchases planned for the second half in Texas? What do you think will be the full-year spending level that you are comfortable with, Craig?

Yes. Regarding capital expenditures, we noticed a decrease from the first quarter to the second quarter as we completed construction on this facility. We also mentioned the upcoming purchase of the Grapevine land, which is expected to take place in either the third or fourth quarter. While we typically do not provide guidance on capital expenditures, we anticipate that for the full year 2018, it will be comparable in terms of total dollars to 2017.

Chad, I understand that new sales offices generally contribute very little. However, this quarter was particularly strong. You increased recurring revenue growth beyond the levels of the previous three quarters. This raises the question of whether you saw any significant contribution from the three new offices opened this quarter. If the answer is no, which is often the case when this question is posed, what do you think accounts for the acceleration in performance this quarter?

Yes. With any quarter, our record is as far as the revenue comes in, you’re always going to have the overwhelming majority of our revenue, new business revenue that comes in, this one could be from new logo adds. Your question about new offices, our new offices continue to do well as expected, but they don’t react differently than what our past offices have reacted as far as contribution. I think I’d mentioned this before. A year before last, we opened up six offices, and I had two sales reps outsell that six offices we opened for that year. And so, new offices will make contributions, but they really start making their contributions past month 24 of original open day.

Could you remind us about the impact of sales from new business? Once a deal is signed, it typically takes about 60 days to get everything operational, and revenue recognition starts only after that. Is that correct? So, the strength we see this quarter likely also reflects last quarter. Am I correct in that assumption?

You are correct. We do not recognize revenue until it has been built, which in this case would have contributed to our count. You are also right that it typically takes around six weeks, though it can sometimes take longer for us to onboard a client. This duration depends on the client's motivation and the severity of the patient’s condition from a data standpoint, which determines what we need to address. Therefore, you are accurate regarding the timing. I'm not entirely sure about the correlation between this quarter and the last quarter in relation to your question. However, I can say that our revenue and its composition have remained consistent from quarter to quarter.

All of my questions are focused on why this quarter is performing so well. This business is operating as usual, and as Raimo pointed out, it has indeed been a very strong quarter.

We’ve been talking about differentiation with the product. I believe that’s resonating again as people look to adopt usage of HCM technology, similarly to how they do everywhere else in their lives. I mean, I think that we are in the beginning stage of people starting to use HCM technology to really work for the business and be able to drive their own ROI. And we’ve been talking about this, we’ve shifted our entire Company along that strategy and we’re all very focused on it. And so, I do believe that’s producing strong results for us at this time.

This is someone sitting in for Mark. Congrats from me as well, and thanks for taking my question. Hey, Chad, regarding the topic that John was inquiring about, I understand that you don’t provide updates on retention or dollar retention, but did a better dollar retention contribute to the upside in the quarter at all?

We always focus on retention, and I've discussed our efforts in this area since our IPO in 2014. Typically, in our industry, most losses occur at the beginning of the year when certain clients decide to start. Losses can also happen throughout the year. Therefore, we usually begin with a retention number and work diligently to improve it over the course of the year. Our retention efforts have resulted in a retention rate of around 91% for the last seven or eight years. While some aspects are beyond our control, many are not, and we remain committed to this focus. It’s still early to discuss retention impacts for the end of the year, but we will continue our efforts as we have in the past, and we'll see how this develops in our fourth quarter and full-year results at the year's end.

Understood. If retention remains relatively stable, I assume that productivity for mature offices is increasing towards the goal of 6.5 million, which was achieved by the top performing sales teams. Is that a fair assumption? How should we view the productivity trajectory for mature offices in the second half?

Yes. We are continuing to get better on sales productivity that comes from both working very hard and actually our sales managers working very hard to improve their skills set for both themselves as well as reps that they have working for them, as well as product differentiation. I mean, we continue to work aggressively on our product in order to differentiate. We think that gives reps a better opportunity when they go into meet with prospective clients, it gives them an opportunity to go in and talk with prospects that maybe we didn’t get the first time around, and so as well as you continue to improve and differentiate the product. And so, I would probably point to both of those that work hand in hand, being able to have a stronger product and then, again, working on sales skills to be able to go out and produce results that increase our overall capacity on the sales department. And so, those are the areas I would point to as generating some of the gains that we had this quarter.

