Earnings Call: Q3 2020

Nov 4, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Paycom Software Third Quarter 2020 Quarterly Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. And please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. James Stanford, Head of Investor Relations of Paycom. Thank you. Please go ahead, sir. Thank you, and welcome to Paycom's Q3 2020 earnings conference call. Certain statements made on this call that are not historical facts, including those related to 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 made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10 ks and our most recent Quarterly Report on Form 10 Q. You should refer to and consider these factors when relying on such forward looking information. Any forward looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Also during today's call, we will refer to certain non GAAP measures, including adjusted EBITDA, non GAAP net income, adjusted gross profit, adjusted gross margin and certain adjusted expenses. We use these non GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non GAAP results is included in the press release that we issued after the close of the market today and is available on our website at investors. Paypalm.com. I'll now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad? Thanks, James, and thank you to everyone joining our call today. I also want to thank our employees for delivering another excellent quarter. For today's call, I'll spend a few minutes on our Q3 2020 results and the long term drivers of our business. Following that, Craig will review our financials and provide some perspective on guidance and then we'll take your questions. I'm very pleased with our performance in the Q3 with continued strong demand for our solutions in a large and expanding human capital management market. We have less than 5% market share, which gives me a lot of confidence in our long runway. The unemployment headwinds across our pre pandemic client base remains relatively unchanged from the Q2, but our product value proposition is having a lot of success and we are plowing through the headwinds with strong new business sales. Q3 revenue and adjusted EBITDA came in at $196,500,000 $67,500,000 respectively, both ahead of our guidance, thanks to strong new client adds and benefits from operational efficiencies. Based on combining our implied full year outlook for revenue growth and adjusted EBITDA margin, we expect to hit the rule of 50 in 2020 despite being in one of the most difficult economic times we've ever seen. And I believe we will improve on the rule of 50 in 2021. Our marketing plan in the 3rd quarter delivered strong demo leads, leading to strong new client sales and we plan to continue to spend aggressively on advertising to fuel future revenue growth. The challenges created by the pandemic are exposing the shortcomings of disparate HCM systems, which are cobbled together from multiple vendors and the value proposition of Paycom's single database solution is stronger than ever for companies of all sizes, including companies well above our target range. We continue to be pulled well above our stated targeted range as larger companies look to leverage automated processes for their own employees. At the same time, our small business adds have continued to increase in 2020 as we continue to build out our inside sales force. Manager on the Go continues to gain popularity and was recently named a top HR product at this year's HR Technology Conference. We are receiving more leads and referrals as the industry shifts toward an employee usage strategy. Since the end of Q1 2020 usage of Manager on the Go has nearly doubled. 98% of all Paycom clients have deployed Manager on the Go. Manager on the Go fundamentally changes manager workflows and accelerates the speed that data moves throughout the system, which further increases the ROI of our solution and sets us up for future usage patterns that paves the way for future product innovation and automation. DDX usage continues to trend upwards towards the 100% mark, up from the low 90s. In July, we changed our sales procedures to ensure that new clients commit to 100% usage. We are now at our highest DDX usage rate since launching the industry's only software of its kind last year. CEOs and HR executives continue to see the savings from an employee's direct relationship with the database. As a reminder, when an employee makes a data change themselves, the company saves $4.51 and the savings are calculated in real time using the DDX. We are extremely ambitious with our product roadmap and we are continuing to invest in R and D. The pandemic's impact on our pre pandemic client revenue remains stable and it's unclear if or when those same clients will add to their employee counts. When we reported earnings in August, we said that without a catalyst, we wouldn't expect employee counts to improve and thus far it has not improved materially nor has it gotten any worse. As we work through these unique times, we will continue to remain focused on 3 controllable activities, providing world class service to our clients, rapidly developing new technologies and increasing the number of new clients added to our platform. Our execution along these three fronts has been exceptional. Based on the strength of our new client revenue trends, differentiated value proposition, less than 5% estimated market share and the effectiveness of our marketing and advertising campaigns, I'm confident we can deliver even stronger full year revenue growth next year on top of our newly established base even without any improvement in our pre pandemic clients' employee base. The digital transformation for businesses is accelerating and our investment to expand our market share is working. Leads continue to be driven by users, employee referrals and our investments in advertising and all are up year over year. We are putting a greater distance between our product, value proposition and that of our competition and we believe we are the clear choice for those seeking a more efficient way to manage HCM needs. I'll stop there and hand it over to Craig to review the financials and guidance. Craig? Thanks, Chad. Before I review our Q3 2020 results, I would like to remind everyone that my comments related to certain financial measures will be on a non GAAP basis. I'll briefly cover our Q3 