Good afternoon. Thank you for attending today's Paycom Software fourth quarter and full year 2022 results conference call. My name is Danielle. I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions -and- answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. It is now my pleasure to hand the conference over to our host, James Samford, Head of Investor Relations. James, the floor is yours.
Thank you, and welcome to Paycom's Earnings Conference Call for the fourth quarter and full year 2022. 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-K. 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. During 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 Richison, Paycom's President and Chief Executive Officer. Chad?
Thanks, James, thank you to everyone joining our call today. We ended 2022 with very strong results, and I'd like to thank all of our employees for the consistent hard work and execution that drove four consecutive quarters of revenue growth of 30% or more over the respective prior year periods. I'll spend a few minutes on the highlights of our fourth quarter and our full year 2022 results and high level expectations for 2023. Following that, Craig will review our financials and our guidance, then we will take questions. Our 2022 fourth quarter revenue of approximately $371 million came in very strong, up 30% year-over-year, bringing our full year 2022 revenue to $1,375 million, also up 30% year-over-year.
Fourth quarter adjusted EBITDA also came in very strong at $164 million, representing an adjusted EBITDA margin of 44%, bringing our full year 2022 adjusted EBITDA to $580 million, representing an adjusted EBITDA margin of 42%. The sum of our 2022 revenue growth rate and adjusted EBITDA margin resulted in us hitting the Rule of 72. With our full year 2023 guidance, we are once again starting the year strong with outlook for a solid Rule of 65. As a reminder, we guide to what we can see based on our existing recurring revenue, new business sales, and anticipated new starts in the near term. I'm pleased with the momentum we are carrying into the new year.
On the product front, 2022 was a very strong year for Paycom, benefiting from our first full year of rolling out Beti, our differentiated employee self-service payroll solution. We are seeing strong demand trends that position us to deliver another year of rapid, profitable growth in 2023. We are leading an industry transformation by making payroll and HCM processes more efficient for both employees and businesses by eliminating manual tasks, improving accuracy, and reducing liability exposure caused when payroll and HCM is done inaccurately. With Beti, employees are doing their own payroll by interfacing directly with their data in a self-service, easy-to-use software. A recent study conducted by Ernst & Young found that the average organization has a 20% inaccuracy rate when it comes to payrolls, which results in lost revenue, hours wasted correcting errors, and increased exposure to potential lawsuits and fines.
Each of these mistakes cost an average of $291 and can cost upwards of $705 for unentered non-productive time errors. You can see how costly these errors become over time. In fact, over the course of a year, a 1,000 employee company could potentially incur almost $1 million in unnecessary costs correcting common payroll mistakes. Beti automates the payroll processes to deliver perfect payroll. Employees are empowered to identify and correct errors ahead of time so that everybody wins. Our marketing plan in 2022 continued to perform well, delivering strong demo leads throughout the year as we spent aggressively on advertising. At the same time, our deliberate investments in marketing are delivering high margin revenues. We saw improving operating leverage in the sales and marketing throughout 2022.
We continue to be pulled upmarket in 2022, with the fastest growing revenue segment of our business coming from clients with greater than 2,000 employees. We are seeing increasing demand from larger organizations that are recognizing the opportunity to simplify their HCM needs, and Paycom is well positioned to benefit from this trend. With only approximately 5% of the TAM today, there's still plenty of runway ahead for us to expand our market share. Paycom received national recognition from several organizations in 2022. As a workplace, we were named one of America's most trusted companies as well as best company for women, and we received a top workplace in Oklahoma award for a 10th consecutive year. These awards are a testament to our hard work, our thriving corporate culture, and our client focus.
As of December 31st, 2022, our head count stood at over 6,300 employees, up 18% year-over-year as we continue to have great success attracting and retaining high-quality talent to further bolster our future growth. Additionally, I want to congratulate the 2022 Paycom Jim Thorpe Award winner, Tre'Vius Hodges-Tomlinson from Texas Christian University. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, who is one of the greatest all-around athletes in history. Jim Thorpe also happened to be an Oklahoman. To sum up, our focus on the employee experience and client ROI continue to fuel our strong results, and we are executing well. I'm very excited about the long list of new innovative opportunities we will be pursuing in 2023 and beyond.
