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Paycom Software Inc
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Good afternoon, and welcome to the Paycom Software Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Paycom's CFO, Craig Boelte. Please go ahead.
Thank you, and good afternoon. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements way have made or make in this presentation are reasonable, actual results could differ materially because the statements are based on our current expectations and are subject to risks and uncertainties.
These risks and uncertainties are discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statements may 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 the course of today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin and certain adjusted expenses. 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, which is available on our website at investors.paycom.com.
I would now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad?
Thanks, Craig and thank you to everyone joining our call today. I will spend a few minutes on the highlights of our fourth quarter 2018 results, review some of our notable achievements in 2018, and also discuss our goals for 2019. Following that, Craig will review our financials and then we will take questions.
2018 was a stellar year for Paycom with many achievements as we enhanced our offering, grew our team and continued to fulfill our mission to be the premier human capital management software provider to companies across the U.S.
We are making major shifts to drive innovation in our industry. I want to thank all of our employees who have become pioneers in this initiative. I believe we will look back on 2018 and realize that this year was just the beginning of a new way businesses and their employees leverage HCM technology to drive efficiencies and create deeper relationships with their staff.
We finished the year with very impressive results. Our 2018 fourth quarter revenue of $150.3 million represented growth of 32% over the comparable prior year period. Our full year 2018 revenue of $566.3 million grew 31% compared to 2017.
Our full year 2018 adjusted EBITDA was $240.9 million, representing an adjusted EBITDA margin of 43%. Our success allowed us to return value to our stockholders by repurchasing over 500,000 shares in the fourth quarter of 2018. With this combination of revenue growth and margin, we achieved the rule of 70, and this places Paycom in a very small group of companies with this profile.
We believe this strong performance is due at least, in part, to our strategy of working to promote employee usage of the Paycom system. We are educating our current and prospective clients about the benefits they can obtain when their employees have a direct relationship with the HR database.
This is a powerful message that resonates across every industry and within an entire organization from the C-suite to entry-level employees. We will continue to pursue this strategy in 2019, and are excited about the value we are helping create for our clients.
As we continue to drive employee usage of our software, we are providing our clients not only world-class technology but also, strategies to help their employees fully realize the value of our application. We have found that when an organizations employees have a direct relationship with the database, it creates significant efficiencies, which can result in a direct impact to our client's bottom line.
In fact, a recent study by Ernst & Young shows, on average, a single HR task or data entry point without self-service, costs an organization $4.39 to complete. If you think about that across the entire employment life cycle, the opportunities for cost savings for employers are substantial. This study examined tasks across the entire HR spectrum and identified many potential areas for cost savings that can be obtained with self-service technology.
These findings underscore our value proposition and imply that companies will continue to embrace HR technology to create efficiencies and drive enterprise value. We believe that Paycom solution is the best option to enable companies to achieve this goal.
I'm also pleased to share that our retention rate for 2018 increased to 92%. This rate had been steady at 91% for the prior six years. We believe this improvement was also helped at the margin by our employee-usage strategy. We're excited and gratified by this progress.
Looking at other areas of achievement in 2018, we opened four new sales offices, Salt Lake City, Rochester, Columbus and San Diego. This brings us to 49 [ph] teams. Our newer offices have been performing well per our expectations. As we look to 2019, we plan to open additional sales offices and look forward to sharing that news with you soon.
As of December 31, 2018, our headcount stood at 3,050 employees, as we have hired people across our organization to help build the foundation for our future growth. Recently, we welcome new personnel to bolster our existing management team in areas of learning and development, finance, marketing and core operations.
These individuals bring years of valuable experience and have worked for companies like Ernst & Young consulting, Procter & Gamble, ConAgra brands, PepsiCo, IBM and PricewaterhouseCoopers, just to name a few. We are eager to utilize their talents to help further our momentum.
