Earnings Call: Q1 2016

May 3, 2016

Good afternoon, and welcome to the Paycom Software first quarter 2016 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, and then one. To withdraw your question, you may press star and two. Please note, today's event is being recorded. I would now like to turn the conference call over to Mr. Craig Boelte. Mr. Boelte, please go ahead. 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 March 31st, 2016, and our annual report on Form 10-K for the year ended December 31st, 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 was 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 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. As we announced in our press release earlier today, Paycom enjoyed continued success in the first quarter of 2016. Our revenue for the first quarter was $90.1 million, representing growth of 63% compared to the comparable prior year period. This was driven both by our ongoing sales success and also by strong performance in the tax form filing portion of our business, which we experience every first quarter. As many of you know, our form filing business to date has consisted of Paycom filing IRS forms W-2 and W-3, and forms 1099 and 1096 on behalf of our clients. This year, for the first time, we also filed forms 1094 and 1095 as required by the Affordable Care Act on behalf of certain clients. These factors combined to generate our revenue outperformance. Craig will provide more detail on our financial performance later on the call, but I'd like to highlight that this strong top-line performance flowed through our income statement to generate very strong adjusted EBITDA of $33 million, or 37% of revenue. This is a record level for Paycom, both on a dollar and percentage basis. I'd like to thank all of our employees for their hard work and incredible performance they put in as part of our efforts surrounding the ACA development and implementation. ACA compliance is very important to our clients, and our team handled every implementation and question with great skill and care. With that, I would like to provide some more color regarding our first quarter performance and also some comments on our view of the marketplace and expectations for 2016. Our momentum continued in the first quarter as our powerful single database payroll and human capital management solution continued to resonate in the marketplace. As a reminder, our target segment consists of companies with 50 to 2,000 employees or what we term the mid-market. We believe there remains substantial runway for continued sales growth in this segment, as in our view, companies in this range are typically not fully leveraging the potential of software technology, particularly within the human capital management or HCM. As we speak with current and prospective clients, we continually encounter companies that can derive substantial value and benefits from our solution. These benefits can take many forms. Some firms can reduce expense significantly by utilizing the Paycom system to evaluate and hire candidates that could potentially generate a valuable Work Opportunity Tax Credit. Other companies that deploy their workforce in shifts can use our system to avoid paying costly overtime. Firms looking to both develop their talent and also reduce turnover also use our learning and survey capabilities to train and engage their workforce. The key differentiator in these scenarios is that by utilizing Paycom's single database, employee data flows seamlessly throughout all its applications, streamlining many HCM functions. We believe our software solution is best in class, and we are committed to maintaining our competitive advantage by continuing to improve our solution. In the first quarter of 2016, we once again more than doubled our adjusted R&D spend, growing it 105% year-over-year to 4.2% of revenue. Though we do not provide formal guidance in this area, we are on pace to more than double our adjusted R&D expense again in 2016. In the second quarter of 2016, we expect it to be close to 6% of revenues. This amount of R&D spending would be double the level of R&D spending from when we went public in 2014. We are excited that this spend is reflected in our software offering, and I am pleased that this spend did not prevent us from experiencing expansion within the margin. The low penetration of advanced cloud-based HCM and payroll solutions in the mid-market is a key driver to our momentum. We anticipate that it will persist for several years as our market share, even today, remains small relative to the opportunity. As we measure it, and as verified by third-party research firms such as International Data Corporation, the addressable market for our services in the United States is approximately $25 billion. Another key driver for Paycom, as well as the entire outsourced HCM industry, is the environment of increasing regulatory complexity. As we observed with the Affordable Care Act, and more recently with the proposed overtime expansion, the trend of lawmakers and regulatory agencies has been to continue to increase the compliance burden on virtually all companies across the U.S. This hits the mid-market particularly hard. These companies typically do not have the internal resources or the time to navigate these requirements. Additionally, it rarely makes sense for mid-market firms to hire staff and build departments to obtain these capabilities, as the return on this investment usually pales when contrasted with investing in their core business. It is the combination of Paycom's expertise in HR regulation and tax laws, along with our proprietary single database system, that allows our