Paycom Software Inc (PAYC) 2021 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Paycom Software Second Quarter 2021 Quarterly Results Conference Call.

(Operator Instructions)

I would now like to hand the conference over to Mr. James Samford.

Thank you.

Please go ahead.

Thank you, and welcome to Paycom's second quarter 2021 earnings conference call.

Certain statements made on this call that are not historical facts, including those related to our future plans, objectives and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements represent our outlook only as of the date of this conference call.

While we believe any forward-looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties.

These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q.

You should refer to and consider these factors when relying on such forward-looking information.

Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Also during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin and certain adjusted expenses.

We use these non-GAAP financial measures to review and assess our performance and for planning purposes.

A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today, and is available on our website at investors.paycom.com.

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

Chad?

Thanks, James, and thank you to everyone joining our call today.

I'll spend a few minutes on the highlights of our second quarter 2021 results and the opportunities we are pursuing as we look ahead.

Following that, Craig will review our financials and our guidance, and then we will take questions.

We delivered very strong second quarter 2021 results with revenue of $242 million that grew 33.3%, our fastest quarterly growth rate compared to the prior year period since Q4 of 2016 and well above the top end of our guidance range.

The upside from the quarter was primarily a result of broad-based demand strength from new client adds and consistent cross-selling to existing clients.

Our second quarter adjusted EBITDA was $87 million, representing an increase of 42% over the prior year period.

With these strong results, we are once again raising our full year guidance, which Craig will discuss in more detail.

The investments we make in our products generate tremendous value for our clients and drive our differentiated employee strategy.

Our newest employee innovation is BETI, the industry's first self-service payroll technology, allowing employees to do their own payroll, which we officially rolled out to the market in early July.

BETI, which stands for Better Employee Transaction Interface, is an employee-driven payroll experience and represents one of the most important advances we've made to date.

With BETI, employees do their own payroll, which allows our clients to benefit from increased payroll accuracy while employees gain full insight to their paycheck, including advanced knowledge of take-home pay and how it's calculated.

Employees have a direct connection to their paycheck to resolve errors well before payday, so they don't have to wait on or contact anyone for assistance.

The additional clarity on how their pay changes and is calculated combined with automatic alerts when items require their action gives employees and clients confidence in the accuracy of their payroll.

I'm very pleased with the launch so far.

We are receiving tremendous feedback, including a VP of HR who said BETI's the most revolutionary payroll product I've ever seen.

Another comment from a Chief HR Officer noted that BETI is giving ownership of payroll to employees and managers which is great because they know better than anyone what their paychecks should be.

As we said during our Q1 earnings call, we are planning to have 100 pilot clients on BETI in the second quarter, and we easily achieved that goal.

On July 6, we opened up BETI to all clients.

And through the end of July, we've already sold BETI to over 1,000 new and existing clients.

I continue to expect that all Paycom clients will eventually deploy BETI.

It's the only way payroll should be done.

Our marketing plan continues to deliver strong demo leads, and we intend to spend aggressively in the coming quarters to fuel future revenue and further expand our market share in a large and expanding HCM TAM.

Our messaging continues to resonate with prospects as we contrast the shortcomings of disparate HCM systems with the value proposition of Paycom's single database solution and self-service capabilities that are stronger than ever.

Employees expect their HR software to be efficient and easy to use.

And once again, we had record high employee usage rates in Q2 as measured by our Direct Data Exchange or DDX.

We continue to enjoy increasing traction with both smaller and larger companies.

As a reminder, we added multiple inside sales teams as we have continued to have success below our target range.

Due to the technological advances we've made and the demand that's building around our employee self-service initiatives, we continue to be pulled further upmarket as well.

As a result, we are pleased to announce that we are expanding our proactive outside sales efforts from targeting firms with 50 to 5,000 employees to targeting firms with 50 to 10,000 employees.

We've had success selling to organizations above our historic range, driven by larger company demand.

This change we are announcing today empowers our sales representatives to proactively target in this expanded segment, and we are excited by this incremental opportunity.

