Paycom Software Inc (PAYC) — Q3 2022 Earnings Call Transcript

Thank you and welcome to Paycom's third quarter 2022 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 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 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. And now I’ll 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 delivered another very strong quarter with a focus on high-quality revenue growth that produces world-class margins. I'll spend a few minutes on the highlights and then turn it over to Craig to review our financials and our guidance and then we'll take questions. Our third quarter 2022 revenue of approximately $334 million came in very strong, up 30% year-over-year, with rapid recurring revenue growth driven by new business sales. Demand for self-service solutions that enable employees to interact directly with their data continues to be strong and feedback on self-service payroll remains very positive. At the center of our automation strategy is BETI, which is how businesses and their employees win in payroll. BETI is the future of payroll and already nearly half of our clients have embraced self-service payroll. Our go-to-market strategy includes 54 outside sales teams that focus on penetrating their respective territories. And we augment their sales efforts with marketing and advertising that drive lead volumes, brand awareness and the call to action. Our efforts are producing strong demo leads and our new brand campaign is driving strong recognition across our target market range. We are also seeing a surge in organic lead referrals coming directly from employees. As more employees experienced BETI and Paycom's comprehensive employee self-service solutions, many are seeking to bring us into the current workplace. Just like in the consumer world, employees don't want to go backwards in technology. And with Paycom, employees get the best HCM user experience and the most control over their data interactions. Employee users are becoming Paycom advocates. And when they get promoted in their current position or move on to a new organization, they are becoming strong influencers. We have a long runway to go and our multifaceted go-to-market strategy should help deliver rapid new business growth for many years to come. To sum up, we are delivering high-quality profitable revenue growth. Based on our strong financial results to date and expectations for the remainder of the year, achievement of our full year guidance for 30% revenue growth and 41% adjusted EBITDA margin puts us back into the pre-pandemic Rule of 70. Our differentiated product strategy focused on employee experience and self-service payroll is producing outstanding fundamentals with accelerating revenue growth in 2022, expanding adjusted EBITDA margins and strong cash flows. I want to thank our employees for their focus and commitment to Paycom. With that, I’ll turn the call over to Craig for a review of our financials and guidance. Craig?

Thanks, Chad. Before I review our third quarter and our outlook for the fourth 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. Third quarter 2022 results were very strong, with total revenues of $334.2 million, representing growth of 30% over the comparable prior year period. Our revenue growth is being fueled by strong demand for our differentiated solution and strong new business wins. Within total revenues, recurring revenue was $328.2 million for the third quarter, representing 98% of total revenues and growing 31% from the comparable prior year period. Total adjusted gross profit for the third quarter was $280.5 million, representing an adjusted gross margin of 83.9%. Our focus on high-quality revenue produces world-class margins and we remain on target to achieve strong full year adjusted gross margins of approximately 85%. Adjusted sales and marketing expense for the third quarter of 2022 was $85.8 million or 25.7% of revenues compared to 25.9% of revenues in the prior year period. Adjusted R&D expense was $37.3 million in the third quarter of 2022 or 11.2% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $52 million in the third quarter compared to $40.7 million in the prior year period. Our investments in sales and marketing and innovation are fueling our market share gains and we plan to continue to invest in these areas to drive our future growth. Adjusted EBITDA was $126 million in the third quarter of 2022 or 37.7% of total revenues compared to $89.7 million in the prior year or 35% of total revenues. I am pleased with the 270 basis points of year-over-year adjusted EBITDA margin expansion that we saw in the quarter, which reflects the strength of our business model and flow-through of high-margin revenue upside. GAAP net income for the third quarter was $52.2 million or $0.90 per diluted share versus $30.4 million or $0.52 per diluted share in the prior year period based on approximately 58 million shares. Non-GAAP net income for the third quarter of 2022 was $73.4 million or $1.27 per diluted share versus $53.6 million or $0.92 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 basis. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of approximately $317 million and total debt of $29 million. The average daily balance of funds held on behalf of clients was approximately $1.85 billion in the third quarter of 2022. Now let me turn to guidance. With our very strong third quarter and the strength of our recurring revenue model, we are raising our full year 2022 guidance. We now expect revenue in the range of $1.371 billion to $1.373 billion or 30% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $560 million to $562 million, representing adjusted EBITDA margin of 41% at the midpoint of the range and a 120 basis point expansion from the prior year. For the fourth quarter of 2022, we expect total revenues in the range of $366 million to $368 million, representing a growth rate over the comparable prior year period of approximately 29% at the midpoint of the range. We expect adjusted EBITDA for the fourth quarter in the range of $144 million to $146 million, representing an adjusted EBITDA margin of roughly 40% at the midpoint of the range. Combining our 2022 guidance for revenue growth with adjusted EBITDA margin, we are now expecting to exceed the Rule of 70, which is at least 5 points greater than the Rule of 65 we achieved in 2021. We have a long runway for continued high-margin revenue growth. Our fundamentals continue to improve throughout 2022 and we have strong momentum heading into 2023. With that, we will open the line for questions.

