Paycor HCM - Q4 2021
August 31, 2021
Transcript
Speaker 0
Greetings, and welcome to the Paycor HCI Incorporated 4th Quarter and Fiscal 2021 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Demue.
Thank you, sir. You may begin.
Speaker 1
Good afternoon, and welcome to Paycor HCM's earnings conference call for the Q4 of fiscal year 2021, which ended on June 30. On the call with me today are Raul Villar, Paycor HCM's Chief Executive Officer and Adam Nandy, Paycor HCM's Chief Financial Officer. Our forward results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today's call is being recorded and a replay will be available following the conclusion of the call. Statements made on this call include forward looking statements regarding our financial results, products, customer demand, operations, the impact of COVID-nineteen on our business and other matters.
These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views 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 available on our website. In terms of the agenda for today's call, Raul will provide a quick overview of our Q4 results as well as review our market opportunity and growth strategy.
Adam will provide an overview of our financial model, a detailed review of our Q4 results, provide our guidance for the Q1 and full year fiscal 2022. With that, let me turn the call over to Raul.
Speaker 2
Thank you, Brian. I would like to welcome all of you to Paycor ATM's fiscal Q4 earnings call, which is our first since completing our successful IPO in July. We are thrilled to be a public company with new stakeholders as we execute on our strategy to be the leading SaaS based cloud provider of human capital management solutions for small and medium businesses. I would like to congratulate everyone at Paycor all of their hard work getting us to this milestone and positioning us for even greater success in the future. We'll start by providing a quick overview of our Q4 fiscal 2021 results, which were very strong on both the top and bottom line, reflecting the great momentum we have in our business.
For the Q4, we delivered total revenue of $88,000,000 up 20% year over year total bookings of $31,200,000 up 79% year over year and adjusted operating income of $200,000 For the full year, we reported total revenue of $352,800,000 up 8% year over year total bookings of $115,100,000 up 43% year over year and adjusted operating income of 48,000,000 dollars And we ended the year with over 28,000 total customers and more than 2,000,000 customer employees. Overall, our 4th quarter performance was the culmination of a very strong year for Paycor. We successfully navigated the challenges associated with the COVID-nineteen pandemic and are seeing great momentum across all aspects of the business. Since this is our first earnings call as a public company, I would like to start by providing an overview of Paycor's mission, our large addressable market opportunity, and our proven strategy to accelerate growth. Our mission is to provide HCM solutions that empower leaders to develop winning teams.
We know from experience that high performing companies are successful because of their engaged employees, and we believe the single most important driving force of employee engagement is effective leadership. Our tools are built to enable C suite executives, HR and finance professionals and frontline leaders to streamline administrative tasks and shift their focus to building winning teams. As we look at the market, we believe we have a tremendous opportunity for three reasons. First, the HCM market is massive, with an estimated TAM of 29,000,000,000 dollars The market can support multiple next generation winners and the incumbent providers are underserving this market with outdated technology and an overly complex user experience. Conversely, Paycor has built a disruptive, high performance cloud platform that is intuitively designed and purpose built for all leaders.
Our platform offers unrivaled depth in recruiting, scheduling, talent management, talent development, and workforce analytics. Finally, we are executing on a proven growth strategy of expanding our market coverage, increasing sales productivity, and innovating new products. Our 43% bookings growth in FY 'twenty one demonstrated that our strategy is in flight and yielding great outcomes. To provide additional insight into our core product offering, our comprehensive cloud platform includes onboarding, HR, payroll, tax filing, ACA, analytics, reporting and mobility for both the leader and the employee. We also extend our value proposition with 3 additional bundles that empower leaders in critical focus areas while providing incremental per employee, per month, or PEPM, revenue opportunities for Paycor.
Bundle provides leaders with the tools to create a workplace culture of continuous development by doing 3 things: finding and hiring the best people for their teams, coaching and developing their teams, and rewarding top performers. Our workforce management suite gives frontline leaders the ability to match the right employees with the right skills in the right job and ensure they can accurately schedule and record their time and attendance. These are critical requirements that legacy solutions are ill equipped to handle in today's dynamic business environment. Finally, our Finally, our benefits administration bundle offers a robust set of tools that make it easy for a customer to unify the benefits administration platform of their choice with Paycor. Providing an open platform is a key pillar of our strategy, and providing choice to our customers and broker partners is a differentiated component of our value proposition.
