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Edited Transcript of PAYC earnings conference call or presentation 30-Jul-19 9:00pm GMT

Q2 2019 Paycom Software Inc Earnings Call

Oklahoma City Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Paycom Software Inc earnings conference call or presentation Tuesday, July 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Richison

Paycom Software, Inc. - Founder, President, CEO & Chairman

* Craig E. Boelte

Paycom Software, Inc. - CFO, Treasurer & Corporate Secretary

* James Samford

Paycom Software, Inc. - Head of IR

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Conference Call Participants

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* Brad Robert Reback

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Brent Alan Bracelin

KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst

* Brian Jeffrey Schwartz

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Drew L. Kootman

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Joshua Christopher Reilly

Needham & Company, LLC, Research Division - Associate

* Mark Steven Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Pinjalim Bora

JP Morgan Chase & Co, Research Division - Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

* Shankar Subramaniam

Bank of America Corporation - MD of Financial Institutions

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Paycom Software Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to James Samford, Head of Investor Relations. Please go ahead.

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James Samford, Paycom Software, Inc. - Head of IR [2]

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Thank you, and good afternoon. And welcome to Paycom's Second Quarter 2019 Earnings Conference Call. 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 or make in this presentation 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 most recent annual report on Form 10-K. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statements made speak only as of the date on which this was 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, 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, which is available on our website at investors.paycom.com.

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

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [3]

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Thanks, James, and thank you to everyone joining us on our call today. I'll begin my remarks by reviewing another strong quarter and provide you with some perspective on how our groundbreaking Direct Data Exchange and employee usage initiatives are redefining the relationship employees have with their human capital management or HCM software in the workplace. I'll finish by discussing some additional business highlights, then Craig will review our financials and outlook before taking your questions.

The second quarter results came in strong, thanks to robust new business adds, and we remain well positioned for another excellent full year. Q2 revenue was approximately $169 million, representing growth of 31.5% versus the comparable prior year period. Our adjusted EBITDA of $69.4 million represented a 41% margin. With these results and our momentum, we are raising guidance for the full year, which Craig will discuss in more detail in his remarks.

Employee usage of HCM technology is the future of our industry, and our clients and their employees are embracing the digital transformation faster than ever. With Paycom, they can measure the estimated ROI on their HCM investments and benefit from higher employee engagement, increased productivity and better job satisfaction. Our early investments in employee usage are driving strong sales growth, but we believe this digital transformation is still in the early stages.

Last quarter, we released our Direct Data Exchange or DDX for all of our clients, a highly differentiated enhancement to our software offering that reports all data changes made directly into the HCM database by employees as well as all duplicative data changes typically input by other client representatives. As employee usage gains traction, our clients can track the financial benefits of eliminating these duplicative data input.

Clients choose the pace of their digital transformation, and Paycom can go as fast or as slow as they want. However, we are seeing clients embrace the transformation at a faster pace today than a year ago. Before the DDX, no one in our industry, let alone HR professionals, knew what appropriate employee usage look like or how to measure it. Now they can, and they are embracing it.

Turning to our sales initiatives. In addition to continuing to innovate our product offering, we are also innovating our sales strategy as buying habits across the industry continue to change with more companies becoming more comfortable buying online. This means we will increasingly employ a combination of traditional sales teams and nontraditional sales teams, such as our inside sales group. We recently brought one of our most successful outside sales managers to lead our inside sales initiative because we have found that prospective clients are embracing this nontraditional sales model and buying online. We believe this initiative will aid our sales growth and complement our existing sales efforts.

We also recently opened a new sales office in New Orleans. While we continue to expand our sales footprint, I want to emphasize that the largest driver of our sales growth is coming from the sheer mass of our existing sales force and their increased productivity.

On the technology side, we continue to add talent to our outstanding development teams to focus on new products and software enhancements. We are experiencing a lot of success, and I'm very pleased with the product line. In fact, we recently released Ask Here to all of our clients. This newest tool gives employees a direct line of communication to ask work-related questions of their company representatives and receive timely answers, all through the convenience of Paycom's self-service technology.

