Earnings Call: Q2 2018

Jul 31, 2018

Good afternoon, and welcome to the Paycom Software Second Quarter 2018 Results Conference Call. All participants will be in listen only After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Craig Bolte, Chief Financial Officer. Please go ahead, sir. Thank you, and 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 ks for the year ended December 31, 2017. You should refer to and consider these factors when relying on such forward looking information. Any forward looking statement speaks 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. 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. Thanks, Craig, and thanks to everyone joining our call today to review our Q2 2018 results. As with prior calls, I'll start with some comments on our achievements in the Q2, then speak to developments at the company as well as in the payroll and human capital management or HCM software market. Craig will then provide an update on our financials and guidance. Following that, we will open up the line for questions. Paycom's powerful and intuitive solution continues to gain market share, powering our strong second quarter results, with revenue of $128,800,000 representing growth of 31% over the comparable prior year period. Our profitable model delivered adjusted EBITDA of $53,500,000 representing a 41.5% adjusted EBITDA margin. Additionally, during the Q2, we were pleased to return value to our stockholders by repurchasing over 400,000 shares. At Paycom, our goal is to help our clients achieve success by helping them hire, engage and better manage their workforces using the power of our technology. In our conversations with prospective clients, we see that more and more companies are becoming excited about the potential efficiencies and improvements they can attain by deploying our advanced HCM software solution. Our solution offers a broad set of capabilities that spans the entire employee lifecycle, all of which have been built organically by our internal development team. We believe our offering remains the best option in the marketplace. We also believe that we are still at the beginning of an HCM transformation through which employers experience greater return on their investment by leveraging HCM technology for their employees. Today, HCM systems are still mostly used by system operators. Employee usage remains less than optimal. At Paycom, our vision is to see substantially greater usage of HCM software among our clients' employees. This vision is supported by our years of experience converting clients from our competitors and is further supported by the broad trend of people becoming accustomed to working with self-service solutions and mobile software on a daily basis. Significant employee usage of HCM systems has the potential to both increase employee satisfaction and also provide useful reliable data to employers. However, with people spending more and more time using mobile devices, this goal is only realistic if you have an application that has the capacity to handle a wide range of innovative HCM needs and is easy to log into and use. Paycom's mobile app meets those requirements, providing all the functionality offered by our employee self-service desktop application. We believe the work we've put into developing and refining our mobile app and also our overall employee usage strategy positions us well for continued growth. On our last quarter, I highlighted our redesigned employee self-service desktop and mobile apps and how they allow our clients' employees to access every part of our solution from any device at any time. I'm pleased to report that our mobile app is gaining in popularity and usage with client employees. And we are optimistic that our success in driving this usage will grow. Additionally, we continue to improve our overall offering in the Q2, introducing several enhancements as part of our monthly updates that we roll out to our entire client base. We will continue to introduce new functionality to maintain our competitive position. We are excited about our prospects for continuing to capture market share. In an effort to generate momentum as we head into 2019, we will be investing in certain marketing initiatives in the second half of this year, including a targeted national campaign that we expect to start late in Q3. Additionally, we were excited to see the Oklahoma Sports Hall of Fame release the 2018 Paycom Jim Thorpe Award preseason watch list. This list includes 35 of the nation's best defensive backs representing 11 conferences. The Paycom Jim Thorpe Award, which we are honored to sponsor annually recognizes the best defensive back in college football and is awarded in December. Turning to our internal growth, we also expanded our sales reach in the 2nd quarter opening sales offices in Columbus and San Diego. We are excited to expand our sales footprint to offer our best in class HCM solution to businesses in these markets. These additions bring our total sales team count to 49. On our main campus here in Oklahoma City, we completed construction of our 4th building and have started to move employees into it. This 250,000 square foot building is as large as our first three buildings combined and offers many state of the art features, including studio space where we can create our own content and also a data center that will complement our existing data centers in Oklahoma City and Dallas. Regarding our Texas operations, we recently announced our plans to relocate our Texas operations center to a new facility in Grapevine, Texas. We plan on commencing construction of this new facility in 2019 and are excited about expanding our presence in Texas. Finally, I would like to provide an update regarding our executive management. We have promoted Kathy Odenhall, our Chief Marketing Officer to