Paycor HCM - Q2 2022
February 3, 2022
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. Welcome to Paycor's second quarter fiscal year 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would like to turn the call over to Rachel White, Vice President of Investor Relations.
Rachel White (VP of Investor Relations)
Good afternoon, and welcome to Paycor's earnings call for the second quarter of fiscal year 2022, which ended on December 31. On the call with me today are Raul Villar, Jr., Paycor's Chief Executive Officer, and Adam Ante, Paycor's Chief Financial Officer. Our financial results can be found in our press release issued today, which is available on the investor relations section of our website. Today's call is being recorded, and a replay will be available on our website following the conclusion of the call. Statements made in this call include forward-looking statements related to our financial results, products, customer demand, operations, impact of COVID-19 on our business, and other matters. These statements are subject to risks, uncertainties, and assumptions and are based on our management's current expectations as of today and may not be updated in the future.
Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures is provided in our press release on our website. With that, I'll turn the call over to Raul.
Raul Villar, Jr. (CEO)
Thank you, Rachel. Thank you all for joining us to discuss Paycor's fiscal second quarter results. We delivered a strong second quarter as both revenue and profitability exceeded our guidance. Based on these robust results, we are once again raising our full year guidance, which Adam will discuss in more detail. The $28 billion human capital management market is still in the early stages of shifting to the cloud, which positions Paycor to accelerate revenue growth and increase profitability over time. We continue to experience strong demand for Paycor's modern SaaS HCM solutions for small and medium businesses, as demonstrated by our 20% revenue growth this quarter. Two years ago, we developed a strategy to differentiate Paycor in the market through our open, extensible platform, a focus on leaders, and by tailoring solutions for key industries.
Paycor's built a unique value proposition focused on empowering leaders, which drives employee engagement and business results. Our technology automates mundane leadership tasks so frontline leaders can focus on goal setting, coaching, talent development, and associate engagement, the key elements that drive business performance. The great resignation or reevaluation labor market dynamics highlight the importance of talent acquisition and retention strategies, and we've seen that demand play through to our offerings. Our software is helping companies attract, onboard, coach, and engage employees in a virtual environment with increasing regulatory complexity. Our team is laser-focused on executing the strategy we've outlined, and we exceeded our internal expectations in Q2. As an outcome of our product investment in technology designed for leaders in industries, our win rates continue to increase. Our consistent bookings performance over the last six quarters is starting to deliver accelerated revenue growth.
This is continued validation of our differentiated value proposition, solid execution against our growth levers, and the performance-driven changes we've made across our organization. We've made significant progress against each of our strategic growth initiatives during the quarter. First, our increased focus on Tier 1 markets is working. We continue to significantly increase bookings in Tier 1 markets, which we define as the 15 largest cities in America. One of our biggest strategic focus areas has been aggressively expanding our sales coverage in Tier 1 markets. Today, we have seller coverage in all Tier 1 markets and are now focused on adding additional teams in these markets to drive greater coverage. We exceeded our internal sales staffing targets again this quarter while maintaining high productivity levels.
We are also excited to be the newly named official HR software provider for the Pac-12 Conference, which supports our Tier 1 expansion in the West by increasing brand awareness among their enormous viewership and key business decision-makers. The four-year partnership highlights Paycor and the Pac-12's commitment to developing leaders in and out of the classroom. Second, we continue to successfully partner with brokers. New business coming through our broker channel remains strong and continues to deliver outsized results. Brokers are trusted advisors for mid-market businesses, and they appreciate our flexible approach that enables them to select their benefits administration solution of choice while receiving a prioritized and guided implementation for their valuable clients. We are working with about 10% of the broker community today, and we continue to see a significant expansion opportunity within this valuable referral channel. Third, our industry-specific approach is resonating.
Our purpose-built offerings for our four key verticals, which represents 50% of our TAM, are driving higher win rates, including professional services that launched last quarter. By understanding the specific needs of companies in healthcare, manufacturing, food and beverage, and professional services, we develop tailored solutions that help solve their most pressing human capital challenges. For instance, this quarter, we introduced a new payroll-based journal reporting solution that automates complex staffing reporting requirements for nursing facilities. Lastly, we continue to expand our HCM suite and increase adoption of our bundles. Our team continues to expand our HCM platform by adding new functionality and expanding the breadth and depth of our product portfolio, increasing the total Per Employee Per Month, or PEPM, rate available to $40.