I'm excited about the many benefits companies and their employees gain, such as one online communication resource that ensures all inquiries are addressed, actions are taken and eliminating the needs for employees to follow up through e-mail, phone call or added foot traffic. Now employees don't need to know exactly who to ask questions to as this functionality empowers them to ask any business question, which is then routed to the most appropriate client representative with the relevant expertise. This latest innovation further enhances the employee-employer experience and strengthens the client's employee usage initiatives.

To conclude, we believe Paycom is leading the digital transformation of the HCM industry, which positions us well to deliver value to our clients and their employees throughout the year and beyond.

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

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Craig E. Boelte, Paycom Software, Inc. - CFO, Treasurer & Corporate Secretary [4]

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Before I review our second quarter results for 2019 as well as discuss our outlook for the third quarter and full year 2019, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

As Chad mentioned, we were pleased with our second quarter results, with total revenues of $169.3 million representing growth of 31.5% over the prior year period. Our revenue growth continues to be primarily driven by new business wins.

Within total revenues, recurring revenue was $166 million for the second quarter of 2019, representing 98% of total revenues for the quarter and growing 31.1% from the comparable prior year period. Total adjusted gross profit for the second quarter was $144.4 million, representing an adjusted gross margin of 85.3%. For the full year 2019, we anticipate that our adjusted gross margin will be within a range of 84% to 85%.

Total adjusted administrative expenses were $85.9 million for the quarter as compared to $61.7 million in the second quarter of 2018. Adjusted sales and marketing expense for the second quarter of 2019 was $39 million as compared to $30.2 million in the second quarter of 2018. Adjusted R&D expense was $16.3 million in the second quarter of 2019 or 9.6% of total revenues. Total adjusted R&D costs, including the capitalized portion, were $22.3 million in the second quarter of 2019 compared to $14.6 million in the prior year period.

Adjusted EBITDA was $69.4 million or 41% of total revenues in the second quarter of 2019 compared to $53.5 million in the second quarter of 2018. Our GAAP net income for the second quarter was at $48.8 million or $0.83 per diluted share based on approximately 58 million shares versus $35.7 million or $0.61 per diluted share based on approximately 59 million shares in the prior year period.

Our effective income tax rate was 6.9% for the second quarter and 16.1% for the 6 months ended June 30, 2019. For the full year, we expect our effective income tax rate to be roughly 22% to 23%. For the third quarter, we anticipate noncash stock-based compensation expense to be approximately $5 million to $7 million.

Non-GAAP net income for the second quarter of 2019 was $43.7 million or $0.75 per diluted share based on approximately 58 million shares versus $34.8 million or $0.59 per diluted share in the prior year period. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the third quarter of 2019.

Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $94.8 million and total debt of $33.5 million. As a reminder, this debt represents a financing of expansion-related construction at our corporate headquarters. The average daily balance of funds held on behalf of clients was approximately $1.2 billion in the second quarter of 2019.

Now let me turn to guidance. For the third quarter of 2019, we expect total revenues in the range of $170 million to $172 million, representing a growth rate over the comparable prior year period of approximately 28% at the midpoint of the range. We expect adjusted EBITDA for the third quarter in the range of $61 million to $63 million, representing an adjusted EBITDA margin of approximately 36% at the midpoint of the range.

