Earnings Call: Q1 2020

Apr 28, 2020

Good afternoon. Welcome to the Paycom Software First Quarter 2020 Quarterly Results. All participants will be in listen only mode. Being recorded. I would now like to turn the conference over. Please go ahead. Thank you, and welcome to Paycom's Q1 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 facts could 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 the course of today's call, we will refer to certain non GAAP financial 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. Paycom.com. I'll now turn the call over to Chad Richardson, Paycom's President and Chief Executive Officer. Chad? Thanks, James, and thank you to everyone joining our call today. First, my thoughts go out to those whose health has been impacted by the pandemic. We also sympathize with businesses who are faced with unavoidable reductions in their workforces and the employees who have lost their jobs. Additionally, I'd also like to extend my sincere thanks to first responders, medical personnel and those involved in the supply chain who are on the frontline. Finally, I want to thank our employees who continue to execute while working from home and also our Phase 4 team who remain working at the office. For today's call, I'll spend a few minutes on our Q1 2020 results and some notable achievements. Following that, Craig will review our financials and provide some perspective on financial trends, and then we will take questions. I am particularly pleased with our performance in the Q1. 1st quarter results were strong driven by our high margin recurring revenue business model and continued strength of new business adds. Q1 revenue of $242,400,000 came in above the high end of our guidance range in spite of the effects of unexpected interest rate cuts and an unemployment spike in March. Adjusted EBITDA of 117,900,000 dollars in Q1 was also above our guidance range as a result of record gross margins. We entered the year with strong momentum Even though the month of March was impacted by declining revenues from our current client base due to the effects of COVID-nineteen, we continue to see strong addition of new clients. Volumes compared to the same period last year, which we are driving through our marketing efforts and the strength of our value proposition. The pandemic is exposing scenes created by the disparate systems and that is creating a higher demand for the Paycom single database solution. I am pleased with the incredible results and collaboration I'm seeing across the sales and marketing organization. The appropriate usage of human capital management solutions has never been more important than today and we will continue to invest and innovate to strengthen our position. More employees and managers are accessing the system in HR and employees are doing less paperwork and manual input than ever before. We continue to see strong usage patterns of our products as measured by our direct data exchange or DDX, with usage scores well above Q4 levels. DDX numbers continue to be strong and improve as companies adopt a full employee usage strategy. When employees have a direct relationship with the database, the employee wins, the company wins from real savings estimated at $4.51 per HR task or data entry point as well as higher efficiency and overall employee satisfaction. In February, we launched Manager on the Go, the tool built into Paycom's existing mobile app, which empowers leaders with 20 fourseven accessibility to essential manager side functionality of our solution. I said at the time that I believe this was the single most important product release we had since the launch of our employee self-service app and while we are still early, it's proving to be very popular. Within the 1st 12 weeks since its launch, Manager on the Go has significantly exceeded the employee self-service product adoption over the 12 week comparable post launch period. This easy to use functionality distributes approval responsibilities more broadly and removes impediments to quick data flow and managers across our client base are embracing it. Once managers use Manager on the Go, the vast majority of them fundamentally change the way they interact with our solutions and actions previously completed on the desktop are now completed on the mobile app. I'm very pleased with the trends we are seeing. While many of our clients are unfortunately experiencing significant fluctuation in their employment trends due to COVID-nineteen, we 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. I am more confident than ever than our products value proposition and go to market strategy. I've been saying for some time we may be early with our strategy, but we're not wrong. And today, we're no longer early. The digital transformation for business is accelerating. I'd like to thank all of our employees for their grit and the winning spirit they display every day in this changing environment. With that, I'll turn the call over to Craig. Craig? Before I review our Q1 2020 results, I would like like to turn the call over to the operator for questions. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. We plan to get back to providing annual and quarterly guidance as soon as unemployment trends become more predictable. I'll briefly cover our Q1 results, and where possible, I'll provide some high level comments about our financial outlook. Our approach is to be as transparent as possible based on what we know now. As Chad mentioned, we are very pleased with our Q1 results, especially given the unexpected interest rate cuts and spike in unemployment from the pandemic. In the Q1, we generated total revenues of $242,400,000 representing growth of roughly 21% over the comparable prior year period, which was above our guidance range, driven by strong new business wins and robust recurring revenues. As a reminder, in Q1 2020, there were only 12 banking Wednesdays instead of the usual 13 we had the comparable prior year period. As we discussed last quarter, a Wednesday represents roughly half a week's revenues. Within total revenues, recurring revenue was $238,500,000 for the Q1 of 2020, representing 98% of total revenues for the quarter and also growing 21% from the comparable prior year period. During the month of March, we started to see the spike in unemployment across the country reflected in our client base, a trend that continued into April. The net effect as of today is that the impact on our current client revenue is similar to the percentage increase in unemployment across the country. We are closely monitoring unemployment trends and their impact on our client base. We're also experiencing the impact of 150 basis points interest rate cuts that occurred in March. We estimate the net effect on our business for the rate cuts is roughly $4,500,000 per quarter for the balance of the year. Total adjusted gross profit for the Q1 was 213 $500,000 representing a record adjusted gross margin of 88.1%, up 130 basis points compared to the prior year period. We continue to benefit from high margin recurring revenue and increasing customer service efficiency. Adjusted total administrative expenses were $108,400,000 for the Q1 as compared to $80,000,000 in the Q1 of 2019. Adjusted sales and marketing expense for the Q1 of 2020 was $51,900,000 or 21.4 percent of revenues. We are seeing positive results from our recent ad campaigns and marketing efforts and plan to continue to invest in marketing in Q2 and throughout the year. We believe this is not the time to back off from our marketing plan. In fact, due to the increase in demand we are seeing and the success we are having, we plan to spend more in Q2 than we did in Q2. Our R and D expense was $19,400,000 in the Q1 of 2020 or 8% of total revenues. Adjusted total R and D costs, including the capitalized portion for the quarter of 2020 compared to 21,100,000 dollars and we continue to invest in our future growth through innovation and new product development. Adjusted EBITDA was $117,900,000 in the Q1 of 2020 or 48.7 percent of total revenues compared to $103,300,000 in the Q1 of 2019 or 51.7 percent of total revenues. Our GAAP net income for the Q1 was $63,000,000 or $1.08 per diluted share based on approximately 58,000,000 shares versus 47,300,000 or 0 point 8 on approximately 58,000,000 shares in the prior year period. Our effective income tax rate for the Q1 of 2020 was 28.7%. Non GAAP net income for the Q1 of 2020 was $77,900,000 or $1.33 per diluted share based on approximately $59,300,000 or $1.19 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. Since we increased our buyback on March 12, 2020, we have repurchased over 200 and to date, Paycom has repurchased nearly 2016. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of 182,000,000 dollars and total debt of $32,000,000 As a reminder, this debt represents a financing of construction at our corporate headquarters. Cash from operations was $82,000,000 for the Q1, reflecting our strong revenue performance and the profitability of our business model. The average daily balance of funds held on behalf of clients was approximately $1,400,000,000 in the Q1 of 2020. To conclude, I'll repeat what Chad said. We are focused on mitigating the impact of the pandemic on our current client revenue numbers 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 the strongest value proposition in our industry. We are confident that 2020 can still deliver the enviable combination of growth and margins that we have consistently demonstrated, and we look forward to being able to quantify that macroeconomic factors become more stabilized or predictable. With that, we will open the line for questions. Operator? We will now begin the question and answer session. We will follow-up from each Our first question is from Raimo Lenschow from Barclays. Go ahead. Hey, thanks for taking my question and I hope everyone at TCOM is staying safe and I wish all the best to everyone. First question for me, Chad. You guys have been in kind of a crisis more than 2,008, 2,009. Can you just kind of compare and contrast what you saw back then? How it compares to now? And then like and what lessons you learned back then? And then I have a follow-up. Sure. So in 2,008 and 2,009 obviously we were a lot smaller company. We were somewhat geo focused in a certain area. I would say we were more in the Midwest and Southwest at that time. From that period of time, you had the mortgage crisis going on and other factors. And really at that time, it became a cash flow management issue for us. And at that point in time, we changed the way we managed our greater ACH risk at that time. So we made