Welcome to the Paycom Software Q4 2018 Earnings Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Paycom's CFO, Craig Boelte. Please go ahead.
Thank you. Good afternoon. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives, and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we have made or make in this presentation are reasonable, actual results could differ materially because the statements are based on our current expectations and are subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information.
Any forward-looking statements may speak only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also, during the course of today's call, we will refer to certain non-GAAP financial measures, including Adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, and certain adjusted expenses. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today, which is available on our website at investors.paycom.com. I will now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad?
Thanks, Craig. Thank you to everyone joining our call today. I will spend a few minutes on the highlights of our Q4 2018 results, review some of our notable achievements in 2018, and also discuss our goals for 2019. Following that, Craig will review our financials, and then we will take questions. 2018 was a stellar year for Paycom, with many achievements as we enhanced our offering, grew our team, and continued to fulfill our mission to be the premier human capital management software provider to companies across the U.S. We are making major shifts to drive innovation in our industry. I want to thank all of our employees who have become pioneers in this initiative.
I believe we will look back on 2018 and realize that this year was just the beginning of a new way businesses and their employees leverage HCM technology to drive efficiencies and create deeper relationships with their staff. We finished the year with very impressive results. Our 2018 Q4 revenue of $150.3 million represented growth of 32% over the comparable prior year period. Our full year 2018 revenue of $566.3 million grew 31% compared to 2017. Our full year 2018 Adjusted EBITDA was $240.9 million, representing an Adjusted EBITDA margin of 43%. Our success allowed us to return value to our stockholders by repurchasing over 500,000 shares in the Q4 of 2018. With this combination of revenue growth and margin, we achieved the rule of 70, and this places Paycom in a very small group of companies with this profile.
We believe this strong performance is due at least in part to our strategy of working to promote employee usage of the Paycom system. We are educating our current and prospective clients about the benefits they can obtain when their employees have a direct relationship with the HR database. This is a powerful message that resonates across every industry and within an entire organization, from the C-suite to entry-level employees. We will continue to pursue this strategy in 2019 and are excited about the value we are helping create for our clients. As we continue to drive employee usage of our software, we are providing our clients not only world-class technology but also strategies to help their employees fully realize the value of our application.
We've found that when an organization's employees have a direct relationship with the database, it creates significant efficiencies which can result in a direct impact to our clients' bottom line. In fact, a recent study by Ernst & Young shows on average, a single HR task or data entry point without self-service costs an organization $4.39 to complete. If you think about that across the entire employment lifecycle, the opportunities for cost savings for employers are substantial. This study examined tasks across the entire HR spectrum and identified many potential areas for cost savings that can be obtained with self-service technology. These findings underscore our value proposition and imply that companies will continue to embrace HR technology to create efficiencies and drive enterprise value.
We believe the Paycom solution is the best option to enable companies to achieve this goal. I'm also pleased to share that our retention rate for 2018 increased to 92%. This rate had been steady at 91% for the prior six years. We believe this improvement was also helped at the margin by our employee usage strategy. We are excited and gratified by this progress. Looking at other areas of achievement in 2018, we opened four new sales offices, Salt Lake City, Rochester, Columbus, and San Diego. This brings us to 49 teams. Our newer offices have been performing well per our expectations. As we look to 2019, we plan to open additional sales offices and look forward to sharing that news with you soon.
As of December 31st, 2018, our headcount stood at 3,050 employees, as we have hired people across our organization to help build the foundation for our future growth. Recently, we welcomed new personnel to bolster our existing management team in areas of learning and development, finance, marketing, and core operations. These individuals bring years of valuable experience and have worked for companies like Ernst & Young Consulting, Procter & Gamble, Conagra Brands, PepsiCo, IBM, and PricewaterhouseCoopers, just to name a few. We are eager to utilize their talents to help further our momentum. Turning to other areas of expansion, we are excited to announce that we will soon break ground on our Texas Operations Center in Grapevine, Texas. Late last year, we finalized our agreement with the city of Grapevine, which includes a $5 million tax incentive.
We anticipate we will break ground on this new project in the H1 of 2019, and that it should take 18 to 24 months to complete. We expect this 14-acre campus will eventually house 1,000 jobs. Paycom received national recognition from several organizations in 2018. In Q4, we earned three additional accolades. For the sixth consecutive year, we earned Top Workplace and Oklahoma Honors, and Glassdoor recognized us as one of the best places to work among large-sized U.S. companies in 2019. Both of these Top Workplace awards are extremely rewarding and a testament to the culture we continue to develop and grow. Additionally, Paycom made Deloitte Technology Fast 500 list, a list of 500 fastest growing technology, media, telecommunication, life science, and energy tech companies in North America.
