Paycom Software Inc (PAYC) — Q4 2023 Earnings Call Transcript

Thank you, and welcome to Paycom's earnings conference call for the fourth quarter and full-year 2023. 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 and quarterly report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Also, during today's call, we will refer to certain non-GAAP 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 Co-CEO. Chad?

Thanks, James, and thank you to everyone joining our call today. We ended 2023 with better-than-expected results, thanks to the considerable coordinated efforts of our team across the organization. Before digging into the quarterly results and achievements in 2023, I'd like to discuss today's announcements about the promotion of Chris Thomas to Co-CEO. Following that, I will briefly introduce Chris, who previously served as our COO. Craig will then review our financials and our guidance before taking questions. With that, let's get started. As Founder and CEO of Paycom, my position has provided me the opportunity to work with great leaders who have built Paycom into a world-class HR and payroll software company. One such leader is Chris Thomas. He is someone I have extreme confidence in and a leader I can share responsibilities with at Paycom. I've been preparing this opportunity for Chris and myself to work even more closely together for some time now. Today's announcement further illustrates the trust I have in our leadership. Personally, this is very exciting, because it allows me to invest further in the areas that I'm passionate about, which are the ones where I can have the largest impact for our clients. In this new role for Chris, Paycom will be even stronger than ever before. A key area of my continued focus will be product innovation and strategy. And Chris will continue to focus on operating other aspects of the business. Our collaboration has strengthened Paycom, and I'm excited for what we will do going forward. In the last several months, we continued to strengthen our leadership team with the addition of Jason Clark as Chief Administrative Officer and Steve Sturges as Chief Marketing Officer. Jason was the CEO of one of the region's largest workers' comp insurance companies. Having worked with Jason in various capacities for about 12 years, I officially brought him into the organization last year knowing this was an ideal fit for him and for Paycom. Steve formerly owned and operated a very successful marketing agency, and I've had the privilege of working with him for about 15 years. I'm excited to see him continue to elevate our brand, engage our clients, and drive further demand generation for our sales force. This evolution of our organization is exciting, and I believe it will bring significant value to our clients, employees, and investors. Now, I want to discuss our vision for 2024 and then look back on some highlights of 2023. Following a better-than-expected end to 2023, in 2024, we are primarily focused on three key areas: world-class service, solution automation, and client ROI achievement. Our continued focus is being the leading provider of comprehensive payroll and human capital management solutions in every market we serve. We are bringing the power of Paycom to more employers and employees and showing more organizations the ROI they experience by using our single database software. On the product front, Beti has been one of the products at the leading edge of our AI and automation strategy, delivering tremendous ROI to our clients. Our recently commissioned third-party study on Beti highlighted three benefit areas: on average, over an 80% reduction in errors, a 90% reduction in time spent processing payroll, and improved employee engagement. A leader within the restaurant industry noted that the automation from Beti took days off payroll processing time and that as employee checkers went down, employee engagement went up. Additionally, certain organizations using Beti experienced up to 100% of their end-users regularly engaging with our easy-to-use system. Solutions like Paycom’s GONE tool are expanding automation to other areas of our product suite, namely our time off applications. The rollout of GONE towards the end of 2023 has been going very well. This new product uses AI and decisioning logic to automate all decisions for time-off requests, which further enhances both the employee and the manager experience by eliminating conflicts and resolving time-sensitive decisions. Today, clients may make between 20 and 30 decisions or more per year per employee concerning PTO, vacation requests, and the denials or approvals that go into staffing decisions. GONE eliminates those unnecessary interaction points by providing a consistent and fully automated experience for employees, managers, HR administrators, and the business as a whole. With GONE, an employee in any industry can request time-off at midnight on a Friday and know immediately if it is approved or denied because GONE has automated all time-off request decisions. It's another example of a product that's a win for our clients and a win for their employees. We delivered a lot of innovation on the international front in 2023. We launched our global HCM product and now companies of all sizes use this product across 180 countries and in 15 languages and dialects. We developed and launched native payroll in Canada and Mexico. Now we've developed and are launching a native payroll solution in the United Kingdom. Our international strategy complements our product strategy and adds to the momentum we are seeing with US-based companies that have an international presence. While still early, we are very excited about the potential impact this initiative will have on our expanded team. While I'm proud of our product developments and international expansion in 2023, I'm even more excited about where we're headed with the product department. As a company, we all know and feel the excitement that is happening within our walls. Since 1998, Paycom has changed the way businesses operate through innovation and automation. Our revolutionary product roadmap will continue to bring new levels of value to our clients. I'm glad to see both growth in our product and in people we are elevating and bringing back into the organization. The buzz about the future of product innovation across the organization is exciting and encouraging. The client experience is everything to us, and that all starts with our product. We are excited to release more product enhancements and innovations than ever before. To sum up, in 2024, we will continue to be hyper-focused on world-class service, solution automation, and client ROI achievement strategies. This means we will continue our emphasis on client ROI and user experience. I'm confident that the size of our opportunity and our track record for execution will bolster our growth trajectory. I'd like to thank our employees for their important contributions in 2023 and commitment to Paycom. In fact, because of them, Paycom earned many top workplace accolades in 2023, most notably Gallup's Exceptional Workplace Award. Additionally, Newsweek recognized us as one of the most trustworthy organizations and as a Top Workplaces for Diversity for parents and families. These accolades mean a lot because it's a reflection of our leadership and the culture we've built. Before turning the call over to Craig, I'd like Chris to briefly introduce himself and discuss his vision for the role. Chris?

