Good morning, and thank you for joining us at the Paycor session at the Goldman Sachs Communicopia and Technology Conference. I'm Gabriela Borges. I cover emerging software here at Goldman, along with my colleague on the far right, Kevin Kumar. And I'm delighted to have the Paycor executive team on stage with me, Raul Villar, CEO, and Rachel White, Investor Relations. Thank you for your time. Thank you. So, Raul, I wanted to start with a little bit of your history over the past four years with Paycor. As you think back through your most significant accomplishments, what are you most surprised by to the upside, and what has been more challenging when you think through some of the milestones that you've hit? Yeah, I think, when we started the journey in the pre-IPO session, you know, our goal was to accelerate to 20% recurring revenue growth over the long term. And that was our aspiration, and we were able to do it in the first year and last year as well. So I think, you know, the results came faster than we anticipated early on, so we feel really pleased about that. I think, you know, on a go-forward basis, the most challenging thing is, you know, to continue to execute at that level and continue to raise the bar, and how to go from, you know, low 20s to mid-20s to high 20s. And so that's what we're focused on now, is how to continue to do that, you know, on a sustainable basis. A big part of the improvements that you've realized in normalized growth over the last couple of years has been expansion to Tier 1 markets. How are you measuring success of that priority, and what inning do you think we are in, in realizing that opportunity for Paycor? Yeah, I mean, for folks in the audience, Paycor was historically a Midwestern company, followed a Midwestern footprint, and so our goal has been to expand to what we call Tier 1 cities, which are the 15 largest cities in America. We really focus on the 50 largest. Tier 1, Tier 2, and Tier Tier 3 is how we categorize them. We have coverage in all of them. I'd say we're in the middle innings. We have, you know, roughly what we would consider about 40% coverage in totality, so we can more than double our sales organization. We have slightly less coverage, you know, mid-30s in the Tier 1 markets. I think from our perspective, how we measure success is, you know, we've been able to maintain our win rates, our deal size, our deal timing, you know, across all three tiers. They operate very similarly. The competition's the same. So you know, we continue to grow productivity in the low single digits while adding 20%+ headcount. So we feel like that's been successful and, you know, as those folks graduate, you know, we'll see more productivity. When you look at the data that informs your decisions on where to add your incremental salesperson, I'm curious if you could share some observations with us, particularly as during COVID, we saw so much shift in, I would think, where the incremental growth in regions is coming from? Yeah. I mean, we for each of the 50 cities, we know how many companies exist and how many employees are available, and then we know how many sellers we have and how many prospects they should have. So we look at it from a demand perspective first, and then we look at it from a capability perspective second. You know, do we have a good leader? Can we add more people? Do we have to add a second team or a third team in that market? So it's a combination of, is the market demand there? Is it growing? As an example, Tennessee is not a Tier 1 market, it's a Tier 3 market, but it is operating like a Tier 1 market because there's so much growth going on in Nashville and Knoxville and some of the cities in Tennessee that we're expanding there faster than we are, you know, maybe some Tier 2 markets. Absolutely. And so I know how much thoughtfulness you and the team put into dividing territories and balancing new hires in your sales organization with productivity, with territories. Would love if you could share some observations. How are you thinking about making these decisions into your new fiscal year? Yeah. So we're still looking to grow 20% headcount growth in FY 2024. And, you know, we again look at it based on, you know, where we can. Now we're really working at our second and third tiers. And so, you know, we're following where the density of the opportunity is. So, you know, we have lots of expansion in California, you know, just based on the size of the market. And we continue to see expansion in Texas. I mean, four of the top 20 cities from a population perspective in America are in Texas, so we continue to grow there. The Southeast is a really big opportunity. Florida in general is again another big market. Those are the three big markets we think about. If you get Florida, Texas, and California right, you know, everything else takes care of itself. And so that's where most of our growth is. There's been a debate in the HCM software world for quite some time now on how to think about the moving pieces to competition. Mm-hmm. ADP has historically been one of the larger players in this space. You've got Paycom and Paylocity, and we've had conversations in the past about a very fragmented set of smaller competitors that are more regional. Give us your latest thoughts on how the competition is evolving, and when you look at your win rates, where the biggest sources of share gain are coming from for Paycor? Yeah, I mean, the biggest, you know, let's take a step back and talk about the market. 