Lastly, I want to congratulate the 2018 Paycom Jim Thorpe Award winner, Deandre Baker from the University of Georgia. This award recognizes the most outstanding defensive back in college football and memorializes one of the greatest athletes in Jim Thorpe, who also happens to be an Oklahoman. Deandre showed true grit and determination throughout his collegiate career, and we are proud that we are able to honor his achievements. To sum up, 2018 was a banner year for Paycom, and we're excited to make 2019 another year of success. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?
Before I review our Q4 results for 2018 and also our outlook for the Q1 and full year 2019, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. Also, we adopted the new revenue recognition standard, ASC 606, on January 1st, 2018, utilizing the full retrospective method of transition, which required us to recast the prior periods presented. Our comparisons discussed in today's call reflect those adjustments. We use Adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, and certain adjusted expenses as supplemental measures to review and assess our performance and for planning purposes. Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures that exclude non-cash stock-based compensation expense and certain other expenses that are not core to our operations. Non-GAAP net income also reflects adjustments for the effective income taxes.
Adjusted gross profit is defined as gross profit plus applicable non-cash stock-based compensation expense, adjusted gross margin reflects adjusted gross profit as a percentage of revenues. The adjusted expenses we discussed reflect the GAAP expense amounts, less non-cash stock-based compensation expense. Reconciliations of GAAP to non-GAAP measures discussed today are included in the earnings press release issued earlier this afternoon. As Chad mentioned, we are pleased with our Q4 results, with total revenues of $150.3 million, representing accelerated growth of 32% over the comparable prior year period. Our full year 2018 revenue was $566.3 million, representing growth of 31% compared to 2017. Our revenue growth continues to be primarily driven by new business wins. Within total revenues, recurring revenue was $147.9 million for Q4 of 2018, representing 98% of total revenues for the quarter and growing 32% from the comparable prior year period.
Total adjusted gross profit for Q4 was $126.7 million, representing an adjusted gross margin of 84%. For the full year 2018, our adjusted gross margin was 85%. For 2019, we are increasing our target adjusted gross margin range to 83%-85%. Total adjusted administrative expenses were $78.3 million for the quarter as compared to $52.8 million in Q4 of 2017. Adjusted sales and marketing expense for the Q4 of 2018 was $40.5 million. Adjusted R&D expense was $12.5 million in the Q4 of 2018, or 8% of total revenues. Total adjusted R&D costs, including the capitalized portion, were $17.7 million in the Q4 of 2018, compared to $11.1 million in the prior year period. Total adjusted R&D costs for the full year 2018, including the capitalized portion, were $61.5 million or 10.9% of total revenues.
Adjusted EBITDA was $57.5 million in the Q4 of 2018, compared to $48.4 million in the Q4 of 2017. For the full year 2018, Adjusted EBITDA was $240.9 million, or 43% of total revenues, compared to $185.7 million, or 43% of total revenues in 2017. Our GAAP net income for Q4 was $31.4 million, or $0.54 per diluted share, based on approximately 58 million shares, versus $48.9 million or $0.83 per diluted share, based on approximately 59 million shares in the prior year period. Our effective income tax rate for the Q4 2018 was 26.4%. For the full year 2018, our GAAP net income was $137.1 million, or $2.34 per diluted share.
I will highlight that due to the remeasurement of our deferred tax liabilities associated with the Tax Act in December 2017, we recognized a benefit to our provision in Q4 of 2017 of approximately $24.9 million, or $0.42 per diluted share after the effective adjustments for ASC 606. Non-GAAP net income for the Q4 of 2018 was $35.4 million or $0.61 per diluted share, based on approximately 58 million shares, versus $53.2 million or $0.90 per diluted share, based on approximately 59 million shares in the prior year period. We expect non-cash stock-based compensation for the Q1 of 2019 to be approximately $21 million. For the full year, we anticipate non-cash stock-based compensation will be approximately $47 million. For 2019, we anticipate our full year effective income tax rate to be 23%-25% on a GAAP basis.
