Earnings Call: Q4 2016

Feb 8, 2017

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Paycom Q4 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Craig Bolte, Chief Financial Officer, you may begin your conference. 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 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 quarterly report on Form 10 Q for the quarter ended September 30, 2016, and our annual report on Form 10 ks for the year ended December 31, 2015. 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, 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. I'd like to welcome everyone to our Q4 2016 earnings call. On this call, I will begin with some highlights of our results for both the Q4 and the full year. I will then provide some comments regarding our view into the marketplace for cloud based payroll and human capital management or HCM. And then follow that with some examples of key client wins during the quarter. Craig will review our financials and then we will open up the line for questions. Before I begin, I want to take a moment to thank our incredible team of Paycom employees. With such robust growth, it becomes all the more important to sustain the culture that makes Paycom a great place to work and thrive. I am grateful to all of our team members who give their all to provide unparalleled service to our clients and also help keep our unique culture alive and strong. Due to our passionate and engaged workforce, we were awarded the title of Top Workplace in Oklahoma. This marked our 4th consecutive year on the list and this year we were also awarded the Direction Award. This additional award comes as a result of feedback from employees who believe the company is going in the right direction. We also celebrated our 2nd year on Deloitte's Fast Technology 500 list, which was a further indication of our success and leadership. We had an excellent year in 2016 and I'm extremely proud of all that we have accomplished. Our sales momentum continued with full year revenue of $329,100,000 representing 46.5% growth over the comparable prior year period. For the Q4 of 2016, we achieved revenue of $87,800,000 representing 35% growth over the comparable prior year period. I'd like to take a moment to highlight our 4th quarter performance. In the Q4 of 2016, we lapped our 1st full quarter of ACA revenue from current clients. As a reminder, in Q4 of 2015, we also experienced a pull forward of clients that started early on our system to gain ACA compliance. As such, we were very pleased with our ability to post a 35% growth rate over this very hefty comp. Craig will review our guidance in more detail later on the call, but I'm pleased to share that we are starting this year off strong with positive indications from our sales team and the market that make us optimistic for 2017. Additionally, I'm pleased to share that our retention rate for 2016 was once again 91% indicating ongoing client satisfaction with Paycom. 2016 was our 2nd full year as a public company. As we celebrate this milestone, we combine the perspective of what we have accomplished with what is possible for us to achieve. As I survey the marketplace, I believe our strategic advantage is more significant than ever. We believe that the trend of companies replacing multi single function payroll and HR software solutions with the easy to use yet extremely powerful Paycom system is set to continue for several years. This trend will be both driven by executives seeking the value creating ROI offered by the Paycom system and also by younger workers who have lived their entire lives with mobile devices and user friendly interfaces and who will increasingly demand modern HCM software experiences from their employers. Feedback from our sales organization validates that this trend continues to gain momentum and I will highlight some examples of this later in my prepared remarks. In 2016, we continue to build the foundation that we believe will allow us to remain at the forefront of this trend and capture the resulting growth opportunity. We significantly expanded our Oklahoma City corporate campus, completing and moving employees into our new third building. We commenced construction on Building 4, which will provide as much space as our first three buildings combined, as well as a parking garage. Additionally, we bolstered our Board of Directors adding seasoned executives, Rick Duches and J. C. Watts. We welcome both of them to Paycom and look forward to their contributions. Along with our physical expansion, we continue to grow our team, making the required investments in our workforce to support our anticipated growth. In 2016, we added personnel across every department, growing our headcount to 2,075 as of December 31, 2016. Notably, we expanded our R and D group growing adjusted R and D cost to 8% of revenue for the full year ended 2016. We have always been very efficient with our R and D spend. Our high productivity has been enabled by the fact that our solution was built with a single database. As we have matured over the years, we have continually strived to improve our software development process. And even today, we continue to make adjustments to become more streamlined and efficient. We had the opportunity to host several investors at our corporate headquarters in 2016. A highlight of every visit is touring our R and D area, where investors can see firsthand not just the size and scope of our R and D team, but also the unique culture that allows our team to develop top quality software at such an impressive pace. Because our goal is to potentially replace several different vendors when we win a new client, we have to ensure that our offerings provide greater value to our client than those of our competitors. As a reminder, we compete in several HCM areas and with many companies whose sole focus is one specific area. The culture of efficiency goes beyond our R and D organization and permeates throughout our entire company. While we are making the required investments to secure our growth, we are also focused on leveraging the profitability inherent in our model. Now I'll provide some brief comments regarding the Affordable Care Act. At this time, we