We are seeing excellent adoption of the talent management bundle we launched in 2021, which not only provides leaders with the tools they need to recruit and onboard associates, but also includes deep functionality to develop, recognize, and engage them. Talent is top of mind for all business leaders today, and as a result, it's driving a considerable increase in attach rates for new and existing customers. Another differentiated aspect of our software is its open, unified, and extensible platform that enables us to rapidly add capabilities and to integrate additional partners. It provides a time-to-market advantage to stay ahead of the dynamic evolving needs of our clients.
In the last year, we have made significant investments to bolster our interoperability, including launching a new platform that enables customers and partners to do self-serve integrations, reducing the average time it takes to build an integration by 50%, and we quadrupled the total number of partners in our marketplace. We now have nearly 200 partners in our ecosystem, providing flexibility for our clients to select the best applications for their industry. This quarter, we also released new functionality within our Paycor Analytics tool that provides predictive analysis on employee turnover. It provides leaders with actual insights to identify the top drivers of employee resignation and potential at-risk employees to help prevent turnover in today's challenging labor market.
As leaders nationwide continue to work through the great resignation, it's more critical than ever to understand why employees leave and what an employer can do to prevent or better plan for that outcome. We are committed to providing intelligent analytics to help leaders uncover these valuable insights. I would also like to commend our team for their efforts over the last year, including through this year-end, in providing comprehensive and customer-first implementation and support to our clients, both of which have been receiving excellent best-in-class marks. Over the last few quarters, we launched a customer support portal with a highly efficient customer chat tool and a robust self-service knowledge base. As a result of these and other enhancements, we've seen an 80% improvement in client wait times during the second quarter.
We're also extremely proud to be recognized as a top workplace for the second year in a row by Energage, an organization with a 15-year history of surveying more than 20 million employees to help build and brand top workplaces. Results are based on 15 cultural drivers that are proven to predict high performance against industry benchmarks. It demonstrates our commitment to live the cultural best practices we advocate to our clients that drive employee engagement and business performance. Lastly, we would like to congratulate our client, the Cincinnati Bengals and Who Dey Nation, on their amazing season and upcoming Super Bowl appearance. With that, I'll turn the call over to Adam to discuss our financial results and guidance.
Adam Ante (CFO)
Go Bengals. Thanks, Raul. I'll begin with a review of our second quarter results and close with our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. Total revenue was $103 million, a 20% increase year-over-year, and this is the first time quarterly revenues have exceeded $100 million. The increase was primarily driven by new client growth and continued PEPM expansion, as well as low single-digit organic labor market growth. The average number of employees per customer has returned to pre-COVID levels for our client base. At quarter end, our customer base had grown to a record 29,000 clients. This growth largely comes from the mid-market, as our micro segment of under 10 employees remained flat.
Our go-to-market strategy targets clients with 10-1,000 employees, and all of our client growth is coming from this segment, growing 8% year-over-year. This segment represents 80% of our revenue and just over 60% of our clients. Net retention continues to trend favorably and is now in line with historical pre-COVID levels. We believe this is due to a combination of recovering employment levels and investments we've made across implementation and client support. Adjusted gross profit margin was 66.6%, down from 71% a year ago and in line with our expectation. This change is largely due to increased amortization related to capitalized software and contract acquisition costs. Margin was also impacted to a lesser extent by the termination of COVID-related cost initiatives, as well as continued investments in our service organization to ensure a great client experience.
Adjusted gross margin excluding depreciation and amortization was 76.5% for the quarter, a decrease of 158 basis points year-over-year and in line with our expectations. We have now delivered sequential margin improvements for the last two quarters as we drive scale out of our customer experience investments. Sales and marketing expense was $33 million, or 32% of revenue, compared to $25 million, or 29% of revenue a year ago. Aligned with our ambitious growth plans, we continue to invest to expand our sales teams and marketing programs, especially in Tier 1 markets. We are seeing great results and attractive returns on our investments, and we intend to continue aggressively investing while targeting neutral free cash flow annually.