Thanks, Chad. I'm honored to help lead such an incredible organization. I want to personally thank you for the guidance, tools, and insights you provided me through the years. Having had the opportunity to lead approximately 10 departments over my tenure, like product, service, learning, HCM, and implementation impacts, to name a few, I feel even more prepared to help leap Paycom into the future. I am proud of our leadership group who have strategized and built the client value achievement strategy. We spent a lot of quality time throughout the year, especially last quarter, having meaningful engagements with our clients, and the feedback has been very encouraging. We are strengthening our relationships and relentlessly pursuing solutions that deliver high ROI for our clients. The innovations in automation and user experience are resonating across our client base. Delivering immediate and measurable value to our clients will deliver long-term value to Paycom. As a result, our service and client relations groups are working together more closely than ever before, which is driving further ROI for our clients. We're going to continue to generate even more momentum as we engage clients to help them maximize their value when using our system. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Thanks, Chris. Before I review our fourth quarter and full-year results for 2023 and our outlook for the first quarter and full-year 2024, 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 solid results with full-year 2023 revenue of $1.694 billion, up 23% compared to 2022. Fourth quarter results were better-than-expected, with total revenues of $435 million, representing growth of 17% over the comparable prior year period. Our revenue growth was driven by new business wins, partially offset by lower cross-selling to existing clients. Within total revenues, recurring revenue was $427 million for the fourth quarter of 2023, representing 98% of total revenues for the quarter and growing 17% from the comparable prior year period. We delivered strong net income and adjusted EBITDA in 2023. Full-year GAAP net income was $341 million or $5.88 per diluted share based on approximately 58 million shares. Non-GAAP net income for 2023 was $449 million or $7.75 per diluted share, up 26% from the prior year on a per share basis. In the fourth quarter, GAAP net income of $82 million and non-GAAP net income of $110 million represented $1.43 and $1.93 per diluted share, respectively, based on approximately 57 million shares. Full-year adjusted EBITDA was $719 million, representing full-year margin of 42.5%, up over 30 basis points year-over-year. Fourth-quarter adjusted EBITDA was $177 million, representing a quarterly margin of 40.6% for the quarter. During the fourth quarter, we repurchased approximately 1.2 million shares of common stock or approximately 2% of our shares outstanding for a total of $213 million, and we paid over $21 million in cash dividends. As of December 31st, 2023, we have repurchased over 6.1 million shares, and when combined with dividends, we have returned nearly $1 billion to stockholders. We still have approximately $800 million remaining under our buyback authorization as of December 31st, 2023, and the Board has approved our next quarterly dividend of $0.375 per share, payable in mid-March. We ended 2023 with approximately 36,800 clients, representing a growth rate of 1% compared to 2022. On a parent company grouping basis, we ended the year with roughly 19,500 clients, up 2% compared to 2022. Digging into client mix details and using client figures based on parent company groupings, client count for companies with greater than 500 employees was up 11% year-over-year, and client count for companies with greater than 2,000 employees was up nearly 18% year-over-year. Total number of employee records stored in our system in 2023 was 6.8 million. Paycom's annual revenue retention rate in 2023 was 90% compared to 91% in 2022, with attrition concentrated primarily at the low end of our market. Note that our earnings press release issued earlier this afternoon included additional information about a recent modification in our annual revenue retention rate calculation. Adjusted R&D expense was $51 million in the fourth quarter of 2023 or 11.6% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $73 million in the fourth quarter of 2023 compared to $52 million in the prior year period. We continue to invest in the long-term future growth opportunity, including in areas of automation, AI, and innovation. Our tax rate for the year ended 2023 was 28% on a GAAP basis. For the full year 2024, we anticipate our effective income tax rate to be approximately 29% on a GAAP basis and approximately 25% on a non-GAAP basis. In fiscal year 2024, we expect stock-based compensation expense as a percent of revenue to be approximately 8.5%. This does not reflect any potential one-time adjustment related to the forfeiture of the 2020 CEO Performance Award. We will provide details on this one-time adjustment if any when we report first-quarter earnings. Turning to the balance sheet. Even after the substantial buybacks and dividends paid in the quarter, we ended the year with a very strong balance sheet, including cash and cash equivalents of $294 million and zero debt. Cash from operations was $485 million in 2023, representing an increase of 33%. The average daily balance of funds held on behalf of clients was approximately $2.2 billion in the fourth quarter of 2023. On the capital expenditure front, our fifth building in Oklahoma City is substantially complete. We estimate total CapEx as a percent of revenues to be approximately 12% in 2024. Now let me turn to guidance. Our approach to guidance remains consistent with our historical approach, and that we guide to what we can see in factoring relevant trends, opportunities, and potential constraints. For 2024, we're also factoring in a wider range of sensitivities, such as fluctuations of interest rates and the outcomes of several near-term strategic initiatives. For fiscal 2024, we expect revenues in the range of $1.860 billion to $1.885 billion, or approximately 11% year-over-year growth at the midpoint of the range, which is consistent with the target growth range we provided on our Q3 earnings call. We expect adjusted EBITDA in the range of $720 million to $730 million, representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range. For the first quarter of 2024, we expect total revenues in the range of $494 million to $497 million, representing a growth rate over the comparable prior year period of approximately 10% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $218 million to $222 million, representing an adjusted EBITDA margin of approximately 44% at the midpoint of the range. 2023 delivered solid results for Paycom. The strength of our product and the client initiatives we have in place give me confidence that 2024 will be a solid year of execution. We will continue to invest in talent, marketing, innovation, customer service, and geographic expansion to strengthen our competitive position and meet the demand of our expanding TAM. With that, we will open the line for questions.

