Paycom Software Inc (PAYC) — Q4 2020 Earnings Call Transcript

Thank you, and welcome to Paycom’s fourth 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 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 results may 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 the 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 today’s call, we will refer to certain non-GAAP 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 will now turn the call over to Chad Richison, Paycom’s President and Chief Executive Officer. Chad?

Thanks, James, and thank you to everyone joining our call today. A special thank you to all of our employees for an outstanding quarter to finish the year. I will spend a few minutes on the highlights of our fourth quarter 2020 results. Then I will review some of our notable achievements in 2020, and also discuss our goals for 2021. Following that Craig will review our financials and our guidance, and then we will take questions. 2020 was a strong year for Paycom. We innovated our sales processes and accelerated our new business sales during the global pandemic. These accomplishments have set the stage for a year of rapid growth that we believe will propel Paycom to reach $1 billion in revenues in 2021. The digital transformation of the human capital management industry has reached a critical stage where the accepted practice of HR and payroll personnel inputting data for employees has come to an end. The industry trend toward self-service has been leading to this point, and I believe the pandemic effectively sealed the fate of the old model. Businesses must shift to provide employees direct access to the database because it’s better for the business and the employees. The coming extinction of the old model has been our expectation for many years, and I’m very excited to see it happening. Our differentiated solution positions Paycom very well to accelerate this trend and deliver long-term sustainable growth. We finished the year with strong results. Our 2020 fourth quarter revenue of $221 million came in very strong, thanks to elevated new business starts in the quarter. Our full year 2020 revenue of $841 million grew 14% compared to 2019. Paycom maintained an annual revenue retention rate of 93% even with the pandemic causing some businesses to close and a reduction in employee headcount related revenue at existing clients. Our full year 2020 adjusted EBITDA was $331 million, representing an adjusted EBITDA margin of 39%. Our focus on the sum of revenue growth and adjusted EBITDA margin has served us well in balancing both growth with profitability and in 2020, we exceeded our recently stated goal of hitting the Rule of 50. With Q1 of 2021 expected to be the last quarter that the pandemic impacts our numbers from a year-over-year perspective, I believe we have an opportunity to reach the Rule of 60 in 2021. Our marketing plan throughout 2020 worked very well, delivering strong demo leads throughout the year. In 2021, we plan to continue to spend aggressively on advertising to fuel future revenue growth and continue to expand a roughly 5% market share in a large and expanding HCM TAM. We are capitalizing on the shortcomings of disparate HCM systems with the value proposition of Paycom’s single database solution that is stronger than ever for companies of all sizes, including companies well above our stated targeted range. We continue to be pulled well above our stated target range as larger companies look to leverage automated processes for their own employees. At the same time, our small business adds continue to increase in 2020 thanks