On a non-GAAP basis, we anticipate our full year effective income tax rate to be 25%-27%. We have returned value to our stockholders in the form of over 1.1 million shares repurchased over the course of 2018, including over 900,000 shares purchased in the open market. In Q4, we repurchased over 500,000 shares. We anticipate fully diluted shares outstanding will be approximately 59 million shares in the Q1 of 2019. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $45.7 million and total debt of $34.4 million. As a reminder, this debt represents a financing of construction at our corporate headquarters. Cash from operations was $39 million for Q4, reflecting our strong revenue performance and the profitability of our business model.
The average daily balance of funds held on behalf of clients was approximately $1 billion in the Q4 of 2018. Let me turn to guidance for the Q1 and full year for fiscal 2019. For the Q1 of 2019, we expect total revenues in the range of $194 million-$196 million, representing a growth rate over the comparable prior year period of approximately 27% at the midpoint of the range. We expect Adjusted EBITDA for the Q1 in the range of $97 million-$99 million, representing an Adjusted EBITDA margin of approximately 50% at the midpoint of the range. For fiscal 2019, we expect revenue in the range of $710 million-$712 million, or approximately 26% year-over-year growth at the midpoint of the range.
We expect Adjusted EBITDA in the range of $288 million-$290 million, representing an Adjusted EBITDA margin of approximately 41% at the midpoint of the range. With that, we will open the line for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Raimo Lenschow with Barclays. Please go ahead.
Hey, thanks for taking my question, and congrats on a great finish to the year, guys. Can I start with the retention rate? You moved up to 92%, which is kind of like the big move for you. Can you talk a little bit about drivers? Is it a new strategy already to focus on usage? Is it kind of you moving up a little bit higher in the market and you have better retention there? Can you talk to that, Chad?
Sure. Raimo, HR has been in the middle of the data transfer process between the employee and the database out of necessity due to lack of technology, and it's no longer necessary for HR to be in the middle of the data collection process. We've been focused on driving that change in the industry and demonstrating meaningful returns and value for our clients. The focus that we had on that last year also coincided with the release of our app as we redeveloped our desktop version to have a mobile first view. We focused on not only usage, but usage mandates. We believe that, like Paycom, when our clients mandate usage to the employee, it drives the return on that investment.
I do believe that as we've seen employee usage increase, and we've been able to deliver more value to our clients, they've stayed with us.
A follow-up. If I look at the Grapevine expansion, that's kind of pretty meaningful. It's like if you think 1,000 people versus the 3,000 you have so far, can you talk a little bit about what you're going to do there and why it is so important?
Well, Raimo, we've always had a presence in the Dallas area. We have an operations center where we actually process out of that center. We also have a group of developers in Dallas as well. The main thing is we're consolidating those facilities as well as continuing to expand in the Grapevine area. There's a great pool of talent in the Dallas area.
Yeah. Okay. The last question is, in the last quarter, you talked a little bit about that you're now kind of allowing your sales people to maybe go high up the market of from the 2,000 that you had kind of your natural limit before. Can you talk a little bit about what you see there so far? Is my question a little bit too early, or can you see any kind of changes there already? Thank you.
Well, how I'll answer that is we were already seeing great success in that market. As you know, reps had already been allowed to market to those clients. It's just that Paycom's marketing efforts weren't directed to those clients. We've had a lot of success in that market, actually, we're having success above that market right now. I would see us continuing to deliver solutions to that market as well as we move throughout 2019.
Perfect. Thank you. Congrats.
Thank you.
The next question comes from Samad Samana with Jefferies. Please go ahead.
Hi. Thanks for taking the question. This is Anu on for Samad. Couple of questions, if I may. First of all, the outperformance we saw this quarter and in the guide, how much of that do you think is based on the upmarket business versus the SMBs? Is one doing better versus the other, versus your expectations?
That's fairly granular to be able to get into that specifically. I would tell you that our quarter hasn't reacted differently from quarter to quarter as far as the mix of business that we bring in. We have continued to creep up into the upper market, and I've disclosed that every quarter. I would say that the overachievement that we had in Q4 was really attributed to the new client wins that we were able to onboard throughout the quarter, which would include deals in and some above our stated range.
Okay. Thank you. I guess the second one was around the new marketing campaign that you did. Your Q1 guide was strong. It was strong in margins, too. How much of the impact do you think has carried over from that campaign into your Q1 guide? I just have one follow-up after that.
