Paycor HCM - Q3 2023

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to Paycor's Third Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the call over to Rachel White, Vice President of Investor Relations.

Speaker 1

Good afternoon, and welcome to Paycor's earnings call for the 3rd quarter of fiscal year 2023, which ended on March 31. On the call with me today are Raul Villar, Jr, Pacore'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 and are based on management's current expectations as of today and may not be updated in the future.

Therefore, these statements should not be relied upon as representing our views as of any 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.

Speaker 2

Thank you, Rachel, and thank you all for joining us to discuss Pacore's fiscal 3rd quarter results. As employee engagement nationwide dropped to the lowest level in nearly a decade, we are seeing robust demand for our modern With these essential talent tools, our customers are improving the core strength of their critical frontline leaders and increasing their employee retention by 10%. Revenue grew 32% this quarter as we continue to make great progress expanding our sales coverage and increasing PePAM. This also marks the 4th consecutive quarter of margin expansion delivering over 400 basis points of improvement year over year, while investing in capabilities that Further differentiate Paycor in the market. Paycor's strong results are evidence of consistent execution across the enterprise.

We continue to expand our go to market capabilities, seller headcount growth remains on track for 20%, Win rates remain high, average deal size continues to expand and we are pleased to report another record 3rd quarter for bookings. These efforts are underpinned by investments in brand awareness, lead generation and broker relationships that drive sales opportunities. We are thrilled with the acquisition of Verb, A people development platform incorporating behavioral science and proprietary micro learning content to create best in class Workplace training. The acquisition will enhance Paycor's mission of empowering leaders by providing them with learning tools to develop their associates with personalized development pathways. Like our other recent acquisitions, We plan to fully integrate Ferb's innovative technology into our HCM suite and increase PEPM leveraging our broad distribution channel.

We expect the integrated offering to be available as part of our talent management bundle in the first half fiscal year 2024. Within our talent management bundle, we recently completed the integration of our new AI driven recruiting technology, Paycor Smart Sourcing. We continue to see strong demand for this solution with more than 600 customers scheduled for activation. Building on Paycor's initial artificial intelligence innovation, Acorn Smart Sourcing and Predictive Resignation, we introduced our existing natural language processing and sentiment analysis engines into performance reviews to provide frontline leaders real time feedback on the language they're using in evaluations to foster more humanized, engaging work culture. We will continue to leverage AI in our platform To efficiently empower leaders like using generative AI to aid the recruiting process by generating job descriptions along with several other exciting innovations

Speaker 3

on our product roadmap.

Speaker 2

Furthermore, we continue to lead with the most extensive network of partners, deep two way integrations and API connectivity points to meet our clients' unique business needs. In the last year, we added over 100 partners to our ecosystem to expand our reach and provide new capabilities and value for our customers. Lastly, We are proud that Paycor was recognized for its modern and differentiated platform with 6 Titan Business Intelligence Awards for our best in class talent management solution, Acorn Smart Sourcing and insightful analytics that help frontline leaders optimize business decisions. I would like to thank the entire Paycor team for these amazing results. With that, I'll turn the call over to Adam to discuss our financial results and guidance.

Speaker 4

Thanks, Raul. I'll discuss our Q3 results and outlook for the remainder of the fiscal year. As a reminder, my comments related to financial measures are on a non GAAP basis. We delivered another strong quarter Total revenues of $161,000,000 a 32% increase year over year and recurring revenue growth of 23% over the prior year, marking the 6th straight quarter of Achieving our 20% plus target and a testament to the consistent execution from our team. Our revenue growth continues to be driven by new business wins and cross sells, Growing the number of employees on our platform to nearly 2,400,000, up 7% over the prior year with more than 30,000 customers.

As we shift our portfolio up market and focus our resources on clients with greater than 100 employees, our average customer size continues to increase. Now it's 79 employees per customer, up from 75 last year. Aligned with this intentional strategic shift, we continue to see moderation in employee growth in the micro While the number of employees in the mid market and enterprise segments increased 9% year over year. This past quarter, our clients' employment level was essentially flat over the prior quarter, In line with our expectations and prior guidance. As a reminder, organic employment levels among our existing customer base have typically only impacted revenue growth by a point or 2 outside of an anomaly like COVID.

All in, net retention continues to trend favorably with benefits from cross sales and pricing increases, marginally offset by relative softness in our customers organic hiring. Effective PEPM increased 15% year over year to just over $21 for the quarter. SeveM Growth is comprised of 3 primary drivers, including cross sales, pricing initiatives and higher bundle adoption at the point of sale. This quarter, Teva Growth also benefited from strong form filing revenue, some of which we believe was pulled forward from the 4th quarter. We're also pleased with the progress we've made expanding our partner program made possible by the investments in our interoperability engine.