We have clients in this segment already, so we're confident that our solution will compete and serve these clients effectively.

On the Paycom branding front, we recently signed a 15-year naming rights partnership with the Oklahoma City Thunder that will transform their downtown home into the Paycom Center.

Oklahoma City is home to thousands of our employees, and I'm happy that the Paycom Center will be home of the Thunder.

We have now lapped a tough prepandemic year-over-year comparison, and Q2 is more reflective of our historical growth profile, record new client additions over this past year driving our growth.

While we saw a very small headcount improvement in our prepandemic client revenue base, our guidance and future growth initiatives are not reliant on any employment improvement.

In summary, Q2 was a very strong quarter that reflects the strength of our execution throughout the pandemic and the investments we've made to further distance ourselves from the competition.

Innovation, customer service and new client growth represent the foundation of our long-term revenue growth strategy.

And with only approximately 5% market share of a growing TAM, we continue to have a long runway ahead of us.

I want to thank all of our hardworking and dedicated employees for their resilience and commitment to winning.

With that, I'll turn the call over to Craig for a review of our financials and guidance.

Craig?

Before I review our second quarter 2021 results and our outlook for the third quarter and full year 2021, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

We are very pleased with our second quarter results with total revenues of $242.1 million, representing growth of 33.3% over the comparable prior year period, driven primarily by broad-based strength with new client wins and consistent cross-selling to existing clients.

Within total revenues, recurring revenue was $237.6 million for the second quarter of 2021, representing 98% of total revenues for the quarter and growing 33.5% from the comparable prior year period.

Total adjusted gross profit for the second quarter was $206.9 million, representing an adjusted gross margin of 85.4%.

For 2021, we remain on target for adjusted gross margin to be in the range of 85% to 86%.

Adjusted total administrative expenses were $136 million for the second quarter as compared to $106 million in the second quarter of 2020.

Adjusted sales and marketing expense for the second quarter of 2021 was $64.3 million or 26.6% of revenues.

Our marketing strategy continues to generate strong demo leads, both within and outside our historical target market range of 50 to 5,000 employees.

We plan to continue to invest in marketing throughout the remainder of 2021.

And as Chad mentioned, we have increased our target market range to 50 to 10,000, thus empowering our outside sales representatives to proactively target larger companies.

Adjusted R&D expense was $26.2 million in the second quarter of 2021 or 10.8% of total revenues.

Adjusted total R&D costs, including the capitalized portion, were $38 million in the second quarter of 2021 compared to $27.7 million in the prior year period.

We continue to be very pleased with the high-quality innovation we are seeing from our investments in R&D, and we'll continue to aggressively recruit talent in R&D to drive our future growth.

Adjusted EBITDA was $87 million in the second quarter of 2021 or 35.9% of total revenues compared to $61.2 million in the second quarter of 2020 or 33.7% of total revenues.

Our GAAP net income for the second quarter was $52.3 million or $0.90 per diluted share versus $28.6 million or $0.49 per diluted share in the prior year period based on approximately 58 million shares in both periods.

Non-GAAP net income for the second quarter of 2021 was $56.5 million or $0.97 per diluted share versus $35.9 million or $0.62 per diluted share in the prior year period.

We expect noncash stock-based compensation for the third quarter of 2021 to be approximately $25 million to $26 million.

For the full year, we anticipate noncash stock-based compensation will be approximately $95 million to $100 million.

For 2021, we anticipate our full year effective income tax rate to be 24% to 25% on a GAAP basis.

On a non-GAAP basis, we anticipate our full year effective income tax rate to be 26% to 27%.

Turning to the balance sheet.

We ended the second quarter of 2021 with cash and cash equivalents of $202.4 million and total debt of $30 million related to construction at our corporate headquarters.

Cash from operations was $57 million for the second quarter, reflecting our strong revenue performance and the profitability of our business model.

The average daily balance of funds held on behalf of clients was approximately $1.6 billion in the second quarter of 2021.