We understand that in order to maximize our platform strengths, we also need a powerful go to market effort that empowers our sellers to win. We have developed a comprehensive sales methodology that is focused on attracting and developing high performing sellers, providing them with a specific and repeatable selling motion, and leveraging technology to increase their productivity. Our go to market strategy is straightforward and actionable. First, we are aggressively hiring to expand our seller footprint with a clear focus on Tier 1 cities, which are the 15 most populous markets in the U. S.
Given our Midwestern heritage, we have historically had stronger sales coverage in smaller Tier 3 cities such as Kansas City, Raleigh, and Louisville. Conversely, we've had an enormous opportunity to expand in Tier 1 cities such as New York, L. A, and San Francisco, where we currently have only 20% of our potential seller coverage. We experienced fantastic success competing in Tier 1 markets in FY 'twenty one, and these markets delivered our highest win rates. Over 50% of our FY 'twenty one bookings growth came from Tier 1 markets, and we are confident in our ability to expand our presence in these large, dense markets.
Secondly, our strategy of delivering technology and expertise for key industries is resonating in the market. The needs of a manufacturer are different than a restaurant, and we are delivering a solution designed for these industries. Over 40% of our bookings growth in FY 'twenty one was generated by our industry strategy. Finally, engaging with brokers is an essential part of our growth strategy. We have positioned Paycor as the HCM vendor of choice for the broker community by combining a prioritized client implementation with the benefit admin platform that the broker prefers.
This empowers the broker to select the appropriate platform for their client while providing the insights, tools, and competitive differentiation they need to grow and retain their book of business. We've seen great success with brokers who referred more than 40% of our bookings in fiscal 2021. Looking at our 4th quarter performance, we saw fantastic results from our go to market strategy. Our booking success was broad based with strong new customer signings and great upsell activity across our installed base. The success of our bundle strategy drove meaningful Peplum expansion.
We ended the year with more than 370 sellers, an increase of 6%. A primary focus for us in fiscal 2021 was enhancing seller productivity, and we were notably successful in this area. In FY 'twenty two, we are forecasting to grow our sellers by 20% to 25%, with the majority of our new sellers deployed in Tier 1 markets. We increased the number of brokers engaging with Paycor more than 40% year over year and now have more than 1300 active broker partners. In this quarter, we launched a number of new product features, including recognition, which is offered with our core product offering.
This feature allows leaders and peers to recognize the efforts of their teams directly through the platform and providing leaders with another method of celebrating, motivating and engaging their teams. Our success in the 4th quarter provides a great foundation for even better performance in fiscal 'twenty 2 and beyond. We entered 2022 with a proven strategy and strong momentum across all aspects of our business. Our focus this year will be to build upon our success by continuing to invest in our go to market team by adding sellers and increasing productivity across our existing team, further expanding our engagement with broker partners and making it even easier for them to do business with Paycor and executing on our product development roadmap to increase the value we deliver to customers and make additional progress towards our 3 year goal of a $50 Peppem product portfolio. We have never felt better about our business and our ability to accelerate revenue growth.
We are in the early stages of SMBs replacing legacy HCM solutions with modern cloud based solutions. This multibillion dollar market opportunity gives Paycor a long runway to generate high levels of growth and profitability for the foreseeable future. We believe we are in a great position to deliver significant value to our customers and shareholders over the long term. With that, let me turn the call over to our CFO, Adam Ante, to walk you through our financial results. Adam?
Speaker 3
Thanks, Raul. Before I turn to our Q4 results, I'd like to start by providing a brief overview of our financial model. We have a highly visible and recurring SaaS revenue model. Nearly 90% of our revenue is subscription based through the sale of our Payroll and HCM SaaS solutions, and is generally based on the number of active employees a customer has and the number of products that they use. About 6% of our revenue is annually recurring related to year end tax filing.
We also have a small percentage of professional services revenue and finally, interest income related to the funds we hold on behalf of our clients. Interest income has a meaningful headwind to growth given the current rate environment, but has the potential to flip to a tailwind if rates rise. We typically sign month to month contracts with our customers, and we invoice at the time of service or monthly in arrears. As a result, we have minimal deferred revenue and calculated billings is not a relevant metric for us. So now we'll get to our results in more detail.