'Cause most investors think it's all an ADP play, and ADP, you know, has 16% of the market. It's just not as big as everyone thinks. And ADP and Paychex combined have about a quarter. So 75% of the market, you know, is using something else. And it's primarily, you know, legacy software, ERP software or regional service bureaus. And so, you know, we see a significant amount of our wins come from those two buckets. Those two buckets are as big as ADP, if not bigger. And so we think there's lots of opportunity to continue to win. We get, you know, roughly three quarters of our wins come from a combination of regional service bureaus, ERP software, and ADP, and Paychex. And so, you know, we, we think that that formula has a long runway. A lot of people talk about, you know, retention improvements at ADP or Paychex and the impact. And just to put it in perspective, ADP had a retention improvement of 10 basis points last year. So they, they lost $950 million, instead of $975 million. For us to have a great year next year, you know, we need from ADP, maybe $50 million out of their $950 million in losses. So... And they're forecasting that to go backwards. I, I mean, it's not that significant of a play. I understand our predecessors made it a very simple story that they were disintermediating ADP, and it just wasn't true, and it's still not true. The market is much bigger than ADP or Paychex. If I were a Paycor sales rep, would my strategy going into a 100-employee customer that is an ADP customer, be any different to how I approach an opportunity at a customer that has a regional provider? Absolutely. So with ADP, it's all about user experience. Because ADP has all the feature functionality that's required, it's just how they put it together and how they deliver that service. That's the biggest gap. And with a regional service bureau or an ERP, they have significant limitations on the product side. So as HCM has expanded beyond payroll, most of the ERP software is just the payroll module that's within the bigger software stack. And the regional service bureaus are primarily payroll, and if they have add-on features, they're through, like, partnerships, and it's not as integrated. So I would say that when we're going against the other legacies, it's more about the product, and when we're going against ADP, it's more about the experience. Do your win rates differ depending on those two cohorts? They're similar. We have really strong win rates. They bounce around a little bit based on sample size, but I would say they're greater than 50%. Our highest win rates are against regional and in-house, just because, you know, they have less product. And so when people see it, they go: "Oh, yeah, that's what I'm looking for. I can pull multiple vendors together and consolidate my spend. The other piece of competition that I wanted to spend time on is some of the big headlines we see around VC-backed competition. So I'm thinking of the Gustos, the Ripplings, the Deels of the world, where you tend to see a fair amount of billboards, advertising, et cetera, in Tier 1 markets. How do you think about that competitive piece of the landscape evolving? Yeah, I mean, we don't really see them, not yet. And, you know, we track win-loss on a monthly basis. You know, Gusto's more downmarket, so we just don't swim there. And, Deel is, you know, more global and HR-focused, and we just don't compete with them. They're probably competing more against, like, ADP and Workday and Ultimate, Ceridian upmarket in the enterprise space, the large enterprise space. You know, and so I... You know, for us, the, you know, if you think about it, the three modern HCM platforms, Paylocity, Paycom, and us, are all over 30 years old. And the only company that's created scale, that's entered the market, that's about 15-20 years old, is Gusto, and that's been downmarket. The big moat is, you know, essentially the payroll tax compliance engine that's required in, you know, 10,000 jurisdictions in the U.S. That's the biggest moat. The second biggest moat is, unfortunately, in the mid-market, it still requires face-to-face sales distribution. That's expensive, and it's in-market, and so it requires this broad, you know, commitment to expanding distribution, which is expensive. Those two things have limited