Paycom Software Inc (PAYC) 2014 Q4 法說會逐字稿

Hello, and welcome to the Paycom fourth-quarter and full-year FY14 results teleconference.

(Operator Instructions)

At this time, I'd like to turn the conference over to Mr. Craig Boelte, Chief Financial Officer of Paycom. Mr. Boelte, you may begin.

Thank you, 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 are reasonable, actual results could differ materially because the statements are based on our current expectations, and are subject to risks and uncertainties. These risks and uncertainties are discussed in our final prospectus that was filed with the Securities and Exchange Commission on January 15, 2015.

You should refer to and consider these factors when relying on such forward-looking information. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results is currently available in our press release that we issued after the close of the market today, which is located on our website, 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 us today. We have a lot of ground to cover as 2014 was a transformative year for Paycom with many achievements and incredible progress.

Let's start with our fourth-quarter and full-year results. I will quickly touch on our results at a high level, while letting Craig handle a deeper look at our financials.

We had a stellar fourth quarter, with revenue of $44 million representing growth of 45.4% from the comparable prior-year period. This growth rate is a testament to the ongoing compelling nature of the Paycom solution.

We are continuing to see success in the marketplace, as prospective clients continue to see the value offered by our robust, yet easy to use, single-database offering. For the fourth quarter of 2014, our adjusted EBITDA was $7.8 million, which represents growth of 120.7% from the comparable prior period.

Now, let's take a look at our full-year results. For the full year 2014, our revenue was nearly $151 million, which grew 40.3% compared to 2013. For the full year 2014, our adjusted EBITDA was $27 million.

In addition to offering best-in-class functionality and allowing rapid product development, our single-database platform and history as a cloud provider from day one allows Paycom to be very profitable. As our results for this quarter and the full year underscore.

We ended the year with 1,021 employees, which represents employee growth of 21.5% over the comparable prior period. This contrasts with our revenue growth of 40.3% for the same period, and highlights the increasing productivity of our team.

2014 was a pivotal year for Paycom, as we hit several key milestones in our goals to become the leading provider of payroll and HCM services. We went public in April, and our initial public offering has broadened our visibility and profile. And has helped spread the Paycom message with potential clients as we continue to grow.

We expanded our sales office footprint in 2014, adding five new sales offices in the first quarter and laying the foundation for our future growth. These new offices are continuing to ramp up, and every passing month we are encouraged by their improving performance.

Today, we are pleased to announce that we continue to build on our momentum with the opening of new sales offices. This past month, we opened an additional 5 new sales offices bringing our total sales teams to 36. These new sales offices are located in Cincinnati, Kansas City, Nashville, Pittsburgh, and a second New York City office located in Brooklyn.

It is our strategy to open new offices with proven sales managers from an existing territory. And, we are excited to deploy these proven sales professionals in what we anticipate will be very productive territories for Paycom.

As a reminder, it typically takes a new sales team 24 months to reach maturity. So these new offices announced today are poised to drive growth in 2017 and beyond.

We are optimistic that our offices opened this month will share in the success our established offices have enjoyed to date. Our sales executives are second to none in terms of their drive, attitude and training. They also have the benefit of selling what we believe is the premier solution in the industry.

When we survey the landscape and evaluate the feedback we receive from our current and prospective clients, we believe that there remains ample runway for ongoing growth, as human resource professionals and forward-thinking C-suite executives continue to learn about the benefits they can achieve with the Paycom solution.

Let me spend a couple of minutes highlighting a few examples of new clients that joined the Paycom family in the fourth quarter. These examples were chosen from a large pool of new clients to showcase the breadth of appeal of our solution. All of these new clients were using a SaaS provider.

First, we converted a healthcare provider with roughly 3,700 employees that had been using a variety of vendors across payroll, time and attendance, and benefit administration. They chose Paycom for our superior Affordable Care Act reporting abilities, as well as the very attractive option of consolidating all these functions under one provider. This client will also utilize our background check capabilities, which is a crucial function for a healthcare organization.

Next, we signed a higher education client with nearly 3,000 employees. This client had been using one of the legacy provider's SaaS offerings and was attracted to the robust reporting capabilities offered by the Paycom solution. And, it's worth noting that the economic impact of our solution presented a significant economic return for this organization.

