Earnings Call: Q3 2016

Nov 1, 2016

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Paycom Q3 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. Mr. Craig Bolte, 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 June 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 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. The Q3 marked yet another success for our organization as we grew revenue, added new clients across the country and further extended our product development. The Paycom solution continues to gain traction in a wide range of industries. Revenue of $77,300,000 represented growth of 40% over the comparable prior year period. Our profitable cash generative business model continues to deliver results with Q3 2016 adjusted EBITDA of $18,200,000 as compared to $10,800,000 in the Q3 of 2015. In addition to our business success in the Q3, we continue to drive value for our stockholders. Since announcing our repurchase plan, on May 26, 2016, we have repurchased over 525,000 shares within the last 5 months. Our unified single database payroll and human capital management or HCM solution is designed to help companies and their employees realize their full potential. With our solution, companies can become more efficient and strategic, allowing them to spend their valuable time focusing on their business rather than navigating the ever changing tax code and HR regulations. Within our target market segment of core mid market and upper mid market, we believe that our value proposition is increasing. Companies in this segment typically choose not to deploy the resources necessary to manage and continually integrate multiple vendors and products to meet all of their HCM needs. At the same time, they are becoming increasingly aware that it is vital to use technology to attract, train, retain and manage their employees in order to remain competitive. We believe that adoption of our solution will continue to be driven by the trend of growing technology sophistication among the C suite and HR executives and also the increasing complexity of tax codes and HR regulation. At Paycom, we are experts in navigating this complexity and this capability is core to our value proposition. What makes our solution even more attractive is the accurate and reliable data that the Paycom solution delivers as a result of our foresight to build our solution on the foundation of a single database. Our single database foundation not only provides precise actionable data, but also allows us to comprehensively enhance our offering with those features we believe will best help our clients. A great example of our ability to develop and deploy crucial functionality that can have an immediate and significant impact is our Fair Labor Standards Act or FLSA Toolkit. In August, we introduced the FLSA Toolkit as a preemptive response to the new Department of Labor rules regarding overtime pay that will go into effect on December 1. We believe that this change will have a broad impact on many companies as it provides certain employees whose annual salaries are less than $47,476 are eligible for overtime pay. We believe that our FLSA toolkit is the best option for companies seeking to minimize both the impact of increased compensation costs and the cultural challenges that may arise in the workforce and the compensation gap between entry level and senior employees becomes compressed as a result of the new rule. The rule will potentially have a much broader financial impact to companies than the Affordable Care Act or ACA. The ACA called for employers to prove they were offering affordable healthcare coverage to their employees. For most companies in our Target segment, the impact of ACA was primarily a data management compliance and reporting issue. Since companies with 100 employees or greater were typically already offering affordable healthcare to their workforce. The new FLSA rule in contrast will likely change core compensation structures for many companies. While it will probably impact almost every company to some degree, for certain industries, it may have a dramatic impact on their bottom line. For example, companies with salaried managers who work long hours and make a salary below the $47,000 threshold or companies that have workers who receive a significant portion of their compensation in the form of bonuses and commissions could be substantially impacted. In our view, this rule change will require CFOs and CEOs to take a very strategic approach to minimizing cost while achieving compliance. I will emphasize that we do not anticipate a large impact to our revenue from our FLSA toolkit since it is included within our government and compliance module. However, we do see the new FLSA rule as an extremely effective conversation starter for our sales representatives seeking to engage with prospective clients. Our bimonthly webinars on this topic are the most popular webinars we've had to date indicating that awareness of this potential issue among executives is likely trending at least as strong as it was for the ACA. I'd like to note that an important part of our development process is derived from feedback from our sales and service organizations. We have strong and open lines of communication between our sales, service and development groups. This creates a positive feedback loop whereby our R and D organization receives direct feedback from our sales team regarding real time customer needs then is able to develop features and products based on this information. This in turn empowers our sales force to go to market with the best solution that can drive customer success. Our FLSA toolkit is a great example of this. This inner team communication is just one example of the cohesive and energetic culture at