Hey, thank you and all the best to the new management structure from me. Two questions. One, Chad, can you just speak a little bit to retention in 2023, and customer growth in 2023 because if I do the math right, it was like a 1% growth, which seems unusual for you guys. Can you talk a little bit about factors we saw there, and that probably kind of linked in with that 90% retention number? And then on EBITDA guidance, Craig for you, and if I look at this year, we're kind of guiding down a little bit on EBITDA margin. Can you talk a little bit maybe about some of the projects or some of the work you're doing there that kind of drives that? Thank you.

Sure, Raimo. I’ll address both of those. Regarding retention, this year we reported 90%, down from 91% last year. Typically, we don’t break it down by client size, but most of the attrition came from the down-market segment. During COVID, we brought on many smaller clients, increasing our team from five salespeople to ten teams of eight. That influx of smaller clients is primarily what affected retention in that group. They are particularly sensitive to macroeconomic factors like rising interest rates and inflation. As for margins, we’ve consistently operated in the range of 39% to 41% over the past four or five years, which is where we aimed to start this year. This allows us the flexibility to invest in innovation and sales to continue driving revenue growth.

Okay. Perfect. Makes sense. Thank you.

Hi, good evening. Thanks for taking my questions and welcome to the new members of management. Maybe my question follows up a little bit on Raimo's. I'd like to dig deeper into the retention change. It's gone from 94% down to 90%, that's about 4 points. Is that all due to the surge in clients that you added during the COVID period, and I guess the question is maybe what is causing the attrition beyond that being is it business failure ticking up, is it non-controllable churn? Maybe help us think through what is causing that at the low-end?

