Paycom Software Inc (PAYC) — Q4 2022 Earnings Call Transcript

Thank you, and welcome to Paycom's earnings conference call for the fourth quarter and full year 2022. 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. 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 2022 with very strong results, and I'd like to thank all of our employees for the consistent hard work and execution that drove four consecutive quarters of revenue growth of 30% or more over the respective prior year periods. I'll spend a few minutes on the highlights of our fourth quarter and our full year 2022 results and high-level expectations for 2023. Following that, Craig will review our financials and our guidance, and then we will take questions. Our 2022 fourth quarter revenue of approximately $371 million came in strong, up 30% year-over-year, bringing our full year 2022 revenue to $1.375 billion, also up 30% year-over-year. Fourth quarter adjusted EBITDA also came in strong at $164 million, representing an adjusted EBITDA margin of 44%, bringing our full year 2022 adjusted EBITDA to $580 million, representing an adjusted EBITDA margin of 42%. The sum of our 2022 revenue growth rate and adjusted EBITDA margin resulted in us hitting the Rule of 72. With our full year 2023 guidance, we are once again starting the year strong with an outlook for a solid Rule of 65. As a reminder, we guide to what we can see based on our existing recurring revenue, new business sales, and anticipated new starts in the near term. I'm pleased with the momentum we are carrying into the new year. On the product front, 2022 was a very strong year for Paycom benefiting from our first full year of rolling out Beti, our differentiated employee self-service payroll solution. We are seeing strong demand trends that position us to deliver another year of rapid profitable growth in 2023. We are leading an industry transformation by making payroll and HCM processes more efficient for both employees and businesses by eliminating manual tasks, improving accuracy, and reducing liability exposure caused when payroll and HCM is done inaccurately. With Beti, employees are doing their own payroll by interfacing directly with their data in a self-service, easy-to-use software. A recent study conducted by Ernst & Young found that the average organization has a 20% accuracy rate when it comes to payroll, which results in lost revenue, hours wasted correcting errors, and increased exposure to potential lawsuits and fines. Each of these mistakes costs an average of $291 and could cost upwards of $705 for unentered nonproductive time errors. So you can see how costly these errors become over time. In fact, over the course of the year, a 1,000-employee company could potentially incur almost $1 million in unnecessary costs correcting common payroll mistakes. Beti automates the payroll processes to deliver perfect payroll, and employees are empowered to identify and correct errors ahead of time so that everybody wins. Our marketing plan in 2022 continued to perform well, delivering strong demo leads throughout the year as we spent aggressively on advertising. At the same time, our deliberate investments in marketing are delivering high-margin revenues, and we saw improving operating leverage in sales and marketing throughout 2022. We continue to be pulled upmarket in 2022, with the fastest-growing revenue segment of our business coming from clients with greater than 2,000 employees. We are seeing increasing demand from larger organizations that are recognizing the opportunity to simplify their HCM needs. And Paycom is well positioned to benefit from this trend. With only approximately 5% of the TAM today, there's still plenty of runway ahead for us to expand our market share. Paycom received national recognition from several organizations in 2022. As a workplace, we were named One of America's Most Trusted Companies, as well as Best Company for Women, and we received a Top Workplace in Oklahoma award for a tenth consecutive year. These awards are a testament to our hard work, our thriving corporate culture, and our client focus. As of December 31, 2022, our headcount stood at over 6,300 employees, up 18% 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 2022 Paycom Jim Thorpe Award winner, Travis Hodges Tomlinson from 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, our focus on the employee experience and client ROI continue to fuel our strong results, and we are executing well. I'm very excited about the long list of new innovative opportunities we will be pursuing in 2023 and beyond. I'd like to thank our employees for helping to make 2022 such a strong year, and we are set up for another great year in 2023. 