I'd like to thank our employees for helping to make 2022 such a strong year. We are set up for another great year in 2023. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?
Before I review our fourth quarter and full year results for 2022 and our outlook for the first quarter and full year 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We ended the year with very strong results with full year 2022 revenue of $1.375 billion, up 30.3% compared to 2021. Fourth quarter results were excellent with total revenues of $370.6 million, representing growth of 30% over the comparable prior year period. Our revenue growth was driven by strong demand, new business wins, and adoption of recent new product offerings.
Within total revenues, recurring revenue was $364 million for the fourth quarter of 2022, representing 98% of total revenues for the quarter and growing 30% from the comparable prior year period. We ended 2022 with approximately 36,600 clients, representing a growth rate of 8% compared to 2021. On a parent company grouping basis, we ended the year with roughly 19,100 clients, also up 8% compared to 2021. Total number of employee records increased 14% year-over-year in 2022 to 6.5 million. Paycom's annual revenue retention rate in 2022 was 93%, which was consistent with our recent four-year average of 93% and up more than 200 basis points from the prior four-year period average of 91%.
Total adjusted gross profit for the fourth quarter was $312.5 million, representing an adjusted gross margin of 84.3%. For the full year 2022, our adjusted gross margin was 84.9%. Adjusted sales and marketing expense for the fourth quarter of 2022 was $87.3 million or 23.5% of revenues. Our marketing strategy in 2022 has been very effective at driving high-quality demo leads. With the revenue generated from prior period investments, we saw a 100 basis point improvement in adjusted sales and marketing expense as a percentage of revenues for the year. We plan to continue to invest in marketing in Q1 and throughout 2023. Adjusted R&D expense was $36.6 million in the fourth quarter of 2022 or 9.9% of total revenues.
Adjusted total R&D costs, including the capitalized portion, were $51.8 million in the fourth quarter of 2022 compared to $44 million in the prior year period. We have a very strong pipeline of product development opportunities in 2023 that we believe will create tremendous value for our clients and for Paycom. Adjusted EBITDA was $163.9 million in the fourth quarter of 2022 or 44.2% of total revenues compared to $109.6 million in the fourth quarter of 2021 or 38.4% of total revenues.
For the full year 2022, adjusted EBITDA was $579.7 million or 42.2% of total revenues compared to $419.3 million or 39.7% of total revenues in 2021, representing over 240 basis points of margin expansion. Our GAAP net income for the fourth quarter was $80 million or $1.38 per diluted share versus $48.7 million or $0.84 per diluted share in the prior year period based on approximately 58 million shares in both periods. For the full year 2022, our GAAP net income was $281.4 million or $4.84 per diluted share, up 44% year-over-year.
Non-GAAP net income for the fourth quarter of 2022 was $100.2 million or $1.73 per diluted share versus $64.4 million or $1.11 per diluted share in the prior year period. For the full year 2022, our non-GAAP net income was $357.2 million or $6.14 per diluted share versus $260.4 million or $4.48 per diluted share in the prior year period, up 37% year-over-year. For Q1 and full year 2023, we anticipate our effective income tax rate to be approximately 28% on a GAAP basis and approximately 26% on a non-GAAP basis. Turning to the balance sheet.
We ended the year with a very strong balance sheet, including cash and cash equivalents of $401 million and total debt of $29 million. During 2022, we repurchased approximately 365,000 shares for a total of nearly $100 million. Through December 31st, 2022, Paycom has repurchased nearly 4.7 million shares since 2016 for a total of nearly $590 million, and we currently have $1.1 billion remaining in our buyback program. Cash from operations was $365 million in 2022, representing an increase of 14.3%. The new requirement in 2022 to capitalize instead of expense R&D costs resulted in approximately $27 million in additional income tax payments that would have been deferred under previous law.