changes to protect cash flow at that time and exposure for ACH risk. But actually the three things we're focusing on back at that time, we continue to focus on providing world class service to our clients. We continue to innovate through the rapid development of our software and we also were aggressive in adding new clients. And so those are the same lessons or the same activities that we're focused on right now. But it's a little different 2,009 and 2008 from today. Okay. And then the follow-up, thank you for that. The next question I had was on, we had now like a good month of kind of working from home, etcetera. And you guys have been in terms of your sales approach very local. And I saw in the statement that you gave out that maybe there's increased productivity by kind of doing it over video calls, etcetera. Can you see what you're seeing in the field at the moment in terms of willingness to engage, ability to engage from your sales force, etcetera? We're 1 month in, so hopefully you're getting some data points already. Yes. And so we've sold face to face for a long time until we added the inside sales group. Again, we had about 5 of them for about 10, 15 years and then we built out 14 teams over the last 6 months in inside sales. So we've had a little bit of experience with selling virtually. I will say, we came into this year with strong sales momentum. We had a very strong value proposition. It continued to resonate. Then we ran into the pandemic. And so on Sunday, March 15, we actually closed all sales offices and moved them to the virtual work from home model. During the weeks of March 16 and the week beginning March 23, we rescheduled all of those sales appointments and really focused on retraining our outside sales organization on a somewhat new model. During those 2 weeks, our book sales business dropped about 50%. For the current week, which would have been the week I believe began March 30, our book sales was back up to 80% of what we had been selling. Up to the rest of April, we're actually at the same level of book sales numbers we were pre COVID. So from a sales bookings perspective, we continue to sell business through this. I can tell you that used to a sales manager could go on 6 calls a week, now they can go on 6 in 2 days. And so reps are still highly engaged with individuals as they also work from home. Some of them are actually our clients or prospective clients, I should say, actually may go into the office and then use a type of virtual technology to actually engage with us. But there are still people out there buying and it's a good time to buy. I will tell you that the digital transformation has accelerated through this. I think our value proposition is stronger today, not less so. And so we're having some success with sales. Okay, perfect. Good luck. Thank you. Our next question is from Samad Samana from Jefferies. Go ahead. Hi, good afternoon and thank you for taking my questions. And I'd like to echo, I hope everybody is staying safe and doing well in this type of environment. So I guess my first question, Craig, just for clarity, you said that the change in Paycom's customer base has been consistent with unemployment kind of more broadly. Can you just clarify, so does that mean that you've seen, I guess what's the change in pace for control that you've seen from pre crisis to as it stands 1 month into April? Samad, I can take that as well and Craig can also chime in. The point is, is it would be unreasonable to think that Paycom would not follow the increase in the rate of unemployment. I would say that we're an accurate sampling size of the U. S. Market as it relates to payrolls. We are industry agnostic, so we're diversified across all industries. Oftentimes when it comes to unemployment, we are going to see the impact before the unemployment number actually comes out. There are many states, California, Massachusetts, Illinois, other states where you're having to pay that last check either same day or next day from your payday. And so oftentimes someone is going to receive their last check prior to filing unemployment and then actually being in within the number. And so it would be unreasonable to think that we wouldn't follow. If you look at it for the last 12 trailing months, been fairly consistent. It's kind of run between 3.5% to 3.8% and that's based on anywhere from 163,000,000 to 165,000,000 dollars available, so you calculate that. We saw in March, specifically the last couple of years where you started to see that jump. And it jumped to 4.4% or 7,100,000 unemployed. Since that time for April, you're looking at since March 15, I think we've had 26 1,000,000 unemployment claims filed. It looks like about $24,000,000 of those could hit in April, we would expect. And so that you do that division over the 163 available workforce, you're going to come up with a different unemployment number than the 3.5 ish that it had been or the 4.4 that it was in March. And so all we're saying that right now is we have had visibility into our numbers. There are some changes that's happening with unemployment. We don't know if these will necessarily accelerate through Q2. We don't know if they'll stabilize. And so I think it's just too early to tell, but unemployment does have an impact on our current client revenue. The mitigating factors