Paycom Software Inc

NYSE:PAYC

Earnings Call Transcript 2021-Q1

[Operator]

Hello, my name is Philip, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Paycom Software First Quarter of 2021 Quarterly Results Conference Call. [Operator Instructions] Thank you. And now I turn the call over to your host, Mr. James Samford, please go ahead.

[James Samford, Investor Relations]

Thank you, and welcome to Paycom’s First Quarter 2021 Earnings Conference Call. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation 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 the most recent Annual Report on Form 10-K and our most recent 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 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?

[Chad Richison, President and Chief Executive Officer]

Thanks, James, and thank you to everyone joining our call today. I will spend a few minutes on the highlights of our First Quarter of 2021 results. Then I'll review the progress we're making on our goals for 2021. Following that Greg will review our financials and our guidance, and then we will take questions. But first I want to thank my colleague and good brand Jeff York, for his many years of service leading our sales organization. Over the last 14 years, Jeff has built a sustainable sales organization with a deep bench of like-minded professionals.

I look forward to continuing to work with him in his strategic leadership role. One of those like-minded individuals is our new Chief Sales Officer, Holly Faurot. Holly is a true success story at Paycom. Her 14 year career with us began with an internship in the sales organization. Ali quickly progressed into a top sales rep, a top sales manager and a top regional sales manager, earning many of the company's highest sales ranking awards along the way. In 2016, she was asked to further expand pay comms client relations department, which presents additional products to clients and focuses on creating value by increasing employee usage.

Holly has been instrumental in contributing to the success of pay comp across the entire sales organization, and I'm confident she will continue to build on the momentum we are seeing. We delivered strong first quarter results, even with a tough pre COVID year over year comparison, our 2021 first quarter revenue of $272.2 million grew 12.3% compared to the prior year period and came in above the top end of our guidance range.

Despite several previously identified headwind unsurprisingly, the first quarter revenue was impacted by lower forms, filings and adjustments due to lower hiring trends in industries most impacted by the pandemic in 2020, excluding forms, filings and adjustments. Revenue are year over year recurring revenue growth accelerated again in Q1, as we go through 2021, we will have a cleaner comparison that will provide a true reflection of our revenue growth profile. Since the arrival of the pandemic turning to profitability.

Our first quarter adjusted EBITDA was 133 million representing adjusted EBITDA margin of 48.9% as reflected in our updated guidance, which Craig will discuss. We believe the combination of revenue growth and adjusted EBITDA margin makes us well positioned to exceed the rule of six feet in 2021. Our marketing plan continues to work very well. Delivering strong demo leads in the first quarter, we continue to see success from our advertising span and we intend to continue to spend aggressively to fuel future revenue growth and expand, or roughly 5% market share and a large and expanding HCM team.

We are capitalizing on the shortcomings of disparate HCM systems with the value proposition. The pay comes single database solution that is stronger than ever. Employees expect their HR software to be efficient and easy to use. In fact, in a recent survey, we commissioned with the third party employees express frustration with complex and disparate HR software. That lack the transparency and usability they've come to expect from consumer oriented technologies, pay comms, employee usage strategy and single database solutions. Squarely addresses these expectations.

We had record high employee usage rates in Q1 as measured by our direct ad exchange or DDX. This is fueling new opportunities for product innovation and automation for products like Bette or better employee transaction interface for payroll, which we started rolling out to a select few clients during the quarter, Betty is already receiving high marks as it transforms the way payroll is done, I believe over the next 12 to 18 months that he will become the standard for how payroll should be done.

Now that the first quarter is over. We have substantially left dependent mix impact on our comparable year. Over year numbers, new client additions are driving our growth in Q2 and beyond the negative revenue impact the pandemic had on our pre-payment client revenue remained stable while we haven't seen any material improvement in employment trends at those same clients, our forecast and future growth initiatives are not dependent on any improvement.

Our strategy throughout the pandemic has remained unchanged. We will continue to focus on the three controllable activities of providing world-class service to our clients rapidly developing new technologies and increasing the number of new clients added to our platform. We've done a great job and succeeded in these areas, which has kept us on track to achieve our growth initiatives. I'd like to thank our employees for their patience, flexibility, and grit over these last 14 months and summary.

Now that we've left Q1 tough year over year comparison with the last pre COVID quarter, we expect that the strength of our growth profile will be reflected in our future results. The record new business revenue and record number of new clients added in 2020 combined with robust first quarter sales is bolstering our long-term revenue growth opportunity.

As a reminder, we only have approximately 5% market share of a growing TAM. So we have a long runway ahead of us. Our strategy is working and our products have never been more relevant with that. I'll turn the call over to Craig for a view of our financials and guidance. Craig?

