Paycom Software Inc (PAYC) — Q1 2020 Earnings Call Transcript

Thank you and welcome to Paycom's first quarter 2020 earnings conference call. Certain statements made on this call that are not historical facts, including those related to 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 made on this call are reasonable, actual facts could differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made 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, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. 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 and is available on our website at investors.paycom.com. I’ll now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer.

Thanks, James, and thank you to everyone joining our call today. First, my thoughts go out to those whose health has been impacted by the pandemic. We also sympathize with businesses that are faced with unavoidable reductions in their workforces and the employees who have lost their jobs. Additionally, I'd also like to extend my sincere thanks to first responders, medical personnel, and those involved in the supply chain who are on the front line. Finally, I want to thank our employees who continue to execute while working from home and also our Phase Four team who remain working at the office. For today's call, I'll spend a few minutes on our first quarter 2020 results and some notable achievements. Following that, Craig will review our financials and provide some perspective on financial trends, and then we will take questions. I am particularly pleased with our performance in the first quarter. First-quarter results were strong, driven by our high-margin recurring revenue business model and continued strength of new business adds. Q1 revenue of $242.4 million came in above the high end of our guidance range in spite of the effects of unexpected interest rate cuts and an unemployment spike in March. Adjusted EBITDA of $117.9 million in Q1 was also above our guidance range as a result of record gross margins. We entered the year with strong momentum following record revenue retention in 2019 and a value proposition that is stronger than ever. Even though the month of March was impacted by declining revenues from our current client base due to the effects of COVID-19, we continue to see strong addition of new clients. We are also experiencing elevated lead volumes compared to the same period last year, which we are driving through our marketing efforts and the strength of our value proposition. The pandemic is exposing seams created by the disparate systems and that is creating a higher demand for the Paycom single database solution. I am pleased with the incredible results and collaboration I am seeing across the sales and marketing organization. The appropriate usage of human capital management solutions has never been more important than today, and we will continue to invest and innovate to strengthen our position. More employees and managers are accessing the system, and HR and employees are doing less paperwork and manual input than ever before. We continue to see strong usage patterns of our products as measured by our Direct Data Exchange or DDX, with usage scores well above Q4 levels. DDX numbers continue to be strong and improve as companies adopt a full employee usage strategy. When employees have a direct relationship with the database, the employee wins, and the company benefits from real savings estimated at $4.51 per HR task or data entry point, as well as higher efficiency and overall employee satisfaction. In February, we launched Manager on-the-Go, a tool built into Paycom's existing mobile app which empowers leaders with 24/7 accessibility to essential manager-side functionality of our solution. I said at the time that I believe this was the single most important product release we had since the launch of our employee self-service app. And while we are still early, it's proving to be very popular. Within the first 12 weeks since its launch, Manager on-the-Go has significantly exceeded the employee self-service product adoption over the 12-week comparable post-launch period. This easy-to-use functionality distributes approval responsibilities more broadly and removes impediments to quick data flow, and managers across our client base are embracing it. Once managers use Manager on-the-Go, the vast majority of them fundamentally change the way they interact with our solutions, and actions previously completed on the desktop are now completed on the mobile app. I'm very pleased with the trends we are seeing. While many of our clients are unfortunately experiencing significant fluctuation in their employment trends due to COVID-19, we remain focused on three controllable activities: providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. I am more confident than ever in our product's value proposition and go-to-market strategy. I've been saying for some time that we may be early with our strategy, but we are not wrong. And today, we are no longer early. The digital transformation for business is accelerating. I'd like to thank all of our employees for their grit and the winning spirit they display every day in this changing environment. With that, I'll turn the call over to Craig.

