Paycom Software Inc (PAYC) — Q4 2021 Earnings Call Transcript

Thank you. And welcome to Paycom’s fourth quarter 2021 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 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 our most recent annual report on Form 10-K. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statements 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 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 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. We ended 2021 with a very strong quarter and I’d like to thank all of our employees for the outstanding effort they put in to making 2021 a great success. I will spend a few minutes on the highlights of our fourth quarter 2021 results. Then I will review some of our notable achievements throughout the year. Following that, Craig will review our financials and our guidance, and then we will take questions. 2021 was a very strong year for Paycom. We extended our platform to the employee even further through innovations like Beti, which enables employees to do their own payroll and we are seeing very strong adoption and record employee usage as measured by the DDS. Strong demand continues to bolster our sales momentum and record new client sales in 2021 have positioned us to deliver another year of rapid growth in 2022. For years, I have been predicting the end of the old model whereby HR and payroll personnel's routine of inputting data for employees is replaced by a self-service model that provides employees direct access to the database. The old model is dying and that is good for both the business and the employee. Paycom is leading this transformation. We will continue to automate the processes that generate maximum ROI for our clients. Our 2021 fourth quarter revenue of $285 million came in very strong, up 29% year-over-year. Our full year 2021 revenue of $1.56 billion grew 25% compared to 2020. Employee usage, which is at a record high, is a key driver of revenue retention and I am pleased to announce that Paycom’s annual revenue retention rate increased once again to 94% this year, which is a validation of the strong ROI our clients are achieving. Our full year 2021 adjusted EBITDA was $419 million, representing an adjusted EBITDA margin of nearly 40%. The sum of our 2021 revenue growth rate and adjusted EBITDA margin resulted in us hitting the Rule of 65%, reflecting the solid demand for our solutions and the profitability of our business model and was well ahead of our stated goal to reach the Rule of 60. As you can see with our full year 2022 guidance, we are starting strong with the Rule of 65. Our marketing plan throughout 2021 continued to perform well, delivering strong demo leads throughout the year as we spent aggressively on advertising. More importantly, our sales teams are successfully closing these leads, which is the key driver of our revenue growth. In our first year as our Chief Sales Officer, Holly Faurot has executed fabulously on her sales plan and I am very pleased with the coordination we are seeing across the sales and marketing organizations. We are capitalizing on the shortcomings of disparate HCM systems that are failing both the employees who struggle to use them and the businesses that struggle just to make them work. Our proven single database platform just works better and we continue to differentiate ourselves with easy-to-use solutions that enhance the employee experience and generate maximum ROI for our clients. In response to increasing demand in 2021, we expanded the upper end of our target client size range from 5,000 to 10,000 employees, as we are seeing success selling to larger clients. We are also concurrently expanding geographically to meet the increased demand. In addition to the Manhattan office we announced a few months ago, we recently opened four outside sales offices in the following locations, Las Vegas, Jacksonville, New England, and South Jersey. We have now opened five offices in the last five months. That said, I’d remind everyone that we still only have approximately 5% of the TAM today, so there’s plenty of runway ahead to expand and continue to capture market share. Paycom received national recognition from several organizations in 2021. Our latest innovation Beti was awarded the Top HR Product of the Year honor. As a workplace, we earned the top 20 ranking in Best Places to Work in the U.S. by Top Workplaces and we were named the Top Workplace in Oklahoma for the ninth consecutive year. We were also named the Best Company for Women to Work. These awards are a testament to our execution and thriving corporate culture. As of December 31, 2021, our headcount stood at 5,385 employees, up 28% year-over-year, as we continue to have great success attracting and retaining high-quality talent to further bolster our future growth. Additionally, I want to congratulate the 2021 Paycom Jim Thorpe Award winner, Coby Bryant, from the University of Cincinnati. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, who was one of the greatest all-around athletes in history. Jim Thorpe also happened to be an Oklahoman. To sum up, we are executing well on all fronts with innovative solutions, high employee usage, and increasing revenue retention. Robust market demand and our proven go-to-market strategy are fueling strong new client revenue momentum. I’d like to thank our employees for helping to make 2021 such a strong year and we are set up to do even better in 2022, and we are off to a great start. With that, I will turn the call over to Craig for review of our financials and guidance. Craig?