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 2022 and our outlook for the first quarter and full year 2023, 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 with full year 2022 revenue of $1.375 billion, up 30.3% compared to 2021. Fourth quarter results were excellent, with total revenues of $370.6 million, representing growth of 30% over the comparable prior year period. Our revenue growth was driven by strong demand, new business wins, and adoption of recent new product offerings. Within total revenues, recurring revenue was $364 million for the fourth quarter of 2022, representing 98% of total revenues for the quarter and growing 30% from the comparable prior year period. We ended 2022 with approximately 36,600 clients, representing a growth rate of 8% compared to 2021. On a parent company grouping basis, we ended the year with roughly 19,100 clients, also up 8% compared to 2021. Total number of employee records increased 14% year-over-year in 2022 to 6.5 million. Paycom's annual revenue retention rate in 2022 was 93%, which was consistent with our recent four-year average of 93% and up more than 200 basis points from the prior four-year period average of 91%. Total adjusted gross profit for the fourth quarter was $312.5 million, representing an adjusted gross margin of 84.3%. For the full year 2022, our adjusted gross margin was 84.9%. Adjusted sales and marketing expense for the fourth quarter of 2022 was $87.3 million, or 23.5% of revenues. Our marketing strategy in 2022 has been very effective at driving high-quality demo leads with the revenue generated from prior period investments, and we saw a 100 basis point improvement in adjusted sales and marketing expense as a percentage of revenues for the year. We plan to continue to invest in marketing in Q1 and throughout 2023. Adjusted R&D expense was $36.6 million in the fourth quarter of 2022 or 9.9% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $51.8 million in the fourth quarter of 2022 compared to $44 million in the prior year period. We have a very strong pipeline of product development opportunities in 2023 that we believe will create tremendous value for our clients and for Paycom. Adjusted EBITDA was $163.9 million in the fourth quarter of 2022, or 44.2% of total revenues compared to $109.6 million in the fourth quarter of 2021, or 38.4% of total revenues. For the full year 2022, adjusted EBITDA was $579.7 million or 42.2% of total revenues compared to $419.3 million or 39.7% of total revenues in 2021, representing over 240 basis points of margin expansion. Our GAAP net income for the fourth quarter was $80 million or $1.38 per diluted share versus $48.7 million or $0.84 per diluted share in the prior year period based on approximately 58 million shares in both periods. For the full year 2022, our GAAP net income was $281.4 million, or $4.84 per diluted share, up 44% year-over-year. Non-GAAP net income for the fourth quarter of 2022 was $100.2 million, or $1.73 per diluted share versus $64.4 million, or $1.11 per diluted share in the prior year period. For the full year 2022, our non-GAAP net income was $357.2 million, or $6.14 per diluted share versus $260.4 million, or $4.48 per diluted share in the prior year period, up 37% year-over-year. For Q1 and full year 2023, we anticipate our effective income tax rate to be approximately 28% on a GAAP basis and approximately 26% on a non-GAAP basis. Turning to the balance sheet. We ended the year with a very strong balance sheet, including cash and cash equivalents of $401 million and total debt of $29 million. During 2022, we repurchased approximately 365,000 shares for a total of nearly $100 million. Through December 31, 2022, Paycom has repurchased nearly 4.7 million shares since 2016 for a total of nearly $590 million, and we currently have $1.1 billion remaining in our buyback program. Cash from operations was $365 million in 2022, representing an increase of 14.3%. The new requirement in 2022 to capitalize instead of expense R&D costs resulted in approximately $27 million in additional income tax payments that would have been deferred under previous law. This impacted both our operating cash flow and free cash flow compared to 2021. The average daily balance of funds held on behalf of clients was approximately $2.1 billion in the fourth quarter of 2022. For 2023, we anticipate stock compensation to be approximately $120 million. On the capital expenditure front, we're in full construction of our fifth building in Oklahoma City and we now estimate total CapEx as a percent of revenues to be approximately 12% in 2023. Now let me turn to guidance. For fiscal 2023, we expect revenue in the range of $1.7 billion to $1.702 billion or approximately 24% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $700 million to $702 million, representing an adjusted EBITDA margin of approximately 41% at the midpoint of the range. Once again, we are starting the year's guidance at the Rule of 65. For the first quarter of 2023, we expect total revenues in the range of $443 million to $445 million, representing a growth rate over the comparable prior year period of approximately 26% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $210 million to $212 million, representing an adjusted EBITDA margin of approximately 48% at the midpoint of the range. 2022 was a very strong year for Paycom, reflecting the strength of prior year investments and consistent execution. We will continue to invest in talent, marketing, innovation, customer service, and geographic expansion to meet the strong demands we are experiencing. With that, we will open the line for questions.