clients to not just achieve compliance, but obtain significant organizational efficiencies that, in turn, drive very compelling ROIs. This combination also allows Paycom to react quickly to changes in regulation and provide thought leadership and tools to our current and prospective clients. A great example of this is our overtime expansion tool that we recently introduced and is proving to be very popular. As many of you know, the Department of Labor is expected to expand overtime protections in 2016. Our tool allows executives to quickly determine how much the proposed changes are likely to cost their organization, and also provides employers with inflection point salary levels at which they would economically be better off raising compensation rather than paying overtime. I want to underscore that it is the combination of our regulatory knowledge, software development capabilities, and also the flexible nature of our single database platform that allowed us to react so rapidly. This synergy between regulatory knowledge and software development is a key competitive differentiator for Paycom and is something we've built and refined for many years. Another key differentiator we enjoy at Paycom is our highly effective and organically built sales organization. Our sales force is trained to identify areas where our solution can be most effective for prospective clients, and to work collaboratively with those prospects to help them obtain the most valuable outcomes during deployment. As I detailed on our last call, we launched 6 new sales teams in January, bringing our total number to 42. These teams are progressing in line with our expectations and should reach maturity at the 24-month mark. These teams follow the 5 new teams we launched in 2015, which are also progressing closer to becoming fully mature teams. I recently had the opportunity to spend time with our sales force at our annual President's Club gathering to celebrate their achievements. The mood among the sales organization remains extremely positive, as our recent success is spurring the teams to reach even higher and to keep our momentum rolling through 2016 and beyond. I'd like to highlight a few client wins that we won in the first quarter. These highlights are just a selection of the many new clients that joined the Paycom family, and I use them as examples to illustrate the broad appeal of our solution across industries. First, we signed a large event security staffing company. This client has just over 3,000 employees and was using a national Paycom competitor. This client loved our high-touch customer service model, along with the ease of use of our system for their employees and the ability to access actionable analytics. Next, we brought on a transportation company with over 8,000 employees. This company provides shuttle services to consumers across a large metropolitan area and was also using a large national Paycom competitor. In addition to needing to consolidate multiple systems, this client also wanted to automate and standardize their onboarding process, which they've been doing manually prior to using Paycom. Finally, we welcomed a fast-growing building products company with over 2,000 employees. This client was also using a national Paycom competitor and was facing challenges obtaining the service they needed to support their growth. With the Paycom system, the client now has the ability to produce analytics in real time that allow them to make critical decisions on labor and cut down on unnecessary labor expenses. Our solution empowers their managers to better control labor costs on a daily basis because of our robust and user-friendly analytics tool. Before I hand the call over to Craig, I want to take a moment to highlight that The Journal Record recently recognized him with a 2016 Financial Stewardship Award in the public company category. Craig has been Paycom's CFO for over a decade. He has been an invaluable leader within Paycom for years and has been instrumental in helping guide and grow the company to where it is today. With that, I will now turn the call over to Craig for an update on our financials and our guidance. Craig? Thanks, Chad. Before I review our first quarter results and also our outlook for the second quarter 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. Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures that exclude stock-based compensation and other non-recurring charges, including transaction expenses related to our follow-on public offering. A reconciliation of our GAAP to non-GAAP results is included in our press release. We experienced a strong first quarter with total revenues of $90.1 million, representing year-over-year growth of 63% from the comparable prior year period. As Chad mentioned, revenue outperformance was driven by a combination of continued strong sales growth, better than expected growth in our tax form filings business, and also performance from forms filing related to the ACA. Within total revenues, recurring revenue was $88.9 million for the first quarter of 2016, representing 99% of total revenues for the quarter and growing 64% from the comparable prior year period. I would like to now comment on the ANRR. We have decided to discontinue providing ANRR because of the limitations of this metric. ANRR is a measure of when business is onboarded, not when it is sold. This means that investors who attempt to forecast ANRR are effectively creating an estimate for a very brief period of time because of our short sales cycle, which is typically four to six weeks, and our onboarding cycle, which is a similar period of time. Based on client choice and need, this creates