This impacted both our operating cash flow and free cash flow as compared to 2021. The average daily balance of funds held on behalf of clients was approximately $2.1 billion in the fourth quarter of 2022. For 2023, we anticipate stock compensation to be approximately $120 million. On the capital expenditure front, we're in full construction of our fifth building in Oklahoma City, and we now estimate total CapEx as a percent of revenues to be approximately 12% in 2023. Now let me turn to guidance. For fiscal 2023, we expect revenue in the range of $1,700 million-$1,702 million, or approximately 24% year-over-year growth at the midpoint of the range.
We expect adjusted EBITDA in the range of $700 million-$702 million, representing an adjusted EBITDA margin of approximately 41% at the midpoint of the range. Once again, we are starting the year's guidance at the Rule of 65. For the first quarter of 2023, we expect total revenues in the range of $443 million-$445 million, representing a growth rate over the comparable prior year period of approximately 26% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $210 million-$212 million, representing an adjusted EBITDA margin of approximately 48% at the midpoint of the range. 2022 was a very strong year for Paycom, reflecting the strength of prior year investments and consistent execution.
We will continue to invest in talent, marketing, innovation, customer service, and geographic expansion to meet the strong demands we are experiencing. We will open the line for questions. Operator?
If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We would also ask that you limit yourself to one question and one follow-up question. The first question comes from the line of Raimo Lenschow of Barclays. Please proceed.
Two questions. Chad, can you talk a little bit about what you're seeing out there in terms of end demand? Obviously, you know, the markets are nervous. There's kind of data points about SMB coming in, they might be weaker on some of the players in the other segment of the software market. Just talk a little bit of what you're seeing. You know, we're also looking at the numbers. Your renewals came in at 93% versus 94%. Just kind of paint a picture for us a little bit there. One for Craig. If you think about the new year and investments alike, how do you think balance that kind of seeing, you know, other guys being nervous about the economy and your investment approach for the year?
Just talk a little bit about the flexibility there. Thank you.
Yeah, I'll start off. I mean, our go-to-market remains very strong. You know, we continue to have very strong book sales, and we've been selling Beti across the board. New clients that come in have about 50% of their employees doing their own payroll within the first two months of using Beti. That continues to be successful. You know, from 2015 to 2018, we had a retention rate of anywhere from 91%-92%. It was 91% for three of those years and 92% for one of those years. For the last four years, from 2019 through 2022, we've had a retention rate of 93% for three of the years and 94% of one of those years. You know, there's often rounding at play as you look through that.
What I will also say is, with clients who have Beti, we have a much, much higher retention rate across our base, and I would expect retention to continue to rise as a larger percent of our current client base deploys Beti.
Yeah, Raimo, then, you know, on the plan for 2023, you know, we've given our guidance on our adjusted EBITDA and, you know, it's still a very, you know, a strong guide on that as we're looking at 41%. You know, we, as I mentioned in the prepared remarks, you know, we're gonna continue to spend on the marketing side, the R&D side, and then, you know, in the service side as well. Really, the, you know, the marketing is the one area where we can pull levers. You know, we don't have any long-term commitments out there, so that is an area where, you know, we could pull levers if we needed to.
Thank you. The next question comes from Samad Samana of Jefferies. Please proceed.
Great. Thanks for taking my questions. I guess first one, Chad, did I hear you say... I think you said you had just more than 6,300 employees? I think that's high teens growth over the prior year. I'm just curious how we should think about the hiring in context of it. It's slightly slower than it was in 2021. I'm just curious, is it that Should expect just productivity to increase, maybe what the exit rate on that growth rate is and just how we think about the hiring trends for Paycom itself?
Yeah. I mean, you know, we hired what we looked to hire last year. I think believe our growth was around 18% in hiring. You know, we definitely have a more efficient client. I've been talking about for quite some time who, you know, we kind of have the haves and the have-nots when you look across our client base with those clients that have already deployed Beti and are getting strong usage out of it. We're having to do less for them. I mean, we're having to fix less things. We're having to, you know, do less adjustments. They're just much more efficient. You know, we don't need as many people when people are using Beti.
That said, you know, we had a very healthy, growth in our, employment, last year. I believe we had, success with that.
Great. Maybe if I just think about, we've almost fully lapped the new office expansions by a year. I know it usually takes a little bit over a year for them to become fully productive, but just how are those progressing, and how should we think about? Are there any new planned offices that you're assuming in the 2023 guidance that you just gave?
