Paycor HCM Inc

NASDAQ:PYCR

Earnings Call Transcript 2021-Q4

[Operator]

Greetings and welcome to the Paycor HCM, Inc. Fourth Quarter and Fiscal 2021 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brian Denyeau. Thank you, sir. You may begin.

[Brian Denyeau]

Good afternoon, and welcome to Paycor HCM's earnings conference call for the fourth quarter of fiscal year 2021, which ended on June 30. On the call with me today are Raul Villar, Paycor HCM's Chief Executive Officer; and Adam Ante, Paycor HCM's Chief Financial Officer.

Our following results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today's call is being recorded, and a replay will be available following the conclusion of the call.

Statements made on this call include forward-looking statements regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views of any subsequent date.

We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures is provided in our press release available on our website.

Turning to the agenda for today's call, Raul will provide a quick overview of our fourth quarter results as well as review our market opportunity and growth strategy. Adam will provide an overview of our financial model, a detailed review of our fourth quarter results, provide our guidance for the first quarter and full year fiscal 2022.

With that, let me turn the call over to Raul.

[Raul Villar, executive]

Thank you, Brian. I would like to welcome all of you to Paycor HCM's fiscal fourth quarter earnings call, which is our first since completing our successful IPO in July. We are thrilled to be a public company with new stakeholders as we execute on our strategy to be the leading SaaS-based cloud provider of human capital management solutions for small and medium businesses. I would like to congratulate everyone at Paycor for all of their hard work getting us to this milestone and positioning us for even greater success in the future.

We'll start by providing a quick overview of our fourth quarter and fiscal 2021 results, which were very strong on both the top and bottom line, reflecting the great momentum we have in our business. For the fourth quarter, we delivered total revenue of $88 million, up 20% year-over-year. Total bookings of $31.2 million up 79% year-over-year and adjusted operating income of $200,000. For the full year, we reported total revenue of $352.8 million, up 8% year-over-year; total bookings of $115.1 million, up 43% year-over-year and adjusted operating income of $48 million. And we ended the year with over 28,000 total customers and more than 2 million customer employees.

Overall, our fourth quarter performance was the culmination of a very strong year for Paycor. We successfully navigated the challenges associated with the COVID-19 pandemic and are seeing great momentum across all aspects of the business. Since this is our first earnings call as a public company, I would like to start by providing an overview of Paycor's mission, our large addressable market opportunity and our proven strategy to accelerate growth. Our mission is to provide HCM solutions that empower leaders to develop winning teams. We know from experience that high-performing companies are successful because of their engaged employees, and we believe the single most important driving force of employee engagement is effective leadership. Our tools are built to enable C-suite executives, HR and finance professionals and frontline leaders to streamline administrative tasks and shift their focus to building winning teams.

As we look at the market, we believe we have a tremendous opportunity for 3 reasons: First, the HCM market is massive with an estimated TAM of $29 billion. The market can support multiple next-generation winners, and the incumbent providers are under serving this market with outdated technology and an overly complex user experience. Conversely, Paycor has built a disruptive, high-performance cloud platform that is intuitively designed and purpose-built for all leaders. Our platform offers unrivaled depth in recruiting, scheduling, talent management, talent development and workforce analytics.

Finally, we are executing on a proven growth strategy of expanding our market coverage, increasing sales productivity and innovating new products. Our 43% bookings growth in FY '21 demonstrated that our strategy is in flight and yielding great outcomes.

To provide additional insight into our core product offering, our comprehensive cloud platform includes onboarding, HR, payroll, tax filing, ACA, analytics, reporting and mobility for both the leader and the employee. We also extend our value proposition with 3 additional bundles that empower leaders in critical focus areas while providing incremental per employee per month, or PEPM, revenue opportunities for Paycor.

Our talent management bundle provides leaders with the tools to create a workplace culture of continuous development by doing 3 things: finding and hiring the best people for their teams, coaching and developing their teams and rewarding top performers. Our workforce management suite gives frontline leaders the ability to match the right employees with the right skills in the right job and ensure they can accurately schedule and record their time and attendance. These are critical requirements that legacy solutions are ill-equipped to handle in today's dynamic business environment.