that we have are continuing to add new clients onto our platform. We are seeing people engaging right now as well as any upsells we might do to current clients. But I would say that those have always been dwarfed by new logo ads. Yes. And I would echo what Chad said, even though we do have some clients that are in those industries hardest hit, like restaurants and hotels, we're not overexposed to any of those industries and are very industry agnostic. Great. Thank you for that thorough answer. I really appreciate it. And then maybe just one follow-up. There's been a lot of investors have asked us a question about what percentage of a contract is typically fixed versus what is the variable component that's based on headcount or payrolls process. So any directional percentage you can give us, is it 10% or is it 50%? It would be helpful just in framing as we're doing the math. Well, I'm going to just go ahead and give this information out. I haven't given it out before, but I'm going to talk about our billing. We have a base fee and that base fee is one employee and so if you have one employee with Paycom and you're using the Paycom system, we're going to have the base fee. All right now, if you add multiple employees, more base fees. But ultimately, on smaller clients, percent of a client's merger, that base fee gets substantially distributed into the employee loss percent. Percent and the employee loss percentage becomes very close to equal to the loss of revenue percent on that client. So it really just has to do with size of client before you could really figure out exactly how much of the base fee is in there. Now, I will say this, we're not necessarily seeing increased client attrition when we're talking about units, whether it be someone leaving, what we're not seeing increased client attrition from either someone leaving and or going out of business. The impact we're really seeing is the impact as it relates to employee count. The clients that we're working with might go from running 200 checks normally with us, the ones that are impacted, again, not all are, and some have even some growth in this, but for the most part, we do have several clients that may have been running 300 checks and now they're running 17. And so we're going to still have the client, but again, we're going to be impacted by that unemployment number. Great. I really appreciate the openness and wish you guys well, and I'll pass it along to the next person. Thank you again. Our next question is from Mark Murphy from JPMorgan. Go ahead. Yes. Thank you very much. Actually, good timing. I wanted to follow-up on Samad's question, Chad. Just to clarify the math on the unemployment. So we've seen 26,000,000 unemployment claims out of a workforce of about 164,000,000 dollars So you get about 16%. I guess I'm just curious if the employees are furloughed and they've applied for unemployment, wouldn't they still be a payee in the Paycom system, right? And then so then you'd still be getting paid for the furloughed employees? Or is that not accurate? That would not be accurate and furloughed. Typically, a furloughed employee is an employee that still has their job, but is not paid. Paycom is based on number of paid employees as it goes through. Now, those employees would remain active in our system. They would continue to use our employee app and when they come off furlough, we'll begin to receive the billing from them. But and as far as furloughed employees and how they may be also included in that unemployment number, we would want to check on that. But as in regards to our system, furloughed, terminated, laid off, those should all have a very similar impact in our number, although you're going to have different termination codes because those have different rehiring activities that someone's going to take as they turn them back into active pays. Okay, understood. And then as a follow-up, I'm just curious if you've been able to survey your customer base at all to try to ascertain where they think their headcount might trough at, perhaps when it would bottom, the pace of rehiring, at what level perhaps they think it would stabilize to try to inform your business plan. I'll give you a for instance, if a customer had 300 employees, they think it's going to drop to 200 in May, maybe then they think it would ramp back up to 270. You could at least try to recalibrate and then plan on a 10% reduction in their headcount. Have you been able to do anything like that somewhat scientifically or even to have enough anecdotes to create some type of a guess on how that will look? Well, I think that there's many things that we'll be able to do once we see a trend and or some stabilization, which makes something predictable. For many of our clients, they have the same unknown factors that we do, if you think about it. So it might just be timing. We might be a little early on being able to get good information that way. But we definitely are staying close to our clients. I mean, we talked to them on a continual basis and we've been able to kind of see in different areas and different industries potentially impacts, but it's really all over the board and we still remain hopeful that at some point it stabilizes. We just don't know where it stabilizes at. Does a company to go into a certain phase for themselves, do they