to the efforts of our expanded inside sales force. Growing employee usage of the Paycom system is generating a substantial return on investment for our clients, their employees, and Paycom. High employee usage rates as measured by our Direct Data Exchange or DDX remained strong across our client base. When combined with high adoption of Manager on-the-Go, these applications are creating new opportunities for product innovation and automation. An example of such automation that we’ve deployed internally is fully automated payroll. It has been our goal to provide our clients with a better employee transaction interface for payroll. BETI, or B-E-T-I, is that better employee transaction interface. BETI guides individuals through an employee-specific payroll process in which they create and approve their own paycheck. This means payroll is completed at pay period end, which has traditionally been the date on which the payroll department gets started. What used to take an entire payroll team’s days to aggregate is now fully automated and put directly into the employee’s hands. This new approach leverages all of our solutions to produce what we call the perfect payroll and eliminates duplicative processes that can create confusion and inaccuracies when employees don’t have visibility or control over their own payroll data. This level of employee control is the future of payroll, and I’m looking forward to being able to roll BETI out to the market in 2021. As of December 31, 2020, our headcount stood at approximately 4,200 employees, up 12% year-over-year, as we continued to hire high-quality talent throughout the pandemic to further bolster the foundation of our future growth. While greater than 95% of our employees continue working remotely across the country, we look forward to returning to our offices at some point this year, but only when it’s safe to do so. Paycom received national recognition from several organizations in 2020. We’re in the top five ranking in Best Places to Work in the U.S. by Top Workplaces and the number one spot in Oklahoma, and we were named the Fortune 100 fastest-growing companies for the fourth consecutive year. These awards are very rewarding and a testament to our execution in driving corporate culture. Additionally, I want to congratulate the 2020 Paycom Jim Thorpe Award Winner, Trevon Moehrig of Texas Christian University. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, who is one of the greatest all-around athletes in history. Jim Thorpe also happened to be an Oklahoman. To sum up, we addressed the 2020 challenges with confident results, which enabled our solutions to shine and expose the weaknesses of other disparate systems in the market. The pandemic’s impact on our pre-pandemic client revenue remained stable. And while it’s unclear if or when those same clients will add to their employee counts, our continued growth relies on remaining focused on the three controllable activities that made 2020 so successful. That is providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. Our commitment to investing through the pandemic generated elevated leads and sales. Once we get past Q1 2021, we will have lapped the pandemic’s impact on our comparable year-over-year numbers. Finally, I’d like to thank our employees for their ongoing commitment and flexibility. As we said throughout 2020, the pandemic didn’t build character; it revealed it. I was glad to see we were all who we thought we were. Your efforts have set us up greatly for 2021. With that, I’ll turn the call over to Craig for a review of our financials and guidance. Craig?

