Good afternoon, welcome to the Paycom Software third quarter 2018 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, you may signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, you may press star then one on your touch-tone phone. To withdraw that question, please press star then two. Please note today's event is being recorded. With that, I'd like to turn the conference over to Mr. 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 annual report on Form 10-K for the year ended December 31st, 2017. You should refer to and consider these factors when relying on such forward-looking information.
Any forward-looking statements speak only as of the date on which it is made, 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. During the course of today's call, we will refer to certain non-GAAP financial measures. 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, thanks to everyone joining our call today to review our third quarter 2018 results. I will start with some comments on the progress we achieved during the third quarter, along with some developments in our business and how we view the market for the payroll and human capital management or HCM software industry. Craig will provide an update on our financials and guidance. Following that, we will open the line for questions. We had an excellent third quarter. Our momentum continued as companies across a wide range of industries and geographies turned to Paycom to help them achieve success. Third quarter revenue of $133.3 million represented growth of 32% over the comparable prior year period. Adjusted EBITDA was $49.2 million, representing a 37% adjusted EBITDA margin. During the third quarter, we returned value to our stockholders by repurchasing over 30,000 shares.
Our success is being driven by the employee digital transformation that has come to the HCM industry. Employees of clients using the Paycom solution have a direct relationship with the database. This is the way it works with all consumer-based technology, so employees are already accustomed to it. This is the Paycom model today and is expected to be the model for all in the future. HCM products where employees do not have a direct relationship with the database will find it challenging to maximize ROI for business. We have been working on executing this vision for several quarters, and it's really starting to drive results across the board, both with new sales and also with helping existing clients leverage the Paycom system to enhance their operations. We believe the industry is at the beginning of this wholesale transition and that Paycom is leading the charge.
As we continue our mission of helping clients improve their businesses with our best-in-class HCM solution, we are enjoying increasing traction with larger companies. Due to this, we are pleased to announce that we are expanding our proactive sales efforts from targeting firms with 50-2,000 employees to targeting firms with 50-5,000 employees. We have had great success selling to organizations above the 2,000-employee level as word of mouth about the Paycom solution frequently pulls in larger company leads to our sales group. This change we are announcing today empowers our sales representatives to proactively target companies in this expanded segment, and we are excited by this incremental opportunity. We have many clients in this segment already and several clients larger than 5,000 employees, so we are confident that our solution will compete and serve these clients effectively.
Our marketing team is working hard to enlarge our sales funnel. As many of you have seen, we launched an extensive marketing campaign in the third quarter, highlighted by our national TV commercial and also featuring digital radio, digital video, and social media. In addition, we are covering major market airports and estimate our commercials and other campaign assets will be seen over 280 million times. In fact, the first week of the campaign delivered nearly 30 million impressions alone. We believe these marketing efforts will continue to elevate our brand. Importantly, this commercial doesn't just advertise the Paycom solution but demonstrates the way employees will interact with HCM technology of the future. Our growth continues to gain recognition.
In August, Paycom was ranked fifth on Fortune magazine's 2018 100 Fastest-Growing Companies list of domestic and foreign publicly traded companies based on revenue growth, profit, and stock returns over the past three years. This was the second consecutive year we've made the prestigious list. We were the only Software as a Service technology provider in the payroll and human capital management industry to place in the top 100 and landed on the list above companies such as Facebook, Amazon, and Netflix. We were excited to see the Oklahoma Sports Hall of Fame announce the list of semifinalists for the Paycom Jim Thorpe Award, which is presented annually to the top defensive back in college football. The three finalists will be announced on November 19th, and the winner will be announced live on December 6th on ESPN. Finally, I would like to highlight that we recently celebrated our 20th year of business.
I want to thank all of our dedicated employees and loyal clients for their support in this journey. I'm very proud of all that we have achieved over this period of significant growth. Today, I'm more confident than ever that we have the right people, product, and culture to continue our success. To sum up, Paycom is leading the digital transformation of the HCM industry. This leadership is reflected in our strong results. With that, I will turn the call over to Craig for a review of our financials and guidance. Craig?