variable start dates, which in turn leads to variability in ANRR. We saw an example of this just last quarter when we experienced the pull forward of approximately $10 million in ANRR due to the ACA reporting deadlines. With respect to the first quarter of 2016, bookings and ANRR were consistent with our expectations. Our anticipated future ANRR is reflected in both our second quarter and full year revenue guidance, both of which are the largest we have ever provided on a growth and of course, absolute dollar basis. Total adjusted gross profit for the first quarter was $78.3 million, representing adjusted gross margin of 87%. This compares to 85% in the first quarter of 2015. Strength in our adjusted gross margin line was driven in part by the outperformance in our forms filing business, as well as ongoing improved efficiencies across our organization. For the full year 2016, we anticipate that adjusted gross margin will be within a range of 82%-84%. Turning to operating expenses, as a reminder, we pay commission to our sales representatives based solely on new sales at the conclusion of the client's first monthly billing cycle. This is a one-time commission that we recoup over the life of the client relationship. When we experience strong sales performance in a quarter, there is a potential for us to see increased expenses in that quarter, depending on the timing of the client's onboarding process. Adjusted sales and marketing expense for the first quarter of 2016 was $28.4 million. This amount represents approximately a $2 million sequential decline from the prior quarter. This was driven by strong commissions in Q4 2015, due in part to the pull forward of certain deals into the fourth quarter of 2015 by the Affordable Care Act that we have discussed in last quarter's call. For the first quarter, total adjusted administrative expenses were $48.2 million. This compares to $35.5 million in the first quarter of 2015. Adjusted R&D expense of $3.8 million increased 105% from the comparable prior year period as we continue to invest in our solution. Adjusted EBITDA was $33 million or 37% of total revenue in the first quarter of 2016, compared to $13.6 million or 25% of total revenue in the first quarter of 2015. Adjusted EBITDA was positively impacted by the commission expense trend I mentioned earlier, as well as the strong forms filing revenue. Non-GAAP net income for the first quarter of 2016 was $19.4 million or $0.33 per diluted share based on approximately 58.4 million shares versus $6.7 million or $0.12 per diluted share based on approximately 56.6 million shares a year ago. The effective tax rate was 35% compared to 41% in the comparable prior year quarter, primarily due to the availability of the Section 199A deduction and the R&D tax credit. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $72.1 million and debt of $25.6 million. As a reminder, this debt represents the financing of our corporate headquarters. Cash from operations was $29.9 million for the first quarter, reflecting our strong revenue performance and the profitability of our business model. With that, let me turn to guidance for the second quarter and for fiscal 2016. For the second quarter of 2016, we expect total revenues in the range of $69 million-$71 million, representing a growth rate over the comparable prior year period of approximately 43% at the midpoint of the range. We expect adjusted EBITDA for the second quarter in the range of $14 million-$16 million, representing an adjusted EBITDA margin of approximately 21% at the midpoint of the range. For fiscal 2016, we are increasing our guidance for revenue to a range of $320 million-$322 million, or approximately 43% year-over-year growth at the midpoint of the range. We're also increasing our full year adjusted EBITDA guidance for fiscal 2016 to a range of $73 million-$75 million, representing an adjusted EBITDA margin of 23% at the midpoint of the range. With that, we will open the line for questions. Operator? Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one. If you're using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your question, you may press star and two. Again, it is star and then one to ask a question. Our first question today comes from Raimo Lenschow from Barclays. Please go ahead with your question. Hey, thank you for taking my question, congratulations to a great quarter. Going back to Craig and Chad for the ANRR, I totally get your logic on it's volatile. We saw it in Q4. Is there any other way that you think we should look at the business in terms of going forward? That's the first question. The second question is, can you help us understand how much of the special effect did you get from ACA and the tax filing? Was there anything special that will not be there next year, or is it just like you're doing more now, which basically is showing up, and so next year you will have a very similar situation? Thank you. All right. Thanks, Raimo. This is Chad. I'll go ahead and take the last question first. As far as ACA, everything we bill a client for as it relates to ACA is either recurring on a monthly basis or it's recurring on an annual basis. All of the revenue is recurring, so we would expect to experience similar forms filings with the same type of view next year for the same quarter in 2017. Those will recur. As it relates to ANRR, this was a metric that really, we almost, last quarter, were thinking about not providing it due to the volatility that we experienced. Last quarter was going to be anywhere from 48%-97%, depending upon the four pull-forward starts, which we indicated was $10 million at that time. That anomaly, due to the earlier starts