Ladies and gentlemen, thank you for standing by and welcome to the Paycom Software Third Quarter 2020 Quarterly Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. James Samford, Head of Investor Relations for Paycom. Thank you. Please go ahead, sir.

Thank you, and welcome to Paycom's third quarter 2020 earnings conference call. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives and expected performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also during today’s call, we will refer to certain non-GAAP measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin, and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today and is available on our website at investors.paycom.com. I’ll now turn the call over to Chad Richison, Paycom's President and Chief Executive Officer. Chad?

Thanks, James, and thank you to everyone joining our call today. I also want to thank our employees for delivering another excellent quarter. For today's call, I'll spend a few minutes on our third quarter 2020 results and the long-term drivers of our business. Following that, Craig will review our financials and provide some perspective on guidance and then we'll take your questions. I'm very pleased with our performance in the third quarter with continued strong demand for our solutions in a large and expanding human capital management market. We have less than 5% market share, which gives me a lot of confidence in our long runway. The unemployment headwinds across our pre-pandemic client base remain relatively unchanged from the second quarter, but our product value proposition is having a lot of success and we are pushing through the headwinds with strong new business sales. Q3 revenue and adjusted EBITDA came in at $196.5 million and $67.5 million, respectively, both ahead of our guidance thanks to strong new client adds and benefits from operational efficiencies. Based on combining our implied full-year outlook for revenue growth and adjusted EBITDA margin, we expect to hit the Rule of 50 in 2020 despite being in one of the most difficult economic times we've ever seen. And I believe we will improve on the Rule of 50 in 2021. Our marketing plan in the third quarter delivered strong demo leads, leading to strong new client sales, and we plan to continue to spend aggressively on advertising to fuel future revenue growth. The challenges created by the pandemic are exposing the shortcomings of disparate HCM systems, which are cobbled together from multiple vendors, and the value proposition of Paycom's single database solution is stronger than ever for companies of all sizes including companies well above our target range. We continue to be pulled well above our stated target range as larger companies look to leverage automated processes for their own employees. At the same time, our small business adds have continued to increase in 2020 as we continue to build out our inside sales force. Manager on-the-Go continues to gain popularity and was recently named a top HR product at this year's HR Technology Conference. We are receiving more leads and referrals as the industry shifts toward an employee usage strategy. Since the end of Q1 2020, usage of Manager on-the-Go has nearly doubled. 98% of all Paycom clients have deployed Manager on-the-Go. Manager on-the-Go fundamentally changes manager workflows and accelerates the speed that data moves throughout the system, which further increases the ROI of our solution and sets us up for future usage patterns that pave the way for future product innovation and automation. DDX usage continues to trend upwards towards the 100% mark, up from the low 90s. In July, we changed our sales procedures to ensure that new clients commit to 100% usage. We are now at our highest DDX usage rate since launching the industry's only software of its kind last year. CEOs and HR executives continue to see the savings from an employee's direct relationship with the database. As a reminder, when an employee makes a data change themselves, the company saves $4.51, and the savings are calculated in real-time using the DDX. We are extremely ambitious with our product roadmap and we are continuing to invest in R&D. The pandemic's impact on our pre-pandemic client revenue remains stable and it's unclear if or when those same clients will add to their employee counts. When we reported earnings in August, we said that without a catalyst we wouldn't expect employee counts to improve. And thus far it has not improved materially nor has it gotten any worse. As we work through these unique times, we will continue to remain focused on three controllable activities: providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. Our execution along these three fronts has been exceptional. Based on the strength of our new client revenue trends, differentiated value proposition, less than 5% estimated market share, and the effectiveness of our marketing and advertising campaigns, I'm confident we can deliver even stronger full-year revenue growth next year on top of our newly established base even without any improvement in our pre-pandemic clients' employee base. The digital transformation for businesses is accelerating and our investment to expand our market share is working. Leads continue to be driven by users, employee referrals, and our investments in advertising, and all are up year-over-year. We are putting a greater distance between our product, value proposition, and that of our competition and we believe we are the clear choice for those seeking a more efficient way to manage HCM needs. I'll stop there and hand it over to Craig to review the financials and guidance. Craig?