For fiscal 2019, we are increasing our revenue guidance to a range of $728 million to $730 million or approximately 29% year-over-year growth at the midpoint of the range. We are also increasing our full year 2019 adjusted EBITDA guidance to a range of $306 million to $308 million, representing an adjusted EBITDA margin of approximately 42% at the midpoint of the range.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Raimo Lenschow with Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [2]

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First of all, congrats from me for another great quarter. Chad, my question is around the new sales strategy. Can you expand a little bit on the move to an inside sales? That's obviously like a big step for you because you had a very strong direct model. Inside sales historically has been more kind of slightly lower in the market. Like how do you plan -- or like how big is this going to get? And how do you try to do the client segmentation?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [3]

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Yes. So I appreciate the question. So if this isn't a shift in strategy, we've been having success selling online. You did allude to the fact that we've had a small inside sales organization here that does sell to smaller either prospects that call us or potentially clients that have an easier situation. But anyway, we continue to have increased lead volume in both the inside and outside sales. And these inside sales efforts are just augmenting our traditional sales model. It's not replacing it. And so this should be accretive.

The plans we have to continue to expand our footprint in outside sales haven't changed. As I just mentioned, we did open up an office in New Orleans. So we continue to open up new offices in a staggered approach when it makes sense. But we also are having increased lead volume coming in through inside sales.

And in addition to innovating our product, we're also innovating our sales strategy as well. And so -- but I wouldn't call this a shift in strategy. We're expanding in both areas.

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Operator [4]

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The next question comes from Samad Samana with Jefferies.

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Unidentified Analyst, [5]

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This is [Howard] on for Samad. I have one for Chad and one for Craig. So for Chad, I'm curious, are you seeing any cases of larger customers that are showing resistance to this fully employee self-service approach to HR? So it could be whether due to -- it could be due to organizational complexities or industry or regulatory barriers. And -- or I guess another way of asking is, on the flip side, are there any industry verticals that have fewer organizational complexities, and thus, they're more -- is it there -- it could be 5,000 to 10,000 employees, but they're more likely to switch to self-service. And then for Craig, just if -- I'm looking at the revenue guidance. And if I want to back into EBITDA, I think it implies that you guys are going to see tremendous sales and marketing leverage in 4Q. And so is that true? And then -- and if that is true, what are the drivers?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [6]

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Yes. So I'll take the first question. I mean I'm sure I could single out a specific prospect that, for one reason or another, might not embrace the strategy of employees having a direct relationship with the database. But I can't think of a good reason why any prospect, regardless of size, wouldn't want their employees to have a direct relationship with the database. In fact, I believe that's what the enterprise market has been trying to build to with the multiple interfaces. And now you're even seeing companies lay over areas of technology onto those back-end so that employees can actually have some level of experience with their data.

And so now I think whether you're a large client or a large prospect, whether you're a smaller prospect, this is the future of our industry, and we're experiencing that future today. And so I would expect that all enterprise-level-type clients would receive the same type of value that the others -- and we're actually seeing that. We do continue to sell at the upper end of our range and even above that. And so our lead generations actually continues to drive results for us in those areas. I'll let Craig answer the guidance question.

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Craig E. Boelte, Paycom Software, Inc. - CFO, Treasurer & Corporate Secretary [7]

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Yes. In terms of the adjusted EBITDA in the back half, we would expect to see some leverage in the sales and marketing but also in the G&A line as well kind of in the back half.

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Unidentified Analyst, [8]

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Okay. And if I may, just to follow up, Craig, have you guys updated long-term operating margin guidance, the long-term targets or sales and marketing, what that could be over the -- I mean like can we see it, perhaps, dip below 20% of sales over the next few years?

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Craig E. Boelte, Paycom Software, Inc. - CFO, Treasurer & Corporate Secretary [9]

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We have not given any long-term guidance on adjusted EBITDA.

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Operator [10]

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The next question comes from Mark Murphy with JPMorgan.

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Pinjalim Bora, JP Morgan Chase & Co, Research Division - Analyst [11]

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This is Pinjalim on behalf of Mark. Congrats on the quarter, guys. Two questions for me. Chad, you said you have opened one office this year. I think it was 4 offices in the first half of last year. How do you feel about the balance between the need for office opening than the productivity gains of the existing offices? And in that context, I mean could you talk about how sales productivity per mature office is tracking maybe versus last year?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [12]

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Yes. Well, first, I'd say without productivity gains, you don't need to open up any offices. Productivity gains are very important, and so we continue to drive that. We've opened up a lot of offices. I've said this in the past. Now we're at 50, and at -- once those offices are full, they're averaging about 8 reps each. And so that's 400 reps for us, and that's quite a bit out there in the U.S. right now.