[Craig Boelte, Chief Financial Officer]

Before I review our first quarter of 2021 results in our outlook for the second quarter and full year 2021, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

As Chad mentioned, we are pleased with our first quarter results with total revenues of $272.2 million representing growth of roughly 12% over the comparable prior year period, which was primarily driven by new business wins, including very strong new client revenue starts in the first quarter within total revenues, recurring revenue was $267.8 million for the first quarter of 2021, representing 98% of total revenues for the quarter and growing 12% from the comparable prior to your period as expected the effects of lower head count on our pre-pandemic clients and the impact of 150 basis point infrastructure that that occurred in March of 2020 remain relatively unchanged.

In addition, as we discussed on our Q4 2020 earnings call your employees, working in industries hardest hit by the pandemic and lower overall turnover in those industries resulted in pure annual forms, filings and adjustments. It is difficult for us to estimate the exact amount that those trends impacted us, but we don't believe it was dramatically different from our expectations.

Total adjusted gross profit for the first quarter was $236.9 million representing adjusted gross margin of 87% for 2021. Our target adjusted gross margin find is expected to remain strong at approximately 85 to 86% adjusted. Total administrative expenses were $119.8 million for the first quarter as compared to $108.4 million in the first quarter of 2020.

Adjusted sales, a marketing expense for the first quarter point 2021 was $59.3 million or 21.8% of revenues. We continue to be very pleased with our marketing strategy, but another quarter of very strong demo leads and we plan to continue to invest in marketing throughout the remainder of 2021 adjusted R&D expense was $23.1 million in the first quarter of 2021 or 8.5% of total revenue adjusted total R&D costs, including the capitalized portion for $34 million in the first quarter of 2021 compared to $27.6 million in the prior year period.

We've been aggressively recruiting talent in R&D to drive our future growth through innovation and new product development adjusted EBITDA was $133 million in the first quarter of 2021 or 48.9% of total revenues compared to $117.9 million in the first quarter of 2020 or 48.7% of total revenues.

We've benefited from cost efficiencies in G&A, which we expect to continue throughout the year. So we plan to continue to invest in the marketing and R&D. Our GAAP net income for the first quarter was $64.6 million or $1.11 per diluted share versus $63 million or $1.08 per diluted share in the prior year period based on approximately $58 million shares in both periods. Non-GAAP net income for the first quarter of 2021 was $85.9 million or $47 per diluted share versus $77.9 million or $33 per diluted share based on approximately $58 million shares in both, we expect non-cash stock based compensation for the second quarter of 2021, the approximately $27 million to $28 million for the full year.

We anticipate non-cash stock based compensation will be approximately $105 million to $110 million turning to the balance sheet. We ended the first quarter of 2021 with cash and cash equivalents of $215.1 million and told that a $30.5 million related to construction at our corporate headquarters cash from operations was $89.5 million for the first quarter, reflecting our strong revenue performance and the profitability of our business model.

Average daily balance of funds held on behalf of clients with approximately $1.7 billion in the first quarter of 2021, shifting to guidance we have now substantially last, the last pre COVID year over year comparison, and our guidance for strong second quarter revenue growth represents a career reflection of the strong performance we achieved throughout 2020. We're pleased to be able to provide the following Q2 and full year guidance for the second quarter of 2021.

We expect total revenues in the range of $231 million to $233 million representing a growth rate over the comparable prior year period, approximately 28% at the mid-point of the range we expected just to tee that off for the second quarter in the range of $80 million to $82 million, representing an adjusted the, but on margin of approximately 35% at the mid-point of the range for fiscal 2021, we are raising our expected revenue range.

The $1.017 billion to $1.019 billion up from $1.009 billion to $1.011 billion or approximately 21% year over year growth. At the mid-point of the range, we expect adjusted EBITDA in the range of $400 million to $402 million representing an adjusted, but margin of approximately 39.4% at the mid-point of the reign to conclude our strategy to mitigate the impact of the pandemic and grow the business has been working.

And we will continue to focus on providing world-class service chart, clients rapidly developing new technologies and increasing the number of new clients added to our platform. We have a strong balance sheet, a profitable recurring business model, and a long runway to deliver sustainable long-term revenue growth. With that, we will open the line for questions operator?

[Operator]

[Operator Instructions] your first question is from the line of I'm sorry if I mispronounce it Raimo Lenschow with Barclays.

[Raimo Lenschow, Barclays]

Hey, it it's very close. Thank you. He congrats on a great quarter and I'm sure you're looking forward to Q2. Chad, can you remind us because that's the question I get a lot from investors. How can the 12% growth in Q1 jump to like 28% in Q2? Because it comes, I can easily, like what's, what's maybe talk about the puts and takes that are driving it because that makes it really exciting. And then one for crack you mentioned it a cost efficiency efficiency in DNA. Can you just kind of elaborate a little bit on that one? Thank you.