Thanks, Chad. Before I review our third quarter 2020 results, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. I'll briefly cover our Q3 results and trends, then I'll provide some high-level comments about Q4 guidance. Last quarter, we discussed how the effect on our current client revenue of lower headcount at our pre-pandemic clients represented a loss of approximately $2 million in weekly recurring revenue. The impact of 150 basis point interest rate cuts that occurred in March represented an additional loss of roughly $350,000 in weekly recurring revenue. To date, we haven't seen any catalysts that have materially changed this weekly headwind. Our growth is therefore largely coming from new client business. In the third quarter, we generated total revenues of $196.5 million representing growth of 12.3% over the comparable prior year period driven by strong new business wins. Within total revenues, recurring revenue was $192.7 million for the third quarter of 2020, representing 98% of total revenue for the quarter. Total adjusted gross profit for the third quarter was $166.8 million, representing adjusted gross margin of 84.9%. Adjusted total administrative expenses were $113.3 million for the third quarter as compared to $94.4 million in the third quarter of 2019. Adjusted sales and marketing expense for the third quarter of 2020 was $58.3 million or 29.7% of revenues, up from $46.7 million in the prior year period. Our deliberate increase in advertising and marketing efforts over the last several quarters are translating into more demo leads, virtual meetings, and increased close rates, and we intend to be aggressive in this area again in Q4 to drive further market share gains. We expect Q4 sales and marketing expense to be similar to Q3 on both a GAAP and adjusted basis. Adjusted R&D expense was $19.7 million in the third quarter of 2020 or 10% of total revenues. Adjusted total R&D cost including the capitalized portion were $29.8 million in the third quarter of 2020 compared to $24.8 million in the prior year period. Product innovation remains a key driver of our growth and we will continue to expand our R&D investments to further differentiate our solutions. Adjusted EBITDA was $67.5 million in the third quarter of 2020 or 34.3% of total revenues compared to $66.6 million in the third quarter of 2019 or 38% of total revenues. We are deliberately investing in future growth through the pandemic and believe this sets us up well for accelerating growth in 2021. Our GAAP net income for the third quarter was $27.5 million or $0.47 per diluted share based on approximately 58 million shares versus $39.2 million or $0.67 per diluted share based on approximately 58 million shares in the prior year period. For Q4, we expect our effective income tax rate to be approximately 29% and our full year effective income tax rate to be approximately 22% to 24%. Non-cash stock-based compensation expense was $19.5 million in the third quarter and we expect non-cash stock-based compensation for the fourth quarter of 2020 to be approximately the same as Q3 2020. Non-GAAP net income for the third quarter of 2020 was $40.6 million or $0.70 per diluted share based on approximately 58 million shares versus $41.1 million or $0.70 per diluted share based on approximately 58 million shares in the prior year period. We anticipate fully diluted shares outstanding will be approximately 58 million shares in the fourth quarter of 2020. As of September 30, 2020, we have repurchased over 4 million shares since 2016 and have $172 million remaining in our buyback program. Turning to the balance sheet. We ended the third quarter with cash and cash equivalents of $156 million and total debt of $31 million. Cash from operations was $66.8 million for the third quarter or a 24.5% increase over the comparable prior year period. The average daily balance of funds held for clients was approximately $1.1 billion in the third quarter of 2020. Now let me turn to our guidance. For the fourth quarter of 2020, we expect total revenues in the range of $212 million to $214 million, representing a growth rate over the comparable prior year period of approximately 10% at the midpoint of the range. We expect adjusted EBITDA for the fourth quarter in the range of $76 million to $78 million, representing adjusted EBITDA margin of approximately 36% at the midpoint of the range. Based on this outlook, we now feel we can comfortably deliver a combination of revenue growth and adjusted EBITDA margin to hit a Rule of 50, despite a pandemic and lower interest on funds held for clients. We estimate the pandemic's impact lowered our recurring revenue base by a total of roughly $90 million to $95 million over the last three quarters of 2020, in addition to the loss of sales earlier in the year while we transitioned our sales organization to the work-from-home model. Our focus continues to be on mitigating the impact of the pandemic on our business by providing world-class service to our clients, rapidly developing new technologies, and increasing the number of new clients added to our platform. We have a strong balance sheet, a highly profitable recurring business model, and a rapidly expanding value proposition. With that we will open the line for questions.

And your first question comes from the line of Raimo Lenschow from Barclays.

Two quick ones. Chad, you talked about the new business doing well. Do you have any kind of data points that help us or any more commentary around that should help us understand the momentum that you have there?