Chad, looking back over the past year or two, can you provide any insight into the growth of your per employee per month landing price? I ask because you continue to expand your portfolio, and it seems like your primary focus is on landing large accounts rather than cross-selling or upselling. Therefore, this metric might be a good way to measure your success. Can you help us quantify the per employee per month landing price?

I guess, what I’d say is we haven’t updated that number since IPO and we’ve chosen not to do that due to competitive reasons. I can’t say and answer to your question, over the past year there has not been a significant increase in the PPM from that period of time. We’ve been very focused on usage, again. It’s easier to sell products to clients than to get them to use it appropriately. So, we’ve been really focused on that in order to help clients actually deliver the ROI that we presented to them. And that’s been our focus. So, as we continue to get greater usage, does that allow us to sell other products that they didn’t have? Well, certainly it does. And can you really sell additional products to someone who isn’t using a large percentage of the products that they currently have? I mean, well, you can, but it just doesn’t help them meet the objective for the business. So, we want to be a partner in that. So, that’s been our focus. It’s been usage. And I think that’s making a difference in both how our current clients use the product as well as us being able to leverage them as references as we go out into the field and work with new prospect opportunities.

And then, Craig, maybe one for you. Gross margins jumped out as pretty strong in the quarter, I think they were up almost 200 basis points year-over-year. I know it seems like you kicked maybe the range of guidance for the year a bit. Anything, one-time in nature that drove the gross margins frankly in Q2? And historically, we see gross margins pick up even more in Q3 and Q4. Why would that not be the case again this year?

Yes. On the gross margin, we’ve always been in the 82% to 84% range, and we did tick that up to 83% to 84%. The greatest impact on that gross margin is just the timing of when the hires come in. We bring people in and it takes them a while to ramp up and learn to be able to take on the clients and then they will take on a few and then ramp to full capacity. So, some of that’s in timing. I don’t know that I would read a lot into that moving towards the third and fourth quarter other than it kind of ranges between that 83% and 84%. And one thing I’d call up kind of as a housekeeping matter, last quarter, we called out our stock comp at being in that 5 million to 6 million range. This quarter, it was slightly lower than that. So, just for modeling purposes, I wanted to keep that in that range.

Keep it in the 5% to 6% range?

Yes, in the 5% to 6%. We had some forfeitures true-up second quarter that caused it to be a little lower.

Chad, you’ve always emphasized usage. I was wondering, can you dimensionalize some of the progress that you’re making with regards to increased usage, like how should we think about it or how do you measure it, and how are you thinking about it in terms of how it should trend over the course of this year?

I believe there's a significant opportunity for us in terms of usage, especially when considering the overall industry. Specifically, the question is about what employees could be using that they currently are not. Generally, usage among employees has been low across the industry. Until we began focusing on our usage strategy, our own usage metrics were also disappointing. However, we have since concentrated on this area and have seen improvements, though we are still not at our desired level of usage. Our goal is for clients to fully utilize the software, allowing employees to engage directly with the database, which benefits everyone involved. We are still in the early stages of developing our usage strategy. Increased usage leads to the creation of more products because when users engage with a comprehensive set of features, we can identify additional areas where we can deliver value for their business. I anticipate that employee-level usage of our product will continue to grow as we progress.

Does that change at all, like who you are having the most success against in terms of gaining new clients from?

I wouldn’t say that things are changing dramatically. It's still the usual factors driving our business successes. Conversations are starting to shift in both the C Suite and HR departments as they become aware of various technologies that they can utilize. Much of this relates to task management in our industry, where certain tasks are not optional; they are necessities that need to be handled. While people may not enjoy them, they must be completed. These tasks are often mandated. Therefore, when we can provide better technology that enhances accuracy in these situations, it becomes very advantageous for our clients. I believe that as we transition from mandatory tasks to those that people want to engage with, we will see a significant increase in usage. However, it begins with the essentials. Employees must enroll in benefits, track their time, request time off, and manage their COBRA benefits. There are many such tasks – expense reports, for example – that are integral to employment. We remain focused on these areas, and I see prospects for continued growth in usage. Honestly, I would be quite disappointed if we fail to keep up our progress as we have in the past.

And then, any dimension with regards to the additional marketing spend, how we should think about it?