Turning to other areas of expansion, we are excited to announce that we will soon break ground on our Texas operation center in Grapevine, Texas. Late last year, we finalized our agreement with the city of Grapevine, which includes a $5 million tax incentive. We anticipate we will break ground on this new project in the first half of 2019, and that it should take 18 to 24 months to complete. We expect this 14-acre campus will eventually house 1,000 jobs.
Paycom received national recognition from several organizations in 2018. In the fourth quarter, we earned three additional accolades. For the sixth consecutive year, we earned Top Workplace in Oklahoma Honors, and Glassdoor recognized us as one of the best places to work among large-sized U.S. companies in 2019. Both of these top workplace awards are extremely rewarding and a testament to the culture we continue to develop and grow.
Additionally, Paycom made Deloitte & Touche Technology Fast 500 list, a list of 500 fastest-growing technology, media telecommunication, life science and energy tech companies in North America.
Lastly, I want to congratulate the 2018 Paycom Jim Thorpe Award winner, Deandre Baker, from the University of Georgia. This award recognizes the most outstanding [indiscernible] back in college football and memorializes one of the greatest athletes in Jim Thorpe, who also happens to be an Oklahoman. Deandre showed true grit and determination throughout his collegiate career, and we're proud that we are able to honor his achievement. To sum up, 2018 was a banner year for Paycom, and we're excited to make 2019 another year of success.
With that, I'll turn the call over to Craig for review of our financials and guidance. Craig?
Before I review our fourth quarter results for 2018 and also our outlook for the first quarter and full year 2019, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. Also, we adopted the new revenue recognition standard ASC 606 on January 1, 2018, utilizing the full retrospective method of transition, which required us to recast the prior periods presented.
Our comparisons discussed in today's call reflect those adjustments. We use adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin and certain adjusted expenses as supplemental measures to review and assess our performance and for planning purposes.
Adjusted EBITDA and non-GAAP net income or non-GAAP financial measures that exclude non-cash stock-based compensation expense and certain other expenses that are not core to our operations.
Non-GAAP net income also reflects adjustments for the effective income taxes. Adjusted gross profit is defined as gross profit plus applicable of non-cash stock-based compensation expense, and adjusted gross margin reflects adjusted gross profit as a percentage of revenues.
The adjusted expenses we discussed reflect the GAAP expense amounts, less non-cash stock-based compensation expense. Reconciliations of GAAP to non-GAAP measures discussed today are included in the earnings press release issued earlier this afternoon.
As Chad mentioned, we are pleased with our fourth quarter results with total revenues of $150.3 million, representing accelerated growth of 32% over the comparable prior year period. Our full year 2018 revenue was $566.3 million, representing growth of 31% compared to 2017.
Our growth - revenue growth continues to be primarily driven by new business wins. Within total revenues, recurring revenue was $147.9 million for the fourth quarter of 2018, representing 98% of total revenues for the quarter and growing 32% from the comparable prior year period.
Total adjusted gross profit for the fourth quarter was $126.7 million, representing an adjusted gross margin of 84%. For the full year 2018, our adjusted gross margin was 85%. For 2019, we are increasing our target adjusted gross margin range to 83% to 85%.
Total adjusted administrative expenses were $78.3 million for the quarter as compared to $52.8 million in the fourth quarter of 2017. Adjusted sales and marketing expense for the fourth quarter of 2018 was $40.5 million.
Adjusted R&D expense was $12.5 million in the fourth quarter of 2018 or 8% of total revenues. Total adjusted R&D cost, including the capitalized portion, were $17.7 million in the fourth quarter of 2018 compared to $11.1 million in the prior year period.
Total adjusted R&D costs for the full year 2018, including the capitalized portion were $61.5 million or 10.9% of total revenues. Adjusted EBIT double $57.5 million in the fourth quarter of 2018 compared to $48.4 million in the fourth quarter of 2017.
For the full year 2018, adjusted EBITDA was $240.9 million or 43% of total revenues compared to $185.7 million or 43% of total revenues in 2017. Our GAAP net income for the fourth quarter was $31.4 million or $0.54 per diluted share based on approximately 58 million shares versus $48.9 million or $0.83 per diluted share based on approximately 59 million shares in the prior year period.