We're still evaluating the impact of that campaign. In general, we're happy with it. I don't know that I can even point to one revenue dollar that was achieved in 2018, that was generated through that campaign. I do believe it's provided us some help as, again, we're marketing a new way to do something and transforming the way employees use HCM technology. I do believe it's going to provide us some help as we move throughout this year.
Okay. Just to follow up on that, I guess depending on what you discover about these campaigns, should we expect similar campaigns of similar size in 2019, have you built such campaigns into your forecast? That's it for me.
To the extent we have planned campaigns, which we have planned campaigns throughout 2019, they're currently baked into our guidance.
Okay. Thanks for answering our questions.
The next question comes from Mark Marcon with Robert W. Baird. Please go ahead.
Good afternoon, and congratulations. It's a great year. Can you talk a little bit about the revenue growth is primarily a source of new wins. Can you give us a little bit of a sense in terms of client count, or do we have to wait for the 10-K for that? Average client size, how's that trending? Did I hear you right, Chad, in terms of you had some wins in Q4 that are above the stated range, and I'm assuming you mean the stated new range or the stated old range?
That's correct. We've continued to sell both in the stated new range as well as above the stated new range. I went to our sales meeting a week ago last Friday, they had sold two deals above 5,000 employees. We've made it easier for these businesses to buy as our products become easier to both implement and use all the way out to the employee. I don't know. Hopefully, that answers that question. As far as the client count, Craig's got those numbers right now.
Mark. The client count based on Fed ID is 23,533, and then based on parent company group is 12,754.
Great. Can you talk a little bit about module sales, average client sale now in terms of how many additional modules you're selling and how we should think about pricing?
Yeah. We haven't made any changes to our pricing structure. As far as module selling, I've said it continuously on past calls that we've always been good at selling modules. It's getting clients to use the modules we're selling to help derive value and ROI to themselves that I would say, like the rest of our industry, we were a little light on. We've really focused on getting the clients to use the products that we've already sold them. Of course, as we bring on new clients, usage is a focus from the beginning. Last year, we really made a shift in that. I would say 2017, as I had talked before, was a year that, I'm not going to use the term necessarily struggling, but we were shifting our entire organization toward a specific strategy.
2018, we got to reap the benefits of that strategy in being right. I've said before, we might be early, but we're not wrong with this strategy. I do believe that right now that as we look two years out, one year out, what have you, I don't believe you're going to have a lot of employees emailing, making phone calls and what have you, so the data can be input into the database. We're going to continue to focus on bringing that to the market.
That's great. One last one, if I could. Just with regards to the margin guidance, the EBITDA margin guidance for this year, how should we think about longer term under 606, how the margin structure should flow? Obviously, you're doing best in class already, how should we think about that longer term?
I would tell you right now that we're very focused on growth. As a person that started the company with an SBA loan and 13 credit cards, I've said before that old habits die hard, I don't feel like we have a burning need to spend cash that we're able to generate. If something does make sense for us in the future for us to do something in order to goose the revenue growth, I think those are things that we would look at. I can tell you, as we've planned out 2019, I feel really good about what our strategy is for that's why guidance is where it's at right now.
That's great. Congrats.
Thank you.
The next question comes from Brad Zelnick with Credit Suisse. Please go ahead.
Hi, it's Bhavin for Brad. Chad, can you just quickly give us an update on what's driving some of the improved productivity within your existing offices? Has there been any meaningful change in go-to-market strategy or changes in the competitive landscape?
We've continued to work on driving sales enhancements and being able to generate greater returns off of both of our sales staff as well as for any one team. I can tell you what I believe is driving our results right now is this product strategy. If you guys have been following me for a while, I've kind of always said, the best salesperson wins the deal. That doesn't necessarily mean the best solution does. I believe there's a shift in that right now. I think if somebody's interested in our strategy of what I'm going to tell you is 100% employee usage mandate is where they're going to drive the most value in using the Paycom system. If somebody's interested in that strategy, then we're really who they're going to use, and that's not to say that we make clients work this strategy.
If a client wants to buy our product and use it the same way they're using the older systems that they may have had, and to input data into one single database, and that's the value they receive, I'm not going to say that we would not allow that. We're going to do everything within our power to get that client to realize the ROI that's available to them if they use the product correctly. I think our focus on that has been proliferating into other organizations as we work with both clients and prospects around these initiatives.