You know, we always guide to what we can see. I mean, first, I'll answer those office questions. You know, we did open up five offices over the course of about three months. One of those, I believe, was in December of 2021. The others were in first quarter of 2022. All of those continued to progress. They wouldn't be at full staffing yet, but they would achieve that throughout this year, as well as with the full backline pipeline. Then, next year, in the year of 2024, they would all be on the same quota as our mature offices are.
As far as what we anticipate to do this year from office openings, as we all know that you followed us for a while, office openings that we would anticipate to expand into this year would have very little impact on this year, but would have more of an impact on both 2024 as well as 2025.
Thank you. The next question comes from Mark Marcon of Baird. Please proceed.
Hey, good afternoon. Thanks for taking my questions. One question. Craig, you mentioned, you've got $2.1 billion held for cash held for clients in the fourth quarter. What sort of effective yield are you getting on that? What is the expectation with regards to the float balance growing over the course of the coming year and how we should think about an effective yield on that?
Mark, on the balance, you know, if you look at it this quarter, it grew about 13%. It's grown, you know, at different rates throughout, you know, 2022. You know, it's typically gonna grow at a rate, you know, lower than what our expected, you know, revenue growth rate is going to be. You know, part of that is, you know, as we continue to move up market, that those funds are held, you know, for a less period of time. You know, we have to make those payments much quicker. You know, that move up market would keep that from growing at the same rate as, you know, our growth rate. You know, in terms of the yield, we haven't really, you know, given the exact yield.
You know, what we do say is that, you know, as the rates move up, you know, for every 25 basis points, we would expect to get about $5 million. You know, it layers in over time. You know, as we're continuing to look for longer term investments on our portfolio, you know, some of those are at a little lower rate, and we've actually started to layer in some of those. You could see that from some of our earlier filings. You know, we're not going to get. Also the banks are a little slower to give you those 25 basis points. It takes a couple quarters to get those layered in. You know, it would be something lower than the, you know, the fed funds rate.
Okay. Would the rule of thumb 70%-80% of fed funds with a delay be kind of a good rule of thumb to think of?
I mean, I, well, I think you're close. I mean, I would say that that's kind of in the range, Mark.
We're sub four today.
Yeah, we're sub four.
Thank you. The next question comes from Brian Schwartz of Oppenheimer. Please proceed.
Hi, Chad and Craig. Thanks for taking my questions. Congratulations on a real nice job with the business and on 4Q. Chad, I just wanted to ask you a question about either the business activity or the pipeline momentum by customer size. Are you seeing any differences in terms of the demand or the behavior of the larger organizations that are flowing through the pipeline versus, say, the smaller companies?
Well, we've definitely continued to, you know, creep up as we have done even since IPO, as we've continued to increase our target market. In fact, last year, revenue was up 60% with clients that had 2,000 employees or more. You know, we are definitely seeing a demand continuing to be pulled higher, especially as, you know, businesses are looking to deploy Beti so that their employees can actually do their own payroll.
Thank you. One follow-up just for Craig real quickly. Did you buy back any stock in the quarter? Can you just remind me again how much authorization you have left for buybacks? Thanks.
I don't think we didn't buy back any this quarter. For the full year, you know, we bought back about $100 million worth, and I think we have $1.1 billion left on our buyback.
Thank you. The next question comes from Joshua Reilly of Needham. Please proceed.
Hey, guys. Thanks for taking my questions. If you look at the growth expectations for 2023 here, how do you think about the mix of growth from new customers versus existing? As we know, existing customers, while smaller historically in net new bookings, their growth has increased in the last couple of years, and we're seeing some different trends with different software vendors.
Yeah. Ours is going to primarily come from new logo ads when you just look at the size of revenue that we need to grow by in order to continue to hit, you know, our objectives. You know, first prize is gonna be new logo ads. We don't really have a lot to call out on pace per control growth from that perspective. You know, new logo ads is gonna be primary for us. We've always had a healthy upsell to current clients. It's just been at a much smaller level than what new logo ads are. It's been consistent. Our upsells to current clients as a percentage has been consistent each year with the exception of the year we had ACA.
Got it. That's helpful. As we look to Q1 here, how should we think about the impact from W-2 revenue? Remember last year, you know, that was impacted on a year-over-year basis because of the turnover in 2020 due to COVID. Are the trends gonna normalize here in this March quarter given what happened in 2022 with hiring or anything to highlight there?
Yeah. I feel like they are more normal. I think it's important to understand that, you know, the our year-end services as far as what we provide to a client, that hadn't changed a lot in the last 15 years as far as, you know, you added 1099s at one point, but you have W-2s, W-3s, 1099. Meanwhile, the growth of our other revenue as we've added all these other products, you know, has been somewhat substantial. It's just the percentage or amount that our year-end services has on the overall client base is much lower now than what it was in the past just because it's not growing at the same rate. I would say, yeah. I mean, I would say yes from a normalization.
I think you saw, normal hiring and business patterns, more so last year than what you had, you know, in a couple of years past. From a normalization of year-end forms filing, yes, I would say that we are, we're there.
Thank you. Next question comes from Steve Enders of Citigroup. Please proceed.
Hi. Great. Thanks for thanks for taking the question here. I guess I just wanna, you know, dig into a little bit more on the outlook for next year and particularly on the margin side. I think, you know, talked about in the past that, you know, if we think about floating income flowing through that, you know, that, you know, some of that would flow down to the bottom line. Just trying to think about how you're thinking about, you know, that layering in for 2023 and kind of where the biggest areas of incremental investment are coming and that's leading to the EBITDA, you know, slight EBITDA guide down from where we were in 2022.
Yeah. It's primarily, you know, we've continued to, you know, invest in sales and marketing, you know, and that's what we've, you know, we said on the prepared remarks. You know, we're gonna continue to invest there as you know, and assume that it's gonna continue to work. That's really the area where we're gonna continue to invest. Also in the R&D, I mean, we have a lot of projects in the works, and we'll continue to hire aggressively in the R&D side as well.
Okay. I guess on the marketing spend that you are putting out there, I know it's been a more recent initiative for you all, I guess. What's kind of been the ROI on those dollars that you have seen and, you know, how has that kind of changed the, you know, top of funnel activity or conversion rates that you've seen as kind of the brand awareness campaigns have gotten out there more?
I mean, marketing, you know, we started in 2020. That was also the year that we added four inside sales teams. In 2021, we added another six inside sales teams. I believe one of those years, our unit count went up about 17% with 17% growth. Marketing drove that. You know, as we do our marketing and spend money on advertising, you know, we have clients of all size call us. Marketing's directly responsible for any business that's coming in below 50 employees. You have some direct responsibility for it above 50 employees, but, you know, it provides more support at that level as our go-to-market's different above 50 employees than what we experience below.
Growth's first prize, as Craig's talked about, and as we look at guidance into this year, you know, we expect to spend healthy marketing. Also, we expect for it to work, which would return itself with highly profitable revenue, you know, which we did see throughout 2022, which produced healthy adjusted EBITDA margins.
The next question comes from Siti Panigrahi of Mizuho. Please proceed.
Thanks for taking my question. Chad, if I look at your clients growth in 2022, 8%, that's kind of slowing down versus pre-COVID level, which used to be more in teens. Well I'm sure there's a factor of like you're moving up markets or client size, but is there anything else we should, anything that impacted? How should we think about the client growth rate going forward?
Yeah, I would say the comp had a little bit to do with it. You know, prior to 2020 we had five sales reps that sold inside sales. In 2020, we added 40, and then in 2022, we added roughly another 50, 60. We started selling small business, you know, emerging business in a much stronger way as the advertising was working. I don't want to say that our unit count was inflated, prior, you know, but it was different because we did add a lot of small business units and, you know, it contributed to a 17% growth in units. I think we've had... Again, it did that in a year where we did 25% revenue growth.
I think as we look last year, you know, you could deduct that we had a lot of success, selling in mid-range and above, mid-range in clients. I would say our small business ads were somewhat more normalized, because we didn't really add any small business teams last year like we had in 2020 and 2021.
Thanks for that color. As a follow-up, into your guidance, what sort of conservatism have you backed into your guidance? I know this is definitely going to help float income this year, but what sort of macro, you know, environment you're, you know, factored in into your guidance?
Yeah, I mean, you know, we continue to guide in the $2 million range. We have quite a bit of visibility as we go quarter-over-quarter. You know, I will say that, you know, we started our guide last year for 2022. We started it at 25%. We were comping over a year where we had done 25% growth. You know, this year we're starting our guide at 24% comping over a year where we had done 30% growth. You know, we haven't changed our approach to guidance. We guide what we can see. You know, achievement matters throughout the year. That's what we're focused on as we move throughout the year. I'm trying to answer your conservatism.
I mean, we guide to what we can see each time, and we look to unload the musket throughout the quarter.
Thank you. The next question comes from Bryan Bergin with Cowen. Please proceed.
Hi, good afternoon. Thank you. I wanted to follow up on retention first. I heard the comments about Beti clients being higher and the relative stability from prior years. Just as we think about the year-on-year downtick here, can you talk about, you know, is this larger client churn or is it a lot of churn among smaller clients? Just trying to understand that dynamic.
We're definitely, from a smaller client perspective, now of course, they contribute, smaller revenue amounts, but from a smaller client perspective, I do think that you're seeing more of a trend, like maybe what you saw more pre-pandemic. I mean, there's less prop up for them in the market. You know, for most new businesses, I believe about 75% of them fail within the first three years. All that's at play, you know, when you're working with smaller business. As I just mentioned, we started adding, really started adding those small business units in 2020, and then continued throughout 2021 and, you know, even added more obviously in 2022. That definitely plays into it. I would also say that it's a revenue retention number.
You have a dividing number that you start with. I've been talking for quite some time about the efficiencies that clients who are using Beti and what they're gaining. In fact, we're not having the same hiccups with them that we would often charge them for at a lower margin and then have to fix. Now those are really being prevented with Beti. You've got a couple of things at play, and then also you've got some rounding at play. All that's to say is 93% from what I've seen still up there in an industry leading number. You know, I do expect, again, with clients that have Beti, I mean, we're, you know, we're running at a 99% type retention rate with them.
You know, it's a little bit different there. As we continue to convert our current client base over to Beti, you know, we expect to have some gains in that. I will mention that, you know, we always have some uncontrolled losses, your bought, sold, merged type businesses. Getting to 100% isn't achievable. You know, I believe that we continue to have an opportunity to bump up retention, and that's gonna come through usage, appropriate usage of our product.
Okay, understood. Then a follow-up on margin here. Craig, I may have missed it, but did you say where you expect gross margin to land in 2023? You know, I hear your message on increased efficiency in sales and marketing, but, and you've also mentioned increased, I guess, new product development. Should we expect that the explanation around the EBITDA downtick year-over-year more about R&D ramping, or is it both R&D and S&M?
Yeah, I would say it's both, R&D and sales and marketing, you know, and as we're looking, you know, for our plans for 2023. You know, we didn't really talk about the adjusted EBITDA, but we've been, you know, in a pretty narrow range for the last, you know, several years.
Gross margin.
Yeah, gross margin f or the last several years.
Thank you. The next question comes from Jason Celino of Key Banc. Please proceed.
Hey, afternoon, guys. Maybe Chad, you've been pretty vocal about opportunities to automate payroll and broader HR. You know, when we think about generative AI, I feel like this is up your alley. I mean, what excites you most about the technology if you've looked into it, and what could it mean for Paycom and HR as a whole?
Well, I mean, you know, we are solving, you know, problems for the client and processes that I believe can be automated and, you know, hadn't been until really Beti came into play, which somewhat forces appropriate usage within our software for employees so that they can get paid correctly. I do believe that there's more automation that we can be doing. But, you know, you've got to start with you've got to have the client and the employees using the product correctly, which I will say that about 50% of our client base, that is the case. You know, last year was our first full year of selling Beti and bringing it to the market. So we're having a lot of success with that.
