Paycor HCM - Q4 2022
August 23, 2022
Transcript
Operator (participant)
Greetings, and welcome to the Paycor Q4 and full year earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel White, Vice President of Investor Relations.
Rachel White (VP of Investor Relations)
Good afternoon, and welcome to Paycor's earnings call for the Q4 of fiscal year 2022, which ended on June 30th. On the call with me today are Raul Villar, Jr., Paycor's Chief Executive Officer, and Adam Ante, Paycor's Chief Financial Officer. Our financial results can be found in our press release issued today, which is available on the investor relations section of our website. Today's call is being recorded, and a replay will be available on our website following the conclusion of the call. Statements made in this call include forward-looking statements related to our financial results, products, customer demand, operations, impact of COVID-19 on our business, and other matters. These statements are subject to risks, uncertainties and assumptions and are based on 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 will also refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics, and a reconciliation of non-GAAP to GAAP measures is provided in our press release on our website. With that, I'll turn the call over to Raul.
Raul Villar Jr. (CEO)
Thank you, Rachel, and thank you all for joining us to discuss Paycor's fiscal Q4 and full year results. Revenue growth continued accelerating, culminating with 26% growth for the quarter, our highest in recent record, and 22% growth for the year. We exceeded the top end of our revenue and profitability guidance by 7% and over 100% respectively. In our first year as a public company, we have consistently demonstrated revenue growth acceleration, and following two years of significant investments in our client experience, started expanding margins year over year in Q4. I would like to thank our employees for their dedication and contribution to our performance. Our fantastic results are not possible without them. Our differentiated value proposition, built for leaders and configured by industry, continues to resonate in the market.
This quarter, we introduced a new tagline, Empowering Leaders, that reinforces our commitment to empower frontline leaders to be more effective so they can deliver enhanced business results for their organizations. To further enhance our unique industry configuration, we launched nearly 20 industry-specific product features and over 20 industry integrations this year. Our go-to-market execution has been excellent as we continue to make significant progress expanding our sales coverage, winning with broker referrals, and growing PEPM. The competitive dynamics have remained consistent and demand remains strong, resulting in robust bookings growth of 24% year-over-year. Over 80% of our new business stems from legacy providers, including in-house, regional service bureaus, and legacy providers, ADP, and Paychex. Our win rates are at record levels, which is a result of the strong demand for our open, modern cloud platform focused on leaders and configured by industry.
In a competitive labor market, we increased sales headcount 23%. We have established sellers in all Tier 1 markets today and will continue expanding coverage in these markets for the foreseeable future. To further leverage our strong sales and marketing flywheel and promote Paycor's brand on an unprecedented national scale, we secured exclusive naming rights for Paycor Stadium for the next 16 years. Given the powerful viewership of the NFL, Paycor Stadium will reach the largest audiences in America. The sponsorship includes signage, hospitality and events, a community giving initiative, and other multimedia assets. We have been headquartered in Cincinnati for over 30 years and a long-standing partner of the Bengals. As longtime fans, this is a proud moment for our employees and our community. Finally, we continue to expand our modern HCM suite and have increased PEPM $3 or 8% this year to $42.
In the last year, we released over 1,200 features powered by the inclusion of more than 500 customer ideas into our solution, demonstrating our commitment to delivering a world-class client experience. Leveraging powerful APIs, Paycor's modern, extensible platform enables rapid development and partner integrations. The developer portal has been highly utilized since its launch in February, with partner integrations growing by 26% in FY22. Moreover, we grew the total number of API endpoints available in our system by 57% year-over-year. This investment is paying off in greater connectivity and integration for our customers, with total API usage growing 148% since February. Looking ahead to FY23, we will maintain our focus on winning share in the SMB space, delivering sustainable 20%+ revenue growth and expanding margins.
We intend to do so through a relentless focus on execution, further penetration in tier one markets, and continued PEPPM expansion. We are pleased with our HCM suite's competitive positioning and are now focused on leapfrogging innovation. With that, I'll turn the call over to Adam to discuss our financial results and guidance.
Adam Ante (CFO)
Thanks, Raul. I'll review our Q4 and full year results, and then share our outlook for the Q1 and next fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. Total revenue for the quarter was $111 million, increasing 26% year-over-year, our highest on record. Revenue growth was driven by continued acceleration in new business, strong adoption of our bundled pricing strategy, and growth of our partner program. We exceeded the top end of our revenue guidance by 7% and significantly outperformed our adjusted operating income guidance through diligent investment management. For the fiscal year, total revenue was $429 million, increasing 22% year-over-year. Our bookings grew 24% versus the prior year, reaching $142 million and setting us up nicely for continued revenue growth into FY23.