Thanks. That's very helpful. Just follow up for Craig. Craig Boelte, just following up on the last question. Can you give us an additional insight into just some of the EBITDA margin compression into fiscal 2019? How much is related to more spend on marketing versus R&D or other areas?
Well, as we're starting 2019, I'd like to point out that we're really starting at a level that's higher than where we started 2018. As we're looking at the spend for 2019, we're continuing to spend in the R&D area. You've seen it continue to tick up, then just kind of across the rest of the organization just as well, just slight amounts. Then we'll see as we go throughout the year on the sales and marketing.
Thanks, guys.
The next question comes from Mark Murphy with J.P. Morgan. Please go ahead.
Hey, congratulations on the great results. This is Pinjalim Bora on behalf of Mark Murphy. Thanks for taking my questions. Going on to the productivity question again. Chad, could you update us on the number of mature sales teams that you have going into 2019, and what are your expectations for productivity for those mature sales teams in 2019?
Yeah. With the three that will be maturing in 2019 at various times, because they were opened at various times, and it's 24 months to maturity. Important to note that an office does continue to mature past that initial stage, but they're fully staffed at that point, and they would be having a pipeline. You would deduct before that had not yet matured that we would be waiting on for 2020. That would leave us with 45 offices that we will have mature over some period of time during 2019.
Got it. The productivity per office assumptions that you have, do you feel like-
I'll just go ahead and say it. On the last call, I talked about updating our sales capacity number. I gave that number initially in November 2016, about 28 months ago. The goal was to provide some guidelines about what we were thinking about sales and how high sales achievement could go for any one sales rep in any one office. Since then, we've done a lot of work on our sales, and we've made progress on the employee usage strategy and other areas that impact that number as well. I'm not going to necessarily say we broke the model, but I've already got two reps just in the first month of this year that are averaging over $1 million in sales already. Our top rep last year sold more than anyone sold before. Our sales number does continue to increase.
Additionally, the sales capacity figure did not account for additional business such as Q1 forms, upsells to current clients, any of our inside sales. It's become more competitively sensitive to discuss that number without talking about what all goes into it. That's not a number that we're going to be updating moving forward.
Understood. Lastly, Chad, this year you opened four offices. Last year, I believe you opened three, but three or four years before that, I think you had a cadence of five to six. Should we kind of expect this lower cadence for 2019 and beyond or is it just random and just a matter of timing?
We open up offices when it makes sense. It is based on opportunities that we have internally to develop. Currently, our backfill reps as well as those mature office managers who would be relocating to start up these offices or sales teams, if you will. We continue to focus on that. We will be opening up offices this year. We also feel really good at where we're at with being able to achieve our numbers right now with the production that we're seeing across the board within our sales organization.
Fantastic. Thank you.
Thank you.
The next question comes from Brad Reback with Stifel. Please go ahead.
Great. Thanks very much. Chad, from a high level, revenue growth is about 2x the rate of client growth in 2018. Is that predominantly a result of better attach or larger customers? Thanks.
I don't know that I've gone into that a whole lot. Definitely, we've continued to add larger clients to our platform. I've discussed that every quarter. We've continued to do that. I'm going to go back to what I said earlier about we've always been really good at delivering what we believe a client's going to use up front. As a reminder, our sales reps are not able to go back into the current client base and upsell them new products after that client's been onboarded with us for longer than 30 days. Because of that, in the analysis stage, we look to deliver those products we believe the client's going to need and use up front. I would have to say it's more weighted toward us moving upmarket and selling some larger clients than what it would be necessarily attach rates.
What I will say, though, is that the usage of those products that we have sold is continuing to move higher.
Got it. Thanks very much.
Thank you.
The next question comes from Brian Schwartz with Oppenheimer. Please go ahead.
Hi. Thanks for taking my questions this afternoon. Great job on the quarter and the year. Chad, just one question on the move upmarket, just on the competition and maybe the structure of the deals. As you press up to the 5,000 seat, it sounds like you had some deal activity even above that. Are you seeing a different set of competitors in those type of engagements? Then when we think about the structure of the deal activity in that market, are there any noticeable difference in terms of the sales cycles or maybe the deployments of the customers? Time. Thanks.