Well, I mean our bookings and our leads, our new business sales, and our new business starts have all remained at record highs. And from where I sit right now, I don't see that changing. Now that we've returned to guidance, we're focused on that piece. I do believe that you see these numbers that we've added reflected in our current quarter as well as in our guidance. As a reminder, a deal that might start at the beginning of a quarter, we would receive 100% of the revenue for that new business. And should that deal start at the middle or end of the quarter, we would receive proportionate revenue for that business but we would receive all of the revenue for that in subsequent quarters. So how deals start matters, but for us, leads have been up, sales have been up, and so starts, so I'm very happy with what we're accomplishing right now.

Perfect. And then one follow-up. Like in your prepared commentary, when you talked about COVID, you mentioned that obviously, the headwind is that people have a lower employee count. And since you get paid on a per paycheck basis that hurts you. So in a way, if you think about it like it's a good way to understand it. At the beginning of the crisis, people were furloughed then they didn't come back, and so you're kind of running with that gap. And then as you think about next year as hiring starts again and the new clients that you win, you'll kind of fill up that gap that was created. Is that the right way to think about it?

Well, we're actually going to look to fill the entire gap with new clients added. That's what we've done up to now. I mentioned that we haven't seen any material changes in our pre-COVID – the impact on our pre-COVID client base. And so we did mention how it was $2 million, anywhere from $1.95 million to $2 million of loss that we were seeing per week. We mentioned that at the end of August – or sorry, at the beginning of August and we did say that we had seen stabilization in that number throughout the second quarter. As we sit here today, we can't call out that that number has changed materially. I mean you may have had a small impact one week or another of less than $100,000 impact on that number to the positive. So to the extent it was $2 million, it might be a little above $1.9 million, depending on what week you measure. But we said in August, that without a catalyst, we wouldn't expect the impact on a pre-COVID client employee count to improve. And while the unemployment has improved since that date, it's still double what it was pre-COVID. It hasn't materialized for our clients who reduced staff. And it makes sense. I mean, there's nothing that's really happened since August that would cause a hotel to suddenly start hiring their people back or restaurants, or entertainment businesses, or health clubs. So the fact is, those businesses are more surviving. I wouldn't necessarily call them thriving at this point. And we're waiting on either an end to the pandemic, or some type of a stimulus before I think we'd see some meaningful change to that. So as we look into the future, we believe we've established a new base. Hopefully, we get some tailwind out of it. But right now, I'd call it more of a crosswind as it stabilized, and we're jumping through that, and we can get to where we need to get by adding on new clients, which I will say we've been doing – adding on new business at record pace through the pandemic. So I don't see a situation in which that stops for us as our value proposition has only gotten stronger.

Perfect. Congrats. Thank you. Well done.

Thank you.

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

Hi. Good evening. Thanks for taking my questions. I hope everybody is doing well. Maybe Chad, just a starting point, I want to follow up on Raimo's question around new bookings. If I rewind back to 2019, the company has added about 3,000 new clients. That's about 750 average per quarter. I'm just curious to further frame that new bookings, is it fair to assume that you're adding more than that 750 per quarter kind of on an annualized or quarterly basis exiting July and into Q3? We're just trying to maybe numerically nail down what that booking suggests.

Yeah. I mean, well, what I can tell you – and I haven't called out exactly units. Units would be based on how many smaller deals we got versus larger deals. I'm more talking about the revenue generated. Whether it's a larger or smaller deal, the aggregate amount of revenue that we are both selling as well as converting, continues to remain strong and has been at record levels as we've continued on. Now, it's gotten better, right? In the beginning, we were trying to get back to pre-pandemic, which I'd mentioned in our first quarter. I believe I gave that announcement either at the very end of April or 1st of May that we had gotten back to pre-pandemic sales levels, after we had backed off for a little bit and kind of curled up into a ball and was kind of waiting to see what happened. We got back to pre-pandemic levels. Last quarter, I talked about how that's even accelerated. I mentioned that we've had our best month, as I reported in August talking about July, and then what I've talked about. This quarter is just the continuation of that in that we continue to get stronger and stronger in both the book sales as well as the started sales.

Great. And maybe just as a follow-up to that. The commentary it sounds – both you and Craig mentioned 2021 or looking out ahead to that, and I believe reacceleration of revenue was mentioned. I'm curious if you could maybe just frame that a little bit. Are we thinking – when you say that is it in terms of accelerating from 2020 levels? Or should we think about acceleration in the context of back to what Paycom was historically growing when we're thinking about kind of a high 20s, 30% type of grower in 2018 and 2019?