The majority of revenue growth stems from new business wins and cross-sales, driving PEPPM expansion in the high single-digit percentages and organic labor market growth in the low single digits. With the success of our client experience and product investments, net revenue retention reached a historical high of 98%. Additionally, our focus on partner expansion in the last year, such as income and employment verification services and automated background screening, is increasingly contributing to our business, and we expect it will continue to grow. The number of employees on our platform increased 15% annually to a record 2.3 million. Our average customer size increased to 77 employees in Q4, an increase of 9% year-over-year as we continue to shift away from the micro segment and accelerate growth among clients with more than 100 employees.
For the quarter, adjusted gross profit margin improved to 66.1% versus 65.4% a year ago. Adjusted gross margin excluding depreciation and amortization was 76.6% for the quarter, an increase of nearly two points year-over-year. Sales and marketing expense was $37 million, or 33% of revenue, compared to 34% a year ago. The sustainability of our revenue growth hinges on driving new business through expansion of our sales teams and marketing programs, primarily in tier one markets. Sales headcount increased 23% to approximately 460 sellers this year, and we expect to add sales resources at a similar pace next year. On a gross basis, we invested $18 million in R&D or 16% of revenue, slightly lower than 18% a year ago 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 enhance client value and expand our PEPPM opportunity. G&A expense was $18 million or 16% of revenue, down from 20% in the Q4 of 2021. We intend to continue to progressively drive G&A down as a percentage of revenue following this year's improvement of 37 basis points. While our primary objective remains sustainable 20%+ revenue growth, we intend to steadily expand margins as we scale the business. We increased quarterly operating income to $9.2 million or an 8.3% profit margin compared to just 0.2% last year. The greater than 800 basis point expansion was driven by thoughtful investment management as we've grown the business.
Shifting to the balance sheet and cash flow, this quarter, we generated $5 million of free cash flow compared to a consumption of $21 million last year as we scaled the business. We ended the year with $133 million in cash and no debt. This quarter, we generated interest income of approximately $1.3 million on average client funds of just under $1 billion. As overnight rates have increased with the Fed rate increases, our overall effective rate was 52 basis points for this quarter, compared to just 16 basis points last quarter. Turning to the outlook for FY23, we continue to be positive about the momentum in the business, strong demand environment, and Paycor's leadership position in the HCM market.
The labor market has remained tight, while we continue to closely monitor the macro environment, our guidance assumes continued strong demand. We generated about 50 basis points of interest income in the Q4 and expect that rate to more than double in the Q1 as overnight rates start to benefit from the Fed funds rate increases. At current rates, we estimate interest income will be in the low $10 million range for the full year. For the Q1, we expect total revenue of between $112 million and $114 million, or about 23% growth at the high end of our range, and adjusted operating income of between $4.5 million and $6 million.
For the full year, we expect revenue of between $510 million and $516 million, or 20% growth at the top end of our range. We anticipate adjusted operating income of $58 million-$61 million. In summary, we made significant progress this year scaling and re-accelerating the front end of the business. We continue to press into our leader and industry focus that is resonating with clients. We remain enthusiastic about the trajectory of the business and opportunities to capture market share while expanding profitably. With less than 2% share of our $29 billion total addressable market, we have significant runway for continued growth. With that, we'll open the call for questions. Operator?
Operator (participant)
Thank you.
Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question comes from the line of Mark Murphy with JPMorgan. Please proceed.
Mark Murphy (Executive Director)
Yeah, thank you very much, and congratulations on a fantastic finish to the year. Raul, I wanted to start by asking you which elements of Paycor's differentiation do you think are making the biggest difference, when you look at your win rates in the current environment, which you said have been increasing. I'm wondering if it's more the industry specific focus, the focus on leaders. I'm also wondering how often is the real-time payroll processing engine coming up in those conversations and maybe making a difference versus some of the competitors that might still be running in more of a batch mode?
Raul Villar Jr. (CEO)
Thanks, Mark. I think it's a combination of all three. Industry clearly stands out. We're generating, you know, over 50% of our bookings in the four key industries that we're focused on. Our win rates, you know, are at the highest levels in those four key industries. So I would say, you know, of one industry definitely stands out. However, you know, the talent elements of our leader messaging are also, you know, appealing to our end markets. People are really interested in how to attract and retain people in this labor market. So that tends to be a significant advantage as well. Then lastly, you know, we've had a real-time processing engine for a long time. Our employees have been able to see their pay stub 72 hours before payroll for years.