Thanks, Chad. Before I review our fourth quarter and full year results for 2021 and our outlook for the first quarter and full year 2022, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We ended the year with very strong results, delivering a milestone full year 2021 revenue total of $1,056 million, up 25.4% compared to 2020. Fourth quarter results were excellent with total revenues of $285 million, representing growth of 29% over the comparable prior year period. Our revenue growth is driven by strong demand, new business wins, and adoption of recent new product offerings. Within total revenues, recurring revenue was $280 million for the fourth quarter of 2021, representing 98% of total revenues for the quarter and growing 29% from the comparable prior year period. We ended 2021 with nearly 34,000 clients, representing a growth rate of 9% compared to 2020. On a parent company grouping basis, we ended the year with roughly 17,700 clients, representing a growth rate of 10% compared to 2020. Total adjusted gross profit for the fourth quarter was $239.7 million, representing an adjusted gross margin of 84.1%. For the full year 2021, our adjusted gross margin was 85.1%. For 2022, our target adjusted gross margin range is expected to remain strong at approximately 85% to 86%. Adjusted sales and marketing expense for the fourth quarter of 2021 was $72.3 million or $25.4 of revenues. Our marketing strategy in 2021 has been very effective at driving high-quality demo leads, and our outside and inside sales teams have been doing a great job closing these leads. We plan to continue to invest in marketing in Q1 and throughout 2022. In addition, as Chad said, we have added four more outside sales offices, bringing the total outside sales office openings to five new openings in the last five months. We also continue to add inside sales personnel as we grow our sales organization to meet the demand. Adjusted R&D expense was $32.3 million in the fourth quarter of 2021 or 11.3% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $44 million in the fourth quarter of 2021, compared to $33.2 million in the prior year period. We aggressively recruited talent in R&D throughout the pandemic. We plan to continue to invest in our future growth through innovation and new product development. Adjusted EBITDA was $109.6 million in the fourth quarter of 2021 or 38.4% of total revenues, compared to $84.2 million in the fourth quarter of 2020 or 38.1% of total revenues. For the full year 2021, adjusted EBITDA was $419.3 million or 39.7% of total revenues, compared to $330.8 million or 39.3% of total revenues in 2020. Our GAAP net income for the fourth quarter was $48.7 million or $0.84 per diluted share versus $24.4 million or $0.42 per diluted share in the prior year period based on approximately 58 million shares. For the full year 2021, our GAAP net income was $196 million or $3.37 per diluted share. Our effective income tax rate for the fourth quarter of 2021 was 30.4%. Non-GAAP net income for the fourth quarter of 2021 was $64.4 million or $1.11 per diluted share versus $49.1 million or $0.84 per diluted share in the prior year period. For the full year 2021, our non-GAAP net income was $260.4 million or $4.48 per diluted share versus $203.5 million or $3.49 per diluted share in the prior year period. For 2022, we anticipate our full year effective income tax rate to be approximately 28% on a GAAP and non-GAAP basis with Q1 GAAP effective tax rate expected to be approximately 30%. Turning to the balance sheet, we ended the year with cash and cash equivalents of $278 million and total debt of $29 million. Cash from operations was $319 million in 2021, representing an increase of 40.6%, 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 $1.9 billion in the fourth quarter of 2021. During 2021, we repurchased approximately 164,000 shares for a total of roughly $65.6 million. Through December 31, 2021, Paycom has repurchased nearly 4.3 million shares since 2016 for a total of nearly $488 million, but we currently have $266 million remaining in our buyback program. Now let me turn to guidance. For fiscal 2022, we expect revenue in the range of $1.314 billion to $1.316 billion or nearly 25% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $524 million to $526 million, representing an adjusted EBITDA margin of approximately 40% at the midpoint of the range. We are starting this year’s guidance at the Rule of 65. For the first quarter of 2022, we expect total revenues in the range of $342 million to $344 million, representing a growth rate over the comparable prior year period of 26% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $161 million to $163 million, representing an adjusted EBITDA margin of 47% at the midpoint of the range. 2021 was a very strong year for Paycom as a direct result of the investments we made. We will continue to invest in talent, marketing, innovation, customer service, and geographic expansion to meet the strong demand we are experiencing and to support our high expectations for long-term future growth. With that, we will open the line for questions.