results and trends, then I'll provide some high level comments about Q4 guidance. Last quarter, we discussed how the effect on our current client revenue of lower headcount at our pre pandemic clients represented a loss approximately $2,000,000 in weekly recurring revenue. The impact of 150 basis point interest rate cuts that occurred in March represented an additional loss of roughly $350,000 in weekly recurring revenue. To date, we haven't seen any catalysts that have materially changed this weekly headwind. Our growth is therefore largely coming from new client business. In the Q3, we generated total revenues of $196,500,000 representing growth of 12.3% over the comparable prior year period, driven by strong new business wins. Within total revenues, recurring revenue was 190 $2,700,000 for the Q3 of 2020, representing 98% of total revenue for the quarter. Total adjusted gross profit for the 3rd quarter was $166,800,000 representing adjusted gross margin of 84.9 percent. Adjusted total administrative expenses were $113,300,000 for the 3rd quarter as compared to $94,400,000 in the Q3 of 2019. Adjusted sales and marketing expense for the Q3 of 2020 was $58,300,000 or 29.7 percent of revenues, up from $46,700,000 in the prior year period. Our deliberate increase in advertising and marketing efforts over the last several quarters are translating to more demo leads and virtual meetings and increased close rates, and we intend to be aggressive in this area again in Q4 to drive further market share gains. We expect Q4 sales and marketing expense to be similar to Q3 on both a GAAP and adjusted basis. Adjusted R and D expense was $19,700,000 in the Q3 of 2020 or 10% of total revenues. Adjusted total R and D costs, including the capitalized portion, were $29,800,000 in the Q3 of 2020 compared to $24,800,000 in the prior year period. Product innovation remains a key driver of our growth and we will continue to expand our to further differentiate our solutions. Adjusted EBITDA was $67,500,000 in the Q3 of 2020 or 34.3 percent of total revenues compared to $66,600,000 in the Q3 of 2019 or 38% of total revenues. We are deliberately investing in future growth through the pandemic and believe this sets us up well for accelerating growth in 2021. Our GAAP net income for the Q3 was $27,500,000 or $0.47 per diluted share based on approximately 58,000,000 shares versus $39,200,000 or $0.67 per diluted share based on approximately 58,000,000 shares in the prior year period. For Q4, we expect our effective income tax rate to be approximately 29% and our full year effective income tax rate to be approximately 22% to 24%. Non cash stock based compensation expense was $19,500,000 in the 3rd quarter and we expect non cash stock based compensation for the Q4 of 2020 to be approximately the same as Q3 2020. Non GAAP net income for the Q3 of 2020 was $40,600,000 or $0.70 per diluted share based on approximately 58,000,000 shares versus $41,100,000 or $0.70 per diluted share based on approximately 58,000,000 shares in the prior year period. We anticipate fully diluted shares outstanding will be approximately 58,000,000 shares in the Q4 of 2020. As of September 30, 2020, we have repurchased over 4,000,000 shares since 2016 and have $172,000,000 remaining in our buyback program. Turning to the balance sheet, we ended the Q3 with cash and cash equivalents of $156,000,000 and total debt of $31,000,000 Cash from operations was $66,800,000 for the 3rd quarter or a 24 point 5% increase over the comparable prior year period. The average daily balance of funds held for clients was approximately $1,100,000,000 in the Q3 of 2020. Now let me turn to our guidance. For the Q4 of 2020, we expect total revenues in the range of $212,000,000 to $214,000,000 representing a growth rate over the comparable prior year period of approximately 10% at the midpoint of the range. We expect adjusted EBITDA for the 4th quarter in the range of $76,000,000 to $78,000,000 representing adjusted EBITDA margin of approximately 36% at the midpoint of the range. Based on this outlook, we now feel we can comfortably deliver the combination of revenue growth and adjusted EBITDA margin to hit a rule of 50 despite a pandemic and lower interest on funds held for clients. We estimate the pandemic's impact lowered our recurring revenue base by a total of roughly $90,000,000 to $95,000,000 over the last three quarters of 2020, in addition to the loss of sales earlier in the year, while we transitioned our sales organization to the work from home model. Our focus continues to be on mitigating the impact of the pandemic on our business by providing world class service to our clients, rapidly developing new technologies and increasing the number of new clients added to our platform. We have a strong balance sheet, a highly profitable recurring business model and a rapidly expanding value proposition. With that, we will open the line for questions. Operator? And your first question comes from the line of Raimo Lenschow from Barclays. Your line is open. Hey, 2 quick ones. Chad, you talked about the new business doing well. Do you have any kind of data points that kind of help us or any more commentary around that? Should you kind of help us understand the momentum that you have there? Well, I mean, our bookings and our leads, our new business sales and our new business starts have all remained at record highs. And from where I sit right now, I don't see that changing. Now that we've returned to guidance, we're focused on that piece. I do believe that you see these numbers that we've added reflected in our current quarter as well as in our guidance. As a reminder, a deal that might start at the beginning of a quarter, we would receive 100% of the revenue for that new business. And should that deal start at the middle or end of the quarter, we would receive proportionate revenue for that business, but we would receive all of the revenue for that subsequent quarters. So how deals start matter, but for us, leads have been up, sales have been up and so start. So very happy with what we're accomplishing right now. Perfect. And then one follow-up, like in your prepared commentary when you talked about COVID, you mentioned that obviously the headwind is that people have a lower employee count and since you get paid on a per paycheck basis, that hurts you. So in a way if you think about it