[Chad Richison, President and Chief Executive Officer]

Yeah. Thanks. Raimo. So I guess first, I would say, as you know, Q1 is typically one of our largest quarters for revenue in any given calendar year, and that's because of our annualized revenue billings of forms, filings and adjustments that come in throughout the year, which has to do with you know, hiring and turnover trends throughout the year at different businesses.

Well, 2020 reacted differently than any other year since I've been doing this since 1998, in which the hiring trends were different. It wouldn't be a traditionally, you know, a restaurant that may have a hundred employees could easily do 300 W2's with forms filings. And what have you you know, they share that same restaurant may do 120 a W2. So we saw significant differences in hiring trends throughout 2020 than what we'd seen in the past. We did try to estimate what those would be.

Also as a reminder, this Q1, we are still lapping Q1 of a previous year that did not have COVID in it which made for a tougher comps. And, you know, as we move through out second quarter we've substantially lapped the pandemic. Now you did still have a recurring revenue still getting worse throughout the month of April. As we had mentioned that it, got to its worst point beginning in may and then started this stabilized, but we are excited about our next quarter guide.

You know, the guide that we're putting forth in Q2 of this year is the largest Q2 guide we've had since 2017 on a percentage basis for revenue growth. So, you know, you weren't you, you weren't necessarily wrong in your early take that you know, we're getting back on the right track or, you know, they're since civic alphabet, Arish, Tigan Sheena Mo as you might say, in your native language,

[Raimo Lenschow, Barclays]

That's very good. Yeah.

[Chad Richison, President and Chief Executive Officer]

Miners paying off my German miners paying off Prego, I'll answer your second one in England. His last name is bulky you know, in terms of the[indiscernible] the cost effective, you know, efficiencies, we're seeing, you know you know, as we're looking to hire additional people, you know those are primarily to be in other areas of our income statement. So, you know, we're continuing to hire aggressively in the R&D area, and then the you know, in the sales and marketing as well as in the operations area. So you know, we're just not going to see the same level of hiring in the, in the, on the G and nylon is what we would see in other areas of the business.

[Operator]

Your next question comes from the line of Samad Samana with Jefferies.

[Samad Samana, Jefferies]

Good, good afternoon. And thanks for taking my questions. Chad, maybe the first one for you on the booking side, you know, as you mentioned, we're starting to kind of a lap last year and you guys had a great 2020 would you say that one was one Q 2020 from a bookings perspective? You know, it wasn't a record compared to other quarters, maybe just help us further triangulate on, on the, in quarter new bookings performance, and then just a follow up question as well?

[Chad Richison, President and Chief Executive Officer]

Well, I mean, since obviously our bookings have been very strong. I mean, last year we did have a record bookings as well as we added a record. Well, that record new business revenues, as well as a record number of clients to our platform, which was an increase from prior years as we've returned to guidance, you know, we've gotten away from talking about bookings, obviously. Our bookings are very strong as what's reflected in our in our second quarter guide.

[Samad Samana, Jefferies]

Understood. And then maybe on Betty's, you mentioned a couple of customers have a, that it's already been rolled out to them. Could you maybe help us understand how pricing for that's working and maybe how pervasive that use of that looks like at those customers?

[Chad Richison, President and Chief Executive Officer]

Yeah, I mean, Betty's really an all or nothing type usage product. I mean, you do have to change your internal process in order to use Betty, because like we said, in the past, payrolls are traditionally started after pay period end and, and Betty contemplates all that happening at payroll beginning to where one's pay period ends, the payroll is done.

And so we have had clients already submit using Betty and their employees are actually able to use Betty as a matter of fact, one within the first hour of release we had like 65% employee approvals. And by the time of submission, they were over 85%. So, you know, employees are already engaging in it. We're getting feedback from employees that, you know, this is the first time I've really looked at my check and, and much less understood it.

So we're having a lot of positive there. We expect to put on you know, at least a hundred more clients in the next couple of months on Betty and then throughout the year we'll continue to convert all over. And what I mean by convert, it's not a conversion of data, it's more a conversion of, of their internal process and how you approach each payroll a little bit differently in our own environment.

We've gone from over 55 clicks or processes within a payroll down to three each person's experience is going to be differently depending on you, you know, whether you're doing commissions, bonuses, labor, distribution, job costing. So it is a little bit different for each company, but it does drive a lot of efficiencies. And as those payroll administrators submit a payroll, you know, they have a very high degree of confidence in the accuracies that have already been approved by those employees.

So it's going very well now, as far as billing Betty's, not Betty's not going to be billed unlike many of our other modules. It will be a per life per employee fee to use Betty. And then as we move throughout this year we'll continue to sell more and more clients on its value grant. And I apologize in advance for squeezing a third one in, but I'll break the rules here.

Any other changes we should expect with, with Holly's appointment in her new role and any other changes to either the go to market motion or, or the sales organization that we should they should, we should anticipate in conjunction with that. Well, I mean, we, we change as a sales organization every year. You know, we changed about three or four years ago to really focus on employee usage as an organization.