are assisting our clients with complying with the current law. When and if ACA is eliminated, we will react appropriately and promptly. If responsibility goes to none. The ACA could also be repealed and replaced with something still requiring the annual reporting of employee information. Another option is that the current law could be repealed so that there is no longer a requirement for businesses to report employee information. With that scenario in mind, if this was the last month for ACA billing and next month it is gone, we estimate that we would need to replace approximately 3% of our revenue for the remainder of the year. As a reminder, we don't just assist our clients with tax and regulatory compliance. We provide a comprehensive set of software solutions, including recruiting, compensation, training, HR, benefits administration and many others. Our system are used to help clients navigate each of these areas and much more. So while the immediate elimination of ACA would have a minor impact on our revenue from a certain number of our current clients, we do not believe it would impact our overall value proposition or our new business onboarding pace. Now, I'll provide some examples of notable new client wins from the quarter. First, we signed a trucking company with 3,200 employees. The client had been processing their payroll in house and we're doing many things manually, including onboarding new employees, benefits enrollment and several other key processes. This client chose Paycom because they wanted a true hire to retire system that would service their entire organization. And with our platform, they were able to eliminate 5 point solution providers as well as several other manual processes. They are very excited about the positive impact they expect our solution to have on their firm. Additionally, they really valued our hands on implementation process and the care and attention we brought to the table. Next, we welcomed a retail services company with 3,500 employees to the Paycom family. They had been previously using a large competitor for payroll and also point solution providers for applicant tracking, background checks and performance management, as well as a homegrown internal system for employee onboarding. This client wanted to consolidate these disparate systems and eliminate manual entry and the associated exposure. Finally, we are very pleased to bring on a health services company with over 8,000 employees. They evaluated several vendors as part of their transition. With Paycom, this client was able to eliminate 7 point solution providers. In addition to gaining these efficiencies, this company chose Paycom because they believe that our solution is the right platform to help them achieve their growth targets. We are honored to partner with them and excited to provide a foundation for their future growth. To conclude, we had an excellent Q4 and a tremendous year. And I will now turn the call over to Craig for an update on our financials and guidance. Thanks, Chad. Before I review our Q4 results and also our outlook for the Q1 and full year 2017, I would like to remind everyone that my comments related to certain financial measures will be on a non GAAP basis. We use adjusted EBITDA and non GAAP net income as supplemental measures to review and assess our performance and for planning purposes. Adjusted EBITDA is a non GAAP financial measure that excludes non cash stock based compensation expense and certain transaction expenses that are not core to our operations. Non GAAP net income is a non GAAP financial measure that also reflects adjustments for non cash stock based compensation expense and certain transaction expenses that are not core to our operations, which are further adjusted for the effective income taxes. Reconciliations of the GAAP to non GAAP measures discussed today are included in our press release. As Chad mentioned, we experienced a strong 4th quarter with total revenues of $87,800,000 representing year over year growth of 35% from the comparable prior year period. Our full year 2016 revenues were $329,100,000 representing growth of 46.5 percent from the comparable prior year period. Within total revenues, recurring revenue was $86,300,000 for the Q4 of 2016, representing 98% of total revenues for the quarter and growing 36% from the comparable prior year period. Total adjusted gross profit for the Q4 was $72,800,000 representing an adjusted gross margin of 83%. For the full year 2017, we anticipate that our gross margin will be within a range of 2% to 84%. Total adjusted administrative expenses were $56,500,000 for the quarter as compared to $47,400,000 in the Q4 of 2015. Adjusted sales and marketing expense for the Q4 of 2016 was $35,600,000 Adjusted R and D expense was $6,500,000 in the Q4 of 2016, representing growth of 157% over the comparable prior year period. As Chad detailed, we have continued to invest in R and D to maintain and expand the competitiveness of our solution. As a reminder, a portion of our R and D expense is capitalized. Our total adjusted R and D costs for the Q4 of 2016, including the capitalized portion, were $8,400,000 or 10% of total revenues. Total adjusted R and D costs for the full year of 2016, including the capitalized portion, were $27,200,000 or 8% of total revenues. Adjusted EBITDA was $20,700,000 or 24 percent of total revenues in the Q4 of 2016 compared to $10,500,000 or 16% of total revenues in the Q4 of 2015. Our GAAP net income for the Q4 was $8,600,000 or 0.15 dollars per diluted share based on approximately 59,000,000 shares versus $5,200,000 or $0.09 per diluted share a year ago. Our effective income tax rate for the Q4 of 2016 was 32% and the rate for the full year was 23%. For modeling purposes, for 2017, we estimate that our combined federal and state tax rate will be 35%. Non GAAP net income for the Q4 of 2016 was $10,800,000 or $0.18 per diluted share based on approximately 59,000,000 shares versus $6,000,000 or $0.10 per diluted share a year ago. We repurchased 634,506 shares during the Q4, completing our initial $50,000,000 stock repurchase plan. As of today, we have repurchased approximately 1,100,000 shares in total. Our Board of Directors has extended our plan authorizing the repurchases of up to an additional $50,000,000 worth of common stock and we look forward to continuing to return cash to our stockholders via these repurchases. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $60,200,000 and total debt of $29,800,000 As a reminder, this debt represents a financing of construction at our corporate headquarters. Construction of our 4th building and parking garage are proceeding well. Cash from operations was $24,500,000 for the 4th quarter, reflecting our strong revenue performance and the profitability of our business model. With that, let me turn to guidance for the Q1 and full year for fiscal 2017. I want to emphasize that because of the current uncertainty surrounding which of the various provisions of the ACA will be affected by congressional action as well as the timing of any such action, this guidance assumes that the ACA would remain in place for the remainder of 2017 without any modifications. For the Q1 of 2017, we expect total revenues in the range of $114,500,000 to $116,500,000 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 Q1 in the range of $42,000,000 to $44,000,000 representing an adjusted EBITDA margin of approximately 37% at the midpoint of the range. For fiscal 2017, we are introducing revenue guidance to a range of $422,000,000 to $424,000,000 or approximately 29% year over year growth at the midpoint of the range. For our full year 2017, our adjusted EBITDA guidance is a range of $113,000,000 to $115,000,000 representing an adjusted EBITDA margin of approximately 27% at the midpoint of the range. With that, we will open the line for questions. Operator? Your first question comes from Raimo Lenschow from Barclays. Your line is open. Hey, thanks for taking my questions. Congratulations on a great end to the year. Couple of questions, if I may. First of all, Chad, in the past you talked about kind of office openings. And I know like investors paid a lot of attention, but we probably shouldn't because it takes an office 2 years to kind of get fully up and running. Is there do you want to make any comments in terms of how you think about 2017? Or should we just kind of ignore that for the time being? Then the second question that I had was on, if I look at your strength in the last year, there was a lot of that was driven by the existing offices selling a lot better. What is your assumptions for 2017 in terms of the momentum you saw in 2016? Do you think you can carry that over into 2017? And then I had a quick one for Craig. You look at the guidance, what's your assumptions on interest rates for this year? Because obviously interest rates increases will help you on the carry that you have. What's your base assumption for the guidance? Thank you. All right. Well, thanks, Raimo. I'll take the first two. First on office openings, I mean, we haven't changed our strategy on that. As I've said in the past, we will be opening up offices this year. It's rare that we've ever had offices is open too much before this date, February 8. I do know at 1 year we did announce office openings, I think with our very year end announced earnings announcements, some others have been actually announced in the Q2. So as we get those office opened, be announcing it. But our strategy on that hasn't changed. That also falls into your second part of your question. As a company, we have always matured our maturing offices and that is where we experience a lot of our growth. I've talked about it in the past that office openings due to the way we do it does produce somewhat of a drain on our current talent, which we get all back in subsequent years. And so we're very focused on our current strategy. Nothing's changed on our end. We will be continuing to open up offices this year and as well as maturing as I've talked about in the past, maturing our current group to bridge the gap in between our new business sales capacity that exists as an opportunity and what we're actually achieving. As far as the interest rates, I'll turn that over to Craig. Okay. Raimo, on the interest rates, our guidance basically assumes rates are where they are today. There's talk about 2 to 3 2, possibly even 3 interest rate increases during the year of 25 basis points. I think it's somewhat dangerous to include those because you just never know if they're going to happen. One thing I would though remind you is that we're holding a significant amount of client funds. During the Q4, our average daily balance was around $680,000,000 On a pre tax basis, that's about $1,700,000 So that really falls to the bottom line. Perfect. Thank you. Well done. Thank you. Your next question comes from Michael Mineroff with Credit Suisse. Your line is open. Thanks for taking my questions and very nice job guys. Chad, I just want to follow-up on Raimo's question about office openings and I heard the commentary that you just made. But could you give us a sense of how many offices that you plan to open? I mean without knowing the exact locations, I don't necessarily know if that would be competitive information. And then the second question is around the ACA. It's helpful on the ACA commentary and it's been helpful from your competitors as well to get that specific information and understanding that it is variable. If we take out all of the noise around ACA and all of the contribution that it's given us over the for the next couple of years north or south of 30% on a normalized basis? And then I just have one follow-up on the 8,000 seat deal, please. Yes. So, I mean, your first question is office openings. I mean, we've never guided to the number of offices that we're opening. As far as releasing it to the competition, that's really secondary as far as my apprehension to continue to talk about what we're doing next. It's my own people. We tap people on the shoulder when they're ready. As we know, they've raised their hands and as they've hit certain goals to where we're ready. And that process hasn't changed for us. And so the very first people who will know and what's going on are our current people. And so as we continue to have those discussions internally and identify the many different markets that we can get