Finally, our benefits administration bundle offers a robust set of tools that make it easy for our customer to unify the benefits administration platform of their choice with Paycor. Providing an open platform is a key pillar of our strategy and providing choice to our customers and broker partners is a differentiated component of our value proposition.

We understand that in order to maximize our platform strengths, we also need a powerful go-to-market effort that empowers our sellers to win. We have developed a comprehensive sales methodology that is focused on attracting and developing high-performing sellers, providing them with a specific and repeatable selling motion and leveraging technology to increase their productivity. Our go-to-market strategy is straightforward and actionable. First, we are aggressively hiring to expand our seller footprint with a clear focus on Tier 1 cities, which are the 15 most populous markets in the U.S. Given our Midwestern heritage, we have historically had stronger coverage in smaller Tier 3 cities, such as Kansas City, Raleigh and Louisville. Conversely, we've had an enormous opportunity to expand in Tier 1 cities such as New York, L.A. and San Francisco, where we currently have only 20% of our potential seller coverage. We experienced fantastic success competing in Tier 1 markets in FY '21, and these markets delivered our highest win rates. Over 50% of our FY '21 bookings growth came from Tier 1 markets, and we are confident in our ability to expand our presence in these large dense markets.

Secondly, our strategy of delivering technology and expertise for key industries is resonating in the market. The needs of a manufacturer are different than a restaurant and we are delivering a solution designed for these industries. Over 40% of our bookings growth in FY '21 was generated by our industry strategy.

Finally, engaging with brokers is an essential part of our growth strategy. We have positioned Paycor as the HCM vendor of choice for the broker community by combining a prioritized client implementation with the benefit admin platform that the broker prefers. This empowers the broker to select the appropriate platform for their client while providing the insights, tools and competitive differentiation they need to grow and retain their book of business. We've seen great success with brokers who referred more than 40% of our bookings in fiscal 2021.

Looking at our fourth quarter performance, we saw fantastic results from our go-to-market strategy. Our booking success was broad-based with strong new customer signings and great upsell activity across our installed base. The success of our bundle strategy drove meaningful PEPM expansion. We ended the year with more than 370 sellers, an increase of 6%. A primary focus for us in fiscal 2021 was enhancing seller productivity, and we were notably successful in this area. In FY '22, we are forecasting to grow our sellers by 20% to 25%, with the majority of our new sellers deployed in Tier 1 markets.

We increased the number of brokers engaging with Paycor more than 40% year-over-year and now have more than 1,300 active broker partners. In this quarter, we launched a number of new product features, including recognition, which is offered with our core product offering. This feature allows leaders and peers to recognize the efforts of their teams directly through the platform and providing leaders with another method of celebrating, motivating and engaging their teams.

Our success in the fourth quarter provides a great foundation for even better performance in fiscal '22 and beyond. We entered 2022 with a proven strategy and strong momentum across all aspects of our business. Our focus this year will be to build upon our success by continuing to invest in our go-to-market team by adding sellers and increasing productivity across our existing team, further expanding our engagement with broker partners and making it even easier for them to do business with Paycor, and executing on our product development road map to increase the value we deliver to customers, and make additional progress towards our 3-year goal of a $50 PEPM product portfolio.

We have never felt better about our business and our ability to accelerate revenue growth. We are in the early stages of SMBs replacing legacy HCM solutions with modern cloud-based solutions. This multibillion-dollar market opportunity gives Paycor a long runway to generate high levels of growth and profitability for the foreseeable future. We believe we are in a great position to deliver significant value to our customers and shareholders over the long term.

With that, let me turn the call over to our CFO, Adam Ante, to walk you through our financial results. Adam?

[Adam Ante, executive]

Thanks, Raul. Before I turn to our fourth quarter results, I'd like to start by providing a brief overview of our financial model. We have a highly visible and recurring SaaS revenue model. Nearly 90% of our revenue is subscription-based through the sale of our payroll and HCM SaaS solutions, and it's generally based on the number of active employees a customer has and the number of products that they use. About 6% of our revenue is annually recurring related to year-end tax filing. We also have a small percentage of professional services revenue; and finally, interest income related to the funds we hold on behalf of our clients. Interest income has a meaningful headwind to growth given the current rate environment, but has the potential to flip to a tailwind if rates rise.