Hey. Thank you. Congrats to a great finish to the year. Chad and Craig, I’d like two questions. One was on the retention rates of 94%, is kind of again up from last year, a very, very strong number, especially considering where you were playing in the market. Can you talk a little bit about the drivers there and how are you thinking about this number going forward? And then the second question is where I got a lot of questions from investors was around the customer adds. Obviously, last year, especially with the pandemic, you had a crazy big number there, that moderated this year; how do you think about it, especially in light of your comments, Craig, around the investments in inside and outside deals? Thank you.

Yeah. Raimo, starting with the first on retention, it was about three or four years ago that we started to increase that rate. We had been 91% for six years straight and then it jumped up to 92%. It really jumped up once we started implementing employee usage products. We came out with the app, and it went up. Then we looked at the year before, the pandemic hit in 2020, and it went up again to 93%. Again, we had driven through the direct data exchange, having employees make those changes themselves, increasing satisfaction for those clients as it increased their return on investment. In 2020, we held the line at 93%, which had somewhat to do with it being a trailing revenue retention number. Obviously, 2020, we did have some retreat in our revenue; just the natural attrition that came from those employees being laid off or leaving their business during the pandemic and then now in 2021, we have been able to increase it once again to 94%. The answer to that question, though, it’s really driven by usage. The more success a client has using our products, the greater the return on the investment they are achieving, which makes them want to stay with us longer. As for how high can it go? At some point you do have to look at, you will always have a certain number of clients that could be bought, sold, and merged. But we are very ambitious with that number. We are seeing a lot of satisfaction across the client base, so I wouldn’t necessarily say we are done with our retention aspirations, but we feel really good about being able to raise it again. As far as the client count that you mentioned, in 2019, our parent company group and those are decision, client decisions, grew by 6.5%, that client number. Of course, today in 2021, it grew 10%. Last year, it grew 18%, which was really in conjunction with the fact that we added small business teams to sell small business units. We accelerated our advertising spend in 2020, which generated a high volume of leads, a lot of which were beneath the 50 employee range. That’s when we added several teams to catch that, which really benefitted us from a percentage growth unit add. I would point out that in 2020, even though we did have around 18% parent company group growth from a unit perspective, our growth per client, billings per client annualized were roughly flat, and in 2021 that number is up about 14%.

Okay. Perfect. Thank you. Congrats.

Thank you. Thank you.

Hi. Great. Congrats. I will echo that as well just a really great end to 2021. So, maybe, Chad, I wanted to just follow up on Raimo’s question and you kind of touched on it a little bit there at the end. But if I think about the net adds that you have added in the context of the, call it, net new recurring revenue, you are getting to like an average customer size of new customers added like north of $70,000 of average revenue versus, like, let’s call it, in the 50s, maybe looking back to 2019. So you are seeing pretty significant growth there. I am just curious, is that a fair way to think about it that you are just signing customers that are even much larger today than in 2021, and how should we maybe think about that just on the historical comparison?

Sure. So it’s been similar to what you have seen us pick up in the past as we have continued to focus on larger clients, that’s driven that number up. We are having more success selling larger clients. So you might say that the ones we are bringing in on average are larger than what we brought in in the past. We are selling more of them. So we are just having more unit counts at that level than what we have had in the past. And then, obviously, we have continued to add product into the mix, which also adds value to each deal that we bring in, regardless of what size they are at.

Great. And then maybe just a follow-up, Beti is impacting retention in a positive way. I am curious if you can maybe update us on what the traction is in terms of getting the install base to using Beti and how we should think about that progression in 2022.

Yeah. So we are having a lot of success with the install base using Beti. I mean, internally, there is a little bit of a process change for our clients. You are moving things that you were doing after the payroll ends, the pay period ends. You are moving that to the beginning. But we continue to have success selling Beti, both into our current install base. And as a reminder, all new business that we have brought on since July of last year all have Beti included in its pricing and usage expectation.

Great. Thank you for taking my questions.

Thank you.

Great. Thanks very much. Just a first quick one. Chad, can you remind us how many sales teams, both internal and external, you have today and maybe where that was a year ago?

Sure. Craig?

