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Operator
Hello, my name is Dan and I will be your conference operator today. At this time I would like to welcome everyone to the Paycom Software, Inc. second-quarter earnings conference call.
(Operator Instructions)
I would now like to turn the call over to Craig Boelte, Chief Financial Officer. Please go ahead.
- CFO
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 filings with the Securities and Exchange Commission, including our quarterly report on form 10-Q for the quarter ended March 31, 2016, and our annual report on form 10-K for the year ended December 31, 2015. You should refer to and consider these factors when we rely on such forward-looking statements. Any forward-looking statements speaks only as of the date on which it is made and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
Also during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation 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.
- CEO & President
Thanks, Craig.
Our momentum continued through the second quarter of 2016. We had excellent results, with revenue of $74 million, representing growth of 51% over the comparable prior-year period. We are pleased with our performance and believe our sales success is due to the growing recognition of the benefits that can be gained from Paycom's single database architecture.
Our organically built and internally trained sales force is focused solely on the US market, which we believe holds ample opportunity to fuel our growth for many years to come. In fact, we believe that we are still in the early stages of a multi-year mission to gain market share and grow into one of the largest providers of cloud-based payroll and human capital management software.
To further illustrate what drives our confidence, I would like to share some insight into some of the ways the Paycom solution help clients improve their workforce process and succeed. When clients select Paycom, they are not just buying the product. They are also improving their processes and unlocking ways to engage their workforce by aligning with a strategic and knowledgeable business partner.
At Paycom we developed our payroll and HCM software to work seamlessly with each other, leveraging the true power of our single database system to enable executives to run their businesses more efficiently. When we engage with a new client, the Paycom system represents an opportunity for them to not only enhance their existing processes, but also institute new processes to enable the C-suite to better manage their workforce, since it is frequently the first time they have had all of their HCM data available in a single place.
In addition to implementing the Paycom system for new clients, we're often helping them put best practices in place that are enabled by our system. These improved practices drive even greater efficiencies and also increase client engagement with the Paycom solution across the entire organization, from front-line employees to the C-suite.
Finally, leveraging both our talented development teams and also our internal analytics, we gain insight into client usage across the entire system, application by application, employee by employee. Using this data, we identify best practices for each aspect of the Paycom solution and bring those findings to our clients.
We're now using our internally developed learning management system to teach our clients and their employees how to best use the Paycom system. Our clients have enjoyed this media-rich learning platform, known as Paycom University, and this has been a great introduction to the power of our LMS offering. The constant improvements to our system and helping clients optimize how they can use it are having a positive impact on sales. We are seeing productivity improvements across the entire sales organization. These improvements are evident in our results and guidance.
Turning to the market, I will now provide some comments regarding the upcoming changes to the FLSA overtime relations. As many of you know, in December, the rules regarding overtime pay will change dramatically. The annual salary threshold for employees' overtime exemption will increase from approximately $24,000 to over $47,000 per year. Similar to the ACA, this will have a broad and significant impact on many American businesses. From our perspective, ACA compliance initiatives were effectively tasked to the HR departments, particularly within the mid-market, where most employers were already providing appropriate health insurance to their employees.
In contrast, the proposed changes to the overtime law will demand attention from the C-suite as business leaders look to accurately measure and potentially adjust their employee competition strategies to ensure compliance with the law in the most efficient manner. We believe the FLSA potentially will have a significantly greater financial impact to clients in the mid-market than the ACA.
As with the lead up to the ACA compliance deadline, we are seeing a wide range of knowledge and preparedness among current and prospective clients. Many companies aren't have not yet acknowledged, let alone embraced, the impending changes.
This is where Paycom serves as a knowledge resource to future and existing clients. We provide a substantial amount of information in the form of white papers, webinars, and of course, through our highly trained sales force. The proposed FLSA changes are providing useful conversation starters for our sales reps, as we believe that the Paycom solution offers the best option for employers to adapt to the potential upcoming changes in the most strategic and efficient way.
With that, I am pleased to highlight our recent announcement of the FLSA Toolkit, which is part of our government compliance application. This FLSA analytics tool is simple yet powerful and uses employee data to perform a cost analysis of workforce restructuring strategy, and can help executives determine the best course of action when looking to navigate the changes to the FLSA law.
This tool is yet another example of the ability of our R&D organization to comprehensively develop products that serve the needs of our clients. We continue to invest in our R&D in the second quarter, growing our adjusted R&D expense 114% year over year.
As with prior earnings calls, I will now provide a few examples of notable client wins within the quarter. I will remind everyone that our target client range remains companies with 50 to 2000 employees. However, larger clients above this range continue to see increased efficiencies and value by implementing the Paycom system as they look to abandon silo technology that no longer meets their needs.
First, we on-boarded an assisted living company with multiple locations and over 3,000 employees. They had been using a competing vendor for payroll and relied on several other HCM vendors, while also performing manual processes for many key functions. After transitioning from a large number of providers, this client really values having a single, completely integrated system. Additionally, they greatly appreciated our on-site implementation and training, which was tailored to the client's needs and schedule.
Next, we converted a restaurant chain with over 40 locations and nearly 4,000 employees that also had been using a competing vendor. In addition to the benefits gained from a completely integrated system, this client was attracted to Paycom because of our learning management system. The prior LMS provider was not fully integrated with their payroll system, and because of this, they were not achieving the results they needed. Of course, this client is also enjoying the benefits now of having all of their HCM functions in one application, including talent acquisition, on boarding, background checks and many others.
Lastly, we welcomed and entertainment company with over 5,500 employees across several states. They had been using an in-house system prior to Paycom and were searching for a solution that would be robust, yet easy to use across their entire employee base. They also wanted to standardize hiring practices and communicate better with their workforce. With Paycom they were able to accounts these objectives through a combination of surveys and personal action forms.
Finally, with several locations in different states, they experienced challenges in the past, organizing their data and maintaining compliance with the multiple tax jurisdictions. With Paycom their tax compliant processes are now automated.
To close, I would like to highlight that we were recognized as one of the Achievers 50 Most Engaged Work Places for 2016. This accolade is a testament to our culture and also the use of our own technology. Having an engaged workforce helps us attract and retain top talent, which allows us to effectively compete in the marketplace.
Finally, as many of you know, earlier this year Welsh Carson and its affiliated entities distributed their remaining Paycom shares to their limited partners and general partners. After yesterday's Board meeting, Rob Minicucci and Sanjay Swani stepped down from our Board. Both were formally nominees of Welsh Carson who served on our Board for several years and we would like to thank them for their service.
With that, I will now turn the call over to Craig for an update on our financials and our guidance. Craig?
- CFO
Thanks, Chad.
Before I begin, I am pleased to announce that our Founder and CEO, Chad Richison, has been elected as Chairman of our Board and will succeed Rob Minicucci. Before I review our second-quarter results and also our outlook for the third quarter and full year 2016, I would like to remind everyone that my comments relating to certain financial measures will be on a non-GAAP basis. We use adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess our performance and for planning purposes.
Adjusted EBITDA is a non-GAAP financial measure that excludes non-cash stock-based compensation expense and certain transaction expenses that are not core to our operations. Non-GAAP net income is a non-GAAP financial measure that also reflects adjustments for non-cash stock-based compensation expense and certain transaction expenses that are not core to our operations, which are further adjusted for the effect of income taxes. A reconciliation of the GAAP to non-GAAP measures discussed today is included in our press release.
We experienced a strong a second quarter, with total revenues of $73.9 million, representing year-over-year growth of 51% from the comparable prior-year period. As Chad mentioned, we experienced ongoing success of our sales teams as our solution continues to gain traction in the marketplace. Within total revenues, recurring revenue was $72.5 million for the second quarter of 2016, representing 98% of total revenues for the quarter and growing 52% from the comparable prior-year period.
Total adjusted gross profit for the second quarter was $62.3 million, representing an adjusted gross margin of 84.3%. This compares to 83.6% in the second quarter of 2015. For the full year of 2016, we anticipate adjusted gross margin will be within a range of 82% to 84%.
Total adjusted administrative expenses were $43 million for the quarter. This amount compares to $30.1 million in the second quarter of 2015. Adjusted sales and marketing expense for the second quarter of 2016 was $24 million. Adjusted R&D expense of $4.1 million in the second quarter of 2016 represented an increase of 114% from the comparable prior-year period.
Adjusted EBITDA was $22.6 million, or 38.6% of total revenue in the second quarter of 2016 compared to $13.1 million, or 26.8% of total revenue in the second quarter 2015. We experienced a strong increase in adjusted EBITDA due in part to sales out performance and also increased cost efficiencies across our organization.
Non-GAAP net income for the second quarter of 2016 was $12.4 million, or $0.21 per diluted share based on approximately 58.7 million shares, versus $6 million, or $0.10 per diluted share based on approximately 58.4 million shares a year ago. The effective tax rate was 35% for the three months ended June 30, 2016. We expect the fully diluted share count in the third quarter to increase by approximately 725,000 shares, less the number of shares withheld to satisfy tax obligations due to the vesting of restricted stock with market-based vesting conditions and also less any shares we may repurchase pursuant to our previously announced repurchase program.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $80.9 million and debt of $29.3 million. As a reminder, this debt represents the financing and construction of our corporate headquarters. We were proud to recently complete the third building at our campus, which will help accommodate our growth.
We recently entered into a new loan agreement in connection with construction of a fourth building and are excited commence the early phases of the design and development. Cash from operations was $24.6 million for the second quarter, reflecting our strong revenue performance and the profitability of our business model. The year-to-date average daily flow balance for funds held for clients was approximately $660 million.
With that, let me turn to guidance for the third quarter and for FY16. For the third quarter 2016, we expect total revenues in the range of $75 million to $77 million, representing a growth rate over the comparable prior-year period of approximately 37% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $13 million to $15 million, representing an adjusted EBITDA margin and of approximately 18% at the midpoint of the range.
For FY16, we are increasing our revenue guidance to a range of $325 million to $327 million, or approximately 45% year-over-year growth at the midpoint of the range. We are also increasing our full-year adjusted EBITDA guidance for FY16 to a range of $83 million to $85 million, representing an adjusted EBITDA margin of approximately 26% at the midpoint of the range.
With that, we will open the line for questions. Operator?
Operator
(Operator Instructions)
Raimo Lenschow, Barclays.
- Analyst
Thank you. A couple questions, if I may. Chad, I know you don't give ANRR numbers anymore and you will not answer me on this one, but if you talk qualitatively about how was business activity in the quarter? Obviously, the numbers look really good but we are looking at revenue which is more backwards looking. How did the quarter feel for you in terms of -- and compared to what you saw previously?
- CEO & President
I kind of thought you answered that question in the first part of your question. (laughter) Obviously, like you said, it's not a metric that we talk about anymore. Obviously, we have had -- continued to experience strong growth as it relates to on-boarding of new clients. We are very focused on that and we look to continue to do that into the future.
- Analyst
Perfect. It was worth a try. (laughter) If you look about the FLSA act, how do we have to think about it in terms of all of these different -- we had ACA, now we have this one. For us in terms of modeling purposes, how do -- is this kind of an ongoing every year thing that kind of new stuff will be coming out? In terms of magnitude how should we think about this?
- CEO & President
Yes. The FLSA is actually going to update for the first time in 12 years beginning December 1 of this year and it's going to go from a $45 -- or $455 per week threshold to a $913 per week threshold, which means employees that are paid a salary that make less than $913 a week, which is roughly $47,000 a year, will be subject to overtime. In that, you can only account for 10% of bonus and commission, basically non-discretionary income. You can only account for 10% of it.
So if you have a person making $40,000 a year in salary and they are making another $30,000 in commission and bonus, they are actually subject to the overtime rules. You would actually have to start tracking hours on that individual and paying them overtime, even though their gross amount is much more than the $47,000 but it's how you are paying it. Our tool allows them to go through the analytics of both, those people who are salaried employees close to the range that may not have enough overtime, where they keep them at that range to again be efficient in their payment, as well as identify those employees who are going to make above $47,000 when you include the 10% bonus and commission. Potentially, these employers would choose, as I believe we would, to make that -- to restructure that employee's commission and bonus compensation and actually put more into salary so that they do not have to pay them overtime and therefore track hours.
As far as the change beginning in 2020, they actually, because this is the first time they had made the change in 12 years, in 2020 they're actually going to start increasing it every three years, keeping in line with the economy. We don't -- this isn't going to go away. It's going to kick off on December 1 and then like anything else people are going to have to continuously manage it. I believe it's going to have a great impact on companies that do not manage it successfully.
- Analyst
For you it's basically just another add-on model, basically -- module like you have like you have obviously twenty [and the odd more].
- CEO & President
Correct. This actually -- this toolkit is actually now embedded in our government and compliance module which we already have. We do intend on providing clients with this module. We also are using it for discussion purposes because clients just now, both clients as well as new prospects are just now deciding what exactly are they going to do. Who are they going to move where, and what is the impact, so they can actually run if/then scenarios. If I change their salary to this and their bonuses is this, what's the clac for me and what does that mean in my business. Also, this has to be reconciled every quarter by the employer and any underpayment has to be remitted at that time to each employee.
This is a DOL, Department of Labor, type thing and so unlike ACA compliance, where you are filing returns directly with the IRS at the end of the year, this is something to where employees, if they were underpaid, not unlike if they were underpaid right now through not having the correct minimum wage or what have you, they would file a claim with the Department of Labor. That's really how this is managed at this time. I have heard that somehow the DOL and IRS could be working together in certain areas on this, but I haven't seen any regs come out on that yet.
That's where we are at today. Like anything, every year it is more and more regulation, more and more changes and more and more that businesses have to deal with, and that's something we do. We're good at making it easier for them to handle what's often times forced on them.
- Analyst
Okay, perfect. Thank you very much. That is really helpful. Well done.
Operator
Michael Nemeroff, Credit Suisse.
- Analyst
Hi, guys, thanks for taking my questions, and nice quarter. Just looking at the EBITDA guide for the rest of the year and looking at where it started the year, it's just really impressive. I am curious, for Craig, what has changed on the expense side? Where are you getting so much leverage? As it relates to new office openings, Chad, given that you are seeing so much success on the profitability side, could you maybe give us a glimpse into how you're thinking about the number of new office openings in 2017 and whether we could see a sharp increase from where we have been for the last couple of years?
- CFO
With respect to the adjusted EBITDA and the guidance for the rest of the year, for the first half of the year, obviously the forms filing was very strong at the beginning of the year, so that had a -- that additional revenue flows through to the adjusted EBITDA and the costs associated with that are not all that significant. As we look at the second quarter you look up and down the lines of the income statement and we saw some margin expansion up and down. We had some in the gross margin, as well as G&A and sales and marketing. As we continue to outperform on the revenue line, a lot of that is falling through to the bottom line.
- CEO & President
As far as the office openings, we have opened the most offices that we've ever opened this year, and that combined with last year, I believe, puts us at about 10 or 11 that have actually been opened -- yes, 11 opened in the last 19 months. We are still absorbing all of those openings and all those moves and at the appropriate time where it makes sense for us to expand even further, we're going to look to do that.
- Analyst
Is there any limitation on increasing the number of office openings? Do you have enough experienced managers that you could open more offices if you choose to?
- CEO & President
Well, I am not really going to guide to exactly what we're going to do next year at this time. What I can tell you for sure, the longer someone is in a territory with us, the more experience they gain and the more qualified that they have -- just the rule that they have. And just a rule of numbers; over time, the more offices you have with more maturity amongst each office, the more candidates you're going to have as well. But for right now we are very focused on continuing to absorb what we've done and really experience the benefits that we are experiencing from those offices that have been opened longer than 24 months.
- Analyst
Thanks for taking my questions.
- CEO & President
Thank you.
Operator
John DiFucci, Jefferies.
- Analyst
Thank you. Chad and Craig, the results are impressive, but revenue as you know given the SaaS model as far as backward looking, though cash is really strong, so that's good, it sort of helps us look forward a little bit. Chad, can you give us a little color at all, even subjective, on the momentum of the business in this quarter relative to the last couple of quarters?
- CEO & President
I think the revenue and the guidance speak for itself. I know that as far as closes for us, we have continued to have very strong closes on our deals, and that is as far as on-boarding clients. We continue to be pulled up to the top end of the range. Each quarter it seems like now I've highlighted those companies that are actually just above our range. Our executive reps, we continue to have more executive reps mature. As many of you know, it takes about 14 months once a rep starts with us for them to achieve executive rep status and that group represents the overwhelming majority of everything we sell. So we continue to have more executive reps added each month as we continue on, and we continue to get stronger and stronger.
- Analyst
That's helpful. To that last point, maybe if you can talk a little bit about not necessarily the new offices and how they opened. We know there's some time that it takes for them to take hold, but offices that are in transition from new to sort of mature, and how these offices -- and then you know that the term mature, I know isn't necessarily mature in that it's not going to grow anymore, but those with more tenure -- how they progressed in regards to their contribution to the results. Have things continued similar to what they've done in the past? Recently, you talked about what you are talking about here, where you're getting some larger customers. Has that trend continued at all, or any changes in regards to any of that?
- CEO & President
Yes, it's all increased. The top office we're going to have this year is going to outsold the top office we had last year. We had some significant top rep sales last year but already we have people on pace -- at pace to beat that; and so we continue on. And then as far as the success moving up market and selling it at the top end of our range -- not that we had all want to ignore the lower mid-market, because we have had great success there as well, but we do have more product to sell. The product -- we continue our R&D efforts, so it gets better and better. We just talk about a FLSA toolkit that we are now embedding into our government compliance tool to help people be able to navigate the new regulation. For us, we wake up every day and really try to get better than what we were the day before. I think using our own training modules has made it easier for us and we're going to continue to do the same as we move forward.
- Analyst
Great, thanks, Chad. Nice job.
Operator
Mark Murphy, JPMorgan.
- Analyst
Hi, Chad and Craig, this is Albert Chi on for Mark Murphy. I'll offer my congrats on a great quarter. I want to ask as a follow up to Raimo's question on -- thanks to providing the details around the FLSA but just wanted to get a better sense of how we should size the relative impact of the overtime changes versus ACA. I know you talked about how ACA related billings as a percent of revenue would be around the low-single digits in 2016. Do you have any sense of how that's going to shake out for the overtime?
- CEO & President
I think the impact to our clients and prospects as it relates to overtime is really going to be the expense on their end. Most companies, the largest impact that they had with the ACA expense was what they paid either us or one of the competitive vendors, or really about maintaining compliance. Most of the companies in the mid-market were offering affordable healthcare, so to a large extent the expense associated with ACA was what they were paying their vendor, or what they are using themselves to stay compliant and make those ongoing decisions. Not that it's all one-to-one and that every bit of their expense was what they would pay a vendor, but it's a substantial portion.
As it relates to this, it really just depends on a company's makeup. If they have employees that are salaried at $40,000 salary and these employees are working 60 hours a week, they are going to have to convert that $40,000 employee into an hourly employee and they're going to have to pay them overtime, time and a half, on those 20 hours each week. It's a significant change and so companies who are good at analyzing and predicting both what has happened, what they have currently and what they expect to happen in the future based on what has happened in the past. Those companies who are good at that are going to save themselves a lot of money. Those companies who aren't are either going to spend a lot or potentially have DOL cases opened up.
That was really my statement, that this is much more impactful, I believe, for an organization when you are talking about pay and salary and what you have to pay. There aren't really many choices for workarounds on it. You just have to really be good and know your data and that's where having a single database comes in when you have the payroll, time, and attendance data in the exact same system; compensation data, non-discretionary compensation data, and everything in the same system. It's easy to gather and you have history tables that have this information. I believe it's going to have a significant impact, and I still believe we're at the very early stages of it being something that clients even want to -- an exercise that they really want to go through.
- Analyst
Got it. That's interesting. Do you think, I guess broadly, do you think that these changes could weigh on companies' earnings in any particular way?
- CEO & President
I think it depends on the company. I don't see on any midsize company how it has zero impact on their expense. I couldn't really see a situation -- unless they already were paying everybody that had a salary over $47,000, then potentially that could be the case, but when you get into companies that have 600, 700 or 800 employees, or 400 employees, you typically have more diversity than just that. I think it's going to have an impact on businesses for sure.
- Analyst
Got it. Thanks very much.
Operator
Brendan Barnicle, Pacific Crest Securities.
- Analyst
Hi, this is Trevor Upton on for Brendan. Thanks for taking my questions. Just to follow-up on the FLSA question, I'm assuming that Paycom would benefit through increasing adoption of the government and compliance application. Is that correct?
- CEO & President
That is correct.
- Analyst
Can you kind of talk about where the penetration of that currently is?
- CEO & President
We don't talk about adoption rates for our products, but I do believe that we do have some bandwidth in government compliance to go out there and be able to push this product so that clients can leverage it to manage this highly sensitive cost area for them. I also believe it's a major conversation starter that we have with prospects. I do believe we were -- like ACA, we were very quick to this and when we developed something we developed a comprehensive system that not only helps them out of the gate but helps them on an ongoing basis and even does a lot of the thinking for them as far as being able to predict data points based on prior data points over the same period. I think we're going to get some at-bats with this. We're going to having conversations with this. Like everything else, we're going to continue to move forward.
- Analyst
That makes sense. One of the incumbent service bureaus decided ACA as a change event that has increased churn for them. It sounds like FLSA should have a similar impact?
- CEO & President
I don't know what necessarily impacts other companies' churn, but we do have a good product. We had a good ACA product and I believe that our FLSA product coming out of the gate is a very strong product and like any of our products, we are very committed to make the necessary changes along the way as regulations change.
- Analyst
Okay, thanks. Lastly, can you talk about the impetus for the share buyback and how you weighed that versus other uses of cash?
- CEO & President
I think it's our goal. We started off with our share buyback last quarter. It is our goal over time to reduce the overall share count. We looked at our cash and what we're really able to do at this time and we felt it was an appropriate amount to start that now.
- Analyst
Okay, that's all I have. Thank you.
Operator
Brad Reback, Stifel.
- Analyst
Great, thanks very much. Craig, real quickly, the gross margin guide for the year of $82 million to $84 million would imply somewhat of a tick up in COGS in the back half. Are there any specific items causing that?
- CFO
No, as we look at our gross margin guidance we kept it at that $82 million and $84 million and if we over achieve it tends to creep closer to that $84 million in terms of our over achievement on revenue. One thing that we pointed out is, we have to hire in front of the revenue growth. As we look quarter to quarter, we want to make sure we have the people on the bench to service that growth and those new clients that come on board. That's why it fluctuates potentially from quarter to quarter. It's really on a headcount basis.
- Analyst
Great. Thanks very much.
- CEO & President
Thank you. Do we still have an operator?
Operator
Mark Marcon, RW Baird.
- Analyst
Good afternoon. Thanks for taking my question and congratulations. I was wondering if you could talk about the sales teams in terms of with the latest count is in terms of total, and how many you would consider to be mature right now? As a follow-up to that, if you could just describe what sort of activity the mature ones are currently seeing particularly in some of the older markets in terms of pipeline, level of growth, prospects going forward. Thank you.
- CEO & President
All right. We have 42 offices right now. 11 are still in the process of maturing, so that leaves us with 31 that are currently mature being that we are now in August. I would say that as far as how one looks different than the other, the substantial difference outside of the first maybe six months opening is really going to be the staffing in each office. A newer office is going to have a couple sales reps in it, maybe two or three. A mature office is going to have in between seven and nine sales reps at full staff. A new office is going to have zero executive reps (technical difficulty) four, five, six, or more. It just makes a difference. That's why it takes a little bit of time for these to mature. As far as the activity and the expected quota for new reps and everything else, those remain the same. Really what changes is just the progression and maturity stage that they are at that time.
- Analyst
Great. Can you just talk a little bit more about the pipeline you are currently seeing in terms of new opportunities that are out there? The hits that you are getting. What sort of impact is the success that you've seen thus far helping with regards to potential client recognition, acceptance, et cetera?
- CEO & President
You know, it's always really been strong. We are really in an industry where people really like technology as they continue to engage their workforce. It hasn't been that long that there's really been technology to where you could really even engage a workforce. If we think back 15, 20 years ago, it wasn't that often that people were leveraging this type of technology in the cloud to communicate with their employees in a meaningful way, as well as the rest of their management staff to be able to collaborate on important items that can impact cost, HR and what have you.
We're continuing to see that. I've never really seen a time where it's been down. I think anytime you have a great solution, you're going to get your at-bats out there. I think the longer you're in the business, the more popular you get, the more references you have at different levels, the more references you are able to create. We're just continuing our momentum as we have in the past; and I would say it's been all similar in that it's been very strong demand for a long time, I think, for our entire industry.
- Analyst
Great. One last one. Just any other comments with regards to client retention rates, what you're seeing there?
- CEO & President
As far as our client retention rate, that's a metric that we actually we disclose each year and as all of you know, it's been flat, the same for the last four years. It is something we definitely focus on at Paycom. How you continue to set a company up, make sure they are good from the get-go and then continue to increase usage along the way. You definitely want to have your clients using the technology they are purchasing. That is something we are very focused on for us from a retention standpoint, always.
- Analyst
Great. Thank you.
Operator
Jim Macdonald, First Analysis.
- Analyst
Chad, congrats on becoming Chairman. Can you tell us your thoughts on, are you going to replace the two Welsh Carson directors that resigned?
- CEO & President
Yes, it is our expectation that we would be replacing that. We are in the process right now of conducting those interviews and we will be announcing those in the future.
- Analyst
Great. As a follow-on to Mark's question, as you grow so rapidly, how do you think about maintaining your service quality and really making sure your clients have a seamless experience?
- CEO & President
Well luckily, I've had years and years of practice. From our standpoint, we've continued to grow. I think we have a 40% CAGR over the last five years and so you have to continue to do that. Really it's about the processes you put in place. I've said it before that a substantial number of employees anywhere would fail at a company if it weren't for the processes that they put in place to help them succeed. We're very focused on our processes. We're very focused on updating our processes.
We're very focused on client feedback that revolves around our process because likewise with new technology, you also have to make sure you are providing a new type of service. You don't want to have a 2016 technology and your service model stuck in 2001, or your on-boarding piece. You have to continue to innovate across the board. It's not just the software. It's the process, it's the setup, it's R&D, it's everything. You have to continue to innovate across the board and we've really gotten a lot of experience in continuing to do that, be good at recruiting and a lot of that comes from leveraging our own tools internally, to be able to make those things happen.
- Analyst
Just a quick follow-up to that, do you try to maintain the client contact so that people aren't seeing new faces all the time?
- CEO & President
Well, definitely. You want to give the client the best experience that, that client can have and I believe that starts off with great technology. I can remember when I used to do first sales calls myself, I actually sold our first 400 deals here at Paycom where I was teaching people what the Internet was and kind of plugging it in for them. Even from back then, you go in with your plan and you want to have a very good technology solution and we just continued to innovate that along the way. It's something we've experienced in the past as far as continuing to grow these departments over time and I see us just continuing that.
- Analyst
Great. Thanks very much.
Operator
John Byun, UBS.
- Analyst
Thank you. Just wanted to kind of go back to the FLSA a little bit. In terms of the government compliance module, given that you've added more functionality, would you be increasing the price for that? Is there any way to get a sense for how that's priced relative to other core modules?
- CEO & President
At this time, the functionality is within the government compliance tool. We did put it in there so clients of ours that have current government compliance, they have it available for them today and we're working with them. We do have a large number of clients that aren't set up on government compliance. We're looking at bringing that to them as well as adding it to each prospect that comes in. This is almost a have-to-have now for companies that start with us moving forward. That's not to say they absolutely have to buy it from us, but it wouldn't make a lot of sense, I wouldn't think, for a product with this type of impact, for a client to actually onboard our service without it. But it's still optional for them.
- Analyst
Okay. In terms the potential impact, is there any way to think about seasonality or timing? Should there be some market increase into Q4, or will it really be more spread out?
- CEO & President
You do have a mandate right now, December 1, so that is something that's out there that all companies need to be compliant by then, and then you're going to have the ongoing aspect of management continuing on. If there is a point where people want to jump on, it's that. You might have some people jump on after they get their first DOL compliant. It just really depends.
- Analyst
Okay, that's helpful. One last question. You're getting increasing success of market and just wondering if you are seeing [work in] Ultimate more often as you move up and in what situations do you do notably better than them when you do see them?