Paycom, where team members are passionate about doing their jobs well and helping our clients succeed. I believe that our unique culture at Paycom is our most important attribute and that it is the foundation that has allowed us to grow into one of the largest payroll and HCM HCM providers in the United States. With that, I would like to provide some highlights of clients we brought into the Paycom family in the Q3. First, we signed a staffing company with over 2,000 employees. When we first engaged with the company, they had been processing their payroll and HCM functions with an antiquated in house system. This client initially chose one of our largest competitors based on price, but in the middle of implementation switched to Paycom due to our strong service model and robust functionality. Next, we welcomed a media production company with nearly 5,000 employees. This company had been using a competing vendor for payroll as well as separate systems for time and attendance and HR management. Lack of integration among these separate products led to poor analytics. They wanted to partner with a company that allowed them to avoid integration issues and gain actionable intelligence in order to meet the compliance needs of multiple jurisdictions and a diverse employee base. In addition to much of our core product, they are also using our pre hire background checks, onboarding and tax credit applications. Finally, we welcomed a non profit organization with 2,500 employees. They were previously using a large competitor and selected Paycom due to our robust and easy to use reporting features, as well as our ability to categorize workers at a granular level down to a specific project or grant. Additionally, our GL concierge tool has proven to be very helpful to this client. Their controller is using this tool to easily allocate funds where needed, all before processing payroll. This ability has increased reporting accuracy and helps put this client in a position well suited to pursue opportunities to raise additional funds in the future. To conclude, we had a very productive quarter and are optimistic for a strong close to the year. I will now turn the call back over to Craig for an update on our financials and our guidance. Craig? Thanks, Chad. Before I review our Q3 results and also our outlook for the Q4 and full year 2016, I would like to remind everyone that my comments related to certain financial measures will be on a non GAAP basis. We 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 effect of income taxes. A reconciliation of the GAAP to non GAAP measures discussed today is included in our press release. We experienced a strong third quarter with total revenues of $77,300,000 representing year over year growth of 40% from the comparable prior year period. As a reminder, during the Q3 of 2016, we anniversaried the initial ACA related revenues that we experienced in the Q3 of 2015. Within total revenues, recurring revenue was $75,900,000 for the Q3 of 2016, representing 98% of total revenues for the quarter and growing 40% from the comparable prior year period. Total adjusted gross profit for the Q3 was $63,900,000 representing an adjusted gross margin of 83%. For the full fiscal year 2016, we anticipate adjusted gross margin will be within a range of 83% to 84%. Total adjusted administrative expenses were $49,100,000 for the quarter as compared to $38,300,000 in the Q3 of 2015. Adjusted sales and marketing expense for the Q3 of 2016 was $27,600,000 Adjusted R and D expense was $5,700,000 in the Q3 of 2016, representing growth of over 158 percent over the comparable prior year period. As part of our initiative to maintain our world class solution, we have continued to invest in R and D. As a reminder, a portion of our R and D expense is capitalized. Our total adjusted R and D costs for the Q3 of 2016 including the capitalized portion were $7,600,000 or 9.8 percent of total revenue. Total adjusted R and D costs for the 9 months ended September 30, 2016 including the capitalized portion were $18,800,000 or 7.8 percent of total revenues. As everyone may note, this is a significant increase from past years. Adjusted EBITDA was $18,200,000 or 23.5 percent of total revenue in the Q3 of 2016 compared to $10,800,000 or 19.5 percent of total revenues in the Q3 of 2015. Our strong adjusted EBITDA performance was driven in part by sales outperformance and also achievement of cost efficiencies across our organization. Additionally, we are pleased to announce that we are updating our long term adjusted EBITDA margin target to 30% to 33%. And we are able to target this level while still enjoying robust growth and also making substantial investments in R and D underscores the strength of our business model. Our GAAP net income for the Q3 was $6,200,000 During the Q3 of 2016, we adopted accounting standard update 20 sixteen-nine or ASU 20 sixteen-nine which simplified the accounting for certain aspects of share based payments to employees. We recognize a discrete benefit to income tax expense of $6,800,000 for excess tax benefits due to the vesting of certain share based payment awards for the 3 9 months ended September 30, 2016. As a result, our effective income tax rate decreased to 20.87 percent for the 9 months ended September 30, 2016. Non GAAP net income for the Q3 of 2016 was $9,000,000 or $0.15 per diluted share based on approximately 59,000,000 shares versus $4,700,000 or $0.08 per diluted share based on approximately 58,400,000 shares a year ago. ASU 20 sixteen-nine had no impact on non GAAP net income or non GAAP earnings per share. As Chad mentioned, we remain focused on returning value to our stockholders. We repurchased 402,000 626 shares during the Q3 under our $50,000,000 stock repurchase plan. As of today, we have repurchased 525,040 shares under our stock repurchase plan. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $74,500,000 and debt of $30,100,000 As a reminder, this debt represents the financing of construction at our corporate headquarters. Construction of our 4th building has commenced and is proceeding well. Cash from operations was $19,900,000 for the 3rd quarter, reflecting our strong revenue performance and the profitability of our business model. With that, let me turn to guidance for the 4th quarter and for fiscal 2016. For the Q4 of 2016, we expect total revenues in the range of $85,000,000 to $87,000,000 representing a growth rate over the comparable prior year period of approximately 32% at the midpoint of the range. As a reminder, we will be anniversarying our ACA related revenues that we experienced in the Q4 of 2015 as well as the pull forward of starts that we mentioned in the Q4 of 2015 related to clients that began early in order to gain ACA compliance that normally would have started in the Q1 of 2016. We expect adjusted EBITDA for the Q4 in the range of $14,000,000 to $16,000,000 representing an adjusted EBITDA margin of approximately 17% at the midpoint of the range. For fiscal 2016, we are increasing our revenue guidance to a range of $326,500,000 to $328,500,000 or approximately 46% year over year growth at the midpoint of the range. We are also increasing our full year adjusted EBITDA guidance for fiscal 2016 to a range of $88,000,000 to $90,000,000 representing an adjusted EBITDA margin of approximately 27% at the midpoint of the range. With that, we will open the line for questions. Operator? Our first question comes from John DiFucci with Jefferies. Your line is open. Thank you. Craig, you said that the Q3 anniversary, the benefit of the ACA benefit from last year, but you never really quantified that last year. I mean, I think you and Chad had talked about some very minor revenue contribution, But we know the Q3 was really strong last year. Do you was there any have you ever quantified any pull forward of ACA like you did for the Q4, for the Q3 of last year? Is there some way we can start to think about that? I guess that's the question. Yes, John, this is Chad. Q3 of last year was actually the very first quarter that we started began billing for ACA. We did call out a number, the Q3 of last year of how much that represented of business. Now not necessarily new business that we brought on due to ACA as far as bringing the client on in its entirety, but as far as current clients that had adopted ACA as well as new onboarded clients that had the ACA module. I forget the exact number, but I want to say it was around $800,000 maybe for Q3 as I recall down. 4th quarter obviously was a lot stronger and we did apply a percentage to that, which I would have to check with to give you that exact number. Okay. And did you see do you think you saw any pull forward in the Q3 of last year? I'm just trying to look at year over year comps and listening that the quarter looks good, but it doesn't it's not the kind of I guess the kind of beat that I think people have come to expect from you. Yes. I mean, we've had we obviously last year we had some what I'm going to say are positive surprises. I mean, anytime you're bringing a half to half product, which I believe ACA was our enhanced version, anytime you're bringing a have to have product to market, especially to a current client base, there's not a long backlog on that. I mean, you're able to sell the client and set them up and begin billing within 2 or 3 days versus the pipeline and backlog you get from selling new business. So we didn't have a lot of insight into exactly how much of that business we would be on boarding and what exactly the uptake would be and how immediate it would make an impact. And so the first thing I would say about the revenue overachievement above maybe what had been our guide last year. So we had some positive surprises that began billing immediately. The second I would say is so much of our new business onboarding, it does depend on when a client starts within a quarter, something we've explained before. If a client starts at the beginning of a quarter, we're going to receive 100% the total revenue opportunity for that client. Than if that client starts in the last month or last 2 weeks of a month in which obviously we've received a proportionately smaller portion. So I'm sorry, Chet, are you saying in this particular quarter or was it more back end loaded as far as when you started? Well, I saw this quarter as a great quarter. Obviously, we're tracking new business sales week to week here. And I really didn't see anything that would cause me to want to go in and look to see exactly when a deal started when. I'm just more explaining that from the standpoint of guidance over achievement. We had a lot of positive surprises. I mean 98% of our revenue is recurring. So we do have pretty good insight into subsequent quarters. Oftentimes, the outperformance, especially some of that we achieved last year in the 4 quarters where we had just begun to initially bill for ACA. Those were positive surprises and they were positive to the extent that not only they were sold, but they began billing immediately. Okay. And I'll just I guess, because I can't help but try ANRR, I know you don't give that anymore, but did it grow this quarter or does it decline given how strong a compare it was last year? It's not something that we measured. I mean, we kind of shot that and buried it. But I mean, it is something that we definitely we track book sales every week. We're a sales organization of weekly quotas, weekly achievement and we've continued to drive that. Okay. Thank you. Thank you. Your next