Congrats on a great quarter in this kind of environment. Chad, one question for you, then a follow-up for Craig. In terms of what you’re seeing in the market at the moment, like obviously, there’s one company after the other that’s kind of talked about like lean demands, things happening. You guys are spending out a little bit in terms of like not seeing anything. Can you just talk a little bit about how that’s possible in terms of is there a different nature of what’s going on that people are holding on to their employees for longer, so then you guys don’t see it? Is it kind of the offering? But it looks like it’s more the whole HR space. So that’s the first question. Then for Craig, any comments on the operating cash flow because that one number that came in lower than the model. So I’m sure there’s something going on there, would be great to hear. Congrats again.

Sure. I mean I'll take the first one. And I would say, first, I mean, the hiring market is still a little tight, not like it was. I mean I would say there's been a little softening in hiring as far as it shifting maybe more into an employer's market. I would still say that we're not there yet. I mean for us, though, as far as moving deals around, I mean, moving deals forward, I mean, September and October were huge book sales months for us. And as a reminder, I mean, we only have 5% of the TAM. I mean we reported 33,800 clients at the end of last year. Our 2 largest competitors have a combined 1.7 million clients. And we’re out there making businesses more efficient by having their employees do the payroll themselves. So we’re not short on opportunity right now. We’re making businesses more efficient and I don’t see why that would slow down for us as that’s really within our control.

Yes. And I would say on the operating cash flow, Raimo, a couple of things impacted this third quarter. And most of it was really just timing between quarters but we had some additional tax payments here in the third quarter. Typically, we get some benefits as it relates to discrete items on stock compensation. And that caused our rate to be slightly higher, so we made some additional payments here in the third quarter. And then the rest is really more just expenses and the timing of those expenses and when they're paid. So nothing really to point out other than those 2 items.

Chad, maybe first one for you. If I think about the growth, staying above 30% even against normalized comps, it’s clearly impressive. And if I look at the fourth quarter guidance, it’s actually a stronger seasonal uplift as your initial guidance for the fourth quarter than normal, so the plus 10%. If I go back and look last year, I think you said something closer to like plus 7%, plus 8%. I’m just curious if you can help us maybe think about what’s driving the confidence in that strong seasonal uptick in the December quarter? If there’s anything you’re seeing in terms of change in renewal timing, or is it just float revenue? Just help us understand that.

Yes. I mean we've had a lot of strong starts as of late. And so those starts, when a deal starts in the quarter, that really does matter. The size of our beat for a quarter is really dictated by when a deal starts. If we start that new business, that new client for us, if we start them at the beginning of the quarter, we receive 100% of the revenue billing for that client. If we start the deal at the end of the quarter, we might receive only 15% to 30% of the revenue billing for that client for that quarter. Then of course, all subsequent quarters, we receive 100%. So we do have pretty good visibility as we go quarter-to-quarter. And what would be driving the fourth quarter is, obviously, we benefited from some rate increases. We've talked about that as how those layer in. I mean as you've seen, those do start to layer in. But also just the strength of our new client conversions. We're converting clients at a rapid pace. They're using the product right off the bat, which is helpful. And so we're having strong growth into the fourth quarter.