Yeah. So outside sales teams, we are at 54 now, and as we mentioned, we have added the four recent ones and then we added one towards the end of last year. So we have added five of those. And then in terms of inside sales teams, from our KPIs, we count the inside and the CRR group as one. But we have also announced that we have had over 10 plus we are adding to the inside sales group.

And so, outside sales is at 54 I think right now…

Yes.

…total outside sales teams. Brad, the last time we added sales, outside sales team, we added in 2019, we added our New Orleans office. We did not add any in 2020. The end of 2021 is when we brought through Manhattan and then we continued on with four since then.

That’s great. And maybe just following up to close the loop on the unit versus pricing dynamic, with these added sales teams, would it be right to assume that we could probably see a more even split in 2022 with the 25% growth between unit and price, or maybe even a little more unit?

I am not sure. We are not as focused on unit growth, I would say. Obviously, we want to win our deals. Sometimes our unit growth goes up, as it did in 2020, just because of the success we had with our inside sales group. Obviously, those deals have a smaller revenue contribution. So as we turned into 2021 and we had success selling in 2020 as well above our range, but in 2021, we raised our range because we continue to have so much success. Our focus continues to be the mid-market, but we also have success below and that is really what contributes to the increase in unit count are the small unit deals.

Got it. Thanks very much.

Thank you.

Hey. Good afternoon. Let me add my congratulations. With regards to the revenue per client increasing by 14%, how much of that is just because of the bigger clients that you are selling relative to an increase in terms of the number of employees per client just as employment came back versus adding more modules or selling more modules? Is there a way to think about that in terms of the three elements?

Yeah. I mean, well it’s going to be driven by size of client number of modules sold into clients, for sure. Any contribution from improving employment in regards to our base would be minimal.

Okay. So that was a minimal contribution in terms of the employees in the base.

Correct.

Great. And then, can you talk a little bit about the assumptions for the gross margins, obviously, continue to be best in class? I am wondering if you can just talk a little bit about the expectations here for 2022. What are you assuming in terms of average flow balance and with rates starting to finally move back up? How much do you think you could end up capturing as rates start hopefully normalizing?

Yeah. In our gross margins, we don’t anticipate, we don’t factor in any rate increases. I mean, obviously, if there are rate increases, which they are talking about here in the first quarter in March, that would be a tailwind to us based on the average daily balance somewhere between $4 million and $5 million on an annual basis. But that would layer in, Mark. It wouldn’t come to us the day of the increase in rates. So that’s something that kind of layers in over time.

Is that $4 million to $5 million for how many basis points?

For the 12 months.

Yeah. Thank you. Excellent. Thank you.

Hey, guys. This is Josh on for Ryan. Congrats on the strong year and quarter here. I am curious, now that you have just opened five sales offices, what are you seeing in the macro that is kind of giving you this confidence here over the last couple of quarters to open these offices? And then are you seeing improved activity in hospitality and some of the troubled industries from the pandemic starting to pick up here materially before Omicron hit? And then what kind of a pause are you seeing with Omicron, if any?

Sure. First, I want to discuss the new office openings. Demand is really pushing us to expand our sales teams. We began investing significantly in marketing in 2020, which generated high-quality revenue and strong margins for us, resulting in a continuous stream of leads. Since we didn't open any offices in 2020, it's time for us to restart that process. Regarding Omicron, it's often unclear why one company might see a decrease in employment one week and an increase the next. I don't view these factors as having a significant impact on our upcoming quarters as long as we maintain stability. We've experienced that stability since the summer of 2020, which makes us confident about our position going forward. Barring any major changes in the employment landscape, which we do not anticipate, we expect business as usual throughout the year.

Okay. Got it. Great. And then just the follow-up question on the interest income. Is that kind of returns to the model here over the next couple of years, investors are obviously more focused on free cash flow generation with the increasing interest rates? How do you think about the balance of reinvesting that interest income for growth versus letting it just fall to free cash flow and ultimately buying back more shares, obviously, depending on how the stock price goes?

Yeah. Gross price is always growth for us. I mean, we have been investing our profits into growth and they are creating more profits. So, that’s just kind of what’s been happening. But in regards to the interest rates, we wouldn’t do anything other than the natural things we are doing right now. Craig, I don’t know if you would add anything.

No. I mean, obviously, as I come back, we would trade off a point of margin for a point of growth, but we are going to still spend wisely as you see that we have always done.