in fourth quarter, it not only impacted our fourth quarter comp, which we did talk about, it impacts first quarter of this year, depending on that pull forward. It impacts fourth quarter of this year as we head into that. It will also impact 2017. As we looked at that, we looked at ANRR becoming really less useful because we were either going to have to explain more and more client starts and how that changes throughout the year, or we are going to have to start breaking out how much of it was one thing versus another. Another piece of our ANRR as we look forward, it is a commission number. There are those items that we commission on. Over time, there might be additional revenue items that we add within our platform that we do not necessarily commission on. That would be another area. I will remind, as I know you know, Raimo, ANRR is also included in the guidance. As far as modeling, or as far as what I would direct people to in what we see as being important, sales office openings and those that are both ramping to maturity as well as those mature offices. We have been very consistent in how those offices have grown over time and how those offices have become mature. We look forward to continuing that strategy. Perfect. Thank you. Well done. Thank you. Our next question comes from John DiFucci from Jefferies. Please go ahead with your question. Thank you. I'm sorry, Chad, I'm going to ask a follow-up to both of Raimo's questions. Can you tell us what the impact of the ACA related tax form filing was this year so we can sort of look at the year-over-year impact it had for this year relative to forget about next year, just so we can sort of size that? Then I have a follow-up. Yeah. We haven't broken out specifically the ACA forms filings. Obviously, we've done less ACA form filings than what we do our normal forms filings. So there would be some type of percentage of that. We do believe that most of the clients that are with us that are eligible for ACA or should be required to file ACA are on that platform right now. So I wouldn't expect that we would necessarily see huge growth relative specific to just ACA next year as being proportionally different than the forms filings that we have. We haven't broken that out separately. Okay. We could estimate what that is that we have, you can't even just. I'm just thinking about the year-over-year growth was significant. I don't anticipate modeling this going forward in the year because it's a big impact in this quarter. Well, one thing I did say previously on the call last quarter, which, from where I sit today, I wouldn't make any changes to this comment, and that is that we would expect ACA-related billings for this year to equal low single digits as a % of our overall revenue for 2016, if that helps. Okay. Thank you. If I could, on the ANRR, Chad, I understand why you're doing this. I think we all do. To just sort of abruptly stop giving us the metric kind of raises a lot of questions, especially, and you give some good reasons why sales and marketing expense will be down or was down this quarter and certainly down as a % of total revenue. You can come to other conclusions, too, as to why you might have given that since sales and marketing expense is tied to commissions and perhaps, can you give us any kind of subjective information, even around ANRR in this current quarter to sort of bridge us instead of just stopping it unexpectedly? Well, I do think that, if you're able to look at our guidance to second quarter, that would suggest a level of ANRR. I guess I can answer it this way. We still are selling the same way we've always sold. Our salespeople woke up today, and they're selling as much and more than what they've sold in the past. We have more mature sales teams than we've had in the past. Our pipeline's as strong as it's ever been. Our value proposition is very strong. We've put a lot into R&D. We expect that next quarter, R&D is going to be close to 6% of revenue. As you guys know, on the call, we started off as a company IPO-ing of 3%. We've done a lot to really impact everything. I understand what some people might see as an elimination of a metric that we felt that over time has become, I think, somewhat less informative. With the anomalies that we've had come in, become more difficult over time to explain and make sure that everything's in the right quarter. Again, with ANRR, you could have a client start on March 8th, and because they're a biweekly client, they go into second quarter ANRR, and then you can have the same client start on March 8th, and because they're a semi-monthly client, they go into first quarter ANRR. There's just a lot of anomalies that come up with that, and we feel like we've got a strong future here, and we want to focus on what's important, and we believe that is sales office openings. We believe that sales teams that continue to mature much further past what we had anticipated in the past. We're looking forward to continuing that strategy. Okay. Well, can you tell us if ANRR grew this quarter? We know there was a pull forward last quarter of $10 million into the fourth quarter from the first quarter. I'd anticipate that you didn't get the kind of growth you had seen anywhere near that. I don't mind sharing with you that ANRR grew without the pull forward. Okay. Without the pull forward. I'm sorry, does that mean? I'm saying even if we do not include the $10 million pull forward, ANRR grew- Okay as reflected in our second quarter guidance. Okay. Cool. Thank you very much. Now, with a $10 million pull forward, it would've been another record piece. Again, we're trying to move away from that as a metric. I get it. I