New incremental partner revenue streams such as income and employment verification services and other software partnerships are expanding services to our clients We'll increasingly contribute to our revenue growth into next year. In addition to the consistent revenue growth, we've also demonstrated point is higher than last year as we continue to scale. Sales and marketing expense was $46,000,000 or 29% of revenue, in line with our long term targets. And we continue to invest as we expand our sales team nationally. On a gross basis, we invested $22,000,000 in R and D or 14% of revenue, A similar level to last year and in line with our long term targets.

Our team continues to efficiently add new functionality through organic development, Partnerships and best in class product tuck ins that create value for our clients and expand our petchem opportunity. G and A expense was $19,000,000 or 11.9 percent of revenue, down nearly 300 basis points from 14 point Year to date, G and A expense as a percentage of recurring revenue is more than 150 basis points lower than last year. Adjusted operating income increased nearly 60 percent, dollars 39,000,000 with margins of 24%, up more than 400 basis points from 20% last positive for the full fiscal year. At the close of the quarter, our cash balance increased to $83,000,000 with no debt. This quarter, we generated interest income of just under $11,000,000 on average client funds of approximately $1,200,000,000 Yielding an effective rate of just over 3.70 basis points, the majority of our client funds remain in overnight counts, which are capturing Fed fund rates Faster and more completely.

Our outlook on the HCM demand environment remains positive. The labor market remains tight as non farm payrolls continue to increase, Growth has moderated. Job openings are at elevated levels and workforce participation remains low. Similar to last quarter, Our guidance assumes no material change in the broader demand environment or labor market, which has been fairly consistent and flat organic employee growth among existing customers for the balance of the year. Please keep in mind that we had a really strong 4th quarter last year compared to our 2 year recurring revenue CAGR of 21% through the 2nd quarter.

We are not anticipating the same outsized form filing benefit that we had this Q3. Separately, while we are enthusiastic about the acquisition of Verb, It will be immaterial to our operations today. With these factors in mind, we are once again raising our guidance for fiscal 2023. For the Q4, we expect total revenues of between $135,000,000 $137,000,000 or 24% growth at the high end of the range and adjusted operating income of between $13,000,000 $14,000,000 For the full year, we expect revenues of $548,000,000 to $550,000,000 or 20% growth at the top end of the range. And we anticipate adjusted operating income of $80,000,000 to $81,000,000 With respect to interest income, we expect our effective rate to increase marginally in the 4th quarter.

And at today's rates, we anticipate interest Income will be in the range of $30,000,000 to $32,000,000 for the full year on average client funds balances of just over $1,000,000,000 We remain on track to reinvest about a third of our interest income in temporary programs to accelerate our product roadmap, expand marketing programs and invest in scaling the business. In summary, our modern HCM platform that empowers frontline leaders to improve employee engagement and retention is resonating with customers. Our team continues to execute. We've demonstrated margin expansion as we scale the business and believe there is significant runway for further growth. As a mission critical application still early in its transition to the cloud, We believe in the durability of the category and our opportunity to continue capturing share within the expanding $32,000,000,000 HCM market.

With that, we will open the call for questions. Operator?

Speaker 0

Thank you. And ladies and gentlemen, And our first question comes from Mark Murphy with JPMorgan. Please state your question.

Speaker 2

Thank you. Congrats on

Speaker 5

the very nice results. Raul, when you look at the trends across your core verticals, Healthcare, Manufacturing, Food and Bev, Professional Services, are the demand patterns there aligning with kind of what we see in the broader economy? For instance, what I mean is the services PMIs are showing expansion. The manufacturing PMIs are a bit softer. I'm Wondering if that kind of spread shows up at all in your bookings patterns or employment trends?

Then I have

Speaker 6

a quick follow-up.

Speaker 2

No, we haven't seen any material changes in our performance across the 4 verticals. Obviously, We're still seeing a strong resurgence in food, beverage and accommodations across the platform. Healthcare And manufacturing are really big components of our total addressable market and our overall Percentage. So we haven't seen any changes in our base. Or in our locations.

Yes, understood. Okay. And then when

Speaker 5

we look around at product ratings and reviews, they do remain ultra strong for Paycor. I'm wondering in which areas are you most excited about kind of what you see in the R and D roadmap? And if you could just touch a bit on talent, That module seems to have a pretty high ceiling on the attach rate. And I'm just wondering if you're looking at that and feeling like that could become an ever larger mix of the revenue stream?

Speaker 2

Yes. So obviously, the thing we're most excited about is as we continue to expand in the marketplace, we're Our platform is not only the easiest to use, but the most powerful in our competitive set. So we feel really good about that. From what we're most excited about is clearly talent. Talent continues to grow.