Total revenue for the Q4 was $88,000,000 a 20% increase year over year. This was the fastest revenue growth in the last 10 quarters, driven by a combination of new customer acquisition, good upsell activity and the continued recovery in employment across our customer base as well as an easier prior year comparable. Our business is directly tied to the U. S. Labor market.
So for the fiscal year 2021, we did experience a material growth headwind related to the economic of COVID-nineteen on SMB Companies. In the Q4, this headwind turned to a significant tailwind as the prior year experienced by far the most pronounced job losses due to COVID-nineteen. Easier comps contributed approximately 4 to 5 points of revenue growth in the 4th quarter. For the full year, our net revenue retention was 88%. This is below our historic level in the mid-90s due to the impacts of COVID I just mentioned.
But we saw significant improvement in net retention throughout the year as employment levels improved. And net retention in the 4th quarter was nearly back to pre pandemic levels. Moving down the P and L. Adjusted gross profit margin was 65.4%, which was down from 69.9% in the Q4 of fiscal 2020. The primary drivers of the change were an increase in amortization related to capitalized software and deferred contract acquisition costs as well as the anniversary of certain COVID related cost initiatives and continued investments in our service organization to ensure a great experience for our customers.
We have a scalable and efficient model and are optimistic in our ability to return to gross margins above 70% over time. Turning to operating expenses. Adjusted sales and marketing expense in the 4th quarter was $30,200,000 or 34% of revenue compared to 30% of revenue in the prior year period. This increase reflects the proactive investments we're making to expand our team of sellers across markets, particularly Tier 1 locations. Based on the success we're seeing in total bookings and the early stage of this market opportunity, we intend to continue investing aggressively to build out our sales capacity.
Adjusted R and D expense was $9,500,000 or 11% of revenue, which was consistent with the prior year. Before capitalization, we invested 18% of our revenue in R and D, and we expect to continue to make meaningful investments to support the expansion of our HCM SaaS platform, and we'll be introducing new products and features in fiscal 'twenty two and beyond. Adjusted G and A expense was $17,600,000 or 20 percent of revenue compared to 13% of revenue in the Q4 of 2020. The increase in G and A expense was largely due to the incremental cost of becoming a public company. We expect to begin driving leverage on the G and A line in the coming quarters now that we have most of our public company costs in a run rate.
Adjusted operating income was $200,000 essentially breakeven margin compared to 15% in the prior year period. The change in profitability reflects the drivers I mentioned above. We've been a consistently profitable business and we expect the Q4 to be below mark in profitability going forward. We are confident in our ability to invest for growth and deliver attractive levels of profitability. With regards to the balance sheet, we ended the quarter with $2,600,000 in cash $49,100,000 of long term debt.
Subsequent to the end of the quarter, we raised $459,000,000 in net proceeds from our IPO, 60,000,000 of which we used to redeem the Series A redeemable preferred stock as well as retire our outstanding debt. We have a well capitalized balance sheet that provides ample liquidity to fund our growth investments and other strategic priorities. We ended the quarter with $670,000,000 in funds held for clients with average daily client funds of $771,800,000 Interest income generated on these funds was $429,000 or approximately 22 basis points. Turning now to guidance, we'll start with the Q4. We expect total revenue of between $89,000,000 $90,000,000 and adjusted operating income of between $1,000,000 $1,500,000 For the full year, we expect total revenue of $396,000,000 to 400,000,000 dollars and adjusted operating income of between $30,000,000 to $32,000,000 There are a few things to keep in mind regarding our outlook.
Overall, we are optimistic about the growth opportunities and underlying trends in our business. The growth in bookings in fiscal 2021 will take 12 to 18 months to fully ramp into revenue and provide significant visibility to future growth. We expect another strong year of bookings growth in fiscal 'twenty two, driven primarily by the expansion of our sales team as well as continued improvements in productivity. We believe looking at bookings on an annual basis is the most useful approach, and we intend to provide an update on our bookings performance on our year end earnings call. While we experienced growth from improved employment trends in our portfolio during the Q4, we are assuming a tempered level of employment growth in fiscal 'twenty 2.
This is driven in part by uncertainty related to the Delta variant. We have not seen any business impact from it to date, but it is something we are watching closely. It's also important to keep in mind that our comps get harder throughout fiscal 2022. This will be particularly true in the Q4. Our guidance assumes interest rates remain low and will continue to be a headwind to interest income through fiscal 'twenty two.