Like some of the, you know, employee service tools that some of our competition, you know, are really leveraging and driving in the market we've had for years. You know, we consider that table stakes. I think it's really helped us from that perspective. The ability to have, you know, a really flexible payroll engine has eliminated the need for, you know, those kind of tools in the market for our customers.
Mark Murphy (Executive Director)
Okay, wonderful. Thank you for that. The other question I had was, are you able to help us with the size of the largest organizations that you might have been landing during Q4? Just at the other end of the spectrum, maybe Adam, if the macro backdrop slows in the next 12 months, is it safe to say that your bookings targets aren't materially reliant on that sub-10 employee segment at this point where customers can be more economically sensitive, just given the way you've mixed upmarket?
Adam Ante (CFO)
Yeah. Hey, Mark. To both questions, you know, we sign a lot of clients that are over 1,000 employees and at the top end of our range, but none of them represent even 0.5% of our overall revenue. There's quite a bit of, you know, diversification there across all of our clients and none individually worth necessarily, you know, talking through. I would say from a bookings perspective in that microsegment, we're definitely not reliant on that as we think about the overall bookings targets and our go-to-market strategy. I mean, we definitely close business in that sub space, in that sub-ten space, in that microsegment. But it's not a material, an overly material part of where we go to market and of our overall composition of our bookings.
Mark Murphy (Executive Director)
Thank you very much.
Raul Villar Jr. (CEO)
Thanks, Mark.
Operator (participant)
Our next question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed.
Speaker 15
Hi, you have Kallie on for Gabriela. First question, just on adoption trends across newer products such as expense management and developer portal, what are you seeing there, and how much are new products helping drive NRR up?
Adam Ante (CFO)
Yeah, what we're seeing, like, with expense management, our go-to-market strategy is really to build it into our core HCM bundle. It helps to lift overall PEPPM and overall attach to that product as it's included in the bundle. We continue to see really strong adoption of our core HCM bundle. We sell that more than 90% of the time to new business. In terms of broader adoption, we continue to lift the number of modules that our clients are buying. We're selling, you know, somewhere between that two and three on average across our entire portfolio to new business. They're buying, you know, two to three, closer to the midpoint of that range, in terms of number of new modules that they're attaching.
We continue to see good lift from the addition of these new products that we're bringing in to the overall attach of our bundle pricing strategy.
Speaker 15
Okay. Thank you so much. That's super helpful. And then just to follow up on that, super impressive NRR number, but where do you see that going forward? I mean, what do you think you can do to kind of drive that even higher? And what do you see as the main levers of that, for the next two years, maybe?
Adam Ante (CFO)
Yeah, I mean, there's a couple key levers. One is the underlying, you know, gross retention. As we continue to lift gross retention over time, you'll see that, you know, the number has room to to continue to improve. You know, one of the bigger drivers is as we continue to release new product and create more compelling bundles and pricing strategies, we continue to see lift from that. Additional cross-sell, which hasn't been our primary focus thus far. As we continue to drive additional cross-sell, there's room for it to continue to improve from where we are today.
Bhavin Shah (Director - Software Equity Research)
All right, great. Congrats on the quarter.
Raul Villar Jr. (CEO)
Thank you.
Adam Ante (CFO)
Thanks, Callie.
Operator (participant)
Our next question comes from the line of Samad Samana with Jefferies. Please proceed.
Samad Samana (Managing Director)
Congrats on the strong end to the fiscal year. Maybe first one for you, Adam. Just, I think I heard you say low teens of millions for the float revenue. I think that implies somewhere around, let's call it 18-ish% for the rest of the business as far as growth goes. One, I just wanted to check if that was right from a high-level perspective. Two, you know, it seems like you guys are a stone's throw from getting to the 20%+ type of level the company is looking at. I'm just curious, maybe what would need to happen above and beyond the sales growth or the bookings growth that would get you there on a full year basis in fiscal 2023? Just trying to understand kind of what went into that high teens assumption.
Adam Ante (CFO)
Yeah, I mean, as we just think about the full-year guide, right? We're sort of at the longest point of the year right now. We did guide to almost 23% at the top end of the range for Q1, so we feel good about that. It's just gonna be the continued demand environment and the opportunity to drive additional bookings and the flow-through of those bookings to revenue. Then of course, you know, like we talked about, that additional cross-sell and the pricing strategies that go along with that. A lot of the things that contributed to the upside that we saw here in Q4, it's really just about continued execution of those strategies through the balance of the year.