Before I review our third quarter results for 2018 and also our outlook for the fourth quarter and full year 2018, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We adopted the new accounting standard ASC 606 on January 1, 2018, utilizing the full retrospective method of transition, which required us to recast the prior period presented. Our comparisons discussed in today's call reflect those adjustments. We use adjusted EBITDA and non-GAAP net income 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 transaction and other expenses that are not core to our operations. Non-GAAP net income also reflects adjustments for the effects of income taxes.
Reconciliations of the GAAP to non-GAAP measures discussed today are included in the earnings press release issued earlier this afternoon. We were pleased with our third quarter results, with total revenue of $133.3 million, representing growth of 32% over the comparable prior year period. Our revenue growth continues to be primarily driven by new business wins. We are pleased with our continued improvement in sales productivity. Within total revenues, recurring revenue was $130.8 million for the third quarter of 2018, representing 98% of total revenues for the quarter and growing 31% from the comparable prior year period. Total adjusted gross profit for the third quarter was $111.5 million, representing an adjusted gross margin of 84%. For the full year 2018, we anticipate that our adjusted gross margin will be within a range of 84%-85%.
Total adjusted administrative expenses were $70.7 million for the quarter as compared to $49.6 million in the third quarter of 2017. Adjusted sales and marketing expense for the third quarter of 2018 was $35.2 million. As Chad mentioned, sales and marketing expense was elevated this quarter. We expect that it will be elevated in the fourth quarter due to our national advertising campaign. Adjusted R&D expense was $11.3 million in the third quarter of 2018, or 8.5% of total revenues. Total adjusted R&D costs, including the capitalized portion, were $16.1 million in the third quarter of 2018, compared to $10.8 million in the prior year period. Adjusted EBITDA was $49.2 million in the third quarter of 2018, compared to $40.4 million in the third quarter of 2017.
Our GAAP net income for the third quarter was $28.8 million or $0.49 per diluted share based on approximately 59 million shares, versus $20.9 million or $0.35 per diluted share based on approximately 59 million shares in the prior year period. Our effective income tax rate for the third quarter 2018 was 21%. Non-GAAP net income for the third quarter of 2018 was $30.6 million or $0.52 per diluted share based on approximately 59 million shares, versus $23.2 million or $0.39 per diluted share based on approximately 59 million shares in the prior year period. We anticipate our full year effective income tax rate to be 21%-22% on a GAAP basis. On a non-GAAP basis, we anticipate our full year effective income tax rate to be 25%-26%.
In the third quarter, we returned value to our stockholders by repurchasing over 30,000 shares, including over 11,000 shares purchased in the open market. We anticipate fully diluted shares outstanding will be approximately 59 million shares in the fourth quarter of 2018. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $85 million and total debt of $34.8 million. As a reminder, this debt represents a financing of construction at our corporate headquarters. Cash from operations was $45.5 million for the third quarter, 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 $888 million in the third quarter of 2018. Let me turn to guidance for the fourth quarter and full year for fiscal 2018.
For the fourth quarter of 2018, we expect total revenues in the range of $142.5 million-$144.5 million, representing a growth rate over the comparable prior year period of approximately 26% at the midpoint of the range. We expect adjusted EBITDA for the fourth quarter in the range of $49.5 million-$51.5 million, representing an adjusted EBITDA margin of approximately 35% at the midpoint of the range. For fiscal 2018, we are increasing our revenue guidance to a range of $558.5 million-$560.5 million, or approximately 29% year-over-year growth at the midpoint of the range. We are increasing our full-year 2018 adjusted EBITDA guidance to a range of $233 million-$235 million, representing an adjusted EBITDA margin of approximately 42% 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. If you would like to ask a question, you may press star then one on your telephone keypad. To withdraw the question, please press star then two. Once again, if you'd like to ask a question today, please press star then one. Today's first question will come from Raimo Lenschow with Barclays. Please go ahead.