Yeah, I mean at the low-end it's typically more going out of business, but that group of clients are more impacted by the macro. We also changed the way we marked our clients' loss where we're pulling that forward a little bit, Samad, where we're marking them quicker than we have in the past and that way we can get back out, and really, we tried to sell some of those as are still in implementation, so.

Great. As I consider the fourth quarter, it significantly exceeded our guidance. I'm curious about the rates, which seem to be declining. Have you noticed any changes in the employment market or in pre-employment services performing better than anticipated, particularly with bonus runs? Could you help us understand the strength you experienced in the fourth quarter compared to the guidance you provided after the third quarter?

Yeah, I mean. I would say we probably went into the fourth quarter a little more conservative than what we have in the past after a kind of our Q3 results. We were really looking at where the downside could be or what can happen in the fourth quarter, and I would say things came in better than what we expected.

Great. Appreciate you taking my questions.

Can you hear me?

Yeah.

Hello? Can you hear me?

Hey, Mark. We can hear you.

Okay. Great. Thanks. Hey, can you talk a little bit about the traction with the sales force and what you're seeing just in terms of new client growth, because I'm looking at the implied ex-float revenue growth for the first quarter, and you did mention the retention is lower, so understand part of that, but I'm wondering, can you just talk a little bit about sales effectiveness and what you're seeing there?

We've experienced significant success in sales effectiveness, offering a differentiated solution that provides unique value. As mentioned during the call, we've had greater success with clients in the 500 and above segment, reporting an 11% growth in that category and 18% growth in the group with 2000 or more. We have faced some pressure in the lower end of the market, particularly regarding resources as we onboard clients and manage our resources to maximize client value. Overall, we're seeing substantial success in the market. Often, there is a trade-off between smaller units and slightly larger ones, particularly in terms of employee size.

Great. And then can you talk a little bit about the specific areas of investment that you would be making? You're starting the year out with a slightly more conservative EBITDA target, what are the specific areas where you're going to invest a little bit more? I imagine part of that is product, which you ended up referencing, but I'm wondering if there's any other areas that we should look to?

Growth has always been our primary focus. When we discuss the impact from an adjusted EBITDA viewpoint, we concentrate on three key areas: solution automation, exceptional service, and achieving client ROI. We have the necessary staff to support these initiatives, and we are actively working on them to yield positive outcomes. Any additional expenses will be related to our growth initiatives.

Great. Thank you.

Thank you.

Yeah. Hi, thanks for taking my question this afternoon. Chad, I wanted to ask you along the lines of the sales effectiveness, what you're seeing in terms of cycles and as well as the top of the funnel momentum? Are you seeing any changes in that aspect of sales?

I mean, that's a good question. We've continued to go further at market, I've mentioned it on the call. And there is a little bit different motion as we work through that process and as we've gotten better at it. And so, as you go further up market, you're going to have, it might take you a little bit longer than what it would then if you're in the mid-market. For us, it's still about the work of the sales individual. I mean, it really does determine how strong a sales individual is in regards to the process that's being worked and how quickly a client can see that value and then onboard onto the system. So, I would say it's more specific to an individual salesperson. And then I would add to that that as you go up market, you have more people that you talk to, more stakeholders within any company, and you want to make sure you cover all those bases as you move toward.

Thank you. And the follow-up question I had on the project investments, just thinking about that on the sales and distribution side. Is there anything you can share with us on how you're thinking about the pace of either new offices or new sales rep hiring this year, maybe versus what you did last year in 2023? Thanks.

We are entering 2024 with a well-staffed sales team. While we need to see how things develop, our office openings are determined by our internal capacity. I can say that we are better positioned in terms of staffing going into 2024 than we have been for some time, especially with our managers. We will consider any opportunities that arise throughout the year when it makes sense for us.

Yeah, thanks for taking my questions. Maybe just some more color on the customers you're seeing attrition with, in the cohort of those who have adopted Beti versus the remaining customers yet to adopt Beti. Are you seeing higher attrition with those that are yet to adopt Beti?

I mean, we want to begin talking about our retention as one number; whether someone's on Beti or not, they are a client of ours, and we want them to be a client of ours. Obviously, I've called this out in the past, it continues to hold true, those companies that use our system fully get the most value out of it. And obviously, we have a lower, much lower attrition with businesses that use Beti versus those that don't.