totally understand, Chad, those last comments are very helpful. Thank you very much. You bet. Our next question comes from Mark Murphy from JP Morgan. Please go ahead with your question. Yes, thank you very much, I will add my congratulations. Chad, I wanted to ask you, when you look at your recent new client wins, on average, can you help us understand how many disparate systems is the customer unplugging when they go to install the Paycom system? I think I'm trying to understand how often are you seeing really a one-for-one swap out of just a payroll system versus, I think, more frequently, you are displacing payroll, maybe also talent management, maybe some expense management or a COBRA product or something else. Just on average, what is it that you're seeing there recently? I obviously couldn't update an average to be accurate without going through all of the data of those clients that we've recently onboarded. It would be extremely uncommon, and a matter of fact, I don't know of a situation where we didn't at least replace three or more. Whether that is another product that someone actually bought or potentially, in the mid-market, you can have clients that have deployed an Access database with other information in it that they use. Maybe they've hooked Crystal Reports or another type of Cognos or reporting tool within their database as well. When you're talking about replacing multiple systems, there's a lot there that we could look at. Okay, great. I wanted to ask you as well, what are you experiencing in terms of what I think sometimes people refer to as the acclimation and the usage of the products or just the dynamics that keep clients engaged and keep them sticky and driving the retention rates? For instance, are you seeing greater adoption of the new products like Learning or the GL Concierge or some of the other newer products at the time a contract is being signed? Yes. Let me answer it this way. We've gotten a lot better at onboarding clients to increase usage from the beginning. We find that often a client buys for the full value proposition and then even though they might have everything, they might not have used everything in the beginning. I think it's important that clients get what they pay for and that they're using everything. Obviously, usage increases retention, as well as it just makes it easier for everyone else to use the product, specifically their employees. That's the way we look at it. We have experienced a greater client usage and greater client confidence in the product recently and as we move forward. That's a very specific strategy for us that we've undertaken as something we feel as being very important. Okay, great. I wanted to also go back to an earlier comment. You did say briefly a moment ago that the pipeline is as strong as it's ever been. I just wanted to drill into that. Can you provide any more color or any more texture in terms of what you're seeing? Are the sales teams maturing more rapidly than in the past? I guess I'm curious based on that, and like you said, I think we can kind of back into a feel for ANRR or even bookings by looking at the Q2 guidance, which is quite strong. When you make that pipeline comment, is your gut feel that the new bookings trajectory would be pretty healthy here going forward? Obviously, we do not guide bookings. We're not guiding to ANR, but my comments are more geared toward this. We now have 42 cities open. We had five more mature in first quarter this year because we had five that we had opened in 2014. Those are mature. We have more executive sales reps than we've ever had in the past. Our sales teams are selling more than they've ever sold in the past. Our reps are selling more than they've ever sold in the past. In the past, we had a couple reps do $1 million, then we had three or four do $1 million, and now, just got back, several did $1 million, and several did over $1.5 million. We're just seeing them sell more and more and more. When I'm talking about our pipeline remains strong, I'm looking at each sales team. I'm seeing that we have a number of sales team, and then also the growing success within each sales team continues. Yes, our pipeline for new clients remains very strong. Okay, great. Thank you very much. Thank you. Our next question comes from Michael Nemeroff from Credit Suisse. Please go ahead with your question. Hey, guys. This is Alex on for Michael. Thanks for taking my question, I'll echo the congratulations. Just one, if I may. Can you provide a general update on your strategy for new sales office openings? Should we still expect the timing to remain consistent with prior years, where you typically launch all of them in the first quarter of each year? Also, as your bench of regional sales managers continues to grow, is there any chance that you would step on the accelerator and open more than, let's say, six new offices next year? Thanks. Yeah. This year was the most offices we've ever opened to date at six. Obviously, there's a lot of the year left, as we continue throughout the year, we'll make the decision on what we may or may not open based on both opportunity as well as backfill. It's important that any time we do deploy a new sales team strategy, that we have great success, we've had that in the past. We look forward to continue that. As a general rule, what we've been consistent with is not talking about those cities that we're going to open or how many. It is true, this was our first year to open up six. What's also true, something you've pointed out, is that for the last three years, we've opened them up in the first quarter. In years past, that hasn't always been the case. We're going to