We typically sign month-to-month contracts with our customers, and we invoice at the time of service or monthly in arrears. As a result, we have minimal deferred revenue and calculated billings is not a relevant metric for us.

So now we'll get to our results in more detail. Total revenue for the fourth quarter was $88 million, a 20% increase year-over-year. This was the fastest revenue growth in the last 10 quarters, driven by a combination of new customer acquisition, good upsell activity and the continued recovery in employment across our customer base as well as an easier prior year comparable. Our business is directly tied to the U.S. labor market. So for the fiscal year 2021, we did experience a material growth headwind related to the economic impact of COVID-19 on SMB companies. In the fourth quarter, this headwind turned to a significant tailwind as the prior year experienced by far the most pronounced job losses due to COVID-19. Easier comps contributed approximately 4 to 5 points of revenue growth in the fourth quarter.

For the full year, our net revenue retention was 88%. This is below our historic level in the mid-90s due to the impacts of COVID I just mentioned, but we saw a significant improvement in net retention throughout the year as employment levels improve, and net retention in the fourth quarter was nearly back to pre-pandemic levels.

Moving down the P&L. Adjusted gross profit margin was 65.4%, which was down from 69.9% in the fourth quarter of fiscal 2020. The primary drivers of the change were an increase in amortization related to capitalized software and deferred contract acquisition costs as well as the anniversary of certain COVID-related cost initiatives and continued investments in our service organization to ensure a great experience for our customers.

We have a scalable and efficient model and are optimistic in our ability to return to gross margins above 70% over time.

Turning to operating expenses. Adjusted sales and marketing expense in the fourth quarter was $30.2 million or 34% of revenue compared to 30% of revenue in the prior year period. This increase reflects the proactive investments we're making to expand our team of sellers across markets, particularly Tier 1 locations. Based on the success we're seeing in total bookings and the early stage of this market opportunity, we intend to continue investing aggressively to build out our sales capacity.

Adjusted R&D expense was $9.5 million or 11% of revenue, which was consistent with the prior year. Before capitalization, we invested 18% of our revenue in R&D, and we expect to continue to make meaningful investments to support the expansion of our HCM SaaS platform, and we'll be introducing new products and features in fiscal '22 and beyond.

Adjusted G&A expense was $17.6 million or 20% of revenue compared to 13% of revenue in the fourth quarter of 2020. The increase in G&A expense was largely due to the incremental costs of becoming a public company. We expect to begin driving leverage on the G&A line in the coming quarters now that we have most of our public company costs in a run rate. Adjusted operating income was $200,000, essentially breakeven margin compared to 15% in the prior year period. The change in profitability reflects the drivers I mentioned above. We've been a consistently profitable business, and we expect the fourth quarter to be the low mark in profitability going forward. We are confident in our ability to invest for growth and deliver attractive levels of profitability.

With regard to the balance sheet, we ended the quarter with $2.6 million in cash and $49.1 million of long-term debt. Subsequent to the end of the quarter, we raised $459 million in net proceeds from our IPO. $260 million of which we used to redeem the Series A Redeemable Preferred Stock as well as retire our outstanding debt. We have a well-capitalized balance sheet that provides ample liquidity to fund our growth investments and other strategic priorities. We ended the quarter with $670 million in funds held for clients with average daily client funds of $771.8 million. Interest income generated on these funds was $429,000 or approximately 22 basis points.

Turning now to guidance. We'll start with the quarter. We expect total revenue of between $89 million and $90 million, and adjusted operating income of between $1 million and $1.5 million. For the full year, we expect total revenue of $396 million to $400 million and adjusted operating income of between $30 million to $32 million.

There are a few things to keep in mind regarding our outlook. Overall, we are optimistic about the growth opportunities and underlying trends in our business. The growth in bookings in fiscal '21 will take 12 to 18 months to fully ramp into revenue and provide significant visibility to future growth. We expect another strong year of bookings growth in fiscal '22, driven primarily by the expansion of our sales team as well as continued improvements in productivity. We believe looking at bookings on an annual basis is the most useful approach, and we intend to provide an update on our bookings performance on our year-end earnings call.