Our effective income tax rate for the fourth quarter of 2018 was 26.4%. For the full year 2018, our GAAP net income was $137.1 million or $2.34 per diluted share.
I will highlight that due to the remeasurement of our deferred tax liabilities associated with the Tax Act in December 2017, we recognized a benefit to our provision in the fourth quarter of 2017 of approximately $24.9 million or $0.42 per diluted share after the effect of adjustments for ASC 606.
Non-GAAP net income for the fourth quarter of 2018 was $35.4 million or $0.61 per diluted share based on approximately 58 million shares versus $53.2 million or $0.90 per diluted share based on approximately 59 million shares in the prior year period.
We expect non-cash stock-based compensation for the first quarter of 2019 to be approximately $21 million. For the full year, we anticipate non-cash stock-based compensation would be approximately $47 million.
For 2019, we anticipate our full year effective income tax rate to be 23% to 25% on a GAAP basis. On a non-GAAP basis, we anticipate our full year effective income tax rate to be 25% to 27%.
We have returned value to our stockholders in the form of over 1.1 million shares repurchased over the course of 2018, including over 900,000 shares purchased in the open market.
In the fourth quarter, we purchased - we repurchased over 500,000 shares. We anticipate fully diluted shares outstanding will be approximately 59 million shares in the first quarter of 2019.
Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $45.7 million, and total debt of $34.4 million. As a reminder, this debt represents a financing of construction at our corporate headquarters.
Cash from operations was $39 million for the fourth quarter, reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately $1 billion in the fourth quarter of 2018.
Now let me turn to guidance for the first quarter and full year for fiscal 2019. For the first quarter of 2019, we expect total revenues in the range of $194 million to $196 million, representing a growth rate over the comparable prior year period of approximately 27% at the midpoint of the range.
We expect adjusted EBITDA for the first quarter in the range of $97 million to $99 million, representing an adjusted EBITDA margin of approximately 50% at the midpoint of the range. For fiscal 2019, we expect revenue in the range of $710 million to $712 million, or approximately 26% year-over-year growth at the midpoint of the range.
We expect adjusted EBITDA in the range of $288 million to $290 million, representing an adjusted EBITDA margin of approximately 41% at the midpoint of the range.
With that, we will open the line for questions. Operator?
[Operator Instructions] The first question comes from Raimo Lenschow with Barclays. Please go ahead.
Hey. Thanks for taking my question. And congrats on a great finished to the year, guys. Can I start with the retention rate? So you moved up to 92, which is kind of like a big move for you. Can you talk a little bit about the drivers? Is it a new strategy already to focus on usage? Is it kind of you moving up a little bit higher in the market and you have better retention there? Can you talk to that, Chad?
Sure. So Raimo, HR has been in the middle of the data transfer process between the employee and the database, out of necessity, due to lack of technology. And no, it's no longer necessary for HR to be in the middle of the data collection process. And we've been focused on driving that change in the industry and demonstrating meaningful returns and value for our clients.
And so the focus that we had on that last year also coincided with the release of our app, as we redeveloped our desktop version to have a mobile first-view. And we focused on not only usage but usage mandates. We believe that like Paycom, when our clients mandate usage to the employee, it drives the return on that investment. And so I do believe that as we've seen employee usage increase and we've been able to deliver more value to our clients, they have stayed with us.
And then, the follow-up like, so if I look at the Grapevine expansion that's come pretty meaningful, it's like, if you think of 1,000 people versus 3,000 you have so far. Can you talk a little bit about what you want to do there and why it is so important?
Well, Raimo, I mean, we've always had a presence in the Dallas area. We have an operation center where we actually process out of that center. We also have a group of developers in Dallas as well.
So the main thing is we're consolidating those facilities as well as continuing to expand in the Grapevine area, and there is a great pool of talent in the Dallas area.