Two questions. Chad, can you talk a little bit about what you're seeing in terms of end demand? Obviously, the markets are nervous with data points about SMB potentially being weaker for some of the players in the other segments of the software market. So just talk a little bit about what you're seeing. We're also looking at the numbers; your renewals came in at 93 versus 94. Just kind of paint a picture for us there. And then one for Craig, if you think about the new year and investments, how do you think balance that with seeing other players nervous about the economy and how your investment approach for the year? Just talk a little bit about the flexibility there.

Yes, I'll start off. I mean our go-to-market remains very strong. We continue to have very strong book sales, and we've been selling Beti across the board. New clients that come in have about 50% of their employees doing their own payroll within the first two months of using Beti. And so that continues to be successful. From 2015 to 2018, we had a retention rate of anywhere from 91% to 92%; it was 91% for three of those years and 92% for one of those years. For the last four years, from 2019 through 2022, we've had a retention rate of 93% for three of the years and 94% for one of those years. There's often rounding at play as you look through that. But what I will also say is with clients who have Beti, we have a much, much higher retention rate across our base. And I would expect retention to continue to rise as a larger percent of our current client base deploys Beti.

Yes, Raimo, on the plan for 2023, we've given our guidance on our adjusted EBITDA, and it's still a very strong guide on that at 41%. As I mentioned in the prepared remarks, we're going to continue to spend on the marketing side, in R&D, and then in the service side as well. And really, the marketing is the one area where we can pull leverage. We don't have any long-term commitments out there. So that is an area where we could pull levers if we needed to.

Great. Chad, did I hear you say you have just over 6,300 employees? That suggests high teens growth compared to the previous year. I'm curious about the hiring, considering it's slightly slower than in 2021. Should we anticipate an increase in productivity? What is the exit rate for that growth, and how should we view the hiring trends for Paycom?

We hired according to our plans from last year, achieving approximately 18% growth in our workforce. Our clients are now operating more efficiently. I've mentioned before that we can distinguish between those clients who have successfully implemented Beti and those who have not. The clients already using Beti are demonstrating strong engagement, which means we are required to do less for them in terms of fixing issues and making adjustments. Consequently, we don’t need as many employees when clients are effectively using Beti. Nonetheless, we experienced significant growth in our workforce last year, and I believe that was successful.

Great. We've nearly completed the first year since the new office expansions. Typically, it takes a little over a year for these offices to become fully productive, so how are they progressing? Additionally, are there any new office openings planned that you're incorporating into the 2023 guidance you just provided?

We always guide to what we can see. I mean, first, I'll answer those office questions. We did open up five offices over the course of about three months. One of those, I believe, was in December of 2021. The others were in the first quarter of 2022. All of those continue to progress. They wouldn't be at full staffing yet, but they would achieve that throughout this year, as well as with the full backline pipeline. And then next year, in the year of 2024, they would all be on the same quota as our mature offices are. As far as what we anticipate to do this year from office openings, as we all know, that you followed us for a while, office openings that we would anticipate to expand into this year would have very little impact on this year but would have more of an impact on both 2024 as well as 2025.

One question. Craig, you mentioned you've got $2.1 billion held for cash, held for clients in the fourth quarter. What sort of effective yield are you getting on that? And what is the expectation with regards to the float balance growing over the course of the coming year? How should we think about an effective yield on that?

Yes. If you look at the balance this quarter, it grew at varying rates throughout 2022. Generally, it will grow at a lower rate than our anticipated revenue growth. This is partly because, as we transition to higher-end markets, those funds are retained for a shorter duration, and we need to make payments more quickly. This market shift will prevent it from growing at the same rate as our overall growth. Regarding the yield, we haven't provided an exact figure, but we anticipate that for every 25 basis points increase, we would see about $5 million. However, this impact accumulates over time. We're also focusing on longer-term investments within our portfolio, some of which yield slightly lower returns, and we have begun to incorporate those, as indicated in our earlier filings. Additionally, banks tend to be slower in adjusting to those 25 basis points, so it may take a few quarters for this to fully reflect. Therefore, we expect it to be lower than the Fed funds rate.

Okay. Would the rule of thumb, 70% to 80% of Fed funds with a delay be kind of a good rule of thumb to think of?

I think you're close.

I would say that that's kind of in the range, Mark.

We're sub-4 today.

Congratulations on a real nice job with the business in 4Q. I just wanted to ask you a question about either the business activity or the pipeline momentum by customer size. Are you seeing any differences in terms of the demand or the behavior of the larger organizations that are flowing through the pipeline versus, say, the smaller companies?

Well, we've definitely continued to creep up as we have done even since IPO as we've continued to increase our target market. In fact, last year, revenue was up 60% with clients that had 2,000 employees or more. So we are definitely seeing continued demand being pulled higher, especially as businesses are looking to deploy Beti so that their employees can actually handle their own payroll.

And then one follow-up just for Craig real quickly. Did you buy back any stock in the quarter? And can you just remind me again how much authorization you've left for buybacks?