While we experienced growth from improved employment trends in our portfolio during the fourth quarter, we are assuming a tempered level of employment growth in fiscal '22. This is driven in part by uncertainty related to the Delta variant. We have not seen any business impact from it to date, but it is something we are watching closely. It's also important to keep in mind that our comps get harder throughout fiscal '22. This will be particularly true in the fourth quarter. Our guidance assumes interest rates remain low and will continue to be a headwind to interest income through fiscal '22.

We will continue to invest in our sales expansion strategy in line with recent levels as we look to grow our sales headcount by 20% to 25% for the year. We expect this investment to continue to drive front-end growth as we drive towards sustainable 20-plus percent revenue growth over the long term.

And with that, I will turn it over to the moderator for questions.

[Operator]

[Operator Instructions] Our first question comes from Mark Murphy of JPMorgan.

[Mark Murphy, analyst]

Congratulations on the fantastic bookings trajectory, the increase to guidance here. So Raul, the broker channel bookings being up more than 100% during the fiscal year, it's a pretty stunning trajectory during a COVID-impacted year. Could you walk us through the dynamics that are driving that broker channel success? And how much runway you think is left to add more brokers?

[Raul Villar, executive]

Yes. Thanks, Mark. A couple of things to point to. First and foremost, a little over a year ago, we hired a senior executive to run the broker program for us. And I think we put together a value proposition that combines preferred implementation for the brokers and a benefit administration agnostic platform strategy. So we let the broker pick the platform of their choice. And that's resonating in the marketplace. That, combined with guaranteeing that they're going to get a prioritized implementation for their clients. And so we've seen significant success in the channel, it increased each quarter.

And when we think about the long-term opportunity here, we have relationships with a little over 1,300 brokers today. And there's 14,000 in the U.S. And so we can go deeper with the existing brokers that we have, and we'll continue to attract new broker partners. So we think we're in the early innings of the strategy. We're continuing to press in on the broker channel, and we expect it to continue to have meaningful contributions to our bookings growth in FY '22.

[Mark Murphy, analyst]

Okay. Great. And then Adam, I wanted to ask you, could you remind us what percentage of the portfolio is priced on a PEPM basis today? And just what was that trend in PEPM? I mean I think you're saying it was up through Q4. Do you have any thoughts on just the magnitude of increase that you're seeing on the PEPM side, the realized PEPM?

[Adam Ante, executive]

Yes. Mark, so on the actual PEPM increase, we're seeing an increase in sort of the mid-single digits on a pretty regular basis, which you could see sort of each quarter. In terms of the actual portfolio, the size of the portfolio, I'd say about 90% of the portfolio heading into the year was priced on a per check basis. And we've seen a continued trend push more and more towards a bundled PEPM strategy. So we're attaching more than 90% -- 90% of our new deals are attached with a bundle or a PEPM-based strategy, and we've seen that mix begin to shift from closer to -- from 90% down to about 80% of the portfolio is represented now by the per check. So something that we expect to continue into the future, for sure.

[Operator]

Our next question comes from Bhavin Shah with Deutsche Bank.

[Bhavin Shah, analyst]

Great. Congrats on a great start to a public company. Just in terms of your sales expansion strategy, can you maybe talk about where you're seeing the most success from a productivity perspective? And then how can you ensure to maintain those levels of productivity as you expand that sales force 20% to 25%?

[Raul Villar, executive]

Sure. So we had broad success across the entire geographic footprint in the past year that contributed to the bookings growth we have. However, we had a 91% growth in the fourth quarter in Tier 1 markets. And so we're seeing significant growth in the top 15 cities in the U.S. And we're going to continue to press in with headcount additions throughout the year in those markets. So we feel really good about that. So I would say, all in all, good in all the markets, but we have such an underpenetrated opportunity in the Tier 1 markets that we're going to continue to outperform there for the foreseeable future.

[Bhavin Shah, analyst]

Got it. That's helpful there. And can you maybe just talk about what you've seen from a demand perspective since the IPO. Have you seen any tangible growth in your pipeline, just given the brand awareness around your public nature now?

[Raul Villar, executive]

Yes. So I mean, demand -- we've always had strong demand in the pipeline. I think it's a 30-year-old company. I think what is really helping us is in competitive sales situations that we're public now has added a little cache to the brand. And so it's helped us with some of the larger transactions that we're working on in Q1. And so I think it's been really helpful. We're taking advantage of all the positive press that we've received in order to [ prime the ] pump for the demand in order to continue to generate outsized bookings performance in Q1 and on a go-forward basis.

