Paycom Software, Inc. (PAYC) Q4 2016 Earnings Report, Transcript and Summary

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] Thank you. 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 Web site 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 of 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 such robust growth, it becomes all the more important to sustain a 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 workforce we were awarded the title of top workplace in Oklahoma. This marked our fourth consecutive year on the list and 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 a further indication of our success and leadership. We had an excellent year in 2016 and I am extremely proud of all that we have accomplished. Our sales momentum continues 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 would 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 am 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 am 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 market place, 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 a easy to use yet extremely powerful Paycom system, is set to continue for several years. This trend will be both 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 continued 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 and 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, Ric Duques and J.C. Watts. We welcome both of them to Paycom and look forward to their contributions. Along with our physical expansion we continue to grow our team, making the required investments in our workforce to support our anticipated growth. In 2016, we added personnel across every department, growing our headcount to 2075 as of December 31, 2016. Notably, we expanded our R&D group, growing adjusted R&D cost 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 data base. 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 investors can see firsthand 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 efficiency 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 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 on-boarding pace. Now we will provide some examples of notable new client wins from the quarter. First, we signed a trucking company with 3200 employees. The client had been processing their payroll inhouse and were doing many things manually including, on-boarding new employees, benefits enrollment and several other key processes. This client chose Paycom because they wanted at true hire to retire system that would service their entire organization and with our platform they were able to eliminate five point solution providers as well 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 caring attention we brought to the table. Next, we welcomed a retail services company with 3500 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 home grown internal system for employee on-boarding. This client wanted to consolidate these disparate systems and eliminate manual entry and the associated exposure. Finally, we are very pleased to bring on a health services company with over 8000 employees. They evaluated several vendors as part of their transition. With Paycom this client was able to eliminate seven point solution provides. 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 and I will now turn the call over to Craig for an update 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 on a non-GAAP basis. We use adjusted EBITDA and non-GAAP net income as supplemental measures to review and assess our performance and for planning purposes. Adjusted EBITDA is a non-GAAP financial measure that excludes non-cash stock-based compensation expense and certain transaction expenses that are not core to our operations. Non-GAAP net income is a non-GAAP financial measure that also reflects adjustments for non-cash stock-based compensation expense and certain transaction expenses that are not core to our operations which are further adjusted for the effect of income taxes. 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 rate purchases 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 fiscal 2017. 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 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 fiscal 2017, 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 the 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] Your first question comes from Raimo Lenschow from Barclays. Your line is open.

A couple of questions if I may. First of all, Chad, in the past you talked about kind of office openings and I know like investors paid a lot of attention but we probably shouldn’t be because it takes an office two years to kind of get fully up and running. Do you want to make any comments in terms of how you think about '17 or should we just kind of ignore that for the time being. Then the second question that I had was on, if I look your strength in the last year, a lot of that was driven by the existing offices selling a lot better. What is your assumptions for '17 in terms of the momentum you saw in '16. Do you think you can carry that all the way into '17? And then I had a quick one for Craig. If you look at the guidance, what's your assumptions on interest rates for this year? Because obviously interest rate increases will help you on the carry that you have. What's your base assumption for the guidance? Thank you.

All right. Well, thanks, Raimo. I will take the first two. First on office openings. I mean we haven't changed our strategy on that. As I had 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 on that hasn’t changed. That also falls into your second part of your question, as a company we have always matured, are maturing offices, and that is where we experience a lot of our growth. I have 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. So we are very focused on our current strategy. Nothing has changed on our end. We will be continuing to open up offices this year as well as maturing as I have talked about in the past. Maturing our current group to bridge the gap in between our new business sales capacity that exists as an opportunity and what we are actually achieving. As far as the interest rates, I will turn that over to Craig.

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

Your next question comes from Michael Nemeroff with Credit Suisse. Your line is open.

Chad, I just want to follow up on Raimo's question about office openings and I heard the commentary that you just made. But could you give us a sense of how many offices that you plan to open, I mean without knowing the exact locations, I don’t necessarily know if that would be competitive information. And then the second question is around the ACA. It's helpful on the ACA commentary and that’s been helpful from your competitors as well to get that specific information and understanding that it is variable. If we take out all of the noise around ACA and all of the contribution that it's given us, given you over the last couple of years, I am curious, is your expectation on growth for the next couple of years north or south of 30% on a normalized basis. And then I just have one follow up on the 8000 [CTL] [ph] please.