We didn't buy back any stock this quarter. For the full year, we have repurchased approximately $100 million worth of shares, and we currently have $1.1 billion remaining in our buyback authorization.

If you look at the growth expectations for 2023 here, how do you think about the mix of growth from new customers versus existing? As we know, existing customers, while smaller historically in net new bookings, their growth has increased in the last couple of years. And we're seeing some different trends with different software vendors.

Yes. Ours is going to primarily come from new logo adds when you just look at the size of revenue that we need to grow by in order to continue to hit our objectives. So first, price is going to be new logo adds. We don't really have a lot to call out on pace per control growth from that perspective. But new logo adds are going to be primary for us. We've always had a healthy upsell to current clients. It's just been at a much smaller level than what new logo ads are, and it's been consistent; our upsells to current clients as a percentage have been consistent each year with the exception of the year we had ACA.

Got it. That's helpful. And then as we look to Q1 here, how should we think about the impact from W2 revenue? Remember, last year, that was impacted on a year-over-year basis because of the turnover in 2020 due to COVID. Are the trends going to normalize here in this March quarter given what happened in '22 with hiring or anything to highlight there?

Yes, I believe the situation is more normal now. It's important to recognize that our year-end services provided to clients have not changed significantly over the last 15 years, aside from adding 1099 forms at one point. We still handle W2s, W3s, and 1099s. However, the growth of our other revenue streams, as we’ve introduced various new products, has been quite substantial. As a result, the share or impact of year-end services on our overall client base is now much lower compared to the past because it isn’t growing at the same pace. I do believe we are seeing a normalization. Last year showed more typical hiring and business patterns compared to recent years. Thus, in terms of the filing of year-end forms, yes, we are at a normalized level.

I guess I just want to dig into a little bit more on the outlook for next year and particularly on the margin side. I think you talked about in the past that if we think about float income flowing through that, some of that would flow down to the bottom line. So just trying to think about how you're thinking about that layering in for '23 and where are the biggest areas of incremental investments are coming, and that leads into the EBITDA, slight guide down from where we were in '22.

Yes. Primarily, we've continued to invest in sales and marketing, and that's what we said in the prepared remarks. We're going to continue to invest there and assuming it's going to continue to work. So that's really the area where we're going to continue to invest. Also in the R&D, I mean, we have a lot of projects in the works, and we'll continue to hire aggressively in the R&D side as well.

Okay. And I guess on the marketing spend that you're putting out there, I know it's been a more recent initiative for you all. I guess, what's kind of been the ROI on those dollars that you have seen? And how has that changed the top of funnel activity or conversion rates that you've seen as the brand awareness campaigns have gotten out there more?

Yes. I mean marketing, we started in 2020. That was also the year that we added four inside sales teams. And then in 2021, we added another six inside sales teams. I believe one of those years, our unit count went up about 17% with 72% growth. Marketing drove that as we do our marketing and spend money on advertising; we have clients of all sizes call us. And so marketing is directly responsible for any business that's coming in below 50 employees. And you have some direct responsibility for it above 50 employees, but it provides more support at that level as our go-to-market's different, above 50 employees than what we experience below. Growth first prize, as Craig has talked about. And as we look at guidance into this year, we expect to spend on healthy marketing. But also, we expect for it to work, which would return itself with highly profitable revenue, which we did see throughout 2022, which produced a healthy adjusted EBITDA margin.

Chad, looking at your clients' growth in 2022, which was 8%, it seems to be slowing down compared to pre-COVID levels that were usually in the teens. While I understand there may be factors such as moving up markets or client size, is there anything else that impacted this? How should we view the client growth rate going forward?

Yes, I would say the comparison had a little bit to do with it. Before 2020, we had five sales representatives focused on inside sales. In 2020, we added 40, and then in 2022, we added approximately another 50 or 60. We began targeting small businesses and emerging businesses more effectively as our advertising efforts paid off. I don't want to imply that our unit count was artificially high before, but it was different because we added many small business units, contributing to a 17% growth in units. Notably, this occurred during a year in which we experienced 25% revenue growth. Looking back at last year, it’s clear that we had significant success reaching midrange and larger clients. In contrast, our additions of small businesses were somewhat normalized because we did not expand our small business teams last year like we did in 2020 and 2021.

And then as a follow-up, in your guidance, what sort of conservatism have you baked into your guidance? I know this is definitely going to help float come this year, but what sort of macro environment you've factored into your guidance?