Before I review our fourth quarter and full year results for 2020 and also our outlook for the first quarter and full year 2021, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. As Chad mentioned, we are pleased with our fourth quarter results with total revenues of $220.9 million, representing growth of roughly 14% over the comparable prior year period. Our full year 2020 revenue was $841.4 million, representing growth of 14% compared to 2019. Our revenue growth continues to be primarily driven by new business wins, including very strong new client revenue starts in the fourth quarter. We ended 2020 with approximately 31,000 clients, representing a growth rate of 17% compared to 2019. On a parent company grouping basis, we ended the year with approximately 16,000 clients, representing a growth rate of 18% compared to 2019. Within total revenues, recurring revenue was $216.7 million for the fourth quarter of 2020, representing 98% of total revenues for the quarter and growing 14% from the comparable prior year period. Total adjusted gross profit for the fourth quarter was $188.9 million, representing an adjusted gross margin of 85.5%, up 20 basis points compared to the prior year period. For the full year 2020, our adjusted gross margin was 85.9%, also up 20 basis points compared to full year 2019. For 2021, our target adjusted gross margin range is expected to remain strong at approximately 85% to 86%. Adjusted total administrative expenses were $119.1 million for the fourth quarter as compared to $98.6 million in the fourth quarter of 2019. Adjusted sales and marketing expense for the fourth quarter of 2020 was $58.9 million or 26.7% of revenues. We have been very pleased with our marketing strategy throughout 2020, which more than doubled the demo lead request compared to 2019, and we plan to continue to invest in marketing in Q1 and throughout 2021. Adjusted R&D expense was $23.2 million in the fourth quarter of 2020 or 10.5% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $33.2 million in the fourth quarter of 2020, compared to $25.1 million in the prior year period. Adjusted total R&D costs for the full year 2020, including the capitalized portion, were $118.3 million or 14.1% of total revenues compared to $93.3 million or 12.6% of total revenues in the prior year. Even through the pandemic, we aggressively recruited talent in R&D, and we planned to continue to invest in our future growth through innovation and new product development. Adjusted EBITDA was $84.2 million in the fourth quarter of 2020 or 38.1% of total revenues compared to $78.6 million in the fourth quarter of 2019 or 40.6% of total revenues. For the full year 2020, adjusted EBITDA was $330.8 million or 39.3% of total revenues compared to $317.9 million or 43.1% of total revenues in 2019. Our GAAP net income for the fourth quarter was $24.4 million or $0.42 per diluted share based on approximately 58 million shares versus $45.4 million or $0.78 per diluted share based on approximately 58 million shares in the prior year period. Our effective income tax rate for the fourth quarter of 2020 was 33.4%. For the full year 2020, our GAAP net income was $143.5 million or $2.46 per diluted share. Non-GAAP net income for the fourth quarter of 2020 was $49.1 million or $0.84 per diluted share based on approximately 58 million shares versus $50.5 million or $0.86 per diluted share based on approximately 58 million shares in the prior year period. We expect non-cash stock-based compensation for the first quarter of 2021 to be approximately $26 million. For the full year, we anticipate non-cash stock-based compensation will be approximately $110 million. For 2021, we anticipate our full-year effective income tax rate to be 25% to 26% on a GAAP basis. On a non-GAAP basis, we anticipate our full-year effective income tax rate to be 27% to 28%. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the first quarter of 2021. Turning to the balance sheet, we ended the year with cash and cash equivalents of $152 million and total debt of $30.9 million related to the construction at our corporate headquarters. Cash from operations was $52.9 million for the fourth 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 $1.3 billion in the fourth quarter of 2020. During 2020 we repurchased approximately 433,000 shares for a total of roughly $115 million, including 244,000 shares purchased in the open market. Through December 31, 2020, Paycom has repurchased 4.1 million shares since 2016 for a total of nearly $423 million, and we currently have $135 million remaining in our buyback program. Now let me turn to guidance. With the continued stabilization of our current client revenue base, we are pleased to be able to provide Q1 and full-year guidance that is consistent with our historical guidance approach of guiding to what we can see as of today. As a reminder of the effect on our current client revenue of lower headcount at our pre-pandemic clients continues to represent a loss of approximately $1.9 million to $2 million in weekly recurring revenue. The impact of a 150 basis point interest rate cut that occurred in March of 2020 represents an additional loss of roughly $350,000 in weekly recurring revenue. Also, the first quarter benefits from form filing revenue related to employee tax forms for payrolls run in 2020. We estimate that in Q1 2021, there will be fewer forms filed than normally would have been filed by our client base as a result of fewer employees working in industries hardest hit by the pandemic and lower overall turnover in those industries. Fewer forms filed represents a roughly $6 million to $7 million headwind to Q1 2021 recurring revenue. With these factors in mind, our full-year and first-quarter 2021 guidance is as follows. For the fiscal 2021, we expect revenue in the range of $1.009 billion to $1.011 billion or approximately 20% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $396 million to $398 million, representing an adjusted EBITDA margin of approximately 39.3% at the midpoint of the range. For the first quarter of 2021, we expect total revenues in the range of $270 million to $272 million, representing a growth rate over the comparable prior year period of approximately 12% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $126 million to $128 million, representing an adjusted EBITDA margin of approximately 47% at the midpoint of the range. Q1 2021 is expected to be the last quarter that the pandemic will impact our year-over-year comparisons. After that, our achievement should be more reflective of the strong fundamental growth our business can generate.