We focused on selling usage, we'd come out with the DDX. Then we came out with a manager on the go Nat. Now Betty. So obviously as we settle into this year, you know, there are some changes that we make to our selling motion, but that's not unlike what we've done in any given year. You know, Holly was you know, she was our first intern on the sales side. And actually she started interning for us when I was the sales manager.

So Holly has a deep knowledge of what we've been doing this entire time. She's helped us build the depth to now. And the reason why Holly was chosen is it allows us to continue to increase the drive that we have throughout our sales organization with a consistent leader you know, with also a consistent talk track that we've been driving throughout the sales organization for the last 20 years. So I wouldn't see any significant changes happening to the sales other than what we always have, which is a improvements on our strategies as we deliver more value to the client.

[Samad Samana, Jefferies]

Perfect. Thanks again for taking my questions. Thank you.

[Operator]

Your next question from the line of Baird with [indiscernible]

[Unidentified Analyst]

Great, thanks very much. Chad, the upside in the quarter, wasn't as robust as we've come to expect with you guys. Was there any sort of one or two items in the quarter that maybe weren't as strong W2's maybe a bit below original expectations or anything along those lines?

[Chad Richison, President and Chief Executive Officer]

Yeah, it's related to year-end services. I mean, our, you know, we have pretty good visibility quarter to quarter based off of our recurring revenue. And then, you know, what we believe we will be adding from a new client, a revenue perspective, you know, when you're looking at year-end, which as you guys have seen in the past are typically our largest step quarters because of those year-end service fees. You know, it gets harder to exactly you know, put an exact number on how those negative trends impacted us.

We did a pretty good job of estimating that, but and we don't necessarily guide to have a certain level of B we guide to what we can see and oftentimes with new business revenue that can be impacted you know, one way or the other. And as it relates to first quarter though we've always been heavy on annual forms, filings adjustments. And, and so, and also to note that, you know, it's not just our W2 forms you know, with us, we also have ACA forms at the Everett at the end of every year as well.

So I think we did a pretty good job estimating its impact. Obviously the fact that we continue to grow throughout the quarter and we'll coming out strong into Q2 reflects that we did have a strong adds throughout Q1 and coming out of Q4, but, you know, those, those numbers were impacted by our annual foams filing business.

[Unidentified Analyst]

Great. Thanks very much.

[Operator]

Your next question is from Milan [indiscernible]with Baird.

[Unidentified Analyst]

Hey, good afternoon. And thanks for taking my questions. I'm wondering, you know, the commentary with regards to what you're seeing in terms of the number of employees within the client base. You mentioned it wasn't much of a help in terms of the first quarter, but as you look through the quarter and going into March and then April and now going into may, are you, are you starting to see a rebuild and how should we think about the sensitivity in terms of if there's a one in a 1% increase in terms of the number of employees, how does that translate to revenue? Broadly speaking?

[Chad Richison, President and Chief Executive Officer]

Yeah, I mean, well, we'd like to think, you know, 1% equals 1%, but that 1% has to happen you know, across our client base that we serve, which is less than 5% of the total addressable market. And so you know, as in answer to your question, as far as those clients that were mostly impacted by the pandemic that we said really hit its worst for us in may, and then started to stabilize for us, we haven't seen any meaningful changes in those, in those same clients.

So, you know, as we move forward, I don't know that that number becomes an important bellwether for us. As far as that you know, $1.85 million to $2 million impact that we see from the recurring revenue negative impact from those clients. So I don't know that it's a part of our story moving forward. Obviously we would hope that those clients are able to hire back and that they are able to come out of it in the same situation that they entered into it. But we'll have to say again, we're not seeing any we're not seeing any meaningful improvement in those, in those numbers.

[Unidentified Analyst]

Okay. is that because of certain industries, Chad, or, I mean, when you take a look at the overall employment numbers broadly speaking, it's it does seem like, you know, sequentially on a seasonally adjusted basis. Things are improving broadly speaking, and we'll, we'll get the April report here in, in, in a few days. Is it just certain industries or what would be the reason why we wouldn't start seeing some of the national trends come down to, to the Paycom client base?

[Chad Richison, President and Chief Executive Officer]

Well, I mean, our comments, weren't really a wholesale about you know the United States, as much as it is about these particular clients that work with us and you know, were working with us prior to the pandemic. They, you know, that we that, that they had to layoffs in different hiring trends throughout the year. You know, a lot of them may have been kept afloat with the PPP. That's been out there. And what have you, but we're not, we haven't seen any significant movement with that group.

Like I said, I do believe that people took their hits early, as it related to many of our clients. They may not be as quick to add people back potentially some may have become a little bit more efficient and, you know there may be some out there that are you know struggling, but again, we've been focused on adding new business to our pipeline. So and focused on and focused on those. So all that's to say it's been stable with that group. And I don't know if or when the trends would impact that group because I believe it's going to be more of a client by client impact.