like is a good way to understand it at the beginning of the crisis, if you were furloughed, then they didn't come back. And so you're kind of running with that gap. And then as you think about next year, as hiring starts again and the new clients that you win, you kind of fill up that gap that was created. Is that the right way to think about it? Well, we're actually going to look to fill the entire gap with new clients added. That's what we've done up to now. I mentioned that we haven't seen any material changes in our pre COVID client the impact on our pre COVID client base. And so we did mention how it was $2,000,000 anywhere from $1,950,000 to $2,000,000 of loss that we were seeing per week. We mentioned that at the end of August or sorry, at the beginning of August. And we did say that we'd seen stabilization in that number throughout the Q2. As we sit here today, we can't call out that that number has changed materially. I mean, you may have had a small impact 1 week or another of less than 100 $1,000 impact on that number to the positive. So to the extent it was $2,000,000 it might be a little above 1,900,000 depending on what week you measure. But we said in August that without a catalyst, we wouldn't expect the impact on a pre COVID client employee count to improve. And while the unemployment has improved since that date, it's still double what it was pre COVID, It hasn't materialized for our clients who reduce staff. And it makes sense. I mean, there's nothing that's really happened since August that would cause a hotel to all of a sudden start hiring their people back or restaurants or entertainment business or health clubs. So the fact is, is those businesses are more surviving. I wouldn't necessarily call them thriving at this point. And we're waiting on either an end to the pandemic or some type of stimulus before I think we'd see some meaningful change to that. So as we look into the future, we believe we've established a new base. Hopefully, we get some tailwind out of it. But right now, I'd call it more of a crosswind as it's stabilized and we're driving through that and we can get to where we need to get by adding on new clients, which I will say we've been doing, adding on new business at record pace through the pandemic. So I don't see a situation in which that stops for us as our value proposition has only gotten stronger. Your next question comes from the line of Samad Samana from Jefferies. Your line is open. Hi, good evening. Thanks for taking my questions. Hope everybody is doing well. Maybe, Chad, just a starting point, I want to follow-up on Raimo's question on new bookings. If I rewind back to 2019, the company has added about 3,000 new clients, that's about 7.50 average per quarter. I'm just curious to further frame that new bookings, is it fair to assume that you're adding more than that $7.50 per quarter, kind of on an annualized or quarterly basis exiting July into 3Q? We're just trying to maybe numerically nail down what that booking suggests. Yes. I mean, what I can tell you and I haven't called out exactly units. Units would be based on how many smaller deals we got versus larger deals. I'm more talking about the revenue generated, whether it's a larger or smaller deal, the aggregate amount of revenue that we are both selling as well as converting continues to remain strong and has been at record levels as we've continued on. Now it's gotten better, right? In the beginning, we were trying to get back to pre pandemic, which I had mentioned in our Q1. I believe I gave that announcement either the very end of April or 1 May that we had gotten back to pre pandemic sales levels after we had backed off for a little bit and kind of curled up into a ball and was kind of waiting to see what happened, we got back to pre pandemic levels. Last quarter, I talked about how that's even accelerated, mentioned that we've had our best month as I reported in August talking about July. And then what I've talked about this quarter is just the continuation of that in that we continue to get stronger and stronger in both the book sales as well as the started sales. Great. And maybe just as a follow-up to that, the commentary, it's on both you and Craig mentioned 2021 are looking out ahead to that end. I believe reacceleration of revenue was mentioned. I'm curious if you could maybe just frame that a little bit. Are we thinking when you say that, is it in terms of accelerating from 2020 levels or should we think about acceleration in the context of back to what Paycom was historically growing when we're thinking about kind of a high 20s, 30% type of grower in 2018 2019? Yes. Well, we've calculated the impact on our revenue right now. It's nobody has to guess how many fingers we're holding up. We're telling you how many fingers we're holding up. So we've already calculated the amount of the impact that that has on us. And so and we also believe it well, we know it's been stable. And so as we turn into next year, obviously, we have a 1st quarter comp that doesn't have much COVID impact on it. But as we move into those subsequent quarters throughout the year and we're lapping COVID with a new established base and added clients during this time, I feel very comfortable about our ability to get back to a very strong growth numbers with strong adjusted EBITDA numbers as well. Great. Thanks guys and glad to hear about the strong bookings performance again this quarter. Thank you. Your next question comes from the line of Yao Chew from Credit Suisse. Your line is open. Hi, everyone. Good evening. Thanks for taking my question. I hope you're all keeping well and safe. Congrats on the quarter, remarkable execution from everyone involved here. I had a question around one of the comments that ADP made on the recent quarter and it ties a little bit to that, you're mentioning around stimulus, Chad, in terms of catalyst. They said stimulus helped clients that would have fallen to bankruptcy and there remains continued uncertainty as further stimulus constrained from partial shutdowns. I want to get taken this 2 ways. Number 1, how do you think further stimulus or like thereof would have a meaningful impact on the path of recovery for your business? And 2, how do you position the business or go to market motion differently to react to the possibility of stimulus? Yes. Well, I mean, we're operating our business to