Hey, thanks for taking my question and congrats on a great end to the year. You guys – I mean, as you mentioned, after Q1 the comps are getting significantly easier and you must be looking forward to that as well. How do you think about the linearity if you think about Q2, Q3, Q4? Is there – a lot of your comps have talked about like it’s actually more the back half of the year, etc.; like how do I have to think about that from your perspective? And then, I have one follow-up.

Sure, Raimo. So our approach to guidance hadn’t changed as Craig said in prepared remarks. I mean, we’re focused on what we can see. If you compare our Q2 through Q4 guidance that we’ve given, implied guidance that we’ve given for Q2, Q3, Q4 this year you’ll notice that it’s not unlike guidance we’ve given in the past. Matter of fact, it’s within a 0.5 point to 1.5 point of every guide we’ve started with going all the way back to 2018 for that same period. So we’re not going to necessarily get into the linearity of it, but I would just say that we always guide to what we can see and I believe that we are being consistent in how we provide this guide today.

Yes, I agree with that, Raimo. In terms of linearity, we’re not – we don’t have anything in the guidance related to recovery towards the back half. It would be more level throughout the year on that as opposed to any sort of back half recovery that would be baked in.

Yes. Okay. And then this year was like a – and on the full year where you had the inside sales model working; what have you learned in terms of the pandemic, in terms of people kind of selling remotely, inside sales being successful? In terms of how you translate that maybe into kind of planning the expansion going forward? I know it’s a very broad open question, but I hope that works.

Sure. So we had inside sales. We’ve had it for a while, but we actually took a strategic position with inside sales toward the end of 2019, which really that group had always been selling online or virtually. We were able to leverage a lot of those processes that we had put in place for inside sales as we made the shift for our outside sales staff. As we sit here today, we are still 100% virtual selling right now as well as conversion, as well as upsells to current clients. And so exactly what we would come back as far as when we do full selling on site, that’s really going to be dictated by the client. I do believe that we’ve gained some efficiencies in this model and I’m not just talking about cost, I’m talking about performance. And I believe we would look to maintain those as we look to open back up as a nation here in the coming year.

Hi, good evening. Thanks for taking my questions. Chad, maybe first one for you, just as I think about bookings in the context of that customer data, it looks like Paycom added actually more customers in 2020 than it did in 2019. So it certainly kind of supports the strong bookings trends, but also maybe can you help us understand how the mix of those new customers add looked versus inside sales versus from the quota-carrying field sales that are now selling virtually versus maybe coming inbound online through some of your advertising campaigns? Just trying to think what drove that nice acceleration in units?

Yes. So coming into the year, I would have expected, really our – because we are selling low market, small business market as well, which we’ve opened up. I mean, the percentage of small business units that we have, I mean, it’s I believe mid-90s is the percent of our revenue, that’s represented by clients that have over 50 employees. So you’re still low on the small business, but in fact, we did accelerate that this year, and I would have expected our average amount per client to drop a little bit based on that; what we actually saw is you’re taking about 10% out, let’s call it, just on client employees that you can already calculate through our revenue. So you’ve already got that hit. And then the fact that we’re selling small business clients, I was a little surprised to see that our average per client held very close to the same. It had been growing for the last several years, but even with the COVID hit, we took on our numbers that average stayed really close to the same and that came from us continuing to have success selling down market. But also we’re having a lot of success continuing to sell up market and continue to be pulled further up. And so those are starting to average each other out, but obviously, you do have some higher unit growth as you look at the down market opportunities.

Definitely helpful. And then maybe just a follow-up, the total full-year headcount was up about 12%, I’m curious how the quota-carrying reps growth looked in 2020? And how should we think about that embedded growth in quota-carrying headcount for 2021?

Yes, we don’t break out that separate from overall. Obviously, we had talked about earlier in the year as we were going through the pandemic. We did recoil a little bit and kind of held-off on certain things, then once we kind of opened our eyes and saw what was going on, we started to accelerate that to get back to a normal level as we headed throughout the summer. And so, we have – the number of teams that we have fully staffed, that’s at eight per team. And then, we look to add people to the extent that we have any turnover we would be looking to add people to replace those positions. So no real strong information to give you on exactly the number of quota-carrying employees we added for sales, but what I would say is that you did see us throughout 2020 expand our inside sales model quite a bit. And so, that was a new focus that we had not really had until late 2019.

Hi, thank you for taking my question. You guys had an amazing year, all things considered, retention, client adds, everything. But in some of our work, we’ve come across the general sentiment from shareholders that they’re looking to do better and be more aggressive given the lessons and the pain that they’ve seen over 2020. So the question I have is do you think 2021 gets tougher only because from a competitive viewpoint some of these companies may be renewing or doubling down on their efforts to prevent similar churn or losses that they saw?