During the second quarter of 2021, we repurchased approximately 94,000 shares for a total of roughly $32 million.

Through June 30, 2021, Paycom has repurchased over 4.2 million shares since 2016, for a total of approximately $455 million, and we currently have roughly $300 million remaining in our buyback program.

Shifting to guidance.

We are pleased to provide strong third quarter guidance that reflects the robust performance we achieved in the first half of 2021, and we are raising our full year 2021 outlook as a result.

Our Q3 and full year guidance are as follows: for the third quarter of 2021, we expect total revenues in the range of $249 million to $251 million, representing a growth rate over the comparable prior year period of approximately 27% at the midpoint of the range; we expect adjusted EBITDA for the third quarter in the range of $87 million to $89 million, representing an adjusted EBITDA margin of approximately 35.2% at the midpoint of the range.

For fiscal 2021, we are raising our expected revenue range to $1.036 billion to $1.038 billion, up from $1.017 billion to $1.019 billion or approximately 23.2% year-over-year growth at the midpoint of the range.

We expect full year adjusted EBITDA in the range of $410 million to $412 million, representing an adjusted EBITDA margin of approximately 39.6% at the midpoint of the range.

When combined, we now expect revenue growth and adjusted EBITDA margin to easily exceed the Rule of 60 this year.

To conclude, we are very pleased with the performance in the quarter, which gives us increasing confidence in our outlook for the remainder of the year.

With the launch of BETI, an expanded target market and a deep product development pipeline, we have a long runway ahead of us to continue to deliver rapid growth for years to come.

With that, we will open the line for questions.

Operator?

(Operator Instructions) Your first question comes from the line of Raimo Lenschow with Barclays.

First of all, congratulations.

That was an amazing quarter and amazing return to high growth.

Chad, quick question on the decision to go towards like the 50 to 10,000 employee clients.

Now historically, you're always a little bit hesitant because field cycles there seem to get more complex, slightly longer, et cetera.

How do you manage that process?

And can you still do it with the same sales force?

And then I had one follow-up.

Sure, Raimo.

So if you remember, it was about 3 years ago, our range at that time was 50 to 2,000 employees.

We continue to be pulled up.

And so at that point in time, we made it official, allowing our employees to target -- proactively target companies of that range because, again, we've been pulled more upmarket.

Same thing's happened here up to 10,000.

We continue to be pulled further upmarket.

I would say that the buying criteria for companies of that size has changed.

We're all working with the same type of employee.

There's no such thing as a large market employee and a small market employee.

You can work for a 300-employee one company and work for a 10,000-employee company the next.

And so we're providing a very easy-to-use standard way for employees to interact with their data, and we're finding it easier to work with larger businesses as they look to displace multiple disparate systems with one.

Yes.

Okay.

Perfect.

Makes sense.

And then on BETI, like if you think about the 1,000 and greater than 1,000 clients already signed up, like what has been the feedback so far from those clients?

What were some surprises maybe that you've seen there that you can utilize for the rest of the client base?

Thank you, and congrats again.

You bet.

And so employees, like I've been saying, employees pretty much fly blind into every payroll.

They do the work.

They clock in, clock out, put in their expenses, manage benefits, manage time off and everything else.

And then they get blindfolded before payday.

And then they get to find out on payday what it meant.

I mean it's similar to blinding the pilots right before they land.

And so what we've done is taken that blindfold off to where employees understand how their checks are calculated, and they can help the payroll department have perfect payrolls because there's not a payroll person out there that doesn't have anxiety going into each payroll day because they want it to be perfect.

And so what BETI does is help everybody get to the right level of accuracy.

And it also eliminates a lot of the after fact manual checks, voids and adjustments that oftentimes clients have to do after an employee's check is incorrect, and we know how important it is for employees' checks to be perfect.

They expect it.

So we're having a lot of success with it, and I would expect us to continue that.

Your next question comes from the line of Samad Samana with Jefferies.

I've got to congrats on the 30%-plus growth.

It was great to see that come back.