look at the opportunity as we move throughout the year and make those decisions we think will best impact us for both this year as well as into the future. Because as everyone knows by now, those of you that have followed us closely, it takes an office 24 months to mature, and the office openings that we have this year are going to have a substantial impact for us as they mature into 2018, as we have had five more mature from 2014 into this quarter. Perfect. Thank you for taking my question and congrats again. Thank you. Our next question comes from Brendan Barnicle from Pacific Crest Securities. Please go ahead with your question. Hi, this is Trevor Upton on for Brendan. Thanks for taking my questions. A couple of quick ones. Regarding ACA-related billings being low single digits for the year, should most of that be in Q1? We haven't broken that out specifically as far as that goes. That's a good question, we have not broken that out. Definitely Q1. It depends on growth throughout the year of our ACA-related monthly items, it's hard to exactly say that. As we sit here today, when you take into account that Q1 does have ACA forms filings, I would think it would be a quarter that would rival out quarters, if not be better than out quarters in regards to ACA revenue. Okay, thanks. The non-ACA forms filings, was there any unexpected strength in the quarter? I would say no, that's been business as usual for us. There were no changes in what we did this year with the tax form filings, any other than Now, obviously, the more new clients we added on last year, we're going to produce more form W-2s and W-3s as well as your 1099s. You would have an uptick to the extent that your client base grew, or client growth grew, and employee count, which of course, ours did throughout the year. It wouldn't have different characteristics than what it's had in the past. Okay. Other than the ACA piece. Right. Understood. Lastly from me, the EBITDA guidance suggests second half costs are a little bit higher than we were expecting. You mentioned the R&D expenses. Is there anything else we should think about? No, as we're looking at the out quarters for the adjusted EBITDA guidance, it would primarily be in the R&D as well as sales and marketing. Yeah, the sales and marketing expense as well. Anything unusual there just based on revenue, or? No, just as we're ramping offices, they continue to sell at high levels. In those out quarters, as we mentioned on previous calls, those sales reps hit certain gates, the commission expense goes up throughout the year. Yeah. There are accelerators throughout the sales year, which for us starts in February, ends in January. Understood. Thank you. Thank you. Our next question comes from Brad Reback from Stifel. Please go ahead with your question. Great. Thanks a lot. Just a quick financial statement question. If I look at the cash flow statement, client funds held increased by $429 million in the quarter. Anything other than timing going on there? No, typically on the client funds held, that first quarter is a strong quarter, primarily because you have FUTA and SUTA that fills that first quarter, then people will hit those limits. As you look at the last year, every quarter tends to increase after that first quarter. It will drop off a little after the first quarter and then build back up. This was our strongest quarter. We had over $1 billion in client funds held. Which would reflect the onboarded clients that we have done throughout the year last year. Got it. Thanks very much. All right. Thank you. Our next question comes from Corey Greendale from First Analysis. Please go ahead with your question. Hey, good afternoon. Congratulations on the strong quarter. I wanted to ask actually about the Q1 guidance. As a public company, you have a strong track record of doing at least a little better than your guidance. I think this was a new kind of standard. Can you address maybe a little more specifically what went better than you expected on revenue in Q1? We had definitely strong onboarding for new business, as you look at it. Some of it even onboarded in December, which we discussed, which means you're getting billing for all those, at the beginning of the quarter, throughout the quarter, instead of those that may have come in through the middle of the quarter, and you get less of the billing for that specific quarter. That had an impact. Obviously, there was some impact for ACA forms filing. Really it's the two that combined that gave us a strong first quarter. Okay. On the EBITDA line, I think you beat the high end of that by $10 million, which is more than you beat the high end of the revenue guidance by. What was on the cost side that you outperformed by $4 million or something like that? Well, we continue to look for and gain efficiencies in every line item. That's a strategy of ours. That continued into the first quarter. Okay. Last one for me. I just want to clarify your comments on the R&D. You're talking about the R&D expense on the income statement? That is correct. Then, there's about a third, around 30%, that we capitalize. That is correct on the 6%. We should assume that that 30% ratio will hold going forward? It depends on the projects they're working on. We capitalize certain projects. Yeah, it's been historically between 30% and 33%. Okay. Great. Thank you. Thank you. Our next question comes from Mark Marcon from RW Baird. Please go ahead with your question. Thank you. Let me add my congratulations. With regards to the ACA, can you just talk a little bit about just how satisfied you were with the actual execution of the program, with the forms, and what are you seeing in terms of