Hey, thanks for taking my questions, and congrats on the quarter. Chad, can we talk a little bit about the changes you mentioned earlier in terms of where salespeople can sell? Going up from the 2,000 as this kind of the ceiling up to 5,000 is obviously a big step for you. Can you just double-click on that a little bit? Part of that reason why you were in the 2,000 is because there is more service model, where if you go to the 5,000, it's more a software model. Also the other things, like your concerns in the past were a little bit, I seem to remember that it's kind of big elephant hunting, and it's kind of difficult to get the sales velocity that you wanted. Can you talk a little bit what kind of drove your decision here?
Yeah. Thanks, Raimo. I will point out that we used to highlight deals that we sold above our range of 2,000 employees on the earnings calls. We continued to highlight them until about a year and a half ago or so, as we continued to bring them in. All that's to say that this isn't a new territory for us. We've continued to be driven upmarket through requests. We've both sold and converted several above our range this past quarter. This is really our proactive sales efforts. As I've spoken before, our sales reps proactively target companies that have between 50 and 2,000 employees. As we are pulled up above that range, we do sell them.
Now, as we've continued to be pulled up range, as well as our products become easier to sell, we are now allowing reps to proactively target those companies from 2,000 to 5,000 as well.
Okay, perfect. Last quarter, you talked a little bit about the focus on the slightly different sales motion and the focus on usage. Can you talk a little bit about what you saw this quarter in terms of the organization getting comfortable around that and success stories there?
Yeah. Our product is, I guess I would say, we're increasing the gap of differentiation between our product and what we believe is out there in the marketplace. It's making it easier to sell. Honestly, I'll be updating the sales capacity number next quarter. This year, a record that was set a couple of years ago, by a sales rep that had been here 10 years, has already been broken by a rep that's been with us for 14 months, and we've still got months left in this year. Our newer reps, we're having a lot more success with them as we've made it easier for prospective clients to recognize the advantages they receive from using this type of technology. We're having some success with that as well.
Okay, perfect. Thank you.
All right. Thank you.
Next question will be from John DiFucci with Jefferies. Please go ahead.
Thank you. Chad, my first question is more of a competition question. I think a lot in the investment community have been talking more about ADP. ADP's talking about slightly better retention rates and that they pulled most of their mid-market customers to their internal SaaS solutions now. I'm just curious, has that changed at all? ADP has been a source of customers, not only for you, but for others in the business. I'm just curious if that's changed at all, your go-to-market or what you sense on a competitive front from ADP.
Yeah. I'm not going to get into each competitive or alternative to us individually. What I would say is go back to the prior statement I made. We have created further differentiation, and we've widened the gap between Paycom and other products. How someone is going to use the Paycom product is going to be different than how they are using these other traditional providers. I wouldn't say that there's any change to that as far as how our value proposition's able to impact any of our competitors' clients.
Okay. That's fair. I guess, sort of a follow-up to Raimo's question in the going after the 2K-5K employee customers. Has there been a change in the customer base? One of the reasons I think you and others don't tend to go bigger is because bigger customers demand customization, more customization. I think a lot of your bigger customers, when you do sign them, have said, "Hey, listen, we're going to go with your best practices. You do it. You're the expert. We're going to go there." Are you seeing more bigger customers accepting of a SaaS solution that has best practices that perhaps doesn't want to go and customize and have a lot of services around it?
Is that any change you're seeing in the market, or are you just I'm just trying to get to, again, what Raimo said about the reason that it makes sense to do that now.
Yeah. We've continued to see a progressive attitude toward larger companies that believe that they can implement these types of solutions. We've seen that for a while. Again, I've continued to highlight since 2014 and talk about the fact that we continue to sell businesses at the top end and above our range. We've had so much success with that, we are now allowing sales reps to proactively target that. Do I think that's going to change the way our sales reps approach their territory? No, because you still have a limited number of prospects in your territory in the range from 2,000 to 5,000, as you look at any one sales rep. I believe that we've stayed in this range. We've increased our value proposition.