succeed whether there's a stimulus or a fast end of the pandemic regardless. And so we're focused on those things we can control and there being a stimulus or there being a stimulus that actually works to drive business growth, we'll have to kind of take a wait and see approach on that. But I do think that a stimulus can bridge the gap between those businesses that may be going out of business. It could be the difference in them going out of business or their survival. As we look at the amount of revenue that we've lost per week, which again has been stable. There is an amount of business there that we've been able to identify that it has gone out of business. It's a smaller number, but there is a percentage of the hit that we are taking on these headwinds that we would not expect to come back just because it is a it's related to business closures. And that's a much smaller amount. I mean, I would say that represents probably less than 10%. It's probably in the single digits of that amount of that we've lost every week. I would say a 90% or more of it is still in business processing with a lower employee count. Got you. Super helpful. Thank you. One quick follow-up, wanted to double click on inside sales, which you called out. Can you remind us of the size and resources you've dedicated to this effort? What the learnings have been? And any particular module or need that's resonating with clients in this environment? Yes. So right now, we have 4 inside sales teams. They are fully staffed at 32 employees. Obviously, they each have managers. They focus on the businesses that have below 50 employees. We've continued to generate interest down market. Thankfully, we had inside sales before we made the shift because I would say our outside sales, they're not using the exact same model to sell that inside sales is using, but they do use a lot of the same technology and methods through which to connect. And so we've continued to grow our inside sales. Obviously, when you add a number of inside sales people much larger than what you had the previous year, you would expect to have success down market. And so we do continue to have success down market as well with our inside sales group. That's great. Thank you. Congrats again. Thank you. Your next question comes from the line of Adam Borr from Stifel. Your line is open. Great. And thanks for taking the question. Just maybe for Chad, now that we're in the typically strong selling season, just given the pandemic and the changes that we've caused, any sense on how the HCM monetizations are being prioritized relative to past years? Well, I mean, I think that our advertising is helping with that. I wouldn't say that people wake up in the morning excited about shifting over, changing over their human capital management products. It's probably about going to the dentist or making those changes. And as we've moved through COVID, I think that the pain points have become more apparent and using outdated systems where employees have multiple systems that they need to use. So actually they oftentimes go without. The shift to employee usage, I mean, that's the thing moving forward. We're not going backwards as a society and you're going to just see more and more businesses figure out that they can leverage their own employees' desires for their own benefit and receive a very strong return on the investment that they're paying with Paycom. So we're going to continue to drive that and receive those benefits. And again, the pandemic has only exposed the problems with using disparate outdated systems. And so we're focused on that and we're having quite a bit of success and that's going to continue through selling season, which for Paycoms all year round. Excellent. Thanks again. Your next question comes from the line of Mark Marcon from Baird. Your line is open. Hey, good afternoon and congratulations. Wondering with regards to the bookings that you're seeing, any change at all in terms of the composition, in terms of the source of the bookings? Are you seeing that are more that are coming from, say, regionals relative to some of the bigger competitors that are out there? And Chad, I think you also mentioned that you're being pulled up market even beyond your range. Can you expand a little bit on that in terms of what you're seeing? Sure. So as far as the bookings, they're all similar. There's just more of them. It's the usual suspects. I did call out that we do continue to be pulled up above our targeted range or our stated range, I should say. And that's been happening I mean, that's been happening since we went public. We continue to be talking about being pulled up above our range. And so that's continued to happen during this environment as well. And so we have both that as well as I mentioned earlier, we have built out our inside sales group much larger than what we had this same time last year. So you would also expect that we would be having some success below 50 as well as that was somewhat traditionally I don't necessarily want to say ignored, but it was not a focus for us. And now we have a group and several teams that are making that a focus down market. It sounds like you're being barbelled a little bit in terms of being pulled up and down, which is great. Can you talk a little bit about you mentioned that the close rates are improving. How much and what do you attribute that to? Yes. We're not going to call out exactly the specifics on that improvement. We've always had better close rates as you measure them over time. Your 1 month close rate selling a deal is going to be different than your 3 month close rate. Again, if you give a deal a little bit longer, you might have a higher close rate. But I would say the one thing that I would point to that I believe that's really helping us with our close rate is the fact that we are catching a more interested and knowledgeable prospect. We're hitting the airwaves hard with our advertising. We've been doing quite a bit on digital as well as we've had significant word-of-mouth from employees that go from one company to another and then bring us in. And so we are when someone's calling us now, which again is different, oftentimes most of the business we've brought on, we've called. And I'm not stating that still isn't a large part of our business. But one thing that has gone up as a percentage has been the number of call ins or