Got it. That's helpful. What are you seeing in average headcount for a customer, and what assumptions are you making in guidance regarding average headcount per customer? Also, if you expect it to be flat year-over-year in '24, does that present a challenge to growth compared to a typical year for you? Thanks.

We have noticed that the headcount for each customer has remained very stable. As we prepare for our 2024 guidance, we anticipate this stability to continue regarding headcount per customer.

Okay. Great. Thanks for taking the question. And maybe for Chad, just when we get a better sense for, I guess why now is the right time to shift to a Co-CEO structure and why is the time for you to be focusing more on the product and strategic side of the business today?

It's been 25 years, and I have the right person to collaborate with. This is something we've been working on. As Chris mentioned in his prepared remarks, he has taken a tour through the company and has already managed 10 of our significant departments. I'm excited about this, and the essence is that innovation is where I often excel, and that's what I'm best at. There are new technologies and opportunities to explore now, making it an exciting time. I've thoroughly enjoyed leading special projects, and as I mentioned at the Barclays Conference last September, our product department is reporting to me again. I've been focused on that along with our sales strategy. I'm not retiring, and I'm not sure what that would entail. I want to compete and be part of a team. Ultimately, Chris and I can achieve more together than I could individually.

Okay. That's helpful. Can we get an update on how the Beti adoption is progressing and how it might integrate into the base? What are the expectations for this year regarding its potential?

Yeah. I mean, I'm not going to say we're pushing Beti back into the base. I think that to the extent a client sees the value and they're ready to use Beti within their organization, we're there to provide that. We are meeting clients where they live in usage right now and helping them achieve value, regardless of whether they use Beti or not. I will say though, as I continue to say, Beti drives a lot of efficiencies for businesses. It makes a giant impact for both them and their employees. Our go-to-market strategy has been 100% Beti since July of 2021, and in regards to current clients, we're meeting them where they live and we're helping them achieve value because our systems are very robust without Beti. And it keeps getting missed, but GONE is a very significant product. I mean it automated quite a lot for a business. And so, a lot of our clients are achieving a lot of value through using that product as well right now.

Great. Thanks so much. And congratulations on the better-than-expected results. Just wanted to talk about the buyback for a minute. I mean it seems like, maybe the first time it's been scaled. Just any thoughts around that and as we think about the buyback into '24, again it looks like the average share repurchase price is about $1.78, just want to start there, so any thoughts on that?

For the quarter, we repurchased slightly over 2% of the company, and for the entire year, we bought back 1.5 million shares. We have been actively repurchasing stock and still have a significant amount remaining in our buyback program. We plan to continue being opportunistic in our share repurchases.

Then if you think about the Beti adoption across existing clients and the implementation, has that kind of run its course at this point, or is there any way to think about how that flexes over the course of 2024?

Well, I believe there will continue to be clients that see and want to utilize the value of Beti. And so, yes, we will have more clients and as they see the value and choose to come onto Beti to actually achieve that value, we're going to be there to help them. I will say we're meeting clients where they live with our product right now. And that's a good place for us. That's a good place for clients. We're meeting them where they live, and we're helping them achieve the value available to them in the software, whether they use Beti or not; it's a single database system. It's very easy to use, and there are all kinds of areas where our clients are receiving value, especially right now, as we've even introduced GONE, that's giving us more-and-more conversations because everybody wants to automate time-off requests. I mean, there's nobody that doesn't want to automate time-off requests. So we're having a lot of success with that as well right now.

Thank you for taking my question. I wanted to ask about the CRR strategy. I know in the last few quarters you've mentioned that CRR will focus on cross-selling Beti. However, I understand it typically has a narrower focus. So what is the current CRR strategy? Are they cross-selling any other modules? Also, how should we view the cannibalization opportunity you mentioned regarding CRR spending more time promoting Beti? What changes can we expect and what will be the impact for 2024?

Sure, so what I would say is, even as we looked into this year, it wasn't as much that the CRRs were out-pushing Beti as much as they were out converting the Beti's that had already told us they are wanting to go. And that does take some time with the CRRs to do that and that time they spent doing that, making sure we get appropriate usage, prevented them from being able to do certain other tasks. I mean, I would say that right now, and I've been saying this even probably mentioned this on last quarter, we're not preventing a CRR from going out and selling; there's just a certain criteria of usage that we look for both before you sell a client a product as well as after you sold a client a product to make sure that the value is being achieved. So I would just say that there is a little bit different process that they go through now regarding selling, as you've heard me say before, it's easier to sell a client a product than to get them to actually use it the correct way to achieve value, and we've been very focused on both of those pieces, both in last year and that will continue into 2024.