We continue to be pulled further up market, because one thing you have to realize is, in some of these products, we can go into a client and ask them to show us how their employees use the product. It can take them 20 minutes to pull everything up. In Paycom's product, it's one solution. It's on the app and desktop. At some point, you look at what's the difference between an employee that works at a 2,000-employee company or an employee that works at a 4,000-employee company. There's not a large difference there. Again, we've had success in the market, and this is just us allowing our sales reps to proactively approach that market.
Okay. Thanks, Chad. I'm sorry, I'm going to ask one follow-up because I'm a little perplexed at the stock action after hours here. I often am, by the way. Going after this market, does this have anything to do with your existing business starting to show-- The numbers look good to me, but show any kind of weakness where you think you need to expand, or is this an incremental opportunity?
Absolutely not. This is an incremental opportunity, and again, I will say, as I'd highlighted in the past, we're already in this market. We're just making it official for our sales reps.
Got it. That's helpful. Thanks a lot, Chad.
All right. Thank you.
Next question today will be from Mark Murphy with JPMorgan. Please go ahead.
Hi, good afternoon. This is Matt Koss on behalf of Mark Murphy. Thanks for taking my question. Craig, you mentioned you're pleased with continued improvement in sales productivity. Are there any specific metrics you can point to that make you feel this way about sales productivity? You also mentioned your $888 million average daily float balance. Can you share with us the rate that you earned on that and any expectations for the rate you might earn on that going forward that's contemplated in your guidance?
Yeah. I'll start with the first one, metrics on sales productivity. I think one of the biggest metrics on sales productivity is revenue production, which is reflected in our numbers that we've reported this quarter. I've given you something a little bit anecdotal in talking about how our new reps are having so much success. As a reminder, last year, our sales rep of the year was a rookie. This year, as I've pointed out, a rep that's been with us 14 months is going to set a single record, and maybe more of them, by the way. We're still a couple of months away from year-end, but one rep has already surpassed a record that was set by a 10-year rep a couple of years ago.
We have made it easier to sell as we have been able to deliver stronger ROI that's easier to identify from the client. In regards to the float that we make off, that's not something that we've disclosed specifically. Craig, I don't know if you want to provide any more color on that.
Yeah. That's a rate that we have not disclosed in the past. As we've mentioned in the past, those are client funds, and they typically are invested in a short duration. It would be dangerous to include in our guidance any future rate increases, so we do not do that.
I will also say this, is that our approach to interest rate and how we manage that has not changed from one quarter to the last.
Thank you very much.
Next question today will be from Mark Marcon with RW Baird. Please go ahead.
Hey, Chad. Hey, Craig. I was wondering if you could talk a little bit about the sales and marketing efforts. Just wondering how much is incremental as we look at this past third quarter and looking to the guidance in terms of the fourth quarter. How much more are you spending for that relative to the sales? Within sales, separately from that, are you adding any additional people to the teams to go after this new market opportunity in terms of the upmarket?
Okay, I'll answer your last question first, and the answer to that would be no. Our sales teams are the same size as they've been in the past. The only change we've made is allow them to go up to 2,000-5,000.
Yeah, in terms of the sales and marketing, we don't break out the marketing piece separately, Mark, but we started running the ads
Towards the end of the third quarter, so we had some costs in the third quarter, but the majority of those are going to fall into the fourth quarter. If you look at our full year adjusted EBITDA guidance, it's very similar to where we finished last year as a % of revenue, yet we've been able to fit in this significant marketing effort.
I guess the question is, the margin will be about similar. They're obviously impressive margins, so should we think, on a go-forward basis, basically that the EBITDA growth is basically going to be more in line with revenue growth, or is there further potential for scale or leverage?