question comes from Raimo Lenschow with Barclays. Your line is open. Raimo, you there? Again, Mr. Len Shao, your line is open. The next question comes from Mark Murphy with JPMorgan. Your line is open. Hi, congrats on the quarter, Chad and Craig. It's actually Albert Hsu on for Mark. Just want to ask, we were over at HR Tech earlier this month and the topic of legislation came up and ACA and FLSA have been well covered. But do you see any other drivers on the horizon? And I know some of your peers, at least within the ecosystem, have been talking that maybe the equal employment compliance could be a driver next year. Is that something that you're seeing on your end? Every year we do continue to see different legislative changes. It's oftentimes people focus on at the federal level and we do have a lot of those at the federal level. But as well as once people start rolling or once the Fed starts rolling new minimums out, you'll oftentimes see states adopt different rates than what the Fed adopts. So I wouldn't be surprised if certain states increase the FLSA salary limit as we've seen certain states increase the minimum wage, the federal minimum wage as far as for their state. So I think we'll see some of that. A year hasn't ever gone by that we haven't seen an incredible amount legislation, which would include not only the payroll tax calculation, but also labor law pieces, which are included in your comment there. Got it. Thanks. That's helpful. And actually just a quick one on R and D, which looks like it came up pretty nicely in the quarter. Are you able to talk or give us a little bit more insight into where those dollars are currently being spent and where you see them going maybe in the future? I know some themes come up with newer smaller modules tend to be around predictive analytics and maybe addressing the millennial workforce. Is that something that's on the roadmap? Thanks. Well, just kind of sticking with what we've done in the past, I definitely don't like to telegraph the things that we're working on, primarily because we want sales reps out there talking about the products that we have today. We did point out that we did increase R and D this quarter quite a bit, 150% plus over the same prior year period. We've kind of been low man on R and D spending even though we've had significant output. We want to continue to drive output. We have very lofty initiatives for our R and D group as well as outside of just innovation. We also have a lot of compliance that we definitely have to keep up with and we want to stay ahead of that. One specific is the FLSA. I think that companies that do are very good at working through with the FLSA toolkit are going to save themselves some money. Someone that thinks FLSA is easy to comply with is going to overpay their employees. And so by managing that ongoing with the toolkit, that's important. That's one of the items. And once you put out a product, it is important to note, anytime we put out a product, that's the beginning and you're going to continue based on user experience and feedback, you're going to continue to update those products and make them even stronger as well as expand. So I guess if I could put it in 3 buckets for you, it would be the continual ongoing compliance in both labor and tax. You're going to have innovation of creating new products. And then also you're going to have solidifying and going even deeper into the product sets that we have today and the R and D expense is all used toward that. Great. Thanks a lot. Congrats again. You bet. Thank you. The next question comes from Michael Minerals with Credit Suisse. Your line is open. Hey guys, nice quarter. Thanks for taking my questions. Just a couple of ones. Chad, can you just maybe comment on the sales office productivity this quarter? Was it in line with your expectations? And how are the newer offices as we've talked in the past, I mean they do continue to ramp. We've been very consistent in how we announce new office openings and how we actually open them. And we're still very confident we can get to 120 sales teams as we've discussed across the U. S. The earliest we've ever opened up an office is February and the latest is October. And right now, our new business sales performance capacity with the current offices we've opened is greater than $260,000,000 So by new business performance capacity, what I mean is the amount of new business that our total sales teams could sell today if they were achieving top performance level. Now, this doesn't include any sales to current clients for as far as upsells to current clients and it also excludes inside sales to small deals. I'm only talking about our outside sales force, which does represent the overwhelming majority of all of our sales. Now how we calculate the sales performance capacity and how we've calculated the $260,000,000 is by reconciling our top performing office with the average sales performance of our top reps that went to President's Club. And then we multiply that by the number of territories that a team has. And so to that end, we believe a top performing office can sell roughly $6,500,000 in new business at performance capacity. So we're working very hard on bridging the gap there, and that is capturing the unachieved new business sales that exists in the space between actual sales achievement and the new business sales performance capacity. And so I guess the answer to your question is, yes, our mature offices are doing well. We do believe that they could be doing better because we would like everyone to get to the top level. And we've still got new reps and new teams that we're continuing to build up and improve that skill. Now you can we can also increase capacity 3 ways. 1 is by product development, the