Yes, okay. And the last question is, in the last quarter, you talked a little bit about that you now kind of allowing your salespeople to maybe kind of go high up the market from the 3,000 that you have kind of as your natural limit before. Can you talk a little bit about what you see there so far? Is that - is my question a little bit too early? Or can you see any kind of changes there already? Thank you.
Well, what I would answer that is, we were already seeing great success in that market. And as you know, reps had already been allowed to market to those clients. It's just that Paycom's marketing efforts weren't directed to those clients.
We've had a lot of success in that market and actually, we're having success above that market right now. And so I would see us continuing to deliver solutions to that market as well as we move throughout 2019.
Perfect. Thank you, congrats.
Thank you.
The next question comes from Samad Samana with Jefferies. Please go ahead.
Hi. Thanks for taking the question. This is Anu [ph] on for Samad. A couple of questions, if I may. First of all, the outperformance we saw this quarter and in the guide, how much of that do you think is based on the upmarket business versus the SMBs? Is one doing better than - versus the other, what's your expectations?
That's fairly granular to be able to get into that specifically. I would tell you that our quarter hasn't reacted differently from quarter to quarter as far as the mix of business that we bring in. We have continued to creep up into the upper market, not disclosed that every quarter.
So I would say that the overachievement that we had in fourth quarter was really attributed to the new client wins that we were able to onboard throughout the quarter, which would include deals and some above our stated range.
Okay. And I guess, the second one was around your new marketing campaign that you did. Your 1Q guide was strong. It was strong in margins too. So how much of the impact do you think has carried over from that campaign into your 1Q guide? Then, I just have one follow-up after that.
We're still evaluating the impact of that campaign. I mean, in general, we're happy with it. I can't - I don't know that I can even point to one revenue dollar that was achieved in 2018 that was generated through that campaign.
But I do believe it's provided us some help, as again, we're marketing a new way to do something and transforming the way employees use HCM technology. And so I do believe, it's going to provide us some help as we move throughout this year.
Okay. And just to follow up on that, so I guess, depending on what you kind of discover about these campaigns, should we expect like similar campaigns of similar size in 2019? And have you just built such campaigns into your forecast? And that's it for me.
To the extent, we have planned campaigns, which we have planned campaigns throughout 2019, they're currently baked into our guidance.
Okay. Thanks for answering the questions.
The next question comes from Mark Marcon with R.W. Baird. Please go ahead.
Hey, good afternoon. And congratulations, its great year. Can you talk a little bit about - the revenue growth is primarily a source of new wins. Can you give us a little bit of a sense in terms of like client count or should - do we have to wait for the 10-K for that?
And then, average client size, how is that trending? And did I hear you right, Chad, in terms of the - you had some wins in the fourth quarter that are above the stated range, and I'm assuming you mean, the stated new range or the stated old range?
Yes, that's correct. We continue to sell both in the stated new range as well as above the stated new range. I mean, I went to our sales meeting a week ago last Friday, and they had sold two deals about 5,000 employees.
So we've made it easier for these businesses to buy as our products become easier to both implement and use all the way up to the employee. And so I don't know. Hopefully, that answers that question. As far as the client count, Craig's got those numbers right now.
Yes, Mark, so the client count based on fed ID is 23,533. And then, based on parent company group is 12,754.
Great. And then, can you talk a little bit about module sales, average client sale now in terms of how many additional modules you're selling and how we should think about pricing?
Yes, we haven't made any changes to our pricing structure. As far as module selling, I mean, I've said it continuously on past calls that we've always been good at selling modules. It's getting clients to use the modules we're selling to help drive value and return on investment to themselves that I would say, like the rest of our industry, we were a little light on.
And so we've really focused on getting the clients to use the products that we've already sold them. And then, of course, as we bring on new clients, usages are focused from the beginning.
And so last year, we really made a shift in that. I would say, 2017, as I talked before, was a year that I'm not going to use the term necessarily struggling, but we were shifting our entire organization toward a specific strategy. And 2018, we got to reap the benefits of that strategy in being right. I've said before, we might be early, but we're not wrong with the strategy.