And our focus is growing as fast as we can in 2022. So we have that locked and loaded and the funds to be able to do that.

Great. Thanks, guys.

Thank you.

Oh! Siti Panigrahi. Hey. Congratulations. Great quarter. So I was getting two questions about your Q1 guidance. Sequentially, it was 21% is almost similar to last year versus prior to COVID is 30% plus. Is there a similar kind of expectation from W2 and form filing this year as well, Chad, or any other factors you have considered in your guidance?

There’s a bit of that. I would point to how the fourth quarter in 2021 was our highest revenue quarter from a fourth-quarter perspective. Typically, the first quarter can exceed the fourth quarter over the years. This year, the fourth quarter exceeded the first quarter, which really hasn’t happened since 2015. Our revenue mix is changing as we continue to sell more products at the time of sale and into our existing base. The contribution from those annualized form filings to our overall client annualized revenue is decreasing. The monthly recurring revenue we charge clients is outpacing the growth in annualized fees. While some trends we saw in 2020 also occurred in 2021, I believe our comparisons were somewhat easier this year than they were going into 2021 when looking at W2s from 2019. All of this indicates that the monthly recurring revenue we charge clients, driven by the additional products they are purchasing and finding value in, is growing faster than any increase in our annualized fees.

That's great information. I have a quick follow-up. It's wonderful to see that you have added four to five sales offices. How do you anticipate the competitive landscape will shift in your segment above $5,000 now that you have sales offices that can engage in-person, which is likely more important for reaching this high-end customer? How should we view growth in that segment?

Well, I think it still remains to be seen how prospects are going to buy this technology. We are still, I mean, most people are still buying virtually. Again, we are not going to try to pull clients on to a certain way to buy. We are going to meet them where they live. If they are used to buying virtually and want to buy virtually, we have the solution for that, and of course, if clients want us to come out there, we have that availability to be able to do that. But I would say that we are not seeing a huge shift to in-person selling at this point. We remain ready. But again, that’s something that we are going to meet the client where they live on that.

That’s great. Thank you, Chad.

Thank you.

Hi, guys. Good afternoon. Thank you. So you measure kind of the sales force metrics. Can you talk a bit about where sales force productivity stands relative to pre-pandemic levels?

Sales productivity has significantly improved from pre-pandemic levels, whether assessed on a per representative basis or on a team basis. During the pandemic, we adapted and enhanced our sales approach. We became more strategic, improved our connections with prospects, and refined our marketing and retargeting efforts. Consequently, sales have been very strong and continue to be robust today.

Okay. And as far as employee growth or client employee growth goes, I think I heard you say, it was minimal in the fourth quarter. Are you embedding any assumption on client employee growth in your 2022 outlook?

No.

All right. Thank you.

Thank you.

Hey, thanks for taking my question. Chad, could you share your thoughts on the pipeline, the length of sales cycles, and the overall impact of the Great Resignation, both positive and negative, on the business as we look ahead to 2022?

Yeah. What I would say is, in regards to the pipeline, our pipeline remains very strong. I also would say through virtual selling, I do think it’s been, to some extent, easier to connect to some of the players that you would have in a large organization. In small organizations, you might talk to two or three people, but in a large organization, you have multiple decision-makers, and in our case, multiple user buyers, because we are impacting many parts of the businesses. As far as a tight labor market, I mean, I think that impacts all of us. We have had a lot of success in the tight labor market, especially in the management ranks of being able to increase quality for us in those areas. We are up 28%. I mean, from an employment perspective, we added 28% to our employee base last year. So definitely we noticed it being tied out there. But it’s definitely, you have to be competitive. But we have had a lot of success building our recruiting teams over the years with very strong learning management systems where we are able to spin up employees quickly, get them started on their career.

In follow up, Chad, the number of sales offices you added in 2021 seems to reflect a potential catch-up from not being able to proceed as quickly in 2020. It appears that this could be attributed to more individuals being ready to make a move after facing delays due to COVID, whether due to attrition from competitors like ADP and Paychex or shifts in the competitive landscape. There was a significant ransomware attack at UKG. I'm curious about the current competitive environment and how your income has been directed towards incremental investments, particularly in expanding the sales team more than in previous years. What should we take away from this situation?