interested parties that are requesting those demos. And they're just more educated on what our value proposition is going into it. And I think that that's leading to a higher level of close rate for us right now. Great. And then one last one. Just it sounds like you're getting more logos, but can you talk a little bit about upsells to the extent you're seeing them? Yes. We continue to upsell to current clients. It's never been anything that we've ignored. We've always done that aggressively and that remains the case today. No change in percentage from upsells to current clients versus new client or new business revenue that we're onboarding to our platform. So no changes in percentage there. We're not selling more we're not upselling more to our current clients now as a percentage of new revenue added than what we've done in the past. Great. Thank you very much. Your next question comes from the line of Daniel Jester from Citi. Your line is open. Great. Thanks. Taking my question, everybody. First, maybe a question on margins. Year to date, EBITDA margins are down, I think, about 4 points compared to the same period in 2019. So can you just reflect like how much of this is just the float revenue going away versus other factors impacting the business? And as you think about the margin structure of the business going into next year, kind of what are the puts and takes we should be thinking about in terms of the potential to improve off of this year's level? Sure. So the EBITDA margin is down, like you said, about 4 points. I mean, that's primarily from the float revenue that we were receiving, which is a high margin piece of our business as well as the fact that our current clients are paying less employees. I mean that's also a piece that impacts that margin. So the things we've been extremely proud of is just our gross margin stayed fairly consistent even through this. And we're seeing efficiencies throughout the organization, both in our servicing organization and our onboarding as well as just the sales organization. So as we move into 2021, we talked about hoping to improve and obviously the margin is one area we're going to continue to focus on. But the other thing is we're super focused on revenue growth. So we're going to spend to in terms of sales and marketing for that revenue growth as well. And then I know that implementation is a very small part of the revenue base, but it is growing at half the pace on a year over year basis as subscription revenue. Given sort of the commentary about the strength of new bookings, should we see improvement in the growth rates in that implementation revenue line in the coming quarters or how should we be thinking about that? Thanks. Yes. As a reminder, the new booking the setup revenue that we charge clients, we capitalize that and recognize that over a 10 year period. So the amounts that we're charging for that setup goes into the deferred bucket. So you're not going to see significant changes in that on the revenue line. As a reminder, there's other items in that line as well. We have certain hardware sales as it relates to time and attendance and some other items as well. Great. Thanks guys. Appreciate the color. Your next question comes from the line of Brian Schwartz from Oppenheimer and Company. Your line is open. Thank you and thank you for taking my questions this afternoon. Chad, a that you're doing or the higher deals? Have they changed at all here in the virtual world? No, not really. I mean, we did have a transition period, right, of deals that we had sold January, February March that had a certain expectation of what conversion would look like. And then we changed what all that looked like. I mean you were expecting someone to come out to your office. You're expecting different training on-site. I mean there was a lot of things that we had to change. But as we sit here today, that's all filtered itself out. Any pushes that we had through into the second quarter, we started to all see that come back. And as we sit here today, our no start rate for business sold is not unlike it was last year. So they're very similar. So I think as we moved throughout the quarters, you did have some pushes. You had a few delayed starts just because we had to really go back and not going to say resell because we never really lost the deal, but we did have to acclimate them to a different process mindset of implementation. And we've done that and those deals have been onboarded. So as we sit here today and as we look forward, is nothing to call out on any type of either elongated time to go live or accelerated time to go live. And if I could ask you the follow-up question, Chad, just thinking about it and moving ahead. Do you feel that you have enough sales capacity here? You said you're fully staffed with the inside sales, but clearly, what you're talking about customers to be able to continue to deploy these new customers and achieve the high satisfaction levels that the company has always been able to do? Yes. I mean, you always want more salespeople. We're continuing to add salespeople. I think one thing we've been able to do in the beginning, again, we had to shift over to the new hiring and we started doing that early this summer. Hiring and we started doing that early this summer where we started getting back to that. Our sales reps are having a lot more success right now. We're having a significant productivity gains amongst our same sales organization that we've had. Our office opening strategy is still intact. We still do plan to open up offices as it makes sense. Also, right now, every city is open. So, we're able to really sell from anywhere right now. So I see us returning back to the same model we had in the past at the appropriate time. We still may receive some efficiencies through us, I don't know yet, then we're going to continue I don't know yet, then we're going to continue to sell that way even though we may be back in our offices, selling from those desks instead of selling from our home desks. So we'll kind of see what happens. But so far, with the exception of the negative impact that the pandemic has had on our current client pre pandemic revenue as well as interest rates, With the exception of that, every impact that we've had as we've gone through this has really been positive. And we're very happy about what our future looks like right now. Last