So Chad, maybe the first question for you.

Just when I think about -- it sounds like cross-selling was much more -- mentioned more often on this call.

And I think historically, you tend to say customers adopt -- that they adopt upfront.

So can you help us understand why cross-selling is becoming a bigger motion?

And is that primarily BETI?

Or is it across the portfolio?

Yes.

I couldn't say that our cross-selling today as a percentage is more of our revenue than what it's been in the past.

I would say, on a percentage basis, still cross-selling for the biggest percent of our revenue was during that year of ACA, where again, everybody had to take it.

I do believe that we're going to be having 3 or 4 quarters here of some pretty good cross-selling as we move everybody over to the Better Employee Transaction Interface, which is BETI.

Also as we're selling new -- onboarding new clients now, BETI is a part of that.

And so our sales reps, BETI comes with the payroll package now.

It is an additional fee for that, but it is included on every quote moving forward for new businesses as we believe this is the way businesses win and achieve their return on investment with our product as it relates to the payroll side of what we do.

Great.

Really helpful.

And then maybe as a follow-up to that, this was one of the biggest beats to take, I'm supposed to, kind of relative to expectations.

So I'm curious if you could maybe help us maybe unpack how much -- how you think about it in terms of better new bookings versus this uplift to BETI versus employment recovery in the installed base when we -- as we think about maybe the strength in the quarter?

Sure.

Well, in regards to beating BETI, BETI had very little to 0 impact on second quarter.

I talked about it on our May call that we would be looking to put 100 clients on it that quarter.

We achieved that, I think, within the first couple of weeks.

And then we held, we went through that.

And then on July 6, we actually released it to all other clients.

So that was within this quarter.

So BETI would have played 0 impact as it relates to last quarter.

We do think it's going to be part of our differentiated strategy moving forward.

So new logo adds, as usual, is what contributes to our growth, followed by upsells to current clients.

As far as macro, we've been going through this now for a little bit.

I've been talking a little bit about us having some improvement with the prepandemic client base as far as this quarter.

I'd say we saw an improvement in hiring during this past quarter and the impact that it had on our revenue for this quarter from our prepandemic client base was $1 million to $1.5 million for the quarter.

So that's about $100,000 worth of weekly improvement on that number that we had talked about prior.

Your next question comes from the line of Brad Reback with Stifel.

Chad, as your sales people have the opportunity to move further upmarket, do you think that changes the sales cycle length?

And if it does lengthen, how do you manage that?

No, I don't.

I mean a little bit.

It's hard for me to say that a 5,000-employee company's sales cycle is going to be the same as a 150-employee company sales cycle.

I will say the 5,000-employee sales cycle is the same as a 10,000-employee sales cycle.

So I don't know that there's some major differences between the 2 of those as far as what their sales cycles would be.

We're still not looking to engage with a long sales cycle that requires us to link up with multiple disparate systems, so somebody has to be a fit for us to go into that.

Something else I would say is we continue to have strength in downmarket.

We continue to aggressively achieve our lead volumes, and they continue to go up.

And oftentimes, those leads are also small business.

And so first of this year, we had 4 sales teams, and that was up from 1 the previous year.

Throughout this year, we've added another 6 inside sales teams.

And so now we're at 10 inside sales teams which sell the emerging business, so that would be the below 50 market.

So we continue to do extremely well below 50.

And we continue to be pulled upmarket because, again, it's the same employee interface, whether you work for a 15-employee company or whether you work for a 10,000-employee company, those employees expect ease of use and easy access to their system.

And so we're seeing a lot of momentum being created based off of employee usage needs and how much it makes it easier for them.

That's great.

And one quick follow-up on BETI.

Can you help us on the monetization on -- sorry if I missed it, what type of uplift you get from an existing customer that's adding BETI?

And then on net new, what type uplift?

Yes.

So we've added products in the past where we got 100% usage very quickly, and I'm thinking of DDX and Manager on-the-Go.

And those are products that we just included in our pricing with BETI.