take additional steps throughout the year or is March a steady state for them because they took the hit upfront? We don't really know that yet. And as this quarter goes on, I think we'll have more information on that. Yes, Mark, and one thing too with the Payroll Protection Program, like the example you gave, those people have applied for some assistance. And under the rules, if they use 75% of that to rehire, then you can have a loan forgiveness on that. But so we may see some of that as well. Okay. And then Craig, one very final question. Is there any change with respect to customers or prospects asking for price discounts or payment deferrals in this kind of environment? Our pricing model is very fair. It's actually the thing that's impacting us right now. Our pricing model is based off the number of employees that you're paying within the system substantially. And so obviously, I'm going to take that company. I said that maybe 300 employees. Well, when they were 300 employees, they're paying us for 300 employees. Now that they're 17, they're paying us for 17. So that's a fair model. And I wouldn't see any reason that we would make changes to our pricing model at this point. Okay, very good. Thank you so much. You bet. Our next question is from Brad Weback from Stifel. Go ahead. Great. Thanks very much. Chad, on the new business activity, can you give us a sense of your ability to implement remotely? Yes, I mean, to be able to implement, it's very similar to the way we were doing. A lot of our implementations, not going to say necessarily done, you definitely have the conversation with the transition rep with that client, you go through training that way. But substantially, most all of our implementation has been done through either the Oklahoma City and or Dallas area. And so a lot of it was really done remotely anyway with the exception of the training and the data collection. As a reminder, also we've had an inside sales group for quite some time. So no, we're not seeing it being more difficult becoming more difficult for us to implement. In fact, our measurement through the 1st quarters and implementations are going faster than what they traditionally had. And honestly, so is the sales process somewhat. I can tell you that before we'd have a we'd set an appointment on a Tuesday and we might have that call in 2 or 3 weeks. Now we're setting that appointment on a Tuesday, we could be having that appointment on Wednesday And we're getting most people at the table. And so I wouldn't say it's it definitely hasn't slowed us down from being able to convert. You will have clients that due to the current situation that they may be in, you could have clients that choose to wait a little bit longer, but I don't even have anything to really call out in regards to that right now. But anyway, that's where I would leave that. Great. Thanks. And one quick follow-up. Have you seen a moderation in the rate of decline in the number of people that you're paying, your customers are paying on a weekly basis over the last, we'll call it 3 or 4 weeks? Well, I'll go back to what I said. It would be unreasonable to think that we wouldn't continue to follow increases in the unemployment rate. And so you would be hoping that that would moderate to some level of stabilization at some point. Got it. Thank you. You bet. Our next question is from Mark Marcon from Baird. Go ahead. Hey, good afternoon, Chad and Craig. Thanks for taking my question and best wishes for safety during these times. I'm wondering, can you talk a little bit just a follow on the from a revenue perspective? How should we think about just the sensitivity there? I know it varies across the different client sizes, but if we're taking a look at the portfolio as a whole, how should we think about that? I mean, larger clients, you're going to be close to a 1 to 1 ratio on larger clients. Smaller clients, it's going to be a lot less, I mean, from that, meaning that it really does depend on size of clients. But a larger client, you're definitely closer to the one to one because the base fee has been eaten up by that one employee company. Now if you're talking about a 30 or 40 employee company, I mean you're going to have quite a bit of base still in there. But once you're going up to 200, 300, 500, 2000, 3000, I mean the ratio is going to be closer to 1% loss in their employment equals close to 1% loss in current client revenue. Okay. And then with regards to the new sales, that sounds tremendous. Can you talk a little bit about like who you're winning from? Is there any is there some special attraction in terms of the mobile soft service capabilities that would lead you to get more clients from older providers or has the mix changed in any way, shape or form? It's an interesting question. I will say that it's usual suspects for us. We're hitting them the usual ways. We do have a much stronger product now. I talked about the employee mobile app as well as the DDX success we're having. Many people are using our ask here as we've gone through this environment. By rolling out Manager on the Go, I mean, our adoption rate on we're we're having high levels of engagement. And so I would not say that any of our competitors have the level of engagement we have. And so we do continue to onboard people from the usual suspects. You do