We have a marketing strategy. The thing about marketing is you can waste a lot of money in marketing and advertising if you are not measuring it and you are not getting the return from it. So, we do have ambitious marketing objectives as we’ve had every year here at Paycom. We are going to be embarking on another national strategy. We have one similar to this last year that we embarked on. We’re doing that again, as we’ve talked about, in the second and third quarter in an effort to get some momentum as we head into 2019 as well as differentiate the product and the new message. So, we look forward to getting out there in the coming quarters with that message.

Hi. This is Clark on for Brent. Chad, I think something that we’ve seen so far this year is that businesses are assuming kind of healthy and are interested in some modernization efforts. I was wondering if there is anything to call out in terms of customers that might be interested in the non-primary products, maybe the talent side and whether you’ve seen an increased willingness or interest to kind of do the modernization all at once, if they had no talent system or a legacy system they might be looking to improve upon? Anything you could talk about that momentum.

Yes. HCM has increasingly become prominent in an industry that was mostly focused on payroll and labor management. We’ve observed HCM products starting to penetrate the mid-market, which were previously aimed at enterprise-level customers. This shift has been occurring over the last five years, with HCM adoption continuing to grow, especially in talent management. Companies need to have a strategy for managing talent for our products to be effective; without it, usage will be limited and it won't significantly influence their operations. Additionally, there is a need for education on why background checks are essential, as many businesses still neglect them or only perform them on a small portion of their workforce. Best practices that were once typical for larger companies are now becoming accessible to the mid-market due to evolving technology, and we believe we are leading this change.

And then, a question for Craig. Sales and marketing came in lower than we were estimating. Is there anything you could call out in terms of that line item? Was there any kind of the push out of the marketing campaign in terms of maybe expecting to starting this quarter and now for the second half or any color on that regard?

I mean, no, nothing that we pushed to the third quarter. Chad did mention, we are going to have some additional initiatives starting in the fourth quarter of this year.

Chad, given mobile product seems to be becoming an increasingly meaningful point of differentiation in the market, first and foremost, do you see it helping you win deals? And then number two, down the road, do you see additional monetization opportunities with that?

Yes. I do believe it’s helping us. Again, the mobile products is the reflection of our overall software. It’s just an easier way for employees to access. We have the desktop version and then obviously we have the mobile. So, mobile devices have become prevalent in the world today. And so, we are able to leverage that. Are there opportunities that we’ve identified that can allow us to not just increase usage but increase revenue opportunities for us, which also increases additional ROI for our clients? There sure are. But, again, we’re very focused on delivering, not only that, but making sure that the clients are using the products that they have available to them today. Because we also believe as part of this process, clients can get greater returns on their investment in Paycom, if they will use the full system. And that’s really what we want people to do, that’s what we’ve been embarking on. And then, once people have done that, does generate additional opportunities. But I will say that right now we have some very significant mandated videos that’s in our LMS content right now. If I cannot get a specific client to watch videos which are somewhat mandated and very timely, I really can’t sell them anything else after that, as it relates to content. I’ve got to get people to use the content that’s there before you can create additional, that will be meaningful to them. Does that mean we’re not creating content? No, we’re continuing to create content. And the answer to your question, I do believe that we will have a greater success in the future with all of our products as we increase usage at the employee level.

Following up on the previous question, now that you are a few quarters into the learning content offering, could you discuss what you've observed regarding usage trends for the content you've created? Additionally, can you share any details about the plans for developing more content in the latter half of this year and early 2019?

Yes. We’re concentrating on content creation. I mentioned it as an example because there are certain requirements that we want employees to go through their content as well as test and certify them to ensure they’ve completed the course, as I mentioned earlier. We are still in the early stages of getting people to fulfill these mandatory requirements, let alone the additional training that might be beneficial in their specific industries. We continue to develop content, and I believe that Learning Management Systems are a relatively new area for our business and for Human Capital Management in general, especially within the midmarket, which can be utilized not only by us but also by our clients and even competitors as the market evolves toward a more knowledgeable workforce. The new generation learns differently, and a two-hour course is not effective for millennials. We are learning more about how people learn and what resources are available to them, and we’re focusing on all these aspects as we approach the market.

And then, just a quick follow-up. I guess more broadly, as you look at the group of offices that are reaching full maturity this year and perhaps comparing them or looking back to the last year or the group two years ago. Anything anecdotally that you’re seeing in terms of what some of the new offices might be doing better or maybe accelerating more quickly, again, versus looking in the past and sort of how those offices have ramped up or how they’ve acted or performed at full maturity?