I would say that, first of all, when we're above 1,000, I can't say that we've run into a different competitor that we didn't previously know of or hadn't competed with in the past. Is selling to the upmarket still complex? Sometimes it is. It's somewhat dependent upon the goals of the organization and how they're set up currently. Also, we're starting to see more of them come to us. I think over time, I talk about this as one of the first statements I've made, that you look back 20 years ago, our products were complex. You look back five years ago, we had an easier product, but it did complex things and what have you. HR has been really having to work hard to keep all the data correct.
Most of these systems, whether or not the data's correct or not is based on how well HR has been interfacing with those employees and being able to grab that data. That's changing now. We believe as HR offloads the data input process, it's going to allow them to create more meaningful relationships with their staff and help drive even greater results. We've been focused on that ourselves.
One follow-up question I have, just on the retention metric with the step-up here this year. Chad, is that partly reflective of the bigger customers that are now within the install base, or is it too early for that to show up and the improvement in the retention is really from the entire core? Just trying to dig into that a little bit more. Thanks.
I can tell you that we've always sold larger customers, we've always sold more of them as we've added more reps and what have you. We've always sold at the top end of our margin. I believe the retention's related to usage of our software and driving real results for those clients. I've said it before, it doesn't cost any extra to use our system the right way. As we're taking employee usage from 3% at an organization to 87% at an organization, that's making a very strong impact for those clients. As they've become acclimated to that way of doing something, it can be very exciting for both our clients and us as well as what opportunities exist for all of us in the future.
Thank you for taking my questions this afternoon.
The next question comes from Scott Berg with Needham. Please go ahead.
Hi, everyone. This is Scott on for Ryan MacDonald. Thanks for taking our questions. Most of our questions have been answered, I do have one is, as you continue to sell larger deals, that tends to be an area that's more price competitive, we see more discounting on all the modules in the suite. Do you think you can maintain your leading, your SaaS-leading gross margins, even as you potentially have to discount as you move higher? Thank you.
What I would say about that is, I think it's more about cost versus price. What's the overall cost of the system when you include the ROI and what have you? If it's just about price, I wouldn't say that Paycom would be a fit for that. If we haven't differentiated our solution in a deal, I don't know that we would be ready to provide a price. I will just tell you this, we're focused on ROI. Does that mean that you don't have to have some scaled pricing for extremely large clients? Sure you do, because at some point, the base fees become eaten up in that price expansion for each additional life.
Sure, I think that we'll have that as we scale, and we have, but I don't really think our price versus any one of our competitors are necessarily a fair way to compare us when a buyer is making a decision. They should base it based on what is going to be the return on investment of that decision, and also, what else are they going to have to add around one of our competitor's system to exact the result that we're going to be driving for them. I'll just leave it at that. Thus far, I can't say that we're winning deals. We aren't winning deals based on price. Does that mean we haven't in the past?
I'm sure we've got a sales rep out there, here and there, where that's happened before, but as we identify that, those aren't things that we're looking to continue.
Great. Thanks. That's the only question I have at the moment.
All right.
Congrats again.
The next question comes from Shankar Subramanian with Bank of America Merrill Lynch. Please go ahead.
Hi. Thanks for taking my question, and congrats on the results. I just have a question on the R&D spend. As you look at the 2019 and looking to spend the R&D dollars, where exactly are you investing heavily? What are the new products that you think would help sustain growth this year and then the year later? Thank you.
Yeah. Consistent with past comments, we don't telegraph specifically what we're working on. I can tell you that in R&D, you're going to have an amount dedicated to maintenance. As tax laws change, as labor laws change, we do have items that are mandated to us. You have to make those changes in the system in order to keep your clients compliant, you're always going to dedicate a certain amount to that. You're going to dedicate a certain amount to module enhancements. Those are current modules that you have, that with greater usage, new opportunities for cost reduction strategies throughout an organization develop, it allows you to develop more in that.
The third bucket that I would say that we continue to focus on is innovation, that would be bringing new tools and new concepts to the HCM market that may not currently exist or might exist in a different, more complicated form.
Got it. Just a quick question on benefits. Looks like there's some new regulations on the HRA side related to the ACA premiums. Is there any tailwind, as you see, from regulation to benefits for you specifically?
Regulation to benefits. I'm familiar with what's going on right now with ACA specifically the forms that they're talking about. We don't have any guide on that yet, as you mentioned, there's benefits that have to be displayed. We're trying to figure out how that would be. I think it's still too early to talk about, if you are in fact talking about the impact of ACA specifically those forms as they reflect benefits, it's a little too early for us to comment on that right now. Were you talking about something else, or was it, in fact, that's what you were talking?