Mark, there's been quarters where we've spent millions of dollars on a national advertising campaign, as we've talked about, both third and fourth quarter of this year. Then there's been quarters where we've spent zero on this type of campaign. So those are levers we pull. We pull those levers when we feel like we can gain market share and continue, because we're a growth company, and we're very focused on growth, and we have great opportunity. So we're spending these dollars because we believe it's going to set us up very well for 2019. It is a lever. To the extent we spend the money, we do expect the revenue. It is something we measure. If it works, it's something we would do again. Early indications are things are going well. It also should have a commensurate revenue achievement tied to it.
When you're talking about impact on margins, I think what we're really talking about, as it relates to our fourth quarter guidance, is we're spending ahead of any revenue achieved. The campaign's been going on for a little bit now. I can't attribute $1 in revenue to it. I can attribute leads and what have you, but you know our sales cycle and you know our conversion process. To think that we would start advertising towards some time in third quarter, and we would've already had revenue for that, obviously we wouldn't. This is about an opportunity that we believe we had. Also, it's an education piece. We are educating a new way to use HCM technology. That's what we're doing.
Great. The reason for the question, Chad, was just basically the guidance would imply lower margins for the fourth quarter of this year relative to a year ago. It does seem to me that you are spending ahead of the revenue, and you've always successfully converted it, but I was just trying to get an order of magnitude or just to understand that a little bit better.
Yeah. I don't remember exactly the national advertising campaign. We had a smaller one last year. I don't know that it ran all the way through fourth quarter, and it definitely wouldn't have been anywhere close to the type of spend that we're doing on this type of advertising campaign. Again, this is something that we talked about with our last earnings announcement.
Okay, great. Last one, just in terms of moving up, did the sales force request that they could move up?
Yeah, in 2008.
Okay, great. Thanks.
Next question will be from Brad Zelnick with Credit Suisse. Please go ahead.
Hey, this is Kevin Ma on for Brad. Thanks for taking the question. Just on your go to market with this expanded base, will there be any change to the sales strategy for going after these customers up market or perhaps different incentive structures?
No, there's not any change to the strategy. When you're saying change to the strategy, there is an approach that you might take differently with a smaller business than what you are a larger business. When we're talking about a company that has 2,000 employees or a company that has 4,000 employees, there's not much of a different approach on that. What can make a deal complex is not necessarily size, but oftentimes industry and certain portions of what they're trying to achieve on either the payroll labor or time and labor side. No, I don't see any change to our model. Again, this is something we've been doing anyway, so we're just making it official for the sales reps.
Got it. Makes sense. Thank you.
Next question will be from Corey Greendale with First Analysis. Please go ahead.
Hey, good afternoon. I'm going to ask about that topic as well. I'm pretty sure you're saying no change in terms of how you're sort of bifurcating or splitting the sales force. In other words, you don't have salespeople specifically going after the high end. I just want to verify that that's true. Is there any change in the profile of reps you're hiring or in the training or onboarding process as you expand the addressable size?
Yeah, no change to any of that. The only change here is permission.
Okay.
Which was already granted should someone call us.
Got it. In terms of managing sales cycles or how sales managers are working with reps to say, "Hey, you should get these quick hit victories with smaller customers and then not totally focus on the high end or only focus." Is anything like that happening in terms of tactics or coaching?
No. Again, we sold several deals in this range last quarter. We converted, implemented, and they're current clients this quarter. You can go back quarter upon quarter in the past, and it's been the same. Whenever you're doing a conversion, it's important to focus on each client individually, and that's what we do. When it comes to conversion, every deal's a snowflake. They look like they're the same, but they're not.
Okay. Then just one quick one for Craig. The non-GAAP
G&A increased more in Q3 than we ordinarily see. Do you know what drove that and what we should expect in Q4?
The non-GAAP
G&A
G&A?
Yeah.
Sure. The non-GAAP G&A, one thing in that line is we had some additional headcount as well as we brought the new building online, we had some elevated levels there in Q3 due to the new building, which, as a reminder, it's the same size as our other three buildings combined. We had some additional costs, Q3 in G&A, as it related to bringing that building online.