[Operator]

Our next question comes from Samad Samana with Jefferies.

[Ryan Bressner, analyst]

It's Ryan Bressner on for Samad. I guess just talk a little bit more about -- you mentioned earlier that a large part of your wins come from legacy incumbents in the market. I'm just wondering if you could talk a bit more about how switching costs compare there? And where you see some value add in terms of pricing and other features there?

[Raul Villar, executive]

Yes. So I think we continue to see an outsized proportion over 80% of our wins coming from what we would consider legacy providers, so ADP, paychecks, in-house solutions. And it's really about user experience is the primary reason, cloud enablement. And some of the talent modules that we've added are really attractive in the current work environment. And so the combination of a modern, easy-to-use solution that's in the cloud with a lot of the bills and what we're looking for to attract and retain employees in this market. It's proven to be really successful against the legacy user experiences that we're competing with.

[Operator]

Our next question comes from Kevin McVeigh with Crédit Suisse.

[Kevin McVeigh, analyst]

Let me add my congratulations as well. If I heard you right, it seems like 91% of the growth was in Tier 1 markets. How should we think about the bookings? I know you talked to 12 to 18 months, but all things equal, I'd imagine those are larger-sized clients, how should we think about the implementation of those? And is there any way to maybe frame what the average PEPM is amongst some of those bookings numbers?

[Adam Ante, executive]

Kevin, I don't think that we necessarily see a significant difference across tiers, meaning that the clients are larger in Tier 1. I'd say that marginally may be true, but we don't see a significant difference. We still -- we remain focused in our target segment of 10 to 1,000 and then our field sales really focused in that 50 to 1,000 segments. So as we ad teams in the Tier 1 markets I mean we're still really focused in that 50 to 1,000 segment. And yes, I think that you will see, like Raul had mentioned, overperformance as we think about our win rate across tiers. I mean, we are more successful in those Tier 1 markets.

And from a PEPM perspective, it tends to be that you get a little bit better price competitiveness when you get into those Tier 1 markets rather than over where we've otherwise been weighted like a [ Louisville ] or a Tier 4 market where you have to be a little bit more aggressive.

[Kevin McVeigh, analyst]

That helps a lot. And then in terms of client employees, are they -- have they exceeded pre-COVID levels at this point? And how should we think about -- any thoughts as to what the guidance reflects some kind of the runoff of federal benefits in early September, if you factor that in at all?

[Adam Ante, executive]

Yes. I mean so prior to COVID, we had just about 2 million employees, just under 2 million employees. And heading into the fourth quarter and the primary impact to COVID in April 2020, we really saw a pretty meaningful depression there, dropped about 6%, seemingly overnight. And it sort of rained back up through July, but we definitely, since come back, Q4 of last year was the easiest, I'd say, the easiest comp that we're going to see just given the extra pressure that we saw in the labor market. But we've since come back, we're just over 2 million employees now, so slightly ahead of where we were heading into COVID. And we're seeing that underlying growth in the portfolio start to come back, which is clearly benefiting the Q4 growth number in that 20%

[Operator]

Our next question comes from Terry Tillman with Truist Securities.

[Terrell Tillman, analyst]

I'll like to add the congratulations. But I was going to get on here and say I've never heard my [ hometown of [indiscernible] mentioned on an earnings call, but now I'm going to say, I've never heard it mention twice on an earnings call. Raul, maybe the first question for you is the Tier 1 opportunity, just better representation in those Tier 1 markets. It sounds really key going forward. And you talked about 20% to 25% seller growth as the target in FY '22. So if you look at kind of at the end of '22 if we kind of fast forward. How do you think you are in terms of representation in the Tier 1 markets by the end of FY '22? And then just how long is that journey going to be to have better representation? And then I had a question for Adam.

[Raul Villar, executive]

Yes. So at the end of '22, we'll be almost double of what we were at the beginning of '20. So we're really accelerating headcount growth into those markets. And I was just on a new hire class yesterday. I welcomed all the new hires. And I had a new hire manager from San Francisco, Washington and Philadelphia. So I was really excited to see them there because we hired the manager first, and then we wrap 6 to 8 sellers around the manager. So we're already moving ahead in those 3 markets there with incremental teams. And so -- we think this is a 3- to 5-year play in just Tier 1 markets alone, adding significant account every year.

