Good afternoon, and welcome to the Paycom Software first quarter 2019 quarterly results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Craig Boelte, Chief Financial Officer. Please go ahead, sir.
Thank you and good afternoon. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives, and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we have made or make in this presentation are reasonable, actual results could differ materially because these statements are based on our current expectations and are subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K. You should refer to and consider these factors when relying on such forward-looking information.
Any forward-looking statements made speaks only as of the date on which it was made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also, during the course of today's call, we will refer to certain non-GAAP financial measures, 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, which is available on our website at investors.paycom.com. I will now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad?
Thanks, Craig, and thank you to everyone joining our call today. I'll begin my remarks by reviewing another strong performance during the first quarter. I'll then share some details around Paycom's new groundbreaking Direct Data Exchange and finish by discussing some other early 2019 highlights. Following that, Craig will review our financials, and then we will take questions. We kicked off another year with robust results that exceeded our guidance, positioning us well to accomplish our performance objectives for 2019. Q1 revenue was approximately $200 million, representing growth of 30% versus the comparable prior year period. Top line growth percentage accelerated versus the pace in last year's first quarter. Our adjusted EBITDA of $103 million represents a 52% margin. Today, we're also raising our guidance for the full year, and Craig will have more details in his remarks.
Our performance this quarter was primarily a result of our strong software offering, focused sales efforts, and the additional value we are bringing to the market with our concentrated employee usage strategy. Employee usage of human capital management, or HCM technology, is the future of our industry. We believe having a comprehensive HCM system can lead to higher employee engagement, increased productivity, better job satisfaction, and higher employee retention. Our single database HCM solution, including our mobile app, empowers our clients' employees to take ownership of their HR functions. During the quarter, we released our new Direct Data Exchange for all Paycom clients. This is a highly differentiated enhancement to our overall software offering. It's a first-of-its-kind solution within the HCM industry that measures the efficiency of the data collection process.
The Direct Data Exchange does this by reporting all of the data changes made directly into the HR database by employees, as well as all of the duplicative data points typically input by other client representatives. Paycom firmly believes an HCM system that empowers its employees to easily make and confirm changes to their own data and to take full ownership of their personal information produces the strongest ROI for the data collection process. Before the availability of the Direct Data Exchange, businesses had no way of truly knowing the level of inefficiencies hidden within their HCM processes and system. Now they have the tool to effectively drive efficiencies into their HCM environment. Moving to other recent business highlights. In early April, we broke ground on our new operations center in Grapevine, Texas.
It will be exciting to see the land transformed into what will soon be another beautiful Paycom facility. We expect this 14-acre campus will eventually house 1,000 jobs and should be completed in under two years. The Dallas-Fort Worth area features a great pool of talent to help foster our continued growth efforts. Turning to our sales initiatives. We are continuing to expand our sales organization through 2019 and beyond, and we will do so at a pace that is appropriate for our business and that we believe will allow us to effectively achieve the greatest revenue growth, which is and will remain a top priority for us. This April also marked our fifth anniversary of becoming a publicly traded company on the New York Stock Exchange, and I'm extremely pleased with all that the Paycom team has worked hard to achieve together during this past half decade.
In addition to our exceptional growth and overall financial performance, we've been recognized numerous times for our positive workplace culture and dedication to client engagement. Since the beginning of 2014, we have released many compelling new products and software enhancements, nearly doubled the number of sales teams, and significantly expanded the footprint of our corporate headquarters. Paycom is blessed to have assembled the most talented team in the industry, and I'm very grateful for their hard work and dedication. The best is yet to come. To conclude, I'm proud of our strong start to 2019 and look forward to continued success through this year and beyond. With that, I'll turn the call over to Craig for a review of our financials and updated guidance. Craig?