Before I review our first quarter 2020 results, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. These are unprecedented times, and while we are withdrawing our full-year guidance, we plan to get back to providing annual and quarterly guidance as soon as unemployment trends become more predictable. I'll briefly cover our Q1 results and, where possible, I'll provide some high-level comments about our financial outlook. Our approach is to be as transparent as possible based on what we know now. As Chad mentioned, we are very pleased with our first quarter results, especially given the unexpected interest rate cuts and spiking unemployment from the pandemic. In the first quarter, we generated total revenues of $242.4 million, representing growth of roughly 21% over the comparable prior year period, which was above our guidance range, driven by strong new business wins and robust recurring revenues. As a reminder, in Q1 2020, there were only 12 banking Wednesdays instead of the usual 13 that we had in the comparable prior year period, and a Wednesday represents roughly half a week's revenues. Within total revenues, recurring revenue was $238.5 million for the first quarter of 2020, representing 98% of total revenues for the quarter and also growing 21% from the comparable prior year period. During the month of March, we started to see the spiking unemployment across the country reflected in our client base, a trend that continued into April. The net effect as of today is that the impact on our current client revenue is similar to the percentage increase in unemployment across the country. We are closely monitoring unemployment trends and their impact on our client base. We're also experiencing the impact of 150 basis point interest rate cuts that occurred in March. We estimate the net effect on our business for the rate cuts is roughly $4.5 million per quarter for the balance of the year. Total adjusted gross profit for the first quarter was $213.5 million, representing a record adjusted gross margin of 88.1%, up 130 basis points compared to the prior year period. We continue to benefit from high-margin recurring revenue and increasing customer service efficiency. Adjusted total administrative expenses were $108.4 million for the first quarter as compared to $80 million in the first quarter of 2019. Adjusted sales and marketing expense for the first quarter of 2020 was $51.9 million or 21.4% of revenues. We are seeing positive results from our recent ad campaigns and marketing efforts and plan to continue to invest in marketing in Q2 and throughout the year. We believe this is not the time to back off from our marketing plan. In fact, due to the increase in demand we're seeing and the success we are having, we plan to spend more in Q2 than we did in Q1. Adjusted R&D expense was $19.4 million in the first quarter of 2020, or 8% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $27.6 million in the first of 2020 compared to $21.1 million in the prior year period. We plan to continue to invest in our future growth through innovation and new product development. Adjusted EBITDA was $117.9 million in the first quarter of 2020, or 48.7% of total revenues compared to $103.3 million in the first quarter of 2019, or 51.7% of total revenues. Our GAAP net income for the first quarter was $63 million, or $1.08 per diluted share based on approximately 58 million shares versus $47.3 million or $0.81 per diluted share based on approximately 58 million shares in the prior year period. Our effective income tax rate for the first quarter of 2020 was 28.7%. Non-GAAP net income for the first quarter of 2020 was $77.9 million or $1.33 per diluted share based on approximately 58 million shares, compared to $69.3 million or $1.19 per diluted share based on approximately 58 million shares in the prior year period. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the second quarter of 2020. Since we increased our buyback on March 12, 2020, we have repurchased over 260,000 shares. Today, Paycom has repurchased nearly 4 million shares since 2016. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $182 million and total debt of $32 million. As a reminder, this debt represents financing of construction at our corporate headquarters. Cash from operations was $82 million for the first 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 $1.4 billion in the first quarter of 2020. To conclude, I'll repeat what Chad said. We are focused on mitigating the impact of the pandemic on our current client revenue numbers by providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. We have a strong balance sheet, a highly profitable recurring business model, and the strongest value proposition in our industry. We are confident that 2020 can still deliver the enviable combination of growth and margins that we have consistently demonstrated, and we look forward to being able to quantify that combination for you as soon as macroeconomic factors become more stabilized or predictable. With that, we will open the line for questions.

Hey, thanks for taking my question, and I hope everyone at Paycom has been safe and wishing all the best to everyone. First question from me. Chad, you guys have been in kind of a crisis mode in 2008 and 2009. Can you just kind of compare and contrast what you saw back then, how it compares to now, and what lessons you learned back then? And then I have a follow-up.