into, And as that's been done, then of course, we would be talking about that in the future. So again, I would point back to and I'm not 100% for sure, but I think with the exception of maybe once or and then maybe a couple of other offices early, it would have been odd for us to have opened up any offices before February 8. So we still do have the remaining of the year and we're very focused on that. As far as the ACA contribution, I think was your second question. Yes, it's around the long term growth, the sustainability of the long term growth rate. Yes. I mean, there isn't a product that we have that we use as a crutch to support future growth. It's every product in aggregate. So it's never one product and that would be the truth with ACA. ACA was a very popular product. We were very forthcoming with that and it came about and everybody had to get compliant and most products that have a compliance piece to it are fairly popular. And so it was, we've called out that it does represent a smaller portion of our overall revenue. We're not giving 2018 guidance today, but I can tell you that we're set up to be a very good grower over the next several years. And I think the way that we have worked our business even overcoming pretty strong growth comps last year. We're heading into Q1 with our largest comp, 63% growth from Q1. And I think that we're going to be coming out the gate to strong on that. Yes. That's helpful, Chad. Then on the large eight thousand seat deal that you signed in the quarter, congrats on that. How long do you expect implementations for something of that size to stretch on? And do you see more of those types of size of deals in your pipeline currently? Or is this more of a one off situation? Yes. I mean it would be uncommon for anything that we sell to stretch on longer than 3 months from a conversion standpoint. Typically they're much earlier than that. I've always taken the position that the longer you allow a conversion to take data your data becomes worse and worse over time and the longer you're stuck in conversion, the harder conversion gets. So we're set up to onboard companies very efficiently and that company would follow the same onboarding process as our other companies. That's great. Thanks for taking my questions. Congratulations. Thank you. Your next question comes from John DiFucci with Jefferies. Your line is open. Thank you. Chad and Craig, your implied EBITDA margin for 2017 is sort of flat to down a little bit after a couple of years of significant expansion. I'm just kind of wondering what's the thinking there? Like what is why is that the case given you're still going to you're not going to have as much growth per your guidance next year, but it's still very robust growth on the top line? Yes. On our adjusted EBITDA guidance, this is really our starting point for the year. And as we look out throughout the year, I mean, we're still set up to be a high growth company and part of that comes with increased commissions and selling and marketing expenses. So as we sit here today, that's really our beginning point on guidance and what we know sitting here today. And we also I mean, we do hire ahead of the revenue that we catch. And I don't know to what extent there would be, of course, some of that in there. I mean, we have guided to 27%. We feel like as we sit here today, that's a good guide for us and we'll be updating that as we have more information and we move along. Okay, thanks. That sounds like a good starting point. And I guess have you adjusted your 2017 guidance relative to your expectations prior to the new FLSA overtime rules being blocked? Because I think you had implied at least in earlier indications for 2017 that you'd see some benefit from that and now that looks less certain? Yes. Well, I did talk about FLSA and how it is if it were to have not had the injunction, I mean, if it were to have continued on, it would have had a very large impact on American businesses. And I came out and said that and it would have. Anytime you're doubling the minimum wage for salaried employees, it's going to impact many industries. So I also said that it's not something we're charging for, it's included in our government compliant module, which it is. But I will also say this. I mean, we have companies right now that are using our FLSA tool. I mean, there are 31 state there are different minimum wage counts in 31 states. Several of them have a different minimum wage count based on your occupation. So a company like Oregon has a state law based or state minimum wage based on where you're located, urban or rural. Minnesota has different wages based on employer revenue. Nevada has different ones based on whether the employer offers health coverage or not. And so the FLSA and staying compliant with the minimum wage count definitely is at the federal level, But also you can use our tool to impact state as well. And so I do feel like it's a well, we know it's a product that's out there. It is being used right now. It does not have an associated revenue piece to it, but a lot of our products don't. And it's again, it's the full solution that delivers the value proposition to our client base. Chad, at least the way I understand it and correct me if I'm wrong, that it was a little unclear to me, but I thought that you had implied that you'd sell more of the government compliance tool realizing that this is a functionality that's included in that and people buy it for a lot of different reasons. But is there anything in guidance that implies the sale of that tool was going to increase because of FLSA currently in current guidance? Our guidance was not changed based on FLSA based off of any FLSA expectation. Does that answer the question? Okay. I think so. I just want to be clear though, did you have originally in your guidance, your previous indications for 2017, any uplift in sales of the compliance tool because of Telus? No. Okay. That's it. That's the answer I was looking for. Thank you very much. Thanks a lot. Nice job, guys. Thank you. Your next question comes from Mark Murphy with JPMorgan. Your line is open. Yes. Thank you very much. So Chad, you had mentioned in your script that you had some good success