We will continue to invest in our sales expansion strategy in line with recent levels as we look to grow our sales headcount by 20% to 25% for the year. We expect this investment to continue to drive front end growth as we drive towards sustainable 20 plus percent revenue growth over the long term. And with that, I will turn it over to the moderator for questions.
Speaker 0
Our first question comes from Mark Murphy with JPMorgan. Please proceed with your question.
Speaker 4
Yes, thank you very much. Congratulations on the fantastic bookings trajectory, the increase to guidance here. So Raul, the broker channel bookings being up more than 100% during the fiscal year, It's a pretty stunning trajectory during a COVID impacted year. Can you walk us through the dynamics that are driving that broker channel success and how much runway you think is left to add more brokers?
Speaker 2
Yes. Thanks, Mark. Couple of things to point to. 1st and foremost, a little over a year ago, we hired a senior executive to run the broker program for us. And I think we put together a value proposition that combines preferred implementation for the brokers and a benefit administration agnostic platform strategy.
So we like the broker pick the platform of their choice and that's resonating in the marketplace. That combined with guaranteeing that they're going to get a prioritized implementation for their client. And so we've seen significant success in the channel of increase each quarter. And when we think about the long term opportunity here, we have relationships with a little over 1300 brokers today. And there's 14,000 in the U.
S. And so we can go deeper with the existing brokers that we have and we'll continue to attract new broker partners. So we think we're in the early innings of the strategy. We're continuing to press in on the broker channel and we expect it to continue to have meaningful contributions to our bookings growth in FY 'twenty two.
Speaker 4
Okay, great. And then, Adam, I wanted to ask you, could you remind us what percentage of the portfolio is priced on a PePPham basis today and just what was that trend in PePPham? I mean, I think you're saying it was up through Q4. Do you have any thoughts on just the magnitude of increase that you're seeing on the PePAM side, the realized PePAM?
Speaker 3
Yes. Mark, so on the actual PePAM increase, we're seeing an increase in sort of the mid single digits on a pretty regular basis, which you could see sort of each quarter. In terms of the actual portfolio, size of the portfolio, I'd say about 90% of the portfolio heading into the year was priced on a per check basis, and we've seen a continued trend push more and more towards a bundled Peppam strategy. So we're attaching more than 90% 90% of our new deals are attached with a bundle or a Peppam based strategy, and we've seen that mix begin to shift from closer to from 90% down to about 80% of the portfolio is represented now by the Per Check. So something that we expect to continue into the future for sure.
Speaker 4
Excellent. Thank you very much.
Speaker 2
Thanks, Mark.
Speaker 0
Thank you. Our next question comes from Bhavan Shah with Deutsche Bank. Please proceed with your question.
Speaker 5
Great. Congrats on that. Great start to a public company. Just in terms of your sales expansion strategy, can you maybe talk about where you're seeing the most success from a productivity perspective? And then how can you ensure to maintain those levels of productivity as you expand that sales force to 20% to 25%?
Speaker 2
Sure. So we had broad success across the entire geographic footprint in the past year that contributed to the bookings growth we have. However, we had 91% growth in the 4th quarter in Tier 1 markets. And so we're seeing significant growth in the top 15 cities in the U. S.
And we're going to continue to press in with headcount additions throughout the year in those markets. So we feel really good about that. So I would say all in all, good in all the markets, but we have such an underpenetrated opportunity in the Tier 1 markets that we're going to continue to outperform there for the foreseeable future.
Speaker 5
Got it. That's helpful there. And can you maybe just talk about what you've seen from a demand perspective since the IPO? Have you seen any tangible growth in your pipeline just given the brand awareness around your public nature now?
Speaker 2
Yes. So, I mean demand, we've always had strong demand in the pipeline. I think it's a 30 year old company. I think what is really helping us is in competitive sales situations that were public now has added a little cache to the brand. And so it's helped us with some of the larger transactions that we're working on in Q1.
And so I think it's been really helpful. We're taking advantage of all the positive press that we've received in order to prime the pump for the demand in order to continue to generate outsized bookings performance in Q1 and on a go forward basis.
Speaker 5
Great. Congrats again.
Speaker 2
Thank you.