other is by sales skills and then of course opening new offices. That's helpful, Chad. And that's a perfect segue into my next question about the plan for new offices. What do you expect to end the year with? And maybe you can give us a little preview of how many do you plan to accelerate the number of office openings in 2017? Well, I mean, just as we've done in the past, I mean, we want to make sure that we don't have salespeople thinking they're relocating or managers thinking they're relocating until the time of relocation. So we've never announced offices before we have signed leases and managers and reps ready to move to those locations. But what I will say is that anybody that would take my prior comments to lead them to believe that we are not opening up offices next year, they would be wrong. We will be opening up offices next year. But I also wanted to point out, we had a significant amount of new business sales performance capacity right now that exists within our current group. And we look forward to capturing that as well. Okay. Thanks for taking my questions. All right. Thank you, Mike. The next question comes from Brad Reback with Stifel. Your line is open. Great. Thanks guys. Just a real quick question from the balance sheet. Client funds held seem to decrease sequentially almost about $400,000,000 or so. Any seasonal issues there or what caused that? No, typically on client funds, at the end of a quarter depending on what day the quarter ends, it could be that we're holding a significant amount or at the end of the quarter is on a date that we're not holding quite as much because typically those funds have to be remitted as early as a couple of days and as late as a couple of months. So you can have some seasonality just looking at the balance sheet. One thing we didn't put it in the prepared remarks, but we're at around $660,000,000 average daily balance on those funds held. So we're still holding a significant amount of client funds and we obviously look forward to today where maybe we're getting a little bit more on the interest side on those. Perfect. Thanks very much. The next question comes from Mark Maran with Baird. Your line is open. Thanks for taking my call. I'm wondering when you think about the sales performance across the various regions, were there any areas that really stood out that you could denote? No, I would not say that. I think you have your usual suspects and then you continue to have the new offices that are maturing. I would say, oftentimes, or the manager, not necessarily the geography. I think or the manager, not necessarily the geography. I think I pointed out last year our top rep sold $1,700,000 and she was here in Oklahoma City. We had 2 other reps sell $1,600,000 And again, when I am talking about new business sales performance capacity, we're choosing numbers below that because if you take $1,700,000 or $1,600,000 multiply it by $8,000,000 you're going to get up to $13,000,000 and that's not what we believe our current sales performance capacity is at. Great. And then Chad, you've always talked about you're not going to open up sales offices until people are ready. How would you judge the ability to open up additional sales offices? And perhaps it's helpful also to discuss like, okay, well, when you open up more offices, having it impact more than just the office that's opening, you're also impacting the old office as well? Yes, that's correct. And so just as a reminder, we take a successful manager that's currently with us. We relocate them to a new geography or an existing geography where we're creating a new territory. And then we backfill them with a sales rep who is now ready to lead and be a manager. The more offices you have, the more opportunity you have not only to move managers who are ready, but also the backfill of those And we continue to grow the skill set of that as we've done. I mean, we've opened up, I think, 16 offices in the last 30 months, last 31 months, so which has been significant. But also we there's a gap there. You don't want your sales performance capacity as far as what they're able to sell and what they're actually achieving. You don't want a major gap in that. And I'm not saying our gap is major, but we do see a gap. And when we do a good job of closing that gap as we've been doing this since 2,005, I mean, this isn't a new way that we manage sales. But as we close that gap, we actually increase the performance of the overall sales organization. And so we're not going to do anything that's going to negatively impact our current trajectory. So to that end, we will be opening up offices and we're also going to be focusing on increasing the skill set as well as the performance of the reps we have hired right now. Great. Thank you. The next question comes from Jim MacDonald with First Analysis. Your line is open. Yes. Good afternoon, guys. Chad, what are you seeing out in the market and the economy or any uncertainty around the election? Has that changed at all? Yes, I mean, I can't really comment to that. I think I said this in the last call, I mean, we're either going to have more legislative changes or a lot more legislative changes. I mean, every year that goes by, we have something and every time they try to fix something it gets 2 or 3 times worse. So there's something else we have to deal with. And so anytime something that's new, there are changes. And so I see changes regardless. It's not our job to say whether or not we agree with the changes one way or the other. It's our job to develop them, be able to put them out for the client, so that they're able to utilize them to make minimal impact on their overall cost. And we're geared up to do that. Okay. And then I saw that sales and marketing expense grew 