in replacing a number of point products in some of your recent wins. And so I'm wondering at this point how diversified is the revenue stream if you compare it to a couple of years ago, for instance, in terms of how diversified the revenue stream is outside of that core payroll piece? Yes. I mean, that's not something that we've updated. We had talked about and it which is true, we sell one total product and then it's modules that clients choose to take. The longer we've had a product, the higher the adoption. And so time and attendance is a product we've had for quite a long time. Obviously, it's going to have a higher adoption rate than a product we may have come out with a year or 2 ago. And so but it's the products as a whole that when we go in there is what we're selling. One product that has the many different modules associated. So in answer to your question, all I can tell you is that it is going to be more diversified over time just because we have more products and the adoption rate of these products also increases over time. And we start off with 100 percent of all of our clients have the payroll module. And so over time, that's obviously going to be as a percentage be somewhat diluted into the overall product mix. Okay. It makes sense. And then as well, any comment on the linearity of starts or go lives during Q4? Is it possible that they just the timing, there's always an ebb and flow. Is it possible they were a little more back end loaded in Q3 and then a bit more linear in Q4? No. I would say that this year end would be similar to past year ends with the exception of the pull forward that we had due to the ACA phenomenon and companies wanting to get compliant for that next year. So outside of that, our starts have been somewhat consistent based on how they followed when the deal was booked originally. Okay, got it. And then the last one I wanted to ask you, with the understanding that obviously the guidance that you're giving us now as you said is a starting point And we're aware of your track record with that over the years. I was looking at when you look back on 2016, the company grew just absolute dollar terms revenue grew by $104,000,000 And then the 2017 guidance, it has you growing by a smaller increment of about $94,000,000 And so, I think mathematically, I know there are some moving pieces, but it seems to imply that new bookings are running kind of around the same level or relatively flat year over year because the bookings drive the incremental growth. And I was thinking that it's against the backdrop where EDP is guiding to flattish bookings growth going forward where they had kind of surprised negatively on that. I guess I'm just curious there and not that there's anything wrong with flat bookings for a little while, but just how are you looking at that? And then is there a point where you kind of get through this the tough comps relating to ACA where you think that would start growing pretty nicely again? Yes, Mark. One thing to keep in mind in last year, that was the 1st year that we had the ACA forms filing. So in that Q1, we had a pretty significant lift relative to the form filings, as well as we had the full year of some of that ACA. But that was one of the phenomenon that we had Q1 of 2016. Yes. And as far as, I mean, the guide this year, I mean, I'm unaware of any company that had a higher growth rate in our industry than us last year. I'm also unaware of any company that's guiding to a higher growth rate than us this year. So I think we're coming off the toughest comp out there and we're pretty proud about what's going on and we're all indications from our sales staff, which I stay close to is that we're in really good shape as we head into this year. Thank you. Thank you. Your next question comes from David Hayes with Canaccord. Your line is open. Hey, thanks guys. Craig, wondering if you could update us on what you're seeing in terms of sales retention, maybe senior level, mid level and then hiring environment? What any changes there we should be aware of? Yes. We have had basically the same retention rate amongst our executive reps. This group sells the overwhelming majority of our new business and we've maintained a 90% or better retention rate with that group. I had mentioned in the past to everybody that we do have some turnover amongst our newer reps, but also that we had really focused on that. And as of January, we just promoted or 37 executive new or 37 executive reps or 37 people just became executive reps. And so as I had mentioned, I believe a couple of earnings calls ago, we're very focused on developing our current younger group of people that are coming up and we're having success with that. So from what I see early indications are that our turnover rate amongst new reps is down. We're having greater success keeping our newer reps. And again, with executive reps, it's remained roughly the same. Got it. Thanks, Chad. And then maybe as you think about kind of the product development roadmap, talk about some areas where you're focusing there. I think a lot of recent investments have been in response to regulatory changes. So I guess with kind of an uncertain backdrop these days on that front, I'm have to whether it's on the tax side. I mean, there might be some changes whether it's ACA or others. But at the end of the day, we're constantly updating tax tables, new tax calcs, new filings and everything else along with whatever is thrown into the mix, sometimes retro. So that's always a main focus of ours as we go through prioritization, that's always top. And then the things that follow that or really go alongside with that, because it's a different group that works on both is the continual expansion of our value proposition, so that our clients can experience a better interface and a better experience by using Paycom and really eliminate waste within their organization. Yes, makes sense. Okay. Thanks guys. Thank you. Your next question comes from Brad Reback from Stifel. Your line is open. Great. Thanks very much. The ACA 3% commentary that you gave, does that exclude the forms filing business from the month of January? That everything that's been billed, both January February, my commentary