Speaker 6
Thank you.
Speaker 0
Our next question comes from Samad Samana with Jefferies. Please proceed with your question.
Speaker 7
Hi, thanks for taking my question. It's Ryan Bressner on for Samad. I guess just talk a little bit more about you mentioned earlier that a large part of your wins come from legacy incumbents in the market. I was wondering if you could talk a bit more about how switching costs compare there and where you see some value add in terms of pricing and other features there?
Speaker 2
Yes. So I think we continue to see an outsized proportion over 80% of our wins coming from what we would consider legacy providers. So ADP, Paychex, in house solutions. And it's really about user experience is the primary reason, cloud enablement. And some of the talent modules that we've added are really attractive in the current work environment.
And so the combination of modern easy to use solution that's in the cloud with a lot of the bells and whistles people are looking for to attract and retain employees in this market, proven to be really successful against the legacy user experiences that we're competing with.
Speaker 7
Thank you for taking the time.
Speaker 2
Yes. Thank you.
Speaker 0
Thank you. Our next question comes from Kevin McVeigh with Credit Suisse. Please proceed with your question.
Speaker 8
Great. Thanks so much. And let me add my congratulations as well. Hey, if I heard you right, it seems like 91% of the growth was in Tier 1 markets. How should we think about the bookings?
I know you talked to 12 to 18 months, but all things equal, I'd imagine those are larger sized clients. How should we think about the implementation of those? And is there any way to maybe frame what the average PAPO may is among some of those bookings numbers?
Speaker 3
Kevin, I don't think that we necessarily see a significant difference across tiers, meaning that clients are larger in Tier 1. I'd say that marginally may be true, but we don't see a significant difference. We still we remain focused in our target segment of 10 to 1,000 and then our field sales really focused in that 50 to 1,000 segments. So as we add teams in the Tier 1 markets, I mean, we're still really focused in that 50 to 1,000 segment. And yes, I think that you will see, like Raul had mentioned, over performance as we think about our win rate across tiers.
I mean, we are more successful in those Tier 1 markets. And from a PePAM perspective, it tends to be that you get a little bit better price competitiveness when you get into those Tier 1 markets rather than over where we've otherwise been weighted like Louisville or a Tier 4 market where you have to be a little bit more aggressive.
Speaker 8
That helps a lot. And then in terms of client employees, are they have they exceeded pre COVID levels at this point? And how should we think about any thoughts as to what the guidance reflects from kind of the runoff of federal benefits in early September, if you factor that in at all?
Speaker 3
Yes. I mean, so prior to COVID, we had just about 2,000,000 employees, just under 2,000,000 employees. And heading into the Q4 and the primary impact to COVID in April 2020, we really saw a pretty meaningful depression there, dropped about 6% seemingly overnight. And it sort of ran back up through July, but we've definitely since come back. Q4 of last year was the easiest I'd say, the easiest comp that we're going to see just given the pressure that we saw in the labor market.
But we've since come back, we're just over 2,000,000 employees now, so slightly ahead of where we were heading into COVID. And we're seeing that underlying growth in the portfolio start to come back, which is clearly benefiting the Q4 growth number in that 20%.
Speaker 0
Thank you. Our next question comes from Terry Tillman with Truist Securities. Please proceed with your question.
Speaker 6
Hey, good afternoon. Thanks for taking my questions. And I'd like to go with the congratulations. I was going to get on here and say, I've never heard my hometown of Louisville mention on an earnings call, but now I'm going to say I've never heard it mentioned twice on an earnings call. So thanks for that.
But Raul, maybe the first question for you is the Tier one opportunity, just better representation in those Tier one markets, it sounds really key going forward. And you talked about 20% to 25% seller growth as the target in FY 'twenty two. So if you look at kind of the end of 'twenty two, if we kind of fast forward, how do you think you are in terms of representation in the Tier one markets by the end of FY '22? And then just how long is that journey going to be to have better representation? And then I had a question for Adam.
Speaker 2
Yes. So at the end of '22, we'll be almost double of what we were at the beginning of 'twenty. So we're really accelerating headcount growth into those markets. And I was just on a new hire class yesterday. I welcome all the new hires.