Before I review our first quarter results of 2019, as well as discuss our outlook for the second quarter and full year 2019, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. As Chad mentioned, we were pleased with our first quarter results, with total revenues of $199.9 million, representing growth of 30% over the prior year period. Our revenue growth continues to be primarily driven by new business wins. Within total revenues, recurring revenue was $196.9 million for the first quarter of 2019, representing 98% of total revenues for the quarter and growing 30% from the comparable prior year period. Total adjusted gross profit for the first quarter was $173.5 million, representing an adjusted gross margin of 87%.
For the full year 2019, we anticipate that our adjusted gross margin will be within a range of 83%-85%. Total adjusted administrative expenses were $80 million for the quarter, as compared to $58.7 million in the first quarter of 2018. Adjusted sales and marketing expense for the first quarter of 2019 was $37.1 million, as compared to $30.4 million in the first quarter of 2018. Adjusted R&D expense was $15.4 million in the first quarter of 2019, or 7.7% of total revenues. Total adjusted R&D costs, including the capitalized portion, were $21.1 million in the first quarter of 2019, compared to $13.1 million in the prior year period. adjusted EBITDA was $103.3 million, or 52% of total revenues in the first quarter of 2019, compared to $80.7 million, or 52% of total revenues in the first quarter of 2018.
Our GAAP net income for the first quarter was at $47.3 million, or $0.81 per diluted share based on approximately 58 million shares, versus $41.2 million, or $0.70 per diluted share based on approximately 59 million shares in the prior year period. Our effective income tax rate for the first quarter of 2019 was 23.9%. In the first quarter, our non-cash stock-based compensation increased by $7.6 million over the prior year period due to the issuance and subsequent vesting of restricted stock with market-based vesting conditions. For the second quarter, we anticipate non-cash stock-based compensation expense to be approximately $6 million-$7 million. The restricted stock vesting events in the first quarter had an impact on our first quarter tax rate, lowering it approximately 400 basis points.
non-GAAP net income for the first quarter of 2019 was $69.3 million, or $1.19 per diluted share based on approximately 58 million shares, versus $55.8 million, or $0.95 per diluted share in the prior year period. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the second quarter of 2019. Since we initiated our repurchase program in 2016, Paycom has repurchased more than 3.5 million shares at an average share price of $79.56. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $91.3 million and total debt of $34 million. As a reminder, this debt represents a financing of expansion-related construction at our corporate headquarters. Cash from operations was $80.4 million for the first quarter, reflecting our strong revenue performance and the profitability of the Paycom business model.
The average daily balance of funds held on behalf of clients was approximately $1.2 billion in the first quarter of 2019. Now let me turn to guidance for the second quarter and full year for fiscal 2019. For the second quarter of 2019, we expect total revenues in the range of $162.5 million-$164.5 million, representing a growth rate over the comparable prior year period of approximately 27% at the midpoint of the range. We expect adjusted EBITDA for the second quarter in the range of $62.5 million-$64.5 million, representing an adjusted EBITDA margin of approximately 39% at the midpoint of the range. For fiscal 2019, we are increasing our revenue guidance to a range of $718 million-$720 million, or approximately 27% year-over-year growth at the midpoint of the range.
We are also increasing our full year 2019 adjusted EBITDA guidance to a range of $296 million-$298 million, representing an adjusted EBITDA margin of approximately 41% at the midpoint of the range.
With that, we will open the line for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. To allow time for everyone in queue, please limit yourself to one question and one follow-up. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Raimo Lenschow with Barclays. Please go ahead with your question.
Hey, thanks, and congrats on another great quarter. Chad, can I start with the Direct Data Exchange? How do you see that in terms of how you're going to utilize that? Basically, it looks like a really nice tool for clients. Is that kind of something that you think about using in the sales process because you can kind of visually show the clients how they are doing and how they could do better? Or is that something you're going to charge for? I had a follow-up question.
Yeah, think about the Direct Data Exchange is almost like a health check of our system. If you're driving a vehicle, you have a dashboard that tells you how your oil is and everything else, and that's what this is. It shows how our system is working. The Direct Data Exchange tracks the number of direct data changes made into the system by employees. It also tracks the changes that are duplicative or being made indirectly. Our clients use this to help drive ROI for themselves. We're having a lot of success with it. These usage numbers continue to ramp with this, and I believe that this type of strategy in the Direct Data Exchange is really the death knell, if you will, to the indirect data collection process that exists right now in our industry.