was if it were to end after this month, we would expect all billing for forms to be completed by the end of February. Okay. So just to be clear, so the 3% would be starting from March 1 onwards? That's correct. And then add the forms? That is correct. Now there might be some forms still that we have done that may not have been billed based on certain clients' wishes at different times. But yes, 99 point whatever percent of that 3% is going to be the recurring fee, not forms. Great. And then just one follow-up, Chad, on your commentary with your newer sales reps. I know on last quarter you talked about changing some of the quota goals to make executive rep. Obviously, that's not impacting retention at all, in fact is improving it? Well, it's not the changing of the goals that's improving. Yes, we did change the level or the amount that someone needs to onboard because they before they are able to become an executive rep. Really what and we've done that just because people were reaching it quicker than what we had anticipated. But it's really a focus on those people that weren't getting there. And meanwhile, we have a program to get people there. It's just something that we needed to really focus on and makes that a top priority for our sales management organization, which we've done. And so it's really that, the on purpose strategic development of our new people, and not allowing them to get caught as we focus on our higher growth group. It's really the strategic focus on that group that is making the change. Again, I mean, I've got about a couple of quarters of information, but I mean, those couple of quarters are telling me that the efforts that we've made to increase retention amongst our new reps is working. Great. Thanks very much. Thank you. Your next question comes from Brent Bracelin from Pacific Crest Securities. Your line is open. Hi. This is Trevor Upton on for Brent. Thanks for taking my questions. Just a couple of quick follow ups. One more on office openings, if I could. You open new offices when you have reps that are ready to step into that new role and also when you've identified attractive markets. Has there been a change in identifying either of those? There has not. Okay. And then ACA, the 3% left in the year, is the total still looking around 5% of revenue? Yes. We don't we've said approximately 5% and we have not changed that amount since we initially gave it out in what I believe was Q4 2015. I'd have to look at that. But I would those are the same approximate numbers we have today. Okay. Thank you. And then just one final one. FLS obviously got pushed out, but we had heard that just a discussion of it was maybe increasing some customer interest. Can you maybe talk about the pace of client growth kind of through Q4 if the election changed anything and how that's continued through Q1? Yes. I mean, I haven't seen any difference. I mean, now this is my 5th President, I guess, that I've been through. Let me count those up 4. This will be my 4th President, I guess that I've been through 5th election cycle. So I mean there's always something different. I mean in the mid market, they're out there working their business and they're looking to eliminate waste or create efficiencies. And so that really doesn't change. And no, we haven't seen any slowdown in people's willingness to onboard onto our product based on the election results. I mean, as far as FLSA goes, we're not an FLSA company. We have a product that can help with the overtime account based on the new salary increases to the minimum wage, which might not happen at the federal level. It could very well happen at on state levels and already has as far as the actual hourly minimum wage. And so our value proposition as it relates to our government compliance, Again, FLSA just it's not just FLSA, it's everything that we sell in that area. And we're not seeing any slowdown with government and compliance tool due to the FLSA injunction. Great. Thank you. Your next question comes from Mark MacLean with R. W. Baird. Your line is open. Good afternoon and congrats on a great year. Thank you. And with regards to the EBITDA guidance, when we take a look at sales and marketing, R and D, G and A, which elements would you expect to see grow the fastest on a year over year basis and which one would you expect to grow the slowest? Throughout this year? Yes, in 2017. And some of that's based on timing of when deals come in and what the commission rates are at as sales and it's easy to point to R and D as being a place that we're continuing to spend. But some of that comes down to timing on when the sales is onboarding as far as what the corresponding commission rate to that is. Sure. I just meant as it relates to the guidance that you gave, what a midpoint would be. I mean, the G and A should be relatively easy to shouldn't vary that much. That's correct. I mean, you would see some efficiencies in the G and A. Sales and marketing as a whole should continue to grow and then as well as R and D, we continue to increase our pace on the R and D side as well. Okay, great. And then our gross margin, what Chad mentioned, we have to hire ahead of the business. So there's going to be times where the gross margin fluctuates and that's why we gave the range of 82 to 84 just because we have to hire ahead of the business coming in. I appreciate that. And then with regards to just the tone of business across your various offices, when we take a look at some of your more mature offices, how have those been trending? Yes. The mature offices that we have not relocated a manager from, meaning it's a mature office, but they don't have a new manager. They have also the mature manager that's been in there. I mean, those are our best offices. The second would be those offices that are mature, in which we've relocated a manager and then backfill them with the manager. Would be a second. And then the final piece would be those new offices that are not yet mature. So always the offices where we have maintained our current managers do the best. Great. And then with regards to the some of the bigger sales that you ended up getting and closing this past quarter. When you were going through and replacing