And I had a new hire manager from San Francisco, Washington and Philadelphia. So I was really excited to see them there because we hired the manager first and then we wrap 6 to 8 sellers around the manager. So we're already moving ahead in those 3 markets there with incremental teams. And so we think this is a 3 to 5 year play in just Tier 1 markets alone adding significant account every year. And so we have really a long runway in Tier 1.
And so we're going to continue to press into it, Terry. We think in 5 years, we still will have upside in Tier 1s. And we still have opportunity to continue to round out our teams in Tier 2 and Tier 3. So we'll do that where we're trying to be efficient and taking advantage of a great leader or an emerging market where appropriate. But the headcount opportunity at Paycor is it's at a minimum of 5 year opportunity to continue to add in that 20 plus percent range of headcount to continue to drive future bookings.
Speaker 6
Got it. That's great to hear. And I guess, Adam, as it relates to the 20% to 25% selling growth that Al was talking about, I don't know how you've been doing so far into the new fiscal year. I know it's just a few months, but how do we frame or kind of lay out the sales and marketing expenses layering in through the year? Is it linear or how is that going to flow?
Thank you.
Speaker 3
Yes. Hey, thanks, Jerry. Yes, I think you'll see a little bit of an increase in sales and marketing expense in Q4 of 'twenty one, right, as we've begun to accelerate coming out of COVID. And so I think you'll see us come off of that step up with a similar increase. And most of the hiring in this case is going to be towards the front half of the year.
So we'll start to see that continue here over the coming quarters. And then we'll look to the second half of the year in terms of performance in the back half, whether or not we want to pull those headcount forward heading into FY 'twenty three. But yes, I think you'll see that start here in Q1 and Q2 as we bring most of those hires forward.
Speaker 6
Thank you.
Speaker 0
Thank you. Our next question comes from Brad Radack with Stifel. Please proceed with your
Speaker 9
was fairly evenly split by seat growth in ARPU gains. As we look forward, given the significant amount of headcount being added to the sales force, should we think more growth comes from headcount, your client seats versus pricing or do you expect it to remain fairly even?
Speaker 2
Yes. So
Speaker 3
you're saying between the just number of new deals versus the productivity of the sellers or are you thinking about overall revenue growth specifically?
Speaker 9
Total revenue growth, if I think of price in P and Q, right?
Speaker 3
Yes. I think that's right. I mean, so we're seeing I think it will probably be a little bit more weighted towards the actual number of employees versus just the rate growth. So we've been growing historically in that sort of low teens, and I think that you're going to see that plus as we continue to accelerate the revenue growth. And then yes, I think you're going to see the balance of that come from the P side of that equation as the average rates are as those clients are buying more and they're coming on at the bundled more complete sale at the point of sale.
But I think more in the near term, I think it's going to be weighted a little bit more towards the employee growth.
Speaker 9
Great. Very much, guys.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from Bryan Bergin with Cowen. Please proceed with your question.
Speaker 10
Hi, guys. Good afternoon. Thank you. I had a question on bookings. So I was curious if you would comment on how bookings have trended in 1Q thus far?
And can you talk about the demand environment by employer size, so above, below and within your target market?
Speaker 2
Yes. So we continue to see strong demand in the marketplace as we've entered the quarter, and we're really confident we're going to have a strong bookings quarter. And from a demand perspective, going back to Q4, 85% growth in the mid market space, and we define that as 50 plus and so really strong in our upmarket demand. We're seeing demand 50 to 1500. And so we continue to take advantage of that opportunities.
And so a couple of years ago, we shifted the focus of our demand generation and our go to market motion from the low end of the market to the to 50 plus and we're starting to really reap the rewards of that decision and seeing really strong demand in that segment.
Speaker 10
Okay. And then just on fiscal 'twenty two outlook. As you built the annual forecast, can you just help us understand some of the revenue growth components as far as what you're expecting out of new unit expansion, upsells and potentially kind of the pace per control so we can understand that employment based recovery that you've assumed?
Speaker 3
Yes. I mean, as we think about the employment base really coming back, I mean, historically, it's run-in sort of the low single digits. And I'd say that we're still a little bit cautious, and so we haven't really built it back to the original or sort of pre COVID labor growth levels. So we would expect something a little bit more conservative in our plan at this point or in our projections at this point than that low single digit number. And in the balance, of course, as we think about new business coming on, like Raul had mentioned, adding sellers in that 20% to 25% range, we really have expectation that we'll continue to accelerate bookings.