question. And really that really is driven by the value proposition. I mean, that's what's driving everything. We have the right value proposition for business and they can make that shift very easily right now and start they can receive a product that works for them and pays them back versus a product they have to work and that's costing them money. And so that's really what's driving it. Last question for me for Craig. I think you got this question here before, kind of just more directly about thinking about the margin trajectory for 'twenty one. I'll ask it a little bit differently because you've given a lot of color here so far. Are any of the savings that are happening today, let's just say T and E from having the remote work force. Are any of those sustainable here as we think about 2021 or any other items such as leases? Maybe you can share with us how you're thinking about the Paycom organization returning to work and any color on that would be helpful? Thank you very much. Yes. I would say on the travel and entertainment, obviously, that's at a much lower level than it had been in the past where we would bring entire sales organization in to train. I mean, a lot is going to depend on what it looks like next year. I mean, once we if we get back to normal and we'll see those numbers start to go up some. So I think that's what I would say on that. On the leases, we're still evaluating that. But at this point, we're continuing kind of as normal until we see what it looks like in 2021. And just to kind of dovetail off of that, we haven't been expanding our adjusted EBITDA number, our adjusted EBITDA percentages by pulling levers. We've been doing it by selling profitable business that all follows the same margin profile. And so the more business we sell, over time, we are receiving that benefit of the increase of adjusted EBITDA. And so when we look into next year, saving money on travel and entertainment and those types of sales, I mean, we're not going to spend poorly on it, but that's not really our objective is saving that. Our objective is to continue to accelerate revenue, continue to onboard clients and capture more than the 5% of the market that we have today. And that's what's going to drive our margins as well as our revenue growth into the future. Thank you very much. Your next question comes from the line of Alex Zukin from RBC. Your line is open. Hey, guys. Thanks for taking my question and congrats as well. Maybe just the first one for me. Chad, can you remind us what's vertical exposure for the business? You mentioned one of the reasons that you didn't see kind of the same uptick from employment bouncing back because of the hospitality, travel, maybe restaurants. Can you remind us what's the exposure rate there? Yes, we're industry agnostic and so we've said that. I guess you could somewhat calculate the exposure rate in that we've told you guys exactly what the weekly impact to our revenue has been from that those same clients having employee attrition, layoff furloughs or what you have. But I would say it's a little bit different everywhere. Some states have restaurants doing better than others. Some states are doing better at restaurants because the weather is conducive for their business and potentially if the weather does not hold up, we could see a different situation. But what we've seen up to now is people were being responsible early on with preparing for the pandemic, at least our clients. I think I mentioned early on, I mean, when we were reporting Q1 that we do think many of our clients took their hits early because we started to see some of that in mid March as they started to make those moves. So I'm hopeful that people start to add back and I think that they will at some point. We're just not waiting on for that. We're not just not waiting on that to happen or being dependent upon that for our future growth initiatives. That makes total sense. And I guess, do you expect walk us through because you've seen a round of stimulus get enacted and if you can kind of share with us from a timing perspective, if we do get stimulus at some point very early in the year, when would you expect that to Yes Yes, I don't know. When you look at stimulus, I would say even stimulus in the last package had a much larger impact on small business than what it did midsize and large business, at least from my standpoint of kind of what we saw, who took what, if you will. And so I just think all that just depends on what type of stimulus they're putting out there. If they do a stimulus that's tied to quality jobs of people producing quality jobs at certain amounts of pay you give your stimulus based on that or even a stimulus that has some reimbursements based off of the company adding quality jobs, it's probably going to be a pretty nice tailwind for us. If the stimulus comes and sending checks directly to individuals that are at their house, we could have a tighter labor market. So we're just going to have to see from that. But again, I'm going to separate us from the impacts of employment. The changes in employment that have impacted Paycom, we've seen those stabilize now for, I mean, 4 or 5 months. And so as we head throughout this quarter and definitely as we head into next year, we're expecting that to be stable and then we're expecting to be able to hit our growth objectives through adding new clients to our platform, which has really we've been doing a good job right now. And I think as we lap COVID with COVID, we're going to be in good shape. That makes sense. And then maybe just a final one. When you talk about bookings trajectory, you talked about new record bookings this quarter. Last quarter, I would say, you talked about record months as well. When I hear you say faster sales cycles, more informed buyers, more effective and efficient go to market, is it fair to ask you then, are you seeing accelerating sequential bookings growth 3Q to 2Q and if you kind of stay on cadence, you should see the same things 3Q to 4Q? Yes, I want to get away from calling out bookings each time. I have been calling out bookings because we weren't giving you much of anything else. And I thought that, listen, I at least want to tell people that even though we're not guiding, bookings are going well. Now that we've returned to guidance, I don't want to keep talking about bookings, but I have said this on this call