It is already a bigger part of our And so we believe Talend has the capability to be as big as payroll and HR. So there's so many components and in that over time we're going to continue to build out On that platform and you can see that with our acquisition of Verb that we're focused on continuing to Add niche components into the ecosystem there, because there's strong demand to both source employees, but also to retain employees. And We believe it's going

Speaker 7

to be the

Speaker 2

next component of a core ATM module. And so when I started this category, we sold payroll, HR became part of payroll over the next few decades and we believe payroll HR Talent will be the future definition of what a core HCM platform is with workforce management and benefits still being Based on the needs of the industry that you're serving.

Speaker 5

Thank you very much.

Speaker 8

Yes. Thank you.

Speaker 0

Our next question comes from Gabriela Borges with Goldman Sachs.

Speaker 9

Hi, this is Kevin on for Gabriela. Thanks for taking the question. I just wanted to double click on guidance. I think it implies a higher sequential decline in recurring revenue in 4Q Prior years. So just curious, maybe the moving pieces in terms of how much revenue was pulled forward and how you're thinking about normalized recurring revenue growth going forward?

Speaker 4

Yes, we've tried to be consistent with the revenue guidance that we've put out over the last couple of years. A couple of the key things that sort of list off in the prepared remarks. The guidance assumes no material change in the broader demand environment in the labor market, Which has been fairly consistent. The flat organic employee growth though is what we've been seeing more recently that's trended down over the last couple of quarters. So we're assuming that that persists into the next quarter.

And then like I'd mentioned, we did have a strong Q4 last year With some form filing revenue that we believe in this quarter isn't going to persist into Q4. And so There's a little bit pull forward from Q4, not material, but on the margin, you're just seeing part of that as the guide into the Q4 or the Q4.

Speaker 9

Got it. That's helpful. And then looks like seller hiring is on track. Just curious how retention is holding up and Ramp in sales productivity, is that tracking in line with your expectations, particularly more ramp reps that have been around for a year or 2? Thank you.

Speaker 2

Yes. On seller retention, we continue to have strong retention, up significantly year over year. Productivity, despite strong hiring, our overall productivity is higher. So what that is would reference is that the people that are anniversarying into Tier 2 or 2nd year or 3rd year Are doing better. So productivity continues to operate as designed.

Speaker 8

Thanks for taking my questions.

Speaker 2

Yes. Thank you, Kevin.

Speaker 0

Your next question comes from Samad Samana with Jefferies.

Speaker 10

Hi, good afternoon. Thanks for taking my questions. Maybe Raul, the first one for you. As you guys move up market and target the 100 employee plus companies. 1, does it change maybe the type of seller that you're trying to hire?

And 2, as it relates to the micro part of the business, are you kind of like just letting that naturally maybe a trade away or Is that something where you're just investing left behind it? Just trying to maybe think about through that dynamic.

Speaker 2

Yes. I'll start with the first question about sellers And seller demographics, about 2 years ago when or 3 years ago, When Chuck came on board, we changed the profile over the 1st 9 months, and we've kept that profile. And that profile is really focused on some of the 3 to 10 years business experience, high velocity, And we want to teach them HCM and we want to teach them software sales. And so it's been a successful model for us. We've been able to find Applicants, we've been able to retain those applicants and we've been able to drive productivity.

So, we feel good about that. And we think that will Those reps can scale through the entire segment that we're covering today. As far as the micro segment goes, We're not intentionally declining the segment. What I would say is we're investing more resources into the 100 plus segment. And so obviously like our peers that focus on the SMB, the low end of the SMB segment like Paychex, etcetera, that Low end segment is going to have natural churn at a higher rate than your upmarket segment.

We're just not replacing at the same rate that we used to replace because we're replacing a 5 employee company that leaves with 150 employee company.

Speaker 10

Great. And then maybe just a follow-up for Adam on the margin side. I'm not an economist. I have no idea what rates will do, but it seems like the prevailing view is that at least short term rates might have peaked. I'm curious How you're thinking about getting margin from core operating leverage versus what floats contributing?

And if your mindset is shifting as maybe We get a stabilization in rates overall and how we're seeing that.

Speaker 4

Yes. Hey, Samad. So first, I would say that no, We're not going to shift our strategy. Our strategy has intentionally been about investing some of the interest expense or interest income back into the business, But that we want to continue to drive expansion on recurring margins. And so you can actually see that in the adjusted gross margins on a recurring basis expanded Year over year.

It, of course, expanded with interest the interest income as well. And G and A, specifically, where you should see some additional leverage, we Expanded that on a recurring basis. And that's part of our strategy. So we want to continue to drive that going forward. And then we were opportunistic about Taking some of that interest income and investing it back in the marketing and expanding sales programs and then also pulling forward Product roadmap.

And so you see that showing up inside of our P and L today where those on a recurring basis did not expand. But those programs were intentionally designed to be able to be turned off when we've decided that either rates have peaked or we want to let that flow down To margin. So we have that opportunity and that's how we continue to run the business is on a recurring basis for sure.

Speaker 10

Great. Thank you so much.

Speaker 2

Thank you.