have some systems out there that were more in house in nature or even some competitors that may have been more regional using licensed software and those models are very much disrupted right now in this environment. So to the extent we have low hanging fruit, it's going to be more in that area, but we're also having just a lot of success because we have a lot of clients who even call us back. We pitched them 1 or 2 years ago. It was what it was. They understand the value proposition, weren't ready to make the move. Right now, I think people are forced to look for additional efficiencies. I think most all companies come out of this leaner and more efficient and we're going to do our part just to make sure that's what happens on the efficiency side. Terrific. Thank you. Our next question is from Daniel Jester from Citi. Go ahead. Great. Thank you for taking my question. I appreciate your comments about most of the impact you're seeing so far is in the reduction of employees at your clients' account. But I suspect that as this situation extends, there is the risk of higher churn just from macroeconomic volatility. So I'm just wondering, you've done a great job over the years improving retention. Is there anything specific you're putting in place to help improve or keep retention up even in these uncertain times? I mean, really for retention, if you're talking about the actual loss of a client that might go out of business other than helping them find resources that might help them stay in business, there's not a whole lot of impact we can make there. Now what I will say is even at IPO, we announced that 90 percent of our revenues derived from companies that have greater than 50 employees. And so today, that's only going to be greater than revenue. My bet is it's much higher than 90% at this point. And so for us, what we're seeing is more a decrease, not a go away. Now some of that may be answered in how long are we in this, do things improve when they improve, how long can someone last, but as we sit here today, we can't really call out a business failure today. We can call out business failures, I should say. We can't call out business out impact to that unemployment is having on those business revenue on those client revenues. Great. Thank you. And then you mentioned this briefly in your prepared remarks about DDX and improvement in engagement there. I'm just wondering based on what you've seen, is the usage of DDX consistent across your customers, whether they're in either managing these times well or not? I just wonder in times of crisis, do people go back to the old ways and move away from automation or does the automation stick through even in times of turbulence? Thank you. That's actually a really good question. We have not seen DDX scores. I mean, DDX scores have continued to go up. I can tell you this just in a couple of anecdotes, it's actually been where we'll have clients that you'll see in certain areas, it forces their DDX to go up. If they were just kind of adopting, let's say you had a DDX score of 96%, you were sort of adopting, To some level, it forced people to have 100 percent adoption. I'm not saying that we've made it to 100 percent adoption, but this the environment that we're going through right now has not had a negative impact on the DDX scores. Now DDX is a measurement of employee usage and actually a measurement of using the system the correct way. And so I would just answer that by saying more and more people are using the system the correct way today than what they had in the past. Great. Thank you very much. Our next question is from Brian Schwartz from Oppenheimer. Go ahead. Yes. Hi. Thanks for taking my question this afternoon. Chad, I was just wondering if you could provide some additional color on either what you're seeing in terms of the sales or the elevated lead activity by company size. If there's any reason for us to think that the sales activity by company size should be materially different for the business ahead? Thanks. No. So I'm not announcing anything different on what we're doing from a size perspective. We continue to sell both in and above our range. I'd also called out that I think it was last earnings call, I called out that continue to sell the small business market. So I would say that's been very consistent for us. Yes, we continue to see clients come in at the top end of our range or even above, but we've always seen that. And so, it's been very consistent and that would be also consistent with the leads that we see. Thank you. Our next question is from Alex Zukin from RBC Capital Markets. Go ahead. Hey, guys. Thanks for taking the question and glad to hear you're staying safe out there. Maybe just the first one, Jack, can you remind us on kind of the linearity of bookings in a quarter usually? And then maybe traditionally or typically from an intra quarter perspective, like how much visibility do you typically have 1 quarter out on the business? Yes. So first of all, on the bookings, I would say that month to month, they'll kind of change. I mean, typically, I'll say this, typically summer is on a great month. I can tell you, 2 years ago, August was our largest book sales month. So it just depends. They're all over. It ebbs and flows, right? You fill up your pipeline, then you close pipeline. It is most common