Well, I mean, the – I believe that with our product, it’s fully differentiated and it produces a return on investment for our clients as well as prospective clients. So I don’t believe we’re going to be getting into the situation where we’re doing a lot of price selling. Now that said, there is a market for every product, and so you have to be in line with what product fees are, but really it’s an ROI-driven strategy. And so, we would expect people to take our product that want a differentiated strategy with a different ROI, I mean, we just talked about how we’re going to be providing – our products are going to be doing full service payroll in the future. I mean, employees are going to be doing their own payroll and we’re starting with that right now internally; we’ve produced a better employee transaction interface through BETI and we’re going to be rolling that out throughout the year. And so just as employees are used to applying for jobs online, they’re used to doing their banking online, they’re used to doing their shopping online, we’re going to be bringing that to the payroll business. I mean, it just doesn’t make sense that we’re not already there, to be quite honest with you, it’s how businesses win. And when you think about the hours of businesses saved, I mean, why can’t employers save more on these types of input activities? So I mean, if you’re with Paycom, you could save 100,000 different keystrokes; some of our clients save millions of keystrokes every month. So that’s where it’s going. I don’t see the market moving away from that. So all that’s to say is I believe in order for people to compete with us, with the value proposition, it’s going to have to more match the value proposition that we’re delivering because over time you’re going to be seeing more and more differentiation around what the employees do as it relates to data transfer versus what the employer does as it relates to the same topic.

Thank you, very clear. And I just have a quick follow-up. Can you broadly speak to staffing levels of new business wins at this point in time? I’m just curious as we’ve worked our way through this, are new guys coming onboard at 25%, 50%, 75% capacity, is it getting better? Just broad-strokes is fine.

Yes, I mean, I will tell you that past May, we stopped trying to figure that out. I mean, we’re out there, we’re bringing on business; they have what they have. If there is growth in that number, great; we’re not expecting it. We haven’t been forecasting it up to now. I don’t really know what happens next year, but for us, once we’ve lapped this first quarter, we don’t really need the growth in the numbers now; that’s not to be flippant about it, obviously, I would love for our clients and everybody to get back to normal. I guess, what I would say is, we’re very much focused on new business adds. And however many employees they have at that time is really irrelevant to us. We want to set them up correctly and we need a certain number of new business adds to cover the losses that we experienced from a current client employee headcount attrition. We need a certain amount of revenue and new clients to cover that, and we’ve been well on our way to doing that, as I believe is reflected in both our numbers and guidance.

Hi. Good afternoon. And let me add my congratulations to the whole team. Can you talk a little bit more about being pulled up market in terms of what you’re seeing? What are the characteristics of the bigger-than-target market clients that are coming to you, what exactly are they looking for? Who are they typically coming from? And do you see that accelerating, are you seeing more RFPs in the large account side?

Yes. I mean, we continue to see it. I mean, I wouldn’t say it’s a whole lot different than it’s been in the past, but we’ve continued to see acceleration of larger clients above our range coming to us. In fact, two years ago, we moved our range from 2,500 up to 5,000. We continue to see clients well above the 5,000 range coming to us. I mean, the reason why is because they’re working with the same employee. Whether you’re an employee and you work for a 25,000-employee company or whether you’re an employee and you work for a 500-employee company, you really dislike manual processes that really become time suckers out of your day. And so, all employees would prefer to use something that’s extremely easy to use, comprehensive and has quite a bit of consistency, and that’s also better for the employer. And so, I think that large businesses on the enterprise level have been trying very hard for a long time to provide a single type solution to their employees because they do realize the importance of that; they’ve just done it through integration and we do have a product that works for what they’re trying to accomplish, that’s incredibly scalable. And so, I do see us continuing to go up market as we’re pulled and I see us continuing to stay focused on the mid-market and then, as we get leads below 50, we’ll continue to sell them as well. But regardless of what the size of the company you work for, you’re still the same in person and you’re still the same employee, and you value things of ease when it comes to task management and HCM. So all that’s to say is enterprise products are over complicating the situation for the employee, and a lot of you guys on the call, you know that; you work for companies with large organizations and you know what kind of a mess you have to work with in technology. It’s oftentimes an eight-legged octopus with no head. So we’re fixing that problem in mid-market, and I see us doing the same as we continue to be pulled up market.