Sure. So in 2008 and 2009, obviously, we were a lot smaller company. We were somewhat geo-focused in a certain area. I would say we were more in the Midwest and Southwest at that time. From that period of time, you had the mortgage crisis going on and other factors. And really, at that time, it became a cash flow management issue for us. And at that point in time, we changed the way we managed our cash for clients because you had greater ACH risk at that time. So we made changes to protect cash flow at that time and exposure for ACH risk. But actually, the three things we're focusing on right now are the three things we focused on back at that time. We continue to focus on providing world-class service to our clients, we continue to innovate through the rapid development of our software, and we also were aggressive in adding new clients. And so those are the same lessons or the same activities that we're focused on right now, but it's a little different than in 2009 and '08 from today.

Thank you for that. My follow-up question is about the month we've spent working from home. Your sales approach has been very local, and I noticed your statement mentioned productivity improvements, possibly through video calls. Can you share what you're observing in the field regarding your sales team's willingness and ability to engage? Since it's been a month, I hope you have some data points to share.

Yes, we've been selling face-to-face for quite some time before establishing our inside sales group. We had a small team for about 10 to 15 years and then expanded to four teams in inside sales over the past six months, giving us some experience with virtual selling. We started this year with strong sales momentum and a compelling value proposition that resonated well, but then the pandemic hit. On March 15, we closed all sales offices and transitioned to a virtual work-from-home model. In the weeks of March 16 and March 23, we rescheduled all sales appointments and focused on retraining our outside sales organization for this new model. Our booked sales dropped by approximately 50% during those two weeks. However, by the week beginning March 30, our booked sales rebounded to 80% of our previous levels. Throughout the rest of April, our booked sales numbers returned to pre-COVID levels, indicating that we are still successfully selling during this time. Sales managers can now conduct six calls in just two days, and our representatives remain actively engaged with prospects, even as some may go into their offices and utilize virtual technology to connect with us. There are still customers ready to buy, and the market conditions are favorable. The digital transformation has only accelerated during this period, and I believe our value proposition is even stronger now. Consequently, we are experiencing success in sales.

Okay, good luck.

Hi, good afternoon. Thank you for taking my questions. I hope everyone is staying safe and doing well during this time. My first question, Craig, for clarity, you mentioned that the change in Paycom's customer base has aligned with unemployment trends more generally. Can you clarify that? What change in pace for control have you observed from before the crisis to now, one month into April?

I can address that, and Craig can add more if he wishes. It would be unrealistic to assume that Paycom would not be affected by the rise in unemployment rates. We're a representative sample of the U.S. payroll market and are diversified across various industries. Typically, we notice the effects of unemployment before the official numbers are released. In several states, such as California, Massachusetts, and Illinois, the last paycheck is often issued either the same day or the next day after the pay date. As a result, individuals might receive their final paycheck before applying for unemployment, influencing the reported figures. Over the past year, unemployment rates have remained relatively stable, fluctuating between 3.5% and 3.8%, with around 163 million to 165 million people in the workforce. Recently, we observed a spike in March, particularly in the last couple of weeks, when unemployment jumped to 4.4%, translating to 7.1 million unemployed individuals. Since March 15th, approximately 26 million unemployment claims have been filed, with around 24 million likely to be processed in April. When you factor that into the available workforce, the unemployment rate will likely differ from the previous figures of around 3.5% or 4.4%. Currently, we have visibility into our own metrics, and while changes in unemployment are occurring, it's too soon to predict whether these trends will accelerate or stabilize in the second quarter. Unemployment does impact our existing client revenue, but we are still onboarding new clients and experiencing engagement, even though those efforts are often overshadowed by the acquisition of new clients.

Yes. And I would echo what Chad said. Even though we do have some clients who are in those industries hardest hit like restaurants and hotels, we're not overexposed to any of those industries and are very industry-agnostic.

Great. Thank you for that thorough answer. I really appreciate that. And then maybe just one follow-up. There's been a lot of investors who've asked us a question about what percentage of a contract is typically fixed versus what is the variable component that's based on headcount or payrolls processed. So, any directional percentage you can give us. Is it 10%? Is it 50%? It would be helpful just in framing as we're doing the math.