And finally, but not least, we brought on a quick-service restaurant group with over 2,000 employees. This company was using a separate HR and payroll offering, and wanted to have a single solution. I'm very pleased that we are going to drive over $75,000 a year to this client's bottom line.

I'd also like to point out that all three of these examples are clients with employee bases of at least 2,000. Which underscores the trend of Paycom reaching further up market, and is evidence of the flexibility and scalability of our solution.

Turning to our solution, our R&D spending increased over 100% in 2014, and we were able to generate substantially more functionality including push reporting, candidate tracker, surveys and schedule exchange.

We also launched our Affordable Care Act offering. Which is enjoying great traction in these early days of the Act, as clients seek to understand the impact of the Affordable Care Act and how they need to stay compliant with the evolving requirements of this legislation.

All of these enhancements are the result of listening carefully to our clients and responding quickly to their request, and also working to anticipate their needs. We are able to leverage our single-database architecture and our skilled development teams to create new enhancements quickly and efficiently.

Today, we are extremely excited to announce the launch of a new application that we've been working on for nearly a year. Paycom Learning, our learning management system, or LMS, represents what we believe will be the best-in-class learning management system in the marketplace. Paycom Learning is a new application. And like all of Paycom applications, it's really just additional functionality of the same solution and does not require any integration.

Paycom Learning will allow our clients to offer educational modules to their employees. Workers often need to obtain certifications or recertifications in order to maintain their status or improve their career path. Additionally, new hires are often required to take mandatory training courses, like ethics, compliance, company overviews, skills or job safety, during their on-boarding process, just to name a few.

Traditional HCM vendors' learning systems are often comprised of multiple-point products from multiple vendors. We don't run into many companies that offer LMS within their full suite of payroll and HR offerings. With the Paycom system, everything is provided in one solution.

For example, the Paycom LMS video is viewed in a browser and does not require to download a video software to view. This makes it easier for all employees to complete their course.

Additionally, the system makes it easy to connect the learning and certification to the applicable job title. Even pay levels can adjust to reflect employee progress. This saves time for both the employee and also HR professionals, further enhancing the efficiency of the organization.

We look forward to introducing this new offering to the marketplace. And, we believe we will see strong appeal for Paycom Learning, as companies continue to realize the benefits they can achieve by going with a single-database system.

To conclude, we had a great first year as a public company. We believe our compelling offering, dedicated sales force, and continued product innovation will help us sustain our momentum through 2015 and beyond.

Now, I'll turn the call over to Craig to discuss our financial results and outlook. Craig?

Thanks, Chad. Before I review our fiscal fourth-quarter and full-year results, and also our outlook for the first quarter and FY15, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures that exclude stock-based compensation and other non-recurring charges, including transaction expenses related to our initial public offering and our recent secondary offering. A reconciliation of our GAAP to non-GAAP results is included in our press release.

Our fourth-quarter results were strong, with total revenues of $44 million representing year-over-year growth of 45.4% from the comparable prior-year period. Our growth in the fourth quarter continued to be primarily driven by new client additions by our mature sales teams, though our more recently opened sales teams are producing on track with our expectations.

For the full year 2014, total revenue of $150.9 million represents growth of 40.3% as compared to 2013. Within total revenues, recurring revenue was $43.2 million for the fourth quarter of 2014. Representing 98% of total revenues for the quarter and growing 45.1% from the comparable prior-year period.

Annualized new recurring revenue, or ANRR, was $20.6 million for the fourth quarter of 2014. Up from $14.3 million in the same period last year, and representing 43.8% growth from the comparable prior-year period. For the full year 2014, ANRR was $59.6 million, representing growth of 41.8% from the comparable prior-year period.

Total adjusted gross profit for the fourth quarter was $36.5 million, representing an adjusted gross margin of 82.8%. This compares to 80.4% in the fourth quarter of 2013. Cost of revenue consists largely of hosting and support costs, along with the employee-related expenses for client support and ACH fees. For 2015, we expect overall gross margin to be approximately 78% to 82%.

Turning to operating expenses, as a reminder, we pay commissions to our sales reps based solely on new sales at the time of their first monthly billing cycle. This is a one-time commission paid which we recoup over the life of the client relationship. When we experience strong sales performance in a quarter, there is the potential for us to see increased expenses in that quarter depending on the time of when the sales occur.

For the fourth quarter, total adjusted administrative expenses were $30.7 million. This compares to $23.4 million in the fourth quarter of 2013.

Adjusted EBITDA was $7.8 million, or 17.6% of revenue in the fourth quarter of 2014, compared to $3.5 million, or 11.6% of revenue in the fourth quarter of 2013. For the full year 2014, adjusted EBITDA was $27 million, representing approximately 18% of revenue, as compared to $19.9 million, or 18.5% of revenue in 2013.

Non-GAAP net income for the fourth quarter of 2014 was $3.1 million, or $0.06 per diluted share based on approximately 54 million shares, versus a non-GAAP net loss of $100,000, or $0.00 per diluted share based on approximately 46 million shares in the year-ago period. For the full year 2014, non-GAAP net income was $9.6 million, or $0.19 per diluted share as, compared with non-GAAP net income of $2.7 million, or $0.06 per diluted share in 2013.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $25.1 million and debt of $27 million. As a reminder, this debt represents the financing on our corporate headquarters.

With that, let me turn to guidance for the first quarter and for FY15. For the first quarter of 2015, we expect total revenues in the range of $49 million to $50 million, representing a growth rate of approximately 34% at the midpoint. We expect adjusted EBITDA in the range of $9 million to $10 million, representing an adjusted EBITDA margin of 19% at the midpoint.

For FY15, we expect total revenues to be between $194 million to $196 million, or 29% year-over-year growth at the midpoint. We expect adjusted EBITDA in the range of $32 million to $34 million, representing an adjusted EBITDA margin of 17% at the midpoint.

In summary, we had an excellent fourth quarter, which capped a strong first year as a public company for Paycom. With that, we will open the lines up for questions. Operator?

(Operator Instructions)

Raimo Lenschow, Barclays.

Hey, guys, this is Harry on the phone for Raimo. Thanks for taking the question, and congrats on a really great quarter and the new product. I just wanted to dig in a little bit on that.

So how do you see the product with regard to early traction with your existing customers? Competitively, are you doing rip and replace of, I guess, it would be maybe cornerstone, or what are you seeing on that end? And in terms of pricing, how is that shaking out?

All right, thanks, Harry. So this is a product that we actually released to our sales organization three weeks ago. I know that we have brought in one deal as of last week, I believe, and it's in conversion right now.

And so it's still very early. This is a product we've been working on for a year, but really we started this when we entered the talent management market about two and a half years ago. We knew this would be an area that we would end up developing out.

And as we listen to both prospect and customer demand, this was an area that we thought would have some traction. And so we've developed it out like with any products we do develop. We do develop products out that we expect to be best-in-class, and we would expect the same with LMS.

As far as pricing, this will raise our overall cost per employee which we have right now that's to annualize which we have right now stands at about 400. We haven't given any hard, fast numbers on exactly how much that would be, but this will be an additional cost as an add-on to our talent management functionality.

Got it. And just a quick follow-up from a high-level, obviously, as you mentioned, it's still very, very early. But what have your conversations with customers generally been like, if you've had any other than that one that you've brought in, generally positive feedback? Have they been a part of testing on any level?

Yes. We definitely have had a focus group come in as we were going through our development of the product. And some of the focus group were current customers. All companies, especially customers that we work with or prospects that we actually sell in our employee count range that we go after, they are all providing training at some level for their employees.

And so they're all doing this, either using another product or more often than not we're going to be seeing them using multiple products and doing it manually. There are a number of products that you could cobble together to actually perform these tasks, which many companies do.

And then there are also companies out there that do this through their learning management systems, you mentioned one earlier. And so, we're going to be seeing a mix of both, and we're excited to be getting out there with this product.

Great. Thanks, guys. Congrats on a good quarter.

Michael Nemeroff, Credit Suisse.

Hey, guys, thanks for taking my questions. And congratulations on a really strong quarter and a good end to the year.

Thanks, Michael.

So a couple of questions. New office openings, five at the end of this year, which is going to drive growth in 2017. I understand that. Is there any chance that you would maybe step on the accelerator and open more than what you're thinking over the next couple of quarters, let's say, and then really trying to juice that growth a little bit faster?

We are definitely happy that we were able to open up five this first quarter. I know we've somewhat set a trend in that we opened up five first quarter of 2013. We are always looking for the opportunity to open up new offices.

And as I mentioned before, our model is we take an existing sales manager who is proven, relocate them to a new office, and then backfill them with an up-and-coming sales rep who has proven to be a leader. And therefore, able to be a sales manager.

So it's a lot harder to do when you have seven offices, and it gets a little easier when you have 15 offices. And gets a little easier when you have 31 and 36 offices.

And so we still do have a bench of sales managers that are ready to relo, we also have a bench of people that are ready to backfill them. Right now we're going to focus on absorbing those offices that we've opened to ensure success, and then as we make moves in subsequent quarters, we'll definitely be announcing those.

That's helpful. So, the first example that you mentioned, Chad, in your prepared remarks of a 3,700 employee Company. I'm just curious, how long was the sales cycle was that versus some of the other smaller ones?

And how experienced a salesperson did that close that in? And as you start to move up and sign larger companies, would you consider hiring more enterprise-level salespeople, which I know is somewhat inconsistent with your current sales training model?

Well, I will say this. As far as the 3,700-employee Company, we chose these from a sampling of clients that we've actually brought on. I can't point to the exact sales rep that has sold this. This may have been a sales rep that's been with us for four months.

We have a world-class training program. We do put out reps that can sell enterprise-level companies right now. And if we want to say enterprise is above 2,000 or enterprise is above 3,000, we've proven that quarter after quarter as we've continued on. And so we are looking to continue to add sales reps.

With the new offices that we're opening right now, five new offices we're opening, we'll be adding sales reps to that. We'll continue to add sales reps to maintain 100% staffing in the offices we're in. We have chosen the model that we've chosen to be able to actually hire very intelligent people with Bachelor degrees or better.

Some have outside sales experience, many do not. Some are changing career. We've chosen that model; we do feel like we have great success with that.

I do think our numbers from last year and the years prior actually reflect that, so I'm very proud of the group that we have, our salesgroup. I think they're second to none, and if I could find better people to do it a better way, then we would be changing to that model. But again, we feel very confident in our model and the success we're having.

That's great. And just one quick one for Craig.

The gross margin guidance that you gave for 2015 was 78% to 82%. It's been firmly over 80% for the last couple of years. I'm just curious, is there anything in that 78% to 82% that would cause you to think that it will be closer to 78%, or what's the logic behind that?

No, that's just the range we gave. As we continue to open the offices, we need to staff and train ahead of that growth and to handle that new business coming in. So we'll continue to have cost discipline in the gross margin, but I wanted to give a range and that just to handle that growth.

Great. Thanks for taking my questions. Have a good night.

Mark Murphy, JPMorgan.

Thank you. I will add my congratulations as well, Chad. You had mentioned several wins with companies above the 2,000-employee level. And so I'm curious, when you look at the 2015 deal pipeline, is that also tilting in the direction of larger organizations? So do you think there's some kind of a sustainable change afoot here?

We have really been focused on those clients that have greater than 100 employees for a while now. I say that, in 2013, we put out, as part of our S-1 filing, we put out that 86% of our revenue came from companies that had greater than 50 employees. And we definitely are not going to ignore that market either.

But we do have sales reps that continue to gain confidence in our value proposition, as well as a market that's gaining confidence in our value proposition as we've moved up market. And again, as someone has success selling a 2,000-employee company and then you realize a 3,000-employee company isn't that much different, and we have success selling that. And then as we have more sales reps, by nature, we're going to sell more of them.

So I'm not going to say that we're necessarily shifting our market in a different direction. We're just having people that are having success selling businesses. This isn't our first quarter to have companies that have well over 2,000 employees onboarded onto our system. So I see that trend continuing, as well as I see us to continue to sell in the mid-market which we've been successful at.

Okay, great. In terms of the Affordable Care Act offering, is there any way to quantify the contribution? For example, is that providing a tailwind for the ANRR growth that is detectable to you?

Is it adding a point or a few points here and there? And given the dynamic that's driving that, does that feel as though it's going to be sustainable?

I wouldn't be able to necessarily say, because our ACA product is a part of our overall system. It's not something that at this point in time we're charging more for. It's included in our system.