And so we have really a long runway in Tier 1. And so we're going to continue to press into it, Terry. We think in 5 years, we still will have upside in Tier 1. And we still have opportunity to continue to round out our teams in Tier 2 and Tier 3. So we'll do that where we're trying to be efficient and taking advantage of a great leader or an emerging market where appropriate. But the headcount opportunity at Paycor is -- it's at a minimum, a 5-year opportunity to continue to add in that 20-plus percent range of head count to continue to drive future bookings.

[Terrell Tillman, analyst]

Got it. That's great to hear. And I guess, Adam, as it relates to the 20% to 25% seller growth that Raul was talking about, I don't know how you've been doing so far into the new fiscal year. I know it's just a few months, but how do we frame or kind of lay out the sales and marketing expenses layering in through the year? Is it linear? Or how is that going to flow?

[Adam Ante, executive]

Yes. Thanks, Terry. Yes, I think you'll see a little bit of an increase in sales and marketing expense in Q4 of '21, right, as we've begun to accelerate coming out of COVID. And so I think you'll see us come off of that step up with a similar increase. And most of the hiring in this case is going to be towards the front half of the year. So we'll start to see that continue here over the coming quarters. And then we'll look to the second half of the year in terms of performance in the back half whether or not we want to pull those headcount forward heading into FY '23. But yes, I think you'll see that start here in Q1 and Q2 as we bring most of those hires forward.

[Operator]

Our next question comes from Brad Reback with Stifel.

[Brad Reback, analyst]

So if my math is right, it looks like growth in the fourth quarter was fairly evenly split by seat growth in ARPU games. As we look forward, given the significant amount of headcount being added to the sales force, should we think more growth comes from headcount client seats versus pricing? Or do you expect it to remain fairly even?

[Adam Ante, executive]

Yes. So you're saying between the just number of new deals versus the productivity of the sellers? Or are you thinking about overall revenue growth specifically?

[Brad Reback, analyst]

Total revenue growth, if I think of pricing P&Q, right? So...

[Adam Ante, executive]

Yes. Yes, I think that's right. I mean so we're seeing -- I think it will probably be a little bit more weighted towards the actual number of employees versus just the rate growth. So we've been growing historically in that sort of low teens. And I think that you're going to see that plus as we continue to accelerate the revenue growth. And then yes, I think you're going to see the balance of that come from the P side of that equation as the average rates are -- as those clients are buying more and they're coming on at the bundle more complete sale -- at the point of sale. So yes, but I think more in the near term, I think it's going to be weighted a little bit more towards the employee growth.

[Operator]

Our next question comes from Bryan Bergin with Cowen.

[Bryan Bergin, analyst]

I had a question on bookings. So I was just curious if you would comment on how bookings have trended in 1Q thus far. And can you talk about the demand environment by employer size to above, below and within your target market?

[Raul Villar, executive]

Yes. So we continue to see strong demand in the marketplace as we've entered the quarter, and we're really confident we're going to have a strong bookings quarter. And from a demand perspective, going back to Q4, 85% growth in the mid-market space, and we define that as 50 plus. And so really strong in our upmarket demand. We're seeing demand 50 to 1,500. And so we continue to take advantage of that opportunities. And so a couple of years ago, we shifted the focus of our demand generation and our go-to-market motion from the low end of the market to 50 plus, and we're starting to really reap the rewards of that decision and seeing really strong demand in that segment.

[Bryan Bergin, analyst]

Okay. And then just on fiscal '22 outlook. As you built the annual forecast, can you just help us understand some of the revenue growth components as far as what you're expecting out of new unit expansion, upsells and essentially kind of the pace for control so we can understand that employment base recovery that you've assumed?

[Adam Ante, executive]

Yes. I mean as we think about the employment base really coming back, I mean, historically, it's run in sort of the low single digits. And I'd say that we're still a little bit cautious and so we haven't really built it back to the original or sort of pre-COVID labor growth levels. So we would expect something a little bit more conservative in our plan at this point or in our projections at this point than that low single-digit number.