new entrants. We see lots of regional service bureaus that get up to about $5 million-$10 million, and then they either sell or they kind of just lose steam. I wanted to touch on the labor market. Maybe the, you know, what you're seeing in terms of trends. I know Non-Farm Payrolls is a key metric for Paycor. So maybe just comment on that and just the general willingness to do payroll modernizations right now. Thank you. Yeah, sure. So, you're right, we like to look at Non-Farm Payrolls. That's a great indicator for our portfolio in terms of customer growth. In a typical economy, we tend to see between one and three points of revenue growth. That's been flatter over the past few quarters, and that's our anticipation moving into next year. The big revenue drivers of our business are really employee growth on the platform. As Will mentioned, there's a lot of legacy platform opportunities out there, as well as platform expansion, as we continue to enhance our product platform, cross-sell back into the base, and get higher average deal size as we move up market. Yeah. Well, you made an interesting point on ADP churn, but curious on, I guess, churn with the regional bureaus. Is that pretty consistent to historical levels? How does that typically, what does that, you know, look like? I think it's been increasing just because the HCM suite is expanding and the buyer is expecting a much broader solution, and they can't bring it to market. They don't have the R&D resources to invest, and if they partner, it tends to be loose, you know, one-way integrations. And so there's a lot of downsides to that. And that's, you know, become, you know, a nice sweet spot for us in the market. Yeah. Another topic that comes up is, you know, in the context of demand is, you know, bookings growth was quite strong in 2023. I think 23% growth. So maybe just talk about bookings growth and how that... you know, maybe the lag effect to revenue and what that looks like in 2024. Obviously, you've set 2024 guidance, and so maybe talk about that seasonality and how, you know, that bookings growth gives you confidence, you know, for driving sustainable 20+% growth. Yeah, absolutely. We had a record bookings quarter in Q4, and a lot of that came in in June. So we were pleased with the overall number of 23% growth for the year. We're just expecting that to accelerate throughout the year. There's a couple of dynamics driving that, one of which is we announced an embedded HCM solution, so we're expecting some partner revenue to layer in, in the back half of the year. And then the other piece is, as we continue to move upmarket, these larger clients tend to want to start on a clean calendar year in January. So instead of starting in the next quarter or two, we are seeing a little bit of a lag effect starting in January. These bookings obviously have been booked, and so that gives us confidence in the acceleration of the business throughout the year. Another part of kind of maybe the strength of 2023 was really nice, I guess, cross-selling and bundles. You saw some solid PEPM growth. Maybe talk about maybe the, you know, is that also a key lever for 2024? What's the sustainability of that kind of, you know, cross-selling dynamic? Yeah, absolutely. We had 11% effective PEPM expansion in fiscal 2023. That was driven by three primary things. The first is cross-sell, the second is higher average deal size at the point of sale. As we continue to move upmarket, those larger clients just tend to take a more complete solution. And then the third piece is really pricing initiatives. We think, high single digits is probably a more sustainable level moving forward. We had some really good price take of late. Mm-hmm. But absolutely, it's one of our two big growth levers. Yeah. And I guess maybe to step back and just look at listed PEPM, I mean, it's grown nicely over the years. I think during the IPO, it was at 35. It's around 48, I believe, right now, and I think recently Paycor upped the potential to 60. So maybe, you know, talk about the visibility you have into, you know, that growth in listed PEPM. You know, are there gaps in the platform that, you know, you wanna add to kinda drive that PEPM expansion? Yeah. I mean, there's no gaps in the platform. I think we've been on a consistent approach with our R&D team, that part of their responsibility is to add $3-$5 PEPM per year, so they're on quota. And but we see a lot of opportunity to continue to expand within Talent. There's hundreds of micro businesses in HCM that revolve around the Talent ecosystem, so we're gonna continue to press in on Talent. We're gonna... You know, we've even segmented to our Talent bundle, to Talent on the attraction side and then Talent on the retention side. And so we're gonna continue to press in there. Obviously, there's lots of opportunities to, you know, build modules quickly with AI that, you know, will