that the end of the year for our industry would be where your largest booking numbers would come just because admittedly most all companies in our space would tell you January is a large start month for prospective clients for us. And so you do expect sales to be higher. Matter of fact, some people in our industry even call it selling season. They'll say we're gearing up for selling season, which is kind of the December timeframe. I can tell you with Paycom, we're open for sales on a continual basis and it's hard for us to really point to significant book sales in one area versus the other. It really has to do with how fast we're clearing out that pipeline, which leads to your visibility question. If we have somebody within our pipeline in a 90 day close, the likelihood of them closing being that they've been in our pipeline for 90 days is much smaller. It's our goal to continue to get deals that we engaged with today, to be able to move forward throughout the sales process and to get them closed up in the 6 to 8 week period. So when it comes to visibility as it relates to book sales, do we have 3 to 6 month visibility? I wouldn't trust a 6 month pipeline for myself because those are businesses that we should be able to get them going on the solution so that they can start receiving the ROI sooner rather than later. Got it. And then just maybe as a follow-up, I think probably some of us are pretty surprised to hear that new bookings have kind of returned to pre COVID levels in April and you're not seeing any customer any meaningful changes in customer churn. Do you anticipate that being like when you think about the balance of this year, is that something you're anticipating to continue? Do you anticipate those levels to kind of trend off? And if so, how much do you anticipate to kind of sell into the base to insulate a little bit from that? Well, I think there's a difference between hope and anticipation. I mean, I think if we were able to really quantify a lot of those and have a high level of confidence in that of this of the trend we have today continuing, we would be able to be providing more information than what we're doing right now. I will say that even our appointment numbers through April are similar as they were pre COVID. And so the interest hadn't slowed down and our ability to have those meetings hasn't slowed down. As far as your answer on clients maybe losing their business, I would say, which we hope doesn't happen. I mean, that's really something I'm not going to have great visibility. And I mean, I can see when a client might drop, again, to use the same example, from 300 to 17 employees. I don't know what happens to that client after that if we're in a certain environment for too long. That's really going to depend on it's almost a per client basis what decisions they are making about their business. So it's just hard to judge that right now. I don't think it's going to be forever that we're unable to judge that. And I'm talking about, I do think there's going to come a point in time where we'll have better information on that. But it's hard to tell right now. Got it. Thank you. Our next question is from Ryan McDonald from Needham and Company. Go ahead. Hi, Chad and Craig. Thanks for taking my question. Chad, you mentioned before that there's a bit of a difference, I think, in the code that's entered whether a customer furloughs an employee versus lays off an employee. Can you just talk about what you're seeing in terms of mix with your clients or to the extent that you have seen thus far of layoffs versus furloughing at this point? No. I would just go back to what I said. The impact on us would be the same from a revenue perspective. I don't know, you're really going through and asking, okay, do clients even understand the difference between them, between furlough, between a laid off employee or between an employee that you might be using something different through some type of termination method or an onboarding method you're going to go back to later. So no, I mean, I wouldn't be able to give you exact numbers on those who have been furloughed versus terminated and or laid off. All that's to say though, if someone has put in a termination code for any one of those within the system or left them furloughed and active, but they're not receiving payment, it's going to react it's going to impact our revenue the same regardless of which one of those they choose. Got it. And then just a follow-up, I wanted to touch on gross margins in the quarter. I think over the past few years here, Q1 gross margins have been running in that 86% to 87% range. You had a really strong performance there at 88%. What drove that nice increase that we saw on a year over year basis during the quarter? Is it the expanded usage from something else? Yes. I mean, what you're definitely having, and I'll let Craig chime in a little bit on this, but you're definitely having efficiencies gained from usage of the product. I mean, we've talked about before that our call volume, even the calls coming into Paycom has been equal to or less than prior year same quarter. And so even the call volumes that are coming into Paycom, we're receiving less calls because clients are using the product correctly, they are using it correctly. And so we're having a lot more success. And also