Paycom Software Inc (PAYC) 2016 Q4 法說會逐字稿

Good afternoon. My name is Kelly and I will be your conference operator today. At this time I would like to welcome everyone to the Paycom Q4 2016 earnings conference call.

(Operator Instructions)

Craig Boelte, Chief Financial Officer, you may begin your conference.

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 September 30, 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 relying on such forward-looking information. Any forward-looking statements speak 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 schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today, which is available on our website at investors.paycom.com.

I will now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer.

Thanks, Craig. I would like to welcome everyone to our fourth-quarter 2016 earnings call. On this call, I will begin with some highlights for our results for both the fourth quarter and the full year. I will then provide some comments regarding our view into the marketplace for cloud-based payroll and human capital management, or HCM and then follow that with some examples of key client wins during the quarter. Craig will review our financials and then we will open up the line for questions.

Before I begin, I want to take a moment to thank our incredible team of Paycom employees. With so much robust growth it becomes all the more important to sustain the culture that makes Paycom a great place to work and thrive. I am grateful to all of our team members who give their all to provide unparalleled service to our clients and also help keep our unique culture alive and strong.

Due to our passionate and engaged work force we were awarded the title of Top Workplace in Oklahoma. This marked our fourth consecutive year on the list. This year we were also awarded the Direction Award. This additional award comes as a result of feedback from employees who believe the Company is going in the right direction. We also celebrated our second year on Deloitte's Fast Technology 500 list, which was further indication of our success in leadership.

We had an excellent year in 2016 and I am extremely proud of all that we have accomplished. Our sales momentum continued, with full-year revenue of $329.1 million, representing 46.5% growth over the comparable prior-year period. For the fourth-quarter of 2016 we achieved revenue of $87.8 million, representing 35% growth over the comparable prior-year period.

I'd like to take a moment to highlight our fourth-quarter performance. In the fourth quarter of 2016 we lapped our first full quarter of ACA revenue from current clients. As a reminder, in Q4 of 2015 we also experienced a pull forward of clients that started early on our system to gain ACA compliance. As such, we were very pleased with our ability to post a 35% growth rate over this very hefty comp.

Craig will review our guidance in more detail later on the call, but I'm pleased to share that we are starting this year off strong, with positive indications from our sales team and the market that make us optimistic for 2017. Additionally, I'm pleased to share that our retention rate for 2016 was once again 91%, indicating ongoing client satisfaction with Paycom.

2016 was our second full year as a public Company. As we celebrate this milestone, we combine the perspective of what we have accomplished with what is possible for us to achieve. As I survey the marketplace, I believe our strategic advantage is more significant than ever.

We believe that the trend of companies replacing multi single-function payroll and HR software solutions with the easy to use yet extremely powerful Paycom system is set to continue for several years. This trend will both be driven by executives seeking the value-creating ROI offered by the Paycom system and also by younger workers who have lived their entire lives with mobile devices and user-friendly interfaces and who will increasingly demand modern HCM software experiences from their employers. Feedback from our sales organization validates that this trend continues to gain momentum and I will highlight some examples of this later in my prepared remarks.

In 2016 we continue to build the foundation that we believe will allow us to remain at the forefront of this trend and capture the resulting growth opportunity. We significantly expanded our Oklahoma City corporate campus, completing moving employees into our new third building. We commenced construction on building four, which will provide as much space as our first three buildings combined, as well as a parking garage.

Additionally, we bolstered our Board of Directors, adding seasoned executives Rick Duques and JC Watts. We welcome both of them to Paycom and look forward to their contributions.

Along with our physical expansion, we continued to grow our team, making the required investments in our work force to support our anticipated growth. In 2016 we added personnel across every department, growing our headcount to 2,075 as of December 31, 2016. Notably, we expanded our R&D group, growing adjusted R&D costs to 8% of revenue for the full year ended 2016. We have always been very efficient with our R&D spend. Our high productivity has been enabled by the fact that our solution was built with a single database. As we have matured over the years, we have continually strived to improve our software development process and even today we continue to make adjustments to become more streamlined and efficient.

We had the opportunity to host several investors at our corporate headquarters in 2016. A highlight of every visit is touring our R&D area, where investor can see first hand, not just the size and scope of our R& D team, but also the unique culture that allows our team to develop top-quality software at such an impressive pace. Because our goal is to potentially replace several different vendors when we win a new client, we have to ensure that our offerings provide greater value to our client than those of our competitors. As a reminder, we compete in several HCM areas and with many companies whose sole focus is one specific area. The culture of efficiently goes beyond our R&D organization and permeates throughout our entire Company. While we are making the required investments to secure our growth, we are also focused on leveraging the profitability inherent in our model.

Now I will provide some brief comments regarding the Affordable Care Act. At this time we are assisting our clients with complying with the current law. When and if ACA is eliminated, we will react appropriately and promptly. If responsibility goes to the individual states, we could have separate state laws and regs, with sub-regs for several states while other states may have none.

The ACA could also be repealed and replaced with something still requiring the annual reporting of employee information. Another option is that the current law could be repealed so that there is no longer a requirement for businesses to report employee information. With that scenario in mind, if this was the last month for ACA billing and next month it is gone, we estimate that we would need to replace approximately 3% of our revenue for the remainder of the year.

As a reminder, we don't just assist our clients with tax and regulatory compliance. We provide a comprehensive set of software solutions, including recruiting, compensation, training, HR, benefits administration, and many others. Our system are used to help our clients navigate each of these areas and much more. So while the immediate elimination of ACA would have a minor impact on our revenue from a certain number of our current clients, we do not believe it would impact our overall value proposition or our new business onboarding pace.

Now I'll provide some examples of notable new client wins from quarter. First, we signed a trucking company with 3,200 employees. The client had been processing their payroll in-house and were doing many things manually, including onboarding new employees, benefits enrollments, and several other key processes. This client chose Paycom because they wanted a true hire-to-retire system that would service their entire organization and with our platform they were able to eliminate five point solutions providers as well as several other manual processes. They are very excited about the positive impact they expect our solution to have on their firm. Additionally, they really valued our hands-on implementation process and the care and attention we brought to the table.

Next, we welcomed a retail services company with 3,500 employees to the Paycom family. They had been previously using a large competitor for payroll and also point solution providers for applicant tracking, background checks, and performance management, as well as a homegrown internal system for employee onboarding. This client wanted to consolidate these disparate systems and eliminate manual entry and the associated exposure.

Finally, we are very pleased to bring on health services company with over 8,000 employees. They evaluated several vendors as part of their transition. With Paycom, this client was able to eliminate seven point solution providers in addition to gaining these efficiencies. This company chose Paycom because they believe that our solution is the right platform to help them achieve their growth targets. We are honored to partner with them and excited to provide a foundation for their future growth.

To conclude, we had an excellent fourth quarter and a tremendous year. I will now turn the call over to Craig for an up date on our financials and guidance.

Thanks, Chad. Before I review our fourth-quarter results and also our outlook for the first-quarter and full-year 2017, I would like to remind everyone that my comments related to certain financial measures will be 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 effective income taxes. Reconciliations of the GAAP to non-GAAP measures discussed today are included in our press release.

As Chad mentioned, we experienced a strong fourth quarter, with total revenues of $87.8 million, representing year-over-year growth of 35% from the comparable prior-year period. Our full-year 2016 revenues were $329.1 million, representing growth of 46.5% from the comparable prior-year period. Within total revenues, recurring revenue was $86.3 million for the fourth-quarter of 2016, representing 98% of total revenues for the quarter and growing 36% from the comparable prior-year period.

Total adjusted gross profit for the fourth quarter was $72.8 million, representing an adjusted gross margin of 83%. For the full year 2017, we anticipate that our gross margin will be within a range of 82% to 84%. Total adjusted administrative expenses were $56.5 million for the quarter as compared to $47.4 million in the fourth-quarter of 2015. Adjusted sales and marketing expense for the fourth-quarter of 2016 was $35.6 million.

Adjusted R&D expense was $6.5 million in the fourth-quarter of 2016, representing growth of 157% over the comparable prior-year period. As Chad detailed, we have continued to invest in R&D to maintain and expand the competitiveness of our solution. As a reminder, a portion of our R&D expense is capitalized. Our total adjusted R&D costs for the fourth-quarter of 2016, including the capitalized portion, were $8.4 million, or 10% of total revenues. Total adjusted R&D costs for the full year of 2016, including the capitalized portion, were $27.2 million, or 8% of total revenues.

Adjusted EBITDA was $20.7 million, or 24% of total revenues in the fourth-quarter of 2016, compared to $10.5 million, or 16% of total revenues in the fourth-quarter of 2015. Our GAAP net income for the fourth-quarter was $8.6 million, or $0.15 per diluted share, based on approximately 59 million shares, versus $5.2 million, or $0.09 per diluted share a year ago. Our effective income tax rate for the fourth-quarter of 2016 was 32% and the rate for the full year was 23%. For modeling purposes for 2017 we estimate that our combined federal and state tax rate will be 35%. Non-GAAP net income for the fourth-quarter of 2016 was $10.8 million, or $0.18 per diluted share, based on approximately 59 million shares, versus $6 million, or $0.10 per diluted share a year ago.

We repurchased 634,506 shares during the fourth quarter, completing our initial $50 million stock repurchase plan. As of today, we have repurchased approximately 1.1 million shares in total. Our Board of Directors has extended our plan, authorizing the repurchases of up to an additional $50 million worth of common stock and we look forward to continuing to return cash to our stockholders via these repurchases.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $60.2 million and total debt of $29.8 million. As a reminder, this debt represents the financing of construction at our corporate headquarters. Construction of our fourth building and parking garage are proceeding well. Cash from operations was $24.5 million for the fourth quarter, reflecting our strong revenue performance and the profitability of our business model.

With that, let me turn to guidance for the first-quarter and full-year for FY17. I want to emphasize that because of the current uncertainty surrounding which of the various provisions of the ACA will be affected by Congressional action as well as the timing of any such action, this guidance assumes that the ACA would remain in place for the remainder of 2017 without any modifications.

For the first-quarter of 2017, we expect total revenues in the range of $114.5 million to $116.5 million, representing a growth rate over the comparable prior-year period of approximately 28% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $42 million to $44 million, representing an adjusted EBITDA margin of approximately 37% at the midpoint of the range. For FY17, we are introducing revenue guidance to a range of $422 million to $424 million, or approximately 29% year-over-year growth at the midpoint of the range. For our full year 2017, our adjusted EBITDA guidance is a range of $113 million to $115 million, representing an adjusted EBITDA margin of approximately 27% at the midpoint of the range.

With that, we will open the line for questions. Operator?

(Operator Instructions)

Raimo Lenschow, Barclays.

Hey, thanks for taking my questions. Congratulations on a great end to the year. Couple of questions, if I may. First of all, Chad, in the past you talked about office openings and I know investors paid a lot of intention but we probably shouldn't because it takes office two years to get fully up and running. Do you want to make any comments in terms of how you think about 2017 or should we ignore that for the time being?

Then the second question that I had was the on the -- if I look at your strength in the last year, a lot of that was driven by the existing offices selling a lot better. What is your symptoms for 2017 in terms of the momentum you saw in 2016? Do you think you can carry that over into 2017?

Then I had a quick one for Craig. If you look at the guidance, what is your assumptions on interest rates for this year, because obviously interest rates increases will help you on the carry that you have? What's your base assumption for the guidance? Thank you.

All right. Thanks, Raimo. I will take the first two.

First on office openings, we haven't changed our strategy on that. As I'd said in the past, we will be opening up offices this year. It's rare that we have ever had offices open too much before this date, February 8. I do know at one year we did announce office openings, I think, with our very year-end earnings announcements. Some others have been actually announced in the second quarter, so as we get those office opened, we will be announcing it. But our strategy has not changed.

That also falls into your second part of your question. As a Company, we have always matured our maturing offices and that is where we experience a lot of our growth. I've talked about it in the past that office openings, due to the way we do it, does produce somewhat of a drain on our current talent, which we get all back in subsequent years.

We are very focused on our current strategy. Nothing's changed on our end. We will be continuing to open up offices this year as well as maturing, as I've talked about in the past, maturing our current group to bridge the gap in between our new business sales capacity that exist as an opportunity and what we're actually achieving. As far as the interest rates, I'll turn it over to Craig.

Raimo, on the interest rates, our guidance basically assumes rates are where they are today. There is talk about two, possibly even three, interest rate increases during the year of 25 basis points. I think it is somewhat dangerous to include those, because you just never know if they are going to happen. One thing I would, though, remind you is that we're holding a significant amount of client funds. During the fourth quarter our average daily balance was $680 million. On a pre-tax basis and that's about $1.7 million. That really falls to the bottom line.

Perfect. Thank you. Well done.

Thank you.

Michael Nemeroff, Credit Suisse.

Very nice job, guys. Chad, I just wanted to follow up on Raimo's questions about office openings. I heard the commentary that you just made, but could you give us a sense of how many offices that you plan to open? Without knowing the exact locations, I don't necessarily know if that would be competitive information.

The second question is around the ACA -- it's helpful on the ACA commentary and it's been helpful from your competitors as well to get that specific information and understanding that it is a variable. If we take out all of the noise around ACA and all of the contribution that it's given you over the last couple of years, I'm curious is your expectation on growth for the next couple of years north or south of 30% on a normalized basis? Then I just have one follow up on the [8,000 CTL], please.

Yes. Your first question is office openings. We never guided to the number of offices that we are opening. As far as releasing it to the competition, that's really secondary as far as my apprehension to continue to talk about what we're doing next. It's my own people. We tap people on the shoulder when they are ready as we know they've raised their hands and as they've hit certain goals to where we are ready.

That process has not changed for us. The very first people who will know what's going on are our current people. As we continue to have those discussions internally and identify the many different markets that we can get into and as that's been done, then of course we would be talking about that in the future.

Again, I would point back to, and I'm not 100% for sure, but I think with the exception of maybe once and maybe a couple of other offices early, it would've been odd for us to have opened up any offices before February 8. We do still have the remaining of the year and we're very focused on that. As far as the ACA contribution, I think was your second question (multiple speakers) --

The long-term growth, the sustainability of the long-term growth rate.

Yes, I mean, there isn't a product that we have that we use as a crutch to support future growth. It is every product in aggregate, so it is never one product that would be the truth with ACA. ACA was a very popular product. We were very forthcoming with that and it came about and everybody had to get compliant and most products that have a compliance piece to it are fairly popular and so it was. We've called out that it does represent a smaller portion of our overall revenue.

We are not giving 2018 guidance today, but I can tell you that we're set up to be a very good grower over the next several years and I think that the way that we have worked our business, even overcoming pretty strong growth comps last year. We are heading into Q1 with our largest comp, 63% growth from Q1, and I think that we're coming out the gate strong on that.

That's helpful, Chad. Then on the large 8,000 CTL deal you signed a quarter, congrats on that. How long do you expect implementations for something of that size to stretch on? Do you see more of those types of size of deals in your pipeline currently, or is this more of a one-off situation?

Yes, it would be uncommon for anything that we sell to stretch on longer than three months from a conversion standpoint. Typically, they are much earlier than that. I've always taken the position that the longer you allow a conversion to take data, your data becomes worse and worse over time and the longer you are stuck in conversion the harder conversion gets. We're set up to onboard companies very efficiently and that company would follow the same onboarding process as our other companies.

That's great. Thanks for taking my questions. Congratulations.

Thank you.

John DiFucci, Jefferies.

Thank you. Chad and Craig, your implied EBITDA margin for 2017 is for flat to down a little bit after a couple of years of significant expansion. I'm wondering what's the thinking there? What is -- why is that the case, given you are not going to have as much growth per your guidance next year but it is still very robust growth on the top line.

Yes. On our adjusted EBITDA guidance, this is really our starting point for the year. As we look out throughout the year, we're still set up to be high-growth Company and part of that comes with increased commissions and selling and marketing expenses. As we sit here today, that's really our beginning point on guidance and what we know sitting here today.

We also -- we do hire ahead of the revenue that we catch and I don't know to what extent there would be some of that in there. We have guided to 27% and we feel like as we sit here today that the good guide for us and we will be updating that as we have more information and we move along.

Okay. Thanks. That sounds like a good starting point. Have you adjusted your 2017 guidance relative to your expectations prior to the new FLSA overtime rules being blocked? Because I think you had implied at least in earlier indications for 2017 that you would see some benefit from that and now that looks less certain.

Yes. I did talk about FLSA and how it is if it were to have not had the injunction. If it were to have continued on it would've had a very large impact on American businesses and I came out and said that and it would have. Anytime you're doubling the minimum wage for salaried employees it's impact many industries.

I also said that it's not something we are charging for. It's included in our government compliant model, which it is. But I will also say this. We have companies right now that are using our FLSA tool. There are 31 -- there are different minimum wage caps in 31 states. Several of them have a different minimum wage calc based on your occupation.

A company like Oregon has a state law based -- or state minimum wage based on where you are located, urban or rural. Minnesota has different wages based on employer revenue. Nevada has different ones based on whether the employer offers health coverage or not.

So the FLSA and staying compliant with the minimum wage calc definitely is at the federal level, but also you can use our tool to impact state as well. I do feel like -- well, we know, it's a product that's out there. It is being used right now. It does not have an associated revenue piece to it, but a lot of our products don't and it's, again, it's the full solution that delivers the value proposition to our client base.

Chad, at least the way I understood it, and correct me if I am wrong, but it was a little unclear to me, but I thought that you had implied that you'd sell more of the government compliance tool, realizing that this is of functionality that's included in that and people buy it for a lot of different reasons. Is there anything in guidance that implies the sale of that tool was going to increase because of FLSA currently, in current guidance?

Our guidance was not changed based on FLSA, based off of any FLSA expectation. (multiple speakers) Does that answer the question?

I think so. I just want to be clear, though. Did you have originally in your guidance, your previous indications for 2017, any uplift in sales of the compliance tool because of -- (multiple speakers).

No. No.

Okay. That's the answer I'm looking for. Thank you very much. Thanks a lot. Nice job, guys.

You're welcome.

Thank you.

Mark Murphy, JPMorgan.

Thank you very much. Chad, you had mentioned in the script that you had some good success in replacing a number of point products in some of your recent wins. I am wondering at this point just how diversified is the revenue stream if you compare to a couple of years ago. For instance, in terms of how diversified the revenue stream is outside of that core payroll piece?

Yes, I mean, that is not something that we have updated. We had talked about, which is true, we sell one total product and then it's modules that clients choose to take. The longer we have had a product, the higher the adoption. Time and attendance is a product we've had for quite a long time. Obviously it's going to have a higher adoption rate than a product we may have come out with a year or two ago. But it's the products as a whole that when we go in there is what we are selling, one product that has the many different modules associated.

Okay.

In answer to your question, all I can tell you is, is that it is going to be more diversified over time just because we have more products and the adoption rate of these products also increases over time. We start off with 100% of all of our clients have the payroll module and so over time that's obviously going to be, as a percentage be somewhat diluted into the overall product mix.

Okay. Makes sense. Any comment on the linearity of starts or go lives during Q4? Is a possible that they -- just the timing. There's always an ebb and flow. Is it possible they were a little more backend loaded in Q3 and then a bit more linear in Q4?

No. I would say that this year end would be similar to past year ends with the exception of the pull-forward we had due to the ACA phenomenon and companies wanting to get compliant for that next year. Outside of that, our starts have been somewhat consistent based on how they followed when the deal was booked originally.

Okay. Got it. The last one I wanted to ask you with the understanding that obviously the guidance that you are giving us now as you said is a starting point and we are aware of your track record with that over the years. I was looking at -- when you look back on 2016, the Company grew, just absolute dollar terms, revenue grew by $104 million and then the 2017 guidance, it has you growing by a smaller increment of about $94 million.

I think mathematically, I know there are some moving pieces but seems to imply that new bookings are running around the same level or relatively flat year over year because the bookings drive the incremental growth. I was thinking that it's against the backdrop where EDP is guiding to flattish bookings growth going forward where they had kind of surprise negatively on that. I guess am just curious -- and not that there's anything wrong with flat bookings for a little while, but just how are you looking at that? Is there a point where you get through this -- the tough comps relating to ACA where you think that would start growing pretty nicely again?

Yes, Mark. One thing to keep in mind, last year, that was the first year we had the ACA forms filing, so in that first quarter we had a pretty significant lift relative to the form filings, as well as we had the full-year of some of that ACA. That was one of the phenomena that we had first quarter of 2016.

Yes and as far as the guide this year, I am unaware of any company that had a higher growth rate in our industry than us last year. I am also unaware of any company that is guiding to a higher growth rate than us this year, so I think we are coming off the toughest comp out there and we are pretty proud about what's going on. All indications from our sales staff, which I stay close to, is that we are in really good shape as we head into this year.

Thank you.

Thank you.

David Hayes, Canaccord.

Thanks, guys. Craig, wondering if you could update us on what you are seeing in terms of sales retention, maybe senior level, mid level and then hiring environment? Any changes there we should be aware of?

Yes. We have had basically the same retention rate amongst our executive reps. This group sales the overwhelming majority of new business and we've maintained a 90% or better retention rate with that group. I had mentioned in the past to everybody that we do have some turnover amongst our newer reps, but also that we had really focused on that and as of January, we just promoted -- or 37 people just became executive reps. As I'd mentioned, I believe a couple of earnings calls ago, we are very focused on developing our current younger group of people that are coming up and we are having success with that.

From what I see, early indications are that our turnover rate amongst new reps is down. We are having greater success keeping our newer reps and again, with executive reps it has remained roughly the same.

Got it. Thanks, Chad. As you think about the product development roadmap, talk about some areas where you are focusing there. I think a lot of recent investments have been in response to regulatory changes. With an uncertain backdrop these days on that front, I'm curious if that changes your R&D focus at all?

Compliance is always number one when it comes to R&D. It's a have-to whether it's on the tax side. There might be some changes whether it's ACA or others, but at the end of the day, we are constantly updating tax tables, new tax calcs, new filings and everything else along with whatever's thrown into the mix, sometimes retro. That's always the main focus of ours as we go through prioritization, that's always top. Then the things that follow that, or really go alongside with that, because it's a different group that works on both, is the continual expansion of our value proposition so that our clients can experience a better interface and a better experience by using Paycom and really eliminate waste within their organization.

Yes. Makes sense. Thanks, guys.

Thank you.

Brad Reback, Stifel.

Great. Thanks very much. The ACA 3% commentary that you gave, does that exclude the forms filing business from the month of January?

Everything that has been billed, both in January and February, my commentary was if it were to end after this month we would expect all billing for forms to be completed by the end of February.

Okay. Just to be clear, so the 3% would be starting from March 1 onward.

That's correct. You are correct.

And then add the forms.

That is correct. Now there might be some forms still that we had done that may have not been billed based on certain clients' wishes at different times, but yes, 99% point whatever of that 3% is going to be the recurring fee, not forms.

Great. Just one follow-up, Chad, on your commentary with the newer sales reps. I know on last quarters you talked about changing some of the quota goals to make executive rep. Obviously that is not impacting retention at all; in fact, it's improving it?

It's not the changing of the goals that's improving. Yes, we did change the level or the amount that someone needs to onboard before they are able to become an executive rep. Really what -- and we've done that just because people were reaching it quicker than what we had anticipated. But it's really a focus on those people that weren't getting there and meanwhile we have a program to get people there. It's just something that we needed to really focus on and make that a top priority for our sales management organization, which we've done.

It's really that, the on-purpose strategic development of our new people and not allowing them to get caught as we focus on our higher growth group. It's really the strategic focus on that group that is making the change. Again, I've got about a couple of quarters of information. I mean, those couple of quarters are telling me that the efforts that we have made to increase retention amongst our new reps is working.

Great. Thanks very much.

Thank you.

Brent Bracelin, Pacific Crest Securities.

This is Trent [Repton] on for Brent. Just a couple of quick follow-ups. One more on office openings, if I could. You opened new offices when you have reps ready to step into that new role and also when you've identified attractive markets. Has there been a change in identifying either of those?

There has not.

Okay. Then ACA, the 3% left in the year, is the total still looking around 5% of revenue?

Yes. We don't -- we've said approximately 5% and we have not changed that amount since we initially gave it out in what I believe was fourth quarter 2015. I would have to look at that. Those are the same approximate numbers that we have today.

Okay. Thank you. Then just one final one. FLSA obviously got pushed out, but we'd heard that a discussion of it was maybe increasing some customer interest. Can you maybe talk about the pace of client growth through Q4, if the election changed anything and how that's continued through the Q1?

Yes, I have not seen any difference. This is my fifth President that been through. Let me count those. This will be my fourth President that I've been through, fifth election cycle. There's always something different. In the mid-market, they are out there working their business and they're looking to eliminate waste or create efficiencies. That really doesn't change and no, we have not seen any slowdown in people's willingness to onboard onto our product based on the election results.

As far as FLSA goes, we're not an FLSA Company. We have a product that can help with the overtime count based on the new salary increases to the minimum wage, which might not happen on the federal level. It could very well happen on state levels and already has as far as the actual hourly minimum wage. So our value proposition as it relates to our government compliance, again, FLSA -- it's not just FLSA, it's everything that we sell in that area and we're not seeing any slowdown of government and compliance tool due to the FLSA injunction.

Great. Thank you.

Mark Marcon, RW Baird.

Good afternoon and congrats on a great year.

Thank you.

With regards to the EBITDA guidance, when we take a look at sales and marketing, R&D, G&A, which elements would you expect to see grow the fastest on a year-over-year basis and which one would you expect to grow the slowest?

Throughout this year?

Yes. In 2017.

Some of that is based on timing of when deals come in and what the commission rates are at as far as sales and marketing. It's easy to point to R&D being a place where we're continuing to spend but -- (multiple speakers). Some of that comes down to timing on when the sales is onboarding as far as the corresponding commission rate to that is.

Sure. I just meant as it relates to the guidance that you gave, what a midpoint would be? The G&A should be relatively easy to -- should not vary that much.

That's correct. You would see some efficiencies in the G&A. Sales and marketing as a whole should continue to grow as well as R&D. We continue to increase our pace on the R&D side as well.

Okay. Great.

In our gross margin, what Chad mentioned, we have to hire ahead of the business. There's going to be times where the gross margin fluctuates and that's why we gave the range of 82% to 84%, just because we have to hire ahead of the business coming in.

I appreciate that. With regards to the tone of business across your various offices, when we take a look at some of your more mature offices, how have those been trending?

Yes, the mature offices that we have not relocated a manager from, meaning it's a mature office but they don't have a new manager, they have also the mature manager that's been in there. Those are our best offices. The second would be those offices that are mature in which we have relocated a manager and then backfilled them with a manager. Those would be second. The final piece would be those new offices that are not yet mature. Always the offices where we have maintained our current managers do the best.

Great. With regards to some of the bigger sales that you ended up getting and closing this past quarter, when you were going through and replacing some single-point solutions, what was that process like from the standpoint of buy-in across various departments that -- and how your solutions for, say, applicant tracking or time in attendance compared to some of the better-of-breed solutions that may have been in place?

Yes, I mean, it's really a mixed bag of what we are going to run into. We're always typically running into a competitor from the payroll side and then time and attendance and when it comes to the different point solution providers, whether it's on the talent side or comp side or surveys or benefits administration or what have you, it's a little bit of a mixed bag.

But what is very common with all of them is this, at our client base, as far as the mid-market, they often buy point solutions to solve a problem. They want to solve a problem. It is not necessarily that they have an overall strategy for how -- or that they are necessarily implementing an overall strategy oftentimes of what do they want everything to look like.

When we are coming in, it's not just, hey, you've got applicant tracking, we do applicant tracking, you have tax credits, we do tax credits. It's helping them implement an overall strategy for what they want their employee use cases to be. It is through that they we're able to deliver, not just help them deliver and complete a strategy, but also a product that automates that strategy. In doing that, you're going to replace everything that the client might be using because that supports the overall strategy that the client is now implementing when they choose Paycom, implement Paycom.

That's great. Thank you.

All right. Thank you.

Jim MacDonald, First Analysis.

Good afternoon, guys. Quick question then some follow-ups. Would you give an update to your current philosophy on up-selling existing customers with more modules?

Well, yes. You definitely want to be able to provide clients with those products that meet their needs and so we are definitely focused on continuing to bring current products that we have that a client might not have implemented yet. I will say, as I have been saying, most of our clients implement the majority of our products, or over half of our products, at the time of their initial conversion. It really depends on when that client was onboarded of whether or not they have a lot of our products or if we're still needing to go back into the client base.

We do continue to sell into our current client base as we have in the past, as well as adding and onboarding new clients. It's important to note that our executive sales group which, again, represents the overwhelming majority of all of our sales business, they are unable to go out and sell something into the current client base after that client has been onboarded with us for greater than 30 days. We have a separate group that then works with the client on that and also helps the client not just sell them, but helps client with usage and can even provide additional training so they're just not a sales resource but there are some other things that they can do as well.

Right. Two technical questions about the quarter. Is there any way to quantify the impact of the pull-forward last year on your growth rate this year? Also can you comment on your G&A was -- seemed like a relatively small increase versus last year in the quarter. Anything unusual that happened in this quarter?

I mean, as far as your first question, I think we called out the exact number and that number based on whether or not it started at the end of November or the first of December, you divide by either 12 or take one-twelfth of it or you might take two-twelfths of it. That might give you a little bit of information on the exact impact that any pull-forward from Q1 2016 in the starts of Q4 2015 may have impacted that quarter. Craig, I'll let you take the second.

On the G&A, 2015 was our first year of SOX compliance. We had quite a bit of G&A in that fourth quarter getting ready for that. This year was more of a maintenance feature, so that's kind of what I would point out. There are several things that go into that but that will probably be the main.

Great. Thanks a lot.

All right. Thank you.

John Byun, UBS.

Hi, thank you. I wanted to see if you can give an update on the total number of modules you have today versus one or two years ago and where did the PPY shake out as well?

The last updated module count we talked about was 26 and then we have not updated the annualized amount opportunity per employee. It still remains at $400 or more. More than $400 is what we said.

In the 26 number, is there a way to reference or versus one or two years ago in terms of how you are expanding your portfolio?

Well, it's been 26. I think we updated -- we had 18 at the IPO, which was in April of 2014. Since then, we've added on eight additional.

Okay. Great. Then one more question. In terms of where you are gaining share, the pockets of share gains or companies onboarding to you. Has there been any change in terms of those sources between legacy, regionals, in-house or out-of-card vendors? Is there any trend that you can point to there?

No. We are in a very competitive industry. Most all deals are competitive. Typically we are going up against the incumbent and often times that plus another vendor, so it's been very competitive and I cannot speak to there being any difference in competition last year from the previous year from even the previous year. In the market that we are focused on.

Okay, great. Thanks very much.

Ryan MacDonald, Wunderlich.