We are in a huge market and at the early stages of transitioning to the cloud, and we strongly believe these investments will enable us to capture share more quickly and drive meaningful value for shareholders. R&D expense was $9.5 million, or 9% of revenue, compared to 11% of revenue a year ago. Including capitalized development costs of $6.4 million, R&D spend was $16 million, or 15% of revenue, similar to the year ago period and in line with our expectations. We will continue to strategically invest in R&D to expand our product portfolio and PEPM opportunity and to drive insights for leaders to better attract, coach, and engage their associates. G&A expense was $16 million, or 16% of revenue, consistent with the second quarter of 2021.
However, we aim to continue to drive G&A down as a percentage of revenue and have done so sequentially. Operating income was $10 million, or a 10% profit margin, compared to 15.7% one year ago. The change in profitability reflects the opportunity to invest in the growth drivers I previously highlighted. We have been consistently profitable and expect to steadily expand margins. In our highly scalable business model, we are confident we can deliver strong top-line growth and attractive levels of profitability over time. With regard to the balance sheet, we ended the quarter with $111 million of cash and no debt. We closed the quarter with an average daily client fund balance of $933 million. Interest income generated on these funds was approximately $340,000, or 14 basis points.
Moving to the guidance for the third quarter, we expect total revenue of $117 million-$118 million, or 18% growth at the midpoint of the range, and adjusted operating income of $19 million-$20 million. For the full year, we are raising our revenue guidance to $411 million-$415 million, or about 17% year-over-year growth at the midpoint of the range. We expect adjusted operating income of $35 million-$37 million. A few things to keep in mind regarding our outlook. Our third quarter is historically our strongest due to seasonality associated with year-end revenue, such as W-2 form generation. We anticipate our year-end form production in Q3 will benefit from easier comps on historically depressed production in the prior year due to lower employment associated with COVID.
We remain optimistic about the growth opportunities and underlying trends in our business. As a reminder, we expect the growth in bookings during FY 2021 will take 12+ months to fully ramp in the revenue. While we've experienced a modest tailwind from improved employment trends in the low single digits, we remain cautious in our guidance, including minimal benefit from labor market growth. This is driven in part by continued uncertainty related to COVID. While we anticipate that interest rates will begin to rise, we expect little impact to our FY 2022 guidance. The overnight rate is the most critical driver of our interest income, and we anticipate some marginal lift as rates seem likely to begin rising in March. However, a 25 basis point increase in the overnight rate on our estimated client funds would generate less than half a million dollars of interest income in a quarter.
In summary, we posted another strong quarter driven by focused execution of our growth plan. We feel good about momentum in the business and believe we have all the elements in place to win in the HCM market. Our modern, extensible platform with a unique focus on leaders in industries is resonating with clients. With the remaining runway in the SMB market alone, we believe we are well positioned to deliver on our target of 20%+ sustainable revenue growth and improved profitability longer term. With that, we'll open the call for questions. Operator?
Operator (participant)
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Mark Murphy with JPMorgan. Please proceed.
Mark Murphy (Managing Director and Head of U.S. Enterprise Software Research)
Yes, thank you very much, and congrats on a great quarter and a great football season. Raul, I wanted to ask you, if are you able to approximate how much faster is the rate of bookings growth that you're seeing in Tier 1 cities if you compare that to tier two and tier three? I mean, is it 50% versus 20%, or is there a way to kind of roughly sketch that out?
Adam Ante (CFO)
Yeah. Mark,
Raul Villar, Jr. (CEO)
Yeah, the way we're looking at it is the growth rate in Tier 1 is above our overall average, and it's over, you know, 50% of our bookings now. It's a way to think about it. We're continuing to press in those markets. We're seeing a lot of success. We're continuing to add headcount. You know, we're on our headcount targets that we had talked about previously of having 20%-25% growth year over year, and the majority of those heads are going into Tier 1 markets.