It is an additional-priced product, even though it's now included on every single payroll deal.

We believe our pricing is competitive, so I don't like to just put it out there.

You may be able to find it out there.

But all I would say is it's reasonably priced like many of our other modules.

Your next question comes from the line of Mark Marcon with Baird.

Let me add my congratulations.

With regards to the rapid ramp in terms of the clients that are using BETI, with the 100 that first came on, can you talk a little bit about like what sort of experiences they were seeing?

Just did it really ease the -- or increased the accuracy that they ended up experiencing?

Are you getting any feedback from clients about, "Hey, our payroll department doesn't need as many people"?

And how easy was it to lift?

You opened it up on July 6 and now you've got over 1,000 on BETI.

How easy was it to convert them to BETI?

Yes.

And so well, with BETI, you're already on it, it's something that we turn on for you, but what we have to work with you to convert are your processes.

You've got a lot of these processes that happen after the fact.

We need to have those happen at the beginning or during the payroll transaction.

And once you do that, a lot of the processes you'd normally do after the fact are irrelevant.

We're able to displace those.

And so we eliminate a lot of processes.

And then with some of the processes, we move them into -- earlier in the processing phase.

And so -- but in answer to your question, we haven't had anybody turn it off.

Once you turn it on and that's what your employees are doing, you have a very high satisfaction rate with employees.

And you have a very strong ROI.

BETI, itself, 100% pays for itself.

And it actually helps even pay for the payroll -- the entire payroll module because there's an incredible amount of ROI when you're not having to do manual checks, voids, adjustments, and wire money into employees' accounts to cover NSF fees they may have because their payroll is wrong.

And so it also gives employees a visibility into what their check is going to be.

A lot of people live check to check.

I mean over 80%, 85% of the U.S. employee lives check to check, and they need to know exactly what their pay is going to be.

And if it's $30 off, that's a big difference for them.

And so BETI gives them visibility long before check date and gives them the ability to interact with their check to make sure it's accurate, which again increases ROI for the business.

It also lowers the business's exposure and certain risks associated with paying people.

There's some pretty specific laws on making sure you pay your employees correctly and that you pay them on time.

And with BETI, that's easily achieved.

That's great.

And did all of those clients have time and attendance already set up?

Or did some of them have to add that?

That's a great question, Raimo.

I would expect that most of our...

It's Mark.

Oh, sorry, Mark.

Sorry, Mark.

Mark, I would expect that most of our clients already had time and attendance because we like to go through there and get the ones using quickly that are already ready.

Now I would say most of our clients at Paycom already have time and attendance.

But you are right, there will be certain modules that as we go to move BETI, would be required for a client to implement.

Great.

And then one last one, just on the -- increasing this, the target range from upper limit of 5,000 to 10,000.

With the -- when you first expanded from 2,000 to 5,000, how many of those 5,000-employee companies were kind of like inbound and kind of approaching you guys?

Obviously, you've got a great marketing campaign that's been very successful.

I imagine that's drawn a number of inquiries.

But can you talk about like how much of that is being pulled in as opposed to being pushed?

Yes.

I mean we do not have a marketing strategy for companies above 5,000.

We do targeted prospecting.

And our targeted prospecting strategies had been, 3 years ago, there were companies below 2,000, and then we moved that to below 5,000, which we've experienced for the last 3 years.

And now we're moving it to 10,000.

And what that means is we'll start proactively targeting these.

We have continued to have people call us of employee sizes in that range.

And again, the more that we've had, we've continued to move up our market.

And so what it allows us to do now is do targeted prospecting toward those.

And as salespeople make calls, they're able to proactively make those calls.

Now sales reps have always been able to make a proactive call.

Sales rep can go out there right now and sell a 50,000-employee company, I don't care.

But as far as what we're -- our targeted prospecting efforts are toward those companies now that have between 50 and 10,000 employees.

And then in our more small business sort of emerging type companies, it would be for those that are also below 50.

Your next question comes from the line of Daniel Jester with Citi.