Yeah, makes sense. Okay. If you look at R&D, you basically are kind of really outpacing a lot of your competitors with the R&D that you're doing there. Can you talk a little bit about some of the initiatives? R&D is growing quite a bit higher than sales and marketing and revenue, et cetera. What are the key things for you for this year?
Yeah. Well, a lot of the things that we're working on are being developed to support our strategy of employee usage. I believe that businesses that lack an employee usage strategy are going to find it hard to compete and even more difficult to attract and retain talent. Businesses in our industry that lack an employee usage strategy will find it hard to compete in our own industry. We're very much focused on this initiative. I've been talking about this for two years. We are now having clients on board, and they are agreeing to a full employee usage strategy, and that means that all changes, as it relates to employee data, would be made by employees when relevant. Obviously, employees aren't going to change their own rate of pay. Most things are being changed by employees in our system.
This is the wave of the future, we're really using it to show as just an additional proof source to our clients of the ROI that can be driven when you use our system correctly. That's really what we've been working on, is getting our clients to use our system the correct way, and we're focused. As far as opportunities it presents for us in the future, once we have client employees all engaged in the system for each data point change, obviously that opens up additional opportunities of development for us. We've been focused on that as we have identified several opportunities that exist. It changes the model of the way our industry works. There's a lot of exciting things coming.
Perfect. Thank you. Congrats.
Thank you.
Our next question comes from Samad Samana with Jefferies. Please go ahead with your question.
Hi. Good afternoon. Thanks for taking my questions. Congrats on a great quarter. First, Chad, you mentioned sales investments to prioritize growth. I was wondering if maybe you could give us an idea as you think about those investments. Is it more headcount at existing offices? Is it potentially opening new offices? Any potential color on how we should think about the timing and the type of those sales investments?
We're continuing to mature all of our offices. Even our mature offices continue to increase their capacity. Opening up new offices is part of our strategy. There's several cities we're not in. There are cities that we're significantly under-penetrated with the current sales offices that we have. We would look to add additional sales offices to those geographies as well. We are also focused on what's the right pace for us. Again, we will be opening up sales offices here in 2019 and continuing that strategy to set us up for subsequent years.
Great. Just one follow-up, if I may. I think that in recent quarters, the company has seen increased success with upmarket customers. I was curious if maybe there are any comments around this quarter and anything notable that we should think about, especially with some of your competitors going through some changes.
Sure. You'll see some difference in the way large companies use this type of technology and smaller companies. The employee of a five-employee company, or even an employee of a 100-employee company, is going to use similar or have similar tasks that need to be automated as an employee that might have 5,000. We've been focused on that. We are continuing to have strong client adds within the upper end of our market, which would be up to 5,000. We are also seeing clients onboard that, again, are above the top end of our range, as we have made it much easier to sell on our end, as well as we've made it easier for clients to buy as the ROI becomes more clear into focus with these strategies.
Great. Really appreciate the answers then. Congrats again on a great-.
Thank you.
start to the year.
Thank you.
Our next question comes from Brad Zelnick with Credit Suisse. Please go ahead.
Hi, it's Bhavin on for Brad. Thanks for taking my question, and congrats on the great start to the year. Can you guys just provide us some insight into how your marketing campaigns are going relative to your expectations? What kind of ROI are you seeing, and what changes have you made to your marketing programs relative to last year?
Last year we did, I would say, double down on this initiative to help market our product toward a new end user. Since the beginning of time, our end user has always been the HR payroll operating manager, and it still is today. They are the end user. However, with an employee engagement strategy, you are able to add value to even what the end users are using with greater employee usage. You will have noticed that our marketing efforts, about 18 months-24 months ago, really started shifting toward that employee user, to help soften the beaches really for our clients that want more employee engagement as they are now directing employee usage.
Got it. That's helpful. Just one quick follow-up. Can you just talk about some of the early insights you've been seeing or early feedback with the Direct Data Exchange, and what are the key insights some of these C-level executives are seeing?
Before you didn't really know how your employees were using the system. You may have thought employees were really using the system. You may have even thought employees weren't. What the Direct Data Exchange does is assign a number directly to what employees are doing. We've seen clients go from 30% usage up to 90%. Even what we call good has changed over time as we're moving all clients up into the 90 percentile and getting some to 100%. That's what we've been focused on. It's a big shift in our industry when you're talking about how to use a product different, and we've been having to drive that, and how clients use the products correctly.
Some are still used to doing it the old way, and where employees might send emails, make phone calls, and what have you, and that information be input by a client representative versus the employee themselves. It's not just about inputting data, it's about information retrieval as well. When this information exists and it's accurate, and it's in the hands of the employee, there is a lot that can be done to increase productivity for both that employee worker as well as the client overall. We've continued to stay focused on that. The DDX or the Direct Data Exchange product, just reflects the health of each organization's HCM product that they've deployed.
Very helpful. Congrats again.
Thank you.
Our next question comes from Mark Murphy with JPMorgan. Please go ahead.
Hi, good afternoon. This is Matt Koff on behalf of Mark Murphy. If you look at the deals you closed in Q1, can you tell us what % of clients agreed to the full employee usage strategy? I know you cited an uptick in retention last quarter, which was a great result of those efforts. Are there any other outcomes worth highlighting as a result of increased employee interaction with the database? I mean, even anecdotal or otherwise, or any metrics you plan to share going forward on how your customers are benefiting?
Sure. Well, first, on the % of those clients that have committed to a full 100 employee usage strategy, I don't have the exact %, but I can tell you it was zero fourth quarter. First quarter was really the first time we really drove it from the sales side. We've been driving usage with our client base now for a couple of years. We then backed it all the way up to the sales process to gain sponsorship of this type of activity before the system's deployed. My personal opinion is, I think it's difficult for companies to buy HCM products in this environment if they're not going to fully leverage it all the way out to the employee, because again, employers use consumer-grade type technology everywhere else in their life. They're not emailing their bank asking them to add a payee or void a check.
I don't understand why we're doing it in our industry, and that's the shift. Percentages, I don't know, but it's gone from zero to quite a bit. As far as the retention number, a little bit of correction on that. That retention gain was for all of last year. We have not reported Quarter One retention numbers, but I do believe as people use our product the way it is intended, and they're generating greater ROI, that should have an impact on retention. If you've bought our hammer and you've been using the claw side of that hammer to beat in, and pound in a nail, and it's working, imagine if you turn it around the other way and use it correctly. We're seeing that happen. It doesn't cost our clients any more to use our product correctly.
When it happens, we're able to demonstrate a very strong ROI that's being realized by our client base, and it's being generally accepted with all of the clients and prospects that we are engaging with.
Thank you.
Thank you.
Our next question comes from Brad Reback with Stifel. Please go ahead with your question.
Great. Thanks very much. Chad, from a high level, if employees at customers start using the service a lot more, will that have any impact on gross margin?
I do believe that the more someone uses our system, the more proficient they become in it. At some level, it does allow, when you're both aligned to the same service results, it does allow for some additional capacity on the service side. We don't charge for using our product correctly. It doesn't cost any more. You could have some areas that are somewhat ancillary to the direct billing items that could provide additional value to us at the margin.
Great. A quick follow-up for Craig. If we think about the increase in float balance coupled with a fairly significant increase in interest rates year-over-year, what type of tailwind has that afforded you on the top line? Thanks.
Well, on the interest rate float, we went from about $1 billion last year at this time to $1.2 billion, quarter-over-same-quarter last year. That's still our client funds, so we invest them just like we have in the past. There were some upticks in rates last year. As we look to guidance this year, we're not anticipating any additional rate increases at this point.
Got it. Thanks very much.
Thank you.
Our next question comes from Mark Marcon with R.W. Baird. Please go ahead with your question.
Hey, good afternoon, Chad and Craig. Congratulations on a great start to the year. I was wondering, first of all, just with regards to the big ramp that you're seeing, can you talk a little bit about some of the big client implementations that you had? It looked like implementation revenue jumped pretty dramatically, so I was just wondering if you could give a little bit of a feel for that. How did those implementations go?
Well, in terms of the implementation revenue, Mark, that's implementation and other. As we recognize implementation revenue, we actually recognize that over a 10-year period, so there's going to be some clock revenue in that number as well.
Yeah.
It was a strong quarter for implementation as well.
Yeah, it was a strong quarter for implementation. Our implementations are still, as they've been in the past, as far as timelines and what have you. We are seeing greater usage prior to implementation as we continue to drive usage even prior to the full deployment go-live of the system.
Great. The margin performance continues to be stellar. I'm wondering if you've thought about giving some new longer-term targets now that we've had 606 in place for a while.
We have not updated our long-term targets right now. We are continuing to review that. We're definitely focused on being a high growth company. I think that's the other side of this. We're focused on growth right now. This is the third consecutive quarter that our growth has accelerated over prior year same period. As far as what we're guiding to, same point today as what we were in last year. Our guidance numbers, we're seeing those higher than what they had been last year at the same time. We're focused on that. We're definitely a mindful company of our margins. We definitely want to be efficient in everything we do, but we're definitely focused on our growth opportunities here as we believe things have changed in our market.
I think it's a new day, which is good for all of our clients and prospects that are out there looking to gain more efficiencies through deployment of this type of technology.
Can I just squeeze one more in? Just with regards to the strong growth that you're seeing, can you characterize that in terms of what percentages from new sales, in terms of number of clients relative to ARPU, and then also what you're seeing in terms of internal client employee hiring and what sort of adds you're seeing there? How we should break it down?
Yeah. I would say the mix has been consistent as it's been in the past. I can't call out that we have a greater amount as a percentage of up-sells today than we've had in the past. Again, the largest up-sell year as a percentage that we had was during the rollout of ACA. It somewhat returned back to normal after that. It's been consistent with years past as far as the mix between new client adds and up-sells to current clients.
Great. Thank you.
Thank you.
Our next question comes from Ryan MacDonald with Needham & Company. Please go ahead.
Good afternoon, Chad and Craig. Congrats on a great quarter. I guess, if you're looking at the solution set that you're providing to customers, we've seen broadly within the HCM market that HR case management is an area of strong demand amongst customers, and particularly as you're moving up market and you look at this Direct Data Exchange solution, does the data you collect from those customers create a potential for you to develop more automation on the platform to offer those customers? Are you seeing any increased demands for that type of automation?
Well, definitely, as you identify and to some extent, incentivize appropriate usage of the system, there does become somewhat of a cadence or a regular action for employees that becomes predictable. At appropriate times, you can automate certain functions that make sense. We're always a client that first looks at what the problem that exists today. We don't try to create a piece of technology and then go create a problem that needs to be fulfilled. As we look at the problems that exist for our clients and the user buyers, we look to automate more of that. As this has been pushed out to the employee base, it's identifying greater opportunities, for both our clients as well as for Paycom to be able to fulfill that through additional software development.
Got it. Thank you very much.
Our next question comes from Shekhar Subramanien with Bank of America Merrill Lynch. Please go ahead with your question.
Yeah. Thank you for letting me ask a question, and congrats on the results. I just have a question on the pain point inefficiencies in the HCM usage in customers. Can you help elaborate on where the inefficiencies are and maybe give some anecdotes on how the clients are using your system now, and how this will change that process?
Yeah. There's inefficiencies throughout the HCM system right now. If you have employees that could be using multiple products, email, and phone call. Even to request time off, you could show up tomorrow and you've got 15 emails on people requesting time off. You got to go in, look at the schedule, decide if you've got enough coverage, whether or not to approve that time off. That's one example versus in a complete full system that has both time and attendance, scheduling, and everything else. The employee can make that decision themselves at night without talking to HR, based that the appropriate rules have already been set up in the system, which we do on our end. There's those examples. There's editing examples, making change to benefit enrollment, expense management, mileage tracking, general HR, and onward. Learning management is another piece.
Those are all initiatives that we continue to drive and make more efficient. I will say this, both clients and HR before, this is their idea. HR has been trying to put this together. They've done it in many cases. I think HR departments and accounting departments and procurement and operating departments across the board have really looked to drive these strategies. HR isn't in the middle of a data collection process because they want to be. They're in the middle of a data collection process out of necessity, because if they hadn't been in the middle of the data collection process in the past, the data wouldn't have even had an opportunity to be correct. It's not necessary for HR to be in the middle of that particular process anymore.
When you remove them out of it helps for their own efficiencies because no one went to get a degree in this type of structure with the intent of doing a lot of data input. We are being able to show a lot of ROI by increasing these efficiencies across the board.
Got it. That's helpful. Just one quick follow-up. If you look at the market you're participating now, the 2K-5K and then below 2K, where would you think this adds the most competitive advantage for you from new client wins?
Everywhere. I don't see why anybody wouldn't use it, to be honest with you. It doesn't make sense anymore, of why somebody wouldn't deploy a full employee usage strategy. The only reason why you wouldn't do it is if you already were doing it, I guess. If you already had a full strategy going and it's working for you. Outside of that, it's where everybody should be trying to get. I don't know that there's much ways you can get better at the software side. When you look at HR, I see them becoming, as they have, more and more strategic over time as they look to go toward more revenue-generating activities versus something that's primarily all cost. If you're great at data input, great. It's not something that you necessarily have to do.
Got it. That's helpful. Thank you, guys.
Our next question comes from Brian Schwartz with Oppenheimer. Please go ahead with your question.
Yeah. Hi. Thanks for taking my questions today. To add my congratulations on the business performance. Chad, can you shed a light at all, just wanted to ask you a question on the mix of the bookings these days between, say, the upper mid-market and the mid-market. Is there any way of maybe parsing on what you're seeing, at least from a percentage of those upper mid-market deals that are coming through the funnel? Then the follow-up question along with that is for Craig. How should we think about the long-term margin implications as that upper mid-market funnel becomes an increasing bigger mix of the booking? Thanks.
Yeah. I'll take the first question and let Craig do the latter. Our mix, we've always sold at the upper end of our market. I remember prior to IPO in 2014, I was talking about five companies at that time that had over 4,000 employees that we had sold the quarter before. That was with a much smaller sales organization and a different product. I just want to point that out that we've always sold at the upper end of our market. It's really about those businesses that we market to. I can't call out a different mix of clients today versus what we've done in the past other than to say we've always had success at the upper end of our markets. I'll let Craig talk about the other.
Yeah. I would say on the margin, as Chad mentioned, we've always been in the mid-market as well as the upper mid-market. It's not like we're going to abandon one, between the 50 and 2,000. I can't see our margin changing a whole lot. We've already had this mix over time anyway.
Got it. One follow-up question. Chad, just wanted to ask you how you're thinking about the hiring plans for this year, and if there's any changes to your original plan given the Q1 performance that the business delivered. Thanks.
No, we have not made any changes to our goals for hiring for this year.
Thank you very much.
All right. Well, I want to thank everybody for joining us on the call today. Over the next few months, we'll be on the road meeting with investors at the following conferences. We'll be at the J.P. Morgan Global Technology, Media and Communications Conference on May 14th in Boston. We'll also be at the Baird Global Consumer, Technology & Services Conference on June 4th in New York. Finally, we will be at the Stifel Cross Sector Insight Conference on June 12th in Boston. We appreciate your continued interest in Paycom and look forward to meeting many of you soon as we get on the road. Thank you, operator. You may disconnect.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.