Yes. I mean, consistent with what I’ve described in the past, your best offices have your best managers. Your best new offices have your best new office managers. I’d say, it’s a territory agnostic. There is so much opportunity for us in the territories that we are in. You are going to see that your best offices are managed by our best people.

Just two questions on the ad campaign. Chad, I hear you loud and clear that there needs to be measurable outcomes. And I’ve heard varying philosophies from folks in the space about the value of mass market advertising. Can you just give us a sense as to what you’re hoping to accomplish? Is it just brand recognition? Is it driving leads or what other metrics?

Yes, I think we're discussing a competitive situation in our industry. Competition benefits consumers, so I prefer not to reveal too much about our marketing strategies. What I can say is that we are focused on branding Paycom and promoting the message of a new digital transformation in our industry. It's important for everyone—ourselves, clients, prospects, and competitors—to embrace this change. We believe there will be new ways people will use these products in the future, which we are already observing in other areas. Our advertising and marketing efforts aim to support not only the Paycom brand but also the shift we anticipate in how these technologies will be utilized.

Could you give us an idea of how the change in interest on client balances might have impacted the results this quarter? Did that grow faster or slower than recurring revenue growth? Any information you can provide would be helpful.

Yes. I mean, we gave the total number of the average daily balance outstanding for the quarter. There was a one rate increase during the quarter was towards the end of the quarter, June 15th. So, that was really the only a rate increase for the quarter. Other than that, we remain the way always have been. We are fairly conservative with our investment on those funds there, client funds. And so, there is really nothing to change in our strategy on investments.

So, my interpretation that means it wasn’t a meaningful driver of sequential acceleration in recurring revenue growth, is that accurate?

That would be accurate.

Actually I just wanted to follow up on that point, Craig. I look at like LIBOR rates, and they were up. I think you talked historically like a 25 basis points is just a little shy of annualized couple of million. So, I just wanted to make sure, is that still the right ballpark? And then what are the primary instruments in which you hold client funds?

We won't disclose the specific instruments we use, but our strategy remains unchanged. I want to clarify that your numbers are slightly off; now that our balance has increased, we are looking at approximately $2.4 million to $2.5 million in annualized revenue, up from less than $2 million due to a smaller balance previously. Our investment approach has been consistent. We have been transparent that rising interest rates positively impact both our revenue and adjusted EBITDA. It doesn't take us significantly more effort to secure 30 basis points compared to 25 basis points. We continue to see a favorable effect as interest rates rise. If you are trying to gauge the exact impact on a quarter, keep in mind that it may not be immediate with some banks, and negotiations may need to happen in advance if they anticipate changes. Overall, we've maintained a cautious approach regarding how we manage client funds.

That’s clear. Thanks for that Chad. Maybe just one follow-up Chad for you. I was just curious in terms of your net new wins, how you describe the size of those customers in terms of average employees. Are they staying pretty consistent with what you’ve seen in recent quarters or any marginal shift one way or the other?

They’ve been consistent with past quarters, which would include continuing to sell some at the upper end of our range as we’ve used to disclose in the past.

Yes, this is Will on behalf of Siti. I wanted to ask about your focus on employee usage and the recent updates to your UI and mobile apps. Could you share any customer feedback on that so far? Also, do you expect this to lead to more cross-selling of your products overall?

Yes. The feedback from the client base has been good, very good. We do monitor employee feedback as employees of our client base goes in and reviews and gives us feedback. So, we are definitely continuously making changes to that software to make it easier to navigate and easier to use at the employee level. Again, we do see opportunities for us to continue to add not just to the app but it’s to the overall product. Again, the app is a device used to gain access to the overall solution. And so, as we go through and we add strategies and develop products for those strategies, it would be for the entire product leveraged through the employee app.

Thanks for taking the question. And congrats on a great quarter. I just want to touch upon the new office openings. So, can you update us on your thoughts on what should we expect for second half? And maybe even beyond that and in terms of where you have in terms of penetration of offices across the U.S. and how much more should we expect in the next two quarters and maybe beyond?