23.1%, I believe in the quarter, which is lower than it has been. Is there any particular reason for that? No. The sales and marketing, it's going to grow, but we're going to see efficiencies kind of throughout the organization, both in the sales and marketing as well as in the G and A figure. You've got to remember that sales and marketing includes has several components. It has salaries, commissions, marketing, it has office space and other things. So, if you look at the offices that we opened this year, you're not some of those fixed costs are lower than what we've had in the in some of the others where we were going into New York or LA or San Francisco. So you'll see some there, as well as in the marketing area. For example, we attended the HR Tech Conference this year and that's the same conference we attended last year, but we didn't attend 40% more conferences in the Q3. So we're going to see some efficiencies there. And then just in the G and A line, we're going to also see some in terms of last year was the 1st year of being SOX compliant. So back half of the year, we had some cost associated with that. And now we're more on a kind of on a maintenance level on that. So I might also dovetail off of that, that one thing that we are also seeing with the new rep influx that we've brought in with opening up the new offices. The new reps are selling and the new reps sell and when they receive a commission, it is half the amount of an executive rep. Additionally, we did increase the amount that a new rep has to sell to become an executive rep. And so we do have reps that stay at the lower commission longer. I think all of that might contribute somewhat to the number you're talking about. Okay, great. Thanks. Thank you. The next question comes from Jon Yuan with UBS. Your line is open. Hi, thanks very much. First question I had was regarding the FLSA. Did you see any increased activity around the government compliance module or the time and attendance in terms of maybe more employees being applied to the product? Yes. So from a government compliance piece, as we bring on new clients, that's a very popular product for us already. And so FLSA was folded into government compliance and so clients already received that. I would point, I guess, where we're getting the most activity as it relates to FLSA is really the webinars. I mean, the webinars we're putting on for FLSA are doubling those same webinars that we put on for ACA. So I do think there are people still somewhat late to the party on gaining compliance with FLSA up until about I think a month ago, maybe 3 weeks ago, they really felt like they were going to be able to kick the can down the road a little bit into next next year and maybe stay off compliance for a little bit. It doesn't look like that's happening. Looks like it's go forward now, December 1. So we're continuing to have those conversations and go through both the education side as well as the analytical side to be able to determine what exactly a client is going to do in the offset and then how they are going to manage it on an ongoing basis, because that's extremely important that they do manage it on an ongoing basis to make sure that they're paying the minimum amount that they need to pay. Okay. That's helpful. And second question, there's obviously a lot of confusion among investors with ANRR. Is there anything you can talk about in terms of the pace of new deals or new business in the quarter? Only to say that I haven't seen any change in characteristic as far as what a client would buy this quarter versus last quarter or the one prior to that. Okay, great. And then last one for Craig. So the stock based comp was a little bit larger this quarter and I think they may be related to some RSUs investing. But could you maybe just give us a quick explanation since it was a pretty big jump? Thanks. Sure. We had some performance RSUs invested this year. And as I mentioned, under the new rules on the tax side, we were able to gain some benefit from that on our GAAP earnings per share. It had no impact on non GAAP earnings per share. So that's really what happened. Moving forward, our stock based comp, I think for Q4, we're estimating at around 3.5% assuming, but we still have some performance RSUs out there. So that's kind of the level it's expected to go to. Thank you. The next question comes from Raimo Lenschow with Barclays. Your line is open. Hey, thanks for that earlier. I had a technical problem. Chad, can you talk a little bit about on the sales force productivity side, like a main driver for the growth we've seen is basically that the existing offices seem to be selling better. We hear stories about some of your sales guys kind of making some really big number or selling some really big numbers. Can you talk a little bit about how you see that evolving over time? And then also has there been an impact for you since you're a public company in terms of the hiring and the quality of the people that you're getting? Thank you. Yes. And so definitely one leads the other. I mean, if you're hiring quality people that are ready to go to work and learn, we're going to have a great success with that. I pointed out before that our executive reps, we have a very, very strong retention rate with them, better than 90%. And then I've also pointed out before that when we lose people, we're losing them before they achieve executive rep status. And we've identified that it's extremely important to get those people to executive rep status as quickly as we can and we're very focused on that. By doing that, that does increase what an office can sell because you have more reps selling at larger numbers versus the traditional sales model, where your top reps can be carrying larger load proportionately