Yeah. Well, we've calculated the impact on our revenue right now. It's – nobody has to guess how many fingers we're holding up. We're telling you how many fingers we're holding up. So we've already calculated the amount of the impact that that has on us. And so – and we also believe that – well, we know, it's been stable. And so as we turn into next year, obviously, we have a first quarter comp that doesn't have much COVID impact on it. But as we move into those subsequent quarters throughout the year, and we're lapping COVID with a new established base and added clients during this time, I feel very comfortable about our ability to get back to very strong growth numbers with strong adjusted EBITDA numbers as well.

Great. Thanks, guys. And glad to hear about the strong bookings performance again this quarter.

Thank you.

Your next question comes from the line of Yao Chew from Credit Suisse. Your line is open.

Hi, everyone. Good evening. Thanks for taking my question, and I hope you all are keeping well and safe. Congrats on the quarter; remarkable execution from everyone involved here. I had a question around one of the comments that ADP made on their recent quarter, and it ties a little bit to that. You're mentioning around stimulus Chad in terms of a catalyst. They said stimulus helped clients that would have fallen to bankruptcy and there remains continued uncertainty as to further stimulus and strain from partial shutdowns. I wanted your take on this in two ways. Number one, how do you think further stimulus or lack thereof would have a meaningful impact on the path of recovery for your business? And two, how do you position the business or go-to-market motion differently to react to the possibility of stimulus?

Yeah. Well, I mean, we're operating our business to succeed whether there's a stimulus or a fast end to the pandemic regardless. And so we're focused on those things we can control. And there being a stimulus, or there being a stimulus that actually works to drive business growth, we'll have to kind of take a wait-and-see approach on that. But I do think that a stimulus can bridge the gap between those businesses that may be going out of business. It could be the difference in them going out of business or their survival. As we look at the amount of revenue that we've lost per week, which again has been stable, there is an amount of business there that we've been able to identify that has gone out of business. It's a smaller number, but there is a percentage of the hit that we are taking on these headwinds that we would not expect to come back just because it's related to business closures. And that's a much smaller amount. I mean, I would say that represents probably less than 10%. It's probably in the single digits of that amount that we've lost every week. I would say, 90% or more of it is still in business, processing with a lower employee count.

Got you. Super helpful. Thank you. One quick follow-up. I wanted to double-click on inside sales, which you called out. Can you remind us the size and resources you've dedicated to this effort, what the learnings have been? And any particular module or need that's resonating with clients in this environment?

Yes. So right now we have four inside sales teams. They are fully staffed at 32 employees. Obviously, they each have managers. They focus on the businesses that have below 50 employees. We've continued to generate interest downmarket. Thankfully we had inside sales before we made the shift, because I would say our outside sales, they're not using the exact same model to sell that inside sales is using, but they do use a lot of the same technology and methods to connect. And so, we've continued to grow our inside sales. Obviously, when you add a number of inside salespeople much larger than what you had the previous year, you would expect to have success downmarket. And so, we do continue to have success downmarket as well with our inside sales group.

That’s great. Thank you. Congrats again.

Thank you.

Your next question comes from the line of Adam Borg from Stifel. Your line is open.

Great. And thanks for taking the question. Just maybe for Chad. Now that we're in the typically strong selling season, just given the pandemic and the changes that it caused, any sense on how the HCM monetizations are being prioritized relative to past years?

I believe our advertising plays a significant role in this. While people generally don't wake up eager to switch their human capital management products, the pain points that arise can motivate them to make those changes, much like the way some might feel about visiting the dentist when they have a problem. With COVID, the issues related to outdated systems have become more evident, especially since employees often have to navigate multiple systems and sometimes choose to go without. The focus on employee engagement is crucial as society progresses; businesses will increasingly realize how to harness their employees' needs to benefit their operations, leading to a strong return on their investment in Paycom. We are committed to driving this forward and reaping these rewards. Moreover, the pandemic has highlighted the challenges of using separate outdated systems, and we are concentrating on that area with considerable success, which we expect to continue throughout the selling season, which for Paycom lasts all year.

Excellent. Thank you, guys.

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

Hey. Good afternoon and congratulations. Wondering with regards to the bookings that you're seeing, any change at all in terms of the composition in terms of the source of the bookings? Are you seeing that more are coming from say regionals relative to some of the bigger competitors that are out there? And Chad, I think you also mentioned that you're being pulled upmarket, even beyond your range. Can you expand a little bit on that in terms of what you're seeing?

