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. After today's presentation, there will be an opportunity to ask Please note today's event is being recorded. I would now like to turn the conference call over to Mr. Craig Bolte. Mr. Bolte, 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 31, 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 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 Q1 of 2016. Our revenue for the Q1 was $90,100,000 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 Q1. As many of you know, our form filing business to date has consisted of Paycom filing IRS forms W-two and W-three and forms 10991096 on behalf of our clients. This year, for the first time, we also filed forms 10941095 as required by the Affordable Care Act on behalf of certain clients. These factors combine to generate 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 $33,000,000 or 37 percent 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 Q1 performance and also some comments on our view of the marketplace and expectations for 2016. Our momentum continued in the Q1 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 50,000 to 2000 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 Q1 of 2016, we once again more than doubled our adjusted R and 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 and D expense again in 2016. And in the Q2 of 2016, we expect it to be close to 6 percent of revenues. This amount of R and D spending would be double the level of R and 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 $25,000,000,000 Another key driver for Paycom as well as the entire 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 the 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 the 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. Now I'd like to highlight a few client wins that we won in the Q1. 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. 1st, 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 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. Now 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 Thanks, Chad. Before I review our Q1 results and also our outlook for the Q2 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 nonrecurring 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 Q1 with total revenues of $90,100,000 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 $88,900,000 for the Q1 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 4 to 6 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 10,000,000 dollars in ANRR due to the ACA reporting deadlines. With respect to the Q1 of 2016, bookings in 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 Q1 was $78,300,000 representing adjusted gross margin of 87%. 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% to 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 onetime commission that we recoup over the life of the client relationship. When we experienced 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 Q1 of 2016 was $28,400,000 This amount represents approximately a 2 $1,000,000 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 Q4 of 2015 by the Affordable Care Act that we have discussed in last quarter's call. For the Q1, total adjusted administrative expenses were $48,200,000 This compares to $35,500,000 in the first quarter of 2015. Adjusted R and D expense of $3,800,000 increased 105% from the comparable prior year period as we continue to invest in our solution. Adjusted EBITDA was $33,000,000 or 37 percent of total revenue in the Q1 of 2016 compared to $13,600,000 or 25 percent of total revenue in the Q1 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 Q1 of 2016 was 19,400,000 dollars or $0.33 per diluted share based on approximately 58,400,000 shares versus 6,700,000 or $0.12 per diluted share based on approximately 56,600,000 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 199 deduction and the R and D tax credit. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $72,100,000 and debt of 25,600,000 dollars As a reminder, this debt represents the financing of our corporate headquarters. Cash from operations was $29,900,000 for the Q1, reflecting our strong revenue performance and the profitability of our business model. With that, let me turn to guidance for the Q2 and for fiscal 16. For the Q2 of 2016, we expect total revenues in the range of $69,000,000 to $71,000,000 dollars 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 2nd quarter in the range of $14,000,000 to $16,000,000 representing an adjusted EBITDA margin approximately 21% at the midpoint of the range. For fiscal 2016, we are increasing our guidance for revenue to a range of $320,000,000 to $322,000,000 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 $73,000,000 to 75,000,000 dollars representing an adjusted EBITDA margin of 23% at the midpoint of the range. With that, we will open the line for questions. Operator? Our first question today comes from Raimo Lenschow from Barclays. Please go ahead with your question. Hey, thank you for taking my question and congratulations to a great quarter. Going back to Greg and Chad for the ANRR, I totally get your logic on like it's volatile we saw in Q4. Is there any other way that you think we should look at the business in terms of going forward? And then can you that's the first question. And the second question can you help us understand like 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 until 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. But all of the revenue is recurring, and so we would expect to experience similar forms filings with the same type of view next quarter as we're in or excuse me, next year for the same quarter in 2017. And so 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, it was going to be anywhere from 48% to 97% depending upon the pull forward starts, which we indicated was 10,000,000 dollars at that time. And that anomaly, due to the earlier starts in Q4, it not only impacted our 4th quarter comp, which we did talk about, it impacts Q1 of this year depending on that pull forward and then it impacts Q4 of this year as we head into that, and it will also impact 2017. And so as we looked at that, we looked at ANR 