Yes, we continue to guide in the $2 million range, which gives us good visibility from quarter to quarter. When we initiated our guidance for 2022 last year, we started at 25%, comparing it to a year where we achieved 25% growth. This year, we're starting at 24%, while comparing it to a year with 30% growth. Our approach to guidance hasn't changed; we guide based on what we can see, and achieving our goals is crucial throughout the year. That's our focus as we progress. To address your question about conservatism, we guide based on our visibility at the time and look to maximize our performance throughout the quarter.

I wanted to follow up on retention first. I heard the comments about Beti clients being higher and the relative stability from prior years. However, considering the year-on-year decrease, can you discuss whether this is due to larger client churn or if it's primarily smaller client churn? I'm trying to understand that dynamic.

We're definitely observing trends among smaller clients, which contribute less revenue. It seems there is a shift more similar to what we experienced before the pandemic, as there’s less support for them in the market. Many new businesses face significant challenges, with about 75% failing within their first three years. This landscape affects our interactions with smaller companies. We began adding small business units in 2020 and have continued to expand throughout 2021 and 2022, which is relevant to this discussion. Revenue retention is also a key factor; we measure from a starting point. I’ve mentioned before how clients are experiencing efficiencies with Beti, which helps us avoid issues that previously led to lower margins and needed fixes. This improvement is significant. Additionally, we’re observing some rounding effects, but the 93% retention rate we have is still industry-leading. For clients using Beti, we’re seeing a retention rate around 99%. This dynamic is different compared to others. As we convert more of our existing client base to Beti, we anticipate further gains in retention. However, we do face some uncontrollable losses, like bot sales and business mergers, which make reaching 100% retention unrealistic. Still, I believe we have the chance to improve retention through the proper usage of our product.

Okay. Understood. And then a follow-up on margin here. So Craig, I may have missed it, but did you say where you expect gross margin to land in 2023? And I hear your message on increased efficiency in sales and marketing, and you've also mentioned increased, I guess, new product development. Should we expect that the explanation around EBITDA downtick year-on-year is more about R&D ramping? Or is it both R&D and S&M?

Yes. I would say it's both R&D and sales and marketing. As we're looking for our plans for 2023, we didn't really talk about the adjusted EBITDA, but we've been doing a pretty narrow range for the last several years. Yes, gross margin for the last several years.

Chad, you've mentioned opportunities in automated payroll and broader HR, and when we discuss generative AI, this seems to fit your expertise. What excites you most about this technology, based on your research? What implications do you see for Paycom and the HR industry overall?

Well, I mean, we are solving problems for the client and processes that I believe can be automated and hadn't been until really Beti came into play, which somewhat forces appropriate usage within our software for employees so that they can get paid correctly. I do believe that there's more automation that we can be doing. But you've got to start with, you've got to have the client and the employees using the product correctly, which I will say that about 50% of our client base, that is the case. Last year was our first full year of selling Beti and bringing it to the market. And so we're having a lot of success with that. I believe AI for the sake of AI isn't really valuable to the client. But I believe that if you can do something consistently and you can use something like AI to do that, I think that's a good thing. So I don't expect we would see it as a wide platform within our industry this year type thing with that, but I think you'll have more and more businesses looking for that machine learning and other types of automation that could be used to automate problems experienced by our clients right now.

Okay. No, that's fair. And then just, Craig, maybe a quick one. I think the beat in the quarter, $18 million, 6% beat toward the higher end of what we've typically seen over the last four years. Anything to note on the strength, expense management, anything on the timing of some investments?

I mean, there are really three or four buckets that really helped drive that EBITDA beat. One, your marketing spend was a little higher in the fourth quarter, and some of that is just when we were doing those marketing things that we had planned. A little higher capitalization rate on the development, and that's focused on new initiatives. Beti clients generate higher-quality revenue. So we saw a little bit of that. And then in the quarter, we had net insurance proceeds of about $4.8 million for expenses that were incurred both current and prior year quarters. So that's what drove the adjusted EBITDA beat.

I just wanted to ask a question. How should we think about growth from existing clients who are expanding their own client base?

It's similar to what we've seen in the past. Excluding the impact of COVID, our experience remains consistent. Each year some clients grow while others may not, some clients expand their business while others downsize. This often balances out over time. We may gain some accounts and lose others, but our growth mainly comes from adding new clients. Holly has achieved sales figures that contribute to our revenue growth, which is essential for meeting our targets. We anticipate stability within our current client base as we provide guidance, and we assume stability rather than growth or downsizing in this area. Our extensive client base of over 30,000 has generally balanced over the last 25 years, apart from the disruptions in 2020 and parts of 2021.