that we've been having record bookings as we've gone through each of these quarters in COVID, last quarter wouldn't have been any different and our expectations for this quarter for bookings that we're entering in wouldn't be any different than that. Perfect. Thank you, guys. Your next question comes from the line of Ryan MacDonald from Needham. Chad, first one for you. When you look at the new client wins that you've had in the strong bookings, what sense do you have of the capacity that these clients are client, but trying to get a sense of what the potential uplift could be once we're client, but trying to get a sense of what the potential uplift could be once we're starting to see these new clients start hiring again? Yes. I don't have a good feel for that. I mean, I look at it, a client that onboards with us with 500 employees, has 500 employees. Will they grow to 1,000? Maybe. Could they be 200 next year based on other factors that may not even be COVID related maybe. And so as we go and we add clients, we don't try to get that myopic in what the future could bring because that's not controllable by us. And so what is controllable is the number of new clients we add onto our platform that's completely controllable by us. We only have 5% of the market. What's controllable by us is continuing to expand our value proposition and therefore the return on investments for our clients. And then also what's controllable for us is the world class service that we provide in an effort to keep all of our clients that we're currently choosing Paycom. And so that's what we're focused on getting more. Hopefully, we're selling some clients that are in industries that are growing, but that's not how we're going to market right now. Got it. And Craig, just a follow-up for you. It looks like free cash flow was quite strong in the quarter, not only from a margin perspective, but also conversion rate from even better free cash flow compared to last few quarters here. What drove the strong performance there, if anything, that you call out? And how sustainable is this from a margin perspective as we look ahead to Q4 and next year? Thanks. Yes. So we had a very strong operating cash flow for the quarter as well as free cash flow. Obviously, some of that's timing on some of those accruals. We did have a little benefit from a tax rate for some items that were specific to the quarter. But overall, we felt like it was a good quarter in terms of operating cash. And then on free cash flow, our CapEx was fairly similar to where it was last quarter. So, I'm excited about both of those. Great, thanks. Due to time constraints, we ask that you please limit yourself to 2 questions. And your next question comes from the line of Siti Panagrahyan from Mizuho. Your line is open. Thanks for taking my question. I just want to dig into your commentary on that rapidly investing on the new product and technology. So Chad, you talked about 2 products like DDX and Manager Go, which basically increase your stickiness and maybe ROI for your customer. But during this pandemic, have you come across any kind of customer needs or requirement that could potentially even drive new revenue opportunity cross selling into your base like On Demand Pay or any of that kind of product? Sure. Well, we've seen significant usage patterns be deployed around learning management. We recently upgraded and released our enhanced background checks product into the market, which has actually allowed us to eliminate some partnerships that we had on the back end. And we've seen that impact go out there. But again, manager on the go, I would say, well, DDX last year and then manager on the go being so significant this year has allowed managers to really improve the data flow and the timeliness of it. And it's been no surprise for anyone that we are trying to automate this industry because it needs to be automated. It's complex. It's high risk, low reward. If you get it right, who cares? You're supposed to get people their benefits. You're supposed to onboard them. You're supposed to get them their checks correctly. So nobody really cares if you get it right. And if you get it wrong, there's significant penalties. And so the more you can automate these products, the bigger win for the business. And so that's what we've been focused on throughout this. And each product has a plan and as we work out those plans, we continue to enhance each one of the usage patterns for each of those products. And so we've been doing that through the pandemic across the board on all of our products, whether it's performance, whether it's onboarding, whether it's learning management, background checks, you've mentioned a couple of products that we've added. And so we'll continue to do that. And we also look forward into the many product initiatives that we'll be rolling out here into the future. Your next question comes from the line of Bryan Bergin from Cowen. Your line is open. Hi, guys. Good afternoon. Thank you. I wanted to follow-up on demand. So it sounds like you've had good success across each sub segment of the market. Can you dig in around your ability to serve the larger clients? We get some questions around enterprise client ceiling. So any metrics you can share on the scale of the largest clients or any details to better gauge your ability to serve that top end? Well, I mean, we're serving clients that triple our stated range. If you're talking about that from a top end, we have a direct focus on clients that we prospect and the primary reason for that is we do believe that the way they make a decision fits with the way that we sell. Our salespeople at Paycom sell every week. And so we definitely choose those prospects. We've continued to be pulled up market as businesses realize it doesn't have to be as difficult as they've made it in many cases. And so there's usually more decision makers the further up market you go, I bet you're also typically dealing with more product, but less functionality that they've deployed. Oftentimes you run into somebody that has a 15,000, 30000 employee company. Dollars 30,000 employee company. They deploy technology. They've spent $2,000,000 on it and it can do 3 things. It's not really a strategy. So I do see us over time continuing to be pulled up market because I do think we're a better fit for businesses that just don't want to work that much on