continue to make, you know, the whole HCM process more efficient for the customer. And so, we don't see a ceiling on PEPM, and we're gonna continue to try to deliver products that differentiate ourselves and differentiate our focus on frontline leaders. Yeah. I guess on the talent module, 'cause that's been really successful, and it sounds like you are adding more components to it. Maybe just talk about the opportunity there, because it feels like, you know, maybe more upmarket, there's a lot of talent vendors out there, and- Mm-hmm. So maybe talk about how, you know, Paycor sees that opportunity, what's differentiated there, you know, as you add more capabilities to talent specifically? Yeah, I mean, if you go back in history, unfortunately, I was there, but you know, the category started really with just payroll and then- Yeah ... added tax filing, and then, you know, evolved to starting selling HR as a, as a module. And today, payroll and HR are, are one module. You go to market with one module. And we believe that in the future, you know, call it in less than five years, payroll, HR, and Talent will be the module that everyone's going to take. So we're- we believe that you're gonna see massive adoption of Talent, because everyone needs to recruit and everyone needs to retain their employees, and they balance out depending on where we are economically. So we, we think that that's going to continue to grow and that will continue to drive penetration there. So for us, Talent, you know, while we're seeing, attach rates nearing 40% at point of sale, we're cross-selling into the base, it's our number one cross-sell. But for us, like, it has already passed workforce management as the second largest revenue line item on our P&L, and we're just getting started, and there's lots of opportunities. As far as the competition goes, as you move into enterprise, yeah, there are some standalone companies that offer those solutions. We're not really competing with Cornerstone or any of those folks. I mean, people that buy Paycor are buying a suite, right? They want one throat to choke for a full integration of payroll and HCM. And so we think that, you know, that's a really compelling value prop. Yeah. And so the core market Paycor focuses on is that 100- 1,000 employee. But, you know, you still do some deals kind of more upmarket in the higher end of that range. Does the needs of the customer evolve? And are you thinking about, you know, does that go into your product roadmap as you start to win some of those larger deals? Yeah. So 15%-20% of our bookings this past year were over 1,000. So I mean, we're there. You know, we just haven't had a press release letting everyone know. So, but ultimately, there are things that are different in that segment. And by the way, we're like focused like probably up to, you know, 2,500 or so as kind of a good mark to think about. And some of the differences are on the reporting side, the analytics. Multiple people enter payroll simultaneously, and so some of those things, scalability of the platform, speed of the platform. And so we're our product roadmap for 2024 has, you know, kind of an over allotment of items against that space to make sure that, you know, we continue to deliver for the clients in that marketplace. But, you know, there's nothing today. Actually, Talent is pulling us up into these deals, and so there's nothing in the product that we don't have. It's more about speed, reporting, multiple pay entries, because you might have multiple people entering on multiple sites. Those are the big things- Yeah. - that we're focused on. I did want to ask about embedded HCM. Rachel, you mentioned that recently announced. Maybe just talk about, you know, what pain point is that addressing, and maybe the incremental TAM that product opens up. Yeah, I'm not sure it's incremental TAM. I think it's really targeting the ERP software vendors that we talked about before that we're going after, the software component of the spend. And we think it's just an easier way to get after it. Again, we have less than 2% market share, and, you know, we want to continue to go after, you know, the market in the most efficient way possible. And we've invested a significant amount to be the most open platform in HCM, and this is one way we can leverage that. And we're excited. We have, you know, a few partners on the platform already that are converting, and converting their software bases onto the platform, and we think it's a really dynamic approach. Gusto's growth was driven through this process downmarket. And so we think we can be the upmarket version, of that in the software space. Your comments on product functionality and moving upmarket lead to a little bit of a discussion on the evolution of what it means to be an HCM software vendor. And if I think about at the very high end, you have someone like a Workday. There's even been conversations