Speaker 0

Your next question comes from Bhavan Shah with Deutsche Bank. Please state your question.

Speaker 6

Great. Thanks for taking my question and congrats on the strong results. It's nice to see the strong PePAN growth of 15% during the quarter. And I know there's plenty of drivers behind that, but any way to kind of break down just where the sources of growth are coming from? And how should we think about kind of PePIM growth going forward?

Yes.

Speaker 4

I mean, we break it down to sort of 3 groups. We look at pricing increases that we might be putting in, cross sell And upsell opportunities. And then also as clients are buying more at the point of sale, when they come on over the clients We're leaving on a net basis. They add additional Peptan to the stack as well.

Speaker 3

I

Speaker 4

would say typically they represent about a third each In terms of the total growth, each of those areas. This quarter, we saw a little bit outsized on the form filing. And so, I think that that was a little bit it's not going to persist In terms of the underlying PEPM growth rate. But we've seen the PEPM growth rate traditionally be in the sort of high single digit, low teens. And That breakdown is typically across those thirds.

Again, pricing, cross sell, upsell and then the new business coming in at a higher rate. We think all those can persist in the near term.

Speaker 6

That's super helpful. And just kind of one follow-up on some of the seller growth that you talked about earlier. And mentioned you continue to be on track for kind of 20% -ish seller growth. How should we think about hiring plans going forward? Is 20% going forward still a good starting point?

And how much of that is maybe dependent on what you're seeing on the employment side or the macro perspective?

Speaker 2

Yes. I mean, we're focused on Driving top line bookings and in order to continue to accelerate our revenue growth. And so we've been Fairly confident that we can continue to add coverage, and that's what we're focused on. We're not seeing anything in the macro that would suggest That we want to pull back on seller headcount.

Speaker 0

Thank you.

Speaker 2

Yes. Thank you.

Speaker 0

Your next question comes from Terry Tillman with Truist Securities.

Speaker 3

Hi, Raul, Adam and Rachel. Congrats for me as well on the quarterly performance. I guess maybe the first question, Raul, for you is, If we kind of dissect these kind of higher growth Tier 1 market opportunities that you're really putting some good new seller Capacity into versus traditional strengths of like Midwest, Great Lakes and Tier 2. Could you maybe comment, I know overall you had record bookings, but How did Tier 1 do in terms of the strength versus your expectations and then those markets that were your bread and butter a long time ago Tier 2?

Speaker 2

Yes. I mean, we have fairly strong performance across the board. Clearly, Tier 1 is over 50 Percent of our results, in new bookings. So we started to see that transition away from being dependent on just the Midwest To drive bookings growth. And so we're seeing more balanced participation, but 54% of our bookings is coming from Tier 1, And we feel pretty good about that.

We want to continue to drive that forward.

Speaker 3

That's great. Thanks for quantifying that. That sounds Pretty bullish. I guess maybe just a follow-up and I don't know if this is for you Raul or Adam, but I didn't have an expectation per se on smart sourcing and how the activation was But I think I heard in your prepared remarks, you've got about 600 customers on smart sourcing that you're kind of rolling out or activating. So how is that versus your initial kind of thoughts on where you'd be at this point?

And I assume that's not a for every employee, maybe that's just for the folks in kind of the recruiting side, what is that driving in terms of kind of an average customer kind of ARPU lift or ASP or contract value lift? Thank you.

Speaker 4

Yes. Hey, Terry. So yes, first, I'd say that we're really excited about the traction that we're seeing with all of our AI products and then specifically on the Smart sourcing. We've been able to through the integration get there a little faster than what we were planning for in the first place. And then the adoption and the excitement from a customer perspective has been really strong.

So at that 600 unit mark, we're earlier than what we had anticipated, I mean getting there a little faster. In terms of how we're taking it to market, it's going to be it's effectively a couple of dollars per employee and that's going into the bundle in terms of how we sell it as part of our talent attraction Sweet now. And we've seen that again, we've seen that sort of sell itself. Of course, I think at the time of the market is really Great for AI folks who are really interested and then the product just hunts really well as well. I mean it comes at the perfect time where folks are looking for Access to talent, they're struggling with it.

And so that sort of $2 space is where we're taking it to market today.

Speaker 3

That's great. Thank you.

Speaker 0

Your next question comes from Bryan Bergin with TD Cowen. Please state your question.

Speaker 11

Hey, guys. Good afternoon. Thank you. Just one from us here. Just taking into account everything you're seeing right now in the demand environment, your kind of 4Q view.

As we think forward here for fiscal 2024, any thoughts and considerations we should be mindful for around growth and margin? Thanks.

Speaker 4

Yes. I mean, we haven't given anything specific to 2024 yet. I'd say that, we want to continue to see how the quarter wraps up and everybody's been talking about The pressure in the second half of the year. So I think it's going to be important for us to see what happens through June, July, August as we give guidance into 'twenty four For sure. We want to be I think we would say that demand environment and the opportunity for HCM broadly is still a massive opportunity and we feel good about The long term sort of recurring nature of the business.