Terrific. And if you can just kind of help me to reconcile the 8% growth in new logos versus 14% employee expansion? How should I interpret those two numbers?

The increasing client size indicates growth. We have successfully moved upmarket, growing from 2,000 to 5,000 clients a couple of years ago and now aiming for 10,000. This shift results in a larger employee count but potentially fewer clients. However, I want to highlight our success with small businesses. In terms of unit count growth, all units are equal, whether they have one employee or 10,000. The overall trend is towards larger clients, apart from the two years when we focused on adding small business and emerging business units, which currently has 10 teams that haven't expanded significantly. We still continue to add small business units.

Chad, I know we touched on this a bit earlier in the call, but are you seeing anything as it relates to changes in the pipeline generation or sales cycles over the past few months? Maybe even reasons why customers are looking to switch and select you?

I mean, we continue to have strong product demonstration leads, but that's oftentimes a function of our marketing and advertising, and we pay for those leads. I can say for us, it's been business as usual. We've been back in the field since September last year, meaning actually back on site on every single call, where before we were doing more of a hybrid some were virtual, some were in-person. So I would say, if anything, we're having fewer calls with the client to get to close. I can't necessarily say that's speeding up the process, but I think we're having better conversations as we go through the process. So really nothing to call out there. Other than today, when a client calls Paycom and looks to have a product demonstration, it's about Beti. And I would say, in times past, it could be about whatever thorn they had in their paw that we'd be looking to pull out. So it's a little different today in the type of lead we are generating.

Got it. And just a follow-up, how do you view the PAR opportunity in 2023 compared to some of the growth you experienced in 2022? Are there any specific areas of modules that you want to highlight?

Beti definitely influences our per employee per month (PEPM) metrics because clients need to purchase and utilize specific products from us. I believe that the clients we worked with in 2022 have a stronger product mix compared to those from 2018 or 2019. We still see opportunities with our existing clients, and we need to move at their pace to transition them to Beti and help them realize its full value. We are actively exploring this, and there are still many chances to increase PEPM within our current client base as well as with new business sales.

Great. Just on that comment about Beti, Chad, can you update us on what percentage of the base has Beti at year-end?

We're at around 50%, similar to where we were when we reported in November. As clients approach year-end, they have different goals, and we are in the process of onboarding clients. Beti requires changes in the client's processes, affecting how their employees use the system. We follow a detailed conversion plan with each client to determine how and when to deploy. We are actively engaging with our clients, and larger clients are deploying the system more quickly. In general, current clients are progressing faster than smaller ones. It's important to note that since July 2021, all businesses, regardless of size, have been transitioned to Beti, so we are primarily discussing our existing client base prior to that time.

Great. And then just lastly, and you touched on this a couple of times about sort of the upmarket success and opportunities. As I think about how you're investing to attack those opportunities. Is this strategic, i.e., that you're devoting more resources specifically because you think there's more opportunity upmarket? Or is this tactical in which kind of year in and year out, you're deploying resources and maybe one year, you see more opportunities smaller and down market, and another you're seeing more opportunity in the upmarket, so you can be sort of tactical with those sales investments?

Yes, I would say it's a combination of both. Our industry has evolved to utilize employee engagement to assist clients. When employees effectively use the product, it reduces the client's exposure and liability associated with processes like payroll and benefits administration. There is a certain level of risk involved, even in job application procedures. I believe the self-service technology has significantly benefited the client. For instance, regardless of whether an employee like Jan Smith works for a small company or a large corporation, their needs are largely the same. Therefore, we have maintained a strong focus on employees, irrespective of their employer. While larger companies do present different challenges compared to smaller firms, we implement strategies and tactical adjustments to meet their needs. The more we cater to employees directly, the less back-end work is required, as much of that work aims to prevent issues with employee data, and any fixes that might arise. Preventive measures are crucial these days, and large companies prefer to minimize additional workload as well.

Well, I want to thank everyone for joining the call today, and I want to send a special thank you to our employees for contributing to our continued success. The year 2022 is a great year for Paycom, and we're set up for another great year in 2023. We'll be hosting meetings in New York at the Wolfe March Madness Software Conference in February. We'll also be participating in the KeyBanc Emerging Tech Conference and the Morgan Stanley TMT Conference in San Francisco in March. We look forward to catching up with many of you soon. And operator, you may disconnect. Thank you.