Thanks, Chad. And then last quarter you talked about some of the impact from macro, mainly like pre-employment checks, those kinds of services. How has that been trending since then?

I would say that we discussed last quarter how the situation remains positive, but it's not growing at the same pace as before. The market is still tight, and we're not seeing as much job switching as we used to, but there is still some upward movement. However, there is still a bit of softness in the pre-employment services area.

Thank you. In terms of the competitive environment, have you noticed any change in 1Q or 4Q, and if so, is it broad-based or limited to certain competitors?

It's always been a highly competitive environment. I've discussed our competitors without naming them. I still believe we are primarily the new company, and we celebrated 25 years last year. To sum it up, we have all known each other for a long time, we've been very competitive, and that remains true.

Got it. And then looking at the 1Q guidance here, how does the absolute dollar form filings revenue embedded within that, why don't you guys compare it to the 1Q '23 form filings revenue, just in terms of how much of a headwind year-on-year that growth represents?

Yeah. I mean, the forms filing is somewhat of a headwind in Q1. We've seen that for several years ago, really not any new forms after the ACA forms came out, so I mean it's kind of been the same type of forms that we typically file. We've talked about the number of people that we have on our system, and that growth rate typically follows kind of the forms filing growth for the quarter.

Great. Thanks for taking my questions. Maybe, Craig, you talked about a wider range, the guidance this year based on different scenarios, where I think you said, interest rates and other strategic initiatives. Maybe can you just talk about what to expect into the low-end versus what you're baking in at the high-end?

I mean, there's different things that we're factoring in on the full-year guide. This is much wider than what we've done in the past. I mean, the main driver is going to be the fed funds rate and what they do with that. You've heard anywhere from 3% to 7% decreases in rates. So we wanted to make sure we gave a range that we could fit that in if any of those scenarios happen.

Okay. Perfect. And then on the customer growth for going forward, maybe for 2024, internally, what types of initiatives like marketing, targeting, do you plan to implement or do to try to reaccelerate that? Thanks.

Yeah, so we're very focused on our go-to-market strategy. We focus on the revenue opportunities available to us. I wouldn't say it's just a unit game. But you're playing both sides of that, obviously, because it's unit does help with the revenue. And so, we're not changing a whole lot when it comes to our strategy. I think our message is getting cleaner. And like we like I said in the call, I mean, we just put out another report in regards to Beti's value. We do continue to have a lot of interest about businesses using Beti and then again just a single database system.

Hi, thanks for taking my question. I have a couple of inquiries about Beti. Have you experienced any client attrition, whether from existing clients or potential clients who are choosing to go in a different direction because they are dissatisfied with Beti? Has there been any negative feedback or pushback from customers regarding Beti, or has the response mostly been positive?

No, we're having a lot of success with Beti. I think you're talking about head-to-head where someone might choose not to use Beti and continue to do it the way it's been done traditionally. That really comes down to the salesperson, and having somebody that understands the value and then also spending the time with the client and all the stakeholders and working through that, so that you know they can actually see the ROI available for them.

Great. I want to know if the latest version of Paycom allows users to utilize Beti and if they can enable or disable the self-certification payroll option for employees, specifically whether there is an option to turn on or off all of Beti except for this feature.

So, we have 34 modules, and those are chosen by the client, how they use those. Now, many of our modules are tied together. And so, it's through one module that you get the value of the other, but that wouldn't be the case with all 34. I would say there's some core modules that are going to be critical for a client to be able to actually process a payroll for tax depositing and everything else. And then there's some other modules; you know that that's more driven at the client choice of whether or not they want to provide that solution to their organization or whether or not they have that covered in another area.

Just last question here is like, if someone has payroll but they are basically not able to run payroll through all, but seem like employees are not required to certify their paycheck every two weeks. Is that a possibility or no?

Yeah, that's client dependent on exactly what they require in that. That’s up to them.