we're onboarding clients with full usage strategies and we've been doing that for over a year. And so we don't have getting all the clients to the right strategy. So you definitely have some of that. And I'm sure there's some other efficiencies gains Craig will talk about. Yes. I mean, obviously, our service department, as the clients are able to use the system and are using the system correctly, our service department is able to handle a larger volume as well. So we've seen that and we've talked about that in the past as well. To give you one more thing on that, Ryan, the number of service individuals that we had servicing clients at the end of December 2020 was the same as the number of service individuals we had servicing clients December 2019. Yes, I think, Chad meant 'nineteen and 'eighteen. Sorry, 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. 'nineteen and 'eighteen. Not 2020. The number of service individuals we had servicing clients at the end of 2019 was basically the same as we had at the end of 2018. So you're going to get some efficiencies when you have service individuals that are able to service more clients because they're better. Great. Thanks for the color. You bet. It's from Siti Panigrani from Mizuho. Go ahead. Yes, Shiti Panigrani. Thanks for taking my question. Chad, just following up on your comment about new business or activities or leads on the pre COVID level, that's something different we have been hearing. It's what we're seeing is small mostly businesses focusing on mission critical application. So what do you think what's the motivation right now for most of those customers switching their payroll at this point? Is there a different kind of motivation than that you didn't hear in pre COVID level? And then are you seeing any certain No. Well, I will say this. I don't think any business ever liked waste. And to the extent businesses still have waste, they're looking to become more efficient. I would also say that payroll and benefits administration and a lot of the things that we're doing in the system, I would say is a very important part of what any business does. So I don't know that I align with the types of things that someone is doing to engage with their employees right now during this environment is less critical. I definitely understand the cash flow management and the others throughout their business. And am I going to say we're the top priority for all? Yes, we are. And there's many businesses in the U. S. And we don't have to sell all of them this week, but we are having a lot of success continuing to drive sales. And I really don't have anything to call out from a sales perspective, save the 2 weeks we took them out to train and the 1 week it took us to kind of get back where we did drop 50% for those 2 weeks and we dropped 80% that 3rd week coming back. But since then, we've been all pistols firing in regards to our sales efforts and the results they're having in book sales. Got it. And I wanted to ask, is there any particular verticals you're seeing more interest activities than others? And also like given that inside sales increase efficiency and inside sales, are you planning to hire more inside sales this year? Yes. We continue to be industry agnostic. There are industries that are going through there's 5,000 employee companies that are now 280 employees. And you know what, what a great time to convert to Paycom. You only pay for the 280 employees that you work through. It's almost like those are great times to convert to Paycom. We're industry agnostic. For us. It doesn't matter where someone is. We're going to be focused on gaining market share as we come through this. We want to be the net winner in that as we come through this. And we've got some headwinds, right? We've got the interest rate now, it's at 0. We've got unemployment that continues to climb. If we're doing the right things and we're focused on the 3 carriers that we mentioned, which is continuing to give world class service, which we have absolutely done during this, continue to roll out rapid product development, which we've absolutely done through this, and continue to add more clients to our platform. I feel like as these things reverse on us that we're going to have some organic tailwinds, if you will. So it's very important right now that we stay focused on all. It doesn't matter to me if a client is furloughing, terminating, laying off employees. Right now, we're open for business. We want to get those clients just like we do those clients who are already growing in the face of this. We want to get them all. Thank you, Ken. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Chad Richison for closing remarks. All right. I want to thank everyone for joining us on the call today. I'd like to send a special thank you to the work they're doing. Over the next couple of months, we'll be meeting with investors virtually at the JPMorgan Conference on May 12. We'll also be at the Needham Conference on May 19, both of these are virtual. And in June, we will participate. We appreciate your continued interest in Paycom and look forward to meeting with many of you soon. Thank you, operator. You may disconnect. Thank you. The conference has now concluded. Thank you for attending today's presentation. 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