Yes. So you first question is office openings. I mean we have 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 are doing next, it's my own people. We tap people on the shoulder when they are ready, as we know they have raised their hands and as they have hit certain goals to where we are ready and that process hasn’t changed for us. And so the very first people who will know what's going on are our current people. So as we continue to have those discussion 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. So, again, I would point back to -- and I am not 100% for sure, but I think with the exception of maybe once and then maybe a couple of other offices early, it would have been odd for us to have opened up any offices before February 8. So we still do have the remaining of the year and we are very focused on that. As far as the ACA contribution, I think was your second question...

Yes. It's around 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's every product in aggregate. So it's never one product and that would be the truth of ACA. ACA was a very popular product. We were very forthcoming with that and it came about and everybody had to get complaint. Most products that have a compliance piece to it are fairly popular and so it was. We have 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 are set up to be a very good grower over the next several years and I think the way that we have worked our business even overcoming pretty strong growth comps last year, we are heading into Q1 with our largest comps, 63% growth from Q1. And I think that we are going to be coming out the gate strong on that.

That’s helpful, Chad. Then on the large 8000 [CTL] [ph] that you signed in the quarter. Congrats on that. How long do you expect implementations for something of that size to stretch on and 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. I mean 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 have always taken the position that the longer you allow a conversion to take data, your data worse and worse over time, and the longer you are stuck in conversion, the harder conversion gets. So we are set up to onboard companies very efficiently and that company would follow the same on-boarding process as our other companies.

Your next question comes from John DiFucci with Jefferies. Your line is open.

Chad and Craig, your implied EBITDA margins for 2017 is for flat to down a little bit after a couple of years of significant expansion. I am just kind of wondering what is the thinking there. Like why is that the case given you are still going to -- you are not going to have as much growth for your guidance next year but still very robust growth on the top line.

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

And we also, I mean we do hire ahead of the revenue that we catch and I don’t know to what extent that would be, of course some of that in there. I mean we have guided to 27%, we feel like as we sit here today, that’s a 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. And I guess have you adjusted your 2017 guidance relative to your expectation prior to the new FLSA over time [rules] [ph] being blocked, I think you had implied at least in earlier indications for 2017 that you see some benefit from that and now that looks less certain.

Yes. Well, 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 have a very large impact on American businesses and I came out and said that and it would have. Any time you are doubling the minimum wage for salaried employees, it's going to impact many industries. So I also said that it's not something we are charging for, it's included in our government compliant module which it is. But I will also say this, I mean we have companies right now that are using our FLSA tool. There are 31 -- there are different minimum wage [caps] [ph] in 31 states. Several of them have a different minimum wage [count] [ph] based on occupation. So a company -- like Oregon has a state law 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 in staying compliant with the minimum wage count definitely is at the federal level but also you can use our tool to impact state as well. And so I do feel like it's, 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 again, it's the full solution that delivers the value proposition to our client base.

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

Our guidance was not changed base on FLSA, based off of any FLSA expectations. 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 the...

No, no.

Okay. That’s the answer I was looking for. Thank you very much.

Your next question comes from Mark Murphy with JP Morgan. Your line is open.

So, Chad, you had mentioned in your script that you had some good success in replacing a number of point products in some of your recent wins. And, so I am wondering at this point, just how diversified is the revenue stream if you compare it 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’s not something that we have updated. We had talked about and 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. And so time and attendance as a product, we have 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 that it is going to be more diversified over time just because we have more products and the adoption rates of these products also increases over time. And 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 to be somewhat diluted in to the overall product mix.

Okay. Makes sense. And then as well, any comment on the linearity of starts or go live during Q4. Is it possible that, just the timing there is always an ebb and flow. Is it possible they were a little more backend loaded in Q3 and then a bit more liner in Q4?

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

Okay. Got it. And then the last one I wanted to ask you and with the understanding that obviously the guidance that you are giving us now as you said is the starting point. And we are aware of your track record with that over the years. I was looking at -- if 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. And so I think mathematically I know there is some moving pieces but it seems to have imply that new bookings are running kind of around the same level or relatively flat year-over-year because the bookings drive the incremental growth. And I was thinking that it's against the a backdrop where EDP is guiding to flattish bookings growth going forward where they had kind of surprised negatively on that. I guess, I am just curious, and not that there is anything wrong with flat bookings for a little while but just how are you looking at that? And then is there a point where you kind of 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 in last year, that was the first year that we had the ACA forms filing. So in that first quarter we had a pretty significant lift both to form filings as well as we had the full year of some of that ACA. But that was one of the phenomenon that we had first quarter of 2016.