client retention with regards to some of your longer-standing clients? Yeah. We've given our client retention metric each year. Last year, once again, was 91%. Yep which it has been the same every year for the last three or four years. We think that remains good. Obviously, we always want to increase retention, and those are strategies that we definitely work on. As far as ACA, I couldn't be happier with the group. It's not just writing code and deploying it. You have to also understand what it's going to do, and then you have to be willing to make the changes throughout the year as things change. This is the very first year, not only how it was calculated and everything else, but it's the first year that it's ever been filed. There were a lot of changes happening throughout the year. I'm very happy with what we've been able to put out there. We will still continue to update items within the ACA module as clients look to become more strategic, in how they comply with ACA. Great. It sounds like client satisfaction with how everything went, for the ACA thus far has been pretty good. Yes. Our client satisfaction, I can't speak for every client. There's clients out there. From my perspective, I'm very proud of the group that we had. I'm unfamiliar with issues related specifically to ACA. Yeah, I'm happy with the way we performed this year. Great. I wasn't suggesting that there were any issues by asking the question. There have been some other players in the space that have had some issues, just checking. With regards to the sales pipeline, is that pretty uniform across when you take a look at your offices that have been open for two or more years, are you seeing a uniform level of uptick in terms of the pipeline, or are there any sort of regional differences that are developing? To the extent it's regional, it's not really about the region, it's about the leader for the office. To the extent that one office is doing better than another office, I would typically point to the leader in that scenario. Usually, they have developed reps, they have more executive reps who have been in their territory longer, in those cities that we've had for a while. Sometimes, you'll have a city that's mature, but we've plucked people out of it. We've plucked executive reps out of it, in order to backfill other opportunities. In some case, you can have an office that's mature that we pull the manager out to open up another city. You do have some of those factors that come into play. We have always, to date, been able to increase the amount that any one office or sales manager can sell or is responsible for selling through their people. We've also been able to increase the amount that any one executive rep can sell. These numbers are getting large for us, and we're excited about that. We don't know where that ends, as far as a cap. We're looking forward to continue to grow as we have in the past. Yep. It sounds like you haven't run into a cap on any one offices yet. No, we represent such a small percentage of the overall TAM. We're out there. Time in the territory dictates success, in most cases. We've had a lot of time in a lot of these territories. Yep. Bookings, just on the ANRR comments, bookings are up materially this Q1 relative to a Q1 a year ago, correct? We haven't given a bookings number, from that standpoint. Again, I would point you to our guidance and kind of how we worked through the first quarter, and the strength we had in that. I would also point to previous comments I've made about sales teams, how they mature, how they continue to mature more, as well as having more executive sales rep. What it takes to become an executive sales rep, and how much success you had to have to get to that level. New reps that come in, they don't become executive sales reps right away. They have to sell a certain amount. Normally takes 12 to 14 months. We are seeing some acceleration in that number as far as the length of time it takes someone to become an executive sales rep. That is one metric that does seem to be increasing in a good way for us as far as shortening the length of time to maturity for an executive sales rep. Okay, great. Thanks and congratulations. Thank you. Our next question comes from John Bayan from UBS. Please go ahead with your question. Hi. Thank you. Actually, my first question was really to your last one. In terms of the sale of offices, the productivity ramp to 24 months, are you seeing any shortening of that ramp period as you incorporate best practices? As far as new office openings, we aren't seeing any material shortening of that to maturity, because they have to ramp up. They're not going to go in and hire 7 to 9 sales reps right away. You're going to start off with a couple, then you're going to have a couple more and a couple more. Again, you're building a pipeline and a reputation within a new market typically, for us. Whether it's a new territory in an existing city or not, you're building that. So, over time, you build that. So I can't say that we've seen cities or office openings mature at a rate faster than what they've done in the past, which is 24 months. Okay. Yeah. That's very helpful. Then, looking at your Q1 numbers and the Q2 guidance, if you look at the difference, would most of the difference sequentially be related to forms business from ACA, W-2s and so on? Would there be any other reason for the seasonal difference? The seasonal difference is the ACA forms filing to the extent it's seasonal now. Not all of the uptick we had in first quarter I would call seasonal, Client adds as well that impact that, especially as they come in at the beginning of a quarter. So I would say that those