So we're going to continue to be bullish there. And I think we're going to want to be consistent into next year. So We've consistently been trying to drive the 20% plus recurring revenue growth and continue to expand margins across the business. That's going to be our strategy going into next year. And then we'll evaluate the demand environment, broader growth and may have to make decisions accordingly as we think about guidance into the months.

Okay.

Speaker 11

Actually, I'm going to squeeze one more in. Just on retention, can you give us a sense on kind of how pre gross retention, Revenue retention compared versus last year. Just any changes would be mind blowing sub-ten and the 1,000 or 1,000 plus mix?

Speaker 4

Yes. Well, across the business, Brian, it's been really consistent. So we continue to be in the high 90% range, really consistent over the last couple of quarters. And I'd say we have seen a little bit of that dip in that micro segment like we talked about, right, the retention in that micro segment, where you've seen a little bit of the softening in the organic PACE per control and their hiring, we are seeing that. But it's not affecting our overall net retention numbers.

So overall, it has been consistent.

Speaker 11

Okay, great. Thank you.

Speaker 0

Your next question comes from Scott Berg with Needham. Please state your question.

Speaker 12

Hey, Rahul, Adam and Rachel. Congrats on the nice quarter and thanks for taking my questions. I guess I got a couple. First, I wanted to start with your sales and marketing spend in the quarter. It had a bigger sequential jump From your Q2 number than you have for as far back as my model goes.

Just want to try to help understand what that jump in particular means just because it Stood out in the model. Yes.

Speaker 4

I mean a bit of it is the continued press into new hiring and sales expansion As well as some of the additional demand programs that we've been running, that we've been talking about incrementally, that we layered into in the middle of the year Or beginning sort of in the Q1. And so some of those programs really were in full swing towards the end of last year in November, December timeframe and then really the full quarter here for the Q3 period.

Speaker 12

Got it. Helpful. And then from a follow-up question that As we all are getting these over the last 30, 60, 90 days. Help us to understand what you think the impact would be from these newer Generative AI Solutions on the HCM space. I think there's a lot of opportunity.

I've been thinking around this for the last couple of weeks, but I don't think The average investor really looks at HCM as maybe a space or sector that can benefit from these technologies. How do you all have a kind of viewpoint on those opportunities?

Speaker 2

Yes. Hey, Scott, I mean, I

Speaker 4

think that we're really excited. We've been investing in the space around AI for the last couple of years. It's not a brand new idea for us. And you could see it show up in the solutions like Telenia and Smart Sourcing and how we're bringing it into applicant tracking. We're releasing some other things as well.

Sentiment analysis just came out for us helping folks write performance reviews and understanding how the sentiment of how they're describing it to their employees and to their associates. Term prediction and the term predictor has been in the product for the last couple of years as well. So that's been a place that we've Been playing. Something that's coming out real recent or real soon is job description generators. And so you'll see some more stuff from us around enabling Our customers will be able to write job descriptions more quickly and more effectively and line it up across industry Best practices and there's a couple of other things that are on the come for us as well.

And we're thinking about it of course inside of the product, but then how we can use it internally our infrastructure and for productivity, to drive additional better assist internally for our customer support reps. So we're really excited about the And we're continuing to leverage the investments we've been making for the last couple of years to continue to accelerate it.

Speaker 12

Great. That's all I have. Thanks for taking my questions.

Speaker 0

Thanks, Scott. Your next question comes from Brad Reback with Stifel, please state your question.

Speaker 8

Great. Thanks very much. I know you guys haven't guided to next year yet. But as we think about the piece parts of the business with recurring being guided to in sort of the upper teens this quarter and I know there are some difficult Because of the pull forward, but is that a good starting place roughly for the recurring revenue for next year? Thanks.

Speaker 4

Hey, Brad. Yes, I mean, we'll clearly give the guidance when we get through get into the Q1 and we'll shape it up. I mean, We overall, I would say, our strategy to continue to drive to 20% recurring over the right period is still our strategy And continue to drive margin expansion. Any 1 quarter, we're going to have to we'll take a different level of diligence in terms of how we guide to But our strategy is not changing right now. And in the face, of course, of a changing demand environment, we'll have to be considered about that.

So the longer that we have to take a look at that, see what's happening in the broader macro environment, I think that's going to be important for us as we think about it. But the broader strategy and the composition and the structure of the business, that's not shifting in any material way in the near term to make us think differently about the opportunity.

Speaker 8

That's great. Thanks very much.

Speaker 4

Thanks, Brad.

Speaker 0

Your next question comes from Brian Peterson with Raymond James. Please go ahead.