[Operator]

You. Our next question is from the line of Daniel Jester with Citi.

[Daniel Jester, Citi]

Pretty great. Yeah. Thanks for taking my question kind of along the same line, Chad, I mean, I think many would project that we're going to see some historic levels of hiring here in the U S in the next couple of quarters. So, you know, you've been through macro up cycles in the past, so maybe you can just remind us how does sort of the HR, either the buying cycle or sort of the sending intention, how does that evolve as we get into a really brisk hiring environment? Do you see HR officers trying to get ahead of that? Or is there a bit of paralysis because they're focused on in the business and maybe don't want to make a change on their payroll module when the outlook looks so bright?

[Chad Richison, President and Chief Executive Officer]

Yeah, I mean, I think, you know, we're in a business where we make those departments more efficient. And so to the fact that you need to go hire many people you know, using our on-boarding product, using our applicant tracking or talent acquisition product, or using our background checks products that we have out there. I mean, I think that we can aid people in that.

So I also think you're really seeing a shift toward the employee user. You know, I don't know that four years ago you could even point to many employee users, especially in the mid market. And today that's really becoming the standard. And so I think there are a lot of business that are focused on leveraging employee usage trends of what they use in their daily lives, working with consumer products. I think there's a lot of businesses looking to leverage that, to create value for themselves.

So as businesses come back and I'm not saying that we're not seeing positive hiring trends, my comments are related to those clients that represented the $1.85 million to $2 million weekly impact. We're not seeing those numbers moved dramatically. Are we seeing impacts of businesses starting to come back and, and hotels starting to hire more and in what have you, we're seeing some of that. And where we can see that is in our talent acquisition is more requisitions as our open AR is in our background check.

So I do think things are getting better, but the question was more related to how are those clients that were impacted those clients that we said had that monthly negative rate, or excuse me, monthly, weekly negative revenue impact of $1.9 million to $2 million. I think about a quarter or so ago, we called that it may have improved to a hundred thousand a weekish?

It kind of fluctuated week to week. And then now we've said you know, we haven't seen any substantial or meaningful change from that which would be accurate as we sit here today, but we are bullish about you know, employee trends beginning to get better for us. It's never something that we've been able to focus on you know layer hat on that or bet the farm on that.

You know, you've got to really do the work and what we are doing. We are going out and we are selling businesses right now. And, you know, if they have 415 employees, then, then we're selling them at that and we're bringing them on now, maybe they grow, maybe they don't, but, but we've just been focused on adding new business into onto our platform and that's worked well for us.

[Daniel Jester, Citi]

Great. Thank you. And then just on Betty quickly you know, now that you've announced that, and you're starting to get some customers on it, are you seeing some of your other customers kind of get more with some of the modules that they need to be able to use that? So are you seeing more engagement on manager on the management of go, are you seeing more engagement on DDX as customers get ready to use Betty in the future?

[Chad Richison, President and Chief Executive Officer]

Yeah, me and him, both manager on the go and DDX are at the highest level of usage, no matter how you measure it. So you know, and I'm talking about at the highest level of usage right now, and so that's been getting better and better as we've gone you know, throughout the, I'd say, I think we've had the DDX for the last 18, 19 months.

We've had manager on the go now for well over a year. And so we continue to see those trends take up now, is that in the anticipation for bedding or is that because of the value someone's receiving by using those things independently, whether you're setting up for Betty or not? I would say it's, it's probably the latter but the fact that it's happening will set us up very well for Betty. And I do believe that as people look and see the value that Betty's going to deliver for both the business, as well as the employees, I think you're going to even have more usage around the DDX and manager on the go from a best practice perspective.

[Operator]

You were next the question is from the line of Brian Schwartz with Oppenheimer.

[Brian Schwartz, Oppenheimer]

Yeah. Hi, thanks for taking my questions this afternoon. Chad, one question for you and then a follow up for Craig for you. I'm a new business that was coming in the quarter. Can you share any color in regards to the linearity on how that business came in? Seemed like there was a possibly a different operating environment when we started in January versus kind of the end of the quarter. And then I have a follow-up for Craig.

[Chad Richison, President and Chief Executive Officer]

Yeah, no, I wouldn't say there's been any meaningful difference in how we've brought in our revenue. The first quarter, this year, then how we had done then how we'd brought in revenue. In first quarter of subsequent years, you know, you're going to typically have your greatest number of starts you know, in the first part of that as people look to start fresh at the beginning of a year, of course, in first quarter, you're your quarter to date near due dates are the same. So anytime in the first quarters you know, not a bad time to convert and what have you, but now I wouldn't say that we'd seen trends meaningful meaningfully different than what we'd seen in the past, as far as when someone chooses to start in the quarter

[Brian Schwartz, Oppenheimer]

Thanks for that. And then Craig one follow-up I just have on the guidance, maybe a underlying, the annual guidance. I remember last quarter when you reinstated the annual guidance, you know, you set a target out there for rule of six day and at that time that guidance had assumed no, a macro recovery and you know, raising your guidance here today, still targeting that rule of 60 for this year, but I'm just wondering if there's any change in terms of your view on that timing behind a macro recovery, or if it still assumes no big macro recovery this year?