There will be some additional fees, if everything holds together and the regs are correct and everything, at the end of 2015, first of 2016 as we file Form 1094s. As well as Form 1095s for both employers and employees. I couldn't necessarily say that ACH is providing us a tailwind, it is a conversation piece.

And I do think that the way we provide our ACA product is very important for clients, especially those that want to do less of the work. Because again, if you have our benefits administration system, time and attendance system, and document storage system, all-in-one system, you have a substantial amount of work already completed for you.

And everything is right there. And so I think the way we've tied it together probably has helped us win some deals. I don't know if we wouldn't have won those deals anyway, so it's just hard to quantify the tailwind that's there.

Okay, great. And, Chad, the last question for me.

Have you detected any evolution in terms of the platforms that you are displacing? For example, if you were to look across ADP, Ceridian Paychecks, ERP vendors, you mentioned the SaaS vendors as well in your prepared comments. Is that mix trending in any particular direction, or are you seeing any different type of behavior from any of those categories?

They've always been very competitive, and I would actually include our large incumbents as SaaS vendors. They do have SaaS offerings.

It would be very rare for us to go out and convert someone from an installed product today. If we're converting someone from one of our competitors, whether it's a newer SaaS competitor or whether it's an incumbent vendor, we're converting them from their SaaS offering. And so our competitors have always been extremely competitive, and we continuously see them innovate their products and that hasn't changed in this last quarter.

Great, thank you very much.

Thank you.

John DiFucci, Jefferies.

Thank you. Hello, Chad and Craig. My first question is a follow-up to Mark's, just his last one.

You obviously had a head start on the established payroll processes with cloud services building your system from the ground up as a multi-tenant solution. And being able to add modules on that, all as one contiguous solution.

But now, these cloud vendors, as Chad, you talked about, they're actually pushing offerings that they tout as cloud-based services themselves. In some cases, they're different, or at least they don't quite have the same kind of efficiency, at least the infrastructure doesn't appear to be that way. But I'm just curious, are you seeing -- you mentioned that that's who you're going up against, but are you seeing any increased friction as they really -- increased sales friction, as they really start to push these products when they realize that they need to do that?

I will go back to what I said earlier, and maybe try to expand on it a little bit more. Our competitors, whether it be incumbent or other SaaS, traditional SaaS providers, have always been extremely competitive. It's really about the total-value proposition.

The cloud hasn't been at key differentiator for us for probably eight years. When we are going up against competitors, they are in the cloud. They're using their cloud version or a true cloud product, and from the client side that's what they know.

They log in on the internet, it's there, it's on the internet, and it allows them to do their work. So it is not unlike years past, all of these vendors, be it an incumbent or SaaS vendors, continue to get better at what they do. And that's why we have continued to innovate our product to keep what we feel is a very strong value proposition for those clients.

Okay, thanks, Chad. I apologize for the background noise here. I'm actually on a train.

But I guess the numbers speak for themselves too, when you think competitively. But I guess one other question, and this is a question you get asked by investors. Some of your most mature offices, which I would say could probably some of your most productive offices, are in the location where your headquarters are in the oil patch.

And I assuming that they are generating good business there. Given the issues around the energy sector, I'm just wondering if that's had any affect on your business with these customers and these particular -- in that region? Or do you expect any affect?

Right. No, and we do get that question. I think back to your prior statement, the numbers do reflect what's going on here. Now this isn't our first -- we've been in business since 1998, and in 2008 we didn't have 36 offices, or even 20, or 15 offices.

And so we were heavily concentrated in the Southwest and the Midwest. And we went through the oil crisis or whatever you want to call it then, with very little impact on our business. As oil prices go down, it does have a tendency to hurt many companies and their employment and then other companies do get a little bit of an uptick when the price of oil goes down.

So we aren't heavily concentrated across any one industry. We're very diversified in that, and I think that's helped us. But in answer to your question, no, we have not seen any impact that we could point to based on the price of oil.

Okay, great. Nice job, guys. Thanks a lot.

Thank you.

Thanks, John.

Richard Davis, Canaccord.

Thanks. Two things, one, thanks for trying to recruit my daughter. That was nice.

Two, maybe it's the radio stations that I listen to, but I hear a decent number of ads for you guys. Could you talk about how you think about radio and, more broadly, media advertising as a driver of demand for your various offices? Thanks.

I will tell you that we really use radio as more of a branding, if you will, for companies that we're already in. Maybe a little bit of a softening the beaches. We get very little business from either radio advertising or even pay-per-click-type advertising.

So our sales model is direct. We also do have referrals that we do receive from both our current clients and third-party influencers. So it's hard to say, but our phone isn't ringing from the radio ads.

But they're a good branding. And if we're already in there talking to someone and they do hear our ad, it is some good branding.

Got it. So it's more of an overlay, which makes sense. Okay.

It's a part of a marketing -- it's one piece of our overall marketing strategy, which includes radio, direct mail, through e-mail, training seminars, and I could continue on and on.

Got it, thanks.

Thank you.

Brendan Barnicle, Pacific Crest Securities.

Thanks so much. Chad and Craig, does the adjusted EBITDA guidance include just those five new offices that you're announcing today, or have you left room for additional office openings?

Our adjusted EBITDA guidance, we guided for the full year as well as the first quarter. Obviously, our first quarter included those five new offices that we're opening, and as new offices come on, the cost of those new offices comes on over time as well. So at this point, we have definitely included for those five offices opening in the first quarter.

But have you left yourself any room if you decide some market looks good that you hadn't planned on that maybe open in the back half of the year or later this year?

We're always going to look at opportunities during the year. And I would say we obviously have some room for opening new offices throughout the year.

Great. And you guys are now at 36 offices. How many do you think you can do here in the US?

This is Chad. I think we can do well over 100 offices in the US.

Chad, would you get to that 100 level before you looked at maybe doing international, or at what point would you think about some of the international expansion?

I couldn't necessarily answer that. As I sit here today, we're going to be responsible with way we grow the Company, both our top line as well as, as you mentioned, the adjusted EBITDA and our margins. And so, we're going to continue to do that, and do it in a way that make sense.

I think as long as we're having success doing what we're doing, we're going to do that. And the market in the US is over a $20 billion market today. And that's the outsourced piece, and so you have a whole nother side that doesn't currently use a vendor.

So we're squarely focused on the market that we have today. There's a lot of opportunity for us, as well as others that are out there. So we're going to look to capture that as we sit here today.

Terrific. Thanks, guys.

Thank you.

(Operator Instructions)

Corey Greendale, First Analysis.

Congratulations on a great year.

Thanks, Corey.

So a couple questions. First of all, just a housekeeping question. I'm sure this will be in the K, but what was your retention rate in 2014?

Our retention rate in 2014 was 91%, consistent with our prior years.

Great. Next question, slicing and dicing your growth drivers a number of different ways, given that you keep adding products, and it sounds like you're moving up customer size. I would think that even your mature offices are still growing to some degree, is that right? Can you give us some sense of the growth rate of a typical mature office right now?

That's not something we've talked about, but it is true that the longer an office is open, the stronger their pipeline. And one could deduct from that, the more they're going to sell over time.

Okay. And then, Craig, you somewhat addressed this question on the gross margin. But I think the guidance, if you take the midpoint of the 2015 guidance, it implies that EBITDA margin is down about 100 basis points. Is that just because you have more non-mature offices, and is that primarily played out in the gross margin line or is there anything else you'd highlight?

No. We're continuing to staff -- we'll have to continue to staff those new offices, as well as continue to ramp up the offices that we opened last year. So that's reflected in the adjusted EBITDA number.

Okay. And the R&D spend in Q4 picked up a little more than at least we had modeled. Is that -- are you actually spending more, or was it a different capitalization rate? And what are your thoughts on R&D spend in 2015?

R&D spend for 2015 is going to continue to increase. We're very focused on our R&D. We're very focused on product creation.

As we were able to roll out several products last year, one substantial product also at the beginning of this year that we talked about. We actually had other pieces of functionality that have been rolled out as well. Although, not significant in fees, were overall significant to what we're able to do.

So we're going to continue that into the year. We're in a business that it's a hard business. Payroll is a hard business.

Understanding taxes, reciprocity law, deposit and filing rules, ACH rules, settlement rules, and what have you, it's a hard business. And so you have to continue to staff for that and stay on top of that, because it's ever-changing. So we're going to continue to do that and focus on that, and with that, yes, we will continue to add to our R&D group in 2015.