Sure. In terms of bookings, everything is similar, just more frequent. We are experiencing continual upward pulls beyond our stated range, and this trend has been consistent since our public listing. This pattern has remained during the current market conditions. Additionally, we have significantly expanded our inside sales team compared to last year, which should contribute to our success in the market below the 50 threshold. This segment was previously less emphasized but is now a priority for several teams.

It sounds like you're experiencing some fluctuations, which is great. Can you share more about the improvement in close rates? How significant is that, and what do you think is driving that change?

Yes. We're not going to specify the exact details of that improvement. Historically, we have had better close rates when measured over time. A one-month close rate for deals will differ from a three-month close rate. If you allow a deal a bit more time, it may result in a higher close rate. One key factor contributing to our improved close rate is that we are attracting more interested and knowledgeable prospects. We have heavily invested in advertising, both digitally and through significant word-of-mouth referrals from employees moving between companies. As a result, we are seeing an increase in the number of inquiries from interested parties requesting demos. These prospects come to us more informed about our value proposition, which I believe is contributing to our higher close rate at this time.

Great. And then one last one. Just it sounds like you're getting more logos, but can you talk a little bit about upsells to the extent you're seeing them?

Yes, we continue to upsell to existing clients and have always done so proactively. This strategy remains unchanged. There has been no alteration in the ratio of upsells from current clients compared to new business revenue we are bringing onto our platform. We are not increasing the percentage of upselling to our current clients relative to the new revenue compared to what we have done in the past.

Great. Thank you very much.

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

Great. Thanks for taking my question, everybody. First, maybe a question on margin. Year-to-date EBITDA margins are down I think about four points compared to the same period in 2019. So can you just reflect like how much of this is just the float revenue going away versus other factors impacting the business? And as you think about the margin structure of the business going into next year kind of what are the puts and takes we should be thinking about in terms of the potential to improve off of this year's level?

The EBITDA margin is down about four points, mainly due to the decrease in float revenue, which is a high-margin aspect of our business. Additionally, our current clients are employing fewer people, which also affects the margin. However, we are proud that our gross margin has remained fairly stable during this time. We are seeing efficiencies across the organization, including in servicing, onboarding, and sales. As we look ahead to 2021, we aim to improve, with a focus on enhancing the margin. We are also highly focused on revenue growth and will invest in sales and marketing to drive that growth.

And then I know that implementation is a very small part of the revenue base, but it is growing at half the pace on a year-over-year basis as subscription revenue. Given sort of the commentary about the strength of new bookings, should we see improvement in the growth rate in that implementation revenue line in the upcoming quarters? Or how should we think about that? Thanks.

Yes. Just to clarify, the setup revenue that we charge clients is capitalized and recognized over a 10-year period. The amounts we charge for the setup go into the deferred revenue category, so you won't see significant changes in the revenue line. Additionally, there are other items included in that line, such as certain hardware sales related to time and attendance and other items.

Great. Thanks guys. Appreciate the color.

Your next question comes from the line of Brian Schwartz from Oppenheimer & Company. Your line is open.

Thank you. And thank you for taking my questions this afternoon. Chad, a follow-up question here on the implementation. Are you seeing any change in the pace of the implementations whether it's the smaller deals that you're doing or the higher deals? Have they changed at all here in the virtual world?

No, not really. We had a transition period with deals sold in January, February, and March that had specific expectations for conversion. Then we made changes to those expectations. Customers were anticipating in-person visits and different training on site, which required us to adjust many things. However, as of now, those issues have been resolved. Any delays we experienced in the second quarter have rebounded. Currently, our no-start rate for business sold is similar to last year, showing very little difference. Throughout the quarters, we did encounter some delays due to the need to familiarize clients with a new implementation process. However, we successfully onboarded those deals. Looking ahead, there’s nothing indicating extended or accelerated timeframes for going live.

And if I could ask you the follow-up question, Chad. Just thinking about it moving ahead do you feel that you have enough sales capacity here? You said you're fully staffed with the inside sales, but clearly what you're talking about the velocity of the new deals and the bookings and the advertising, and then correspondingly with your services organization to be able to continue to deploy these new customers and achieve the high satisfaction levels that the company has always been able to do.