It seems like every day, there's a new story about how tight the labor market is.

So I'm just wondering if you could talk about sort of how the tight labor market may be or may not be impacting inbound demand that you're seeing?

Inbound interest that we're seeing?

Yes, that's right.

Okay.

Okay.

Got it.

Your last part there cut off.

Well, I mean, definitely, I think it plays a role.

We've done a lot of surveys that employees like easy-to-use technology at work.

I've said employees shouldn't have to work to work.

And so you definitely have a frustrated employee base if you have multiple pieces of technology that are difficult to use.

Also, it's a hunt for talent out there.

You want to retain your good employees, that's a must.

Good technology helps you do that.

You also need to deploy pretty good technology on the talent acquisition side because everybody is in a dog fight for talent right now.

It's a very tight labor market.

So I do believe that there's some of that in there.

But everything shifted to this digital transformation and the right way to do something.

And it only makes sense that employees would be the ones engaging with their data.

And so we're having success at that.

But I think the labor market might be tight for a while here.

We'll kind of see what happens after that.

As far as our business, because of our new business adds, we've really -- what we've needed is stability, and we've had that since the summer of last year.

We just -- we needed some stability within the labor market.

And so I don't think even if there's different situations with the pandemic as we go through the remainder of this year, I still believe that we're dealing with somewhat of a tight labor market.

So I don't feel like the macro on a go forward is going to impact us like it had, provided that we have some stability here.

And it looks like we will from an employment perspective.

That's great.

And then just as a follow-up, you've been selling virtually for like 18 months now.

You talked about adding 6 inside sales team.

I'm just wondering if you can kind of reflect on once we actually do get back to a normal environment, does this change your philosophy about adding new sales offices?

No.

No.

I mean it's timing.

We're just now -- our managers are getting back into the office and throughout the rest of this year, people are going to be filtering back into our offices as we go back to the office to do our selling.

As far as what type of model and hybrid model we're going to be using, we've been paying attention to why prospects buy.

We've also been paying attention to how prospects buy.

So we're going to be supporting the methods that best help both the prospect as well as us be able to, in our case, display what our product does, and in their case, have a clear understanding of what the ROI is for them.

Your next question comes from the line of Brian Schwartz with Oppenheimer.

Congratulations on a great quarter.

Chad, maybe if I could just start there on the quarter.

Can you shed any light on just how the bookings or the business activity trended in the quarter, just how the linearity was?

We'll start from there.

Yes.

I mean we've had really strong bookings since April of last year.

Things kind of took off, and we were doing well anyway.

But I mean we've had very strong bookings.

In fact, these last 2 weeks that we just had here in July, these last 2 weeks, that's the largest number we've put up ever in bookings.

And so bookings have been strong as we've continued to push a differentiated strategy that's getting a lot of momentum here in the marketplace.

And then, Chad, one question I had just on the target expansion move here.

I'm just wondering if there's any industry verticals that would have, I would think about, fewer organizational complexities to them, and therefore would just be ripe for BETI and more likely to switch to self-service when you target.

Yes.

I mean I really look at it as it's a product for everybody, from the employee's perspective.

I would even say that the more complex it is, the more you need to deploy BETI.

The more data points you have on a check, the more important it is to deploy something like BETI.

So I'm not going to say that any specific vertical or either easy or complex type of company that BETI would be best for.

I think it's best for everybody, and it's 100% best for the American worker to have a product like this to where they can engage themselves with their data and something that's going to significantly impact their ability to work their financial plan.

And then last question for Craig.

Just on the marketing and advertising campaigns.

Given the bookings momentum here in the business, the commentary, wondering if you have any plans to increase your advertising spend here in the second half of the year in support of the BETI product cycle and the current momentum in the business?

Yes.

We're going to continue to spend aggressively on sales and marketing.

You've seen that in the past, the back half of the year where we've kind of ramped up sales and marketing.

So I would expect to kind of see the same for us through the rest of the year.

Obviously, in marketing plans, we've currently baked into our third quarter and full year guidance.