Mark Murphy (Managing Director and Head of U.S. Enterprise Software Research)
Okay. As a quick follow-up, could you shed any light on how you're thinking about the topic of inflation, if it enters in at all, including, you know, wage inflation that you may be seeing in your own cost structure? From a margin perspective, are you able to, or are you thinking about passing through a cost of living increase, perhaps on the PEPM, right? That maybe to help offset, you know, some of your higher labor input costs.
Adam Ante (CFO)
Yeah. Hey, Mark, this is Adam. Yeah, I mean, we do regular price increases annually. Of course, you know, some of the pressure could allow for us to see some marginally higher price increases, but it's not something that we're overly aggressive with. In terms of the internal labor costs, of course, we see you know, pressure not across the board, but in some areas, nothing that we haven't been able to factor into the guidance that we've shared. You know, as it relates to the customers, I think we'll continue to evaluate pricing opportunities where it makes sense. We're also continuing to transition folks to you know, our newer subscription models and bundles that we've talked through.
That allows for the opportunity to enable more products and for our customers and wrap the increases in at the same time.
Mark Murphy (Managing Director and Head of U.S. Enterprise Software Research)
Understood. Thank you very much.
Raul Villar, Jr. (CEO)
Thanks, Mark.
Operator (participant)
Our next question is from Gabriela Borges with Goldman Sachs. Please proceed.
Gabriela Borges (Managing Director in Software Equity Research)
Hi, good afternoon, and thank you for taking my question. Raul and Adam, I'd love to ask you on whether you're noticing any differences in your Tier 1 customers versus the rest as it pertains to their propensity to cross-sell and to buy more product, as it pertains to their employee growth, what they're seeing on the ground. Just curious if you could compare and contrast for us the health of those metrics in Tier 1 versus two and three.
Adam Ante (CFO)
Hey, Gabriela. Yeah, no, I don't think that we're seeing anything necessarily that different. Nothing that would be overly material, and I think it's probably a little bit early as well as we've been, you know, getting into those tiers more aggressively over the last, you know, 12-24 months. I think it's gonna be, I think there's gonna be a little bit of time before we're gonna see any material differences that we might want to call out. I would say that, you know, clients in those markets can be a little bit larger, so we sell a little bit higher or a little bit larger clients there. They do tend to buy a little bit more at the point of sale.
That's also a function of our sellers, you know, newer sellers in those markets adopting the bundle strategy at the point of sale. I think that you see some of those higher unit economics upfront, and that's really our strategy right now, but a little bit too early to see maybe the propensity to buy longer term.
Gabriela Borges (Managing Director in Software Equity Research)
Okay. That's helpful. Follow-up question is on the sustainability of the 20% growth that you just put up. How should we think about the path to being able to deliver 20% more consistently, particularly as year-over-year comparisons get a little bit harder into June? Thank you.
Adam Ante (CFO)
Yeah. Thanks. You know, I mean, the thing for us and what we've been saying since the beginning is really about the consistency in the bookings in the new business. As we continue to you know execute on our Tier 1 expansion strategy and with the broker model and in our pricing strategies and just deliver the bookings that we've committed to, I think that's where you're gonna continue to see the revenue growth accelerate. Of course, over time, as we continue to improve retention internally, I think that's the other side and the cross-sell back into the base. We're on our way there. We feel good about the path to get to the 20%+.
Gabriela Borges (Managing Director in Software Equity Research)
Appreciate the color. Thank you.
Operator (participant)
Our next question is from Terry Tillman with Truist Securities. Please proceed.
Terry Tillman (Managing Director)
Yeah. Hey, good afternoon. Congrats from me as well. I didn't have this as part of my scripted questions, but I'm gonna go for it. Raul, Adam, and Rachel, I guess I'm curious, who's the best at the Ickey Shuffle? I had two follow-ups.
Raul Villar, Jr. (CEO)
Oh, Adam is definitely the leader in the Ickey Shuffle.