Great. I have a quick follow-up. We're nearing the point of fully utilizing the new sales offices. Can you provide an update on their productivity? Are they operating at full capacity, or is there still potential for improvement? How does this relate to the third quarter's performance and your outlook going forward?

Yes, we opened five offices last year, with one launched late in the first quarter of 2021 and four at the beginning of this year. It typically takes offices 24 months to reach full maturity, which involves having eight representatives with a backlog and pipeline engaged in the field. Currently, our strongest office has four representatives on quota. This number should continue to increase over the next year as they grow, and these offices will achieve the same quotas as our other locations by the end of 2023 for one and at the beginning of 2024 for the other four.

Chad, have you seen any noticeable change in hiring or retention at your customers?

No, I can't say that we've seen any changes. Now obviously, we're seeing changes just from when we're out there hiring people ourselves. And I think to some extent, that mimics a little bit of what our clients would be doing. I would say it's not as extreme as what you were facing maybe even 9 months ago as far as the additional bonuses people would look to pay or the recruiting bonuses people might have. I think more and more companies are getting people back into the office at some level. I think there's less work-from-home and more hybrid, if not even more work at the office. So again, we're not seeing any slowdowns in our at-bats or our lead generation. But I think a lot of that also has to do just with our size. I mean we only have 5% of the market. Most everyone is using a vendor. I mean the craziest thing someone can try to do is try to do payroll by themselves without using a business or a provider. So we’re having success making businesses more efficient with a very differentiated go-to-market strategy that is very much resonating out there with both the workforce as well as with those companies that we serve.

Let me add my congratulations on the strong quarter. Craig, I was wondering if you could give us a feel for like what sort of rates you’re able to get right now on the tax filing float and how that might look or what you’re factoring in for the fourth quarter?

Yes. So Mark, what we've talked about, what each 25 basis points represents, we haven't disclosed the exact rate that we're achieving. Those kind of layer in over time. But for every 25 basis points, at some point, we should be getting close to $5 million on an annualized basis. But all of our investments are fairly short-term. We're doing CDs overnights and then also commercial paper. So those are the types of investments, as well as some 2-year treasuries. So those are really the investments we're seeing now. And then that's kind of where we're at, at this point.

Great. And then Chad, you mentioned really strong bookings here in September and October. Wondering, given the normal cadence, what does that make you feel like for the fourth quarter and the strength that you’re seeing in terms of the pipeline, in terms of the key fall selling season?

I mentioned those months because they are the most recent, but we can look back to August or July or even further if necessary. We have been experiencing strong book sales for quite some time, especially since the pandemic began, and we're receiving a lot of leads from employees. We're seeing interest from some of the largest companies in the world, where 20 of their employees might enter our database within a month. This has resulted in strong leads, and we're able to convert some of them into influencers. These leads provide valuable data and insights as we interact with clients. We have found that employees enjoy using our product. Once we onboard a new client, all of them are utilizing BETI, and within the first two payrolls, over 50% of their employees are already managing their own payroll. This approach sets us apart, as other companies are not achieving this level of client engagement. As employees are promoted or move to other firms, they are introducing us to new opportunities. We’ve seen a lot of success with this model, and I don't anticipate it slowing down. Regardless of changes in the labor market, the value proposition of reducing exposure and risk for companies, while supporting employees in avoiding discrepancies in their pay, remains unchanged.

And congratulations on an excellent quarter. Chad, in terms of deal sizes or maybe the cycles as the lead generations going through to your conversions, are you seeing any meaningful changes in those metrics?

No. Deal sizes have continued to go up. So deal sizes every year, I mean, I can talk about how we continue to be pulled further and further upmarket. As far as the cycles, I wouldn't say there's been any big change to that. And let's see the other part of your question, yes. I mean deal sizes are going up. And the cycles, no meaningful changes there.