than the others. And so again, this is something that in different patterns of our sales career, we go through with being able to increase our sales capacity by gaining efficiencies through those new reps by implementing skills that allows them to get there quicker and we're very focused on that right now. But you're right, we have been continuing to increase our number based on the success of the mature offices. And that's not different today and it wasn't different this quarter. But we definitely do see an opportunity to ramp up these newer offices. Thank you. The next question comes from Ryan MacDonald with Wunderlich Securities. Your line is open. Hey, guys. Congrats on the great quarter. First off, you talked about in your remarks that obviously the FLSA does not have any, I guess, impact in terms of from revenue perspective as it's bundled in governance and compliance. But I guess can you talk about if in terms of the conversations or the pace of business, can you talk about if you're seeing any or have seen or are seeing any pull forwards in new customers signing on as a result of trying to get on to the platform so they can take ahead of time, ahead of the December 1 date so they can take advantage of the FLSA toolkit? I haven't and I would say similar to ACA, I definitely don't think and I said this about ACA too, I definitely don't think someone chooses Paycom just for the FLSA toolkit or just for ACA. It's for the overall value proposition that we put out there that needs to resonate as far as what they're going to do by with turning data into information. And so, yes, I wouldn't be able to comment and say we've seen a pull forward in starts. I think the one comment I made last year based on pull forward was those people that would have started in January of 2016 that pulled forward in December for the sole purpose of gaining compliance for the 2015. But that was really a but again, those clients didn't necessarily use us for the ACA alone. Got it. And then, when you talked about, I think, in one of the client examples that, I think it was the staffing company with over 2,000 employees that they were using initially an in house system and switched over to Paycom. Is this sort of are we seeing at all or a shift in the sort of sales strategy? I know typically Paycom is focused on customers that are already outsourcing the solution or was this more of just a one off circumstance there? Well, we are definitely having more prospects at the upper end reach out to us. We really target companies that are acclimated to the process through using one of our competitors and then it's our goal to get out there and get them to ship to us. It is oftentimes that people research out there who would be a company to use for their employee size. We pop up and they give us a call. And so that does happen more and more, but still from a proportionate level, I would definitely say that our business is coming from companies that currently use one of our vendors and still half of that comes from companies that use the largest vendors out there. All right. Thank you very much. Thank you. The next question comes from Ross MacMillan with RBC Capital. Your line is open. Thanks very much. I have two questions. Just one first for Craig on the gross margin. It was down year over year and I think the guidance for the full year implies it's going to tick down a little more in Q4. I was just curious as to what the puts and takes on higher COGS are relative to revenue? Sure. Our gross margin for the quarter was slightly lower than last year, like 1%. But typically, and we've mentioned this on previous calls, we have to hire ahead of the revenue. So we have some people on the bench ready to take on that revenue. So we see the margins getting too high. It may be that our staffing levels aren't at the level that we need them to be. So we've really in the past, we've said somewhere in that 82% to 84% and that's really what we're looking at for the full year and really where this quarter ended. Great. And just I'm just thinking through the shape of the next couple of quarters where you had record your record bookings in Q4 of last year and then you had a really big Q1 revenue of 16, in part driven by those bookings, which obviously include sort of a one time boost from ACA filing. So just as we think forward, would it make sense that, that sort of March comp is the kind of toughest comp and that would probably be I know you're not guiding to next year yet, but that would probably like a revenue trough that we could start to build off. Just trying to get a sense for the shape of the next couple of quarters. Thanks. Yes, I mean past Q4, we haven't provided any guidance. What I can tell you is that the revenue profile as far as what we build for Q1 of next year and how we build forms and what have you will be the exact same as how we're going to do it this next time. So the revenue would react the same. But as far as the other questions, we haven't guided anything for 2017 yet. Keeping in for what we've done in the past, we've always given that guidance with the Q4 results. Understood. Thanks so much, Chad. Thanks, Craig. All right. Thank you. There are no further questions at this time. I turn the call back to the presenters. All right. Well, I'd like to thank everyone for joining us on the call today. We will be presenting at the UBS Global Technology Conference in San Francisco on November 15, then the Credit Suisse Annual Technology Conference in Scottsdale on November 29 and the Barclays Global TMT Conference in San Francisco on December 7. We hope to see many of you at these events over the next couple of months and thank you for your interest in Paycom. Bye. This concludes today's conference. You may now disconnect.