our Executive Officer team. Kathy has been instrumental to our success at Paycom, leading our marketing and PR efforts for several years and recently taking on increased responsibilities. I'd like to extend thanks to Kathy for her service. We look forward to her continued contributions as we grow. To sum up, our momentum continued across all areas of our business in the second quarter and we are optimistic for our prospects for the remainder of 2018. With that, I will turn the call over to Craig for a review of our financials and guidance. Craig? Before I review our Q2 results for 2018 and also our outlook for the Q3 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. Also, 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 effective income taxes. Reconciliations of the GAAP to non GAAP measures discussed today are included in the earnings press release issued earlier this afternoon. We are pleased with our 2nd quarter results with total revenues of $128,800,000 representing growth of 31% over the comparable prior year period. Our revenue growth continues to be primarily driven by new business wins and we are pleased with our continued excellent performance. Within total revenues, recurring revenue was $126,600,000 for the Q2 of 2018, representing 98.3 percent of total revenues for the quarter and growing 31% from the comparable prior year period. Total adjusted gross profit for the 2nd quarter was $108,300,000 representing an adjusted gross margin of 84.1%. For the full year 2018, we anticipate that our adjusted gross margin will be within a range of 83% to 84%. Total adjusted administrative expenses were $61,700,000 for the quarter as compared to $49,900,000 in the Q2 of 2017. Adjusted sales and marketing expense for the Q2 of 2018 was $30,200,000 Adjusted R and D expense was $10,500,000 in the Q2 of 2018 or 8.1 percent of total revenues. Total adjusted R and D cost including the capitalized was $14,600,000 in the Q2 of 2018 compared to $10,000,000 in the prior year period. Adjusted EBITDA was $53,500,000 or 41.5 percent of total revenues in the Q2 of 2018 compared to $36,600,000 or 37.2 percent of total revenues in the Q2 of 2017. Our GAAP net income for the Q2 was $35,700,000 or $0.61 per diluted share based on approximately 59,000,000 shares versus $20,000,000 or $0.34 per diluted share based on approximately 59,000,000 shares in the prior year period. Our effective income tax rate for the Q2 2018 was 17.9%. Non GAAP net income for Q2 of 2018 was $34,800,000 or $0.59 per diluted share based on approximately 59,000,000 shares versus $20,500,000 or $0.35 per diluted share in the prior year period. We anticipate our full year effective income tax rate to be 22% to 23% on a GAAP basis. On a non GAAP basis, we anticipate our full year effective income tax rate to be 25% to 26%. In the 2nd quarter, we returned value to our stockholders by repurchasing over 400,000 shares, including 350,000 shares purchased in the open market. Since we initiated the repurchase program, we have repurchased over 3,300,000 shares, including over 2,000,000 shares in the open market. We anticipate fully diluted shares outstanding will be approximately 59,000,000 shares in the Q3 of 2018. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $54,600,000 and total debt of $35,300,000 As a reminder, this debt represents a financing of construction at our corporate headquarters. As Chad mentioned, construction of our 4th building is complete. In addition, we recently announced our planned expansion in Grapevine, Texas and expect to close on the land purchase in the second half of the year. Cash from operations was $42,700,000 for the 2nd 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 $960,000,000 in the Q2 of 2018. Now let me turn to guidance for the Q3 and full year for fiscal 20 18. For the Q3 of 2018, we expect total revenues in the range of $129,000,000 to $131,000,000 representing a growth rate over the comparable prior year period of approximately 28% at the midpoint of the range. We expect adjusted EBITDA for the Q3 in the range of $45,500,000 to $47,500,000 representing an adjusted EBITDA margin of approximately 36% at the midpoint of the range. For fiscal 2018, we are increasing our revenue guidance to a range of $554,000,000 to $556,000,000 or approximately 28% year over year growth at the midpoint of the range. We are increasing our full year 2018 adjusted EBITDA guidance to a range of $231,000,000 to 233,000,000 representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range. With that, we will open the line for questions. Operator? And our first question comes from Raimo Lenschow from Barclays. Please go ahead. Hey, thanks for the question and congrats on a great quarter. Chad, can you talk you started to talk a lot more about usage as a kind of way kind of to kind of get deeper into the client base and there's a bigger focus on employees as well. Can you talk a little bit about what you're seeing in terms of our guys that you're historically been selling to like in the 1,000 to 2,000 employees space. Are those guys ready? Those are the commentaries that we historically have seen more in the kind of the enterprise space. Yes. Thanks, Raimo. We've been focused on usage because especially at the employee level because we think that that's one of the most significant ways that our clients can drive ROI for themselves is when the employees have a direct relationship with the database. And we see that happening everywhere else in society as the digital transformation takes shape. I believe it's been a little bit slower to do so in our industry just because everything is so important when you're dealing with payroll and time and attendance and benefits and what have you. And so I think it's been a little slower, but we've been seeing that happen. We've been the ones pushing for that and I definitely see that that's the right strategy in the future. Okay. And then if you look at your profitability, so far this year you've been actually ahead of last year. So but your guidance assumes quite a bit of a ramp up in the second half. Can you talk I mean, you gave us like what you want to do, but can you talk a little bit about timing and how much you want to spend, not necessarily if you can, but like how much you want to spend there because it's quite a step up in the second half? Sure. I mean, Chad called out that in the second half, we're looking at really ramping up some of our sales and marketing initiatives. And so we would see that in the second half as well as some on the R and D, we've always seen a step up as well from quarter to prior year quarter in the R and D area. And then last question for me is like CapEx, like so what's this you do the purchase in the second half of Texas, which will be great. Like what's the level you think for the full year? What are you comfortable with, Craig? Yes. On the CapEx, Raimo, you saw a step down from Q1 to Q2 as we were wrapping up this building and we called out the purchase of the Grapevine land that will occur either a 3rd or Q4. But we would expect the full year 2018. And Ronald, remember, we don't give guidance on CapEx, but we're kind of midway through. We would expect it to be on an absolute dollar basis similar to 2017, 2018 similar. And the next question comes from John DiFucci from Jefferies. Please go ahead. Sorry, thanks. So Chad, I realize that typically you get very little contribution from new sales offices, But this quarter was such a good one. I mean, you accelerated recurring revenue growth above that over the last three quarters. So it sort of begs the question, if you got any if you got a windfall or any meaningful contribution from the 3 new offices you opened this quarter. And if the answer is no, which it usually is, when people ask that question, what is it? What do you attribute this sort of the acceleration this quarter to? Yes. With any quarter, I mean, our recorders as far as the revenue comes in, you're always going to have the overwhelming majority of our revenue, new business revenue that comes in. It's going to be from new logo ads. Your question about new offices, our new offices continue to do well as expected, but they don't react differently than what our past offices have reacted as far as contribution. And I think I'd mentioned this before, year before last we opened up 6 offices and I had 2 sales reps outsell the 6 offices we opened for that year. And so new offices will make contributions, but they really start making their contributions past month 24 of original open date. Okay. And great. And I guess if you can just remind us, like I know remind us about the impact of the sales, the new business once you sign a deal. It's usually is it usually like 60 days before it gets up and running on average, and I know that that varies, but you don't start recognizing revenue until that happens. Is that correct? So the strength this quarter really, I guess, would span last quarter too. Is that am I making the right assumption there? Well, you're correct in that we do not account for revenue until it's been billed and actually Karel. And so you are correct in that. And you're also correct in that in between 6 weeks, between probably 6 weeks, sometimes it can take a little bit longer for us to get a client up, Somewhat depends on the motivation of a client and what kind of I mean how sick the patient is from a data perspective when we go in there and what all we need to fix. So you are right on the timing as well. Okay. I'm not so sure about the correlation between this quarter and last quarter as it relates to your question. But what I will say is that our revenue and our revenue makeup and what have you, the profile of that hasn't changed from quarter to quarter. Okay. And then I so I guess all my questions are really around why is the quarter so strong. And I guess it's just business as usual. And it is it's a very strong quarter as Raimo mentioned too. We've been talking about differentiation with the product. I believe that's resonating again as people look to adopt usage of HCM technology similarly to how they do everywhere else in their lives. I mean, I think that we're in the beginning stage of people starting to use HCM technology to really work for the business and be able to drive their own ROI. And we've been talking about this. We've shift our entire company along that strategy and we're all very focused on it. And so I do believe that's producing strong results for us at this time. Okay, great. Nice job guys. Thank you. And the next question comes from Mark Murphy from JPMorgan. Please go ahead. Hey, thank you. This is Pinjalim for sitting in for Mark. Congrats from me as well and thanks for taking my question. Hey, Chad, on the same topic that John was trying to figure out, I guess, is I know you don't update on retention, dollar retention, but did a better dollar retention contribute to the upside in the quarter at all? We have we always work on retention. I've been talking about our retention efforts now since we IPO ed in 2014. In our industry, typically, most of your losses or a lot of your losses are going to be coming at the beginning of the year as certain clients look to start then. You can also have losses throughout the year. And so with us, we're typically we start off with the retention number. We work on it extremely hard to increase it throughout the year. So far, all of our efforts on retention have produced the same result in 91% retention rate, I believe, for the last 7 or 8 years. Some of that's uncontrolled, but a lot of it is. And so we've been very focused on that. It would be early right now to talk about retention impacts as far as where we are going to finish the year. But we continue to focus on that as we have in the past. And we'll see how that plays out as we report our Q4 and full year results at the end of the year. Understood. Okay. And so if retention is more or less constant, I guess, I would assume that productivity for mature offices is sticking up towards your the goal of $6,500,000 which was the top performing sales teams, I guess. I mean is that fair to assume? How should we think about the trajectory of productivity for mature offices for the second half? Yes. We are continuing to get better on sales productivity. That comes from both working very hard and actually our sales managers working very hard to improve their skill set for both themselves as well as reps that they have working for them as well as product differentiation. I mean, we've continued to work aggressively on our product in order to differentiate. We think that gives reps a better opportunity when they go into meet with prospective clients. It gives them an opportunity to go in and talk with prospects that maybe we didn't get the first time around. And so as well as you continue to improve and differentiate the product. And so I would probably point to both of those. They work hand in hand, being able to have a stronger product and then again working on sales skills to be able to go out and produce results that increase our overall capacity on the sales department. And so that's those are the areas I would point to as generating some of the gains that we had this quarter. Okay. Thank you. That's all I had. And the next question comes from David Hynes from Canaccord. Please go ahead. Hey, thanks guys. Hey, Chad, if you look back over the last, I don't know, year or 2, is there any way you can quantify what kind of growth you're seeing in that your per employee per month landing price? I mean, the reason I ask, right, you continue to expand the portfolio. Think you've admitted that the focus really isn't on cross sell, upsell, your focus is on landing large. So I would think that that metric would be a good kind of measurement of the success you're seeing there. So anyway you can help us quantify per employee per month landing price? I guess what I would say is we haven't updated that number since IPO and we've chosen not to do that due to competitive reasons. I can say an answer to your question over the past year, there has not been a significant increase in the PPM from that period of time. We've been very focused on usage. Again, it's easier to sell products to clients than to get them to use it appropriately. So we've been really focused on that in order to help clients actually deliver the ROI that we presented to them. And that's been our focus. And so as we continue to get greater usage, does that allow us to sell other products that they didn't have? Well, certainly it does. And can you really sell additional products to someone who isn't using a large percentages a large percentage of the products that they currently have? I mean, well, you can, but it just doesn't help them meet the objective for their business. And so we want to be a partner in that. And so that's been our focus, has been usage. And I think that's making a difference in both how our current clients use the product as well as us being able to leverage them as references as we go out into the field and work with new prospect opportunities. Yes, yes, makes sense. And then Craig, maybe one for you. Gross margins jumped out as pretty strong in the quarter. I think they were up almost 200 basis points year over year. And I know it seems like you kicked up maybe the range of guidance for the year a bit. Anything one time in nature that drove the gross margin strength in Q2? And historically, we see it gross margins pick up even more in Q3 and Q4. Why would that not be the case again this year? Yes. On the gross margin, we've always been in the 82% to 84% range and we did take that up to 83% to 84%. The greatest impact on that gross margin is just the timing of when the hires come in. We bring people in and it takes them a while to ramp up and learn to be able to take on the clients and then they'll take on a few and then ramp to full capacity. So some of that's in timing. I don't know that I would read a lot into that moving towards the 3rd Q4, other than it kind of ranges between that 83% and 84%. And one thing I would call out kind of as a housekeeping matter, last quarter we called out our stock comp at being in that $5,000,000 to $6,000,000 range. This quarter was slightly lower than that. So just for modeling purposes, I wanted to kind of keep that in that range. So Keep it in the 5% to 6% range? Yes, in the 5% to 6%. We had some forfeitures true up since Q2 that caused it a little lower. So Great. Okay. Great set of numbers guys. Thank you. Thank you. And the next question comes from Mark Marcon from Baird. Please go ahead. I'd like to add my congratulations. Jed, you've always emphasized usage. I was just wondering, can you dimensionalize some of the progress that you're making with regards to increased usage? Like how should we think about it? Or how do you measure it? And how are you thinking about it in terms of how it should trend over the course of this year? Yes. So I think there's a huge opportunity for us in usage. I think from an I would say usage amongst the employee base from an industry as a whole is I would say usage amongst the employee base from an industry as a whole has been low. I would say that until we really started focusing on our usage strategy, ours was also low to anemic. However, we focus very much on it. We've continued to generate great usage out of it. But we're not where we want to be with usage and having clients really leverage the software out there so that employees can have a direct relationship with the database that makes it easier for everybody. And so we're still focused on that. So we're still at the early innings of even usage strategy. And with greater usage, you create more product from that, because once someone's using a full set of your product, you're able to identify other areas of ROI that you can impact for that business. And so I see usage in our product continuing to increase at the employee level as we move forward. Does that change at all like who you're having the most success against in terms of gaining new clients from? No, I wouldn't say. Well, I can go ahead and tell you that for us, it's been the usual suspects as far as our business wins. We are I think some conversations are starting to change in both the C Suite and HR departments as they notice, different types of technologies where they can that they can actually leverage for themselves. And a lot of this can be even task management. Some things in our industry, they're not like to do, they have to do. You don't really have a choice. I mean, you might not want to do it, but you have to, they're mandated. And so when we can put greater or better technology in someone's hand that allows for a greater accuracy in those types of situations, that is very beneficial to the client base. And so I see as we are able to move from even the have to to the want to's, I think we'll continue to see a greater increase in usage. But you've got to start with those have to's. I mean people have to enroll in benefits. They have to collect time. They have to request time off. They have to get their COBRA benefits. I mean I can go on and on. These are the things. They have to do expense reports. I mean, these are the things that individuals have to do as part of working for business. And so we continue to stay focused on that and I do see opportunities for us to continue to increase usage from here. And quite frankly, I'd be very disappointed if we're not continuing to do that as we've done in the past. Great. And then Eddie, to mention with regards to the additional marketing spend, how we should think about it? We have a marketing strategy. The thing about marketing is you can waste a lot of money in marketing and advertising if you're not measuring it and you're not getting the return from it. So we do have ambitious marketing objectives as we've had every year here at Paycom. We are going to be embarking on another national strategy. We had one similar to this last year that we embarked on. We're doing that again, as we've talked about in the second and third quarter, in an effort to get some momentum as we head into 2019 as well as differentiate the product and the new message. And so we look forward to getting out there in the coming quarters with that message. Great. Congratulations again on the terrific quarter. Thank you. And the next question comes from Brent Bracelin from KeyBanc Capital Markets. Please go ahead. Hi, this is Clark on for Brent. Chad, I think something that we've seen so far this year is that businesses are feeling kind of healthy and are interested in some modernization efforts. I was wondering if there's anything you could call out in terms of customers that might be interested in the non primary products, maybe the talent side and whether you've seen an increased willingness or interest to kind of do the modernization all at once, if they had no talent system or a legacy system that they might be looking to improve upon? Anything you could talk about that momentum? Yes. Well, I can tell you that I think it's been a trend that HCM has become more and more prevalent in what was primarily a payroll and labor management industry of payroll and time and labor management, you started to see the proliferation of HCM products start to move into the mid market. And these products were primarily reserved for the enterprise level market prior to. And so I would say this is a trend that's really been happening for the last 5 plus years of HCM continuing to increase. And that would include the talent management side as people develop processes to be able to implement talent management type procedures. Meaning that, we can sell you the talent management product, but if you don't have a strategy for managing talent or have not adopted a strategy that our product automates, you're not going to really have a lot of usage and it's not going to be part of what impacts your business. And so we're seeing it's an education. It's both an why should people do background checks. You'd be surprised how many businesses out there these days don't do background checks and of the ones that do, they might do it on 10% of their employee base. And so these best practices that were primarily reserved for larger companies, you're now starting to see work themselves through into the mid market as a best practice as it becomes attainable for them through the technology that's available today. And we believe that we're at the lead of that. Great. Great. And then a question for Craig. Sales and marketing came in lower than we were estimating. Is there anything you would call out in terms of that line item? Was there any kind of push out of the marketing campaign in terms of maybe expecting to start in this quarter and now for the second half or any color on that regard? I mean, no, nothing that we pushed out the Q3. I mean, Chad did mention we're going to have some additional initiatives 3rd Q4 of this year. All right. Great. Thank you very much, guys. And the next question comes from Brad Reback from Stifel. Please go ahead. Great. Thanks very much. Chad, your mobile product seems to be becoming an increasingly meaningful point of differentiation in the market. 