And then the balance, of course, as we think about new business coming on, like Raul had mentioned adding sellers in that 20% to 25% range, we really have expectation that we'll continue to accelerate bookings. And of course, there'd be some expectation around productivity level growth. So one important thing to note as you sort of balance in the bookings is, we grew our bookings level at about 22% on a 2-year compound growth rate. And so we expect to accelerate and we intend to accelerate beyond that. Of course, with the easier comps in '21, not likely at that 43% range. So in either case, we'll target to drive the sales and marketing headcount at 20%, 25% range and would expect bookings to perform commismerately.

And then, of course, on the gross retention side, we've seen -- or on our net retention side, we've seen net retention in that 88% range for the year. Historically, it was running in that sort of mid-90% range, 96% in 2019. And so we've seen that return pretty well in Q4, and have seen some improvement in lift here even into the first part of the year. So we would expect that to continue over the balance of the year.

[Operator]

Our next question comes from Brian Peterson with Raymond James.

[Brian Peterson, analyst]

Congrats on the quarter. Just one for me. So Raul, I know you talked about some of the product expansion and the 3-year road map to get to $50. What do you think that longer term outlook could be? Is there a potential ceiling on that? Maybe just talk about some of the puts and takes on what the portfolio could look like longer term.

[Raul Villar, executive]

Yes. I mean great question. And I think the wonderful thing about HCM as a category is that PEPM expansion has been proven throughout my 30 years in the category. And so when we think about it over the next 3 years, we really believe $50 PEPM is within our sight. And there are so many categories to extend upon that. We don't think it's going to be capped at 50%. We think it will continue to expand, whether it be in other employer services or services for the employee. Those different types of opportunities provide long-term expansion opportunities for us, whether it be financial or physical wellness. And those categories are broad and are target-rich for HCM companies. So we think 50 is in our 3-year window, and we think that 50 is just a 3-year stopping point, and we'll be able to continue to expand from there.

[Operator]

Our next question comes from Scott Berg with Needham & Company.

[Scott Berg, analyst]

All right. That's probably better. Sorry about that. You got some great quarter, Raul and Adam. I guess I wanted to start with what you're seeing from a general sales environment today. If you look at the deals that you're signing with new customers today versus, say, just before the pandemic. Are you seeing any differences in the number of modules or what the packaging looks like in terms of how they're buying the Paycor platform over there?

[Raul Villar, executive]

Yes. There's a couple of dynamics that we're seeing, Scott. One is we continue to move our overall employee size up. And so we're continuing to sell larger transactions in that 50 to 1,000 space. And then secondly, we're selling a bundled solution. We started it 2 years ago. We continue to evolve that. And our bundle -- our core bundle has gotten bigger each of the last 3 years that we started. And so we're attaching more products at point of sale. And so we're seeing success lifting up our overall deal size. And so a combination of more employees and more product. And again, we're in the early innings of our expansion of bundles, but we've seen really good returns from the sales force and demand in the marketplace.

[Scott Berg, analyst]

Got it. Helpful. And then last question for me is the company is obviously going through a large reacceleration of growth you're expected to with a number of sales adds coming up. You had detailed the numbers to grow the staff 20% to 25% this year. Where are those reps coming from? Because it seems like every HCM company that I talk with our peers is trying to grow their headcount at higher rates than they have over the last year.

[Raul Villar, executive]

Yes. So we changed the hiring profile after our CRO, Chuck Muller, came in a little over a year ago. We changed the hiring profile. And we're really looking for people with 1 or 2 jobs and are primarily and, call it, a high-activity B2B sales role, not necessarily software sales. So we haven't had issues in demand of attracting those folks because we want to teach them both software sales and HCM sales. And so we believe that's a winning formula for us. We saw significant advantages in productivity instead of trying to reprogram an existing software or HCM rep, that are, a, harder to get and, b, more expensive. So our strategy has been to kind of fish in a different pond than everyone else.

[Operator]

Our next question comes from Pat Walravens with JMP Securities.

[Joey Marincek, analyst]

Great. This is Joey Marincek on for Pat. Just a double-click on the sales hires. How long does it typically take to ramp these new sellers to full productivity? And then secondarily, can you just give us some color on how you're thinking about M&A?