Yes, you have both of them. Craig, I have a follow-up for you. The guidance for the fourth quarter regarding EBITDA and margin is indicating less improvement compared to the performance of the business over the past two quarters. I am curious if there is any catch-up in spending or if you are planning to increase your advertising in the fourth quarter. Do you have any insight on that target?

I would say kind of similar to how we've done in the past. We want to make sure we have the ability to spend as we see necessary as we're going into fourth quarter. And if we want to increase those ad spend, it gives us the ability to do that.

Nice job on the quarter here. If you look at your R&D strategy, I think you have something like 29 modules today. Is the focus going forward more on adding new additional paid modules? Or is it more enhancing the current offerings? Or just maybe an update there?

Yes, I would say it's both. Our strategy, when it comes to both module creation and adoption, hasn't changed. Sometimes, we create additional features and functionality within a product and we do not charge for those features and functionality. DDX is an example of that. Manager on-the-Go is an example of that and I could name many others. And then sometimes, we create a product that has a different level of return on investment. And then we do charge for those products. And it's those products that we call modules and we do have 29 of them. So as we move forward, you'll continue to see a healthy mix of both as it makes sense for us.

Got it. And then just to clarify. On the guidance for the fourth quarter, are you considering the 75 basis point rate increase that’s likely to come out tomorrow in the current guidance?

Yes. I mean any rate increase in November and December will have very little impact on our fourth quarter. Those layer in over time. So those would have a very small impact on our fourth quarter.

This is George on for Steve. I want to ask about competitive landscape. Have you noticed any changes in your running into deals, in particular, as you started to move up market?

Not really. I would just say we're encountering some competitors. We've always had the same players. If we're discussing companies with fewer than 100 employees or fewer than 50 employees, we might see different players. However, when it comes to companies with 2,000 employees or more, we've consistently dealt with the same players for a very long time. Therefore, I wouldn't say we're facing new competitors. We're continuing to move up market, and as a result, we're seeing some of the familiar faces more often.

Got it. And then you mentioned the brand marketing program in your prepared remarks. I’d love to hear a little more on kind of the successes you’ve seen there and if there’s any plans to expand that program.

Yes. When looking at our new branding and marketing, there's been a significant change. We have transitioned from strategies focused on a single database and employee usage through the direct data exchange, where employees handle most of the updates themselves within the Paycom system. About 95% of all changes are made directly by the employees, without any additional effort from HR or payroll. Recently, our brand marketing has shifted to emphasize employees managing their own payroll. Interestingly, employees face consequences if they do not take this responsibility. When we engage with businesses during our analysis, we often ask the payroll representatives if their checks are ever incorrect. They usually respond that if a check appears wrong, they correct it before payroll is processed. This leads to the question of why not extend this practice to all employees, as they would likely act similarly. In the past, we may have leaned toward familiar territories with our app and single database. Today, we are focusing on the more challenging task of helping both employees and HR/payroll personnel understand the benefits of allowing employees to manage their own payroll.

This is Alex on behalf of Siti Panigrahi. I just wanted to ask how has the BETI adoption been trending for this quarter? Like what percent of BETI is your current clients? And what do you expect BETI revenue for FY ‘22? Or how has BETI performance done versus your initial expectations? And then I have a follow-up.

Yes. Approximately 50% of all current clients are using BETI, which includes every client that has been onboarded or sold since last July. While they may not have started using it right at that time, all clients sold since last July are utilizing BETI. The trend in BETI adoption is on the rise. That's why we're seeing many leads from employees transitioning between companies; technology doesn't typically revert to outdated methods. Removing an app from someone's phone and asking them to revert to old practices can be quite challenging. It's unnecessary as well. Therefore, BETI usage is continuing to increase. I previously mentioned that for new clients, about 50% of their employees are managing their own payroll within the first payroll cycle, and this number is growing as clients become more adept at using the product. Our strategy is focused on BETI. I constantly remind our sales team that if they cannot convey the benefits and value of BETI to potential clients, as well as its positive effects on their employees, then there is nothing else for them to sell. Everything else falls into place once BETI is understood as a crucial element. This approach addresses the existing issues employees face regarding accurate data and receiving correct pay from their employers.