Well, I mean, we are focused on dominating the industry and really providing businesses with a very strong return on investment and really that’s happening. A lot of the things that we are competing against are just, they are old ways to use systems. Over time, and you are starting to see that, it just becomes more and more difficult to use them. And we only have 5% of the market. I mean, that’s the other thing. So we have such an opportunity. Demand continues to increase, the popularity of our brands is getting stronger. We have a lot stronger proof sources or larger clients, and we have increased retention rate, which shows you that they are having a lot of success with it. What was your question about UKG?

Oh! I was just asking, have you seen any impact from the hack that they suffered or the security breach in terms of more clients, has that been a pain point that has been used by more clients to switch providers?

Yeah. I just wanted to get you to say it again. We are having success with that. It’s a pretty bad deal when you are down that long and we are having success with that. Our hearts go out to those clients and especially their employees that are impacted. But those are a little bit longer sales cycle when you are talking about the larger deals. I think this happened in December. Obviously, we are on it. We do believe we are going to have success taking some business. I think if you are a CFO or HR person, you would be hard-pressed to stay in that environment without quite a few explanations. At some points, you’ve got to read the room on what industry you are in. There are a lot of restaurants that won’t serve you salmonella 32 days in a row. You might want to eat at one of them. Thanks for the question.

Thanks, Chad.

Yeah. Hi. Congratulations on a good quarter and thanks so much for taking my questions. Chad, just a follow-up again on your optimism on the demand trends, as well as the sales success that you experienced in the quarter, clearly your marketing and sales expansions having some fruition. I just wanted to ask you again here, are you seeing any changes at all in the environment in terms of maybe what customers are asking for on top of the payroll, or is your optimism about the demand trend just kind of strong productivity across the sales force today?

Yeah. Well, I think we definitely have strong productivity across our sales force. But I do believe that’s driven by high-quality leads and a differentiated product strategy that clients are having a lot of success with. You sell one thing, but we are able to prove it out as well, and so we go out there. We onboard clients onto our product and then we are able to prove out the value they are receiving. The more you do that, the more that increases demand as well as it increases confidence with your sales force. The salesperson goes out there and has an incredible amount of success bringing someone onto our platform and that’s a happy client. A lot of confidence is built up within the sales staff. We had to shift strategies here; we didn’t start off with the employee doing the work and inputting the data into the system themselves through the DDX. We didn’t start off with self-service payroll. So, there’s been a little bit of a shift from our sales department selling it one way and really coming into their own with understanding the value of selling it the correct way, which is how the clients are going to currently use the product. We are very bullish on that and really our demand hasn’t seen much or any of the tail off and I am thinking of since 2020, since we came out in 2020. Of course, it’s up from there from what we would have sold in 2020. But since those first couple of weeks in the pandemic when we shifted into virtual leads and increase in marketing and really becoming more efficient in our areas, we have had a lot of success since that time and I haven’t seen us take a step back since that time.

Thanks, Chad. And one follow-up for Craig, Craig, I have a question on the 4Q cash flow. It came in far above what we were modeling. You pointed out the revenue upside is one of the drivers. I just wanted to ask you, did some of the spend plan for 4Q, did that get pushed into 1Q or were there any other anomalies to explain the outsized cash flow growth in the quarter? Thanks.

No. I would say it's mostly just timing, a little bit of timing Q3 to Q4 to Q1. But, I mean, really nothing unusual there. I mean, and part of it’s just the overall strength of the quarter. We had a very strong quarter from a revenue perspective as well for Q4.

Thanks, Craig.

Hey. Thanks for taking my question. So, I guess, most of them have been asked and answered already. I guess, have you thought about giving new updated for ASC 606’s long-term target margins?

Under ASC 606, I am not exactly sure of the question. We are continuing to…

The long-term margins, you used to give like a long-term EBITDA margin, not guide, but a target as you do it...

Yeah. Correct. We did and I think we continue to hit that and then we would update it. And you are right as we went to ASC 606 we have not updated those long-term margins. We have strong margins that we are starting off with right now. Again, we are focused on growth, but our growth is producing a high quality, profitable business. For us, we are focused on the growth side, but we do have healthy strong margins. It’s something we have to take a look at internally of when we may be able to update what our long-term growth margin looks like, but we are focused on growing for the foreseeable future.