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 are we going to have to start that 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. And so there are those items that we commission on. Over time, there might be additional revenue items that we add within our platform that we don't necessarily commission on, and that would be another area. So I will remind, as I know you know, Raimo, ANRR is also included in the guidance. And as far as modeling, I do think or as far as what I would direct people to and what we see as being important, sales office openings and those that are both ramping to maturity as well as those mature offices. We've been very consistent in how those offices have grown over time and how those offices have become mature. And so we look forward to continuing that strategy. Our next question comes from John DiFucci from Jefferies. Please go ahead with your question. Thank you. And I'm sorry, Chad, I'm going to ask 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? And then I have a follow-up. Yes. 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, and 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. And so I wouldn't expect that we would necessarily see huge growth relative specific to just ACA next year as being proportionately different than the forms filings that we have. But we haven't broken that out separately. Okay. So even I mean, because we could estimate what that is that we have, but you can't even just give us because I'm just thinking about the year over year growth was significant. I don't want anybody I mean, I don't anticipate bottling this going forward in the year because it's a big impact in this quarter. But just to say One thing I did say previously on the call last quarter, which I wouldn't 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 percent of our overall revenue for 2016, if that helps. Okay. Okay. Thank you. And then if I could, on the ANRR, Chad, I understand why you're doing this. I think we all do. But 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 percentage of total revenue. But if you can also 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 Q2, I mean, 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. I mean, our salespeople woke up today and they're selling as much and more than what they've sold in the past. I mean, we have more mature sales teams than we've had in the past. Our pipeline is as strong as it's ever been. Our value proposition is very strong. We've put a lot into R and D. We expect that next quarter R and D is going be close to 6% of revenue. And as you guys know on the call, we started off as a company IPO ing of 3%. And so we've done a lot to really impact everything. I understand that what some people might see as an elimination of a metric that we felt that over time has become, I think somewhat less informative. And then 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. Because again, with ANR, you could have a client start on March 8 and because they're a biweekly client, they go into 2nd quarter ANR and then you can have a same client start on March 8. And because they're a semi monthly client, they go into 1st quarter ANRR. And so 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. And we're looking forward to continuing that strategy. Okay. Well, can you tell us if ANRR grew this quarter? I mean, we know there is a pull forward last quarter of $10,000,000 into the Q4 from the Q1. So I'd anticipate that you didn't get the kind of growth you had seen anywhere near that. But share. 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 $10,000,000 pull forward, ANRR grew as reflected in our Q2 guidance. Okay. Okay, cool. Thank you very much. Now with the $10,000,000 pull forward, it would have been another record piece. But again, we're trying to move away from that. I did. I totally understand, Jeb. That last those last comments are very helpful. Thank you very much. You bet. Our next question comes from Mark Murphy from JPMorgan. Please go ahead with your question. Yes. Thank you very much. And I will add my congratulations. So 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? So 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. And so 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. But it would be extremely uncommon. And a matter of fact, I don't know the situation where we didn't at least replace 3 or more. Now 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 reporting or another type of Cognos or reporting tool within their database as well. And so when you're talking about replacing multiple systems, there's a lot there that we could look at. Okay, great. And 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, so just the dynamics that keep clients engaged and keep them sticky and driving the retention rates. Are you so 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. I mean, we've definitely well, let me answer it this way. I mean, 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 might not have, even though they might have everything, they might not have used everything in the beginning. And I think it's important that clients get what they pay for and that they're using everything. And obviously, usage increases retention as well as it just makes it easier for everyone else to use the product, specifically their employees. And so that's the way we look at it. And we have experienced a greater client usage and greater confidence, client confidence in the product recently and as we move forward. But that's a strategy that a very specific strategy for us that we've undertaken as something we view 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. And so I just wanted to drill into that. Can you provide any more color or any more texture in terms of what you're seeing? Is it are the sales teams maturing more rapidly than in the past? And just, 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. But is your gut feel when you make that pipeline comment, is your gut feel that the new bookings trajectory would be pretty healthy here going forward? I mean, 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 5 more mature in Q1 this year because we had 5 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 