Looking out and at this point, you know, four quarters in advance and saying, you know, where do we feel comfortable with the guide? Again, we feel really good about the guide to the 23% revenue growth here in Q1.
Samad Samana (Managing Director)
Great. Then maybe just a follow-up for you, Raul. Just if I think about the growth in the total sellers, it's significant. Your seller base is now actually larger than even some of your, you know, maybe your larger peers. I'm just curious when you think about either the type of salesperson you're able to hire or the productivity that you're assuming for this year, you know, do you need to grow at the same level or what's driving that? Should we think bookings might accelerate as a result of that?
Raul Villar Jr. (CEO)
Yeah, I think, you know, overall, you know, we've continued to add sellers, and this year, you know, as we say, we added 23%, and the majority of them will contribute significantly more next year than this year. Obviously we believe we'll have, you know, bookings lift and bookings growth, from the ramping of the new sales associates that we hired this year. We are focused on a really big, large end market with, you know, approximately 10% of the market has shifted to the cloud, you know, to the modern cloud solution. You know, we believe that we still have plenty of runway, to add sales headcount, and we're focused on adding 20%+ sales headcount for the foreseeable future.
To kind of put it in perspective, you know, we believe that we have about a third of the country covered the way we would cover it if we had unlimited headcount. We have two-thirds of the market to continue to cover with incremental sales adds for, you know, over the next, you know, five years. We think there's tons of opportunity in the market, and we're gonna continue to invest and take advantage of it. Obviously, we'll look for ASP growth. This year we were able to add 23% headcount and grow ASP 1%, which is hard to do. Kudos to the sales team for being able to do that. You know, we're gonna continue to focus on execution to drive those great results in the future.
Samad Samana (Managing Director)
Great. Has Joe Burrow visited your office yet? I'm kidding. Don't answer that one. Just, congrats on signing that partnership.
Raul Villar Jr. (CEO)
Yeah. Thank you.
Samad Samana (Managing Director)
Thanks again, guys.
Adam Ante (CFO)
Thanks, Samad.
Operator (participant)
Our next question comes from the line of Bhavin Shah with Deutsche Bank. Please proceed.
Bhavin Shah (Director - Software Equity Research)
Great. Thanks for taking my question and congrats on the impressive results, yet again. Just following up on Samad's question. Just on the sales coverage going forward, it looks like you're at 28%, like tier one sales coverage ending this year. Raul, you talked a little bit about this, but like, how should we think about that going forward next year and the years beyond? Should we expect you to continue to see a similar type of ramp that you saw from this year versus last as we think about FY 2023 and maybe FY 2024?
Adam Ante (CFO)
Yeah. I mean, we're gonna continue to press into that, you know, a similar growth rate in terms of the number of sellers that we add. We were in that 23% growth, you know, wanna be again in that 20%-25% growth range in terms of the new headcount. What you're gonna see out of that is most of those sellers are gonna go into tier one markets still, which is gonna continue to press that tier one coverage up. 28% today, and you know, there's opportunity to continue to expand that, like Raul had mentioned, really for a handful of years at the rates that we're talking about continuing to grow. We do add sellers into tier two, tier three markets and other markets, as well as in our small market and client teams.
It's not that we only add sellers in tier one. It's just that a big portion of them are gonna continue to go into those markets to expand coverage.
Bhavin Shah (Director - Software Equity Research)
That makes sense. Just on a separate topic, I mean, you talked about in your prepared remarks over 20 kind of industry specific product features. Like which products and which industries are seeing the most resonate well with customers, and how do you think about just the vertical adoption you've seen thus far?
Raul Villar Jr. (CEO)
Yeah. We had strong growth in, you know, all four of the industries, healthcare, manufacturing, food and beverage, and professional services. I would say the product innovation that we delivered into the platform this year was really focused on three different areas, the hiring process, the recruiting process, and a lot of specific time and labor functionality for those specific industries.
Bhavin Shah (Director - Software Equity Research)
Great. Thanks for taking my question.
Raul Villar Jr. (CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Terry Tillman with Truist Securities. Please proceed.
Terry Tillman (Managing Director)
Yeah, thanks. Hey, Raul, Adam, and Rachel. Congrats as well from me on the strong Q4 and the full year. Maybe the first question just relates to tier one markets. You know, you still have a lot of opportunity to add more capacity and get coverage, but in those tier one markets that you're starting to kinda make a name for yourself, are you seeing kinda balanced momentum across all those newer kinda tier ones? Or are there some areas that seem like they're kinda more rising to the top and really leading the charge? Then I had a follow-up question.