Yes. And as far as, I mean the guide this year, I am unaware of any company that had a higher growth rate in our industry then us last year. I am also unaware of any company that’s guiding to a higher growth rate then 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 and we are -- 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.

Your next question comes from David Hynes with Canaccord. Your line is open.

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 sells the overwhelming majority of our new business and we have 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 37 executive rep or 37 people just became executive reps. And so as I had mentioned, I believe a couple of earnings calls ago we were very focused on developing our current younger group of people that are coming up and we are having success with that. So from what I see, early indications are that our turnover rate amongst new reps is down. We are having a greater success keeping our newer reps and again with executive reps its remained roughly the same.

Got it. Thanks, Chad. And then maybe as you think about kind of 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. So I guess with kind of an uncertain backdrop these days on that front, I am curious if that changes kind of your R&D focus at all.

Well, compliance is always number one when it comes to R&D. It's a have to whether it's on the tax side, I mean 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 [counts] [ph] new filings and everything else along with whatever is thrown in to the mix, sometimes retro. So that’s always a main focus of ours as we go through prioritization, that’s always top. And then the things that follow that or really go along side with that because it's a different group that work 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.

Your next question comes from Brad Reback from Stifel. Your line is open.

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

Everything that’s been build 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. So just to be clear. So the 3% would be starting from March 1 onwards and then...

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 not been built based on certain clients wishes at different times but, yes, 99 point whatever percent of that 3% is going to be the recurring fee not forms.

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

Well, 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 because before they are able to become an executive rep. And we have 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, which is something that we needed to really focus on and make that a top priority for our sales management organization which we have done. And so it's really that. The on purpose strategic development of our new people and not allowing them to get a cut as we focus on our higher growth group. It's really the strategic focus on that group that is making the change. Again, I mean I have got about a couple of quarters information but those couple of quarters are telling me the efforts that we have made to increase retention amongst our new reps is working.

Your next question comes from Brent Bracelin from Pacific Crest Securities. Your line is open.

This is [Joe Reptin] [ph] on for Brent. Just a couple of quick follow-ups. One on office openings, if I could. You open new offices when, do you have reps that are 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. And then ACA, the 3% left in the air. Is the total still looking around 5% of revenue?

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

Okay. Thank you. Then just one final one. FLSA obviously got pushed out, but we had 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 Q1?

Yes. I mean I haven't seen any difference. So I mean now this is my fifth President, I guess that I have been through, let me count those. Four, this will be my fourth President, I guess, that I have been through with the election cycle. So I mean there is always something different. I mean in the midmarket, they are out there working their business and they are looking to eliminate waste or create efficiencies. And so that really doesn’t change -- now we haven't seen any slowdown in people's willingness to onboard on to our product based on the election results. I mean as far as FLSA goes, we are not an FLSA company. We have a product that can help with the over time count based on the new salary increases to the minimum wage which might not happen at the federal level. It could very well happen on state levels and already has as far as the actual hourly minimum wage. And 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 are not seeing any slowdown of government compliance tool due to the FLSA injunction.

Your next question comes from Mark Marcon with RW Baird. Your line is open.

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.

I mean some of that is based on timing of when deals come in and what the commission rates are at sales and marketing. I mean it's easy to point to R&D as being a place that we are continuing to spend. But then we will see that -- some of that comes down to timing on when the sales is on-boarding as far as what 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, shouldn’t vary that much.

That’s correct. I mean you would efficiencies in the G&A. Sales and marketing as a whole should continue to grow and then as well as R&D. We will continue to increase our pace on the R&D side as well. And in our gross margin, what Chad mentioned, we have to hire ahead of the business. So you know there is 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. And then with regard 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. I mean those are our best offices. You know the second would be those offices that are mature in which we have relocated a manager and then backfilled them with the manager. Those would be second. And the final piece would be those new offices that are not yet mature. So 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 buying 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 put in, that may have been in place?