Yes, we always want to increase our sales team. We're actively adding to our salesforce. Initially, we had to transition to a new model and managed that transition well. We slowed down hiring during that phase but have resumed it since early summer. Our sales representatives are experiencing greater success at this time, and we've seen significant productivity improvements within our existing sales organization. Our strategy for opening new offices remains in place, and we will continue to open offices where it makes sense. Currently, all cities are operational, allowing us to sell from anywhere. I believe we will revert to our previous model when the time is right. We might find efficiencies in selling, although it's uncertain if clients will continue buying online. Regardless, we will adapt our selling method, whether from our offices or home desks. Despite the negative impact of the pandemic on our pre-pandemic client revenue and interest rates, we have experienced many positive effects. We are optimistic about our future, driven largely by our compelling value proposition. We provide a product that is effective and profitable for businesses, contrasting with products that require effort and incur costs. This value proposition is what propels our growth.

Last question for Craig. I think you have addressed this before regarding the margin trajectory for 2021. I will rephrase it since you have provided a lot of details so far. Are any of the current savings, for example, travel and expenses from having a remote workforce, sustainable as we look ahead to 2021? Additionally, are there other items like leases to consider? It would be helpful if you could share your thoughts on how the Paycom organization plans to return to work. Thank you very much.

Yes, I would say that spending on travel and entertainment is currently much lower than it was in the past when we would bring the entire sales team in for training. A lot will depend on what next year looks like. If things return to normal, we can expect those numbers to start increasing again. Regarding the leases, we are still evaluating that situation, but for now we are continuing as usual until we have a clearer picture of 2021.

To build on that, we haven't increased our adjusted EBITDA percentages through operational changes. Instead, we've achieved this by selling profitable businesses that maintain a consistent margin profile. As we sell more businesses over time, we benefit from the resulting increase in adjusted EBITDA. Looking ahead to next year, while we plan to be mindful of expenses related to travel and entertainment, our primary focus is not on cutting costs but on accelerating revenue, onboarding new clients, and increasing our market share beyond the current 5%. This strategy will drive both our margins and revenue growth moving forward.

Thank you very much.

Your next question comes from the line of Alex Zukin from RBC. Your line is open.

Hey, guys. Thanks for taking my question and congrats as well. Maybe just the first one from me. Chad, can you remind us what's the vertical exposure for the business? You mentioned one of the reasons that you didn't see kind of the same uptick from employment bouncing back was because of hospitality, travel, maybe restaurants. Can you remind us what's the exposure rate there?

Yes. We are not limited to any particular industry. We've indicated that, and you could estimate the exposure rate based on the weekly impact on our revenue caused by client layoffs or furloughs. However, the situation varies from place to place. Some states have restaurants that are performing better than others, partially due to favorable weather conditions. If the weather changes, we might see different results. Up to now, our clients have generally been proactive in preparing for the pandemic. I mentioned previously, during our first quarter report, that many clients seemed to take their hits early, with noticeable changes starting in mid-March. I'm optimistic that businesses will begin to recover and reinstate employees, and I believe that will happen eventually. However, we are not relying on that for our future growth strategies.

That makes total sense. Do you expect us to understand how the recent round of stimulus will impact your customer base? If stimulus is enacted early in the year, when do you anticipate it might influence hiring trends? Or is there a different way we should consider this?

I believe the recent stimulus had a bigger effect on small businesses compared to midsize and large ones. It really depends on the type of stimulus provided. If it focuses on creating quality jobs with fair compensation, it could be beneficial for us. However, if the stimulus involves direct payments to individuals, it might lead to a tighter labor market. We've seen employment changes that affected us stabilize over the past four to five months. As we move through this quarter and into next year, we anticipate this stability to continue and we expect to reach our growth targets by adding new clients to our platform. We've been performing well in that area, and as we move past COVID, I believe we're in a strong position.

That makes sense. And then maybe just one last question. When discussing bookings trajectory, you mentioned achieving new record bookings this quarter. In the previous quarter, you also highlighted record months. When you mention faster sales cycles, more informed buyers, and a more effective and efficient go-to-market strategy, is it reasonable to ask if you're experiencing accelerating sequential bookings growth from the second to the third quarter? And if you maintain this pace, should we expect similar growth from the third to the fourth quarter?

Yes. I want to get away from calling out bookings each time. I have been calling out bookings because we weren't giving you much of anything else and I thought that, well listen, I at least want to tell people that even though we're not guiding, bookings are going well. Now that we've returned to guidance, I don't want to keep talking about bookings. But I have said this on this call that we've been having record bookings as we've gone through each of these quarters in COVID. Last quarter, wouldn't have been any different and our expectations for this quarter for bookings that we're entering in wouldn't be any different than that.

Perfect. Thank you guys.