Raul Villar Jr. (CEO)
Yeah, we've had strong growth, Terry, across you know all the tier one markets. I would say that a significant portion of our growth came in the large Texas cities and large California cities. Those two markets, well, multiple markets have been particularly strong for this fiscal year. We've seen really strong momentum in Florida, strong momentum in the end of the year in the Northeast. We feel really good about where we are in each of the big segments and starting to power up in the teams in those areas.
We've been able to really bifurcate our marketing campaigns to really drive significant awareness into these tier one markets through a variety of different solutions, whether it be Pandora, YouTube, just, you know, connected TV advertisements. It's really helped, you know, us drive awareness in those large markets.
Terry Tillman (Managing Director)
Got it. Thanks, Raul. I guess, Adam, just my follow-up question relates to anything you can share on how we should think about free cash flow for either the quarter or for the full year? I don't know if maybe there's a way we can look at it in relationship to non-GAAP operating income or just any help on how to think about free cash flow. Thank you.
Adam Ante (CFO)
Yeah. Hey, thanks, Terry. Yeah, I mean, we haven't given specific guidance, but I mean, on free cash flow, we wanna continue to expand free cash flow, and you'll see it move with adjusted operating income over time. It's been running, you know, about 10 points, 10-15 points in terms of free cash flow margin behind adjusted operating income. You know, that disconnect or that additional spend is really into the product and into the cost of acquisition. You'll continue to see those investments play through like the product investments and the cost of acquisition for both sales, our implementation resources. That'll put that sort of 10%-15% pressure from adjusted operating income down to adjusted free cash flow.
Terry Tillman (Managing Director)
Okay, thanks.
Raul Villar Jr. (CEO)
Thanks, Terry.
Operator (participant)
Our next question comes from the line of Brian Bergen with Cowen. Please proceed.
Speaker 14
Hi, this is actually Jared on for Brian tonight. Have you seen any impacts in employment levels within your existing client base to date? What are your employment growth assumptions for fiscal 2023?
Adam Ante (CFO)
Yeah. Hey, Jared. So within the base, I mean, we've seen that continued labor market growth in that, really, in the low single digits. We haven't seen a ton of change, I'd say, at the macro level within our portfolio. Of course, specific verticals or specific industries may be reacting a little differently. We saw a lot of comeback or a lot of bounce back from the restaurant and food services segments. Manufacturing played through pretty well this year. Healthcare played through pretty well, a lot of the areas where we focused our industry play on. But that's all in, sort of, resulted in that low single digit organic growth. You know, we haven't considered any of the overall demand environment.
We haven't considered anything necessarily different as we think about our guidance into the future. Again, in this case, it's really only generating something in the sort of low single digits overall. I'd say like from an overall shift perspective, so we also track hourly shifts. Again, sort of tracked right along with the overall market and what we've seen in the labor market more broadly, with the exception really in that micro segment, where I think the micro segment squeezes just a little bit faster, and squeezes a little bit faster enterprise segment. In our target market, in that 10 to 1,000 segment, it's remained really strong.
Speaker 14
Got it. In terms of, we heard the strong NRR of 98%, where did gross revenue retention and client retention land for FY 2022?
Adam Ante (CFO)
Yeah, we haven't shared gross retention specifically or client retention specifically. The net retention is really how we manage the business more broadly. I'd say that gross retention was really in line with where it's been historically, and is not one of the bigger contributors to the increase that we've seen in net retention, just meaning honestly that gross retention will continue to be a tailwind as we continue to improve the business and the client experience that we've invested in over the last couple years. You're gonna continue to see that benefit. It's been.
Gross retention broadly has been really right in line with where you would expect, just given some of the competitor discussion in terms of where they put gross retention and knowing that our portfolio is just a little bit smaller in terms of the average size of our employees per client. Our gross retention would sort of trend with what you would expect.
Speaker 14
Got it. Thank you.
Raul Villar Jr. (CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Scott Berg with Needham. Please proceed.
Michael Rackers (Equity Research Associate)
Hi, everyone. Congrats on the quarter. This is Michael Rackers. I'm on for Scott Berg today. You've talked a bit about the larger average new customer size, with the majority of new bookings coming from customers with more than 100 employees. Is that trend kind of continuing to the same extent today? How should we think about that dynamic moving forward?