Terry Tillman (Managing Director)
Okay. All right. Thank you. Got that out of the way. You know, when you went public, Raul, the coverage ratio was, from a sales perspective, pretty low on Tier 1, and hence that's a big opportunity. I forgot if you said this on the call, but can you give us a sense where you are now on kind of that coverage ratio and where it's expanded to? You know, I know the idea is 20-25% sales hiring, but if you're all having success hiring, have you thought about maybe even going through that threshold? Then I had a follow-up for Adam.
Raul Villar, Jr. (CEO)
Yeah. I mean, from a hiring perspective, again, the majority of the hires are in Tier 1. We've significantly increased our coverage there. We still have, you know, lots of runway there. I think from a, you know, an additional perspective, you know, we're saying with the 20%-25% headcount target for the year, just because it's, you know, the rate of how you can add people into the system and hiring the right leader, onboarding them, we feel like that's the right number for quality. We're staying there. I mean, it could be a little higher, but ultimately, we manage that, you know, day to day. I think we feel good about our guidance from a headcount perspective. You know, we're ahead of the target.
We're seeing good coverage in Tier 1. Obviously, we have a long way to go, just based on our overall sales headcount totals. You know, that's something that we're gonna continue to build on, you know, quarter-over-quarter.
Terry Tillman (Managing Director)
Okay. Thank you for that. I guess, Adam, a question on the conversion of bookings. You've made a point consistently to remind us it could be upwards of 12 months from the strong bookings to conversion to revenue. I'm just curious, though, if there's some level of conservatism in that. Could there be some upside because it's a little bit faster? The reason why I bring this question up, in your all's prepared remarks, you all talked about some of the technology improvements in reducing integration time by 50%. I know that's part of the work to implement. I'm just kinda curious, is there any kinda dry powder or potential conservatism, just you all getting a little bit more adept at rolling this stuff out on behalf of customers? Thank you.
Adam Ante (CFO)
Yeah. Hey, thanks, Terry Tillman. I mean, I definitely think that we're getting more and more efficient in the space. We put a lot of energy into that team. The team's done a great job through the year-end, which is clearly our busiest time here in January. We're also using third parties to help us support some of the peak times. So we're seeing improvements. You know, I do think that there could be some opportunity to continue to accelerate faster. Again, the point is really cautioned about is the continued bookings performance and the 43% growth in bookings coming out of FY 2021 doesn't just show up, you know, through December. It's just gonna continue to come in.
January is a big quarter for us. It'll sort of wrap in that April timeframe, and before all of the revenue or all of the bookings really gets layered into that revenue. But yeah, we continue to see improvements internally, and it's been a big part of our focus over the last couple years.
Terry Tillman (Managing Director)
Okay, great. Thanks.
Operator (participant)
Our next question is from Bryan Bergin with TD Cowen. Please proceed.
Jared Levine (Equity Research Director)
Hi, this is actually Jared Levine on for Brian. In terms of net revenue retention, did that return to the normalized level in the mid-90s%? Where did gross revenue retention stand for 2Q?
Adam Ante (CFO)
Yeah. Hey, Jared. Yeah, gross retention's been fairly consistent. We haven't given the number explicitly, like, on the quarters, for sure, but fairly consistent. Net retention, yeah, has continued to show improvements. We see that return right in that mid-90% range, a little bit better, quarter-over-quarter. We continue to see, you know, positive momentum there in both net retention and gross retention.
Jared Levine (Equity Research Director)
Okay, great. In terms of the demand environment, how would you describe it in terms of the, was it pretty broad-based, or was it skewed towards a certain employer size? Any impact related to Omicron?
Raul Villar, Jr. (CEO)
Yeah, it's been broad-based. I would say, you know, we had strong execution in all markets and all sizes. You know, Omicron, we haven't, you know, seen too much of an impact. It's more of an impact for our clients than it is for us. You know, we're seeing, you know, some impact for them, you know, obviously hiring people and keeping people on staff. Other than that, you know, since businesses haven't closed like the first quarter of COVID, we didn't see any overall impacts in the demand environment.
Jared Levine (Equity Research Director)
All right. Thank you.
Raul Villar, Jr. (CEO)
Thank you.
Operator (participant)
Our next question is from Samad Samana with Jefferies. Please proceed.