Sure. Well, I'm going to just go ahead and give this information out. I haven't given it out before, but I'm going to talk about our billing. We have a base fee, and that base fee is for one employee. If you have one employee with Paycom and you're using the Paycom system, we're going to have the base fee, all right? Now, if you add multiple employees, you might have multiple states, and you may have a few more base fees. But ultimately, on smaller clients, the base fee can be a measurable percent of a client's bill. But as that client gets larger, that base fee gets substantially distributed into the employee loss, and the employee loss percentage becomes very close to equal to the loss of revenue percent on that client. It really just has to do with the size of the client before you could really figure out exactly how much of the base fee is in there. Now, I will say this. We're not necessarily seeing increased client attrition when we're talking about units, whether it be someone leaving. We're not seeing increased client attrition from either someone leaving and/or going out of business. The impact we're really seeing is the impact as it relates to employee count. The clients we’re working with might go from running 200 checks normally with us to the ones that are impacted, but again, not all are, and some have even some growth in this. But for the most part, we do have several clients that may have been running 300 checks and now they're running 17. We're going to still have the client. But again, we're going to be impacted by that unemployment number.

I really appreciate the openness and wish you guys well, and I'll pass along to the next person. Thanks again.

Thank you very much. I wanted to follow up on Samad's question, Chad. Just to clarify the math on the unemployment. We've seen 26 million unemployment claims from a workforce of about 164 million, which is about 16%. I'm curious, if employees are furloughed and have applied for unemployment, wouldn't they still be listed as payees in the Paycom system? Would that mean you'd still be getting paid for the furloughed employees? Or is that not correct?

That would not be accurate. I mean, depending on how you're using the term furloughed, typically a furloughed employee is an employee that still has their job but is not paid. Paycom's model is really based on the number of paid employees as it goes through. Now, those employees would remain active in our system. They would continue to use our employee app. When they come off furlough, we'll begin to receive the billing from them. But as far as furloughed employees and how they may be also included in that unemployment number, we would want to check on that. But in regards to our system, furloughed, terminated, laid off those should all have a very similar impact in our number, although you're going to have different termination codes because those have different rehiring activities that someone's going to take as they turn them back into active pays.

Okay, understood. And then as a follow-up, I'm just curious if you've been able to survey your customer base at all to try to ascertain where they think their headcount might trough at, perhaps when it would bottom, and the pace of rehiring. At what level perhaps they think it would stabilize to try to inform your business plan? For instance, if a customer had 300 employees, they think it's going to drop to 200 in May. Maybe then they think it would ramp back up to 270. You could at least try to recalibrate and then plan on a 10% reduction in their headcount. Have you been able to do anything like that somewhat scientifically or even to have enough anecdotes to create some type of a guess on how that will look?

Well, I think that there are many things that we'll be able to do once we see a trend and/or some stabilization which makes something predictable. For many of our clients, they have the same unknown factors that we do if you think about it. So it might just be timing. We might be a little early on being able to get good information that way. But we definitely are staying close to our clients. I mean we talk to them on a continual basis, and we've been able to kind of see it in different areas and different industries potentially impacts, but it's really all over the board. We still remain hopeful that at some point it stabilizes. We just don't know where it stabilizes at. There's a company that made a decision in March to go into a certain phase for themselves. Do they take additional steps throughout the year, or is March a steady state for them because they took the hit upfront? We don't really know that yet. As this quarter goes on, I think we'll have more information on that.

Yes, Mark, and one thing to note about the Payroll Protection Program is that those individuals have sought assistance. According to the rules, if they allocate 75% of the funds to rehire staff, they may qualify for loan forgiveness. We might see some of that occurring as well.

Okay, very good. Thank you so much.

You bet.

Great. Thanks very much. Chad, on the new business activity, can you give us a sense of your ability to implement remotely?

Yes, implementing is quite similar to how we have conducted many of our implementations in the past. I won't say it’s completely finished. You definitely need to have discussions with the transition representative and undergo training. However, most of our implementation has primarily taken place in the Oklahoma City and Dallas areas. A lot of it was conducted remotely, aside from training and data collection. Additionally, we’ve had an inside sales group for a considerable time. Therefore, we do not find it increasingly challenging to implement. In fact, our metrics for the first quarters show that implementations are progressing faster than usual. The sales process is also moving quicker. For example, we previously scheduled an appointment on a Tuesday, and it might take two or three weeks to have that call. Now, we set that appointment on Tuesday and could meet as soon as Wednesday. We’re getting most potential clients to the table. It hasn't hindered our ability to convert. Some clients might choose to delay due to their current circumstances, but there’s nothing specific to highlight about that right now. That’s where I would conclude.