I'm sorry, does that mean, Craig, that we should expect? Is that kind of a new run rate, or was that more one-time kind of a cost?
We had some one-time, but there are going to be some of those costs that are going to carry on for a while.
Got it. Thank you.
Next question today will be from Shankar Subramanian with Bank of America Merrill Lynch. Please go ahead.
Thanks for taking the question, and congrats on the results. Just on the Q4 guide and how your business is trending in October, it seems like you had a pretty solid June quarter, and obviously you've had a really good September quarter. How should we think about your near-term business conditions? Do you, on a year-over-year basis, do you see the same kind of strength in the end market? Just to help us understand, is there any conservatism in the revenue guidance?
Yeah, I'll say this. Well, we haven't changed the way we guide, and I think if you look at our guidance in the past, it would kind of reflect that. As a matter of fact, I think for this quarter that we're in right now, our initial guidance was 28%. We continue to guide to what we can see. We don't always control when a client converts, and the only way for us to record revenue for that new client is after they convert and actually pay us, start paying us the fees for our service. Yeah, and I would say the other thing in terms of the fourth quarter guidance, the fourth quarter's typically a little bit seasonal for us.
What happens in fourth quarter, November and December specifically, is you'll have companies run off-cycle payrolls as it relates to bonuses and personal use of auto, those type of things. As we're sitting here guiding, we have a good idea on what we think those off-cycle payrolls will be, but you just never know, as well as we brought on a lot of new clients this year. We don't have the history of how they run those payrolls yet.
Got it. The follow-up, I did a survey in September for 200 Paycom, your customers, and about 20% of them were in the 2,000 to 5,000 employee range. It's not that much of a surprise that you are expanding the market. Could you help me understand, kind of from a product perspective, is there any difference between the employee segment of 2,000 to 5,000, what they buy and use versus the 50 to 2,000?
No. Well, 50 to 2,000 is a wide range. I think you can start seeing some difference in usage between. So much of it, I'll tell you, Shankar, so much of it is really dependent upon industry and what someone's trying to achieve. We're going to approach a 4,000-employee quick service restaurant differently than we are a 600-employee hospital that has shift differentials and what have you, which is going to be different than a 400-employee construction company that has labor distribution, burden factors, and everything else. Again, size does not necessarily dictate complexity. I will say it is most often that your larger companies have more complex situations because everything applies. As far as our approach to sales and what we're doing, and as far as the readiness of our product, it's been ready for a long time.
This isn't something that we have to go develop anything different or retrain sales forces or we're not going to see any changes to our conversions. This is what we do. Again, we've been in this business a long time in this market.
Got it. Just one last question. Any update on the new office openings? Are you going to be doing more towards the end of the year? Are you going to be relooking next year to revisit the new office openings?
Yeah. Just as in the past, we have not guided on exactly when we're opening up offices and where, for competitive reasons, and plus we want our own people to know first. We will continue to open up offices over the next 12 months.
Perfect. Thank you so much.
Next question will be from Brian Schwartz with Oppenheimer. Please go ahead.
Yeah, hi. Thanks for taking my question. Chad Richison, I've got a different question. It's a philosophical question around the upselling motion and maybe opening up more SKUs in the future of the business that I wanted to ask you. The retention metrics, the business results in general, you're clearly having success adding lots of new customers, and you seem very pleased with the direction of promoting the self-service usage of the technology and having the direct access and direct relationship with the database. The thought process is, if you're creating greater awareness of the usage of the platform technologies already within the install base, why not start considering creating new SKUs in an upselling motion? I would imagine there's a lot of neat HCM technologies that you could build and easily sell into the install base as you push the usage theme. Thanks.
Yeah. One thing I would say is we have, I believe, 26 modules right now, we started with payroll, and we've continued to add to that. We've got a strong value proposition right now, especially as it relates to the client, the client's ability to maximize their ROI through their employee base. I'll give you one, a very small example. five years ago, I was walking into a video store and getting it off the wall, handing it to the counter. I was paying my fee. I was taking it home, watching it with the kids, returning it the next day. Today, I have a direct relationship with the database as a consumer, and I sit on my couch and do it. That's better for me, and that's also better for that business that I'm interfacing with.