And so when we look at the TAM we already have covered, there's quite a bit there already. And so yes, we are going to continue to expand at times when it makes sense to us, but we also want to capture everything that's available to us now as well.

And so again, I didn't say this to signal a shift in strategy. It's more a little bit -- and I wouldn't necessarily say that it's a shift, but we are seeing some buying habits change and a willingness, depending on situation, for people to buy online. And as I've said earlier, as we're innovating our product, we're also innovating our sales strategy. I don't think people are going to potentially buy the same way 10 years from now that they're buying right now. And we want to be looking at that. And what does that mean? I think the reasons why they buy actually, as we look into the future, will probably be similar to why they're buying right now as far as that goes. But I think how they buy, it can be a little bit different.

We're not changing what we're doing now. I just want to say that. We did open up an office in New Orleans. We do continue to focus on expanding that footprint. So anyway, I would just leave it with that. The second part of your question?

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Pinjalim Bora, JP Morgan Chase & Co, Research Division - Analyst [13]

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Yes. Just to follow up on that, I know you don't disclose the revenue retention number quarterly, but any qualitative comments about that directionally, how that is trending this year so far would be helpful. And I've done this question a few times. How should investors think about a net dollar retention number? That is something -- gross retention plus -- including upsells.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [14]

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Yes. Well, I mean we've measured our retention the same since 2007. And it is a trailing 12, and so we've measured it the same. Last year was the very first time we saw an increase in that over a period of about 7 years. And so obviously, we're looking to increase that this year. Retention is something that improves throughout the year. You're going to typically have your largest losses in the beginning, and then retention improves throughout the year. And so that's why we update it once a year to stay consistent. But it's been our focus to focus on retention. And really, what drives that is client satisfaction and the ROI that they're generating off of using the software and how we're able to increase that ROI for them as well as for their employees. And so those types of things drive retention for us. And we're in the middle of the year, and we'll report that number at the end of this year.

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Operator [15]

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The next question comes from Brad Reback with Stifel.

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [16]

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Chad, can you update us a bit on how the price increase in the quarter was received?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [17]

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Sure. So we made mention of a modest price increase last quarter. And moving forward, we're not going to communicate any pricing in the future as we don't want to discuss our pricing strategy for our competitors. But I will say this, and I've said this in the past, as we drive greater ROI for our clients, it would only make sense that we would have the opportunity to share on the value that we're creating with our R&D spend. Ultimately, our clients are going to decide our value, and I feel really good about the amount of no-fee functionality we've added into the product to drive ROI for our clients as well as their employees. And I believe the clients are having a positive response to that enhancement.

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Operator [18]

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The next question comes from Brent Bracelin with KeyBanc Capital Markets.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [19]

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One for Chad here and then a follow-up for Craig. Chad, just given the tight labor market, it seems like improving employee experience is gaining kind of industry momentum as a tool to increase employee retention. I know this Data Direct Exchange (sic) [Direct Data Exchange] product is early, but can you just talk about what portion of the customer base has kind of embraced the new product so far? It's only out there for one quarter. Is this 5%, 10% of the customer base now adopting the product? And just trying to gauge how fast this product can be embraced by the existing customer base given it is so differentiated.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [20]

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Yes. So the short answer is currently, 95% of our clients have clicked through the DDX 5x or more. And the DDX has been out for 4 months. So we started the shift to employee usage to drive incremental ROI for the client and the employee about 3 years ago. We've already gotten 95% on click-through. Currently, if we look at our clients' usage in aggregate for all of them, we're in the high 80s. But I will say this, I mean, a high 80 isn't a B+ on the DDX. But it does show the clients are progressing. And how we see that, even how they're using it, now we're having clients that want us to break down the DDX per user and per department. And that tells us they're focused on it and they're using it to improve their scores as they're completing the digital transformation in HCM.