Great. Thanks. And one quick follow-up. Have you noticed a slowdown in the decline of the number of customers making weekly payments over the last three or four weeks?

Well, I'll go back to what I said. It would be unreasonable to think that we wouldn't continue to follow increases in the unemployment rate. And so, you would be hoping that that would moderate to some level of stabilization at some point.

Got it. Thank you.

You bet.

Hey, good afternoon, Chad and Craig. Thanks for taking my question and best wishes for safety during these times. I'm wondering, can you talk a little bit, just a follow-on on the impact of the unemployment? If you have a 1% decline in terms of the number of employees paid, what does that translate to from a revenue perspective? How should we think about just the sensitivity there? I know it varies across the different client sizes. But if we're taking a look at the portfolio as a whole, how should we think about that?

I mean, larger clients, you're going to be close to a 1:1 ratio in larger clients. Smaller clients, it's going to be a lot less, I mean from that, meaning that it really does depend on the size of clients. But a larger client, yes, you're definitely closer to the 1:1, because the base fee has been eaten up by that one-employee company. Now if you're talking about a 30- or 40-employee company, I mean you're going to have quite a bit of base still in there. But once you're going up to 200, 300, 500, 2,000, 3,000, I mean the ratio is going to be closer to a 1% loss in their employment equals close to a 1% loss in current client revenue.

Okay. And then with regards to the new sales that sounds tremendous. Can you talk a little bit about who you're winning from? Has there been any change with regards to that? Is there some special attraction in terms of the mobile self-service capabilities that would lead you to get more clients from older providers? Or has the mix changed in any way, shape, or form?

It's an interesting question. I will say that it's usual suspects for us. We're hitting them the usual ways. We do have a much stronger product now. I talked about the employee mobile app as well as the DDX success we're having. Many people are using our Ask Here as we've gone through this environment. By rolling out Manager on-the-Go, I mean our adoption rate on Manager on-the-Go for the first 12 weeks was almost double what our adoption rate was for the employee app for the same launch period. We're having high levels of engagement. I would not say that any of our competitors have the level of engagement we have. We continue to onboard people from the usual suspects. You do have some systems out there that were more in-house in nature or even some competitors that may have been more regional using licensed software. Those models are very much disrupted right now in this environment. So to the extent, we have the low-hanging fruit, it's going to be more in that area. But we're also having just a lot of success because we have a lot of clients who even call us back. We pitched them one or two years ago. It was what it was. They understand the value proposition and weren't ready to make the move. Right now, I think people are forced to look for additional efficiencies. I think most companies come out of this leaner and more efficient, and we're going to do our part just to make sure that's what happens on the efficiency side.

Terrific. Thank you.

Great. Thank you for taking my question. I appreciate your comments about most of the impact you're seeing so far is in the reduction of employees at your clients' accounts. But I suspect that as this situation extends, there is the risk of higher churn just from macroeconomic volatility. So I'm just wondering, you've done a great job over the years improving retention. Is there anything specific you're putting in place to help improve or keep retention up even in these uncertain times?

For retention, when considering the actual loss of a client that may go out of business, there's not much we can do beyond providing resources to help them stay operational. At our IPO, we indicated that 90% of our revenue came from companies with over 50 employees, and this percentage has likely increased since then. We're currently observing a decrease, not an outright loss. The duration of this situation may influence how things play out. We can't specifically identify any business failures right now, but we can see how unemployment is affecting the revenues of those businesses.

Great. Thank you. And then you mentioned this briefly in your prepared remarks about DDX and improvement in engagement there. I'm just wondering, based on what you've seen, is the usage of DDX consistent across your customers whether they're managing these times well or not? I just wonder in times of crisis, do people go back to the old ways and move away from automation? Or does the automation stick through even in times of turbulence? Thank you.