[Raul Villar, executive]

Yes. So I'll start with the sales productivity. And with the new hire, we have a shortened onboarding program. And our objective is to get people productive within in the first month and contributing. However, in HCM and at Paycor, people see productivity lifts between their first and second year. And then sometimes you see a productivity lift between years 2 and 3. And at that point, they're fairly defined about what their average is going to be. But -- so you'll see lift. So the people we hire today, their productivity will increase in FY '23. So they'll contribute in '22, but they'll contribute at an outsized perspective at '23.

As far as M&A goes, we'll continue to be opportunistic and curious. As far as that, we look at lots of different opportunities. We have a proven history of product tuck-ins into our unified platform that has proven to be a winning strategy. And so we'll continue to look at those and anything that's interesting that comes our way. Adam, anything you want to add there?

[Adam Ante, executive]

Yes. No. I mean we've seen that success. And you've seen us do 1 or 2 annually with some really strong success around product-specific tuck-ins. And so we'll continue to evaluate our need around adding that product that fits well into our product suite. So we continue to evaluate those opportunities.

[Operator]

Our next question comes from Mark Marcon with Baird.

[Mark Marcon, analyst]

Let me add my congrats. Bookings were really impressive. Can you talk a little bit about which bundles seem to be the most -- are getting the most traction? Which ones you have the most hope for over the coming year? That's the first question.

[Raul Villar, executive]

Yes. So our core bundle is a payroll HR suite of solutions. And so that's our core bundle. And then I would say we attach workforce management at the highest level. Obviously, with time and attendance and scheduling being really important for many businesses that we serve. What we're most excited about is talent. And with the expansion of our talent management to include coaching and developing and providing goal setting for associates, we've seen really strong attachment of the product in the beginning of Q1. And so we're excited about that opportunity. And we think our talent bundle has an opportunity to eclipse the penetration rates of our workforce management and benefits platform attach rates in the foreseeable future.

[Mark Marcon, analyst]

That's great. What percentage of attachment are you getting on the new bookings with regards to the talent management bundle?

[Adam Ante, executive]

Yes. Mark, yes, I mean, we haven't really shared per se the attach rates. I'd say that they're attaching well. They're attaching how we're expecting them to. And I would say that over the near term, we would expect them to be one of our stronger products overall.

[Mark Marcon, analyst]

Promising. Adam, you were talking earlier about the retention rate. Obviously, COVID ended up impacting things, we've seen this improvement. Can you just talk a little bit about some of the KPIs that you're seeing, the forecast retention? And how you're thinking about it as we go into the fall and winter time period and what that portends?

[Adam Ante, executive]

Yes. I think that the quarterly dynamics around net retention are interesting. There's definitely some seasonal timing around January adds or losses in that case, some of the quarters. But I think that there's expectation. I mean, I think we're expecting to see that lift regularly each quarter, especially as we get towards the back half of the year, I think that there's going to be -- there should be some strong improvement there. And of course, the underlying labor market is going to be the primary driver as that is beginning to rebound. So again, we saw some lift into Q4 of '21. We're seeing that maintain here in the first quarter. And given any changes around the Delta variant and COVID, we would expect that to continue to rise throughout the balance of the year.

[Mark Marcon, analyst]

Great. And then can you just talk a little bit about sales force retention, what you're seeing there, particularly with regards to the new hires and the new profile that you're going for, number one. And let me leave it at that.

[Raul Villar, executive]

Yes. So our sales force retention has improved dramatically since April, so we've gotten better each month. And it really -- in Chuck's first year, our objective was to make sure we got the right profile, set the right expectations, put the right selling motions in place and make sure we have the right people on the team. And so we feel like we're in really good shape now. And our retention levels, we expect them to be in the 70% to 80% retention range for the year, which would be what we would expect in a mid-market sales organization in the category.

[Operator]

There are no further questions at this time. I'd like to turn the floor back over to Raul Villar for any closing remarks.

[Raul Villar, executive]

Yes. I want to thank everyone for your time today. We really appreciate it. We look forward to spending more time with you over the next couple of days and months, and we're really excited about our fourth quarter performance, and we look forward to having a great fiscal '22. So look forward to talking to all of you shortly. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.