just software. It was a necessity 15 years ago, Might even say it was a necessity 7 years ago. It's just not necessary right now. So I see us continuing to have success up market as well. Okay. And then on sales and marketing, I think it was slightly lower than you had projected there. Is that just a function of greater efficiency on the spend you were making? Any color on the better variance there versus outlook and the learnings you can share about sales and marketing targeting and efficiency in this environment? I would say on the sales and marketing, some of that was more timing, slightly lower Q3 and in Q4 we called out what our Q4 spend is. But we're going to make sure that what we spend in marketing that it's efficient and that we're getting the return that we expect with that as well. Yes, we account for every dollar in marketing. So I mean, if we're spending an advertising dollar, we need to get that back. So and thus far, that's what's been happening. All right. Thank you. Your next question comes from the line of Irvin Ramnani from Piper Sandler. Your line is open. Thanks for taking my question. One of the things you mentioned was the continued progress you're seeing winning from traditional players. Are you seeing any of these traditional players enhance the technology to become more competitive? Or are you still able to keep the distance from them? Yes. So I mean, I've never thought our competitors have been asleep at the wheel. It's been a very competitive industry for a long time. I think that you've seen us while we have for sure delivered a different value proposition in the beginning. It was I don't know anybody that beat us to the Internet. I don't know anybody that beat ADP to second. Then you looked at the single database solution that we had built out, that was different than what our competitors were doing, which is primarily a sell best in breed, buy best in breed and integrate. And now we've shifted to an employee strategy in which you have to be online and you really have to have a single data base. Employees don't want to use multiple systems. And so we continue to differentiate our product by the ROI that's delivered to the client. If you want to receive the ROI on a software investment similar to Paycom, I mean, you're going to have to use Paycom. We're not going to beat our competitors at being them and they're not going to beat us at being us. And so we're going to continue to widen the competitive moat as it revolves around usage and we're going to continue to automate even more and more as we move on. Great. In the past, you have shared a metric on aggregate cost savings by using your DDX. Are you able to share some kind of similar stat in terms of aggregate savings from your clients using BDX? Well, so BDX, what BDX does, it actually measures the savings each time an employee makes a change in the system versus if HR makes the change for them. The thought is that any change that an HR department makes, HR payroll, benefit department, hiring department, any change they make for that employee and or applicant in their system is duplicative. They did not read that applicant's mind. They did not read that employee's mind. And so that employee and or applicant could have made that change themselves if they had had easy to use technology because that employee is making all changes themselves everywhere else in their daily lives, why not leverage that at work for the business. And so what the DDX does is it adds that up. And if a client, it wouldn't be uncommon for many of our midsize clients to make 100,000 changes in a month. And if 2,000 of those changes are made by the HR department instead of the employees, That's a company that has a 98 DDX, 98% DDX rating, but they made 2,000 changes. HR made 2,000 changes in the database. So I mean, it's going to cost them $90,000 in hardsoft cost savings that they left on the table because they did the work themselves. And so that's a calculation that was put together by Ernst and Young. I believe when it first came out, it was $4.39 It was updated earlier this year for $4.51 And as we move into next year, I'm sure it will be updated at some point again. Your final question comes from the line of Josh Beck from KeyBanc. Your line is open. Thanks so much for taking the question. I just wanted to ask a little bit about the return on sales and marketing spend. It seems quite favorable when I hear your commentary about new bookings and market share gains. So really as you look into next year and if we remain in this work from home environment, is that an area that you want to continue to lean into? Just would like to hear your framework and how you would evaluate that investment as we go into next year? Yes, for sure. We'll continue to lean into it. I mean, we're having success. There's been times throughout the quarter that we realized that we can spend more, but we're not necessarily going to get more. I mean, sometimes you can spend double and it only goes up 5% on different advertising as you go through this. We've become smart on this and really how we've done that is by measuring every dollar that we're spending. Obviously, we had more powder in the keg this quarter. And if we had thought emptying that out would have brought us more leads, then we would have 100% done that. I'm not interested in training a percent of adjusted EBITDA for a percent of growth. We're just not going to train a percent of adjusted EBITDA for a percent of nothing. So we've been focused on it. Leads still remain at record levels. Sales remain at record levels and new client sales are remaining at record levels right now. So having a lot of success and looking forward to next year and Q4. Good to hear. Really helpful. Thank you. All right. This brings us to the end of our question and answer session. Mr. Chad Richardson, I turn the call back over to you for some closing remarks. All right. I want to thank everyone for joining us on the call today and all the Paycom employees for their continued commitment and execution. Over the next couple of months, we'll be at several virtual conferences this quarter, including Stifel, RBC, Needham, Credit Suisse, as well as Barclays. We look forward to speaking with many of you again soon and appreciate your continued interest in Paycom. Thanks, operator. You may disconnect. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.