- CEO & President
We see the more often because we have more reps and we're in more cities, and we're going to see them more often because we have more at-bats, and obviously they are in that market. But I would say we've been hearing of [work in] especially Ultimate on a continual basis for a long time across the board, whether we are above the 2,000 employee range, or whether in mid market. I think we've all kind of existed and we all kind of have our focus, but we all really exist in similar markets as far as us and Ultimate. We do have crossover so we are going to see them quite a bit. I think we've been very successful with on-boarding and converting businesses from all of our competitors.
- Analyst
Great, thanks very much.
Operator
Ryan MacDonald, Wunderlich Securities.
- Analyst
Hi, guys, congrats on the great quarter. Just kind of piggybacking off of the last question there. As we're talking about this new FLSA toolkit, last year you saw, I think in the fourth quarter, you saw kind of an early pull through of revenues or new customers adopting the solution based on ACA. Do you think given the December 1 deadline or cutoff date for the FLSA or the new regulations, is there a potential for that? Or at least what are you seeing in the pipeline as we're going to the third quarter here? How is that reflected, if at all, in guidance for the third quarter?
- CEO & President
Yes. I would say this. One, as far as guidance, even those deals that would start December 1, you are going to get one-twelfth of the total annualized value for that for December. A major impact in the very last month -- I don't know, but as far as on-boards, we are trying our best to make sure we have several people, and let people know that December 1 go live date for this and it's very important for them to have this information and be able to be utilizing these tools.
Whether or not that means a lot of companies convert very quickly to something, it is a little different than ACA in that standpoint just because ACA did have the forms filing piece to it where you are going to get caught quick. This might be a situation where you might actually make a decision just to give everybody the $47,000 salary so that you've abided by the rule, but then you go back and you realize that had you used good analytics and made some of them hourly because their over time wouldn't put them over that, you find that you make the decision, save yourself $280,000 just by managing it.
If someone wants to get compliant they just raise everybody to $47,000 or make anybody hourly, but I believe in the mid-market especially, and definitely upper-mid-market, you have people that are a lot more strategic than that when it comes to their costs. We're going to be doing everything we can to educate both clients and prospects alike on what's coming and how we can make a substantial impact on mitigating their exposure, as well as reducing their operating costs.
- Analyst
Okay. Shifting to hiring trends, when you look at what you're hiring plan was for this year and what you've done thus far and looking to the back half of the year, can you talk about, would you say you are on plan, ahead of plan, maybe a little bit behind in terms of your ideas for what you are going to add in terms of sales headcount? As we look at the back half of the year here, can you talk about what your additional hiring plans are and maybe potential mix between, say, outside sales and client relations?
- CEO & President
Sure. We give employee count updates once a year. I can tell you just having been here for now 19 years that from a hiring perspective, you're up, you're down, you're up, you're down, you're up, you're down and then you always end up where you need to be. For us, we've continued that throughout the year and really being the methodical on when we bring people on. We are fortunate in a couple of ways in that, as we sell deals, they start.
We have pretty quick start dates so as we sell deal we start, so we have a little bit of notice but we often times we don't have enough notice in the pipeline necessarily to just run out and hire people and get them trained. Oftentimes you get train those people, which Craig was talking about ahead of, which can inflate, sometimes, our gross margin. You have to train those people ahead of them being able to catch the business and the revenue follows later. Sometimes when the revenue follows quicker than what you have actually added employees, sometimes you can get up side down a little bit in where you need to add staff and get them trained and going quickly. It's something that in our business, at least, that you're always managing, but we're also fortunate in that the business comes in incrementally over time and stays with us, so it allows us to be able to do that.
- Analyst
All right, thanks a lot. Congrats again.
- CEO & President
Thank you.
Operator
There are no further questions in the queue at this time. I would now like to turn the call back over to Paycom CEO, Chad Richison.
- CEO & President
All right. I would like to thank everyone for joining us on today's call. We had an excellent second quarter and we are energized for the second half of the year. I want to remind everybody we will be presenting at the Pacific Crest Technology Conference in Vail on Monday -- or excuse me, Tuesday, August 9, and also at the Canaccord Conference in Boston on August 10. Thank you all, and we will be speaking with you soon.
Operator
This concludes today's conference call. You may now disconnect.