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Brent Alan Bracelin, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [21]

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Got it. Very helpful. And then just a follow-up for Craig here. Obviously, growth and billings -- revenue growth and billings growth accelerated this quarter. That's against the backdrop of sales office locations kind of being flat here for the last 4 or 5 quarters. How much of that acceleration in growth was driven by kind of productivity gains, higher attach rates of different modules or the price increase? Any additional color there on what drove the acceleration would be super helpful.

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Craig E. Boelte, Paycom Software, Inc. - CFO, Treasurer & Corporate Secretary [22]

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I mean as we mentioned in the script, new client wins is the majority of the revenue acceleration. We have -- 49 of our 50 offices are out there that are bringing on new clients. And so that's going to represent the majority of that revenue acceleration.

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Operator [23]

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The next question comes from Mark Marcon with Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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Let me add my congratulations. I was wondering if you could talk a little bit about the large client initiative and what we're seeing there in terms of the 2,000 to 5,000 employee range, just what the pipeline looks like, what the receptivity is. How incremental has that been to the acceleration that we've seen in terms of the revenue growth? And then I've got a follow-up.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [25]

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Yes. And so we had been selling above the 2,000 employee range for quite a long time before we actually formalized it and said, okay, now we're moving up to 5,000. And now we're even seeing clients come in above that. So I would just say that we are continuing to get more of those, but we also have more add-backs because we have more reps. And then as our value proposition is getting stronger, people who may not have been as interested in it 6 years ago are more interested in it now because the value proposition continues to get stronger.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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Okay. And then with regards to the fee acceleration in terms of the revenue growth, I know new logos have always been the primary contributor. But to what extent relative to prior second quarters and kind of adjusting for seasonality would the additional attach rates in terms of modules versus more paced for control be and then, of course, the pricing be impacting the acceleration? And can you also talk a little bit about the Ask Here module? And is that an additional incremental charge?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [27]

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Okay. Well, first, I'll tell you, I mean as far as I think you're talking about the revenue growth and what really does that encompass, and you talked about pricing, upsell, new logo adds...

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Yes, just relative to the past.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [29]

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I wouldn't say that it's changed much at all as in the past. I mean I know that our new client wins percentage and our upsell percentage are very consistent as they have been in the past, with the exception of the ACA year, with the exception of that year, where we did have an upside in internal upsells to current clients just because of the sheer mass that kind of all came on at once. With the exception of that, our percentages have been very consistent and always overweighted very heavy toward the new logo side.

As for the Ask Here, like the DDX and even like our app, Ask Here is one of those functionality products that we do include within our stack so that people will use the product correctly. And so Ask Here helps employees embrace the technology even more. Ask Here has a lot of benefits for both the company as well as the employee as an online communication resource, where they can ask their inquiries online. And it's set up by the client to have each question and each subject answered by the expertise of that organization or client representative. And so we just believe this strengthens employee usage and further drives the ROI for the business. And so in answer to your question, no, we aren't charging separately for Ask Here.

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Operator [30]

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The next question comes from Brian Schwartz with Oppenheimer.

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Brian Jeffrey Schwartz, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [31]

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I just have one. I think, Chad, we've talked before in the past -- I know it hasn't been the business sales strategy. It's been a new customer acquisition story, and clearly, that's working really well. We have talked about in the past about maybe capping the installed base, going back to increase the usage and get full penetration within the installed base. I don't know if I know any software company that's full penetration.