And I do believe that right now, that as we look two years out, one year out, what have you, I don't believe you're going to have a lot of employees e-mailing, making phone calls and what have you, so the data can be input into the database. And so we're going to continue focus on bringing that to the market.
That's great. And one last one, if I could. Just with regards to the margin guidance, the EBITDA margin guidance for this year, how should we think about longer term under 606, how the margin structure should flow? Obviously, you're doing best-in-class already, but how should we think about that longer term?
Yes, I would tell you, right now, that we're very focused on growth. But as a person that started the company with an SBA loan and 13 credit cards, I mean, I've said before that old habits die hard, and we're not looking - I don't feel like we have a burning need to spend cash that we're able to generate.
But if something does make sense for us - in the future for us to do something in order to goose the revenue growth, then I think those are things that we would look at. I can tell you as we've planned out 2019, I feel really good about what our strategy is for that, and that's why guidance is where it's at right now.
That's great. Congrats.
The next question comes from Brad Zelnick with Credit Suisse. Please go ahead.
Hi. It's Bhavin [ph] and on for Brad. Chad, can you just quickly give us an update on what's driving some of the improved productivity within your existing offices? Has there been any meaningful change in go-to-market strategy or changes in the competitive landscape?
We've continued to work on driving sales the enhancements and being able to generate greater returns off of both of our sales staff, as well as for any one team. I can tell you what I believe is driving our results right now is product strategy. If you guys have been following me for a while, I've, kind of, always said the best salesperson wins the deal, that doesn't necessarily mean the best solution does.
I believe there is a shift in that right now. I think if somebody is interested in our strategy, what I'm going to tell you is a 100% employee usage mandate is where they're going to drive the most value in using the Paycom system. If somebody's interested in that strategy, then we're really who they're going to use. And that's not to say that we make clients work this strategy.
I mean, if client wants to buy our product and use it the same way, they are using the older systems that they may have had and input data into one single database and that's the value they receive. I'm not going to say that we would not allow that, but we're going to do everything within our power to get that client to realize the return on investment that's available to them, if they use the product correctly. And I think our focus on that has been proliferating into other organizations as we work with both clients and prospects around these initiatives.
Thanks. That's very helpful. Just follow-up for Craig. Craig, I'm just following up on the last question. Can you give us an additional insight into just some of the EBITDA margin compression into fiscal '19? How much is really there to more - spend on marketing versus R&D or other areas?
Well, I mean, as we're starting '19, I'd like to point out that we're really starting at a level that's higher than where we started '18. But as we're looking at the spend for '19, now we're continuing to spend in the R&D area.
You've seen it continue to tick up and then, just kind of across the rest of the organization just to as well just in slight amounts. But then, we kind of - we'll see kind of as we go throughout the year on the sales and marketing.
Thanks, guys.
The next question comes from Mark Murphy with JPMorgan. Please go ahead.
Hey. Congratulations on a great results. This is Pinjalim Bora on behalf of Mark Murphy. Thanks for taking my questions. Going on to the productivity question again. Chad, could you update us on the number of mature sales teams that you have going into 2019? And what are your expectations for productivity for those mature sales teams in 2019?
Yes. So with the three that will be maturing in 2019 at various times because they were opened at various times, and it's 24 months to maturity. Important to note that an office does continue to mature past that initial stage, but they are fully staffed at that point, and they would be having a pipeline.
And so you would deduct before that had not yet matured that we would be waiting on for 2020. And so that would leave us with 45 offices that will be - that we will have mature over some period of time during 2019.
Got it. And then, the productivity per office assumptions that you have? Do you feel like...
I mean, I'll just go ahead and say, on the last call I talked about updating our sales capacity number. I gave that number initially in November of 2016, about 28 months ago, and the goal is to provide some guidelines about what we were thinking about sales and how high sales achievement could go for any one sales rep and any one office.