[Craig Boelte, Chief Financial Officer]

Thanks. Yeah. I mean, Our annual guidance still assumes no macro recovery at this time. So consistent with how we you know, got it last year as well.

[Operator]

Your next question is from the line of Robert Simmons with RBC.

[Robert Simmons, RBC]

Hi, thanks for taking the question. Can you talk to what you're seeing in terms of return to office and return to in person selling and also then what the expense and Margaret, the patients of that are or could be?

[Chad Richison, President and Chief Executive Officer]

Yeah. So is that question as it relates to us or our clients from a return to office?

[Robert Simmons, RBC]

Mostly for you, but, you know, whatever you're saying.

[Chad Richison, President and Chief Executive Officer]

Yeah. You know, well, first I'd say it's very regional and you know, return to office strategies depending on where you're located for us internally we've, we've continued to be work from home. For most everybody we have put out a return to office plan for our employees beginning with the supervisors in certain leaders coming in June. We will then have the team leaders start to come back in, in July, and then we will start alternating in our general population throughout the month of August in hopes of being back to the office Full-Time in September.

Now when you're talking about ourselves opportunities, as far as going to meet with clients, we're going to continue to meet clients where they live. You may have some clients that are wanting us to come in. You may have some parts of our sales process and our steps of certain cells that continue to stay in more of a hybrid model. And then I would see us going in person for others, but I wouldn't say that we're back at that level or anywhere close.

Yet in fact, we don't have any sales person that's gone out and, and called on a purse, a business in person yet. So we're kind of waiting to see how that develops. I would say we're hopeful. But I think that's something that's going to just kind of happen you know, throughout these next couple of quarters. And we'll just kind of see what happens. You know, the expense related to a kind of return to, to office. You know, we wouldn't see that as significant increasing costs. No we're already maintaining the buildings and, and all of those things. So even on the travel side, we wouldn't see it as a significant uptake in any of that's been already baked into our guidance.

[Robert Simmons, RBC]

Correct. Thank you very much.

[Operator]

Your question is from the line of Ryan McDonald with the Needham and company.

[Josh, Needham]

Josh in for Ryan. Just one question for me. If you look at platform usage pre-COVID versus today, do you think clients are deepening their understanding of productivity and how software can affect their workflows that previously, maybe they didn't understand in the same way versus managing their operations. And then do you think this results in a permanent shift of customers buying more models upfront as we exit the pandemic? Or could there be some reversion to pretend mimic trends?

[Chad Richison, President and Chief Executive Officer]

I mean, it would be hard to think that we're going to go backwards in technology. It doesn't usually happen that way once you've you know, once you've made that jump. So I wouldn't think that we're going backwards right. Shift and customers buying more modules upfront as we exit the pandemic, or could there be some reversion to pretend them it trends.

I mean, it would be hard to think that we're going to go backwards in technology. It doesn't usually happen that way once you've you know, once you've made that jump. So I wouldn't think that we're going backwards as far as your question about, you know, I do believe that the farther an employee of the way, maybe the more metrics you may have to look at you know, the harder an employee is to touch the more metrics you're left with that you really need to manage. And so I do think being able to engage with employees through technology makes it both easier for the employee, as well as for the business to kind of really share in the same transparency there.

So I don't see us going backwards in regards to that, plus I really it's something that was happening anyway. I mean, it wasn't that the pandemic created these opportunities. I think the pandemic more sealed the fate of the old way. In fact, we were already seeing trends with employees that are used to using consumer-based technology to, you know, do banking get a plane ticket, order, a coffee, and then they came to work and it was 1992 through email. And what have you.

So we were already seeing the trends of that usage happening. I think the pandemic just provided a stronger proof source for the reason for that. It probably accelerated that for some people that, that I don't see us going backwards in that because it was right before the pandemic and the pandemic just you know, produced another proof source for reasons why it's important to be employees to have a direct relationship with the database.

[Operator]

Your our next question is from the line of [indiscernible] Penny Gray with Mizuho

[Ami Mehta, Mizuho]

Yeah, it's actually Ami Mehta on [indiscernible] behalf. Congrats on the strong print. I've heard the questions about guidance that I'd want to phrase mine a little bit differently. It looks like the magnitude of the two Q guide and the magnitude of the annual year, the full year guide implies some, some strength in the back half of the year. I know you can only comment on what you see for sure right now, but I'd love to get your insight on how to disentangle the magnitude of the two Q guide and that of the annual guide anything you're seeing in the second half of the year specifically would be helpful.