Great. And can you talk a little bit about attach rates for new modules with the new clients, what are you seeing the strongest attach rates? And then, also to the extent that you’re upselling existing clients, what are you seeing the strongest success on?

Yes, we are having strong attach rates across the board. I think that the new innovations that we’ve come out with, both DDX and Manager on-the-Go, is really helping. With that, as we look to go to a full-service payroll set, you’re going to need all products. I mean, you’re going to need benefits administration. You’re going to need expense management. You’re going to need time and attendance. You’re going to need paid time off requests. You’re going to obviously need payroll. And so the more full solution sets we’re able to deploy, the stronger value proposition or higher the ROI the client is going to be able to achieve. Again, it’s not purchasing the products that produces the ROI; it’s using the products that produces the ROI. And as we move to more self-service initiatives, which we’re already there, we’re going to be measuring that for a client, which we believe drives greater overall usage of the entire product.

Great, thanks for taking my question. Just on retention looking backwards in 2020, can you just comment kind of how the year progressed? Did you see the largest churn sort of in the depth of the challenges in the spring or is because the customer churn pretty stable as the year progressed?

Yes. I mean, for the most part, we’ve been very stable, we have not seen that great of a churn impact during that time as well. Typically, your small businesses, you may feel it more than larger ones, but again, you’ve got to understand the different impact that can happen on there. For the most part, we’ve had clients that have been with us for several years and we’ve been able to weather the storm as best as we can. Thankfully, I think a lot of our clients have been patient with us and I believe that’s a reflection of our strong customer service and our product and technology that we’ve been able to maintain a good relationship with them even during these troubling times.

Yes, in terms of cash flow, the things that are going to impact our cash flow obviously are tax rates as well as our CapEx. And so I would expect our CapEx for 2021 as a percent of revenue to be fairly similar as a percent of revenue as what we saw in 2020. One thing to kind of keep in mind is that CapEx, we’re still completing the Dallas operations. And so that will be complete probably end of Q2; we may still have some carryover costs on that on Q3. So as you’re kind of looking at CapEx, that would be the impact for 2021.

Yes. Hi, thanks for taking my question. Craig, I just had a follow-up question for you; you mentioned a comment that you’re anticipating some sort of recovery in the second half of the year. Is it possible just to provide a little more color on how you’re thinking about that? Are you thinking that it could be a full recovery in the base exiting the year or a partial recovery? Just wondering if you could share a little more color on that comment how you’re thinking about the pace of the recovery?

No, Brian. I mentioned that we have not included any recovery in our guidance numbers. As we provide guidance for the full year, we have not factored in a recovery in those numbers.

Yes, for example on that, Brian, it wouldn’t be uncommon for a 250-employee restaurant to have 500 W-2s. Now it’s important to also note that our forms business isn’t just W-2; its W-3 submittals, its 1099s. It also includes in our case ACA forms that we’re also fee-related and charged for in the first quarter. And so there’s more in there than just W-2s. But the short answer is those industries most impacted oftentimes would have higher turnover rates. And so again, it wouldn’t be uncommon for a restaurant that might have 250 employees. You could see 450 or 500 W-2s on that in a full year. And in this type of year for someone that may have had 250 employees may have only seen 275 W-2s because of kind of when it happened and then we lack some growth on that. And so that’s how it’s calculated and expectation of what normally happens with our W-2s as it corresponds to the business that we have in their number of employees and then what didn’t happen this year in regards to that. So again, that’s a first-quarter impact only that we’re talking about.

Hi, thanks for taking the question. I was hoping if you could speak to what you’re assuming in your guidance for retention rates this year?

We don’t guide to what we assume for retention. I can tell you that we’re very bullish on our product and the return on investment that it uses. We’re also bullish on watching how clients used the product and how they’re actually achieving that. And we do believe that does impact retention in a positive way. And so I would say that we are bullish as we look toward retention this year, but that’s not something we guide to as we sit here today.