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

Good evening gentlemen, thanks for taking my questions. Chad first one for you. When you look at the new client wins that you've had in these strong bookings what sense do you have of the capacity that these clients are starting with on the initial land in terms of total employees? I'm sure it's a bit different for each client but trying to get a sense of what the potential uplift could be once we start seeing these new clients start hiring again.

Yeah. I don't have a good feel for that. I mean, I look at a client that onboards with us with 500 employees as 500 employees. Will they grow to 1,000? Maybe. Could they be $200 million next year based on other factors that may not even be COVID-related? Maybe. And so as we go and we add clients we don't try to get that myopic and what the future could bring because that's not controllable by us. And so what is controllable is the number of new clients we add onto our platform. That's completely controllable by us. We only have 5% of the market. What's controllable by us is continuing to expand our value proposition, and therefore, the return on investments for clients. And then also what's controllable for us is the world-class service that we provide in an effort to keep all of our clients that we're currently servicing choosing Paycom. And so that's what we're focused on getting more. Hopefully, we're selling some clients that are in industries that are growing, but that's not how we're going to market right now.

Got it. And Craig just a follow-up for you. It looks like free cash flow was quite strong in the quarter not only from a margin perspective, but also conversion rate from even better free cash flow compared to the last few quarters here. What drove the strong performance there if anything that you'd call out? And how sustainable is this from a margin perspective as we look ahead to the fourth quarter and next year? Thanks.

Yeah. So we had a very strong operating cash flow for the quarter as well as free cash flow. Obviously, some of that's timing on some of those accruals. We did have a little benefit from a tax rate for some items that were specific to the quarter. But overall, we felt like it was a good quarter in terms of operating cash and on free cash flow. Our CapEx was fairly similar to where it was last quarter. So I'm excited about both of those.

Great. Thanks.

Due to time constraints, we ask that you please limit yourself to two questions. And your next question comes from the line of Siti Panigrahi from Mizuho. Your line is open.

Thanks for taking my question. I just want to dig into your commentary on rapidly investing in new products and technology. So Chad you talked about two products like DDX and Manager Go, which basically increase your stickiness and maybe ROI for your customer. But during this pandemic, have you come across any kind of customer need or requirement that could potentially then drive new revenue opportunity cross-selling into your base like on-demand pay or any of that kind of product?

We have observed significant usage patterns emerging in the area of learning management. Recently, we upgraded and launched our enhanced background checks product, which enabled us to phase out some of our backend partnerships and we have noted the positive effects of that change. Manager on-the-Go and last year's DDX have played crucial roles this year in helping managers improve data flow and timeliness. It is no secret that we aim to automate this industry because it is complex and carries high risks with low rewards. If executed correctly, the outcome is expected—benefits for individuals, proper onboarding, and accurate checks. However, mistakes can lead to severe penalties, so automating our products represents a substantial benefit for our business. Our focus has been on this goal, and each product comes with its own plan which we continue to improve according to user patterns. Throughout the pandemic, we've made advancements across all our products, including performance, onboarding, learning management, and background checks. We will keep enhancing our offerings and look forward to rolling out more product initiatives in the future.

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

Hi, guys, good afternoon. Thank you. I want to follow up on demand. So it sounds like you've had good success across each sub-segment of the market. Can you dig in around your ability to serve the larger clients? We get some questions around enterprise client ceiling. So any metrics you can share on the scale of the largest clients or any details to better gauge your ability to serve that top end?

Well, I mean, we're serving clients that triple our stated range. If you're talking about that from the top end, we have a direct focus on clients that we prospect. And the primary reason for that is we do believe that the way they make a decision fits with the way that we sell. Our salespeople at Paycom sell every week and so we definitely choose those prospects. We continue to be pulled up-market as business is realized. It doesn't have to be as difficult, as they've made it in many cases. And so there's usually more decision-makers, the further up market you go, but you're also typically dealing with more product but less functionality that they've deployed. Oftentimes, you run into somebody that has a 15,000-30,000-employee company. They deploy technology. They've spent $2 million on it and it can do three things. It's not really a strategy. So I do see us over time continuing to be pulled up market, because I do think we're a better fit for businesses that just don't want to work that much on just software. It was a necessity 15 years ago. I might even say, it was a necessity seven years ago. It's just not necessary right now. So I see us continuing to have success up market as well.

Okay. And then on sales and marketing, I think it was slightly lower than you had projected there. Is that just a function of greater efficiency on the spend, you were making? Any color on the better variance there versus outlook. And the learning you can share about sales and marketing targeting and efficiency in this environment?