I believe AI, for the sake of AI, you know, isn't really valuable to the client. I believe that, you know, if you can do something consistently, and you can use something like AI, to do that, I think that's a good thing. I don't expect we would see it as a wide platform within our industry, you know, this year, type thing with that. I think you'll have more and more businesses looking for that machine learning and other types of automation that could be used to automate problems experienced by our clients right now.
No, that's fair. Just Craig, maybe a quick one. I think the EBITDA beat in the quarter, $18 million, you know, 6% beat or the higher end of what we've typically seen over the last four years. Anything to note on the strength, expense management, anything on timing of some investments? Thanks.
I mean, you know, there were really, three or four buckets that really helped drive that EBITDA beat. You know, one, you know, marketing spend was a little higher, fourth quarter, and some of that's just when we, you know, are doing those marketing things that we had planned. A little higher capitalization rate on the development, and that's focused on new initiatives. You know, Beti clients generate higher quality revenue, so we saw a little bit of that. In the quarter, we had a net insurance proceeds of about $4.8 million for expenses that were incurred both current and prior quarter. That's really what drove the adjusted EBITDA beat.
Thank you. The next question comes from Arvind Ramnani of Piper Sandler. Please proceed.
Hi. Thanks for taking my question. You know, I just wanted to ask a question. How should we think about growth from existing clients who are expanding their own client base?
Not any different than what we've experienced in the past. I mean, again, I'm removing the COVID year out of that. But not any different than what we've experienced in the past. You know, in any given year, you have some clients grow, you have some clients not. You have some clients buy business, you have some clients sell business. I believe that's always somewhat worked itself out. Maybe we win some, maybe we lose some. But really, the growth for us is driven by new logo adds. I mean, you know, Holly has book sales numbers that drive our revenue growth, and that's how we're going to hit our targets. I think that we expect stability within our current client base as we look to guide. We do have an assumption of stability.
We don't really make assumptions of growth and/or downsizing within those, within our current client base 'cause it, you know, across a 30,000+ client base, you know, it tends to have averaged out over the last 25 years that I've done this with the, with the exception of, you know, the 2020, some in 2021 time period.
Terrific. You know, if you can just kind of help me to reconcile, you know, the 8% growth in new logos versus a 14% employee expansion. How should I interpret those two numbers?
Well, I mean, that would tell you that the client size is growing as well there. You know, I've been continuing to call out that we're having success, continuing to be pulled further and further up market. A couple of years ago, or about six years ago, we went from 2,000 to 5,000. A couple of years ago, I mentioned that we're going above, we're going up to 10,000. I've talked about how we're continuing to be pulled up even further. That's gonna get you a, you know, a larger employee count with potential, you know, for less of a unit count.
I would also say, I don't want to overlook the fact that we've had a lot of success on the small business unit. When you're looking at unit count growth, they're all created equal. I mean, everything's, you know, whether you're a one employee unit or whether you're a 10,000 employee unit, you know, you're created equal on that report from a unit count percentage. It's just been a trend of larger clients, with the exception of the two years where we decided we're going to add our small business, emerging business units, groups, of which now we have 10 teams. That really hadn't grown. The teams haven't grown. Of course, we continue to add small business units.
Thank you. The next question comes from Bhavin Shah of Deutsche Bank. Please proceed.
Great. Thanks for taking my question. Chad, I know we touched on this a bit earlier in the call, but are you seeing anything as it relates to changes in the pipeline generation or sales cycles over the past few months? Maybe even reasons why customers are maybe looking to switch even selecting Paycom?
you know, I mean, we continue to have strong product demonstration leads, but that's oftentimes a function of our marketing and advertising and, you know, we pay for those leads. I can say for us it's been business as usual. You know, we've been back in the field since September of last year, meaning actually back on site on every single call, where before we were doing more of a hybrid. Some were virtual, some were in person. I would say if anything, we're having less calls with the client to get to close. I can't necessarily say that's speeding up the process, but I think we're having better conversations as we go through the process.
Really nothing to call out there, other than today when a client calls Paycom and looks to have a product demonstration, it's about Beti. I would say in times past, it could be about, you know, whatever thorn they had in their paw, that, you know, we were looking to pull out. It's a little different today in the type of lead we are generating.