contributed also. From a seasonality perspective, we're going to have the same type of seasonality on an ongoing basis every first quarter. Okay, great. Just for housekeeping, is there a new tax rate guidance that you have for the year? What should we expect? Go ahead. In terms of the tax rate, we had the first quarter, and we would expect the full year to be a similar rate, on that 35% rate. We factored in the R&D and the 199 deduction based on an annual basis. Unless something changes, and it can fluctuate from quarter to quarter, but that should be in the range. Okay, thank you very much. Our next question comes from Ryan MacDonald from Wunderlich Securities. Please go ahead with your question. Thanks. Congrats on the quarter once again. Just wanted to start with, again, on the sales ramp strategy. Can you talk about cities where you've now added a second sales team in those cities? Are you seeing any change or any different dynamics to that second sales team ramping? Is it something that is maybe taking a bit longer since you're already established with a certain client base within there? Has it been a fairly smooth transition with the first sales team? Yeah. No, you're really not. I would go back again to it's the manager. The territories are substantially the same as in more than we can call on, because of the number, because again, the percentage of the overall TAM that we represent. The cadence at which we bring reps on in a new office opening has remained the same. We need to secure success. We need to make sure that city's not only mature, but solid after maturity. There's a very specific way we go about growing that. That's been maintained regardless of geography that we've opened up. Mm-hmm. Just shifting to some of the deals you mentioned, a few larger deals in the quarter. Can you talk about what kind of shift you're seeing in terms of, or what kind of growth you're seeing as you're closing deals north of the 2,000 employee range? I know you mentioned that the target market there is 50 to 2,000. You sound like there was a few large deals you called out in the quarter. Is that still in the high single digits, low double digits, or are you even seeing more than that on a quarterly basis in terms of deal sizes? It depends on the quarter. I think typically, again, we've been selling at the upper end of our range now for a while, as far as reps have had success and clients have had success with the product. We've sold at the upper end of our range for a while. I wouldn't necessarily say that we've gone dramatically over our range. We do have some outliers, and I've kind of given you some information on some of those on the call. We're still staying very consistent with what our target market is. Just one final question for me. You talked about the introduction of the overtime expansion tool, and as that being as a key differentiator for Paycom. Can you talk about just what type of early success you're seeing with that tool? From a compliance burden standpoint, do you see it as having a similar, if not greater impact, to Paycom's business as ACA has over the past year? Well, I can answer that question from what I see here right now, I would say no. ACA has very specific filing requirements. The overtime laws are more of a labor piece to it. They will have fines, and so it will be important for people to do it correctly. I'm unaware of a forms filing piece to it. From that standpoint, I would say it's a little bit different. Here's how I think we differentiate ourselves, and it's the same way with ACA. You get ahead of it by educating clients on what it is, whether or not they even want to comply or how they're going to comply in the case sometimes of ACA to pay or play. From this perspective, it's basically a new change, where employees that make less than $50,440, and my understanding is now that's going to go lower to $47,000. We don't have all the detail on that yet. You're going to have to pay overtime for salaried employees that make less than that amount, and that's going to impact clients' labor. In some cases, they might choose to make someone salary a little bit larger to match that. In other cases, they might choose to pay the overtime. Either way, it's going to require that you have both payroll history as well as time and attendance data, so that someone can go through and work those analytics to make the decision of how it's going to impact their business from a labor piece. For most companies, labor is their largest expense. Being able to manage that early and make those decisions early versus a quarter later, once it's actually already impacted your labor, is something that we want to get ahead of. Nothing's been rolled out specifically of exactly what the number's going to be, but we do think it's going to be changed. This isn't a new threshold or a new law. The current threshold is $23,660. It's just a massive change in the threshold, which is going to impact many companies out there, especially in the mid-market. Excellent. Thanks for the clarity. Congrats again. All right. Thank you. Ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to turn the conference call back over to management for any closing remarks. All right. I would like to thank everybody for joining us on the call. We appreciate your time and interest in Paycom. We'll be presenting at the Jefferies Technology Conference in Miami on May 11th and also at the JP Morgan TMT Conference in Boston on May 24th. We hope to potentially see all you either there or on the road in the coming months. Thanks to everybody for being on the call. Have a good evening. Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephones.