Hello, and welcome to the Paycom third quarter fiscal 2014 results teleconference. All participants will be in 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, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. At this time, I'd like to turn the conference over to Mr. Craig Boelte, Chief Financial Officer of Paycom. Mr. Boelte, you may begin.
Thank you. 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. When 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 final prospectus that was filed with the Securities and Exchange Commission on April 15th, 2014. You should refer to and consider these factors when relying on such forward-looking information.
We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results is currently available in our press release that we issued after the close of the market today, which is also located on our website at www.paycom.com. I will now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad?
Thanks, Craig. Welcome to everyone joining us today for the call. We had strong financial results for the third quarter of 2014. Our total revenues of $36.6 million grew 42% from the comparable prior year period. Highlighting our success, annualized new recurring revenue, or ANRR, was a record $14.9 million in the third quarter of 2014, up 52% from the comparable prior year period. As a reminder, ANRR is the annualized amount of the first full month of already onboarded new recurring revenue, and we view it as a robust indicator of our future revenue. Our ANRR growth is a testament to both our new client wins and also our ongoing success in bringing on larger clients. It reflects the growing demand for our industry-leading software solution.
We've made great progress so far in 2014, checking off several of our goals as we strive to become the leader in the payroll and human capital management industry. From our five new sales teams to our ongoing application introductions and enhancements and our initial public offering, our momentum is strong and growing. We are taking active steps to ensure that this momentum is sustained through the fourth quarter and beyond. Regarding our cloud-based SaaS solution, we are relentless in our efforts to ensure that our solution remains best in class. We continued to drive our software development in the third quarter of 2014, with adjusted R&D increasing approximately 100% on a year-over-year basis. Our software efforts are helping drive our results. We continue to see examples of clients turning to Paycom when competing offerings lack the functionality and ease of use our solution has.
I'd like to spend a few minutes discussing an upcoming enhancement to our solution that we believe will drive substantial value to our current and future clients and also drive growth for Paycom. As you know, the Affordable Care Act, or ACA, was a transformative piece of legislation in this country. The requirements imposed on individuals and organizations are significant. At Paycom, we quickly realized that our clients had many questions about how to obtain and maintain compliance with the ACA. Our early responses made Paycom a trusted resource for the ACA in the payroll and human capital management industry. We've been a leader for some time in providing education and timely information to our clients and HR professionals alike. More and more businesses are turning to Paycom for our expertise in navigating the ACA. In addition to being a trusted resource of ACA information, we also provide solutions.
Because of our proprietary SaaS platform, we are able to change and update our applications to meet the ever-changing employer mandates. In fact, I'm pleased to share with you that this Thursday, we are releasing an industry-leading ACA solution. This comprehensive solution will encompass robust functionality, empowering employers to navigate one of the single largest changes to the healthcare system our country has ever seen. Paycom's new and existing clients that utilize our payroll, time and attendance, benefit administration, and HR management applications have the resources they need to be fully compliant with all ACA employer-mandated requirements. With this functionality, the clients will be able to deploy the information needed in order to remain ACA compliant. We believe our answer to the ACA mandate is unparalleled. This upcoming development is just one of the ways that our R&D investments are resulting in innovation.
Paycom is helping HR professionals evolve into a strategic role and become a valued resource to the C-suite. In our experience, we are seeing that potential clients cannot find the functionality they require with competing offerings. If you want an easy way to do it all, including a full-service payroll option, Paycom is the best solution. This value proposition is resonating with current and prospective clients, as evidenced by our 52% ANRR revenue growth. I would like to share with you a few examples of some new client wins from the third quarter that illustrate the breadth of the appeal of the Paycom SaaS solution. These new clients hail from very different industries and geographies, indicating the broad success we are experiencing in the marketplace. First, we signed a parking solution provider with nearly 2,000 employees, converting them from one of our large competitors.
This client had been maintaining five separate systems. They were excited to switch to Paycom, as they were looking for an innovative partner that can grow alongside them. Next, we added a restaurant chain with multiple locations and close to 2,000 employees. This client had been handling their payroll and HR needs with an in-house solution. The risk mitigation and clear benefits from automation were appealing to this client. Finally, we were excited to bring a regional health insurance provider with over 1,500 employees onto the Paycom solution. This company was utilizing one of the other SaaS provider solutions and was having issues with maintaining and integrating disparate data and systems.
We are particularly proud of this last deal, as it was generated by one of the five new sales teams we recently launched at the beginning of this year, and this shows how quickly our teams can get up to speed. In addition to our leading SaaS solution, our go-to-market strategy is one of the keys to our success. The success of our sales organization continues to improve as we become more seasoned and as word spreads regarding the power of our solution. As an example, our Tulsa, Oklahoma team is on pace to achieve nearly $2.5 million in ANRR this year. This achievement is even more remarkable when you consider that the city of Tulsa has a population of approximately 440,000.
When you compare that to a city like New York, where we currently have a single sales team just now reaching maturity, we believe the runway for adding new teams to current cities is long, and the potential for growth of mature teams is also substantial. We also have had consistent success with our new sales teams. We are continuing that trend and are laying the groundwork for additional new sales team launches soon. We have deployed our office group to sign leases, and they are setting up office space for the new sales teams we will be announcing very soon. It is our strategy to deploy as many sales teams as we can to provide a platform for our future growth. We will do this while also sustaining our current growth and, just as importantly, remaining profitable.
On a more personal note, I want to mention that I've spent some time visiting our sales teams around the country. I am pleased to report that the excitement level in the field is strong and growing. Our sales associates recognize that they are armed with a highly compelling solution and are in front of a sizable opportunity consisting of thousands of potential clients, all of whom can benefit from the capabilities of the Paycom solution. We are continuing to ensure our sales team members have the most powerful ammunition, as evidenced by our upcoming ACA offering, as well as several other enhancements to our solution. In conclusion, our forward progress continued in the third quarter of 2014. Clients are embracing our solution with enthusiasm. Our 42% revenue growth, as well as our outperformance in ANRR with 52% growth, is evidence of this success.
Additionally, our software development productivity was impressive. We are optimistic as we look to execute against our opportunity for continued growth and to lead the payroll and human capital management industries with our cutting-edge cloud-based solution. We continue to believe that our ability to provide a comprehensive human capital management offering created and hosted off a flexible single database architecture is a key differentiator for Paycom. With that, I will now turn the call over to Craig to discuss our financial results.
Thanks, Chad. Before I review our fiscal third-quarter results and our outlook for the fourth quarter and fiscal 2014, 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 initial public offering. A reconciliation of our GAAP to non-GAAP results is included in a table on our press release. As Chad highlighted, we saw continued robust growth in the third quarter. Total revenues were $36.6 million, representing year-over-year growth of 41.7% from the comparable prior year period. While our growth was primarily driven by new client additions by our mature sales teams, we're also starting to see additions from our more recently opened sales teams.
Additionally, we continue to increase the average revenue per client as we continue to onboard larger clients. Within total revenues, recurring revenues was $35.9 million, representing 98% of total revenues for the quarter and growing 42.4% from the comparable prior year period. ANRR was $14.9 million, up from $9.8 million in the same period last year and representing 52% growth from the comparable prior year period. Total adjusted gross profit for the third quarter was $30.2 million, representing an adjusted gross margin of 82.4%. This compares to 79.3% in the third quarter of 2013. As we have detailed in prior calls, our cost of revenue consists largely of hosting and support costs, along with employee-related expenses for client support and ACH fees. The sequential improvement in gross margin was largely driven by cost disciplines across most of the inputs that make up our total cost of sales.
While we recognize a gross margin improvement for the third quarter of 2014, we also recognize the need to stay ahead of the growth on a staffing basis. We invested heavily at the beginning of the year to account for new sales team growth, as Chad mentioned, we are preparing for new sales teams in the upcoming months, and we will need to staff appropriately to handle the anticipated new business. As such, we expect overall gross margin to be similar to historic levels going forward. Turning to operating expenses, as a reminder, we pay commission to our sales reps based solely on new sales at the time of their first monthly billing cycle. This is a one-time commission paid, which we recoup over the life of the client relationship. For the third quarter, total adjusted administrative expenses were $25.4 million.
This compares to $18 million in the third quarter of 2014. As Chad mentioned, we are continuing to increase our software development staff. We continue to invest heavily in technology, with adjusted research and development expense increasing 100.6% from the comparable prior year period. Adjusted EBITDA was $6.6 million, or 18% of revenue, compared to $3.8 million, or 14.6% of revenue in the third quarter of 2013. From time to time, you will see variability in our adjusted EBITDA margin as we continue to invest for growth. Regarding the third quarter of 2014, we are starting to absorb cost of new sales teams. Non-GAAP net income was $2.7 million, or $0.05 per diluted share based on 53 million shares, versus a break-even net income or $0 per diluted share based on 46 million shares in the year-ago period.
Turning to the balance sheet, we ended the quarter with cash and cash equivalent of $18.5 million and debt of $27.2 million. As a reminder, this debt represents the financing on our corporate headquarters. With that, let me turn to guidance for the fourth quarter and for fiscal 2014. For the fourth quarter of 2014, we expect total revenues in the range of $40 million to $41 million, representing a growth rate of 33.7% at the midpoint. We expect adjusted EBITDA in the range of $5.5 million to $6.5 million, representing an adjusted EBITDA margin of 14.8% at the midpoint. For fiscal 2014, we expect total revenue to be between $147 million to $148 million, or 37.1% year-over-year growth at the midpoint. We expect adjusted EBITDA in the range of $25 million to $26 million, representing an adjusted EBITDA margin of 17.3% at the midpoint.
In summary, our momentum continued into the third quarter. We anticipate ongoing success through the rest of the year as we leverage our investments in R&D and sales and marketing and strive to deliver revenue growth. With that, we will open up the line for questions. Operator?
To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Raimo Lenschow at Barclays.
Hi, guys. This is Harry for Raimo. Thanks for taking the question and congrats on a good quarter. I have a couple questions. I guess I would just start off by asking, what kind of traction are you seeing and success are you seeing with your non-payroll modules?
Thanks for the question, Harry. This is Chad. We do see it as one solution, as we've discussed earlier. The longer we've had a module out, the more success we have, not only selling it, but also implement it and increased use. We continue to drive all products or all modules into the client base.
Good client feedback and from a competitive standpoint, otherwise happy clients?
Yes. You have to continuously develop the modules. As you put them out initially, version seven's always better than version one. We've learned a lot over the years in how we've released these modules. We've taken a lot of knowledge from that in the past, we continue to work on all modules.
Can you guys give a little bit of an update on your plans for new offices that you've talked about a little bit in the past?
Our goal is to continue to penetrate both existing cities as well as open new cities with sales teams. As I mentioned in the past, we do take existing sales managers who are proven. We relocate them to a new city or in a current city where we're going to add a new team, as I mentioned earlier, like a city like New York. We backfill them with an up-and-coming sales executive who's ready to be in management. We've identified several
managers who are ready to reload, as well as several backfills to be able to backfill those positions. As I mentioned in the call earlier, we have deployed our office sales team setup group. We are in the process of negotiating leases and getting those prepared, to be able to launch sales teams.
The five new sales teams that you guys added this quarter, were those existing city expansions or new cities?
We did not add five sales teams this quarter. Those are the five sales teams added earlier in this year, first quarter of this year. They are doing well, and we did have at least one of the examples I mentioned, of one of our current sales did come from one of those new sales teams, but they're trending nicely.
Got it. Great. Thanks.
All right. Thank you.
The next question comes from Richard Davis at Canaccord.
Hey, thanks very much. Two kind of just pretty straightforward questions. One, when we've kind of talked to companies or customers that use your product, ease of use always kind of comes out as a key factor, and I know it's about the back-end database, but is there anything on the front end that you're doing to make it easier to use? Because ease of use is always kind of a neat thing. Just more on the software development side of the house. You talked about kind of adding people. The second question would be, because when I talk to a lot of companies, like, man, it's hard to find people. You guys are doing a good job on that. Could you just kind of triangulate around finding good people? Obviously, you're doing a good job there, but help me out on that. Thanks.
Sure. Okay. On the first question, it's really, I think, understanding not only why prospects buy, but also how they're going to use the system. I think, ease of use is all about innovation. It's being able to sit down and watch people actually use the system. We're users of our own system. We do actually invite clients in. We watch them use the system. We're active in soliciting as well as documenting client feedback to make ease of use a key. The easier a system is to use, the more they're going to use it, and the stronger overall solution we've provided. As far as good people, a lot of what we've done in the past is hired good people and give them the proper training and support they need to grow.
From that, we're able to find good, educated people that want to come in and be a part of our organization. Really for us, it's finding good people that care, who are educated, and wish to be a part of this team. From there, we give them the tools through the proper training and support, as well as management needed to grow their career.
Excellent. Great. Thank you so much.
Thank you.
The next question comes from Brendan Barnicle at Pacific Crest Securities.
Thanks so much. Chad, I'm interested in your commentary on the ACA solutions, I'm curious as to what people are doing now otherwise, and what your competitors are even trying to offer in place of this, given how much it is changing.
Yeah. I appreciate you stating that the fact that ACA, it actually is still changing, there's still regs that we're looking for. A part of the ACA goes into effect 2015, with reports due 2016. There's a piece of it that goes into effect in 2016 for 2017, then even another, in 2018. Even the range changes for who complies with what piece as far as the pay or play component. So, we've done a couple of things. Number 1, it's important to mention that a lot of the information needed comes out of both a time and attendance system, because ACA is really based on hours worked to identify who those are who are full-time employees, so that we know which employers are even eligible.
there's a component for making the healthcare affordable, and in that case, you need to know how much an employee's premium is as far as what they're responsible to pay, coupled with how much the employee makes. Then there's documentation of this, including the notice of the exchange from the beginning, and that's notifying employees that they're even eligible for the ACA. With the Paycom system, we were actually able to take three of our modules that we have currently, and really, if clients have already implemented our time and attendance benefit administration and have our document storage system and onboarding process, they're really able to take that, and there's very little they're going to need to do to be able to maintain it, because we're able to grab the information from the same system and provide the reporting.
For those clients that may not have all of those systems, and maybe they haven't chosen to implement those systems yet, we have developed a system that's actually coming out Thursday, which will allow them to input the information that does not currently exist because they're not using that piece of the system, that will grab the pertinent data that we do have out of payroll and allow them to comply with the ACA mandate. Regardless of which path someone chooses, at the end of the day, Paycom will be helping clients with their Form 1095 for employees, which will be due in February 2016, for everything done for the year of 2015, as well as the employer copy 1094. There's a lot of moving parts. If you don't play, you're penalized, and there's payments, and there's collecting money for that and remitting it to the IRS.
We're still waiting on regs on that, even for who that's remitted to and how that's remitted. I'll stop there, but there's a lot going on with ACA, and we feel like what we're providing is strong.
Great. That was helpful color. Chad, and maybe this is more a question for Craig. The ANRR was impressive at 52% year-on-year growth. We only have limited numbers going back. When was the last time you guys saw that kind of growth level?
That's definitely one of the largest growth year-over-year that we've seen in the past. As we reported last quarter, we were in the 40% range on that. This was a very impressive quarter for growth.
You highlighted some of the reasons why it was better in terms of the additional products. In terms of how we think about the growth trending, should we be thinking of this more as a 50% versus a 40% type grower?
It can have some variability from quarter to quarter, based on when deals come on. The 50% growth rate was a very impressive number for this quarter, and we look forward to continuing to bring on new business.
Terrific. Thanks, guys.
Thank you.
Our next question comes from Brad Reback at Stifel.
Hey, guys. Thanks a lot. On the ACA solution, will the gross margin on that product be similar to the rest of your portfolio?
Yes. For sure, it will be similar to the rest of our portfolio. Payroll's the hardest thing we do, as far as keeping up with all the tax laws and what have you. Payroll has other components involved, depending on which state we're filing taxes with and what they'll actually accept. We're learning a lot more about ACA as far as how it's deposited and penalties may be deposited and how it's all filed and reconciled. We would expect this to be a high gross margin product as we've developed it to be.
Great. Just one follow-up, unrelated. Any reason to think that you won't have more sales teams added in 2015 than you did in 2014? Thanks.
Well, that's a loaded question there. We're definitely always trying to accelerate our growth in all areas. As opportunities present itself, we're looking to capture them. Right now, we're talking with our existing sales management staff to identify who's ready to relocate and start these new teams, then be able to actually backfill them with a strong bench we have ready to do that. As we've identified these people, we'll start opening these cities. We do believe we're ready to begin opening several here very soon.
Great. Thanks a lot.
All right. All right. Well, thanks, everybody. We want to thank everybody for participating in today's call, and we look forward to speaking to everyone again next quarter. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.