Got it. And I wanted to ask, with the rising inflation, have you been able to pass on price increases to your customers for your modules? And how does BETI pricing compare to your other modules?

Yes, BETI pricing is a nominal fee and doesn't compare to the fees of our more substantial modules. Our first pricing adjustment as a company was in 2019. In the future, if we decide to make pricing adjustments, it will be based on the ROI we can deliver to clients. As I've mentioned before, sometimes we develop products without creating a billable module from them. Therefore, whenever we enhance the product's value, it makes sense to share in the value we've created through pricing adjustments.

I wanted to start with margin. Can you comment on the uptick in 3Q adjusted OpEx levels? It sounds like there’s no change to your 85% gross margin target for the year. I’m just curious what added leverage you’re going to get in 4Q to achieve that.

In Q4, there are a few factors that have affected the gross margin. One is our hiring efforts; we've been increasing our operations team to manage the revenue expected at the end of this year and into next year, which has had a minor impact on gross margin. Additionally, the depreciation from bringing the Dallas data center online is also affecting that figure. We are continually seeking efficiencies in our model and will keep looking for ways to improve throughout the rest of the year while maintaining our focus on high growth and future investments.

We've made statements in the past about if our gross margin is up way too high, it oftentimes shows that we could be a little understaffed in operations and service. And so oftentimes, when you see it change a little bit toward the downside, it means that we're hiring ahead of the growth. And then as that growth begins to come in and those people take on full load clients, we start to get some of that back.

Okay. That makes sense. I guess a follow-up just off of that, would you say that you’re fully staffed now across those different parts of the organization? And then just a follow-up on the new sales offices. Are these newer offices ramping faster than historical pace? Or is it basically in line with what you’ve seen?

Yes, I believe we have done a good job of hiring. Over the past nine months, it's become easier for everyone to find talent as the market has shifted back to a more balanced environment. I'm not sure how to integrate all of your questions, but I recall one related to hiring.

That’s right. Yes.

I would say that when it comes to the new sales offices, we have consistently experienced greater success with these offices compared to the past, primarily due to the volume of product we are selling and our focus on moving upmarket. About four or five years ago, I mentioned that we would name an award after the first representative who sells $1 million in a year. Shortly after, someone achieved $2 million in a year individually, and I am confident that this year, we will see someone reach $3 million in sales. Therefore, it is expected that a new office would benefit from having executive representatives whose average sales have increased from below $1 million to over $3 million, which should positively impact all new office opportunities as we continue to open them.

Great. Chad, Craig, I don’t know if it’s just me or I’ve been thinking about Paycom too much but I’ve been seeing more Paycom commercials, especially on football games. During the pandemic, you really leaned into marketing and advertising to capture incremental share. Is it possible that some of the strength we’ve seen over the last couple of quarters is coming from increased top-of-funnel efforts?

We are definitely improving in our marketing, retargeting, and branding efforts. Marketing is one of the key factors that we believe affects our sales, and it often helps us achieve better results. Our market has changed significantly since the start of the pandemic, and our spending has allowed us to generate more leads from employees who are frustrated with inaccuracies in their paychecks.

Okay. No, that’s fair. I guess we’ve been hearing about falling advertising prices as other types of tech and software companies pull back. With this dynamic, does that change the ROI for some of the marketing efforts or cost of acquisition efforts that you do?

No. I still believe that you can waste money on advertising, so it's not going to change our strategy. It is an ROI metric that we measure every week based not only on leads but also on the percentage of appointments we obtain from those leads, and then how we convert them into closed deals as they start. Our method for assessing the effectiveness of our marketing has not changed.

Congratulations on a strong quarter. Relative to others reporting this season, it's impressive how well your team is performing in such a volatile and challenging macro environment. I have a question for you, Chad. Looking at the bigger picture, is the tough macro situation actually beneficial for you? Are companies beginning to shift their priorities toward efficiency, automation in their back office and payroll, and a more normalized hiring environment? How much of a tailwind is this for you? If you consider the durability of this trend, what are your thoughts on its longevity?