That's the way people use technology everywhere in the consumer-based world. They go to work, and we go back to the counter. We realize it's a shift. It's different than what people are used to. We're having great success with it, and so we're showing clients how they can drive even further ROI with this type of usage, and so we're very focused on it. Are you still there, Brian?
Yes. I guess I'll squeeze in a follow-up one too, Chad. Just considering that your customer base is very broad and diverse, can you just share maybe from a big picture view, if you see any tailwinds or headwinds for mid-market HCM technology spending in 2019, just based on the pipeline momentum and the conversations that you're having with the customers? Thanks.
Yeah. Well, I would say if it's just going to be a spend for companies, they probably won't do it and shouldn't do it, regardless of what the other economic environment looks like. For Paycom, we drive ROI, so what someone spends with us, we're looking to give them back through use cases throughout the software. If you're asking me what's the demand out there, I'm not noticing anything that shows a decrease in demand for this type of technology or really automation anywhere within business.
Thank you.
Thank you.
Next question will be from Ryan MacDonald with Needham & Company. Please go ahead.
Yeah. Good afternoon, gentlemen. Congrats on a nice quarter here. I guess you mentioned earlier in your comments about this move-up market that you've been pulled through by request, typically. Can you just talk about, I guess, in those certain situations, sort of how the demand for maybe breadth or depth of product has changed when you're pulled into those situations? Maybe how that impacts, I don't know if it's investments in implementation headcount or customer success headcount moving forward as well.
Yeah, you can be pulled into a deal because a person that used you at one company got a job at another company, and now they're running that company's department, and they're very familiar with your product that they used at the prior company, and they bring you in. You can be pulled into a market by an employee that uses the product, and has influence with that company and brings you in that way. In all cases, though, these clients are looking at our current product and offering. It's not that we are offering them something different than what we are offering the others. It's just we've always had a very robust suite of products. I'm just going to be honest with you that the usage on a lot of these products oftentimes has been lower, and I believe that's across the industry.
That's not a Paycom phenomenon, but oftentimes it's easier to sell someone the brochure than to get them to actually use the product that's there that drives ROI. We've been working on that now for, as you guys know, I've been talking about it now for several years, and we're continuing to drive that. I don't see any area in which it would require different implementation needs, except for the fact that it's more of the same that we're doing.
Got it. Then just a quick follow-up. I'll squeeze in my quarterly question around learning management and sort of what you're seeing from increased usage trends on the content that you've developed and perhaps how that's guiding your strategic vision there as we look out to next year for additional content as well.
Yeah. Learning management, so much of it is dependent on the client and what they're looking to achieve. Sometimes you get a little help, as we just saw with the State of New York, I believe now has a mandate for employees on going through both diversification or anti-discrimination as well as sexual harassment training. That becomes helpful to us as things become mandated, specific trainings become mandated. Far, learning management is really about those clients that want to achieve these types of training initiatives amongst their group. We do see it a lot in the upmarket. That is a product that you're going to see a lot in the upmarket because it is difficult to train people in decentralized environments if you do not have some type of learning management system.
We are continuing to look through our LMS system and what else we can offer with that, but we're also having success with what we're offering today.
Next question will be from Ross MacMillan with RBC. Please go ahead.
Hi, everyone, this is Yawen for Ross. Thanks for taking my questions. Congrats on the quarter. Chad, just wanted to clarify a comment you made earlier on building pipeline as a result of this ad campaign. I'm not super familiar with the effectiveness of national ad campaigns, but you've run smaller ones in the past. Is there any kind of a rule of thumb you'd think about for a multiplier effect, like X amount of dollars goes into ad spend and then just spit out Y dollars in revenue, call it six months out or a year out, or is it more of a brand and impression thing and it's not quite as quantifiable as that?