went we had a couple of reps to a 1,000,000 and we had $3,000,000 or $4,000,000 to $1,000,000 And now just got back several did $1,000,000 and several did over $1,500,000 And so we're just seeing them sell more and more and more. And so 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. And so, yes, I mean, our pipeline for new clients remains very strong. Okay, great. Thank you very much. Thank you. Our next question comes from Michael Nemerov from Credit Suisse. Please go ahead with your question. Hey, guys. This is Alex on for Michael. Thanks for taking my question and 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 prior years where you typically launch all of them in the Q1 of each year? And 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, 6 new offices next year? Thanks. Yes. And so this year was the most offices we've ever opened to date at 6. Obviously, there's a lot of the year left, and as we continue throughout the year, we'll make 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 and we've had that in the past. And so and we look forward to continue that. As a general rule and what we've been consistent with is not talking about those cities that we're going to open or how many. But it is true, this was our 1st year to open up 6. What's also true is something you pointed out is that for the last 3 years, we've opened them up in the Q1. Now in years past, that hasn't always been the case. And 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. 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 5 more mature from 2014 into this quarter. Our next question comes from Brendan Barnickel 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 digit for the year, should most of that be in Q1? We haven't broken that out specifically. As far as that goes, I mean, that's a good question, but we have not broken that out. I mean, definitely Q1, well, it depends on growth throughout the year of our ACA 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. And then 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. And so you would have an uptick to the extent that your client base grew, our client growth grew and employee count, which, of course, ours did throughout the year. But it wouldn't be much it wouldn't have different characteristics than what it's had in the past. Other than the ACA piece. Right, right. Understood. And then lastly from me. The EBITDA guidance suggests second half costs a little higher than we were expecting. You mentioned R and D expenses. Is there anything else we should think about? Noah, as we're looking at the out quarters for the adjusted EBITDA guidance, it would primarily be in the R and D as well as and marketing. Yes, the sales and marketing expense as well. And then anything unusual there just based on revenue or? No, just as we're ramping offices and they continue to sell at high levels. On those out quarters, as we mentioned on previous calls, those sales reps hit certain dates, so the commission expense goes up throughout the year. Yes. There are accelerators throughout the sales year, which for us starts in February and ends in January. 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 $429,000,000 in the quarter. Anything other than timing going on there? No. Typically, on the plant funds held at first quarter is a strong quarter, primarily because you have FUTA and SUDA that builds that Q1 and then people will hit those limits. But as you look at the last year, every quarter tends to increase after that Q1, it will drop off a little after the Q1 and then build back up. And this was our strongest quarter. We had over $1,000,000,000 in client funds held. Which would reflect the onboarded clients that we've done throughout the year last year. Our next question comes from Corey Greendale from First Analysis. Please go ahead with your question. Hey, good afternoon. Congratulations on the strong quarter. So I wanted to ask actually about the Q1 guidance. So you as a public company, you have a strong track record of doing at least a little better than your guidance. I think this is a new kind of standard. So can you address maybe a little more specifically what went better than you expected on revenue in Q1? Well, I mean, 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. And so that had an impact. Obviously, there was some impact for ACA forms filing and really it's the 2 that combined that gave us a strong Q1. Okay. And then on the EBITDA line, I think you beat the high end of that by $10,000,000 which is more than you beat the high end of the revenue guidance by. So what was on the cost side that you outperformed by $4,000,000 or something like that? Well, we continue to look for and gain efficiencies in every line item. And so that's a strategy of ours and that continued into the Q1. Okay. And then last one for me. On the I just want to clarify your comments on the R and D. You're talking about the R and D expense on the income statement? That is correct. And then there's about a third around 30% that we capitalized. So but that is correct on the 6%. And we should assume that, that 30% ratio will hold going forward? It depends on the projects they're working on. We capitalize certain projects. So but yes, it's been historically between 30% 33%. Our next question comes from Mark Marcon from R. W. 