Since then, we've done a lot of work on ourselves, and we've made progress on employee usage strategy and other areas that impact that number as well. And I'm not going to necessarily say we broke the model, but I mean, I've already got two reps just in the first month of this year that are averaging over $1 million in the sales already. Our last - our top rep last year sold more than anyone sold before.
So our sales number does continue to increase. Additionally, the sales capacity figure did not account for additional business such as first quarter forms, up sales to current clients, any of our inside sales.
So it's become more competitively sensitive to discuss that number without talking about what is all - what all goes into it. So that's not a number that we're going to be updating, moving forward.
Understood. And lastly, Chad, this year you opened four offices, last year, you opened three. But few years - I mean, three or four years before that I think you had a cadence of five to six. Should we kind of expect this lower cadence for 2019 and beyond or is it just random and just a matter of timing?
We open up offices when it make sense. It is based on opportunities that we have internally to develop currently our backfill reps, as well as those mature offices managers we would be relocating to start up these offices or sales teams, if you will.
And so we're continued - we continue to focus on that. We will be opening up offices this year. But we also feel really good at where we're at with being able to achieve our numbers right now with the production that we're seeing across the board within our sales organization.
Thank you.
The next question comes from Brad Reback with Stifel. Please go ahead.
Great. Thanks very much. Chad, from a high level, revenue growth was about two-x the rate of client growth in 2018. Is that predominantly a result of better attach or larger customers? Thanks.
I don't know that I've gone into that a whole lot, if I'm taking - I mean, definitely, we've continued to add larger clients to our platform. And I've discussed that every quarter. We continue to do that. I'm going to go back to what I said earlier about, we've always been really good at delivering what we believe our clients are going to use upfront.
As a reminder, our sales reps are not able to go back into the current client base and upsell them new products after that client's been onboarded with us for longer than 30 days. So because of that, in the analysis stage, we look to deliver those products. We believe the clients going to need and use upfront.
And so I would have to say, it's more weighted toward us moving upmarket and selling some larger clients than what it would be necessarily attach rates. What I will say though, is that the usage of those products that we have sold is continuing to move higher.
Got it. Thanks very much.
Thank you.
The next question comes from Brian Schwartz with Oppenheimer. Please go ahead.
Yeah, hi. Thanks for taking my questions. Good afternoon. Great job on the quarter and the year. Chad, just one question on the move upmarket, just on the competition, maybe the structure of the deals. As you - after the 5,000 seats, it sounds like you had some deal activity even above that. Are you seeing a different set of competitors in those type of engagement?
And then, when we think about the structure of the deal activity in that market, are there any noticeable difference in terms of the sale cycles or maybe the deployments of the customer's time? Thanks.
Yeah, I would say that, first of all, we go - when we're about 1,000, I can't say that we've run into a different competitor that we didn't previously know of or hadn't competed with in the past. Is selling to the upmarket still complex? Sometimes it is. It's somewhat dependent upon the goals of the organization and how they're set up currently.
But also, we're starting to see more of them come to us. I mean, I think over time - and I talk about this as one of the first statements I've made that you look back 20 years ago, our products were complex. You look back five years ago, we had an easier product but it did complex things, and what have you.
And so - and HR has been really happened to work hard to keep all the data correct. Most of these systems - whether or not the data is correct or not is based on how well HR has been interfacing with those employees and being able to grab that data.
So that's changing now. And we believe as HR offloads the data input process, it's going to allow them to create more meaningful relationships with their staff and help drive even greater results. And so we've been focused on that ourselves.
And then, one follow-up question I have, just on the retention metric with the step-up here this year. Chad, is that partly reflective of the bigger customers that are now within the install base? Or is it too early for that to show up and the improvement in the retention is really from the entire quarter? Just trying to dig into that a little bit more. Thanks.
Yeah, I mean, I can tell you that we've always sold larger customers and we've always sold more of them as we've added more reps and what have you. And so we've always sold at the top end of our margin. I believe the retention is related to usage of our software and driving real results for those clients.
I mean, I've said it before that didn't cost any extra to use our system the right way. And as we're gen [ph] taking employee usage from 3% at an organization to 87% at an organization, that's making a very strong impact for those clients. And as they become acclimated to that way of doing something, it can be very exciting for both of our clients - for both our clients and us as well as what opportunities exist for all of us in the future.
Thank you for taking my questions this afternoon.
The next question comes from Scott Berg with Needham. Please go ahead.
Hi. This is Scott on for Ryan MacDonald. Thanks for taking our questions. Most of our questions have been answered, but I do have one is, as you can continue to sell larger deals that tends to be an area that's more price-competitive, and we see more discounting on all the modules in the suite. Do you think you can maintain your lead - your SaaS-leading gross margins even as you potentially have to discount as you moved higher? Thank you.
Well, what I would say about that is I think, it's more about cost versus price. What's the overall cost of the system when you include the ROI and what have you. If it's just about price, I wouldn't say that Paycom would be a fit for that. If we haven't differentiated our solution in a deal, I don't know that we would be ready to provide price.
So I would just tell you this, we're focused on ROI. Does that mean that you don't have to have some scale pricing for extremely large clients? Well, sure you do, because at some point, the base fees becomes eaten up in that price expansion for each additional life.
And so sure, I think that we'll have that as we scale, and we have. But I don't really think our price versus any one of our competitors are necessarily a fair way to compare us when a buyer's making a decision, they should base it based on what is going to be the return on investment of that decision. And also, what else are they going to have to add around one of our competitor system to exact the result that we're going to be driving for them.
And so I'll just kind of leave it at that. I am not - I haven't - thus far, I can't say that we're winning deals, well, we aren't winning deals based on price. Does that mean we haven't in the past? I mean, I'm sure we've got a sales rep out there, here and there, where that's happened before. But as we identified that, those aren't things that we are looking to continue.
Great. That's all the question I have at the moment. Congrats again.
The next question comes from Shankar Subramaniam with Bank of America Merrill Lynch. Please go ahead.
Hi. Thanks for taking my question and congrats on the result. I just have a question on the R&D spend. As you look at the 2019 and looking to spend the R&D dollars, where exactly are you investing heavily? What are the new products that you think would help sustain growth this year and then the year later? Thank you.
Yes, I mean, consistent with past comments, we don't telegraph specifically of what we're working on. I can tell you that in R&D, you're going to have an amount dedicated to maintenance as tax laws change, as labor laws change, we do have items that are mandated to us, you have to make those changes in the system in order to keep your clients compliant.
And so you're always going to dedicate a certain amount to that. You're going to dedicate a certain amount to module enhancements. Those are current modules that you have that with greater usage, new opportunities for cost reduction strategies throughout an organization develop, and it allows you to develop more in that.
And then, the third bucket that I would say that we continue to focus on is innovation and that would be bringing new tools and new concepts to the HCM market that may not currently exist or might exist in a different more complicated form.
Got it. And just a quick question on penetrates. Looks like there is some new regulation on HRA sign rate of the ACA premiums. Is there any tailwind as you see from regulation to benefits for you specifically?
Regulation to benefits, I mean, I'm familiar with what's going on right now with ACA and the - specifically, the forms that they are talking about. We don't have any guide on that yet, and they're still - as you mentioned, there's benefits that have to be displayed, and we're trying to figure out how that would be, so I think it's still too early to talk about.
If you are, in fact, talking about the impact of ACA and specifically, those forms as they reflect benefits, it's a little too early for us to comment on that right now. Were you talking about something else or was, in fact, that's what you were talking?
I was talking about HRA, the new expanded regulation on HRA that benefits employers? But I think it's also towards - yes, go ahead.
Yes, I mean, any regulations that are more complicated to the employers is something that we would look to try to help them out with obviously, so...
Thank you, guys for the color.
The next question comes from Ross MacMillan with RBC Capital Markets. Please go ahead.