Samad Samana (Managing Director)
Great. Thanks for taking my question. Good to see the healthy growth. I wanna maybe dig in on the sales side a little bit more. I know you guys talked about coverage and kind of the headcount goals, but how should we think about maybe the percentage of fully ramped productive reps right now? So not just maybe just coverage to quotas, but the productivity mix for reps that are ramped, and kinda how does it compare versus this time last year?
Adam Ante (CFO)
Yeah. Hey, Samad. Of course, as we're hiring more this year than we really did last year, we see that the number of sellers with full quota-carrying capacity are lower, as a percentage of our total than, you know, than they. Excuse me. The ones who are still ramping into their quota, of course, are gonna be higher as we're still hiring those folks and they're newer in their tenure with us. It is gonna be a little bit different than what we would have seen last year. Of course, last year, we only grew our headcount by about 6%, a lot of growth earlier on through Q4, Q1 now and into Q2, like Raul said, on target for that 20%-25%.
We do see, as a percentage of our total sellers, less sort of fully ramped and fully productive sellers, but that is clearly, you know, as we would have expected or as we designed as we, you know, hired these folks in.
Samad Samana (Managing Director)
Great. That certainly bodes well for growth kinda sustaining, right, as those reps come online. That's good to hear. Then maybe just another question I think about in terms of Raul, you know, for the company. On the product side, I know there's a build versus buy versus partner philosophy. I'm curious just with maybe, you know, some of the turmoil we've seen, anything that you think about how you think about being opportunistic maybe, or accelerating some of the product rollouts from a buy perspective and how you're thinking about that.
Raul Villar, Jr. (CEO)
Yeah. I think you know, we continue to be opportunistic in the space. We are you know, evaluating a significant number of opportunities. But for us, it has to be you know, the right type of opportunity that you know, we believe you know, can help us in the future. Historically, we've added one or two tuck-in type acquisitions to help expand our product portfolio and add PEPM to our overall objectives. I think you know, we'll continue to execute against that. Yeah, there's a lot of opportunities in the market, and it's just you know, trying to find the right ones for Paycor.
Samad Samana (Managing Director)
Great. I'll just squeeze one more in. I'll make it a short one. Just as I think about maybe the top of the funnel, you know, we've heard some of the other companies in the space talk about, you know, their own retention normalizing, which I think would be good for Paycor. Are you seeing any changes in maybe the leads that are coming into the top of the funnel, or just how we think about maybe interest activity from SMBs even prior to conversion?
Raul Villar, Jr. (CEO)
Yeah. We've seen significant increase in both our site visitors and what we would consider, you know, high quality leads into the system. We think demand generation, all the fundamentals are really strong right now in the category. There's a lot of drivers to that, you know, primarily, you know, regulatory complexity, talent issues, both attracting and retaining, you know, tend to be things that the companies are looking for, which has created a lot of top-of-funnel opportunities for us.
Samad Samana (Managing Director)
Great. Thank you so much for taking the questions.
Raul Villar, Jr. (CEO)
Thanks, Samad Samana.
Operator (participant)
Our next question is from Brian Peterson with Raymond James. Please proceed.
Brian Peterson (Managing Director, Application Software)
Congrats on the strong quarter, guys, and thanks for taking the question. Maybe just starting on the verticals, you mentioned some early progress on pro services. Can you remind us how big that opportunity is relative to some of your other industry verticals? I'd be curious to think about, you know, how do you look at the ramp of that vertical versus some others that you already have in place?
Adam Ante (CFO)
Yeah. The overall verticals, like the four key verticals that we focus on, represent about half of the overall market, and it represents right now about half of our portfolio. It pretty much in line. We're seeing some outsized growth across our key verticals. I think as you think about when it impacts our revenue growth and how it impacts the pace of the revenue, it's really about right now the upfront, right, in the booking as we're being intentional about how we target in these markets and creating products and a go-to-market strategy that fit. About longer term retention, right? Just creating that better experience across those clients longer term.
I do think that there's a bit of a ramp to continue to see that in any outsized way, but it's continuing to add to our overall bookings performance right now and how we're playing in those verticals.