Speaker 13

Thanks guys and I'll ask for my congrats

Speaker 8

on the strong quarter. So just one for me. Raul, you mentioned the partners that are ramping up. I'm just curious, as you scale the kind of geographic presence in the product portfolio, does the ramp to revenue from those partners become Or is it kind of the same education? I'd love to maybe unpack that a little bit.

Thanks guys.

Speaker 4

Yes. I mean, there are some software partners where we're that are going to take a little bit different of timing as we layer them in, I think, than what you might see Historically, in the market. And so, we have talked a little bit about some of the software partnerships that we're creating. And they're really exciting, both For our customers and then the opportunity to continue to expand the services that we're providing to our customers. And those relationships take a little longer to stand up.

So it is part of a little bit about what we've been seeing, especially in the enterprise space. Some of those just broader partnerships take a little bit longer. We'll bleed into the 2024 like we had mentioned in the prepared remarks, sort of really ramping up revenue into 2024 and beyond.

Speaker 8

Got it. Thanks, guys.

Speaker 0

Your next question comes from Mark Marcon with Baird. Please state your question.

Speaker 13

Hey, good afternoon and thanks for taking my questions. Number 1, with regards to talent, Raul, you mentioned eventually it could end up being as big as payroll or HR. How penetrated is Talent right now within the existing client base and what's the plot for Going back to existing clients to ramp that up?

Speaker 2

Yes. I mean, it is We're in the early innings of cross selling talent into the base. As we've continued to expand the suite, we have A great opportunity to cross sell it back into our clients. And so we have a team of over As cross sellers, that focuses on bringing these new solutions into our client base. And so we continue to see Good penetration there, which is driving it's one of the 3 components that Adam talked about that lifts our PEPM, and we're continuing to see that growth.

Speaker 13

Great. And then can you talk a little bit about in terms of the recurring revenue growth, what percentage was from New logos as opposed to cross sells, obviously, there's form filings in there. But in terms of just thinking about year over year Over the course of this last quarter?

Speaker 4

Yes, yes. What we see, Mark, is typically about a third of the growth that comes from the PePAM growth It's from cross sell, upsell opportunities. And so that's how you might think about that 15%. It's a little less than 3rd because we sort of outsized in a couple of other areas this quarter. But that's typically what we see from the growth in the cross sell, upsells.

Speaker 13

Great. And then just the implied recurring revenue Guide as we're going to be $30,000,000 to $32,000,000 if we're assuming $32,000,000 in terms of float income for the year, How much was the form revenue in the year ago quarter relative to what you're expecting this year?

Speaker 4

Yes. I mean, what we normally see, especially in the Q3, is that we're generating high teens Of our total recurring and other revenue is related to form filings. And then you get sort of low single digits in non Q3 quarters. And so we were definitely at the high side of that here for Q3 and then we'll be maybe a point or 2 lower in the Q4 period, Which typically as we look back, it just tends to be a little bit more moderated in the Q3 period.

Speaker 0

Thank you. And our next question comes from Kevin McVeigh with Credit Suisse. Please state your question.

Speaker 14

Great. Thanks. Thank you. Is there any way to think about the growth in the PePPUM relative to the average client size? I mean, it seems like the average client is, I think, around 79 employees, Up from $75,000,000 How much of that is driving the PePAM growth as opposed to just the natural evolution of the client size as opposed to maybe other factors?

Speaker 4

Yes. Hey, actually, smaller clients have a much larger Peppa. So what we see in the micro space is that those clients tend to pay 2 to 3 times as much on a Peplum basis because the pricing strategy has like a larger Base fee, right, in those smaller clients. But what's happening really is that as new clients are coming on, They're buying a more complete part of the solution. So they tend to adopt more products, they pick up the talent solution And we have a bundle strategy that not all of our clients historically have.

And so as we continue to grow the average client size, Those clients are coming on relative to their similarly sized peers and they're buying more products. So that's really the dynamic. It's not necessarily That the PEPFAM increases. The larger clients tend to get a little bit of scale as they have pricing power.

Speaker 14

Got it. And then as you drive more chat GPT, are you going to be able to slow the rate of sales force higher and Still maintain the growth? I guess, is there going to be more efficiency in the sales force? Is this AI kind of permeates itself? Or Would it if you keep the rate at salesforce growth continent accelerates revenue overall?

Speaker 2

How should we think about that? Yes. The way we think about it is, we are still expanding out our sales force, But we're making great progress. So we're getting closer to the point where we can start to decelerate hiring over It could be next year or the year after, and drive more productivity. And that productivity will be through programs That can help make the sales team more productive and continue to drive productivity, whether that's through selling more product, whether that's through having more tenure, Continued acceleration of a very strong win rate.

There's a lot of different components that would drive individual productivity. And so that's kind of how we map out The future is as we have every territory covered, that we can then flex to productivity, which would yield More margin back to the business.

Speaker 14

Makes sense. Thank you.

Speaker 2

Yes.