The question I wanted to ask you was on the expansion of the inside sales force. Clearly, it sounds like that's geared towards continuing the new customer acquisition. But over time, do you think there's an opportunity to maybe leverage those investments and maybe look back into the installed base and see if you could further the penetration within that base?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [32]

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Sure. Well first of all, I appreciate the question. It allows me to put a little bit more clarity around the inside sales efforts and strategy that I was mentioning earlier. You are correct. Those inside sales are completely for new business wins. They are not for upsells to current clients. When I was talking about how we relocated a manager to be able to build inside sales, that's to handle new business leads. That's not upsells to current clients. We have now and continue to have and have had for some time a group of client relationship reps that do upside -- or upsells to current clients, and they also help us focus on usage. And that group has really done both. As I've said in the past, it's important that clients use the products that we've sold them correctly before we're selling them additional products. And so we focused on that.

I wouldn't ever say that our company has ever had this opinion that, no, we're just going to sell them some things now and then come back later and really sell them what they need. We've always been focused and making sure that the clients have what they need when they need it. But at some level, you have to earn the right through an ROI achievement to sell the additional products. And so -- but I just wanted to state that. We have not ignored inside sales. It's not some grand plan that someday, we're going to come back and start selling everybody all the products they really need. We do that today, and we're focused on usage.

In fact, something I said earlier about the DDX, I said high 80s is not a B. At Paycom, our DDX score, when I looked at it on Thursday, was 99.7%, all right? Well, for this month, we've had 164,000 -- or 165,000 changes so far. 164,700 of those were made by employees. We had about 300 changes made by HR. So we have a 99.7% DDX score. If we had an 88% DDX score, that wouldn't be a B just because of the sheer amount of changes that HR would have made. I mean if we had that top a score, you're probably looking at closer to 20,000 changes that HR would have made. And so that's why it's important. That's why I brought it out. The DDX, we're watching our clients get there in aggregate. Everyone's excited about it, and that's really what's helping us drive results.

And also, we're seeing -- it makes it easier for people to understand what they're buying. If you look at this industry over time, where you're bolting on all these things, even as I explain it to investors, it can get kind of difficult to understand, okay, what is everything someone's doing? As we're looking at -- you're looking into the DDX, I do think it makes it easier for a client to understand what they're buying and what their ROI is going to be. And because of that, you're seeing some buying habits change.

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Operator [33]

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The next question comes from Shankar Subramanian with Bank of America.

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Shankar Subramaniam, Bank of America Corporation - MD of Financial Institutions [34]

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Congrats on the results. I just have a couple of questions. One, on your marketing spend. I know the last couple of years, you've kind of accelerated the spend on marketing, and you've done -- seen good results. Can you talk about how much of that benefit you're seeing in the first half in terms of the results? And then maybe qualitative comment on how you're thinking about second half in terms of your marketing spend.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [35]

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Yes. So we did do the national ad campaign last year. We actually continue to use those assets. Some of those assets, we had to actually repurchase rights to. We've done that. We do continue to use that. We do have strong marketing initiatives, both this quarter as well as through the end of the year. And that is all baked into our current guidance. And we are having success with showing an industry how to use a product the different way.

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Shankar Subramaniam, Bank of America Corporation - MD of Financial Institutions [36]

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Got it. Got it. And from a competitive kind of perspective, any change you have seen notably over the past 3 months, particularly with Ultimate going private? Any kind of color on that would be helpful.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [37]

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I have not. It's usual suspects for us as far as who's out there.

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Operator [38]

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The next question comes from Ryan MacDonald with Needham.

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Joshua Christopher Reilly, Needham & Company, LLC, Research Division - Associate [39]

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This is Josh on for Ryan. I was just wondering what application and/or modules are you -- are helping driving the greatest increase in employee usage on the platform today? Maybe just some color around that would be helpful.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [40]

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Sure. It's somewhat going to depend on the client as far as what you're talking about, what product drives the greatest usage for them. If you have hourly employees with schedules and they're swapping, you're going to have a lot of usage in the system. If you have salaried employees, you're not going to have as much time and attendance. You might be in other areas of usage. And so it's really somewhat client-specific. We're going to deliver all to them that meets their needs at the time, obviously. And then how they're using it is going to really depend on what type of industry they're in, how many employees they have, are they decentralized, are more of their people in one area. And so usage is different per client. But 100% usage looks like 100% usage. We might be talking about the difference in a client that made 200,000 changes total in their database for a month versus a client that only made 80,000 because they have a different employee base that doesn't require the same level of data input and retrieval that you're going to have with other types of employee bases.