Adam Ante (CFO)
Yeah. I mean, overall what you're seeing in the portfolio is that our average employees per company continues to grow. We ended the year at about 77, coming off of about 70 from last year. We're seeing good improvement. That's really the combination of two things. One is that we are seeing the micro segment continue to flatten and not grow at any outsized rate. You're seeing the benefit as we sort of shift more towards the 10+ and 100+ segment. Then as we add additional business, we're really adding that new business from the mid-market. It's coming in at 101, you know, in the sort of 150 range, with clients that we sell, you know, higher than that and then some lower than that.
On average, you're seeing sort of 150-160 in terms of the average client size. Both of those dynamics are really helping to lift the overall size of the portfolio.
Michael Rackers (Equity Research Associate)
Great. Then a little bit on module adoption, which I know you've mentioned earlier, but maybe how does that look in tier one cities versus some of your more established smaller markets? I mean, maybe looking at talent management specifically, I mean, are the trends in adoption, you know, in the tier one markets pretty similar to the established smaller markets, or is there any kind of disconnect there? Thank you.
Raul Villar Jr. (CEO)
Michael, this is Raul. In the tier one markets, we're seeing slightly bigger pay sizes, and slightly more attach, than we do in tier two, three or four markets. You know, it's really positive for us, and it's reinforcing our desire to continue expanding in those markets.
Michael Rackers (Equity Research Associate)
Great. Thank you.
Raul Villar Jr. (CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Brian Peterson with Raymond James. Please proceed.
Speaker 16
Hey, guys. This is Chase on for Brian. Thanks for taking the question. Adam, I'm just curious, how is linearity in the quarter as we're already two months through, the September quarter? Have you seen any changes thus far?
Adam Ante (CFO)
In terms of the overall demand environment or the portfolio?
Speaker 16
Yeah.
Adam Ante (CFO)
Yeah. You know, no, I would say no, nothing significantly different than we wouldn't, you know, otherwise capture in the guidance that we just shared. I'd say that the demand environment has remained strong. What we see in the broader labor market and the tightness of that labor market is playing through to our portfolio. There's nothing that we're seeing right now, and although we continue to stay on top of it, we continue to be on the watch out for, you know, macro changes. Of course, there's a lot of discussion around it. We just haven't seen anything inside of the portfolio or any sort of change in the demand environment that would make us sort of expect anything different, especially over the next, you know, three to six months.
You know, no change is playing through to our portfolio today.
Speaker 16
Got it. On the incremental interest income, as you kind of think of coming through to fiscal 2023, how do you think about reinvestment of that high margin kind of revenue into growth initiatives for something that can flow through to the bottom line? Thanks.
Adam Ante (CFO)
Yeah, absolutely. I mean, it's definitely an opportunity for us, as we think about continuing to invest in growth initiatives, expanding, our sales and marketing engine and making those investments back into our product. We're looking for opportunities to make those investments, in marketing, and demand gen and back into the product to continue to accelerate the front end of the business. You know, we're sort of tentatively targeting, maybe 50% of what we're seeing in the interest income to fall through and looking for opportunities to invest, the other half of it. I'd say that's not specific guidance that we're giving as much as that's how we're sort of targeting to manage the business.
If there's additional opportunities that we find, that we think are strategic and add to the long-term value of the business, then we're gonna continue to make those investments.
Speaker 16
Perfect. Thanks and congrats on the great quarter.
Raul Villar Jr. (CEO)
Yeah. Thanks a lot, Chase.
Operator (participant)
Our next question comes from the line of Brad Reback with Stifel. Please go ahead.
Brad Reback (Managing Director)
Great. Thanks very much. Raul, as you think about the marketing efforts, do you need additional high-profile deals like the Pac-12 and the stadium deal, or have you sufficiently raised your profile at this point where it's incremental going forward?
Raul Villar Jr. (CEO)
Yeah, I think we significantly raised our profile. We evaluate a lot of opportunities. Most of our peers are investing in, you know, sports marketing, whether it be golf, or, you know, patches on NBA teams or NBA stadiums, those type of things. So we felt like it was something that we wanted to do to raise our overall profile. The Pac-12 was unique to the West Coast expansion. The, you know, Bengals naming rights is really unique to, you know, the scarcity of an NFL asset. There's, you know, essentially 30 stadiums, you know, 28 that actually have naming rights, and it's the most popular sport in the, in the U.S. So we felt it was a unique opportunity for us to invest in both our community and expand our brand nationally.