Speaker 0

Your next question comes from Daniel Jester with BMO Capital Markets. Please go ahead.

Speaker 10

Hey, good evening. Thanks for taking my question. Can you just spend a moment walking us through how you see the regulatory environment for AI with regards The hiring and some of the performance reviews and the like, it feels like there's a patchwork of state and local kind of rules that are being formed around this. And I just wonder, as you introduce this into the toolkit for your customers, What's their concern level about the regulatory environment and how much of an impact should we think that that has going forward?

Speaker 2

Yes. Great question. Obviously, it's on everyone's top of mind and we've been really thoughtful about How we do it? And we're on the front end, we're really taking feedback from the hiring managers On what they're looking for. So it's just the source.

It's not the select, which is an area that has far more scrutiny. And then secondly, as far as performance reviews, it's really about helping coach the frontline leader On how their performance review is coming across? Is the verbiage positive? Is it negative? Does it match the sentiment Of the review that you're trying to write.

And so we've been very careful on the technology that we use. Obviously, our legal team is continually evaluating Different laws and regulations to make sure that we comply with all those jurisdictions. But ultimately, we feel like we're in a good place and the products that we're selecting are kind of focused Helping frontline leaders be more effective in their jobs and not really about who to select.

Speaker 4

Yes. And hey, Dan. As we think about things like candidate sourcing, we do think that it's important that we understand the AI, that there's transparency, And that we're applying it ethically and people understand what any sort of biases may or may not exist inside of those models and it's complicated, right? And so I think we're working Intentionally about it, we're interested in how regulators are going to come out more explicitly, whether they're state, whether it's federal And how we can help to provide that level of transparency to our customers so they feel good about it. I would say that we don't hear it as a primary concern Folks, when they see the product, they're really excited about it.

But that's not what drives us for it is I mean, we want to, like I said, continue to Build AI responsibly into the product and ethically and make sure people understand. It's especially important for us being in HCM where we're focused Almost entirely on people and leaders.

Speaker 10

Got you. Appreciate the detailed answer there. Maybe just a second one. Can you remind me where we are on the journey from shifting customers to the from the per paycheck model to The PEPA model, where are we there? Thank you.

Speaker 4

Yes. So most of that shift has really been focused What we would call the SMB market under 50 in the micro segment. And we have moved the majority of those clients over Our bundle strategies and subscription models. We're not going to take that sort of direct approach in the mid market and when we get up into our enterprise clients, That will take longer. So just because we want to be more intentional about those specific contracts and how Their current billing statuses.

And so we'll migrate those over time when it's right for the client, when they're interested in more products or when they're evaluating. And so we're sort of over 50%, well over 60% in terms of the portfolio today, of how much revenue is going through those bundles. And that will continue to progress as we begin moving into the mid market and enterprise clients.

Speaker 10

Great. Thank you very much.

Speaker 0

And our next question comes from Robert Simmons with D. A. Davidson. Please state your question.

Speaker 15

Hey, thanks for taking my question. So speaking at float revenue, I was wondering given how rates seem to be stabilizing, when do you think float revenue growth kind of Normalizes and approximates recurring revenue growth?

Speaker 4

Yes. So I think next year rates will if rates were to be normal or Flat, I should say, over where they sit today. There would still be some growth into next year. And of course, That's there's a lot of variables around that in terms of where the rate environment goes ultimately. But if they were to sit in at this rate, They would effectively be growing over the Q1, the Q1 primarily.

And there's with the 25 basis increase, I mean there's marginal growth here that we're going to see just a couple more dollars into Q4. You're not going to see much change there. But then next year they would sort of flatten out. Of course, if you look at the yield curve, I think the market has a different perspective on what the Fed is going to do. But We're not going to try to be aggressive there and chase rate.

We're just going to sort of deal with it so that we don't put ourselves in any sort of unhedged position.

Speaker 15

Got it. Great. And then you talk about what you're seeing competitively, changes from what some of your competitors are doing in terms of price, in terms of offerings, everything like that?

Speaker 2

Yes. There really hasn't been any shift in the competitive environment from last quarter. I would say it's Fairly

Speaker 15

static. Great. Thank you very much.

Speaker 7

Thank you.

Speaker 0

Your next question comes from Steve Enders with Citi. Please state your question.

Speaker 7

Hi, great. Thanks for taking the questions here. I appreciate the strength in the bookings or new bookings in the quarter. Just wondering, I guess, how does that kind of translate across the different Customer sizes and how should we think about the upper market execution in this past quarter to drive that strength?

Speaker 2

Yes. I mean, all three of our market segments had really strong Quarters, our cross sell team, our SMB team and our mid market team. And our Enterprise segment continues to grow at a really strong rate. So we had a really As a board, strong quarter in all the segments. Our win rates remain strong.

And our deal pipeline It's as strong as it's ever been. So we feel really good about where we are In the demand environment.