Yeah. And I would say, I mean, one thing we are really starting this year, just leave it our margin off where we finished last year. So coming out strong out of the gate, a couple of things kind of looking into 2022 just on a modeling, stock comp, we would expect it to be around $110 million, up slightly from this year. And then one thing, we did bring our Grapevine office facility online here at the end of the fourth quarter. So we are going to see a little bit of an increase in the depreciation for 2022 as it relates to that facility, probably, up around 50 basis points as a percent of revenue. One thing else that we have announced is kind of the expansion in Oklahoma City as well. So CapEx will be similar to last year as it relates to CapEx. All of those play into our margins or some of those you would add and subtract it out for adjusted EBITDA, but we are really excited about where we are starting 2022 with the Rule of 65.

On the CapEx, is that similar dollar amount or similar percent of revenue?

Percent of revenue.

Got it. Great. Thank you very much.

Thanks for addressing my questions. Chad, could you share any insights regarding which modules are experiencing increased adoption as HR shifts to a more strategic role in light of the Great Resignation? Additionally, are you noticing more customers returning or an increase in the size of deals?

Certainly. To begin with the modules, we have consistently seen a strong uptake, and I've mentioned that the longer a module is available, the greater the adoption we observe. When clients implement Beti, certain modules must also be included for effective use. This often facilitates broader adoption, particularly among new clients, all of whom implement Beti. Regarding the impact of modules, we have noticed effects on learning management as organizations focus on retaining and accelerating training for new staff. Our recruiting product has also performed well throughout the pandemic, aiding in identifying candidates for hire. As we assess our product mix, usage has been robust across the board, dependent on the specific industry and the needs of each client. In terms of customer retention, we are not encountering significant losses, as indicated by our improving retention rate. When we do lose a client, we generally engage with them quickly due to their employee base's usage levels. With DDX at 95%, those clients find it challenging to switch providers without jeopardizing their return on investment and the automation benefits obtained from our product. We are successfully winning back clients, but to emphasize, our losses have decreased significantly.

Got it. That’s helpful. And then just quick follow up on your office openings. I mean, as you guys open up five sales offices after not opening one and a half over years, how do you ensure that you don’t see any disruption to your productivity with your other offices as you shift around personnel and make them sales leaders? And to the other point, like, how do we think about sales productivity ramping for these five offices, is there any change to the historical cadence?

You generally don’t move top managers from one office to a new one where they start with no employees without affecting the original office. We are relocating some of our top managers, but the new office should generate enough positive results to offset any negative effects on the old office. By the time the new office matures, there won’t be much difference in performance or quota achievement between the two. While moving managers does have some impact, it's not an enormous sacrifice. We're currently disrupting five offices; previously, it was four out of twelve. The level of disruption is somewhat reduced now, and it may take a little while for the managers to adapt to their new territories. However, since they are our best managers, they typically adjust quickly.

Got it. Helpful. Thanks so much.

Yeah.

Great. Thanks for squeezing me in. Just piggyback on the last question, are all of the five new offices fully staffed today?

No. Our approach is to typically hire a full team, where a complete office has eight sales representatives. We usually start with three or four in a new office; they begin building their sales pipeline and generating initial sales. As mentioned previously, it generally takes around 24 months for an office to reach peak maturity, at which point they have the same quotas, number of representatives, pipeline levels, and expected success as any other well-established office.

Got you. And then just to wrap up on, Beti. When the product went live, Chad, you made some comments about how long you thought it would take to get full penetration into the base. Now that we have seen sort of the growth in the adoption, any updated thoughts about how that progression is going to evolve? Thank you.

I still feel strongly about what I said in the past. I mean, Beti ensures perfect payrolls. It ensures you are not going to have manual checks. You are not going to have voids. You are not going to have employees with overdrafts and everything else. So we continue to have a lot of success deploying Beti and I still expect that all of our clients will be using Beti at some point.

Great. Thank you very much.

All right. I would like to thank everyone for joining us today on the call and a special thanks to our employees for helping deliver another very strong year. This quarter we will be participating in the KeyBanc and Morgan Stanley conferences in San Francisco on March 8th and March 9th, respectively. Both should be in-person, but we will see. We look forward to speaking with many of you very soon. We appreciate your continued support in Paycom. Thank you, Operator. You may disconnect.