Got it. Thanks for that. Just to follow up, how do you think about the PEPPM opportunity in 2023 in relative to some of the growth that you saw in 2022? Any specific areas or modules that are specific to that program?
Well, Beti definitely drives PEPPM because, you know, you definitely have to have a certain product set for us, from us, purchased and being used, you know, in order for Beti to work for you. You know, I would say that the clients that we are selling, you know, in 2022, have a better, stronger product mix than those clients we would've been selling in 2018 into 2019. We still do have an opportunity with current clients. You know, we do have to really work at their pace, you know, to get them over to Beti and to really get them to achieve the value that it can deliver. We continue to look that and at that.
There's still opportunities, obviously within our current client base to deliver more PEPPM as well as on new business sales.
Thank you. Our final question comes from the line of Daniel Jester of BMO Capital Markets. Please proceed.
Hey. Great. Thanks for squeezing me in. Appreciate it. Just on that comment about Beti, Chad, can you update us what percent of the base has Beti at year-end?
We're around 50%. It's about where we were when we reported in November. you know, as clients go through year-end, there's different objectives for both them and us as we're onboarding clients. Beti does require a conversion of process on the side of the client as it is going to change how their employees utilize the system. There's a detailed conversion type plan that we go through with every current client as they choose how and when to deploy. We're continuing to meet out there with our clients. I would also say that your larger clients are deploying it a lot quicker. Current clients are deploying it a lot quicker than what your smaller, current clients might be deploying it.
As a point that I would mention once more, all businesses of any size, whether they are small or large since July of 2021, have been sold and converted into Beti. We're really talking about-
Sure.
our current client base that we had prior to that.
Great. Thank you. Just lastly, and you touched on this a couple times about sort of the upmarket success and opportunities. As I think about sort of how you're investing to attack those opportunities, is this strategic, i.e., you're devoting more resources specifically because you think there's more opportunity upmarket, or is this tactical in which kind of year in and year out you're deploying resources and maybe one year you see more opportunity smaller and downmarket, and another year you're seeing more opportunity in the upmarket so you can be sort of tactical with those sales investments? Thanks very much.
Yeah. I'd say it's a little bit of both. You know, one thing I've been saying for quite some time now, you know, our industry shifted. It shifted to leverage employee usage to help the client. When employees use the product correctly, the client has less exposure and liability around this process, which, you know, paying employees, providing them benefits and everything else, I mean, that carries some exposure, even how you have an employee applies for a job. You know, I believe that this self-service technology has really been helping the client.
The reason I say that is this: You know, when it comes to an employee, you know, Jan Smith, whether Jan Smith works at a 30 employee or whether Jan Smith works for a 10,000 employee in regards to how they work with HCM and payroll products, it's substantially the same as far as the needs that Jan has. What I would say is we've stayed very focused on the employee, and an employee is an employee regardless of which company they work for. Are there some things that a larger company, we just know we're gonna run into that's going to be different than what we would run into in a company that might have, you know, 150 employees? Absolutely. There's some changes in that.
You know, I would say that's where more strategy comes into play, as well as, you know, making tactical moves to make sure that we're able to provide the back end experience that they're looking for. I will say the more that we're doing at the employee level, the less you're having to do on the back end. 'Cause a lot of the things you're doing on the back end is to make sure you're not having issues with the employee data and/or if you do, you're having to fix it. So, you know, you get a lot of points for prevention these days. You know, large companies, they don't wanna do a lot of extra work either.
Thank you. With that, we will conclude our time of question -and- answer. I would now like to hand the conference back over to Chad Richison for closing remarks.
Well, I wanna thank everyone for joining the call today, and I wanna send a special thank you to our employees for contributing to our continued success. 2022 is a great year for Paycom, and we're set up for another great year in 2023. We'll be hosting meetings in New York at the Wolfe March Madness Software Conference in February. We'll also be participating in the KeyBanc Emerging Tech Conference and the Morgan Stanley TMT conference in San Francisco in March. We look forward to catching up with many of you soon. Operator, you may disconnect. Thank you.
Thank you for joining today's call. Thank you for your participation. We would now disconnect your line.