And of course, there'd be some expectation around productivity level growth. So one important thing to note as you sort of balance in the bookings is we grew our bookings level at about 22% on a 2 year compound growth rate. And so we expect to accelerate, and we intend to accelerate beyond that. Of course, with the easier comps in 'twenty one, not likely at that 43% range. So in either case, we'll target to drive the sales and marketing headcount, that 20%, 25% range and would expect bookings to perform commissimurately.
And then, of course, on the gross retention side, we've seen or on our net retention side, we've seen 88% range for the year. Historically, it was running in that sort of mid-ninety percent range, 96% in 2019. And so we've seen that return pretty well in Q4 and have seen some improvement in lift here even into the 1st part of the year. So would expect that to continue over the balance of the year.
Speaker 0
Thank you. Our next question comes from Brian Peterson with Raymond James. Please proceed with your question.
Speaker 1
Hi, congrats on the quarter and
Speaker 9
thanks for taking the question. Just one for me. So Raul, I know you talked about some of the product expansion in the 3 year roadmap to get $50 What do you think that longer term outlook could be? Is there a potential ceiling on that? Maybe just talk about some of the puts and takes
Speaker 6
on what the portfolio could look
Speaker 9
like longer term? Thank you.
Speaker 2
Yes. I mean, great question. And I think the wonderful thing about HCM as a category is that PePAM expansion has been proven throughout my 30 years in the category. And so when we think about it, over the next 3 years, we really believe 50 dollars PEPM is within our sites. And there are so many categories to extend upon that.
We don't think it's going be capped at 50. We think it will continue to expand whether it be in other employer services or services for the employee. Those different types of opportunities provide long term expansion opportunities for us, whether it be financial or physical wellness. And those categories are broad and are target rich for HCM companies. So we think 50 is in our 3 year window and we think that 50 is just a 3 year stopping point and we'll be able to continue to expand from that.
Speaker 9
Good to hear. Thank you.
Speaker 8
Yes.
Speaker 0
Thank you. Our next question comes from Scott Berg with Needham and Company. Please proceed with your question.
Speaker 1
Scott?
Speaker 0
Mr. Burke, please proceed with your question.
Speaker 11
That's probably better. Sorry about that. It's 2021. I don't know how to work a cell phone apparently by now. You guys have a great quarter, Raul and Adam.
Thanks for taking my questions here. I guess I wanted to start with what you're seeing from a general sales environment, say. If you look at the deals that you're signing with new customers today versus say just before the pandemic, are you seeing any differences in the number of modules or what the packaging looks like in terms of how they're buying the Paycor platform today?
Speaker 2
Yes. There's a couple of dynamics that we're seeing, Scott. One is, we continue to move our overall employee size up. And so we're continuing to sell larger transactions in that 50 to 1000 space. And then secondly, we're selling a bundled solution.
We started it 2 years ago. We continue to evolve that. And our core bundle has gotten bigger each of the last 3 years that we started. And so we're attaching more products at point of sale. And so we're seeing success lifting up our overall deal size.
And so a combination of more employees and more product. And again, we're in the early innings of our expansion of bundles, but we've seen really good
Speaker 11
Helpful. And then one last question for me is, the company is obviously going through a large reacceleration of growth you're expected to with a number of sales adds coming up. You had detailed the numbers to grow the staff 20% to 25% this year. Where are those reps coming from? Because it seems like every HCM company that I talk with out there is trying to grow their headcount at higher rates than they have over the last year.
Thanks.
Speaker 2
Yes. So we changed our hiring profile after our CRO, Chuck Mueller, came in a little over a year ago. We changed our hiring profile and we're really looking for people with 1 or 2 jobs in a primarily and call it, a high activity B2B sales role, not necessarily software sales. So we haven't had issues in demand of attracting those folks because we want to teach them both software sales and HCM sales. And so we believe that's a winning formula for us.
We saw significant advantages in productivity, instead of trying to reprogram an existing software or pond than everyone else. Okay. And then, in a different pond than everyone else.
Speaker 9
Congrats on the great quarter again. Thanks.
Speaker 1
Thanks.
Speaker 0
Thank you. Our next question comes from Pat Walravens with JMP Securities. Please proceed with your question.