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 the 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? Yes. And so we've given our client retention metric each year. Last year, once again, was 91%, which it has been the same every year for the last 3 or 4 years. So we think that remains good. Obviously, we always want to increase retention and those are strategies that we definitely work As far as ACA, I mean, 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. And this is the very first year not only how it was calculated and everything else, but the first year that it's ever been filed. And there were a lot of changes happening throughout the year. And so I'm very happy with what we've been able to put out there. And 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. And so it sounds like client satisfaction with how everything went for the ACA thus far has been pretty good? Yes. I mean, yes, our client satisfaction, I mean, I can't speak for every client. There's clients out there. But from my perspective, I'm very proud of the group that we had. I'm unfamiliar with issues related specifically to ACA. And yes, 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 and so just was 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 2 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. I mean, so 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. Now, and sometimes you'll have a city that's mature, but we plucked people out of it. We 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 pulled a manager out to open up another city. And so you do have some of those factors that come into play, but 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. And then we've also been able to increase the amount that any one executive rep can sell. And I mean these numbers are getting large for us and we're excited about that and we don't know where that ends as far as a cap, but we're looking forward to continue to grow as we have in the past. It sounds like you haven't run into a cap on any one offices yet. No, I mean, we represent such a small percentage of the overall TAM. I mean, we're out there, time in the territory dictates success in most cases and we've had a lot of time in a lot of these territories. Yes. And bookings, just to be just on the ANRR comments, I mean bookings are up materially this Q1 relative to 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 Q1 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. And then 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. And 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 Baughyan from UBS. Please go ahead with your Actually, my first question was really to your last one. But 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, and then you're going to have a couple more and a couple more. And again, you're building a pipeline and a reputation within a new market typically for us, whether it's an existing whether it's a new territory in existing city or not, you're building that. And so over time, you build that. And 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. That's very helpful. And then looking at your Q1 numbers and the Q2 guidance, I mean, if you look at the difference, I mean, would most of the difference sequentially be related to forms business from ACA, W-2s and so on or would there be any other reason for the seasonal difference? I mean, the seasonal difference is the ACA forms filing to the extent it's seasonal now. Not all of the uptick we had in Q1, I would call seasonal, when we had client adds as well that impact that, especially as they come in at the beginning of a quarter. And so I would say that those contributed also. But from a seasonality perspective, we're going to have the same type of seasonality on an ongoing basis every Q1. Okay, great. And then just for housekeeping, is there a new tax rate guidance that you have for the year? What should we expect in cut? In terms of the tax rate, we had the Q1 and we would expect the full year to be a similar rate on that 35% rate. We factored in the R and D and the $1.99 deduction based on an annual basis. So unless something changes, they can fluctuate from quarter to quarter, but that should be in the range. Okay. Thanks very much. And our next question comes from Ryan MacDonald from Wonderlic 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? I mean, is it something that is maybe taking a bit longer since you're already established with a certain client base within there? Or is it been a fairly smooth transition with the 1st sales team? Yes. No, you're really not. I mean, I would go back again to it's the manager. I mean, 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. And also the cadence at which we bring reps on in a new office opening has remained the same. And so we need to secure success. We need to make sure that that city is not only mature, but solid after maturity. There's a very specific way we go about growing that. And so that's been maintained regardless of geography that we've opened up. Okay. And then just shifting to some of the deals you mentioned, a few large 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 in as you're closing deals north of the 2,000 employee range. I know you mentioned that the kind of the target market there is 50,000 to 2,000, but obviously it sounds like there is a few large deals you called out in the quarter. Is that still in the low high single digits, low double digits or are you even seeing more than that on a quarterly basis in terms of deal sizes? Yes, 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. And so 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. But we're still staying very consistent with what our target market is. Okay. And then 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? And from a compliance burden standpoint, do you think 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 mean, I can answer that question. From what I see here right now, I would say no. I mean ACA has very specific filing requirements. The overtime laws are more of a labor piece to it, but they will have fines. And so it will be important for people to do it correctly, but I'm unaware of a forms filing piece to it. So 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. And then 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 but we don't have all the detail on that yet. But 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. And for most companies, labor is their largest expense. And so 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. And so nothing's been rolled out specifically of exactly what the number is going to be, but we do think it's going to be changed. And this isn't a new threshold or a new law. I mean, 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. And 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. Well, 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 11 and also at the JPMorgan TMT Conference in Boston on May 24. We hope to potentially see all of you either there on the road in the coming months. And 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