1st and foremost, do you see it helping you win deals? And then number 2, down the road, do you see additional monetization opportunities with that? Thanks. Yes. I do believe it's helping us. Again, the mobile product is the reflection of our overall software. It's just an easier way for employees to access it. We have a desktop version and then obviously we have the mobile. And so mobile devices have become prevalent in the world today and so we're able to leverage that. Are there opportunities that we've identified that can allow us to not just increase usage, but increase revenue opportunities for us, which also increases additional ROI for our clients, there sure are. But again, we're very focused on delivering not only that, but making sure that the clients are using the products that they have available to them today, because we also believe as part of this process, clients can get greater returns on their investment in Paycom if they'll use the full system. And that's really what we want people to do. That's what we've been embarking on. And then once people have done that, that does generate additional opportunities. But I will say that right now we have some very significant mandated videos that's in our LMS content right now. If I cannot get a specific client to watch videos which are somewhat mandated and very timely, I really can't sell them anything else after that as it relates to content. I've got to get people to use the content that's there before you can create additional that will be meaningful to them. Does that mean we're not creating content? No, we're continuing to create content. But in answer to your question, I do believe that we will have greater success in the future with all of our products as we increase usage at the employee level. Great. Thanks very much. And the next question comes from Ryan MacDonald from Needham and Company. Please go ahead. Hi, guys. So I guess following up on a little bit of the answer from the last question, you're now a few quarters into this the learning content offering. Can you just talk about what you've seen thus far in sort of usage and how that's been trending for the content you've created and perhaps to the extent that you can talk about the roadmap for that for creating additional content into the back half of this year and early 2019? Yes, we're focused on content creation. I just brought that up as one product as an example of there are certain mandates that you definitely want employees to experience through their content as well as you want to test them on, certify them, make sure they've completed the courses. My comment earlier was, we're still at the early ages of getting people to do the mandated things, much less the additional items that people will want to train on that makes sense for them in their specific industries. And so we do continue to develop content. I do believe that LMS, which is, I would say, one of the newer areas definitely for our business and I believe of HCM definitely for our business and for the mid market at large. I do seeing that being an area that will be able to be leveraged by not just us, but definitely the client base as well as even opportunities for other competitors out there as the market shifts to a more knowledgeable workforce and the way people not just is it the way that the new generation comes up, not just as a different the way they use technology, they learn differently. You're not going to get a whole lot out of a 2 hour course with a millennial. And so there's other things that you learn along the way of how people learn and what's available to them. So we've been focused on all that as we go to market. And then just a quick follow-up. I guess more broadly, as you look at the group of offices that are reaching full maturity this year and perhaps comparing them or looking back to last year or the group 2 years ago, anything anecdotally that you're seeing in terms of what some of the new offices might be doing better or maybe accelerating more quickly, again, versus looking in the past and sort of how those offices have ramped up or how they've acted or performed at full maturity? Yes. I mean consistent with what I've described in the past, your best offices have your best managers, your best new offices have your best new office managers. I would say it's territory agnostic. There's so much opportunity for us in the territories that we're in. You're going to see that your best offices are managed by our best people. Thank you very much. Thank you. And the next question comes from Corey Greendale from First Analysis. Please go ahead. Hey, good afternoon. Just two questions on the ad campaign. Chad, I hear you unclear that there needs to be measurable outcomes. And I've heard varying philosophies from folks in the space about the value of kind of mass market advertising. Can you just give us a sense of sort of what you're hoping to accomplish? Is it just brand recognition? Is it driving leads? Or what are the metrics? Yes. Again, I think that what we're talking about and I don't want to give away too much on what we're doing on our marketing. I mean, it's a competitive situation. We're in a very competitive industry. Competition is good for the consumer. So I don't want to give too much away other than to say that we're focused on not only branding Paycom, but branding the message of there's a new digital transformation here for our industry and it's time that everybody, us included and clients and prospects and competitors embrace that. There's a new way that people are going to be using these products in the future. We're seeing it in other areas. And so part of our advertising and marketing efforts support not only the Paycom brand, but the change in what we believe will be the new future for how people use these types of technologies. Okay. And then one for Craig. Can you give us a sense? I mean, I'm just wondering how much the change in interest on