That's a great question. We have not observed any decline in DDX scores; in fact, they have continued to rise. I can share a few examples where clients in certain areas have seen their DDX scores increase. For instance, if someone had a DDX score of 96% and was somewhat adopting the system, it has pushed them towards achieving 100% adoption. While I can't say we've reached full adoption, the current environment has not negatively affected DDX scores. DDX measures employee usage and the correct usage of the system. I can say that an increasing number of people are using the system correctly today compared to the past.

Great. Thank you very much.

Yes. Hi. Thanks for taking my question this afternoon. Chad, I was just wondering if you could provide some additional color on either what you're seeing in terms of the sales or the elevated lead activity by company size. If there's any reason for us to think that the sales activity by company size should be materially different for the business ahead. Thanks.

No, I'm not announcing anything new regarding our size strategy. We continue to sell within and above our range. I mentioned in the last earnings call that we have four inside sales teams dedicated to the small business market, and that has remained consistent. We are seeing clients enter at the higher end of our range or even above, which is something we have always experienced. Overall, this trend has been very stable and aligns with the leads we are observing.

Thank you.

Hey, guys. Thanks for taking the question, and glad to hear you're staying safe out there. Maybe just the first one. Chad, can you remind us on kind of the linearity of bookings on a quarter usually? And then, maybe, traditionally or typically, from an intra-quarter perspective, like how much visibility do you typically have one quarter out on the business?

Yes. First of all, the bookings can vary from month to month. Generally, summer tends to be our best month. For example, two years ago, August was our top month for booked sales. It really depends, as there's a natural ebb and flow. You build up your pipeline and then you close deals. In our industry, the largest booking numbers typically happen at the end of the year because many companies tend to start in January. As a result, sales are usually higher during that time. Some in our industry refer to this period as the selling season, which runs from September to December. At Paycom, we are continuously open for sales, making it difficult to highlight significant booked sales in one specific area. It mainly depends on how quickly we are moving through our pipeline. When it comes to visibility regarding booked sales, we do have some, but I wouldn't rely on a six-month pipeline because those businesses should ideally start on the solution sooner to start seeing ROI. Our goal is to move deals we engage with today through the sales process and close them within six to eight weeks.

I understand. As a follow-up, some of us were surprised to learn that new bookings have returned to pre-COVID levels in April and that customer churn remains stable. Do you expect this trend to continue for the remainder of the year? Or do you foresee those levels declining, and if so, to what extent do you plan to sell into your existing customer base to mitigate that?

I think there's a distinction between hope and anticipation. If we could accurately quantify many of these factors and have a strong confidence in the current trend continuing, we would be able to share more information than we currently are. Even our appointment numbers through April are similar to those before COVID. The interest has not decreased, and our ability to hold those meetings remains steady. Regarding clients potentially losing their business, we certainly hope that doesn't occur. However, I don't have clear visibility on that. For instance, if a client goes from 300 to 17 employees, I can't predict what will happen to them afterward, especially if the environment remains unchanged for an extended period. This really depends on the individual decisions each client makes about their business. It's challenging to assess that situation right now. I don't believe we will remain unable to evaluate it forever. Eventually, we will have more information, but at this moment, it is difficult to determine.

Got it. Thank you.

Hi. Chad and Craig. Thanks for taking my question. Chad, you mentioned before that there's a bit of a difference, I think, in the code that's entered whether a customer furloughs an employee versus lays off an employee. Can you just talk about what you're seeing in terms of mix with your clients or to the extent that you have seen thus far of layoffs versus furloughing at this point?

No. I will just reiterate what I previously stated. The impact on our revenue would remain the same. I can't provide specific numbers on how many clients have furloughed versus terminated or laid off employees. It's important to note that if a termination code is entered for any of these scenarios or if someone is left furloughed and active but not receiving payment, it will affect our revenue similarly, regardless of which option is selected.