some single point solutions, What was that process like from the standpoint of buy in across various departments that and how your solutions for say applicant tracking or time and attendance compared to some of the better of breed solutions that may have been put in that may have been in place? Yes. I mean, it's really a mixed bag of what we're going to run into. We're always typically running into a competitor from the payroll side and then time and attendance. And then when it comes to the different point solution providers, whether it's on the talent side or comp side or surveys or benefits administration or what have you, it's a little bit of a mixed bag. But what is very common with all of them is this, at our client base as far as the mid market, they often buy point solutions to solve a problem. They want to solve a problem. It's not necessarily that they have an overall strategy for how or that they're necessarily implementing an overall strategy oftentimes of what do they want everything to look like. And so when we're coming in, it's not just, hey, you've got applicant tracking, we do applicant tracking. You have tax credits, we do tax credits. It's helping them implement an overall strategy for what they want their employee use cases to be. And it's through that that we're able to deliver, not just help them deliver and complete a strategy, but also a product that automates that strategy. And so in doing that, you're going to replace everything that the client might be using because that supports the overall strategy that the client is now implementing when they choose to Paycom. So implement Paycom. That's great. Thank you. All right. Thank you. Your next question comes from Jim MacDonald with First Analyst. Your line is open. Good afternoon, guys. Quick question and some follow ups. Could you give an update to your current philosophy on upselling existing customers with more modules? Well, yes, I mean, you definitely want to be able to provide clients with those products that meet their needs. And so we're definitely focused on continuing to bring current products that we have that a client might not have implemented yet. I will say, as I've been saying, most of our clients implement the majority of our products, so over half of our products at the time of their initial conversion. So it really depends on when that client was onboarded of whether or not they have a lot of our products or if we're still needing to go back into the client base. But we do continue to sell into our current client base as we have in the past as well as adding and onboarding new clients. It's important to note that our executive sales group, which again represents an overwhelming majority of all of our business, sales business, they are unable to go out and sell something into the current client base after that clients have been onboarded with us for greater than 30 days. We have a separate group that then works with the client on that and also helps the client not just sell them, but helps the client with usage and can even provide additional training. So they're not just a sales resource, there's some other things that they can do as well. Right. And two technical questions about the quarter. Is there any way to quantify the impact of the pull forward last year on your growth rate this year? And then also can you comment on your G and A was seemed like a relatively small increase versus last year, any in the quarter, anything unusual that happened this quarter? I mean, as far as your first question, I think we called out the exact number and that number based on whether or not it started at the end of November or the 1 December, you divide by either 12 or to take 1 12th of it or you might take 2 12ths of it. But that might give you a little bit of information on the exact impact that any pull forward from Q1 2016 and the starts of Q4 2015 may have impacted that quarter. Craig, I'll let you take a second. Yes. And on the G and A, 2015 was our 1st year of SOX compliance. So we had quite a bit of G and A in that 4th quarter getting ready for that. This year was more of a maintenance feature. So that's kind of what I would point out. There are several things that go into that, but that would probably be the main. Great. Thanks a lot. All right. Thank you. Your next question comes from John Baughyan with UBS. Your line is open. Hi. Thank you. I want to see if you can maybe give an update on the total number of modules you have today, let's say, this is 1 or 2 years ago and where did the PTY shake out as well? Yes. And so the last updated module count we talked about was 26. And then we have not updated the annualized amount opportunity per employee. It still remains at $400 or more than $400 is what we said. And in the $26,000,000 number, is there a way to kind of reference versus 1 or 2 years ago in terms of how you're expanding your portfolio? Well, it's been 26. I think we updated we had 18 at the IPO, which was in April of 2014. And so we have so since then we've added on 8 additional. Okay, great. And then one more question. I mean in terms of where you're gaining share, the pockets of share gains or companies onboarding to you. I mean, has there been any change in terms of those sources, let's say, between legacy, regionals, in house or other cloud vendors? Is there any trend that you can point to there? No. We're in a very competitive industry. Most all deals are competitive. Typically, we're going up against the incumbent and oftentimes that plus another vendor. So it's been very competitive and I can't speak to there being any difference in competition last year from the previous year from even the previous year in the market that we're focused on. Okay, great. Thanks very much. Thank you. Your next question comes from Ryan MacDonald with Wunderlich. Your line is open. Hi, guys. Congrats on the great quarter. In the previous question or one of the previous questions, you talked about replacing point solution providers with some of the new deals and that being as a part of an overall strategy. When you're replacing these vendors, are these legacy on prem vendors and you're replacing based on an overall shift or strategy towards moving