Your next question is from the line of Ryan MacDonald with Needham.

This is Michael Rackers.

I'm on for Ryan MacDonald.

So we've heard from multiple vendors that churn ticked up slightly in the quarter as some of the customers that may have wanted to make a change last year couldn't do so because of the other pandemic-driven priorities.

Did you experience any similar uptick in churn within your customer base?

And did you see any more opportunities to replace competitors during the quarter given this dynamic?

Yes.

What I would first say is it's a bad idea to use our competitors in relation to churn as a proxy to us.

But we do not report either gains or no gains as it relates to retention until the end of year.

What I would say though is that we're having a lot of success deploying a differentiated product both to new customers as well as to current customers and those clients that are buying product are staying.

And so we're having a lot of success.

It's a differentiated strategy.

And as we continue to have increased DDX usage where more and more employees are the ones making the impressions on the database and not an intermediary through another department within the company, we would have an expectation that we would continue to have a strong retention rate with our clients.

Your next question is from the line of Siti Panigrahi with Mizuho.

This is Matt Diamond on the line for Siti.

I want to add my congrats for the solid results.

The one question that's come up, and we've alluded to it a little bit, is around BETI.

It was mentioned that there were going to be 3 to 4 quarters of continued pretty above-normal cross-selling.

We also know that BETI necessitates all of the Paycom modules in order to -- for a client to be eligible for BETI.

Can you help us handicap what's -- really, what size of the existing client base has all those modules?

It sounds like it's pretty widespread.

So that we can get an idea of the magnitude of that cross-sell opportunity looks like over the next 3 to 4 quarters.

Sure.

And so I do want to say one thing.

BETI does not require you to have all of our modules.

There's a lot of modules you don't need to utilize BETI.

And that would make sense that someone would take the modules, but things like talent acquisition as far as recruiting, COBRA, a lot of our modules, you don't necessarily have to have to run BETI, but it's a good idea that you implement it within your business so that your employees can use one system.

But there are modules that would be required to use BETI, like pay time off, time and attendance, expense management, benefits administration.

There are some of them definitely that you're going to want to use them because without them, you wouldn't be able to use BETI.

A lot of those are fairly popular products to us.

But we have several clients that don't have them.

And so I would like to thank our sales reps who're probably out there right now.

Our CRRs are probably working with a lot of those clients that are already ready to go where we just go and click a button, eliminate most of your processes and shift a few to the beginning.

But I'm sure that we will have our internal sales group, our client relations group continuing to reach out to clients of all characteristics, whether they have all of the products currently required or just partial.

So there is an opportunity there for us.

As far as handicapping it, again, we consider our pricing competitive in nature.

But there are opportunities for us out there.

I do want to say this, though.

Our revenue gains are going to be primarily driven by new business wins, just because of what the -- and I'm saying new logo wins just because of the size of a new logo compared to the potential upsell of that same logo.

That's a perfect segue to my next question.

Is there anything that's being done differently or that's being adjusted on the product side to address these 10k customers and above, these employees, the 10k employees and above.

It doesn't seem to be the case, but anything that could be commented on in regards to the R&D spend?

And what's being prioritized for that customer base would be helpful.

No.

There's no -- we're not doing anything different for a 10,000-employee company that we're doing for a 2,300-employee company.

Your next question is from the line of Bryan Bergin with Cowen.

A question here on BETI.

Can you comment on what level of client adoption you're anticipating by the end of 2021?

And a clarification on the new sales, I understand it's being included in each deal you bid, but are you seeing near 100% attach on it as well here for the last several weeks?

Well, again, yes, we just, like you said, I mean, we started selling it July 6. And as it relates to new clients, a lot of them would be in conversion.

It would be rare that we'd sell a client on July 6, then they would have started by now.

Unless they're a smaller business and on the smaller business side, then you definitely could have had some of that.

Yes, I mean, because it's the way we're training and setting them up.

We're not training you on the old model now.

I mean when you're going through conversion and training, we're training you on how employees do their own payroll.