Got it. And then just a follow-up. I wanted to touch on gross margins in the quarter. I think over the past few years here, first-quarter gross margins have been running in that 86% to 87% range. You had a really strong performance there at 88%. What drove that nice increase that we saw on a year-over-year basis during the quarter? Is it the expanded usage from some of these self-service products or perhaps something else?

Yes. You're definitely seeing efficiencies gained from product usage. We've mentioned that our call volume, even the calls coming into Paycom, has been equal to or less than the same quarter last year. We're receiving fewer calls because clients are using the product correctly. They understand it, and their employees are using it effectively as well. We are experiencing much more success. Additionally, we are onboarding clients with comprehensive usage strategies, which we have been doing for over a year now. We don’t need to put in a lot of effort to correct clients' strategies. There are certainly some other efficiency gains that Craig will discuss further.

Yes. As clients effectively utilize the system, our service department can manage a larger volume of inquiries. We've observed this trend and discussed it previously.

To give you one more thing on that, Ryan, the number of service individuals that we had servicing clients at the end of December 2020 was the same as the number of service individuals we had servicing clients at the end of 2019.

Yes. I think Chad in 2019 and 2018.

Sorry, 2019. The number of service individuals we had servicing clients at the end of 2019 was basically the same as we had at the end of 2018. So you're going to get some efficiencies when you have service individuals that are able to service more clients because the client is using the system better.

Great. Thanks for the color.

You bet.

Yes, Siti Panigrahi. Thank you for your question. Chad, I'd like to follow up on your remarks regarding new business activities and leads returning to pre-COVID levels, which differs from what we have been hearing. It seems that most businesses are currently concentrating on mission-critical applications. What do you believe is motivating these customers to switch their payroll systems now? Is there a different motivation compared to what you've indicated for the pre-COVID period? Additionally, are these primarily new starts?

No. Well, I will say this. I don't think any business ever liked waste. To the extent businesses still have waste, they're looking to become more efficient. I would also say that payroll and benefits administration and a lot of the things that we're doing in the system is, I would say, a very important part of what any business does. When we're talking about critical functions, I don't know that I align with that same thought that the types of things that someone is doing to engage with their employees right now during this environment is less critical. I definitely understand the cash flow management and the other areas that people have to manage throughout their business. Am I going to say we're the top priority for all businesses? No. Are we the top priority for all? Yes, we are. There are many businesses in the U.S., and we don't have to sell all of them this week. But we are having a lot of success continuing to drive sales. I really don't have anything to call out from a sales perspective, save the two weeks we took them out to train and the one week it took us to kind of get back where we did drop 50% for those two weeks and we dropped 80% that third week coming back. But since then, we've been all pistons firing in regards to our sales efforts and the results they're having in booked sales.

I wanted to ask if there are any specific sectors where you're noticing more interest compared to others. Additionally, with the increased efficiency in inside sales, are you considering hiring more inside sales staff this year?

Yes, we remain open to all industries. There are companies with 5,000 employees that have reduced to 280. This is a perfect opportunity to switch to Paycom since you only pay for the 280 employees you manage. It's similar to a year-end transition. These are excellent moments to make the change to Paycom. Our focus is on expanding our market share regardless of the client's situation. We want to emerge as the leading player as we navigate through these challenges. Yes, there are some obstacles, such as the current interest rates being near zero and rising unemployment. However, if we concentrate on the three key areas we mentioned—providing exceptional service, continuing rapid product development, and onboarding more clients—I believe we'll experience positive growth when conditions improve. It's crucial that we remain attentive to all clients, whether they are furloughing, terminating, or laying off employees. We are ready to engage with these clients just as we do with those who are thriving during this period. We aim to attract them all.

Thank you, Chad.

Thank you.

All right. I want to thank everyone for joining us on the call today. I'd like to send a special thank you to Paycom employees for all the valuable work they're doing. Over the next couple of months, we'll be meeting with investors virtually at the JPMorgan conference on May 12. We'll also be at the Needham conference on May 19. Both of these are virtual. In June, we will participate in the Baird and Stifel conferences. We appreciate your continued interest in Paycom and look forward to meeting with many of you soon. Thank you, operator. You may disconnect.