We are just getting started with BETI. All employees will manage their own payroll, and this is how companies can excel in payroll management. It makes sense for employees to handle it themselves. The main reason employees haven't taken on this responsibility is the complexity of existing systems. Our biggest opportunity lies in the fact that people are realizing this and prefer to streamline their processes. Back office operations want to reduce their workload, especially to minimize exposure and risks. I don't believe our ability to advance our product strategically is affected by external factors. While the size of deals may vary based on labor market conditions, the impetus for change remains constant regardless of this environment. We are positioned to support this need. As we empower employees to take control of their payroll and related tasks, accountability for time and labor management, expense management, and benefits administration becomes clearer. Previously, employees were working without understanding how everything fits together. Paycom clarifies their financial trajectory and the impact on payroll. When we remove the confusion and show them the end results, their understanding improves significantly. I anticipate this trend will continue, independent of labor market fluctuations.

Understood. As a different topic, considering the funding environment for private companies right now, I'm unsure if valuations are accurate or if they will adjust. Given the new opportunities you're encountering, especially in the upper market, how would you describe your strategy regarding organic versus inorganic innovation in the next 12 to 24 months?

I believe we are an organic innovation company. I've always stated that we focus on doing what makes sense for us. We continue to develop our products and remain ambitious about our future goals. We are being drawn further into the market. Honestly, I think that as companies grow larger, they face more opportunities for exposure and risk, and it becomes more challenging to ensure that everyone is compensated fairly. Thus, I anticipate that we will see an increasing number of employees from these larger companies reaching out to us. I don't expect that opportunities with larger companies will diminish over time.

Chad, on that quip you made earlier on value of 50% self-service adoption by the first 2 payrolls, what are the things you can do to maybe accelerate that? Like what could those things be in? Is it more awareness than anything else? And any sense of what the upper balance of that would look like?

Our clients are increasingly becoming more proficient, especially new clients who are currently rolling out initiatives to their employees. Approximately 50% of them are participating actively. I believe our clients are becoming better at conveying the benefits of employees managing their own services. This increased participation is indicative of their strong interest. Purchasing a product is one thing, but using it is another, and BETI is certainly seeing high engagement since its launch.

That’s helpful there. And just a quick follow-up. I mean you talked earlier about maybe tweaking the brand marketing strategy a little bit of kind of going at it from a different angle. How has the effectiveness of this marketing campaign evolved for the last few months given some of these changes? Are you able to go after a different customer base or attract buyers that maybe wouldn’t come into your funnel otherwise?

No, because at the end of the day, there's no such thing as an enterprise employee. I mean whether a person works for a large enterprise company or a small company, they have the same mortgage, same bills, same medical needs, same child care needs. They all expect their check to be correct. So employees that work from enterprise company one day, can work for a smaller company the next day and they can be back working for a large company. They're the same person. They expect the same things. And so when it comes to BETI, it's for everyone. It's for the employee and it's regardless of the company's size.

Great. Earlier in the call, Chad, you mentioned bookings for September and October specifically. How did this third quarter compare to previous third quarters in terms of linearity? Did you see an increase in business booked in September and October, or were you just discussing the broader outlook?

Yes, I was commenting on the macro outlook and looking at our bookings from the last two months. I could reference earlier months like August, July, and June as well. To answer your question, we are definitely booking more today than we have in the past. I can say that September is strong, October is strong, and so are August, July, and June. No matter how far back you look, we have consistently performed well.

Okay. And then you’ve actually obviously run this business for a very long time through all sorts of different macroeconomic cycles. I think clearly, there’s a lot of uncertainty about what 2023 looks like. So maybe, just philosophically, Chad, how do you run Paycom in a recession? What changes? What are the levers that we should expect you to pull either to manage cost or drive additional growth?