I think we have definitely raised the brand. We don't need to invest more into the brand for, you know, the next, you know, 12-18 months from that perspective. I think it gives us a little runway to take advantage of the incremental impressions and demand that it will create for the channel.
Brad Reback (Managing Director)
That's great. Just quick follow-up. Adam, given your commentary over the course of this call with respect to the environment, it would appear that your forward guidance has the same level of historical conservatism, going forward? Thanks.
Adam Ante (CFO)
Hey, Brad. Yeah. You know, we wanna continue to be consistent with how we've guided and how we think about. We're not changing any sort of philosophy about our overall guidance methodology. We wanna be prudent, and we're gonna continue to you know, look for opportunities to continue to execute well. That's how I would say we continue to guide how we wanna be consistent with historical performance as best we can.
Pat Walravens (Managing Director and Director of Technology Research)
Perfect. Thanks very much.
Raul Villar Jr. (CEO)
Thank you, Brad.
Operator (participant)
Our next question comes from the line of Mark Marcon with Baird. Please proceed.
Mark Marcon (Senior Research Analyst)
Let me add my congratulations. I was wondering what percentage of the new sales are coming from the tier one markets at this point?
Adam Ante (CFO)
Yeah. We're seeing close to or just over about half of our mid-market sales are coming from tier one markets. We've seen a lot of good success, and like Raul had mentioned, in the Southwest and the West Coast, we've seen a lot of growth and improvement from those markets, which have contributed to that overall performance.
Mark Marcon (Senior Research Analyst)
That's great. I would assume that could accelerate, particularly as you continue to increase your headcount there. I would imagine that the people that you've put in place have an opportunity to ramp their productivity levels even more because they're relatively new. Is that correct?
Raul Villar Jr. (CEO)
Correct. Yep.
Adam Ante (CFO)
Yeah, that's right. Like Raul had mentioned, we saw, you know, I would say marginal ASP improvement on the whole. As you're adding so many sellers, you would expect at some level that your ASP is declining. To hold that flat into 2022 with an opportunity now to leverage a lot of these newer sellers into their productivity ramp, where the second year, they're significantly more productive. You're gonna see that, you know, hopefully in the West, the Southwest continue, but then really across the entire country. Lots of opportunity to drive productivity into 2023 for sure.
Mark Marcon (Senior Research Analyst)
That's great. Can you talk a little bit about the broker channel? You've got about 40%+ of your bookings coming through referrals in the broker channel. How much expansion would you expect from here? How are the broker referred deals relative to the other deals at this point?
Raul Villar Jr. (CEO)
Yeah. I mean, brokers remain, you know, a significantly high close rate. So that's the reason why we're so focused on the channel. You know, we're slightly over 40% in our overall bookings, and in the mid-market specifically, you know, it's over the mid-50s. So a significant, you know, component of our sales go to market motion. And we continue to see increases in the number of referring brokers, you know, nearly 15% increase year over year. And you know, we're just scratching the surface. I mean, we're literally dealing with about, you know, somewhere between 10%-15% of the addressable opportunity in that segment.
Mark Marcon (Senior Research Analyst)
Thanks, Mark.
Operator (participant)
Our next question comes from the line of Pat Walravens with JMP Securities. Please proceed.
Pat Walravens (Managing Director and Director of Technology Research)
Hey, Raul, can you walk us through the strategy for increasing the price per employee per month? I mean, if we look on the website, we can see, you know, for below 50 employees, the core is $8 and complete is $14. Maybe explain how pricing tiers fit into that and how it works for the greater than 50 employees.
Adam Ante (CFO)
Yeah. Hey, Pat. We have a couple different strategies. In that small market, which we've sort of identified as under 50, we have a more subscription-based model that has a base fee and then a per employee per month fee. That base fee starts at $100, and then there's a PEPM fee that gets you all the services based on, you know, how much you're looking to consume. There's a couple different versions there that can take you up to over $200 for a base fee plus, you know, $12-$15 PEPM. That's really the under 50 segment. Then as you go above 50, those clients tend to look for a broader suite of services.
They start picking up time and labor management, they'll pick up benefits, and the talent management, you know, more deeply. That's where we expand to the four bundles that we offer with an HCM core bundle that's now $20, and then benefits talent and time and labor management.
Pat Walravens (Managing Director and Director of Technology Research)
Great. If I could add sort of related to that, but, last quarter, you guys talked about introducing the expense management solution.
Adam Ante (CFO)
Yeah.
Pat Walravens (Managing Director and Director of Technology Research)
How's that going, and what would you like to add to that feature-wise over time?