[Chad Richison, President and Chief Executive Officer]

Yeah, so we we've always guided to what we can say. You know, we have not changed that approach, as we'd said to Q2 is our highest guide that we've had since 2017, you know, as we sit here today, I really don't know deals that are starting in October. But I know as we moved about this quarter and especially as we move throughout you know, future into the future quarters that, you know, we'll, we'll see more and more revenue than that, that we're on-boarding. That's, that's what I would say as well as, you know what I mean, w you know, we, we look as we set up our guide, we got to what we can see and, you know for the back half, you know, we'll continue to take a look and data as appropriate

[Ami Mehta, Mizuho]

And on the, the sales office side of it, I know there's been some commentary around or returned to the office. I'm curious about your plans for sales office openings this calendar year. Is there any light that could be shed there?

[Chad Richison, President and Chief Executive Officer]

You know, it's still part of our strategy opening sales offices, and, you know, we're going to continue to do that as it, as it makes sense, as we talked about during the pandemic, you know, every office was substantially open because our people could really sell a prospect anywhere prior to the pandemic.

You know, it was all in person. So if we needed to if we wanted to sell a deal in Las Vegas, we don't have an office in Las Vegas. We had to, we had to fly someone there and go there in person during the pandemic. We were able to do that virtually and so you know, as we shift back there will be offices that will be looking to open. And then, you know, we'll have to do it in the right time as well, because I'm not a hundred percent sure when we will be going to full in office selling again, if ever from that perspective, as it relates to the mid market.

I'm talking about where every appointment's in person. I mean, before, if we had five appointments with the prospect, every one of them were in person, I'm not a hundred percent sure that's going to be the case on a go-forward basis. And that's not something we're trying to force. That's something where we're going to meet the prospects, where, where they live in a way that produces you know, a successful communication for both for both us and the prospect.

[Operator]

Your next question is from the line of Bryan Bergin with Cowen.

[Bryan Bergin, Cowen]

I thank you. I want to ask a question around clients, switching behaviors. So it wasn't common providers have talked about our retention benefits that that tends to be partly supported by a reluctance to switch here from the pandemic concern and some of the PTP reporting apartments. I just sales team see any of that behavior in the pipeline. And if you consider that an incremental opportunity if things normalize we'll?

[Chad Richison, President and Chief Executive Officer]

Our retention is directly reflected with usage. In fact, someone gave me a retention report the other day, and I thought it was a usage report because the trends are almost the exact same you know, you watch, you watch your usage go up, you watch retention go up. And so that's really what we've been seeing as a, as a reflection of, of strong retention. It's about usage you know, are there out there that make it to where somebody is less likely to switch, I don't think so. I mean, you, you're going to become more efficient if you switched to us with a very strong value proposition, your employees are going to like it more and we're going to create even more value.

So I don't really think waiting. It's a good opportunity to wait on that. So we've been focused on driving revenue prior to the pandemic. We've been focused driving it during the pandemic and, you know, once the pandemic ends, I mean, it's not my job to say when that happens. But once the pandemic's over, I would expect us to continue to have a strong sales, regardless of, of what's out there as far as trends one way or the other with software because of the efficiencies that we're driving and the dramatic difference in experience that a client is going to have using our product today than what they would have, you know, four or five years ago.

[Bryan Bergin, Cowen]

Okay. And then just, Are you seeing any different behavior in what modules existing clients are attaching as, as the economies reopening here, we're seeing new clients take on more at the point of purchase?

[Chad Richison, President and Chief Executive Officer]

The background checks are doing better than they've done in the past or than they did last year, because you're having a, you know, more people hire, you know, when I talk about hiring trends and improvement, I'm talking about those businesses that we had pre-pandemic that were hit. I'm not talking about all the new businesses that we've added since or businesses that weren't hit negatively by the pandemic last year.

So I want to be able to separate the two of those when I'm talking about hiring trends, where we're not seeing improvement, I'm talking about those clients that were most impacted by the pandemic last year, and they're in the industries, you would think they would be in. But we still do see positive trends happening across the board with more people you know, doing background checks, doing on-boarding today more so than they were doing last year, but we're still not back you know, to where we were pre-pandemic.

[Operator]

Your next question is from the line of Josh Beck with KeyBank.

[Josh Beck, KeyBanc]

Thank you for taking the question. Chad, you made a pretty specific comment about bevy becoming the standard for payroll and 12 to 18 months. So I'm just curious what you mean by that would love to hear a little more on that topic.

[Chad Richison, President and Chief Executive Officer]

I think all of our clients will be using Betty within the next 12 to 18 months.