So, as we haven’t done in the past, we haven’t guided to when we are opening up offices, other than to say we’re continuing to focus on our sales strategy, which does include opening up additional offices. But, we are also very focused on increasing sales capacity. We start with the problem, what problem are we looking to solve. And for us, we believe we have quite a bit of runway in front of us of collecting prospects that don’t currently use us and making them current clients. We have certain geographies that we do not exist in and we have other geographies that we can continue to expand in even further as some of our larger cities. So, as we move throughout the year when it makes sense for us, that would be something we would look to do, would be to open up other offices if it makes sense for us at that time. But for us too, we are very focused on continuing to increase the capacity of our sales force. And so, we are definitely focused on that as well.

This would be on the mobile side. Obviously, you are going to run more campaign in the second half and you are seeing better traction among your customer base within the same number of employees. But, do you see mobile kind of opening up your products to beyond the current customer segment to maybe more employees?

We are a business-to-business product, we’re very much focused on delivering ROI for businesses that exist here in the U.S. And so, that’s what we are focused on. To the extent we can do that in a way that benefits employees in other areas, we would definitely be looking to do that. But we are focused on making an impact on our clients’ bottom line. And I believe that’s what clients choose Paycom. And again, our effort is trying to increase that ROI that any client can achieve with Paycom. And if we identify something that allows a client to do that through employee usage, that would be something we would look to develop.

And then, lastly, on the benefit side, it seems like they is an increasing trend for at least certain customers to go and use the third-party benefit administration tools like planned source or business model and so on. How do you see from your customer base, what’s your feedback been in terms of how to use the benefit solution? Do they feel comfortable with what they have seen? And maybe your thoughts on maybe partnering with third-party providers on that front.

Yes. So, we have our own benefits administration module within the same software that we have. It’s ours, we developed it, it’s part of the same database. We’ve had clients on it for some time now. I don’t know the number of years but I mean it’s not a brand new product for us. We are probably four to five years in on benefits administration. As a reminder, we do not provide healthcare coverage or vision or dental to our clients. We help aid them in the choice that they make for those vendors and as part of that. You do have to send the files feeds to those third parties which would be your health insurance company, your dental insurance vision live and what have you. And so, we continue to do today and then after the fact note, where we are taking the clients our files and getting those to the appropriate vendor.

The one question I had was just around the context in terms of the revenue guide for Q3, the sequential growth rate. It’s not much there. So, just wanted to double check with you to see if any business was pulled forward here into 2Q from 3Q. And then, the second question on the second half business, maybe just any overall comments that you can share with us Chad on how the pipeline momentum is trending and how the lead funnel is filling up for you as you look out into the second half of the year?

On the first question, to the extent it pulled forward into Q2, it would still exist in Q3 from a starts perspective. I think, that may have been the question on that.

Yes. I mean, our outlook on guidance is similar to how we’ve been in the past as well.

We guide to what we can see, our approach hasn’t changed. And then your second part of that.

It was on the pipeline. I like to see starts, I like to see pipelines turn into starts. If I see too large of a pipeline, and I’m looking for the starts. And so, we continue to have strong momentum in our sales department. I’ve been excited not just about sales but our conversion departments, our R&D department, our Paycom Specialist department. Everybody has been galvanized this year and actually started last year, really galvanized around the same message and what we’re looking to accomplish. And I really think that’s created an opportunity for us to really have a great year this year as we’re seeing as we head to second quarter.

Just to clarify on that first question, I know I mentioned it earlier, but I’m thinking about how deals have been appearing from one quarter to the next. Based on your comments, was there anything unusual regarding the timing of the deals this quarter?

It is important when a deal starts. If a deal begins at the start of a quarter, you receive the full revenue for it. However, if it starts in the last month of the quarter, you will only receive a portion of that revenue. While this timing is significant, forecasting it can be challenging since we collaborate closely with the client, and their schedules can impact the timing. Thus, trying to be overly specific about when something will start, such as May 1st versus June 12th, can be risky since it can affect the revenue for that quarter. We always guide based on what we can observe and our expectations, and any changes that arise throughout the quarter are reflected in the final figures. Our method for the third quarter will follow the same approach as in the past.

Well, I want to thank everyone for joining us on the call today. And next month we’ll be on the road meeting with investors at the following conferences. We’ll be at the Oppenheimer Technology Internet and Communications Conference in Boston on August 7th. We will be at Canaccord Growth Conference in Boston on August 8th. We will be at the KeyBanc Capital Markets Global Technology Leadership Forum in Vail, Colorado on August 14th. I appreciate everyone’s interest in Paycom. We look forward to meeting with many of you soon. Operator, you may disconnect.