client balances might have affected the results in the quarter, just some sense of did that grow faster or slower than recurring revenue growth or some however you can provide info on that? Yes, I mean, we gave the total number of the average daily balance outstanding for the quarter. There was one rate increase during the quarter was towards the end of the quarter, June 15. So that was really the only rate increase for the quarter. Other than that, we kind of remain the way we always have been. We're fairly conservative with our investment on those funds. They're client funds. And so there's really not been a change in our strategy on investments. So by interpret that, you mean it didn't it wasn't a meaningful driver of sequential acceleration in recurring revenue growth. Is that accurate? That would be accurate. Okay. Thank you. And then the next question comes from Ross Millen from RBC Capital Markets. Please go ahead. Thanks so much and congrats from me as well. Actually, I just wanted to follow-up on that point, Craig. Just I look at like LIBOR rates and they were up. I think you've talked historically like a 25 basis points is just a little shy of annualized couple of 1,000,000. So I just wanted to make sure, is that still the right ballpark? And then what are the primary instruments in which you hold client funds? Thanks. We don't we're not going to go through and I think disclose well, we're not going to disclose the instruments that we use other than our strategy hasn't changed. I will tell you your numbers a little bit off now that our balance has increased, less than $2,000,000 actually now for 25 basis, we would be getting closer to $2,400,000 $2,500,000 in annualized revenue from that. Where it was previously lower was due to the balance being lower. But our approach to how we invest those funds has been the same and very consistent. We haven't hidden the fact that an increase in interest rates are nothing but accretive to both our revenue as well as our adjusted EBITDA. It didn't take us more effort to get 30 basis points than what it does to get 25 basis points. And so we do continue to receive and have a positive impact and lift as interest rates increase. If you're trying to look at, okay, exactly how much does that play into a quarter, I think you have to look at when is that layered in. Some banks, you don't necessarily get it right away. Some you can even negotiate it ahead of time potentially if they know what's coming. And so but for us, our approach to these and how we work with client funds has been one of not being aggressive and we've maintained that same position today as it relates to what we do with those client funds. Yes, that's clear. Thanks for that, Chad. Maybe just one follow-up, Chad, for you. I was just curious in terms of your net new wins, how you describe the size of those customers in terms of average employees? Are they staying pretty consistent with what you've seen in recent quarters or any marginal shift one way or the other? They've been consistent with past quarters, which would include continuing to sell some at the upper end of our range as we used to disclose in the past. Thanks so much. Congrats. Thank you. And the next question comes from Sreede Paniglia from Wells Fargo. Please go ahead. Yes. This is Will on behalf of Citi. I just want to note from a product standpoint, you talked about your focus on employee usage and have recently updated your UI and mobile apps. Could you share any feedback so far from customers on that? And then just wondering if you expect this to drive more cross selling of your products overall? Yes. The feedback from the client base has been good, very good. We do monitor employee feedback as employees of our client base goes in and reviews and gives us feedback. So we are definitely continuous well, we are continuously making changes to that software to make it easier to navigate and easier to use at the employee level. Again, we do see opportunities for us to continue to add not just to the app, but it's to the overall product. Again, the app is a device used to gain access to the overall solution. And so as we go through and we add strategies and develop products for those strategies, it would be for the entire product leveraged through the employee app. Okay, great. Thank you. And the next question comes from Shankar Subramanian from Bank of America Merrill Lynch. Please go ahead. Thanks for taking the question and congrats on a great quarter. Just want to touch upon the new office openings. So can you update us on your thoughts on what should we expect for second half? And maybe even beyond that in terms of where you have in terms of penetration of offices across the U. S. And how much more should we expect in the next two quarters and maybe beyond? Yes. And so as we've done in the past, we haven't guided to when we're opening up other than to say we're continuing to focus on our sales strategy, which does include opening up additional offices. But we're also very focused on increasing sales capacity. I mean, we start with a problem. What problem are we looking to solve? And for us, we believe we have quite a bit of runway in front of us of collecting prospects that don't currently use us and making them current clients. We are we have certain geographies that we do not exist in and we have other geographies that we can continue to expand in even further as some of our larger cities. And so as we move throughout the year when it makes sense for us, that would be something we would look to do, would be to open up other offices if it makes sense for us at that time. But for us too, we're very focused on continuing to increase the capacity of our sales force and so we're definitely focused on that as well. Got it. Just on the mobile side, obviously, you're going to run a more