I mean very little change for us based on what we're already doing. I mean just as a reminder, I mean, we have 5% of the TAM. We have a differentiated product. As I said before, we started off the year with 33,800 clients. We've got 2 competitors that if you combine their client count, it's 1.7 million. And so what happens to us next year is dependent upon us and I think we're in control of that. So I mean, I wouldn't see any major changes from what we're going to be doing into next year.

Great. And I’ll add my congratulations just given fantastic outcome. Can you give us a sense, relative to expectations that you initially said, where was the source of the most upside? Was it modules kind of new logos, just employee per logo per CAC? And any way to just frame that?

New logos.

New logos are very helpful. Chad, is there a way to consider the number we discussed this morning, which is over $10 million, in relation to module adoption and the types of modules that are being used? There's a significant debate in the market regarding whether we will experience a soft landing, and given the overall market conditions, that seems like a plausible scenario. How should we approach the relationship between modules and the current situation?

I mean we definitely have leading indicators that we look at like for background checks, how many people running background checks which is an impact of oftentimes onboarding and what have you. I mean all I would say is this. I mean those types of things are going to impact us a little bit on the margin. But for us, it's really about new logo wins with our differentiated strategy. That's what's really going to drive our growth. Sometimes you have some things that help you with that a little bit and that could be what's going on in the labor market. But I would say it would have to be something extreme to have any negative impact on us. And likewise, I would say it would have to also be extreme on the other side to have some major positive impact on us, except for the fact that our go-to markets normalize and how we're going to market. It's like the way we were going to market pre-pandemic, which for us being out there face-to-face and having those personal interchanges and exchanges of ideas and information really helps us when we're selling deals.

So following up on Samad, your sequential guide is the strongest it’s been, in I believe, 5 years. Are you expecting anything unusual in the quarter such as extra strong burns from this year or anything like that?

I want to ensure I understand the guidance for the fourth quarter. We've previously mentioned that the timing of when deals start in a quarter is important. For instance, if a deal begins at the start of October, we receive the full revenue for that deal. Taking the last quarter as an example, if a deal started at the beginning of July, we captured 100% of the revenue for it. However, if a deal begins in mid-September, we might only receive about 15% of the revenue for that quarter, but in future quarters, we'll get the full amount. This reflects our recurring revenue model. It’s crucial to note this aspect. Additionally, Craig and I have discussed how interest rates play a role over time, which may also contribute some uplift. Ultimately, what matters most to us is the addition of new clients to our platform and the expectation of receiving the full revenue in subsequent quarters, with the fourth quarter being the next one.

Got it. So it’s basically just those 2 things, might switch moving around Q3 versus Q4. All right. Great. And then I guess just have you seen any notable in your competition? I realize it’s the same basis as usual but any changes in kind of the pricing, marketing approach? Any idea who’s commenting recently that they’re seeing their churn kind of increase in normalized but only a little bit, I mean, what are you seeing on that front?

Yes, we've always operated in a highly competitive market. As you pointed out, it involves the same players, but we are the newcomers. Next year marks our 25th year in business. We focus on benchmarking our performance based on the return on investment that customers can achieve by using our product. If a customer chooses one of our competitors, they won't see the same ROI. If someone aligns with our strategy and understands the ROI they could achieve by using our product effectively, they will prefer us over others, regardless of pricing dynamics. However, pricing is important, and there is a market for it that we all recognize. As for changes among our competitors, we haven't noticed any significant shifts, aside from their ongoing efforts to implement strategies they believe will enhance their competitiveness, which can include adjusting prices or offering free features. It really comes down to what we observe in the market, but the landscape remains consistent with what we've experienced in the past.

Okay. Well, I want to thank everyone for joining our call today and thank you all and I want to thank all of our employees for contributing to our continued success. In November, we’ll be hosting meetings in Las Vegas at the Wells Fargo TMT Summit and presenting at the Credit Suisse Annual Technology Conference in Scottsdale. Then in December, we’ll be presenting at the Barclays TMT Conference in San Francisco. We look forward to speaking with many of you soon. Operator, you may disconnect.