Congrats on the great quarter. In one of the previous questions, you talked about replacing point-solution providers with some of the new deals and that being as a part of an overall strategy. When you are replacing these vendors, are these legacy on-prem vendors and you are replacing based on an overall shift or strategy towards moving towards the cloud or are you replacing other cloud vendors at these customers?

Yes. It would be rare that we are replacing something that's not in the cloud in the mid-market. You just really don't run into installed products very much anymore when we are out replacing. What I will point, though, is you can have different point-solution providers where there's crossover, where you track candidates in three of them but you might choose one because it's better than the others and then you might use another other for comp.

So there is crossover amongst point-solution providers as far as their functionality. We could go into client that's using one point-solution provider for one thing very specific and they have another for something separate than that. Then we go to another company that's using the same products and they're using all functionality in one of the point-solution providers. Really it's just dependent upon how the point-solution provider sold it, integrated it and then through the reporting from there. For us, we are going and with an overall strategy to replace all with one system.

Got it. Last quarter you talked about a bit, or you introduced a new metric. It was business sales performance capacity in talking about what the new businesses offices could achieve at full maturity and new sales. Any update to that metric at all or could you at least talk about how that's trended from third quarter to fourth quarter, if any change at all?

Well, I mean, I will say that anything we focus on we impact and we are very, very focused on bridging the gap in this. It is, as I mentioned, our new sales capacity, our metric number was $260 million and as far as from a capacity standpoint again that's new business onboards. And as far as from a capacity standpoint, again, that's new business onboards. As far as a capacity standpoint, I would not update that number today. It's still the $260 million.

As far as our closing gap on that, we are definitely closing gap on that as we continue to work our strategy in that area. I believe just introduced this about three months ago, so it would be a little early for me to give too much of an update on that, other than to say that we are definitely bridging that gap, which is what we have done before. It's not a new metric for us. It's just something we shared last quarter with the general public.

Got it. Finally just last question, have you seen, as you're continuing to ramp sales offices to full maturity, have you seen any impact or change in that time to maturity in instances where you've opened, say, a second or third sales office within the same city or same geography there?

To total maturity, it still takes 24 months, but we are seeing newer offices sell more to maturity. I would say that they are doing better selling early on and their selling more toward maturity but at the end of the day it still takes 24 months for you to have eight salespeople on, caring full quota, trained and backlog and pipeline.

Got it. Thanks again.

Ross MacMillan, RBC Capital Markets.

Thanks a lot and congratulations from me as well. Chad, just two questions. Just on the new business sales capacity metric that you just talked about, is there a way for us to think about when you need to start -- what the ratio, if you will, of what you are able to -- what's comfortable, if you will, from a sales capacity being realized versus that sales capacity target, if you will, or cap. Is there way to think about that ratio and when it gets to a certain ratio you'd definitely want to hire or definitely open more offices or definitely lead on that? I'm curious as to how you think about that ratio realized to potential.

Definitely. That's something we manage internally and one gets to the other. As you bridge that gap, you are bridging it through more developed sales people and that produces a larger bench for you to backfill the relocating -- the current mature relocating managers that are going in to opening up new offices. This is, again, as I said in the past, this is not a new number for us. We constantly measure and manage this number.

It's not -- as far as where we are at in being able to achieve that number, it's not a metric that we are going to disclose from that standpoint, but it is a number that we manage and as that number grows, it should $260 million grow, which achievement would make that grow, but that's what would make it grow. It wouldn't be something where we are just taking a guess. It would be based on actual numbers achieved and again as we work through that process.

For us, it is something we are focused on. We do measure it and it is something that somewhat tells us, are we ready? We feel good about where we are at right now, just be quite honest with you.

That's great. Maybe just one follow-up. ADP had made mention that in terms of new signings in the last, say, 90 days they'd seen a change in the attach of the ACA reporting module. It sounds like you have not seen that, but I just wanted to confirm that point, because we've had a few different views on this from industry players.

No. We have not seen any change in the attach rate for ACA. From our standpoint, it is still, for any one client, it is still a nominal fee that carries substantial penalties. If I were a client in the mid-market, I would not be quick to turn this off. If they wanted to turn something off, there might be some other things that they could turn off that would not have the negative impact that this would should this it stay.

We could be talking about ACA in 2028. I don't know. But it is the current law today and we are going to continue to help clients put themselves in the best situation to be able to comply with the current laws, all current laws, as they exist today.

There are no further questions at this time. I will now turn the call back over to the presenters.

All right. I would like to thank everyone for joining us on the call today. We appreciate your interest in Paycom and we look forward to our continued success in 2017. Thank you.

This concludes today's conference call. You may now disconnect.