campaign in the second half and you're seeing better traction among your customer base within the same number of employees. But do you see mobile kind of opening up your products to beyond current customer segment to maybe more employees? We are a business to business product. We're very much focused on delivering ROI for businesses that exist here in the U. S. And so that's what we're focused on. To the extent we can do that in a way that benefits employees in other areas, we would definitely be looking to do that. But we are focused on making an impact on our clients' bottom line and I believe that's why clients choose Paycom. And again, our effort is in trying to increase that ROI that any client can achieve with Paycom. And if we identify something that allows a client to do that through employee usage, that would be something we would look to develop. Got it. Got it. Then lastly, on the benefit side, it seems like there's an increasing trend for at least certain customers to go use the 3rd party benefit administration tool like PlanSource or business and so on. How do you see from your customer base, what's your feedback been in terms of how they use the benefit solution? Do they feel comfortable with what they're seeing? And maybe your thoughts on maybe partnering with 3rd party providers on that front? Yes. So we have our own benefits administration module within the same software that we have. It's ours. We developed it. It's part of the same database. We've had clients on it for some time now. I don't know the number of years, but I mean it's not a brand new product for us. We're probably 4 to 5 years in on benefits administration. As a reminder, we do not provide healthcare coverage or vision or dental to our clients. We help aid them in the choice that they make for those vendors. And as part of that, you do have to send the files, file feeds to those 3rd parties, which would be your health insurance company, your dental insurance, vision, life and what have you. And so we continue to do that today and after the fact mode where we are taking the clients' files and getting those to the appropriate vendor. Got it. Thank you. And our next question comes from Brian Schwartz from Oppenheimer. Please go ahead. Yes. Hi. Thanks for taking my question this afternoon. I too add my congratulations on a strong performance in 2Q. The one question I had was just around the contacts in terms of the revenue guide for Q3, the sequential growth rate. It's not much there. So just wanted to double check with you to see if any business was pulled forward here into 2Q from 3Q? And then the second question on the second half business, maybe just any overall comments that you could share with us, Chad, on how the pipeline momentum is trending and how the lead funnel is filling up for you as you look out into the second half of the year? Thanks. Well, on the first question, to the extent it pulled forward into Q2, it would still exist in Q3 from a starts perspective. I think that may have been the question on that. Do you want to add on that? Yes. I mean, our outlook on guidance is similar to how we've done it in the past as well. We guide to what we can see our approach hasn't changed. And then your second part of that was on the pipeline. I mean, our I like to see starts. So I like to see pipelines turn into starts. If I see too large of a pipeline, I'm looking for the starts. And so we continue to have strong momentum in our sales department. I've been excited not just about sales, but our conversion departments, our R and D department, our Paycom specialist department. Everybody has been galvanized this year and actually started last year, really galvanized around the same message and what we're looking to accomplish. And I really think that's created an opportunity for us to really have a great year this year as we're seeing as we head through Q2. Thanks. Just to be clear on that first question. So, I know I mentioned fast cuts, but just thinking about deals and how the deals were showing up from 1 quarter to the next. So, it sounds from your commentary, there wasn't anything unusual in terms of where the deals were showing up this quarter. That's correct? No, I will say this, it matters when a deal starts. It does matter. I mean, if you start a deal in the beginning of a quarter, you get 100% of the revenue dollars for it. If you start it the last month of the quarter, the most you're going to get is a third of those revenue dollars for that same deals. But it does matter, but it's hard to forecast because we work with the client. We oftentimes work with the client and it's their timeline, different things come up. And so it's hard and really somewhat dangerous to try to get too myopic on something going to start May 1 versus June 12. But that can impact your revenue for any 1 quarter. And so we've always in our guidance, we've always guided to what we can see and what the expectations are. And then as we move through that quarter, as things change, those are reflected in the final number. And so our approach to Q3 is no different than it has been in the past. Thank you very much. All right. And this concludes our question and answer session. I would now like to turn the conference back over to Chad Richison for any closing remarks. Well, I want to thank everyone for joining us on the call today. Next month, we'll be on the road meeting with investors at the following conferences. We'll be at the Oppenheimer Technology Internet and Communications Conference in Boston on August 7. We'll be at the Canaccord Growth Conference in Boston on August 8. We'll be at the KeyBanc Capital Markets Global Technology Leadership Forum in Vail, Colorado on August 14. Appreciate everyone's interest in Paycom. We look forward to meeting with many of you soon. Operator, you may disconnect.