Great. Thanks for taking my questions. Chad, I think you spoke about some of your strategic initiatives kind of impacting 2024 topline. Can you maybe just provide a little bit more further insight into which ones are having the greatest impact on revenue and how long do you think these kind of headwinds from these strategic initiatives last; is it a one-year thing, or do you think it will take multiple years to play out?

Yeah, in terms of our strategic initiatives for '24, I mean obviously it could have an impact on the topline as well as some of the expenses as well and I would say that a lot of those are going to impact '24 and maybe have a small tail on that?

Got it. And then, I guess maybe one clarification, I think from what at least I understand and please correct me if I'm wrong, it appears like for your messaging today that you're perhaps a little bit less aggressive in terms of pushing Beti into the customer base versus your prior commentary. If that's true, why wouldn't this decrease some of the kind of revenue headwinds that you talked about last quarter that Beti might be creating in fiscal '24?

Yeah. I mean, we talked about some of the headwinds that Beti may be creating; we've talked about that last quarter, and I mean, Beti has a great benefit to the customer. I mean it eliminates errors and those accrue as value to the customer. And we've looked at that and what that as a headwind that might be to us and really that's from eliminating some of those services that we charge for, and we've estimated that to be approximately 5% of revenue. But we wouldn't expect all of that to go away. So that's kind of as we've gone through and really looked at those areas of our business, that could be impacted, that's kind of what we looked at.

Got it. Thanks for taking my questions.

Great. Thanks for taking my question. Just on the gross margin trajectory, I know it's less of a focus than EBITDA. But three straight years of compression exiting 2023, as we think about 2024 and some of the investments you're making, should we think that gross margin compresses again, or how should we be thinking about that for the year ahead?

Yeah. I mean we don't guide to gross margin, only there's several things that go into that. One of the largest impacts to gross margin is really headcount on our service side. And so, we're well-staffed going as we're exiting 2023, and those costs continue to carry on into 2024.

Okay. Great. And then regarding Global HCM, it's exciting to hear about native payroll in Canada and Mexico. Are you currently processing payroll for employees in those countries? If so, could you share some insights on who you are replacing in the market? Are you competing with US-based companies or local providers? I would appreciate more details on your international growth plans. Thank you.

Sure. Regarding Global HCM, specifically for Canada and Mexico, it can be utilized across various countries. In our Global HCM segment, we are likely to displace some of our typical vendors. On the payroll side, it's a mixed situation, as we often replace an in-country partner or vendor for payroll services in both Canada and Mexico, where we are currently operational. Additionally, we announced today that we've expanded our services to include the UK. For Canada and Mexico, we are actively running operations in those markets right now.

Great. Thank you.

Great. Thank you.

Hey, thanks for taking my question. Can you talk about sales productivity and the retention rate assumptions embedded into the 2024 guide, and how that compares to what you saw in 2023? Thanks.

Yeah, I'll take the sales productivity. I mean, we've got a great sales organization. We always have. We've had a great sales strategy. We're continuing to get a lot of people involved with our sales organization. We've done a great job training them and we're set up to go through this year. We did a great job last year throughout the year selling. We had a lot of things working with us on that as we moved throughout the year, we kind of talked about the Beti cannibalization or the displacement of certain fees. Craig talked about that being 5% still total out there, we've seen portions of that 5% already down 20%. So again, that's a successful win for the client. I do think that it takes a certain skillset to be able to go in and work with the client within our industry, and we're having a lot of success there. So we do expect that we're going to sell more this year than what we sold last year, and last year was a good sales year.

Yeah, and in terms of the retention, as we mentioned, the parts that impacted retention the most this year was really at the low-end of the market. And we're exposed to the low-end of the market very small. I mean we're less than 5% that has under 50 employees. And it's actually closer to 3.5%, so as we're moving into the current year, we have already mentioned that the initial looks are positive. So that's kind of the way we look at that.

All right. Thank you. And then just a follow-up to that last point. Are you investing a little less incrementally in that lower end of the market, then would you say? Thanks.

Yes. I would say, we are investing a little less.

Well, thanks everyone for joining the call today. I want to congratulate the 2023 Paycom Jim Thorpe Award Winner, Trey Taylor from the US Air Force Academy. 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 in Oklahoma. We plan on participating in the KeyBanc and Morgan Stanley Conferences in March and seeing many of you in person throughout the coming months. I like to congratulate Chris and thank all our employees for their contribution to Paycom's success. Operator, you may end the call.