around office of the CFO- Mm-hmm. type spend management solutions to be a best-of-breed platform. Yeah, I definitely think that. But we sell into the same buyer, right? So, we sell to the CHRO or the CFO for most of the mid-market decisions. And, I think there's definitely an opportunity there over time. So I think, you know, those are very interesting. We do a little bit of spend management today. Yeah. Not as, complex or robust as the companies going against the office of the CFO. I do think long term, that's an adjacency that will be interesting to evaluate the best way to get after it. On the topic of evaluating the best way to get after it, and this is a little bit of a strategy question too: build versus buy? What we're really good at, and we think, you know, are, you know, extremely open to acquiring technology that expands talent, being an area where we've invested, you know, and had multiple IP acquisitions to help accelerate growth. I think when we think about adjacencies, it would be more through acquisition or partnership than building out. Yeah. Yeah, that's fair. The other comments that you all have made that I find very interesting is the unique perspective that you have into trends in SMB versus enterprise. I remember probably about 18 months ago, where a lot of the headlines that investors were paying attention to were tied to the health of the enterprise and layoffs in particular. Curious to get your updated, observations. When you read the headlines, when you look at the headlines— Mm-hmm. - versus your customer base, how would you describe the way that demand is trending and the health of your customer base is trending relative to the overall economy? Yeah, I mean, I think the headlines are, you know, have been different over the last two years than what we've experienced in HCM. You know, we've seen no change in out of business at the low end of the market. It's been really consistent, even through COVID. You know, the paycheck protection, you know, definitely helped small businesses at the low end during COVID. But post-COVID and even over the last six months, we've seen no material change in out of business. Companies are still looking to hire. The number one thing that our clients ask us for is how can you help us find people, find talent? And so I think there's definitely. While the labor market has tightened a little bit, there's still demand. Non-Farm Payrolls continue to grow, albeit they're growing at a slower rate than they were before. You know, that labor is really, you know, the biggest area. And again, like, when we saw the layoffs last summer in the enterprise space, you know, enterprise clients, you know, hire in advance, you know, of the revenue coming. And so when they see the revenue's not gonna come, they act quickly. Small businesses get impacted mostly by interest rates. And, you know, what we're seeing is moderation in hires there. We're not seeing employment growth there because it's instead of hiring the next employee, they just ask a relative to do more, right? I mean, it's typically what happens. In the mid-market, you know, they kinda hunker in because, you know, they tend to be private, family-owned, and, you know, they try to keep their employees. That's important to them. And so unless there's some dramatic impacts in the economy, you know, we feel pretty good that the mid-market will hold the longest, because of how they're designed. Does the environment feel better or worse versus this time last year? For us, it's been really consistent. Okay. It feels the same. The questions at all these conferences are different. You know, last year it was, when was the world gonna, you know, crumble? And now it's, when is it gonna come back? But for us, it's been really consistent, you know, overall. I mean, the labor market has been fairly consistent for the last few years. I'm gonna pause and go to questions from the audience. Raul, please. ... Revenue retention is, you know, best in class or right up there, not just versus the people who you're primarily taking share from, like the legacy players, but even your kind of more tech-enabled competitors. Assuming that's correct, that your revenue retention is really high in your peer set, what, what drives that for you compared to some of your other competitors? You know, we, we're focused on, you know, designing a really simple, easy-to-use platform, and delivering, you know, a great onboarding experience. Onboarding is really complex in HCM, labor-intensive and data-intensive, especially as the suite has expanded. You have payroll data, you have tax data, you have benefits data. There's a lot of information that gets switched. And then people are looking for, you know, the right answer by the right person in support, and so we just focus on those four things. Obviously, you know, our you know, we continue to look to cross-sell solutions to make it