Brian Peterson (Managing Director, Application Software)
Adam, maybe following up on that. If we think about kind of your vertical or you think about the four verticals, is there anything different that you're seeing in terms of employment trends or attach rates or I'd be curious if you can, you know, frame it between kind of those four verticals and maybe the rest of the business or anything that you'd call out through the second quarter.
Adam Ante (CFO)
Yeah. You know, I think what we see is that in some of those key verticals, we see a greater demand for more complete solution, including workforce management, where you might see benefits attached more frequently, as well as now our talent offering. That's not the case across all the verticals. I think the real driver there is actually the win rate. We tend to win more, and we see outsized performance in terms of the win rate, and then couple that with some stronger demand for those products and we end up having a good solution, you know, to take to market inside of those key verticals.
Brian Peterson (Managing Director, Application Software)
Very clear. Thanks, Adam, and good luck. Congrats and go Bengals.
Operator (participant)
Our next question is from Kevin McVeigh with Credit Suisse. Please proceed.
Kevin McVeigh (Managing Director)
Great. Thanks so much. Hey, it looks like you talked to a potential $50 PEPM target in 2024. Was that always the case, or did you revise that? Because I don't remember seeing that before. If it was revised up, what drove that?
Raul Villar, Jr. (CEO)
No, that's. We've had that target for the last 12 months, you know, to drive towards, and we're just continuing to show the progress that we make against that target. I think, you know, we continue to close the gap. We've been averaging between $3 and $5 PEPM increases per year through organic or inorganic adds to the platform.
Kevin McVeigh (Managing Director)
Great. Is there any way to frame how much that one-time tax work impacts the quarter?
Adam Ante (CFO)
Yeah. I mean, it's nothing that we've given out explicitly. I mean, it becomes part of a part of the revenue in terms of how do we go to market through partners as well. We have partners to support the ERC and tax work as well as other areas of the platform. It's sort of in line historically in terms of its contribution overall, but it's been helpful to be able to support the tax work for sure.
Kevin McVeigh (Managing Director)
Great. Thank you.
Operator (participant)
Our next question is from Bhavin Shah with Deutsche Bank. Please proceed.
Bhavin Shah (Director of Software Equity Research)
Great. Thanks for taking my question. You guys are clearly ahead of your plans in terms of Tier 1 coverage ratio, but maybe can you provide some insight into how those broker relationships in these Tier 1 markets are kind of going and progressing? Where are you relative to your plan? How do we think about those relationships ultimately translating into some new logos and revenue?
Raul Villar, Jr. (CEO)
We're slightly ahead of our target, our internal targets, in the broker channel. We feel like we continue to make good progress there. When we expand into a Tier 1 market, it just gives us an ability to meet with more brokers and connect with more brokers. It gives us more coverage in the channel. We saw, you know, modest growth there. You know, we're up on nearly 10% in new broker connections for the quarter, and we're over target for the year. I think, you know, what's happening is it's really contributing, you know, outsized results for us overall. You know, we're gonna continue to press in on it, both at a national partnership level and local levels as we expand our coverage.
Bhavin Shah (Director of Software Equity Research)
Super helpful. Just as a follow-up, new logo sales have always kind of been the majority of bookings, but have you guys seen any meaningful changes in terms of existing customers coming back to the table for further expansions for things such as talent, just given the great resignation and the great revaluation?
Adam Ante (CFO)
Yeah, I mean, I'd say that we've talked about our focus there and starting to put more resources and investments there. No material changes at this point, but we do continue to see positive momentum in that direction. It'll continue to support the long-term bookings growth, but no material changes in the near term.
Bhavin Shah (Director of Software Equity Research)
That's helpful. I appreciate you taking my questions, and congrats again.
Raul Villar, Jr. (CEO)
Thank you.
Adam Ante (CFO)
Thanks.
Operator (participant)
Our next question is from Mark Marcon with Baird. Please proceed.