towards the cloud? Or are you replacing other cloud vendors at these customers? Yes. It would be rare that we're replacing something that's not in the cloud in the mid market. You just really don't run into installed products very much anymore. So when we're out there replacing, what I will point though is you can have different point solution providers where there's crossover, where you can track candidates in 3 of them, but you might choose one because it's better than the others and then you might use another for comp. So there's crossover amongst point solution providers as far as their functionality. And so we could go into a client that's using one point solution provider for one thing very specific and they have another for something separate than that. Then we go to another company that's using the same products and they're using all functionality in one of the point solution providers. So really it's just dependent upon how the point solution provider sold it, integrated it, and then through the reporting from there. And so for us, we're going in with an overall strategy to replace all with 1 system. Got it. And last quarter, you talked about a bit or you introduced a new metric, it was business sales performance capacity and talking about what the new business offices could achieve at full maturity in new sales. Any update to that metric at all? Or could you at least talk about how that's trended maybe from Q3 to Q4, if any change at all? Well, I mean, I will say that anything we focus on, we impact. And we're very, very focused on bridging the gap in this. It is, as I mentioned, our new business sales capacity, a metric number was 260,000,000 dollars And as far as from a capacity standpoint, again, that's new business onboards. And as far as from a capacity standpoint, I wouldn't update that number today. It's still the $260,000,000 As far as our GAAP closing GAAP on that, we're definitely closing GAAP on that as we continue to work our strategy in that area. Now I believe I just introduced this about 3 months ago. So it'd be a little early for me to give too much of an update on that other than to say that we're definitely bridging that gap, which is what we've done before. It's not a new metric for us. It's just something we shared last quarter with the general public. Got it. And then finally, just last question. Have you seen as you're continuing to ramp sales offices to full maturity, have you seen any impact or change in that time to maturity in instances where you've opened, say, a second or third sales office within the same city or same geography there? To total maturity, it still takes 24 months, but we are seeing newer offices sell more to maturity. So I would say that they're doing better selling early on and they're selling more toward maturity. But at the end of the day, it still takes 24 months for you to have 8 salespeople on carrying full quota, trained and backlog and pipeline. Got it. Thanks. Thanks again. Your next question comes from Ross MacMillan from RBC Capital Markets. Your line is open. Thanks a lot and congratulations from me as well. Chad, just two questions. Just on the new business sales capacity metric that you just talked about, is there a way for us to think about when you need to start to like what the ratio, if you will, of what you're able to or what's comfortable, if you will, from a sales capacity being realized versus that sales capacity target, if you will, or cap. Is there a way to think about that ratio? And when it gets to certain ratio, you'd definitely want to hire or definitely open more offices or definitely sort of lean on that? I'm just curious as to kind of how you think about that ratio realized to potential? Yes. And well, I mean, definitely that's something we manage internally. And one kind of gets the other. I mean, as you bridge that gap, you're bridging it through more developed salespeople. And that produces a larger bench for you to backfill the relocating, the current mature relocating managers that are going in to opening up new offices. So this is debt this is again, as I said in the past, this isn't a new number for us. We constantly measure and manage this number. It's not as far as where we're at and being able to achieve that number, it's not a metric that we're going to disclose from that standpoint. But it is a number that we manage. And as that number grows, should the 260,000,000 grow, which I mean achievement would make that grow, But that's what would make it grow. It wouldn't be something that we were just taking a guess. It would be based on actual numbers achieved, and again as we work through that process. So for us, it's something we're focused on. We do measure it, and it is something that, somewhat tells us, are we ready? And we feel good about where we're at right now, just to be quite honest with you. That's great. And maybe just one follow-up. ADP had made mention that in terms of new signings in the last, say, 90 days, they'd seen a change in the attach of the ACA reporting module. And it sounds like you have not seen that, but I just wanted to confirm that point because we've had a little a few different views on this from industry players. No, we have not seen any change in the attach rate for ACA. And from our standpoint, it is still for any one client, it is still a nominal fee that carries substantial penalties. And if I were a client in the mid market, I wouldn't be quick to turn this off. If they wanted to turn something off, there might be some other things that they could turn off that wouldn't have the negative impact that this would should it stay. And we could be talking about ACA in 2028, I don't know. But it is the current law today and we're going to continue to help clients put themselves in the best situation to be able to comply with the current laws, all current laws as they exist today. There are no further questions at this time. I will now turn the call back over to the presenters. All right. Well, I'd like to thank everyone for joining us on the call today. We appreciate your interest in Paycom, and we look forward to our continued success in 2017. Thank you. This concludes today's conference call. You may now disconnect.