Speaker 7

Okay. I guess kind of digging into that to the last Comment around the pipeline and the deal environment. I think if I remember it from last quarter, maybe the micro segment was a little bit weaker and maybe it's just on the employee side that There's some softness there, but I guess any kind of view into where the pipeline is across those various segments and if you're seeing Maybe some of that continued weakness on the macro side of it?

Speaker 2

Yes. I mean, so to put it in perspective, Steve, like if you think about the overall composition of bookings, on average, you're going to get About 5% of our overall bookings in the SMB segment under 50%. You're going to get about 15% in cross sell And the remaining 80% is going to be in our mid market sales, which goes from 50 employees up into to the low end of enterprise. And that's not changing. And so it's been fairly consistent the mix.

And so what like the micro segment whether The softness we had was more in our installed base, where they weren't seeing organic growth in their clients. But by and large, we're not seeing any changes in our bookings distribution.

Speaker 7

Got you. Okay. No, very helpful context there. And then last question for me and I'll jump back in is just As we think about the bundle, I appreciate that the talent has been resonating a little bit more there. But any way to kind of think about across The new customers coming in, how much is that kind of new bundle or a broader bundle being adopted today versus maybe where it was a year ago?

Speaker 4

Yes. Hey, we continue to see the attach rate increase. And over versus a year ago, I'd say that there's probably 5 to 10 point change Positively, it's not a massive movement on the attach rate, but it continues to trend positively. And it does contribute pretty well the overall ADS and the PEPM that we're picking up, part of what's driving the overall effective PEPM rate increase.

Speaker 7

Okay, perfect. Thanks for taking the questions.

Speaker 0

Your next question comes from Jackson Ader with SVB MoffettNathanson, please state your question.

Speaker 8

Great. Good evening, guys. Thanks for taking my questions. The first one, Adam, you made the comment about larger customers getting a bit more scale on their PePAM. But I'm just curious how much pricing and how much does like for like pricing between you guys and your competitors end up becoming a factor In customer decisions.

And is that is there any difference either in the mid market versus enterprise, how much pricing plays back to?

Speaker 2

Well, I think it's Raul. I mean, clearly, larger customers have more pricing power. And just in sales in general in any category, right? And so we see Peppem decline with size. And so that's kind of natural and that's just nothing has changed, it's not accelerating.

It's very similar as it's always been. What I would say is every deal is competitive and individually negotiated. And so that's why you see a difference between maximum PePPM available PePPM and realized PePPM. That's one component, right? One component is how many modules they buy?

Do they buy the whole suite or a part of the suite? And the second component would be the discounting component. And so I think by and large that pricing has been consistent and we've seen no behavioral changes In any of our competitors.

Speaker 8

Got you. I actually have a follow-up To that though, is it because we've been hearing from ADP that their You guys can use maybe pricing as more of a weapon in order to take more share from some legacy incumbents?

Speaker 2

I mean that hasn't been a strategy that we've gone after. We've really been focused on the value prop and what we deliver. And I think how people calculate retention is different, right? And so I would suggest that that's a revenue retention number based on a lot of businesses that have nothing to do with what Paycor does At ADP.

Speaker 8

Got you. Okay, noted. Thank you.

Speaker 0

Thanks, Jack. Our next question comes from Matt Pfau with William Blair. Please state your question.

Speaker 10

Hey, great. Just wanted to ask one on the Verb acquisition. So maybe what attracted to you with Verb versus other And why did you feel that this was an important, hole to plug in your platform? Thanks.

Speaker 2

Yes, a couple of things. One is from an overall demand perspective, there's an ongoing shift from LMS to micro learning. Most of my 3 children had the attention span Of like 3 minutes long. And so we want to make sure that you're meeting the market, right? So the days of 30 minute Online LMS training courses is probably going to be gone.

And so we want to be part of the next generation Technology and how do you provide bite sized chunks to people and then allow them to reflect and learn on it. Secondly, All female leadership team, that's amazing. And we were really excited about being able to add them To our team. And so the combination of a really cool modern product that is meeting the needs of People in the workforce and that our leaders can use to coach their employees to better outcomes And a great leadership team is why we decided it was a perfect fit for us.

Speaker 0

Great. Thank you. Thank you. Thank you. There are no further questions at this time.

So I'll hand the floor to Raul Villar for closing remarks.

Speaker 2

Thank you again for joining our conference call this evening. I would like to take this opportunity to thank our associates for contributing to these excellent results. We are encouraged by the underlying fundamentals of the business and remain focused on executing our strategy. We look forward to connecting with You at the JPMorgan Global Technology Media and Communications Conference in Boston and Baird Global Consumer Technology and Services Conference in New York Over the coming weeks. Have a great night everyone and happy birthday to my sister Melissa.

Speaker 0

Thank you. And that concludes today's conference. All parties may disconnect. Have a