Okay. And then just one last quick one for you, Chad. Congratulations on the new product.

I think in general, customers at the lower size of your spectrum historically haven't had a learning system. Can you just give some -- do you think that's going to change? Is there some functionality that would make this attractive to smaller employers, or what do you see as the ultimate penetration rate of this product relative to your others?

Well, I definitely think LMS is something that in the past had been somewhat reserved for larger businesses of companies that we work with, as far as the larger end of the mid-market. But I also believe companies that have 50 employees can use an LMS system. They're providing training at 50 and 75 and 100 employees, all rules are starting to apply.

Training is important, and so they are providing this to their employees at some level. They are training their employees. They are having their employees go through standard ethics training and other training.

And so I also think it depends on what type of Company it is, to whether or not they would be more geared toward offering it sooner rather than later. But I do feel like this is a product that you're going to see pick up. Again, the easier something is to distribute it, the more companies -- the more businesses that are going to purchase it.

So I think with our product, we've made it extremely easy to distribute. If you're a client with us today, you already have it. All you have to do is call, and we can turn it on for you.

And so it makes it easy to distribute, the employees are already used to signing in, they're already used to using the full suite of products. So, yes, I do believe it can have an impact for the smaller end of our mid-market as well.

I think it's a good point, and thanks very much.

Thank you.

John DiFucci, Jefferies.

Thanks for taking my second question here. And it's just a follow-up to Brendan's question, and I know you will be asked it. So I rather hope you can address it on the call.

Craig, you said that your guidance for adjusted EBITDA does leave some room in case you open up another office or two -- or you didn't say an office or two, but opening perhaps another office. Does your revenue guidance include any contribution from new offices beyond the five you just opened, or does the revenue guidance include the offices you have in existence today?

I can take that. This is Chad.

From the revenue perspective, the five offices we've opened in this first quarter will represent a very, very small, somewhat non-existent amount of revenue for us as it relates to 2015. They're really going to start having an impact toward the end of 2016, and again they should reach maturity in 2017 as it takes that 24 months. So I think that, again, we're going to be very responsible with how we open up offices.

We are not going to sacrifice adjusted EBITDA. We don't feel like we'll need to, in order to open up offices. There's multiple levers that we have here and a way to calculate that, and one is continuing to generate a good revenue, profitable revenue, that we're bringing in to the business.

And so, that's the way we're looking at it. We've opened up five. The guidance we're giving right now is guidance based on those five.

As we move into subsequent quarters, and if we choose to open up additional offices at that time, we're going to be responsible in the way we've given our guidance. And we're going to open them up responsibly. And so I think we're very comfortable with the guidance we're giving today, and we're going to stand behind that.

Okay, Chad. And I realize that there's very little contribution from the office, but when you open an office at the beginning of the year, if my memory is correct, you can get or expect to get some revenue out of that. Maybe $0.5 million or so. So it sounds, though, like in your current guidance, you're assuming the offices you have today. And am I -- I don't want to put words in your mouth, but is that what you just said in a nutshell?

I want to make sure I understand your question. I guess what I'm saying is, is that the offices that we've opened in first quarter of this year, as they start, we start hiring into those offices and as those reps to start going through training. And then as the reps start building a pipeline, and then as they sell a deal, and then as we start converting that business, and then bring it over as revenue, it's going to take some time.

But it will still follow the same timelines that all of our other offices have followed, in which they'll reach maturity in 24 months. So the bulk of the business that we will be bringing on this year, as well as subsequent years and any years that we've done prior, comes from those offices that are already mature, that have been opened for 24 months or longer. With, as you mentioned, a little bit of sprinkling from the new offices.

All right. John, did we lose you? All right. Well, I guess that's the --

Sorry, Chad. I just didn't want to have everybody hear the announcement. But listen, thank you. Appreciate you taking my question.

All right. Thank you.

I think that's our last question, so I want to thank everyone for participating in today's call. We had a great first year as a public Company. We remain very excited about our value proposition. It continues to resonate as clients look for an easier way to do complex things.

And we look forward for continued growth and progress into 2015. So thank you.

The conference is now concluded. Thank you for attending this presentation. You may now disconnect.