Yes, good evening, gentlemen. Thanks for taking my questions. Chad, first question for you would be curious to hear more about the BETI offering and sort of what stage you’re at in terms of the rollout there? Are you starting to beta that with existing customers? And then naturally, I would think that given the usage component of that or self-usage component that from the employee that it might fit more naturally as a cross-sell or up-sell, which is a bit different than obviously that traditional really focused on hunting model that Paycom has really mastered. Can you talk about sort of the puts and takes there? Thanks.

Throughout the year, we will be rolling out BETI, which will not only be an upsell to current clients but will also become our primary offering in the market for payroll services. We introduced employee self-service in 2002, but it took two years for people to engage with it, even though it was free. In fact, it wasn't until we developed time and attendance online that people began using employee self-service to clock in. I believe BETI is the finishing touch on our payroll services. Internally, we have returned over 80% of our hours back to our payroll department because of our new approach. BETI allows employees to handle payroll continuously rather than waiting for the end of the pay period. This increases efficiency for employees and reduces the potential for errors and liabilities related to payroll corrections and missed items. The transition will be as seamless as changing channels on a TV set, as employees will start doing their own payroll out of convenience and necessity for business success. This is crucial for improving the payroll process. We are currently using BETI internally, and I project that we will have our first clients using it by the second quarter. By the third and fourth quarters, we expect to ramp up its rollout, shifting how employees perceive payroll—starting it at the beginning rather than at the end of a pay period. I genuinely believe this is the most significant product we’ve developed at Paycom because it automates a complex task with minimal room for errors. Payroll accuracy is paramount; anything less than perfect is unacceptable to employees. We will empower employees to take responsibility for confirming their payroll, as they are the only ones who know if they received everything owed to them. I anticipate a year-long rollout for this product, and while it took time for employee self-service to gain traction, I don't expect BETI to take as long due to our focus on user engagement. We'll see early adopters, followed by a broader group as time goes on. I'm really excited about this and can confirm that it will be a paid product.

Excellent, that’s really helpful. As a follow-up, as you think about adding to sales capacity into the new year, you talked about the 95% of your employees are still working remote; does this change in how effective you’ve been, change the way you’re thinking about the traditional expansion model of opening a sales office in various regions or cities? Are there areas where you can continue to expand with a virtual model and say, smaller Tier 2, Tier 3 cities as you look into 2021?

Yes, no, it hasn’t changed my thoughts yet. Now the go-to-market could be a little bit different; what you’re talking about there is territory division and where we place an office and then how we work together. So do I see Paycom individuals working together in an office setting moving forward? Absolutely. Do I know exactly when that would be or what that might look like as we gear back up to maybe be able to visit a client back in their office? I don’t know exactly how that looks right now, but I am extremely confident that our employees will be back in their offices only when it’s safe to do so and we’ll continue the mission that we’ve set for today.

Hey, this is Michael Berg on for Siti. Congrats again on a great quarter and thanks for taking my question. I want to quickly follow-up on the BETI offering. What type of pricing uplift that would be to the core payroll you offer now?

Yes, we’re not going to disclose pricing right now on this call, but I mean eventually, it would be published and you guys would be able to figure that out, but it’s important first, we go through that with our own salespeople individually and our own teams internally. But again, it will be a price that – it will be something that we’re charging for because it produces an incredible amount of return on investment. And in order to use BETI, we had to do everything else right. It’s not like you can do everything else wrong and use BETI. If you’re going to use BETI, you have 100% DDX score, all of your managers are using Manager on-the-Go correctly, and BETI has completely automated your entire payroll process. I mean, it’s almost the means to the end, if you will, BETI, as we roll it out. But it will be a product that we’re charging for because it does create great value.

Got it, that’s very helpful. And then, it seems like you guys are making some pretty significant progress on the below 50 segment and you mentioned it’s less than 10% of revenues. How can we think about that a year ago; was that the same type of percentage or less than 5%? How can we think about how that’s progressed?