I was talking about HRA, the new expanded regulation on HRA, that benefits employers. Yeah. Go ahead.
Any regulations that are more complicated to the employers is something that we would look to try to help them out with, obviously.
Got it. Thank you, guys. That's all I have.
The next question comes from Ross MacMillan with RBC Capital Markets. Please go ahead.
Well, thanks so much, and congratulations. Chad, I wondered if you could just spend a minute I know you've been very focused on employee engagement inside of the application, especially on a mobile UI, and I wondered if you could just talk to how, if at all, is that playing out in your stronger results? Are you seeing that drive lower churn? Are you seeing that drive better word of mouth for new customer acquisition? Just how are you seeing that influence the model? Thanks.
Yeah, I would say it's really all the above. It's definitely driving better results for us amongst our current client base, and then as those employees, for one reason or another, transfer into other businesses that might not currently use Paycom, they're bringing us in. I can tell you story after story about individual employee that walked into different businesses, and we're getting leads from it. As a matter of fact, we were receiving so many leads from it, some of them weren't getting through to the sales organization, and we had to identify that even. This is something we've been focused on, but it all comes down to doing the right thing for the client and helping them be able to transform their employee base into this strategy. It's like this, the first week there's all this data that's coming in for HR to input.
They talk to their employees, show them how to use the system appropriately. In week three, there's less input coming in. Week two, there's less. Within a month, we can typically transform an entire organization to very close to maximum usage within our system. We've been very focused on that, and I do believe that that is not only impacting the ROI and value for our clients, but it's a proof source of what we're able to use as we go in and talk with prospects.
That's great. Maybe a follow-up for Craig, just I know you guide Adjusted EBITDA, but we've seen some variability on cash flow from ops relative to EBITDA. First as we went to 606, but even, I think, 606, we saw a higher conversion of EBITDA in 2018 versus 2017. What's the right way to think about cash flow from ops relative to EBITDA? I don't know if you think of that as a percentage or you have a sort of ballpark way of thinking about that. I think in the last couple of years, it's been in the 70%-75% range. Do you think that's a consistent way to think about it?
Yeah. There's different variables that go into that conversion from Adjusted EBITDA into the operating cash flow. One thing that we don't really guide to is on free cash flow is the CapEx. We kind of mentioned the Grapevine building. What I would say, at least on the free cash flow side, we would expect our CapEx kind of as a percent of revenue to be similar in 2019 to what it was in 2018, but maybe a little bit back-end loaded in terms of that CapEx.
Okay. Very good. Thank you very much, and congrats.
Thank you.
The next question comes from Nandan Amladi with Guggenheim Partners. Please go ahead.
Hi, good afternoon. Thanks for taking my question. This is an industry-level question. I'm sure you saw the Ultimate announcement yesterday. How does a company going private actually impact the competitive dynamics, particularly as you've moved up market?
Well, I would suspect they have the same product today as they did yesterday. I would suspect that their impact on us would be the same.
In terms of their ability to compete, pricing, any of those things?
Yeah, look, I don't think it's a bad thing. I think if you're looking at kind of re-platforming your product so that you can really compete in the market and for the future, for what's coming out in the future, I think, potentially it's a good move. I don't know all the answers to that. Again, Paycom, we're staying in our own lane. We're focused on what we know we can control and really drive value for our clients. I'm really excited about the fact that I believe 2018 was the best year we've had as a company in 20 years, and I got to see a company really shift and drive that. We've had three major events in our 20 years of business, which we celebrated in November, the first event was the internet. I don't know of anybody that beat us to the internet.
The second event for us was focusing on a single database and developing that out, and I've yet to see someone do that. Now we're focused on taking that single database and driving it all the way to the employee where it belongs. It belongs there because that's where technology's met us today. We're very excited about our opportunities here in 2019 and beyond. We've got the right strategy. Now we've just got to continue to work our process and drive results.
Thank you.
All right. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Chad Richison for any closing remarks.
First, I want to thank everyone for joining us on the call today. As many of you may know, in 2018, we celebrated our 20th year in business. While it's been an amazing journey to get here, I still feel very excited by the potential of what we've yet to achieve. We appreciate your interest and look forward to speaking with many of you in the months to come. Operator, you may disconnect.
The conference is now concluded. Thank you for attending today's presentation. You may disconnect your line.