stickier. And we continue to add more products, which also makes the platform stickier. So we're going into football season? Yeah! Yes. Tonight. Give us some color on how your investments in marketing have changed, and some of the incremental ROI that you're seeing off of the stadium sponsorship? Yeah. So, I mean, part of. You know, as we were looking to expand our footprint and change the trajectory of Paycor, you know, you have to have brand awareness, you know, to go along with expanding your sales organization at a significant rate. And for us, you know, we felt like some of the unique sports sponsorships could be really helpful for us, to give credibility, give salespeople confidence in market. And so we did an analysis. All of our peers do advertising. Most HCM peers do golfers. Like, if you watch golf on a Sunday, you'll see all of our peers. So we thought that was a crowded space. We did an analysis, like, you could buy a patch on a hockey team or a baseball team. No one cares. So we decided that was not really a good idea. The NFL's the biggest sport in the U.S. We're domestic. And so we had a unique opportunity to do our home team, which, you know, which, which was a really great opportunity for us, and we thought the price-value relationship worked. We are really focused on ticket allocation, both in Cincinnati and outside of Cincinnati. And so we have, you know, a very robust program to drive bringing prospects to games. In Cincinnati, we have 82 tickets, and we like, almost, like, 65 go to prospects or clients or partners or investors. If you're interested, let us know. And, and so, but we also. Since Cincinnati is not a Tier 1 market, it was really important to us that we got a significant allocation to bring people to the Tier 1 market. So last year, we went to Dallas, New York, we went to Florida, with the Bengals, which is great, and we, you know, get suites in those cities, and we bring prospects to the games. And this year, we extended that to any non-Bengals game, and so we're really, you know, leveraging to drive ticket productivity and drive bookings. And it exceeded our expectations last year, you know, the bookings, you know. And so we've continued to do, you know, those type of sponsorships where appropriate. We just announced Miami Dolphins, big Tier 1 market for us to create awareness, the Washington Commanders in D.C. So we're looking to, you know, create anchor relationships, where they use us for HCM, and we get some advertising, and it, it's been very effective for us in markets. I wanted to end on a question on the implications for the unit economics. I think through some of the themes of our conversation with moving upmarket, with cross-sell, with Tier 1 markets, to me, each of those three things should be levers to improve your unit economics over the medium term. How do you think about it? What are the one or two biggest levers that can get you to a better LTV to CAC as you think about scaling? Yeah, I mean, moving upmarket and selling larger customers is the number one driver- Okay ... of driving LTV to CAC, because larger customers stay longer because it's really complicated to switch. Yeah. They just by nature, if you look at each subsegment in HCM, the retention will improve, you know, by size. So Workday will have the best retention 'cause you're in a multi-year contract, and you're kinda hostage for X amount of years, you know? And you can just go down, you know, all the way down to Paychex, which would have the lowest because they have the smallest client. And so that's number one on the unit economics. The second piece is just sales force tenure and driving a more tenured, you know, sales organization. It takes three years in HCM for someone to be fully ramped. And so, like, our first class still is in their last year of ramping right now, right? Our second class, you know, is in their second year, and they graduate in three years. So, once we get to a steady state where we have more three-year-plus reps, you drive productivity, which also improves your LTV to CAC because you need to hire less new, less productive people. And so it's a combination of those two things, continuing to push upmarket and driving more tenured sales reps. Can you share any specific detail on the order of magnitude difference between LTV to CAC for customers with 100+ versus 100-, or however you think it makes the most sense? We haven't really shared LTV to CAC. I would suggest, though, that the unit economics, I mean, the average deal size under 50 employees is, like, $3,000, and the average deal size above is, like, $30,000. So it's a 10x on the revenue side. And your costs- Is not 10x. -to pay the rep are not 10x. So it's, it's probably, you know, a lot less than that. So, so I, I think that's how I would think about it. It's just more effective on your LTV to CAC. Absolutely. Let's leave it there. Okay. Thank you, Betsy.