[Josh Beck, KeyBanc]

Okay that definitely clarifies it. What about with respect to marketing and advertising? How have you changed maybe the, the composition, the channels versus say pre pandemic? Is there any notable differences in how you want to invest across those areas?

[Chad Richison, President and Chief Executive Officer]

Yeah. Well, I would just say we've gotten better at it. You know, you, as you continue to spend on it. And again, we measure this week after week, week over week based off the number of leads that we get. And so, you know, sometimes some weeks leads are generated in areas maybe a little bit stronger areas one week then than what we may see in the next week meaning that you may have more come in digitally one week and the next week could be delivered through what we're doing from a targeted marketing perspective where we already know who you are, we're targeting you. All of that's a part of our marketing strategy. We're not just putting ads on TV and seeing who's calling us you know, we have we have many legs to our marketing department and as well as to our marketing strategy.

And so it's continued to evolve and we continue, but we've continued to measure it the same way. I mean, our, a successful marketing campaign delivers demo leads for us. Those are companies that request a demo. We have leads that aren't demo leads of someone that may go in and download white papers, or, you know, they're interested, but they have not yet requested a demo from a demo lead perspective. We're still setting appointments with over 90% of those as they come in. So they're very strong leads for us, and we've been having a lot of success.

[Operator]

Your next question is in the line of Arvind Ramnani with Piper Sandler

[Arvind Ramnani, Piper Sandler]

Hi, thanks for taking my congrats on a good quarter. Now just want to go back to this topic of Betty. You know, you certainly provided a lot of color on Betty and it seems that it's getting really good traction. And, and I know it's very different than DDX but, but can you kind of help frame how impactful that is as it pertains to the win rates? I know DDX had like a big impact on, on win rates. And you know, I'm just trying to get an understanding of the business model impact on bitty?

[Chad Richison, President and Chief Executive Officer]

Yeah, I mean well, Betty is a unique product that comes with a unique strategy and that is about having employees being able to visualize what their checks are, what the check is going to be what components impact their check to where they're able to visualize and participate in that throughout the pay period and then it paid period end you know, they're able to approve that that check is correct. And what that does is it eliminates manuals, voids, adjustments, all the things that payroll departments and accounting departments traditionally have to do after the fact, once they found out that that check wasn't exact didn't exactly include everything that it should have for that employee.

And so by moving the process up to the beginning of the pay period versus at the end of the pay period you know, it's going to change the way people do that, that payroll, as far as the win rate, do I think it's going to impact our win rates? Absolutely. once people really start using it, you know, the DDX we came out with it started impacting our retention not long after we came out with it and, and manager on the go, I would say is a similar product as that.

And all of that got more and more people engaged employees, again, engaged in our software, interacting with the database on their own, and the more people that interact with the database on their own, the more accurate the data is, the more confirmation that you have, that the data is accurate and it produces less liability and exposure for the businesses that deploy it. So I see that continuing with us as we move forward. And I do think it's going to impact both our we're in win rates and our retention positively as it becomes prevalent within our platform.

[Arvind Ramnani, Piper Sandler]

Right.

[Operator]

Last question is from the line of Alex Zukin with Wolfe Research.

[Alex Zukin, Wolfe Research]

Hey, there, this is Alan on south street question. No, we only get client counts on a quarterly basis. Like, can you talk about the momentum? You're seeing upmarket that is driving improvement and up rules per client, and I've got one follow up.

[Chad Richison, President and Chief Executive Officer]

Yeah, we've continued to have success. You know, we, we really started rolling out an inside sales group. I wouldn't say we had five or so people for several years. And then about two years ago, we started building out that group, as we've done that, we've obviously seen more deals below our target market. And we've continued to see a deals above our target market.

Even as we rolled through last year, I was even a little bit surprised that our average billings per client wasn't down a little bit when you looked at the growth that we had in client units. So, but it was pretty much the same which just shows the fact that yes, we are continuing to add small business clients, but they're also being bookended with the large business that we continue to bring on as we'll.

[Operator]

And that does conclude the question and answer session. I would like to turn the call over to Chad Richison for closing remarks.

[Chad Richison, President and Chief Executive Officer]

All right. I want to thank everyone for joining us on the call to today. I'd like to send a special thanks to all the employees at Paycom for their commitment and patience throughout the pandemic. Over two thirds of our staff are either fully vaccinated or in the process, as I've stated in the past. I do believe that getting vaccinated saves lives, maybe your own, the likely loved ones. And as from an investor outreach front this quarter, we'll be presenting at the Cowen technology conference on June 1st and at the bear global consumer technology and services conference on June 10th Paycom loss to also be hosting one-on-one meetings in may and in June at the Needham, JP Morgan and steeple conferences. We look forward to speaking with many of you very soon, and I appreciate your continued interest in Paycom. I thank you, operator. You may disconnect.

[Operator]

Thank you. That does conclude today's conference. Thank you for participating. You may now disconnect.