Mark Marcon (Senior Research Analyst)
Good afternoon. Let me add my congratulations. Wondering with regards to the color that you provided in terms of the impact in terms of float income, how much more would you have to grow in order to change kind of the duration that you're investing in? Is there any flexibility, Raul? Obviously you had a ton of experience at ADP, and they obviously have a great program. What's it take to kind of extend out a little bit further?
Adam Ante (CFO)
Hey, Mark. We have a lot of flexibility actually right now to go into longer duration instruments. The majority as of Q2 more than 90% of our instruments were in overnight rates. The problem with getting into longer duration right now is just that of course as the rates rise up or rise over the coming months, potentially it's gonna pinch us. Our preference right this minute is to sort of let the rates sort of flush out, and then we'll continue to move into longer duration instruments, whether that's 30, 60, 90 and then longer. Not more than really five years would be the longest. But we do have lots of opportunity to do that.
It's something that we continue to work on right now, and I think you'll start to see, you know, movement over the next, call that three-six months.
Mark Marcon (Senior Research Analyst)
That's great. I certainly appreciate that you wanna wait until rates actually continue to settle out to a higher level. You can go ahead and you are in a position to make those changes if you want to.
Adam Ante (CFO)
Yeah. Like I mentioned, I mean, more than 90% today is in overnight rates. You know, historically, that's been in that sort of 60%-70% range. There's opportunity to move into longer duration.
Mark Marcon (Senior Research Analyst)
Where's the average float balance now for this last quarter?
Adam Ante (CFO)
It was $933 million for Q2. That's, you know, there's some seasonality to it, of course, and it's a little bit higher in Q2, earlier parts of Q3.
Mark Marcon (Senior Research Analyst)
Great. Any color with regards to just source of wins? You've done a really nice job in the past in terms of identifying whether it's legacy players, regionals, or in-house systems. Any change at all in terms of the composition of the new wins that you're seeing now?
Raul Villar, Jr. (CEO)
Yeah. It's fairly consistent. I would say we're still hovering around that 80%, from legacy. We still have outsized performance against in-house, in regionals versus our peers. Other than that, I would say it's fairly standard. We haven't seen really any changes in the market dynamics.
Mark Marcon (Senior Research Analyst)
Great. Thanks again.
Raul Villar, Jr. (CEO)
Thank you.
Operator (participant)
As a reminder, it is star one on your telephone keypad if you would like to ask a question. Our next question comes from Patrick Walravens with JMP Securities. Please proceed.
Joey Marincek (Senior Research Analyst)
Hi, team. It's Joey Marincek on for Pat. Thanks so much for the questions and congrats on the quarter and to your Bengals. Just one question here. On the TAM, how do you think about the opportunity that exists in the Tier 1 markets, relative to overall TAM? Have you sort of sized what that opportunity looks like? Any color there would be helpful. Thanks so much.
Adam Ante (CFO)
Yeah, sure. As we think about the Tier 1 markets, those top 15 cities, clearly, they're a huge population opportunities for us. I don't have the exact number, but I mean, it's close to 1/3 of the overall market. Maybe about 20% of the overall market sits inside of those top 15 cities, where historically we've had very little coverage. It's a big chunk of the overall TAM.
Joey Marincek (Senior Research Analyst)
Got it. Super helpful. Just a quick follow-up. As you continue to move into the Tier 1 markets, does the competition change at all? Are you sort of seeing more of the, you know, Paychex or how would you describe that? Thanks so much.
Raul Villar, Jr. (CEO)
Yeah, the competition set doesn't change between the tiers. We see ADP, Paylocity, Paycom, you know, in all markets, in most transactions. That hasn't changed as we've entered Tier 1.
Joey Marincek (Senior Research Analyst)
Super helpful. Thank you.
Raul Villar, Jr. (CEO)
Thank you.
Operator (participant)
We have reached the end of our question and answer session. I would like to turn the conference back over to Raul Villar, Jr. for closing remarks.
Raul Villar, Jr. (CEO)
Thank you again for joining us tonight. We appreciate your time and support. We're excited about the momentum in the business and look forward to chatting with you again soon. As always, feel free to reach out if you have any questions. Have a great night, everyone.
Operator (participant)
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.