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Joshua Christopher Reilly, Needham & Company, LLC, Research Division - Associate [41]

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Okay. Great. And then just one other question. When looking at your larger customers with 2,000 employees and above, how much room is there for seat expansion with these customers? Or are they typically getting every employee on the initial deal sign?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [42]

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Well, for seat expansion, you would have it from the beginning. I mean, for us -- let's say this. They wanted to add additional master users or department users even after all their employees are users. They can add as many users as they want. We don't -- we charge on a per employee basis. As far as number of users, they can have as many users as they want on the platform.

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Joshua Christopher Reilly, Needham & Company, LLC, Research Division - Associate [43]

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But for your larger customers, you're typically signing up every employee in the company initially?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [44]

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Well, for any sized organization, we are signing up every employee because we have to do the payroll. We have to input all the totals. We have to balance. Even terminated employees are set up in our system. So anybody that had balances, and we work through that with the client. And so you might have terminated employees that want access to their data. And it would be a best practice to keep an HCM technology turned on for terminated employees so that you do not have to respond on certain issues that they can actually gather that information for themselves. So from an employee side, we're going to set up all.

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Operator [45]

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The next question comes from Drew Kootman with Cantor Fitzgerald.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [46]

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Good quarter. Just wanted to ask on -- as you guys move into those larger businesses, and I know you guys have already sold to that group, but just are you seeing any changes from what the client needs? Do you have to change your sales tactic at all as you move up that group?

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [47]

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I wouldn't know. We're not changing our sales tactics. It's the same group. What I will say is this, though. As you move up, what's the difference in an employee that works for a 200-employee company and an employee that works for a 10,000-employee company? There's no difference. In the past, the difference was the size of the company. And that is still important because the size of the company and how they're set up is going to give you some type of view of complexity and what have you. But the employee users are the same. An employee at a 300-employee company is going to be needing and using the same type of thing that an employee at a 3,000-employee company. And so as far as when you're making an impact to an employee, those 10,000-employee companies, they see their employees as the same way as a 300-employee company might see them as far as a user. I mean you're going to have department leads and salespeople and everything else. And so that's, I think, what's more evening out for everyone, which is making it easier for people to understand the value proposition.

I mean in our industry, oftentimes, people bought off of the brochure, and then you're trying to figure out what you have over the next 3 years of conversion. And so with this, you're seeing it upfront. You know what you're aiming for. And we're having all -- getting a lot of leads just from rank-and-file employees that leave one company and go into another company and don't really want to work with multiple systems and really go backwards in technology.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [48]

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Got it. And then just one quick follow-up on the really strong adjusted EBITDA. Any color on what led to that higher number, especially versus the guidance you guys were expecting?

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Craig E. Boelte, Paycom Software, Inc. - CFO, Treasurer & Corporate Secretary [49]

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I mean, primarily, you saw the revenue flow-through to the adjusted EBITDA line, very similar. So it was really a lot of the revenue beat that was able to flow through to the bottom line.

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Operator [50]

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This concludes our question-and-answer session. I would like to turn the conference back over to Chad Richison for any closing remarks.

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Chad Richison, Paycom Software, Inc. - Founder, President, CEO & Chairman [51]

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All right. Well, I want to thank everyone for joining us on the call today. Next month, we'll be on the road meeting with investors at the following conferences. I'll be presenting at the KeyBanc Technology Leadership Forum on August 13 in Vail, and Craig and James will be hosting investor meetings at both at the Oppenheimer and Canaccord Technology and Growth Conferences in Boston on August 6 and August 7. We appreciate your continued interest in Paycom and look forward to meeting with many of you soon. Thanks, operator. You may disconnect.

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Operator [52]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.