Speaker 6
Great. Thanks so much for the question. This is Joe Marincic on for Pat. Just to double click on the sales hires, how long does it typically take to ramp these new sellers to full productivity? And then secondarily, can you just give us some color on how you're thinking about M and A?
Thank you.
Speaker 1
Yes. So I'll start
Speaker 2
with the sales productivity. And with a new hire, we have a shortened onboarding program and our objective is to get people productive within the 1st month and contributing. However, in HCM and at Paycor, people see productivity lifts between their 1st and second year. And then sometimes you see a productivity lift between years 23. And at that point, they're fairly defined about what their average is going to be.
But so you'll see lift. So the people we hire today, their productivity will increase in FY2023. So they'll contribute in 2022, but they'll contribute at an outsized perspective in 2023. As far as M and A goes, we'll continue to be opportunistic and curious. As far as that, we look at lots of different opportunities.
We have a proven history of product tuck ins into our unified platform that is proven to be a winning strategy. And so we'll continue to look at those and anything that's interesting that comes our way. Adam, anything you want to add there?
Speaker 3
Yes. No, I mean, we've seen that success, and you've seen us do 1 or 2 annually with some really strong success around product specific tuck ins. And so we'll continue to evaluate our need around adding that product that fits well into our product suite. So we continue to evaluate those opportunities.
Speaker 0
Thank you. Our next question comes from Mark Marcon with Baird. Please proceed with your question.
Speaker 9
Hey, good afternoon. Let me add my congrats. Bookings were really impressive. Can you talk a little bit about which bundles seem to be the most are getting the most traction, which ones you have the most hope for over the coming year? That's the first question.
Speaker 2
Yes. So our core bundle is a payroll HR suite of solutions. And so that's our core bundle. And then I would say we attach workforce management at the highest level, obviously with time and attendance and scheduling being really important for many businesses that we serve. What we're most excited about is talent.
And with the expansion of our talent management to include coaching and developing and providing goal setting for associates, we've seen really strong attachment of the product in the beginning of Q1. And so we're excited about that opportunity. We think our talent bundle has an opportunity to eclipse the penetration rates of our workforce management and benefits platform attach rates in the foreseeable future.
Speaker 9
That's great. What percentage of attachment are you getting on the new bookings with regards to the talent management bundle?
Speaker 3
Yes. Hey, Mark. Yes, I mean, we haven't really shared, per se, the attach rates. I'd say that they're attaching well. They're attaching how we're expecting them to.
And I would say that over the near term, we would expect them to be one of our stronger products overall.
Speaker 9
Honestly. Adam, you were talking earlier about the retention rate. Obviously, COVID ended up impacting things. We've seen this improvement. Can you just talk a little bit about some of the KPIs that you're seeing, the forecast retention and how you're thinking about it as we go into the fall and winter time period and what that portends?
Speaker 3
Yes. I think that the quarterly dynamics around net retention are interesting. There's definitely some seasonal timing around January adds or losses in that case, some of the quarters. But I think that there's expectation. I mean, I think we're expecting to see that lift regularly each quarter, especially as we get towards the back half of the year.
I think that there's going to be there should be some strong improvement there. And of course, the underlying labor market is going to be the primary driver as that is beginning to rebound. So again, we saw some lift into Q4 of 2021. We're seeing that maintain here in the Q1. And given any changes around the delta variant and COVID, we would
Speaker 9
sales force retention, what you're seeing there, particularly with regards to the new hires and the new profile that you're going for, number 1? And let me leave it at that.
Speaker 2
Yes. So our sales force retention has improved dramatically since April. So we've gotten better each month. And it really in Chuck's first year, our objective was to make sure we got the right profile, set the right expectations, put the right selling motions in place and make sure we had the right people on the team. And so we feel like we're in really good shape now and our retention levels, we expect them to be in the 70% to 80% retention range for the year, which would be what we would expect in a mid market sales organization in the category.
Speaker 6
There
Speaker 0
are no further questions at this time. I'd like to turn the floor back over to Rahul Volar for any closing remarks.
Speaker 2
Yes. I want to thank everyone for your time today. We really appreciate it. We look forward to spending more time with you over the next couple of days months and we're really excited about our Q4 performance and we look forward to having a great fiscal 'twenty two. So look forward to talking to all of you shortly.
Thank you.
Speaker 0
Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day.