Well, I would say it's what you mentioned, plus. Ads both drive results from you from a leads perspective. They oftentimes soften the beach for the calls you're going to be making also, as well. As well as deals that you're in currently, branding can help move them along. You've got to really look at it in all areas. Look, traditionally, we haven't been a company that's focused on an advertising spend. I believe this is an area where it's going to be positive for our results, because again, we're advertising. I've never seen an HCM product for our type of industry, including the payroll side, that really focuses on the employee's experience with the product. I'm not saying one doesn't exist. I'm saying I've never seen one. This is the first of its kind. We are also advertising a new way.
There is a shift here. We're advertising it. We've been focused on it. I have been saying now for about nine months that we might be early with this strategy, but we're not wrong. I'm going to be able to eliminate we're early with it at some point. We've been focused, and we're going to see how it does. Early indications are it's doing what we expect it to do.
That's great. I guess just wanted to squeeze another one in on this move up market that you mentioned. Obviously, many different ways you can get larger customers into the pipeline. One thing I'm curious about, do you get pulled in as, call it, larger customers open up RFPs? All I'm trying to get here is, does it change the nature of the competitors that you're facing, right? Just thinking out loud, Ultimate or Dayforce tends to play more in that upper 2,000-5,000 range. I'm wondering if competitive sale process is different from being pulled up market organically. Just anything you can speak to on that front would be helpful.
Yeah. First, I'll say that we continue to be pulled up market for companies that have above 5,000 employees as well, and we still do sell in that market. As far as are we going to see competitors more, I would expect we're going to be seeing their client base more as we go in and talk to them about our solution in the 2,000 to 5,000 employee market, because we're going to be proactively targeting it. Yeah, I would expect we're going to definitely be seeing more of their install base.
Got it. Thank you very much.
The next question will be from Nandan Amladi with Guggenheim Partners. Please go ahead.
Hi, good afternoon. Thanks for taking my question. Chad, you talked about your new marketing campaign. Today, what share of your leads come through any sort of digital channels versus just sort of feet on the street type lead generation?
You know.
Yeah, go ahead.
Yeah. Well, if I could figure that out specifically, you never really know. You can be pitching someone for a while, and then they haven't talked to you for a year, and then they come in as a lead. Well, where did that lead start? By the person that actually called them. You can be sending someone marketing material, and then a lead comes in. Oftentimes, you've got to hit these all over, these businesses, in order to advertise what you're doing. We've often done that through, I would say, very light on advertising, to be honest with you. Ours is more of a direct marketing campaign efforts, which we've always done, as well as this is a high-touch sell, that we have to go in and do analysis and what have you.
We are still a direct sales model, and this advertising campaign is there to support that model, not to replace it.
Great. From an R&D perspective, as you look out, you said you have 26 modules in the portfolio already. How much more is left to build, do you think, particularly as you go after the 5,000 segment now more as you go?
I think the more you get companies to use these products, the more use cases develop, which increases opportunity for you to deliver more value to businesses by developing additional product sets.
Yeah, I would say our R&D has continued to increase. Like Chad says, we continue to build out more products. We're going to continue to spend on R&D. One thing, too, kind of as a housekeeping matter that I haven't been able to jump on the call to clear up is stock comp for the third quarter was around $4.5 million. Want to make sure, kind of as we're doing modeling for fourth quarter, that we keep that around that same level.
Thank you.
At this time, this will conclude today's question and answer session. With that, I'd like to turn the conference back over to Mr. Chad Richison for any closing remarks.
All right. Well, thank you to everyone joining us on the call today. Over the next two months, we'll be on the road meeting with investors at the following conferences. We'll be at the Credit Suisse Technology, Media and Telecom conference in Scottsdale, Arizona on November 27th. Then we'll be at the Barclays Global Technology, Media and Telecom conference in San Francisco on December 5th. We appreciate your continued interest in Paycom, and I look forward to meeting with all of you soon. Operator, you may disconnect.