Very similar. I believe at IPO it was 6%. I don’t think it’s changed dramatically from year-to-year; I think we’re real close to where we’ve been in the past on that. Now, we have added small business teams, but we really just started adding them in earnest in 2019, and I – and even though they’ve had a lot of success in 2020, we didn’t really even see an incredible drag on our per-client fee even with losses of certain employees at different clients and with selling small business. Now do you believe it would have had more growth in that client revenue number had we not been selling as many small businesses? But I don’t really think the percentage is going to move drastically from where it’s at today just because of all the success we’re also having upmarket.

Hey, good afternoon and thank you. Wanted to clarify around bookings; did you see a notable acceleration in 4Q demand versus 3Q? Just curious if there was any indication at all of expansions of sales cycles as COVID cases spiked in December. And then, how have you seen the pace of demand progress in January?

Yes, I can’t really say that spikes in COVID cases had impacted our sales from week to week. Now, we did see again the spike had impacted us in that March, April, and May time period where things got really bad and then kind of started to stabilize. But throughout the year, different spikes in cases didn’t impact our ability to sell and move product. Now that we’ve returned to guidance, I believe that our strong sales bookings are included in our guidance as well as our performance. So I’m not going to keep talking about bookings, but what I would say is this, that when we got into March, and especially towards the end of March, I didn’t have an expectation that 2020 would necessarily be a record for bookings and starts. It was. And as we turn into 2021, when you’re looking at our guidance, and you’re looking at the things that we had accomplished through the year, I believe we’re going to need that also in 2021, which is not unlike any other year we’ve had in the past where we’ve always needed record sales and as well as record starts to hit our numbers and accomplish our goal. So as we head into 2021, there is no difference in that. Yes, I mean, we never stop selling those industries. I mean, my philosophy is if you’re growing by 100 employees, well, it’s a great time to add Paycom. If you’re reducing force by 100 employees, well, it’s a great time to add Paycom. So that’s my opinion. We never retreated from trying to sell those organizations. We would look forward to them being able to come back fully. We’re not there yet, but I do think at some point in time that will happen; I don’t really know that it’s a light switch that will go on, I think it will more happen over time that we start to see things like that happen. We’ll have to see; haven’t seen it yet. And then – but again, we remain focused on all industries as we remain industry agnostic. Yes, I mean, there is a lot of changes that we’re going to maintain as we head through this. I mean, I would honestly say probably the only area in which we’re kind of waiting to see what’s going to be a more accepted practice is how we go to market in sales. We’re not waiting on anything else. I mean, when it comes to how we develop software, when it comes to how we’re servicing clients, when it comes to how we’re having those meetings. As far as that process, the efficiencies we’ve gained there, we’d be looking to keep those efficiencies. We’ve gained efficiencies in conversions and how we do conversions; we would be looking to maintain them. So I am not – I don’t think there are a whole lot of things we’re waiting to see what happens before we make decisions. There are a few of them we talked about as far as the go-to-market. But on the back end of efficiencies that we’ve gained through this process, some of them are forced. We had to gain certain efficiencies to be even able to work at home. We even answer the phones at home. We had to gain certain efficiencies. And so there are things that we’re going to maintain as we come back to work from the office, and most of those are already known to us.

One thing I’d say, we are continuing to look for efficiencies throughout the model. I think I had mentioned, I said 95% to 96% on the gross margin. I mean 85% to 86% is what we’re guiding to for the full year on the gross margin, but we’re continuing to look for efficiencies throughout the model, and we’ll continue to do that.

I want to thank everyone for joining us today on the call, and our special thanks to all the employees at Paycom for their flexibility and their perseverance through 2020. Over the next couple of months, we’ll be at several conferences this quarter, including the KeyBanc Emerging Technology Summit on February 24; and Craig and James will be hosting one-on-one meetings at the Morgan Stanley Technology Media and Telecom Conference on March 3. We look forward to speaking with many of you again very soon and appreciate your continued interest in Paycom. Thank you, operator. You may disconnect.