I would say that the sales and marketing spend was affected by timing. We had a slightly lower expenditure in the third quarter, but we have outlined our spending for the fourth quarter. We are committed to ensuring that our marketing expenses are efficient and that we achieve the expected returns from that investment.

Yeah. We account for every dollar in marketing. So, I mean, if we're spending an advertising dollar, we need to get that back. So – and thus far that's what's been happening.

All right. Thank you.

Your next question comes from the line of Arvind Ramnani from Piper Sandler. Your line is open.

Hey. Thanks for taking my question. One of the things you mentioned was the continued progress you're seeing winning from traditional players. Are you seeing any of these traditional players enhance the technology to become more competitive? Or are you still able to keep the distance from them?

Yeah. So, I mean, I've never thought that our competitors have been asleep at the wheel. It's been a very competitive industry for a long time. I think that you've seen us – well, we have for sure delivered a different value proposition in the beginning. It was – I don't know anybody that beat us to the Internet, and I don't know anybody that beat ADP to second. Then you look at the single database solution that we had built out. That was different than what our competitors were doing, which is primarily a sell best-in-breed, buy best-in-breed and integrate. And now we've shifted to an employee strategy, in which you have to be online, and you really have to have a single database. Employees don't want to use multiple systems. And so we continue to differentiate our product by the ROI that's delivered to the client. If you want to receive the ROI on a software investment similar to Paycom, I mean, you're going to have to use Paycom. We're not going to beat our competitors at being them and they're not going to beat us at being us. And so we're going to continue to widen the competitive moat as it revolves around usage and we're going to continue to automate even more and more as we move on.

Great. In the past you have shared a metric on aggregate cost savings by using your DDX. And are you able to share kind of a similar stat in terms of like aggregate savings from your clients using DDX?

Well, so DDX, what DDX does it actually measures the savings each time an employee makes a change in the system versus if HR makes the change for them. The thought is, is that any change that an HR department makes – HR payroll, benefit department hiring department, any change they make for that employee and/or applicant in their system is duplicative. They did not read that applicant's mind. They did not read that employee's mind. And so that employee and/or applicant could have made that change themselves, if they had had easy-to-use technology, because that employee is making all changes themselves everywhere else in their daily lives. Why not leverage that at work for the business? And so what the DDX does is it adds that up. And if a client – it wouldn't be uncommon for many of our midsize clients to make 100,000 changes in a month. And if 2,000 of those changes are made by the HR department instead of the employees, that's a company that has a 98 DDX, 98% DDX rating, but they made 2,000 changes. HR made 2,000 changes in the database. So I mean, it's going to cost them $90,000 in hard/soft cost savings that they left on the table because they did the work themselves. And so that's a calculation that was put together by Ernst & Young. I believe, when it first came out it was $4.39. It was updated earlier this year for $4.51. And as we move into next year, I'm sure it will be updated at some point again.

Your final question comes from the line of Josh Beck from KeyBanc. Your line is open.

Thanks so much for taking the question. I just wanted to ask a little bit about the return on sales and marketing spend. It seems quite favorable when I hear your commentary about new bookings and market share gains. So really as you look into next year and if we remain in this work-from-home environment, is that an area that you want to continue to lean into? I just would like to hear your framework and how you would evaluate that investment as we go into next year?

Yes, for sure. We'll continue to lean into it. I mean we're having success. There have been times throughout the quarter that we realized that we can spend more but we're not necessarily going to get more. I mean, sometimes you can spend double and it only goes up 5% on – in different advertising. As you go through this we've become smart on this. And really how we've done that is by measuring every dollar that we're spending. Obviously, we had more powder in the keg this quarter. And if we had thought emptying that out would have brought us more leads then we would have done that. I'm not interested in training a percent of adjusted EBITDA for a percent of growth. I just – we're just not going to train 8% of adjusted EBITDA for a percent of nothing. So we've been focused on it. Leads still remain at record levels, sales remain at record levels, and new client sales are remaining at record levels right now. So having a lot of success and looking forward to next year and fourth quarter.

This brings us to the end of our question-and-answer session. Mr. Chad Richison, I turn the call back over to you for some closing remarks.

All right. I want to thank everyone for joining us on the call today and to all the Paycom employees for their continued commitment and execution. Over the next couple of months, we'll be at several virtual conferences this quarter including Stifel, RBC, Needham, Credit Suisse, as well as Barclays. We look forward to speaking with many of you again soon and appreciate your continued interest in Paycom. Thanks, operator. You may disconnect.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.