Thanks so much. And congratulations. Chad, I wondered if you could just spend a minute. I know you've been very focused on employee engagement inside of the application, especially on mobile - on a mobile UI. And I wondered if you could just talk to, how if at all, is that playing out in your stronger results? Are you seeing that drive lower churn? Are you seeing that drive better word of mouth for new customer acquisition? Well, just how are you seeing that influence the model? Thanks.
Yeah, I would say, it's really all the above. I mean, it's definitely driving better results for us amongst our current client base and then as those employees, for one reason or another, transfer into other businesses that might not currently use Paycom.
They're bringing us in. I mean, I can tell you story after story about individual employee that walked into different businesses, and we're getting leads from it. As a matter of fact, we were receiving so many leads from it, some of them won't yet through to the sales organization and we had to identify that even.
So this is something we've been focused on. But I mean, it all comes down to doing the right thing for the client and helping them be able to transform their employee base into this strategy. And it's like this, the first week, there's always data that's coming in for HRA to input. They talk to their employees, show them how to use these system appropriately, and week three, there's less input coming in. And week two, there's less. And within a month, we can typically transform an entire organization to very close to maximum usage within our system.
And so we've been very focused on that. And I do believe that, that is not only impacting the ROI and value for our clients, but it's a proved source of what we're able to use as we're going and talk with prospects.
That's great. And then, maybe a follow-up for Craig. Just - I know you guided adjusted EBITDA, but just - we've seen some variability on cash flow from ops relative to EBITDA. First as we went to 606, but then even I think 606, where we saw higher conversion of EBITDA in '18 versus '17.
What's the right way to think about cash flow from ops relative to EBITDA? Is it - I don't know if you think of that as a percentage or you have a sort of ballpark way of thinking about that. I think in the last couple of years, it's been in sort of 70% to 75% range? I mean, is that a - you think that's a consistent way to think about it?
Yes, I mean, there's different variables that go into that, that conversion from adjusted EBITDA into the operating cash flow. One thing that we don't really guide to is - on free cash flow is the CapEx. And we kind of mentioned the Grapevine building. And so what I would say, at least on the free cash flow side, we would expect our CapEx kind of as a percent of revenue to be similar in '19 to what it was in '18, but maybe a little bit back-end loaded in terms of that CapEx.
Okay, very good. Thank you very much. Congrats.
Thank you.
The next question comes from Nandan Amladi with Guggenheim Partners. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. So this is an industry-level question. I'm sure you saw the ultimate announcement yesterday. How does a company going private actually impact the competitive dynamics particularly as you've moved upmarket?
Well, I mean, I would suspect they have the same product today as they did yesterday. So I would suspect that their impact on us would be the same.
But in terms of their ability to compete pricing any of those things?
Yes, look, I don't think it's a bad thing. I mean, I think if you're looking at kind of replatforming your product so that you can really compete in the market and for the future, for what's coming out in the future, I think, potentially, it's good move. I just - I don't know all the answers to that.
Again, Paycom, we're staying in our own lane, we're focused on what we know we can control and really drive value for our clients, and I'm really excited about the fact that I believe 2018 was the best year we've had as a company in 20 years. And I got to see a company really shift and drive that.
We've had three major events in our 20 years of business, which we celebrated in November and the first event was the Internet. And I don't know if anybody that beat us to the Internet.
And second event for us was focusing on a single database and developing that out, and I've yet to see someone do that. And now we're focused on taking that single database and driving it all the way to the employee where it belongs. And it belongs there because that's where technologies met us today.
And so we're very excited about our opportunities here in 2019 and beyond. We've got the right strategy. Now we've just got to continue to work our process and drive results.
Thank you.
All right. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Chad Richison for any closing remarks.
So first, I want to thank everyone for joining us on the call today. As many of you may know, in 2018, we celebrated our 20th year in business. While it's been an amazing journey to get here, I still feel very excited about the potential of what we yet to achieve. And so we appreciate your interest and look forward to speaking with many of you in the months to come. Operator, you may disconnect.
The conference has now concluded. Thank you for attending today's presentation, and you may disconnect your lines.