We're not training you how you input your employees data into our system.

And so yes, it's part of the conversion.

And so it would be illogical for me to think that anybody would even try to do it the old way.

And also, it's included in the ROI.

I mean now our ROI cases include BETI, and it's an important part of the ROI.

I mean you can use BETI and actually, it'll pay -- it can help pay for the entire system, depending upon how many true issues you've been having in payroll.

Payroll is a -- it's a high risk, low-reward activity.

If you get it right, who cares, employees expect it.

And if you get it wrong, you upset employees.

They have NSF fees, and then you get to pay tax penalties.

And so having perfect payroll is extremely important, and it just wouldn't make any sense to me that any client would buy our product without BETI.

And it wouldn't make any sense that they would -- since they bought it, it wouldn't make any sense that they wouldn't use it because their employees want to use it.

Okay.

And then just a follow-up.

A common question we're getting around BETI and the potential offsets of existing service revenue, can you help kind of frame the magnitude of that work within your business to begin with as far as error correction and things like that?

And then clarify your view on the revenue accretion of BETI versus those types of services that might automate away.

I mean there's definitely going to be, BETI is going to replace some, what I'm going to call bad revenue for the client.

The client didn't have visibility.

The employee didn't have visibility, so they have to void a check and they have to do a manual, then they have to send a wire.

And then to the extent there's a tax event created because it extends a different quarter, a different tax period, you've got to deal with that.

And so there are definitely some fees associated with that.

That can be labor work on both our side and the client side, which can carry maybe a higher or a lower, I should say, operating margin as in regards to that.

But -- or higher expense to both us and the client.

From a BETI perspective, there's not anything we're doing to it on our end, and there's not anything the clients having to do.

And what I tell clients is, "Hey, our competitors got themselves out of doing your payroll, we get you out of doing your payroll."

Your next question comes from the line of Alex Zukin with Wolfe Research.

This is Allan on for Alex Zukin.

I just wanted to drill in on the new business going forward.

Obviously, it sounds like you guys are seeing a lot of strength there.

I was wondering if you could help kind of put some context what you're seeing at the lower end of your customer employee range and the top end and kind of how you're thinking about that for the second half?

Yes.

I mean I would say more of the same.

We don't really get to dictate what size company is coming in from our lead volume.

As we use our advertising assets, you could have a 3-employee company clicking on it that has a pet store, and you could have a 10,000-employee company clicking on it.

We're going to be going after those of all sizes and have been.

And so I wouldn't see how we would expect it to be dramatically different than what we're seeing right now.

Again, our move upmarket, we're already there.

We're just announcing it.

I mean we're already there.

We're already getting the leads.

We're already selling the deals.

We've got deals larger than 10,000 that are already using our company.

So we're just making it more official and kind of flying the flag out there right now that we're open for business, and we're going to be targeted prospecting those clients up to 10,000 as well.

At this time, there are no further questions.

I will now turn the call back over to Mr. Chad Richison.

All right.

Thank you.

I want to thank everyone for joining us today on the call.

As we've communicated internally, we're gradually making our way back to the offices and hope to be back as soon as conditions safely permit.

I want to thank all of the Paycom employees for their perseverance through the pandemic.

Over 70% of our staff are either fully vaccinated or are in the process.

I'd like to reiterate that I believe getting vaccinated saves lives.

For every 100,000 fully vaccinated people, it's estimated that less than one will lose their life from a breakthrough COVID-19 case.

Please get your vaccinations and let's end this pandemic.

On the investor outreach side, this quarter, we'll be presenting at the Oppenheimer Conference on August 10, followed by the Wolfe Conference on September 8 and the Citi Conference on September 14.

Paycom will also be hosting one-on-one meetings in August and September at KeyBanc and Piper Sandler conferences.

And we look forward to speaking with many of you very soon and appreciate your continued support of Paycom.

Thank you, operator.

You may disconnect.

Thank you.

And this does conclude today's conference call.

You may now disconnect.