Yes. I mean it's really a mixed bag of what we are going to run into. We are always typically running into a competitor from the payroll side and then time and attendance. And then 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 midmarket, they often buy point solutions to solve a problem. They want to solve a problem. It's not necessarily that they have an overall strategy for how -- or that they are necessarily implementing an overall strategy often times of what do they want everything to look like. And so when we are coming in, it's not just, hey, you have 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. And it's through that that we are able to deliver, not just help them deliver and complete a strategy but also a product that automates that strategy. And so in doing that you are 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 to Paycom. So implement Paycom.

Your next question comes from Jim MacDonald with First Analysis. Your line is open.

Quick question and then some follow ups. Could you give an update to your current philosophy on up-selling existing customers with more modules?

Well, yes. I mean 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 our client might not have implemented yet. I will say, as I have been saying, most of our clients implement the majority of our products, over half of our products at the time of their initial conversion. So it really depends on when that client was onboarded of whether or not they have a lot of our products of if we are still needing to go back into the client base. But 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 know that our executive sales group, which again represents a overwhelming majority of all of our business, sales business, they are unable to go out and sell something into the current client base after their clients have been onboarded with us for greater than 30 days. We have separate group that then works with the client on that and also helps the client not just sell them but helps the client with usage and can even provide additional training. So they are not just a sales resource but there are some other things that they can do as well.

Great. 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? And then 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?

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, the first of December, you divide by either 12 to take one twelfth of it or you might take two-twelfths of it. But that might give you a little bit of information on the exact impact that any pull forward from Q1 2016 in the start of Q4 2015 may have impacted that quarter. Craig, I will let you take the second.

Yes. And on the G&A, 2015 was our first year of SOX compliance so we have 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. You know there's several things that go into that but that would probably be the main.

Your next question comes from John Byun with UBS. Your line is open.

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

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

And in the 26 number, is there a way to kind of reference 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. And so since then we have 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 and let's say 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. Almost all deals are competitive. Typically we are going up against the incumbent and often times that plus and another vendor. So it's been very competitive and I can't 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.

Your next question comes from Ryan MacDonald with Wunderlich. Your line is open.

In a previous question, or 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 midmarket. You just really don’t run into installed products very much anymore. So when we are out there replacing what I will point though is you can have different point solution providers where there is crossover. Where you can track candidates in three of them but you might choose one because it's better than the others and then you might use another for comp. So there is crossover amongst point solution providers as far as there functionality. And so we could go into a client, they have chosen one point solution provider for one thing very specific and they have another for something separate then that. Then we go to another company that’s using the same products and they are using all functionality in one of the point solution providers. So really it's just dependent upon how the point solution providers sold it, integrated it, and then through the reporting from there. And so for us we are going in with an overall strategy to replace all with one system.

Got it. And last quarter you talked about a bit, or you introduced a new metric. It was business sales performance capacity and 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 will say that anything we focus we impact and we are very very focused on bridging the gap in this. It is, as I mentioned, our new business sales capacity, a metric number was $260 million and as far as from a capacity standpoint, again, that’s new business onboard. And as far as from a capacity standpoint, I wouldn’t update that number to day. It's still the $260 million. As far as our gap, closing gap on that, we are definitely closing gap on that as we continue to work our strategy in that area. Now I believe I 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. And then 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?

You know to total maturity it still takes 24 months. But we are seeing newer offices sell more to maturity. So I would say that they are doing better selling early on and they are selling more towards maturity but at the end of the day it still takes 24 months for you to have 8 sales people of carrying full quota trained and backlog in pipeline.

Your next question comes from Ross MacMillan from RBC Capital Markets. Your line is open.

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, like what the ratio, if you will, of what you are able to -- or 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 lean on that? I'm just curious as to how you think about that ratio realized to potential.

Yes. I mean definitely that’s something we manage internally. And one kind of gets the other. I mean as you bridge that gap, you are bridging it through more developed sales people and that produces a larger bench for you to back fill the relocating, the current mature relocating managers that are going in, to opening up new offices. So this is, again, as I said in the past. This isn't a new number for us. We constantly measure and manage this number. As far as where we are at and 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, you know should 260 grow, which I mean achievement would make that grow. But that what's 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, it's a work through that process. So for us, it's something we are focused on. We do measure it and it is something that somewhat tells us, are we ready. And we feel good about where we are at right now. Just to be quite honest with you.

That's great. And 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. And from our standpoint, it is still, for anyone client it is still a nominal fee that carries substantial penalties. And if I were a client in the mid-market, I wouldn’t 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 wouldn’t have the negative impact that this would should it stay. And 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 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. Well, 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.