Adam Ante (CFO)
Yeah. We put that into our HCM core bundle, which lifted it from $18 to $20. You know, we're selling it over 90%+ of the time to new business. We're seeing really good adoption there. We don't sell it in a standalone fashion as of right now, and we'll continue to, you know, invest in that product over time to drive functionality. Go ahead.
Pat Walravens (Managing Director and Director of Technology Research)
Great. All right. Thank you.
Operator (participant)
Our next question comes from the line of Daniel Jester with BMO Capital Markets. Please go ahead.
Daniel Jester (Managing Director of Software Research)
Great. Thanks for taking my question. I was wondering if you could talk to us a little bit about what are the trigger events that are getting customers to really engage. You know, as I look at your results and your peers, it seems like the last, you know, six to nine months have been just an extraordinarily good environment to sell into. I'm wondering if there's commonalities amongst your customers, especially the new ones, in terms of what's getting them to engage now.
Relative to other parts in time, and how confident are you that you're gonna be able to sustain that going forward? Thanks.
Raul Villar Jr. (CEO)
Yeah. Thanks, Dan. I think one of the biggest drivers, you know, coming out of the pandemic has been cloud adoption, overall. I think, you know, our end markets are served, you know, by CHRO, CFOs, and CEOs that may have thought the cloud was a step too far for HCM processing. You know, during the pandemic, you know, they all used the cloud for a lot of new methods of communication and talking to their children or grandchildren, et cetera. They started to work remotely as well. So I do think that's really opened up a window for the modern cloud HCM providers to take share from the legacy providers.
I think you're seeing that over the last three quarters as the markets opened up, you know, our bookings have accelerated, and our revenue has accelerated with it, you know, in the modern cloud. I think the combination of that and our ability to deliver real-time solutions, you know, around talent, that are helping companies cope, you know, with the new modern workforce, whether it be recognition tools, pulse surveys, the ability to communicate and do one-on-ones virtually, all those tools are built into Paycor's Modern Cloud solution and are helping drive adoption.
Daniel Jester (Managing Director of Software Research)
Great. Thank you very much.
Raul Villar Jr. (CEO)
Yeah. Thank you, Dan.
Operator (participant)
Our next question comes from the line of Robert Simmons with D.A. Davidson. Please proceed.
Robert Simmons (SVP and Senior Analyst)
Hey, guys. Great quarter, and thanks for taking the question. I was wondering, I mean, what are the biggest drivers in the quarter relative to guidance of the upside? Like, what surprised you the most?
Adam Ante (CFO)
I think that we ended up seeing just quite a few of those initiatives that we're executing on come through really well. New business, of course, the biggest contributor to our overall growth. We're seeing overperformance from some of the strategic pricing initiatives that we've been running, some of the partner programs, and of course, interest income all came through. The new business continues to convert well. It really ended that all of those initiatives were really hitting on all cylinders as we went into or as we exited the quarter. We saw a lot of the performance come through for, you know, for quite a few of the initiatives.
Robert Simmons (SVP and Senior Analyst)
Got it. Can you talk about the impact of inflation on your business on both the revenue pricing side and on the cost side of the equation?
Adam Ante (CFO)
Yeah. On the cost side, I mean, we see the labor market like wage inflation, of course, across the business, but, you know, not in an overly material way. We see it in some of the new hires, but I think a lot of that has actually calmed down a bit as it was sort of running into the December time period. It was quite a bit harder, and we've seen that wage inflation sort of soften just a little bit. In terms of its impact on the business, from a revenue perspective, of course, it impacts payroll companies and HCM companies quite a bit more directly. We continue to see overnight rates increase as they get closer and closer to the Fed funds rate. We're seeing those.
We generated about 50 basis points of interest income in the quarter, and we'll see that rate probably close to or more than double into Q1. That's really the positive sign from the increase in the inflation and interest rate increases.
Robert Simmons (SVP and Senior Analyst)
Got it. Thanks, guys.
Operator (participant)
Thank you. This concludes our question and answer session. I'd like to turn the call back to Raul Villar for any closing remarks.
Raul Villar Jr. (CEO)
Thank you again for joining us tonight. We appreciate your continued support. We are enthusiastic about the accelerated momentum in the business as we head into the next fiscal year. We look forward to staying in touch and seeing a number of you at Stifel, Deutsche Bank, and HR Tech events this quarter. Have a great evening, everyone.
Operator (participant)
Thank you. This concludes today's conference. Thank you for your participation. You may disconnect.